# Service Corp International: Form 10-Q for the period ended Sep 30, 2009

- Company: [Service Corp International](/companies/sci.md) (CIK 89089)
- Form: 10-Q
- Filed: 2009-11-05
- Accepted by EDGAR: Nov 5, 2009, 07:58 ET
- Period: 2009-09-30
- Accession: 0000950123-09-057992
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/89089/000095012309057992/h68410e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/89089/000095012309057992/

## Management's discussion and analysis

As filed, 64,974 characters.

### The Company

We are North America’s largest provider of deathcare products and services, with a network of funeral homes and cemeteries unequalled in geographic scale and reach. At September 30, 2009, we operated 1,250 funeral service locations and 364 cemeteries (including 206 combination locations) in North America, which are geographically diversified across 43 states, eight Canadian provinces, the District of Columbia, and Puerto Rico. Our funeral segment also includes the operations of 12 funeral homes in Germany that we intend to exit when economic values and conditions are conducive to a sale. Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses. We sell cemetery property and funeral and cemetery products and services at the time of need and on a preneed basis.

Our financial stability is further enhanced by our $6.5 billion backlog of future revenues from both trust and insurance-funded sales at September 30, 2009, which is the result of preneed funeral and cemetery sales. We believe we have the financial strength and flexibility to reward shareholders through dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth.

### Recent Events

#### Acquisition

On October 14, 2009, we entered into a definitive support agreement in which we agreed to acquire all of the outstanding common shares of Keystone North America Inc. (Keystone) for C$8.00 per share in cash. Keystone operates 199 funeral homes and 15 cemeteries in North America. The total transaction is valued at approximately $256 million, including the assumption of Keystone’s outstanding debt.

We have substantial cash on hand that will be used in the transaction and have entered into a commitment letter with JPMorgan Chase Bank, N.A. and Bank of America, N.A. providing for a $250 million bridge financing, subject to certain conditions identified therein. We believe that we have a number of debt capital market alternatives, and we will determine the optimal funding structure consisting of a combination of long-term permanent debt and short-term pre-payable debt prior to the close of the transaction.

The transaction is anticipated to close in the first quarter of 2010, subject to customary closing conditions, including expiration of the waiting period under the Hart-Scott-Rodino Antitrust Act; however, there can be no assurance the acquisition will be completed by this time or at all.

#### Bank Credit Facility

In the fourth quarter of 2009, we intend to amend and extend our senior credit facility to increase the availability thereunder from $300 million to $400 million, and we expect to use cash on hand and the increased availability under our facility to prepay in full our privately placed $150 million aggregate principal amount of Series B Senior notes due November 2011.

### Financial Condition, Liquidity and Capital Resources

### Recent Volatility in Financial Markets

The weakened economy has created some volatility in our cemetery property sales production. During the nine months ended September 30, 2009, preneed and atneed comparable, or “same store”, cemetery property production declined 4.0%, which negatively impacted our cemetery revenue. However, in the third quarter of 2009, we did experience significant recovery compared with the previous three quarters. Preneed and atneed comparable cemetery property sales production increased 15.9% from the prior year third quarter, which exceeded our expectations. See Item 1A of our Form 10-K for the fiscal year ended December 31, 2008 for further discussion of risks presented by the economy.

Our funeral, cemetery merchandise and service, and cemetery perpetual care trusts have been impacted by the volatility in the U.S. and global financial markets. The fair market value of our trust investments declined sharply in the second half of 2008. Since that time, our trusts have recovered commensurate with the overall improvement in the financial markets. During the nine months ended September 30, 2009, our combined trust fund assets increased 19.9%, primarily due to unrealized aggregate net gains. These gains were partially offset by realized aggregate net losses (excluding impairments) of $72.6 million in our preneed funeral and cemetery merchandise and service trusts. In addition, we realized aggregate net losses (excluding impairments) of $8.0 million in our cemetery perpetual care trusts.

As of September 30, 2009, we have cumulative net unrealized losses of $119.1 million in our preneed funeral and cemetery merchandise and service trusts, and cumulative net unrealized losses of $54.5 million in our cemetery perpetual care trusts, as discussed in Notes 4, 5, and 6 in Part I, Item 1, Financial Statements. In the third quarter of 2009, we experienced a substantial recovery in our trust investments, with net investment activity that reduced our net unrealized losses by $200.3 million in our preneed funeral and cemetery merchandise and service trusts and by $77.7 million in our cemetery perpetual care trusts. At September 30, 2009, these net unrealized losses represented 6.6% of our original cost basis of $2.6 billion. As explained in “Critical Accounting Policies, Fair Value Measurements” in our 2008 Annual Report on Form 10-K, changes in unrealized gains and/or losses related to these securities are reflected in *Accumulated other comprehensive income* and offset by the *Deferred preneed funeral and cemetery receipts held in trust* and *Care trusts’ corpus* interests in those unrealized gains and/or losses. Therefore, the majority of these significant net unrealized losses are not reflected in our consolidated statement of operations for the nine months ended September 30, 2009. We do, however, rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations.

#### Trust Investments

In addition to selling our products and services to client families at the time of need, we sell price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery services and merchandise. Since preneed funeral and cemetery services or merchandise will not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into trusts until the merchandise is delivered or the service is performed. Investment earnings associated with our trust investments are expected to mitigate the inflationary costs of providing the preneed funeral and cemetery services and merchandise in the future for the prices that were guaranteed at the time of sale.

Also, we are required by state or provincial law to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus remains in the trust in perpetuity and the net ordinary earnings are intended to offset the expense to maintain the cemetery property. The majority of states require that net gains and losses are retained and added to the corpus, but certain states allow the net realized gains and losses to be included in the income that is distributed.

Independent trustees manage and invest all of the funds deposited into our funeral and cemetery merchandise and service trusts as well as the cemetery perpetual care trusts. The trustees are selected based on their respective geographic footprint and qualifications per state regulations. All of our trustees engage the same independent investment advisor. The investment guidelines are governed by state and provincial legislation. The trustees, with input from the 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. Asset allocation is based on regulatory guidelines and matched to the liability structure of each trust.

