Service Corporation International SCI posted second-quarter 2018 results, wherein both top and bottom lines improved year over year and came ahead of the Zacks Consensus Estimate. In fact, this quarter marked Service Corporation’s seventh consecutive bottom-line beat and first sales beat in the last four quarters.
Service Corporation’s robust earnings surprise history is reflected in its share price movement. Markedly, this Zacks Rank #3 (Hold) stock has rallied 9.6% in a year, outpacing the industry’s growth of 7.6%.
Adjusted earnings increased 25.7% year over year to 44 cents per share and came a penny ahead of the Zacks Consensus Estimate. The year-over-year upside was backed by improved sales, greater operating income, impacts from the new revenue recognition accounting standard, lower tax rate and impacts from share buybacks.
Service Corporation International Price, Consensus and EPS Surprise
Service Corporation International Price, Consensus and EPS Surprise | Service Corporation International Quote
Thanks to the tax reforms, adjusted effective tax rate was 26.7% in the second quarter of 2018, compared with 33.6% in the same period last year.
Total revenues came in at $796.1 million, up almost 3% from $773.2 million recorded in the year-ago period. Moreover, the figure surpassed the consensus mark of $780 million. Greater funeral and cemetery revenues stemming from solid preneed sales production boosted results.
Segment Discussion
Comparable Funeral revenues rose 1.5% on the back of higher general agency revenues and increased recognized preneed revenues. The latter was a result of higher non-funeral home sales production. Core revenues dipped 0.2% on account of lower core funeral services performed, partly cushioned by a rise in core average revenue per service.
Comparable preneed funeral sales production grew 11.2%, driven by strength in core and non-funeral home channels. This, in turn, was fueled by newly introduced sales technology and new marketing campaigns.
Comparable funeral operating profit declined 3.4% to $90.0 million and the operating margin contracted 100 basis points (bps) to 19.6%. This was a result of higher funeral fixed costs, owing to escalated wages of customer-facing workers and unfavorable timing of self-insured medical claims. Moreover, increased selling and marketing expenses led to the drop in operating profit.
Comparable Cemetery revenues rose 3.6% year over year, courtesy of improved sales into the current developed property projects, cemetery property construction projects completion and greater income from endowment care trust fund.
Comparable preneed cemetery sales production jumped 3.6% on account of higher preneed property production, and increased preneed merchandise and services production.
Comparable cemetery operating profit increased 6.1% to $97.2 million, with the respective margin expanding 70 bps to 30%. The upside was driven by higher revenues and impacts from the new accounting standard, somewhat negated by escalated labor expenses and greater investments in marketing programs and search engine optimization.
Costs
Adjusted general and administrative costs went down by $8.1 million, owing to lower costs associated with Service Corporation’s long-term and annual incentive compensation programs. Also, favorable year-over-year comparisons due to exceptionally high legal costs last year aided results this time.
Net hurricane costs through Jun 30 amounted to $1.9 million due to continued repairs at certain locations that were hit by the 2017 disruptions.
The company’s interest costs rose by $2.4 million due to higher interest rates on the company’s floating rate debt as well as increased total debt.
Other Financial Details
Service Corporation ended the quarter with cash and cash equivalents of $164.5 million, long-term debt of $3,493.7 million and total equity of $1,476.4 million.
Net cash from operating activities (excluding special items) amounted to $103.9 million in the second quarter, which was higher than the previous year, courtesy of lower cash taxes.
During the second quarter, Service Corporation returned $141 million to shareholders via dividends and share buybacks, while it returned $291.1 million in the first six months ended Jun 30.
Also, the company incurred capital expenditures of $140.5 million and $179.1 million on strategic acquisitions and construction of new funeral homes during the second quarter and first six months ended Jun 30, respectively.
Outlook
Management remains impressed with the solid earnings and cash flow growth witnessed in the quarter. This also enabled the company to take prudent capital initiatives and augment shareholders’ returns. Going ahead, the company remains focused on revenue growth by enhancing customer service, fortifying market share through boosting preneed sales, and utilizing its expanding scale and deploying capital to augment shareholders’ value.
Given these factors and anticipated gains from lower taxes, management raised its net cash from operating activities outlook for 2018 and now expects the same to range between $575 million and $615 million (up from the old guidance of $540-$600 million). The company now plans to allocate about $195 million (compared with $185 million) toward capital enhancements at existing facilities and cemetery development.
Adjusted earnings per share for the year is still envisioned in a band of $1.72-$1.90. Service Corporation expects adjusted earnings from continuing operations to grow at a rate, which is in line with its expected long-term growth rate of 8%-12%.
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