UNITED STATES SECURITIES AND EXCHANGE COMMISSION

~~WASHINGTON, D. C.~~Washington, D.C. 20549

~~FORM~~Form 10-Q



☒		QUARTERLY REPORT PURSUANT TO SECTION 13 OR ~~15(D)~~15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarterly period ended	~~June 30, 2019~~

MARCH 31, 2020
			OR
☐		TRANSITION REPORT PURSUANT TO SECTION 13 OR ~~15(D)~~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.~~I.R.S. employer identification ~~number)~~
		no.)
1929 Allen Parkway			~~77019~~
Houston			~~(Zip code)~~
Texas		~~(713)~~		~~522-5141~~	77019
(Address of principal executive offices)		(~~Registrant’s telephone number, including area~~Zip code)

	~~None~~
~~(Former name, former address, or former fiscal year, if changed since last report)~~

Registrant’s telephone number, including area code: (713)522-5141

Securities registered pursuant to Section 12(b) of the Act:



Title of Each Class	Trading ~~Symbol(s)~~Symbol (s)	Name of Each Exchange on Which Registered
Common Stock ($1 par value)	SCI	New York Stock Exchange

~~Indicate by check mark whether the registrant (1) has filed all reports required~~Securities registered pursuant to ~~be filed by~~ Section ~~13 or 15(d)~~12(g) 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~~ ☒No☐Act: None

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~~☒ No☐

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):



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	¨
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	¨



☒ 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	☐ ¨	Non-accelerated filer	☐¨	Smaller reporting company	☐	Emerging growth 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.	¨
Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the act).	~~(Do not check if smaller reporting company)~~Yes	☐	No	þ

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. ☐

~~Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).~~ ~~Yes~~☐No☒

The number of shares outstanding of the registrant’s common stock as of ~~July 26, 2019~~April 29, 2020 was ~~182,360,782~~178,143,819 (net of treasury shares).

~~SERVICE CORPORATION INTERNATIONAL~~

~~INDEX~~



SERVICE CORPORATION INTERNATIONAL INDEX

		Page
~~Glossary~~ GLOSSARY		3
~~Part~~PART I. ~~Financial Information~~FINANCIAL INFORMATION		5
Item 1.	Financial Statements	5
	Unaudited Condensed Consolidated Statement of Operations —- Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	5
	Unaudited Condensed Consolidated Statement of Comprehensive Income —- Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	6
	Unaudited Condensed Consolidated Balance Sheet ~~— June 30, 2019~~- March 31, 2020 and December 31, ~~2018~~2019	7
	Unaudited Condensed Consolidated Statement of Cash Flows ~~— Six~~- Three Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	8
	Unaudited Condensed Consolidated Statement of Equity —- Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	9
	Notes to ~~Unaudited Condensed~~ Consolidated Financial Statements	10
	1. Nature of Operations	10
	2. Summary of Significant Accounting Policies	10
	3. Preneed Activities	15
	4. Income Taxes	20
	5. Debt	21
	6. Credit Risk and Fair Value of Financial Instruments	22
	7. Equity	23
	8. Segment Reporting	23
	9. Commitments and Contingencies	24
	10. Earnings Per Share	27
	11. Acquisitions and Divestiture-Related Activities	27
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	28
	The Company	28
	Financial Condition, Liquidity, and Capital Resources	2829
	~~Results~~Result of Operations - Three ~~and Six~~ Months Ended ~~June 30,~~March 31, 2020 and 2019 ~~and 2018~~	3435
	Critical Accounting Policies	38
	Cautionary Statement on Forward-Looking Statements	38
Item 3.	Quantitative and Qualitative Disclosures ~~About~~about Market Risk	39
Item 4.	Controls and Procedures	4140
~~Part II. Other Information~~PART II. OTHER INFORMATION		41
Item 1.	Legal Proceedings	41
Item 1A.	Risk Factors	41
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	41
Item 3.	Defaults Upon Senior Securities	4142
Item 4.	Mine Safety Disclosures	4142
Item 5.	Other Information	42
Item 6.	Exhibits and Financial Statement Schedules	42
~~Signature~~ SIGNATURE		4243

~~GLOSSARY~~

2 Service Corporation International

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~~an 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.

