UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C.Washington, D.C. 20549
FORM Form 10-Q
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☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the quarterly period ended | June 30, 2019
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or
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☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
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| For the transition period from __________ to __________
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Commission file number 1-6402-1
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
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Texas | | | 74-1488375 | |
(State or other jurisdiction of incorporation or organization) | (I. R. S. employer identification number) |
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1929 Allen Parkway | | | 77019 | |
Houston | | | (Zip code) | |
Texas | | (713) | 522-5141 | |
(Address of principal executive offices)
| | (Registrant’s telephone number, including area code) | |
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| None | | | |
(Former name, former address, or former fiscal year, if changed since last report) |
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Title of Each Class | | Trading Symbol(s) | | Name of Each Exchange on Which Registered |
Common Stock ($1 par value) | | SCI | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes☒ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): |
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☒ | | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
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| | For the quarterly period ended | JUNE 30, 2020 |
| | | OR |
| ☐ | | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from to | |
Commission file number 1-6402-1
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
| | | | | | | | | | | | | | | | | |
| Texas | | | 74-1488375 | |
| (State or other jurisdiction of incorporation or organization) | | | | (I.R.S. employer identification no.) | |
| 1929 Allen Parkway | | | | | |
| Houston | | | | | |
| Texas | | | | 77019 | |
| (Address of principal executive offices) | | | | (Zip code) | |
Registrant’s telephone number, including area code: (713)522-5141
Securities registered pursuant to Section 12(b) of the Act:
| | | | | | | | | | | | | | |
| Title of Each Class | | Trading Symbol (s) | | Name of Each Exchange on Which Registered |
| Common Stock ($1 par value) | | SCI | | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
| | | | | | | | | | | | | | |
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| Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. | Yes | þ | No | ¨ |
| Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). | Yes | þ | No | ¨ |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one): | | | | | | | | | |
| Large accelerated filer | ☐
þ
| Accelerated filer | ☐
¨
| Non-accelerated filer | ☐¨ | Smaller reporting company | ☐ | Emerging growth company | ☐ |
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| If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. | ¨ | | | |
| Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the act). | (Do not check if smaller reporting company)Yes | ☐ |
| þ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes☐No☒
The number of shares outstanding of the registrant’s common stock as of July 26, 201928, 2020 was 182,360,782176,219,014 (net of treasury shares).
SERVICE CORPORATION INTERNATIONAL
INDEX
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SERVICE CORPORATION INTERNATIONAL
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2 Service Corporation International
GLOSSARY
Glossary
The following terms are common to the deathcare industry, are used throughout this report, and have the following meanings:
Atneed — Funeral, including cremation, and cemetery arrangements sold once death has occurred.
Cancellation — Termination of a preneed contract, which relieves us of the obligation to provide the goods and services included in the contract. Cancellations may be requested by the customer or be initiated by us for failure to comply with the contractual terms of payment. State or provincial laws govern the amount of refund, if any, owed to the customer.
Care Trust Corpus — The deposits and net realized capital gains and losses included in a perpetual care trust that cannot be withdrawn. In certain states, some or all of the net realized capital gains can be distributed, so they are not included in the corpus.
Cemetery Merchandise and Services — Stone and bronze memorials, markers, outer burial containers, floral placement, graveside services, merchandise installations, urns, and interments.
Cemetery Perpetual Care Trust or Endowment Care Fund (ECF) — A trust fund established for the purpose of maintaining cemetery grounds and property into perpetuity. For these trusts, the corpus remains in the trust in perpetuity and the investment earnings or elected distributions are withdrawn regularly and are intended to defray our expenses incurred to maintain the cemetery. In certain states, some or all of the net realized capital gains can also be distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.
Cemetery Property — Developed lots, lawn crypts, mausoleum spaces, niches, and cremation memorialization property items (constructed and ready to accept interments) and undeveloped land we intend to develop for the sale of interment rights. Includes the construction-in-progress balance during the pre-construction and construction phases of projects creating new developed property items.
Cemetery Property Amortization — The non-cash recognized expenses of cemetery property interment rights, which are recorded by specific identification with the cemetery property revenue for each contract.
Cemetery Property Interment Rights — The exclusive right to determine the human remains that will be interred in a specific cemetery property space. See also Cemetery Property Revenue below.
Cemetery Property Revenue — Recognized sales of interment rights in cemetery property when the receivable is deemed collectible and the property is fully constructed and available for interment.
Combination Location (Combos) — Locations where a funeral service location is physically located within or adjoining a SCI ownedan SCI-owned cemetery location.
Cremation — The reduction of human remains to bone fragments by intense heat.
Cremation Memorialization — Products specifically designed to commemorate and honor the life of an individual that has been cremated. These products include cemetery property items that provide for the disposition of cremated remains within our cemeteries such as benches, boulders, statues, etc. They also include memorial walls and books where the name of the individual is inscribed but the remains have been scattered or kept by the family.
Funeral Merchandise and Services — Merchandise such as burial caskets and related accessories, outer burial containers, urns and other cremation receptacles, casket and cremation memorialization products, flowers, and professional services relating to funerals including arranging and directing services, use of funeral facilities and motor vehicles, removal, preparation, embalming, cremations, memorialization, visitations, travel protection, and catering.
Funeral Recognized Preneed Revenue — Funeral merchandise and travel protection, net sold on a preneed contract and delivered before a death has occurred.
Funeral Services Performed — The number of funeral services, including cremations, provided after the date of death, sometimes referred to as funeral volume.
General Agency (GA) Revenue — Commissions we receive from third-party life insurance companies for life insurance policies sold to preneed customers for the purpose of funding preneed funeral arrangements. The commission rate paid is determined based on the product type sold, the length of payment terms, and the age of the insured/annuitant.
Interment — The burial or final placement of human remains in the ground (interment), in mausoleums (entombment), in niches (inurnment), or in cremation memorialization property (inurnment).
Lawn Crypt — Cemetery property in which an underground outer burial receptacle constructed of concrete and reinforced steel has been pre-installed in predetermined designated areas.
Marker — A method of identifying a deceased person in a particular burial space, crypt, niche, or cremation memorialization property. Permanent burial and cremation memorialization markers are usually made of bronze or stone.
Maturity — When the underlying contracted merchandise is delivered or service is performed, typically at death. This is the point at which preneed funeral contracts are converted to atneed contracts (note — delivery of certain merchandise and services can occur prior to death).
Mausoleum — An above ground structure that is designed to house caskets and/or cremation urns.
Merchandise and Service Trust — A trust account established in accordance with state or provincial law into which we deposit the required percentage of customers’ payments for preneed funeral, cremation, or cemetery merchandise and services to be delivered or performed by us in the future. The amounts deposited can be withdrawn only after we have completed our obligations under the preneed contract or the cancellation of the contract. Also referred to as a preneed trust.
Outer Burial Container — A reinforced container intended to inhibit the subsidence of the earth and house the casket after it is placed in the ground, also known as a burial vault.
Preneed — Purchase of cemetery property interment rights or any merchandise and services prior to death occurring.
Preneed Backlog — Future revenue from unfulfilled preneed funeral, cremation, and cemetery contractual arrangements.
Preneed Cemetery Production — Sales of preneed cemetery contracts. These sales are recorded in Deferred revenue, net until the merchandise is delivered, the service is performed, and the property has been constructed and is available for interment.
Preneed Funeral Production — Sales of preneed funeral trust-funded and insurance-funded contracts. Preneed funeral trust-funded contracts are recorded in Deferred revenue, netnet until the merchandise is delivered or the service is performed. We do not reflect the unfulfilled insurance-funded preneed funeral contract amounts in our Consolidated Balance Sheet. The proceeds of the life insurance policies will be reflected in revenue as these funerals are performed by us in the future.
Preneed Receivables, Net — Amounts due from customers when we have delivered the merchandise, performed the service, or transferred control of the cemetery property interment rights prior to a death occurring or amounts due from customers on irrevocable preneed contracts.
Sales Average — Average revenue per funeral service performed, excluding the impact of funeral recognized preneed revenue, GA revenue, and certain other revenue.
Travel Protection — A product that provides shipment of remains to the servicing funeral home or cemetery of choice if the purchaser passes away outside of a certain radius of their residence, without any additional expense to the family.
Trust Fund Income — Recognized investment earnings from our merchandise and service and perpetual care trust investments.
As used herein, “SCI”, “Company”, “we”, “our”, and “us” refer to Service Corporation International and companies owned directly or indirectly by Service Corporation International, unless the context requires otherwise. Management published a white paper on the corporate website for further understanding of accounting for preneed sales. You can view the white paper at http://investors.sci-corp.com under Featured Documents. Documents and information on our website are not incorporated by reference herein.
4 Service Corporation International
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| PART I. FINANCIAL INFORMATION |
Item 1. Financial Statements
SERVICE CORPORATION INTERNATIONALService Corporation International
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONSCondensed Consolidated Statement of Operations (Unaudited)
(UNAUDITED)
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| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands, except per share amounts) |
| Revenue: | | | | | | | |
| Property and merchandise revenue | $ | 415,492 |
| | $ | 397,600 |
| | $ | 796,701 |
| | $ | 765,814 |
|
| Service revenue | 339,090 |
| | 334,450 |
| | 694,461 |
| | 712,548 |
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| Other revenue | 57,990 |
| | 64,042 |
| | 119,622 |
| | 112,212 |
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| Total revenue | 812,572 |
| | 796,092 |
| | 1,610,784 |
| | 1,590,574 |
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| Costs and expenses: |
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| Cost of property and merchandise | (213,635 | ) | | (209,925 | ) | | (411,529 | ) | | (397,648 | ) |
| Cost of service | (193,378 | ) | | (188,293 | ) | | (384,191 | ) | | (379,141 | ) |
| Overhead and other expenses | (214,413 | ) | | (209,747 | ) | | (432,084 | ) | | (429,896 | ) |
| Total costs and expenses | (621,426 | ) | | (607,965 | ) | | (1,227,804 | ) | | (1,206,685 | ) |
| Operating profit | 191,146 |
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| 188,127 |
| | 382,980 |
| | 383,889 |
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| General and administrative expenses | (29,370 | ) |
| (31,136 | ) |
| (71,900 | ) |
| (65,920 | ) |
| (Losses) gains on divestitures and impairment charges, net | (11,823 | ) |
| 6,865 |
|
| (13,701 | ) |
| 7,347 |
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| Hurricane recoveries (expenses), net | 152 |
| | (1,902 | ) | | (296 | ) | | 330 |
|
| Operating income | 150,105 |
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| 161,954 |
| | 297,083 |
| | 325,646 |
|
| Interest expense | (47,317 | ) |
| (44,519 | ) |
| (94,707 | ) |
| (88,095 | ) |
| Loss on early extinguishment of debt, net | (7,579 | ) |
| — |
|
| (7,579 | ) |
| (10,131 | ) |
| Other income, net | 874 |
|
| 1,880 |
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| 1,594 |
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| 2,264 |
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| Income before income taxes | 96,083 |
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| 119,315 |
| | 196,391 |
| | 229,684 |
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| Provision for income taxes | (23,570 | ) |
| (16,034 | ) |
| (44,665 | ) |
| (44,355 | ) |
| Net income | 72,513 |
|
| 103,281 |
| | 151,726 |
| | 185,329 |
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| Net income attributable to noncontrolling interests | (184 | ) |
| (42 | ) |
| (74 | ) |
| (102 | ) |
| Net income attributable to common stockholders | $ | 72,329 |
|
| $ | 103,239 |
| | $ | 151,652 |
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| $ | 185,227 |
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| Basic earnings per share: | | | | | | | |
| Net income attributable to common stockholders | $ | 0.40 |
|
| $ | 0.57 |
|
| $ | 0.83 |
|
| $ | 1.01 |
|
| Basic weighted average number of shares | 182,369 |
|
| 182,637 |
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| 182,048 |
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| 183,877 |
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| Diluted earnings per share: |
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| |
| | | |
| Net income attributable to common stockholders | $ | 0.39 |
|
| $ | 0.55 |
|
| $ | 0.82 |
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| $ | 0.98 |
|
| Diluted weighted average number of shares | 185,690 |
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| 187,188 |
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| 185,517 |
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| 188,547 |
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| Three Months Ended June 30, | | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | | 2020 | | 2019 |
| (in thousands, except per share amounts)
| | | | | | | |
| Revenue | | | | | | | | |
| Property and merchandise revenue | $ | 414,596 | | | $ | 415,492 | | | | $ | 792,479 | | | $ | 796,701 | |
| Service revenue | 354,799 | | | 339,090 | | | | 722,327 | | | 694,461 | |
| Other revenue | 50,640 | | | 57,990 | | | | 108,194 | | | 119,622 | |
| Total revenue | 820,035 | | | 812,572 | | | | 1,623,000 | | | 1,610,784 | |
| | | | | | | | |
| Costs of revenue | | | | | | | | |
| Cost of property and merchandise | (207,102) | | | (213,635) | | | | (403,550) | | | (411,529) | |
| Cost of service | (173,515) | | | (193,378) | | | | (371,039) | | | (384,191) | |
| Overhead and other expenses | (220,651) | | | (214,413) | | | | (450,600) | | | (432,084) | |
| Costs of revenue | (601,268) | | | (621,426) | | | | (1,225,189) | | | (1,227,804) | |
| Gross profit | 218,767 | | | 191,146 | | | | 397,811 | | | 382,980 | |
| Corporate general and administrative expenses | (37,169) | | | (29,218) | | | | (68,982) | | | (72,196) | |
| Gains (losses) on divestitures and impairment charges, net | 737 | | | (11,823) | | | | 5,282 | | | (13,701) | |
| | | | | | | | |
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| | | | | | | | |
| Operating income | 182,335 | | | 150,105 | | | | 334,111 | | | 297,083 | |
| Interest expense | (41,767) | | | (47,317) | | | | (86,118) | | | (94,707) | |
| Losses on early extinguishment of debt, net | (11) | | | (7,579) | | | | (150) | | | (7,579) | |
| Other income (expense), net | 1,166 | | | 874 | | | | (81) | | | 1,594 | |
| Income before income taxes | 141,723 | | | 96,083 | | | | 247,762 | | | 196,391 | |
| Provision for income taxes | (36,170) | | | (23,570) | | | | (60,208) | | | (44,665) | |
| | | | | | | | |
| | | | | | | | |
| Net income | 105,553 | | | 72,513 | | | | 187,554 | | | 151,726 | |
| Net income attributable to noncontrolling interests | (45) | | | (184) | | | | (105) | | | (74) | |
| Net income attributable to common stockholders | $ | 105,508 | | | $ | 72,329 | | | | $ | 187,449 | | | $ | 151,652 | |
| Basic earnings per share: | | | | | | | | |
| Net income attributable to common stockholders | $ | 0.59 | | | $ | 0.40 | | | | $ | 1.04 | | | $ | 0.83 | |
| Basic weighted average number of shares | 177,902 | | | 182,369 | | | | 179,378 | | | 182,048 | |
| Diluted earnings per share: | | | | | | | | |
| Net income attributable to common stockholders | $ | 0.59 | | | $ | 0.39 | | | | $ | 1.03 | | | $ | 0.82 | |
| Diluted weighted average number of shares | 179,666 | | | 185,690 | | | | 181,639 | | | 185,517 | |
(See notes to unaudited condensed consolidated financial statements)
SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Net income | $ | 72,513 |
| | $ | 103,281 |
| | $ | 151,726 |
| | $ | 185,329 |
|
| Other comprehensive income: | | | | | | | |
| Foreign currency translation adjustments | 6,998 |
| | (5,909 | ) | | 14,399 |
| | (15,501 | ) |
| Total comprehensive income | 79,511 |
| | 97,372 |
| | 166,125 |
| | 169,828 |
|
| Total comprehensive income attributable to noncontrolling interests | (36 | ) | | (41 | ) | | (76 | ) | | (98 | ) |
| Total comprehensive income attributable to common stockholders | $ | 79,475 |
| | $ | 97,331 |
| | $ | 166,049 |
| | $ | 169,730 |
|
Service Corporation International
Condensed Consolidated Statement of Comprehensive Income (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | 2020 | | 2019 | | |
| (In thousands) | | | | | | | |
| Net income | $ | 105,553 | | | $ | 72,513 | | $ | 187,554 | | | $ | 151,726 | | | |
| Other comprehensive income: | | | | | | | | |
| Foreign currency translation adjustments | 13,738 | | | 6,998 | | (17,464) | | | 14,399 | | | |
| | | | | | | | |
| Total comprehensive income | 119,291 | | | 79,511 | | 170,090 | | | 166,125 | | | |
| Total comprehensive income attributable to noncontrolling interests | (47) | | | (36) | | (105) | | | (76) | | | |
| Total comprehensive income attributable to common stockholders | $ | 119,244 | | | $ | 79,475 | | $ | 169,985 | | | $ | 166,049 | | | |
(See notes to unaudited condensed consolidated financial statements)
6 Service Corporation International
SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED) |
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (In thousands, except share amounts) |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 243,684 |
| | $ | 198,850 |
|
| Receivables, net | 82,261 |
| | 73,825 |
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| Inventories | 25,669 |
| | 24,950 |
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| Other | 42,603 |
| | 33,607 |
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| Total current assets | 394,217 |
| | 331,232 |
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| Preneed receivables, net and trust investments | 4,613,523 |
| | 4,271,392 |
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| Cemetery property | 1,834,745 |
| | 1,837,464 |
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| Property and equipment, net | 2,027,417 |
| | 1,977,364 |
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| Goodwill | 1,846,627 |
| | 1,863,842 |
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| Deferred charges and other assets | 1,019,105 |
| | 934,151 |
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| Cemetery perpetual care trust investments | 1,624,709 |
| | 1,477,798 |
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| Total assets | $ | 13,360,343 |
| | $ | 12,693,243 |
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| | | | |
| LIABILITIES & EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable and accrued liabilities | $ | 447,388 |
|
| $ | 479,768 |
|
| Current maturities of long-term debt | 167,084 |
|
| 69,896 |
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| Income taxes payable | — |
|
| 5,936 |
|
| Total current liabilities | 614,472 |
|
| 555,600 |
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| Long-term debt | 3,464,902 |
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| 3,532,182 |
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| Deferred revenue, net | 1,444,564 |
|
| 1,418,814 |
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| Deferred tax liability | 404,230 |
|
| 404,627 |
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| Other liabilities | 370,507 |
|
| 297,302 |
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| Deferred receipts held in trust | 3,693,355 |
|
| 3,371,738 |
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| Care trusts’ corpus | 1,624,097 |
|
| 1,471,165 |
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| Commitments and contingencies (Note 10) |
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| Equity: | |
| |
| Common stock, $1 per share par value, 500,000,000 shares authorized, 186,411,295 and 184,720,582 shares issued, respectively, and 182,468,970 and 181,470,582 shares outstanding, respectively | 182,469 |
|
| 181,471 |
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| Capital in excess of par value | 998,794 |
|
| 972,710 |
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| Retained earnings | 535,173 |
|
| 474,327 |
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| Accumulated other comprehensive income | 27,792 |
|
| 13,395 |
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| Total common stockholders’ equity | 1,744,228 |
|
| 1,641,903 |
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| Noncontrolling interests | (12 | ) |
| (88 | ) |
| Total equity | 1,744,216 |
|
| 1,641,815 |
|
| Total liabilities and equity | $ | 13,360,343 |
|
| $ | 12,693,243 |
|
(See notes to unaudited condensed consolidated financial statements)
SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)
|
| | | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2019 | | 2018 |
| | (In thousands) |
| Cash flows from operating activities: | |
| |
| Net income | $ | 151,726 |
|
| $ | 185,329 |
|
| Adjustments to reconcile net income to net cash provided by operating activities: |
|
|
|
| Loss on early extinguishment of debt | 7,579 |
|
| 10,131 |
|
| Depreciation and amortization | 74,244 |
|
| 78,069 |
|
| Amortization of intangibles | 13,653 |
|
| 13,645 |
|
| Amortization of cemetery property | 33,523 |
|
| 29,813 |
|
| Amortization of loan costs | 2,989 |
|
| 3,017 |
|
| Provision for doubtful accounts | 4,273 |
|
| 4,494 |
|
| Provision for deferred income taxes | 6,090 |
|
| 22,011 |
|
| Losses (gains) on divestitures and impairment charges, net | 13,701 |
|
| (7,347 | ) |
| Gain on sale of investments | — |
| | (2,636 | ) |
| Share-based compensation | 8,013 |
|
| 7,544 |
|
| Change in assets and liabilities, net of effects from acquisitions and divestitures: |
|
|
|
| (Increase) decrease in receivables | (11,608 | ) |
| 965 |
|
| Increase in other assets | (18,643 | ) |
| (10,635 | ) |
| Decrease in payables and other liabilities | (55,148 | ) |
| (37,817 | ) |
| Effect of preneed sales production and maturities: |
|
|
|
| Increase in preneed receivables, net and trust investments | (1,594 | ) |
| (23,494 | ) |
| Increase in deferred revenue, net | 55,441 |
|
| 56,342 |
|
| Decrease in deferred receipts held in trust | (21,346 | ) |
| (14,055 | ) |
| Net cash provided by operating activities | 262,893 |
|
| 315,376 |
|
| Cash flows from investing activities: |
|
|
|
| Capital expenditures | (112,714 | ) |
| (102,890 | ) |
| Acquisitions, net of cash acquired | (32,755 | ) |
| (167,622 | ) |
| Proceeds from divestitures and sales of property and equipment | 11,380 |
|
| 18,305 |
|
| Proceeds from sale of investments | — |
| | 2,900 |
|
| Payments on Company-owned life insurance policies | (8,586 | ) | | (11,733 | ) |
| Proceeds from Company-owned life insurance policies | — |
| | 2,810 |
|
| Other | — |
| | (14,525 | ) |
| Net cash used in investing activities | (142,675 | ) |
| (272,755 | ) |
| Cash flows from financing activities: |
|
|
|
| Proceeds from issuance of long-term debt | 854,263 |
|
| 370,000 |
|
| Debt issuance costs | (15,536 | ) |
| — |
|
| Scheduled payments of debt | (8,712 | ) |
| (8,631 | ) |
| Early payments of debt | (828,121 | ) |
| (259,590 | ) |
| Principal payments on finance leases | (21,807 | ) |
| (19,270 | ) |
| Proceeds from exercise of stock options | 23,101 |
|
| 7,302 |
|
| Purchase of Company common stock | (29,574 | ) |
| (228,866 | ) |
| Payments of dividends | (65,691 | ) |
| (62,241 | ) |
| Bank overdrafts and other | 12,307 |
|
| (8,820 | ) |
| Net cash used in financing activities | (79,770 | ) |
| (210,116 | ) |
| Effect of foreign currency on cash, cash equivalents, and restricted cash | 3,113 |
|
| (2,133 | ) |
| Net increase (decrease) in cash, cash equivalents, and restricted cash | 43,561 |
|
| (169,628 | ) |
| Cash, cash equivalents, and restricted cash at beginning of period | 207,584 |
|
| 340,601 |
|
| Cash, cash equivalents, and restricted cash at end of period | $ | 251,145 |
|
| $ | 170,973 |
|
