Company Quick10K Filing
Quick10K
Service International
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$42.92 181 $7,770
10-Q 2018-09-30 Quarter: 2018-09-30
10-Q 2018-06-30 Quarter: 2018-06-30
10-Q 2018-03-31 Quarter: 2018-03-31
10-K 2017-12-31 Annual: 2017-12-31
10-Q 2017-09-30 Quarter: 2017-09-30
10-Q 2017-06-30 Quarter: 2017-06-30
10-Q 2017-03-31 Quarter: 2017-03-31
10-K 2016-12-31 Annual: 2016-12-31
10-Q 2016-09-30 Quarter: 2016-09-30
10-Q 2016-06-30 Quarter: 2016-06-30
10-Q 2016-03-31 Quarter: 2016-03-31
10-K 2015-12-31 Annual: 2015-12-31
8-K 2019-01-16 Officers, Exhibits
8-K 2018-11-30 Officers
8-K 2018-11-14 Regulation FD, Exhibits
8-K 2018-10-29 Earnings, Exhibits
8-K 2018-08-15 Regulation FD, Exhibits
8-K 2018-07-30 Earnings, Exhibits
8-K 2018-05-23 Shareholder Vote, Exhibits
8-K 2018-05-09 Regulation FD, Exhibits
8-K 2018-04-25 Earnings, Exhibits
8-K 2018-02-20 Regulation FD, Exhibits
8-K 2018-02-13 Regulation FD, Exhibits
NVEE NV5 Global
CRCM Care.com
EVI Envirostar
ASPS Altisource Portfolio Solutions
CRAI CRA
AMBO Ambow Education Holding
LINC Lincoln Educational Services
BHTG Biohitech Global
ATAI ATA
NAUH National American University Holdings
SCI 2018-09-30
Part I. Financial Information
Item 1. Financial Statements
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Item 4. Controls and Procedures
Part II. Other Information
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits
EX-12 sci-2018930xex121.htm
EX-31.1 sci-2018930xex311.htm
EX-31.2 sci-2018930xex312.htm
EX-32.1 sci-2018930xex321.htm
EX-32.2 sci-2018930xex322.htm

Service International Earnings 2018-09-30

SCI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 sci-2018930x10q.htm 10-Q Document

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

FORM 10-Q
þ
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended September 30, 2018
or
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from __________ to __________
Commission file number 1-6402-1
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
Texas
 
74-1488375
(State or other jurisdiction of incorporation or organization)
 
(I. R. S. employer identification number)
 
 
 
1929 Allen Parkway, Houston, Texas
 
77019
(Address of principal executive offices)
 
(Zip code)
 
 
 
 
713-522-5141
 
(Registrant’s telephone number, including area code)
 
 
 
 
None
 
(Former name, former address, or former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
Emerging growth company o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES o NO þ
The number of shares outstanding of the registrant’s common stock as of October 26, 2018 was 180,951,466 (net of treasury shares).
 



SERVICE CORPORATION INTERNATIONAL
INDEX
 
 
 
Page
 
 
 
 
 


2


GLOSSARY
The following terms are common to the deathcare industry, are used throughout this report, and have the following meanings:
Atneed — Funeral, including cremation, and cemetery arrangements sold once death has occurred.
Cancellation — Termination of a preneed contract, which relieves us of the obligation to provide the goods and services included in the contract. Cancellations may be requested by the customer or be initiated by us for failure to comply with the contractual terms of payment. State or provincial laws govern the amount of refund, if any, owed to the customer.
Care Trust Corpus — The deposits and net realized capital gains and losses included in a perpetual care trust that cannot be withdrawn. In certain states, some or all of the net realized capital gains can be distributed, so they are not included in the corpus.
Cemetery Merchandise and Services — Stone and bronze memorials, markers, outer burial containers, floral placement, graveside services, merchandise installations, urns, and interments.
Cemetery Perpetual Care Trust or Endowment Care Fund (ECF) — A trust fund established for the purpose of maintaining cemetery grounds and property into perpetuity. For these trusts, the corpus remains in the trust in perpetuity and the investment earnings or elected distributions are withdrawn regularly and are intended to defray our expenses incurred to maintain the cemetery. In certain states, some or all of the net realized capital gains can also be distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.
Cemetery Property — Developed lots, lawn crypts, mausoleum spaces, niches, and cremation memorialization property items (constructed and ready to accept interments) and undeveloped land we intend to develop for the sale of interment rights. Includes the construction-in-progress balance during the pre-construction and construction phases of projects creating new developed property items.
Cemetery Property Amortization — The non-cash recognized expenses of cemetery property interment rights, which are recorded by specific identification with the cemetery property revenue for each contract.
Cemetery Property Interment Rights — The exclusive right to determine the human remains that will be interred in a specific cemetery property space. See also Cemetery Property Revenue below.
Cemetery Property Revenue — Recognized sales of interment rights in cemetery property when the receivable is deemed collectible and the property is fully constructed and available for interment.
Cremation — The reduction of human remains to bone fragments by intense heat.
Cremation Memorialization — Products specifically designed to commemorate and honor the life of an individual that has been cremated. These products include cemetery property items that provide for the disposition of cremated remains within our cemeteries such as benches, boulders, statues, etc. They also include memorial walls and books where the name of the individual is inscribed but the remains have been scattered or kept by the family.
Funeral Merchandise and Services — Merchandise such as burial caskets and related accessories, outer burial containers, urns and other cremation receptacles, casket and cremation memorialization products, flowers, and professional services relating to funerals including arranging and directing services, use of funeral facilities and motor vehicles, removal, preparation, embalming, cremations, memorialization, visitations, and catering.
Funeral Recognized Preneed Revenue — Funeral merchandise and travel protection, net sold on a preneed contract and delivered before a death has occurred.
Funeral Services Performed — The number of funeral services, including cremations, provided after the date of death, sometimes referred to as funeral volume.
General Agency (GA) Revenue — Commissions we receive from third-party life insurance companies for life insurance policies sold to preneed customers for the purpose of funding preneed funeral arrangements. The commission rate paid is determined based on the product type sold, the length of payment terms, and the age of the insured/annuitant.
Interment — The burial or final placement of human remains in the ground (interment), in mausoleums (entombment), in niches (inurnment), or in cremation memorialization property (inurnment).
Lawn Crypt — An underground outer burial receptacle constructed of concrete and reinforced steel, which is usually pre-installed in predetermined designated areas.
Marker — A method of identifying a deceased person in a particular burial space, crypt, niche, or cremation memorialization property. Permanent burial and cremation memorialization markers are usually made of bronze or stone.

