# Service Corp International: Form 10-Q for the period ended Jun 30, 2018

- Company: [Service Corp International](/companies/sci.md) (CIK 89089)
- Form: 10-Q
- Filed: 2018-07-31
- Accepted by EDGAR: Jul 31, 2018, 14:36 ET
- Period: 2018-06-30
- Accession: 0000089089-18-000035
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/89089/000008908918000035/sci-2018630x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/89089/000008908918000035/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-04-01 to 2018-06-30 | $796.1m | us-gaap:Revenues |
| Revenue | 6 months, 2018-01-01 to 2018-06-30 | $1.59bn | us-gaap:Revenues |
| Cost of revenue | 3 months, 2018-04-01 to 2018-06-30 | $608.0m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2018-01-01 to 2018-06-30 | $1.21bn | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-04-01 to 2018-06-30 | $188.1m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2018-01-01 to 2018-06-30 | $383.9m | us-gaap:GrossProfit |
| Operating income | 3 months, 2018-04-01 to 2018-06-30 | $162.0m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2018-01-01 to 2018-06-30 | $325.6m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-04-01 to 2018-06-30 | $44.5m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2018-01-01 to 2018-06-30 | $88.1m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-04-01 to 2018-06-30 | $16.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2018-01-01 to 2018-06-30 | $44.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2018-04-01 to 2018-06-30 | $103.2m | us-gaap:NetIncomeLoss |
| Net income | 6 months, 2018-01-01 to 2018-06-30 | $185.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.55 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 6 months, 2018-01-01 to 2018-06-30 | $0.98 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2018-04-01 to 2018-06-30 | $0.57 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 6 months, 2018-01-01 to 2018-06-30 | $1.01 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2018-04-01 to 2018-06-30 | 187,188,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2018-01-01 to 2018-06-30 | 188,547,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2018-01-01 to 2018-06-30 | $315.4m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2018-01-01 to 2018-06-30 | $102.9m | us-gaap:PaymentsToAcquireProductiveAssets |
| Dividends paid | 6 months, 2018-01-01 to 2018-06-30 | $62.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2018-01-01 to 2018-06-30 | $228.9m | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-06-30 | $164.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-06-30 | $308.9m | us-gaap:AssetsCurrent |
| Total assets | at 2018-06-30 | $12.86bn | us-gaap:Assets |
| Current liabilities | at 2018-06-30 | $553.9m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2018-06-30 | $3.49bn | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-06-30 | $95.6m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-06-30 | $1.48bn | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,146 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 June 30, 2018, we operated 1,486 funeral service locations and 480 cemeteries (including 285 funeral service/cemetery combination locations), which are geographically diversified across 44 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 enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.

Our financial position is enhanced by our approximately $11.1 billion backlog of future revenue from both trust and insurance-funded preneed sales at June 30, 2018. Preneed selling provides us with a strategic opportunity to lock-in future market share while deterring the customer from going to a competitor in the future. We also believe it adds to the stability and predictability of our revenue and cash flows. While revenue on the majority of preneed merchandise and service sales is deferred until the time of need, sales of preneed cemetery property provide opportunities for full current revenue recognition to the extent that the property is developed and available for use.

We have adequate liquidity and a favorable debt maturity profile, which allows us to return capital to shareholders through share repurchases and dividends.

Factors affecting our operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our 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 continue to focus on our cremation customer’s preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers. We believe the presentation of these additional merchandise and services through our customer-facing technology enhances our customer’s experience by reducing administrative burdens and allowing them to visualize the product offerings and services, which 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 $315.4 million in the first six months of 2018. We have $596.7 million in borrowing capacity under our bank credit facility.