Condensed Consolidated Balance Sheet (Unaudited)
| | | | | | | | | | | |
| | June 30, 2020 | | December 31, 2019 |
| | (In thousands, except share amounts) | | |
| | | |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 222,234 | | | $ | 186,276 | |
| Receivables, net of reserves of $6,006 and $2,262, respectively | 76,963 | | | 81,671 | |
| Inventories | 25,965 | | | 25,118 | |
| Other | 58,474 | | | 80,488 | |
| Total current assets | 383,636 | | | 373,553 | |
| Preneed receivables, net of reserves of $18,277 and $41,142, respectively, and trust investments | 4,622,700 | | | 4,789,562 | |
| Cemetery property | 1,882,890 | | | 1,873,602 | |
| Property and equipment, net | 2,098,196 | | | 2,065,433 | |
| Goodwill | 1,865,401 | | | 1,864,223 | |
| Deferred charges and other assets, net of reserves of $8,245 and $8,374, respectively | 1,035,508 | | | 1,029,908 | |
| Cemetery perpetual care trust investments | 1,599,599 | | | 1,681,149 | |
| Total assets | $ | 13,487,930 | | | $ | 13,677,430 | |
| | | |
| LIABILITIES & EQUITY | | | |
| Current liabilities: | | | |
| Accounts payable and accrued liabilities | $ | 460,718 | | | $ | 478,545 | |
| Current maturities of long-term debt | 87,267 | | | 69,821 | |
| Income taxes payable | 58,840 | | | 8,353 | |
| Total current liabilities | 606,825 | | | 556,719 | |
| Long-term debt | 3,573,709 | | | 3,513,530 | |
| Deferred revenue, net | 1,494,106 | | | 1,467,103 | |
| Deferred tax liability | 433,021 | | | 421,482 | |
| Other liabilities | 381,704 | | | 378,074 | |
| Deferred receipts held in trust | 3,644,212 | | | 3,839,376 | |
| Care trusts’ corpus | 1,600,025 | | | 1,677,891 | |
| Commitments and contingencies (Note 9) | | | |
| Equity: | | | |
| Common stock, $1 per share par value, 500,000,000 shares authorized, 186,104,673 and 185,100,789 shares issued, respectively, and 177,011,040 and 181,184,963 shares outstanding, respectively | 177,011 | | | 181,185 | |
| Capital in excess of par value | 1,002,988 | | | 1,010,361 | |
| Retained earnings | 561,882 | | | 601,903 | |
| Accumulated other comprehensive income | 12,400 | | | 29,864 | |
| Total common stockholders’ equity | 1,754,281 | | | 1,823,313 | |
| Noncontrolling interests | 47 | | | (58) | |
| Total equity | 1,754,328 | | | 1,823,255 | |
| Total liabilities and equity | $ | 13,487,930 | | | $ | 13,677,430 | |
(See notes to unaudited condensed consolidated financial statements)
SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(UNAUDITED)
(In thousands)
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Capital in Excess of Par Value | | Retained Earnings (Accumulated Deficit) | | Accumulated Other Comprehensive Income | | Noncontrolling Interests | | Total |
| Balance at December 31, 2018 | $ | 184,721 |
| | $ | (3,250 | ) | | $ | 972,710 |
| | $ | 474,327 |
| | $ | 13,395 |
| | $ | (88 | ) | | $ | 1,641,815 |
|
| Comprehensive income | — |
| | — |
| | — |
| | 79,323 |
| | 7,251 |
| | 40 |
| | 86,614 |
|
| Dividends declared on common stock ($0.18 per share) | — |
| | — |
| | — |
| | (32,820 | ) | | — |
| | — |
| | (32,820 | ) |
| Employee share-based compensation earned | — |
| | — |
| | 4,568 |
| | — |
| | — |
| | — |
| | 4,568 |
|
| Stock option exercises | 950 |
| | — |
| | 15,012 |
| | — |
| | — |
| | — |
| | 15,962 |
|
| Restricted stock awards, net of forfeitures | 126 |
| | — |
| | (126 | ) | | — |
| | — |
| | — |
| | — |
|
| Purchase of Company common stock | — |
| | (355 | ) | | (1,935 | ) | | (12,252 | ) | | — |
| | — |
| | (14,542 | ) |
| Other | 59 |
| | — |
| | (1,251 | ) | | — |
| | — |
| | — |
| | (1,192 | ) |
| Balance at March 31, 2019 | 185,856 |
| | (3,605 | ) | | 988,978 |
| | 508,578 |
| | 20,646 |
| | (48 | ) | | 1,700,405 |
|
| Comprehensive income | — |
| | — |
| | — |
| | 72,329 |
| | 7,146 |
| | 36 |
| | 79,511 |
|
| Dividends declared on common stock ($0.18 per share) | — |
| | — |
| | — |
| | (32,871 | ) | | — |
| | — |
| | (32,871 | ) |
| Employee share-based compensation earned | — |
| | — |
| | 3,445 |
| | — |
| | — |
| | — |
| | 3,445 |
|
| Stock option exercises | 513 |
| | — |
| | 6,626 |
| | — |
| | — |
| | — |
| | 7,139 |
|
| Purchase of Company common stock | — |
| | (337 | ) | | (1,832 | ) | | (12,863 | ) | | — |
| | — |
| | (15,032 | ) |
| Other | 42 |
| | — |
| | 1,577 |
| | — |
| | — |
| | — |
| | 1,619 |
|
| Balance at June 30, 2019 | $ | 186,411 |
| | $ | (3,942 | ) | | $ | 998,794 |
| | $ | 535,173 |
| | $ | 27,792 |
| | $ | (12 | ) | | $ | 1,744,216 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Common Stock | | Treasury Stock | | Capital in Excess of Par Value | | Retained Earnings | | Accumulated Other Comprehensive Income | | Noncontrolling Interests | | Total |
| Balance at December 31, 2017 | $ | 191,936 |
| | $ | (5,321 | ) | | $ | 970,468 |
| | $ | 210,364 |
| | $ | 41,943 |
| | $ | 47 |
| | $ | 1,409,437 |
|
| Cumulative effect of accounting changes | — |
| | — |
| | — |
| | 172,461 |
| | (229 | ) | | — |
| | 172,232 |
|
| Comprehensive income | — |
| | — |
| | — |
| | 81,988 |
| | (9,589 | ) | | 57 |
| | 72,456 |
|
| Dividends declared on common stock ($0.17 per share) | — |
| | — |
| | — |
| | (31,348 | ) | | — |
| | — |
| | (31,348 | ) |
| Employee share-based compensation earned | — |
| | — |
| | 3,699 |
| | — |
| | — |
| | — |
| | 3,699 |
|
| Stock option exercises | 282 |
| | — |
| | 4,707 |
| | — |
| | — |
| | — |
| | 4,989 |
|
| Restricted stock awards, net of forfeitures | 163 |
| | — |
| | (163 | ) | | — |
| | — |
| | — |
| | — |
|
| Purchase of Company common stock | — |
| | (3,095 | ) | | (16,101 | ) | | (99,601 | ) | | — |
| | — |
| | (118,797 | ) |
| Other | 47 |
| | — |
| | (866 | ) | | — |
| | — |
| | — |
| | (819 | ) |
| Balance at March 31, 2018 | $ | 192,428 |
| | $ | (8,416 | ) | | $ | 961,744 |
| | $ | 333,864 |
| | $ | 32,125 |
| | $ | 104 |
| | $ | 1,511,849 |
|
| Comprehensive income | — |
| | — |
| | — |
| | 103,239 |
| | (5,908 | ) | | 41 |
| | 97,372 |
|
| Dividends declared on common stock ($0.17 per share) | — |
| | — |
| | — |
| | (30,893 | ) | | — |
| | — |
| | (30,893 | ) |
| Employee share-based compensation earned | — |
| | — |
| | 3,845 |
| | — |
| | — |
| | — |
| | 3,845 |
|
| Stock option exercises | 129 |
| | — |
| | 2,184 |
| | — |
| | — |
| | — |
| | 2,313 |
|
| Restricted stock awards, net of forfeitures | 15 |
| | — |
| | (15 | ) | | — |
| | — |
| | — |
| | — |
|
| Purchase of Company common stock | — |
| | (2,971 | ) | | (15,557 | ) | | (91,541 | ) | | — |
| | — |
| | (110,069 | ) |
| Other | 53 |
| | — |
| | 1,927 |
| | — |
| | — |
| | — |
| | 1,980 |
|
| Balance at June 30, 2018 | $ | 192,625 |
| | $ | (11,387 | ) | | $ | 954,128 |
| | $ | 314,669 |
| | $ | 26,217 |
| | $ | 145 |
| | $ | 1,476,397 |
|
| | | | | | | | | | | |
| | Six Months Ended June 30, | | |
| | 2020 | | 2019 |
| (In thousands) | | |
| Cash flows from operating activities: | | | |
| Net income | $ | 187,554 | | | $ | 151,726 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | |
| | | |
| Losses on early extinguishment of debt, net | 150 | | | 7,579 | |
| | | |
| Depreciation and amortization | 75,582 | | | 74,244 | |
| Amortization of intangibles | 11,304 | | | 13,653 | |
| Amortization of cemetery property | 33,696 | | | 33,523 | |
| Amortization of loan costs | 2,571 | | | 2,989 | |
| Provision for expected credit losses | 9,023 | | | 4,273 | |
| Provision for deferred income taxes | 5,681 | | | 6,090 | |
| (Gains) losses on divestitures and impairment charges, net | (5,282) | | | 13,701 | |
| | | |
| Share-based compensation | 7,044 | | | 8,013 | |
| | | |
| Change in assets and liabilities, net of effects from acquisitions and dispositions: | | | |
| Decrease (increase) in receivables | 2,781 | | | (11,608) | |
| Increase in other assets | (18,232) | | | (18,643) | |
| Increase (decrease) in payables and other liabilities | 41,936 | | | (55,148) | |
| Effect of preneed sales production and maturities: | | | |
| Increase in preneed receivables, net and trust investments | (16,520) | | | (1,594) | |
| Increase in deferred revenue, net | 39,374 | | | 55,441 | |
| Decrease in deferred receipts held in trust | (12,360) | | | (21,346) | |
| | | |
| | | |
| | | |
| Net cash provided by operating activities | 364,302 | | | 262,893 | |
| Cash flows from investing activities: | | | |
| Capital expenditures | (104,828) | | | (112,714) | |
| Business acquisitions, net of cash acquired | (26,271) | | | (21,418) | |
| Real estate acquisitions | (32,766) | | | (11,337) | |
| Proceeds from divestitures and sales of property and equipment | 12,136 | | | 11,380 | |
| | | |
Payments for Company-owned life insurance policies
| (3,848) | | | (8,586) | |
Proceeds from Company-owned life insurance policies and other
| 3,519 | | | — | |
| | | |
| | | |
| | | |
| Net cash used in investing activities | (152,058) | | | (142,675) | |
| Cash flows from financing activities: | | | |
| Proceeds from issuance of long-term debt | 190,000 | | | 854,263 | |
| Debt issuance costs | — | | | (15,536) | |
| Scheduled payments of debt | (16,455) | | | (8,712) | |
| Early payments of debt | (95,897) | | | (828,121) | |
| Principal payments on finance leases | (20,453) | | | (21,807) | |
| Proceeds from exercise of stock options | 15,126 | | | 23,101 | |
| | | |
| Purchase of Company common stock | (210,568) | | | (29,574) | |
| Payments of dividends | (68,133) | | | (65,691) | |
| | | |
| Bank overdrafts and other | 6,686 | | | 12,307 | |
| | | |
| Net cash used in financing activities | (199,694) | | | (79,770) | |
| | | |
| | | |
| | | |
| | | |
| | | |
| | | |
| Effect of foreign currency | (4,575) | | | 3,113 | |
| Net increase in cash, cash equivalents, and restricted cash | 7,975 | | | 43,561 | |
| Cash, cash equivalents, and restricted cash at beginning of period | 242,620 | | | 207,584 | |
| Cash, cash equivalents, and restricted cash at end of period | $ | 250,595 | | | $ | 251,145 | |
(See notes to unaudited condensed consolidated financial statements)
8 Service Corporation International
SERVICE CORPORATION INTERNATIONAL
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Service Corporation International
Condensed Consolidated Statement of Equity (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Treasury
Stock,
Par Value | | Capital in
Excess of
Par Value | |
Retained
Earnings | | Accumulated Other
Comprehensive
Income (Deficit) | | Noncontrolling
Interest | | Total |
| | (In thousands, except per share amounts) | | | | | | | | | | | | |
| Balance at December 31, 2018 | $ | 184,721 | | | $ | (3,250) | | | $ | 972,710 | | | $ | 474,327 | | | $ | 13,395 | | | $ | (88) | | | $ | 1,641,815 | |
| Comprehensive income | — | | | — | | | — | | | 79,323 | | | 7,251 | | | 40 | | | 86,614 | |
| Dividends declared on common stock ($0.18 per share) | — | | | — | | | — | | | (32,820) | | | ��� | | | — | | | (32,820) | |
| Stock option exercises | 950 | | | — | | | 15,012 | | | — | | | — | | | — | | | 15,962 | |
| Restricted stock awards, net of forfeitures | 126 | | | — | | | (126) | | | — | | | — | | | — | | | — | |
| Employee share-based compensation earned | — | | | — | | | 4,568 | | | — | | | — | | | — | | | 4,568 | |
| Purchase of Company common stock | — | | | (355) | | | (1,935) | | | (12,252) | | | — | | | — | | | (14,542) | |
| Other | 59 | | | — | | | (1,251) | | | — | | | — | | | — | | | (1,192) | |
| Balance at March 31, 2019 | $ | 185,856 | | | $ | (3,605) | | | $ | 988,978 | | | $ | 508,578 | | | $ | 20,646 | | | $ | (48) | | | $ | 1,700,405 | |
| Comprehensive income | — | | | — | | | — | | | 72,329 | | | 7,146 | | | 36 | | | 79,511 | |
| Dividends declared on common stock ($0.18 per share) | — | | | — | | | — | | | (32,871) | | | — | | | — | | | (32,871) | |
| Stock option exercises | 513 | | | — | | | 6,626 | | | — | | | — | | | — | | | 7,139 | |
| | | | | | | | | | | | | |
| Employee share-based compensation earned | — | | | — | | | 3,445 | | | — | | | — | | | — | | | 3,445 | |
| Purchase of Company common stock | — | | | (337) | | | (1,832) | | | (12,863) | | | — | | | — | | | (15,032) | |
| Other | 42 | | | — | | | 1,577 | | | — | | | — | | | — | | | 1,619 | |
| Balance at June 30, 2019 | $ | 186,411 | | | $ | (3,942) | | | $ | 998,794 | | | $ | 535,173 | | | $ | 27,792 | | | $ | (12) | | | $ | 1,744,216 | |
Service Corporation International
Condensed Consolidated Statement of Equity (Unaudited)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Common
Stock | | Treasury
Stock,
Par Value | | Capital in
Excess of
Par Value | |
Retained
Earnings | | Accumulated Other
Comprehensive
Income (Deficit) | | Noncontrolling
Interest | | Total |
| | (In thousands, except per share amounts) | | | | | | | | | | | | |
| Balance at December 31, 2019 | $ | 185,101 | | | $ | (3,916) | | | $ | 1,010,361 | | | $ | 601,903 | | | $ | 29,864 | | | $ | (58) | | | $ | 1,823,255 | |
| Cumulative effect of accounting changes | — | | | — | | | — | | | 17,118 | | | — | | | — | | | 17,118 | |
| Comprehensive income | — | | | — | | | — | | | 81,941 | | | (31,200) | | | 58 | | | 50,799 | |
| Dividends declared on common stock ($0.19 per share) | — | | | — | | | — | | | (34,414) | | | — | | | — | | | (34,414) | |
| Stock option exercises | 789 | | | — | | | 14,337 | | | — | | | — | | | — | | | 15,126 | |
| Restricted stock awards and units, net of forfeitures | 168 | | | — | | | (168) | | | — | | | — | | | — | | | — | |
| Employee share-based compensation earned | — | | | — | | | 3,406 | | | — | | | — | | | — | | | 3,406 | |
| Purchase of Company common stock | — | | | (2,901) | | | (16,202) | | | (103,999) | | | — | | | — | | | (123,102) | |
| Other | — | | | — | | | (1,095) | | | — | | | — | | | — | | | (1,095) | |
| Balance at March 31, 2020 | $ | 186,058 | | | $ | (6,817) | | | $ | 1,010,639 | | | $ | 562,549 | | | $ | (1,336) | | | $ | — | | | $ | 1,751,093 | |
| Cumulative effect of accounting changes | — | | | — | | | — | | | (129) | | | — | | | — | | | (129) | |
| Comprehensive income | — | | | — | | | — | | | 105,508 | | | 13,736 | | | 47 | | | 119,291 | |
| Dividends declared on common stock ($0.19 per share) | — | | | — | | | — | | | (33,719) | | | — | | | — | | | (33,719) | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| Employee share-based compensation earned | — | | | — | | | 3,638 | | | — | | | — | | | — | | | 3,638 | |
| Purchase of Company common stock | — | | | (2,277) | | | (12,862) | | | (72,327) | | | — | | | — | | | (87,466) | |
| Other | 47 | | | — | | | 1,573 | | | — | | | — | | | — | | | 1,620 | |
| Balance at June 30, 2020 | $ | 186,105 | | | $ | (9,094) | | | $ | 1,002,988 | | | $ | 561,882 | | | $ | 12,400 | | | $ | 47 | | | $ | 1,754,328 | |
(See notes to unaudited condensed consolidated financial statements)
10 Service Corporation International
Service Corporation International
Notes to Unaudited Condensed Consolidated Financial Statements
1. Nature of Operations
We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries operating in the United States and Canada. Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.
Funeral service locations provide all professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles, arranging and directing services, removal, preparation, embalming, cremations, memorialization, travel protection, and catering. Funeral merchandise, including burial caskets and related accessories, urns and other cremation receptacles, outer burial containers, flowers, online and video tributes, stationery products, casket and cremation memorialization products, and other ancillary merchandise, is sold at funeral service locations.
Our cemeteries provide cemetery property interment rights, including developed lots, lawn crypts, mausoleum spaces, niches, and other cremation memorialization and interment options. Cemetery merchandise and services, including memorial markers and bases, outer burial containers, flowers and floral placement, other ancillary merchandise, graveside services, merchandise installation, and interments, are sold at our cemeteries.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
Our consolidated financial statements include the accounts of Service Corporation International (SCI) and all subsidiaries in which we hold a controlling financial interest. Intercompany balances and transactions have been eliminated in consolidation.
Our unaudited condensed consolidated financial statements also include the accounts of the merchandise and service trusts and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. We have retained the specialized industry accounting principles when consolidating the trusts. Our trusts are variable interest entities, for which we have determined that we are the primary beneficiary as we absorb a majority of the losses and returns associated with these trusts. Although we consolidate the trusts, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these trusts; therefore, their interests in these trusts represent a liability to us.
Our interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair statement of our results for these periods. Our unaudited condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.
Reclassifications to Prior Period Financial Statements and Adjustments
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows, except as described below under "Accounting Standards Adopted in 2020".
Use of Estimates in the Preparation of Financial Statements
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in our Annual Report on Form 10-K for the year ended December 31, 2018. These estimates and assumptionsthat may affect the reported amounts of assets and liabilities and disclosuresdisclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods.period. As a result, actual results could differ from these estimates.
Cash, Cash Equivalents, and Restricted Cash
We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amounts of our cash and cash equivalents approximate fair value due to the short-term nature of these instruments.
The components of cash, cash equivalents, and restricted cash were as follows:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| | (In thousands) | | |
| Cash and cash equivalents | $ | 222,234 | | | $ | 186,276 | |
Restricted cash (1) | | | |
Included in Other current assets | 26,309 | | | 54,293 | |
Included in Deferred charges and other assets, net | 2,052 | | | 2,051 | |
| Total restricted cash | 28,361 | | | 56,344 | |
| Total cash, cash equivalents, and restricted cash | $ | 250,595 | | | $ | 242,620 | |
(1) Restricted cash in both periods primarily consists of proceeds from divestitures deposited into escrow accounts under IRS code section 1031 and collateralized obligations under certain insurance policies.
Receivables, net
The components of Receivables, net in our unaudited Condensed Consolidated Balance Sheetwere as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | | | | | |
| Atneed Funeral | | Atneed Cemetery | | Miscellaneous | | Current Portion of Notes | | Total |
| | (In thousands) | | | | | | | | |
| Receivables | $ | 39,208 | | | $ | 22,051 | | | $ | 19,856 | | | $ | 1,854 | | | $ | 82,969 | |
| Reserve for credit losses | (3,573) | | | (1,560) | | | (296) | | | (577) | | | (6,006) | |
| Receivables, net | $ | 35,635 | | | $ | 20,491 | | | $ | 19,560 | | | $ | 1,277 | | | $ | 76,963 | |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 | | | | | | | | |
| Atneed Funeral | | Atneed Cemetery | | Miscellaneous | | Current Portion of Notes | | Total |
| | (In thousands) | | | | | | | | |
| Receivables | $ | 41,370 | | | $ | 20,855 | | | $ | 19,943 | | | $ | 1,765 | | | $ | 83,933 | |
| Allowance for doubtful accounts | (1,899) | | | (363) | | | — | | | — | | | (2,262) | |
| Receivables, net | $ | 39,471 | | | $ | 20,492 | | | $ | 19,943 | | | $ | 1,765 | | | $ | 81,671 | |
Additionally, included in Deferred charges and other assets, net were long-term miscellaneous receivables, net and notes receivable, net as follows:
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| | (In thousands) | | |
| Notes receivable | $ | 13,421 | | | $ | 14,997 | |
| Reserve for credit losses | (7,295) | | | — | |
| Allowance for doubtful accounts | — | | | (8,374) | |
| Notes receivable, net | $ | 6,126 | | | $ | 6,623 | |
| | | |
| Long-term miscellaneous receivables | $ | 6,249 | | | $ | 7,287 | |
| Reserve for credit losses | (950) | | | — | |
| Long-term miscellaneous receivables, net | $ | 5,299 | | | $ | 7,287 | |
12 Service Corporation International
Our atneed trade receivables primarily consist of amounts due for funeral and cemetery services already performed. We provide reserves for credit losses for our receivables. These reserves are based on an analysis of historical trends of collection activity adjusted for current conditions and forecasts. These estimates are impacted by a number of factors, including changes in the economy and demographic or competitive changes in our areas of operation. In the six months ended June 30, 2020, we increased our reserve for credit losses on trade and miscellaneous receivables as a result of the economic impact of the COVID-19 pandemic (COVID-19). Cemetery preneed receivables are collateralized by cemetery property to the extent of the fair value of the property. Prior to adoption of the guidance on credit losses for financial instruments on January 1, 2020, we provided allowances for doubtful accounts on our receivables based on an analysis of historical trends of collection activity.
Payment on atneed contracts is generally due at the time the merchandise is delivered or the services are performed. We also have preneed receivables, as disclosed in Note 3, for which payment generally occurs prior to our fulfillment of the performance obligations. Our preneed contracts may also have extended payment terms with associated financing charges. We do not accrue interest on preneed receivables if they are not paid in accordance with the contractual payment terms given the nature of our merchandise and services, the nature of our contracts with customers, and the timing of the delivery of our services. Generally, receivables are considered past due after thirty days. We do not consider preneed funeral receivables to be past due until the contract converts into an atneed contract at which time the preneed receivable is paid or reclassified as a trade receivable with payment terms of less than thirty days. Collections are generally managed by the locations or third party agencies acting on behalf of the locations, until a receivable is one hundred eighty days delinquent, at which time trade receivables are fully reserved.
The following table summarizes the activity in our reserve for credit losses by portfolio segment, excluding preneed receivables which are presented in Note 3, for the six months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2020 | | Provision for Expected Credit Losses | | | | Write Offs | | Recoveries | | Effect of Foreign Currency | | June 30, 2020 |
| | (In thousands) | | | | | | | | | | | | |
| Trade receivables: | | | | | | | | | | | | | |
| Funeral | $ | (2,690) | | | $ | (2,698) | | | | | $ | 2,644 | | | $ | (935) | | | $ | 106 | | | $ | (3,573) | |
| Cemetery | (1,424) | | | (776) | | | | | 615 | | | (42) | | | 67 | | | (1,560) | |
| Total reserve for credit losses on trade receivables | $ | (4,114) | | | $ | (3,474) | | | | | $ | 3,259 | | | $ | (977) | | | $ | 173 | | | $ | (5,133) | |
| | | | | | | | | | | | | |
| Miscellaneous receivables: | | | | | | | | | | | | | |
| Current | $ | (203) | | | $ | (118) | | | | | $ | — | | | $ | — | | | $ | 25 | | | $ | (296) | |
| Long-term | (715) | | | (235) | | | | | — | | | — | | | — | | | (950) | |
| Total reserve for credit losses on miscellaneous receivables | $ | (918) | | | $ | (353) | | | | | $ | — | | | $ | — | | | $ | 25 | | | $ | (1,246) | |
| | | | | | | | | | | | | |
| Notes receivable | $ | (9,031) | | | $ | 79 | | | | | $ | 1,080 | | | $ | — | | | $ | — | | | $ | (7,872) | |
At June 30, 2020, the amortized cost basis of our miscellaneous and notes receivables by year of origination was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Revolving Line of Credit | | Total |
| | (In thousands) | | | | | | | | | | | | | | |
| Miscellaneous receivables: | | | | | | | | | | | | | | | |
| Current | $ | 18,023 | | | $ | 1,227 | | | $ | 386 | | | $ | 160 | | | $ | 55 | | | $ | 5 | | | $ | — | | | $ | 19,856 | |
| Long-term | 1,221 | | | 2,718 | | | 1,400 | | | 663 | | | 226 | | | 21 | | | — | | | 6,249 | |
| Total miscellaneous receivables | $ | 19,244 | | | $ | 3,945 | | | $ | 1,786 | | | $ | 823 | | | $ | 281 | | | $ | 26 | | | $ | — | | | $ | 26,105 | |
| | | | | | | | | | | | | | | |
| Notes receivable | $ | — | | | $ | — | | | $ | 235 | | | $ | — | | | $ | 98 | | | $ | 6,648 | | | $ | 8,294 | | | $ | 15,275 | |
At June 30, 2020, the payment status of our miscellaneous and notes receivables was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Past Due | | | | | | | | | | | | |
| <30 Days | | 30-90 Days | | 90-180 Days | | >180 Days | | Total | | Current | | Total |
| | (In thousands) | | | | | | | | | | | | |
| Miscellaneous receivables: | | | | | | | | | | | | | |
| Current | $ | 84 | | | $ | 28 | | | $ | — | | | $ | 2 | | | $ | 114 | | | $ | 19,742 | | | $ | 19,856 | |
| Long-term | — | | | — | | | — | | | — | | | — | | | 6,249 | | | 6,249 | |
| Total miscellaneous receivables | $ | 84 | | | $ | 28 | | | $ | — | | | $ | 2 | | | $ | 114 | | | $ | 25,991 | | | $ | 26,105 | |
| | | | | | | | | | | | | |
| Notes receivable | $ | 1 | | | $ | 2 | | | $ | 2 | | | $ | 1,127 | | | $ | 1,132 | | | $ | 14,143 | | | $ | 15,275 | |
Funeral and Cemetery Operations
Revenue is recognized when control of the merchandise or services is transferred to the customer. Our performance obligations include the delivery of funeral and cemetery merchandise and services and cemetery property interment rights. Control transfers when merchandise is delivered or services are performed. For cemetery property interment rights, control transfers to the customer when the property is developed and the interment right has been sold and can no longer be marketed or sold to another customer. Sales taxes collected are recognized on a net basis in our consolidated financial statements.
On our atneed contracts, we generally deliver the merchandise and perform the services at the time of need. Due to limitations on gatherings imposed to mitigate the spread of COVID-19, some customers have requested that we delay the memorial service until after the limitations are over. For these customers, we defer the revenue for the memorial service until it is performed. Memorial services frequently include promises to direct the service, provide facilities and motor vehicles, catering, flowers, and stationery products. All other promises on these contracts, including arrangement, removal, preparation, embalming, cremation, interment, and delivery of urns and caskets and related memorialization merchandise are fulfilled at the time of need. Personalized marker merchandise and marker installation services sold on atneed contracts are recognized when control is transferred to the customer, generally when the marker is delivered and installed in the cemetery.