3


Maturity — When the underlying contracted merchandise is delivered or service is performed, typically at death. This is the point at which preneed funeral contracts are converted to atneed contracts (note — delivery of certain merchandise and services can occur prior to death).
Mausoleum — An above ground structure that is designed to house caskets and/or cremation urns.
Merchandise and Service Trust — A trust account established in accordance with state or provincial law into which we deposit the required percentage of customers’ payments for preneed funeral, cremation, or cemetery merchandise and services to be delivered or performed by us in the future. The amounts deposited can be withdrawn only after we have completed our obligations under the preneed contract or the cancellation of the contract. Also referred to as a preneed trust.
Outer Burial Container — A reinforced container intended to inhibit the subsidence of the earth and house the casket after it is placed in the ground, also known as a burial vault.
Preneed — Purchase of cemetery property interment rights or any merchandise and services prior to death occurring.
Preneed Backlog — Future revenue from unfulfilled preneed funeral, cremation, and cemetery contractual arrangements.
Preneed Cemetery Production — Sales of preneed cemetery contracts. These sales are recorded in Deferred revenue, net until the merchandise is delivered, the service is performed, and the property has been constructed and is available for interment.
Preneed Funeral Production — Sales of preneed funeral trust-funded and insurance-funded contracts. Preneed funeral trust-funded contracts are recorded in Deferred revenue, net until the merchandise is delivered or the service is performed. We do not reflect the unfulfilled insurance-funded preneed funeral contract amounts in our Consolidated Balance Sheet. The proceeds of the life insurance policies will be reflected in revenue as these funerals are performed by us in the future.
Preneed Receivables, Net — After adoption of "Revenue from Contracts with Customers" on January 1, 2018, represents amounts due from customers when we have delivered the merchandise, performed the service, or transferred control of the cemetery property interment rights prior to a death occurring or amounts due from customers on irrevocable preneed contracts. Prior to adoption, represents all amounts due from customers on preneed contracts.
Sales Average — Average revenue per funeral service performed, excluding the impact of funeral recognized preneed revenue, GA revenue, and certain other revenue.
Travel Protection — A product that provides shipment of remains to the servicing funeral home or cemetery of choice if the purchaser passes away outside of a certain radius of their residence, without any additional expense to the family.
Trust Fund Income — Recognized investment earnings from our merchandise and service and perpetual care trust investments.
As used herein, “SCI”, “Company”, “we”, “our”, and “us” refer to Service Corporation International and companies owned directly or indirectly by Service Corporation International, unless the context requires otherwise.


 

4


PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Property and merchandise revenue
$
392,410

 
$
363,934

 
$
1,158,224

 
$
1,116,551

Service revenue
323,246

 
319,810

 
1,035,794

 
1,012,631

Other revenue
63,130

 
47,602

 
175,342

 
153,116

Total revenue
778,786

 
731,346

 
2,369,360

 
2,282,298

Costs and expenses:
 
 
 
 
 
 
 
Cost of property and merchandise
(203,349
)
 
(189,818
)
 
(600,997
)
 
(588,370
)
Cost of service
(188,893
)
 
(179,924
)
 
(568,034
)
 
(546,978
)
Overhead and other expenses
(220,374
)
 
(211,828
)
 
(650,270
)
 
(636,417
)
Total costs and expenses
(612,616
)
 
(581,570
)
 
(1,819,301
)
 
(1,771,765
)
Operating profit
166,170

 
149,776

 
550,059

 
510,533

General and administrative expenses
(41,070
)

(38,992
)

(106,990
)

(121,644
)
Gains (losses) on divestitures and impairment charges, net
7,970


(143
)

15,317


5,545

Hurricane expenses, net
(767
)
 
(1,290
)
 
(437
)
 
(1,290
)
Operating income
132,303

 
109,351

 
457,949

 
393,144

Interest expense
(46,419
)

(42,754
)

(134,514
)

(125,473
)
Loss on early extinguishment of debt, net




(10,131
)


Other income (expense), net
152


(19
)

2,416


(1,049
)
Income before income taxes
86,036

 
66,578

 
315,720

 
266,622

(Provision for) benefit from income taxes
(17,043
)

(10,437
)

(61,398
)

32,830

Net income
68,993


56,141


254,322


299,452

Net (income) loss attributable to noncontrolling interests
(58
)

23


(160
)

(105
)
Net income attributable to common stockholders
$
68,935


$
56,164

 
$
254,162


$
299,347

Basic earnings per share:
 
 
 
 

 

Net income attributable to common stockholders
$
0.38


$
0.30


$
1.39


$
1.59

Basic weighted average number of shares
180,858


187,435


182,859


187,761

Diluted earnings per share:


 





Net income attributable to common stockholders
$
0.37


$
0.29


$
1.36


$
1.56

Diluted weighted average number of shares
185,460


192,243


187,517


192,417

Dividends declared per share
$
0.17


$
0.15


$
0.51


$
0.43


(See notes to unaudited condensed consolidated financial statements)

5


SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
(UNAUDITED)

 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Net income
$
68,993

 
$
56,141

 
$
254,322

 
$
299,452

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
5,951

 
16,580

 
(9,550
)
 
30,185

Total comprehensive income
74,944

 
72,721

 
244,772

 
329,637

Total comprehensive income attributable to noncontrolling interests
(59
)
 
14

 
(157
)
 
(121
)
Total comprehensive income attributable to common stockholders
$
74,885

 
$
72,735

 
$
244,615

 
$
329,516


(See notes to unaudited condensed consolidated financial statements)



6


SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
September 30, 2018
 
December 31, 2017
 
(In thousands, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
158,301

 
$
330,039

Receivables, net
84,018

 
90,304

Inventories
26,061

 
25,378

Other
32,107

 
35,575

Total current assets
300,487

 
481,296

Preneed receivables, net and trust investments
4,568,470

 
4,778,842

Cemetery property
1,835,761

 
1,791,989

Property and equipment, net
1,960,329

 
1,873,044

Goodwill
1,854,167

 
1,805,981

Deferred charges and other assets
954,478

 
601,184

Cemetery perpetual care trust investments
1,596,542

 
1,532,167

Total assets
$
13,070,234

 
$
12,864,503

 
 
 
 
LIABILITIES & EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
482,357


$
489,172

Current maturities of long-term debt
68,806


337,337

Income taxes payable
3,726


2,470

Total current liabilities
554,889


828,979

Long-term debt
3,542,314


3,135,316

Deferred revenue, net
1,431,181


1,789,776

Deferred tax liability
372,929


283,765

Other liabilities
402,593


410,982

Deferred receipts held in trust
3,687,394


3,475,430

Care trusts’ corpus
1,589,948


1,530,818

Commitments and contingencies (Note 9)





Equity:
 

 
Common stock, $1 per share par value, 500,000,000 shares authorized, 193,556,602 and 191,935,647 shares issued, respectively, and 180,933,966 and 186,614,747 shares outstanding, respectively
180,934


186,615

Capital in excess of par value
962,041


970,468

Retained earnings
313,720


210,364

Accumulated other comprehensive income
32,167


41,943

Total common stockholders’ equity
1,488,862


1,409,390

Noncontrolling interests
124


47

Total equity
1,488,986


1,409,437

Total liabilities and equity
$
13,070,234


$
12,864,503

(See notes to unaudited condensed consolidated financial statements)

7


SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(UNAUDITED)

 
Nine Months Ended
 
September 30,
 
2018
 
2017
 
(In thousands)
Cash flows from operating activities:
 

 
Net income
$
254,322


$
299,452

Adjustments to reconcile net income to net cash provided by operating activities:



Loss on early extinguishment of debt
10,131



Depreciation and amortization
117,496


113,641

Amortization of intangibles
20,170


20,923

Amortization of cemetery property
47,509


46,533

Amortization of loan costs
4,531


4,344

Provision for doubtful accounts
6,522


6,846

Provision for (benefit from) deferred income taxes
25,491


(148,465
)
Gains on divestitures and impairment charges, net
(15,317
)

(5,545
)
Gain on sale of investments

(2,636
)
 