Our bank credit agreement requires us to maintain certain leverage and interest coverage ratios. As of June 30, 2018, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of June 30, 2018 are as follows:

|  | Per Credit Agreement | Actual |
| --- | --- | ---: |
| Leverage ratio | 4.50 (Max) | 3.85 |
| Interest coverage ratio | 3.00 (Min) | 5.32 |

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 consistently 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 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 $0.17 per common share in 2018. We target a payout ratio of 30% to 40% 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 six months ended June 30, 2018, we repurchased 6,066,472 shares of common stock at an aggregate cost of $228.9 million, which is an average cost per share of $37.73. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $241.3 million at June 30, 2018. 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.

Subsequent to June 30, 2018, we repurchased 869,229 shares of common stock at an aggregate cost of $32.2 million, which is an average cost per share of $37.03. After these subsequent repurchases, the remaining dollar value of shares authorized to be repurchased under our repurchase program is $209.1 million.

**Repurchase debt.** We seek 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, investing, and financial needs.

#### Operating Activities

Net cash provided by operating activities increased $92.9 million to $315.4 million in the first six months of 2018, compared to $222.5 million in the first six months of 2017. The current period includes a $5.6 million tax refund related to the March 2017 settlement of audits for tax years 1999-2005. The prior year includes $34.2 million cash taxes paid in 2017 related to the March 2017 settlement of audits for tax years 1999-2005 (see Part I, Item 1. Financial Statements, Note 4 for more information) and $6.3 million in pension termination settlement payments.

Excluding the above items, cash flow from operations increased $46.8 million from the prior year as a result of the following:

- a $43.9 million increase in cash receipts from customers,
- a $17.1 million increase in net trust withdrawals,
- a $3.3 million increase in hurricane insurance proceeds,
- a $2.2 million increase in General Agency (GA) and other receipts, and
- a $52.4 million decrease in cash tax payments as a result of the impact of recently enacted tax reform and effective tax planning, excluding the tax items noted above, partially offset by
- a $47.3 million increase in vendor and other payments,
- a $15.6 million increase in employee compensation paid, and
- a $9.2 million increase in cash interest paid.

#### Investing Activities

Cash flows from investing activities used $272.8 million in the first six months of 2018 compared to using $106.8 million in the same period of 2017. The $166.0 million increase from 2018 over 2017 is primarily due to the following:

- a $7.0 million decrease in cash receipts from divestitures and asset sales,
- a $121.2 million increase in cash spent on acquisitions,
- a $17.6 million increase in capital expenditures primarily due to improvements at existing funeral homes,
- a $14.7 million increase primarily for the purchase of land, and
- a $8.3 million increase in payments for Company-owned life insurance policies, net of proceeds.

#### Financing Activities

Financing activities used $210.1 million in the first six months of 2018 compared to using $96.6 million in the same period of 2017. The $113.5 million increase from 2018 over 2017 is primarily due to the following:

- a $108.8 million increase in purchase of Company common stock, and
- a $9.7 million increase in payments of dividends, and
- a $13.3 million decrease in proceeds from exercises of stock options, partially offset by
- a $20.5 million increase in net debt issuance proceeds, net of payments.

### 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 revenue, net.* The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.

*(In millions)*

|  | June 30, 2018 | December 31, 2017 |
| --- | ---: | ---: |
| Preneed funeral | $109.3 | $109.8 |
| Preneed cemetery: |  |  |
| Merchandise and services | 138.1 | 132.2 |
| Pre-construction | 14.5 | 11.9 |
| Bonds supporting preneed obligations | 261.9 | 253.9 |
| Bonds supporting preneed business permits | 4.7 | 4.5 |
| Other bonds | 19.0 | 18.0 |
| Total surety bonds outstanding | $285.6 | $276.4 |

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 six months ended June 30, 2018 and 2017, we had $12.3 million and $11.9 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 enter into price-guaranteed preneed 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 contracts be deposited into merchandise and service trusts until the merchandise is delivered or the service is performed. In certain situations, as described above, where permitted by state or provincial laws, we may post a surety bond as financial assurance for a certain amount of the preneed contract in lieu of placing funds into trust accounts. Alternatively, we may sell a life insurance or annuity policy from third-party insurance companies.

