Service Corporation International — Q3 2023 Form 10-Q
Reporting period: Three and nine months ended September 30, 2023. Figures below are unaudited. SCI is a North American funeral and cemetery operator with 1,486 funeral locations and 489 cemeteries. Management cited a $14.4 billion preneed revenue backlog at quarter-end.
Financial performance
- Third quarter: Revenue was $1.002 billion, up 2.5% year over year. Gross profit was $253.7 million, up 9.8%; gross margin was approximately 25.3%, versus 23.6%. Operating income rose to $223.0 million from $203.4 million. Net income attributable to common stockholders was $122.0 million versus $120.9 million; diluted EPS increased to $0.80 from $0.76.
- First nine months: Revenue was $3.044 billion, down 1.2%. Gross profit declined 8.0% to $804.2 million, and gross margin was approximately 26.4%, versus 28.4%. Operating income decreased to $702.1 million from $760.4 million. Net income attributable to common stockholders fell to $398.9 million from $473.0 million; diluted EPS was $2.60 versus $2.93.
- Operating drivers: Q3 cemetery revenue and gross profit increased, supported by higher recognized preneed revenue, completed construction projects and trust income. Funeral gross profit also improved in Q3, with lower fixed and incentive compensation costs. For the nine months, lower funeral volume and cemetery revenue, higher selling costs, and higher property and merchandise costs pressured results. Comparable funeral services performed declined 7.3% for the nine-month period, while average revenue per service rose 3.6%.
- Interest and taxes: Interest expense rose to $61.5 million in Q3 from $43.5 million and to $174.9 million for nine months from $123.1 million, primarily due to higher floating-rate borrowing costs. The nine-month effective tax rate was 24.5%, versus 25.2%.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $591.5 million, down from $655.4 million. Capital expenditures were $267.8 million; acquisitions used $72.5 million and real estate acquisitions $41.1 million. Cash and cash equivalents were $172.7 million at September 30, 2023, versus $191.9 million at year-end 2022.
- Total debt was $4.574 billion, up from $4.342 billion at December 31, 2022. Approximately 70% was fixed-rate. The total debt interest rate was 5.23%, compared with 4.00% at year-end. SCI reported $800.9 million available under its revolving facility and a 3.54x actual leverage ratio against a 5.00x maximum covenant; it said it was covenant-compliant.
- SCI repurchased 5.13 million shares for $343.2 million in the first nine months and paid $125.5 million in dividends. After quarter-end, it repurchased a further 1.80 million shares for $99.0 million.
- Preneed receivables and trust investments were $5.83 billion. Trust assets and related obligations are subject to legal and regulatory restrictions and should not be viewed as unrestricted corporate liquidity.
Outlook, risks and unusual items
- The filing provides no specific quantitative earnings or revenue guidance. Management described liquidity as adequate, targets leverage of 3.5x–4.0x, and expects to continue balancing acquisitions, debt management and shareholder returns. It noted cremation trends, death rates, pricing, cost control and customer preferences as important operating factors.
- Management attributed the nine-month earnings decline largely to the expected normalization of COVID-19-related activity, alongside higher interest expense. Q3 results benefited from improved cemetery performance and lower incentive compensation costs.
- Unclaimed-property audits involving preneed trust funds remain a potentially material uncertainty. SCI resolved matters in ten states and reached a Florida agreement under which it retains trust earnings but remits principal. The company said it could not reasonably estimate total potential losses; an adverse outcome could materially affect liquidity, cash flow and results.
- Other disclosed exposures include wage-and-hour and operational litigation, self-insurance reserves of $102.8 million, market fluctuations in trust investments, inflation, and possible limits on surety bonding. SCI said the California cremation-contract dispute remained in settlement discussions; the Florida class action settlement was approved and its impact was not material.
- The January 2023 refinancing replaced credit facilities due in 2024 with a $2.175 billion agreement due in 2028. Subsequent to quarter-end, borrowings under the revolver increased by $45 million.
Most important facts for investors to verify
- Whether funeral volume and cemetery trends continue to normalize, and whether pricing and higher average revenue offset lower service volumes.
- How floating-rate debt costs affect interest expense, leverage and cash generation, particularly as debt increased year over year.
- Any developments in state unclaimed-property audits, including potential principal remittances, retained trust earnings and possible loss estimates.
- Whether the reported $14.4 billion preneed backlog converts into revenue and cash flow as expected, recognizing that much of it is future performance obligations and includes insurance-funded contracts.
- Capital allocation after substantial repurchases and dividends, including covenant capacity and remaining authorization for buybacks.