# Service Corp International: Form 10-Q for the period ended Sep 30, 2016

- Company: [Service Corp International](/companies/sci.md) (CIK 89089)
- Form: 10-Q
- Filed: 2016-10-27
- Accepted by EDGAR: Oct 27, 2016, 16:45 ET
- Period: 2016-09-30
- Accession: 0000089089-16-000059
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/89089/000008908916000059/sci-2016930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/89089/000008908916000059/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-07-01 to 2016-09-30 | $721.5m | us-gaap:Revenues |
| Revenue | 9 months, 2016-01-01 to 2016-09-30 | $2.22bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2016-07-01 to 2016-09-30 | $580.7m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2016-01-01 to 2016-09-30 | $1.76bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-07-01 to 2016-09-30 | $140.7m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2016-01-01 to 2016-09-30 | $465.7m | us-gaap:GrossProfit |
| Operating income | 3 months, 2016-07-01 to 2016-09-30 | $114.4m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2016-01-01 to 2016-09-30 | $332.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-07-01 to 2016-09-30 | $39.5m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2016-01-01 to 2016-09-30 | $122.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-07-01 to 2016-09-30 | $27.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2016-01-01 to 2016-09-30 | $76.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-07-01 to 2016-09-30 | $47.7m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2016-01-01 to 2016-09-30 | $110.8m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.24 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2016-01-01 to 2016-09-30 | $0.56 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2016-07-01 to 2016-09-30 | $0.25 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2016-01-01 to 2016-09-30 | $0.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2016-07-01 to 2016-09-30 | 196,567,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2016-01-01 to 2016-09-30 | 197,175,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2016-01-01 to 2016-09-30 | $358.5m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 9 months, 2016-01-01 to 2016-09-30 | $131.2m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 9 months, 2016-01-01 to 2016-09-30 | $73.7m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2016-01-01 to 2016-09-30 | $193.0m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-09-30 | $177.6m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-09-30 | $344.9m | us-gaap:AssetsCurrent |
| Total assets | at 2016-09-30 | $12.05bn | us-gaap:Assets |
| Current liabilities | at 2016-09-30 | $537.8m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2016-09-30 | $3.18bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-09-30 | $89.5m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-09-30 | $1.09bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 55,431 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, 2016, we operated 1,531 funeral service locations and 471 cemeteries (including 262 funeral service/cemetery combination locations), which are geographically diversified across 45 states, eight Canadian provinces, the District of Columbia, and Puerto Rico.

We are well known for our Dignity Memorial® brand, North America's first transcontinental brand of deathcare products and services. Our other brands are Dignity Planning™, National Cremation Society®, Advantage® Funeral and Cremation Services, Funeraria del Angel™, Making Everlasting Memories®, Neptune Society™, and Trident Society™. Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses, which enables 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.

Our financial position is enhanced by our approximately $10.0 billion backlog of future revenue from both trust and insurance-funded sales at September 30, 2016, 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 have developed 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 $358.5 million in the nine months ended September 30, 2016. We have $342.0 million in borrowing capacity under our bank credit agreement.

Our bank credit agreement requires us to maintain certain leverage and interest coverage ratios. As of September 30, 2016, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of September 30, 2016 are as follows:

|  | Per Credit Agreement | Actual |
| --- | --- | ---: |
| Leverage ratio | 4.25 (Max) | 3.92 |
| Interest coverage ratio | 3.00 (Min) | 4.85 |

We believe our sources of liquidity can be supplemented by our ability to access the capital markets for additional debt or equity securities. In March 2016, we entered into a new $1.4 billion bank credit agreement due March 2021 with a syndicate of banks. The credit agreement consists of a $700.0 million Bank Credit Facility and a $700.0 million Term Loan. We used $550.0 million of the Term Loan due March 2021 and $30.0 million of the Bank Credit Facility due March 2021 to repay $270.0 million outstanding borrowings on the Bank Credit Facility due July 2018 and $310.0 million outstanding borrowings on the Term Loan due July 2018. In April 2016, we drew $170.0 million on our Bank Credit Facility due March 2021, and $150.0 million on our Term Loan due March 2021, to repay our $295.0 million 7.0% Senior Notes due June 2017 and associated transaction costs, which resulted in the recognition of a $21.7 million loss on early extinguishment of debt.

