SERVICE CORPORATION INTERNATIONAL The Company We areNorth America's largest provider of deathcare products and services, with a network of funeral service locations and cemeteries unequaled in geographic scale and reach. AtMarch 31, 2020 , we operated 1,475 funeral service locations and 483 cemeteries (including 296 funeral service/cemetery combination locations), which are geographically diversified across 44 states, eight Canadian provinces, theDistrict of Columbia , andPuerto Rico . 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$11.5 billion backlog of future revenue from both trust and insurance-funded preneed sales atMarch 31, 2020 . Preneed selling provides us with a strategic opportunity to gain future market 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 allow 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 customer's 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 customer's 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 quarter of 2020, an outbreak of a novel strain of coronavirus (COVID-19) has spread worldwide and was declared a global pandemic by theWorld Health Organization onMarch 11, 2020 . COVID-19 poses a threat to the health and economic well-being of our employees, customers, and vendors. Our dedicated team of 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 of 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 theCenter 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 them. We have implemented work from home policies at our corporate offices consistent withCDC guidance to reduce the risks of exposure to COVID-19, while still supporting our 1,953 North American 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 earlyMarch 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, we saw our preneed sales activity precipitously decline as North Americans began to practice social distancing and complying with multiple state and provincial shelter in place orders. The weakened economy has also negatively impacted our cemetery property sales. In the first quarter of 2020, comparable preneed and atneed cemetery property production declined 8.4%, which decreased our cemetery revenue. In addition, our preneed customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from COVID-19. Our sales teams are beginning to overcome social distancing obstacles by further leveraging technology and arranging virtual sales presentations with customers who currently prefer to participate from their home. Our sales teams are also utilizing various other tools and techniques such as virtual on-demand preneed sales seminars and setting up 28Service Corporation International --------------------------------------------------------------------------------
PART I
informational pop-up tents to discuss pre-planning from a safe distance. Once this crisis is over, we believe we can leverage on many of the technological solutions that are helping us manage through these unprecedented times. The rigorous restrictions placed on gatherings and mandated by state, provincial, and local governments has posed a unique challenge for our locations. In mid-March, we quickly developed a technology solution by leveraging Facebook Live, which allows extended family and friends to virtually participate in the ceremony alongside the immediate family. We now have over 1,000 locations offering this service and we have trained approximately 1,000 associates in less than a month. In addition, guests are given 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 and carefully designed outdoor venues are also allowing guests to be present, yet remain at a safe distance. Also, several locations now offer customers the ability to broadcast cemetery services through radio transmitters. As we have continued to ramp up and train more locations on streaming services through Dignity Memorial® Facebook pages, we are beginning to see an increase in the number of families choosing this option resulting in tens of thousands of views. Atneed funeral directors are also using virtual meeting platforms to discuss and plan service details with client families. Although they may be unable 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 "Cash Flow" and "Results of Operations" 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$180.0 million in the first three months of 2020. As ofMarch 31, 2020 , we have$621.0 million in excess borrowing capacity under our Bank Credit Facility. Subsequent toMarch 31, 2020 , we increased our outstanding borrowings by$45.0 million which decreased our borrowing capacity under our Bank Credit Facility to$576.0 million . Our Bank Credit Facility requires us to maintain certain leverage and interest coverage ratios. As ofMarch 31, 2020 , we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as ofMarch 31, 2020 are as follows: Per Credit Agreement Actual Leverage ratio 4.75 (Max) 3.88 Interest coverage ratio 3.00 (Min) 5.04 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 inCanada 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 andBuilding New Funeral Service Locations . We manage our footprint by focusing on strategic acquisitions and building new funeral service locations where the expected returns are attractive and exceed our weighted average cost of capital by a meaningful margin. We target businesses with favorable customer dynamics 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 Dividends. Our quarterly dividend rate has steadily grown from$0.025 per common share in 2005 to$0.19 per common share in 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. Absent opportunities for strategic acquisitions, we expect to continue to repurchase shares of our common stock in the open market or through privately negotiated transactions, subject to market conditions, debt FORM 10-Q 29 --------------------------------------------------------------------------------
