# Service Corp International: Form 10-Q for the period ended Sep 30, 2015

- Company: [Service Corp International](/companies/sci.md) (CIK 89089)
- Form: 10-Q
- Filed: 2015-11-02
- Accepted by EDGAR: Nov 2, 2015, 15:36 ET
- Period: 2015-09-30
- Accession: 0000089089-15-000028
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/89089/000008908915000028/sci-2015930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/89089/000008908915000028/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2015-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2015-07-01 to 2015-09-30 | $714.5m | us-gaap:Revenues |
| Revenue | 9 months, 2015-01-01 to 2015-09-30 | $2.22bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2015-07-01 to 2015-09-30 | $572.6m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2015-01-01 to 2015-09-30 | $1.73bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2015-07-01 to 2015-09-30 | $141.9m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2015-01-01 to 2015-09-30 | $486.6m | us-gaap:GrossProfit |
| Operating income | 3 months, 2015-07-01 to 2015-09-30 | $124.5m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2015-01-01 to 2015-09-30 | $393.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2015-07-01 to 2015-09-30 | $43.9m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2015-01-01 to 2015-09-30 | $129.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2015-07-01 to 2015-09-30 | $26.1m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2015-01-01 to 2015-09-30 | $93.8m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2015-07-01 to 2015-09-30 | $47.4m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2015-01-01 to 2015-09-30 | $161.4m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2015-07-01 to 2015-09-30 | $0.23 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2015-01-01 to 2015-09-30 | $0.78 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2015-07-01 to 2015-09-30 | $0.24 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2015-01-01 to 2015-09-30 | $0.80 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2015-07-01 to 2015-09-30 | 203,444,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2015-01-01 to 2015-09-30 | 205,950,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2015-01-01 to 2015-09-30 | $396.6m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2015-01-01 to 2015-09-30 | $104.7m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2015-01-01 to 2015-09-30 | $64.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2015-01-01 to 2015-09-30 | $305.5m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2015-09-30 | $141.9m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2015-09-30 | $320.7m | us-gaap:AssetsCurrent |
| Total assets | at 2015-09-30 | $11.65bn | us-gaap:Assets |
| Current liabilities | at 2015-09-30 | $546.6m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2015-09-30 | $3.05bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2015-09-30 | $95.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2015-09-30 | $1.18bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 60,427 characters.

### 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 September 30, 2015, we operated 1,540 funeral service locations and 469 cemeteries (including 262 combination locations), which are geographically diversified across 45 states, 8 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 related businesses. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.

Our financial position is enhanced by our $9.4 billion backlog of future revenue from both trust and insurance-funded sales at September 30, 2015, which is the result of preneed sales. Preneed selling provides us with a current opportunity to lock-in future market share while deterring the customer from going to a competitor in the future. We 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 we collect 10% from the customer and the property is developed.

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

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 at-need revenue. The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately half of the average revenue earned from a traditional burial service. To further enhance revenue opportunities, we are developing memorialization merchandise and services that specifically appeal to cremation customers. We believe that these additional merchandise and services will help drive increases in the average revenue for a cremation in future periods.

For further discussion of our key operating metrics, see our *Results of Operations* and *Cash Flow* 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 $396.6 million in the nine months ended September 30, 2015. We have $241.7 million in excess borrowing capacity under our bank credit facility.

Our bank credit facility requires us to maintain certain leverage and interest coverage ratios. As of September 30, 2015, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of September 30, 2015 are as follows:

|  | Per Credit Agreement | Actual |
| --- | --- | ---: |
| Leverage ratio | 4.50 (Max) | 3.74 |
| Interest coverage ratio | 3.00 (Min) | 4.96 |

We believe our sources of liquidity can be supplemented by our ability to access the capital markets for additional debt or equity securities. We believe that our $142.0 million of cash on hand, future operating cash flows, and the available capacity under our Bank Credit Facility will give us adequate liquidity to meet our short-term needs. In August 2015, we completed the public offering of $300.0 million aggregate principal amount of our 5.375% Senior Notes due 2024 in a reopening of our existing series of such Notes. The net proceeds, which included a premium of $11.3 million, from the offering were used to redeem all of our outstanding 6.750% Senior Notes due 2016 and to repay $100.0 million of outstanding borrowings under our Bank Credit Facility.

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

**Invest in acquisitions and new builds.** We intend to make acquisitions of funeral homes and cemeteries when pricing and terms are favorable. We expect an acquisition investment to earn an after-tax cash return that is in excess of our weighted average cost of capital with room for execution risk. We will also invest in the construction of funeral home facilities when deemed appropriate. We target businesses with favorable customer segments and/or where we can achieve additional economies of scale.

**Pay a dividend.** Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.12 per common share in 2015. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter upon review of our financial performance.

**Repurchase shares.** Absent a strategic acquisition opportunity, we believe share repurchases are attractive at the appropriate price. During the nine months ended September 30, 2015, we repurchased 11,008,576 shares of common stock at an aggregate cost of $305.5 million, which is an average cost per share of $27.75. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $321.6 million at September 30, 2015. We intend to make purchases from time to time in the open market or through privately negotiated transactions, subject to market conditions, debt covenants, and normal trading restrictions. Our credit agreement contains covenants that limit our ability to repurchase our common stock. There can be no assurance that we will buy our common stock under our share repurchase program in the future.

**Repurchase debt.** We will seek to make open market debt repurchases when it is opportunistic to do so relative to other capital development opportunities to manage our near-term debt maturity profile. We have a relatively consistent annual cash flow stream that is generally resistant to down economic cycles. This cash flow stream and our significant liquidity is available to substantially reduce our long-term debt maturities should we choose to do so. Furthermore, our capital expenditures are generally discretionary in nature and can be managed based on the availability of operating cash flow.

### Cash Flow

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

#### Operating Activities

Net cash provided by operating activities increased $140.4 million to $396.6 million in the first nine months of 2015 from $256.2 million in the first nine months of 2014. Included in 2015 are a decrease of acquisition and transition related costs of $51.0 million, a decrease of $18.3 million in premiums paid on early extinguishment of debt, a decrease of $18.1 million in taxes paid associated with gains on divestitures, a decrease of $10.3 million paid for legal defense fees, and a $3.4 million decrease in excess tax benefits from share-based awards and other.