Goodwill and Intangible Assets
In addition to our annual review, we assess the impairment of goodwill and indefinite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends. As a result of the challenging economic conditions caused by the response to COVID-19, at June 30, 2020, we performed a qualitative assessment of our goodwill. Based on the qualitative assessment, we believe that it is more likely than not that the fair value of the goodwill reporting units exceeds their carrying value and no quantitative assessment of impairment is necessary at June 30, 2020.
During the six months ended June 30, 2020, we performed a quantitative assessment on certain of our tradenames. We recorded a $3.0 million impairment charge for certain of our tradenames during the first quarter of 2020. In determining the fair value of the tradenames, we used the relief from royalty method whereby we determine the fair value of the assets by discounting the cash flows that represent a savings over having to pay a royalty fee for use of the tradenames. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows. For our first quarter of 2020 test, we estimated that the pre-tax savings would range from 2.0% to 5.0% of the revenue associated with the trademark and tradenames, based primarily on our research of intellectual property valuation and licensing databases. We also assumed a terminal growth rate of 1.0% and 2.4% for our funeral and cemetery tradenames, respectively, and discounted the cash flows at a 6.95% discount rate based on the relative risk of these assets to the overall business.
Leases
We have operating and finance leases. Our61 operating leases primarily include funeral service real estatewhere we are the lessor and office equipmentthe non-cancelable term is greater than one year, resulting in $0.7 million and $1.3 million in lease income for funeral service locations, cemetery locations,the three and administrative offices. Our finance leases primarily include transportation equipment but also include real estate and office equipment. Lease terms related to real estate generally range from one to forty years with options to renew at varying terms. Lease terms related to office and transportation equipment generally range from one to eight years with options to renew at varying terms.
six months ended June 30, 2020, respectively. We determine whether an arrangement is or contains a lease at the inception of the arrangement based on the unique facts and circumstances present. Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Leases with a term greater than one year are recognized on the balance sheet as ROU assets and lease liabilities. We have elected not to recognize on the balance sheet leases with terms of one year or less.
Lease liabilitiesthe arrangement. We lease retail space, office space and their corresponding ROUland, and we are party to cellular agreements and land easements. The underlying assets of these lease agreements are recorded at commencement date based on the present value of
lease payments over the expected lease term. For transportation equipment, we use the rate implicit in each lease to calculate the present value. For real estatebuildings and non-transportation equipment leases, the interest rate implicit in lease contracts is typically not readily determinable. Therefore, we use the appropriate collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of future payments for real estate and non-transportation equipment leases. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.
land. We calculate operating lease expense ratably over the lease term plus any reasonably assured renewal periods. We consider reasonably assured renewal options and fixed escalation provisions in our calculation. Generally, our leasesgenerally do not include options to terminate thehave sales-type leases, direct financing leases, or lease prior to the contractual lease expiration date, but future renewal periods are generally cancelable. The majority of our contractually available renewal periods for leases of buildings and land are considered reasonably certain of being exercised. This determination is made by our real estate team based on facts and circumstances surrounding each property. Leases with a term of 12 months or less are not recorded on the balance sheet. The majority of our lease arrangements contain options to (i) purchase the property at fair value on the exercise date, (ii) purchase the property for a value determined at the inception of the lease, or (iii) renew the lease for the fair rental value at the end of the primary lease term. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.
receivables. Certain of our lease agreements include variable rental paymentsincome based on a percentage of sales over base contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements dolevels. Renewal options that can be cancelled by the lessees are not contain any material residual value guarantees or material restrictive covenants. We generally do not have sublease arrangements, sale-leaseback arrangements, or leveraged leases.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For leases commencing before January 1, 2019, we have elected the practical expedient to not separate lease and non-lease components on certain equipment leases, such as copiers where the cost-per-copy maintenance charges are included in our disclosure of future lease income, which includes only the non-cancelable terms and fixed escalation provisions. Certain lease arrangements contain options to purchase the
14 Service Corporation International
property at fair value at the conclusion of the lease charge. On theseterm. Non-lease components are excluded from rental income disclosures. Future undiscounted lease income from operating leases we have elected to account for the lease and non-lease components as a single component. For leases commencing on or after January 1, 2019, we account for the maintenance charges (non-lease components) separate from the lease components.
Cash, Cash Equivalents, and Restricted Cash
The components of cash, cash equivalents, and restricted cash at June 30, 2019 and December 31, 2018 are2020 was as follows:follows (in thousands):
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (In thousands) |
| Cash and cash equivalents | $ | 243,684 |
| | $ | 198,850 |
|
Restricted cash(1): | | | |
Included in Other current assets | 5,716 |
| | 7,007 |
|
Included in Deferred charges and other assets | 1,745 |
| | 1,727 |
|
| Total restricted cash | 7,461 |
| | 8,734 |
|
| Total cash, cash equivalents, and restricted cash | $ | 251,145 |
| | $ | 207,584 |
|
| |
(1)
| Restricted cash in both periods primarily consists of proceeds from divestitures deposited into escrow accounts under IRS code section 1031 and collateralized obligations under certain insurance policies. |
Property and equipment, net
During the fourth quarter of 2018, based on a review of our historical usage patterns for similar assets, we increased our estimate of the remaining useful life of certain building improvements and equipment by one to three years. For the three and six months ended June 30, 2019, these changes in useful life, which were made prospectively, reduced depreciation expense by $4.1 million ($0.02 per basic and diluted share) and $8.0 million ($0.04 per basic and diluted share). | | | | | |
| |
| 2020 (excluding the six months ended June 30, 2020) | $ | 1,833 | |
| 2021 | 3,626 | |
| 2022 | 3,225 | |
| 2023 | 2,537 | |
| 2024 | 2,163 | |
| 2025 and thereafter | 16,806 | |
| Total future undiscounted lease income | $ | 30,190 | |
Accounting Standards Adopted in 2019
Leases
In February 2016 and in January, July, and December 2018, the Financial Accounting Standards Board (FASB) issued and amended new guidance on "Leases" to increase transparency and comparability among organizations. Under the new guidance, we are required to recognize right-of-use (ROU) lease assets and liabilities on our balance sheet and disclose key information about leasing arrangements. In addition, the new guidance offers specific accounting considerations for lessees, lessors, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
We adopted the new guidance on January 1, 2019 using the modified retrospective transition method. As a result of the adoption, we recorded:
| |
• | a $0.7 million reclass from Other current assets to Accounts payable and accrued liabilities for prepaid operating lease expenses,
|
| |
• | a $2.7 million reclass from Accounts payable and accrued liabilities to Deferred charges and other assets for accrued operating lease expenses,
|
| |
• | a $62.6 million increase to Deferred charges and other assets for operating lease right-of-use assets, and
|
| |
• | a $9.4 million and $53.2 million increase to Accounts payable and accrued liabilities and Other liabilities, respectively, for operating lease liabilities.
|
The modified retrospective transition method includes a number of optional practical expedients and accounting policy elections:
1.We elected a package of practical expedients to not reassess:
whether a contract is or contains a lease,
lease classification, or
initial direct costs.
2.We did not elect a practical expedient to use hindsight when determining lease term.
3.We elected the short-term lease recognition exemption.
4.The remaining practical expedients do not apply or do not have a material impact.
We established a project team to implement the new guidance. We implemented a new enterprise-wide lease management system in the form of a pre-configured software-as-a-service cloud-based application to support the adoption and ongoing lease requirements under the new guidance. This system serves as a lease database to manage our lease inventory centrally and ensure completeness of our lease inventory. The system also produces accounting entries and financial reporting disclosures required under the new guidance and provides lease activity business intelligence reporting. We thoroughly tested the new system to ensure it produces accurate data to prepare the required accounting entries and disclosures under the new guidance upon adoption and on an ongoing basis. We evaluated and implemented additional changes to our processes and internal controls to facilitate adoption on January 1, 2019 and to meet the standard’s ongoing reporting and disclosure requirements.
Our current operating lease portfolio is primarily composed of real estate and equipment. As a result of the adoption, we recognized ROU assets and lease liabilities related to substantially all operating lease arrangements. The adoption of "Leases" did not have an impact on our consolidated results of operations or cash flows. We made the required enhanced lease-related disclosures above and in Note 9 of this Form 10-Q.
Internal Use Software
In August 2018, the FASB amended "Internal Use Software" to align the requirements for capitalizing implementation costs incurred in a hosting arrangement for software-as-a-service with the requirements for capitalizing those costs in a hosting arrangement that includes a software license. Costs for implementation activities in the application development stage are capitalized, depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed. Any capitalized costs are amortized over the term of the hosting arrangement. Cash payments for the implementation costs, whether capitalized or not, are presented as operating outflows as that is consistent with the presentation of the fees in the hosting arrangement. We adopted the new guidance on a prospective basis to implementation costs incurred after January 1, 2019 with an immaterial impact on our consolidated results of operations and consolidated financial position and no impact on cash flows.
Recently Issued Accounting Standards2020
Financial Instruments - Credit Losses
In June 2016, the FASB amended "Financialissued "Financial Instruments" - Credit Losses" to provide financial statement users with more decision-useful information about the expected credit losses on debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. During November 2018 and April 2019, the FASB made amendments to the new standard that clarified guidance on several matters, including accrued interest, recoveries, and various codification improvements. The new standard, as amended, replaces the incurred loss impairment methodology in the currentprevious standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates.
TheWe adopted the new guidance is effective for us onas of January 1, 2020, and in the first half of 2019, we established an implementation team and began analyzing the impactapplying a modified retrospective approach to credit loss reserves on our current policiesatneed, preneed, miscellaneous, and procedures to identify potential differences that wouldnotes receivable and a prospective approach for credit loss reserves on our fixed income investments. As a result from applying the requirements of the new standard.adoption, we recorded a $17.0 million increase to Retained earnings, which comprises a $26.4 million and a $5.8 million increase in Preneed receivables, netand trust investments and Deferred tax liability, respectively, and a $2.7 million and a $0.9 million decrease to Receivables, net and Deferred charges and other assets, net, respectively. The implementation team reports findings increase in Preneed receivables, netand progresstrust investments is primarily the result of reducing the reserve for receivables that are collateralized by cemetery property down to the amount at which the amortized cost basis of the project to management on a frequent basis. Through this process, we have identified appropriate changes to our processes, systems, and controls to support recognition and disclosure underreceivable exceeds the new standard. We are still evaluating the impactfair value of the new standard on our consolidated results of operations, consolidated financial position, and cash flows.
property less costs to resell.
Goodwill
In January 2017, the FASB amended "Goodwill" to simplify the subsequent measurement of goodwill. The amended
guidance eliminates Step 2 from the goodwill impairment test. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill of the reporting unit. TheWe adopted the new guidance is effective for us onstandard as of January 1, 2020 and is not expected to have anit had no impact on our consolidated results of operations, consolidated financial position, and cash flows.
Fair Value Measurements
In August 2018, the FASB amended "Fair Value Measurements" to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in level 3 measurements. It clarifies that, for investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the timing either to us or publicly. It also clarifies that the narrative disclosure of the effect of changes in level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of the significant unobservable inputs used in level 3 measurements. The guidance is effective for us with our quarterly filing forWe adopted the period ended March 31,new standard as of January 1, 2020 and we will make the required disclosure changes in that filing. Adoption will not have anit had no impact on our consolidated results of operations, consolidated financial position, and cash flows.
Recently Issued Accounting Standards
Compensation - Retirement PlansBenefits
In August 2018, the FASB amended "Compensation - Retirement Plans"Benefits" to modify the disclosure requirements for defined benefit plans. For us, the amendment requires the disclosure of the weighted average interest crediting rate used for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. It removes the requirement to disclose the approximate amount of future benefits covered by insurance contracts. The guidance is effective for us with our annual filing for the year ended December 31, 2020, and we will make the required disclosure changes in that filing. Adoption will not have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Reference Rate Reform
In March 2020, the FASB issued "Reference Rate Reform" to provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We currently have no hedging relationships and are evaluating our contracts and the optional expedients provided by the new standard.
3. Preneed Activities
Preneed receivables, net and trust investments
The components of Preneed receivables, net and trust investments in our unaudited Condensed Consolidated Balance Sheet at June 30, 2019 and December 31, 2018 arewere as follows:
| | | | | | | | | | | |
| | | |
| June 30, 2020 | | December 31, 2019 |
| | (In thousands) | | |
| | | |
| Preneed receivables, net | $ | 977,021 | | | $ | 947,232 | |
| | | |
| Trust investments, at market | 4,993,442 | | | 5,258,319 | |
| | | |
| Insurance-backed fixed income securities and other | 251,836 | | | 265,160 | |
| Trust investments | 5,245,278 | | | 5,523,479 | |
| Less: Cemetery perpetual care trust investments | (1,599,599) | | | (1,681,149) | |
| Preneed trust investments | 3,645,679 | | | 3,842,330 | |
| | | |
| Preneed receivables, net and trust investments | $ | 4,622,700 | | | $ | 4,789,562 | |
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (In thousands) |
| Preneed funeral receivables | $ | 120,424 |
| | $ | 107,612 |
|
| Preneed cemetery receivables | 896,550 |
| | 883,432 |
|
| Preneed receivables from customers | 1,016,974 |
| | 991,044 |
|
| Unearned finance charge | (50,402 | ) | | (44,981 | ) |
| Allowance for cancellation | (50,520 | ) | | (48,380 | ) |
| Preneed receivables, net | $ | 916,052 |
| | $ | 897,683 |
|
| | | | |
| Trust investments, at market | $ | 5,058,591 |
| | $ | 4,585,720 |
|
| Insurance-backed fixed income securities and other | 263,589 |
| | 265,787 |
|
| Trust investments | 5,322,180 |
| | 4,851,507 |
|
| Less: Cemetery perpetual care trust investments | (1,624,709 | ) | | (1,477,798 | ) |
| Preneed trust investments | $ | 3,697,471 |
| | $ | 3,373,709 |
|
| | | | |
| Preneed receivables, net and trust investments | $ | 4,613,523 |
| | $ | 4,271,392 |
|
| | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | |
| Funeral | | Cemetery | | Total |
| | (In thousands) | | | | |
| Preneed receivables | $ | 136,880 | | | $ | 900,938 | | | $ | 1,037,818 | |
| Unearned finance charges | (15,583) | | | (26,937) | | | (42,520) | |
| Preneed receivables, at amortized cost | 121,297 | | | 874,001 | | | 995,298 | |
| Reserve for credit losses | (10,350) | | | (7,927) | | | (18,277) | |
| Preneed receivables, net | $ | 110,947 | | | $ | 866,074 | | | $ | 977,021 | |
| | | | | |
| December 31, 2019 | | | | |
| Funeral | | Cemetery | | Total |
| | (In thousands) | | | | |
| Preneed receivables | $ | 130,971 | | | $ | 907,973 | | | $ | 1,038,944 | |
| Unearned finance charges | (16,328) | | | (34,242) | | | (50,570) | |
| Preneed receivables, at amortized cost | 114,643 | | | 873,731 | | | 988,374 | |
| Allowance for cancellation | (1,452) | | | (39,690) | | | (41,142) | |
| Preneed receivables, net | $ | 113,191 | | | $ | 834,041 | | | $ | 947,232 | |
16 Service Corporation International
At June 30, 2020, the amortized cost basis of our preneed receivables by year of origination was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| | (In thousands) | | | | | | | | | | | | |
| Preneed receivables, at amortized cost: | | | | | | | | | | | | | |
| Funeral | $ | 32,928 | | | $ | 47,157 | | | $ | 18,298 | | | $ | 9,076 | | | $ | 3,685 | | | $ | 10,153 | | | $ | 121,297 | |
| Cemetery | 182,018 | | | 287,452 | | | 188,393 | | | 116,902 | | | 60,871 | | | 38,365 | | | 874,001 | |
| Total preneed receivables, at amortized cost | $ | 214,946 | | | $ | 334,609 | | | $ | 206,691 | | | $ | 125,978 | | | $ | 64,556 | | | $ | 48,518 | | | $ | 995,298 | |
At June 30, 2020, the payment status of our preneed receivables was as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Past Due | | | | | | | | | | | | |
| <30 Days | | 30-90 Days | | 90-180 Days | | >180 Days | | Total | | Current | | Total |
| | (In thousands) | | | | | | | | | | | | |
| Preneed receivables, at amortized cost: | | | | | | | | | | | | | |
| Funeral | $ | 3,835 | | | $ | 2,233 | | | $ | 1,331 | | | $ | 14,790 | | | $ | 22,189 | | | $ | 99,108 | | | $ | 121,297 | |
| Cemetery | 23,097 | | | 22,616 | | | 11,191 | | | 2,590 | | | 59,494 | | | 814,507 | | | 874,001 | |
| Total preneed receivables, at amortized cost | $ | 26,932 | | | $ | 24,849 | | | $ | 12,522 | | | $ | 17,380 | | | $ | 81,683 | | | $ | 913,615 | | | $ | 995,298 | |
The following table summarizes the activity for the reserve for credit losses on preneed receivables for the six months ended June 30, 2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | |
| January 1, 2020 | | Provision for Expected Credit Losses | | Acquisitions (Divestitures), Net | | Write Offs | | | | Effect of Foreign Currency | | June 30, 2020 |
| | (In thousands) | | | | | | | | | | | | |
| Funeral | $ | (8,057) | | | $ | (3,777) | | | $ | 13 | | | $ | 1,452 | | | | | $ | 19 | | | $ | (10,350) | |
| Cemetery | (6,700) | | | (1,498) | | | — | | | 250 | | | | | 21 | | | (7,927) | |
| Total reserve for credit losses on preneed receivables | $ | (14,757) | | | $ | (5,275) | | | $ | 13 | | | $ | 1,702 | | | | | $ | 40 | | | $ | (18,277) | |
The table below sets forth certain investment-related activities associated with our trusts:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Deposits | $ | 112,905 |
| | $ | 106,843 |
| | $ | 213,357 |
| | $ | 200,112 |
|
| Withdrawals | $ | 116,680 |
| | $ | 114,524 |
| | $ | 224,036 |
| | $ | 221,293 |
|
| Purchases of securities | $ | 240,376 |
| | $ | 407,859 |
| | $ | 689,534 |
| | $ | 1,007,748 |
|
| Sales of securities | $ | 240,599 |
| | $ | 419,357 |
| | $ | 562,390 |
| | $ | 1,035,357 |
|
Realized gains (1) | $ | 54,756 |
| | $ | 87,840 |
| | $ | 98,281 |
| | $ | 146,146 |
|
Realized losses (1) | $ | (16,251 | ) | | $ | (17,552 | ) | | $ | (48,882 | ) | | $ | (29,852 | ) |
| |
(1) | | | | | | | | | | | | | | | | | | | | | | | | | | Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | 2020 | | 2019 | | 2020 | | 2019 | | | (In thousands) | | | | | | | | Deposits | $ | 98,341 | | | $ | 112,905 | | | $ | 203,894 | | | $ | 213,357 | | | Withdrawals | $ | 99,264 | | | $ | 116,680 | | | $ | 213,856 | | | $ | 224,036 | | | Purchases of securities | $ | 456,639 | | | $ | 240,376 | | | $ | 905,291 | | | $ | 689,534 | | | Sales of securities | $ | 441,743 | | | $ | 240,599 | | | $ | 793,569 | | | $ | 562,390 | | Realized gains from sales of securities(1) | $ | 92,435 | | | $ | 54,756 | | | $ | 144,592 | | | $ | 98,281 | | Realized losses from sales of securities(1) | $ | (61,756) | | | $ | (16,251) | | | $ | (147,158) | | | $ | (48,882) | |
(1)All realized gains and losses are recognized in Other income, net for our trust investments and are offset by a corresponding reclassification in Other income, net to Deferred receipts held in trust and Care trusts' corpus. Other income (expense), net for our trust investments and are offset by a corresponding reclassification in Other income (expense), net to Deferred receipts held in trust and Care trusts’ corpus.
|
The costscost and market values associated with trust investments recorded at fairmarket value at June 30, 2019 and December 31, 2018 are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Fair value represents the value of the underlying securities held by the trusts.
| | | | June 30, 2019 | | | June 30, 2020 | |
| | Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Value | | Fair Value Hierarchy Level | Cost | | Unrealized
Gains | | Unrealized
Losses | | Value |
| | | | | (In thousands) | | | | | | | (In thousands) | | | |
| Fixed income securities: | | | | | | | | | Fixed income securities: | | | | | | | | |
| U.S. Treasury | 2 | | $ | 49,425 |
| | $ | 666 |
| | $ | (141 | ) | | $ | 49,950 |
| U.S. Treasury | 2 | $ | 48,249 | | | $ | 1,923 | | | $ | (249) | | | $ | 49,923 | |
| Canadian government | 2 | | 49,627 |
| | 118 |
| | (1,196 | ) | | 48,549 |
| Canadian government | 2 | 38,056 | | | 58 | | | (727) | | | 37,387 | |
| Corporate | 2 | | 13,194 |
| | 53 |
| | (233 | ) | | 13,014 |
| Corporate | 2 | 2,351 | | | 6 | | | (81) | | | 2,276 | |
| Residential mortgage-backed | 2 | | 3,311 |
| | 48 |
| | (1 | ) | | 3,358 |
| Residential mortgage-backed | 2 | 3,254 | | | 168 | | | — | | | 3,422 | |
| Asset-backed | 2 | | 134 |
| | 3 |
| | (7 | ) | | 130 |
| Asset-backed | 2 | 128 | | | 3 | | | (5) | | | 126 | |
| Equity securities: | | | | | | | | | Equity securities: | | |
| Preferred stock | 2 | | 6,114 |
| | 498 |
| | (116 | ) | | 6,496 |
| Preferred stock | 2 | 386 | | | — | | | (35) | | | 351 | |
| Common stock: | | | | | | | | | Common stock: | | |
| United States | 1 | | 1,280,063 |
| | 272,490 |
| | (60,342 | ) | | 1,492,211 |
| United States | 1 | 1,368,878 | | | 284,456 | | | (118,350) | | | 1,534,984 | |
| Canada | 1 | | 38,568 |
| | 10,489 |
| | (1,824 | ) | | 47,233 |
| Canada | 1 | 35,890 | | | 7,793 | | | (3,547) | | | 40,136 | |
| Other international | 1 | | 83,107 |
| | 14,817 |
| | (2,952 | ) | | 94,972 |
| Other international | 1 | 87,167 | | | 19,230 | | | (3,647) | | | 102,750 | |
| Mutual funds: | | | | | | | | | Mutual funds: | | |
| Equity | 1 | | 842,772 |
| | 27,898 |
| | (82,654 | ) | | 788,016 |
| Equity | 1 | 812,202 | | | 13,840 | | | (140,573) | | | 685,469 | |
| Fixed income | 1 | | 1,235,660 |
| | 12,608 |
| | (38,365 | ) | | 1,209,903 |
| Fixed income | 1 | 1,292,673 | | | 23,609 | | | (106,397) | | | 1,209,885 | |
| Other | 3 | | 6,010 |
| | 578 |
| | — |
| | 6,588 |
| Other | 3 | 391 | | | 33 | | | (1) | | | 423 | |
| Trust investments, at fair value | | 3,607,985 |
| | 340,266 |
| | (187,831 | ) | | 3,760,420 |
| Trust investments, at fair value | | 3,689,625 | | | 351,119 | | | (373,612) | | | 3,667,132 | |
| Commingled funds | | | | | | | | | Commingled funds | |
| Fixed income | | 432,113 |
| | 5,185 |
| | (3,083 | ) | | 434,215 |
| Fixed income | | 468,268 | | | 15,647 | | | (2,247) | | | 481,668 | |
| Equity | | 209,194 |
| | 48,175 |
| | — |
| | 257,369 |
| Equity | | 261,895 | | | 33,768 | | | (243) | | | 295,420 | |
| Money market funds | | 343,467 |
| | — |
| | — |
| | 343,467 |
| Money market funds | | 298,674 | | | — | | | — | | | 298,674 | |
| Private equity | | 189,107 |
| | 74,110 |
| | (97 | ) | | 263,120 |
| Private equity | | 211,805 | | | 49,716 | | | (10,973) | | | 250,548 | |
| Trust investments, at net asset value | | 1,173,881 |
| | 127,470 |
| | (3,180 | ) | | 1,298,171 |
| Trust investments, at net asset value | | 1,240,642 | | | 99,131 | | | (13,463) | | | 1,326,310 | |
| Trust investments, at market | | $ | 4,781,866 |
| | $ | 467,736 |
| | $ | (191,011 | ) | | $ | 5,058,591 |
| Trust investments, at market | | $ | 4,930,267 | | | $ | 450,250 | | | $ | (387,075) | | | $ | 4,993,442 | |
|
| | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Value |
| | | | | | (In thousands) | | |
| Fixed income securities: | | | | | | | | | |
| U.S. Treasury | 2 | | $ | 49,187 |
| | $ | 153 |
| | $ | (448 | ) | | $ | 48,892 |
|
| Canadian government | 2 | | 56,343 |
| | 23 |
| | (1,797 | ) | | 54,569 |
|
| Corporate | 2 | | 19,869 |
| | 13 |
| | (516 | ) | | 19,366 |
|
| Residential mortgage-backed | 2 | | 3,611 |
| | 10 |
| | (50 | ) | | 3,571 |
|
| Asset-backed | 2 | | 142 |
| | 2 |
| | (11 | ) | | 133 |
|
| Equity securities: | | | | | | | | | |
| Preferred stock | 2 | | 9,058 |
| | 180 |
| | (412 | ) | | 8,826 |
|
| Common stock: | | | | | | | | | |
| United States | 1 | | 1,236,513 |
| | 149,233 |
| | (138,141 | ) | | 1,247,605 |
|
| Canada | 1 | | 34,821 |
| | 9,082 |
| | (3,026 | ) | | 40,877 |
|
| Other international | 1 | | 77,676 |
| | 6,057 |
| | (10,275 | ) | | 73,458 |
|
| Mutual funds: | | | | | | | | | |
| Equity | 1 | | 760,887 |
| | 7,104 |
| | (151,853 | ) | | 616,138 |
|
| Fixed income | 1 | | 1,180,325 |
| | 800 |
| | (89,179 | ) | | 1,091,946 |
|
| Other | 3 | | 6,548 |
| | 3,210 |
| | (3 | ) | | 9,755 |
|
| Trust investments, at fair value | | | 3,434,980 |
| | 175,867 |
| | (395,711 | ) | | 3,215,136 |
|
| Commingled funds | | | | | | | | | |
| Fixed income | | | 419,206 |
| | 2,419 |
| | (18,981 | ) | | 402,644 |
|
| Equity | | | 205,789 |
| | 19,567 |
| | (11,723 | ) | | 213,633 |
|
| Money market funds | | | 466,429 |
| | — |
| | — |
| | 466,429 |
|
| Private equity | | | 215,618 |
| | 72,897 |
| | (637 | ) | | 287,878 |
|
| Trust investments, at net asset value | | | 1,307,042 |
| | 94,883 |
| | (31,341 | ) | | 1,370,584 |
|
| Trust investments, at market | | | $ | 4,742,022 |
| | $ | 270,750 |
| | $ | (427,052 | ) | | $ | 4,585,720 |
|
18 Service Corporation International
As of June 30, 2019, our unfunded commitment for our
PART I
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | December 31, 2019 | | | | | | |
| Fair Value Hierarchy Level | Cost | | Unrealized
Gains | | Unrealized
Losses | | Value |
| | | | | (In thousands) | | | | |
| Fixed income securities: | | | | | | | | |
| U.S. Treasury | 2 | $ | 49,728 | | | $ | 752 | | | $ | (130) | | | $ | 50,350 | |
| Canadian government | 2 | 41,093 | | | 76 | | | (850) | | | 40,319 | |
| Corporate | 2 | 9,694 | | | 28 | | | (172) | | | 9,550 | |
| Residential mortgage-backed | 2 | 3,210 | | | 59 | | | (1) | | | 3,268 | |
| Asset-backed | 2 | 129 | | | 3 | | | (4) | | | 128 | |
| Equity securities: | | | | | | | | |
| Preferred stock | 2 | 6,338 | | | 804 | | | (115) | | | 7,027 | |
| Common stock: | | | | | | | | |
| United States | 1 | 1,349,828 | | | 303,766 | | | (36,507) | | | 1,617,087 | |
| Canada | 1 | 43,866 | | | 12,369 | | | (2,075) | | | 54,160 | |
| Other international | 1 | 95,257 | | | 18,227 | | | (522) | | | 112,962 | |
| Mutual funds: | | | | | | | | |
| Equity | 1 | 746,581 | | | 31,511 | | | (54,020) | | | 724,072 | |
| Fixed income | 1 | 1,247,930 | | | 16,424 | | | (32,587) | | | 1,231,767 | |
| Other | 3 | 7,034 | | | 1,184 | | | — | | | 8,218 | |
| Trust investments, at fair value | | 3,600,688 | | | 385,203 | | | (126,983) | | | 3,858,908 | |
| Commingled funds | | | | | | | | |
| Fixed income | | 444,744 | | | 5,077 | | | (1,731) | | | 448,090 | |
| Equity | | 249,980 | | | 47,631 | | | — | | | 297,611 | |
| Money market funds | | 397,461 | | | — | | | — | | | 397,461 | |
| Private equity | | 176,388 | | | 80,283 | | | (422) | | | 256,249 | |
| Trust investments, at net asset value | | 1,268,573 | | | 132,991 | | | (2,153) | | | 1,399,411 | |
| Trust investments, at market | | $ | 4,869,261 | | | $ | 518,194 | | | $ | (129,136) | | | $ | 5,258,319 | |
Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and othermezzanine financing. These investments was $141.9 million which, if called, wouldcan never be fundedredeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the trusts.funds. The funds' managers have not communicated the timing of any liquidations.