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

The table below details the results of insurance-funded preneed production and maturities for the three and six months ended June 30, 2018 and 2017, and the number of contracts associated with those transactions.

*(In millions)*

| Preneed insurance-funded: | Three Months Ended June 30, 2018 | 2017 | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Sales production (1) | $148.1 | $133.0 | $274.7 | $261.3 |
| Sales production (number of contracts) (1) | 25,232 | 21,979 | 46,821 | 43,008 |
| General agency revenue | $36.1 | $30.0 | $67.6 | $61.8 |
| Maturities | $82.7 | $80.8 | $179.1 | $172.1 |
| Maturities (number of contracts) | 14,020 | 13,607 | 30,251 | 29,083 |

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

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

The tables below detail our results of preneed production and maturities, excluding insurance contracts, for the three and six months ended June 30, 2018 and 2017.

*(In millions)*

| Funeral: Preneed trust-funded (including bonded): | Three Months Ended June 30, 2018 | 2017 | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: | ---: | ---: |
| Sales production | $92.3 | $81.1 | $185.0 | $164.5 |
| Sales production (number of contracts) | 25,123 | 23,971 | 50,996 | 49,661 |
| Maturities | $70.5 | $64.1 | $147.6 | $131.7 |
| Maturities (number of contracts) | 17,182 | 16,646 | 36,843 | 34,832 |
| **Cemetery:** |  |  |  |  |
| Sales production: |  |  |  |  |
| Preneed | $245.6 | $235.8 | $447.1 | $443.5 |
| Atneed | 79.9 | 79.5 | 165.0 | 163.2 |
| Total sales production | $325.5 | $315.3 | $612.1 | $606.7 |
| Sales production deferred to backlog: |  |  |  |  |
| Preneed | $120.2 | $112.6 | $217.4 | $200.7 |
| Atneed | 59.4 | 58.3 | 122.7 | 118.7 |
| Total sales production deferred to backlog | $179.6 | $170.9 | $340.1 | $319.4 |
| Revenue recognized from backlog: |  |  |  |  |
| Preneed | $81.2 | $75.7 | $138.2 | $130.7 |
| Atneed | 59.5 | 58.3 | 120.4 | 115.6 |
| Total revenue recognized from backlog | $140.7 | $134.0 | $258.6 | $246.3 |

*Backlog of Preneed Contracts:* The following table reflects our backlog of trust-funded deferred preneed contract revenue, including amounts related to *Deferred receipts held in trust* at June 30, 2018 and December 31, 2017. Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our unaudited Condensed Consolidated Balance Sheet) at June 30, 2018 and December 31, 2017. The backlog amounts presented include amounts due from customers for undelivered performance obligations on cancelable preneed contracts to arrive at our total backlog of deferred revenue. The table does not include the backlog associated with businesses that are held for sale.

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

*(In billions)*

|  | June 30, 2018 Fair Value | Cost | December 31, 2017 Fair Value | Cost |
| --- | ---: | ---: | ---: | ---: |
| Deferred revenue, net | $1.43 | $1.43 | $1.79 | $1.79 |
| Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts(1) | 0.57 | 0.57 | — | — |
| Deferred receipts held in trust | 3.59 | 3.36 | 3.48 | 3.18 |
| Allowance for cancellation | (0.28) | (0.26) | (0.27) | (0.25) |
| Backlog of trust-funded deferred revenue, net of estimated allowance for cancellation | $5.31 | $5.10 | $5.00 | $4.72 |
| Backlog of insurance-funded deferred revenue(2) | 5.79 | 5.79 | 5.66 | 5.66 |
| Total backlog of deferred revenue | $11.10 | $10.89 | $10.66 | $10.38 |
| Preneed receivables, net and trust investments | $4.45 | $4.22 | $4.78 | $4.48 |
| Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts(1) | 0.57 | 0.57 | — | — |
| Allowance for cancellation on trust investments | (0.28) | (0.26) | (0.27) | (0.25) |
| Assets associated with backlog of trust-funded deferred revenue, net of estimated allowance for cancellation | $4.74 | $4.53 | $4.51 | $4.23 |
| Insurance policies associated with insurance-funded deferred revenue(2) | 5.79 | 5.79 | 5.66 | 5.66 |
| Total assets associated with backlog of preneed deferred revenue | $10.53 | $10.32 | $10.17 | $9.89 |

(1) Prior to adoption of "Revenue from Contracts with Customers" on January 1, 2018, amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts were included in Preneed receivables, net and trust investments.

