SERVICE CORP INTERNATIONAL - Quarter Report: 2024 March (Form 10-Q)

$ Costs of revenue)())())())() )()) )() () )() () $ $ Diluted earnings per share: $

(See notes to unaudited condensed consolidated financial statements)

FORM 10-Q 5

PART I

Service Corporation International

Condensed Consolidated Statement of Comprehensive Income (Unaudited)

)


	2023
			$
Other comprehensive income:



		()
			$

(See notes to unaudited condensed consolidated financial statements)

6 Service Corporation International

PART I

Service Corporation International

Condensed Consolidated Balance Sheet (Unaudited)

March 31, 2024

December 31, 2023

(In thousands, except share amounts)

ASSETS

Current assets:

Cash and cash equivalents

Receivables, net of reserves of $ and $, respectively

Inventories

Income tax receivable

Other

Total current assets

Preneed receivables, net of reserves of $ and $, respectively, and trust investments

Cemetery property

Property and equipment, net

Goodwill

Deferred charges and other assets, net of reserves of $ and $, respectively

Cemetery perpetual care trust investments

Total assets

LIABILITIES & EQUITY

Current liabilities:

Accounts payable and accrued liabilities

Current maturities of long-term debt

Total current liabilities

Long-term debt

Deferred revenue, net

Deferred tax liability

Other liabilities

Deferred receipts held in trust

Care trusts’ corpus

Commitments and contingencies (Note 9)

per share par value, shares authorized, and shares issued, respectively, and and shares outstanding, respectively

Capital in excess of par value

Retained earnings

Accumulated other comprehensive income

Total common stockholders’ equity

Noncontrolling interests

Total equity

Total liabilities and equity

(See notes to unaudited condensed consolidated financial statements)

FORM 10-Q 7

PART I

Service Corporation International

Condensed Consolidated Statement of Cash Flows (Unaudited)


	Three months ended March 31,
	2024	2023
	(In thousands)
Cash flows from operating activities:
Net income	$	$
Adjustments to reconcile net income to net cash provided by operating activities:

Loss on early extinguishment of debt

Depreciation and amortization
Amortization of intangibles
Amortization of cemetery property
Amortization of loan costs
Provision for expected credit losses
Provision for (benefit from) deferred income taxes		()
Losses (gains) on divestitures and impairment charges, net		()

Share-based compensation

Change in assets and liabilities, net of effects from acquisitions and divestitures:
Decrease in receivables
Decrease (increase) in other assets		()
(Decrease) increase in payables and other liabilities	()
Effect of preneed sales production and maturities:
Increase in preneed receivables, net and trust investments	()	()
Increase in deferred revenue, net
Increase in deferred receipts held in trust



Net cash provided by operating activities
Cash flows from investing activities:
Capital expenditures	()	()
Business acquisitions, net of cash acquired	()	()
Real estate acquisitions	()	()
Proceeds from divestitures and sales of property and equipment

Payments for Company-owned life insurance policies	()	()




Net cash used in investing activities	()	()
Cash flows from financing activities:
Proceeds from issuance of long-term debt
Debt issuance costs		()
Scheduled payments of debt	()	()
Early payments and extinguishment of debt	()	()
Principal payments on finance leases	()	()
Proceeds from exercise of stock options

Purchase of Company common stock	()	()
Payments of dividends	()	()

Bank overdrafts and other	()	()

Net cash used in financing activities	()	()


Effect of foreign currency	()
Net decrease in cash, cash equivalents, and restricted cash	()	()
Cash, cash equivalents, and restricted cash at beginning of period
Cash, cash equivalents, and restricted cash at end of period	$	$

(See notes to unaudited condensed consolidated financial statements)

8 Service Corporation International

PART I

Service Corporation International

Condensed Consolidated Statement of Equity (Unaudited)

Common
Stock

Treasury
Stock,
Par Value

Capital in
Excess of
Par Value

Retained
Earnings

Accumulated Other
Comprehensive
Income

Noncontrolling
Interest

Total

(In thousands, except per share amounts)

Balance at December 31, 2022

()

Comprehensive income

Dividends declared on common stock ($ per share)

()

Employee share-based compensation earned

Stock option exercises

Restricted stock awards, net of forfeitures

()

Purchase of Company common stock

()

Noncontrolling interest payments

()

Other

()

Balance at March 31, 2023

()

Common
Stock

Treasury
Stock,
Par Value

Capital in
Excess of
Par Value

Retained
Earnings

Accumulated Other
Comprehensive
Income

Noncontrolling
Interest

Total

(In thousands, except per share amounts)

Balance at December 31, 2023

()

Comprehensive income

()

Dividends declared on common stock ($ per share)

()

Employee share-based compensation earned

Stock option exercises

Restricted stock awards, net of forfeitures

()

Purchase of Company common stock

()

Other

()

Balance at March 31, 2024

()

$ $ $()

At March 31, 2024, the amortized cost basis of our miscellaneous and notes receivables by year of origination was as follows:


	2024	2023	2022	2021	2020	Prior	Revolving Line of Credit	Total
	(In thousands)
Miscellaneous receivables:
Current	$	$	$	$	$	$	$	$
Long-term
Total miscellaneous receivables	$	$	$	$	$	$	$	$

Notes receivable	$	$	$	$	$	$	$	$

At March 31, 2024, the payment status of our miscellaneous and notes receivables was as follows:

Past Due

<30 Days

30-90 Days

90-180 Days

>180 Days

Total

Current

Total

(In thousands)

Miscellaneous receivables:

Current

Long-term

Total miscellaneous receivables

Notes receivable

12 Service Corporation International

PART I

$ Trust investments, at market Insurance-backed fixed income securities and other Trust investments Less: Cemetery perpetual care trust investments()()Preneed trust investments Preneed receivables, net and trust investments$ $

FORM 10-Q 13

PART I

$ $ Unearned finance charges()()()Preneed receivables, at amortized cost Reserve for credit losses ()()()Preneed receivables, net$ $ $ December 31, 2023FuneralCemeteryTotal (In thousands)Preneed receivables$ $ $ Unearned finance charges()()()Preneed receivables, at amortized cost Reserve for credit losses()()()Preneed receivables, net$ $ $

At March 31, 2024, the amortized cost basis of our preneed receivables by year of origination was as follows:

()

(1)All realized gains and losses are recognized in Other income, net for our trust investments and are offset by a corresponding reclassification in Other income, net to Deferred receipts held in trust and Care trusts’ corpus.

FORM 10-Q 15

PART I

$ $()$ Canadian government2 Corporate2 () Residential mortgage-backed2 () Asset-backed2 () Equity securities: Preferred stock2 () Common stock: United States1 () Canada1 () Other international1 () Mutual funds: Equity1 () Fixed income1 () Trust investments, at fair value () Commingled fundsFixed income () Equity () Money market funds Alternative investments () Trust investments, at net asset value () Trust investments, at market$ $ $()$

16 Service Corporation International

PART I

Our alternative investments include funds invested in limited partnerships with interests in private equity, private market real estate, energy and natural resources, infrastructure, transportation, and private debt including both distressed debt and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds. The funds' managers have not communicated the timing of any liquidations.

to . Maturities of fixed income securities (excluding mutual and commingled funds) at March 31, 2024 are estimated as follows:


			Fair Value
			(In thousands)
Due in one year or less			$
Due in one to five years
Due in five to ten years
Thereafter
Total estimated maturities of fixed income securities			$

Recognized trust fund income (realized and unrealized) related to our preneed trust investments was $ million and $ million for the three months ended March 31, 2024 and 2023, respectively. Recognized trust fund income (realized and unrealized) related to our cemetery perpetual care trust investments was $ million and $ million for the three months ended March 31, 2024 and 2023, respectively.

FORM 10-Q 17

PART I

$ Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts()()Deferred revenue, net$ $ $ Net preneed contract sales Acquisitions (dispositions) of businesses, net

Net investment gains (losses)(1)

Recognized revenue from backlog(2)

()()Recognized revenue from current period sales()()Change in amounts due on unfulfilled performance obligations()()Change in cancellation reserve() Effect of foreign currency and other()()

Ending balance — Deferred revenue, net and Deferred receipts held in trust

$ $

(1)Includes both realized and unrealized investment gains (losses)

18 Service Corporation International

PART II

% and % for the three months ended March 31, 2024 and 2023, respectively. The lower effective tax rate for the three months ended March 31, 2024 was primarily due to an increase in excess tax benefits recognized on the settlement of employee share-based awards, which decreased tax expense during the quarter. The effective tax rate for the three months ended March 31, 2024 was higher than the federal statutory tax rate of % primarily due to state tax expense.

Unrecognized Tax Benefits

As of March 31, 2024, the total amount of our unrecognized tax benefits was $ million and the total amount of our accrued interest was approximately $ million.

million within the next twelve months as a result of concluding various state tax matters.

$ 4.625% Senior Notes due December 2027 5.125% Senior Notes due June 2029 3.375% Senior Notes due August 2030 4.0% Senior Notes due May 2031 Term Loan due January 2028 Bank Credit Facility due January 2028 Obligations under finance leases Mortgage notes and other debt, maturities through 2050 Unamortized debt issuance costs()()Total debt Less: Current maturities of long-term debt()()Total long-term debt$ $

Current maturities of debt at March 31, 2024 include amounts due under our term loan, mortgage notes and other debt, and finance lease payments due within the next year as well as the portion of unamortized debt issuance costs expected to be recognized in the next twelve months.

Approximately, % of our total debt had a fixed interest rate at March 31, 2024 and December 31, 2023, respectively.

The components of our interest rate are as follows:


	March 31, 2024		December 31, 2023
Fixed Debt		%		%
Floating Debt		%		%
Total Debt		%		%

During the three months ended March 31, 2024 and 2023, we paid $ million and $ million in cash interest, respectively.

