Service Corporation International — Q1 2024 Form 10-Q
Business and period: North American deathcare provider operating funeral homes and cemeteries. This unaudited filing covers the three months ended March 31, 2024, compared with Q1 2023. SCI operated 1,485 funeral locations and 490 cemeteries. Management reported a $15.2 billion preneed backlog, including trust- and insurance-funded contracts.
Financial performance
| Metric | Q1 2024 | Q1 2023 |
|---|---|---|
| Total revenue | $1.045 billion | $1.029 billion |
| Gross profit | $274.2 million | $289.1 million |
| Operating income | $232.2 million | $245.6 million |
| Net income attributable to common stockholders | $131.3 million | $144.8 million |
| Diluted EPS | $0.89 | $0.93 |
| Operating cash flow | $220.1 million | $219.6 million |
Revenue increased 1.6%, while gross profit fell 5.1%; gross margin was approximately 26.2%, versus 28.1% a year earlier. Operating margin was approximately 22.2%, versus 23.9%. Net income declined about 9%; fewer diluted shares outstanding partly offset lower earnings per share.
- Revenue mix: Funeral revenue was $604.7 million, down from $609.7 million. Cemetery revenue rose to $440.6 million from $419.0 million, primarily on higher recognized preneed revenue.
- Funeral trends: Comparable funeral services performed fell 2.8% to 93,341; comparable average revenue per service increased 4.0% to $5,619. Comparable funeral gross profit declined 12.2% to $131.2 million, with margin falling to 21.9% from 24.6%. Management cited lower revenue and higher incentive compensation costs.
- Cemetery trends: Comparable cemetery revenue rose 5.0% to $439.8 million, while comparable gross profit increased to $142.5 million. Comparable gross margin slipped to 32.4% from 33.4%, primarily due to higher incentive compensation.
- Interest and taxes: Interest expense increased $10.4 million to $64.4 million, mainly reflecting higher interest and a greater balance of floating-rate debt. The effective tax rate declined to 22.9% from 24.5%, primarily because of excess tax benefits on share-based awards.
Cash, debt and capital allocation
Cash and cash equivalents were $205.6 million at March 31, 2024, down from $221.6 million at year-end. Operating cash flow was nearly flat year over year. Investing used $96.8 million, including $79.8 million of capital expenditures; financing used $134.0 million. SCI paid $43.9 million in dividends and repurchased $49.5 million of stock during the quarter.
Total debt was $4.68 billion, including $63.4 million of current maturities. Approximately 69% of debt was fixed-rate; the reported total debt rate was 5.29%. The company drew $115 million on its revolving credit facility and made $150 million of early repayments on that facility. It reported $706 million of remaining facility borrowing capacity, compliance with debt covenants, and a 3.59x actual leverage ratio versus a 5.00x maximum covenant. Management targets leverage of 3.5x–4.0x and stated it believes liquidity is adequate. The filing provides no specific earnings or revenue guidance.
Management commentary, risks and contingencies
- Management described preneed sales as supporting future revenue and cash-flow predictability. Preneed production and revenue recognition depend on contract maturities, delivery, and cemetery property availability.
- Trust investments increased in value during the quarter; SCI trusts returned 5.6%, compared with a 10.6% gain in the S&P 500. Trust assets are subject to market risk and are not equivalent to unrestricted corporate liquidity.
- The California cremation-contract matter has a proposed settlement including $23 million in civil penalties and certain customer refund rights. It becomes final and effective following court entry of judgment; SCI said its reserve is sufficient and the settlement contains no admission of wrongdoing.
- Unclaimed-property audits involving preneed trust funds remain unresolved in some states. SCI said it cannot reasonably estimate any total possible loss; an adverse outcome could materially affect liquidity, cash flows, or results. The company reported certain state audits resolved and a Florida agreement addressing escheatment of principal.
- SCI reported $106.2 million in self-insurance reserves. Other disclosed risks include trust investment volatility and possible funding requirements, inflation, debt and interest-rate exposure, litigation and regulation, surety-bond availability, changing cremation preferences, and cybersecurity and operational risks.
Important facts for investors to verify
- Whether funeral volume and funeral gross-profit pressure persist, and whether cemetery growth continues to offset it.
- Floating-rate debt exposure, interest costs, leverage, and remaining revolving-credit availability.
- Trust investment performance, preneed contract production and maturities, and the composition and collectability of the reported $15.2 billion backlog.
- Final court approval and implementation of the California settlement, and developments in unresolved unclaimed-property matters.
- Capital spending, acquisitions, dividends, and repurchases relative to operating cash generation and debt reduction.