(2) 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 June 30, 2018, the difference between the backlog and asset fair value amounts totaled $0.57 billion, consisting of $0.25 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $0.09 billion collected from customers that were not required to be deposited into trust, and $0.23 billion in allowable cash distributions from trust assets. As of June 30, 2018, the fair value of the total backlog comprised $2.97 billion related to cemetery contracts and $8.13 billion related to funeral contracts. As of June 30, 2018, the fair value of the assets associated with the backlog of trust-funded deferred revenue comprised $2.71 billion related to cemetery contracts and $2.03 billion related to funeral contracts.

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 shortly 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 cemetery perpetual care trusts. For these investments, the original corpus remains in the trust in perpetuity and the net ordinary earnings or elected distributions are withdrawn 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. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.

Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and 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. 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.

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

Historically, the cemetery perpetual care trusts' investment objectives, in accordance with state and provincial regulations, have emphasized providing a steady stream of current investment income with some capital appreciation in order to provide for the maintenance and beautification of cemetery properties. However, beginning in 2016, we worked with several state legislatures to adjust laws and regulations to allow for a fixed distribution rate from cemetery perpetual care trusts' assets regardless of the level of ordinary income, similar to university endowments. As a result, beginning in 2017, a significant portion of our cemetery perpetual care trust assets were liquidated and reinvested in a more growth-oriented asset allocation with investment objectives similar to the funeral and cemetery merchandise and service trusts. Currently, the asset allocation is split approximately evenly between income and growth orientations. We expect this asset allocation shift to enhance asset growth and provide further protection to our customers. Additionally, we expect more states to adopt total return distribution legislation in the coming years.

As of June 30, 2018, approximately 87% of our trusts were under the control and custody of three large financial institutions. The U.S. trustees primarily use four managed limited liability companies (LLCs), one for each merchandise and service trust type and two for the cemetery perpetual care trust type, and each with an independent trustee as custodian. Each financial institution acting as trustee manages its allocation of trust assets in accordance with the investment policy through the purchase of the 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. These alternative investments are held in vehicles structured as LLCs and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective alternative investment LLCs.

#### Investment Structures

Each financial institution, acting as trustee, manages its allocation of trust assets in compliance with the investment policy primarily through the purchase of four managed LLCs, one for 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, 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.

#### 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 June 30, 2018, the largest single equity position represented less than 1% of the total securities portfolio.

The objective of *private equity fund* investments is to provide high rates of return with reduced volatility and lower correlation. 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

During the six months ended June 30, 2018, the Standard and Poor’s 500 Index increased 2.7% and the Barclay’s Aggregate Index decreased 1.6%, while the combined SCI trusts increased 1.3%.

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

### Results of Operations — Three Months Ended June 30, 2018 and 2017

### Management Summary

In the three months ended June 30, 2018, we reported net income attributable to common stockholders of $103.2 million ($0.55 per diluted share) compared to net income attributable to common stockholders for the same period in 2017 of $68.5 million ($0.36 per diluted share). These results were affected by the following items:

*(In millions)*

|  | Three Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Pre-tax gains from divestitures and impairment, net | $6.9 | $0.8 |
| Pre-tax pension termination obligation | $— | $(1.1) |
| Tax (provision for) benefit from above items | $(2.2) | $0.1 |
| Change in certain tax reserves | $16.1 | $1.3 |

In addition to the above items, the increase in diluted earnings per share was primarily driven by solid funeral and cemetery results, the impact of new accounting standards and selling processes, a lower effective tax rate, and a lower share count, partially offset by higher interest expense.