FORM 10-Q 19

PART I

million of letters of credit outstanding and pay a quarterly fee on the unused commitment of % at March 31, 2024. As of March 31, 2024, we had $ million in borrowing capacity under the Bank Credit Facility. The Bank Credit Facility had an interest rate of % and % at March 31, 2024 and December 31, 2023, respectively.

Debt Issuances and Additions

During the three months ended March 31, 2024, we drew $ million on our Bank Credit Facility due January 2028 for general corporate purposes.

During the three months ended March 31, 2023, we issued or added $ million of debt including:

•$ million in proceeds from certain members of the syndicate of banks in our Term Loan;

•$ million on our Bank Credit Facility due January 2028;

•$ million in proceeds from certain members of the syndicate of banks in our Bank Credit Facility;

•$ million on our Bank Credit Facility due May 2024; and

•$ million in other debt.

Net proceeds from newly issued debt during the three months ended March 31, 2023 were used to pay off our Bank Credit Facility due May 2024 and Term Loan due May 2024, and for general corporate purposes. These transactions resulted in additional debt issuance costs of $ million.

Debt Extinguishments and Reductions

During the three months ended March 31, 2024, we made aggregate debt payments of $ million for scheduled and early debt extinguishment payments including:

•$ million in aggregate principal of our Bank Credit Facility due January 2028;

•$ million in aggregate principal of our Term Loan due January 2028;

•$ million in other debt.

During the three months ended March 31, 2023, we made aggregate debt payments of $ million for scheduled and early debt extinguishment payments including:

•$ million in aggregate principal payments to other members of our Bank Credit Facility;

•$ million in aggregate principal payments to other members of our Term Loan;

•$ million in aggregate principal of our Term Loan due January 2028;

•$ million of premiums paid on early extinguishment of debt; and

•$ million in other debt.

Certain of the above transactions resulted in loss of $ million recorded in Losses on early extinguishment of debt in our Consolidated Statement of Operations for the three months ended March 31, 2023.

20 Service Corporation International

PART I

$ 4.625% Senior Notes due December 2027 5.125% Senior Notes due June 2029 3.375% Senior Notes due August 2030 4.0% Senior Notes due May 2031 Term Loan due January 2028 Bank Credit Facility due January 2028 Mortgage notes and other debt, maturities through 2050 Total fair value of debt instruments$ $

shares of common stock at an aggregate cost of $ million, which is an average cost per share of $. After these repurchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program was $ million at March 31, 2024.

Subsequent to March 31, 2024, we repurchased shares for $ million at an average cost per share of $. After these repurchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program is $ million.

FORM 10-Q 21

PART I

$ Cemetery revenue: $ Gross profit: $ )()) )() () $

$ $ 2023$ $ $

22 Service Corporation International

PART I

million and $ million, respectively.

Litigation and Regulatory Matters

We are a party to various litigation and regulatory matters, investigations, and proceedings. Some of the more frequent routine litigations incidental to our business are based on burial practices claims and employment-related matters, including discrimination, harassment, and wage and hour laws and regulations. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to vigorously defend ourselves in the matters described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, or if we determine an amount for which we would be willing to settle the matter to avoid further costs and risk, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of these matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.

Operational Claims. We are named as a defendant in various lawsuits alleging operational claims, including but not limited to the State of California and Taylor lawsuits described below.

The People of the State of California v. Service Corporation International, a Texas corporation, SCI Direct, Inc. a Florida Corporation, S.E. Acquisition of California, Inc., a California corporation dba Neptune Society of Northern California, Neptune Management Corp., a California corporation, Trident Society, Inc. a California corporation, and Does 1 through 100, inclusive, Case No. RG 19045103; in the Superior Court of the State of California in and for the County of Alameda. In July 2019, we received a letter from the Attorney General, State of California, Department of Justice (“CAAG") alleging that the allocation of prices among certain of our cremation service contracts and cremation merchandise contracts, and the related preneed trust funding, violates section 7735 of the California Business and Professions Code and that provisions of these same contracts constitute false advertising and deceptive sales practices in violation of California consumer protection laws. On November 21, 2019, we filed a complaint, S.E. Combined Services of California, Inc., a California Corporation dba Neptune Society of Northern California, Neptune Management Corp. a California Corporation, and Trident Society, Inc. v. Xavier Becerra, Attorney General of the State of California, and Does 1-50, Case No. 34-2019-00269617; in the Sacramento County Superior Court seeking declaratory relief holding, in general, that our practices, methods, and documentation utilized in the sale of preneed funeral goods and services are in all respects compliant with California law. On December 2, 2019, the CAAG filed the complaint, referenced above, seeking permanent injunction from making false statements and engaging in unfair competition, a placement of funds into preneed trusts, civil penalties, customer refunds, attorneys’ fees, and costs. The parties have reached a settlement of the lawsuit that includes civil penalties of $23 million and provides certain preneed contract consumers the right to receive refunds. The proposed settlement will become final and effective following the entry of judgment by the court, and we maintain a reserve that we believe is sufficient to cover all costs related to the settlement. The proposed settlement represents a compromise of contested claims and does not contain any admission of wrongdoing or fault on the part of the Company, its board of directors or executive officers in the action settlement.