The change in our market-based trust investments with significant unobservable inputs (Level 3) is as follows:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (In thousands) | | | | | | |
| Fair value, beginning balance | | $ | 418 | | | $ | 7,108 | | | $ | 8,218 | | | $ | 9,755 | |
Net realized and unrealized gains (losses) included in Other income (expense), net(1) | | 717 | | | (322) | | | (257) | | | (1,464) | |
| Purchases | | 4,559 | | | 5 | | | 4,569 | | | 5 | |
| Sales | | (5,271) | | | (203) | | | (5,296) | | | (1,708) | |
| | | | | | | | |
| | | | | | | | |
| Transfers | | — | | | — | | | (6,811) | | | — | |
| | | | | | | | |
| Fair value, ending balance | | $ | 423 | | | $ | 6,588 | | | $ | 423 | | | $ | 6,588 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Fair value, beginning balance | $ | 7,108 |
| | $ | 8,533 |
| | $ | 9,755 |
| | $ | 9,067 |
|
Net unrealized (losses) gains included in Other income, net(1) | (322 | ) | | 264 |
| | (1,464 | ) | | (270 | ) |
| Purchases | 5 |
| | 7 |
| | 5 |
| | 7 |
|
| Sales | (203 | ) | | — |
| | (1,708 | ) | | — |
|
| Acquisitions | — |
| | 11,390 |
| | — |
| | 11,390 |
|
| Fair value, ending balance | $ | 6,588 |
| | $ | 20,194 |
| | $ | 6,588 |
| | $ | 20,194 |
|
| |
(1) | All net unrealized gains (losses) recognized in Other income, net for our trust investments are offset by a corresponding reclassification in Other income, net to Deferred receipts held in trust and Care trusts' corpus.
PART I |
Maturity dates of our fixed income securities range from 20192020 to 2040. Maturities of fixed income securities (excluding mutual funds) at June 30, 20192020 are estimated as follows:
|
| | | |
| | Fair Value |
| | (In thousands) |
| Due in one year or less | $ | 53,448 |
|
| Due in one to five years | 52,187 |
|
| Due in five to ten years | 9,253 |
|
| Thereafter | 113 |
|
| Total estimated maturities of fixed income securities | $ | 115,001 |
|
| | | | | |
| Fair Value |
| (In thousands) |
| Due in one year or less | $ | 57,496 | |
| Due in one to five years | 26,054 | |
| Due in five to ten years | 9,494 | |
| Thereafter | 90 | |
| Total estimated maturities of fixed income securities | $ | 93,134 | |
Recognized trust fund income (realized and unrealized) related to theseour preneed trust investments was $47.1$27.0 million and $52.2$29.6 million, for the three months ended June 30, 20192020 and 2018,2019, respectively. Recognized trust fund income (realized and unrealized) related to theseour cemetery perpetual care trust investments was $95.1$17.3 million and $97.1$17.5 million for the three months ended June 30, 2020 and 2019, respectively.
Recognized trust fund income (realized and unrealized) related to our preneed trust investments was $59.2 million and $57.2 million, for the six months ended June 30, 2020 and 2019, respectively. Recognized trust fund income (realized and 2018,unrealized) related to our cemetery perpetual care trust investments was $36.8 million and $37.9 million for the six months ended June 30, 2020 and 2019, respectively.
We have determined that the unrealized losses in our fixed income investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the credit ratings and the severity and duration of the unrealized losses. Our fixed income investment unrealized losses, their associated fair values, and the duration of unrealized losses as of June 30, 2019 and December 31, 2018, respectively, are shown in the following tables:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | June 30, 2020 | | | | | | | | | | |
| In Loss Position
Less Than 12 Months | | | | In Loss Position
Greater Than 12 Months | | | | Total | | |
| Fair
Market
Value | | Unrealized
Losses | | Fair
Market
Value | | Unrealized
Losses | | Fair
Market
Value | | Unrealized
Losses |
| | | | | | (In thousands) | | | | | | |
| U.S. Treasury | $ | 1,201 | | | $ | (3) | | | $ | 1,243 | | | $ | (246) | | | $ | 2,444 | | | $ | (249) | |
| Canadian government | — | | | — | | | 11,973 | | | (727) | | | 11,973 | | | (727) | |
| Corporate | 54 | | | (2) | | | 2,235 | | | (79) | | | 2,289 | | | (81) | |
| | | | | | | | | | | |
| Asset-backed | — | | | — | | | 25 | | | (5) | | | 25 | | | (5) | |
| Total fixed income securities with an unrealized loss | $ | 1,255 | | | $ | (5) | | | $ | 15,476 | | | $ | (1,057) | | | $ | 16,731 | | | $ | (1,062) | |
| | | | | | | | | | | | | | | | | | | | | | | | | | December 31, 2019 | |
| | June 30, 2019 | | In Loss Position
Less Than 12 Months | | | In Loss Position
Greater Than 12 Months | | | Total | |
| | In Loss Position Less Than 12 Months | | In Loss Position Greater Than 12 Months | | Total | | Fair
Market
Value | | Unrealized
Losses | | Fair
Market
Value | | Unrealized
Losses | | Fair
Market
Value | | Unrealized
Losses |
| | Value | | Unrealized Losses | | Value | | Unrealized Losses | | Value | | Unrealized Losses | | | | | | (In thousands) | | | | | |
| | | | | | (In thousands) | | | | | |
| Fixed income securities: | | | | | | | | | | | | |
| U.S. Treasury | $ | 2,898 |
| | $ | (113 | ) | | $ | 4,830 |
| | $ | (28 | ) | | $ | 7,728 |
| | $ | (141 | ) | U.S. Treasury | $ | 3,023 | | | $ | (36) | | | $ | 1,947 | | | $ | (94) | | | $ | 4,970 | | | $ | (130) | |
| Canadian government | — |
| | — |
| | 18,246 |
| | (1,196 | ) | | 18,246 |
| | (1,196 | ) | Canadian government | — | | | — | | | 13,804 | | | (850) | | | 13,804 | | | (850) | |
| Corporate | 979 |
| | (2 | ) | | 7,384 |
| | (231 | ) | | 8,363 |
| | (233 | ) | Corporate | 30 | | | — | | | 4,826 | | | (172) | | | 4,856 | | | (172) | |
| Residential mortgage-backed | — |
| | — |
| | 50 |
| | (1 | ) | | 50 |
| | (1 | ) | Residential mortgage-backed | — | | | — | | | 51 | | | (1) | | | 51 | | | (1) | |
| Asset-backed | — |
| | — |
| | 24 |
| | (7 | ) | | 24 |
| | (7 | ) | Asset-backed | — | | | — | | | 28 | | | (4) | | | 28 | | | (4) | |
| Total temporarily impaired fixed income securities | $ | 3,877 |
| | $ | (115 | ) | | $ | 30,534 |
| | $ | (1,463 | ) | | $ | 34,411 |
| | $ | (1,578 | ) | |
| Total fixed income securities with an unrealized loss | | Total fixed income securities with an unrealized loss | $ | 3,053 | | | $ | (36) | | | $ | 20,656 | | | $ | (1,121) | | | $ | 23,709 | | | $ | (1,157) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2018 |
| | In Loss Position Less Than 12 Months | | In Loss Position Greater Than 12 Months | | Total |
| | Value | | Unrealized Losses | | Value | | Unrealized Losses | | Value | | Unrealized Losses |
| | | | | | (In thousands) | | | | |
| Fixed income securities: | | | | | | | | | | | |
| U.S. Treasury | $ | 6,899 |
| | $ | (226 | ) | | $ | 16,374 |
| | $ | (222 | ) | | $ | 23,273 |
| | $ | (448 | ) |
| Canadian government | 2,254 |
| | (9 | ) | | 25,330 |
| | (1,788 | ) | | 27,584 |
| | (1,797 | ) |
| Corporate | 11,579 |
| | (206 | ) | | 6,563 |
| | (310 | ) | | 18,142 |
| | (516 | ) |
| Residential mortgage-backed | 351 |
| | (4 | ) | | 3,010 |
| | (46 | ) | | 3,361 |
| | (50 | ) |
| Asset-backed | — |
| | — |
| | 79 |
| | (11 | ) | | 79 |
| | (11 | ) |
| Total temporarily impaired fixed income securities | $ | 21,083 |
| | $ | (445 | ) | | $ | 51,356 |
| | $ | (2,377 | ) | | $ | 72,439 |
| | $ | (2,822 | ) |
20 Service Corporation International
Deferred revenue, net
Deferred revenue, net represents future revenue, including distributed trust investment earnings associated with unperformed trust-funded preneed contracts that are not held in trust accounts. Future revenue and net trust investment earnings that are held in trust accounts are included in Deferred receipts held in trust.
The components of Deferred revenue, net in our unaudited Condensed Consolidated Balance Sheet at June 30, 2019 and December 31, 2018 arewere as follows:
| | | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 | |
| | (In thousands) | | (In thousands) | |
| Deferred revenue | $ | 2,020,663 |
| | $ | 1,989,232 |
| Deferred revenue | $ | 2,090,129 | | | $ | 2,046,000 | | |
| Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts | (576,099 | ) | | (570,418 | ) | Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts | (596,023) | | | (578,897) | | |
| Deferred revenue, net | $ | 1,444,564 |
| | $ | 1,418,814 |
| Deferred revenue, net | $ | 1,494,106 | | | $ | 1,467,103 | | |
The following table summarizes the activity infor our contract liabilities, which are recordedreflected in Deferred revenue, net and Deferred receipts held in trust for:
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| | (In thousands) | | |
Beginning balance — Deferred revenue, net and Deferred receipts held in trust | $ | 5,306,479 | | | $ | 4,790,552 | |
| Net preneed contract sales | 496,467 | | | 496,842 | |
| Acquisitions (dispositions) of businesses, net | 12,777 | | | (29,665) | |
Net investment (losses) gains(1) | (189,474) | | | 327,819 | |
Recognized revenue from backlog(2) | (226,663) | | | (212,912) | |
| Recognized revenue from current period sales | (237,296) | | | (241,589) | |
| Change in amounts due on unfulfilled performance obligations | (18,151) | | | (3,770) | |
| Change in cancellation reserve | 1,070 | | | (206) | |
| Effect of foreign currency and other | (6,891) | | | 10,848 | |
Ending balance — Deferred revenue, net and Deferred receipts held in trust | $ | 5,138,318 | | | $ | 5,137,919 | |
(1)Includes both realized and unrealized investment (losses) gains.
(2)Includes current year trust fund income through the six months ended June 30, 2019:date of performance.
|
| | | | | | | |
| | Six Months Ended |
| | June 30, |
| | 2019 | | 2018 |
| | (In thousands) |
Beginning balance — Deferred revenue, net and Deferred receipts held in trust | $ | 4,790,552 |
| | $ | 5,265,206 |
|
| Cumulative effect of accounting changes | — |
| | 37,991 |
|
| Net preneed contract sales | 496,842 |
| | 505,146 |
|
| (Divestitures) acquisitions of businesses, net | (29,665 | ) | | 148,048 |
|
Net investment gains (1) | 327,819 |
| | 20,720 |
|
Recognized revenue from backlog (2) | (212,912 | ) | | (212,195 | ) |
| Recognized revenue from current period sales | (241,589 | ) | | (242,438 | ) |
| Change in amounts due on unfulfilled performance obligations | (3,770 | ) | | (551,092 | ) |
| Change in cancellation reserve | (206 | ) | | 62,147 |
|
| Effect of foreign currency and other | 10,848 |
| | (12,554 | ) |
Ending balance — Deferred revenue, net and Deferred receipts held in trust | $ | 5,137,919 |
| | $ | 5,020,979 |
|
| |
(1) | Includes both realized and unrealized investment earnings. |
| |
(2) | Includes current year trust fund income through the date of performance. |
4. Income Taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete
items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitation, and increases or
decreases in valuation allowances on deferred tax assets. Our effective tax rate was 24.5%25.5% and 13.4%24.5% for the three months ended June 30, 20192020 and 2018,2019, respectively. Our effective tax rate was 22.7%24.3% and 19.3%22.7% for the six months ended June 30, 20192020 and 2018,2019, respectively. The higher effective tax rate for the three and six months ended June 30, 2019 was2020 is above the 21.0% federal statutory tax rate primarily due to favorable adjustments allowed under SAB 118 in the prior year,state tax expense, partially offset with the higher excessby tax benefits from increased exercisesrecognized on the settlement of stock options in 2019.employee share-based awards.
Unrecognized Tax Benefits
As of June 30, 2019,2020, the total amount of our unrecognized tax benefits was $1.4$1.3 million and the total amount of our
accrued interest was $0.6$0.7 million.
The federal statutes of limitationslimitation have expired for all tax years prior to 2015,2016, and we are not currently under audit by the IRS. Various state jurisdictions are auditing years 20092013 through 2017. There are currently no federal or provincial audits in Canada; however, years subsequent to 20142015 remain open and could be subject to examination. It is reasonably possible that the amount of unrecognized tax benefits may change within the next twelve months. However, given the number of years that remain subject to examination and the number of matters being examined, an estimate of the range of the possible increase or decrease cannot be made.
5. Debt
The components of Debt as of June 30, 2019 and December 31, 2018 was as follows:are:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (In thousands) |
| 4.5% Senior Notes due November 2020 | $ | 200,000 |
| | $ | 200,000 |
|
| 8.0% Senior Notes due November 2021 | 150,000 |
| | 150,000 |
|
| 5.375% Senior Notes due January 2022 | 98,906 |
| | 425,000 |
|
| 5.375% Senior Notes due May 2024 | 850,000 |
| | 850,000 |
|
| 7.5% Senior Notes due April 2027 | 184,350 |
| | 200,000 |
|
| 4.625% Senior Notes due December 2027 | 550,000 |
| | 550,000 |
|
| 5.125% Senior Notes due June 2029 | 750,000 |
| | — |
|
| Term Loan due December 2022 | — |
| | 641,250 |
|
| Term Loan due May 2024 | 650,000 |
| | — |
|
| Bank Credit Facility due December 2022 | — |
| | 395,000 |
|
| Obligations under finance leases | 197,230 |
| | 211,952 |
|
| Mortgage notes and other debt, maturities through 2050 | 34,825 |
| | 4,076 |
|
| Unamortized premiums, net | 6,103 |
| | 6,562 |
|
| Unamortized debt issuance costs | (39,428 | ) | | (31,762 | ) |
| Total debt | 3,631,986 |
| | 3,602,078 |
|
| Less: Current maturities of long-term debt | (167,084 | ) | | (69,896 | ) |
| Total long-term debt | $ | 3,464,902 |
| | $ | 3,532,182 |
|
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| | (In thousands) | | |
| 8.0% Senior Notes due November 2021 | $ | 150,000 | | | $ | 150,000 | |
| 5.375% Senior Notes due May 2024 | 850,000 | | | 850,000 | |
| 7.5% Senior Notes due April 2027 | 152,710 | | | 153,465 | |
| 4.625% Senior Notes due December 2027 | 550,000 | | | 550,000 | |
| 5.125% Senior Notes due June 2029 | 750,000 | | | 750,000 | |
| Term Loan due May 2024 | 617,500 | | | 633,750 | |
| Bank Credit Facility due May 2024 | 390,000 | | | 295,000 | |
| Obligations under finance leases | 175,618 | | | 185,252 | |
| Mortgage notes and other debt, maturities through 2050 | 52,370 | | | 45,104 | |
| Unamortized premiums and discounts, net | 5,155 | | | 5,634 | |
| Unamortized debt issuance costs | (32,377) | | | (34,854) | |
| Total debt | 3,660,976 | | | 3,583,351 | |
| Less: Current maturities of long-term debt | (87,267) | | | (69,821) | |
| Total long-term debt | $ | 3,573,709 | | | $ | 3,513,530 | |
Current maturities of debt at June 30, 20192020 include amounts due within the next year under our Term Loan,term loan, mortgage notes and other debt, and finance leases within the next year as well as the portion of unamortized premiums and our 5.375% Senior Notes due January 2022, which we redeemeddiscounts and debt issuance costs expected to be recognized in July 2019.the next twelve months.
Our consolidated debt had a weighted average interest rate of 4.94%4.22% and 4.99%4.72% at June 30, 20192020 and December 31, 2018,2019, respectively. Approximately 77%68% and 66%69% of our total debt had a fixed interest rate at June 30, 20192020 and December 31, 2018,2019, respectively.
During the six months ended June 30, 20192020 and 2018,2019, we paid $97.3$83.9 million and $89.1$97.3 million in cash interest, respectively.
Bank Credit Agreement
In May 2019, we entered into a new $1.7 billion bank credit agreement due May 2024 with a syndicate of banks. The $1.7 billion bank credit agreement comprises a $1.0 billion Bank Credit Facility and a $0.7 billion Term Loan, both due May 2024, including a sublimit of $100.0 million for letters of credit. We accounted for this transaction as a modification of the agreement. Through modifying the Term Loan, we received $49.3 million in proceeds from certain members of the syndicate of banks and paid $32.1 million in principal payments to other members, netting to a $17.2 million increase in our outstanding Term Loan balance.
As of June 30, 2019,2020, we have nohad $390.0 million outstanding borrowings under our Bank Credit Facility due May 2024, $650.0$617.5 million of outstanding borrowings under our Term Loan due May 2024, and $32.9$34.0 million of letters of credit issued. The bank credit agreementBank Credit Facility provides us with flexibility for working capital, if needed, and is guaranteed by a majority of our domestic subsidiaries. The subsidiary guaranty is a guaranty of payment of the outstanding amount of the total lending commitment, including letters of credit. The bank credit agreement contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, and certain dividend and share repurchase restrictions. As of June 30, 2019,2020, we were in compliance with all of our debt covenants. We pay a quarterly fee on the unused commitment, which was 0.20% at June 30, 2019.2020. As of June 30, 2019,2020, we have $967.1$576.0 million in borrowing capacity under the Bank Credit Facility.
Subsequent to June 30, 2020, we increased our outstanding borrowings by $20.0 million to $410.0 million under our Bank Credit Facility due May 2024.
Debt Issuances and Additions
During the six months ended June 30, 2020, we drew $190.0 million on our Bank Credit Facility for general corporate purposes.
During the six months ended June 30, 2019, we issued or added $854.3 million of debt including:
•$750.0 million unsecured 5.125% Senior Notes due June 20292029;
•$55.0 million on our Bank Credit Facility due December 2022; and
•$49.3 million in additional proceeds from certain members of the syndicate of banks in our Bank Credit FacilityFacility.
Newly issuedThe debt wasproceeds were used to pay offdown our Bank Credit Facility due December 2022, to partially redeem our 5.375% Senior Notes due January 2022, to fund acquisition activity, and for general corporate purposes. These transactions resulted in additional debt issuance costs of $15.5 million.million .
22 Service Corporation International
Debt Extinguishments and Reductions
During the six months ended June 30, 2018,2020, we drew a totalmade aggregate debt payments of $370.0$112.4 million onfor scheduled and early extinguishment payments including:
•$95.0 million in aggregate principal of our Bank Credit Facility to fund the redemptiondue May 2024;
•$16.3 million in aggregate principal of our 7.625% Senior Notes due October 2018, to make required principal payments on our Term Loan due December 2022, to fund acquisition activity,May 2024;
•$0.8 million in aggregate principal of 7.5% Senior Notes due April 2027 repurchased on the open market;
•$0.1 million of premiums paid on early extinguishment; and
•$0.2 million in other debt.
Certain of the above transactions resulted in the recognition of a loss of $0.2 million recorded in Losses on early extinguishment of debt, net in our unaudited Condensed Consolidated Statement of Operations for general corporate purposes.
Debt Extinguishments and Reductionsthe six months ended June 30, 2020.
During the six months ended June 30, 2019, we made aggregate debt payments of $836.8 million for scheduled and early extinguishment payments including:
•$450.0 million in aggregate principal of our Bank Credit Facility;Facility due December 2022;
•$40.5 million in aggregate principal payments to other members of our Term Loan;Loan due December 2022;
•$326.1 million in aggregate principal 5.375% Senior Notes due January 2022;
•$15.7 million in aggregate principal of 7.5% Senior Notes due April 2027;
•$4.3 million of premiums paid on early extinguishment; and
•$0.2 million in other debt.
Certain of the above transactions resulted in the recognition of a loss of $7.6 million recorded inLosses on earlyextinguishment of debt, net in our Consolidated Statement of Operations for the six months ended June 30, 2019.
During the six months ended June 30, 2018, we made aggregate debt payments of $268.2 million for scheduled and early extinguishment payments including:
•$250.0 million in aggregate principal of our 7.625% Senior Notes due October 2018;
•$9.6 million in call premium for redemption of the 7.625% Senior Notes due October 2018;
•$8.4 million in aggregate principal of our Term Loan; and
•$0.2 million in other debt.
6. Credit Risk and Fair Value of Financial Instruments
Fair Value Estimates
The fair value estimates of the following financial instruments have been determined using available market information and appropriate valuation methodologies. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair valuecarrying values of receivables on preneed funeral and cemetery contracts are impracticableapproximate fair value due to estimate because of the lack of a trading market and the diverselarge number of diverse individual contracts with varying terms.
