Company Quick10K Filing
Quick10K
Service International
Closing Price ($) Shares Out (MM) Market Cap ($MM)
$42.32 182 $7,710
10-Q 2019-03-31 Quarter: 2019-03-31
10-K 2018-12-31 Annual: 2018-12-31
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
10-Q 2015-09-30 Quarter: 2015-09-30
10-Q 2015-06-30 Quarter: 2015-06-30
10-Q 2015-03-31 Quarter: 2015-03-31
10-K 2014-12-31 Annual: 2014-12-31
10-Q 2014-09-30 Quarter: 2014-09-30
10-Q 2014-06-30 Quarter: 2014-06-30
10-Q 2014-03-31 Quarter: 2014-03-31
10-K 2013-12-31 Annual: 2013-12-31
8-K 2019-06-14 Other Events, Exhibits
8-K 2019-05-22 Enter Agreement, Off-BS Arrangement, Other Events, Exhibits
8-K 2019-05-21 Enter Agreement, Other Events, Exhibits
8-K 2019-05-08 Officers, Shareholder Vote
8-K 2019-05-08 Regulation FD, Exhibits
8-K 2019-05-07 Enter Agreement, Other Events, Exhibits
8-K 2019-05-07 Other Events, Exhibits
8-K 2019-04-24 Earnings, Exhibits
8-K 2019-02-21 Regulation FD, Exhibits
8-K 2019-02-18 Earnings, Exhibits
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
EPAM Epam Systems 9,270
LITE Lumentum Holdings 4,540
TSE Trinseo 1,770
LRN K12 1,250
CREX Creative Realities 24
AMTX Aemetis 23
LIVC Live Current Media 0
MSCG Managed Futures Premier Graham 0
ENDL Endless Charge 0
ALFA Alfacourse 0
SCI 2019-03-31
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-10.28 sci-2019331xex1028.htm
EX-10.29 sci-2019331xex1029.htm
EX-31.1 sci-2019331xex311.htm
EX-31.2 sci-2019331xex312.htm
EX-32.1 sci-2019331xex321.htm
EX-32.2 sci-2019331xex322.htm

Service International Earnings 2019-03-31

SCI 10Q Quarterly Report

Balance SheetIncome StatementCash Flow

10-Q 1 sci-2019331x10q.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 March 31, 2019
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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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
 
 
(Do not check if smaller reporting company)


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 April 23, 2019 was 182,242,305 (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.
Combination Location (Combos) — Locations where a funeral service location is physically located within or adjoining a SCI owned cemetery location.
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, travel protection, 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 — Cemetery property in which an underground outer burial receptacle constructed of concrete and reinforced steel has been 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.
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).

3


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 — 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.
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
 
March 31,
 
2019
 
2018
 
(In thousands, except per share amounts)
Revenue:
 

 
Property and merchandise revenue
$
381,209

 
$
368,214

Service revenue
355,371

 
378,098

Other revenue
61,632

 
48,170

Total revenue
798,212

 
794,482

Costs and expenses:
 

 
Cost of property and merchandise
(197,894
)
 
(187,723
)
Cost of service
(190,813
)
 
(190,848
)
Overhead and other expenses
(217,671
)
 
(220,149
)
Total costs and expenses
(606,378
)
 
(598,720
)
Operating profit
191,834

 
195,762

General and administrative expenses
(42,530
)

(34,784
)
(Losses) gains on divestitures and impairment charges, net
(1,878
)

482

Hurricane (expenses) recoveries, net
(448
)
 
2,232

Operating income
146,978

 
163,692

Interest expense
(47,390
)

(43,576
)
Loss on early extinguishment of debt, net


(10,131
)
Other income, net
720


384

Income before income taxes
100,308

 
110,369

Provision for income taxes
(21,095
)

(28,321
)
Net income
79,213

 
82,048

Net income (loss) attributable to noncontrolling interests
110


(60
)
Net income attributable to common stockholders
$
79,323


$
81,988

Basic earnings per share:
 
 
 
Net income attributable to common stockholders
$
0.44


$
0.44

Basic weighted average number of shares
181,696


185,130

Diluted earnings per share:
 
 
 
Net income attributable to common stockholders
$
0.43


$
0.43

Diluted weighted average number of shares
185,317


189,923


(See notes to unaudited condensed consolidated financial statements)

5


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

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Net income
$
79,213

 
$
82,048

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
7,401

 
(9,592
)
Total comprehensive income
86,614

 
72,456

Total comprehensive income attributable to noncontrolling interests
(40
)
 
(57
)
Total comprehensive income attributable to common stockholders
$
86,574

 
$
72,399


(See notes to unaudited condensed consolidated financial statements)



6


SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
March 31, 2019
 
December 31, 2018
 
(In thousands, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
153,694

 
$
198,850

Receivables, net
81,811

 
73,825

Inventories
25,219

 
24,950

Other
29,328

 
33,607

Total current assets
290,052

 
331,232

Preneed receivables, net and trust investments
4,498,502

 
4,271,392

Cemetery property
1,840,782

 
1,837,464

Property and equipment, net
1,993,346

 
1,977,364

Goodwill
1,859,194

 
1,863,842

Deferred charges and other assets
1,023,282

 
934,151

Cemetery perpetual care trust investments
1,573,903

 
1,477,798

Total assets
$
13,079,061

 
$
12,693,243

 
 
 
 
LIABILITIES & EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
520,187


$
479,768

Current maturities of long-term debt
68,554


69,896

Income taxes payable
15,802


5,936

Total current liabilities
604,543


555,600

Long-term debt
3,409,196


3,532,182

Deferred revenue, net
1,431,389


1,418,814

Deferred tax liability
408,323


404,627

Other liabilities
359,318


297,302

Deferred receipts held in trust
3,598,213


3,371,738

Care trusts’ corpus
1,567,674


1,471,165

Commitments and contingencies (Note 10)





Equity:
 

 
Common stock, $1 per share par value, 500,000,000 shares authorized, 185,855,605 and 192,428,122 shares issued, respectively, and 182,250,721 and 181,470,582 shares outstanding, respectively
182,251


181,471

Capital in excess of par value
988,978


972,710

Retained earnings
508,578


474,327

Accumulated other comprehensive income
20,646


13,395

Total common stockholders’ equity
1,700,453


1,641,903

Noncontrolling interests
(48
)

(88
)
Total equity
1,700,405


1,641,815

Total liabilities and equity
$
13,079,061


$
12,693,243

(See notes to unaudited condensed consolidated financial statements)