Excluding the above items, cash flow from operations increased $39.3 million as a result of the following:

- a $36.6 million increase in cash receipts from customers;
- a $21.4 million increase in net trust fund withdrawals;
- an $11.3 million decrease in cash interest paid; and
- a $4.1 million decrease in employee compensation; partially offset by
- a $29.1 million increase in cash tax payments; and
- a $5.0 million increase in vendor and other payments.

#### Investing Activities

Cash flows from investing activities used $125.8 million in the first nine months of 2015 compared to providing $284.1 million in the same period of 2014. This was primarily attributable to a $386.0 million decrease in cash receipts from divestitures and asset sales, an increase of $30.6 million in cash spent on acquisitions, and a $9.6 million increase in capital expenditures, partially offset by a $20.3 million increase in net withdrawals of restricted funds.

#### Financing Activities

Financing activities used $298.4 million in the first nine months of 2015 compared to using $416.4 million in the same period of 2014. This decrease was primarily driven by a decrease in debt payments net of issuance proceeds of $295.7 million, increased proceeds from exercise of stock options of $2.9 million, and a $15.0 million decrease in purchases of noncontrolling interests, partially offset by a $175.3 million increase in repurchases of Company common stock and an $11.0 million increase in payments of dividends.

We repurchased 11.0 million shares in the first nine months of 2015 for $305.5 million and 6.3 million shares in the same period of 2014 for $130.2 million. We paid cash dividends of $64.1 million in the first nine months of 2015 and $53.0 million in the same period of 2014.

### 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 funeral and cemetery sales activities. The obligations underlying these surety bonds are recorded on the unaudited condensed consolidated balance sheet as *Deferred preneed funeral revenue* and *Deferred preneed cemetery revenue.* The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.

*(In millions)*

|  | September 30, 2015 | December 31, 2014 |
| --- | ---: | ---: |
| Preneed funeral | $112.6 | $121.1 |
| Preneed cemetery: |  |  |
| Merchandise and services | 136.0 | 138.1 |
| Pre-construction | 4.9 | 4.6 |
| Bonds supporting preneed obligations | 253.5 | 263.8 |
| Bonds supporting preneed business permits | 4.5 | 4.4 |
| Other bonds | 18.0 | 18.0 |
| Total surety bonds outstanding | $276.0 | $286.2 |

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. For the three months ended September 30, 2015 and 2014, we had $5.2 million and $5.0 million, respectively, of cash receipts attributable to bonded sales. For the nine months ended September 30, 2015 and 2014, we had $15.2 million and $14.7 million, respectively, of cash receipts attributable to bonded sales. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.

Surety bond premiums are paid annually and 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 because of lack of surety capacity or surety company non-performance.

### Preneed Funeral and Cemetery Activities and Backlog of Contracts

In addition to selling our products and services to client families at the time of need, we sell price-guaranteed preneed contracts, which provide for future funeral or cemetery services and merchandise. Since preneed merchandise or services will 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 paid into merchandise and service trusts until the merchandise is delivered or the service is performed. These trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. In certain situations, as described above, where permitted by state or provincial laws, we post a surety bond as financial assurance for a certain amount of the preneed contract in lieu of placing funds into trust accounts.

*Trust-Funded Preneed Contracts:* The funds are deposited into trust and invested by independent trustees in accordance with state and provincial laws. 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.

The tables below detail our results of preneed production and maturities, excluding insurance contracts, for the three and nine months ended September 30, 2015 and 2014.

*(In millions)*

| Funeral: Preneed trust-funded (including bonded): | Three Months Ended September 30, 2015 | 2014 | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Sales production | $65.0 | $58.7 | $196.9 | $173.1 |
| Sales production (number of contracts) | 20,975 | 20,424 | 63,623 | 59,580 |
| Maturities | $53.5 | $52.8 | $168.5 | $163.6 |
| Maturities (number of contracts) | 15,798 | 15,872 | 49,518 | 45,378 |
| **Cemetery:** |  |  |  |  |
| Sales production: |  |  |  |  |
| Preneed | $180.5 | $163.6 | $569.1 | $510.5 |
| Atneed | 73.9 | 71.0 | 228.3 | 233.2 |
| Total sales production | $254.4 | $234.6 | $797.4 | $743.7 |
| Sales production deferred to backlog: |  |  |  |  |
| Preneed | $88.6 | $72.6 | $262.2 | $212.2 |
| Atneed | 54.8 | 55.4 | 171.1 | 177.0 |
| Total sales production deferred to backlog | $143.4 | $128.0 | $433.3 | $389.2 |
| Revenue recognized from backlog: |  |  |  |  |
| Preneed | $64.9 | $64.8 | $167.5 | $152.9 |
| Atneed | 54.9 | 56.4 | 167.5 | 173.1 |
| Total revenue recognized from backlog | $119.8 | $121.2 | $335.0 | $326.0 |

*Insurance-Funded Preneed Contracts:* Where permitted by state or provincial law, customers may arrange their preneed contract by purchasing a life insurance policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. The policy amount of the insurance contract between the customer and the third-party insurance company generally equals the amount of the preneed contract. As the insurance contract is between the insurance company and the customer, we do not reflect the unfulfilled insurance-funded preneed contract amounts in our unaudited condensed consolidated balance sheet.

The table below details the results of insurance-funded preneed production and maturities for the three and nine months ended September 30, 2015 and 2014, and the number of contracts associated with those transactions.

*(In millions)*

| Preneed insurance-funded: | Three Months Ended September 30, 2015 | 2014 | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Sales production (1) | $136.4 | $134.6 | $409.7 | $452.7 |
| Sales production (number of contracts) (1) | 22,803 | 21,801 | 68,215 | 75,675 |
| General Agency revenue | $34.9 | $32.3 | $101.3 | $92.2 |
| Maturities | $72.8 | $76.8 | $241.4 | $271.6 |
| Maturities (number of contracts) | 12,086 | 12,794 | 40,873 | 46,768 |

(1) Amounts are not included in our unaudited condensed consolidated balance sheet.