The fair value of our debt instruments at June 30, 20192020 and December 31, 20182019 was as follows:
|
| | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | (In thousands) |
| 4.5% Senior Notes due November 2020 | $ | 200,376 |
| | $ | 198,930 |
|
| 8.0% Senior Notes due November 2021 | 164,437 |
| | 160,800 |
|
| 5.375% Senior Notes due January 2022 | 99,212 |
| | 428,188 |
|
| 5.375% Senior Notes due May 2024 | 876,724 |
| | 851,275 |
|
| 7.5% Senior Notes due April 2027 | 221,275 |
| | 214,940 |
|
| 4.625% Senior Notes due December 2027 | 566,671 |
| | 517,077 |
|
| 5.125% Senior Notes due June 2029 | 793,125 |
| | — |
|
| Term Loan due December 2022 | — |
| | 629,579 |
|
| Term Loan due May 2024 | 650,000 |
| | — |
|
| Bank Credit Facility due December 2022 | — |
| | 387,061 |
|
| Mortgage notes and other debt, maturities through 2050 | 34,824 |
| | 4,076 |
|
| Total fair value of debt instruments | $ | 3,606,644 |
| | $ | 3,391,926 |
|
| | | | | | | | | | | |
| June 30, 2020 | | December 31, 2019 |
| | (In thousands) | | |
| 8.0% Senior Notes due November 2021 | $ | 159,294 | | | $ | 165,375 | |
| 5.375% Senior Notes due May 2024 | 867,230 | | | 879,606 | |
| 7.5% Notes due April 2027 | 174,074 | | | 188,381 | |
| 4.625% Senior Notes due December 2027 | 573,485 | | | 577,500 | |
| 5.125% Senior Notes due June 2029 | 806,250 | | | 798,525 | |
| Term Loan due May 2024 | 617,500 | | | 633,750 | |
| Bank Credit Facility due May 2024 | 390,000 | | | 295,000 | |
| Mortgage notes and other debt, maturities through 2050 | 52,370 | | | 45,104 | |
| Total fair value of debt instruments | $ | 3,640,203 | | | $ | 3,583,241 | |
The fair valuevalues of our long-term, fixed-ratefixed rate loans waswere estimated using market prices for those loans, and therefore they are classified within Level 2 of the fair value measurements hierarchy. The Term Loan, Bank Credit Facility, agreement, and the mortgage notes and other debt are classified within Level 3 of the fair value measurements hierarchy. The fair valuevalues of these instruments hashave been estimated using a discounted cash flow analysis based on our incremental borrowing rate for similar
borrowing arrangements. An increase (decrease) in the inputs results in a directionally opposite change in the fair value of the instruments.
7. Equity
(All shares reported in whole numbers)
Share RepurchasesRepurchase Program
Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our stockshare repurchase program. During the six months ended June 30, 2019,2020, we repurchased 692,3255,177,807 shares of common stock at an aggregate cost of $29.6$210.6 million, which is an average cost per share of $42.72.$40.67. After these repurchases, the remaining dollar value of shares authorized to be purchased under ourthe share repurchase program was approximately $165.7$106.2 million at June 30, 2019.2020.
Subsequent to June 30, 2019,2020, we repurchased 142,492791,744 shares of common stockfor $30.4 million at an aggregate cost of $6.7 million, which is an average cost per share of $46.78.$38.40. After these subsequent repurchases, the remaining dollar value of shares authorized to be repurchasedpurchased under ourthe share repurchase program is $159.0$75.8 million.
24 Service Corporation International
8. Segment Reporting
Our operations are both product-based and geographically-based, and the reportable operating segments presented below include our funeral and cemetery operations. Our geographic areas include the United States and Canada, where we conduct both funeral and cemetery operations.
Our reportable segment information, including disaggregated revenue, information iswas as follows:follows and includes a reconciliation of gross profit to our consolidated income before income taxes.
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Revenue from customers: | | | | | | | |
| Funeral revenue: | | | | | | | |
| Atneed revenue | $ | 245,418 |
| | $ | 243,013 |
| | $ | 504,148 |
| | $ | 517,512 |
|
| Matured preneed revenue | 148,584 |
| | 146,045 |
| | 305,034 |
| | 311,374 |
|
| Core funeral revenue | 394,002 |
| | 389,058 |
| | 809,182 |
| | 828,886 |
|
| Non-funeral home revenue | 13,121 |
| | 11,836 |
| | 26,094 |
| | 25,513 |
|
| Recognized preneed revenue | 39,728 |
| | 33,919 |
| | 71,053 |
| | 66,379 |
|
| Other revenue | 32,127 |
| | 33,835 |
| | 65,443 |
| | 62,235 |
|
| Total funeral revenue | 478,978 |
| | 468,648 |
| | 971,772 |
| | 983,013 |
|
| Cemetery revenue: | | | | | | | |
| Atneed revenue | 82,286 |
| | 80,941 |
| | 163,737 |
| | 163,985 |
|
| Recognized preneed property revenue | 151,875 |
| | 143,166 |
| | 280,487 |
| | 252,106 |
|
| Recognized preneed merchandise and service revenue | 73,570 |
| | 73,130 |
| | 140,609 |
| | 141,493 |
|
| Core revenue | 307,731 |
| | 297,237 |
| | 584,833 |
| | 557,584 |
|
| Other revenue | 25,863 |
| | 30,207 |
| | 54,179 |
| | 49,977 |
|
| Total cemetery revenue | 333,594 |
| | 327,444 |
| | 639,012 |
| | 607,561 |
|
| Total revenue from customers | $ | 812,572 |
| | $ | 796,092 |
| | $ | 1,610,784 |
| | $ | 1,590,574 |
|
| Operating profit: | | | | | | | |
| Funeral operating profit | $ | 90,590 |
| | $ | 90,421 |
| | $ | 196,008 |
| | $ | 210,876 |
|
| Cemetery operating profit | 100,556 |
| | 97,706 |
| | 186,972 |
| | 173,013 |
|
| Operating profit from reportable segments | 191,146 |
| | 188,127 |
| | 382,980 |
| | 383,889 |
|
| General and administrative expenses | (29,370 | ) | | (31,136 | ) | | (71,900 | ) | | (65,920 | ) |
| (Losses) gains on divestitures and impairment charges, net | (11,823 | ) | | 6,865 |
| | (13,701 | ) | | 7,347 |
|
| Hurricane recoveries (expenses), net | 152 |
| | (1,902 | ) | | (296 | ) | | 330 |
|
| Operating income | 150,105 |
| | 161,954 |
| | 297,083 |
| | 325,646 |
|
| Interest expense | (47,317 | ) | | (44,519 | ) | | (94,707 | ) | | (88,095 | ) |
| Loss on early extinguishment of debt, net | (7,579 | ) | | — |
| | (7,579 | ) | | (10,131 | ) |
| Other income, net | 874 |
| | 1,880 |
| | 1,594 |
| | 2,264 |
|
| Income before income taxes | $ | 96,083 |
| | $ | 119,315 |
| | $ | 196,391 |
| | $ | 229,684 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | | | | | |
| 2020 | | 2019 | | 2020 | | 2019 | | | | |
| | (In thousands) | | | | | | | | | | |
| Revenue from customers: | | | | | | | | | | | |
| Funeral revenue: | | | | | | | | | | | |
| Atneed revenue | $ | 256,166 | | | $ | 245,418 | | | $ | 520,954 | | | $ | 504,148 | | | | | |
| Matured preneed revenue | 158,357 | | | 148,584 | | | 321,940 | | | 305,034 | | | | | |
| Core funeral revenue | 414,523 | | | 394,002 | | | 842,894 | | | 809,182 | | | | | |
| Non-funeral home revenue | 14,146 | | | 13,121 | | | 28,597 | | | 26,094 | | | | | |
| Recognized preneed revenue | 27,663 | | | 39,728 | | | 60,463 | | | 71,053 | | | | | |
| Other revenue | 24,615 | | | 32,127 | | | 53,889 | | | 65,443 | | | | | |
| Total funeral revenue | 480,947 | | | 478,978 | | | 985,843 | | | 971,772 | | | | | |
| Cemetery revenue: | | | | | | | | | | | |
| Atneed revenue | 91,102 | | | 82,286 | | | 176,145 | | | 163,737 | | | | | |
| Recognized preneed property revenue | 152,117 | | | 151,875 | | | 268,199 | | | 280,487 | | | | | |
| Recognized preneed merchandise and services revenue | 69,844 | | | 73,570 | | | 138,508 | | | 140,609 | | | | | |
| Core cemetery revenue | 313,063 | | | 307,731 | | | 582,852 | | | 584,833 | | | | | |
| Other revenue | 26,025 | | | 25,863 | | | 54,305 | | | 54,179 | | | | | |
| Total cemetery revenue | 339,088 | | | 333,594 | | | 637,157 | | | 639,012 | | | | | |
| Total revenue from customers | $ | 820,035 | | | $ | 812,572 | | | $ | 1,623,000 | | | $ | 1,610,784 | | | | | |
| Gross profit: | | | | | | | | | | | |
| Funeral gross profit | $ | 115,957 | | | $ | 90,590 | | | $ | 219,533 | | | $ | 196,008 | | | | | |
| Cemetery gross profit | 102,810 | | | 100,556 | | | 178,278 | | | 186,972 | | | | | |
| Gross profit from reportable segments | 218,767 | | | 191,146 | | | 397,811 | | | 382,980 | | | | | |
| Corporate general and administrative expenses | (37,169) | | | (29,218) | | | (68,982) | | | (72,196) | | | | | |
| Gains (losses) on divestitures and impairment charges, net | 737 | | | (11,823) | | | 5,282 | | | (13,701) | | | | | |
| | | | | | | | | | | |
| Operating income | 182,335 | | | 150,105 | | | 334,111 | | | 297,083 | | | | | |
| Interest expense | (41,767) | | | (47,317) | | | (86,118) | | | (94,707) | | | | | |
| Losses on early extinguishment of debt, net | (11) | | | (7,579) | | | (150) | | | (7,579) | | | | | |
| Other income (expense), net | 1,166 | | | 874 | | | (81) | | | 1,594 | | | | | |
| Income before income taxes | $ | 141,723 | | | $ | 96,083 | | | $ | 247,762 | | | $ | 196,391 | | | | | |
Our geographic area information is as follows:
|
| | | | | | | | | | | |
| | United States | | Canada | | Total |
| | | | (In thousands) | | |
| Three Months Ended June 30, | | | | | |
| Revenue from external customers: | | | | | |
| 2019 | $ | 767,394 |
| | $ | 45,178 |
| | $ | 812,572 |
|
| 2018 | $ | 750,445 |
| | $ | 45,647 |
| | $ | 796,092 |
|
| Six Months Ended June 30, | | | | | |
| Revenue from external customers: | | | | | |
| 2019 | $ | 1,521,474 |
| | $ | 89,310 |
| | $ | 1,610,784 |
|
| 2018 | $ | 1,494,558 |
| | $ | 96,016 |
| | $ | 1,590,574 |
|
9. Leases
Our leases principally relate to funeral service real estate and office, maintenance, and transportation equipment. The majority of our lease arrangements contain options to (i) purchase the property at fair value on the exercise date, (ii) purchase the property for a value determined at the inception of the lease, or (iii) renew the lease for the fair rental value at the end of the primary lease term.
Future lease payments for non-cancelable operating and finance leases as of June 30, 2019 was as follows:
| | | | | | | | | | | | | | | | | |
| United States | | Canada | | Total |
| | (In thousands) | | | | |
| Three Months Ended June 30, | | | | | |
| Revenue from external customers: | | | | | |
| 2020 | $ | 781,842 | | | $ | 38,193 | | | $ | 820,035 | |
| 2019 | $ | 767,394 | | | $ | 45,178 | | | $ | 812,572 | |
| Six Months Ended June 30, | | | | | |
| Revenue from external customers: | | | | | |
| 2020 | $ | 1,541,114 | | | $ | 81,886 | | | $ | 1,623,000 | |
| 2019 | $ | 1,521,474 | | | $ | 89,310 | | | $ | 1,610,784 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Operating | | Finance | | Total |
| | (In thousands) |
| 2019 (excluding the six months ended June 30, 2019) | $ | 5,408 |
| | $ | 23,722 |
| | $ | 29,130 |
|
| 2020 | 11,343 |
| | 43,681 |
| | 55,024 |
|
| 2021 | 10,056 |
| | 61,946 |
| | 72,002 |
|
| 2022 | 8,928 |
| | 25,721 |
| | 34,649 |
|
| 2023 | 6,759 |
| | 18,614 |
| | 25,373 |
|
| Thereafter | 45,164 |
| | 47,754 |
| | 92,918 |
|
| Total lease payments | $ | 87,658 |
| | $ | 221,438 |
| | $ | 309,096 |
|
| Less: Interest | (23,051 | ) | | (24,208 | ) | | (47,259 | ) |
| Present value of lease liabilities | $ | 64,607 |
| | $ | 197,230 |
| | $ | 261,837 |
|
As of December 31, 2018, we disclosed the following future lease payments for non-cancelable operating and finance leases exceeding one year:
|
| | | | | | | |
| | Operating | | Finance |
| | (In thousands) |
| 2019 | $ | 11,295 |
| | $ | 46,998 |
|
| 2020 | 9,550 |
| | 51,943 |
|
| 2021 | 8,251 |
| | 57,881 |
|
| 2022 | 7,282 |
| | 21,842 |
|
| 2023 | 5,397 |
| | 15,587 |
|
| 2024 and thereafter | 37,841 |
| | 40,447 |
|
| Total | $ | 79,616 |
| | $ | 234,698 |
|
| Less: Interest on finance leases | | | (22,746 | ) |
| Total principal payable on finance leases | | | $ | 211,952 |
|
The components of lease cost for the three and six months ended June 30, 2019 were as follows:
|
| | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| | (In thousands) |
| Amortization of leased assets | $ | 10,348 |
| | $ | 21,312 |
|
| Interest on lease liabilities | 1,453 |
| | 3,284 |
|
| Total finance lease cost | 11,801 |
| | 24,596 |
|
| Operating lease cost | 3,074 |
| | 6,268 |
|
| Variable lease cost | 420 |
| | 792 |
|
| Total lease cost | $ | 15,295 |
| | $ | 31,656 |
|
Supplemental balance sheet information as of June 30, 2019 related to leases was as follows:
|
| | | | | | |
| Lease Type | | Balance Sheet Classification | | June 30, 2019 |
| | | | | (In thousands) |
Operating lease right-of-use assets (1) | | Deferred charges and other assets | | $ | 62,383 |
|
Finance lease right-of-use assets (1) | | Property and equipment, net | | 190,889 |
|
Total right-of-use assets (1) | | | | $ | 253,272 |
|
| | | | | |
| Operating | | Accounts payable and accrued liabilities | | $ | 8,472 |
|
| Finance | | Current maturities of long-term debt | | 39,940 |
|
| Total current lease liabilities | | | | 48,412 |
|
| Operating | | Other liabilities | | 56,135 |
|
| Finance | | Long-term debt | | 157,290 |
|
| Total non-current lease liabilities | | | | 213,425 |
|
| Total lease liabilities | | | | $ | 261,837 |
|
| |
(1) | Right-of-use assets are presented net of accumulated amortization. |
The weighted-average life remaining and discount rates of our leases as of June 30, 2019 were as follows:
|
| | | | | |
| | Operating | | Finance |
| Weighted-average remaining lease term (years) | 12.2 |
| | 5.2 |
|
| Weighted-average discount rate | 4.7 | % | | 3.5 | % |
Supplemental cash flow information related to leases for the three and six months ended June 30, 2019 were as follows:
|
| | | | | | | |
| | Three Months Ended June 30, 2019 | | Six Months Ended June 30, 2019 |
| | (In thousands) |
| Cash paid for amounts in the measurement of lease liabilities | | | |
| Operating cash flows for operating leases | $ | 3,124 |
| | $ | 6,217 |
|
| Operating cash flows for finance leases | 1,773 |
| | 3,721 |
|
| Financing cash flows for finance leases | 11,163 |
| | 21,820 |
|
Total cash paid for amounts included in the measurement of lease liabilities
| $ | 16,060 |
| | $ | 31,758 |
|
| | | | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | $ | 15,308 |
| | $ | 34,474 |
|
| Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 2,125 |
| | $ | 6,365 |
|
We have 64 operating leases where we are the lessor and the non-cancelable term is greater than one year, resulting in $0.7 million and $1.4 million in lease income for the three and six months ended June 30, 2019. We lease office space and excess land, and we are party to cellular agreements and land easements. We generally do not have sales-type leases, direct financing leases, or lease receivables. The adoption of ASC 842 did not have an impact on our accounting for lessor leases. Future undiscounted lease income from operating leases as of June 30, 2019 were as follows (in thousands):
|
| | | |
| 2019 (excluding the six months ended June 30, 2019) | $ | 1,341 |
|
| 2020 | 1,772 |
|
| 2021 | 1,417 |
|
| 2022 | 1,092 |
|
| 2023 | 504 |
|
| Thereafter | 243 |
|
| Total cash receipts | $ | 6,369 |
|
10.9. Commitments and Contingencies
Insurance Loss Reserves
We purchase comprehensive general liability, morticians’morticians and cemetery professional liability, automobile liability, and workers’ compensation insurance coverage all of which are structured with high deductibles. The high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. As of June 30, 20192020 and December 31, 2018,2019, we have self-insurance reserves of $80.3$87.2 million and $80.1$84.3 million, respectively.
Litigation and Regulatory Matters
We are a party to various litigation and regulatory matters, investigations, and proceedings. Some of the more frequent routine litigations incidental to our business are based on burial practices claims and employment-related matters, including discrimination, harassment, and wage and hour laws and regulations. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to vigorously defend ourselves in the matters described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.
Wage and Hour Claims. We are named as a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour pay, including but not limited to the Samborsky, Fredeen Horton, Quismundo, and Kallweit lawsuitslawsuit described below. Given the nature of these lawsuits, except for those lawsuits where a settlement is referenced, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
Charles Samborsky, et al, individuallyLisa Fredeen, an aggrieved employee and on behalf of those persons similarly situated, v. SCI California Funeral Services, Inc., et al ; Case No. BC544180; in the Superior Court of the State of California for the County of Los Angeles, Central District-Central Civil West Courthouse. This lawsuit was filed in April 2014 against an SCI subsidiary and purports to have been brought on behalf ofother aggrieved employees who worked as family service counselors in California since April 2010. The plaintiffs allege causes of action for various violations of state laws regulating wage and hour pay. In addition, this lawsuit also asserts claims under the California Private Attorney General Act (PAGA) provisions on behalf of other similarly situated California persons. The plaintiffs seek unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The claims have been sent to arbitration. In July 2017, the arbitrator entered an award rejecting the plaintiffs' claims, ruling that they did not sue the correct party. Plaintiffs continue to assert claims under PAGA that are not subject to arbitration.
Adrian Mercedes Vasquez, an individual and on behalf of others similarly situated, v. California Cemetery and Funeral Services, LLC, et al; Case No. BC58837;BC706930; in the Superior Court of the State of California for the County of Los Angeles. This lawsuit was filed in July 2015 against SCI subsidiaries on May 18, 2018 and purports to be brought on behalf of the defendants' current and former non-exempt California employees during the four years preceding the filing of the complaint. The plaintiff allegesThis lawsuit asserts numerous causes of actionclaims for alleged wage and hour pay violations.violations under the California Labor Code and the California Private Attorneys General Act. The plaintiff seeks unpaid wages, compensatory and punitive damages, civil penalties, attorneys’ fees and costs, interest, and injunctive relief. The claims were ordered to arbitration, andinterest. Given the arbitrator has determined that the claims would proceed as a bilateral arbitration. On May 24, 2019, the arbitrator issued an opinion rejecting plaintiff’s claims in their entirety. In addition, the plaintiff filed an unfair labor practice charge against defendants with the National Labor Relations Board alleging that by enforcing a mandatory arbitration provision, defendants allegedly violated the National Labor Relations Act. That action is currently pending.
Lisa Fredeen, an aggrieved employee and on behalf of other aggrieved employees v. California Cemetery and Funeral Services, LLC, et al; Case No. BC706930; in the Superior Court of the State of California for the County of Los Angeles. This lawsuit was filed on May 18, 2018, by the same law firm that filed the Vasquez case described above against SCI subsidiaries, asserting claims for violations of the California Labor Code and PAGA, based on alleged facts similar to those alleged in the Vasquez suit. The plaintiff seeks civil penalties, interest, and attorneys’ fees.
Nicole Romano, individually and on behalf of all others similarly situated v. SCI Direct, Inc., et al; Case No. BC656654; in the Superior Court of California for the County of Los Angeles. This lawsuit was filed in April 2017 against SCI subsidiaries and purports to have been brought on behalf of persons who worked as independent sales representatives in the U.S. during the
four years preceding the filing of the complaint. In addition, this lawsuit also asserts claims under PAGA provisions on behalf of other similarly situated California persons. The plaintiff alleges numerous causes of action for alleged wage and hour pay violations, including misclassifying the independent sales representatives as independent contractors instead of employees. The plaintiff seeks unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The parties reached a settlementnature of this lawsuit, andwe are unable to reasonably estimate the Doyle lawsuit referenced below in November 2018. The settlement agreement is subject to court approval. The financial termspossible loss or ranges of the settlement call for SCI Direct to pay a total of $2.5 million in relation to both the Romano and Doyle lawsuits. On May 21, 2019, the Court granted the parties' Motion for Preliminary Approval of Class Action Settlement.
James Doyle, individually and on behalf of all others similarly situated v. SCI Direct, Inc., et al; Case No. 2:18-cv-05859 in the United States District Court Central District of California, removed fromCase No.BC705666; in the Superior Court of California for the County of Los Angeles. This lawsuit was filed in May 2018, against an SCI subsidiary, by the same attorneys who filed the Romano case described above, and alleges causes of action and seeks damages and relief similar to those in the Romano case. The parties reached a settlement of this lawsuit and the Romano lawsuit referenced above in November 2018. On December 26, 2019, this matter was consolidated into the Romano lawsuit. The settlement agreement, noted above, is subject to court approval. The financial terms of the settlement call for SCI Direct to pay a total of $2.5 million collectively for the Romano and Doyle lawsuits.
Felicia Horton, an individual and on behalf of other aggrieved employees v. SCI Direct, Inc., et al; Case No. 37-2016-00039356-CU-OE-CTL; in the Superior Court of California for the County of San Diego. This lawsuit was filed in November 2016, against SCI subsidiaries, on behalf of the plaintiff who worked as an independent sales representative of our subsidiary in California. In addition, this lawsuit asserts claims under PAGA on behalf of other similarly situated California persons. The lawsuit alleges causes of action and seeks damages and relief similar to those in the Romano case described above. The attorneys in the Horton case have also filed an additional lawsuit, against SCI subsidiaries, alleging individual and PAGA claims similar to those alleged in the Horton case. The additional individual and PAGA claim lawsuits are styled Jandy Quismundo v. SCI Direct, Inc., et al; Case No. 37-2017-00031825-CU-OE-CTL; in the Superior Court of California for the County of San Diego, and Jaime Kallweit v. SCI Direct, Inc., et al; Case No. 37-2017-00037186-CU-OE-CTL; in the Superior Court for the State of California for the County of San Diego. Sandra Dorian v. SCI Direct, Inc., et al; Case No 37-2018-0061985-CU-OE-CTL; in the Superior Court of California for the County of San Diego, and Holly Karpiak v. SCI Direct, Inc., et al; Case No. 37-2019-00031328-CU-OE-CTL, in the Superior Court of California for the County of San Diego. In addition to the wage and hour and PAGA claims described above, Horton alleges claims for sexual harassment and wrongful discharge. After a trial, the judge issued a preliminary statement of decision on April 19, 2019, awarding approximately $0.3 million related to the aforementioned claims above.loss, if any.
Claims Regarding Acquisition of Stewart Enterprises. We are involved in the following lawsuit.
Karen Moulton, Individually and on behalf of all others similarly situated v. Stewart Enterprises, Inc., Service Corporation International and others ;others; Case No. 2013-5636; in the Civil District Court Parish of New Orleans, Louisiana. This case was filed as a class action in June 2013 against an SCI and our subsidiary in connection with SCI's acquisition of Stewart Enterprises, Inc. The plaintiffs allege that SCI aided and abetted breaches of fiduciary duties by Stewart Enterprises and its board of directors in negotiating the combination of Stewart Enterprises with a subsidiary of SCI. The plaintiffs seek damages concerning the combination. We filed exceptions to the plaintiffs’ complaint that were granted in June 2014. Thus, subject to appeals, SCI will no longer be party to the suit. The case has continued against our subsidiary Stewart Enterprises and its former individual directors. However, in October 2016, the court entered a judgment dismissing all of plaintiffs’ claims. Plaintiffs have appealed the dismissal. Given the nature of this lawsuit, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
Operational Claims.We are named a defendant in various lawsuits alleging operational claims, including but not limited to the BernsteinState of California and HoodTaylor lawsuits described below.
