Service Corporation International — FY2015 Form 10-K
Business context and reporting period. The filing covers the fiscal year ended December 31, 2015; fourth-quarter figures are unaudited. SCI is North America’s largest deathcare provider, operating 1,535 funeral locations and 469 cemeteries across the U.S. and Canada. Revenue comes from funeral and cemetery merchandise and services sold at need and in advance (preneed).
Key financial metrics
| Metric | FY2015 | FY2014 |
|---|---|---|
| Revenue | $2,986.4 million | $2,994.0 million |
| Gross profit / margin | $671.9 million / 22.5% | $675.7 million / 22.6% |
| Operating income / margin | $550.3 million / 18.4% | $607.5 million / 20.3% |
| Net income attributable to common stockholders | $233.8 million | $172.5 million |
| Diluted EPS | $1.14 | $0.81 |
| Net cash from operating activities | $472.2 million | $317.4 million |
| Total debt, including current maturities | $3,166.9 million | $3,054.7 million |
| Cash and cash equivalents | $134.6 million | $177.3 million |
At December 31, 2015, current assets were $308.4 million and current liabilities were $519.4 million. Management identified approximately $85 million of unencumbered cash and $199 million of available Bank Credit Facility capacity. Debt covenants were satisfied: leverage ratio 3.82 versus a maximum 4.25, and interest coverage 4.89 versus a minimum 3.00. Approximately 76% of debt was fixed-rate, at a weighted-average rate of 5.18%.
SCI declared $0.44 per share in dividends for 2015 and paid $87.6 million. It repurchased 12.5 million shares for $345.3 million, averaging $27.72 per share. Capital expenditures were $151.0 million.
Material changes versus comparable periods
- Revenue declined 0.3% year over year. Common-stockholder net income rose 35.5% and diluted EPS increased from $0.81 to $1.14, while operating income fell 9.4%.
- The earnings increase included a substantially lower effective tax rate: 36.5% in 2015 versus 56.1% in 2014. The 2014 rate was elevated mainly by nondeductible goodwill associated with required Stewart acquisition divestitures.
- 2014 operating income included a $116.6 million net gain on divestitures and impairments, versus $6.5 million in 2015. 2015 also included $6.9 million of losses on early debt extinguishment; 2014 had $29.2 million of such losses.
- Funeral revenue declined to $1,888.8 million from $1,920.5 million, including the effect of divested locations. Comparable funeral revenue increased, but comparable gross profit fell 0.8% as inflation in fixed costs outweighed revenue growth.
- Cemetery revenue increased 2.2% to $1,097.6 million. Comparable cemetery gross profit rose 8.5%, mainly on higher recognition of preneed property sales.
- Operating cash flow increased by $154.8 million. SCI reported the 2015 total included various special cash-flow items; excluding the specified items in its analysis, operating cash flow increased only $5.3 million year over year.
- SCI issued $300 million of 5.375% senior notes due 2024, using proceeds to redeem its 6.75% notes due 2016 and repay $100 million of credit-facility borrowings. Total debt nevertheless increased year over year.
In the fourth quarter, revenue was $769.4 million versus $783.4 million in Q4 2014; gross profit was $187.4 million versus $205.3 million; operating income was $157.0 million versus $220.3 million; and diluted EPS was $0.36 versus $0.42. Q4 2014 benefited from divestiture-related gains.
Outlook, commentary, risks, and unusual items
- SCI gave no specific quantitative earnings or revenue guidance in the provided filing. Management’s priorities are revenue growth, leveraging scale, and capital deployment. Capital priorities are acquisitions and new funeral-home construction, dividends, share repurchases, then debt repurchases.
- Management cited a $9.5 billion preneed backlog at year-end, up from $9.3 billion in 2014, as a source of future revenue. The backlog includes insurance-funded contracts not recorded as balance-sheet assets or liabilities.
- Cremations were 51.6% of comparable services in 2015, versus 51.0% in 2014. SCI noted lower average revenue for cremations than traditional burials and is expanding cremation memorialization offerings.
- Trust investment returns were negative in 2015: funeral merchandise/service trusts −1.5%, cemetery merchandise/service trusts −1.0%, and perpetual-care trusts −0.3%. SCI reported $13.9 million of unrealized losses in certain trusts that could require replenishment under applicable rules. Management said no loss-contract charge was required at year-end.
- Key risks include investment-market declines and potential trust funding requirements; dependence on third-party insurers and surety bonds; leverage, floating-rate debt and restrictive covenants; competition, lower cremation economics, and fixed operating costs; regulation and preneed trust rules; litigation, burial-practice and wage/hour claims; self-insurance estimates; cyber risk; and Canadian currency exposure.
- Outstanding surety bonds totaled $277.7 million. If surety coverage were canceled and replacement unavailable, SCI estimated a potential funding requirement of approximately $179.2 million. Contractual obligations totaled $4.28 billion undiscounted, including debt maturities and interest.
- SCI disclosed several lawsuits and investigations; outcomes could not be determined. In February 2016, a court granted the Archdiocese of Los Angeles summary judgment in a lease dispute involving six properties; SCI’s subsidiary intended to appeal. The filing says the ultimate outcome and liability could not be quantified.
Important facts for investors to verify
- Separate recurring operating performance from the prior-year divestiture gain, debt-refinancing costs, and year-to-year tax-rate effects.
- Review debt maturities, covenant headroom, floating-rate exposure, and whether cash repurchases and dividends remain consistent with liquidity needs.
- Assess the trust portfolios’ performance, unrealized losses, regulatory funding obligations, and the extent to which preneed backlog converts to future cash and earnings.
- Track funeral and cemetery comparable volumes, pricing, cremation mix, and the cost trend behind funeral gross-profit pressure.
- Monitor the Los Angeles lease appeal, other litigation and tax contingencies, and renewal or replacement of surety arrangements.