Service Corp International: Form 10-Q for the period ended Sep 30, 2019

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, 2019, we operated 1,477 funeral service locations and 483 cemeteries (including 290 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 $11.6 billion backlog of future revenue from both trust and insurance-funded preneed sales at September 30, 2019. 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 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 believe 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 atneed revenue. The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average revenue for cremations is lower than that for traditional burials. To further enhance revenue opportunities, we continue to focus on our cremation customers' preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers. We believe the presentation of these additional merchandise and services through our customer-facing technology enhances our customers' 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 $472.2 million in the first nine months of 2019. We had $729.5 million in borrowing capacity under our Bank Credit Facility at September 30, 2019.

Our bank credit agreement requires us to maintain certain leverage and interest coverage ratios. As of September 30, 2019, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of September 30, 2019 are as follows:

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

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 minimum operating cash requirements, 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:

Investing in Acquisitions and Building New Funeral Service Locations. 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 additional funeral service locations. We target businesses with favorable customer categories and/or where we can achieve additional economies of scale.

Paying Dividends. Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.18 per common share in 2019. We target a payout ratio of 30% to 40% of earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter upon review of our financial performance.

Repurchasing Shares. Absent a strategic acquisition opportunity, we believe share repurchases are attractive at the appropriate price. 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 Facility 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 repurchase program in the future.

During the nine months ended September 30, 2019, we repurchased 1,176,139 shares of common stock at an aggregate cost of $52.2 million, which is an average cost per share of $44.37. During August 2019, our Board of Directors increased our share repurchase authorization to $400 million. After these repurchases and the increase in authorization, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $389.0 million at September 30, 2019.

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

Cash Flow

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

Operating Activities

Net cash provided by operating activities increased $19.9 million to $472.2 million in the first nine months of 2019, compared to $452.3 million in the first nine months of 2018. Excluding $6.4 million in legal settlements in the current period and a $5.6 million tax refund in the prior period, cash flow from operations increased by $31.9 million from prior year. The 2019 increase comprises:

• a $59.2 million increase in cash receipts from customers,
• a $10.0 million increase in General Agency (GA) and other receipts, and
• a $0.1 million decrease in cash interest paid, partially offset by
• a $17.2 million increase in net trust deposits,
• a $16.7 million increase in employee compensation,
• a $2.9 million increase in vendor and other payments, and
• a $0.6 million increase in recurring cash tax payments.

Investing Activities

Cash flows from investing activities used $239.7 million in the first nine months of 2019 compared to using $346.8 million in the same period of 2018. The $107.1 million decrease from prior year is primarily due to the following:

• a $120.2 million decrease in cash spent on acquisitions,
• a $14.5 million decrease primarily due to a 2018 purchase of land,
• a $2.4 million decrease in payments on Company-owned life insurance policies, net of proceeds, partially offset by
• a $11.2 million increase in capital expenditures primarily due to the construction of new funeral homes,
• a $15.9 million decrease in cash receipts from divestitures and asset sales, and
• a $2.9 million decrease in proceeds from sale of other investments.

Financing Activities

Financing activities used $242.0 million in the first nine months of 2019 compared to using $279.1 million in the same period of 2018. The $37.1 million decrease from prior year is primarily due to:

• a $223.5 million decrease in purchase of Company common stock,
• a $21.4 million increase in proceeds from exercises of stock options
• a $18.2 million change in bank overdrafts and other, partially offset by
• a $220.4 million increase in payments of debts, net of proceeds from the issuance of debt, and
• a $5.6 million increase in payments of dividends.

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 to the customer 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)

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 nine months ended September 30, 2019 and 2018, we had $18.6 million and $18.1 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. Because 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. We do not reflect the unfulfilled insurance-funded preneed contract amounts in our unaudited Condensed Consolidated Balance Sheet because they are not assets and 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 at the time of need. 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 nine months ended September 30, 2019 and 2018, and the number of contracts associated with those transactions.

(In millions)

(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 nine months ended September 30, 2019 and 2018.

(In millions)

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 September 30, 2019 and December 31, 2018. 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, 2019 and December 31, 2018. 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)

(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/or appraisals. As of September 30, 2019, the difference between the backlog and asset fair value amounts totaled $0.54 billion, consisting of $0.23 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $0.08 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 September 30, 2019, the fair value of the total backlog comprised $3.05 billion related to cemetery contracts and $8.58 billion related to funeral contracts. As of September 30, 2019, the fair value of the assets associated with the backlog of trust-funded deferred revenue comprised $2.79 billion related to cemetery contracts and $2.09 billion related to funeral contracts.

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 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, during 2016, SCI 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 September 30, 2019, approximately 88% 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 September 30, 2019, 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 nine months ended September 30, 2019, the Standard and Poor’s 500 Index increased 20.6% and the Barclay’s Aggregate Index increased 8.5%. By comparison, the SCI trusts, which increased 12.9% during the same nine month period, are more broadly and globally diversified with an allocation of approximately 50% equities, 35% fixed income securities, 10% alternative and other investments with remaining 5% available in cash.

