Service Corporation International — Q3 2022 Form 10-Q
Business context and reporting period. SCI is a North American funeral and cemetery operator, with 1,463 funeral service locations and 488 cemeteries at September 30, 2022. This unaudited filing covers the three and nine months ended September 30, 2022, compared with the same 2021 periods.
Financial performance and position
Amounts below are in U.S. dollars; financial figures are rounded to millions unless otherwise noted.
| Metric | Q3 2022 | Q3 2021 | First 9 months 2022 | First 9 months 2021 |
|---|---|---|---|---|
| Revenue | $977.7 | $1,034.4 | $3,081.0 | $3,099.9 |
| Gross profit / margin | $231.0 / 23.6% | $338.0 / 32.7% | $874.5 / 28.4% | $993.8 / 32.1% |
| Operating income / margin | $203.4 / 20.8% | $304.3 / 29.4% | $760.4 / 24.7% | $892.2 / 28.8% |
| Net income attributable to common stockholders | $120.9 | $209.9 | $473.0 | $596.4 |
| Diluted EPS | $0.76 | $1.23 | $2.93 | $3.49 |
| Operating cash flow | Not separately provided for the quarter | $655.4 | $730.4 |
- Revenue and profit: Q3 revenue declined 5.5%; nine-month revenue declined 0.6%. Net income attributable to common stockholders fell 42.4% in Q3 and 20.7% year to date.
- Cash flow and investment: Nine-month capital expenditures were $252.8 million, up from $177.8 million. Investing activities used $244.2 million; financing activities used $496.6 million.
- Liquidity and debt: Cash and cash equivalents were $168.0 million at September 30, down from $268.6 million at year-end 2021. Total debt was $4.19 billion, versus $3.97 billion; the weighted average interest rate was 3.77%, and about 75% of debt was fixed-rate. SCI reported $551.3 million of unused bank facility capacity and compliance with its debt covenants. Subsequent to quarter-end, facility borrowings increased by $30 million.
- Capital returns: SCI repurchased $586.6 million of shares and paid $118.4 million in dividends during the first nine months. It reported 9.15 million shares repurchased in that period.
- Preneeds and trusts: Backlog of future preneed revenue was $13.32 billion, down from $13.66 billion at year-end 2021. Trust investments at market were affected by negative financial-market returns; combined trust-related contract liability balances reflected $851.9 million of net investment losses in the nine-month period.
Material changes and management commentary
- Management attributed lower earnings primarily to the expected easing of COVID-19-related funeral activity, inflation in employee, energy, maintenance and other costs, higher technology costs, and lower trust fund income. Higher interest expense also weighed on results.
- Q3 comparable funeral services performed declined 8.6% to 85,555, while comparable average revenue per service increased 0.6% to $5,449. The comparable cremation rate rose to 61.4%.
- Q3 comparable funeral gross profit fell to $102.1 million from $169.5 million, and comparable cemetery gross profit fell to $128.3 million from $169.6 million. Nine-month comparable gross profit declined in both segments as well.
- Management said families were generally choosing pre-pandemic or more comprehensive services in 2022, supporting preneed sales and average revenue per funeral service. It also cited acquisitions and new construction as contributors to revenue.
- Management expects leverage to return to its target range of 3.5x–4.0x as pandemic-related earnings effects subside; reported leverage at quarter-end was 3.05x. No specific earnings or revenue guidance was provided in the filing.
Risks, contingencies, and unusual items
- Market declines affect trust investment values and recognized trust income; management noted that SCI trusts declined 17.5% in the first nine months of 2022. The company also identifies possible trust-funding requirements as a risk.
- SCI is involved in litigation and regulatory matters, including wage-and-hour claims, California allegations concerning preneed cremation contracts, and unclaimed-property audits in 39 states. The filing says potential losses in certain matters cannot be reasonably estimated and that adverse outcomes could materially affect financial condition, results, or cash flows. Audits were resolved in 10 states. A Florida class action had a tentative settlement with an immaterial attorney-fee payment and enhanced cancellation rights; court approval was preliminary.
- Self-insurance reserves were $95.2 million. Other disclosed risks include inflation and supply-chain pressures, cremation trends, interest rates and indebtedness, surety-bond availability, cybersecurity and technology disruptions, and changes in death rates.
- Q3 included a $14.4 million net gain on divestitures and impairments. The prior-year quarter included an $8.3 million vendor-waiver cash receipt, which did not recur. Nine-month 2022 results included a $1.2 million loss on early debt extinguishment.
- SCI reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. It reported no material changes to the risk factors in its 2021 Form 10-K.
Important facts for investors to verify
- Whether funeral volumes, cemetery contract velocity, and segment margins stabilize as pandemic-related comparisons recede and inflation persists.
- How trust portfolio performance affects investment income, asset values, and preneed contract obligations.
- Debt, floating-rate exposure, covenant headroom, and progress toward management’s 3.5x–4.0x leverage target.
- Cash generation after capital expenditures and the sustainability of share repurchases and dividends.
- Developments in the California and Florida proceedings and the multistate unclaimed-property audits, including any eventual loss estimates or cash requirements.