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. AtJune 30, 2021 , we operated 1,458 funeral service locations and 485 cemeteries (including 297 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 500,000 families each year with professionalism, compassion, and attention to detail. Our financial position is enhanced by our$13.2 billion backlog of future revenue from both trust and insurance-funded preneed sales atJune 30, 2021 . 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 world-wide, COVID-19 is still 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. In early 2020, the rigorous restrictions placed on gatherings and mandated by state, provincial, and local governments posed a unique challenge for our locations. We quickly implemented technology solutions, including livestreaming on social media, which allowed extended family and friends to virtually participate in the ceremony alongside the immediate family. Atneed funeral directors continue to use virtual meeting platforms as a tool to discuss and plan service details with client families. Our preneed sales teams continue to overcome social distancing obstacles in certain areas of the country by leveraging virtual arrangements with customers who may prefer to purchase cemetery property and merchandise from the safety of their home or setting up outdoor canopies to discuss pre-planning from a safe distance. Although they may face challenges to meet face-to-face, our funeral directors continue to listen, understand, suggest, and plan important details for honoring a loved one's life. By capitalizing on our physical and digital presence in our response to the COVID-19 crisis, we have been able to further leverage our scale. The accelerated use of new technology required to successfully meet customer needs during COVID-19 has provided many advantages and further differentiates us from our competitors. The utilization of new technology is increasing digital sales leads to record levels and producing a more effective and efficient sales model through enhanced use of our customer relationship management platform. In addition, we see an improvement in our relationship with our customers due to a dedicated focus on service excellence and honoring the details of every life we are privileged to serve, as well as enabling a seamless interaction with families through a best-in-class website experience. Our continued focus on service excellence during these trying times has been recognized by families who continue to share their positive experiences publicly across Google, Facebook, and Yelp. Our all-time average review rating has continued to increase through 2021 and directly reflects the efforts of our front-line heroes, who consistently go above and beyond for families. 26Service Corporation International -------------------------------------------------------------------------------- PART I As community restrictions have lifted and vaccine distribution becomes more widespread, we have experienced unprecedented growth in our preneed cemetery sales as well as a significant increase in the number of families who desire memorial services. 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$489.8 million in the first six months of 2021. As ofJune 30, 2021 , we had$966.0 million in remaining borrowing capacity under our Bank Credit Facility. Our Bank Credit Facility requires us to maintain certain leverage and interest coverage ratios. As ofJune 30, 2021 , we were in compliance with all of our debt covenants. Our leverage ratio has recently benefited from the strong earnings associated with the increase in services performed throughout the COVID-19 pandemic; however, as these impacts subside in future years, we expect leverage to return to our 3.5 to 4.0x target leverage range. Our financial covenant requirements and actual ratios as ofJune 30, 2021 were as follows: Per Credit Agreement Actual Leverage ratio 4.75 (Max) 2.49 Interest coverage ratio 3.00 (Min) 9.60 We believe we have the financial strength and flexibility to reward shareholders through share repurchases and dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth. We believe that our unencumbered cash on hand, future operating cash flows, and the available capacity under our bank credit agreement will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations. Due to cash balances residing inCanada and minimum 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 deployment strategy is prioritized as follows: Investing in Acquisitions andBuilding New Funeral Service 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. Paying Dividends. Our quarterly dividend rate has steadily grown from$0.025 per common share in 2005 to$0.21 per common share in 2021. 