### Funeral Results

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

|  | Three Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Consolidated funeral revenue | $468.6 | $458.9 |
| Less: Revenue associated with acquisitions/new construction | 8.6 | 2.8 |
| Less: Revenue associated with divestitures | — | 3.0 |
| Comparable1 funeral revenue | 460.0 | 453.1 |
| Less: Comparable recognized preneed revenue | 33.7 | 30.2 |
| Less: Comparable general agency and other revenue | 33.5 | 29.5 |
| Adjusted comparable funeral revenue | $392.8 | $393.4 |
| Comparable services performed | 73,978 | 74,466 |
| Comparable average revenue per service2 | $5,310 | $5,283 |
| Consolidated funeral operating profit | $90.4 | $92.1 |
| Less: Operating profit associated with acquisitions/new construction | 0.8 | 0.4 |
| Less: Operating loss associated with divestitures | (0.4) | (1.5) |
| Comparable funeral operating profit | $90.0 | $93.2 |

(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2017 and ending June 30, 2018.

(2) We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding recognized preneed revenue, general agency 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 revenue is preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, and is 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 $468.6 million for the three months ended June 30, 2018 compared to $458.9 million for the same period in 2017. This increase is primarily attributable to a $6.9 million increase in comparable revenue as described below and $5.8 million in revenue contributed by acquired properties. These increases were partially offset by the loss of $3.0 million in revenue contributed by properties that have been subsequently divested.

Comparable revenue from funeral operations was $460.0 million for the three months ended June 30, 2018 compared to $453.1 million for the same period in 2017. This $6.9 million increase is due to a 0.5% increase in average revenue per funeral service, an increase in general agency revenue resulting from higher preneed funeral insurance production, and an increase in recognized preneed revenue as a result of higher non-funeral home sales production, partially offset by 0.7% lower comparable services performed.

A slight increase in the organic sales average was offset by a 120 basis point increase in our cremation mix. Our total comparable cremation rate increased to 54.6% in the three months ended June 30, 2018 from 53.4% in 2017 as a result of an increase in both direct cremations and cremations with service.

#### Funeral Operating Profit

Consolidated funeral operating profit decreased $1.7 million, or 1.8%, in the three months ended June 30, 2018 compared to the same period in 2017. This decrease is primarily attributable to a decrease in comparable funeral operating profit of $3.2 million, or 3.4%. Comparable funeral operating profit decreased $3.2 million to $90.0 million and the operating margin percentage decreased 100 basis points to 19.6%. Our fixed costs in the funeral segment were higher by $8.7 million, or 3.4%, as expected wage increases for critical customer-facing employees and the timing of self-insured medical claims added to the increase. Additionally, we experienced higher selling costs associated with marketing and sales lead procurement that we believe is helping drive the increase in funeral preneed sales production.

### Cemetery Results

*(In millions)*

|  | Three Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Consolidated cemetery revenue | $327.4 | $314.4 |
| Less: Revenue associated with acquisitions/new construction | 3.0 | 1.0 |
| Less: Revenue associated with divestitures | 0.1 | 0.5 |
| Comparable1 cemetery revenue | $324.3 | $312.9 |
| Consolidated cemetery operating profit | $97.7 | $91.4 |
| Less: Operating profit (loss) associated with acquisitions/new construction | 0.5 | (0.1) |
| Less: Operating loss associated with divestitures | — | (0.1) |
| Comparable cemetery operating profit | $97.2 | $91.6 |

(1) We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2017 and ending June 30, 2018.

#### Cemetery Revenue

Consolidated revenue from our cemetery operations increased $13.0 million, or 4.1%, in the second quarter of 2018 compared to the same period in 2017 primarily due to a $11.4 million increase in comparable cemetery revenue described below and $2.0 million in revenue contributed by acquired properties. The increase in comparable revenue over the prior year quarter is primarily due to increased sales into existing developed property projects, the completion of cemetery property construction projects, and higher endowment care trust fund income.