Caroline Bernstein,The People of the State of California v. Service Corporation International, a Texas corporation, SCI Direct, Inc. a Florida Corporation, S.E. Acquisition of California, Inc., a California corporation dba Neptune Society of Northern California, Neptune Management Corp., a California corporation, Trident Society, Inc. a California corporation, and Does 1 through 100, inclusive, Case No. RG 19045103;in the Superior Court of the State of California in and for the County of Alameda. In July 2019, we received a letter from the Attorney General, State of California, Department of Justice (“CAAG") alleging that the allocation of prices among certain of our cremation service contracts and cremation merchandise contracts, and the related preneed trust funding, violates section 7735 of the California Business and Professions Code and that provisions of these same contracts constitute false advertising and deceptive sales practices in violation of California consumer protection laws. On November 21, 2019, we filed a complaint,S.E. Combined Services of California, Inc., a California Corporation dba Neptune Society of Northern California, Neptune Management Corp. a California Corporation, and Trident Society, Inc. v. Xavier Becerra, Attorney General of the State of California, and Does 1-50, Case No. 34-2019-00269617;in the Sacramento County Superior Court seeking declaratory relief holding, in general, that our practices, methods, and documentation utilized in the sale of preneed funeral goods and services are in all respects compliant with California law. On December 2, 2019, the CAAG filed the complaint, referenced above, seeking permanent injunction from making false statements and engaging in unfair competition, a placement of funds into preneed trusts, civil penalties, customer refunds, attorneys’ fees, and costs. We believe our contracts comply with applicable laws. Given the nature of this matter, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
Nancy Taylor, on behalf of herself and Marla Urofsky on behalf of Rhea Schwartz, and both on behalf of all others similarly situated v. SCI Pennsylvania Funeral Services, Inc. and Service Corporation International, and others, Case No. 2:17-cv-04960-GAM;20-cv-60709; in the United States District Court EasternSouthern District of Pennsylvania.Florida Fort Lauderdale Division. This case was filed in November 2017 April 2020
26 Service Corporation International
as a purported national or alternatively as a PennsylvaniaFlorida class action regardingalleging that the allocation of prices among certain of our Forest Hills/Shalom Memorial Park in Huntingdon Valley, Pennsylvaniacremation service contracts and our Roosevelt Memorial Park Cemetery in Trevose, Pennsylvania. Plaintiffs allege wrongful burialcremation merchandise contracts, and the related preneed trust funding, and the failure to disclose commissions paid and sales practices. Plaintiffs seekpractices associated with the sale of third-party travel protection plans, violate the Florida Deceptive and Unfair Trade Practices Act and constitute unjust enrichment. Plaintiff seeks refunds, general, actual, compensatory consequential and punitiveexemplary damages, attorneys’ fees and costs,civil penalties, interest, and injunctive relief.attorney fees. Given the nature of this lawsuit, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
Shelley T. Hood v. Pine Crest Funeral Home and Cemetery A/K/A Pine Crest Funeral Home, Service Corporation International, and others; Case No. 02-CV-2017-900635.00; in the Circuit Court of Mobile County, Alabama. This case was filed in March 2017. Plaintiff alleges she contracted with Pine Crest Funeral Home to cremate her mother’s remains on March 25, 2011. Plaintiff further alleges that the cremated remains could not be located when she contacted Pine Crest Funeral Home to take possession of the cremated remains in October 2015. Plaintiff sought compensatory and punitive damages. The plaintiff
was awarded compensatory and punitive damages after a jury trial. This matter has settled for a confidential, non-material amount.
Unclaimed Property Audit. We are involved in the following matter.
We received notices from a third partythird-party auditor representing the unclaimed property departments of certain states regarding preneed funeral and cemetery contracts that were not funded by the purchase and assignment of the proceeds of insurance policies. The auditor claims that we are subject to the laws of those states concerning escheatment of unclaimed funds. The auditor seeks escheatment of funds from the portion of such contracts for which it claims that we will probably not be required to provide services or merchandise in the future. No actual audits have commenced at this time. Given the nature of this lawsuit,matter, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
Other Potential Contingencies
In October of 2018, we received a letter from the Illinois Office of the Comptroller claiming that our subsidiary improperly withdrew a total of $13.6 million from perpetual care trusts covering 24 of our cemeteries in Illinois. We believe these withdrawals were entirely proper for the ongoing care of those cemeteries under Illinois law.
In July of 2019, we received a letter from the State of California, Department of Justice alleging that the allocation of prices among certain of our cremation service contracts and cremation merchandise contracts violates section 7735 of the Business and Professions Code and that provisions of these same contracts constitute false advertising and deceptive sales practices in violation of California consumer protection laws. The State of California, Department of Justice has requested various injunctive terms, monetary relief of $15.0 million and modified refunds for certain California consumers. We believe our contracts comply with applicable laws.
We intend to vigorously defend all of the above matters; however, an adverse decision in one or more of such matters could have a material effect on us, our financial condition, results of operations, and cash flows.
11.10. Earnings Per Share
Basic earnings per common share (EPS) excludes dilution and is computed by dividing Net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPSearnings per share reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common sharesstock that then sharedparticipated in our earnings.
A reconciliation of the numerators and denominators of the basic and diluted EPS computationsearnings per share is presented below:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands, except per share amounts) |
| Amounts attributable to common stockholders: | | | | | | | |
| Net income: | | | | | | | |
| Net income — basic | $ | 72,329 |
| | $ | 103,239 |
| | $ | 151,652 |
| | $ | 185,227 |
|
| After tax interest on convertible debt | — |
| | 15 |
| | — |
| | 30 |
|
| Net income — diluted | $ | 72,329 |
| | $ | 103,254 |
| | $ | 151,652 |
| | $ | 185,257 |
|
| Weighted average shares (denominator): | | | | | | | |
| Weighted average shares — basic | 182,369 |
| | 182,637 |
| | 182,048 |
| | 183,877 |
|
| Stock options | 3,278 |
| | 4,265 |
| | 3,418 |
| | 4,391 |
|
| Restricted stock units | 43 |
| | 165 |
| | 51 |
| | 158 |
|
| Convertible debt | — |
| | 121 |
| | — |
| | 121 |
|
| Weighted average shares — diluted | 185,690 |
| | 187,188 |
| | 185,517 |
| | 188,547 |
|
| Net income per share: | | | | | | | |
| Basic | $ | 0.40 |
| | $ | 0.57 |
| | $ | 0.83 |
| | $ | 1.01 |
|
| Diluted | $ | 0.39 |
| | $ | 0.55 |
| | $ | 0.82 |
| | $ | 0.98 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | | |
| 2020 | | 2019 | 2020 | | 2019 | | |
| | (In thousands, except per share amounts) | | | | | | | |
| Amounts attributable to common stockholders: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Net income — basic and diluted | $ | 105,508 | | | $ | 72,329 | | $ | 187,449 | | | $ | 151,652 | | | |
| Weighted average shares: | | | | | | | | |
| Weighted average shares — basic | 177,902 | | | 182,369 | | 179,378 | | | 182,048 | | | |
| Stock options | 1,740 | | | 3,278 | | 2,221 | | | 3,418 | | | |
| Restricted share units | 24 | | | 43 | | 40 | | | 51 | | | |
| | | | | | | | |
| Weighted average shares — diluted | $ | 179,666 | | | $ | 185,690 | | $ | 181,639 | | | $ | 185,517 | | | |
| Amounts attributable to common stockholders: | | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
| Earnings per share: | | | | | | | | |
| Basic | $ | 0.59 | | | $ | 0.40 | | $ | 1.04 | | | $ | 0.83 | | | |
| Diluted | $ | 0.59 | | | $ | 0.39 | | $ | 1.03 | | | $ | 0.82 | | | |
The computation of diluted
EPSearnings per share excludes outstanding stock options and restricted share units in certain periods in which the inclusion of such equity awards would be
anti-dilutive inantidilutive to the periods presented. Total
equity awardsantidilutive options and restricted stock units not
currently included in the computation of
dilutive EPSdiluted earnings per share are as follows (in shares):
|
| | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| Antidilutive options | 105 |
| | 1,155 |
| | — |
| | 868 |
|
| | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | | | | |
| | 2020 | | 2019 | 2020 | | 2019 | | |
| (In thousands) | | | | | | | |
| | | | | | | | |
| Antidilutive options | 2,706 | | | 105 | | 1,486 | | | — | | | |
| Antidilutive restricted share units | 67 | | | — | | 49 | | | — | | | |
| | | | | | | | |
| | | | | | | | |
| | | | | | | | |
12.
11. Acquisitions and Divestiture-Related Activities
Acquisitions
In June 2018, we acquired fifteen funeral homes and seven cemeteries in four states (the “acquired businesses”) for $82.2 million in cash. Additionally, we paid $49.8 million of the acquired businesses existing debt in conjunction with the closing of the acquisition. We have completed our purchase price allocation. During 2019, we made the following adjustments to our estimates of the fair value of assets and liabilities (in thousands):
|
| | | | |
| Increase in the fair value of preneed receivables, net and trust investments | | $ | (3,056 | ) |
| Increase in the fair value of cemetery property | | (3,511 | ) |
| Decrease in the fair value of preneed customer relationship intangible assets | | 11,996 |
|
| Increase in the fair value of current liabilities | | 3,019 |
|
| Decrease in the fair value of deferred revenue and deferred receipts held in trust | | (14,156 | ) |
| Decrease in the fair value of deferred income taxes | | (6,883 | ) |
| Other | | (191 | ) |
| Total adjustment to goodwill | | $ | (12,782 | ) |
Excluding the June 2018 acquisition described above, we spent $32.8$59.0 million and $35.6$32.8 million, for several smaller, tuck-in acquisitions forreal estate, funeral service, and cemetery locations during the six months ended June 30, 20192020 and 2018,2019, respectively.
Divestiture-Related Activities
As divestitures occur in the normal course of business, gains or losses on the sale of such assetslocations are recognized in the income statementunaudited Condensed Consolidated Statement of Operations line item (Losses) gainsGains (losses) on divestitures and impairment charges, net, which consist ofcomprised the following:
| | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | 2020 | | 2019 |
| | (In thousands) | | | | | |
| Gains (losses) on divestitures, net | $ | 737 | | | $ | (9,643) | | $ | 8,366 | | | $ | (9,097) | |
| Impairment losses | — | | | (2,180) | | (3,084) | | | (4,604) | |
| Gains (losses) on divestitures and impairment charges, net | $ | 737 | | | $ | (11,823) | | $ | 5,282 | | | $ | (13,701) | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In thousands) |
| (Losses) gains on divestitures, net | $ | (9,643 | ) | | $ | 6,865 |
| | $ | (9,097 | ) | | $ | 8,141 |
|
| Impairment losses | (2,180 | ) | | — |
| | (4,604 | ) | | (794 | ) |
| (Losses) gains on divestitures and impairment charges, net | $ | (11,823 | ) | | $ | 6,865 |
| | $ | (13,701 | ) | | $ | 7,347 |
|
28 Service Corporation International
Item 2. Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations
The Company
We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries unequaled in geographic scale and reach. At June 30, 2019,2020, we operated 1,4781,472 funeral service locations and 481483 cemeteries (including 287296 funeral service/cemetery combination locations), which are geographically diversified across 44 states, eight Canadian provinces, the District of Columbia, and Puerto Rico.
We are well known for our Dignity Memorial® brand, North America's first transcontinental brand of deathcare products and services. Our other brands are Dignity Planning™, National Cremation Society®, Advantage® Funeral and Cremation Services, Funeraria del Angel™, Making Everlasting Memories®, Neptune Society™, and Trident Society™. Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.
Our financial position is enhanced by our approximately $11.6$11.9 billion backlog of future revenue from both trust and insurance-funded preneed sales at June 30, 2019.2020. Preneed selling provides us with a currentstrategic opportunity to lock-ingain future market share while deterring the customer from going to a competitor in the future.share. We also believe it adds to the stability and predictability of our revenue and cash flows. While revenue on the majority of preneed merchandise and service sales is deferred until the time of need, sales of preneed cemetery property provide opportunities for full current revenue recognition to the extent that the property is developed and available for use.
We have adequate liquidity and a favorable debt maturity profile, which allowsallow us to return capital to shareholders through share repurchases and dividends.
Factors affecting our operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed revenue. The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average revenue for cremations is lower than that for traditional burials. To further enhance revenue opportunities, we continue to focus on our cremation customers' preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers. We believe the presentation of these additional merchandise and services through our customer-facing technology enhances our customers' experience by reducing administrative burdens and allowing them to visualize the product offerings and services, which will help drive increases in the average revenue for a cremation in future periods.
Recent Trends
During the first half of 2020, an outbreak of a novel strain of coronavirus (COVID-19) spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020. COVID-19 poses a threat to the health and economic well-being of our employees, customers, and vendors. Our dedicated associates on the front lines are acting as first responders and providing essential services for the well-being of our client families and communities. The operation of all our facilities is critically dependent on our employees who staff these locations. To ensure the well-being of all our employees and their families, we have provided them with detailed health and safety literature on COVID-19, such as the Center for Disease Control (the “CDC”)’s industry-specific guidelines for working with the deceased who were and may have been infected with COVID-19. In addition, we provide personal protection equipment to those employees whose positions require such equipment. We have continued to add measures to help ensure client families can safely visit our locations and celebrate the life of their loved ones. We have implemented work from home policies at our corporate offices consistent with CDC and local government guidance to reduce the risks of exposure to COVID-19, while still supporting our locations and the customers they serve.
Like most businesses world-wide, COVID-19 has impacted us financially; however, we cannot, with certainty, presently predict the scope, severity, or duration with which COVID-19 will impact our business, financial condition, results of operations, and cash flows. As recently as the middle of March 2020, sales growth was continuing to trend in line and consistent with our forecast for the first quarter of 2020 and when compared to the first quarter of 2019. However, over the last two weeks of March and through April, we saw our preneed sales activity precipitously decline as North Americans began to practice social distancing while complying with multiple state and provincial shelter-in-place orders. As local governments began to reopen in the back half of the second quarter, we saw an increase in the velocity of our preneed cemetery sales. Due to the impacts of COVID-19 and uncertainty about the duration of the effects, we took a variety of actions to preserve capital, including but not limited to, reducing the base salaries for officers from the peak of the COVID -19 effects in late April 2020 until late May when the impacts eased.
The rigorous restrictions placed on gatherings and mandated by state, provincial, and local governments have posed a unique challenge for our locations. In mid-March, we quickly implemented technology solutions, including leveraging Facebook Live, which allows extended family and friends to virtually participate in the ceremony alongside the immediate family. In addition, certain locations found other ways to include families and friends in services, including giving guests the opportunity to leave condolences on balloons that are tied to chapel chairs so families can feel connected to those unable to attend in person. We also carefully designed outdoor venues to allow guests to be present, yet remain at a safe distance and even offer customers the ability to broadcast cemetery services through radio transmitters at certain locations. Atneed funeral directors are also using virtual
meeting platforms to discuss and plan service details with client families. Our preneed sales teams have continued to overcome social distancing obstacles in certain areas of the country by leveraging technology with customers who may prefer to purchase cemetery property and merchandise from the safety of their home or setting up outdoor pop-up tents to discuss pre-planning from a safe distance.Although they may face challenges to meet face-to-face, our funeral directors continue to listen, understand, suggest, and plan important details for honoring a loved one’s life.
For further discussion of our key operating metrics, see our Results"Cash Flow" and “Results of Operations and Cash FlowOperations” sections below.
Financial Condition, Liquidity, and Capital Resources
Capital Allocation Considerations
We rely on cash flow from operations as a significant source of liquidity. Our cash flow from operating activities provided $262.9$364.3 million in the first six months of 2019. We had $967.12020. As of June 30, 2020, we have $576.0 million in excess borrowing capacity under our Bank Credit Facility.
Subsequent to June 30, 2020, we increased our outstanding borrowings by $20.0 million, which decreased our borrowing capacity under our Bank Credit Facility at June 30, 2019.to $556.0 million.
Our bank credit agreementBank Credit Facility requires us to maintain certain leverage and interest coverage ratios. As of June 30, 2019,2020, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of June 30, 20192020 are as follows:
|
| | | | | | | | | | |
| Per Credit Agreement | | Actual |
| Leverage ratio | 4.75 (Max) | | 3.893.79 | |
| Interest coverage ratio | 3.00 (Min) | | 4.835.32 | |
We believe we have the financial strength and flexibility to reward shareholders through share repurchases and dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth.
We believe that our unencumbered cash on hand, future operating cash flows, and the available capacity under our bank credit agreement will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations. Due to cash balances residing in Canada and minimum operating cash requirements, a portion of our cash on hand is encumbered.
We consistently evaluate the best uses of our cash flow that will yield the highest value and return on capital. Our capital deployment strategy is prioritized as follows:
Investing in Acquisitions and Building New Funeral Service LocationsLocations.. We intend to makemanage our footprint by focusing on strategic acquisitions ofand building new funeral service locations where the expected returns are attractive and cemeteries when pricing and terms are favorable. We expect an acquisition investment to earn an after-tax cash
return that is in excess ofexceed our weighted average cost of capital with room for execution risk. We will also invest in the construction of additional funeral service locations.by a meaningful margin. We target businesses with favorable customer categoriesdynamics and/or where we can achieve additional economies of scale. We continue to pursue strategic acquisitions and build new funeral service locations in areas that provide us with the potential for scale.
Paying DividendsDividends.. Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.18$0.19 per common share in 2019.2020. We target a payout ratio of 30% to 40% of after-tax earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter upon review of our financial performance.
Repurchasing Shares.Shares. Absent aopportunities for strategic acquisition opportunity,acquisitions, we believe share repurchases are attractive at the appropriate price. We intendexpect to make purchases from timecontinue to timerepurchase shares of our common stock in the open market or through privately negotiated transactions, subject to market conditions, debt covenants, and normal trading restrictions. Our Bank Credit Facility contains covenants that limit our ability to repurchase our common stock. There can be no assurance that we will buy our common stock under our repurchase program in the future.
During the six months ended June 30, 2019,2020, we repurchased 692,3255,177,807 shares of common stock at an aggregate cost of $29.6$210.6 million, which is an average cost per share of $42.72.$40.67. After these repurchases, the remaining dollar value of shares authorized to be purchased under ourthe share repurchase program was approximately $165.7$106.2 million at June 30, 2019. 2020.
Subsequent to June 30, 2020, we repurchased 791,744 shares for $30.4 million at an average cost per share of $38.40. After these repurchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program is $75.8 million.
Managing Debt.Debt. We will seek to make open market debt repurchases when it is opportunistic to do so relative to other capital deployment opportunities and manage our near-term debt maturity profile. We have a relatively consistent annual cash flow stream that is generally resistant to down economic cycles. This cash flow stream and our significant liquidity isare available to substantially reduce our long-term debt maturities should we choose to do so. Furthermore, our capital expenditures are generally discretionary in nature and can be managed based on the availability of operating cash flow.
30 Service Corporation International
Cash Flow
We believe our ability to generate strong operating cash flow is one of our fundamental financial strengths and provides us with substantial flexibility in meeting our operating and investing needs.
Operating Activities
Net cash provided by operating activities decreased $52.5was $364.3 million toand $262.9 million infor the first six months ofended June 30, 2020 and 2019, compared to $315.4 million in the first six months of 2018. respectively.
Excluding $6.4 million in legal settlements in the current period and a $5.6 million tax refund in the prior period, cash flow from operations decreased by $40.5increased $95.0 million from prior year.for six months ended June 30, 2020 versus the same period in 2019. The 2020 increase over 2019 decrease comprises:
•a $22.4$47.6 million increasedecrease in cash tax payments.
•a $29.6 million decrease in vendor and other payments,payments.
•a $21.1$13.4 million increasedecrease in cash interest payments,
•a $10.4 million decrease in employee compensation, and
•a $18.7 million increase in cash tax recurring payments,
a $11.8 million increase in net trust deposits, and
a $8.2 million increase in cash interest paid, partially offset by
a $31.0$3.4 million increase in cash receipts from customers, andpartially offset by
•a $10.7$9.4 million increasedecrease in General Agency (GA) and other receipts.
Investing Activities
Cash flows from investing activities used $152.1 million and $142.7 million infor the first six months ofended June 30, 2020 and 2019, compared to using $272.8respectively. The $9.4 million in the same period of 2018. The $130.1 million decreaseincrease from 20192020 over 20182019 is primarily due to the following:
•a $134.9$21.4 million decreaseincrease in cash spent on real estate acquisitions, and
•a $14.5$4.9 million decrease primarily for the purchase of land,increase in cash spent on business acquisitions, partially offset by
•a $0.3$8.3 million decrease in payments onfor Company-owned life insurance policies, net of proceeds, partially offset by
•a $9.8$7.9 million increasedecrease in capital expenditures, primarily due to improvements at existing funeral homes,the temporary deferral of certain capital expenditures as we navigate the impact of the COVID-19 pandemic, and
•a $6.9$0.7 million decreaseincrease in cash receipts from divestitures and asset sales, and
a $2.9 million decrease in proceeds from sale of other investments.sales.
Financing Activities
Financing activities used $79.8$199.7 million infor the first six months of 2019ended June 30, 2020 compared to using $210.1$79.8 million infor the same period of 2018.in 2019. The $130.3$119.9 million decreaseincrease from 20192020 over 20182019 is primarily due to:
•a $199.3$181.0 million decreaseincrease in purchase of Company common stock,
•a $21.1$8.0 million decrease in proceeds from exercises of stock options.
•a $5.6 million change in bank overdrafts and other,acquisition-related financing, and
•a $15.8 million increase in proceeds from exercises of stock options partially offset by
a $102.4 million decrease in proceeds from the issuance of debt, net of payments, and
a $3.5$2.4 million increase in payments of dividends.dividends, partially offset by
•a $77.1 million decrease in debt payments, net of proceeds.
Financial Assurances
In support of our operations, we have entered into arrangements with certain surety companies whereby such companies agree to issue surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our preneed funeral and cemetery sales activities. The obligations to the customer underlying these surety bonds are recorded on the unaudited Condensedour Consolidated Balance Sheet as Deferred revenue, net. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.
| | | | June 30, 2019 | | December 31, 2018 | | June 30, 2020 | | December 31, 2019 |
| | (In millions) | | (In millions) | |
| Preneed funeral | $ | 91.9 |
| | $ | 106.9 |
| Preneed funeral | $ | 94.3 | | | $ | 94.6 | |
| Preneed cemetery: |
| |
| Preneed cemetery: | | | |
| Merchandise and services | 143.6 |
| | 137.9 |
| Merchandise and services | 149.6 | | | 147.6 | |
| Pre-construction | 16.4 |
| | 15.4 |
| Pre-construction | 22.2 | | | 20.3 | |
| Bonds supporting preneed obligations | 251.9 |
| | 260.2 |
| |
| Bonds supporting preneed funeral and cemetery obligations | | Bonds supporting preneed funeral and cemetery obligations | 266.1 | | | 262.5 | |
| Bonds supporting preneed business permits | 4.7 |
| | 4.2 |
| Bonds supporting preneed business permits | 5.5 | | | 5.5 | |
| Other bonds | 18.8 |
| | 18.9 |
| Other bonds | 19.7 | | | 19.7 | |
| Total surety bonds outstanding | $ | 275.4 |
| | $ | 283.3 |
| Total surety bonds outstanding | $ | 291.3 | | | $ | 287.7 | |
When selling preneed contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law. For the six months ended June 30, 20192020 and 2018,2019, we had $12.4$3.7 million and $12.3$12.4 million, respectively, of cash receipts from sales attributable to bonded sales.contracts. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.
Surety bond premiums are paid annually and the bonds are automatically renewable until maturity of the underlying preneed contracts, unless we are given prior notice of cancellation. Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. Management does not expect that we will be required to fund material future amounts related to these surety bonds because ofdue to a lack of surety capacity or surety company non-performance.
Preneed Funeral and Cemetery Activities and Backlog of Contracts
In addition to selling our products and services to client families at the time of need, we enter into price-guaranteed preneed contracts, which provide for future funeral or cemetery merchandise and services. Because preneed funeral and cemetery merchandise or services will generally not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed contracts be deposited into merchandise and service trusts until the merchandise is delivered or the service is performed. In certain situations, as described above, where permitted by state or provincial laws, we may post a surety bond as financial assurance for a certain amount of the preneed contract in lieu of placing funds into trust accounts. Alternatively, we may sell a life insurance or annuity policy from third-party insurance companies.
Insurance-Funded Preneed Contracts: Where permitted by state or provincial law, we may sell a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. These general agency commissions (GA revenue) are based on a percentage per contract sold and are recognized as funeral revenue when the insurance purchase transaction between the preneed purchaser and third-party insurance provider is completed. All selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred. We do not reflect the unfulfilled insurance-funded preneed contract amounts in our unaudited Condensed Consolidated Balance Sheet because they are not assets and liabilities as defined in Statement of Accounting Concepts No. 6 as we have no claim to the insurance proceeds until the contract is fulfilled and no obligation under the contract until the benefits are assigned to us at the time of need.Sheet. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenue as we perform these funerals.
32 Service Corporation International
The table below details theour results of insurance-funded preneed production and maturities for the three and six months ended June 30, 2019 and 2018, and the number of contracts associated with those transactions.maturities.
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| 2020 | | 2019 | | 2020 | | 2019 |
| (Dollars in millions) | | | | | | |
| Preneed insurance-funded: | | | | | | | |
Sales production(1) | $ | 104.9 | | | $ | 149.5 | | | $ | 229.9 | | | $ | 285.6 | |
Sales production (number of contracts) (1) | 19,353 | | | 26,215 | | | 41,448 | | | 50,127 | |
| General agency revenue | $ | 27.3 | | | $ | 34.2 | | | $ | 59.7 | | | $ | 70.2 | |
| Maturities | $ | 94.8 | | | $ | 84.2 | | | $ | 188.7 | | | $ | 175.3 | |
| Maturities (number of contracts) | 16,553 | | | 14,365 | | | 32,473 | | | 29,978 | |
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In millions) |
| Preneed insurance-funded: | | | | | | | |
Sales production (1) | $ | 149.5 |
| | $ | 148.1 |
| | $ | 285.6 |
| | $ | 274.7 |
|
Sales production (number of contracts) (1) | 26,215 |
| | 25,232 |
| | 50,127 |
| | 46,821 |
|
| General agency revenue | $ | 34.2 |
| | $ | 36.1 |
| | $ | 70.2 |
| | $ | 67.6 |
|
| Maturities | $ | 84.2 |
| | $ | 82.7 |
| | $ | 175.3 |
| | $ | 179.1 |
|
| Maturities (number of contracts) | 14,365 |
| | 14,020 |
| | 29,978 |
| | 30,251 |
|
| |
(1)
| Amounts are not included in our unaudited Condensed Consolidated Balance Sheet. |
Trust-Funded Preneed Contracts: The funds collected from customers and required by state or provincial law are deposited into trusts. We retain any funds above the amounts required to be deposited into trust accounts and use them for working capital purposes, generally to offset the selling and administrative costs of our preneed programs. Although this represents cash flow to us, the associated revenues are deferred until the merchandise is delivered or services are performed (typically at maturity). The funds in trust are then invested by professional money managers with oversight by independent trustees in accordance with state and provincial laws.