FORM 10-Q 3

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).

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. Management published a white paper on the corporate website for further understanding of accounting for preneed sales. You can view the white paper at http://investors.sci-corp.com under Featured Documents.

4 Service Corporation International

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

~~SERVICE CORPORATION INTERNATIONAL~~Service Corporation International

~~CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS~~

~~(UNAUDITED)~~

Condensed Consolidated Statement of Operations (Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
(In thousands, except per share amounts)
Revenue:
Property and merchandise revenue $ 415,492
$ 397,600
$ 796,701
$ 765,814
Service revenue 339,090
334,450
694,461
712,548
Other revenue 57,990
64,042
119,622
112,212
Total revenue 812,572
796,092
1,610,784
1,590,574
Costs and expenses:

Cost of property and merchandise (213,635 ) (209,925 ) (411,529 ) (397,648 )
Cost of service (193,378 ) (188,293 ) (384,191 ) (379,141 )
Overhead and other expenses (214,413 ) (209,747 ) (432,084 ) (429,896 )
Total costs and expenses (621,426 ) (607,965 ) (1,227,804 ) (1,206,685 )
Operating profit 191,146

188,127
382,980
383,889
General and administrative expenses (29,370 )
(31,136 )
(71,900 )
(65,920 )
(Losses) gains on divestitures and impairment charges, net (11,823 )
6,865

(13,701 )
7,347
Hurricane recoveries (expenses), net 152
(1,902 ) (296 ) 330
Operating income 150,105

161,954
297,083
325,646
Interest expense (47,317 )
(44,519 )
(94,707 )
(88,095 )
Loss on early extinguishment of debt, net (7,579 )
—

(7,579 )
(10,131 )
Other income, net 874

1,880

1,594

2,264
Income before income taxes 96,083

119,315
196,391
229,684
Provision for income taxes (23,570 )
(16,034 )
(44,665 )
(44,355 )
Net income 72,513

103,281
151,726
185,329
Net income attributable to noncontrolling interests (184 )
(42 )
(74 )
(102 )
Net income attributable to common stockholders $ 72,329

$ 103,239
$ 151,652

$ 185,227
Basic earnings per share:
Net income attributable to common stockholders $ 0.40

$ 0.57

$ 0.83

$ 1.01
Basic weighted average number of shares 182,369

182,637

182,048

183,877
Diluted earnings per share:

Net income attributable to common stockholders $ 0.39

$ 0.55

$ 0.82

$ 0.98
Diluted weighted average number of shares 185,690

187,188

185,517

188,547



	Three Months Ended March 31,
	2020			2019
	(in thousands, except per share amounts)
Revenue
Property and merchandise revenue	$	377,883		$	381,209
Service revenue	367,528			355,371
Other revenue	57,554			61,632
Total revenue	802,965			798,212
Costs of revenue
Cost of property and merchandise	(196,448		)	(197,894		)
Cost of service	(197,524		)	(190,813		)
Overhead and other expenses	(229,949		)	(217,671		)
Costs of revenue	(623,921		)	(606,378		)
Gross profit	179,044			191,834
Corporate general and administrative expenses	(31,813		)	(42,978		)
Gains (losses) on divestitures and impairment charges, net	4,545			(1,878		)
Operating income	151,776			146,978
Interest expense	(44,351		)	(47,390		)
Loss on early extinguishment of debt, net	(139		)	—
Other (expense) income, net	(1,247		)	720
Income before income taxes	106,039			100,308
Provision for income taxes	(24,038		)	(21,095		)
Net income	82,001			79,213
Net (income) loss attributable to noncontrolling interests	(60		)	110
Net income attributable to common stockholders	$	81,941		$	79,323
Basic earnings per share:
Net income attributable to common stockholders	$	0.45		$	0.44
Basic weighted average number of shares	180,854			181,696
Diluted earnings per share:
Net income attributable to common stockholders	$	0.45		$	0.43
Diluted weighted average number of shares	183,585			185,317