*Backlog of Preneed Contracts:* The following table reflects our backlog of trust-funded deferred preneed contract revenue, including amounts related to *Deferred preneed receipts held in trust* at September 30, 2015 and December 31, 2014. Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our unaudited condensed consolidated balance sheet) at September 30, 2015 and December 31, 2014. The backlog amounts presented are reduced by an amount that we believe will cancel before maturity based on historical experience.

The table also reflects our preneed receivables and trust investments (fair value and cost bases) associated with the backlog of deferred preneed contract revenue, net of the estimated cancellation allowance. 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 assets associated with those revenue. Because the future revenue exceed the asset amounts, future revenue will exceed the cash distributions actually received from the associated trusts. The following table does not include backlog associated with businesses held for sale.

*(In billions)*

|  | September 30, 2015 Fair Value | Cost | December 31, 2014 Fair Value | Cost |
| --- | ---: | ---: | ---: | ---: |
| Deferred preneed funeral revenue | $0.55 | $0.55 | $0.54 | $0.54 |
| Deferred preneed funeral receipts held in trust | 1.50 | 1.56 | 1.63 | 1.63 |
|  | $2.05 | $2.11 | $2.17 | $2.17 |
| Allowance for cancellation on trust investments | (0.15) | (0.15) | (0.17) | (0.17) |
| Backlog of trust-funded preneed funeral revenue | $1.90 | $1.96 | $2.00 | $2.00 |
| Backlog of insurance-funded preneed revenue(1) | 5.08 | 5.08 | 4.82 | 4.82 |
| Total backlog of preneed funeral revenue | $6.98 | $7.04 | $6.82 | $6.82 |
| Preneed funeral receivables, net and trust investments | $1.73 | $1.79 | $1.84 | $1.85 |
| Allowance for cancellation on trust investments | (0.14) | (0.14) | (0.16) | (0.16) |
| Assets associated with backlog of trust-funded deferred preneed funeral revenue, net of estimated allowance for cancellation | $1.59 | $1.65 | $1.68 | $1.69 |
| Insurance policies associated with insurance-funded deferred revenue, net of estimated allowance for cancellation(1) | 5.08 | 5.08 | 4.82 | 4.82 |
| Total assets associated with backlog of preneed funeral revenue, net of estimated allowance for cancellation | $6.67 | $6.73 | $6.50 | $6.51 |
| Deferred preneed cemetery revenue | $1.13 | $1.13 | $1.06 | $1.06 |
| Deferred preneed cemetery receipts held in trust | 1.44 | 1.52 | 1.52 | 1.53 |
|  | $2.57 | $2.65 | $2.58 | $2.59 |
| Allowance for cancellation on trust investments | (0.11) | (0.11) | (0.11) | (0.11) |
| Total backlog of deferred cemetery revenue | $2.46 | $2.54 | $2.47 | $2.48 |
| Preneed cemetery receivables, net and trust investments | $2.27 | $2.36 | $2.31 | $2.32 |
| Allowance for cancellation on trust investments | (0.12) | (0.12) | (0.13) | (0.13) |
| Total assets associated with backlog of deferred cemetery revenue, net of estimated allowance for cancellation | $2.15 | $2.24 | $2.18 | $2.19 |

(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 September 30, 2015, the difference between the backlog and asset market amounts represents $0.25 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $0.18 billion collected from customers that were not required to be deposited into trust, and $0.18 billion in allowable cash distributions from trust assets.

The table also reflects the amounts expected to be received from insurance companies through the assignment of policy proceeds related to insurance-funded contracts. We do not reflect the unfulfilled insurance-funded preneed amounts in our consolidated balance sheet because they are not assets or liabilities as defined in Statement of Accounting Concepts No. 6 as we have no claim to the insurance proceeds until the contract is fulfilled and no obligation under the contract until the benefits are assigned to us after the time of need.

### Trust Investments

In addition to selling our merchandise and services to client families at the time of need, we sell price-guaranteed preneed contracts, which provide for future merchandise and services. Since preneed merchandise or services will 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 paid into trusts and/or preneed 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 merchandise or services in the future for 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 sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus remains in the trust in perpetuity and the net ordinary earnings are intended to defray the expense to maintain the cemetery property. While some of the 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 income that is distributed.

Independent trustees manage and invest all of the funds deposited into the merchandise and service trusts as well as the cemetery perpetual care trusts. The majority of trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. All of the trustees engage the same independent investment managers. The 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. Asset allocation is based on the liability structure of each trust. The investment advisor recommends investment managers to the trustees that are selected on the basis of various criteria set forth in the investment policy. The primary investment objectives for the merchandise and service trusts include (1) achieving growth of principal over time sufficient to preserve and increase the purchasing power of the assets, and (2) preserving capital within acceptable levels of volatility. Preneed contracts generally take years to mature; therefore, the funds associated with these contracts are often invested for several market cycles. The cemetery perpetual care trusts emphasize providing a steady stream of investment income with some capital appreciation. The trustees seek to control risk and volatility through a combination of investment styles, asset classes, and diverse mix of investment managers.

As of September 30, 2015, 87% of our trusts were under the control and custody of three large financial institutions. The U.S. trustees primarily use three managed limited liability (LLCs), one for each trust type, and each with a different independent trustee as custodian. Each financial institution acting as trustee manages its allocation of trust in accordance with the investment policy through the purchase of the LLCs' units. For those accounts not eligible for participation in the LLCs or in the event a particular state's regulations contain 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, which comprise private equity and real estate investments. These investments are 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 LLCs.

#### Fixed Income Securities

Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility. The SCI trusts have direct investments primarily in government fixed income securities. Insurance-backed fixed income investments preserve the principal, guarantee annual appreciation, and reduce overall portfolio volatility.

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 products sold in certain Canadian jurisdictions must be invested in these instruments.