The tables below detail our results of preneed production and maturities, excluding insurance contracts for the three and six months ended June 30, 2019 and 2018.are as follows:
|
| | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended |
| | June 30, | | June 30, |
| | 2019 | | 2018 | | 2019 | | 2018 |
| | (In millions) |
| Funeral: | | | | | | | |
| Preneed trust-funded (including bonded): | | | | | | | |
| Sales production | $ | 102.9 |
| | $ | 92.3 |
| | $ | 196.1 |
| | $ | 185.0 |
|
| Sales production (number of contracts) | 28,257 |
| | 25,123 |
| | 53,349 |
| | 50,996 |
|
| Maturities | $ | 72.4 |
| | $ | 70.5 |
| | $ | 145.5 |
| | $ | 147.6 |
|
| Maturities (number of contracts) | 18,140 |
| | 17,182 |
| | 36,843 |
| | 36,843 |
|
| Cemetery: | | | | | | | |
| Sales production: | | | | | | | |
| Preneed | $ | 240.5 |
| | $ | 245.6 |
| | $ | 457.2 |
| | $ | 447.1 |
|
| Atneed | 83.5 |
| | 79.9 |
| | 165.5 |
| | 165.0 |
|
| Total sales production | $ | 324.0 |
| | $ | 325.5 |
| | $ | 622.7 |
| | $ | 612.1 |
|
| Sales production deferred to backlog: | | | | | | | |
| Preneed | $ | 102.3 |
| | $ | 120.2 |
| | $ | 196.2 |
| | $ | 217.4 |
|
| Atneed | 61.5 |
| | 59.4 |
| | 122.3 |
| | 122.7 |
|
| Total sales production deferred to backlog | $ | 163.8 |
| | $ | 179.6 |
| | $ | 318.5 |
| | $ | 340.1 |
|
| Revenue recognized from backlog: | | | | | | | |
| Preneed | $ | 74.3 |
| | $ | 81.2 |
| | $ | 137.5 |
| | $ | 138.2 |
|
| Atneed | 59.4 |
| | 59.5 |
| | 119.0 |
| | 120.4 |
|
| Total revenue recognized from backlog | $ | 133.7 |
| | $ | 140.7 |
| | $ | 256.5 |
| | $ | 258.6 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | Six Months Ended June 30, | | |
| | 2020 | | 2019 | | 2020 | | 2019 |
| | (Dollars in millions) | | | | | | |
| Funeral: | | | | | | | |
| Preneed trust-funded (including bonded): | | | | | | | |
| Sales production | $ | 79.8 | | | $ | 102.9 | | | $ | 169.0 | | | $ | 196.1 | |
| Sales production (number of contracts) | 21,677 | | | 28,257 | | | 44,856 | | | 53,349 | |
| Maturities | $ | 71.6 | | | $ | 72.4 | | | $ | 150.0 | | | $ | 145.5 | |
| Maturities (number of contracts) | 19,445 | | | 18,140 | | | 39,035 | | | 36,843 | |
| Cemetery: | | | | | | | |
| Sales production: | | | | | | | |
| Preneed | $ | 265.2 | | | $ | 240.5 | | | $ | 459.3 | | | $ | 457.2 | |
| Atneed | 93.8 | | | 83.5 | | | 178.4 | | | 165.5 | |
| Total sales production | $ | 359.0 | | | $ | 324.0 | | | $ | 637.7 | | | $ | 622.7 | |
| Sales production deferred to backlog: | | | | | | | |
| Preneed | $ | 116.8 | | | $ | 102.3 | | | $ | 211.4 | | | $ | 196.2 | |
| Atneed | 67.0 | | | 61.5 | | | 129.3 | | | 122.3 | |
| Total sales production deferred to backlog | $ | 183.8 | | | $ | 163.8 | | | $ | 340.7 | | | $ | 318.5 | |
| Revenue recognized from backlog: | | | | | | | |
| Preneed | $ | 76.5 | | | $ | 74.3 | | | $ | 142.4 | | | $ | 137.5 | |
| Atneed | 63.8 | | | 59.4 | | | 125.6 | | | 119.0 | |
| Total revenue recognized from backlog | $ | 140.3 | | | $ | 133.7 | | | $ | 268.0 | | | $ | 256.5 | |
Backlog of Preneed Contracts: The following table reflects our backlog of trust-funded deferred preneed contract revenue, including amounts related to Deferred receipts held in trust at June 30, 20192020 and December 31, 2018.2019. Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our unaudited Condensed Consolidated Balance Sheet) at June 30, 20192020 and December 31, 2018.2019. The backlog amounts presented include amounts due from customers for undelivered performance obligations on cancelable preneed contracts to arrive at our total backlog of deferred revenue. The table does not include the backlog associated with businesses that are held for sale.
The table also reflects our preneed receivables and trust investments associated with the backlog of deferred preneed contract revenue including the amounts due from customers for undelivered performance obligations on cancelable preneed contracts. We believe that the table below is meaningful because it sets forth the aggregate amount of future revenue we expect to recognize as a result of preneed sales, as well as the amount of funds associated with this revenue. Because the future revenue exceeds the assets, future revenue will exceed the cash distributions actually received from the associated trusts and future collections from the customer.
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 | | | | December 31, 2019 | | |
| | Fair Value | | Cost | | Fair Value | | Cost |
| | (In billions) | | | | | | |
| Deferred revenue, net | $ | 1.49 | | | $ | 1.49 | | | $ | 1.47 | | | $ | 1.47 | |
| Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts | 0.60 | | | 0.60 | | | 0.58 | | | 0.58 | |
| Deferred receipts held in trust | 3.64 | | | 3.58 | | | 3.84 | | | 3.54 | |
| Allowance for cancellation on trust investments | (0.25) | | | (0.24) | | | (0.27) | | | (0.25) | |
| Backlog of trust-funded deferred revenue, net of estimated allowance for cancellation | 5.48 | | | 5.43 | | | 5.62 | | | 5.34 | |
Backlog of insurance-funded revenue (1) | 6.44 | | | 6.44 | | | 6.37 | | | 6.37 | |
| Total backlog of deferred revenue | $ | 11.92 | | | $ | 11.87 | | | $ | 11.99 | | | $ | 11.71 | |
| | | | | | | |
| Preneed receivables, net and trust investments | $ | 4.62 | | | $ | 4.56 | | | $ | 4.79 | | | $ | 4.49 | |
| Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts | 0.60 | | | 0.60 | | | 0.58 | | | 0.58 | |
| Allowance for cancellation on trust investments | (0.25) | | | (0.24) | | | (0.27) | | | (0.25) | |
| Assets associated with backlog of trust-funded deferred revenue, net of estimated allowance for cancellation | 4.97 | | | 4.92 | | | 5.10 | | | 4.82 | |
Insurance policies associated with insurance-funded deferred revenue (1) | 6.44 | | | 6.44 | | | 6.37 | | | 6.37 | |
| Total assets associated with backlog of preneed revenue | $ | 11.41 | | | $ | 11.36 | | | $ | 11.47 | | | $ | 11.19 | |
| | | | | | | |
|
| | | | | | | | | | | | | | | |
| | June 30, 2019 | | December 31, 2018 |
| | Fair Value | | Cost | | Fair Value | | Cost |
| | | | (In billions) | | |
| Deferred revenue, net | $ | 1.44 |
| | $ | 1.44 |
| | $ | 1.42 |
| | $ | 1.42 |
|
| Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts | 0.58 |
| | 0.58 |
| | 0.57 |
| | 0.57 |
|
| Deferred receipts held in trust | 3.69 |
| | 3.49 |
| | 3.37 |
| | 3.47 |
|
| Allowance for cancellation | (0.27 | ) | | (0.25 | ) | | (0.24 | ) | | (0.25 | ) |
| Backlog of trust-funded deferred revenue, net of estimated allowance for cancellation | $ | 5.44 |
| | $ | 5.26 |
| | $ | 5.12 |
| | $ | 5.21 |
|
Backlog of insurance-funded deferred revenue(1) | 6.16 |
| | 6.16 |
| | 5.97 |
| | 5.97 |
|
| Total backlog of deferred revenue | $ | 11.60 |
| | $ | 11.42 |
| | $ | 11.09 |
| | $ | 11.18 |
|
| Preneed receivables, net and trust investments | $ | 4.61 |
| | $ | 4.41 |
| | $ | 4.27 |
| | $ | 4.37 |
|
| Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts | 0.58 |
| | 0.58 |
| | 0.57 |
| | 0.57 |
|
| Allowance for cancellation on trust investments | (0.27 | ) | | (0.25 | ) | | (0.24 | ) | | (0.25 | ) |
| Assets associated with backlog of trust-funded deferred revenue, net of estimated allowance for cancellation | $ | 4.92 |
| | $ | 4.74 |
| | $ | 4.60 |
| | $ | 4.69 |
|
Insurance policies associated with insurance-funded deferred revenue(1) | 6.16 |
| | 6.16 |
| | 5.97 |
| | 5.97 |
|
| Total assets associated with backlog of preneed deferred revenue | $ | 11.08 |
| | $ | 10.90 |
| | $ | 10.57 |
| | $ | 10.66 |
|
| |
(1) | Amounts are not included in our unaudited Condensed Consolidated Balance Sheet. |
The fair value of our trust investments was based on a combination of quoted market prices, observable inputs such as interest rates or yield curves, and/orand appraisals. As of June 30, 2019,2020, the difference between the backlog and asset fair valuemarket amounts totaled $0.52 billion, consisting ofrepresents $0.23 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $0.06$0.08 billion collected from customers that were not required to be deposited into trust,trusts, and $0.23$0.20 billion in allowable cash distributions from trust assets. As of June 30, 2019,2020, the fair value of the total backlog comprised $3.07$3.12 billion related to cemetery contracts and $8.53$8.80 billion related to funeral contracts. As of June 30, 2019,2020, the fair value of the assets associated with the backlog of trust-funded deferred revenue comprised $2.82$2.89 billion related to cemetery contracts and $2.1$2.08 billion related to funeral contracts. As of June 30, 2020, the backlog of insurance-funded contracts of $6.44 billion is equal to the proceeds we expect to receive from the associated insurance policies.
Trust Investments
In addition to selling our products and services to client families at the time of need, we enter into price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery merchandise and services. Since preneed funeral and cemetery merchandise or services will generally not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into trusts and/or escrow accounts until the merchandise is delivered or the service is performed. Investment earnings associated with the trust investments are expected to mitigate the inflationary costs of providing the preneed funeral and cemetery merchandise and services in the future at the prices that were guaranteed at the time of sale.
Also, we are required by state and provincial law to pay a portion of the proceeds from the preneed or atneed sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus generally remains in the trust in perpetuity and the net ordinary earnings or elected distributions are withdrawn with the intention of offsettingas allowed to defray the expense to maintain the cemetery property. While many states require that net capital gains or losses be retained and added to the corpus, certain states allow the net realized capital gains and losses to be included in the net ordinary earnings that are distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.
Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and services trusts as well as the cemetery perpetual care trusts. The majority of the trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. Most of the trustees engage the same independent investment managers. These trustees, with input from SCI's wholly-owned registered investment advisor, establish an investment
34 Service Corporation International
policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection. The investments are also governed by state and provincial guidelines. All of the trusts seek to control risk and volatility through a combination of asset classes, investment styles, and a diverse mix of investment managers.
Asset allocation is based on the liability structure of each funeral, cemetery, and perpetual care trust. Based on the various criteria set forth in the investment policy, the investment advisor recommends investment managers to the trustees. The primary investment objectives for the funeral and cemetery merchandise and service trusts include 1) preserving capital within acceptable levels of volatility and risk and 2) achieving growth of principal over time sufficient to preserve and increase the purchasing power of the assets. Preneed funeral and cemetery contracts generally take several years to mature; therefore, the funds associated with these contracts are often invested through several market cycles.
Historically, the cemetery perpetual care trusts' investment objectives, in accordance with state and provincial regulations, have emphasized providing a steady stream of current investment income with some capital appreciation in order to provide for the current and future maintenance and beautification of cemetery properties. However, during 2016, SCI worked with several state legislatures to adjust laws and regulations to allow for a fixed distribution rate from cemetery perpetual care trusts' assets regardless of the level of ordinary income, similar to university endowments. As a result, beginning in 2017, a significant portion of our cemetery perpetual care trust assets were liquidated and reinvested in a more growth-oriented asset allocation with investment objectives similar to the funeral and cemetery merchandise and service trusts. Currently,As of June 30, 2020, the asset allocation is almost evenly split approximately evenly between income and growth orientations. We expect this asset allocation shift to enhance asset growth and provide further protection to our customers. Additionally, we expect more states to adopt total return distribution legislation in the coming years.
As of June 30, 2019,2020, approximately 87%88% of our trusts were under the control and custody of three large financial institutions. The U.S. trustees primarily use four managed limited liability companies (LLCs), one for each merchandise and service trust type and two for the cemetery perpetual care trust type, and each with an independent trustee as custodian. Each financial institution acting as trustee manages its allocation of trust assets in accordance with the investment policy through the purchase of the appropriate LLCs' units. For those accounts not eligible for participation in the LLCs or in the eventwhere a particular state's regulations contain other investment restrictions, the trustee utilizes institutional mutual funds that comply with our investment policy or with such state restrictions. The U.S. trusts include a modest allocation to alternative investments. These alternative investments are held in vehicles structured as LLCs and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective alternative investment LLCs.
Investment Structures
Each financial institution, acting as trustee, manages its allocation of trust assets in compliance with the investment policy primarily through the purchase of one of four managed LLCs, one for eachmatched to their trust type and each with a different, independent trustee acting as custodian. The managed LLCs use the following structures for investments:
Commingled funds.Funds. These funds allow the trusts to access, at a reduced cost, some of the same investment managers and strategies used elsewhere in the portfolios.
Mutual funds.Funds. The trust funds employ institutional share class mutual funds where operationally or economically efficient. These mutual funds are utilized to invest in various asset classes including U.S. equities, non-U.S. equities, corporate bonds, government bonds, high yield bonds, and commodities, all of which are governed by guidelines outlined in their individual prospectuses.
Separately managed accounts.Managed Accounts. To reduce the costs to the investment portfolios, the trusts utilize separately managed accounts where appropriate.
Asset Classes
Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility. The majority of the fixed income allocation for the trusts is invested in institutional share class mutual funds. Where the trusts have direct investments in individual fixed income securities, these are primarily in government and corporate instruments.
Canadian government fixed income securities are investments in Canadian federal and provincial government instruments. In many cases, regulatory restrictions mandate that the funds from the sales of preneed funeral and cemetery productscontracts sold in certain Canadian jurisdictions must be invested in these instruments.
Equity investments have historically provided long-term capital appreciation in excess of inflation. The trusts have direct investments in individual equity securities primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment styles (i.e., growth and value). The majority of the equity allocation is managed by institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, we believe these securities are well-diversified. As of June 30, 2019,2020, the largest single equity position represented less than 1% of the total securities portfolio.
The objective of privatePrivate equity fund investments investments isserve to provide high rates of return with reduced volatility and lower correlation. These investments are typically long term in duration. These investments are diversified by strategy, sector, manager, and vintage year. The investments consist of numerous limited partnerships, including but not limited to private equity, real estate, fund of funds,energy,
infrastructure, transportation, distressed debt, and mezzanine financing. The trustees that have oversight of their respective alternative LLCs work closely with the investment advisor in making all investment decisions.
Trust Performance
During the six months ended June 30, 2019,2020, the Standard and Poor’s 500 Index increased 18.5%decreased 3.1% and the Barclay’s Aggregate Index increased 6.1%, and. This compares to the combined SCI trusts increased by 13.1%.that declined 3.4% during the same period. SCI trusts have a diversified allocation of approximately 54% equities, 34% fixed income securities, 7% alternative and other investments with remaining 5% available in cash.
SCI, the trustees, and the investment advisor monitor the capital markets and the trusts on an on-going basis. The trustees, with input from the investment advisor, take prudent action as needed to achieve the investment goals and objectives of the trusts.
Results of Operations — Three and Six Months Ended June 30, 2020 and2019 and 2018
Three Months Ended June 30, 2020 and 2019
Management Summary
In the three months ended June 30, 2019,second quarter of 2020, we reported consolidated net income attributable to common stockholders of $72.3$105.5 million ($0.390.59 per diluted share) compared to net income attributable to common stockholders forin the same period in 2018second quarter of $103.22019 of $72.3 million ($0.550.39 per diluted share). These results were affectedimpacted by the following items:certain significant items including:
|
| | | | | | | |
| | Three Months Ended June 30, |
| | 2019 | | 2018 |
| | (In millions) |
| Pre-tax (losses) gains from divestitures and impairment, net | $ | (11.8 | ) | | $ | 6.9 |
|
| Pre-tax loss from the early extinguishment of debt | $ | (7.6 | ) | | $ | — |
|
| Pre-tax legal settlement | $ | 1.6 |
| | $ | — |
|
| Tax effect from above items | $ | 4.2 |
| | $ | (2.2 | ) |
| Change in certain tax reserves | $ | (1.2 | ) | | $ | 16.1 |
|
| | | | | | | | | | | |
| Three Months Ended June 30, | | |
| 2020 | | 2019 |
| | (In millions) | | |
| Pre-tax gains (losses) on divestitures and impairment charges, net | $ | 0.7 | | | $ | (11.8) | |
| Pre-tax loss on early extinguishment of debt, net | $ | — | | | $ | (7.6) | |
| | | |
| | | |
| | | |
| Pre-tax legal settlement | $ | — | | | $ | 1.6 | |
| Tax effect from special items | $ | (0.1) | | | $ | 4.2 | |
| Change in uncertain tax reserves and other | $ | — | | | $ | (1.2) | |
In addition to the above items, referenced in the table above, growth in our cemetery segment coupled with a favorable adjusted effective tax rate more than offset an anticipated increase inover the prior year quarter can be attributed to higher funeral gross profit and lower interest expense, relatedpartially offset by higher corporate general and administrative and income taxes.
36 Service Corporation International
Funeral Results
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2020 | | 2019 | | |
| | (Dollars in millions, except average revenue per service) | | | | |
| Consolidated funeral revenue | $ | 480.9 | | | $ | 479.0 | | | |
| Less: revenue associated with acquisitions/new construction | 10.1 | | | 1.5 | | | |
| Less: revenue associated with divestitures | 0.1 | | | 1.3 | | | |
Comparable(1) funeral revenue | 470.7 | | | 476.2 | | | |
| Less: comparable recognized preneed revenue | 27.4 | | | 39.7 | | | |
| Less: comparable general agency and other revenue | 24.6 | | | 31.9 | | | |
| Adjusted comparable funeral revenue | $ | 418.7 | | | $ | 404.6 | | | |
| Comparable services performed | 88,492 | | | 78,511 | | | |
Comparable average revenue per service(2) | $ | 4,732 | | | $ | 5,153 | | | |
| | | | | |
| Consolidated funeral gross profit | $ | 116.0 | | | $ | 90.6 | | | |
| Less: gross profit (loss) associated with acquisitions/new construction | 3.1 | | | (0.3) | | | |
| Less: gross loss associated with divestitures | — | | | (0.6) | | | |
Comparable(1) funeral gross profit | $ | 112.9 | | | $ | 91.5 | | | |
(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2019 and ending June 30, 2020 .
(2) We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding general agency revenue, recognized preneed revenue, and other revenue to avoid distorting our average of normal funeral services revenue, by the timingcomparable number of services performed during the period. Recognized preneed revenue is preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, net, and excluded from our recent debt refinancing.calculation of comparable average revenue per service because the associated service has not yet been performed.
|
| | | | | | | |
| | Three Months Ended June 30, |
| | 2019 | | 2018 |
| | (Dollars in millions, except average revenue per service) |
| Consolidated funeral revenue | $ | 479.0 |
| | $ | 468.6 |
|
| Less: Revenue associated with acquisitions/new construction | 9.2 |
| | 2.6 |
|
| Less: Revenue associated with divestitures | 0.3 |
| | 1.7 |
|
Comparable (1) funeral revenue | 469.5 |
| | 464.3 |
|
| Less: Comparable recognized preneed revenue | 39.1 |
| | 33.8 |
|
| Less: Comparable general agency and other revenue | 31.6 |
| | 33.9 |
|
| Adjusted comparable funeral revenue | $ | 398.8 |
| | $ | 396.6 |
|
| Comparable services performed | 76,439 |
| | 74,913 |
|
Comparable average revenue per service(2) | $ | 5,217 |
| | $ | 5,294 |
|
| | | | |
| Consolidated funeral operating profit | $ | 90.6 |
| | $ | 90.4 |
|
| Less: Operating loss associated with acquisitions/new construction | (0.6 | ) | | 0.1 |
|
| Less: Operating loss associated with divestitures | (0.2 | ) | | (1.5 | ) |
Comparable funeral operating profit | $ | 91.4 |
| | $ | 91.8 |
|
| |
(1) | We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2018 and ending June 30, 2019. |
| |
(2) | We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding recognized preneed revenue, general agency revenue, and other revenue to avoid distorting our average of normal funeral services revenue, by the comparable number of services performed during the period. Recognized preneed revenue are preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, net and are excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed. |
Funeral Revenue
Consolidated revenue from funeral operations was $479.0$480.9 million for the three months ended June 30, 20192020 compared to $468.6$479.0 million for the same period in 2018.2019. This increase is primarily attributable to the $8.6 million increase of $6.6 million in revenue contributed by acquired and newly constructed properties andoffset by a $5.2$5.5 million increasedecrease in comparable revenue as described below partially offset by $1.4and the loss of $1.2 million in revenue contributed by properties that have been subsequently divested.
Comparable revenue from funeral operations was $469.5$470.7 million for the three months ended June 30, 20192020 compared to $464.3$476.2 million for the same period in 2018.2019. This $5.2$5.5 million, increase is dueor 1.2%, decrease was primarily attributable to 2.0% higher comparable services performed and a $5.3$12.3 million increasedecrease in recognized preneed revenue partiallyand a $7.3 million decrease in comparable general agency and other revenue as both revenue decreases resulted from lower preneed sales production. These revenue decreases were somewhat offset by 1.5% decreasea 12.7% increase in averageservices performed during the second quarter of 2020 compared to 2019 primarily due to COVID-19 pandemic related deaths. The 12.7% increase in services performed comprised a 13.2% increase in services performed by our funeral service locations and a 9.6% increase in cremations performed by our non-funeral home channel.
Average revenue per funeral service and lower other revenue. 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.
Organic sales average growth of 1.5% was more than offset by 190 basis point increase in the total comparable cremation rate, which increased to 56.7% in8.2% for the three months ended June 30, 2020 compared to the same period in 2019. The social distancing effects from the pandemic resulted in fewer and smaller memorial funeral services, which negatively impacted our average revenue per funeral service. Our total comparable cremation rate increased to 58.9% in 2020 from 57.1% in 2019 from 54.8%as the COVID-19 pandemic created a temporary shift towards direct cremation, particularly in 2018 as a resultthe first half of an increase in both direct cremationsthe quarter when there were more widespread restrictions on social distancing and cremations with service.gathering sizes.
Funeral OperatingGross Profit
Consolidated funeral operatinggross profit was essentially flatincreased $25.4 million, or 28.0%, for the three months ended June 30, 2020 compared to 2019. This increase is primarily attributable to comparable funeral gross profit of $21.4 million, or 23.4%, as well as a $3.4 million increase in gross profit from acquired and newly constructed properties. Comparable funeral gross profit increased $21.4 million to $112.9 million and the gross profit percentage increased 480 basis points to 24.0%. Growth in our core business produced healthy incremental margins that more than offset the decline in lower margin revenue streams such as recognized preneed revenue and general agency revenue. The funeral margins were also positively impacted by purposeful cost reductions implemented in late March and early April in response to the prior year as we focused on managing our fixed cost structure against limited revenue growth.COVID-19 pandemic.
Cemetery Results
| | | | | | | | | | | | | |
| Three Months Ended June 30, | | | | |
| 2020 | | 2019 | | |
| | (In millions) | | | | |
| Consolidated cemetery revenue | $ | 339.1 | | | $ | 333.6 | | | |
| Less: revenue associated with acquisitions | 0.2 | | | 0.2 | | | |
| Less: revenue associated with divestitures | 0.1 | | | 0.4 | | | |
Comparable(1) cemetery revenue | $ | 338.8 | | | $ | 333.0 | | | |
| | | | | |
| Consolidated cemetery gross profit | $ | 102.8 | | | $ | 100.6 | | | |
| Less: gross profit associated with acquisitions | — | | | 0.1 | | | |
| Less: gross profit associated with divestitures | — | | | 0.1 | | | |
Comparable(1) cemetery gross profit | $ | 102.8 | | | $ | 100.4 | | | |
|
| | | | | | | |
| | Three Months Ended June 30, |
| | 2019 | | 2018 |
| | (In millions) |
| Consolidated cemetery revenue | $ | 333.6 |
| | $ | 327.4 |
|
| Less: Revenue associated with acquisitions/new construction | 5.3 |
| | 1.3 |
|
| Less: Revenue associated with divestitures | 0.3 |
| | 0.5 |
|
Comparable (1) cemetery revenue | $ | 328.0 |
| | $ | 325.6 |
|
| | | | |
| Consolidated cemetery operating profit | $ | 100.6 |
| | $ | 97.7 |
|
| Less: Operating profit associated with acquisitions/new construction | 0.9 |
| | 0.3 |
|
| Less: Operating profit associated with divestitures | 0.1 |
| | 0.1 |
|
| Comparable cemetery operating profit | $ | 99.6 |
| | $ | 97.3 |
|
| |
(1) | We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2018 and ending June 30, 2019. |
Cemetery Revenue
Consolidated revenue from our cemetery operations increased $6.2$5.5 million, or 1.9%1.6%, infor the second quarter of 2019three months ended June 30, 2020 compared to the same period in 2018 primarily due to a $4.0 million increase in revenue contributed by acquired properties and a $2.4 million increase in comparable cemetery revenue The comparable revenue growth over the prior year quarter is2019 primarily due to an increase in comparable revenue. The $5.8 million, or 1.7%, increase in comparable revenue was primarily attributable to $9.0 million, or 11.0%, increase in atneed revenue. This increase in atneed revenue was driven by an increase in services performed and was somewhat offset by a $3.5 million, or 4.8%, decrease in recognized preneed property revenue from sales into existing developed cemetery property projects partially offset by lower other revenue (primarily endowment care trust fund income) due to the timing of capital gainsmerchandise and other distributions.service revenue.