We believe that our unencumbered cash on hand, future operating cash flows, and the available capacity under our bank credit agreement will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations. Due to cash balances residing in Canada and expected minimum operating cash in transit, a portion of our cash on hand is encumbered.

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 service locations 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 service locations. 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 $0.13 per common share in 2016. We target a payout ratio of 35% to 45% 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 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, 2016, we repurchased 7,542,812 shares of common stock at an aggregate cost of $193.0 million, which is an average cost per share of $25.59. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $88.0 million at September 30, 2016. 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 bank 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 was $358.5 million in the first nine months of 2016, compared to $396.6 million in the first nine months of 2015.

Operating cash flows are impacted by the following items:

*(In millions)*

|  | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Premiums paid on early extinguishment | $20.5 | $6.5 |
| Excess tax benefits from share-based awards | $11.5 | $17.3 |
| System transition and other costs | $11.1 | $4.2 |

Excluding the above items, cash flow from operations decreased $23.0 million for the first nine months of 2016 versus the same period in 2015. The 2016 decrease is primarily due to expected higher cash tax payments of $29.9 million, partially offset by favorable working capital initiatives.

#### Investing Activities

Cash flows from investing activities used $179.1 million in the first nine months of 2016 compared to using $125.8 million in the same period of 2015. This was primarily attributable to an increase of $24.7 million in cash spent on acquisitions, a $26.5 million increase in capital expenditures, and a $2.9 million increase in net withdrawals of restricted funds, partially offset by a $1.7 million increase in cash receipts from divestitures and asset sales. The increase in capital expenditures primarily relates to the development of contemporary cemetery property, which enables our sales force to drive sustainable growth in our preneed cemetery property sales, and the construction of new funeral homes.

#### Financing Activities

Financing activities used $140.3 million in the first nine months of 2016 compared to using $298.4 million in the same period of 2015. This decrease was primarily driven by a decrease in purchases of Company common stock of $112.5 million and an increase in debt issuance proceeds net of payments of $69.4 million partially offset by decreased proceeds from exercise of stock options of $14.5 million, a decrease of $5.8 million in excess tax benefits from share based awards, and a $9.6 million increase in payments of dividends.

We repurchased 7.5 million shares in the first nine months of 2016 for $193.0 million and 11.0 million shares in the same period of 2015 for $305.5 million. We paid cash dividends of $73.7 million in the first nine months of 2016 and $64.1 million in the same period of 2015.

### 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, 2016 | December 31, 2015 |
| --- | ---: | ---: |
| Preneed funeral | $118.6 | $112.7 |
| Preneed cemetery: |  |  |
| Merchandise and services | 141.3 | 136.7 |
| Pre-construction | 7.8 | 5.9 |
| Bonds supporting preneed obligations | 267.7 | 255.3 |
| Bonds supporting preneed business permits | 4.5 | 4.5 |
| Other bonds | 18.9 | 17.9 |
| Total surety bonds outstanding | $291.1 | $277.7 |

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. For the three months ended September 30, 2016 and 2015, we had $5.5 million and $5.2 million, respectively, of cash receipts attributable to bonded sales. For the nine months ended September 30, 2016 and 2015, we had $16.1 million and $15.2 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 may 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, 2016 and 2015.

*(In millions)*

| Funeral: Preneed trust-funded (including bonded): | Three Months Ended September 30, 2016 | 2015 | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Sales production | $72.5 | $65.0 | $216.4 | $196.9 |
| Sales production (number of contracts) | 22,549 | 20,975 | 68,562 | 63,623 |
| Maturities | $58.1 | $53.5 | $177.2 | $168.5 |
| Maturities (number of contracts) | 15,295 | 15,798 | 48,417 | 49,518 |
| **Cemetery:** |  |  |  |  |
| Sales production: |  |  |  |  |
| Preneed | $189.8 | $180.5 | $595.6 | $569.1 |
| Atneed | 72.6 | 73.9 | 230.1 | 228.3 |
| Total sales production | $262.4 | $254.4 | $825.7 | $797.4 |
| Sales production deferred to backlog: |  |  |  |  |
| Preneed | $93.9 | $88.6 | $283.8 | $262.2 |
| Atneed | 55.6 | 54.8 | 172.4 | 171.1 |
| Total sales production deferred to backlog | $149.5 | $143.4 | $456.2 | $433.3 |
| Revenue recognized from backlog: |  |  |  |  |
| Preneed | $73.4 | $64.9 | $187.1 | $167.5 |
| Atneed | 56.5 | 54.9 | 171.3 | 167.5 |
| Total revenue recognized from backlog | $129.9 | $119.8 | $358.4 | $335.0 |

*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 a 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, 2016 and 2015, and the number of contracts associated with those transactions.