#### Equity Securities

Equity investments have historically provided long-term capital appreciation in excess of inflation. The SCI trusts have direct investments primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment objectives (i.e., growth and value). The majority of the equity portfolio is managed by multiple institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, these securities are well diversified. As of September 30, 2015, the largest single equity position represented less than 1% of the total securities portfolio.

#### Mutual Funds

The SCI trust funds employ institutional mutual funds where operationally or economically efficient. Institutional mutual funds are utilized to invest in various asset classes including U.S. equities, non-U.S. equities, convertible bonds, corporate bonds, government bonds, Treasury inflation protected securities (TIPS), high yield bonds, real estate investment trusts (REITs), and commodities. The mutual funds are governed by guidelines outlined in their individual prospectuses.

#### Private Equity

The objective of these investments is to provide high rates of return with controlled volatility. These investments are typically long-term in duration. These investments are diversified by strategy, sector, manager, and vintage year. Private equity exposure is accessed through LLCs established by certain preferred trustees. These LLCs invest in numerous limited partnerships, including private equity, fund of funds, distressed debt, and mezzanine financing. The trustees that have oversight of their respective LLCs work closely with the investment advisor in making all current investments.

#### Trust Performance

The trust fund income recognized from these investment assets is volatile. During the nine months ended September 30, 2015, the Standard and Poor’s 500 Index decreased 5.3% and the Barclay’s Aggregate Index increased 1.1%, while the combined SCI trusts decreased 3.1%.

SCI, the trustees, and the investment advisor monitor the capital markets and the trusts on an ongoing 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 September 30, 2015 and 2014

### Management Summary

Key highlights in the third quarter of 2015 were as follows:

- Comparable funeral gross profit decreased $11.5 million, or 12.9%, primarily due to a decrease in comparable revenue, inflationary increases in our fixed cost structure.
- Comparable cemetery gross profit increased $6.1 million, or 10.5%, primarily driven by increases in preneed cemetery property sales that were partially offset by an unfavorable impact of Canadian currency.

### Results of Operations

In the third quarter of 2015, we reported net income attributable to common stockholders of $47.4 million ($0.23 per diluted share) compared to net income attributable to common stockholders in the third quarter of 2014 of $17.7 million ($0.08 per diluted share). These results were affected by the following items:

*(In thousands)*

|  | 2015 | 2014 |
| --- | ---: | ---: |
| Net after-tax gains (losses) from the sale of assets | $6,848 | $(25,878) |
| After-tax (losses) gains from the early extinguishment of debt | $(4,199) | $1,029 |
| After-tax expenses related to acquisition and transition costs | $— | $(5,349) |
| Change in certain tax reserves and other | $(1,118) | $(1,750) |

47

### Consolidated Versus Comparable Results

The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the three months ended September 30, 2015 and 2014. We define comparable operations (or same store operations) as those funeral and cemetery locations that were owned for the entire period beginning January 1, 2014 and ending September 30, 2015. The following tables present operating results for funeral and cemetery locations that were owned by us during this period.

*(In millions)*

| Three Months Ended September 30, 2015 Revenue | Consolidated | Less: Results Associated with Acquisition/New Construction | Less: Results Associated with Divestitures | Comparable |
| --- | ---: | ---: | ---: | ---: |
| Funeral revenue | $449.2 | $3.8 | $0.5 | $444.9 |
| Cemetery revenue | 265.3 | 2.7 | — | 262.6 |
| Total revenue | $714.5 | $6.5 | $0.5 | $707.5 |
| Gross profit |  |  |  |  |
| Funeral gross profit | $77.0 | $(0.6) | $(0.2) | $77.8 |
| Cemetery gross profit | 64.9 | 1.0 | (0.1) | 64.0 |
| Total gross profit | $141.9 | $0.4 | $(0.3) | $141.8 |

*(In millions)*

| Three Months Ended September 30, 2014 Revenue | Consolidated | Less: Results Associated with Acquisition/New Construction | Less: Results Associated with Divestitures | Comparable |
| --- | ---: | ---: | ---: | ---: |
| Funeral revenue | $458.9 | $0.4 | $10.0 | $448.5 |
| Cemetery revenue | 259.4 | 0.1 | 6.2 | 253.1 |
| Total revenue | $718.3 | $0.5 | $16.2 | $701.6 |
| Gross profit |  |  |  |  |
| Funeral gross profit | $89.7 | $(0.2) | $0.6 | $89.3 |
| Cemetery gross profit | 58.6 | — | 0.7 | 57.9 |
| Total gross profit | $148.3 | $(0.2) | $1.3 | $147.2 |

The following table provides the data necessary to calculate our consolidated average revenue per service for the three months ended September 30, 2015 and 2014. We calculate average revenue per service by dividing consolidated funeral revenue, excluding GA revenue, recognized preneed revenue, and certain other revenue, to avoid distorting our averages of normal funeral services revenue, by the number of consolidated funeral services performed during the period. Recognized preneed revenue are preneed sales of items that are delivered at the time of sale, including memorial merchandise and travel protection and are excluded from our calculation of consolidated average revenue per service because the associated service has not yet been performed.

*(In millions, except funeral services performed and average revenue per funeral service)*

|  | Three Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| Consolidated funeral revenue | $449.2 | $458.9 |
| Less: Consolidated recognized preneed revenue | 25.7 | 22.6 |
| Less: Consolidated GA revenue | 34.9 | 32.3 |
| Less: Other revenue | 4.1 | 3.3 |
| Adjusted consolidated funeral revenue | $384.5 | $400.7 |
| Consolidated funeral services performed | 73,874 | 76,306 |
| Consolidated average revenue per service | $5,205 | $5,251 |

48

The following table provides the data necessary to calculate our comparable average revenue per service for the three months ended September 30, 2015 and 2014. We calculate average revenue per service by dividing comparable funeral revenue, excluding comparable GA revenue, recognized preneed revenue, and certain other revenue, to avoid distorting our averages of normal funeral services revenue, by the number of comparable funeral services performed during the period. Recognized preneed revenue are preneed sales of items that are delivered at the time of sale, including memorial merchandise and travel protection, and are excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed.