7


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

 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Cash flows from operating activities:
 

 
Net income
$
79,213


$
82,048

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



Loss on early extinguishment of debt


10,131

Depreciation and amortization
37,126


38,981

Amortization of intangibles
7,066


7,103

Amortization of cemetery property
15,723


12,825

Amortization of loan costs
1,620


1,518

Provision for doubtful accounts
1,917


2,158

Provision for (benefit from) deferred income taxes
2,492


(1,692
)
Gains (losses) on divestitures and impairment charges, net
1,878


(482
)
Share-based compensation
4,568


3,699

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



(Increase) decrease in receivables
(8,716
)

11,587

Increase in other assets
(13,180
)

(6,685
)
Increase in payables and other liabilities
29,545


20,486

Effect of preneed sales production and maturities:



Decrease in preneed receivables, net and trust investments
7,983


9,742

Increase in deferred revenue, net
30,392


16,550

(Decrease) increase in deferred receipts held in trust
(12,731
)

3,489

Net cash provided by operating activities
184,896


211,458

Cash flows from investing activities:



Capital expenditures
(51,573
)

(46,241
)
Acquisitions, net of cash acquired
(19,240
)

(33,934
)
Proceeds from divestitures and sales of property and equipment
7,764


6,452

Payments on Company-owned life insurance policies
(7,891
)
 
(9,246
)
Proceeds from Company-owned life insurance policies

 
2,810

Other

 
70

Net cash used in investing activities
(70,940
)

(80,089
)
Cash flows from financing activities:



Proceeds from issuance of long-term debt
15,000


185,000

Scheduled payments of debt
(8,535
)

(8,535
)
Early payments of debt
(135,000
)

(259,594
)
Principal payments on finance leases
(10,657
)

(7,646
)
Proceeds from exercise of stock options
15,962


4,989

Purchase of Company common stock
(14,542
)

(118,797
)
Payments of dividends
(32,820
)

(31,348
)
Bank overdrafts and other
7,906


(7,574
)
Net cash used in financing activities
(162,686
)

(243,505
)
Effect of foreign currency on cash, cash equivalents, and restricted cash
1,540


(1,145
)
Net decrease in cash, cash equivalents, and restricted cash
(47,190
)

(113,281
)
Cash, cash equivalents, and restricted cash at beginning of period
207,584


340,601

Cash, cash equivalents, and restricted cash at end of period
$
160,394


$
227,320

(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

 

 

 
81,988

 
(9,589
)
 
57

 
72,456

Dividends declared on common stock ($0.17 per share)

 

 

 
(31,348
)
 

 

 
(31,348
)
Employee share-based compensation earned

 

 
3,699

 

 

 

 
3,699

Stock option exercises
282

 

 
4,707

 

 

 

 
4,989

Restricted stock awards, net of forfeitures
163

 

 
(163
)
 

 

 

 

Purchase of Company common stock

 
(3,095
)
 
(16,101
)
 
(99,601
)
 

 

 
(118,797
)
Other
47

 

 
(866
)
 

 

 

 
(819
)
Balance at March 31, 2018
$
192,428

 
$
(8,416
)
 
$
961,744

 
$
333,864

 
$
32,125

 
$
104

 
$
1,511,849


 
Common
Stock
 
Treasury Stock
 
Capital in
Excess of
Par Value
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2018
$
184,721

 
$
(3,250
)
 
$
972,710

 
$
474,327

 
$
13,395

 
$
(88
)
 
$
1,641,815

Comprehensive income

 

 

 
79,323

 
7,251

 
40

 
86,614

Dividends declared on common stock ($0.18 per share)

 

 

 
(32,820
)
 

 

 
(32,820
)
Employee share-based compensation earned

 

 
4,568

 

 

 

 
4,568

Stock option exercises
950

 

 
15,012

 

 

 

 
15,962

Restricted stock awards, net of forfeitures
126

 

 
(126
)
 

 

 

 

Purchase of Company common stock

 
(355
)
 
(1,935
)
 
(12,252
)
 

 

 
(14,542
)
Other
59

 

 
(1,251
)
 

 

 

 
(1,192
)
Balance at March 31, 2019
$
185,856

 
$
(3,605
)
 
$
988,978

 
$
508,578

 
$
20,646

 
$
(48
)
 
$
1,700,405


(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 consolidated financial statements include the accounts of Service Corporation International (SCI) and all subsidiaries in which we hold a controlling financial interest. Intercompany balances and transactions have been eliminated in consolidation.
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. We have retained the specialized industry accounting principles when consolidating the trusts. Our trusts are variable interest entities, for which we have determined that we are the primary beneficiary as we absorb a majority of the losses and returns associated with these trusts. Although we consolidate the trusts, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these trusts; therefore, their interests in these trusts represent a liability to us.
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, 2018, 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.
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, 2018. 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.
Leases
We have operating and finance leases. Our operating leases primarily include funeral service real estate and office equipment for funeral service locations, cemetery locations, and administrative offices. Our finance leases primarily include transportation equipment but also include real estate and office equipment. Lease terms related to real estate generally range from one to forty years with options to renew at varying terms. Lease terms related to office and transportation equipment generally range from one to eight years with options to renew at varying terms.
We determine whether an arrangement is or contains a lease at the inception of the arrangement based on the unique facts and circumstances present. Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Leases with a term greater than one year are recognized on the balance sheet as ROU assets and lease liabilities. We have elected not to recognize on the balance sheet

10


leases with terms of one year or less.
Lease liabilities and their corresponding ROU assets are recorded at commencement date based on the present value of lease payments over the expected lease term. For transportation equipment, we use the rate implicit in each lease to calculate the present value. For real estate and non-transportation equipment leases, the interest rate implicit in lease contracts is typically not readily determinable. Therefore, we use the appropriate collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of future payments for real estate and non-transportation equipment leases. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.
We calculate operating lease expense ratably over the lease term plus any reasonably assured renewal periods. We consider reasonably assured renewal options and fixed escalation provisions in our calculation. Generally, our leases do not include options to terminate the lease prior to the contractual lease expiration date, but future renewal periods are generally cancelable. The majority of our contractually available renewal periods for leases of buildings and land are considered reasonably certain of being exercised. This determination is made by our real estate team based on facts and circumstances surrounding each property. Leases with a term of 12 months or less are not recorded on the balance sheet. The majority of our lease arrangements contain options to (i) purchase the property at fair value on the exercise date, (ii) purchase the property for a value determined at the inception of the lease, or (iii) renew the lease for the fair rental value at the end of the primary lease term. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.
Certain of our lease agreements include variable rental payments based on a percentage of sales over base contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We generally do not have sublease arrangements, sale-leaseback arrangements, or leveraged leases.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For leases commencing before January 1, 2019, we have elected the practical expedient to not separate lease and non-lease components on certain equipment leases, such as copiers where the cost-per-copy maintenance charges are included in the lease charge. On these leases, we have elected to account for the lease and non-lease components as a single component. For leases commencing on or after January 1, 2019, we account for the maintenance charges (non-lease components) separate from the lease components.
Cash, Cash Equivalents, and Restricted Cash
The components of cash, cash equivalents, and restricted cash at March 31, 2019 and December 31, 2018 are as follows:
 