Cemetery OperatingGross Profit
Consolidated cemetery operatinggross profit increased $2.9$2.2 million, or 3.0%2.2%, in the second quarter of 2019three months ended June 30, 2020 compared to the same period in 20182019, which is primarily dueattributable to a $0.6 million increase in operating profit contributed by acquired properties and a $2.3 millionthe increase in comparable operatinggross profit of $2.4 million, or 2.4%. Comparable cemetery gross profit increased $2.4 million to $99.6 million. The $2.3$102.8 million, increase in comparable cemetery operating profit is primarily reflecting higher recognized preneed property revenue and the impact ofgross profit percentage increased 10 basis points to 30.3%, which was primarily driven by growth from the cemetery revenue increases described above as well as purposeful cost reduction initiatives which more than offset the anticipated decline of high margin trust fund income.reductions implemented in late March and early April in response to COVID-19.
Other Financial Statement Items
Corporate General and Administrative Expenses
Corporate general and administrative expenses
General and administrative expenses decreased $1.8 were $37.2 million for the three months ended June 30, 2020 compared to $29.4$29.2 million in the second quarter of 2019. The currentprior year quarter included a reduction in legal expenses of 1.6$1.6 million. Excluding these costs,this prior year change in legal expenses, corporate general and administrative expenses were relatively flat compared increased $6.4 million primarily related to a $3.0 million charitable contribution for community outreach efforts.
Gains (Losses) on Divestitures and Impairment Charges, Net
We recognized a $0.7 million net pre-tax gain on asset divestitures and impairments, net in the second quarter of 2018 due2020 compared to continued effective cost management offsetting normal fixed cost growth.
(Losses) gains on divestitures and impairment charges, net
Losses on divestitures werea $11.8 million in 2019, decreasing $18.7 million from the gain of $6.9 million in 2018. This is the result ofpre-tax loss on asset divestitures ofassociated with non-strategic funeral and cemetery locations in the United States and Canada.
Interest expenseExpense
Interest expense increased $2.8 decreased $5.6 million to $47.3$41.8 million in the second quarter of 2019. This increase is primarily due to higher interest rates related to our floating rate debt.
Loss on early extinguishment of debt
We incurred a $7.6 million loss on early extinguishment of debt in the second quarter of 2019 associated with the execution of strategic refinancing transactions.
Provision for income taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitation, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was 24.5% and 13.4% for the three months ended June 30, 20192020 primarily due to lower interest rates on our floating rate debt and 2018,other debt refinancing activities over the last twelve months.
Provision for Income Taxes
Our effective tax rate was 25.5% and 24.5% for the three months ended June 30, 2020 and 2019, respectively. The higher effective tax rate for the three months ended June 30, 2019 was2020 is above the 21.0% federal statutory tax rate primarily due to favorable adjustments allowed under SAB 118 in the prior year,impact of state income taxes, partially offset with the higher excessby tax benefits from increased exercisesrecognized on the settlement of stock options in 2019.employee share-based awards.
Weighted average sharesAverage Shares
The diluted weighted average number of shares outstanding was 185.7179.7 million infor the three months ended June 30, 2019,2020 compared to 187.2185.7 million infor the same period in 2018.2019. The decrease in the number of sharesprimarily reflects the impact of shares repurchased under our share repurchase program.
Six Months Ended June 30, 2020 and 2019
Management Summary
In thethe first six months ended June 30, 2019,of 2020, we reported consolidated net income attributable to common stockholders of $151.7$187.4 million ($0.821.03 per diluted share) compared to net income attributable to common stockholders for the same period in 20182019 of $185.2$151.7 million ($0.980.82 per diluted share). These results were affectedimpacted by the following items:certain significant items including:
|
| | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
| | (In millions) |
| Pre-tax (losses) gains from divestitures and impairment charges, net | $ | (13.7 | ) | | $ | 7.3 |
|
| Pre-tax losses from the early extinguishment of debt, net | $ | (7.6 | ) | | $ | (10.1 | ) |
| Pre-tax legal settlements | $ | (6.4 | ) | | $ | — |
|
| Tax benefit from above items | $ | 6.8 |
| | $ | (0.6 | ) |
| Change in certain tax reserves and other | $ | (1.2 | ) | | $ | 17.3 |
|
| | | | | | | | | | | |
| Six Months Ended June 30, | | |
| 2020 | | 2019 |
| | (In millions) | | |
| Pre-tax gains (losses) on divestitures and impairment charges, net | $ | 5.3 | | | $ | (13.7) | |
| Pre-tax losses on early extinguishment of debt, net | $ | (0.2) | | | $ | (7.6) | |
| | | |
| | | |
| | | |
| Pre-tax legal settlements | $ | — | | | $ | (6.4) | |
| Tax effect from special items | $ | (1.4) | | | $ | 6.8 | |
| Change in uncertain tax reserves and other | $ | 0.2 | | | $ | (1.2) | |
In addition to the above items, referenced in the table above, growth in ourincrease over the prior year can be attributed to higher funeral gross profit and lower interest expense, which was partially offset by lower cemetery segment coupled with a favorable adjusted effective tax rate more than offsetgross profit and an anticipated increase in interest expense relatedincome taxes.
Funeral Results
| | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | |
| | (Dollars in millions, except average revenue per service) | | | | |
| Consolidated funeral revenue | $ | 985.8 | | | $ | 971.8 | | | |
| Less: revenue associated with acquisitions/new construction | 17.1 | | | 2.3 | | | |
| Less: revenue associated with divestitures | 0.1 | | | 3.2 | | | |
Comparable(1) funeral revenue | 968.6 | | | 966.3 | | | |
| Less: comparable recognized preneed revenue | 60.0 | | | 71.0 | | | |
| Less: comparable general agency and other revenue | 53.8 | | | 65.2 | | | |
| Adjusted comparable funeral revenue | $ | 854.8 | | | $ | 830.1 | | | |
| Comparable services performed | 173,661 | | | 161,805 | | | |
Comparable average revenue per service(2) | $ | 4,922 | | | $ | 5,130 | | | |
| | | | | |
| Consolidated funeral gross profit | $ | 219.5 | | | $ | 196.0 | | | |
| Less: gross profit associated with acquisitions/new construction | 4.0 | | | — | | | |
| Less: gross losses associated with divestitures | (0.3) | | | (1.2) | | | |
Comparable(1) funeral gross profit | $ | 215.8 | | | $ | 197.2 | | | |
(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2019 and ending June 30, 2020 .
(2) We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding general agency revenue, recognized preneed revenue, and other revenue to the timingavoid distorting our average of our recent debt refinancing and decreased revenue from fewernormal funeral services revenue, by the comparable number of services performed due to a weaker 2019 flu season.during the period. Recognized preneed revenue is preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, net, and excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed.
|
| | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
| | (Dollars in millions, except average revenue per service) |
| Consolidated funeral revenue | $ | 971.8 |
| | $ | 983.0 |
|
| Less: revenue associated with acquisitions/new construction | 17.7 |
| | 2.9 |
|
| Less: revenue associated with divestitures | 1.1 |
| | 4.2 |
|
Comparable (1) funeral revenue | 953.0 |
| | 975.9 |
|
| Less: comparable recognized preneed revenue | 69.9 |
| | 66.3 |
|
| Less: comparable general agency and other revenue | 64.7 |
| | 62.1 |
|
| Adjusted comparable funeral revenue | $ | 818.4 |
| | $ | 847.5 |
|
| Comparable services performed | 157,460 |
| | 160,796 |
|
Comparable average revenue per service(2) | $ | 5,198 |
| | $ | 5,271 |
|
| | | | |
| Consolidated funeral operating profit | $ | 196.0 |
| | $ | 210.9 |
|
| Less: operating profit (loss) associated with acquisitions/new construction | 0.1 |
| | (0.2 | ) |
| Less: operating loss associated with divestitures | (0.6 | ) | | (2.4 | ) |
Comparable funeral operating profit | $ | 196.5 |
| | $ | 213.5 |
|
| |
(1) | We define comparable (or same store) operations as those funeral service locations owned by us for the entire period beginning January 1, 2018 and ending June 30, 2019. |
| |
(2) | We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding recognized preneed revenue, general agency revenue, and other revenue to avoid distorting our average of normal funeral services revenue, by the comparable number of services performed during the period. Recognized preneed revenue are preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, net and are excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed. |
Funeral Revenue
Consolidated revenue from funeral operations was $971.8$985.8 million for the six months ended June 30, 20192020, compared to $983.0$971.8 million for the same period in 2018.2019. This decreaseincrease is primarily attributable to the $14.8 million increase in revenue contributed by acquired and newly constructed properties and a $22.9$2.3 million decreaseincrease in comparable
revenue as described below, andpartially offset by the loss of $3.1 million in revenue contributed by properties that have been subsequently divested partially offset by a $14.8 million increase in revenue contributed by acquired and newly constructed properties.divested.
Comparable revenue from funeral operations was $953.0$968.6 million for the six months ended June 30, 20192020 compared to $975.9$966.3 million for the same period in 2018. The $22.92019. This $2.3 million, decreaseor 0.2%, increase was primarily attributable to a 7.3% increase in services performed compared to 2019 primarily due to COVID-19 pandemic related deaths. The increase in services performed comprised a 2.1%7.2% increase in services performed by our funeral service locations and a 8.3% increase in cremations performed by our non-funeral home channel. These revenue increases were partially offset by a $11.0 million decrease in comparable services performed, resulting from a weaker 2019 flu season, recognized preneed revenue
and a 1.4%$11.4 million decrease in general agency and other revenue as both revenue declines resulted from lower preneed sales production.
Average revenue per funeral service decreased 4.1% for the six months ended June 30, 2020 compared to the same period in 2019. The social distancing effects from the pandemic resulted in fewer and smaller funeral services which negatively impacted our average revenue per funeral service.
Comparable average revenue per service declined $73, or 1.4%, as a 1.1% increase in the organic sales average was offset by a 180 basis point increase in the Our total comparable cremation rate which increased 150 basis points to 56.5%58.5% in the first six months of 2019 from 54.7%2020 as the COVID-19 pandemic created a temporary shift towards direct cremation, particularly in 2018 as a resultthe first half of an increase in both direct cremationsthe second quarter when there were more widespread restrictions on social distancing and cremations with service.gathering sizes.
Funeral OperatingGross Profit
Consolidated funeral operatinggross profit decreased $14.9increased $23.5 million, or 7.1%12.0%, in the first six monthshalf of 20192020 compared to the same period in 2018.2019. This decreaseincrease is primarily attributable to a decreaseincreases in comparable funeral operatinggross profit of $17.0$18.6 million, or 8.0%.9.4%, as well as a $4.0 million increase in gross profit contributed by acquired and newly constructed properties. Comparable funeral operatinggross profit decreased $17.0increased $18.6 million to $196.5$215.8 million and the operating margingross profit percentage decreased 130increased 190 basis points to 20.6%, which is primarily due22.3%. Growth in our core business produced healthy incremental margins that more than offset the decline in lower margin revenue streams such as recognized preneed revenue and general agency revenue. The funeral margins were also positively impacted by purposeful cost reductions implemented in late March and early April in response to the decreased revenue from funeral services performed resulting from a weaker 2019 flu season coupled with effectively managing our fixed cost structure.COVID-19 pandemic.
Cemetery Results
| | | | | | | | | | | | | |
| Six Months Ended June 30, | | | | |
| 2020 | | 2019 | | |
| | (In millions) | | | | |
| Consolidated cemetery revenue | $ | 637.2 | | | $ | 639.0 | | | |
| Less: revenue associated with acquisitions | 0.7 | | | 0.2 | | | |
| Less: revenue associated with divestitures | 0.1 | | | 0.9 | | | |
Comparable(1) cemetery revenue | $ | 636.4 | | | $ | 637.9 | | | |
| | | | | |
| Consolidated cemetery gross profit | $ | 178.3 | | | $ | 187.0 | | | |
| Less: gross profit associated with acquisitions | 0.2 | | | 0.1 | | | |
| Less: gross profit associated with divestitures | — | | | 0.1 | | | |
Comparable(1) cemetery gross profit | $ | 178.1 | | | $ | 186.8 | | | |
|
| | | | | | | |
| | Six Months Ended June 30, |
| | 2019 | | 2018 |
| | (In millions) |
| Consolidated cemetery revenue | $ | 639.0 |
| | $ | 607.6 |
|
| Less: revenue associated with acquisitions | 9.8 |
| | 1.4 |
|
| Less: revenue associated with divestitures | 0.6 |
| | 1.0 |
|
Comparable (1) cemetery revenue | $ | 628.6 |
| | $ | 605.2 |
|
| | | | |
| Consolidated cemetery operating profit | $ | 187.0 |
| | $ | 173.0 |
|
| Less: operating profit associated with acquisitions | 0.8 |
| | 0.4 |
|
| Less: operating profit associated with divestitures | 0.2 |
| | — |
|
| Comparable cemetery operating profit | $ | 186.0 |
| | $ | 172.6 |
|
| |
(1) | We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2018 and ending June 30, 2019. |
Cemetery Revenue
Consolidated revenue from our cemetery operations increased $31.4decreased $1.8 million, or 5.2%0.3%, for the six months ended June 30, 2020 compared to the same period in 2019 primarily due to a decrease in comparable revenue. The $1.5 million, or 0.2%, decrease in comparable revenue was primarily attributable to a $14.4 million decrease in recognized preneed revenue due to the social distancing effects of the pandemic during late first quarter and early part of the second quarter. This revenue decrease was partially offset by a $12.7 million increase in atneed revenue driven by an increase in services performed during the latter half of the second quarter.
Cemetery Gross Profit
Consolidated cemetery gross profit decreased $8.7 million, or 4.7%, in the six months ended June 30, 20192020 compared to the same period in 2018,2019, which is primarily attributable to a $23.4the decrease in comparable gross profit of $8.7 million, or 4.7%. Comparable cemetery gross profit decreased $8.7 million to $178.1 million, and the gross profit percentage decreased 130 basis points to 28.0%, which was primarily driven by the decrease in the revenue described above coupled with an increase in comparable revenue and $8.4 million in revenue contributed by acquired properties. The comparable revenue growth over the prior year is due to increased recognized preneed property revenue from sales into existing developed cemetery property projects and higher endowment care trust fund income. These increases were partially offset by lower atneed cemetery revenue as activities were reduced from a milder flu season compared to the prior year.
Cemetery Operating Profit
Consolidated cemetery operating profit increased $14.0 million, or 8.1%, in the six months ended June 30, 2019 compared to the same period in 2018 primarilyour selling costs as a result of a $13.4the $25.1 million, or 10.4%, increase in our comparable operating profit. Comparable cemetery operatingpreneed sales production during the second quarter. The gross profit increased $13.4 milliondecline was mitigated by purposeful cost reductions implemented in late March and early April in response to $186.0 million primarily due to the revenue increases described above as well as the impact of cost reduction initiatives. The operating margin percentage increased 110 basis points to 29.6%.COVID-19.
Other Financial Statement Items
Corporate General and Administrative Expenses
GeneralCorporate general and administrative expenses were $69.0 million in the first six months of 2020 compared to $72.2 million in 2019. Excluding a $6.4 million legal settlement recorded in the prior year quarter, corporate general and administrative expenses increased $6.0$3.2 million to $71.9 million in the six months ended June 30, 2019 compared to $65.9 million in the same period of 2018. The current year period includes $6.4 millionprimarily related to a legal reserve established$3.0 million charitable contribution for future settlements. Excluding these costs, general and administrative expenses decreased $0.4 million due to effective cost management.community outreach efforts.
40 Service Corporation International
Gains (Losses) Gains on Divestitures and Impairment Charges, Net
(Losses) gainsWe recognized a $5.3 million net pre-tax gain on asset divestitures and impairment charges,impairments, net declined $21.0in the second quarter of 2020 as $8.4 million in the six months ended June 30, 2019 compared to the same period of 2018. These losses and gains werefrom asset divestitures associated with the divestitures of non-strategic funeral and cemetery locations in the United States and Canada and the disposal ofwere partially offset by $3.1 million in impairment charges, primarily related to certain transportation assets.tradenames.
Interest Expense
Interest expense increased $6.6 decreased $8.6 million to $94.7$86.1 million in the six months ended June 30, 2019 primarily due to increased interest rates on our floating rate debt.
Loss on Early Extinguishment of Debt, Net
We incurred losses of $7.6 million in the six months ended June 30, 2019 and $10.1 million in the same period of 2018 on the early extinguishment of debt associated with the execution of strategic refinancing transactions.
Provision for Income Taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, events such as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitations, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was 22.7% and 19.3% for the six months ended June 30, 2019 2020 primarily due to lower interest rates on our floating rate debt and 2018,other debt refinancing activities over the last twelve months.
Provision for Income Taxes
Our effective tax rate was 24.3% and 22.7% for the six months ended June 30, 2020 and 2019, respectively. The higher effective tax rate for the six months ended June 30, 2019 was2020 is above the 21% federal statutory tax rate primarily due to favorable adjustments allowed under SAB 118 in the prior year,state tax expense, partially offset with the higher excessby tax benefits from increased exercisesrecognized on the settlement of stock options in 2019.employee share-based awards.
Weighted Average Shares
The diluted weighted average number of shares outstanding was 181.6 million for the six months ended June 30, 2020 compared to 185.5 million in the first six months of 2019, compared to 188.5 million infor the same period in 2018.2019, The decrease in the number of sharesprimarily reflects the impact of shares repurchased under our share repurchase program.
Critical Accounting Policies, Recent Accounting Pronouncements, and Accounting Changes
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Although we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from the estimates on which our financial statements are prepared at any given point of time. Changes in these estimates could materially affect our consolidated financial position, consolidated results of operations, or cash flows. Significant items that are subject to such estimates and assumptions include revenue and expense accruals, fair value of merchandise and perpetual care trust assets, and the allocation of purchase price to the fair value of assets acquired. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2018.
There were no significant changes to our accounting policies that have occurred subsequent to December 31, 2018, except as described below within Recent Accounting Pronouncements and Accounting Changes.2019.
Recent Accounting Pronouncements and Accounting Changes
For discussion of recent accounting pronouncements and accounting changes, see Part I, Item 1. Financial Statements, Note 2 of this Form 10-Q.
Cautionary Statement on Forward-Looking Statements
The statements in this Form 10-Q that are not historical facts are forward-looking statements made in reliance on the "safe harbor"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,"“believe”, “estimate”, “project”, “expect”, “anticipate”, or "predict,"“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 consolidated 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. Importantbehalf of, the Company. These factors which could cause actual resultsare discussed below. We assume no obligation and make no undertaking to differ materially from those inpublicly update or revise any forward-looking statements include, among others,made herein or any other forward-looking statements made by the following:Company, whether as a result of new information, future events, or otherwise.
•The COVID-19 pandemic has had an adverse effect on our business and results of operations and future public health threats could have additional material adverse consequences for our business and results of operations.
•Our affiliated funeral and cemetery 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 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.revenue and cash flows.
•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, 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 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 systemssystem or processesprocess 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 backlogtrust funds could have a material adverse impact on our liquidity, cash flows, and financial results.
•The funeral and cemetery industry is competitive.
•If the number of deaths in our markets declines, our cash flows and revenue may decrease. Changes in the number of deaths are not predictable from market to market or over the short term.
•If we are not able to respond effectively to changing consumer preferences, our market share, operating results, financial condition, or cash flow 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.
For further information•Cemetery burial practice claims could have a material adverse impact 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.financial results.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market” risk refers to the risk of gains or losses arising from changes in interest rates and prices of marketable securities. The disclosures are not meant to be precise indicators of expected future gains or losses, but rather indicators of reasonably possible gains or losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk-sensitive instruments were entered into for purposes other than trading.
42 Service Corporation International
Marketable Equity and Debt Securities — Price Risk
In connection with our preneed operations and sales, the related trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values as of June 30, 20192020 are presented in
Part I, Item 1. Financial Statements, Note 3 of this Form 10-Q. Also, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations Financial Conditions,"Financial Condition, Liquidity and Capital Resources,Resources" section for discussion of trust investments.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of June 30, 2019,2020, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on our evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective as of June 30, 20192020 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our consolidated financial condition, consolidated results of operations, and cash flows for the periods presented in conformity with US GAAP.
Changes in Internal Control Over Financial Reporting
NoThere were no changes in our internal control over financial reporting occurred during the quarter ended June 30, 20192020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
| | |
| PART II. OTHER INFORMATION |
Item 1. Legal Proceedings
Information regarding legal proceedings is set forth in Part I, Item 1. Financial Statements, Note 109 of this Form 10-Q, which information is hereby incorporated by reference herein.
Item 1A. Risk Factors
ThereThe COVID-19 pandemic has had an adverse effect on our business and results of operations and future public health threats could have been noadditional material changesadverse consequences for our business and results of operations.
The recent spread of COVID-19 has impacted the global economy and our business and results of operations. As a result of the COVID-19 pandemic and the related adverse economic and health consequences, we have experienced and may continue to be subject to any of the following risks:
•our preneed sales have decreased;
•our preneed installment contract defaults have increased;
•the value of our preneed trust investments and related net investment income have diminished due to the disruption in the financial markets.
We may also experience the following COVID-19 related risks:
•our funeral and cemetery revenues may decrease due to reduced and deferred services, actual or perceived consumer financial constraints, government restrictions on gathering sizes and voluntary social distancing;
•illness may disrupt our workforce;
•our supply chain could be disrupted;
•our operating costs may increase due to increased overtime, health insurance claims, worker’s compensation claims, supply costs, or other effects related to COVID-19.
Any of the foregoing risks could have a material, adverse effect on our business, financial condition, and results of operations. Given the ongoing and dynamic nature of the spread of COVID-19, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain and largely outside of our control.
To the extent the COVID-19 pandemic adversely affects our business, operations, financial condition and results of operation, it may also have the effect of heightening many of the other risks. Other Risk Factors asare set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2018.2019.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
The following table summarizes our share repurchases during the three months ended June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of
Shares Purchased | | Average Price
Paid per Share | | Total Number
of Shares
Purchased as
Part of Publicly
Announced Programs | | Approximate Dollar Value of
Shares That
May Yet be
Purchased Under the Program |
| April 1, 2020 — April 30, 2020 | | 1,097,361 | | | $ | 38.10 | | | 1,097,361 | | | $ | 151,872,558 | |
May 1, 2020 — May 31, 2020 (1) | | 369,580 | | | $ | 37.24 | | | 368,922 | | | $ | 138,133,132 | |
| June 1, 2020 — June 30, 2020 | | 810,144 | | | $ | 39.38 | | | 810,144 | | | $ | 106,232,812 | |
| | 2,277,085 | | | | | 2,276,427 | | | |
(1) 658 shares purchased in May 2020 in connection with the surrender of shares by associates to satisfy certain tax withholding obligations under compensation plans. These repurchases were not part of our publicly announced program and do not affect our share repurchase program.
44 Service Corporation International
|
| | | | | | | | | | | | | | |
| Period | | Total number of shares purchased | | Average price paid per share | | Total number of shares purchased as part of publicly announced programs | | Dollar value of shares that may yet be purchased under the program |
| April 1, 2019 - April 30, 2019 | | 12,486 |
| | $ | 39.91 |
| | 12,486 |
| | $ | 180,167,864 |
|
| May 1, 2019 - May 31, 2019 | | 104,539 |
| | $ | 42.99 |
| | 104,539 |
| | $ | 175,673,783 |
|
| June 1, 2019 - June 30, 2019 | | 220,403 |
| | $ | 45.36 |
| | 220,403 |
| | $ | 165,676,767 |
|
| | | 337,428 |
| | | | 337,428 |
| | |
Item 3. Defaults Upon Senior Securities.Securities
None.
Item 4. Mine Safety Disclosures.Disclosures
Not applicable.
Item 5. Other Information.Information
None.No other information.
Item 6. Exhibits
|
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| Exhibit Number | | | Description |
|
| | — |
| |
Fifteenth Supplemental3.2 | | — | |
| | — | |
| | — | |
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| | — |
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| | — |
| Credit Agreement,Company, The Bank of New York and The Bank of New York Trust Company, N.A., appointing a successor trustee for the Senior Indenture dated May 22, 2019, between Service Corporation International, JPMorgan Chase Bank, N.A., as administrative agent, and certain other financial institutions, as lenders party theretoof February 1, 1993 (Incorporated by reference to Exhibit 10.14.1 to Form 8-K filed May 23, 2019)10-Q for the fiscal quarter ended June 30, 2005).
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| | — |
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|
| | — |
| |
101 |
| | — |
| Interactive data file. |
| | | | | | | | | | | |
| Exhibit Number | | | Description |
| 101 | | — | Interactive data file formatted Inline XBRL. |
| 104 | | — | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
* Management contract, compensatory plan or arrangement.
46 Service Corporation International
Signature
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
|
| | | | | | | |
July 30, 20192020 | | SERVICE CORPORATION INTERNATIONAL | |
| By: | /s/ Tammy MooreTAMMY MOORE |
| | Tammy Moore, |
| | Vice President and Corporate Controller (Principal Accounting Officer) |