*(In millions, except funeral services performed and average revenue per funeral service)*

|  | Three Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| Comparable funeral revenue | $444.9 | $448.5 |
| Less: Comparable recognized preneed revenue | 25.2 | 22.4 |
| Less: Comparable GA revenue | 34.6 | 32.1 |
| Less: Other revenue | 4.1 | 3.1 |
| Adjusted comparable funeral revenue | $381.0 | $390.9 |
| Comparable funeral services performed | 73,048 | 73,996 |
| Comparable average revenue per service | $5,216 | $5,282 |

### Funeral Results

#### Funeral Revenue

Consolidated revenue from funeral operations were $449.2 million in the third quarter of 2015 compared to $458.9 million for the same period in 2014. This decrease is primarily attributable to the loss of $10.0 million in revenue contributed in 2014 by properties that have been subsequently divested as the decrease in comparable revenue described below was largely offset by revenue contributed by acquired and newly opened properties.

Comparable revenue from funeral operations were $444.9 million in the third quarter of 2015 compared to $448.5 million for the same period in 2014. Declines in total comparable funeral services performed and comparable average revenue per service were partially offset by a $2.9 million increase in recognized preneed revenue for items that are delivered at the time of sale and a $2.5 million increase in GA revenue.

#### Funeral Services Performed

Our consolidated funeral services performed decreased 3.2% during the third quarter of 2015 compared to the same period in 2014, primarily because of the loss of services performed by properties that have been subsequently divested. Our comparable funeral services performed declined 1.3%. Growth of 10.4% in prearranged services performed sold through our non-funeral home channel was more than offset by atneed and prearranged services sold through our funeral homes declining 2.2%.

Our comparable cremation rate of 51.7% in the third quarter of 2015 increased from 50.9% in the same period of 2014. This growth in comparable cremations was generated primarily by direct cremations. While the average revenue for direct cremations and cremations with service is lower than that for traditional burials, we continue to expand our cremation memorialization product and service offerings, which resulted in higher average revenue for cremation services.

#### Average Revenue Per Service

Our consolidated average revenue per service decreased $46, or 0.9%, in the third quarter of 2015 compared to 2014, primarily due to a 1.2% decrease in comparable average revenue per service. Our comparable average revenue per service decreased $66 in the third quarter of 2015 compared to the same period in 2014. Absent the negative impact of the increase in non-funeral home prearranged services, which carry a lower average per service, our comparable average revenue per service decreased $24, or 0.4%. Inflationary pricing growth was offset by an unfavorable Canadian currency impact, an increase in cremation mix, and lower trust fund income related to the negative financial market conditions during the third quarter.

#### Funeral Gross Profit

Consolidated funeral gross profit decreased $12.7 million, or 14.2%, in the third quarter of 2015 compared to the same period in 2014. This decrease is primarily attributable to the decrease in comparable gross profit described below and the loss of $0.8 million in gross profit contributed by properties that have been subsequently divested.

Comparable funeral gross profit decreased $11.5 million, or 12.9%, in the third quarter of 2015 compared to the same period in 2014. The comparable gross margin percentage decreased from 19.9% to 17.5% in the third quarter of 2015 when compared to the same period in 2014. The decrease in gross profit is primarily the result of the decrease in comparable revenue described above and inflationary increases in our fixed cost structure.

### Cemetery Results

#### Cemetery Revenue

Consolidated cemetery revenue increased $5.9 million, or 2.3%, in the third quarter of 2015 compared to the same period in 2014. This increase is attributable to the $9.5 million increase in comparable revenue described below partially offset by the loss of $6.2 million in revenue contributed in 2014 by properties that have been subsequently divested.

Comparable revenue increased $9.5 million, or 3.8%, primarily as a result of an increase in preneed cemetery property sales production that was somewhat offset by lower recognized trust fund income related to financial market conditions during the quarter and an unfavorable Canadian currency impact.

#### Cemetery Gross Profit

Consolidated cemetery gross profit increased $6.3 million, or 10.8%, in the third quarter of 2015 compared to the same period in 2014. This increase is attributable to the $6.1 million increase in comparable gross profit described below.

Comparable cemetery gross profit increased $6.1 million, or 10.5%, and gross margin percentage increased from 22.9% to 24.4% in the third quarter of 2015 compared to the same period in 2014 primarily as a result of the increase in comparable revenue described above partially offset by an unfavorable Canadian currency impact.

### Other Financial Statement Items

#### General and Administrative Expenses

General and administrative expenses decreased $11.6 million to $28.2 million during the third quarter of 2015. The prior year included $10.7 million in acquisition and transition costs related to the integration of Stewart and $2.9 million of system integration and other costs. Excluding these costs, general and administrative expenses increased $2.0 million over the prior year quarter, which is primarily due to collections on insurance claims in the third quarter of 2014 that did not recur in 2015.

#### (Losses) Gains on Divestitures and Impairment Charges, Net

We recognized a $10.8 million net pre-tax gain on divestitures and impairment charges in the third quarter of 2015 from the sale of non-strategic funeral and cemetery locations compared to a $26.6 million net pre-tax gain in the same period of 2014 from the required Federal Trade Commission divestitures of funeral and cemetery locations in the United States stemming from the Stewart acquisition.

#### Losses on Early Extinguishment of Debt

During the three months ended September 30, 2015, we recognized a $6.9 million loss on early extinguishment of debt as we took advantage of historically low interest rates to refinance our 6.75% Senior Notes due 2016.

#### Provision for Income Taxes

Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statute of limitations, and increases or decreases in valuation allowances. Our effective tax rate was 35.3% and 81.7% for the three months ended September 30, 2015 and 2014, respectively. The higher effective tax rate for the three months ended September 30, 2014 was primarily due to the gain on required divestitures associated with the Stewart acquisition. The effective tax rate for the third quarter of 2015 is above the 35% federal statutory tax rate primarily due to state tax expense partially offset by state legislative changes and foreign earnings taxed at lower rates.