*(In millions)*

| Preneed insurance-funded: | Three Months Ended September 30, 2016 | 2015 | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: | ---: | ---: |
| Sales production (1) | $131.9 | $136.4 | $422.4 | $409.7 |
| Sales production (number of contracts) (1) | 21,434 | 22,803 | 69,156 | 68,215 |
| General agency revenue | $32.1 | $34.9 | $105.4 | $101.3 |
| Maturities | $76.0 | $72.8 | $239.4 | $241.4 |
| Maturities (number of contracts) | 12,943 | 12,086 | 40,778 | 40,873 |

(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, 2016 and December 31, 2015. 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, 2016 and December 31, 2015. 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 this revenue. Because the future revenue exceeds 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, 2016 Fair Value | Cost | December 31, 2015 Fair Value | Cost |
| --- | ---: | ---: | ---: | ---: |
| Deferred preneed funeral revenue | $0.57 | $0.57 | $0.56 | $0.56 |
| Deferred preneed funeral receipts held in trust | 1.56 | 1.53 | 1.51 | 1.56 |
|  | $2.13 | $2.10 | $2.07 | $2.12 |
| Allowance for cancellation on trust investments | (0.12) | (0.12) | (0.16) | (0.16) |
| Backlog of trust-funded preneed funeral revenue | $2.01 | $1.98 | $1.91 | $1.96 |
| Backlog of insurance-funded preneed revenue(1) | 5.34 | 5.34 | 5.10 | 5.10 |
| Total backlog of preneed funeral revenue | $7.35 | $7.32 | $7.01 | $7.06 |
| Preneed funeral receivables, net and trust investments | $1.82 | $1.79 | $1.76 | $1.81 |
| Allowance for cancellation on trust investments | (0.10) | (0.10) | (0.15) | (0.15) |
| Assets associated with backlog of trust-funded deferred preneed funeral revenue, net of estimated allowance for cancellation | $1.72 | $1.69 | $1.61 | $1.66 |
| Insurance policies associated with insurance-funded deferred revenue, net of estimated allowance for cancellation(1) | 5.34 | 5.34 | 5.10 | 5.10 |
| Total assets associated with backlog of preneed funeral revenue, net of estimated allowance for cancellation | $7.06 | $7.03 | $6.71 | $6.76 |
| Deferred preneed cemetery revenue | $1.18 | $1.18 | $1.12 | $1.12 |
| Deferred preneed cemetery receipts held in trust | 1.57 | 1.52 | 1.46 | 1.51 |
|  | $2.75 | $2.70 | $2.58 | $2.63 |
| Allowance for cancellation on trust investments | (0.15) | (0.15) | (0.11) | (0.11) |
| Total backlog of deferred cemetery revenue | $2.60 | $2.55 | $2.47 | $2.52 |
| Preneed cemetery receivables, net and trust investments | $2.47 | $2.42 | $2.32 | $2.37 |
| Allowance for cancellation on trust investments | (0.15) | (0.15) | (0.12) | (0.12) |
| Total assets associated with backlog of deferred cemetery revenue, net of estimated allowance for cancellation | $2.32 | $2.27 | $2.20 | $2.25 |

(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, 2016, the difference between the backlog and asset fair value amounts represents $0.26 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $0.11 billion collected from customers that were not required to be deposited into trust, and $0.20 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 unaudited condensed 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 upon or after the time of need.

### 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 remains in the trust in perpetuity and the net ordinary earnings are distributed with the intention of offsetting the expense 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 net ordinary earnings that are distributed.

Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and services 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. 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. Asset allocation is based on the liability structure of each funeral, cemetery, and perpetual care trust. The investment advisor recommends investment managers to the trustees, which are selected on the basis of various criteria set forth in the investment policy. 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 years to mature; therefore, the funds associated with these contracts are often invested through several market cycles. The cemetery perpetual care trusts' investment objectives emphasize providing a steady stream of current investment income with some capital appreciation. All of the trusts seek to control risk and volatility through a combination of asset classes, investment styles, and a diverse mix of investment managers.