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 covenants and final determination by our Board of Directors each quarter upon review of our financial performance. Repurchasing Shares. Absent opportunities for strategic acquisitions, we expect to continue to repurchase shares of our common stock in the open market or through privately negotiated transactions, subject to market conditions, debt covenants, and normal trading restrictions. There can be no assurance that we will buy our common stock under our repurchase program in the future. During the six months endedJune 30, 2021 , we repurchased 3,683,396 shares of common stock at an aggregate cost of$187.3 million , which is an average cost per share of$50.85 . DuringMay 2021 , our Board of Directors increased our share repurchase authorization to$500 million . After these repurchases and the increase in our share repurchase authorization, the remaining dollar value of shares authorized to be purchased under the share repurchase program was$460.2 million atJune 30, 2021 . Subsequent toJune 30, 2021 , we repurchased 407,683 shares for$22.5 million at an average cost per share of$55.19 . After these repurchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program is$437.7 million . Managing Debt. We will seek to make open market debt repurchases when it is opportunistic to do so relative to other capital deployment opportunities and manage our near-term debt maturity profile. We have a relatively consistent annual cash flow stream that is generally resistant to down economic cycles. This cash flow stream and our significant liquidity are available to substantially reduce our long-term debt maturities should we choose to do so. FORM 10-Q 27 -------------------------------------------------------------------------------- PART I Cash Flow We believe 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$489.8 million and$364.3 million for the six months endedJune 30, 2021 and 2020, respectively. Cash flow from operations increased$125.5 million for the six months endedJune 30, 2021 versus the same period in 2020. The 2021 increase versus 2020 comprises: •a$378.1 million increase in cash receipts from customers, •a$14.9 million decrease in cash interest payments (the decrease over the prior year is due to the lack of interest payments in 2021 on the 5.375% Senior Notes dueMay 2024 which were redeemed in the second half of 2020), and •a$10.0 million increase inGeneral Agency (GA) and other receipts, partially offset by •a$120.3 million increase in employee compensation payments, •a$100.4 million increase in cash tax payments, •a$34.3 million increase in net trust deposits, and •a$22.5 million increase in vendor and other payments. Investing Activities Cash flows from investing activities used$108.6 million and$152.1 million for the six months endedJune 30, 2021 and 2020, respectively. The$43.5 million decreased outflow from 2021 versus 2020 is primarily due to the following: •a$22.7 million decrease in cash spent on business acquisitions, •a$22.2 million decrease in cash spent on real estate acquisitions, and •a$1.7 million decrease in capital expenditures, partially offset by •a$3.1 million increase in payments for Company-owned life insurance policies, net of proceeds. Financing Activities Financing activities used$176.5 million for the six months endedJune 30, 2021 compared to using$199.7 million for the same period in 2020. The$23.2 million decreased outflow from 2021 versus 2020 is primarily due to: •a$23.4 million decrease in purchase of Company common stock, •a$15.2 million increase in debt proceeds, net of repayments, and •a$1.1 million increase in proceeds from exercises of stock options, partially offset by •a$13.7 million change in bank overdrafts and other, and •a$2.8 million increase in payments of dividends. 28Service Corporation International -------------------------------------------------------------------------------- PART I 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 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. June 30, 2021 December 31, 2020 (In millions) Preneed funeral $ 89.2 $ 94.4 Preneed cemetery: Merchandise and services 147.0 149.4 Pre-construction 23.0 24.2 Bonds supporting preneed funeral and cemetery obligations 259.2 268.0 Bonds supporting preneed business permits 6.7 5.5 Other bonds 20.3 20.7 Total surety bonds outstanding$ 286.2 $ 294.2 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. 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 or 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. Insurance-Funded Preneed Contracts: Where permitted by state or provincial law, we may sell a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. These general agency commissions (GA revenue) are based on a percentage per contract sold and are recognized as funeral revenue when the insurance purchase transaction between the preneed purchaser and third-party insurance provider is completed. All selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred. We do not reflect the unfulfilled insurance-funded preneed contract amounts in our Consolidated Balance Sheet. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenue as we perform these funerals. FORM 10-Q 29 -------------------------------------------------------------------------------- PART I The table below details our results of insurance-funded preneed production and maturities. Three months ended June 30, Six months ended June 30, 2021 2020 2021 2020 (Dollars in millions) Preneed insurance-funded: Sales production(1)$ 180.3
30,436 19,353 54,225 41,448
General agency revenue $ 43.1 $ 87.5
14,608 16,553 33,604 32,473
(1) Amounts are not included in our Consolidated Balance Sheet.
Trust-Funded Preneed Contracts: The funds collected from customers and required
by state or provincial law are deposited into trusts. We retain any funds above
the amounts required to be deposited into trust accounts and use them for
working capital purposes, generally to offset the selling and administrative
costs of our preneed programs. Although this represents cash flow to us, the
associated revenues are deferred until the merchandise is delivered or services
are performed (typically at maturity). The funds in trust are then invested by
professional money managers with oversight by independent trustees in accordance
with state and provincial laws.