#### Cemetery Operating Profit

Consolidated cemetery operating profit increased $6.3 million, or 6.9%, in the second quarter of 2018 compared to the same period in 2017. Comparable cemetery operating profit increased $5.6 million to $97.2 million and the operating margin percentage increased 70 basis points to 30.0%. The improvement was partially due to the increased revenue described above and a $4.7 million net benefit of deferring selling compensation under the new revenue recognition accounting standard. These increases were partially offset by investments in our marketing programs and search engine optimization that are leading to increased sales production, as well as higher labor costs due to permanent wage increases for certain of our critical customer-facing employees.

### Other Financial Statement Items

#### General and Administrative Expenses

General and administrative expenses decreased $9.2 million to $31.1 million in the three months ended June 30, 2018. The prior year period includes $1.1 million related to a pension termination settlement. Excluding this settlement, general and administrative expenses decreased $8.1 million primarily related to decreased costs related to the Company's long-term incentive compensation programs and unusually high legal expenses in the prior year.

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

Gains on divestitures increased increased $6.1 million to $6.9 million in the three months ended June 30, 2018 associated with the divestitures of non-strategic funeral and cemetery locations in the United States and Canada.

#### Hurricane (Expenses) Recoveries, Net

Hurricane (expenses) recoveries, net, reflects $1.9 million in damages incurred through June 30, 2018 as we continue repairs at various locations caused by the 2017 hurricanes.

#### Interest Expense

Interest expense increased $2.4 million to $44.5 million in the three months ended June 30, 2018 as we were impacted by increased interest rates on our floating rate debt as well as an increase in the overall balance of our total debt.

#### (Provision For) Benefit From 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 limitation, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was 13.4% and 32.5% for the three months ended June 30, 2018 and 2017, respectively. The decrease in the effective tax rate for the three months ended June 30, 2018 primarily due to the decrease in the U.S. federal income tax rate and remeasurement of deferred taxes as a result of change in estimate in the finalization of the 2017 tax returns and tax reform.

#### Weighted Average Shares

The diluted weighted average number of shares outstanding was 187.2 million in the three months ended June 30, 2018, compared to 192.1 million in the same period in 2017. The decrease in the number of shares reflects the impact of shares repurchased under our share repurchase program.

### Management Summary

In the six months ended June 30, 2018, we reported net income attributable to common stockholders of $185.2 million ($0.98 per diluted share) compared to net income attributable to common stockholders for the same period in 2017 of $243.2 million ($1.26 per diluted share). These results were affected by the following items:

*(In millions)*

|  | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Pre-tax gains from divestitures and impairment charges, net | $7.3 | $5.7 |
| Pre-tax losses from the early extinguishment of debt, net | $(10.1) | $— |
| Pre-tax pension termination obligation | $— | $(12.8) |
| Tax (provision for) benefit from above items | $(0.6) | $2.5 |
| Change in certain tax reserves and other | $17.3 | $107.2 |

In addition to the above items, the increase in diluted earnings per share was primarily driven by solid funeral and cemetery results, the impact of new accounting standards and selling processes, a lower effective tax rate, and a lower share count, partially offset by higher interest expense.

### Funeral Results

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

|  | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Consolidated funeral revenue | $983.0 | $957.6 |
| Less: Revenue associated with acquisitions/new construction | 15.2 | 4.1 |
| Less: Revenue associated with divestitures | 0.8 | 7.0 |
| Comparable1 funeral revenue | 967.0 | 946.5 |
| Less: Comparable recognized preneed revenue | 66.0 | 62.2 |
| Less: Comparable general agency and other revenue | 61.6 | 60.0 |
| Adjusted comparable funeral revenue | $839.4 | $824.3 |
| Comparable services performed | 158,854 | 156,324 |
| Comparable average revenue per service2 | $5,284 | $5,273 |
| Consolidated funeral operating profit | $210.9 | $204.7 |
| Less: Operating profit associated with acquisitions/new construction | 1.7 | 1.1 |
| Less: Operating loss associated with divestitures | (1.0) | (2.8) |
| Comparable funeral operating profit | $210.2 | $206.4 |

(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2017 and ending June 30, 2018.

