SERVICE CORPORATION INTERNATIONAL The Company
We areNorth America's largest provider of deathcare products and services, with a network of funeral service locations and cemeteries unequaled in geographic scale and reach. AtMarch 31, 2023 , we operated 1,480 funeral service locations and 490 cemeteries (including 303 funeral service/cemetery combination locations), which are geographically diversified across 44 states, eight Canadian provinces, theDistrict of Columbia , andPuerto Rico . Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis. We strive to offer families exceptional service in planning life celebrations and personalized remembrances. Our Dignity Memorial® brand serves approximately 600,000 families each year with professionalism, compassion, and attention to detail. Our financial position is enhanced by our$14.0 billion backlog of future revenue from both trust and insurance-funded preneed sales atMarch 31, 2023 . Preneed selling provides us with a strategic opportunity to gain future market share. We also believe it adds to the stability and predictability of our revenue and cash flows. While revenue on the majority of preneed merchandise and service sales is deferred until the time of need, sales of preneed cemetery property provide opportunities for full current revenue recognition to the extent that the property is developed and available for use.
We have adequate liquidity and a favorable debt maturity profile, which allow us to reinvest and grow our business as well as return capital to shareholders through share repurchases and dividends.
Factors affecting our operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed revenue. The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average revenue for cremations is lower than that for traditional burials. To further enhance revenue opportunities, we continue to focus on our cremation customers' preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers. We believe the presentation of these additional merchandise and services through our customer-facing technology improves our customers' experience by reducing administrative burdens and allowing them to visualize the enhanced product and service offerings, which we believe will help drive increases in the average revenue for a cremation in future periods.
Recent Trends
Like most businesses worldwide, COVID-19 is still directly and indirectly impacting various aspects of our business operations; however, we cannot, with certainty, predict the scope, severity, or duration with which COVID-19 will continue to impact our business, financial condition, results of operations, and cash flows. During the past two years, including the first quarter of 2022, our results were positively impacted by the effects of COVID-19 and its variants. While we anticipated our 2023 results would return to pre-pandemic expectations, we continue to see growth in our funeral preneed sales production as well as a positive impact on our average revenue per service. We view this as further evidence that our customers continue to value what our team does best, which is helping our client families gain closure and healing through the process of grieving, remembrance, and celebration.
For further discussion of our key operating metrics, see our " Cash Flow " and " Results of Operations " sections below.
Financial Condition, Liquidity, and Capital Resources
Capital Allocation Considerations
We rely on cash flow from operations as a significant source of liquidity. Our cash flow from operating activities provided$219.6 million in the first three months of 2023. As ofMarch 31, 2023 , we had$976.5 million in remaining borrowing capacity under our Bank Credit Facility.
Our Bank Credit Facility requires us to maintain a certain leverage ratio which
we were in compliance with at
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Our leverage ratio requirement and actual ratio as ofMarch 31, 2023 were as follows: Per Credit Agreement Actual Leverage ratio 5.00 (Max) 3.56
We have the financial strength and flexibility to reward shareholders with dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth.
Our unencumbered cash on hand, future operating cash flows, and the available capacity under our Bank Credit Facilities will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations. Primarily due to cash balances residing inCanada andPuerto Rico as well as minimum captive insurance balance and operating cash requirements, a portion of our cash on hand is encumbered.
