Business context and reporting period
Service Corporation International (SCI), North America’s largest deathcare provider, filed this unaudited Form 10-Q for the quarter and nine months ended September 30, 2021. It operated 1,453 funeral locations and 485 cemeteries. Results compare with the corresponding 2020 periods.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Revenue | $1,034.4m | $918.2m | $3,099.9m | $2,541.2m |
| Gross profit / margin | $333.0m / 32.2% | $263.7m / 28.7% | $979.2m / 31.6% | $661.5m / 26.0% |
| Operating income | $304.3m | $223.2m | $892.2m | $557.3m |
| Net income attributable to common stockholders | $209.9m | $127.4m | $596.4m | $314.9m |
| Diluted EPS | $1.23 | $0.72 | $3.49 | $1.74 |
Revenue increased 12.6% in Q3 and 22.0% year to date. Funeral revenue was $592.3m in Q3 and $1,743.4m year to date; cemetery revenue was $442.1m and $1,356.5m, respectively. Year-to-date cemetery growth was especially strong, including higher recognized preneed property revenue and atneed sales.
Operating cash flow was $730.4m for the first nine months, versus $559.4m in 2020. Investing activities used $180.7m and financing activities used $368.6m. Cash and cash equivalents were $406.9m at September 30, 2021. Long-term debt was $3,760.0m, with total debt of $3,825.8m; the company also had $966.0m of available Bank Credit Facility capacity. The weighted-average debt interest rate was 3.80%; 82% of debt carried fixed rates. SCI reported compliance with debt covenants.
Material changes versus prior comparable periods
- Q3 funeral comparable services performed increased 3.5%; comparable average revenue per service rose 7.6% to $5,406. Year-to-date comparable services increased 6.4% and average revenue per service rose 6.8% to $5,292. Management attributed much of the volume increase to COVID-19-related deaths and noted the prior-year comparison was affected by restrictions on memorial services.
- Comparable cemetery revenue rose 10.6% in Q3 and 30.8% year to date. Higher sales averages, contract velocity, preneed production and trust income contributed.
- Interest expense fell $2.1m in Q3 and $15.0m year to date, primarily reflecting lower floating-rate debt balances and refinancing. Year-to-date early debt-extinguishment losses were $5.2m, compared with $18.4m in 2020.
- Diluted weighted-average shares declined to 170.0m in Q3 and 171.1m year to date, from 178.1m and 180.5m, respectively, primarily due to repurchases.
Outlook, management commentary, risks and unusual items
Management said operating results benefited from increased services performed, improved funeral sales averages, cemetery revenue growth, fewer corporate expenses and lower interest expense. SCI described liquidity as adequate and its debt maturity profile as favorable. It expects leverage to return to its 3.5–4.0x target range as pandemic-related earnings effects subside; no specific revenue or earnings guidance was provided.
SCI reported a $13.3bn preneed revenue backlog at September 30, 2021, including trust-funded and insurance-funded arrangements. Most insurance-funded contract amounts are not recorded on the balance sheet. Trust investment values and returns are exposed to market fluctuations; trust assets and related customer liabilities are substantial and are not equivalent to unrestricted corporate liquidity.
Notable Q3/year-to-date items included $7.8m/$15.2m net gains on divestitures and impairments, an $8.3m cash receipt from a vendor waiver and release agreement, and year-to-date $5.2m of debt-extinguishment losses. The company cited continued COVID-19 uncertainty, market risk in trust investments, potential trust-funding requirements, reliance on surety bonding, higher costs under price-guaranteed preneed contracts, and operational, regulatory, litigation and unclaimed-property risks.
Contingencies include California and Florida lawsuits concerning cremation contract pricing, preneed trust funding and sales practices; wage-and-hour claims; an Illinois claim concerning $13.6m of perpetual-care trust withdrawals; and unclaimed-property audits. SCI stated it could not reasonably estimate potential losses for several matters. The Stewart Enterprises acquisition-related case was considered resolved after dismissal was affirmed and further review denied.
Investor verification points
- Assess how much 2021 earnings and cash flow depended on elevated pandemic-related deaths and whether service volumes and margins normalize.
- Review the composition and market sensitivity of trust investments, preneed backlog funding, and the distinction between trust assets and available corporate cash.
- Track leverage against management’s 3.5–4.0x target and the use of remaining credit capacity, alongside debt maturities and covenant headroom.
- Evaluate the sustainability of share repurchases and dividends relative to operating cash flow, capital expenditure and debt obligations.
- Monitor unresolved litigation, unclaimed-property matters, surety availability and any changes in estimated contingencies.