Service Corporation International — 2016 Form 10-K Summary
Business context and reporting period
The filing covers the fiscal year ended December 31, 2016; it is an annual report, not a standalone fourth-quarter filing. SCI is North America’s largest deathcare provider, operating 1,502 funeral locations and 470 cemeteries across the U.S. and Canada. Its business includes funeral and cemetery services, merchandise, and preneed arrangements. The reported preneed backlog was $10.0 billion at year-end.
Financial performance and position
| Metric | FY 2016 | FY 2015 |
|---|---|---|
| Revenue | $3,031.1 million | $2,986.0 million |
| Gross profit / margin | $676.4 million / 22.3% | $674.6 million / 22.6% |
| Operating income / margin | $511.9 million / 16.9% | $550.3 million / 18.4% |
| Net income attributable to common stockholders | $177.0 million | $233.8 million |
| Diluted EPS | $0.90 | $1.14 |
| Cash from operations | $463.6 million | $472.2 million |
| Capital expenditures | $193.4 million | $151.0 million |
| Cash and cash equivalents at year-end | $195.0 million | $134.6 million |
| Total debt, including current maturities | $3,286.6 million | $3,124.4 million |
Revenue grew 1.5% year over year, while common-stockholder net income fell 24.3% and diluted EPS declined 21.1%. The 2016 gross and operating margins were approximately 22.3% and 16.9%, respectively. Operating cash flow less capital expenditures was approximately $270.1 million, down from $321.2 million in 2015. Year-end equity was $1,095.2 million.
SCI had $317.3 million of available borrowing capacity under its bank facility. It reported compliance with debt covenants; the actual leverage ratio was 3.83 against a 4.25 maximum, and interest coverage was 5.21 against a 3.00 minimum. About 63% of debt was fixed-rate, at a weighted average rate of 4.68%. The reported current maturities of debt were $90.0 million.
For the fourth quarter of 2016, unaudited revenue was $809.1 million and net income attributable to common stockholders was $66.2 million, or $0.34 diluted EPS. Fourth-quarter 2015 figures were $769.3 million, $72.4 million, and $0.36, respectively.
Material changes versus the prior comparable period
- Funeral revenue declined to $1,868.9 million from $1,888.8 million. Comparable funeral services performed fell 2.7%, partly reflecting unusually strong flu activity in the first half of 2015. Comparable average revenue per service increased 0.9%, but funeral gross profit fell 7.4% to $364.2 million.
- Cemetery revenue increased 5.9% to $1,162.3 million, and cemetery gross profit rose 10.9% to $312.2 million. Growth reflected higher recognized preneed revenue, preneed property production, and perpetual-care trust capital-gain distributions.
- Interest expense declined $10.8 million to $162.1 million. SCI refinanced debt in 2016, including replacing its prior bank facility and term loan with a $1.4 billion credit agreement due 2021, and repaid $295 million of 7.0% notes due 2017. Early debt extinguishment resulted in a $22.5 million pretax loss.
- Investing cash outflow increased, with capital expenditures up $42.5 million, primarily for cemetery property development and new funeral homes. Share repurchases were $227.9 million, versus $345.3 million in 2015; dividends paid were $98.4 million, versus $87.6 million.
Outlook, management commentary, risks, and unusual items
- Management’s stated priorities are revenue growth, leveraging scale, and disciplined capital deployment, with investment in acquisitions and new builds prioritized ahead of dividends, repurchases, and debt buybacks. The filing gives no numeric earnings or revenue guidance.
- Management expects demographic aging and preneed sales to support future opportunity. The preneed backlog rose to $10.0 billion from $9.5 billion. SCI also identified growth in cremation as a challenge: cremations were 52.4% of comparable services in 2016, and average cremation revenue is lower than burial revenue.
- Reported earnings included a $26.8 million net pretax loss on divestitures and impairment, including $31.2 million of impairment tied to Los Angeles funeral-home divestitures; $22.5 million of debt-extinguishment losses; $12.0 million of system-transition costs; $5.5 million of acquisition costs; and a $5.6 million pension termination settlement. A $20.9 million change in certain tax reserves also affected results. The effective tax rate was 45.7%, versus 36.5% in 2015, primarily reflecting a foreign deferred-tax valuation allowance and nondeductible goodwill related to divestitures.
- Key risks include market declines in trust investments and possible trust replenishment requirements; competition and changing consumer preferences; lower funeral volumes or a higher cremation mix; regulatory changes affecting preneed trusts or surety bonds; debt, covenant, and floating-rate exposure; Canadian currency risk; litigation and self-insurance claims; and cyber and data-security incidents.
- SCI had $8.1 million of unrealized losses in certain state-regulated trusts. If surety coverage were canceled without replacement, the company estimated potential trust funding of about $169.4 million. It also reported $235.6 million of liabilities for uncertain tax positions and related interest and penalties. An IRS agreement in principle covering tax years 1999–2005 had cleared the Joint Committee on Taxation, but final resolution remained conditional.
- The independent auditor gave an unqualified opinion on the financial statements and concluded internal control over financial reporting was effective as of year-end. SCI disclosed an immaterial $5.5 million out-of-period expense for previously improperly capitalized acquisition costs.
Important facts for investors to verify
- Whether funeral volume and margins stabilize, and whether cemetery growth and preneed production continue to offset funeral declines.
- How much reported earnings reflect recurring operations versus impairments, debt refinancing, transition costs, and tax items.
- Debt maturity, covenant headroom, interest-rate exposure, and the effect of ongoing dividends and buybacks on leverage and liquidity.
- Trust investment performance, statutory funding requirements, cancellation assumptions, and the ability of trust assets and insurance proceeds to cover future contract fulfillment costs.
- Progress and final outcome of the IRS audit resolution, pending litigation, and the Los Angeles divestiture and related impairment.