The investment advisor recommends investment managers to the trustees that are selected on the basis of various criteria set forth in the investment policy. The primary investment objectives for the funeral and cemetery merchandise and service trusts include (1) achieving growth of principal over time sufficient to preserve and increase the purchasing power of the assets; (2) producing current income to support the specific objectives of each trust type; and (3) preserving capital within acceptable levels of volatility. Preneed funeral and cemetery contracts generally take years to mature. Therefore, the funds associated with these contracts are often invested for several market cycles. While cemetery perpetual care trusts share the same investment objectives as listed above, these trusts emphasize providing a steady stream of investment income with some capital appreciation. The trusts seek to control risk and volatility through a combination of asset class, manager, and security level diversification.

The market values of our trust investments at September 30, 2009 are detailed below (in thousands).

| Fixed income securities: | Funeral Merchandise and Service | Cemetery Merchandise and Service | Total Funeral and Cemetery Merchandise and Service | Cemetery Perpetual Care Funds | Total |
| --- | ---: | ---: | ---: | ---: | ---: |
| U.S. Treasury | $35,695 | $41,196 | $76,891 | $6,157 | $83,048 |
| Canadian government | 93,156 | 14,945 | 108,101 | 25,178 | 133,279 |
| Corporate | 34,365 | 9,615 | 43,980 | 40,011 | 83,991 |
| Mortgage-backed | 5,107 | 9,299 | 14,406 | 3,693 | 18,099 |
| Asset-backed | 150 | — | 150 | — | 150 |
| Equity securities: |  |  |  |  |  |
| Preferred stock | — | — | — | 8,926 | 8,926 |
| Common stock (based on investment objectives): |  |  |  |  |  |
| Growth | 150,657 | 208,432 | 359,089 | 4,098 | 363,187 |
| Value | 170,742 | 251,547 | 422,289 | 115,577 | 537,866 |
| Mutual funds: |  |  |  |  |  |
| Equity | 92,660 | 204,806 | 297,466 | 97,096 | 394,562 |
| Fixed income | 135,243 | 178,713 | 313,956 | 470,757 | 784,713 |
| Private equity | 10,911 | 3,788 | 14,699 | 8,271 | 22,970 |
| Other | 1,298 | 1,346 | 2,644 | 6,508 | 9,152 |
|  | 729,984 | 923,687 | 1,653,671 | 786,272 | 2,439,943 |
| Assets associated with businesses held for sale | (1,786) | (49,424) | (51,210) | (19,778) | (70,988) |
| Cash and cash equivalents | 150,452 | 139,110 | 289,562 | 81,665 | 371,227 |
| Insurance-backed fixed income securities | 214,999 | — | 214,999 | — | 214,999 |
| Total trust assets | $1,093,649 | $1,013,373 | $2,107,022 | $848,159 | $2,955,181 |

37

As of the end of the quarter, 96% of our trusts were under the control and custody of four preferred trustees. The three large U.S. trustees primarily use common trust fund structures as the investment vehicle for their trusts. Through the common trust fund structure, each respective trustee manages the allocation of assets through individual managed accounts or institutional mutual funds. In the event a particular state prohibits the use of a common trust fund as a qualified investment, the trustee utilizes institutional mutual funds. The U.S. trusts include a modest allocation to alternative investments, which are comprised primarily of private equity and real estate investments. These investments are structured as limited liability companies (LLCs) and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective LLCs.

#### Fixed Income Securities

Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility. Our trusts have direct investments primarily in government fixed income securities.

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

#### Equity Securities

Equity investments have historically provided long-term capital appreciation in excess of inflation. Our trusts have direct investments primarily in domestic equity portfolios that include large, mid and small capitalization companies of different investment objectives (i.e., growth and value). The majority of our equity portfolio is managed by multiple institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, these securities are well diversified. As of September 30, 2009, the largest single equity position represented less than 1% of our total equity securities portfolio.

#### Mutual Funds

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

#### Private Equity

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

#### Outlook for Trust Investments

The trust fund income recognized from these investment assets continues to be volatile. During the recent economic downturn, our trusts outperformed the broad market due to their diversified investment strategy. During the twelve months ended September 30, 2009, the Standard and Poor’s 500 Index decreased approximately 7% and the combined SCI trusts increased approximately 5%. During the three months ended September 30, 2009, the Standard and Poor’s 500 Index increased approximately 16% and the combined SCI trusts increased approximately 12%. As the capital markets continue to improve, we expect our trusts to participate in the recovery.

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

### Capital Allocation Considerations

We rely on cash flow from operations as a significant source of liquidity. Our cash flow from operating activities provided $305.3 million during the nine months ended September 30, 2009. Our current cash and cash equivalents balance is approximately $200 million as of October 31, 2009. In addition, we have approximately $250 million in excess borrowing capacity under our revolving credit facility.

Our credit facility requires us to maintain certain leverage and interest coverage ratios. As of September 30, 2009, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of September 30, 2009 are as follows:

|  | Per credit agreement | Actual |
| --- | --- | ---: |
| Leverage ratio | 4.25 (Max) | 3.35 |
| Interest coverage ratio | 2.75 (Min) | 3.73 |

Our financial covenant requirements under our credit facility become more restrictive over time. Under the existing agreement, our future leverage and interest coverage ratios are as follows:

|  | Leverage ratio (max) |
| --- | ---: |
| 2009 | 4.25 |
| 2010 | 3.75 |
| Thereafter | 3.50 |

|  | Interest coverage ratio (min) |
| --- | ---: |
| 2009 thru June 2010 | 2.75 |
| Thereafter | 3.00 |

We intend to amend and extend our senior credit facility to increase the availability thereunder from $300 million to $400 million, and we expect to use cash on hand and the increased availability under our facility to prepay in full our privately placed $150 million aggregate principal amount of Series B Senior notes due November 2011.

We believe our sources of liquidity can be supplemented by our ability to access the capital markets for additional debt or equity securities. However, given the current environment, interest rates on new borrowings are significantly higher than levels experienced in recent history. We believe that our cash on hand, future operating cash flows, and the available capacity under our credit facility will be adequate to meet our financial obligations over the next 12 months.

### 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 operating and investing needs.

Operating Activities — Net cash provided by operating activities increased $71.9 million during the nine months ended September 30, 2009, compared to the nine months ended September 30, 2008. The increase was the result of a $90 million United States Federal transaction-related tax payment in the prior year, partially offset by an $18.1 million net decrease in working capital. The net decrease in working capital reflects lower collections of preneed and atneed receivables, which were partially offset by our cost control initiatives in the current year.

