Service Corporation International Announces Second Quarter 2019 Financial Results And Raises Guidance

HOUSTON, July 29, 2019 /PRNewswire/ -- Service Corporation International (NYSE: SCI), the largest provider of deathcare products and services in North America, today announced results for the second quarter of 2019. Our unaudited consolidated financial statements can be found at the end of this press release. The table below summarizes our key financial results:

Quarterly Summary:

• Diluted earnings per share were $0.39 in the second quarter of 2019 compared to $0.55 in the second quarter of 2018. The $0.16 decrease was primarily due to a $7.6 million loss on early extinguishment of debt, a $18.7 million change in net losses on divestiture and impairment charges, and a $7.5 million increase in income taxes compared to the prior year quarter. Diluted earnings per share excluding special items were $0.47 for the second quarter of 2019 compared to $0.44 in 2018. Growth in our cemetery segment coupled with a favorable adjusted effective tax rate more than offset an anticipated increase in interest expense related to the timing of our recent debt refinancing.
• Net cash provided by operating activities was $78.0 million in the second quarter of 2019 compared to $103.9 million in the second quarter of 2018. The second quarter of 2019 was impacted by $6.4 million in legal settlement payments. Net cash provided by operating activities excluding special items was $84.4 million in the second quarter of 2019 compared to $103.9 million in the second quarter of 2018. Growth in operating profit was more than offset by an expected $28.2 million increase in cash taxes and cash interest paid over the prior year quarter.
• During the second quarter, we returned $47.9 million to shareholders through share repurchases and dividends and invested $23.6 million of capital into accretive acquisitions and the construction of new funeral service locations. We also repurchased $15.7 million of certain senior notes through open market repurchases.

Tom Ryan, the Company's President, Chairman, and Chief Executive Officer, commented on the second quarter of 2019:

"We are pleased to announce adjusted earnings per share growth of almost 7% primarily driven by increases in comparable cemetery revenue and a lower adjusted effective tax rate. In our cemetery segment, we faced a tough sales comparison as the second quarter of 2018 had the highest sales production in several years. Given this tough comparison, we are pleased to report modest cemetery margin growth primarily due to effective cost management during the quarter. Based on our mid-year performance, we are raising the midpoint of our full year adjusted earnings per share guidance by two cents to $1.95 and confirming our annual adjusted operating cash flow guidance. I would like to thank our 24,000 associates for their unwavering commitment in providing excellent service to our client families. We believe our long-term growth strategy is on track as we continue to grow revenue, leverage our unparalleled scale, and deploy our capital wisely to enhance shareholder value."

UPDATED OUTLOOK FOR 2019

Our revised outlook for potential earnings and cash flow in 2019 is as follows:

REVIEW OF RESULTS FOR SECOND QUARTER 2019

Consolidated Segment Results
(See definitions of revenue line items later in this earnings release.)

Comparable Funeral Results

The table below details comparable funeral results of operations ("same store") for the three months ended June 30, 2019 and 2018. We consider comparable operations to be those owned for the entire period beginning January 1, 2018 and ending June 30, 2019.

(Dollars in millions, except average revenue per service and average revenue per contract sold)

• Total comparable funeral revenue increased by $5.2 million, or 1.1%, primarily due to higher recognized preneed revenue of $5.3 million coupled with increases in core revenue and non-funeral home revenue. This growth was partially offset by lower other revenue of $2.3 million.
• Core revenue increased $1.0 million primarily as the result of a 1.1% increase in core funeral services performed offset by a 0.8% decrease in core average revenue per service. Organic sales average growth of 0.9% was more than offset by a 170 basis point increase in the core cremation rate. Our non-funeral home revenue grew 10.3% due to an 8.4% increase in services performed coupled with a 1.6% increase in average revenue per service.
• Recognized preneed revenue grew $5.3 million, or 15.7%, compared to the prior year as a result of higher non-funeral home sales production primarily from an increase in the number of contracts sold.
• Other revenue decreased $2.3 million, primarily due to lower General Agency (GA) revenue as a result of a decrease in insurance-funded preneed sales production. For the year, GA revenue is up $2.1 million, or 3.1%, which is in-line with expectations.
• Comparable funeral operating profit was essentially flat to the prior year as we focused on managing our fixed cost structure against limited revenue growth.
• Comparable preneed funeral sales production increased $7.5 million, or 3.1%, in the second quarter of 2019 compared to 2018. This increase was primarily due to higher sales in our non-funeral home channel.