Unclaimed Property Audits

We have received notices from auditors representing the unclaimed property departments of approximately forty states regarding the escheatment of preneed trust funds held in association with unused preneed funeral and cemetery contracts ("Unused Preneed Trust Funds"). The states claim that these Unused Preneed Trust Funds are subject to the states’ unclaimed property or escheatment laws and generally assert that all or a portion of the Unused Preneed Trust Funds are escheatable if the beneficiary and/or purchaser is deceased or presumed deceased and no services or merchandise have been provided. We received notice that no additional property is due to be reported for the states of Alabama, Connecticut, Iowa, Kentucky, Maryland, Massachusetts, Montana, Nebraska, New Mexico, Oklahoma, Oregon, Pennsylvania, Rhode Island, South Carolina, South Dakota, Texas, West Virginia, and Wyoming. We consider the unclaimed property audits resolved in those eighteen states.

We have entered into an audit resolution agreement with the State of Florida Department of Financial Services and Division of Unclaimed Property ("Florida Agreement"). The Florida Agreement provides for the Company to retain the trust fund earnings and to escheat the principal to the State of Florida, which resulted in an increase in trust fund income in 2023.

We have reserved all of our rights, claims, and defenses. Given the nature of these matters, we are unable to reasonably estimate the total possible loss or ranges of loss, if any.

We believe we have strong defenses to these claims and we intend to vigorously defend all of the above matters; however, an adverse decision in one or more of such matters could have a material effect on us, our financial condition, results of operations, and cash flows.

FORM 10-Q 23

PART I

10.

$ Weighted average shares: Amounts attributable to common stockholders:Earnings per share: $ $

The computation of diluted EPS excludes outstanding stock options and restricted share units in certain periods in which the inclusion of such equity awards would be antidilutive to the periods presented. Total antidilutive options not currently included in the computation of diluted earnings per share are as follows (in shares):

24 Service Corporation International

PART I

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The Company

We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries unequaled in geographic scale and reach. At March 31, 2024, we operated 1,485 funeral service locations and 490 cemeteries (including 306 funeral service/cemetery combination locations), which are geographically diversified across 44 states, eight Canadian provinces, the District of Columbia, and Puerto Rico. Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis. We strive to offer families exceptional service in planning life celebrations and personalized remembrances. Our Dignity Memorial® brand serves approximately 600,000 families each year with professionalism, compassion, and attention to detail.

Our financial position is enhanced by our $15.2 billion backlog of future revenue from both trust and insurance-funded preneed sales at March 31, 2024. Preneed selling provides us with a strategic opportunity to gain future market share. We also believe it adds to the stability and predictability of our revenue and cash flows. While revenue on the majority of preneed merchandise and service sales is deferred until the time of need, sales of preneed cemetery property provide opportunities for full current revenue recognition to the extent that the property is developed and available for use.

We have adequate liquidity and a favorable debt maturity profile, which allow us to reinvest and grow our business as well as return capital to shareholders through share repurchases and dividends.

Factors affecting our operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed revenue. The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average revenue for cremations is lower than that for traditional burials. To further enhance revenue opportunities, we continue to focus on our cremation customers' preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers. We believe the presentation of these additional merchandise and services through our customer-facing technology improves our customers' experience by reducing administrative burdens and allowing them to visualize the enhanced product and service offerings, which we believe will help drive increases in the average revenue for a cremation in future periods.

For further discussion of our key operating metrics, see our "Cash Flow" and “Results of Operations” sections below.

Financial Condition, Liquidity, and Capital Resources

Capital Allocation Considerations

We rely on cash flow from operations as a significant source of liquidity. Our cash flow from operating activities provided $220.1 million in the first three months of 2024. As of March 31, 2024, we had $706.0 million in remaining borrowing capacity under our Bank Credit Facility.

Our Bank Credit Facility requires us to maintain a certain leverage ratio with which we were in compliance at March 31, 2024. We target a leverage ratio of 3.5x to 4.0x.

Our leverage ratio requirement and actual ratio as of March 31, 2024 were as follows:


	Per Credit Agreement	Actual
Leverage ratio	5.00 (Max)	3.59

We have the financial strength and flexibility to reward shareholders with dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth.

Our unencumbered cash on hand, future operating cash flows, and the available capacity under our Bank Credit Facilities will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations. A portion of our cash on hand is encumbered primarily due to cash balances residing in Canada and Puerto Rico, as well as minimum captive insurance balance and operating cash requirements.

FORM 10-Q 25

PART I

We consistently evaluate the best uses of our cash flow that will yield the highest value and return on capital. Our capital allocation strategy is prioritized as follows:

Investing in Acquisitions and Building New Funeral Service and Cemetery Locations. We manage our footprint by focusing on strategic acquisitions and building new funeral service locations where the expected returns are attractive and exceed our weighted average cost of capital by a meaningful margin. We target businesses with favorable customer dynamics and/or where we can achieve additional economies of scale. We continue to pursue strategic acquisitions and build new funeral service locations in areas that provide us with the potential for scale.