*Investing Activities —* Net cash used in investing activities decreased $72.4 million during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, primarily due to a decrease of $45.9 million in capital expenditures, a $20.5 million decrease in deposits of restricted funds, and a $5.2 million decrease in acquisition activity.

*Financing Activities —* Net cash used in financing activities increased by $52.8 million during the nine months ended September 30, 2009 compared to the nine months ended September 30, 2008, primarily due to a $64.2 million increase in debt payments in 2009 to early extinguish certain of our debt, partially offset by a $7.3 million increase in proceeds from exercise of stock options.

### Financial Assurances

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

*(Dollars in millions)*

|  | September 30, 2009 | December 31, 2008 |
| --- | ---: | ---: |
| Preneed funeral | $126.6 | $130.6 |
| Preneed cemetery: |  |  |
| Merchandise and service | 125.8 | 132.4 |
| Pre-construction | 2.3 | 2.9 |
| Bonds supporting preneed funeral and cemetery obligations | 254.7 | 265.9 |
| Bonds supporting preneed business permits | 4.6 | 5.1 |
| Other bonds | 21.6 | 17.7 |
| Total surety bonds outstanding | $280.9 | $288.7 |

When selling preneed funeral and cemetery contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law. For the three months ended September 30, 2009 and 2008, we had $6.0 million and $7.3 million, respectively, of cash receipts attributable to bonded sales. For the nine months ended September 30, 2009 and 2008, we had $18.6 million and $23.1 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

Since preneed funeral and cemetery services or merchandise will not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into merchandise and service trusts until the merchandise is delivered or the service is performed. These trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. In certain situations, as described above, where permitted by state or provincial laws, we post a surety bond as financial assurance for a certain amount of the preneed funeral or cemetery contract in lieu of placing funds into trust accounts.

The tables below detail our results of preneed funeral and cemetery production and maturities, excluding insurance contracts, for the three and nine months ended September 30, 2009 and 2008.

*(Dollars in millions)*

*(Dollars in millions)*

| Funeral: Preneed trust-funded (including bonded): | North America Three Months Ended September 30, 2009 | 2008 | Nine Months Ended September 30, 2009 | 2008 |
| --- | ---: | ---: | ---: | ---: |
| Sales production | $33.7 | $42.8 | $109.7 | $121.2 |
| Sales production (number of contracts) | 6,705 | 8,419 | 21,063 | 24,392 |
| Maturities | $41.4 | $49.2 | $130.6 | $157.4 |
| Maturities (number of contracts) | 9,872 | 10,756 | 32,394 | 34,696 |
| **Cemetery:** |  |  |  |  |
| Sales production: |  |  |  |  |
| Preneed | $101.7 | $86.6 | $289.4 | $287.1 |
| Atneed | 58.0 | 59.8 | 179.7 | 191.0 |
| Total sales production | $159.7 | $146.4 | $469.1 | $478.1 |
| Sales production deferred to backlog: |  |  |  |  |
| Preneed | $41.4 | $37.8 | $120.2 | $118.7 |
| Atneed | 43.8 | 45.7 | 137.9 | 145.6 |
| Total sales production deferred to backlog | $85.2 | $83.5 | $258.1 | $264.3 |
| Revenue recognized from backlog: |  |  |  |  |
| Preneed | $30.7 | $32.6 | $98.6 | $97.8 |
| Atneed | 44.8 | 47.8 | 137.0 | 149.3 |
| Total revenue recognized from backlog | $75.5 | $80.4 | $235.6 | $247.1 |

*Insurance-Funded Preneed Funeral Contracts:* Where permitted by state or provincial law, customers may arrange their preneed funeral contract by purchasing 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. The policy amount of the insurance contract between the customer and the third-party insurance company generally equals the amount of the preneed funeral contract. We do not reflect the unfulfilled insurance-funded preneed funeral contract amounts in our unaudited condensed consolidated balance sheet.

The table below details the results of insurance-funded preneed funeral production and maturities for the three and nine months ended September 30, 2009 and 2008, and the number of contracts associated with those transactions.

*(Dollars in millions)*

*(Dollars in millions)*

| Preneed funeral insurance-funded (1): | North America Three Months Ended September 30, 2009 | 2008 | Nine Months Ended September 30, 2009 | 2008 |
| --- | ---: | ---: | ---: | ---: |
| Sales production | $88.4 | $83.6 | $240.0 | $234.0 |
| Sales production (number of contracts) | 14,822 | 13,782 | 40,487 | 38,985 |
| General agency revenue | $15.8 | $14.9 | $42.4 | $41.2 |
| Maturities | $58.2 | $54.5 | $182.5 | $181.2 |
| Maturities (number of contracts) | 10,998 | 10,520 | 34,173 | 35,461 |

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

*Backlog of Preneed Funeral and Cemetery Contracts:* The following table reflects our backlog of trust-funded deferred preneed funeral and cemetery contract revenues, including amounts related to *Deferred preneed funeral and cemetery receipts held in trust,* as of September 30, 2009. 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, 2009. The backlog amounts presented are reduced by an amount that we believe will cancel before maturity based on historical experience.

The table also reflects our preneed funeral and cemetery receivables and trust investments (market and cost basis) associated with the backlog of deferred preneed funeral and cemetery contract revenues, net of the estimated cancellation allowance. We believe that the table below is meaningful because it sets forth the aggregate amount of future revenues we expect to recognize as a result of preneed sales, as well as the amount of assets associated with those revenues. Because the future revenues exceed the asset amounts, future revenues will exceed the cash distributions actually received from the associated trusts.