Comparable Cemetery Results

The table below details comparable cemetery results of operations ("same store") for the three months ended June 30, 2019 and 2018. We consider comparable operations to be those owned for the entire period beginning January 1, 2018 and ending June 30, 2019.

• Comparable cemetery revenue increased $2.4 million, or 0.7%, in the second quarter of 2019 compared to the second quarter of 2018. The revenue growth over the prior year quarter is due to an $8.0 million, or 5.6%, increase in recognized preneed property revenue from sales into existing developed cemetery property projects. This increase was offset by $5.9 million of anticipated lower other revenue (primarily endowment care trust fund income) due to the timing of capital gains and other distributions.
• Comparable preneed cemetery sales production decreased $7.0 million, or 2.9%, on a very difficult comparison to a strong prior year performance. For the six months ended June 30, 2019 comparable cemetery sales production increased $5.8 million, or 1.3%.
• Comparable cemetery operating profit increased $2.3 million to $99.6 million and the operating margin percentage increased 50 basis points to 30.4%, primarily reflecting higher recognized preneed property revenue and the impact of cost reduction initiatives which more than offset the decline in high margin trust fund income.

Other Financial Results

• General and administrative expenses decreased $1.8 million to $29.4 million in the second quarter of 2019. The current year quarter included a reduction in legal expenses of $1.6 million. Excluding these costs, general and administrative expenses were relatively flat compared to the second quarter of 2018 due to continued effective cost management offsetting normal fixed cost growth.
• Interest expense increased $2.8 million to $47.3 million in the second quarter of 2019. This increase is primarily due to higher interest rates related to our floating rate debt.
• We incurred a $7.6 million loss on early extinguishment of debt related to strategic refinancing transactions that occurred during the second quarter of 2019.
• The GAAP effective income tax rate for the second quarter of 2019 was 24.5%, up from the prior year second quarter of 13.4% primarily due to adjustments related to the implementation of tax reform in 2018. Our adjusted effective income tax rate was 23.3% in the second quarter of 2019, compared to an adjusted effective income tax rate of 26.7% in the prior year quarter. The decrease in the adjusted rate is primarily due to higher excess tax benefits on the increased exercises of stock options.

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 decreased $19.5 million to $84.4 million in the second quarter of 2019 from $103.9 million in the prior year quarter. Growth in operating profit and favorable working capital initiatives was more than offset by an expected $20.0 million increase in cash taxes and $8.2 million increase in cash interest paid over the prior year quarter. The increase in cash interest primarily relates to the timing of new senior notes and our redemption of existing senior notes that occurred during the second quarter.

A summary of our capital expenditures is set forth below:

Total capital expenditures increased as expected in the current quarter by $4.5 million primarily due to increases in the construction of new funeral service locations which is in-line with expectations.

TRUST FUND RETURNS

Total trust fund returns include realized and unrealized gains and losses and dividends and are shown without netting of certain fees. A summary of our consolidated trust fund returns for the three and six months ended June 30, 2019 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 continuing 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 Tuesday, July 30, 2019, 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 (800) 708-4540 or (847) 619-6397 with the passcode of 48836705. 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 August 6, 2019 and can be accessed at (888) 843-7419 or (630) 652-3042 with the passcode of 48836705#. 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 trust funds own investments in securities, 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 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 declines, our cash flows and revenue may decrease.
• If we are not able to respond effectively to changing consumer preferences, our market share, revenue, cash flows, 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 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 financial results.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2018 Annual Report on Form 10-K. 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 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 June 30, 2019, we owned and operated 1,478 funeral service locations and 481 cemeteries (of which 287 are combination locations) in 44 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