Return Excess Cash to Shareholders. Absent strategic acquisition or other higher return opportunities, we intend to return excess cash to shareholders. Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.30 per common share in 2024. We target a payout ratio of 30% to 40% of after tax earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenant, and final determination by our Board of Directors each quarter upon review of our financial performance.

Managing Debt. We continue to focus on maintaining optimal levels of liquidity and financial flexibility. We generate a relatively consistent annual cash flow stream that is generally resistant to down economic cycles. This cash flow stream and our significant liquidity allow us to opportunistically manage our debt maturity profile as we maintain a target leverage ratio of 3.5x to 4.0x.

Cash Flow

Our ability to generate strong operating cash flow is one of our fundamental financial strengths and provides us with substantial flexibility in meeting operating and investing needs.

Operating Activities

Net cash provided by operating activities was $220.1 million and $219.6 million for the for the three months ended March 31, 2024 and 2023, respectively.

The $0.5 million increase in operating cash flows from 2023 comprises:

•a $17.7 million increase in cash receipts from customers,

•a $12.7 million decrease in employee compensation payments,

•a $3.7 million decrease in cash tax payments, and

•a $3.5 million increase in General Agency (GA) commission and other receipts, partially offset by

•a $14.2 million increase in cash interest payments,

•a $12.5 million increase in net trust deposits, and

•a $10.4 million increase in vendor and other payments.

Investing Activities

Cash flows from investing activities used $96.8 million and $94.9 million for the three months ended March 31, 2024 and 2023, respectively. The $1.9 million increased outflow in 2024 over 2023 is primarily due to the following:

•a $7.1 million increase in cash spent on business acquisitions,

•a $1.9 million increase in total capital expenditures which comprises:

•a $1.5 million increase in expenditures for growth capital expenditures/construction of new funeral service locations, and

•$0.4 million increase in maintenance capital expenditures:

•a $5.7 million increase in expenditures for cemetery property development,

•a $2.1 million increase in expenditures for capital improvements at existing field locations, and

•a $7.4 million decrease in expenditures for digital investments and corporate.

•a $1.4 million increase in net repayments for Company-owned life insurance policies,

•a $1.2 million decrease in cash receipts from divestitures and asset sales, partially offset by

•a $9.7 million decrease in cash spent on real estate acquisitions.

26 Service Corporation International

PART I

Financing Activities

Financing activities used $134.0 million for the three months ended March 31, 2024 compared to using $163.1 million for the same period in 2023. The $29.1 million decreased outflow from 2024 over 2023 is primarily due to the following:

•a $116.5 million decrease in purchase of Company common stock, and

•a $8.5 million increase in proceeds from exercises of stock options, partially offset by

•a $91.9 million increase in debt repayments, net of proceeds,

•a $2.7 million increase in payments of dividends, and

•a $1.3 million change in bank overdrafts and other.

Financial Assurances

In support of our operations, we have entered into arrangements with certain surety companies whereby such companies agree to issue surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our preneed sales activities. The obligations underlying these surety bonds are recorded on our unaudited Condensed Consolidated Balance Sheet as Deferred revenue, net. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.


	March 31, 2024		December 31, 2023
	(In millions)
Preneed funeral	$	65.2	$	67.8
Preneed cemetery:
Merchandise and services	140.7		141.3
Pre-construction	53.6		54.6
Bonds supporting preneed funeral and cemetery obligations	259.5		263.7
Bonds supporting preneed business permits	7.7		7.6
Other bonds	26.2		25.4
Total surety bonds outstanding	$	293.4	$	296.7

When selling preneed contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law.

Surety bond premiums are paid annually and the bonds are automatically renewable until maturity of the underlying preneed contracts, unless we are given prior notice of cancellation.

Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. Management does not expect that we will be required to fund material future amounts related to these surety bonds due to a lack of surety capacity or surety company non-performance.

Preneed Activities and Backlog of Contracts

In addition to selling our products and services to client families at the time of need, we enter into price-guaranteed preneed contracts, which provide for future funeral or cemetery merchandise and services. Because preneed funeral and cemetery merchandise and services will generally not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed contracts be deposited into merchandise and service trusts until the merchandise is delivered or the service is performed. In certain situations, as described above, where permitted by state or provincial laws, we may post a surety bond as financial assurance for a certain amount of the preneed contract in lieu of placing funds into trust accounts. Alternatively, we may sell a life insurance or annuity policy from third-party insurance companies.

FORM 10-Q 27

PART I

Insurance-Funded Preneed Contracts

Where permitted by state or provincial law, we may sell a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. These general agency revenues are based on a percentage per contract sold and are recognized as funeral revenue when the insurance purchase transaction between the preneed purchaser and third-party insurance provider is complete. All selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred. We do not reflect the unfulfilled insurance-funded preneed contract amounts in our unaudited Condensed Consolidated Balance Sheet. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenue as we perform these funerals.