*(Dollars in billions)*

|  | September 30, 2009 Market | Cost |
| --- | ---: | ---: |
| Deferred preneed funeral revenues | $0.60 | $0.60 |
| Deferred preneed funeral receipts held in trust | 1.09 | 1.14 |
|  | $1.69 | $1.74 |
| Allowance for cancellation on trust investments | (0.12) | (0.12) |
| Backlog of trust-funded deferred preneed funeral revenues | $1.57 | $1.62 |
| Backlog of insurance-funded preneed funeral revenues | 3.27 | 3.27 |
| Total backlog of preneed funeral revenues | $4.84 | $4.89 |
| Preneed funeral receivables and trust investments | $1.31 | $1.36 |
| Allowance for cancellation on trust investments | (0.11) | (0.11) |
| Assets associated with backlog of trust-funded deferred preneed funeral revenues, net of estimated allowance for cancellation | $1.20 | $1.25 |
| Insurance policies associated with insurance-funded deferred preneed funeral revenues, net of estimated allowance for cancellation | 3.27 | 3.27 |
| Total assets associated with backlog of preneed funeral revenues | $4.47 | $4.52 |
| Deferred preneed cemetery revenues | $0.81 | $0.81 |
| Deferred preneed cemetery receipts held in trust | 1.01 | 1.08 |
|  | $1.82 | $1.89 |
| Allowance for cancellation on trust investments | (0.14) | (0.14) |
| Backlog of deferred cemetery revenues | $1.68 | $1.75 |
| Preneed cemetery receivables and trust investments | $1.31 | $1.38 |
| Allowance for cancellation on trust investments | (0.14) | (0.14) |
| Assets associated with backlog of deferred cemetery revenues, net of estimated allowance for cancellation | $1.17 | $1.24 |

The difference between the backlog and asset amounts represents the contracts for which we have posted surety bonds as financial assurance in lieu of trusting, the amounts collected from customers that were not required to be deposited into trust, and allowable cash distributions from trust assets. The table also reflects the amounts expected to be received from insurance companies through the assignment of policy proceeds related to insurance-funded funeral contracts.

### Results of Operations — Three Months Ended September 30, 2009 and 2008

### Management Summary

Key highlights in the third quarter of 2009 were as follows:

- Funeral gross profit increased $9.5 million or 16.0% due to lower variable merchandise costs, a decline in personnel costs related to work-force initiatives, and a reduction in self-insurance casualty reserves; partially offset by the impact of lower funeral services performed and a decrease in funeral trust fund income; and
- Cemetery gross profit increased $9.4 million or 40.7% due to increased property revenues, a decline in personnel costs related to work-force initiatives, and a reduction in self-insurance casualty reserves; partially offset by a decrease in merchandise revenues.

### Results of Operations

In the third quarter of 2009, we reported net income attributable to common stockholders of $31.2 million ($.12 per diluted share) compared to net income attributable to common stockholders in the third quarter of 2008 of $14.6 million ($.06 per diluted share). Our results were impacted by the following items:

- a net after-tax loss on asset sales of $2.3 million in the third quarter of 2009, primarily due to an impairment charge on various locations in North America as compared to an after-tax loss on asset sales of $8.3 million in the third quarter of 2008;
- increase in certain tax reserves of $0.8 million in the third quarter of 2009 as compared to a reduction of $1.0 million in the third quarter of 2008;
- an after-tax gain from the early extinguishment of debt of $0.3 million in the third quarter of 2009; and
- an after-tax charge of $2.6 million related to Hurricane losses in the third quarter of 2008.

### Consolidated Versus Comparable Results

The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the three months ended September 30, 2009 and 2008. We define comparable operations (or same store operations) as those funeral and cemetery locations owned by us for the entire period beginning January 1, 2008 and ending September 30, 2009. The following tables present operating results for funeral and cemetery locations that were owned by us during this period.

*(Dollars in millions)*

| Three Months Ended September 30, 2009 North America Revenue | Consolidated | Less: Results Associated with Acquisition/ New Construction | Less: Results Associated with Divestitures | Comparable |
| --- | ---: | ---: | ---: | ---: |
| Funeral revenue | $327.4 | $4.3 | $0.6 | $322.5 |
| Cemetery revenue | 168.3 | 1.7 | 0.2 | 166.4 |
|  | 495.7 | 6.0 | 0.8 | 488.9 |
| Germany revenue | 1.5 | — | — | 1.5 |
| Total revenue | $497.2 | $6.0 | $0.8 | $490.4 |
| North America Gross Profits |  |  |  |  |
| Funeral gross profits | $68.7 | $(0.9) | $(0.3) | $69.9 |
| Cemetery gross profits | 32.5 | 0.2 | 0.1 | 32.2 |
| Total gross profits | $101.2 | $(0.7) | $(0.2) | $102.1 |

*(Dollars in millions)*

| Three Months Ended September 30, 2008 North America Revenue | Consolidated | Less: Results Associated with Acquisition/ New Construction | Less: Results Associated with Divestitures | Comparable |
| --- | ---: | ---: | ---: | ---: |
| Funeral revenue | $348.9 | $8.2 | $4.5 | $336.2 |
| Cemetery revenue | 166.0 | 3.5 | 0.6 | 161.9 |
|  | 514.9 | 11.7 | 5.1 | 498.1 |
| Germany revenue | 1.5 | — | — | 1.5 |
| Total revenue | $516.4 | $11.7 | $5.1 | $499.6 |
| North America Gross Profits |  |  |  |  |
| Funeral gross profits | $59.2 | $— | $(0.7) | $59.9 |
| Cemetery gross profits | 23.1 | 0.6 | 0.1 | 22.4 |
| Total gross profits | $82.3 | $0.6 | $(0.6) | $82.3 |

The following table provides the data necessary to calculate our consolidated average revenue per funeral service for the three months ended September 30, 2009 and 2008. We calculate average revenue per funeral service by dividing consolidated funeral revenue, excluding General Agency (GA) revenues and certain other revenues to avoid distorting our averages of normal funeral services revenue, by the consolidated number of funeral services performed during the period.

*(Dollars in millions, except*

|  | Three Months Ended September 30, 2009 average revenue per funeral service) | 2008 |
| --- | ---: | ---: |
| Consolidated funeral revenue | $328.9 | $350.4 |
| Less: consolidated GA revenue | 15.8 | 14.9 |
| Less: other revenue | 1.8 | 2.2 |
| Adjusted consolidated funeral revenue | $311.3 | $333.3 |
| Consolidated funeral services performed | 60,494 | 65,177 |
| Consolidated average revenue per funeral service | $5,146 | $5,114 |

43

The following table provides the data necessary to calculate our comparable average revenue per funeral service for the three months ended September 30, 2009 and 2008. We calculate average revenue per funeral service by dividing comparable funeral revenue, excluding comparable GA revenues and certain other revenues to avoid distorting our averages of normal funeral services revenue, by the comparable number of funeral services performed during the period.