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covenants, and normal trading restrictions. There can be no assurance that we will buy our common stock under our repurchase program in the future. During the three months endedMarch 31, 2020 , we repurchased 2,900,722 shares of common stock at an aggregate cost of$123.1 million , which is an average cost per share of$42.44 . After these repurchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program was$193.7 million atMarch 31, 2020 . Subsequent toMarch 31, 2020 , we repurchased 1,097,361 shares for$41.8 million at an average cost per share of$38.09 . After these repurchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program is$151.9 million . Managing 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 is 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. 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 operating and investing needs. Operating Activities Net cash provided by operating activities was$180.0 million , and$184.9 million for the three months endedMarch 31, 2020 , and 2019, respectively. Cash flow from operations decreased$4.9 million for 2020 versus 2019. The 2020 decrease over 2019 comprises: • a$25.8 million increase in employee compensation, and
• a
• a
• a
• a
• a
a$0.1 million decrease in cash tax payments. Investing Activities Cash flows from investing activities used$69.7 million and$70.9 million , in 2020, and 2019, respectively. The$1.2 million decrease from 2020 over 2019 is primarily due to the following: • a$7.6 million decrease in payments for Company-owned life insurance policies,
net of proceeds,
• a
and
• a
development, partially offset by
• a
• a
construction of new funeral service locations.
Financing Activities Financing activities used$110.1 million in 2020 compared to using$162.7 million in 2019. The$52.6 million decrease from 2020 over 2019 is primarily due to: • a$169.9 million decrease in debt payments, net of proceeds, partially offset
by
• a
• a
• a
30Service Corporation International --------------------------------------------------------------------------------
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• a
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 sales activities. The obligations underlying these surety
bonds are recorded on our 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.
December 31,
March 31, 2020 2019
(In millions)
Preneed funeral $ 91.4 $ 94.6
Preneed cemetery:
Merchandise and services 154.0 147.6
Pre-construction 20.5 20.3
Bonds supporting preneed funeral and cemetery obligations 265.9 262.5
Bonds supporting preneed business permits 5.6 5.5
Other bonds 19.7 19.7
Total surety bonds outstanding $ 291.2 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 three months endedMarch 31, 2020 and 2019, we had$2.2 million and$5.7 million , respectively, of cash receipts from sales attributable to bonded 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 due to a lack of surety capacity or surety company non-performance. Preneed 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 Consolidated Balance Sheet. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenue as we perform these funerals. FORM 10-Q 31 --------------------------------------------------------------------------------
PART I
The table below details our results of insurance-funded preneed production and
maturities.
Three Months Ended March 31,
2020 2019
(Dollars in millions)
Preneed insurance-funded:
Sales production(1) $ 125.0 $ 134.8
Sales production (number of contracts) (1) 22,095 23,799
General agency revenue $ 32.4 $ 36.0
Maturities $ 93.8 $ 90.4
Maturities (number of contracts) 15,919 15,472
(1) Amounts are not included in our 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 are as follows:
Three Months Ended March 31,
2020 2019
(Dollars in millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production $ 89.2 $ 94.5
Sales production (number of contracts) 23,179 25,327
Maturities $ 78.4$ 73.8 Maturities (number of contracts) 19,591 18,844 Cemetery: Sales production: Preneed $ 194.1$ 216.7 Atneed 84.6 82.0 Total sales production $ 278.7$ 298.7 Sales production deferred to backlog: Preneed $ 94.6$ 93.9 Atneed 62.3
60.8
Total sales production deferred to backlog $ 156.9$ 154.7 Revenue recognized from backlog: Preneed $ 65.9$ 63.2 Atneed 61.8
59.6
Total revenue recognized from backlog $ 127.7
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 atMarch 31, 2020 andDecember 31, 2019 . Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our Consolidated Balance Sheet) atMarch 31, 2020 andDecember 31, 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. 32Service Corporation International --------------------------------------------------------------------------------
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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.
