Business context and reporting period
Service Corporation International (SCI), North America’s largest deathcare provider, reported unaudited results for the three months ended March 31, 2022, compared with the first quarter of 2021. It operated 1,467 funeral service locations and 488 cemeteries. Results reflect both atneed business and preneed contracts, which generate revenue over time as services are performed or property becomes available.
Financial and operating highlights
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $1,112.4 million | $1,078.0 million | Up 3.2% |
| Gross profit | $376.9 million | $382.4 million | Down 1.4% |
| Gross margin | 33.9% | 35.5% | Down 1.6 percentage points |
| Operating income | $335.7 million | $342.0 million | Down 1.9% |
| Net income attributable to common stockholders | $219.5 million | $228.9 million | Down 4.1% |
| Diluted EPS | $1.34 | $1.33 | Up 0.8% |
| Operating cash flow | $332.2 million | $297.6 million | Up $34.6 million |
Revenue growth included funeral revenue of $649.1 million, up $29.7 million, and cemetery revenue of $463.3 million, up $4.8 million. Funeral comparable average revenue per service increased 5.4% to $5,430, while comparable services performed fell 3.4%. Comparable cremation rate rose 1.3 percentage points to 59.8%.
Funeral gross profit was $196.0 million, compared with $194.4 million; comparable funeral gross profit declined $2.1 million. Cemetery gross profit fell to $180.9 million from $188.1 million; comparable cemetery gross profit declined 5.1%. Management cited higher staffing, service, selling compensation, incentive compensation, and modest inflationary costs as margin pressures.
Cash and cash equivalents were $300.6 million at March 31, 2022. Total debt was $4.03 billion, including $63.9 million of current maturities; the debt-weighted average interest rate was 3.73%, and 78% of debt was fixed rate. SCI reported $736.3 million of available Bank Credit Facility capacity and compliance with debt covenants. Its reported actual leverage ratio was 2.60 against a 4.75 maximum, and interest coverage was 9.84 against a 3.00 minimum.
Capital spending was $56.7 million. Share repurchases totaled $256.4 million, and dividends paid were $40.0 million. The quarterly dividend declared was $0.25 per share. Diluted weighted-average shares decreased to 163.8 million from 172.4 million, helping diluted EPS rise despite lower net income.
Material changes and management commentary
- Revenue increased, but gross profit and operating income declined. Net income was lower, while diluted EPS edged higher primarily as repurchases reduced the share count.
- Operating cash flow improved, supported by increased customer receipts and lower cash taxes and interest, partly offset by higher employee compensation and vendor payments.
- Trust-funded contract liabilities were affected by $201.6 million of net investment losses, compared with $146.2 million of gains in Q1 2021. SCI said its trusts declined 4.1% during the quarter, compared with a 4.6% decline in the S&P 500 and a 5.9% decline in the Barclays Aggregate Index.
- Management said families’ selection of funerals and celebrations had essentially returned to pre-pandemic levels, with demand for more comprehensive memorial services supporting preneed sales and average funeral revenue. SCI noted that the scope and duration of COVID-19 effects remain uncertain.
- Management expects leverage to return to its 3.5–4.0x target range as earnings effects associated with elevated pandemic-period services subside. The filing provides no specific full-year revenue or earnings guidance.
Outlook, risks, contingencies, and unusual items
SCI reported a $13.6 billion backlog of future revenue from trust- and insurance-funded preneed contracts. This is not equivalent to current-period revenue or unrestricted cash; fulfillment timing, investment returns, customer collections, and contract cancellations affect realization. Insurance-funded backlog amounts and related policies are not included on the balance sheet.
Key risks include market declines in affiliated trust investments and possible trust-funding requirements; loss or cancellation of surety capacity; third-party insurer financial condition; debt and covenant limitations; changing cremation preferences and death rates; inflation, staffing and supply-chain pressures; regulation; cybersecurity; and litigation. The company reported $291.0 million in surety bonds outstanding and said it did not expect material future funding needs from lack of surety capacity or surety non-performance.
SCI disclosed wage-and-hour claims, California and Florida claims concerning cremation contract pricing, trust funding and sales practices, and unclaimed-property audits. The company said it could not reasonably estimate potential losses for the matters described. Audits were reported resolved in ten states; matters in other states remain. An adverse outcome could materially affect financial condition, results, or cash flows. Self-insurance reserves were $95.0 million at quarter-end.
Other notable items: interest expense increased $3.2 million to $39.0 million, primarily due to fixed-rate bond issuance in 2021. The effective tax rate rose to 26.0% from 25.3%, partly because negative financial-market returns reduced the cash value of certain life insurance policies and the associated tax benefit. Net gains on divestitures and impairment charges were $0.5 million versus $1.3 million a year earlier.
Important facts for investors to verify
- Whether funeral and cemetery margin declines persist as staffing, service levels, selling compensation, and inflationary costs evolve.
- Trust portfolio performance and the impact of market values, investment gains or losses, and any applicable trust-funding requirements.
- Conversion of the $13.6 billion preneed backlog into recognized revenue and cash, including cancellation, collection, and fulfillment trends.
- Progress and potential exposure in the disclosed litigation and unclaimed-property matters, for which loss estimates were not provided.
- Debt, liquidity, leverage trajectory, and capital returns, particularly given substantial first-quarter repurchases and management’s expected normalization of leverage.