March 31, 2019
 
December 31, 2018
 
(In thousands)
Cash and cash equivalents
$
153,694

 
$
198,850

Restricted cash(1):
 
 
 
Included in Other current assets
4,964

 
7,007

Included in Deferred charges and other assets
1,736

 
1,727

Total restricted cash
6,700

 
8,734

Total cash, cash equivalents, and restricted cash
$
160,394

 
$
207,584

(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.
Property and equipment, net
During the fourth quarter of 2018, based on a review of our historical usage patterns for similar assets, we increased our estimate of the remaining useful life of certain building improvements and equipment by one to three years. For the three months ended March 31, 2019, these changes in useful life, which were made prospectively, reduced depreciation expense by $3.9 million ($0.02 per basic and diluted share).
Accounting Standards Adopted in 2019
Leases
In February 2016 and in January, July, and December 2018, the Financial Accounting Standards Board (FASB) issued and amended new guidance on "Leases" to increase transparency and comparability among organizations. Under the new guidance, we are required to recognize right-of-use (ROU) lease assets and liabilities on our balance sheet and disclose key information about leasing arrangements. In addition, the new guidance offers specific accounting considerations for lessees, lessors, 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.

11


We adopted the new guidance on January 1, 2019 using the modified retrospective transition method. As a result of the adoption, we recorded:
a $0.7 million reclass from Other current assets to Accounts payable and accrued liabilities for prepaid operating lease expenses,
a $2.7 million reclass from Accounts payable and accrued liabilities to Deferred charges and other assets for accrued operating lease expenses,
a $62.6 million increase to Deferred charges and other assets for operating lease right-of-use assets, and
a $9.4 million and $53.2 million increase to Accounts payable and accrued liabilities and Other liabilities, respectively, for operating lease liabilities.
The modified retrospective transition method includes a number of optional practical expedients and accounting policy elections:
1.We elected a package of practical expedients to not reassess:
whether a contract is or contains a lease,
lease classification, or
initial direct costs.
2.We did not elect a practical expedient to use hindsight when determining lease term.
3.We elected the short-term lease recognition exemption.
4.The remaining practical expedients do not apply or do not have a material impact.
We established a project team to implement the new guidance. We implemented 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 requirements under the new guidance. This system serves as a lease database to manage our lease inventory centrally and ensure completeness of our lease inventory. The system also produces accounting entries and financial reporting disclosures required under the new guidance and provides lease activity business intelligence reporting. We thoroughly tested the new system to ensure it produces accurate data to prepare the required accounting entries and disclosures under the new guidance upon adoption and on an ongoing basis. We evaluated and implemented additional changes to our processes and internal controls to facilitate adoption on January 1, 2019 and to meet the standard’s ongoing reporting and disclosure requirements.
Our current operating lease portfolio is primarily composed of real estate and equipment. As a result of the adoption, we recognized ROU assets and lease liabilities related to substantially all operating lease arrangements. The adoption of "Leases" did not have an impact on our consolidated results of operations or cash flows. We made the required enhanced lease-related disclosures above and in Note 9 of this Form 10-Q.
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 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 post-implementation stages are expensed. Any capitalized costs are amortized 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. We adopted the new guidance on a prospective basis to implementation costs incurred after January 1, 2019 with an immaterial impact on our consolidated results of operations and consolidated financial position and no impact on cash flows.
Recently Issued Accounting Standards
Financial Instruments
In June 2016 and November 2018, 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.
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 of the reporting unit. The new

12


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 related to fair value. 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 related to the 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 we will make the required disclosure changes in that filing. Adoption will not 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 we will make the required disclosure changes in that filing. Adoption will not have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
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 March 31, 2019 and December 31, 2018 are as follows:
 
March 31, 2019
 
December 31, 2018
 
(In thousands)
Preneed funeral receivables
$
111,372

 
$
107,612

Preneed cemetery receivables
880,293

 
883,432

Preneed receivables from customers
991,665

 
991,044

Unearned finance charge
(44,699
)
 
(44,981
)
Allowance for cancellation
(49,102
)
 
(48,380
)
Preneed receivables, net
$
897,864

 
$
897,683

 
 
 
 
Trust investments, at market
$
4,909,135

 
$
4,585,720

Insurance-backed fixed income securities and other
265,406

 
265,787

Trust investments
5,174,541

 
4,851,507

Less: Cemetery perpetual care trust investments
(1,573,903
)
 
(1,477,798
)
Preneed trust investments
$
3,600,638

 
$
3,373,709

 
 
 
 
Preneed receivables, net and trust investments
$
4,498,502

 
$
4,271,392


13


The table below sets forth certain investment-related activities associated with our trusts:
 
 
Three Months Ended
 
 
March 31,
 
 
2019
 
2018
 
 
(In thousands)
Deposits
 
$
100,452

 
$
93,269

Withdrawals
 
$
107,356

 
$
106,769

Purchases of securities
 
$
446,761

 
$
599,651

Sales of securities
 
$
317,855

 
$
614,424

Realized gains (1)
 
$
43,525

 
$
58,306

Realized losses (1)
 
$
(32,631
)
 
$
(12,296
)
(1)
All realized gains and losses are recognized in Other income, net for our trust investments and are offset by a corresponding reclassification in Other income, net to Deferred receipts held in trust and Care trusts' corpus.

The costs and values associated with trust investments recorded at fair value at March 31, 2019 and December 31, 2018 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.
 
