Service Corporation International — Q2 2023 Form 10-Q
Reporting period: Three and six months ended June 30, 2023. Unaudited results. SCI is a North American funeral and cemetery operator; at quarter-end it operated 1,488 funeral locations and 491 cemeteries. Management cited a $14.4 billion preneed revenue backlog.
Financial performance
| Metric | Q2 2023 | Q2 2022 | First half 2023 | First half 2022 |
|---|---|---|---|---|
| Revenue | $1.013 billion | $990.9 million | $2.042 billion | $2.103 billion |
| Operating income | $233.5 million | $221.2 million | $479.1 million | $556.9 million |
| Net income attributable to common stockholders | $132.2 million | $132.7 million | $277.0 million | $352.2 million |
| Diluted EPS | $0.86 | $0.82 | $1.80 | $2.17 |
| Gross margin | 25.8% | 26.9% | 27.0% | 30.6% |
| Operating cash flow | Not separately stated | Not separately stated | $363.6 million | $472.9 million |
Q2 revenue rose 2.3%, while operating income increased despite lower gross profit, mainly reflecting lower corporate G&A and higher divestiture gains. Q2 net income was nearly flat; fewer shares outstanding and a lower tax rate offset higher interest expense. First-half revenue fell 2.9% and common-stockholder net income fell 21.4%, reflecting lower funeral and cemetery gross profit as pandemic-related activity normalized, inflationary costs, and higher interest expense.
Q2 funeral revenue increased to $565.4 million; comparable funeral services performed declined 2.4%, while comparable average revenue per service increased 3.2%. Cemetery revenue increased to $448.0 million, but cemetery gross profit declined 2.7%. For the first half, funeral and cemetery gross profit fell 15.2% and 13.7%, respectively. First-half comparable funeral volume declined 7.7% and comparable cemetery revenue declined 4.4%.
Balance sheet, debt and capital
- June 30 cash and cash equivalents were $172.5 million, versus $191.9 million at year-end 2022. Current assets were $322.9 million and current liabilities $688.3 million.
- Total debt was $4.514 billion, up from $4.342 billion at year-end; long-term debt was $4.452 billion. Approximately 71% of debt carried fixed rates. The reported total debt interest rate was 5.14%, compared with 4.00% at year-end; floating-rate debt was 7.20%.
- SCI refinanced its bank agreement in January, extending the revolving facility and term loan to January 2028. It reported $861.5 million of borrowing capacity, compliance with debt covenants, and actual leverage of 3.60x against a 5.00x maximum. Management targets leverage of 3.5x–4.0x.
- First-half capital expenditures were $177.0 million; acquisitions and real estate acquisitions used $39.4 million and $17.4 million, respectively. Financing included $252.1 million of share repurchases and $82.0 million of dividends. The quarterly dividend was $0.27 per share.
Cash flow, outlook and risks
First-half operating cash flow declined $109.2 million year over year, with management attributing the decrease largely to weaker operating results versus the pandemic-affected 2022 period, higher cash interest and compensation payments, and lower customer receipts. Investing activities used $211.1 million; financing activities used $181.6 million. Cash, cash equivalents and restricted cash totaled $176.8 million at June 30.
The filing gives no numerical earnings or revenue guidance. Management described liquidity as adequate and emphasized acquisition and construction opportunities, debt management, and shareholder returns, subject to covenant limits and Board approval. It targets a dividend payout ratio of 30%–40% of after-tax earnings excluding special items.
Key risks include inflation and labor costs, interest-rate and market volatility affecting trust assets, cremation trends, changes in death rates, dependence on surety capacity and third-party insurers, cybersecurity and operational disruptions, and litigation or regulation. SCI could not reasonably estimate potential losses for certain California wage-and-hour claims and multistate unclaimed-property audits involving preneed trust funds; adverse outcomes could materially affect liquidity, results, or cash flows. The company reported those audits involved 39 states and that ten states were resolved. Self-insurance reserves were $102.1 million.
Notable items included $7.6 million of first-half net gains on divestitures and impairment charges, $1.1 million of debt-extinguishment losses, and $33.8 million higher first-half interest expense year over year. Management cited continued COVID-19 effects but said the unusually high pandemic-related activity had contributed to prior-year comparisons. Disclosure controls were assessed as effective; no material change in internal control was reported.
Investor verification priorities
- Track funeral and cemetery volumes, average revenue per service, and gross margins as pandemic comparisons and inflation continue to affect results.
- Assess floating-rate exposure, refinancing benefits, debt levels, leverage and available revolver capacity.
- Review trust-asset market performance, liquidity restrictions, and the relationship between the $14.4 billion backlog and associated assets; trust assets are not equivalent to unrestricted corporate cash.
- Monitor outcomes and potential financial exposure from unclaimed-property audits, California matters, and other litigation for which loss estimates are unavailable.
- Compare capital allocation—repurchases, dividends, acquisitions and investment spending—with operating cash generation.