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, 2019 and 2018

Management Summary

In the three months ended September 30, 2019, we reported net income attributable to common stockholders of $70.8 million ($0.38 per diluted share) compared to net income attributable to common stockholders for the same period in 2018 of $68.9 million ($0.37 per diluted share). These results were affected by the following items:

(In millions)

In addition to the items referenced in the table above, growth in our funeral segment coupled with reductions in corporate general and administrative expenses were partially offset by a decline in cemetery revenue.

Funeral Results

(Dollars in millions, except average revenue per service)

(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2018 and ending September 30, 2019.

(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, net 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 $460.1 million for the three months ended September 30, 2019 compared to $451.0 million for the same period in 2018. This $9.1 million increase is primarily attributable to the increase of $4.6 million in revenue contributed by acquired properties, and a $5.7 million increase in comparable revenue as described below partially offset by $1.2 million in revenue contributed by properties that have been subsequently divested.

Comparable revenue from funeral operations was $448.6 million for the three months ended September 30, 2019 compared to $442.9 million for the same period in 2018. This $5.7 million increase is due to 1.7% higher comparable services performed and a $1.1 million increase in recognized preneed revenue partially offset by 0.5% decrease in average revenue per funeral service.

Organic sales average growth of 1.3% was more than offset by 150 basis point increase in the total comparable cremation rate, which increased to 56.8% in the three months ended September 30, 2019 from 55.3% in 2018 as a result of an increase in both direct cremations and cremations with service.

Funeral Operating Profit

Consolidated funeral operating profit increased $6.3 million, or 9.3%, for the three months ended September 30, 2019 compared to the same period in 2018. This increase is primarily attributable to an increase in comparable funeral operating profit of $5.7 million, or 8.4%. Comparable operating margin percentage increased 110 basis points to 16.5%, which is primarily due to the revenue increases described above in addition to continued effective management of our fixed costs.

Cemetery Results

(In millions)

(1) We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2018 and ending September 30, 2019.

Cemetery Revenue

Consolidated revenue from our cemetery operations decreased $18.7 million, or 5.7%, in the third quarter of 2019 compared to the same period in 2018 primarily due to a $18.8 million decrease in comparable cemetery revenue. The comparable revenue decline over the prior year quarter is primarily $21.0 million, or 14.0%, decrease in recognized preneed property revenue as well as a $3.1 million decline in other revenue (primarily endowment care trust fund income) due to the timing of capital gains and other distributions. These decreases were somewhat offset by increases in atneed revenue and recognized preneed merchandise and service revenue.

Cemetery Operating Profit

Consolidated cemetery operating profit decreased $12.6 million, or 12.9%, in the third quarter of 2019 compared to the same period in 2018 primarily due to a $11.8 million decrease in comparable operating profit. Comparable operating profit decreased $11.8 million to $85.3 million and the operating margin percentage decreased 210 basis points to 28.0%. These decreases reflect lower recognized preneed property revenue partially offset by continued effective management of our fixed costs.

Other Financial Statement Items

General and administrative expenses

General and administrative expenses decreased $11.7 million to $29.4 million in the third quarter of 2019, primarily related to higher expenses in the prior year for our long-term incentive compensation plan that is tied to increases in total shareholder return.

(Losses) gains on divestitures and impairment charges, net

Losses on divestitures were $1.5 million in 2019, decreasing $9.5 million from the gain of $8.0 million in 2018. This is the result of divestitures of non-strategic funeral and cemetery locations in the United States and Canada.

Losses on early extinguishment of debt

We incurred a $9.1 million loss on early extinguishment of debt in the third quarter of 2019 related to strategic refinancing transactions. These transactions include the open market repurchases of our 7.5% Senior Notes due 2027 along with the refinancing of our 4.5% Senior Notes due November 2020 and our 5.375% Senior Notes due January 2022 that were completed during the third quarter of 2019.

Provision for income taxes

Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete

items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in

estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitation, and increases or

decreases in valuation allowances on deferred tax assets. Our effective tax rate was 2.7% and 19.8% for the three months ended September 30, 2019 and 2018, respectively. The lower effective tax rate for the three months ended September 30, 2019 was primarily due to the reduction in a tax liability as a result of the expiration of the statute of limitations.

Weighted average shares

The diluted weighted average number of shares outstanding was 185.8 million in the three months ended September 30, 2019, compared to 185.5 million in the same period in 2018. The decrease in the number of shares reflects the impact of shares repurchased under our share repurchase program.

Management Summary

In the nine months ended September 30, 2019, we reported net income attributable to common stockholders of $222.4 million ($1.20 per diluted share) compared to net income attributable to common stockholders for the same period in 2018 of $254.2 million ($1.36 per diluted share). These results were affected by the following items:

(In millions)

In addition to the items referenced in the table above, reductions in corporate general and administrative expense, coupled with a favorable adjusted effective tax rate, more than offset an anticipated increase in interest expense related to the timing of our recent debt refinancing.

Funeral Results

(Dollars in millions, except average revenue per service)

(1) We define comparable (or same store) operations as those funeral service locations owned by us for the entire period beginning January 1, 2018 and ending September 30, 2019.