*(Dollars in millions, except*

|  | Three Months Ended September 30, 2009 average revenue per funeral service) | 2008 |
| --- | ---: | ---: |
| Comparable funeral revenue | $324.0 | $337.7 |
| Less: comparable GA revenue | 15.7 | 14.9 |
| Less: other revenue | 2.0 | 2.1 |
| Adjusted comparable funeral revenue | $306.3 | $320.7 |
| Comparable funeral services performed | 59,266 | 62,118 |
| Comparable average revenue per funeral service | $5,168 | $5,163 |

### Funeral Results

#### Funeral Revenue

Consolidated revenues from funeral operations were $328.9 million in the third quarter of 2009 compared to $350.4 million in the same period in 2008. This decrease is due to a 7.2% decline in funeral services performed, an unfavorable Canadian currency impact of $1.7 million, and $4.2 million in decreased trust fund income.

#### Funeral Services Performed

Our consolidated funeral services performed decreased 7.2% in the third quarter of 2009 compared to the same period in 2008. Our comparable funeral services performed decreased 4.6% in the third quarter of 2009 compared to the same period in 2008. We believe the decline in deaths in our markets is consistent with trends experienced by other funeral service providers and industry vendors. Our comparable cremation rate of 42.8% in the third quarter of 2009 increased slightly from 42.3% in 2008.

#### Average Revenue Per Funeral

Our consolidated average revenue per funeral service increased $32, or 0.6% in the third quarter of 2009 compared to the same period in 2008. Our comparable average revenue per funeral service increased $5, or 0.1%, in the third quarter of 2009 over the same period in 2008. Excluding an unfavorable Canadian currency impact of $1.7 million and decreased trust fund income, the comparable average revenue per funeral service grew approximately 1.9%.

#### Funeral Gross Profit

Consolidated funeral gross profits increased $9.5 million in the third quarter of 2009 compared to same period in 2008. The consolidated gross margin percentage increased to 20.9% from 16.9%. Comparable funeral gross profits increased $10.0 million, or 16.7%, when compared to the same period in 2008. This increase is due to lower variable merchandise costs, a decline in personnel costs related to work-force initiatives, and a reduction in self-insurance casualty reserves; partially offset by the decrease in revenues described above.

### Cemetery Results

#### Cemetery Revenue

Consolidated revenues from our cemetery operations increased $2.3 million, or 1.4%, in the third quarter of 2009 compared to the same period in 2008. Comparable cemetery revenues increased $4.5 million, or 2.8%, when compared with the same period in 2008. This increase was primarily driven by a $9.2 million increase in preneed production partially offset by a $3.5 million decline in atneed revenue, which was in line with our expectations.

#### Cemetery Gross Profits

Consolidated cemetery gross profit increased $9.4 million, or 40.7%, in the third quarter of 2009 compared to the same period in 2008. Our consolidated cemetery gross margin percentage was 19.3% compared to 13.9% in the same period in 2008. These increases reflect a decline in personnel costs related to work-force initiatives, a reduction in our self-insurance casualty reserves, and the increased property production described above. The cemetery gross profit in the quarter exceeded our expectations as cost control initiatives and higher-than-expected property production more than offset lower-than-expected atneed revenues due to a reduced number of deaths in our markets.

### Other Financial Statement Items

#### General and Administrative Expenses

General and administrative expenses of $21.0 million in the third quarter of 2009 increased $4.9 million compared to the third quarter of 2008 primarily due to $4.0 million in increased employee benefit expenses in 2009.

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

We recognized a $2.2 million net pre-tax loss on divestitures and impairment charges in the third quarter of 2009. This loss was due primarily to impairment charges on various locations in North America. In the third quarter of 2008, we recognized a $12.8 million net pretax loss from impairment charges and asset divestitures primarily associated with non-strategic funeral and cemetery businesses in the United States and Canada.

#### Hurricane Expense, net

Hurricane expense, net reflects $4.3 million in estimated property damages incurred at various locations caused by Hurricane Ike in September 2008, net of estimated insurance recoveries.

#### Interest Expense

Interest expense decreased to $29.4 million in the third quarter of 2009, compared to $33.2 million in the third quarter of 2008. The decrease was primarily due to lower average levels of debt. For additional information see Part I, Item 1. Financial Statements, Note 9.

#### Gain on Early Extinguishment of Debt

During the third quarter of 2009, we purchased $17.2 million of our senior notes and debentures on the open market. As a result of these transactions, we recognized a gain of $0.5 million, which represents a $0.8 million discount to early extinguish the debt, partially offset by the write-off of unamortized deferred loan costs of $0.3 million. For additional information regarding these debt payments, see Part I, Item 1. Financial Statements, Note 9.

#### Provision for Income Taxes

The income tax rate was 38.8% in the third quarter of 2009 as compared to 7.3% in the third quarter of 2008. The low tax rate in 2008 reflects discrete items, including the release of tax reserves due to the expiration of certain statutory limitations and state tax planning.

#### Weighted Average Shares

The diluted weighted average number of shares outstanding was 253.0 million in the third quarter of 2009, compared to 260.4 million in the third quarter of 2008, reflecting share repurchases in 2008 under our Board-approved share repurchase program.

### Results of Operations — Nine Months Ended September 30, 2009 and 2008

### Management Summary

Key highlights during the first nine months of 2009 were as follows:

- Funeral gross profit decreased $16.1 million or 6.7%, due to the impact of lower funeral services performed and a decrease in funeral trust fund income, which were partially offset by lower variable merchandise costs, a decline in personnel costs related to work-force initiatives, and a decrease in self-insurance casualty reserves; and
- Cemetery gross profit decreased $7.8 million due to revenue declines, which were largely offset by lower variable selling compensation and merchandise expenses, a decline in personnel costs related to work-force initiatives, and a decrease in self-insurance casualty reserves.

### Results of Operations

In the first nine months of 2009, we reported net income attributable to common stockholders of $88.8 million ($.35 per diluted share) compared to net income attributable to common stockholders in the first nine months of 2008 of $87.6 million ($.33 per diluted share). These results were impacted by the following items:

- a net after-tax loss on asset sales of $5.3 million in the first nine months of 2009 partially offset by a reduction in indemnification claims related to our former French operations, as compared to an after-tax loss on asset sales of $19.8 million in the first nine months of 2008;
- a reduction in certain tax reserves of $1.6 million in the first nine months of 2009 as compared to $3.6 million in the first nine months of 2008;
- an after-tax gain from the early extinguishment of debt of $2.4 million in the first nine months of 2009;
- an after-tax expense related to our integration of Alderwoods of $0.7 million in the first nine months of 2008;
- an after-tax charge of $2.6 million related to Hurricane losses in the first nine months of 2008; and,
- an after-tax loss from discontinued operations of $0.4 million in the first nine months of 2008.