(2) We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding recognized preneed revenue, general agency 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 revenue 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 $983.0 million for the six months ended June 30, 2018 compared to $957.6 million for the same period in 2017. This increase is primarily attributable to a $20.5 million increase in comparable revenue as described below and $11.1 million in revenue contributed by acquired properties, partially offset by the loss of $6.2 million in revenue contributed by properties that have been subsequently divested.

Comparable revenue from funeral operations was $967.0 million for the six months ended June 30, 2018 compared to $946.5 million for the same period in 2017. The $20.5 million increase was primarily due to a 1.6% increase in comparable services performed. The increase in services performed comprises a 1.5% increase in services performed by our funeral homes and a 2.5% increase in cremation services performed by our non-funeral home channel.

Average revenue per service was relatively flat as a slight increase in the organic sales average was offset by a 120 basis point increase in the core cremation mix. Our total comparable cremation rate increased to 54.5% in the six months ended June 30, 2018 from 53.3% in 2017 as a result of an increase in both direct cremations and cremations with service.

#### Funeral Operating Profit

Consolidated funeral operating profit increased $6.2 million, or 3.0%, in the six months ended June 30, 2018 compared to the same period in 2017. This increase is primarily attributable to an increase in comparable funeral operating profit of $3.8 million, or 1.8%, and the increase in revenue described above. Comparable funeral operating profit increased $3.8 million to $210.2 million, which is primarily due to the increased revenue from funeral services performed resulting from the stronger flu season. This was slightly offset by investments in our marketing programs and search engine optimization that are leading to increased sales production, as well as from higher labor costs due to permanent wage increases for certain of our customer facing employees.

### Cemetery Results

*(In millions)*

|  | Six Months Ended June 30, 2018 | 2017 |
| --- | ---: | ---: |
| Consolidated cemetery revenue | $607.6 | $593.3 |
| Less: Revenue associated with acquisitions/new construction | 4.8 | 1.6 |
| Less: Revenue associated with divestitures | 0.3 | 1.0 |
| Comparable1 cemetery revenue | $602.5 | $590.7 |
| Consolidated cemetery operating profit | $173.0 | $156.1 |
| Less: Operating profit associated with acquisitions/new construction | 1.0 | 0.2 |
| Less: Operating loss associated with divestitures | — | (0.2) |
| Comparable cemetery operating profit | $172.0 | $156.1 |

(1) We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2017 and ending June 30, 2018.

#### Cemetery Revenue

Consolidated revenue from our cemetery operations increased $14.3 million, or 2.4%, in the six months ended June 30, 2018 compared to the same period in 2017, primarily attributable to a $11.8 million increase in comparable revenue and $3.2 million in revenue contributed by acquired properties, partially offset by the loss of $0.7 million in properties that have been subsequently divested. The increase in comparable revenue over the prior year is primarily due to the completion of cemetery property construction projects and higher endowment care trust fund income.

#### Cemetery Operating Profit

Consolidated cemetery operating profit increased $16.9 million, or 10.8%, in the six months ended June 30, 2018 compared to the same period in 2017. This increase is primarily the result of a $15.9 million increase in comparable operating profit. Comparable cemetery operating profit increased $15.9 million to $172.0 million and the operating margin percentage increased 210 basis points to 28.5%. The increase in comparable cemetery operating profit was partially due to increased revenue as described above, partially offset by investments in our marketing programs and search engine optimization that are leading to increased sales production, as well as from higher labor costs due to permanent wage increases for certain of our customer facing employee.

### Other Financial Statement Items

#### General and Administrative Expenses

General and administrative expenses decreased $16.7 million to $65.9 million in the six months ended June 30, 2018. The prior year period includes $12.8 million related to a pension termination settlement. Excluding these costs, general and administrative expenses decreased $3.9 million primarily related to decreased costs related to the Company's long-term incentive compensation program.