March 31, 2020 December 31, 2019
Fair Value Cost Fair Value Cost
(In billions)
Deferred revenue, net $ 1.48 $ 1.48 $ 1.47 $ 1.47
Amounts due from customers for unfulfilled
performance obligations on cancelable preneed
contracts 0.58 0.58 0.58 0.58
Deferred receipts held in trust 3.17 3.48 3.84 3.54
Allowance for cancellation on trust investments (0.21 ) (0.24 ) (0.27 ) (0.25 )
Backlog of trust-funded deferred revenue, net of
estimated allowance for cancellation 5.02 5.30 5.62 5.34
Backlog of insurance-funded revenue (1) 6.43 6.43 6.37 6.37
Total backlog of deferred revenue $ 11.45 $
11.73
Preneed receivables, net and trust investments$ 4.12 $ 4.43 $ 4.79 $ 4.49 Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts 0.58 0.58 0.58 0.58 Allowance for cancellation on trust investments (0.21 ) (0.24 ) (0.27 ) (0.25 ) Assets associated with backlog of trust-funded deferred revenue, net of estimated allowance for cancellation 4.49 4.77 5.10 4.82
Insurance policies associated with insurance-funded deferred revenue (1)
6.43 6.43 6.37 6.37
Total assets associated with backlog of preneed
revenue $ 10.92 $
11.20
(1) Amounts are not included in our 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 appraisals. As ofMarch 31, 2020 , the difference between the backlog and asset market amounts represents$0.23 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting,$0.09 billion collected from customers that were not required to be deposited into trusts, and$0.21 billion in allowable cash distributions from trust assets. As ofMarch 31, 2020 , the fair value of the total backlog comprised$2.85 billion related to cemetery contracts and$8.60 billion related to funeral contracts. As ofMarch 31, 2020 , the fair value of the assets associated with the backlog of trust-funded deferred revenue comprised$2.60 billion related to cemetery contracts and$1.89 billion related to funeral contracts. As ofMarch 31, 2020 , the backlog of insurance-funded contracts of$6.43 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 earnings or elected distributions are withdrawn as 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 earnings that are distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal. FORM 10-Q 33 --------------------------------------------------------------------------------
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Our trusts have been and continue to be impacted by adverse conditions in theU.S. and global financial markets primarily as a result of COVID-19. The fair market value of our trust investments declined sharply inMarch 2020 . As ofMarch 31, 2020 , we have net unrealized losses of$462.4 million in our trusts, as discussed in Note 3. AtMarch 31, 2020 , these net unrealized losses represented 9.6% of our original cost basis of$4.8 billion . As explained in "Critical Accounting Policies, Fair Value Measurements" in our 2019 annual report on Form 10-K, changes in unrealized gains and/or losses related to these securities are reflected in Other comprehensive income (loss) or Other income (loss) and offset by the Deferred preneed funeral and cemetery receipts held in trust and Care trusts' corpus interests in those unrealized gains and/or losses. Therefore, the majority of these net unrealized losses have no net impact on our unaudited Condensed Consolidated Statement of Operations for the three months endedMarch 31, 2020 . We do, however, rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations. 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 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 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. As ofMarch 31, 2020 , the asset allocation is almost evenly split 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 ofMarch 31, 2020 , approximately 87% of our trusts were under the control and custody of three large financial institutions. TheU.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, 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 where 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. TheU.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, matched 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. 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. 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 includingU.S. equities, non-U.S. equities, corporate bonds, 34Service Corporation International --------------------------------------------------------------------------------
PART I
government bonds, high yield bonds, and commodities, all of which are governed by guidelines outlined in their individual prospectuses. Separately 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 contracts 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 ofMarch 31, 2020 , the largest single equity position represented less than 1% of the total securities portfolio. Private equity fund investments serve 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, 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 three months endedMarch 31, 2020 , the Standard and Poor's 500 Index decreased 19.6% and the Barclay's Aggregate Index increased 3.2%. This compares to the SCI trusts that decreased 15.9% during the same period, which have a diversified allocation of approximately 50% equities, 36% fixed income securities, 8% alternative and other investments with remaining 6% 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 Months EndedMarch 31, 2020 and 2019 Management Summary In the first quarter of 2020, we reported consolidated net income attributable to common stockholders of$81.9 million ($0.45 per diluted share) compared to net income attributable to common stockholders in 2019 of$79.3 million ($0.43 per diluted share). These results were impacted by certain significant items including: Three Months EndedMarch 31, 2020 2019 (In millions)
Pre-tax gains (losses) on divestitures and impairment charges, net
$ 4.5 $ (1.9 )
Pre-tax loss on early extinguishment of debt, net $ (0.1 ) $ -
Pre-tax legal matters $ - $ (8.0 )
Tax effect from special items $ (1.2 ) $ 2.5
Change in uncertain tax reserves and other $ 0.2 $ -
In addition to the above items, the decrease over the prior year quarter can be
attributed to lower gross profit primarily related to less preneed cemetery
property sales due to the effects of the COVID-19 pandemic, which was partially
offset by reductions in corporate general and administrative expenses and lower
interest expense.