### Consolidated Versus Comparable Results

The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the nine months ended September 30, 2009 and 2008. We define comparable operations (or same store operations) as those funeral and cemetery locations that were owned for the entire period beginning January 1, 2008 and ending September 30, 2009. The following tables present operating results for funeral and cemetery locations that were owned by us during this period.

*(Dollars in millions)*

| Nine Months Ended September 30, 2009 North America Revenue | Consolidated | Less: Results Associated with Acquisition/ New Construction | Less: Results Associated with Divestitures | Comparable |
| --- | ---: | ---: | ---: | ---: |
| Funeral revenue | $1,031.8 | $14.0 | $4.6 | $1,013.2 |
| Cemetery revenue | 485.2 | 5.5 | 0.8 | 478.9 |
|  | 1,517.0 | 19.5 | 5.4 | 1,492.1 |
| Germany revenue | 4.8 | — | — | 4.8 |
| Total revenue | $1,521.8 | $19.5 | $5.4 | $1,496.9 |
| North America Gross Profits |  |  |  |  |
| Funeral gross profits | $223.7 | $(1.4) | $(0.9) | $226.0 |
| Cemetery gross profits | 79.2 | 1.8 | 0.1 | 77.3 |
|  | 302.9 | 0.4 | (0.8) | 303.3 |
| Germany gross profits | 0.2 | — | — | 0.2 |
| Total gross profits | $303.1 | $0.4 | $(0.8) | $303.5 |

46

*(Dollars in millions)*

| Nine Months Ended September 30, 2008 North America Revenue | Consolidated | Less: Results Associated with Acquisition/ New Construction | Less: Results Associated with Divestitures | Comparable |
| --- | ---: | ---: | ---: | ---: |
| Funeral revenue | $1,113.9 | $8.2 | $17.4 | $1,088.3 |
| Cemetery revenue | 519.4 | 3.5 | 2.3 | 513.6 |
|  | 1,633.3 | 11.7 | 19.7 | 1,601.9 |
| Germany revenue | 5.4 | — | — | 5.4 |
| Total revenue | $1,638.7 | $11.7 | $19.7 | $1,607.3 |
| North America Gross Profits |  |  |  |  |
| Funeral gross profits | $239.7 | $(0.2) | $(1.3) | $241.2 |
| Cemetery gross profits | 87.0 | 0.6 | — | 86.4 |
|  | 326.7 | 0.4 | (1.3) | 327.6 |
| Germany gross profits | 0.3 | — | — | 0.3 |
| Total gross profits | $327.0 | $0.4 | $(1.3) | $327.9 |

The following table provides the data necessary to calculate our consolidated average revenue per funeral service for the nine months ended September 30, 2009 and 2008. We calculate average revenue per funeral service by dividing consolidated funeral revenue, excluding GA revenues and certain other revenues to avoid distorting our averages of normal funeral services revenue, by the consolidated number of funeral services performed during the period.

*(Dollars in millions, except*

|  | Nine Months Ended September 30, 2009 average revenue per funeral service) | 2008 |
| --- | ---: | ---: |
| Consolidated funeral revenue | $1,036.6 | $1,119.3 |
| Less: consolidated GA revenue | 42.4 | 41.2 |
| Less: other revenue | 6.0 | 7.1 |
| Adjusted consolidated funeral revenue | $988.2 | $1,071.0 |
| Consolidated funeral services performed | 193,572 | 210,482 |
| Consolidated average revenue per funeral service | $5,105 | $5,088 |

The following table provides the data necessary to calculate our comparable average revenue per funeral service for the nine months ended September 30, 2009 and 2008. We calculate average revenue per funeral service by dividing comparable funeral revenue, excluding comparable GA revenues and certain other revenues to avoid distorting our averages of normal funeral services revenue, by the comparable number of funeral services performed during the period.

*(Dollars in millions, except*

|  | Nine Months Ended September 30, 2009 average revenue per funeral service) | 2008 |
| --- | ---: | ---: |
| Comparable funeral revenue | $1,018.0 | $1,093.7 |
| Less: comparable GA revenue | 42.1 | 41.1 |
| Less: other revenue | 6.1 | 6.9 |
| Adjusted comparable funeral revenue | $969.8 | $1,045.7 |
| Comparable funeral services performed | 189,141 | 205,071 |
| Comparable average revenue per funeral service | $5,127 | $5,099 |

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### Funeral Results

#### Funeral Revenue

Consolidated revenues from funeral operations were $1,036.6 million in the first nine months of 2009 compared to $1,119.3 million in the same period in 2008. This decrease is due to an 8.0% decline in funeral services performed, an unfavorable Canadian currency impact of $15.0 million, and $14.4 million in decreased trust fund income.

#### Funeral Services Performed

Our consolidated funeral services performed decreased 8.0% in the first nine months of 2009 compared to the same period in 2008. Our comparable funeral services performed decreased 7.8% in the first nine months of 2009 compared to the same period in 2008. We believe the decline in deaths in our markets is consistent with trends experienced by other funeral service providers and industry vendors and was due in part to a relatively mild influenza season compared to the first nine months of 2008 and an additional day due to a leap year in the prior year. Our comparable cremation rate of 42.8% in the first nine months of 2009 increased from 41.7% in 2008.

#### Average Revenue Per Funeral

Our consolidated average revenue per funeral service increased $17, or 0.3% in the first nine months of 2009 compared to the same period in 2008. Our comparable average revenue per funeral service increased $28, or 0.5%, in the first nine months of 2009 over the same period in 2008. Excluding an unfavorable Canadian currency impact of $15.0 million and decreased trust fund income, the comparable average revenue per funeral service grew approximately 3.3%.

#### Funeral Gross Profit

Consolidated funeral gross profits decreased $16.1 million in the first nine months of 2009 compared to same period in 2008. The consolidated gross margin percentage increased to 21.6% from 21.4%. Comparable funeral gross profits decreased $15.3 million, or 6.3%, when compared to the same period in 2008. This decrease is due to the impact of lower funeral services performed and a decrease in funeral trust fund income, which were partially offset by lower variable merchandise costs, a decline in personnel costs related to work-force initiatives, and a decrease in self-insurance casualty reserves.

