Service Corporation International — Q1 2020 10-Q
Business context and period: North American deathcare provider operating funeral homes and cemeteries. This unaudited report covers the three months ended March 31, 2020, compared with Q1 2019. COVID-19 restrictions and economic disruption affected business activity, particularly in the final weeks of the quarter.
Financial performance and position
| Metric | Q1 2020 | Q1 2019 |
|---|---|---|
| Revenue | $803.0 million | $798.2 million |
| Gross profit; gross margin | $179.0 million; 22.3% | $191.8 million; 24.0% |
| Operating income; operating margin | $151.8 million; 18.9% | $147.0 million; 18.4% |
| Net income attributable to common stockholders | $81.9 million | $79.3 million |
| Diluted EPS | $0.45 | $0.43 |
| Operating cash flow | $180.0 million | $184.9 million |
- Funeral revenue rose 2.5% to $504.9 million; cemetery revenue fell 2.4% to $298.1 million. Cemetery gross profit declined 12.6% to $75.5 million.
- Cash and cash equivalents were $176.3 million at March 31, down from $186.3 million at year-end. Total debt was $3.62 billion, including $85.9 million of current maturities.
- Available Bank Credit Facility capacity was $621 million at quarter-end; after a subsequent $45 million draw, capacity was $576 million. SCI reported compliance with debt covenants. Actual leverage ratio was 3.88 versus a 4.75 maximum; interest coverage was 5.04 versus a 3.00 minimum.
- Capital expenditures were $52.3 million. Operating cash flow less capital expenditures was approximately $127.7 million. Financing cash outflow included $123.1 million of share repurchases and $34.4 million of dividends.
- Reported trust investments at market value declined to $4.33 billion from $5.26 billion at year-end. SCI disclosed $462.4 million of net unrealized trust investment losses; most were offset in the financial statements by interests attributed to contract holders and care-trust corpus.
Changes versus prior year
- Revenue increased 0.6%, but gross profit fell 6.7%, reflecting weaker cemetery results and higher employee, maintenance, and credit-loss expenses.
- Net income attributable to common stockholders increased 3.3%; diluted EPS rose from $0.43 to $0.45, partly reflecting fewer weighted-average shares after repurchases.
- Comparable funeral services performed increased 2.3%; comparable average revenue per service increased 0.2%. The comparable cremation rate rose to 58.2% from 56.9%.
- Comparable cemetery property sales production declined 8.4%, contributing to a 10.0% decline in recognized preneed property revenue.
- Operating cash flow decreased $4.9 million. Corporate G&A was lower, in part because Q1 2019 included an $8.0 million legal reserve; 2020 also included a $4.5 million net gain on divestitures and impairment charges, versus a $1.9 million net loss in 2019.
Outlook, risks, contingencies, and unusual items
- Management said the full scope, severity, and duration of COVID-19’s impact could not be predicted. Preneed sales declined sharply in the last two weeks of March; cemetery property sales were weakened, and gathering restrictions delayed some memorial services and related revenue recognition.
- Management cited potential further declines in preneed sales and revenue, increased installment-contract defaults, market-related losses in trust investments, workforce or supply disruption, and higher operating costs. The filing provides no quantified earnings or revenue guidance.
- The company reported an $11.5 billion preneed backlog at March 31, comprising $5.02 billion of trust-funded deferred revenue and $6.43 billion of insurance-funded revenue. These are future obligations and expected revenue, not current-period cash or recognized revenue.
- SCI repurchased 2.90 million shares for $123.1 million during the quarter and repurchased a further 1.10 million shares for $41.8 million after quarter-end. The quarterly dividend declared was $0.19 per share.
- Adoption of the expected-credit-loss standard increased opening retained earnings by $17.1 million. SCI also recorded a $3.0 million tradename impairment charge; no interim goodwill impairment was deemed necessary.
- Legal and regulatory matters include California allegations involving preneed cremation contracts and trust funding, an Illinois dispute over $13.6 million in perpetual-care trust withdrawals, and unclaimed-property inquiries. SCI said it could not reasonably estimate potential losses for several matters; an adverse decision could materially affect results, financial condition, or cash flows. A separate cemetery practices lawsuit was settled in April for an immaterial amount.
Most important facts for investors to verify
- How COVID-19 restrictions and economic conditions affected subsequent funeral volumes, cemetery sales, service deferrals, and preneed installment collections.
- Whether trust investment values recovered or deteriorated after March 31, and how market changes affect trust funding and future contract obligations.
- Progress and potential financial exposure in the California, Illinois, and unclaimed-property matters, which the filing does not quantify clearly.
- Post-quarter borrowing, liquidity, covenant headroom, and the pace of buybacks and dividends relative to operating cash flow and debt.
- Whether reduced cemetery property sales and pressure on gross margins persisted beyond Q1; the filing gives no numerical forward guidance.