Business context and reporting period
Service Corporation International (SCI), North America’s largest deathcare provider, filed this unaudited Form 10-Q for the three months ended March 31, 2021, with comparison to the three months ended March 31, 2020. It operated 1,461 funeral locations and 484 cemeteries. Results include funeral and cemetery operations in the U.S. and Canada.
Financial performance
| Metric | Q1 2021 | Q1 2020 |
|---|---|---|
| Revenue | $1,078.0 million | $803.0 million |
| Gross profit | $377.5 million | $179.0 million |
| Operating income | $342.0 million | $151.8 million |
| Net income attributable to common stockholders | $228.9 million | $81.9 million |
| Diluted EPS | $1.33 | $0.45 |
| Operating cash flow | $297.6 million | $180.0 million |
| Capital expenditures | $42.3 million | $52.3 million |
Gross margin was approximately 35.0%, compared with 22.3% in Q1 2020; operating margin was approximately 31.7%, compared with 18.9%. Interest expense was $35.8 million, down from $44.4 million. The effective tax rate was 25.3%, versus 22.7%.
At March 31, 2021, cash and cash equivalents were $243.7 million. Total debt was $3.656 billion, including $217.1 million of current maturities; long-term debt was $3.439 billion. The weighted-average debt interest rate was 3.66%, and 68% of debt was fixed-rate. SCI reported $521.0 million of available Bank Credit Facility capacity and compliance with debt covenants. Total assets were $14.788 billion and total equity was $1.851 billion.
Financing cash outflows were $243.0 million, including $100.0 million of early debt payments, $106.1 million of common-stock repurchases, and $35.6 million of dividends. The quarterly dividend was $0.21 per share. SCI repurchased 2.14 million shares at an average $49.58 per share during the quarter and repurchased a further 695,722 shares for $36.2 million after quarter-end.
Material changes versus the prior comparable period
- Revenue rose approximately 34%, while net income attributable to common stockholders increased to $228.9 million from $81.9 million. Management attributed the improvement primarily to higher funeral and cemetery gross profit, fewer shares outstanding, and lower interest expense, partly offset by higher taxes.
- Comparable funeral services performed increased 22.2%, primarily reflecting COVID-19-related deaths. Comparable average revenue per funeral service increased 0.4% to $5,142; the comparable cremation rate increased 30 basis points to 58.5%.
- Comparable cemetery revenue increased 53.9%, primarily from a $119.4 million increase in recognized preneed revenue and a $39.5 million increase in atneed revenue.
- Comparable funeral and cemetery gross margins improved to 31.0% and 40.7%, respectively, with management citing revenue growth and a more efficient cost structure.
- Operating cash flow increased $117.6 million year over year. Financing cash use rose by $132.9 million, primarily because of higher net debt payments.
Outlook, management commentary, risks and unusual items
Management said COVID-19 continued to affect operations and that the duration and severity of further effects could not be predicted. It reported strong preneed cemetery sales and increased demand for memorial services as community restrictions eased. SCI cited its $12.9 billion preneed backlog as supporting future revenue and cash-flow predictability, while noting that most preneed revenue is deferred until performance.
Management expects leverage to return to its 3.5–4.0x target range as the earnings effects associated with elevated services during the pandemic subside. No specific full-year revenue or earnings guidance was provided. The company described liquidity as adequate and expects to continue evaluating acquisitions, dividends, repurchases, and debt management, subject to market conditions and covenant restrictions.
Investment returns affected trust-related amounts: recognized preneed trust fund income was $45.0 million versus $32.2 million, and perpetual-care trust income was $20.8 million versus $19.5 million. Trust investment gains and losses are generally offset by corresponding reclassifications to trust-related liabilities or corpus; they should not be treated as ordinary operating earnings without reviewing the accounting detail.
Risks include COVID-19 effects, market volatility in trust investments, possible trust-funding requirements, reliance on surety bonds and third-party insurers, high debt, changing cremation preferences, and litigation or regulatory outcomes. SCI disclosed wage-and-hour and consumer-practices cases, state unclaimed-property audits, and an Illinois claim concerning $13.6 million of perpetual-care trust withdrawals. For several matters, the company said it could not reasonably estimate a possible loss or range of loss. Self-insurance reserves were $97.0 million at quarter-end.
Important facts for investors to verify
- Whether the unusually high funeral volumes and cemetery preneed sales persist as pandemic-related effects change.
- How much reported earnings growth reflects sustainable operating performance versus service volume, trust investment results, and cost efficiencies.
- The composition, funding, cancellation exposure, and realization timing of the $12.9 billion preneed backlog, including insurance-funded contracts not recorded as balance-sheet assets.
- The 2021 senior notes’ $150 million principal due in November 2021, refinancing or repayment plans, and continued covenant headroom.
- Developments in the disclosed California, Florida, unclaimed-property, Illinois trust, and other legal or regulatory matters, for which some potential losses are not estimable.