The tables below detail our results of preneed production and maturities,
excluding insurance contracts:
Three months ended
June 30, Six months ended June 30,
2021 2020 2021 2020
(Dollars in millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production $ 112.2 $ 79.8 $ 229.3 $ 169.0
Sales production (number of contracts) 28,740 21,677 60,469 44,856
Maturities $ 82.3 $ 71.6 $ 172.9 $ 150.0
Maturities (number of contracts) 19,265 19,445 42,159 39,035
Cemetery:
Sales production:
Preneed $ 359.7 $ 265.2 $ 683.9 $ 459.3
Atneed 112.2 93.8 242.3 178.4
Total sales production $ 471.9 $ 359.0 $ 926.2 $ 637.7
Sales production deferred to backlog:
Preneed $ 150.5 $ 116.8 $ 275.4 $ 211.4
Atneed 79.9 67.0 169.1 129.3
Total sales production deferred to backlog $ 230.4 $ 183.8 $ 444.5 $ 340.7
Revenue recognized from backlog:
Preneed $ 85.3 $ 76.5 $ 170.4 $ 142.4
Atneed 75.7 63.8 157.9 125.6
Total revenue recognized from backlog $ 161.0 Backlog of Preneed Contracts: The following table reflects our backlog of trust-funded deferred preneed contract revenue, including amounts related to Deferred receipts held in trust atJune 30, 2021 andDecember 31, 2020 . Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our Consolidated Balance Sheet) atJune 30, 2021 andDecember 31, 2020 . The backlog amounts presented include amounts due from customers for undelivered performance obligations on cancelable preneed contracts to arrive at our total backlog of deferred revenue. The table does not 30Service Corporation International -------------------------------------------------------------------------------- PART I include the backlog associated with businesses that are held for sale. The table also reflects our preneed receivables and trust investments associated with the backlog of deferred preneed contract revenue, including the amounts due from customers for undelivered performance obligations on cancelable preneed contracts. We believe that the table below is meaningful because it sets forth the aggregate amount of future revenue we expect to recognize as a result of preneed sales, as well as the amount of funds associated with this revenue. Because the future revenue exceeds the assets, future revenue will exceed the cash distributions actually received from the associated trusts and future collections from the customer. June 30, 2021 December 31, 2020 Fair Value Cost Fair Value Cost (In billions) Deferred revenue, net $
1.52
0.68 0.68 0.64 0.64
Deferred receipts held in trust 4.61 3.77 4.27 3.66
Allowance for cancellation on trust investments (0.32) (0.25) (0.29) (0.25)
Backlog of trust-funded deferred revenue, net of estimated allowance for cancellation
6.49 5.72 6.11 5.54
Backlog of insurance-funded revenue (1) 6.72 6.72 6.58 6.58
Total backlog of deferred revenue $
13.21
Preneed receivables, net and trust investments $
5.79
0.68 0.68 0.64 0.64
Allowance for cancellation on trust investments (0.32) (0.25) (0.29) (0.25)
Assets associated with backlog of trust-funded deferred revenue, net of estimated allowance for cancellation
6.15 5.37 5.70 5.12
Insurance policies associated with insurance-funded deferred revenue (1)
6.72 6.72 6.58 6.58
Total assets associated with backlog of preneed revenue
(1) Amounts are not included in our Consolidated Balance Sheet. The fair value of our trust investments was based on a combination of quoted market prices, observable inputs such as interest rates or yield curves, and appraisals. As ofJune 30, 2021 , the difference between the backlog and asset market amounts represents$0.20 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting,$1.13 billion collected from customers that were not required to be deposited into trusts, and$0.18 billion in allowable cash distributions from trust assets partially offset by$1.17 billion in amounts due on delivered property and merchandise. As ofJune 30, 2021 , the fair value of the total backlog comprised$3.74 billion related to cemetery contracts and$9.47 billion related to funeral contracts. As ofJune 30, 2021 , the fair value of the assets associated with the backlog of trust-funded deferred revenue comprised$3.64 billion related to cemetery contracts and$2.51 billion related to funeral contracts. As ofJune 30, 2021 , the backlog of insurance-funded contracts of$6.72 billion was equal to the proceeds we expect to receive from the associated insurance policies. Trust Investments In addition to selling our products and services to client families at the time of need, we enter into price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery merchandise and services. Since preneed funeral and cemetery merchandise or 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 funeral and cemetery contracts be paid into trusts and/or escrow accounts until the merchandise is delivered or the service is performed. Investment earnings associated with the trust investments are expected to mitigate the inflationary costs of providing the preneed funeral and cemetery merchandise and services in the future at the prices that were guaranteed at the time of sale. Also, we are required by state and provincial law to pay a portion of the proceeds from the preneed or atneed sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus generally remains in the trust in perpetuity and the earnings or elected distributions are withdrawn as allowed to defray the expense to maintain the cemetery property. While many states require that net capital gains or losses be retained and added to the corpus, certain states allow the net realized capital gains and losses to be included in the earnings that are distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal. FORM 10-Q 31 -------------------------------------------------------------------------------- PART I Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and service trusts as well as the cemetery perpetual care trusts. The majority of the trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. Most of the trustees engage the same independent investment managers. These trustees, with input from SCI's wholly-owned registered investment advisor, establish an investment policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection. The investments are also governed by state and provincial guidelines. All of the trusts seek to control risk and volatility through a combination of asset classes, investment styles, and a diverse mix of investment managers. Asset allocation is based on the liability structure of each funeral, cemetery, and perpetual care trust. Based on the various criteria set forth in the investment policy, the investment advisor recommends investment managers to the trustees. The primary investment objectives for the funeral and cemetery merchandise and service trusts include 1) preserving capital within acceptable levels of volatility and risk and 2) achieving growth of principal over time sufficient to preserve and increase the purchasing power of the assets. Preneed funeral and cemetery contracts