The table below details our results of insurance-funded preneed production and maturities.


	Three months ended March 31,
	2024		2023
	(Dollars in millions)
Preneed insurance-funded:
Sales production(1)	$	177.2	$	180.2
Sales production (number of contracts) (1)	28,448		29,211
General agency revenue	$	49.8	$	46.5
Maturities	$	108.4	$	104.8
Maturities (number of contracts)	17,256		17,055

(1) Amounts are not included in our unaudited Condensed Consolidated Balance Sheet.

Trust-Funded Preneed Contracts

The funds collected from customers, and required by state or provincial law, are deposited into trusts. We retain any funds above the amounts required to be deposited into trust accounts and use them for working capital purposes, generally to offset the selling and administrative costs of our preneed programs. Although this represents cash flow to us, the associated revenues are deferred until the merchandise is delivered or services are performed (typically at maturity). The funds in trust are then invested by professional money managers with oversight by independent trustees in accordance with state and provincial laws.

28 Service Corporation International

PART I

The tables below detail our results of preneed production and maturities, excluding insurance contracts:


	Three months ended March 31,
	2024		2023
	(Dollars in millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production	$	138.9	$	142.1
Sales production (number of contracts)	34,132		35,212
Maturities	$	96.6	$	93.5
Maturities (number of contracts)	22,248		22,416
Cemetery:
Sales production:
Preneed	$	330.8	$	305.7
Atneed	108.0		110.8
Total sales production	$	438.8	$	416.5
Sales production deferred to backlog:
Preneed	$	158.5	$	158.0
Atneed	78.5		78.1
Total sales production deferred to backlog	$	237.0	$	236.1
Revenue recognized from backlog:
Preneed	$	105.0	$	113.1
Atneed	78.6		77.1
Total revenue recognized from backlog	$	183.6	$	190.2

Backlog of Preneed Contracts

The following table reflects our backlog of trust-funded deferred preneed contract revenue, including amounts related to deferred receipts held in trust at March 31, 2024 and December 31, 2023. Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our unaudited Condensed Consolidated Balance Sheet) at March 31, 2024 and December 31, 2023. The backlog amounts presented include amounts due from customers for undelivered performance obligations on cancelable preneed contracts to arrive at our total backlog of deferred revenue. The table does not include the backlog associated with businesses that are held for sale.

The table also reflects our preneed receivables and trust investments associated with the backlog of deferred preneed contract revenue, including the amounts due from customers for undelivered performance obligations on cancelable preneed contracts. We believe that the table below is meaningful because it sets forth the aggregate amount of future revenue we expect to recognize as a result of preneed sales, as well as the amount of funds associated with this revenue. Because the future revenue exceeds the assets, future revenue will exceed the cash distributions actually received from the associated trusts and future collections from the customer.

FORM 10-Q 29

PART I


	March 31, 2024				December 31, 2023
	Fair Value		Cost		Fair Value		Cost
	(In billions)
Deferred revenue, net	$	1.71	$	1.71	$	1.70	$	1.70
Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts	0.97		0.97		0.95		0.95
Deferred receipts held in trust	4.91		4.25		4.67		4.18
Allowance for cancellation on trust investments	(0.28)		(0.24)		(0.26)		(0.24)
Backlog of trust-funded deferred revenue, net of estimated allowance for cancellation	7.31		6.69		7.06		6.59
Backlog of insurance-funded revenue (1)	7.90		7.90		7.78		7.78
Total backlog of deferred revenue	$	15.21	$	14.59	$	14.84	$	14.37

Preneed receivables, net and trust investments	$	6.43	$	5.77	$	6.19	$	5.70
Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts	0.97		0.97		0.95		0.95
Allowance for cancellation on trust investments	(0.28)		(0.24)		(0.26)		(0.24)
Assets associated with backlog of trust-funded deferred revenue, net of estimated allowance for cancellation	7.12		6.50		6.88		6.41
Insurance policies associated with insurance-funded deferred revenue (1)	7.90		7.90		7.78		7.78
Total assets associated with backlog of preneed revenue	$	15.02	$	14.40	$	14.66	$	14.19

(1) Amounts are not included in our unaudited Condensed Consolidated Balance Sheet.

The fair value of our trust investments was based on a combination of quoted market prices, observable inputs such as interest rates or yield curves, and appraisals. As of March 31, 2024, the difference between the backlog and asset market amounts represents $0.18 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $1.33 billion collected from customers that were not required to be deposited into trusts, and $0.19 billion in allowable cash distributions from trust assets partially offset by $1.51 billion in amounts due on delivered property and merchandise. As of March 31, 2024, the fair value of the total backlog comprised $4.38 billion related to cemetery contracts and $10.83 billion related to funeral contracts. As of March 31, 2024, the fair value of the assets associated with the backlog of trust-funded deferred revenue comprised $4.40 billion related to cemetery contracts and $2.72 billion related to funeral contracts. As of March 31, 2024, the backlog of insurance-funded contracts of $7.90 billion was equal to the proceeds we expect to receive from the associated insurance policies when the corresponding contract is serviced.