(See notes to unaudited condensed consolidated financial statements)

~~SERVICE CORPORATION INTERNATIONAL~~

FORM 10-Q 5

~~CONDENSED CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME~~

~~(UNAUDITED)~~

PART I

Service Corporation International

Condensed Consolidated Statement of Comprehensive Income (Unaudited)



	Three Months Ended March 31,
	2020			2019
	(In thousands)
Net income	$	82,001		$	79,213
Other comprehensive income:
Foreign currency translation adjustments	(31,202		)	7,401
Total comprehensive income	50,799			86,614
Total comprehensive income attributable to noncontrolling interests	(58		)	(40		)
Total comprehensive income attributable to common stockholders	$	50,741		$	86,574

(See notes to unaudited condensed consolidated financial statements)

6 Service Corporation International

PART I

Service Corporation International

Condensed Consolidated Balance Sheet (Unaudited)



	March 31, 2020			December 31, 2019
	(In thousands, except share amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	176,261		$	186,276
Receivables, net of reserves of $5,485 and $2,262, respectively	75,064			81,671
Inventories	27,891			25,118
Other	80,252			80,488
Total current assets	359,468			373,553
Preneed receivables, net of reserves of $15,224 and $41,142, respectively, and trust investments	4,122,025			4,789,562
Cemetery property	1,879,960			1,873,602
Property and equipment, net	2,057,893			2,065,433
Goodwill	1,861,454			1,864,223
Deferred charges and other assets, net of reserves of $8,867 and $8,374, respectively	1,016,806			1,029,908
Cemetery perpetual care trust investments	1,417,652			1,681,149
Total assets	$	12,715,258		$	13,677,430

LIABILITIES & EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	474,994		$	478,545
Current maturities of long-term debt	85,885			69,821
Income taxes payable	26,415			8,353
Total current liabilities	587,294			556,719
Long-term debt	3,535,754			3,513,530
Deferred revenue, net	1,478,520			1,467,103
Deferred tax liability	431,010			421,482
Other liabilities	350,614			378,074
Deferred receipts held in trust	3,165,686			3,839,376
Care trusts’ corpus	1,415,287			1,677,891
Commitments and contingencies (Note 9)
Equity:
Common stock, $1 per share par value, 500,000,000 shares authorized, 186,057,728 and 185,100,789 shares issued, respectively, and 179,241,180 and 181,184,963 shares outstanding, respectively	179,241			181,185
Capital in excess of par value	1,010,639			1,010,361
Retained earnings	562,549			601,903
Accumulated other comprehensive (deficit) income	(1,336		)	29,864
Total common stockholders’ equity	1,751,093			1,823,313
Noncontrolling interests	—			(58		)
Total equity	1,751,093			1,823,255
Total liabilities and equity	$	12,715,258		$	13,677,430

(See notes to unaudited condensed consolidated financial statements)

FORM 10-Q 7

PART I

Service Corporation International

Condensed Consolidated Statement of Cash Flows (Unaudited)



