Service Corporation International: FY2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011; the filing was signed February 13, 2012. SCI is North America’s largest deathcare provider, operating funeral homes and cemeteries, with sales both at need and through preneed contracts. At year-end, it reported 1,435 funeral service locations and 374 cemeteries, including operations in Germany that management intends to exit when conditions permit.
Financial performance and key metrics
| Metric | FY2011 | FY2010 |
|---|---|---|
| Revenue | $2,316.0 million | $2,190.6 million |
| Gross profit / gross margin | $478.5 million / 20.7% | $449.2 million / 20.5% |
| Operating income / operating margin | $363.7 million / 15.7% | $354.0 million / 16.2% |
| Net income attributable to common stockholders | $144.9 million | $126.4 million |
| Diluted EPS | $0.61 | $0.50 |
| Operating cash flow | $388.1 million | $354.4 million |
| Capital expenditures | $118.4 million | $97.9 million |
| Cash and cash equivalents at year-end | $128.6 million | $170.8 million |
| Total debt, including current maturities | $1,884.7 million | $1,854.9 million |
| Equity | $1,412.2 million | $1,479.9 million |
Margins above are calculated from reported revenue and income figures. SCI’s $500 million bank facility was extended to March 2016; $65.0 million was drawn and $32.7 million supported letters of credit at year-end, leaving $402.3 million of borrowing capacity. The company reported compliance with debt covenants: leverage ratio 3.12 versus a 4.00 maximum, and interest coverage 4.35 versus a 3.00 minimum. About 89% of debt was fixed rate, at a weighted-average rate of 6.69%. Management said there were no significant long-term debt maturities until October 2014 and expected available liquidity to meet obligations for the next 12 months.
Cash flow from investing activities was a $190.3 million outflow and financing activities were a $238.7 million outflow; cash declined $42.3 million during the year. SCI repurchased about 19.8 million shares for $195.7 million and paid $44.8 million of cash dividends. The declared dividend was $0.20 per share for the year.
Changes versus the prior comparable period
- Revenue rose 5.7% and net income attributable to common stockholders rose 14.6%. Revenue growth reflected acquisitions, including Neptune, and comparable cemetery growth; the prior-year Keystone acquisition also affected comparisons.
- Funeral gross profit increased $13.7 million and cemetery gross profit increased $15.6 million. Comparable cemetery revenue grew 6.9%; comparable funeral services performed declined 2.5%.
- Comparable average revenue per funeral service increased 2.9% to $5,366, while consolidated average revenue per service edged down 0.2% to $5,215, in part reflecting acquisition and product mix.
- SCI acquired 70% of The Neptune Society in June 2011 for $44 million, expanding into direct cremation. The purchase-price allocation remained incomplete at filing date. SCI’s North American cremation rate reached 44.4%, versus 41.9% in 2010.
- Operating cash flow increased $33.7 million, while capital spending rose $20.5 million. Total debt increased $29.8 million and year-end cash fell $42.3 million.
- Operating income increased, but operating margin declined from 16.2% to 15.7%. The 2011 result included an $11.0 million pretax net loss on divestitures and impairments, versus an $8.5 million gain in 2010.
Outlook, management commentary, risks and unusual items
- Management’s stated priorities were preneed sales and customer initiatives, operating discipline, and selective acquisitions or construction. SCI forecast 2012 capital improvements and cemetery development spending of $95 million to $105 million. The filing provides no specific revenue or earnings guidance.
- Unfulfilled preneed funeral and cemetery contract backlog was approximately $6.9 billion at year-end, compared with $6.8 billion a year earlier. Insurance-funded preneed contract amounts are generally not recorded as balance-sheet assets.
- Trust investment returns were mixed: 2011 reported returns were 0.7% for preneed funeral and cemetery merchandise/service trusts and 5.2% for perpetual-care trusts. SCI recorded $54.2 million of trust investment impairment charges in 2011, compared with $21.7 million in 2010. Management reported no loss-contract charge was required at year-end.
- Key risks include trust-market losses and possible trust replenishment requirements, competition and pricing pressure, a decline in deaths, the increasing cremation share, high fixed operating costs, preneed cost inflation, and the financial condition of third-party insurers. Surety-bond cancellation or nonrenewal could require up to $187.8 million of funding if replacement coverage were unavailable.
- Contingencies include cemetery burial-practice litigation, wage-and-hour cases, and other claims. A purported casket antitrust class action was dismissed, but plaintiffs appealed; their prior class-wide damages estimate was $950 million to $1.5 billion before trebling. SCI said ultimate liabilities in the identified cases could not be quantified. Uncertain tax position liabilities, including related interest and penalties, totaled $198.1 million.
- Other notable items: the effective tax rate fell to 35.2% from 42.1%, primarily due to the sale of the Puerto Rican subsidiary and its tax-basis effects. SCI reported no goodwill impairment; it did record a $1.2 million impairment of certain intangible assets. The independent auditor issued an unqualified opinion and found internal control over financial reporting effective.
Most important facts for investors to verify
- How much of revenue and earnings growth came from acquisitions versus comparable operations, and whether the decline in comparable funeral volume continues.
- Whether cemetery property sales, preneed production, and trust income sustain the improved cemetery results and margins.
- Trust portfolio performance, unrealized losses, trust funding rules, and any future replenishment or loss-contract exposure.
- Debt covenant headroom, the refinancing profile after 2014, and the cash demands of dividends, repurchases, and planned capital spending.
- Neptune’s integration, purchase accounting, and profitability, along with the economics of SCI’s growing cremation business.
- Developments in material litigation, tax audits and uncertain tax positions, and the possible availability and cost of surety coverage.