Share-based compensation
11,740


10,719

Change in assets and liabilities, net of effects from acquisitions and divestitures:



(Increase) decrease in receivables
(964
)

12,568

Increase in other assets
(19,251
)

(15,814
)
(Decrease) increase in payables and other liabilities
(2,879
)

66,455

Effect of preneed sales production and maturities:



Increase in preneed receivables, net and trust investments
(37,387
)

(58,631
)
Increase in deferred revenue, net
43,329


37,438

Decrease in deferred receipts held in trust
(10,541
)

(981
)
Net cash provided by operating activities
452,266


389,483

Cash flows from investing activities:



Capital expenditures
(165,943
)

(141,652
)
Acquisitions, net of cash acquired
(187,616
)

(75,818
)
Proceeds from divestitures and sales of property and equipment
29,890


32,588

Proceeds from sale of investments

2,900

 

Payments for Company-owned life insurance policies
(14,283
)
 
(6,189
)
Proceeds from Company-owned life insurance policies
2,810

 
2,591

Purchase of land and other

(14,525
)
 
175

Net cash used in investing activities
(346,767
)

(188,305
)
Cash flows from financing activities:



Proceeds from issuance of long-term debt
395,000


120,000

Scheduled payments of debt
(25,601
)

(26,376
)
Early payments of debt
(259,590
)


Principal payments on capital leases
(29,771
)

(40,509
)
Proceeds from exercise of stock options
18,481


30,672

Purchase of Company common stock
(275,726
)

(148,818
)
Payments of dividends
(93,002
)

(80,711
)
Purchase of noncontrolling interest


(4,580
)
Bank overdrafts and other
(8,842
)

2,790

Net cash used in financing activities
(279,051
)

(147,532
)
Effect of foreign currency on cash, cash equivalents, and restricted cash
(1,111
)

9,463

Net (decrease) increase in cash, cash equivalents, and restricted cash
(174,663
)

63,109

Cash, cash equivalents, and restricted cash at beginning of period
340,601


211,506

Cash, cash equivalents, and restricted cash at end of period
$
165,938


$
274,615

(See notes to unaudited condensed consolidated financial statements)

8


SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(UNAUDITED)
(In thousands)
 
Common
Stock
 
Treasury Stock
 
Capital in
Excess of
Par Value
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2017
$
191,936

 
$
(5,321
)
 
$
970,468

 
$
210,364

 
$
41,943

 
$
47

 
$
1,409,437

Cumulative effect of accounting changes

 

 

 
172,461

 
(229
)
 

 
172,232

Comprehensive income

 

 

 
254,162

 
(9,547
)
 
157

 
244,772

Dividends declared on common stock ($0.51 per share)

 

 

 
(93,002
)
 

 

 
(93,002
)
Employee share-based compensation earned

 

 
11,740

 

 

 

 
11,740

Stock option exercises
1,340

 

 
17,141

 

 

 

 
18,481

Restricted stock awards, net of forfeitures
178

 

 
(178
)
 

 

 

 

Purchase of Company common stock

 
(7,302
)
 
(38,159
)
 
(230,265
)
 

 

 
(275,726
)
Noncontrolling interest payments

 

 

 

 

 
(80
)
 
(80
)
Other
103

 

 
1,029

 

 

 

 
1,132

Balance at September 30, 2018
$
193,557

 
$
(12,623
)
 
$
962,041

 
$
313,720

 
$
32,167

 
$
124

 
$
1,488,986


(See notes to unaudited condensed consolidated financial statements)


9


SERVICE CORPORATION INTERNATIONAL
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1.
Nature of Operations
We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries operating in the United States and Canada. Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other 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.
Funeral service locations provide all professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles, arranging and directing services, removal, preparation, embalming, cremations, memorialization, travel protection, and catering. Funeral merchandise, including burial caskets and related accessories, urns and other cremation receptacles, outer burial containers, flowers, online and video tributes, stationery products, casket and cremation memorialization products, and other ancillary merchandise, is sold at funeral service locations.
Our cemeteries provide cemetery property interment rights, including developed lots, lawn crypts, mausoleum spaces, niches, and other cremation memorialization and interment options. Cemetery merchandise and services, including memorial markers and bases, outer burial containers, flowers and floral placement, other ancillary merchandise, graveside services, merchandise installation, and interments, are sold at our cemeteries.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
Our unaudited condensed consolidated financial statements include the accounts of Service Corporation International (SCI) and all subsidiaries in which we hold a controlling financial interest. Our financial statements also include the accounts of the merchandise and service trusts and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. Our interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair statement of our results for these periods. Our unaudited condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2017, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.
Reclassifications to Prior Period Financial Statements and Adjustments
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows except as described below under "Accounting Standards Adopted in 2018".
Use of Estimates in the Preparation of Financial Statements
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in our Annual Report on Form 10-K for the year ended December 31, 2017. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from these estimates.
Funeral and Cemetery Operations
Revenue is recognized when control of the merchandise or services is transferred to the customer. Our performance obligations include the delivery of funeral and cemetery merchandise and services and cemetery property interment rights. Control transfers when merchandise is delivered or services are performed. For cemetery property interment rights, control transfers to the customer when the property is developed and the interment right has been sold and can no longer be marketed or sold to another customer. Sales taxes collected are recognized on a net basis in our consolidated financial statements.
On our atneed contracts, we generally deliver the merchandise and perform the services at the time of need. Personalized marker merchandise and marker installation services sold on atneed contracts are recognized when control is transferred to the customer, generally when the marker is delivered and installed in the cemetery, which occurs on the same day.


