Business context and reporting period
Service Corporation International (SCI) filed this Form 10-K for the fiscal year ended December 31, 2019. SCI is North America’s largest deathcare provider, operating 1,471 funeral locations and 482 cemeteries across the U.S. and Canada. Results below compare FY2019 with FY2018; fourth-quarter figures are identified separately.
Financial performance and position
- Revenue: $3.231 billion, up 1.3% from $3.190 billion. Gross profit was $760.6 million, approximately 23.5% of revenue, versus $760.3 million, or 23.8%, in 2018. Operating income increased to $666.6 million from $630.7 million.
- Profit: Net income attributable to common stockholders was $369.6 million ($1.99 diluted EPS), down from $447.2 million ($2.39). The 2018 comparison benefited substantially from tax-related items; the effective tax rate was 20.4% in 2019 versus a 1.3% tax benefit in 2018.
- Fourth quarter: Revenue was $850.8 million versus $820.8 million. Net income attributable to common stockholders was $147.2 million ($0.79 diluted EPS), versus $193.0 million ($1.04). Operating income rose to $240.9 million from $172.7 million.
- Cash flow: Operating cash flow was $628.8 million, up from $615.8 million. Investing activities used $278.5 million and financing activities used $319.1 million. Capital expenditures were $240.0 million.
- Debt and liquidity: Total debt, including finance leases, was approximately $3.58 billion; cash and cash equivalents were $186.3 million. SCI reported $671.0 million of borrowing capacity under its bank facility and compliance with debt covenants. The leverage ratio was 3.78 against a 4.75 maximum; interest coverage was 5.03 against a 3.00 minimum. Approximately 69% of debt was fixed-rate. Debt maturities are concentrated in 2024, when $1.66 billion is scheduled.
- Other metrics: Preneed backlog reached $12.0 billion, up from $11.1 billion. Comparable funeral services performed were essentially flat at 307,702; comparable average revenue per service declined 0.6% to $5,239. Cremation represented 56.8% of comparable services, versus 55.1% in 2018.
Material changes versus 2018
- Revenue rose modestly, while common-stockholder net income fell 17.4%, reflecting notably different tax effects and other special items between years.
- Operating income increased despite nearly flat gross profit, supported in part by lower corporate general and administrative expense ($126.9 million versus $145.6 million) and higher net gains on divestitures and impairment charges ($32.9 million versus $15.9 million).
- Comparable funeral gross profit declined $1.8 million; the comparable margin fell 20 basis points to 19.8%, primarily reflecting investment in preneed sales. Comparable cemetery gross profit declined $2.2 million, and its margin fell 30 basis points to 30.0%, with maintenance and administrative costs exceeding revenue growth.
- SCI refinanced and repaid significant debt during 2019, issued $750 million of 5.125% senior notes due 2029, and repurchased $129.6 million of its shares. Dividends declared increased to $0.72 per share from $0.68.
Outlook, risks and unusual items
Management provided no specific numerical earnings or revenue guidance in the supplied filing text. Its stated priorities are revenue growth, leveraging operating scale, and disciplined capital deployment. Management expects demographic aging and preneed growth to support longer-term demand, while continuing to adapt offerings and technology to customer preferences, including cremation and personalized memorialization.
- Key operating risks include rising cremation mix and lower average cremation revenue, competition, unpredictable death rates, fixed operating costs, labor and supply disruptions, and execution risks in acquisitions and growth investments.
- Trust investments are exposed to market volatility. Trust returns were strong in 2019 after losses in 2018; investment shortfalls could require SCI to fund future service or cemetery-care obligations. SCI disclosed $12.0 million of unrealized losses in certain trusts subject to potential replenishment requirements.
- Surety-bond cancellation or nonrenewal could require up to approximately $153.8 million of trust funding if replacement coverage were unavailable. The company stated it did not expect material future funding from this risk.
- SCI faces litigation and regulatory matters, including California allegations concerning preneed cremation contracts and trust funding, an Illinois claim involving $13.6 million of perpetual-care trust withdrawals, and an unclaimed-property audit inquiry. For several matters, the company said potential losses could not be reasonably estimated; it intends to defend them.
- Other exposures include substantial indebtedness and covenant restrictions, self-insurance reserves of $84.3 million, cybersecurity and privacy risks, Canadian currency exposure, and potential goodwill impairment. The auditor identified the funeral reporting unit goodwill assessment as a critical audit matter; no goodwill impairment was recorded, but $3.4 million of tradename impairment was recognized in 2019.
- SCI reported effective disclosure controls and internal control over financial reporting; the independent auditor gave an unqualified opinion on the financial statements and internal controls.
Important facts for investors to verify
- Reconcile the year-over-year earnings decline, especially the impact of tax items and other special items in both years.
- Review debt refinancing terms, the 2024 maturity concentration, covenant headroom, and the availability of the bank facility.
- Assess whether preneed backlog growth converts into revenue and cash flow as expected, and whether trust assets adequately support guaranteed obligations.
- Track cremation mix, comparable funeral revenue per service, and segment margins as SCI adapts its products and pricing.
- Monitor developments and possible financial impacts from the California, Illinois, and unclaimed-property matters; the filing does not provide clear loss estimates for several of these contingencies.