Service Corporation International — 2013 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2013; fourth-quarter figures are also reported. SCI is North America’s largest deathcare provider, operating funeral homes and cemeteries across the United States and Canada, as well as 12 funeral homes in Germany that it intends to exit when conditions permit. On December 23, 2013, SCI acquired Stewart Enterprises, substantially expanding its network. Stewart’s results are included only from the acquisition date.
Financial performance and position
| Metric | 2013 | 2012 | Change / context |
|---|---|---|---|
| Revenue | $2,556.4 million | $2,410.5 million | Up 6.0% |
| Gross profit | $549.6 million | $523.2 million | Up 5.0%; gross margin approximately 21.5%, versus 21.7% |
| Operating income | $388.2 million | $399.8 million | Down 2.9%; operating margin approximately 15.2%, versus 16.6% |
| Net income attributable to common stockholders | $143.8 million | $152.5 million | Down 5.7%; diluted EPS was $0.67, versus $0.70 |
| Cash from operations | $384.7 million | $369.2 million | Up $15.5 million |
| Investing cash flow | Used $1,156.8 million | Used $175.0 million | Primarily reflects Stewart acquisition spending |
| Financing cash flow | Provided $825.1 million | Used $231.5 million | Debt issuance funded the acquisition |
| Total debt at year-end | $3,301.9 million | $1,948.1 million | Includes current maturities; substantial increase associated with Stewart |
| Cash and borrowing availability | $144.9 million cash; $418.9 million facility capacity | At February 10, 2014, capacity was $308.9 million after subsequent debt repayments | |
| Dividend declared per share | $0.27 | $0.23 | Board approved a $0.08 quarterly dividend in February 2014 |
At year-end, SCI reported a 4.05 leverage ratio against a 5.00 maximum and 6.21 interest coverage against a 3.00 minimum under its credit agreement. Approximately 76% of debt was fixed-rate, at a weighted-average rate of 5.25%. Current assets were $393.7 million and current liabilities were $642.6 million.
Material changes versus the prior period
- Funeral revenue increased to $1,704.4 million from $1,625.8 million; cemetery revenue increased to $852.0 million from $784.7 million. Cemetery gross profit rose 13.2% to $198.6 million, while funeral gross profit increased 0.9% to $350.5 million.
- Comparable funeral services performed declined 0.8%, while comparable average revenue per service rose 1.9% to $5,267. Cremation represented 50.0% of comparable services, up from 48.5% in 2012.
- Comparable cemetery revenue rose 8.1%, supported by higher recognized preneed property revenue and trust income. Comparable cemetery preneed sales increased 8.0%; comparable preneed funeral sales increased 11.1%.
- General and administrative expense increased to $155.1 million from $121.9 million, primarily due to Stewart-related costs. Interest expense rose to $142.4 million from $135.1 million.
- The effective tax rate increased to 39.3% from 37.3%, primarily reflecting nondeductible Stewart transaction costs and changes in tax reserves.
- SCI’s reported $8.9 billion preneed backlog at year-end, up from $7.4 billion, represents future revenue from unfulfilled funeral and cemetery contracts; some insurance-funded contracts are not recorded on the balance sheet.
Outlook, commentary, risks and unusual items
- Management expects approximately $60 million in annual cost savings from Stewart, with $30 million targeted for 2014 and the remainder for 2015. Integration costs, execution, and timing could affect realization.
- Management identified preneed growth, consumer-relevant offerings, cremation-related products and services, scale efficiencies, and selective acquisitions as strategic priorities. It cited demographic aging as a long-term opportunity, but provided no quantitative earnings or revenue guidance.
- Reported 2013 earnings included $33.2 million of after-tax Stewart acquisition and transition expenses, $7.4 million of after-tax legal-defense and labor-related expenses, and $5.3 million of after-tax systems-transition expenses. SCI also recorded a $6.3 million pretax net loss on divestitures and impairments.
- SCI completed the acquisition for a purchase price of $1.5 billion, including assumed debt. The purchase-price allocation remained preliminary at filing. FTC-related divestitures resulted in $310.9 million of net assets classified as held for sale.
- Key risks include increased leverage and debt covenants, refinancing and interest-rate exposure, trust investment volatility and possible trust replenishment, competition and rising cremation mix, and the ability to realize Stewart synergies. SCI reported $19.7 million of unrealized trust losses in jurisdictions where replenishment or withdrawal restrictions may apply.
- Several legal matters concern alleged cemetery burial practices and wage-and-hour claims. The Eden Memorial Park class action was proceeding to trial in January 2014; SCI stated it could not quantify its ultimate liability. The company also faces regulatory, tax, reputational, and cybersecurity risks.
- SCI reported no charge for expected losses on preneed contracts as of year-end. Trust investment declines could nonetheless create future funding requirements or charges.
Important facts for investors to verify
- Whether the $60 million Stewart synergy target is achieved on the stated 2014–2015 schedule, and what integration costs are incurred.
- Post-acquisition leverage, covenant headroom, debt maturities, and the sustainability of dividends alongside acquisition and debt-service needs.
- Comparable funeral volume, cremation mix, average revenue per service, cemetery preneed production, and conversion of the reported backlog into recognized revenue and cash.
- Developments in the Eden Memorial Park litigation and other legal matters, and any material changes to recorded reserves or possible exposure.
- Trust portfolio performance, funding requirements, surety-bond availability, and final purchase accounting for Stewart.