Service Corporation International — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021. This is an annual report, not a standalone fourth-quarter filing. SCI is North America’s largest deathcare provider, operating 1,471 funeral service locations and 488 cemeteries across the U.S., Canada, Puerto Rico and the District of Columbia.
Financial performance and liquidity
| Metric | 2021 | 2020 | Change |
|---|---|---|---|
| Total revenue | $4.143 billion | $3.512 billion | +18.0% |
| Gross profit | $1.304 billion | $977 million | +33.4% |
| Operating income | $1.191 billion | $843 million | +41.3% |
| Net income attributable to common stockholders | $803 million | $516 million | +55.6% |
| Diluted EPS | $4.72 | $2.88 | +63.9% |
| Cash provided by operating activities | $921 million | $804 million | +$116 million |
Gross margin was approximately 31.5% in 2021 versus 27.8% in 2020; operating margin was approximately 28.7% versus 24.0% (calculated from reported figures). Funeral revenue rose 14.2% to $2.343 billion, while cemetery revenue rose 23.4% to $1.800 billion. Comparable funeral services performed increased 4.4%, and comparable average revenue per service increased 7.1% to $5,337. Cemetery growth reflected strong preneed property sales and higher atneed sales.
At year-end, total debt including finance leases was $3.966 billion, cash and cash equivalents were $269 million, and borrowing capacity under the bank facility was $811 million. The company reported $65 million of current debt maturities and compliance with debt covenants; actual leverage was 2.56x against a 4.75x maximum. Approximately 79% of debt was fixed-rate. Cash flow from operations funded $415 million of investing outflows and $466 million of financing outflows. Financing included $554.6 million of share repurchases and $146.9 million of dividends. The quarterly dividend was $0.23 per share at year-end.
SCI reported a $13.7 billion preneed backlog, up from $12.7 billion in 2020. Trust investments are associated with customer and cemetery obligations and should not be viewed as freely available corporate cash. Current assets of $441 million were below current liabilities of $728 million.
Material changes and unusual items
- Net income increased primarily due to higher funeral and cemetery gross profit and lower interest expense. 2021 results included a $25.2 million net pretax gain on divestitures and impairment charges, a $5.2 million pretax loss on early debt extinguishment, and an $8.3 million vendor settlement receipt.
- COVID-19-related deaths continued to support service volumes in 2021. As restrictions eased, families sought more memorial services, supporting average revenue per service and preneed sales. Management said it cannot predict the pandemic’s future effects.
- The comparable cremation rate rose to 59.3% from 58.6%. SCI said cremations generally generate lower average revenue than traditional burials.
- Trust investment returns were 14.4% in 2021, compared with 15.6% in 2020. Trust investment performance affects funding for future contract fulfillment and cemetery care.
- SCI acquired 30 funeral homes and two cemeteries during 2021, investing $121.4 million. It issued $800 million of 4.0% senior notes due 2031 and repaid or refinanced other debt.
Outlook, risks and contingencies
Management’s strategy is to grow revenue through customer offerings and preneed sales, leverage its scale and technology, and deploy capital to acquisitions, new builds, debt management and shareholder returns. It cited demographic aging, including the Baby Boomer generation, as a long-term opportunity. The filing provides no quantified earnings or revenue guidance. Management expects leverage to rise naturally as earnings become less affected by the pandemic.
Key risks include continued uncertainty from COVID-19, changes in death rates and cremation preferences, inflation and labor or supply-chain pressures, market declines affecting trust assets, debt and covenant constraints, cybersecurity and information-system disruptions, regulation of preneed trusts and sales, and Canadian currency exposure. SCI disclosed litigation involving wage-and-hour claims and allegations concerning cremation-contract pricing, trust funding and sales practices; it said potential losses could not be reasonably estimated. Unclaimed-property audits had been resolved in ten states, while notices had been received from 39 states; potential exposure was also not reasonably estimable. Surety-bond cancellation could require replacement coverage or approximately $135.7 million of trust funding.
The auditor issued an unqualified opinion on the financial statements and internal control over financial reporting. Goodwill impairment testing was identified as a critical audit matter, reflecting judgment involved in projected cash flows and valuation assumptions.
Important facts for investors to verify
- How much of 2021’s elevated service volume and earnings growth is sustainable as pandemic-related effects normalize.
- Whether trust returns, preneed sales and backlog growth adequately offset future fulfillment costs, inflation and cancellation risk.
- Developments and potential financial exposure in the California, Florida and wage-and-hour litigation, and remaining unclaimed-property audits.
- Debt maturities, covenant headroom, capital allocation and the effect of ongoing repurchases and dividends on leverage.
- Goodwill valuation assumptions and the sensitivity of trust investments and earnings to market declines.