#### Weighted Average Shares

The diluted weighted average number of shares outstanding was 203.4 million during the third quarter of 2015 compared to 213.0 million in the same period 2014. The decrease in the number of shares reflects the impact of shares repurchased under our share repurchase program, partially offset by stock options exercised.

### Results of Operations — Nine Months Ended September 30, 2015 and 2014

### Management Summary

Key highlights in the first nine months of 2015 were as follows:

- Comparable funeral gross profit increased $6.7 million, or 2.3%, primarily due to an increase in comparable funeral revenue, partially offset by inflationary increases in our fixed cost structure and an unfavorable impact of Canadian currency.
- Comparable cemetery gross profit increased $31.7 million, or 20.5%, primarily driven by an increase in preneed property sales production and higher trust fund income, partially offset by an unfavorable impact of Canadian currency.

### Results of Operations

In the first nine months of 2015, we reported net income attributable to common stockholders of $161.4 million ($0.78 per diluted share) compared to net income attributable to common stockholders in the first nine months of 2014 of $84.7 million ($0.39 per diluted share). These results were affected by the following items:

*(In thousands)*

|  | 2015 | 2014 |
| --- | ---: | ---: |
| Net after-tax gains (losses) from the sale of assets | $1,175 | $(20,125) |
| After-tax losses from the early extinguishment of debt | $(4,199) | $(17,420) |
| After-tax expenses related to acquisition and transition costs | $(1,824) | $(24,576) |
| After-tax expenses related to legal defense fees and labor matters | $— | $(7,398) |
| Change in certain tax reserves and other | $(2,411) | $(5,723) |

### Consolidated Versus Comparable Results

The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the nine months ended September 30, 2015 and 2014. We define comparable operations (or same store operations) as those funeral and cemetery locations that were owned for the entire period beginning January 1, 2014 and ending September 30, 2015. The following tables present operating results for funeral and cemetery locations that were owned by us during this period.

*(In millions)*

| Nine Months Ended September 30, 2015 Revenue | Consolidated | Less: Results Associated with Acquisition/New Construction | Less: Results Associated with Divestitures | Comparable |
| --- | ---: | ---: | ---: | ---: |
| Funeral revenue | $1,428.4 | $8.7 | $2.3 | $1,417.4 |
| Cemetery revenue | 788.6 | 5.4 | 0.2 | 783.0 |
| Total revenue | $2,217.0 | $14.1 | $2.5 | $2,200.4 |
| Gross profit |  |  |  |  |
| Funeral gross profit | $298.9 | $(0.8) | $(2.0) | $301.7 |
| Cemetery gross profit | 187.7 | 1.5 | (0.5) | 186.7 |
| Total gross profit | $486.6 | $0.7 | $(2.5) | $488.4 |

51

*(In millions)*

| Nine Months Ended September 30, 2014 Revenue | Consolidated | Less: Results Associated with Acquisition/New Construction | Less: Results Associated with Divestitures | Comparable |
| --- | ---: | ---: | ---: | ---: |
| Funeral revenue | $1,447.5 | $0.8 | $57.2 | $1,389.5 |
| Cemetery revenue | 763.1 | 0.2 | 33.4 | 729.5 |
| Total revenue | $2,210.6 | $1.0 | $90.6 | $2,119.0 |
| Gross profit |  |  |  |  |
| Funeral gross profit | $310.1 | $(0.3) | $15.4 | $295.0 |
| Cemetery gross profit | 160.3 | (0.2) | 5.5 | 155.0 |
| Total gross profit | $470.4 | $(0.5) | $20.9 | $450.0 |

The following table provides the data necessary to calculate our consolidated average revenue per service for the nine months ended September 30, 2015 and 2014. We calculate average revenue per service by dividing consolidated funeral revenue, excluding GA revenue, recognized preneed revenue, and certain other revenue, to avoid distorting our averages of normal funeral services revenue, by the number of consolidated funeral services performed during the period. Recognized preneed revenue are preneed sales of items that are delivered at the time of sale, including memorial merchandise and travel protection insurance and are excluded from our calculation of consolidated average revenue per service because the associated service has not yet been performed.

*(In millions, except funeral services performed and average revenue per funeral service)*

|  | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| Consolidated funeral revenue | $1,428.4 | $1,447.5 |
| Less: Consolidated recognized preneed revenue | 74.2 | 65.1 |
| Less: Consolidated GA revenue | 101.3 | 92.2 |
| Less: Other revenue | 10.4 | 9.9 |
| Adjusted consolidated funeral revenue | $1,242.5 | $1,280.3 |
| Consolidated funeral services performed | 239,153 | 245,216 |
| Consolidated average revenue per service | $5,195 | $5,221 |

52

The following table provides the data necessary to calculate our comparable average revenue per service for the nine months ended September 30, 2015 and 2014. We calculate average revenue per service by dividing comparable funeral revenue, excluding comparable GA revenue, recognized preneed revenue, and certain other revenue to avoid distorting our averages of normal funeral services revenue, by the number of comparable funeral services performed during the period. Recognized preneed revenue are preneed sales of items that are delivered at the time of sale, including memorial merchandise and travel protection insurance and are excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed.

*(In millions, except funeral services performed and average revenue per funeral service)*

|  | Nine Months Ended September 30, 2015 | 2014 |
| --- | ---: | ---: |
| Comparable funeral revenue | $1,417.4 | $1,389.5 |
| Less: Comparable recognized preneed revenue | 72.9 | 64.6 |
| Less: Comparable GA revenue | 101.0 | 90.6 |
| Less: Other revenue | 10.3 | 9.2 |
| Adjusted comparable funeral revenue | $1,233.2 | $1,225.1 |
| Comparable funeral services performed | 236,824 | 234,267 |
| Comparable average revenue per service | $5,207 | $5,230 |

### Funeral Results

#### Funeral Revenue

Consolidated revenue from funeral operations were $1,428.4 million in the nine months ended September 30, 2015 compared to $1,447.5 million for the same period in 2014. This decrease is primarily attributable to the loss of $54.9 million in revenue contributed by properties that have been subsequently divested partially offset by a $27.9 million increase in comparable revenue as described below and $7.9 million in revenue contributed by acquired properties.

