Service Corporation International — FY 2017 Form 10-K
Reporting period: Fiscal year ended December 31, 2017; filed February 14, 2018. SCI is North America’s largest deathcare provider, operating 1,488 funeral locations and 473 cemeteries across the U.S. and Canada.
Financial performance and position
- Revenue: $3.095 billion, up 2.1% from $3.031 billion in 2016. Funeral revenue was $1.868 billion; cemetery revenue was $1.227 billion.
- Operating income: $569.2 million, versus $511.9 million. Operating margin was approximately 18.4%, compared with 16.9% in 2016.
- Net income attributable to common stockholders: $546.7 million, or $2.84 diluted EPS, versus $177.0 million, or $0.90, in 2016. The increase primarily reflects substantial tax benefits, not a comparable increase in underlying operating performance.
- Cash flow: Operating cash flow was $502.3 million, up from $463.6 million. Capital expenditures were $214.5 million; operating cash flow less capital expenditures was approximately $287.8 million.
- Segment results: Comparable funeral operating profit rose 4.0% to $370.6 million, with a 20.3% margin. Comparable cemetery operating profit rose 10.5% to $349.4 million, with a 28.6% margin.
- Debt and liquidity: Total debt was $3.473 billion, including $337.3 million in current maturities; cash and equivalents were $330.0 million. SCI reported $966.7 million of available borrowing capacity and compliance with debt covenants at year-end.
- Balance sheet: Total assets were $12.865 billion and equity was $1.409 billion. Preneed backlog was $10.7 billion, including insurance-funded contracts not recorded as balance-sheet assets or liabilities.
Material changes versus 2016
- Revenue increased 2.1%; cemetery revenue grew 5.6%, while funeral revenue was nearly flat. Cemetery growth was driven principally by higher recognized preneed revenue.
- Comparable funeral services performed increased 0.9%, and comparable average revenue per service increased 0.1%. Cremations reached 53.5% of comparable services, up from 52.6%.
- Operating income increased 11.2%, aided by improved segment results and a $7.0 million net gain on divestitures and impairments, versus a $26.8 million net loss in 2016.
- 2017 income included a $146.6 million income-tax benefit, versus $149.4 million of tax expense in 2016. Drivers included provisional Tax Act benefits and the IRS audit settlement; the 2017 effective tax rate was a benefit of 36.6%.
- SCI refinanced debt, issuing $550 million of 4.625% notes due 2027 and establishing a new credit agreement due 2022. The $250 million 7.625% note due October 2018 was redeemed in January 2018.
- SCI repurchased $199.6 million of shares and paid $108.8 million of dividends in 2017. The year-end dividend rate was $0.15 per share quarterly.
Outlook, risks, and unusual items
- Management’s strategy is to grow revenue, leverage its network and preneed business, and deploy capital through acquisitions and new builds, dividends, share repurchases, and opportunistic debt reduction. The filing provides no quantified earnings or revenue guidance.
- In February 2018, the Board raised the quarterly dividend to $0.17 per share and authorized up to $400 million in additional share repurchases. Future capital returns remain subject to covenants, market conditions, and Board approval.
- Management expects the Tax Act to favorably affect the effective tax rate and net income in 2018 and later periods, but its accounting impact was provisional and still under review. SCI estimated a $168.4 million benefit from remeasuring deferred taxes, partly offset by $22.2 million of transition-tax expense.
- Hurricanes Harvey, Irma, and Maria caused $11.9 million of repair and cleanup costs; $6.3 million of insurance proceeds reduced the net 2017 expense to $5.6 million. Management anticipated immaterial hurricane-related expense in 2018.
- Other notable 2017 costs included a $12.8 million pension termination settlement and an $11.5 million legal settlement, net of insurance recoveries.
- Key risks include market declines in trust investments and possible required trust replenishment; competition and price pressure; the increasing cremation mix, which generally yields lower revenue per service; high fixed operating costs; debt and covenant constraints; regulatory changes affecting preneed trusts or surety bonds; litigation and cemetery-practice claims; unclaimed-property audits; cyber and IT disruption; and Canadian currency exposure.
- SCI disclosed $15.0 million of unrealized losses in certain trusts subject to potential replenishment requirements and $166.0 million of potential funding if surety bonds were canceled without replacement. The company stated it did not expect material future funding needs from surety arrangements.
- PwC issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded controls were effective.
Important facts for investors to verify
- How much of 2017’s earnings improvement came from one-time tax benefits and settlements versus recurring operating growth.
- Whether cemetery preneed sales, backlog maturities, and margins can sustain growth, and how trust investment performance affects contract economics.
- Debt maturities, floating-rate exposure, covenant headroom, and the effects of refinancing and shareholder distributions on leverage.
- Developments in litigation, unclaimed-property audits, trust replenishment requirements, and surety-bond renewals.
- Whether continued cremation growth affects service volumes, average revenue, and profitability as management expands cremation-related offerings.