FORM 10-Q 35--------------------------------------------------------------------------------
PART I
Funeral Results
Three Months Ended March 31,
2020 2019
(Dollars in millions, except average
revenue per service)
Consolidated funeral revenue $ 504.9 $ 492.8
Less: revenue associated with acquisitions/new
construction 7.0 0.9
Less: revenue associated with divestitures - 1.9
Comparable(1) funeral revenue 497.9 490.0
Less: comparable recognized preneed revenue 32.6 31.3
Less: comparable general agency and other revenue 29.2 33.1
Adjusted comparable funeral revenue $ 436.1 $ 425.6
Comparable services performed 85,169 83,294
Comparable average revenue per service(2) $ 5,120 $ 5,110
Consolidated funeral gross profit $ 103.6
$ 105.4 Less: gross profit associated with acquisitions/new construction
1.0 0.4
Less: gross losses associated with divestitures (0.3 ) (0.8 )
Comparable(1) funeral gross profit $ 102.9 $ 105.8
(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
March 31, 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 comparable 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 calculation of comparable average
revenue per service because the associated service has not yet been
performed.
Funeral Revenue Consolidated revenue from funeral operations was$504.9 million for the three months endedMarch 31, 2020 , compared to$492.8 million for the same period in 2019. This increase is primarily attributable to the$6.1 million increase in revenue contributed by acquired and newly constructed properties and the$7.9 million increase in comparable revenue as described below, partially offset by the loss of$1.9 million in revenue contributed by properties that have been subsequently divested. Comparable revenue from funeral operations was$497.9 million for the three months endedMarch 31, 2020 compared to$490.0 million for the same period in 2019. This$7.9 million , or 1.6% increase was primarily attributable to a 2.3% increase in services performed compared to 2019. The increase in services performed comprises a 1.5% increase in services performed by our funeral service locations and a 7.1% increase in cremation services performed by our non-funeral home channel. We also experienced a$1.3 million increase in recognized preneed revenue. These revenue increases were somewhat offset by a$3.9 million decrease in other revenue primarily due to lower comparable general agency revenue as a result of a decrease in insurance-funded preneed sales production due to the social distancing effects of the pandemic. Average revenue per funeral service increased 0.2% for the three months endedMarch 31, 2020 compared to the same period in 2019 as a 1.4% increase in the organic sales average was offset by a 130 basis point increase in the total cremation rate. Our total comparable cremation rate increased to 58.2% in 2020 from 56.9% in 2019 primarily as a result of an increase in direct cremations. Funeral Gross Profit Consolidated funeral gross profit decreased$1.8 million , or 1.7%, in 2020 compared to 2019. This decrease is primarily attributable to a decrease in comparable funeral gross profit of$2.9 million , or 2.7%. Comparable funeral gross profit decreased$2.9 million to$102.9 million and the gross profit percentage decreased 90 basis points to 20.7%, as the revenue increases described above were more than offset by an increase in inflationary employee-related expenses and an increase in provision for expected credit losses based on current and projected economic conditions surrounding COVID-19.
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