### Cemetery Results

#### Cemetery Revenue

Consolidated revenues from our cemetery operations decreased $34.2 million, or 6.6%, in the first nine months of 2009 compared to the same period in 2008. Comparable cemetery revenues declined $34.7 million, or 6.8%, when compared with the same period in 2008. This decrease was primarily driven by a $3.7 million decline in comparable recognized preneed property revenues as well as a $16.1 million decline in atneed revenues, which was in line with our expectations and continued to be impacted by negative consumer sentiment resulting from the difficult economic environment. Other revenue decreased $10.2 million as cemetery trust fund income recognized from our preneed merchandise and service trusts declined $5.8 million due to negative market returns experienced in late 2008 and early 2009.

#### Cemetery Gross Profits

Consolidated cemetery gross profit decreased $7.8 million, or 9.0%, in the first nine months of 2009 compared to the same period in 2008. Our consolidated cemetery gross margin percentage was 16.3% compared to 16.8% in the same period in 2008. These decreases reflect the revenue declines discussed above, partially offset by lower variable selling compensation expenses, a decline in personnel costs related to work-force initiatives, and a reduction in self-insurance casualty reserves. The cemetery gross profit in the first nine months of 2009 exceeded our expectations as cost control initiatives helped to offset lower-than-expected atneed revenues due to a reduced number of deaths in our markets.

### Other Financial Statement Items

#### General and Administrative Expenses

General and administrative expenses of $69.2 million in the first nine months of 2009 were $6.4 million higher when compared to $62.8 million in the nine months ended 2008 primarily due to increases in certain legal and investigative fees and a $4.7 million increase in employee benefit expenses, as reductions in corporate bonuses and long-term incentive plans did not recur.

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

We recognized a $1.3 million net pre-tax loss on divestitures and impairment charges in the first nine months of 2009. This loss was due to a $19.0 million impairment charge and asset divestitures offset by a $17.7 million release of VAT, social security, and litigation indemnifications related to our former French operations. In the first nine months of 2008, we recognized a $28.7 million net pretax loss from impairment charges and asset divestitures primarily associated with non-strategic funeral and cemetery businesses in the United States and Canada.

#### Hurricane Expense, net

Hurricane expense, net reflects $4.3 million in estimated property damages incurred at various locations caused by Hurricane Ike in September of 2008, net of estimated insurance recoveries.

#### Interest Expense

Interest expense decreased to $93.4 million in the first nine months of 2009, compared to $100.6 million during the nine months ended September 30, 2008. The decrease was primarily due to repayment and maturity of our senior notes and debentures, and lower rates associated with floating rate debt. For additional information see Part I, Item 1. Financial Statements, Note 9.

#### Gain on Early Extinguishment of Debt

During the nine months ended September 30, 2009, we purchased $91.3 million of our senior notes and debentures on the open market. As a result of these transactions, we recognized a gain of $3.9 million, which represents a $5.2 million discount to early extinguish the debt partially offset by the write-off of unamortized deferred loan costs of $1.3 million. For additional information regarding the debt payments, see Part I, Item 1. Financial Statements, Note 9.

#### Provision for Income Taxes

The income tax rate was 38.8% in the first nine months of 2009 as compared to 34.6% in the first nine months of 2008. The low tax rate in 2008 reflects discrete items, including the release of tax reserves due to the expiration of certain statutory limitations and state tax planning.

#### Weighted Average Shares

The diluted weighted average number of shares outstanding was 251.3 million during the nine months ended September 30, 2009, compared to 263.0 million during the nine months ended September 30, 2008, reflecting 2008 share repurchases under our Board-approved share repurchase program.

### Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Except as described below, our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2008.

#### Noncontrolling Interests

The FASB issued authoritative guidance for noncontrolling interests in December 2007, which establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. The guidance clarifies that a noncontrolling interest in a subsidiary, which is sometimes referred to as an unconsolidated investment, is an ownership interest in the consolidated entity that should be reported as a component of equity in the consolidated financial statements. Among other requirements, the guidance requires consolidated net income to be reported at amounts attributable to both the parent and the noncontrolling interest. It also requires disclosure, on the face of the consolidated income statement, of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest. We adopted the provisions of the FASB guidance on January 1, 2009 and applied the provisions retrospectively. As a result, we have modified our unaudited condensed consolidated statement of operations, unaudited condensed consolidated balance sheet, unaudited condensed consolidated statement of cash flows, and unaudited condensed consolidated statement of equity to incorporate the required disclosure of noncontrolling interest information.

During our examination of the FASB authoritative guidance for noncontrolling interests and its impact on our current accounting, we determined that balances historically designated as “non-controlling interest” in our consolidated preneed funeral and cemetery trusts and our cemetery perpetual care trusts do not meet the criteria for non-controlling interest as prescribed by the new guidance, which states that only a financial instrument classified as equity in the trusts’ financial statements can be a noncontrolling interest in the consolidated financial statements. The interest related to our merchandise and service trusts is classified as a liability because the preneed contracts underlying these trusts are unconditionally redeemable upon the occurrence of an event that is certain to occur. In addition, since the earnings from our cemetery perpetual care trusts are used to support the maintenance of our cemeteries, the interest in these trusts also retains the characteristics of a liability. Accordingly, effective December 31, 2008, we re-characterized the amounts historically described as “*Non-controlling interest in funeral and cemetery trusts”* as either “*Deferred preneed funeral receipts held in trust”* or “*Deferred preneed cemetery receipts held in trust”*, as appropriate. Additionally, we re-characterized the amounts historically described as “*Non-controlling interest in cemetery perpetual care trusts”* as “*Care trusts’ corpus”.*

#### Fair Value Measurements

We measure the available-for-sale securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis in accordance with the FASB authoritative guidance for fair value measurements. This guidance defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date, establishes a framework for measuring fair value, and expands disclosures about instruments measured at fair value. The guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:

- Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
- Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;
- Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

An asset’s or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Certain available-for-sale securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts have been classified in Level 3 of the hierarchy due to significant management judgment required as a result of the absence of quoted market prices, inherent lack of liquidity, or the long-term nature of the securities. For additional disclosures required by FASB guidance for all of our available-for-sale securities, see Part I, Item 1. Financial Statements, Notes 4, 5, and 6.