generally take several years to mature; therefore, the funds associated with these contracts are often invested through several market cycles. Where allowed by state and provincial regulations, the cemetery perpetual care trusts' primary investment objectives are growth-oriented to provide for a fixed distribution rate from the trusts' assets, similar to university endowments. Where such distributions are limited to ordinary income, the cemetery perpetual care trusts' investment objectives emphasize providing a steady stream of current investment income with some capital appreciation. Both types of distributions are used to provide for the current and future maintenance and beautification of the cemetery properties. As ofJune 30, 2021 , approximately 89% of our trusts were under the control and custody of three large financial institutions. TheU.S. trustees primarily use four managed limited liability companies (LLCs), one for each merchandise and service trust type and two for the cemetery perpetual care trust type, each with an independent trustee as custodian. Each financial institution acting as trustee manages its allocation of trust assets in accordance with the investment policy through the purchase of the appropriate LLCs' units. For those accounts not eligible for participation in the LLCs or where a particular state's regulations contain other investment restrictions, the trustee utilizes institutional mutual funds that comply with our investment policy or with such state restrictions. TheU.S. trusts include a modest allocation to alternative investments. These alternative investments are held in vehicles structured as LLCs and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective alternative investment LLCs. Investment Structures Each financial institution, acting as trustee, manages its allocation of trust assets in compliance with the investment policy primarily through the purchase of one of four managed LLCs, matched to their trust type and each with a different, independent trustee acting as custodian. The managed LLCs use the following structures for investments: Commingled Funds. These funds allow the trusts to access, at a reduced cost, some of the same investment managers and strategies used elsewhere in the portfolios. Mutual Funds. The trust funds employ institutional share class mutual funds where operationally or economically efficient. These mutual funds are utilized to invest in various asset classes includingU.S. equities, non-U.S. equities, corporate bonds, government bonds, high yield bonds, and commodities, all of which are governed by guidelines outlined in their individual prospectuses. Separately Managed Accounts. To reduce the costs to the investment portfolios, the trusts utilize separately managed accounts where appropriate. Asset Classes Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility. The majority of the fixed income allocation for the trusts is invested in institutional share class mutual funds. Where the trusts have direct investments in individual fixed income securities, these are primarily in government and corporate instruments. Canadian government fixed income securities are investments in Canadian federal and provincial government instruments. In many cases, regulatory restrictions mandate that the funds from the sales of preneed funeral and cemetery contracts sold in certain Canadian jurisdictions must be invested in these instruments. Equity investments have historically provided long-term capital appreciation in excess of inflation. The trusts have direct investments in individual equity securities primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment styles (i.e., growth and value). The majority of the equity allocation is managed by institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, we believe these securities are well-diversified. As ofJune 30, 2021 , the largest single equity position represented less than 1% of the total securities portfolio. 32Service Corporation International -------------------------------------------------------------------------------- PART I Private equity fund investments serve to provide high rates of return with reduced volatility and lower correlation. These investments are typically long term in duration. These investments are diversified by strategy, sector, manager, and vintage year. The investments consist of numerous limited partnerships, including but not limited to private equity, real estate, energy, infrastructure, transportation, distressed debt, and mezzanine financing. The trustees that have oversight of their respective alternative LLCs work closely with the investment advisor in making all investment decisions. Trust Performance During the six months endedJune 30, 2021 , the Standard and Poor's 500 Index increased 15.3% and the Barclay's Aggregate Index decreased 1.6%. This compares to the SCI trusts that increased 10.5% during the same period. SCI trusts have a diversified allocation of approximately 61% equities, 27% fixed income securities, 7% alternative and other investments with the remaining 5% available in cash. Recognized trust fund income (realized and unrealized) related to our preneed trust investments was$88.8 million and$59.2 million , for the six months endedJune 30, 2021 and 2020, respectively. Recognized trust fund income (realized and unrealized) related to our cemetery perpetual care trust investments was$47.8 million and$36.8 million for the six months endedJune 30, 2021 and 2020, respectively. Trust fund income is significantly higher compared to the prior year due to higher investment returns, higher capital gains, and an increase in services performed. SCI, the trustees, and the investment advisor monitor the capital markets and the trusts on an on-going basis. The trustees, with input from the investment advisor, take prudent action as needed to achieve the investment goals and objectives of the trusts. Results of Operations - Three Months EndedJune 30, 2021 and 2020 Three Months EndedJune 30, 2021 and 2020 Management Summary In the second quarter of 2021, we reported consolidated net income attributable to common stockholders of$157.7 million ($0.92 per diluted share) compared to net income attributable to common stockholders in the second quarter of 2020 of$105.5 million ($0.59 per diluted share). These results were impacted by certain significant items including:
Three months ended
2021 2020
(In millions)
Pre-tax gains on divestitures and impairment charges, net $ 6.2 $ 0.7
Pre-tax loss on early extinguishment of debt, net $ (5.2) $ -
Tax effect from significant items $
(0.7)
In addition to the above items, the increase over the prior year quarter can be
attributed to higher gross profit related to strong growth in cemetery
recognized preneed revenue primarily driven by a more productive and efficient
sales force. Our current period results also benefited from fewer shares
outstanding, lower interest expense, and a lower effective tax rate.