Comparable revenue from funeral operations were $1,417.4 million in the first nine months of 2015 compared to $1,389.5 million for the same period in 2014. This $27.9 million increase was primarily due to a 1.1% increase in comparable funeral services performed as described below, an $8.3 million increase in recognized preneed revenue for items that are delivered at the time of sale, and a $10.4 million increase in GA revenue.

#### Funeral Services Performed

Our consolidated funeral services performed decreased 2.5% during the nine months ended September 30, 2015 compared to the same period in 2014, primarily because of the loss of services performed by properties that have been subsequently divested offset by a 1.1% increase in comparable funeral services performed. This growth comprises a 13.5% increase in prearranged services performed sold through our non-funeral home channel coupled with a 0.1% increase in atneed and prearranged services sold through our funeral homes.

Our comparable cremation rate of 51.3% in the nine months ended September 30, 2015 increased from 50.8% in 2014. This growth in comparable cremations was generated primarily by direct cremations. While the average revenue for direct cremations and cremations with service is lower than that for traditional burials, we continue to expand our cremation memorialization product and service offerings, which have resulted in higher average revenue for cremation services.

#### Average Revenue Per Service

Our consolidated average revenue per service decreased $26, or 0.5%, for the nine months ended September 30, 2015 compared to the same period in 2014, primarily due to a 0.4% decrease in comparable average revenue per service. Our comparable average revenue per service decreased $23 for the nine months ended September 30, 2015 compared to the same period in 2014. Absent the negative impact of the increase in non-funeral home prearranged services, which carry a lower average per service, our comparable average revenue per service increased $23, or 0.4%. Inflationary pricing growth was partially offset by an unfavorable Canadian currency impact, an increase in cremation mix, and lower trust fund income.

#### Funeral Gross Profit

Consolidated funeral gross profit decreased $11.2 million, or 3.6%, in the nine months ended September 30, 2015 compared to the same period in 2014. This decrease is primarily attributable to the loss of $17.4 million in gross profit contributed by properties that have been subsequently divested offset by a $6.7 million increase in comparable gross profit as described below.

Comparable funeral gross profit increased $6.7 million, or 2.3%, and the comparable gross margin percentage increased from 21.2% to 21.3% in the nine months ended September 30, 2015 when compared to the same period in 2014 primarily as a result of the increase in comparable revenue as described above partially offset by inflationary increases in our fixed cost structure and an unfavorable impact of Canadian currency.

### Cemetery Results

#### Cemetery Revenue

Consolidated revenue from our cemetery operations increased $25.5 million, or 3.3%, in the nine months ended September 30, 2015 compared to the same period in 2014. This increase is primarily attributable to the $53.5 million increase in comparable revenue and $5.2 million in revenue contributed by acquired properties partially offset by the loss of $33.2 million in revenue contributed by properties that have been subsequently divested.

Comparable cemetery revenue increased $53.5 million, or 7.3%, primarily as a result of an increase in preneed property sales production and higher trust fund income, partially offset by an unfavorable impact of Canadian currency.

#### Cemetery Gross Profit

Consolidated cemetery gross profit increased $27.4 million, or 17.1%, in the nine months ended September 30, 2015 compared to the same period in 2014. This increase is primarily the result of the $31.7 million increase in comparable gross profit described below partially offset by the loss of $6.0 million in gross profit contributed by properties that have been subsequently divested.

Comparable cemetery gross profit increased $31.7 million, or 20.5%, and gross margin percentage increased from 21.2% to 23.8% in the nine months ended September 30, 2015 compared to the same period in 2014. This increase is primarily the result of higher revenue discussed above, partially offset by an unfavorable impact of Canadian currency.

### Other Financial Statement Items

#### General and Administrative Expenses

General and administrative expenses decreased $45.1 million to $96.8 million during the nine months ended September 30, 2015 compared to $141.9 million for the same period in 2014. The current period included $4.1 million in system transition costs. The prior year included $41.2 million in acquisition and transition costs mostly related to Stewart, $12.2 million in legal settlements and defense fees primarily related to the settlement of the Eden matter, and $8.2 million in system integration and other costs. Excluding these costs in both periods, general and administrative expenses increased $12.4 million over the prior year, which is primarily due to the permanent costs associated with the increased scale of the combined SCI and Stewart entity and collections on insurance claims in 2014 that did not recur.

#### Gains on Divestitures and Impairment Charges, net

We recognized a $3.4 million net pre-tax gain on divestitures and impairment charges in the nine months ended September 30, 2015 from the sale of non-strategic funeral and cemetery locations compared to $58.8 million net pre-tax gain on divestitures and impairment charges in the nine months ended September 30, 2014, which was associated with the required Federal Trade Commission divestitures of funeral and cemetery locations in the United States stemming from the Stewart acquisition.

#### Interest Expense

Interest expense decreased $4.8 million to $129.8 million during the first nine months of 2015. This decrease in interest expense is primarily due to the refinancing of our 6.75% Senior Notes due 2015, our 6.5% Senior Notes due 2019, and our 7.0% Senior Notes due 2019 in the first half of 2014.

#### Losses on Early Extinguishment of Debt

During the nine months ended September 30, 2015, we recognized a $6.9 million loss on early extinguishment of debt as we took advantage of historically low interest rates to refinance our 6.75% Senior Notes due 2016.

During the nine months ended September 30, 2014, we recognized a $29.2 million loss on early extinguishment of debt as we took advantage of historically low interest rates to refinance our 6.75% Senior Notes due 2015, our 6.5% Senior Notes due 2019, and our 7.0% Senior Notes due 2019.

#### Provision for Income Taxes

Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statute of limitations, and increases or decreases in valuation allowances. Our effective tax rate was 36.5% and 60.0% for the nine months ended September 30, 2015 and 2014, respectively. The higher effective tax rate for the nine months ended September 30, 2014 was primarily due to the gain on required divestitures associated with the Stewart acquisition. The effective tax rate for the nine months ended September 30, 2015 is above the 35% federal statutory tax rate primarily due to state tax expense partially offset by state legislative changes and foreign earnings taxed at lower rates.