10


We also sell price-guaranteed preneed contracts through various programs providing for future merchandise and services at prices prevailing when the agreements are signed. Revenue associated with sales of preneed contracts is deferred until control of the merchandise or the services is transferred to the customer, which is upon delivery of the merchandise or as services are performed, generally at the time of need.
On certain preneed contracts, we sell memorialization merchandise, which consists of urns and urn-related products, that we deliver to the customer at the time of sale. Revenue is recognized at the time of delivery when control of the memorialization merchandise is transferred.
For personalized marker merchandise sold on a preneed contract, we will:
purchase the merchandise from vendors,
personalize such merchandise in accordance with the customer's specific written instructions,
either store the merchandise at a third-party bonded storage facility or install the merchandise, based on the customer's instructions, and
transfer title to the customer.
We recognize revenue and record the cost of sales when control is transferred for the merchandise, which occurs upon delivery to the third-party storage facility or installation of the merchandise at the cemetery.
There is no general right of return for delivered items.
We also sell travel protection as an agent of a third party. Travel protection is a service that provides shipment of remains to the servicing funeral home or cemetery of choice if the purchaser passes away outside of a certain radius of their residence, without any additional expense to the family. We do not provide travel protection services and we are not primarily obligated to provide such services under these arrangements. Therefore, we record revenues, net of amounts due to these parties, at the time of sale.
Total consideration received for price-guaranteed preneed and for atneed contracts with customers represents the stated amount of the contract excluding any amounts collected on behalf of third parties, such as sales taxes. The total consideration received for contracts with customers is allocated to each performance obligation based on relative selling price. Relative selling prices are determined by either the amount we sell the performance obligation for on a stand-alone basis or our best estimate of the amount we would sell it for based on an adjusted market assessment approach that is consistent with our historical pricing practices.
Payment on atneed contracts is generally due at the time the merchandise is delivered or the services are performed. For preneed contracts, payment generally occurs prior to our fulfillment of the performance obligations. Our preneed contracts may also have extended payment terms with associated financing charges. Pursuant to state or provincial law, all or a portion of the proceeds from merchandise or services sold on a preneed basis may be required to be deposited into trust funds. When we receive payments from the customer, we deposit the amount required by law into the merchandise and service trusts and reclassify the corresponding amount from Deferred revenue, net into Deferred receipts held in trust. Amounts are withdrawn from the merchandise and service trusts when we fulfill the performance obligations. Earnings on these trust funds, which are specifically identifiable for each performance obligation, are also included in total consideration. We defer these investment earnings related to the merchandise and service trusts until the associated merchandise is delivered or services are performed. Fees charged by our wholly-owned registered investment advisor are also included in revenue in the period in which they are earned. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in revenue.
A portion of the proceeds from the sale of cemetery property interment rights is required by state or provincial law to be paid into perpetual care trust funds by us to maintain the cemetery. This portion of the proceeds is not recognized as revenue. Investment earnings from these trusts are distributed to us regularly and recognized in current cemetery revenue. These distributions are intended to defray cemetery maintenance costs incurred by us for our owned cemetery properties, which are expensed as incurred. The principal of such perpetual care trust funds generally cannot be withdrawn; however, in lieu of the distribution of realized income, certain states allow a unitrust distribution which may contain elements of income, capital appreciation, and principal.
Costs related to delivery or performance of merchandise and services are charged to expense when merchandise is delivered or services are performed. Costs related to property interment rights include the property and construction costs specifically identified by each project. Property and construction costs are charged to expense when the revenue is recognized by specific identification in the performance of a contract. Incremental direct selling costs are deferred and recognized when the associated performance obligation is fulfilled based on specific identification in the fulfillment of a contract. All other selling costs are expensed as incurred.
As of September 30, 2018, we had $281.7 million in deferred incremental direct selling costs included in Deferred charges and other assets. These deferred costs are classified as long-term on our Condensed Consolidated Balance Sheet because we do not control the timing of the delivery of the merchandise or performance of the services as they are generally provided at the

11


time of need. Such amounts are recognized based upon specific identification when the related performance obligations are delivered.
Insurance-funded preneed contracts
Not included in our Condensed Consolidated Balance Sheet are insurance-funded preneed contracts that will be funded by life insurance or annuity contracts issued by third party insurers. Where permitted by state or provincial law, we may sell a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. These general agency commissions (GA revenue) are based on a percentage per contract sold and are recognized as funeral revenue when the insurance purchase transaction between the preneed purchaser and third-party insurance provider is completed. All selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred. We do not reflect the unfulfilled insurance-funded preneed contract amounts in our Condensed Consolidated Balance Sheet. The policyholder has made a revocable commitment to assign the proceeds from the policy 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.
Cash, Cash Equivalents, and Restricted Cash
The components of cash, cash equivalents, and restricted cash at September 30, 2018 and December 31, 2017 are as follows:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Cash and cash equivalents
$
158,301

 
$
330,039

Restricted cash(1):
 
 
 
Included in Other current assets
5,692

 
8,625

Included in Deferred charges and other assets
1,945

 
1,937

Total restricted cash
7,637

 
10,562

Total cash, cash equivalents, and restricted cash
$
165,938

 
$
340,601

(1)
Restricted cash in both periods primarily consists of proceeds from divestitures deposited into escrow accounts under IRS code section 1031 and collateralized obligations under certain insurance policies.
Accounting Standards Adopted in 2018
Revenue Recognition
In May 2014, the FASB issued "Revenue from Contracts with Customers," which replaced existing revenue recognition guidance. During 2016, the FASB made several amendments to the new standard that clarified guidance on several matters, including principal vs. agent considerations, identifying performance obligations, sales taxes, and licensing.
The new standard, as amended, requires that we recognize revenue in the amount of which we expect to be entitled for delivery of promised goods and services to our customers. The new standard also resulted in enhanced revenue-related disclosures, including any significant judgments and changes in judgments. Additionally, the new standard requires the deferral of incremental direct selling costs to the period in which the related revenue is recognized.
The standard primarily impacts the manner in which we recognize a) certain nonrefundable up-front fees and b) incremental costs to acquire new preneed funeral trust contracts and preneed and atneed cemetery contracts (i.e., selling costs). The nonrefundable fees will be deferred and recognized as revenue when the underlying goods and services are delivered to the customer. The incremental direct selling costs will be deferred and recognized by specific identification to the delivery of the underlying goods and services.
We adopted the standard as of January 1, 2018 using the modified retrospective approach applied to all contracts that were not completed at adoption based on the contract terms in existence at adoption. As a result of the adoption, we recorded a $172.2 million increase to Retained earnings, which comprises a $268.0 million increase to Deferred charges and other assets partially offset by a $38.0 million increase to Deferred revenue, net and a $57.8 million increase to Deferred tax liability.We made the enhanced revenue-related disclosures in Footnotes 2, 3, and 8 of this Form 10-Q.
Additionally, the amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts are required to be presented with Deferred revenue, net, instead of as Preneed receivables, net and trust investments on our unaudited Condensed Consolidated Balance Sheet. Accordingly, we reclassified $544.8 million of these amounts from Preneed receivables, net and trust investments to Deferred revenue, net. As a result of this reclassification, we eliminated our previous cancellation reserve on these performance obligations.
We will continue to expense costs to acquire new preneed funeral insurance contracts in the period incurred. The insurance contracts are not, and will not be, reflected in our unaudited Condensed Consolidated Balance Sheet because they do not

12


represent assets or liabilities, 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 impact of adopting the new guidance on our unaudited Condensed Consolidated Statement of Operations for the three and nine months ended September 30, 2018 are as follows:
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
As Reported
 
Effect of New Guidance
 
Without New Guidance
 
As Reported
 
Effect of New Guidance
 
Without New Guidance
 
(in thousands, except per share amounts)
Revenue
$
778,786

 
$
106

 
$
778,892

 
$
2,369,360

 
$
1,124

 
$
2,370,484

Costs and expenses
(612,616
)
 
(253
)
 
(612,869
)
 
(1,819,301
)
 
(14,205
)
 
(1,833,506
)
Operating profit (loss)
166,170

 
(147
)
 
166,023

 
550,059

 
(13,081
)
 
536,978

General and administrative expenses
(41,070
)
 
 
 
(41,070
)
 
(106,990
)
 

 
(106,990
)
Gain on divestitures and impairment charges, net
7,970

 

 
7,970

 
15,317

 

 
15,317

Hurricane recoveries, net
(767
)
 

 
(767
)
 
(437
)
 

 
(437
)
Operating income (loss)
132,303

 
(147
)
 
132,156

 
457,949

 
(13,081
)
 
444,868

Interest expense
(46,419
)
 
 
 
(46,419
)
 
(134,514
)
 

 
(134,514
)
Loss on early extinguishment of debt, net

 

 

 
(10,131
)
 

 
(10,131
)
Other income, net
152

 

 
152

 
2,416

 

 
2,416

Income (loss) before income taxes
86,036

 
(147
)
 
85,889

 
315,720

 
(13,081
)
 