FORM 10-Q 33
--------------------------------------------------------------------------------
PART I
Funeral Results
Three months ended June 30,
2021 2020
(Dollars in millions, except average
revenue per service)
Consolidated funeral revenue $ 531.7 $ 480.9
Less: revenue associated with acquisitions/new construction 7.1 3.2
Less: revenue associated with divestitures 0.2 1.5
Comparable(1) funeral revenue 524.4 476.2
Less: comparable recognized preneed revenue 32.8 27.7
Less: comparable general agency and other revenue 39.8 24.6
Adjusted comparable funeral revenue $ 451.8 $ 423.9
Comparable services performed 84,449 89,675
Comparable average revenue per service(2) $
5,350
Consolidated funeral gross profit$ 108.4 $ 116.0 Less: gross profit associated with acquisitions/new construction 1.3 1.2 Less: gross losses associated with divestitures (0.2) (0.2) Comparable(1) funeral gross profit $
107.3
(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginningJanuary 1, 2020 and endingJune 30, 2021 . (2) We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding general agency revenue, recognized preneed revenue, and other revenue to avoid distorting our average of normal funeral services revenue, by the comparable number of services performed during the period. Recognized preneed revenue is preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, net, and excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed. Funeral Revenue Consolidated revenue from funeral operations was$531.7 million for the three months endedJune 30, 2021 compared to$480.9 million for the same period in 2020. This$50.8 million increase is primarily attributable to the$3.9 million increase in revenue contributed by acquired and newly constructed properties and a$48.2 million increase in comparable revenue as described below partially offset by the loss of$1.3 million in revenue contributed by properties that have been subsequently divested. Comparable revenue from funeral operations was$524.4 million for the three months endedJune 30, 2021 compared to$476.2 million for the same period in 2020. This$48.2 million , or 10.1%, increase was primarily attributable a 13.2% increase in the comparable average revenue per funeral service that was offset somewhat by a 5.8% decrease in comparable services performed during the second quarter of 2021 compared to 2020. The decrease in comparable services performed was primarily due to COVID-19 pandemic related deaths in the prior year quarter. Additionally, we experienced a$15.2 million increase in comparable general agency and other revenue and a$5.1 million increase in comparable recognized preneed revenue, as both increases resulted from increases in comparable preneed funeral sales production. Comparable average revenue per funeral service increased$623 , or 13.2% for the three months endedJune 30, 2021 , compared to the same period in 2020. During the second quarter of 2020, the social distancing effects from the pandemic resulted in fewer and smaller memorial funeral services, which negatively impacted our average revenue per funeral service in the prior year quarter. Our total comparable cremation rate increased 20 basis points to 59.1% for the three months endedJune 30, 2021 . Funeral Gross Profit Consolidated funeral gross profit decreased$7.6 million , or 6.6%, for the three months endedJune 30, 2021 compared to 2020. This decrease is primarily attributable to the decrease in comparable funeral gross profit of$7.7 million , or 6.7%. Comparable funeral gross profit decreased$7.7 million to$107.3 million and the comparable gross profit percentage decreased 360 basis points to 20.5%. Funeral gross profit was reduced as staffing and service levels normalized compared to the prior year quarter, driven by our customers desire for more robust remembrances and celebrations. Fixed costs increased due to higher incentive compensation expense and pent up repairs and maintenance expenses. 34Service Corporation International --------------------------------------------------------------------------------
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