	Three Months Ended March 31,
	2020			2019
	(In thousands)
Cash flows from operating activities:
Net income	$	82,001		$	79,213
Adjustments to reconcile net income to net cash provided by operating activities:
Loss on early extinguishment of debt, net	139			—
Depreciation and amortization	37,912			37,126
Amortization of intangibles	5,257			7,066
Amortization of cemetery property	13,924			15,723
Amortization of loan costs	1,276			1,620
Provision for expected credit losses	3,197			1,917
Provision for deferred income taxes	4,233			2,492
(Gains) losses on divestitures and impairment charges, net	(4,545		)	1,878
Share-based compensation	3,406			4,568
Change in assets and liabilities, net of effects from acquisitions and dispositions:
Decrease (increase) in receivables	2,460			(8,716		)
Decrease (increase) in other assets	10,549			(13,180		)
(Decrease) increase in payables and other liabilities	(4,832		)	29,545
Effect of preneed sales production and maturities:
Decrease in preneed receivables, net and trust investments	19,134			7,983
Increase in deferred revenue, net	12,908			30,392
Decrease in deferred receipts held in trust	(7,027		)	(12,731		)
Net cash provided by operating activities	179,992			184,896
Cash flows from investing activities:
Capital expenditures	(52,275		)	(51,573		)
Business acquisitions, net of cash acquired	(26,349		)	(13,882		)
Real estate acquisitions	(2,114		)	(5,358		)
Proceeds from divestitures and sales of property and equipment	11,324			7,764
Payments for Company-owned life insurance policies	(3,770		)	(7,891		)
Proceeds from Company-owned life insurance policies	3,519			—
Net cash used in investing activities	(69,665		)	(70,940		)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	75,000			15,000
Scheduled payments of debt	(8,222		)	(8,535		)
Early payments of debt	(25,792		)	(135,000		)
Principal payments on finance leases	(10,254		)	(10,657		)
Proceeds from exercise of stock options	15,126			15,962
Purchase of Company common stock	(123,102		)	(14,542		)
Payments of dividends	(34,414		)	(32,820		)
Bank overdrafts and other	1,575			7,906
Net cash used in financing activities	(110,083		)	(162,686		)
Effect of foreign currency	(8,249		)	1,540
Net decrease in cash, cash equivalents, and restricted cash	(8,005		)	(47,190		)
Cash, cash equivalents, and restricted cash at beginning of period	242,620			207,584
Cash, cash equivalents, and restricted cash at end of period	$	234,615		$	160,394

(See notes to unaudited condensed consolidated financial statements)

8 Service Corporation International

PART I

Service Corporation International

Condensed Consolidated Statement of Equity (Unaudited)

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
(In thousands)
Net income $ 72,513
$ 103,281
$ 151,726
$ 185,329
Other comprehensive income:
Foreign currency translation adjustments 6,998
(5,909 ) 14,399
(15,501 )
Total comprehensive income 79,511
97,372
166,125
169,828
Total comprehensive income attributable to noncontrolling interests (36 ) (41 ) (76 ) (98 )
Total comprehensive income attributable to common stockholders $ 79,475
$ 97,331
$ 166,049
$ 169,730



	Common Stock		Treasury Stock, Par Value			Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income (Deficit)		Noncontrolling Interest			Total
	(In thousands, except per share amounts)
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 ($.18 per share)	—		—			—			(32,820		)	—		—			(32,820		)
Stock option exercises	950		—			15,012			—			—		—			15,962
Restricted stock awards, net of forfeitures	126		—			(126		)	—			—		—			—
Employee share-based compensation earned	—		—			4,568			—			—		—			4,568
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



	Common Stock		Treasury Stock, Par Value			Capital in Excess of Par Value			Retained Earnings			Accumulated Other Comprehensive Income (Deficit)			Noncontrolling Interest			Total
	(In thousands, except per share amounts)
Balance at December 31, 2019	$	185,101	$	(3,916	)	$	1,010,361		$	601,903		$	29,864		$	(58	)	$	1,823,255
Cumulative effect of accounting changes	—		—			—			17,118			—			—			17,118
Comprehensive income	—		—			—			81,941			(31,200		)	58			50,799
Dividends declared on common stock ($.19 per share)	—		—			—			(34,414		)	—			—			(34,414		)
Stock option exercises	789		—			14,337			—			—			—			15,126
Restricted stock awards and units, net of forfeitures	168		—			(168		)	—			—			—			—
Employee share-based compensation earned	—		—			3,406			—			—			—			3,406
Purchase of Company common stock	—		(2,901		)	(16,202		)	(103,999		)	—			—			(123,102		)
Other	—		—			(1,095		)	—			—			—			(1,095		)
Balance at March 31, 2020	$	186,058	$	(6,817	)	$	1,010,639		$	562,549		$	(1,336	)	$	—		$	1,751,093

(See notes to unaudited condensed consolidated financial statements)

