Service Corporation International — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; comparisons are with the corresponding 2021 periods. SCI is a North American funeral and cemetery operator. At quarter-end it operated 1,459 funeral service locations and 488 cemeteries. The interim financial statements are unaudited.
Financial results
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Revenue | $990.9 million | $987.5 million | $2,103.3 million | $2,065.5 million |
| Gross profit | $266.6 million | $273.3 million | $643.6 million | $655.8 million |
| Operating income | $221.2 million | $245.8 million | $556.9 million | $587.9 million |
| Net income attributable to common stockholders | $132.7 million | $157.7 million | $352.2 million | $386.6 million |
| Diluted EPS | $0.82 | $0.92 | $2.17 | $2.25 |
| Gross margin | 26.9% | 27.7% | 30.6% | 31.7% |
Revenue grew about 0.3% in Q2 and 1.8% in the first half, while earnings declined in both periods. Management attributed the year-over-year earnings decline principally to lower gross profit, higher corporate and administrative costs, interest and taxes, and lower trust fund income; reduced share count and contributions from acquisitions and new builds partly offset the decline.
- Segment trends: Q2 funeral revenue rose 3.2% to $548.8 million, while cemetery revenue fell 3.0% to $442.0 million. For the first half, funeral revenue increased 4.1% to $1,197.9 million and cemetery revenue decreased 1.0% to $905.3 million.
- Funeral operations: Comparable funeral services performed declined 2.0% in Q2 and 2.2% in the first half. Comparable average revenue per service increased 1.8% and 3.7%, respectively. The comparable cremation rate was 61.2% for Q2 and 60.5% for the first half.
- Cemetery operations: Comparable cemetery revenue declined 4.0% in Q2 and 1.9% in the first half. Management cited lower preneed sales and lower trust-related income, including the absence of prior-year capital-gain distributions.
- Cash flow: First-half operating cash flow was $472.9 million versus $489.8 million. Investing used $151.9 million, including $152.4 million of capital expenditures. Financing used $388.0 million, including $360.1 million of share repurchases and $79.6 million of dividends. Cash, cash equivalents and restricted cash totaled $209.7 million at June 30.
- Debt and liquidity: Total debt was $4.02 billion, up from $3.97 billion at December 31, 2021. The weighted-average interest rate was 3.94%; approximately 78% of debt was fixed-rate. SCI reported $726.3 million of available Bank Credit Facility capacity and compliance with debt covenants. Its actual leverage ratio was 2.69 against a 4.75 maximum; interest coverage was 9.54 against a 3.00 minimum.
- Balance sheet and trusts: Total assets were $14.70 billion and total equity was $1.84 billion. Preneed receivables and trust investments were $5.42 billion. Trust investments were exposed to market declines: SCI trusts decreased 14.6% in the first half, compared with a 20.0% decline in the S&P 500 and a 10.4% decline in the Barclays Aggregate Index.
Material changes, outlook and risks
- First-half cash flow from operations decreased $16.9 million year over year. Management cited higher vendor and employee payments and interest, partly offset by higher customer receipts and lower cash taxes.
- SCI reported a $13.3 billion backlog of future revenue from trust- and insurance-funded preneed contracts, compared with $13.7 billion at year-end 2021. The backlog is not equivalent to current-period revenue or freely available cash.
- Management said its leverage had benefited from strong pandemic-period funeral volume and expects leverage to return to its 3.5–4.0x target range as those effects subside. It described liquidity as adequate and cited operating cash flow and credit-facility capacity. No specific revenue or earnings guidance was provided.
- Management noted ongoing COVID-19, inflationary and economic pressures, while reporting that customers were generally choosing pre-pandemic or more comprehensive memorial services. It identified cremation trends, service volumes, pricing and costs as important operating factors.
- Material legal and regulatory matters include California and Florida claims concerning cremation-contract pricing, trust funding and sales practices; a Florida case had a tentative settlement subject to court approval. SCI also described multistate unclaimed-property audits involving preneed contracts; potential losses could not be reasonably estimated. Management warned that adverse outcomes could materially affect results, liquidity or cash flows.
- Other risks include trust investment losses or funding requirements, possible loss of surety-bond capacity, insurance-company performance, litigation, regulation, labor and supply costs, and the company’s substantial indebtedness. SCI said there were no material changes to the risk factors in its 2021 Form 10-K.
Investor verification priorities
- Track whether funeral-service volume and average revenue per service offset continuing cemetery weakness and higher operating costs.
- Review trust-asset performance and the effect of investment returns on trust-related income, deferred balances and future obligations.
- Monitor debt, floating-rate exposure, leverage and available credit capacity as pandemic-related volume effects normalize.
- Assess share repurchases and dividends against cash generation, capital spending and debt priorities; SCI repurchased 5.65 million shares for $360.1 million in the first half.
- Follow developments in the California, Florida and unclaimed-property matters; the filing does not provide a clear estimate of possible losses for several matters.