Service Corporation International — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are with the three months ended March 31, 2022. SCI operates funeral homes and cemeteries in the U.S. and Canada. Financial statement amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Total revenue | $1,028.7 | $1,112.4 | Down $83.7 (7.5%) |
| Gross profit | $289.1 | $376.9 | Down $87.8 |
| Operating income | $245.6 | $335.7 | Down $90.1 |
| Net income attributable to common stockholders | $144.8 | $219.5 | Down $74.8 |
| Diluted EPS | $0.93 | $1.34 | Down $0.41 |
| Cash from operating activities | $219.6 | $332.2 | Down $112.6 |
| Capital expenditures | $77.9 | $56.7 | Up $21.2 |
Consolidated gross margin was approximately 28.1%, compared with 33.9% in Q1 2022, based on reported revenue and gross profit. Funeral gross profit was $149.5 million (down 23.7%); cemetery gross profit was $139.6 million (down $41.3 million). Interest expense rose $14.9 million to $53.9 million, primarily reflecting higher rates on floating-rate debt. The effective tax rate declined to 24.5% from 26.0%.
Liquidity, debt, and capital allocation
- At March 31, 2023, cash and cash equivalents were $157.8 million; cash, cash equivalents, and restricted cash totaled $166.1 million. Current assets were $326.1 million and current liabilities were $767.4 million.
- Total debt was $4.399 billion, including $71.4 million of current maturities. About 71% of debt had fixed rates. Weighted-average interest rates were 4.93% overall and 6.45% on floating-rate debt.
- SCI replaced its May 2024 credit agreement in January with a $2.175 billion facility due January 2028, comprising a $1.5 billion revolver and a $675 million term loan. Remaining revolver capacity at quarter-end was $976.5 million; the company reported compliance with its debt covenants and an actual leverage ratio of 3.56 against a 5.00 maximum.
- After quarter-end, SCI borrowed another $75 million under the revolver. It repurchased 2.43 million shares for $167.3 million during the quarter and paid $41.2 million in dividends. The quarterly dividend was $0.27 per share.
- SCI reported a $14.0 billion preneed revenue backlog, including insurance-funded contracts that are not recorded on the balance sheet. Trust assets and related customer obligations are subject to legal restrictions and should not be treated as freely available corporate liquidity.
Material changes and management commentary
- Management attributed weaker year-over-year results primarily to the expected decline from elevated COVID-19-related activity in Q1 2022. Comparable funeral services performed fell 10.5%; comparable average revenue per service rose 1.0% to $5,449. The comparable cremation rate increased 240 basis points to 62.5%.
- Comparable funeral revenue fell 7.1% and comparable funeral gross profit fell $48.0 million; management cited lower volume and higher selling costs related to increased preneed insurance sales. Comparable cemetery revenue declined 9.7%, reflecting lower recognized preneed and atneed revenue, while cemetery gross profit was also pressured by higher maintenance costs.
- Operating cash flow was lower partly because of reduced customer receipts and increased vendor, employee compensation, interest, and tax payments. Investing outflows increased with higher capital spending and real estate and business acquisitions.
- Management described liquidity as adequate and said it intends to pursue strategic acquisitions and construction where returns are attractive, manage debt, and return excess cash through dividends and, absent higher-return opportunities, repurchases. The filing provides no specific full-year earnings or revenue guidance.
Risks, contingencies, and unusual items
- SCI reported a $1.1 million loss on early extinguishment of debt. Trust investment income was lower year over year: preneed trust income was $36.0 million versus $45.9 million, and cemetery perpetual-care trust income was $22.0 million versus $24.4 million.
- SCI is defending California and Florida matters involving cremation contract pricing, preneed trust funding, and sales practices. The Florida class action settlement provides enhanced cancellation rights and an immaterial attorneys’ fee payment; its claims process was underway. SCI said a possible loss in the California matter could not be reasonably estimated, and settlement discussions may or may not succeed.
- Unclaimed-property auditors in 39 states have asserted that certain preneed funds may be escheatable. SCI reported resolutions with no additional property due in 10 states, but said potential losses overall could not be reasonably estimated and an adverse decision could materially affect liquidity, cash flows, or results.
- Other cited risks include investment-market fluctuations and possible trust-funding requirements, inflation, interest rates and indebtedness, surety-bond availability, insurance-provider financial condition, rising cremation trends, litigation and regulation, and operational, technology, supply-chain, and public-health disruptions.
Key facts investors should verify
- Whether funeral volumes and cemetery revenue continue to normalize from the pandemic-influenced prior-year comparison, and whether pricing offsets higher cremation mix and operating costs.
- How higher floating rates, subsequent revolver borrowing, debt maturities, and covenant limits affect interest expense and financial flexibility.
- Whether operating cash flow and capital spending support dividends, repurchases, and planned growth investments without weakening liquidity.
- Developments and any quantified exposure in the California litigation and state unclaimed-property audits; the filing does not provide clear loss estimates for these matters.
- Trust investment performance, preneed backlog conversion and cancellations, and the distinction between trust assets, associated obligations, and corporate cash available for use.