FORM 10-Q 9

~~SERVICE CORPORATION INTERNATIONAL~~

~~CONDENSED CONSOLIDATED BALANCE SHEET~~

~~(UNAUDITED)~~

June 30, 2019 December 31, 2018
(In thousands, except share amounts)
ASSETS
Current assets:
Cash and cash equivalents $ 243,684
$ 198,850
Receivables, net 82,261
73,825
Inventories 25,669
24,950
Other 42,603
33,607
Total current assets 394,217
331,232
Preneed receivables, net and trust investments 4,613,523
4,271,392
Cemetery property 1,834,745
1,837,464
Property and equipment, net 2,027,417
1,977,364
Goodwill 1,846,627
1,863,842
Deferred charges and other assets 1,019,105
934,151
Cemetery perpetual care trust investments 1,624,709
1,477,798
Total assets $ 13,360,343
$ 12,693,243

LIABILITIES & EQUITY
Current liabilities:
Accounts payable and accrued liabilities $ 447,388

$ 479,768
Current maturities of long-term debt 167,084

69,896
Income taxes payable —

5,936
Total current liabilities 614,472

555,600
Long-term debt 3,464,902

3,532,182
Deferred revenue, net 1,444,564

1,418,814
Deferred tax liability 404,230

404,627
Other liabilities 370,507

297,302
Deferred receipts held in trust 3,693,355

3,371,738
Care trusts’ corpus 1,624,097

1,471,165
Commitments and contingencies (Note 10)

Equity:

Common stock, $1 per share par value, 500,000,000 shares authorized, 186,411,295 and 184,720,582 shares issued, respectively, and 182,468,970 and 181,470,582 shares outstanding, respectively 182,469

181,471
Capital in excess of par value 998,794

972,710
Retained earnings 535,173

474,327
Accumulated other comprehensive income 27,792

13,395
Total common stockholders’ equity 1,744,228

1,641,903
Noncontrolling interests (12 )
(88 )
Total equity 1,744,216

1,641,815
Total liabilities and equity $ 13,360,343

$ 12,693,243

~~(See notes to unaudited condensed consolidated financial statements)~~

~~SERVICE CORPORATION INTERNATIONAL~~

~~CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS~~

~~(UNAUDITED)~~

PART I

Six Months Ended
June 30,
2019 2018
(In thousands)
Cash flows from operating activities:

Net income $ 151,726

$ 185,329
Adjustments to reconcile net income to net cash provided by operating activities:

Loss on early extinguishment of debt 7,579

10,131
Depreciation and amortization 74,244

78,069
Amortization of intangibles 13,653

13,645
Amortization of cemetery property 33,523

29,813
Amortization of loan costs 2,989

3,017
Provision for doubtful accounts 4,273

4,494
Provision for deferred income taxes 6,090

22,011
Losses (gains) on divestitures and impairment charges, net 13,701

(7,347 )
Gain on sale of investments —
(2,636 )
Share-based compensation 8,013

7,544
Change in assets and liabilities, net of effects from acquisitions and divestitures:

(Increase) decrease in receivables (11,608 )
965
Increase in other assets (18,643 )
(10,635 )
Decrease in payables and other liabilities (55,148 )
(37,817 )
Effect of preneed sales production and maturities:

Increase in preneed receivables, net and trust investments (1,594 )
(23,494 )
Increase in deferred revenue, net 55,441

56,342
Decrease in deferred receipts held in trust (21,346 )
(14,055 )
Net cash provided by operating activities 262,893

315,376
Cash flows from investing activities:

Capital expenditures (112,714 )
(102,890 )
Acquisitions, net of cash acquired (32,755 )
(167,622 )
Proceeds from divestitures and sales of property and equipment 11,380

18,305
Proceeds from sale of investments —
2,900
Payments on Company-owned life insurance policies (8,586 ) (11,733 )
Proceeds from Company-owned life insurance policies —
2,810
Other —
(14,525 )
Net cash used in investing activities (142,675 )
(272,755 )
Cash flows from financing activities:

Proceeds from issuance of long-term debt 854,263

370,000
Debt issuance costs (15,536 )
—
Scheduled payments of debt (8,712 )
(8,631 )
Early payments of debt (828,121 )
(259,590 )
Principal payments on finance leases (21,807 )
(19,270 )
Proceeds from exercise of stock options 23,101

7,302
Purchase of Company common stock (29,574 )
(228,866 )
Payments of dividends (65,691 )
(62,241 )
Bank overdrafts and other 12,307

(8,820 )
Net cash used in financing activities (79,770 )
(210,116 )
Effect of foreign currency on cash, cash equivalents, and restricted cash 3,113

(2,133 )
Net increase (decrease) in cash, cash equivalents, and restricted cash 43,561

(169,628 )
Cash, cash equivalents, and restricted cash at beginning of period 207,584

340,601
Cash, cash equivalents, and restricted cash at end of period $ 251,145

$ 170,973

~~(See notes to unaudited condensed consolidated financial statements)~~

~~SERVICE CORPORATION INTERNATIONAL~~

~~CONDENSED CONSOLIDATED STATEMENT OF EQUITY~~

~~(UNAUDITED)~~

~~(In thousands)~~

Common
Stock
Treasury Stock
Capital in
Excess of
Par Value

Retained Earnings (Accumulated
Deficit)

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
Comprehensive income —
—
—
72,329
7,146
36
79,511
Dividends declared on common stock ($0.18 per share) —
—
—
(32,871 ) —
—
(32,871 )
Employee share-based compensation earned —
—
3,445
—
—
—
3,445
Stock option exercises 513
—
6,626
—
—
—
7,139
Purchase of Company common stock —
(337 ) (1,832 ) (12,863 ) —
—
(15,032 )
Other 42
—
1,577
—
—
—
1,619
Balance at June 30, 2019 $ 186,411
$ (3,942 ) $ 998,794
$ 535,173
$ 27,792
$ (12 ) $ 1,744,216

Service Corporation International

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
Comprehensive income —
—
—
103,239
(5,908 ) 41
97,372
Dividends declared on common stock ($0.17 per share) —
—
—
(30,893 ) —
—
(30,893 )
Employee share-based compensation earned —
—
3,845
—
—
—
3,845
Stock option exercises 129
—
2,184
—
—
—
2,313
Restricted stock awards, net of forfeitures 15
—
(15 ) —
—
—
—
Purchase of Company common stock —
(2,971 ) (15,557 ) (91,541 ) —
—
(110,069 )
Other 53
—
1,927
—
—
—
1,980
Balance at June 30, 2018 $ 192,625
$ (11,387 ) $ 954,128
$ 314,669
$ 26,217
$ 145
$ 1,476,397

~~(See notes~~Notes to ~~unaudited condensed consolidated financial statements)~~

~~SERVICE CORPORATION INTERNATIONAL~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~Unaudited Condensed Consolidated Financial Statements


1.	~~Nature of Operations~~

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 unaudited condensed consolidated 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,~~2019, 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 2020".

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~~that may affect the reported amounts of assets and liabilities and ~~disclosures~~disclosure 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.~~period. 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.

10 Service Corporation International

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 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~~PART I

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

We consider all highly liquid investments with an original maturity of three months or less to be cash equivalents. The carrying amounts of our cash and cash equivalents approximate fair value due to the short-term nature of these instruments.

The components of cash, cash equivalents, and restricted cash ~~at June 30, 2019 and December 31, 2018 are~~were as follows:

June 30, 2019 December 31, 2018
(In thousands)
Cash and cash equivalents $ 243,684
$ 198,850
Restricted cash⁽¹⁾:

Included in Other current assets
5,716
7,007
Included in Deferred charges and other assets
1,745
1,727
Total restricted cash 7,461
8,734
Total cash, cash equivalents, and restricted cash $ 251,145
$ 207,584