March 31, 2019
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
47,311

 
$
250

 
$
(291
)
 
$
47,270

Canadian government
2
 
45,738

 
73

 
(1,138
)
 
44,673

Corporate
2
 
10,713

 
5

 
(256
)
 
10,462

Residential mortgage-backed
2
 
3,127

 
6

 
(15
)
 
3,118

Asset-backed
2
 
135

 
2

 
(9
)
 
128

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
6,086

 
496

 
(114
)
 
6,468

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
1,283,369

 
237,651

 
(67,561
)
 
1,453,459

Canada
1
 
36,092

 
9,614

 
(1,110
)
 
44,596

Other international
1
 
79,441

 
14,482

 
(1,984
)
 
91,939

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
815,033

 
21,692

 
(87,972
)
 
748,753

Fixed income
1
 
1,195,893

 
4,201

 
(45,751
)
 
1,154,343

Other
3
 
6,706

 
402

 

 
7,108

Trust investments, at fair value
 
 
3,529,644

 
288,874

 
(206,201
)
 
3,612,317

Commingled funds
 
 
 
 
 
 
 
 
 
Fixed income
 
 
419,253

 
2,721

 
(9,559
)
 
412,415

Equity
 
 
208,179

 
35,698

 
(305
)
 
243,572

Money market funds
 
 
375,874

 

 

 
375,874

Private equity
 
 
195,000

 
69,957

 

 
264,957

Trust investments, at net asset value
 
 
1,198,306

 
108,376

 
(9,864
)
 
1,296,818

Trust investments, at market
 
 
$
4,727,950

 
$
397,250

 
$
(216,065
)
 
$
4,909,135


14


 
December 31, 2018
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
49,187

 
$
153

 
$
(448
)
 
$
48,892

Canadian government
2
 
56,343

 
23

 
(1,797
)
 
54,569

Corporate
2
 
19,869

 
13

 
(516
)
 
19,366

Residential mortgage-backed
2
 
3,611

 
10

 
(50
)
 
3,571

Asset-backed
2
 
142

 
2

 
(11
)
 
133

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
9,058

 
180

 
(412
)
 
8,826

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
1,236,513

 
149,233

 
(138,141
)
 
1,247,605

Canada
1
 
34,821

 
9,082

 
(3,026
)
 
40,877

Other international
1
 
77,676

 
6,057

 
(10,275
)
 
73,458

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
760,887

 
7,104

 
(151,853
)
 
616,138

Fixed income
1
 
1,180,325

 
800

 
(89,179
)
 
1,091,946

Other
3
 
6,548

 
3,210

 
(3
)
 
9,755

Trust investments, at fair value
 
 
3,434,980

 
175,867

 
(395,711
)
 
3,215,136

Commingled funds
 
 
 
 
 
 
 
 
 
Fixed income
 
 
419,206

 
2,419

 
(18,981
)
 
402,644

Equity
 
 
205,789

 
19,567

 
(11,723
)
 
213,633

Money market funds
 
 
466,429

 

 

 
466,429

Private equity
 
 
215,618

 
72,897

 
(637
)
 
287,878

Trust investments, at net asset value
 
 
1,307,042

 
94,883

 
(31,341
)
 
1,370,584

Trust investments, at market
 
 
$
4,742,022

 
$
270,750

 
$
(427,052
)
 
$
4,585,720

As of March 31, 2019, our unfunded commitment for our private equity and other investments was $135.4 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
 
 
March 31,
 
 
2019
 
2018
 
 
(In thousands)
Fair value, beginning balance
 
$
9,755

 
$
9,067

Net unrealized losses included in Other income, net(1)
 
(1,142
)
 
(534
)
Sales
 
(1,505
)
 

Fair value, ending balance
 
$
7,108

 
$
8,533

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

15


Maturity dates of our fixed income securities range from 2019 to 2040. Maturities of fixed income securities (excluding mutual funds) at March 31, 2019 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
51,407

Due in one to five years
45,592

Due in five to ten years
8,540

Thereafter
112

Total estimated maturities of fixed income securities
$
105,651

Recognized trust fund income (realized and unrealized) related to these trust investments was $48.0 million and $44.9 million for the three months ended March 31, 2019 and 2018, 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 March 31, 2019 and December 31, 2018, respectively, are shown in the following tables:
 
March 31, 2019
 
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
$
6,645

 
$
(188
)
 
$
10,015

 
$
(103
)
 
$
16,660

 
$
(291
)
Canadian government

 

 
17,772

 
(1,138
)
 
17,772

 
(1,138
)
Corporate
1,643

 
(3
)
 
7,262

 
(253
)
 
8,905

 
(256
)
Residential mortgage-backed

 

 
2,330

 
(15
)
 
2,330

 
(15
)
 Asset-backed

 

 
21

 
(9
)
 
21

 
(9
)
Total temporarily impaired fixed income securities
$
8,288

 
$
(191
)
 
$
37,400

 
$
(1,518
)
 
$
45,688

 
$
(1,709
)
 
December 31, 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
$
6,899

 
$
(226
)
 
$
16,374

 
$
(222
)
 
$
23,273

 
$
(448
)
Canadian government
2,254

 
(9
)
 
25,330

 
(1,788
)
 
27,584

 
(1,797
)
Corporate
11,579

 
(206
)
 
6,563

 
(310
)
 
18,142

 
(516
)
Residential mortgage-backed
351

 
(4
)
 
3,010

 
(46
)
 
3,361

 
(50
)
 Asset-backed

 

 
79

 
(11
)
 
79

 
(11
)
Total temporarily impaired fixed income securities
$
21,083

 
$
(445
)
 
$
51,356

 
$
(2,377
)
 
$
72,439

 
$
(2,822
)


16


Deferred revenue, net
The components of Deferred revenue, net in our unaudited Condensed Consolidated Balance Sheet at March 31, 2019 and December 31, 2018 are as follows:
 
March 31, 2019
 
December 31, 2018
 
(In thousands)
Deferred revenue
$
2,009,467

 
$
1,989,232

Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts
(578,078
)
 
(570,418
)
Deferred revenue, net
$
1,431,389

 
$
1,418,814

    
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 three months ended March 31,
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Beginning balance — Deferred revenue, net and Deferred receipts held in trust
$
4,790,552

 
$
5,265,206

Cumulative effect of accounting changes

 
37,991

Net preneed contract sales
240,388

 
244,091

(Divestitures) Acquisitions of businesses, net
(12,310
)
 
40,332

Net investment gains (losses) (1)
230,540

 
(46,918
)
Recognized revenue from backlog (2)
(115,103
)
 
(115,202
)
Recognized revenue from current period sales
(101,242
)
 
(105,256
)
Change in amounts due on unfulfilled performance obligations
(6,178
)
 