As of September 30, 2016, approximately 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 companies (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 assets 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.

#### Investment Structures

Each financial institution, acting as trustee, manages its allocation of trust assets in compliance with the investment policy primarily through the purchase of three managed limited liability companies (LLCs), one or each trust type and each with a different, independent trustee acting as custodian. The managed LLCs use the following structures for investments:

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

*Mutual funds.* The trust 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, Treasury inflation protected securities (TIPS), high yield bonds, and commodities, all of which are governed by guidelines outlined in their individual prospectuses.

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

For those accounts not eligible for participation in the managed LLCs, the trustee utilizes institutional share class mutual funds that comply with our investment policy statement or with applicable state or provincial regulations. The U.S. trusts also include a modest allocation to alternative investments, which comprise primarily private equity investments. These investments are also held in LLCs and are managed by certain trustees.

#### Asset Classes

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

*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 September 30, 2016, the largest single equity position represented less than 1% of the total securities portfolio.

The objective of *private equity* investments is to provide high rates of return with reduced volatility. These investments are typically long-term in duration. These investments are diversified by strategy, sector, manager, and vintage year. The investments consist of numerous limited partnerships, including private equity, real estate, fund of funds, 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.

#### Trust Performance

The trust fund income recognized from these investment assets is volatile. During the nine months ended September 30, 2016, the Standard and Poor’s 500 Index increased 7.8% and the Barclay’s Aggregate Index increased 5.8%, while the combined SCI trusts increased 7.7%.

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, 2016 and 2015

### Management Summary

In the third quarter of 2016, we reported net income attributable to common stockholders of $47.7 million ($0.24 per diluted share) compared to net income attributable to common stockholders in the third quarter of 2015 of $47.4 million ($0.23 per diluted share). These results were affected by the following items:

*(In thousands)*

|  | Three Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Pre-tax gains from divestitures and impairment, net | $557 | $10,764 |
| Pre-tax losses from the early extinguishment of debt | $(25) | $(6,918) |
| Pre-tax expenses related to system transition costs | $(2,252) | $(124) |
| Tax provision from above items | $(1,467) | $(1,131) |
| Change in certain tax reserves and other | $(768) | $(1,042) |

In addition to the above items, growth in cemetery revenue, higher recognized preneed funeral revenue, lower interest expense, and effective management of our back office overhead expenses were partially offset by lower funeral services performed and increases in cemetery administrative and maintenance costs.

### Funeral Results

*(Dollars in millions, except average revenue per service)*

|  | Three Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Consolidated funeral revenue | $445.5 | $449.3 |
| Less: Revenue associated with acquisitions/new construction | 6.8 | 2.0 |
| Less: Revenue associated with divestitures | 0.7 | 2.4 |
| Comparable1 funeral revenue | 438.0 | 444.9 |
| Less: Comparable recognized preneed revenue | 27.4 | 25.5 |
| Less: Comparable general agency and other revenue | 30.3 | 35.6 |
| Adjusted comparable funeral revenue | $380.3 | $383.8 |
| Comparable services performed | 71,717 | 73,062 |
| Comparable average revenue per service2 | $5,303 | $5,253 |
| Consolidated funeral gross profit | $75.6 | $77.7 |
| Less: Gross profit (loss) associated with acquisitions/new construction | 0.8 | (0.2) |
| Less: Gross loss associated with divestitures | (0.3) | (0.4) |
| Comparable funeral gross profit | $75.1 | $78.3 |

(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2015 and ending September 30, 2016.

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

#### Funeral Revenue

Consolidated revenue from funeral operations was $445.5 million for the third quarter of 2016 compared to $449.3 million for the same period in 2015. This decrease is primarily attributable to a $6.9 million decrease in comparable revenue as described below as well as the loss of $1.7 million in revenue contributed by properties that have been subsequently divested. These decreases were partially offset by $4.8 million in revenue contributed by acquired properties.

Comparable revenue from funeral operations was $438.0 million for the third quarter of 2016 compared to $444.9 million for the same period in 2015. This $6.9 million decrease was primarily due to a 1.8% decrease in comparable services performed and lower general agency revenue due to a temporary mix change between trust and insurance production as well as the decision to cease production at the Catholic mortuaries in the Los Angeles Archdiocese. These decreases were partially offset by a $1.9 million increase in recognized preneed revenue driven by an increase in the number of contracts sold through our non-funeral home channel and the average price per contract. The decrease in services performed comprises a 2.3% decrease in services performed by our funeral homes offset by a 3.4% increase in cremation services performed by our non-funeral home channel.

