Service Corporation International — FY2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023. This is an annual report, not a standalone fourth-quarter filing; the supplied text does not provide separate Q4 results.
Business context
SCI is North America’s largest deathcare provider, operating 1,483 funeral service locations and 489 cemeteries across the U.S., Canada, the District of Columbia, and Puerto Rico. It serves customers through atneed services and preneed funeral and cemetery contracts. Its reported preneed backlog was $14.8 billion at year-end, compared with $13.7 billion in 2022.
Financial performance and liquidity
| Metric | 2023 | 2022 |
|---|---|---|
| Total revenue | $4.100 billion | $4.109 billion |
| Gross profit | $1.092 billion | $1.155 billion |
| Operating income | $944.3 million | $927.3 million |
| Net income attributable to common stockholders | $537.3 million | $565.3 million |
| Diluted EPS | $3.53 | $3.53 |
| Operating cash flow | $869.0 million | $825.7 million |
- Gross margin declined to approximately 26.6% from 28.1%; operating margin rose to approximately 23.0% from 22.6%. Net margin was approximately 13.1%, versus 13.8%.
- Funeral revenue fell 1.2% to $2.303 billion, and funeral gross profit declined 8.9% to $497.1 million. Comparable funeral services performed decreased 5.6%, while comparable average revenue per service rose 2.8% to $5,573. Cremation represented 62.9% of comparable services, up from 61.3%.
- Cemetery revenue increased 1.1% to $1.797 billion, but gross profit fell 2.3% to $594.7 million. Higher recognized preneed revenue was partly offset by lower atneed revenue and higher selling, maintenance, and employee costs.
- Interest expense increased $67.3 million to $239.4 million, primarily due to higher floating rates and debt balances. The full-year weighted average rate on floating-rate debt was reported as 7.11% in MD&A; the debt note reports 7.44% for floating-rate debt. Verify the applicable calculation and period in the filing.
- Cash and cash equivalents were $221.6 million. Long-term debt, finance leases, mortgages, and other debt totaled $4.7 billion in aggregate principal; $63.3 million was due within 12 months. Expected future interest payments were $1.2 billion, including $250.9 million due in 2024.
- SCI reported $670.9 million of borrowing capacity under its revolving credit facility and a 3.58x actual leverage ratio against a 5.00x maximum covenant; its stated target is 3.5x–4.0x. The company said it was in compliance with debt covenants.
- Investing cash outflow was $469.4 million; financing cash outflow was $381.1 million. Capital expenditures were $361.8 million. SCI repurchased 8.7 million shares for $549.6 million and paid $168.0 million in dividends.
Changes, outlook, and management commentary
- Revenue decreased slightly year over year; net income declined about 5%, while diluted EPS was unchanged, supported in part by a lower share count. Management attributed weaker operating comparisons mainly to the expected easing of COVID-19-related activity in the prior year.
- Cash from operations increased $43.3 million, primarily reflecting lower cash tax payments, including a tax accounting method change that defers cash taxes into future years. Higher cash interest, lower customer receipts, and increased compensation payments partly offset the increase.
- Trust investments returned 16.3% in 2023, following a negative 11.5% return in 2022. Management cited the large preneed backlog, demographic trends from the aging Baby Boomer generation, technology, customer personalization, and preneed sales as growth opportunities.
- The company states it intends to continue investing in acquisitions and new locations and returning excess cash through dividends and repurchases, subject to opportunities, market conditions, and debt covenants. The filing provides no specific 2024 revenue or earnings guidance.
- Notable prior-year item: 2022 included a $64.6 million pretax estimate for certain legal matters; no corresponding estimate was recorded in 2023. 2023 also included a $9.8 million net gain on divestitures and impairment charges.
Risks and contingencies
- Trust assets are exposed to market losses and inflation; a significant decline could require SCI to fund shortfalls or replenish certain trusts. No delivery-loss charge was required at year-end 2023, and no replenishment was then necessary for reported trust unrealized losses.
- Rising interest rates affect floating-rate debt and cash interest costs. Debt covenants restrict certain borrowing, dividends, and repurchases; a covenant breach could trigger default and acceleration.
- Growth in cremation, which generally has lower average revenue than traditional burial, changing preferences, death-rate variation, and the industry’s high fixed-cost structure may pressure revenue and margins. Inflation, labor, supply-chain, weather, and public-health disruptions are also identified risks.
- SCI faces litigation and regulatory matters, including California allegations concerning preneed cremation contracts and trust funding, and unclaimed-property audits in approximately 40 states. The company says it cannot reasonably estimate the total possible loss, if any, from the unclaimed-property matters. The Florida class action described in the filing was settled and considered resolved.
- If all surety providers canceled or did not renew relevant bonds, SCI estimated it could need to fund approximately $121.9 million into state-mandated trusts. The company also identifies cybersecurity, privacy, insurance-reserve, tax, and potential goodwill-impairment risks. It reported no cybersecurity incident with a material impact.
Important facts for investors to verify
- Reconcile the floating-rate debt weighted-average rate disclosed in MD&A (7.11%) with the debt note (7.44%), and assess sensitivity to rates and scheduled maturities.
- Review the California matter, state unclaimed-property audits, and any subsequent developments or changes to legal reserves and disclosures.
- Assess the quality and sustainability of preneed backlog growth, including trust-funded assets, insurance-funded contracts, cancellations, and the timing of revenue recognition.
- Track funeral volume, cremation mix, average revenue per service, segment margins, and whether cost increases can be offset through pricing and productivity.
- Evaluate ongoing capital allocation—acquisitions, development, dividends, and share repurchases—against leverage, cash generation, and covenant headroom.