(606,888
)
Change in cancellation reserve
148

 
61,987

Effect of foreign currency and other
2,807

 
(6,517
)
Ending balance — Deferred revenue, net and Deferred receipts held in trust
$
5,029,602

 
$
4,768,826

(1)Includes both realized and unrealized investment earnings.
(2)Includes current year trust fund income through the date of performance.
4. Income Taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitation, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was 21.0% and 25.7% for the three months ended March 31, 2019 and 2018, respectively. The lower effective tax rate for the March 31, 2019 was primarily due to higher excess tax benefits on increased exercises of stock options.
Unrecognized Tax Benefits
As of March 31, 2019, the total amount of our unrecognized tax benefits was $1.4 million, and the total amount of our accrued interest was $0.5 million.
The federal statutes of limitations have expired for all tax years prior to 2015, and we are not currently under audit by the IRS. Various state jurisdictions are auditing years 2009 through 2017. There are currently no federal or provincial audits in Canada; however, years subsequent to 2013 remain open and could be subject to examination. It is reasonably possible that the amount of unrecognized tax benefits may change within the next twelve months. However, given the number of years that remain subject to examination and the number of matters being examined, an estimate of the range of the possible increase or decrease cannot be made.


17


5. Debt
Debt as of March 31, 2019 and December 31, 2018 was as follows:
 
March 31, 2019
 
December 31, 2018
 
(In thousands)
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
632,813

 
641,250

Bank Credit Facility due December 2022
275,000

 
395,000

Obligations under finance leases
193,958

 
211,952

Mortgage notes and other debt, maturities through 2050
24,920

 
4,076

Unamortized premiums, net
6,334

 
6,562

Unamortized debt issuance costs
(30,275
)
 
(31,762
)
Total debt
3,477,750

 
3,602,078

Less: Current maturities of long-term debt
(68,554
)
 
(69,896
)
Total long-term debt
$
3,409,196

 
$
3,532,182


Current maturities of debt at March 31, 2019 include amounts due under our Term Loan, mortgage notes and other debt, and finance leases within the next year.
Our consolidated debt had a weighted average interest rate of 5.03% and 4.99% at March 31, 2019 and December 31, 2018, respectively. Approximately 69% and 66% of our total debt had a fixed interest rate at March 31, 2019 and December 31, 2018, respectively.
During the three months ended March 31, 2019 and 2018, we paid $24.9 million in cash interest in each period.
Bank Credit Agreement
As of March 31, 2019, we have $275.0 million of outstanding borrowings under our Bank Credit Facility due December 2022; $632.8 million of outstanding borrowings under our Term Loan due December 2022; and issued $32.9 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 March 31, 2019, we were in compliance with all of our debt covenants. We pay a quarterly fee on the unused commitment, which was 0.25% at March 31, 2019. As of March 31, 2019, we have $692.1 million in borrowing capacity under the Bank Credit Facility.
Subsequent to quarter end, we have increased our outstanding borrowings by $40.0 million to $315.0 million under our Bank Credit Facility due December 2022.
Debt Issuances and Additions
In March 2019, we drew $15.0 million on our Bank Credit Facility for general corporate purposes.
In January 2018, we drew $175.0 million on our Bank Credit Facility to fund the redemption of our 7.625% Senior notes due October 2018. In March 2018 we drew $10.0 million on our Bank Credit Facility to make required payments on our Term Loan due December 2022.
Debt Extinguishments and Reductions
During the three months ended March 31, 2019, we made aggregate debt payments of $143.5 million for scheduled and early extinguishment payments including:
$135.0 million in aggregate principal of our Bank Credit Facility December 2022;
$8.4 million in aggregate principal of our Term Loan due December 2022; and
$0.1 million in other debt.

18


During the three months ended March 31, 2018, we made aggregate debt payments of $268.1 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;
$8.4 million in aggregate principal of our Term Loan due December 2022; and
$0.1 million in other debt.

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 March 31, 2019 and December 31, 2018 was as follows:
 
March 31, 2019
 
December 31, 2018
 
(In thousands)
4.5% Senior Notes due November 2020
$
199,940

 
$
198,930

8.0% Senior Notes due November 2021
163,665

 
160,800

5.375% Senior Notes due January 2022
427,673

 
428,188

5.375% Senior Notes due May 2024
874,225

 
851,275

7.5% Senior Notes due April 2027
230,000

 
214,940

4.625% Senior Notes due December 2027
550,676

 
517,077

Term Loan due December 2022
632,813

 
629,579

Bank Credit Facility due December 2022
275,000

 
387,061

Mortgage notes and other debt, maturities through 2050
24,920

 
4,076

Total fair value of debt instruments
$
3,378,912

 
$
3,391,926

The fair value of our long-term, fixed-rate loans were estimated using market prices for those loans, and therefore they 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 has been 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.
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 three months ended March 31, 2019, we repurchased 354,897 shares of common stock at an aggregate cost of $14.5 million, which is an average cost per share of $40.97. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $180.7 million at March 31, 2019.

19


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
 
March 31,
 
2019
 
2018
 
(In thousands)
Revenue from customers:
 
 
 
Funeral revenue:
 
 
 
Atneed revenue
$
258,730

 
$
274,499

Matured preneed revenue
156,450

 
165,329

Core funeral revenue
415,180

 
439,828

Non-funeral home revenue
12,973

 
13,677

Recognized preneed revenue
31,325

 
32,460

Other revenue
33,316

 
28,400

Total funeral revenue
492,794

 
514,365

Cemetery revenue:
 
 
 
Atneed revenue
81,451

 
83,044

Recognized preneed property revenue
128,612

 
108,940

Recognized preneed merchandise and services revenue
67,039

 
68,363

Core revenue
277,102

 
260,347

Other revenue
28,316

 
19,770

Total cemetery revenue
305,418

 
280,117

Total revenue from customers
$
798,212

 
$
794,482

Operating profit:
 
 
 
Funeral operating profit
$
105,418

 
$
120,455

Cemetery operating profit
86,416

 
75,307

Operating profit from reportable segments
191,834

 
195,762

General and administrative expenses
(42,530
)
 
(34,784
)
(Losses) gains on divestitures and impairment charges, net
(1,878
)
 
482

Hurricane (expenses) recoveries, net
(448
)
 
2,232

Operating income
146,978

 
163,692

Interest expense
(47,390
)
 
(43,576
)
Loss on early extinguishment of debt, net

 
(10,131
)
Other income, net
720

 
384

Income before income taxes
$
100,308

 
$
110,369

Our geographic area information is as follows:
 
United States
 
Canada
 
Total
 
 
 
(In thousands)
 
 
Three Months Ended March 31,
 
 
 
 
 
Revenue from external customers:
 
 
 
 
 
2019
$
754,080

 
$
44,132

 
$
798,212

2018
$
744,113

 
$
50,369

 
$
794,482


20


9. Leases
Our leases principally relate to funeral service real estate and office, maintenance, and transportation equipment. The majority of our lease arrangements contain options to (i) purchase the property at fair value on the exercise date, (ii) purchase the property for a value determined at the inception of the lease, or (iii) renew the lease for the fair rental value at the end of the primary lease term. 