Average revenue per funeral service increased 1.0% in the third quarter of 2016 compared to the third quarter of 2015. Organic growth at the customer level of 2.1% was partially offset by the increase in our cremation mix. Our total comparable cremation rate increased to 52.1% in the third quarter of 2016 from 51.3% in 2015 as a result of an increase in both direct cremations and cremations with service.

#### Funeral Gross Profit

Consolidated funeral gross profit decreased $2.1 million in the third quarter of 2016 compared to the same period in 2015. This decrease is primarily attributable to a decrease in comparable funeral gross profit of $3.2 million, or 4.1%. The impact of the decline in higher margin core revenue due to lower funeral services performed and a decline in general agency revenue was partially offset by lower operating expenses and increases in recognized preneed revenue from our non-funeral home channel.

### Cemetery Results

*(In millions)*

|  | Three Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Consolidated cemetery revenue | $276.0 | $265.2 |
| Less: Revenue associated with acquisitions/new construction | 2.0 | 1.8 |
| Less: Revenue associated with divestitures | — | 0.3 |
| Comparable1 cemetery revenue | $274.0 | $263.1 |
| Consolidated cemetery gross profit | $65.2 | $63.9 |
| Less: Gross profit associated with acquisitions/new construction | 0.4 | 0.8 |
| Less: Gross loss associated with divestitures | (0.2) | — |
| Comparable cemetery gross profit | $65.0 | $63.1 |

(1) We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2015 and ending September 30, 2016.

#### Cemetery Revenue

Consolidated revenue from our cemetery operations increased $10.8 million, or 4.1%, in the third quarter of 2016 compared to the same period in 2015 primarily due to a $10.9 million increase in comparable cemetery revenue in the third quarter of 2016 compared to the same period in 2015. This increase primarily resulted from increased recognized preneed revenue from higher preneed sales production and higher merchandise deliveries.

#### Cemetery Gross Profit

Consolidated cemetery gross profit increased $1.3 million, or 2.0%, in the third quarter of 2016 compared to the same period in 2015. This increase is primarily the result of a $1.9 million increase in comparable gross profit primarily driven by growth in recognized preneed revenue, partially offset by increases in cemetery administrative and maintenance costs.

### Other Financial Statement Items

#### General and Administrative Expenses

General and administrative expenses decreased $1.0 million to $26.9 million in the third quarter of 2016 compared to $27.9 million in the same period of 2015. The current quarter includes an increase of $2.2 million in system transition costs primarily related to the 2016 implementation of a new general ledger system. Excluding this $2.2 million, general and administrative expenses decreased $3.2 million compared to prior year quarter as we effectively managed our back office overhead expenses.

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

Gains (losses) on divestitures and impairment charges, net decreased $10.2 million in the third quarter of 2016 compared to the same period of 2015 as we divested non-strategic funeral and cemetery locations in the prior year quarter.

#### Interest expense

Interest expense decreased $4.4 million to $39.5 million in the third quarter of 2016 as we benefited from the debt refinancings over the past year by lowering interest on our Senior Notes and increasing our proportion of lower variable rate debt.

#### Loss on Early Extinguishment of Debt

During the third quarter of 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 statutes of limitations, and increases or decreases in valuation allowances. Our effective tax rate was 36.6% and 35.3% for the three months ended September 30, 2016 and 2015, respectively. The higher effective tax rate for the three months ended September 30, 2016 is primarily due to increased interest expense accruals associated with uncertain tax positions.

#### Weighted Average Shares

The diluted weighted average number of shares outstanding was 196.6 million in the third quarter of 2016, compared to 203.4 million in the same period in 2015. The decrease in the number of shares reflects the impact of shares repurchased under our share repurchase program.