Trust Investments

In addition to selling our products and services to client families at the time of need, we enter into price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery merchandise and services. Since preneed funeral and cemetery merchandise or services will generally not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into trusts and/or escrow accounts until the merchandise is delivered or the service is performed. Investment earnings associated with the trust investments are expected to mitigate the inflationary costs of providing the preneed funeral and cemetery merchandise and services in the future at the prices that were guaranteed at the time of sale. Also, we are required by state and provincial law to pay a portion of the proceeds from the preneed or atneed sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus generally remains in the trust in perpetuity and the earnings or elected distributions are withdrawn as allowed to defray the expenses to maintain the cemetery property. While many states require that net capital gains or losses be retained and added to the corpus, certain states allow the net realized capital gains and losses to be included in the earnings that are distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.

Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and service trusts as well as the cemetery perpetual care trusts. The majority of the trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. Most of the trustees engage the same independent investment managers. These trustees, with input from SCI's wholly-owned registered investment advisor, establish an investment policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection. The investments are also governed by state and provincial guidelines. All of the trusts

30 Service Corporation International

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seek to control risk and volatility through a combination of asset classes, investment styles, and a diverse mix of investment managers.

Asset allocation is based on the liability structure of each funeral, cemetery, and perpetual care trust. Based on the various criteria set forth in the investment policy, the investment advisor recommends investment managers to the trustees. The primary investment objectives for the funeral and cemetery merchandise and service trusts include 1) preserving capital within acceptable levels of volatility and risk and 2) achieving growth of principal over time sufficient to preserve and increase the purchasing power of the assets. Preneed funeral and cemetery contracts generally take several years to mature; therefore, the funds associated with these contracts are often invested through several market cycles.

Where allowed by state and provincial regulations, the cemetery perpetual care trusts’ primary investment objectives are growth-oriented to provide for a fixed distribution rate from the trusts’ assets. Where such distributions are limited to ordinary income, the cemetery perpetual care trusts’ investment objectives emphasize providing a steady stream of current investment income with some capital appreciation. Both types of distributions are used to provide for the current and future maintenance and beautification of the cemetery properties.

As of March 31, 2024, approximately 95% of our trusts were under the control and custody of five large financial institutions. The U.S. trustees primarily use four managed limited liability companies (LLCs), one for each merchandise and service trust type and two for the cemetery perpetual care trust type, each with an independent trustee as custodian. Each financial institution acting as trustee manages its allocation of trust assets in accordance with the investment policy through the purchase of the appropriate LLCs' units. For those accounts not eligible for participation in the LLCs or where a particular state's regulations contain other investment restrictions, the trustee utilizes institutional mutual funds that comply with our investment policy or with such state restrictions. The U.S. trusts include a modest allocation to alternative investments. These alternative investments are held in vehicles structured as LLCs and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective alternative investment LLCs.

Investment Structures

The managed LLCs use the following structures for investments:

Commingled funds allow the trusts to access, at a reduced cost, some of the same investment managers and strategies used elsewhere in the portfolios.

Separately managed accounts are trusts that utilize separately managed accounts, where appropriate, to reduce the costs to the investment portfolios.

Mutual funds employ institutional share class mutual funds where operationally or economically efficient. These mutual funds are utilized to invest in various asset classes including U.S. equities, non-U.S. equities, corporate bonds, government bonds, high yield bonds, and commodities, all of which are governed by guidelines outlined in their individual prospectuses.

Asset Classes

Equity investments have historically provided long-term capital appreciation in excess of inflation. The trusts have direct investments in individual equity securities primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment styles (i.e., growth and value). The majority of the equity allocation is managed by institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, we believe these securities are well-diversified. As of March 31, 2024, the largest single equity position represented approximately 1% of the total securities portfolio.

Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility. The majority of the fixed income allocation for the trusts is invested in institutional share class mutual funds. Where the trusts have direct investments in individual fixed income securities, these are primarily in government and corporate instruments.

Canadian government fixed income securities are investments in Canadian federal and provincial government instruments. In many cases, regulatory restrictions mandate that the funds from the sales of preneed funeral and cemetery contracts sold in certain Canadian jurisdictions must be invested in these instruments.

Alternative investments serve to provide high rates of return with reduced volatility and lower correlation to publicly-traded securities. These investments are typically longer term in duration and are diversified by strategy, sector, manager, geography, and vintage year. The investments consist of numerous limited partnerships invested in private equity, private market real estate, energy and natural resources, infrastructure, transportation, and private debt including both distressed debt and mezzanine financing. The trustees that have oversight of their respective alternative LLCs work closely with the investment advisor in making all investment decisions.

FORM 10-Q 31

PART I

Trust Performance

During the three months ended March 31, 2024, the Standard and Poor’s 500 Index increased 10.6% and the Bloomberg’s US Aggregate Bond Index decreased 0.8%. This compares to SCI trusts that increased 5.6% during the same period, which exceeded our internal custom benchmark. The SCI trusts have a diversified allocation of approximately 60% equities, 26% fixed income securities, 10% alternative and other investments with the remaining 4% available in money market funds.