(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, net 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 $1,431.9 million for the nine months ended September 30, 2019 compared to $1,434.0 million for the same period in 2018. This decrease is primarily attributable to a $17.3 million decrease in comparable revenue as described below and $4.2 million in revenue contributed by properties that have been subsequently divested partially offset by a $19.4 million increase in revenue contributed by acquired and newly constructed properties.

Comparable revenue from funeral operations was $1,400.9 million for the nine months ended September 30, 2019 compared to $1,418.2 million for the same period in 2018. The $17.3 million decrease was primarily due to a 0.9% decrease in comparable services performed, resulting from a weaker 2019 flu season, and a 1.1% decrease in the average revenue per service partially offset by $4.9 million increase in comparable recognized preneed revenue and $2.8 million increase in GA revenue.

Comparable average revenue per service declined $58, or 1.1%, as a 1.2% increase in the organic sales average was offset by a 170 basis point increase in the total comparable cremation rate, which increased to 56.6% in the first nine months of 2019 from 54.9% in 2018 as a result of an increase in both direct cremations and cremations with service.

Funeral Operating Profit

Consolidated funeral operating profit decreased $8.6 million, or 3.1%, in the first nine months of 2019 compared to the same period in 2018. This decrease is primarily attributable to a decrease in comparable funeral operating profit of $11.6 million, or 4.1%, partially offset by $1.9 million contributed by properties that have been subsequently divested. Comparable funeral operating profit decreased $11.6 million to $270.4 million and the operating margin percentage decreased 60 basis points to 19.3%, which is primarily due to the decreased revenue from funeral services performed resulting from a weaker 2019 flu season partially offset by continued effective management of our fixed costs.

Cemetery Results

(In millions)

(1) We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2018 and ending September 30, 2019.

Cemetery Revenue

Consolidated revenue from our cemetery operations increased $12.7 million, or 1.4%, in the nine months ended September 30, 2019 compared to the same period in 2018, primarily attributable to $8.9 million in revenue contributed by acquired properties and a $4.6 million increase in comparable revenue. The comparable revenue growth over the prior year is due to increased recognized preneed property revenue from sales into existing developed cemetery property projects.

Cemetery Operating Profit

Consolidated cemetery operating profit increased $1.4 million, or 0.5%, in the nine months ended September 30, 2019 compared to the same period in 2018 primarily as a result of a $1.5 million increase in comparable operating profit. Comparable cemetery operating profit increased $1.5 million to $271.3 million primarily due to the revenue increases described above. The operating margin percentage of 29.1% remained flat to the prior year.

Other Financial Statement Items

General and Administrative Expenses

General and administrative expenses decreased $5.7 million to $101.3 million in the nine months ended September 30, 2019 compared to $107.0 million in the same period of 2018. The current year period includes $6.4 million related to a legal reserve established for future settlements. Excluding these costs, general and administrative expenses decreased $12.1 million primarily related to higher expenses in the prior year for our long-term incentive compensation plan that is tied to increases in total shareholder return.

(Losses) Gains on Divestitures and Impairment Charges, Net

(Losses) gains on divestitures and impairment charges, net, declined $30.5 million in the nine months ended September 30, 2019 compared to the same period of 2018. These losses and gains were associated with the divestitures of non-strategic funeral and cemetery locations in the United States and Canada and the disposal of certain transportation assets.

Interest Expense

Interest expense increased $6.9 million to $141.4 million in the nine months ended September 30, 2019 primarily due to increased interest rates on our floating rate debt.

Losses on Early Extinguishment of Debt, Net

We incurred losses of $16.6 million in the nine months ended September 30, 2019 and $10.1 million in the same period of 2018 on the early extinguishment of debt associated with the execution of strategic refinancing transactions. These transactions include the open market repurchases of our 7.5% Senior Notes due 2027 along with the refinancing of our 4.5% Senior Notes due November 2020 and our 5.375% Senior Notes due January 2022 that were completed during the nine months ended September 30, 2019. During the nine months ended September 30, 2018, we completed the refinancing of our 7.625% Senior Notes due October 2018.

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, events such 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 on deferred tax assets. Our effective tax rate was 17.3% and 19.4% for the nine months ended September 30, 2019 and 2018, respectively. The lower effective tax rate for the nine months ended September 30, 2019 was primarily due to the reduction in a tax liability as a result of the expiration of the statute of limitations and higher excess tax benefits on the increased exercises of stock options, partially offset by the adjustment related to the implementation of tax reform in 2018.

Weighted Average Shares

The diluted weighted average number of shares outstanding was 185.6 million in the first nine months of 2019, compared to 187.5 million in the same period in 2018. 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, 2018.

There were no significant changes to our accounting policies that have occurred subsequent to December 31, 2018, 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 of this Form 10-Q.

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 2018 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 (http://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.

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 September 30, 2019 are presented in Part I, Item 1. Financial Statements, 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.

Disclosure Controls and Procedures

As of September 30, 2019, 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, 2019 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our consolidated financial condition, consolidated 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 September 30, 2019 that have materially affected or are reasonably likely to materially affect, our internal control over financial reporting.

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, 2018.