302,639

(Provision for) benefit from income taxes
(17,043
)
 
42

 
(17,001
)
 
(61,398
)
 
2,538

 
(58,860
)
Net income (loss)
68,993

 
(105
)
 
68,888

 
254,322

 
(10,543
)
 
243,779

Net income attributable to noncontrolling interests
(58
)
 

 
(58
)
 
(160
)
 

 
(160
)
Net income (loss) attributable to common stockholders
$
68,935

 
$
(105
)
 
$
68,830

 
$
254,162

 
$
(10,543
)
 
$
243,619

Earnings per share (1)
 
 
 
 
 
 
 
 
 
 
 
Basic
$
0.38

 
$

 
$
0.38

 
$
1.39

 
$
(0.06
)
 
$
1.33

Diluted
$
0.37

 
$

 
$
0.37

 
$
1.36

 
$
(0.06
)
 
$
1.30

(1)
Net income per share is computed independently for each of the columns presented. Therefore, the sum of the first two columns' earnings per share may not equal the Without New Guidance column.
Cash Flow
In August and November 2016, the FASB amended "Statement of Cash Flows" to clarify guidance on the classification of certain cash receipts and cash payments. Additionally, the guidance requires that the statement of cash flows reflects changes in restricted cash in addition to cash and cash equivalents. Amended guidance includes clarification on debt prepayments and extinguishment costs, contingent consideration in business combinations, proceeds from insurance claims, and premium payments on Company-owned life insurance. We adopted the new guidance retrospectively on January 1, 2018. As a result, we have recast our unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2017 as follows:
 
As Previously Reported
 
Effect of New Guidance
 
As Recast
 
(in thousands)
Net cash provided by (used in) operating activities
$
389,614

 
$
(131
)
 
$
389,483

Cash flows from investing activities:
 
 
 
 
 
Capital expenditures
(141,652
)
 

 
(141,652
)
Acquisitions, net of cash acquired
(49,635
)
 
(26,183
)
 
(75,818
)
Proceeds from divestitures and sales of property and equipment
12,547

 
20,041

 
32,588

Payments for Company-owned life insurance policies

 
(6,189
)
 
(6,189
)
Proceeds from Company-owned life insurance policies

 
2,591

 
2,591

Other
175

 

 
175

Net cash used in investing activities
(178,565
)
 
(9,740
)
 
(188,305
)
Net cash used in financing activities
(147,532
)
 

 
(147,532
)
Effect of foreign currency on cash, cash equivalents, and restricted cash
9,453

 
10

 
9,463

Net increase in cash, cash equivalents, and restricted cash
72,970

 
(9,861
)
 
63,109

Cash, cash equivalents, and restricted cash at beginning of period
194,986

 
16,520

 
211,506

Cash, cash equivalents, and restricted cash at end of period
$
267,956

 
$
6,659

 
274,615


13



Retirement Plans
In March 2017, the FASB amended "Retirement Plans" to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by requiring the classification of interest costs and actuarial gains and losses separately from operating income on the unaudited Condensed Consolidated Statement of Operations. We adopted the new guidance on January 1, 2018 and applied the practical expedient of reclassifying the amounts disclosed as "total net periodic benefit cost" in Note 11 to our December 31, 2017 Form 10-K from Operating income to Other income (expense), net. For the third quarter of 2017, we reclassified $74 thousand and $221 thousand from Costs and expenses and General and administrative expenses, respectively, to Other income (expense), net. For the first nine months of 2017 we reclassified $221 thousand and $663 thousand from Costs and expenses and General and administrative expenses, respectively, to Other income (expense), net.
Financial Instruments
In January 2016 and February 2018, the FASB amended "Financial Instruments" to provide additional guidance on the recognition and measurement of financial assets and liabilities. The amendment requires investments in equity instruments to be measured at fair value with changes in fair value reflected in net income. For us, these changes in fair value will be offset by a corresponding change in the fair value of Deferred receipts held in trust or Care trusts' corpus. The amendment also changes the required disclosures associated with equity instruments as a result of the change in presentation. The new guidance was effective for us on January 1, 2018 and our adoption did not materially impact our consolidated results of operations, consolidated financial position, and cash flows as of and for the three and nine months ended September 30, 2018. We made the appropriate disclosure changes in Footnote 3 of this Form 10-Q.
Stock Compensation
In May 2017, the FASB amended "Stock Compensation" to clarify which changes in terms and conditions of share-based awards require accounting for as modifications. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. We adopted the new guidance on January 1, 2018, which did not have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Recently Issued Accounting Standards
Financial Instruments
In June 2016, the FASB amended "Financial Instruments" to provide financial statement users with more decision-useful information about the expected credit losses on debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. This amendment replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates. The new guidance is effective for us on January 1, 2020, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Leases
In February 2016, January 2018, and July 2018, the FASB amended "Leases" to increase transparency and comparability among organizations. Under the new standard, an entity will be required to recognize right of use lease assets and liabilities on its balance sheet and disclose key information about leasing arrangements. In addition, the new standard offers specific accounting guidance for a lessee, a lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
We will adopt ASU 2016-02 “Leases” on January 1, 2019 using the modified retrospective transition method, with a cumulative effect adjustment to opening Retained earnings recorded as of that date.  The modified retrospective transition method includes a number of optional practical expedients and accounting policy elections.
1)
We will elect a Package of Practical Expedients to not reassess:
whether a contract is or contains a lease (as an accounting policy election, we will not reassess whether arrangements grandfathered under EITF 01-8 are or contain leases),
lease classification, or
initial direct costs.
2)
We will not elect a practical expedient to use hindsight when determining lease term.
3)
We will elect the short-term lease recognition exemption.
4)
The remaining practical expedients do not apply or are not expected to have a material impact.

We have established a team to implement the standard update. The implementation team reports findings and progress of the project to management on a frequent basis. We have begun implementation of a new enterprise-wide lease management system in the form of a pre-configured software as a service cloud-based application to support the adoption and ongoing lease

