Service Corporation International Announces Third Quarter 2014 Financial Results And Provides Preliminary Outlook For 2015

HOUSTON, Oct. 29, 2014 /PRNewswire/ -- Service Corporation International (NYSE: SCI), the largest provider of deathcare products and services in North America, today reported results for the third quarter 2014. Our unaudited 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 from continuing operations excluding special items was $0.23 in the third quarter of 2014, which was an increase of 27.8% over the prior year quarter. An increase in comparable funeral profits and preneed cemetery sales production at comparable properties along with the contribution of the legacy Stewart properties led to the increase.
• Consolidated funeral gross profit grew $21.3 million and the funeral gross margin percentage increased to 19.2% from 16.8% in the third quarter of 2014 compared to the prior year quarter, primarily due to an increase in comparable funeral services performed and sales average along with the contribution from the legacy Stewart funeral homes.
• Consolidated cemetery gross profit increased $11.2 million in the third quarter of 2014 while the gross margin percentage remained relatively flat compared to the prior year quarter. The contribution from the Stewart cemeteries coupled with an increase in comparable preneed sales production drove the increase in gross profits.
• Net cash provided by operating activities excluding special items increased 20.5% to $123.2 million in the third quarter of 2014 compared to $102.2 million in the prior year quarter due primarily to the increase in gross profits described above and higher collections on preneed installment contracts.
• During the third quarter, we returned $88.7 million to our shareholders through a combination of share repurchases and dividends.

Tom Ryan, the Company's President and Chief Executive Officer, commented on the third quarter of 2014:
"I am very proud of our entire team for delivering a solid performance in the third quarter with earnings growth of 28% and cash flow growth of 21% due in large part to our acquisition and successful integration of Stewart. Our comparable funeral business performed exceptionally well, delivering a 17% growth in gross profit compared to prior year.  With the integration substantially complete and our leverage ratios at the targeted levels, we are focused on growing preneed sales and allocating capital to the highest and best use. Looking ahead to 2015, we believe we are well-positioned to deliver solid results and substantial cash flows for our shareholders."

REVIEW OF RESULTS FOR THIRD QUARTER AND FIRST NINE MONTHS OF 2014

Comparable Funeral Results

The table below details comparable funeral results of operations ("same store") for the three months ended September 30, 2014 and 2013 and excludes the results of Stewart. We consider comparable operations to be those owned for the entire period beginning January 1, 2013 and ending September 30, 2014.

• Comparable funeral revenues increased $9.3 million mainly due to a 1.5% increase in average revenue per service coupled with a 0.3% increase in funeral services performed. Additionally we experienced a $2.2 million increase in recognized preneed revenues.
• Comparable funeral gross profit increased $10.9 million, or 16.8% and the adjusted gross margin percentage increased 240 basis points to 19.1% primarily as a result of the increase in revenues. Comparable gross profit was further enhanced by the natural leveraging of the overhead support costs as well as lower selling costs associated with the new policy for handling terminally imminent contracts as described below.
• Preneed funeral sales production, excluding terminally imminent contracts, increased $2.9 million for the quarter or 1.9%. For the nine months ended September 30th, preneed funeral sales production excluding terminally imminent contracts increased $17.0 million or 3.7%. A terminally imminent contract is where a family chooses to make arrangements several weeks or a few months in advance of need and historically represented 16% to 18% of our preneed funeral sales production. We have now begun to transition this customer from the preneed counselor to the funeral director. This process change will have the effect of reducing our costs and focusing the counselor on working traditional preneed sales opportunities. The financial statement impact has improved profits but converted what was historically a preneed contract to an atneed contract. Therefore, we feel that providing sales production excluding terminally imminent contracts gives a truer reflection of preneed activities.

Comparable Cemetery Results

The table below details comparable cemetery results of operations ("same store") for the three months ended September 30, 2014 and 2013 and excludes the results of Stewart. We consider comparable operations to be those owned for the entire period beginning January 1, 2013 and ending September 30, 2014.

• Comparable cemetery revenues grew $10.7 million or 5.2% primarily from an increase in cemetery sales production and a $3.1 million increase in recognized trust fund income.
• Preneed cemetery sales production increased $7.3 million or 5.6% in the current quarter compared to the same period last year.
• Comparable cemetery gross profit increased $4.0 million and the adjusted gross margin percentage increased 70 basis points to 24.1% in the current quarter. Profits on the higher revenues were slightly offset by higher selling costs associated with the increased preneed sales production, planned advertising and media spend, and higher administrative and maintenance expenses.