Future lease payments for non-cancelable operating and finance leases as of March 31, 2019 were as follows (in thousands):
 
Operating
 
Finance
 
Total
2019 (excluding the three months ended March 31, 2019)
$
8,527

 
$
35,237

 
$
43,764

2020
10,873

 
41,702

 
52,575

2021
9,460

 
59,553

 
69,013

2022
8,388

 
23,352

 
31,740

2023
6,241

 
16,569

 
22,810

Thereafter
43,574

 
39,990

 
83,564

Total lease payments
$
87,063

 
$
216,403

 
$
303,466

Less: Interest
(23,373
)
 
(22,445
)
 
(45,818
)
Present value of lease liabilities
$
63,690

 
$
193,958

 
$
257,648


As of December 31, 2018, we disclosed the following future lease payments for non-cancelable operating and finance lease exceeding one year (in thousands):
 
Operating
 
Finance
2019
$
11,295

 
$
46,998

2020
9,550

 
51,943

2021
8,251

 
57,881

2022
7,282

 
21,842

2023
5,397

 
15,587

2024 and thereafter
37,841

 
40,447

Total
$
79,616

 
$
234,698

Less: Interest on finance leases
 
 
(22,746
)
Total principal payable on finance leases
 
 
$
211,952


We have 60 operating leases where we are the lessor and the non-cancelable term is greater than one year, resulting in $0.7 million in lease income for the three months ended March 31, 2019. We lease office space and excess land, and we are party to cellular agreements and land easements. We generally do not have sales-type leases, direct financing leases, or lease receivables. The adoption of ASC 842 did not have an impact on our accounting for lessor leases.

Future undiscounted lease income from operating leases as of March 31, 2019 were as follows (in thousands):
2019 (excluding the three months ended March 31, 2019)
$
1,949

2020
1,660

2021
1,312

2022
996

2023
426

Thereafter
94

Total cash receipts
$
6,437







21


The components of lease cost for the three months ended March 31, 2019 were as follows (in thousands):
Amortization of leased assets
$
10,964

Interest on lease liabilities
1,831

Total finance lease cost
12,795

Operating lease cost
3,194

Variable lease cost
372

Total lease cost
$
16,361


Supplemental balance sheet information as of March 31, 2019 related to leases was as follows (in thousands):
Lease Type
 
Balance Sheet Classification
 
Amounts Recognized
Operating lease right-of-use assets (1)
 
Deferred charges and other assets
 
$
61,432

Finance lease right-of-use assets (1)
 
Property and equipment, net
 
187,088

Total right-of-use assets (1)
 
 
 
$
248,520

 
 
 
 
 
Operating
 
Accounts payable and accrued liabilities
 
$
8,584

Finance
 
Current maturities of long-term debt
 
39,619

Total current lease liabilities
 
 
 
48,203

Operating
 
Other liabilities
 
55,106

Finance
 
Long-term debt
 
154,339

Total non-current lease liabilities
 
 
 
209,445

Total lease liabilities
 
 
 
$
257,648

(1) Right-of-use assets are presented net of accumulated amortization.

The weighted-average life remaining and discount rates of our leases for the three months ended March 31, 2019 were as follows:
 
Operating
 
Finance
Weighted-average remaining lease term (years)
12.2

 
4.9

Weighted-average discount rate
4.8
%
 
3.4
%
Supplemental cash flow information related to leases for the three months ended March 31, 2019 were as follows:
 
(In thousands)

Cash paid for amounts in the measurement of lease liabilities
 
Operating cash flows from operating leases
$
3,093

Operating cash flows from finance leases
$
1,948

Financing cash flows from finance leases
$
10,657

Total cash paid for amounts included in the measurement of lease liabilities

$
15,698

 
 
Right-of-use assets obtained in exchange for new finance lease liabilities
$
19,166

Right-of-use assets obtained in exchange for new operating lease liabilities
$
4,240

10. Commitments and Contingencies
Insurance Loss Reserves
We purchase comprehensive general liability, morticians’ and cemetery professional liability, automobile liability, and workers’ compensation insurance coverage, all of which are structured with high deductibles. The high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. As of March 31, 2019 and December 31, 2018, we have self-insurance reserves of $83.3 million and $80.1 million, respectively.