14


requirements under the new guidance. This system serves as a lease database to manage our lease inventory centrally and ensure completeness of lease inventory. The system also produces accounting entries and financial reporting disclosures accurately under the new guidance and provides lease activity business intelligence reporting. We are currently testing the new system to ensure it produces the data to prepare the required accounting entries and disclosures under the new guidance upon adoption and on an ongoing basis. We are evaluating additional changes to our processes and internal controls to facilitate adoption on January 1, 2019 and to meet the standard’s on-going reporting and disclosure requirements.
Our current operating lease portfolio is primarily composed of real estate and equipment. Upon adoption of this standard, we expect to recognize a right-of-use asset and liability related to substantially all operating lease arrangements. We are developing our estimate of the right-of-use asset and lease liability based on the present value of the lease payments.  Based on our current lease portfolio, we expect the adoption of the new standard to significantly impact our consolidated financial position due to the recognition of the right-of-use asset and liability for our operating leases. However, the ultimate impact of adoption will depend on the lease portfolio as of the adoption date.
Goodwill
In January 2017, the FASB amended "Goodwill" to simplify the subsequent measurement of goodwill. The amended guidance eliminates Step 2 from the goodwill impairment test. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill. The new guidance is effective for us on January 1, 2020, and is not expected to have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Fair Value Measurements
In August 2018, the FASB amended "Fair Value Measurements" to modify the disclosure requirements. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy for timing of transfers between levels, and (3) the valuation processes used in level 3 measurements. It clarifies that, for investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the timing either to us or publicly. It also clarifies that the narrative disclosure of the effect of changes in level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of significant unobservable inputs used in level 3 measurements. The guidance is effective for us with our quarterly filing for the period ended March 31, 2020 and is not expected to have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Retirement Plans
In August 2018, the FASB amended "Retirement Plans" to modify the disclosure requirements for defined benefit plans. For us, the amendment requires the disclosure of the weighted average interest crediting rate used for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. It removes the requirement to disclose the approximate amount of future benefits covered by insurance contracts. The guidance is effective for us with our annual filing for the year ended December 31, 2020 and is not expected to have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Internal Use Software
In August 2018, the FASB amended "Internal Use Software" to align the requirements for capitalizing implementation costs incurred in a hosting arrangement for software-as-a-service that is a service contract with the requirements for capitalizing those costs in a hosting arrangement that includes a software license. Costs for implementation activities in the application development stage are capitalized, depending on the nature of the costs, while costs incurred during the preliminary project and postimplementation stages are expensed. Any capitalized costs are expensed over the term of the hosting arrangement. Cash payments for the implementation costs, whether capitalized or not, are presented as operating outflows as that is consistent with the presentation of the fees in the hosting arrangement.The new guidance is effective for us on January 1, 2020, and we are still assessing the impact on our consolidated results of operations, consolidated financial position, and cash flows.

15


3. Preneed Activities
Preneed receivables, net and trust investments
The components of Preneed receivables, net and trust investments in our unaudited Condensed Consolidated Balance Sheet at September 30, 2018 and December 31, 2017 are as follows:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Preneed funeral receivables(1)
$
117,730

 
$
336,925

Preneed cemetery receivables(1)
856,637

 
1,118,146

Preneed receivables from customers(1)
974,367

 
1,455,071

Unearned finance charge
(46,273
)
 
(45,515
)
Allowance for cancellation (1)
(48,667
)
 
(107,749
)
Preneed receivables, net
$
879,427

 
$
1,301,807

 
 
 
 
Trust investments, at market
$
5,023,407

 
$
4,749,548

Insurance-backed fixed income securities and other
262,178

 
259,654

Trust investments
5,285,585

 
5,009,202

Less: Cemetery perpetual care trust investments
(1,596,542
)
 
(1,532,167
)
Preneed trust investments
$
3,689,043

 
$
3,477,035

 
 
 
 
Preneed receivables, net and trust investments
$
4,568,470

 
$
4,778,842

(1)
Upon adoption of "Revenue from Contracts with Customers" on January 1, 2018, we reclassified amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts as a reduction in Deferred revenue, net. As a result of this reclassification, we eliminated the allowance for cancellation on these performance obligations.

The table below sets forth certain investment-related activities associated with our trusts:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Deposits
$
96,539

 
$
86,028

 
$
296,651

 
$
277,286

Withdrawals
$
97,525

 
$
99,872

 
$
318,818

 
$
297,595

Purchases of securities
$
265,125

 
$
886,732

 
$
1,273,683

 
$
1,792,190

Sales of securities
$
295,983

 
$
509,675

 
$
1,331,981

 
$
1,742,860

Realized gains (1)
$
70,095

 
$
79,971

 
$
216,241

 
$
185,897

Realized losses (1)
$
(20,358
)
 
$
(17,707
)
 
$
(50,210
)
 
$
(62,657
)
(1)
All realized gains and losses are recognized in Other income (expense), net for our trust investments and are offset by a corresponding reclassification in Other income (expense), net to Deferred receipts held in trust and Care trusts' corpus.
 



16



The costs and values associated with trust investments recorded at fair value at September 30, 2018 and December 31, 2017 are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Fair value represents the value of the underlying securities held by the trusts.
 
September 30, 2018
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
49,924

 
$
14

 
$
(621
)
 
$
49,317

Canadian government
2
 
59,507

 
36

 
(1,738
)
 
57,805

Corporate
2
 
24,962

 
67

 
(336
)
 
24,693

Residential mortgage-backed
2
 
3,809

 
10

 
(91
)
 
3,728

Asset-backed
2
 
142

 
2

 
(10
)
 
134

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
10,080

 
891

 
(186
)
 
10,785

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
1,208,054

 
295,891

 
(42,913
)
 
1,461,032

Canada
1
 
36,162

 
11,804

 
(1,425
)
 
46,541

Other international
1
 
75,039

 
10,707

 
(4,613
)
 
81,133

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
728,307

 
45,012

 
(12,089
)
 
761,230

Fixed income
1
 
1,231,818

 
3,492

 
(46,257
)
 
1,189,053

Other
3
 
14,726

 
4,228

 

 
18,954

Trust investments, at fair value
 
 
3,442,530

 
372,154

 
(110,279
)
 
3,704,405

Commingled funds
 
 
 
 
 
 
 
 
 
Fixed income
 
 
427,226

 
2,462

 
(17,359
)
 
412,329

Equity
 
 
206,040

 
40,558

 
(2
)
 
246,596

Money market funds
 
 
380,743

 

 

 
380,743

Private equity
 
 
212,462

 
68,388

 
(1,516
)
 
279,334

Trust investments, at net asset value
 
 
1,226,471

 
111,408

 
(18,877
)
 
1,319,002

Trust investments, at market
 
 
$
4,669,001

 
$
483,562

 
$
(129,156
)
 
$
5,023,407


17


 
December 31, 2017
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
48,805

 
$
14

 
$
(117
)
 
$
48,702

Canadian government
2
 
81,500

 
160

 
(1,089
)
 
80,571

Corporate
2
 
13,540

 
327

 
(170
)
 
13,697

Residential mortgage-backed
2
 
3,279

 
16

 
(14
)
 
3,281

Asset-backed
2
 
320

 
15

 
(10
)
 
325

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
7,834

 
385

 
(139
)
 
8,080

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
1,161,015

 
266,822

 
(24,739
)
 
1,403,098

Canada
1
 
30,762

 
12,545

 
(522
)
 
42,785

Other international
1
 
63,510

 
13,174

 
(2,834
)
 
73,850

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
613,934

 
59,100

 
(4,312
)
 
668,722

Fixed income
1
 
1,230,196

 
11,897

 
(23,943
)
 
1,218,150

Other
3
 
5,953

 
3,114

 

 
9,067

Trust investments, at fair value
 
 
3,260,648

 
367,569

 
(57,889
)
 
3,570,328

Commingled funds
 
 
 
 
 
 
 
 
 
Fixed income
 
 
454,242

 
235

 
(5,860
)
 
448,617

Equity
 
 
214,000

 
12,826

 

 
226,826

Money market funds
 
 
287,435

 

 

 
287,435

Private equity
 
 
166,860

 
51,631

 
(2,149
)
 
216,342

Trust investments, at net asset value
 
 
1,122,537

 
64,692

 
(8,009
)
 
1,179,220

Trust investments, at market
 
 
$
4,383,185

 
$
432,261

 
$
(65,898
)
 
$
4,749,548

As of September 30, 2018, our unfunded commitment for our private equity and other investments was $96.3 million which, if called, would be funded by the assets of the trusts.
The change in our market-based trust investments with significant unobservable inputs (Level 3) is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017
 
2018
 
2017
 
(In thousands)
Fair value, beginning balance
$
20,194

 
$
7,924

 
$
9,067

 
$
7,163

Net unrealized gains (losses) included in Other income (expense), net(1)
1,020

 
(116
)
 
750

 
694

Purchases
36

 
1,881

 
43

 
1,909

Sales
(9
)
 
(854
)
 
(9
)
 
(931
)
Acquisitions
(2,287
)
 

 
9,103

 

Fair value, ending balance
$
18,954

 
$
8,835

 
$
18,954

 
$
8,835

(1)
All net unrealized gains (losses) recognized in Other income (expense), net for our trust investments are offset by a corresponding reclassification in Other income (expense), net to Deferred receipts held in trust and Care trusts' corpus.