	March 31, 2020		December 31, 2019
	(In thousands)
Cash and cash equivalents	$	176,261	$	186,276
Restricted cash ⁽¹⁾:
Included in Other current assets	56,308		54,293
Included in Deferred charges and other assets, net	2,046		2,051
Total restricted cash	58,354		56,344
Total cash, cash equivalents, and restricted cash	$	234,615	$	242,620


⁽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~~Receivables, net

The components of Receivables, net in our unaudited Condensed Consolidated Balance Sheetwere as follows:



	March 31, 2020
	Atneed Funeral			Atneed Cemetery			Miscellaneous			Current Portion of Notes			Total
	(In thousands)
Receivables	$	40,644		$	20,601		$	17,478		$	1,826		$	80,549
Reserve for credit losses	(2,877		)	(1,617		)	(367		)	(624		)	(5,485		)
Receivables, net	$	37,767		$	18,984		$	17,111		$	1,202		$	75,064



	December 31, 2019
	Atneed Funeral			Atneed Cemetery			Miscellaneous		Current Portion of Notes		Total
	(In thousands)
Receivables	$	41,370		$	20,855		$	19,943	$	1,765	$	83,933
Allowance for doubtful accounts	(1,899		)	(363		)	—		—		(2,262		)
Receivables, net	$	39,471		$	20,492		$	19,943	$	1,765	$	81,671

Additionally, included in Deferred charges and ~~equipment,~~other assets, netwere long-term miscellaneous receivables, net and notes receivable, net as follows:

~~During~~



	March 31, 2020			December 31, 2019
	(In thousands)
Notes receivable	$	14,203		$	14,997
Reserve for credit losses	(7,926		)	—
Allowance for doubtful accounts	—			(8,374		)
Notes receivable, net	$	6,277		$	6,623

Long-term miscellaneous receivables	$	7,560		$	7,287
Reserve for credit losses	(941		)	—
Long-term miscellaneous receivables, net	$	6,619		$	7,287

FORM 10-Q 11

PART I

Our atneed trade receivables primarily consist of amounts due for funeral and cemetery services already performed. We provide reserves for credit losses for our receivables. These reserves are based on an analysis of historical trends of collection activity adjusted for current conditions and forecasts. These estimates are impacted by a number of factors, including changes in the ~~fourth~~economy and demographic or competitive changes in our areas of operation. In the first quarter of ~~2018, based on a review of our historical usage patterns for similar assets,~~2020, we increased our ~~estimate~~reserve for credit losses on trade and miscellaneous receivables as a result of the ~~remaining useful life~~economic impact of ~~certain building improvements~~the COVID-19 pandemic (COVID-19). Cemetery preneed receivables are collateralized by cemetery property to the extent of the fair value of the property. Prior to adoption of the guidance on credit losses for financial instruments on January 1, 2020, we provided allowances for doubtful accounts on our receivables based on an analysis of historical trends of collection activity.

Payment on atneed contracts is generally due at the time the merchandise is delivered or the services are performed. We also have preneed receivables, as disclosed in Note 3, for which payment generally occurs prior to our fulfillment of the performance obligations. Our preneed contracts may also have extended payment terms with associated financing charges. We do not accrue interest on preneed receivables if they are not paid in accordance with the contractual payment terms given the nature of our merchandise and ~~equipment~~services, the nature of our contracts with customers, and the timing of the delivery of our services. Generally, receivables are considered past due after thirty days. We do not consider preneed funeral receivables to be past due until the contract converts into an atneed contract at which time the preneed receivable is paid or reclassified as a trade receivable with payment terms of less than thirty days. Collections are generally managed by the locations or third party agencies acting on behalf of the locations, until a receivable is one ~~to three years. For~~hundred eighty days delinquent, at which time trade receivables are fully reserved.