SCI, the trustees, and the investment advisor monitor the capital markets and the trusts on an on-going basis. The trustees, with input from the investment advisor, take prudent action as needed to achieve the investment goals and objectives of the trusts.

Results of Operations — Three Months Ended March 31, 2024 and 2023

Management Summary

In the first three months of 2024, we reported consolidated net income attributable to common stockholders of $131.3 million ($0.89 per diluted share) compared to net income attributable to common stockholders for the same period in 2023 of $144.8 million ($0.93 per diluted share). These results were impacted by certain items including:


	Three months ended March 31,
	2024		2023
	(In millions)
Pre-tax (losses) gains on divestitures and impairment charges, net	$	(0.7)	$	0.7
Pre-tax losses on early extinguishment of debt	$	—	$	(1.1)





Tax effect from significant items	$	0.1	$	0.1
Change in uncertain tax reserves and other	$	—	$	0.2

In addition to the above items, the decrease from the prior year was expected, as higher cemetery gross profit, a lower share count, and a lower tax rate was slightly overcome by lower funeral gross profit as well as higher interest expense.

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Funeral Results


	Three months ended March 31,
	2024		2023
	(Dollars in millions, except average revenue per service)
Consolidated funeral revenue	$	604.7	$	609.7
Less: revenue associated with acquisitions/new construction	4.8		0.5
Less: revenue associated with divestitures	0.5		1.3
Comparable(1) funeral revenue	599.4		607.9
Less: non-funeral home preneed sales revenue	28.9		41.2
Less: core general agency and other revenue	46.0		47.9
Adjusted comparable funeral revenue	$	524.5	$	518.8
Comparable services performed	93,341		96,051
Comparable average revenue per service(2)	$	5,619	$	5,401

Consolidated funeral gross profit	$	131.9	$	149.5
Less: gross profit associated with acquisitions/new construction	0.4		—
Less: gross profit associated with divestitures	0.3		—
Comparable(1) funeral gross profit	$	131.2	$	149.5

(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2023 and ending March 31, 2024.

(2) We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding general agency revenue, non-funeral home preneed sales revenue, and other revenue to avoid distorting our average of normal funeral services revenue, by the comparable number of funeral services performed during the period.

Funeral Revenue

Consolidated revenue from funeral operations was $604.7 million for the three months ended March 31, 2024, compared to $609.7 million for the same period in 2023. This $5.0 million decrease is primarily attributable to a $8.5 million decrease in comparable revenue as described below and offset by $4.3 million of growth in revenue contributed by acquired and newly constructed properties.

Comparable revenue from funeral operations was $599.4 million for the three months ended March 31, 2024 compared to $607.9 million for the same period in 2023. The $8.5 million decrease was due to a $12.3 million decrease in non-funeral home preneed sales revenue slightly offset by an increase of $3.7 million in core funeral revenue. Core revenue increased by $3.7 million primarily due to a 3.9% increase in core average revenue partially offset by a 3.0% decrease in core funeral services performed. The core cremation rate increased 70 basis points to 56.6%.

Non-funeral home preneed sales revenue decreased by $12.3 million primarily due to operational changes in certain markets with respect to timing of merchandise deliveries. This decrease is partially offset by an increase in general agency revenue as we continue to shift from trust-funded to insurance-funded contracts.

Funeral Gross Profit

Consolidated funeral gross profit decreased $17.6 million, or 11.8%, in the first three months of 2024 compared to 2023. This decrease is primarily attributable to the $18.3 million, or 12.2%, decrease in comparable funeral gross profit. Comparable funeral gross profit decreased $18.3 million to $131.2 million and the comparable gross profit percentage decreased from 24.6% to 21.9%. This decrease is primarily due to the decline in revenue mentioned above and an increase in annual incentive compensation costs over the prior year quarter.

FORM 10-Q 33

PART I

Cemetery Results


	Three months ended March 31,
	2024		2023
	(In millions)
Consolidated cemetery revenue	$	440.6	$	419.0
Less: revenue associated with acquisitions/new construction	0.9		—
Less: revenue associated with divestitures	(0.1)		0.3
Comparable(1) cemetery revenue	$	439.8	$	418.7

Consolidated cemetery gross profit	$	142.3	$	139.6
Less: gross losses associated with acquisitions/new construction	(0.1)		(0.2)
Less: gross losses associated with divestitures	(0.1)		(0.1)
Comparable(1) cemetery gross profit	$	142.5	$	139.9

Employment and Noncompetition Agreement, dated January 1, 2022 between OFTC, Inc. and Elisabeth G. Nash.

Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

FORM 10-Q 39

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


May 2, 2024	SERVICE CORPORATION INTERNATIONAL
	By:	/s/ TAMMY MOORE
		Tammy Moore Vice President and Corporate Controller (Principal Accounting Officer)

40 Service Corporation International

SERVICE CORP INTERNATIONAL - Quarter Report: 2024 March (Form 10-Q)

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