18


Maturity dates of our fixed income securities range from 2018 to 2077. Maturities of fixed income securities (excluding mutual funds) at September 30, 2018 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
64,152

Due in one to five years
59,940

Due in five to ten years
10,290

Thereafter
1,295

 
$
135,677

Recognized trust fund income (realized and unrealized) related to these trust investments was $50.2 million and $39.1 million for the three months ended September 30, 2018 and 2017, respectively. Recognized trust fund income (realized and unrealized) related to these trust investments was $147.3 million and $122.6 million for the nine months ended September 30, 2018 and 2017, respectively.
We have determined that the unrealized losses in our fixed income investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the credit ratings and the severity and duration of the unrealized losses. Our fixed income investment unrealized losses, their associated values, and the duration of unrealized losses as of September 30, 2018 and December 31, 2017, respectively, are shown in the following tables:
 
September 30, 2018
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Value
 
Unrealized
Losses
 
Value
 
Unrealized
Losses
 
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
25,192

 
$
(576
)
 
$
3,119

 
$
(45
)
 
$
28,311

 
$
(621
)
Canadian government

 

 
26,469

 
(1,738
)
 
26,469

 
(1,738
)
Corporate
9,332

 
(65
)
 
6,089

 
(271
)
 
15,421

 
(336
)
Residential mortgage-backed
3,378

 
(89
)
 
100

 
(2
)
 
3,478

 
(91
)
 Asset-backed

 

 
99

 
(10
)
 
99

 
(10
)
Total temporarily fixed income impaired securities
$
37,902

 
$
(730
)
 
$
35,876

 
$
(2,066
)
 
$
73,778

 
$
(2,796
)
 
December 31, 2017
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Value
 
Unrealized
Losses
 
Value
 
Unrealized
Losses
 
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
29,014

 
$
(115
)
 
$
106

 
$
(2
)
 
$
29,120

 
$
(117
)
Canadian government
20,947

 
(639
)
 
6,370

 
(450
)
 
27,317

 
(1,089
)
Corporate
2,423

 
(31
)
 
4,453

 
(139
)
 
6,876

 
(170
)
Residential mortgage-backed
2,880

 
(12
)
 
151

 
(2
)
 
3,031

 
(14
)
 Asset-backed

 

 
74

 
(10
)
 
74

 
(10
)
Total temporarily impaired fixed income securities
$
55,264

 
$
(797
)
 
$
11,154

 
$
(603
)
 
$
66,418

 
$
(1,400
)


19


Deferred revenue, net
The components of Deferred revenue, net in our unaudited Condensed Consolidated Balance Sheet at September 30, 2018 and December 31, 2017 are as follows:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
Deferred revenue
$
1,999,092

 
$
1,789,776

Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts(1)
(567,911
)
 

Deferred revenue, net
$
1,431,181

 
$
1,789,776

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

The following table summarizes the activity in our contract liabilities, which are recorded in Deferred revenue, net and Deferred receipts held in trust for the nine months ended September 30, 2018:
 
2018
 
(In thousands)
Beginning balance — Deferred revenue, net and Deferred receipts held in trust
$
5,265,206

Cumulative effect of accounting changes
37,991

Net preneed contract sales
745,566

Acquisitions (divestitures) of businesses, net
159,194

Net investment earnings (1)
102,119

Recognized revenue from backlog (2)
(297,407
)
Recognized revenue from current period sales
(403,477
)
Change in amounts due on unfulfilled performance obligations
(544,780
)
Change in cancellation reserve
62,120

Effect of foreign currency and other
(7,957
)
Ending balance — Deferred revenue, net and Deferred receipts held in trust
$
5,118,575

(1)Includes both realized and unrealized investment earnings.
(2)Includes current year trust fund income through the date of performance.
4. Income Taxes

On December 22, 2017, the U.S. federal government enacted the Tax Cuts and Jobs Act (the Tax Act), which significantly revised U.S. corporate income tax law by, among other things, reducing the U.S. federal corporate income tax rate from 35% to 21% and implementing a modified territorial tax system that includes a one-time transition tax on deemed repatriated earnings of foreign subsidiaries. Due to the complexities involved in accounting for the Tax Act, the SEC issued Staff Accounting Bulletin (SAB) 118, which requires that we include in our financial statements the reasonable estimate of the impact of the Tax Act on earnings to the extent such reasonable estimate has been determined.
SAB 118 allows us to report provisional amounts within a measurement period up to one year due to the complexities inherent in adopting the changes. We consider both the recognition of the transition tax and the remeasurement of deferred taxes incomplete. We adjusted our provisional amounts during the nine months ended September 30, 2018 by $16.3 million due to the remeasurement of deferred taxes resulting from a change in estimate related to the finalization of the 2017 tax return. Additionally, new guidance from regulators, interpretation of the law, and refinement of our estimates from ongoing analysis of data and tax positions may change the provisional amounts recorded. Any changes in the provisional amount recorded will be reflected in income tax expense in the period identified.
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 19.8% and 15.7% for the three months ended September 30, 2018 and 2017, respectively. The increase in the effective tax rate for the three months ended September 30, 2018 was primarily the result of lower tax benefits recognized on the settlement of employee share-based awards. Our effective tax rate was an expense of 19.4% and a benefit of 12.3% for the nine months ended September 30, 2018 and 2017,

20


respectively. The higher effective tax rate for the nine months ended September 30, 2018 was primarily due to the effects of the 2017 IRS audit settlement, partially offset by the decrease in the U.S. federal income tax rate and remeasurement of deferred taxes as a result of the change in estimate in the finalization of the 2017 tax return.
Unrecognized Tax Benefits
As of September 30, 2018, the total amount of our unrecognized tax benefits was $80.8 million and the year-to-date total amount of our accrued interest was $13.2 million.
In March 2017, we received from the IRS Office of Appeals the fully executed Form 870-AD for the years 1999-2005, which effectively settled the issues under audit for those years. Tax years subsequent to 2005 remain open to review and adjustment by the IRS. In addition, we are under audit by various state jurisdictions for years 2009 through 2017. There are currently no federal or provincial audits in Canada. It is reasonably possible that the amount of unrecognized tax benefits could significantly decrease over the next 12 months as certain tax positions will be released as a result of statutes closing. However, since the years to which uncertain tax positions relate remain subject to review by the tax authorities, a current estimate of the range of decrease that may occur within the next 12 months cannot be made.
5. Debt
Debt as of September 30, 2018 and December 31, 2017 was as follows:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
7.625% Senior Notes due October 2018
$