#### Weighted Average Shares

The diluted weighted average number of shares outstanding was 206.0 million for the nine months ended September 30, 2015 compared to 215.4 million in the same period 2014. The decrease in the number of shares reflects the impact of shares repurchased under our share repurchase program, partially offset by stock option exercises.

### Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2014.

No other significant changes to our accounting policies have occurred subsequent to December 31, 2014, except as described below within *Recent Accounting Pronouncements and Accounting Changes.*

### Recent Accounting Pronouncements and Accounting Changes

For discussion of recent accounting pronouncements and accounting changes, see Part I, Item 1. Financial Statements, Note 3.

### Cautionary Statement on Forward-Looking Statements

The statements in this Form 10-Q that are not historical facts are forward-looking statements made in reliance on the “safe harbor” protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as “believe,” “estimate,” “project,” “expect,” “anticipate,” or “predict,” that convey the uncertainty of future events or outcomes. These statements are based on assumptions that we believe are reasonable; however, many important factors could cause our actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by us, or on our behalf. Important factors, which could cause actual results to differ materially from those in forward-looking statements include, among others, the following:

- Our affiliated funeral and cemetery trust funds own investments in equity securities, fixed income securities, and mutual funds, which are affected by market conditions that are beyond our control.
- We may be required to replenish our affiliated funeral and cemetery trust funds to meet minimum funding requirements, which would have a negative effect on our earnings and cash flow.
- Our ability to execute our strategic plan depends on many factors, some of which are beyond our control.
- Our credit agreements contain covenants that may prevent us from engaging in certain transactions.
- If we lost the ability to use surety bonding to support our preneed funeral and preneed cemetery activities, we may be required to make material cash payments to fund certain trust funds.
- The funeral home and cemetery industry is competitive.
- Increasing death benefits related to preneed funeral contracts funded through life insurance contracts may not cover future increases in the cost of providing a price-guaranteed funeral service.
- The financial condition of third-party insurance companies that fund our preneed funeral contracts may impact our future revenue.
- Unfavorable results of litigation could have a material adverse impact on our financial statements.
- Unfavorable publicity could affect our reputation and business.
- If the number of deaths in our markets declines, our cash flows and revenue may decrease.
- If we are not able to respond effectively to changing consumer preferences, our market share, revenue, and profitability could decrease.
- The continuing upward trend in the number of cremations performed in North America could result in lower revenue and gross profit.
- Our funeral home and cemetery businesses are high fixed-cost businesses.
- Regulation and compliance could have a material adverse impact on our financial results.
- Cemetery burial practice legal claims could have a material adverse impact on our financial results.
- A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.
- Declines in overall economic conditions beyond our control could reduce future potential earnings and cash flows and could result in future impairments to goodwill and/or other intangible assets.
- Any failure to maintain the security of the information relating to our customers, their loved ones, our associates, and our vendors could damage our reputation, could cause us to incur substantial additional costs and to become subject to litigation, and could adversely affect our operating results.
- Our Canadian business exposes us to operational, economic, and currency risks.
- Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and prevent us from fulfilling our obligations under our indebtedness.
- Failure to maintain effective internal control over financial reporting could adversely affect our results of operations, investor confidence, and our stock price.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2014 Annual Report on Form 10-K. Copies of this document as well as other SEC filings can be obtained from our website at www.sci-corp.com. We assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

## Market risk

As filed, 583 characters.

### Marketable Equity and Debt Securities — Price Risk

In connection with our preneed operations and sales, the related trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices.

Cost and market values as of September 30, 2015 are presented in Part I, Item 1. Financial Statements and Notes 4, 5, and 6 of this Form 10-Q. Also, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, *Financial Conditions, Liquidity and Capital Resources*, for discussion of trust investments.

## Controls and procedures

As filed, 3,547 characters.

### Disclosure Controls and Procedures

As of September 30, 2015, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on our evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective as of September 30, 2015.

### Material Weakness in Internal Control over Financial Reporting and Status of Remediation Efforts

As initially reported in our Form 10-K for the year ended December 31, 2014 we did not maintain effective internal control over financial reporting as of December 31, 2014 as a result of a material weakness in accounting for income taxes. A material weakness is a control deficiency, or combination of control deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis. Refer to Item 9A in our Annual Report on Form 10-K for the year ended December 31, 2014 for a description of this material weakness.

In response to the identified material weakness, our management, with oversight from the Company’s Audit Committee, has dedicated significant resources, including retaining third party consultants, to enhance the Company’s internal control over financial reporting and remediate the previously disclosed material weakness over the course of 2015. In connection with these efforts, the Company documented its internal controls with respect to the annual tax basis balance sheet process and performed those controls in the preparation of the tax basis balance sheet.

Based on the actions taken by our management, including the testing and assessment of the effectiveness of internal controls related to the completion and review of our tax basis balance sheet process, our management has concluded that the previously identified and disclosed material weakness no longer exists as of September 30, 2015.

### Changes in Internal Control over Financial Reporting

Management, together with our CEO and CFO, evaluated the changes in our internal control over financial reporting during the quarter ended September 30, 2015. As outlined above, we have implemented and refined our controls to remediate the material weakness related to our annual tax basis balance sheet process, including the annual reconciliation of the tax basis balance sheet following the filing of income tax returns and the establishment of preparer and reviewer roles, thus strengthening the tax compliance process. The implemented controls are changes in our internal control over financial reporting during the quarter ended September 30, 2015, that have materially affected, or are reasonably likely to material affect, our internal control over financial reporting.

## Risk factors

As filed, 158 characters.

There have been no material changes in our Risk Factors as set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2014.

Filed Nov 2, 2015.
Source: SEC EDGAR, the filing index for accession 0000089089-15-000028. Last ingested by Listed: Nov 6, 2026, 13:24 ET. No prices; not investment advice.