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

Gains on divestitures and impairment charges, net, improved $1.7 million in the six months ended June 30, 2018 compared to the same period of 2017 , associated with the divestitures of non-strategic funeral and cemetery locations in the United States and Canada.

#### Hurricane (Expenses) Recoveries, Net

Hurricane (expenses) recoveries, net, reflects $4.2 million in damages incurred through June 30, 2018 at various locations caused by the 2017 hurricanes, offset by $4.5 million of insurance proceeds recognized through June 30, 2018.

#### Interest Expense

Interest expense increased $5.4 million to $88.1 million in the six months ended June 30, 2018 as we were impacted by increased interest rates on our floating rate debt as well as an increase in the overall balance of our total debt.

#### Loss on Early Extinguishment of Debt

We incurred a $10.1 million loss on early extinguishment of debt in the first six months of 2018 to manage our near-term debt maturity profile and lower our effective interest rate by refinancing our 2018 notes.

#### (Provision For) Benefit From 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 on deferred tax assets. Our effective tax rate was an expense of 19.3% and a benefit of 21.6% for the six months ended June 30, 2018 and 2017, respectively. The higher effective tax rate for the six months ended June 30, 2018 was primarily due to the effects of the 2017 IRS audit settlement, partially offset by the decrease in the U.S. federal income tax rate and remeasurement of deferred taxes as a result of the change in estimate in the finalization of the 2017 tax return and tax reform.

#### Weighted Average Shares

The diluted weighted average number of shares outstanding was 188.5 million in the first six months of 2018, compared to 192.5 million in the same period in 2017. 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. Although we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from the estimates on which our financial statements are prepared at any given point of time. Changes in these estimates could materially affect our consolidated financial position, consolidated results of operations, or cash flows. Significant items that are subject to such estimates and assumptions include revenue and expense accruals, fair value of merchandise and perpetual care trust assets, and the allocation of purchase price to the fair value of assets acquired. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2017.

There were no significant changes to our accounting policies that have occurred subsequent to December 31, 2017, 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 securities, 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 and cemetery industry is competitive.
- Increasing death benefits related to preneed contracts funded through life insurance or annuity 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 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 decline, our cash flows and revenue may decrease.
- If we are not able to respond effectively to changing consumer preferences, our market share, revenue, cash flows, and/or profitability could decrease.
- The continuing upward trend in the number of cremations performed in North America could result in lower revenue, operating profit, and cash flows.
- 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 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, therefore, we could be exposed to unexpected costs that could negatively affect our financial performance.
- A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.
- Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could have a material adverse effect on the results of our operations, financial condition, or cash flows.
- 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, financial condition, or cash flow.
- 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.
- A failure of key information technology systems or processes could disrupt and adversely affect our business.
- Failure to maintain effective internal control over financial reporting could adversely affect our results of operations, investor confidence, and our stock price.
- The application of unclaimed property laws by certain states to our preneed funeral and cemetery backlog could have a material adverse impact on our liquidity, cash flows, and our financial results.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2017 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, 1,235 characters.

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market” risk refers to the risk of gains or losses arising from changes in interest rates and prices of marketable securities. The disclosures are not meant to be precise indicators of expected future gains or losses, but rather indicators of reasonably possible gains or losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk-sensitive instruments were entered into for purposes other than trading.

### 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 June 30, 2018 are presented in Part I, Item 1. Financial Statements and Note 3 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, 1,573 characters.

### Disclosure Controls and Procedures

As of June 30, 2018, 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 June 30, 2018 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

No changes in our internal control over financial reporting occurred during the quarter ended June 30, 2018 that 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, 2017.

Filed Jul 31, 2018.
Source: SEC EDGAR, the filing index for accession 0000089089-18-000035. Last ingested by Listed: Nov 6, 2026, 13:24 ET. No prices; not investment advice.