 
$
250,000

4.5% Senior Notes due November 2020
200,000

 
200,000

8.0% Senior Notes due November 2021
150,000

 
150,000

5.375% Senior Notes due January 2022
425,000

 
425,000

5.375% Senior Notes due May 2024
850,000

 
850,000

7.5% Senior Notes due April 2027
200,000

 
200,000

4.625% Senior Notes due December 2027
550,000

 
550,000

Term Loan due December 2022
649,688

 
675,000

Bank Credit Facility due December 2022
395,000

 

Obligations under capital leases
212,126

 
197,232

Mortgage notes and other debt, maturities through 2050
5,749

 
6,036

Unamortized premiums, net
6,789

 
7,456

Unamortized debt issuance costs
(33,232
)
 
(38,071
)
Total debt
3,611,120

 
3,472,653

Less: Current maturities of long-term debt
(68,806
)
 
(337,337
)
Total long-term debt
$
3,542,314

 
$
3,135,316

Current maturities of debt at September 30, 2018 include amounts due under our Term Loan, mortgage notes and other debt, and capital leases within the next year.
Our consolidated debt had a weighted average interest rate of 4.93% and 4.73% at September 30, 2018 and December 31, 2017, respectively. Approximately 66% and 75% of our total debt had a fixed interest rate at September 30, 2018 and December 31, 2017, respectively.
During the nine months ended September 30, 2018 and 2017, we paid $113.1 million and $101.7 million in cash interest, respectively.
Bank Credit Agreement
As of September 30, 2018, we have $395.0 million of outstanding borrowings under our Bank Credit Facility due December 2022; $649.7 million of outstanding borrowings under our Term Loan due December 2022; and issued $33.3 million of letters of credit. The bank credit agreement provides us with flexibility for working capital, if needed, and is guaranteed by a majority of our domestic subsidiaries. The subsidiary guaranty is a guaranty of payment of the outstanding amount of the total lending commitment, including letters of credit. The bank credit agreement contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, and certain dividend and share repurchase restrictions. As of September 30, 2018, we were in compliance with all of our debt covenants. We pay a quarterly fee on the unused commitment, which was 0.25% at September 30, 2018. As of September 30, 2018, we have $571.7 million in borrowing capacity under the Bank Credit Facility.

21


Debt Issuances and Additions
During the nine months ended September 30, 2018, we drew $395.0 million on our Bank Credit Facility as follows:
$175.0 million to fund the redemption of our 7.625% Senior notes due October 2018 in January 2018.
$10.0 million to make required payments on our Term Loan due December 2022 in March 2018.
$185.0 million to fund acquisition activity, to make required payments on our Term Loan due December 2027 and for general corporate purposes in June 2018.
$25.0 million to fund acquisition activity and for general corporate purposes in September 2018.
During the nine months ended September 30, 2017, we drew $120.0 million on our Bank Credit Facility to make required payments on our Term Loan, to fund our IRS settlement payments, and for general corporate purposes.
Debt Extinguishments and Reductions
During the nine months ended September 30, 2018, we made aggregate debt payments of $285.2 million for scheduled and early extinguishment payments including:
$250.0 million in aggregate principal of our 7.625% Senior Notes due October 2018;
$9.6 million in call premium for redemption of the 7.625% Senior Notes due October 2018;
$25.3 million in aggregate principal of our Term Loan due December 2022; and
$0.3 million in other debt.
Certain of the above transactions resulted in the recognition of a loss of $10.1 million recorded in Loss on early extinguishment of debt in our unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2018.
During the nine months ended September 30, 2017, we made aggregate principal debt payments of $26.4 million, including $26.3 million for scheduled payments towards our Term Loan.
6. Fair Value of Financial Instruments
Fair Value Estimates
The fair value estimates of the following financial instruments have been determined using available market information and appropriate valuation methodologies. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair value of receivables on preneed contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms.
The fair value of our debt instruments at September 30, 2018 and December 31, 2017 was as follows:
 
September 30, 2018
 
December 31, 2017
 
(In thousands)
7.625% Senior Notes due October 2018
$

 
$
259,563

4.5% Senior Notes due November 2020
200,000

 
199,590

8.0% Senior Notes due November 2021
166,200

 
175,313

5.375% Senior Notes due January 2022
430,911

 
436,178

5.375% Senior Notes due May 2024
867,000

 
892,118

7.5% Senior Notes due April 2027

225,500

 
238,004

4.625% Senior Notes due December 2027

528,000

 
558,250

Term Loan due December 2022
649,688

 
675,000

Bank Credit Facility due December 2022
395,000

 

Mortgage notes and other debt, maturities through 2050
5,749

 
6,036

Total fair value of debt instruments
$
3,468,048

 
$
3,440,052

The fair value of our long-term, fixed-rate loans were estimated using market prices for those loans, and therefore are classified within Level 2 of the fair value measurements hierarchy. The Term Loan, Bank Credit Facility agreement, and the mortgage notes and other debt are classified within Level 3 of the fair value measurements hierarchy. The fair value of these instruments was estimated using a discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. An increase (decrease) in the inputs results in a directionally opposite change in the fair value of the instruments.

22


7. Equity
Share Repurchases
Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our stock repurchase program. During the nine months ended September 30, 2018, we repurchased 7,301,736 shares of common stock at an aggregate cost of $275.7 million, which is an average cost per share of $37.76. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $194.4 million at September 30, 2018.
8. Segment Reporting
Our operations are both product-based and geographically-based, and the reportable operating segments presented below include our funeral and cemetery operations. Our geographic areas include the United States and Canada, where we conduct both funeral and cemetery operations.
Our reportable segment, including disaggregated revenue, information is as follows:
 
Three Months Ended
 
Nine Months Ended
 
September 30,
 
September 30,
 
2018
 
2017(1)
 
2018
 
2017(1)
 
(In thousands)
Revenue from customers:
 
 
 
 
 
 
 
Funeral revenue:
 
 
 
 
 
 
 
Atneed revenue
$
236,021

 
$
236,166

 
$
753,378

 
$
757,096

Matured preneed revenue
138,754

 
135,219

 
450,081

 
425,281

Core funeral revenue
374,775

 
371,385

 
1,203,459

 
1,182,377

Non-funeral home revenue
11,534

 
10,783

 
37,249

 
34,804

Recognized preneed revenue
32,129

 
26,630

 
98,508

 
88,883

Other revenue
32,518

 
28,731

 
94,753

 
89,103

Total funeral revenue
450,956

 
437,529

 
1,433,969

 
1,395,167

Cemetery revenue:
 
 
 
 
 
 
 
Atneed revenue
76,983

 
76,079

 
240,967

 
238,196

Recognized preneed property revenue
151,269

 
129,611

 
403,375

 
378,546

Recognized preneed merchandise and services revenue
68,967

 
69,255

 
210,460

 
206,376

Core cemetery revenue
297,219

 
274,945

 
854,802

 
823,118

Other revenue
30,611

 
18,872

 
80,589

 
64,013

Total cemetery revenue
327,830

 
293,817

 
935,391

 
887,131

Total revenue from customers
$
778,786

 
$
731,346

 
$
2,369,360

 
$
2,282,298

Operating profit:
 
 
 
 
 
 
 
Funeral operating profit
$
68,145

 
$
70,118

 
$
279,021

 
$
274,802

Cemetery operating profit
98,025

 
79,658

 
271,038