We consistently evaluate the best uses of our cash flow that will yield the highest value and return on capital. Our capital allocation strategy is prioritized as follows:
Investing inAcquisitions and Building New Funeral Service and Cemetery Locations. We manage our footprint by focusing on strategic acquisitions and building new funeral service locations where the expected returns are attractive and exceed our weighted average cost of capital by a meaningful margin. We target businesses with favorable customer dynamics and/or where we can achieve additional economies of scale. We continue to pursue strategic acquisitions and build new funeral service locations in areas that provide us with the potential for scale. Managing Debt. We continue to focus on maintaining optimal levels of liquidity and financial flexibility. Our recent$525.0 million increase in our bank credit facility bolsters our flexible capital strategy and allows us to manage our debt maturity profile by making open market debt repurchases when it is opportunistic to do so. We generate a relatively consistent annual cash flow stream that is generally resistant to down economic cycles. This cash flow stream and our significant liquidity allow us to substantially reduce our long-term debt maturities should we choose to do so. InJanuary 2023 , we entered into a new bank credit agreement that consists of a$675.0 million term loan dueJanuary 2028 and a revolving credit facility dueJanuary 2028 providing for borrowings of up to$1.5 billion . Proceeds from this new bank credit agreement were used to settle our existing Term Loan dueMay 2024 and Bank Credit Facility dueMay 2024 . The new bank credit agreement provides us flexibility with incremental liquidity for capital investment, working capital, and other general corporate purposes. Return Excess Cash to Shareholders. Absent strategic acquisition or other higher return opportunities, we intend to return excess cash to shareholders. Our quarterly dividend rate has steadily grown from$0.025 per common share in 2005 to$0.27 per common share in 2023. We target a payout ratio of 30% to 40% of after tax earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenant and final determination by our Board of Directors each quarter upon review of our financial performance.
Cash Flow
Our ability to generate strong operating cash flow is one of our fundamental financial strengths and provides us with substantial flexibility in meeting operating and investing needs.
Operating Activities
Net cash provided by operating activities was$219.6 million and$332.2 million for the three months endedMarch 31, 2023 and 2022, respectively. Cash flow from operations decreased$112.6 million for the three months endedMarch 31, 2023 versus the same period in 2022. This expected decrease in operating cash flow is primarily due to$90.3 million in lower operating income (excluding the impact from divestitures) as the first quarter of 2022 was impacted significantly by the continued effects of the COVID-19 pandemic.
The 2023 decrease in operating cash flows over 2022 comprises:
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Investing Activities
Cash flows from investing activities used $94.9 million and $55.7 million for
the three months ended March 31, 2023 and 2022, respectively. The $39.2 million
increased outflow in 2023 over 2022 is primarily due to the following:
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Financing Activities
Financing activities used
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Financial Assurances
In support of our operations, we have entered into arrangements with certain
surety companies whereby such companies agree to issue surety bonds on our
behalf as financial assurance and/or as required by existing state and local
regulations. The surety bonds are used for various business purposes; however,
the majority of the surety bonds issued and outstanding have been used to
support our preneed sales activities. The obligations underlying these surety
bonds are recorded on our unaudited Condensed Consolidated Balance Sheet as
Deferred revenue, net. The breakdown of surety bonds between funeral and
cemetery preneed arrangements, as well as surety bonds for other activities, is
described below.
March 31, 2023 December 31, 2022
(In millions)
Preneed funeral $ 67.8 $ 68.4
Preneed cemetery:
Merchandise and services 141.3 141.5
Pre-construction 51.7 42.5
Bonds supporting preneed funeral and cemetery obligations 260.8 252.4
Bonds supporting preneed business permits 7.1 7.1
Other bonds 23.9 23.9
Total surety bonds outstanding $ 291.8 $ 283.4
When selling preneed contracts, we may post surety bonds where allowed by state
law. We post the surety bonds in lieu of trusting a certain amount of funds
received from the customer. The amount of the bond posted is generally
determined by the total amount of the preneed contract that would otherwise be
required to be trusted, in accordance with applicable state law.
Surety bond premiums are paid annually and the bonds are automatically renewable
until maturity of the underlying preneed contracts, unless we are given prior
notice of cancellation.
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Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. Management does not expect that we will be required to fund material future amounts related to these surety bonds due to a lack of surety capacity or surety company non-performance.
Preneed Activities and Backlog of Contracts
In addition to selling our products and services to client families at the time of need, we enter into price-guaranteed preneed contracts, which provide for future funeral or cemetery merchandise and services. Because preneed funeral and cemetery merchandise and services will generally not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed contracts be deposited into merchandise and service trusts until the merchandise is delivered or the service is performed. In certain situations, as described above, where permitted by state or provincial laws, we may post a surety bond as financial assurance for a certain amount of the preneed contract in lieu of placing funds into trust accounts. Alternatively, we may sell a life insurance or annuity policy from third-party insurance companies.
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