Service Corporation International — FY 2012 Form 10-K
Reporting period: Fiscal year ended December 31, 2012. The filing also reports fourth-quarter results. SCI is North America’s largest deathcare provider, operating 1,437 funeral service locations and 374 cemeteries in North America, plus 12 funeral homes in Germany that it plans to exit when conditions permit.
Financial performance and position
| Metric | FY 2012 | FY 2011 |
|---|---|---|
| Revenue | $2.410 billion | $2.316 billion |
| Gross profit / margin | $525.2 million / 21.8% | $478.5 million / 20.7% |
| Operating income / margin | $399.8 million / 16.6% | $363.7 million / 15.7% |
| Net income attributable to common stockholders | $152.5 million | $144.9 million |
| Diluted EPS | $0.70 | $0.61 |
| Operating cash flow | $369.2 million | $388.1 million |
| Capital expenditures | $115.6 million | $118.4 million |
| Cash and cash equivalents at year-end | $92.7 million | $128.6 million |
| Total debt at year-end | $1.948 billion | $1.885 billion |
FY 2012 cash flow from operations less capital expenditures was approximately $253.6 million, versus $269.7 million in 2011. Total assets were $9.684 billion and equity was $1.363 billion at year-end. SCI had $380.4 million of available borrowing capacity under its bank facility. It was compliant with debt covenants: actual leverage was 3.10 against a 4.00 maximum, and interest coverage was 4.69 against a 3.00 minimum.
In Q4 2012, revenue was $629.4 million versus $586.6 million in Q4 2011; net income attributable to common stockholders was $26.4 million versus $44.6 million, and diluted EPS was $0.12 versus $0.20.
Material changes and operating drivers
- Annual revenue increased 4.1%, while net income attributable to common stockholders rose 5.3%. Diluted EPS increased from $0.61 to $0.70, with share repurchases reducing diluted weighted-average shares to 219.1 million from 236.7 million.
- Comparable funeral revenue increased, supported by higher average revenue per service and general agency revenue, but comparable services performed declined 2.0%. Comparable average revenue per service rose 2.2% to $5,485. Cremations were 45.1% of comparable services, up from 44.5%.
- Comparable cemetery revenue grew 6.3%, reflecting higher recognized property revenue and trust income. Comparable cemetery gross margin increased to 22.5% from 20.1%; funeral gross margin increased to 22.3% from 21.5%.
- The preneed backlog of future funeral and cemetery revenues increased to $7.4 billion from $6.9 billion. Comparable preneed cemetery sales rose 10.2% and comparable preneed funeral sales rose 3.6%.
- Operating cash flow declined $18.9 million, despite increased customer receipts, primarily due to higher vendor payments, payroll, cash taxes, and lower net trust withdrawals.
Outlook, risks and unusual items
- SCI provided no specific earnings or revenue guidance. It expected 2013 capital improvements and cemetery development spending of $105 million to $115 million and said it intended to continue evaluating acquisitions, dividends, share repurchases, and opportunistic debt repurchases.
- In November 2012, SCI issued $200 million of 4.5% senior notes due 2020 and used the proceeds to redeem $180.7 million of 7.375% notes due 2014. The refinancing generated a $22.7 million pretax early-extinguishment loss, including a $21.4 million cash make-whole payment. SCI reported a 37.3% effective tax rate, including a benefit related to partial IRS audit settlement.
- Key risks include market declines in funeral and cemetery trusts, potential trust replenishment requirements, and possible loss of surety coverage. If bonds were not renewed and replacement coverage unavailable, SCI estimated it could need to fund about $180.6 million into state-mandated trusts. Trust investment losses in certain states totaled $7.4 million at year-end.
- Pending cemetery burial-practice class actions and wage-and-hour claims could lead to material damages or other relief; SCI said outcomes could not be quantified. The Eden Memorial Park case was scheduled for trial in July 2013.
- Other risks include increasing cremation rates and lower average cremation revenue, high fixed operating costs, competition, regulatory changes, insurance-funded contract exposure to third-party insurers, and debt covenant restrictions. Management reported no goodwill impairment in 2012, but recorded a $1.2 million impairment of certain tradenames.
Investor facts to verify
- Whether preneed sales growth and the $7.4 billion backlog translate into future recognized revenue and cash generation as expected.
- How comparable funeral volumes, cremation mix, average service revenue, and cemetery property sales trend in subsequent periods.
- Trust portfolio performance, any required trust contributions, and the availability and renewal terms of surety bonds.
- Developments, accruals, and potential exposure in the cemetery-practice and wage-and-hour litigation, including the Eden trial.
- Debt levels, covenant headroom, planned capital spending, and the sustainability of dividends and repurchases alongside liquidity needs.