22


Litigation and Regulatory Matters
We are a party to various litigation and regulatory matters, investigations, and proceedings. Some of the more frequent routine litigations incidental to our business are based on burial practices claims and employment-related matters, including discrimination, harassment, and wage and hour laws and regulations. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to vigorously defend ourselves in the matters described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.
Wage and Hour Claims. We are named a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour pay, including but not limited to the Samborsky, Vasquez, Fredeen, Romano, Doyle, Horton, Quismundo, and Kallweit lawsuits described below. Given the nature of these lawsuits, except for those lawsuits where a settlement is referenced, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
Charles Samborsky, et al, individually and on behalf of those persons similarly situated, v. SCI California Funeral Services, Inc., et al ; Case No. BC544180; in the Superior Court of the State of California for the County of Los Angeles, Central District-Central Civil West Courthouse. This lawsuit was filed in April 2014 against an SCI subsidiary and purports to have been brought on behalf of employees who worked as family service counselors in California since April 2010. The plaintiffs allege causes of action for various violations of state laws regulating wage and hour pay. In addition, this lawsuit also asserts claims under the California Private Attorney General Act (PAGA) provisions on behalf of other similarly situated California persons. The plaintiffs seek unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The claims have been sent to arbitration. In July 2017, the arbitrator entered an award rejecting the plaintiffs' claims, ruling that they did not sue the correct party. Plaintiffs continue to assert claims under PAGA that are not subject to arbitration.
Adrian Mercedes Vasquez, an individual and on behalf of others similarly situated, v. California Cemetery and Funeral Services, LLC, et al; Case No. BC58837; in the Superior Court of the State of California for the County of Los Angeles. This lawsuit was filed in July 2015 against SCI subsidiaries and purports to be brought on behalf of the defendants' current and former non-exempt California employees during the four years preceding the filing of the complaint. The plaintiff alleges numerous causes of action for alleged wage and hour pay violations. The plaintiff seeks unpaid wages, compensatory and punitive damages, civil penalties, attorneys’ fees and costs, interest, and injunctive relief. The claims have been ordered to arbitration, and the arbitrator has determined that the claims will proceed as a bilateral proceeding. In addition, the plaintiff filed an unfair labor practice charge against defendants with the National Labor Relations Board alleging that by enforcing a mandatory arbitration provision, defendants allegedly violated the National Labor Relations Act.
Lisa Fredeen, an aggrieved employee and on behalf of other aggrieved employees v. California Cemetery and Funeral Services, LLC, et al; Case No. BC706930; in the Superior Court of the State of California for the County of Los Angeles. This lawsuit was filed on May 18, 2018, by the same law firm that filed the Vasquez case described above against SCI subsidiaries, asserting claims for violations of the California Labor Code and PAGA, based on alleged facts similar to those alleged in the Vasquez suit. The plaintiff seeks civil penalties, interest, and attorneys’ fees.
Nicole Romano, individually and on behalf of all others similarly situated v. SCI Direct, Inc., et al; Case No. BC656654; in the Superior Court of California for the County of Los Angeles. This lawsuit was filed in April 2017 against SCI subsidiaries and purports to have been brought on behalf of persons who worked as independent sales representatives in the U.S. during the four years preceding the filing of the complaint. In addition, this lawsuit also asserts claims under PAGA provisions on behalf of other similarly situated California persons. The plaintiff alleges numerous causes of action for alleged wage and hour pay violations, including misclassifying the independent sales representatives as independent contractors instead of employees. The plaintiff seeks unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The parties reached a settlement of this lawsuit and the Doyle lawsuit referenced below in November 2018. The settlement agreement is subject to court approval. The financial terms of the settlement call for SCI Direct to pay a total of $2.5 million in relation to both the Romano and Doyle lawsuits.
James Doyle, individually and on behalf of all others similarly situated v. SCI Direct, Inc., et al; Case No. 2:18-cv-05859 in the United States District Court Central District of California, removed from Case No. BC705666; in the Superior Court of California for the County of Los Angeles. This lawsuit was filed in May 2018, against an SCI subsidiary, by the same attorneys who filed the Romano case described above, and alleges causes of action and seeks damages and relief similar to those in the Romano case. The parties reached a settlement of this lawsuit and the Romano lawsuit referenced above in November 2018. The settlement agreement is subject to court approval. The financial terms of the settlement call for SCI Direct to pay a total of $2.5 million collectively for the Romano and Doyle lawsuits.
Felicia Horton, an individual and on behalf of other aggrieved employees v. SCI Direct, Inc., et al; Case No. 37-2016-00039356-CU-OE-CTL; in the Superior Court of California for the County of San Diego. This lawsuit was filed in November 2016, against SCI subsidiaries, on behalf of the plaintiff who worked as an independent sales representative of our

23


subsidiary in California. In addition, this lawsuit asserts claims under PAGA on behalf of other similarly situated California persons. The lawsuit alleges causes of action and seeks damages and relief similar to those in the Romano case described above. The attorneys in the Horton case have also filed an additional lawsuit, against SCI subsidiaries, alleging individual and PAGA claims similar to those alleged in the Horton case. The additional lawsuits are styled Jandy Quismundo v. SCI Direct, Inc., et al; Case No. 37-2017-00031825-CU-OE-CTL; in the Superior Court of California for the County of San Diego, and Jaime Kallweit v. SCI Direct, Inc., et al; Case No. 37-2017-00037186-CU-OE-CTL; in the Superior Court for the State of California for the County of San Diego. In addition to the wage and hour and PAGA claims described above, Horton alleges claims for sexual harassment and wrongful discharge. After a trial, the judge issued a preliminary statement of decision on April 19, 2019, awarding approximately $0.3 million related to the aforementioned claims above.
Claims Regarding Acquisition of Stewart Enterprises. We are involved in the following lawsuit.
Karen Moulton, Individually and on behalf of all others similarly situated v. Stewart Enterprises, Inc., Service Corporation International and others ; Case No. 2013-5636; in the Civil District Court Parish of New Orleans, Louisiana. This case was filed as a class action in June 2013 against SCI and our subsidiary in connection with SCI's acquisition of Stewart Enterprises, Inc. The plaintiffs allege that SCI aided and abetted breaches of fiduciary duties by Stewart Enterprises and its board of directors in negotiating the combination of Stewart Enterprises with a subsidiary of SCI. The plaintiffs seek damages concerning the combination. We filed exceptions to the plaintiffs’ complaint that were granted in June 2014. Thus, subject to appeals, SCI will no longer be party to the suit. The case has continued against our subsidiary Stewart Enterprises and its former individual directors. However, in October 2016, the court entered a judgment dismissing all of plaintiffs’ claims. Plaintiffs have appealed the dismissal. Given the nature of this lawsuit, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
Operational Claims. We are named a defendant in various lawsuits alleging operational claims, including but not limited to the Bernstein and Hood lawsuits described below.
Caroline Bernstein, on behalf of herself and Marla Urofsky on behalf of Rhea Schwartz, and both on behalf of all others similarly situated v. SCI Pennsylvania Funeral Services, Inc. and Service Corporation International, Case No. 2:17-cv-04960-GAM; in the United States District Court Eastern District of Pennsylvania. This case was filed in November 2017 as a purported national or alternatively as a Pennsylvania class action regarding our Forest Hills/Shalom Memorial Park in Huntingdon Valley, Pennsylvania and our Roosevelt Memorial Park Cemetery in Trevose, Pennsylvania. Plaintiffs allege wrongful burial and sales practices. Plaintiffs seek compensatory, consequential and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. Given the nature of this lawsuit, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
Shelley T. Hood v. Pine Crest Funeral Home and Cemetery A/K/A Pine Crest Funeral Home, Service Corporation International, and others; Case No. 02-CV-2017-900635.00; in the Circuit Court of Mobile County, Alabama. This case was filed in March 2017. Plaintiff alleges she contracted with Pine Crest Funeral Home to cremate her mother’s remains on March 25, 2011. Plaintiff further alleges that the cremated remains could not be located when she contacted Pine Crest Funeral Home to take possession of the cremated remains in October 2015. Plaintiff seeks compensatory and punitive damages. The plaintiff was awarded compensatory and punitive damages after a jury trial. We have filed post-trial motions seeking to set aside or reduce the award. We do not believe there is any loss in excess of the amount accrued for this litigation.
Unclaimed Property Audit. We are involved in the following matter.
We received notices from a third party auditor representing unclaimed property departments of certain states regarding preneed funeral and cemetery contracts that were not funded by the purchase and assignment of the proceeds of insurance policies. The auditor claims that we are subject to the laws of those states concerning escheatment of unclaimed funds. The auditor seeks escheatment of funds from the portion of such contracts for which it claims that we will probably not be required to provide services or merchandise in the future. No actual audits have commenced at this time. Given the nature of this lawsuit, we are unable to reasonably estimate the possible loss or ranges of loss, if any.
We intend to vigorously defend all of the above matters; however, an adverse decision in one or more of such matters could have a material effect on us, our financial condition, results of operations, and cash flows.
Other Potential Contingencies
In October of 2018, we received a letter from the Illinois Office of the Comptroller claiming that our subsidiary improperly withdrew a total of $13.6 million from perpetual care trusts covering 24 of our cemeteries in Illinois. We believe these withdrawals were entirely proper for the ongoing care of those cemeteries under Illinois law. We intend to vigorously defend the withdrawal of these funds.