### Results of Operations — Nine Months Ended September 30, 2016 and 2015

### Management Summary

In the nine months ended September 30, 2016, we reported net income attributable to common stockholders of $110.8 million ($0.56 per diluted share) compared to net income attributable to common stockholders for the same period in 2015 of $161.4 million ($0.78 per diluted share). These results were affected by the following items:

*(In thousands)*

|  | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Pre-tax (losses) gains from divestitures and impairment, net | $(30,432) | $3,403 |
| Pre-tax losses from the early extinguishment of debt | $(22,503) | $(6,918) |
| Pre-tax acquisition and integration costs | $(5,486) | $(2,968) |
| Pre-tax expenses related to system transition costs | $(11,216) | $(1,082) |
| Tax benefit from above items | $21,079 | $2,560 |
| Change in certain tax reserves and other | $(3,426) | $(1,754) |

In addition to the above items, growth in cemetery revenue, higher recognized preneed funeral revenue, lower interest expense, and effective management of our back office overhead were partially offset by lower funeral services performed and increases in cemetery administrative and maintenance costs.

### Funeral Results

*(Dollars in millions, except average revenue per service)*

|  | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Consolidated funeral revenue | $1,404.6 | $1,428.5 |
| Less: Revenue associated with acquisitions/new construction | 12.8 | 3.8 |
| Less: Revenue associated with divestitures | 1.3 | 8.9 |
| Comparable1 funeral revenue | 1,390.5 | 1,415.8 |
| Less: Comparable recognized preneed revenue | 85.1 | 74.0 |
| Less: Comparable general agency and other revenue | 101.0 | 100.3 |
| Adjusted comparable funeral revenue | $1,204.4 | $1,241.5 |
| Comparable services performed | 228,221 | 236,519 |
| Comparable average revenue per service2 | $5,277 | $5,249 |
| Consolidated funeral gross profit | $273.9 | $299.8 |
| Less: Gross profit associated with acquisitions/new construction | 1.1 | 0.1 |
| Less: Gross loss associated with divestitures | (1.6) | (2.6) |
| Comparable funeral gross profit | $274.4 | $302.3 |

(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2015 and ending September 30, 2016.

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

#### Funeral Revenue

Consolidated revenue from funeral operations was $1,404.6 million for the nine months ended September 30, 2016 compared to $1,428.5 million for the same period in 2015. This decrease is primarily attributable to a $25.3 million decrease in comparable revenue as described below.

Comparable revenue from funeral operations was $1,390.5 million for the nine months ended September 30, 2016 compared to $1,415.8 million for the same period in 2015. This decrease was primarily due to a 3.5% decrease in comparable services performed, impacted by an unusually strong flu season in the first half of 2015. This decrease was partially offset by an increase in recognized preneed revenue driven by an increase in the number of contracts sold through our non-funeral home channel and the average price per contract. The decrease in services performed comprises a 4.1% decrease in services performed by our funeral homes partially offset by a 3.3% increase in cremation services performed by our non-funeral home channel.

Average revenue per funeral service increased 0.5% in the first nine months of 2016 compared to the same period in 2015. Organic growth at the customer level of 2.7% was largely offset by the increase in our cremation mix, lower trust fund income, and an unfavorable Canadian currency impact. Our total comparable cremation rate increased to 51.9% in the first nine months of 2016 from 51.0% in 2015 as a result of an increase in both direct cremations and cremations with service.

The decrease in funeral services performed was partially offset by a $3.4 million increase in general agency revenue from higher preneed insurance sales production and an $11.1 million increase in recognized preneed revenue as we sold more contracts through our non-funeral home channel and the average contract price increased.

#### Funeral Gross Profit

Consolidated funeral gross profit decreased $25.9 million in the first nine months of 2016 compared to the same period in 2015. This decrease is primarily attributable to a decrease in comparable funeral gross profit of $27.9 million. The decline in higher margin revenue from funeral services performed by our funeral homes was partially offset by lower operating expenses and increased gross profit from recognized preneed revenue.

### Cemetery Results

*(In millions)*

|  | Nine Months Ended September 30, 2016 | 2015 |
| --- | ---: | ---: |
| Consolidated cemetery revenue | $817.5 | $788.3 |
| Less: Revenue associated with acquisitions/new construction | 6.4 | 3.3 |
| Less: Revenue associated with divestitures | 0.1 | 0.7 |
| Comparable1 cemetery revenue | $811.0 | $784.3 |
| Consolidated cemetery gross profit | $191.7 | $187.0 |
| Less: Gross profit associated with acquisitions/new construction | 1.8 | 1.3 |
| Less: Gross loss associated with divestitures | (0.3) | (0.2) |
| Comparable cemetery gross profit | $190.2 | $185.9 |

(1) We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2015 and ending September 30, 2016.