In February 2008, the FASB provided a one-year deferral of the effective date of its authoritative guidance for fair value measurements for non-financial assets and liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. In accordance with deferral provisions, we adopted the guidance for our non-financial assets and liabilities, such as goodwill and property and equipment that we disclose or recognize at fair value on a non-recurring basis as of January 1, 2009. As none of our non-financial assets or liabilities within the scope of guidance experienced an event that required fair value measurement during the nine months ended September 30, 2009, our adoption for these assets and liabilities has had no impact on our results of operations, consolidated financial position, or cash flows.

In April 2009, the FASB issued additional guidance on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased and re-emphasizes that the objective of a fair value measurement remains an exit price. The guidance, which was effective for us in the second quarter of 2009, did not have a material impact on our results of operations, consolidated financial position, or cash flows.

### Recent Accounting Pronouncements and Accounting Changes

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

### Cautionary Statement on Forward-Looking Statements

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

- Changes in general economic conditions, both domestically and internationally, impacting financial markets (e.g., marketable security values, access to capital markets, as well as currency and interest rate fluctuations) that could negatively affect us, particularly, but not limited to, levels of trust fund income, interest expense, and negative currency translation effects.
- Changes in operating conditions such as supply disruptions and labor disputes.
- Our inability to achieve the level of cost savings, productivity improvements or earnings growth anticipated by management, whether due to significant increases in energy costs (e.g., electricity, natural gas, and fuel oil), costs of other materials, employee-related costs or other factors.
- Inability to complete acquisitions, divestitures or strategic alliances as planned or to realize expected synergies and strategic benefits.
- The outcomes of pending lawsuits, proceedings, and claims against us and the possibility that insurance coverage is deemed not to apply to these matters or that an insurance carrier is unable to pay any covered amounts to us.
- Allegations regarding compliance with laws, regulations, industry standards, and customs regarding funeral or burial procedures and practices.
- The amounts payable by us with respect to our outstanding legal matters exceed our established reserves.
- Amounts that we may be required to replenish into our affiliated funeral and cemetery trust funds in order to meet minimal funding requirements.
- The outcome of pending Internal Revenue Service audits. We maintain accruals for tax liabilities that relate to uncertain tax matters. If these tax matters are unfavorably resolved, we will make any required payments to tax authorities. While such payments would affect our cash flow, we do not believe they would impair our ability to service debt or our overall liquidity. If these tax matters are favorably resolved, the accruals maintained by us will no longer be required, and these amounts will be released through our tax provision at the time of resolution.

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- Our ability to manage changes in consumer demand and/or pricing for our products and services due to several factors, such as changes in numbers of deaths, cremation rates, competitive pressures, and local economic conditions.
- Changes in domestic and international political and/or regulatory environments in which we operate, including potential changes in tax, accounting, and trusting policies.
- Changes in credit relationships impacting the availability of credit and the general availability of credit in the marketplace.
- Our ability to successfully access surety and insurance markets at a reasonable cost.
- Our ability to successfully leverage our substantial purchasing power with certain of our vendors.
- The effectiveness of our internal control over financial reporting, and our ability to certify the effectiveness of the internal controls and to obtain an unqualified attestation report from our auditors regarding the effectiveness of our internal control over financial reporting.
- The possibility that restrictive covenants in our credit agreement and privately placed debt securities may prevent us from engaging in certain transactions.
- Our ability to buy our common stock under our share repurchase programs, which could be impacted by, among others, restrictive covenants in our bank agreements, unfavorable market conditions, the market price of our common stock, the nature of other investment opportunities presented to us from time to time, and the availability of funds necessary to continue purchasing common stock.
- The financial condition of third-party insurance companies that fund our preneed funeral contracts may impact our future revenues.
- Continued economic crisis and financial and stock market declines could reduce future potential earnings and cash flows and could result in future goodwill impairments.
- The weakened economy may cause customers to reassess preneed funeral or cemetery arrangements or decrease the amounts atneed customers are willing to pay or consider cremation as opposed to burial.
- Changes in our funeral and cemetery trust funds, investments in equity securities, fixed income securities, and mutual funds could be significantly negatively impacted by the weakened economy.

For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2008 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, 674 characters.

### Marketable Equity and Debt Securities — Price Risk

In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery 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, 2009 are presented in Part I, Item 1. Financial Statements and Notes 4, 5, and 6 of this Form 10-Q. Also, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, *Financial Conditions, Liquidity and Capital Resources*, for discussion of recent volatility in financial markets.

## Controls and procedures

As filed, 3,739 characters.

### Disclosure Controls and Procedures

As of September 30, 2009, 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. In light of the material weakness set forth below, these officers have concluded that our disclosure controls and procedures were not effective as of September 30, 2009. To address the material weakness described below, we performed additional review and analysis and other post-closing procedures to ensure that our income tax provision and related tax disclosures were prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP). Based on the additional procedures performed, management has concluded 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, result of operations and cash flows for the periods presented in conformity with US GAAP.

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

As reported in our Form 10-K as of December 31, 2008, we did not maintain effective internal control over financial reporting as of December 31, 2008 as a result of the material weakness in accounting for income taxes. Specifically, we did not maintain effective controls over the completeness and accuracy of our quarterly and year-end tax provision calculations and related deferred income taxes and income taxes payable in accordance with US GAAP.

In response to the identified material weakness, our management, with oversight from our Audit Committee, has dedicated significant resources to enhance our internal control over financial reporting and to remedy the identified material weakness. However, this material weakness continues to exist as of September 30, 2009. Management is in the process of conducting an assessment of the Company’s accounting for income tax processes with the assistance of an outside Big Four public accounting firm. This assessment will identify areas for process and technological improvements to integrate tax information, optimize the tax organization structure, and reduce manual processes. Additionally, management has implemented, or will implement, the remediation steps listed in Item 9A of our Annual Report on Form 10-K to enhance our internal controls over the calculation of our income tax provision and related balance sheet accounts.

We believe these remediation steps, once implemented, will address the material weakness in our accounting for income taxes, and will enhance our internal control over financial reporting and our disclosure controls and procedures.

### Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

## Risk factors

As filed, 141 characters.

There have been no material changes in our Risk Factors as set forth in Item 1A of our Form 10-K for the fiscal year ended December 31, 2008.

Filed Nov 5, 2009.
Source: SEC EDGAR, the filing index for accession 0000950123-09-057992. Last ingested by Listed: Nov 6, 2026, 13:24 ET. No prices; not investment advice.