Other Financial Results  

• General and administrative expenses increased $6.0 million to $39.7 million. The current quarter included $10.7 million of costs related to the integration of Stewart and $2.9 million of system integration and other costs. The prior year included $7.1 million of costs related to the acquisition of Stewart and $2.3 million of system integration costs. Excluding these one-time costs in both periods, general and administrative expenses increased $1.8 million over the prior year which was primarily due to the timing of charitable contributions and professional fees.
• As anticipated, interest expense increased to $43.4 million compared to $38.1 million in the prior period due to the incremental debt associated with the Stewart acquisition.
• As a result of divestitures required by the Federal Trade Commission (FTC) in connection with the Stewart acquisition, we recognized a gain on divestitures of $26.6 million during the third quarter of 2014. Our effective tax rate of 81.7% for the quarter is the result of higher tax gains on the FTC divestitures as there was no deductible goodwill associated with them.

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 increased $21.0 million to $123.2 million for the third quarter due primarily to the increase in gross profits at comparable locations, higher collections on preneed installment contracts, and the contribution of legacy Stewart properties. These increases were partially offset by expected higher interest payments of $13.8 million related to incremental debt associated with the Stewart acquisition. We also incurred an anticipated $3.5 million more in cash taxes.
• A summary of our capital expenditures is set forth below:

TRUST FUND RETURNS  

Total trust fund returns include realized and unrealized gains and losses and dividends. A summary of our consolidated trust fund returns for the three and nine months ended September 30, 2014 is set forth below:

OUTLOOK

Our outlook is detailed below:

Our 2015 outlook reflects an anticipated increase in cash taxes, which is the primary reason for the expected decrease in net cash provided by operating activities excluding special items from our 2014 outlook.

This outlook reflects management's current views and estimates regarding future economic and financial market conditions, company performance and financial results, business prospects, the competitive environment, and other events. This outlook is subject to a number of risks and uncertainties, many of which are beyond the control of SCI, that could cause actual results to differ materially from the potential results highlighted above. A further list and description of these risks and uncertainties and other matters can be found later in this press release under "Cautionary Statement on Forward-Looking Statements".

NON-GAAP FINANCIAL MEASURES  

Earnings from continuing operations excluding special items and diluted earnings per share from continuing operations excluding special items (or sometimes referred to as normalized earnings per share) 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 from continuing operations excluding special items and our GAAP diluted earnings per share to diluted earnings per share from continuing operations 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 Thursday, October 30, 2014, at 8:30 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) 619-6548 with the passcode of 38322541. 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 and can be accessed at (630) 652-3042 with the passcode of 38322541#. Additionally, a replay of the conference call will be available on our website for approximately ninety days.

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 in order 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 home and cemetery industry continues to be increasingly competitive.
• Increasing death benefits related to preneed funeral contracts funded through life insurance or annuity contracts may not cover future increases in the cost of providing a price-guaranteed funeral service.
• The financial condition of third-party insurance companies that fund our preneed funeral contracts may impact our future revenues.
• Unfavorable results of litigation, including currently pending class action cases concerning cemetery or burial practices, 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 revenues may decrease.
• If we are not able to respond effectively to changing consumer preferences, our market share, revenues, and profitability could decrease.
• The continuing upward trend in the number of cremations performed in North America could result in lower revenues and gross profit.
• Our funeral home and cemetery businesses are high fixed-cost businesses.
• Regulation and compliance could have a material adverse impact on our financial results.
• Increased costs, including potential increased health care costs, may have a negative impact on earnings and cash flows.
• Cemetery burial practice claims could have a material adverse impact on our financial results.
• A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.
• 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.
• We may fail to realize the anticipated benefits of the acquisition of Stewart.
• The acquisition of Stewart may result in unexpected consequences to our business and results of operations.
• Our level of indebtedness following the completion of the acquisition of Stewart 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 prevent us from fulfilling our obligations under our indebtedness.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings included in our 2013 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 September 30, 2014, we owned and operated 1,576 funeral homes and 471 cemeteries (of which 261 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