#### Cemetery Revenue

Consolidated revenue from our cemetery operations increased $29.2 million, or 3.7%, in the nine months ended September 30, 2016 compared to the same period in 2015 primarily attributable to the $26.7 million increase in comparable revenue. The increase in comparable revenue is primarily the result of an increase in recognized preneed revenue, higher preneed property production, and an increase in cash distributions of capital gains received from perpetual care trusts.

#### Cemetery Gross Profit

Consolidated cemetery gross profit increased $4.7 million, or 2.5%, in the nine months ended September 30, 2016 compared to the same period in 2015. This increase is primarily the result of a $4.3 million increase in comparable gross profit. The gross profit increase was driven by growth in recognized preneed and atneed revenue and higher preneed property production, partially offset by increased selling commissions from higher sales production and increases in cemetery administrative and maintenance costs.

### Other Financial Statement Items

#### General and Administrative Expenses

General and administrative expenses increased $5.8 million to $102.7 million in the nine months ended September 30, 2016 compared to $96.9 million in the same period of 2015. The current period includes $5.5 million in acquisition costs and

$11.2 million in system transition costs primarily related to our 2016 implementation of a new general ledger system. The prior year period includes $4.1 million of acquisition and system transition costs. Excluding these costs, general and administrative expenses decreased $6.8 million in the nine months ended September 30, 2016 compared to the same period in 2015 as we effectively managed our back office overhead expenses.

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

Gains (losses) on divestitures and impairment charges, net decreased $33.8 million in the nine months ended September 30, 2016 compared to the same period of 2015. The nine months ended September 30, 2016 includes $31.2 million of impairment charges related to the planned divestiture of certain funeral homes in Los Angeles, California. The nine months ended September 30, 2015 primarily comprises losses on the divestiture of underperforming properties.

#### Interest expense

Interest expense decreased $7.9 million to $122.0 million in the nine months ended September 30, 2016 as we benefited from the debt refinancings over the past year by lowering interest on our Senior Notes and increasing our proportion of lower variable rate debt.

#### Loss on Early Extinguishment of Debt

We incurred a $22.5 million loss on early extinguishment of debt in the nine months ended September 30, 2016 primarily to manage our near-term debt maturity profile and lower our effective interest rate by refinancing our Senior Notes due 2017. We expect this transaction to result in cash interest savings of approximately $9.0 million in 2016.

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 out 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 40.8% and 36.5% for the nine months ended September 30, 2016 and 2015, respectively. The higher effective tax rate for the nine months ended September 30, 2016 is primarily due to the impairment charges described above and the increased interest expense accruals associated with uncertain tax positions.

#### Weighted Average Shares

The diluted weighted average number of shares outstanding was 197.2 million in the nine months ended September 30, 2016, compared to 206.0 million in the same period in 2015. The decrease in the number of shares reflects the impact of shares repurchased under our share repurchase program.

### 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, 2015.

There were no significant changes to our accounting policies that have occurred subsequent to December 31, 2015, 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 2.

### 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 in order 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 and cemetery industry is competitive.
- Increasing death benefits related to preneed contracts funded through life insurance contracts may not cover future increases in the cost of providing a price-guaranteed 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.
- We use a combination of insurance, self-insurance and large deductibles in managing our exposure to certain inherent risks, as such, we could be exposed to unexpected costs that could negatively affect our financial performance.
- A number of years 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 may 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 2015 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, 2016 are presented in Part I, Item 1. Financial Statements and Notes 3, 4, and 5 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, 2,170 characters.

### Disclosure Controls and Procedures

As of September 30, 2016, 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, 2016 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with US GAAP.

### Changes in Internal Control Over Financial Reporting

On July 5, 2016, we deployed a new financial management system that is an integrated and scalable application leveraged to interface with other internal and external computer systems and has resulted in the elimination of certain manual processes while automating and streamlining those tasks. The new financial management system is intended to provide enhanced transactional processing, analysis, and reporting compared to our legacy system and is further intended to strengthen our internal controls over financial reporting. Other than the new financial management system, there were no changes in our internal control over financial reporting as for the quarter ended September 30, 2016, which have materially affected, or are reasonably likely to materially 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, 2015.

Filed Oct 27, 2016.
Source: SEC EDGAR, the filing index for accession 0000089089-16-000059. Last ingested by Listed: Nov 6, 2026, 13:24 ET. No prices; not investment advice.