24


11. Earnings Per Share
Basic earnings per common share (EPS) excludes dilution and is computed by dividing Net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common shares that then shared in our earnings.
A reconciliation of the numerators and denominators of the basic and diluted EPS computations is presented below:
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands, except per share amounts)
Amounts attributable to common stockholders:
 
 
 
Net income:
 
 
 
Net income — basic
$
79,323

 
$
81,988

After tax interest on convertible debt

 
15

Net income — diluted
$
79,323

 
$
82,003

Weighted average shares (denominator):
 
 
 
Weighted average shares — basic
181,696

 
185,130

Stock options
3,562

 
4,522

Restricted stock units
59

 
150

Convertible debt

 
121

Weighted average shares — diluted
185,317

 
189,923

Net income per share:
 
 
 
Basic
$
0.44

 
$
0.44

Diluted
$
0.43

 
$
0.43

The computation of diluted EPS excludes outstanding stock options and restricted share units in certain periods in which the inclusion of such equity awards would be anti-dilutive in the periods presented. Total equity awards not included in the computation of dilutive EPS are as follows (in shares):
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Antidilutive options

 
577

Antidilutive restricted stock units
37

 

12. Divestiture-Related Activities
As divestitures occur in the normal course of business, gains or losses on the sale of such assets are recognized in the income statement line item Losses (gains) on divestitures and impairment charges, net, which consist of the following:
 
Three Months Ended
 
March 31,
 
2019
 
2018
 
(In thousands)
Gains on divestitures, net
$
546

 
$
1,276

Impairment losses
(2,424
)
 
(794
)
(Losses) gains on divestitures and impairment charges, net
$
(1,878
)
 
$
482




25


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The Company
We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries unequaled in geographic scale and reach. At March 31, 2019, we operated 1,479 funeral service locations and 482 cemeteries (including 287 funeral service/cemetery combination locations), which are geographically diversified across 44 states, eight Canadian provinces, the District of Columbia, and Puerto Rico.
We are well known for our Dignity Memorial® brand, North America's first transcontinental brand of deathcare products and services. Our other brands are Dignity Planning™, National Cremation Society®, Advantage® Funeral and Cremation Services, Funeraria del Angel™, Making Everlasting Memories®, Neptune Society™, and Trident Society™. Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.
Our financial position is enhanced by our approximately $11.4 billion backlog of future revenue from both trust and insurance-funded preneed sales at March 31, 2019. Preneed selling provides us with a current opportunity to lock-in future market share while deterring the customer from going to a competitor in the future. We also believe it adds to the stability and predictability of our revenue and cash flows. While revenue on the majority of preneed merchandise and service sales is deferred until the time of need, sales of preneed cemetery property provide opportunities for full current revenue recognition to the extent that the property is developed and available for use.
We have adequate liquidity and a favorable debt maturity profile, which allows us to return capital to shareholders through share repurchases and dividends.
Factors affecting our operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed revenue. The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average revenue for cremations is lower than that for traditional burials. To further enhance revenue opportunities, we continue to focus on our cremation customers' preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers.  We believe the presentation of these additional merchandise and services through our customer-facing technology enhances our customers' experience by reducing administrative burdens and allowing them to visualize the product offerings and services, which will help drive increases in the average revenue for a cremation in future periods.
For further discussion of our key operating metrics, see our Results of Operations and Cash Flow sections below.
Financial Condition, Liquidity and Capital Resources
Capital Allocation Considerations
We rely on cash flow from operations as a significant source of liquidity. Our cash flow from operating activities provided $184.9 million in the first three months of 2019. We have $692.1 million in borrowing capacity under our Bank Credit Facility.
Our bank credit agreement requires us to maintain certain leverage and interest coverage ratios. As of March 31, 2019, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of March 31, 2019 are as follows:
 
Per Credit Agreement
 
Actual
Leverage ratio
4.50 (Max)
 
3.83
Interest coverage ratio
3.00 (Min)
 
4.90

We believe we have the financial strength and flexibility to reward shareholders through share repurchases and dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth.
We believe that our unencumbered cash on hand, future operating cash flows, and the available capacity under our bank credit agreement will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations. Due to cash balances residing in Canada and minimum operating cash requirements, a portion of our cash on hand is encumbered.
We consistently evaluate the best uses of our cash flow that will yield the highest value and return on capital. Our capital deployment strategy is prioritized as follows:
Investing in Acquisitions and Building New Funeral Service Locations. We intend to make acquisitions of funeral service locations and cemeteries when pricing and terms are favorable. We expect an acquisition investment to earn an after-tax cash return that is in excess of our weighted average cost of capital with room for execution risk. We will also invest in the

26


construction of additional funeral service locations. We target businesses with favorable customer categories and/or where we can achieve additional economies of scale.
Paying Dividends. Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.18 per common share in 2019. We target a payout ratio of 30% to 40% of earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter upon review of our financial performance.
Repurchasing Shares. Absent a strategic acquisition opportunity, we believe share repurchases are attractive at the appropriate price. We in