The following table summarizes the activity in our reserve for credit losses by portfolio segment, excluding preneed receivables which are presented in Note 3, for the three ~~and six~~ months ended ~~June 30, 2019,~~March 31, 2020:



	January 1, 2020			Provision for Expected Credit Losses			Write Offs		Recoveries			Effect of Foreign Currency		March 31, 2020
	(In thousands)
Trade receivables:
Funeral	$	(2,690	)	$	(679	)	$	993	$	(523	)	$	22	$	(2,877	)
Cemetery	(1,424		)	(478		)	214		—			71		(1,617		)
Total reserve for credit losses on trade receivables	$	(4,114	)	$	(1,157	)	$	1,207	$	(523	)	$	93	$	(4,494	)

Miscellaneous receivables:
Current	$	(203	)	$	(203	)	$	—	$	—		$	39	$	(367	)
Long-term	(715		)	(226		)	—		—			—		(941		)
Total reserve for credit losses on miscellaneous receivables	$	(918	)	$	(429	)	$	—	$	—		$	39	$	(1,308	)

Notes receivable	$	(9,031	)	$	33		$	448	$	—		$	—	$	(8,550	)

At March 31, 2020, the amortized cost basis of our miscellaneous and notes receivables by year of origination was as follows:



	2020		2019		2018		2017		2016		Prior		Revolving Line of Credit		Total
	(In thousands)
Miscellaneous receivables:
Current	$	15,048	$	1,609	$	484	$	229	$	97	$	11	$	—	$	17,478
Long-term	665		3,609		1,854		974		412		46		—		7,560
Total miscellaneous receivables	$	15,713	$	5,218	$	2,338	$	1,203	$	509	$	57	$	—	$	25,038

Notes receivable	$	—	$	—	$	254	$	—	$	98	$	7,030	$	8,647	$	16,029

12 Service Corporation International

PART I

At March 31, 2020, the payment status of our miscellaneous and notes receivables was as follows:



	Past Due
	<30 Days		30-90 Days		90-180 Days		>180 Days		Total		Current		Total
	(In thousands)
Miscellaneous receivables:
Current	$	214	$	41	$	16	$	74	$	345	$	17,133	$	17,478
Long-term	—		—		—		—		—		7,560		7,560
Total miscellaneous receivables	$	214	$	41	$	16	$	74	$	345	$	24,693	$	25,038

Notes receivable	$	—	$	—	$	—	$	1,214	$	1,214	$	14,815	$	16,029

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. Due to limitations on gatherings imposed to mitigate the spread of COVID-19, some customers have requested that we delay the memorial service until after the limitations are over. For these customers, we defer the revenue for the memorial service until it is performed. Memorial services frequently include promises to direct the service, provide facilities and motor vehicles, catering, flowers, and stationary products. All other promises on these contracts, including arrangement, removal, preparation, embalming, cremation, internment, and delivery of urns and caskets and related memorialization merchandise are fulfilled 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.

Goodwill and Intangible Assets

In addition to our annual review, we assess the impairment of goodwill and indefinite-lived intangible assets whenever events or changes in ~~useful life,~~circumstances indicate that the carrying value may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends. As a result of economic conditions caused by the response to COVID-19, at March 31, 2020, we performed a qualitative assessment of our goodwill and indefinite-lived intangible assets. Based on the qualitative assessment, we believe that it is more likely than not that the fair value of the goodwill reporting units exceeds their carrying value and no interim quantitative assessment of impairment is necessary for goodwill. Based on the qualitative assessment, including the amount by which ~~were made prospectively, reduced depreciation expense~~fair value exceeded carrying value in our last annual test, we performed a quantitative assessment on certain of our tradenames. We recorded a $3.0 million impairment charge for certain of our tradenames during the three months ended March 31, 2020. In determining the fair value of the tradenames, we used the relief from royalty method whereby we determine the fair value of the assets by ~~$4.1 million ($0.02 per basic~~discounting the cash flows that represent a savings over having to pay a royalty fee for use of the tradenames. The discounted cash flow valuation uses projections of future cash flows and ~~diluted share)~~includes assumptions concerning future operating performance and ~~$8.0 million ($0.04 per basic~~economic conditions that may differ from actual future cash flows.

For our interim test, we estimated that the pre-tax savings would range from 2.0% to 5.0% of the revenue associated with the trademark and ~~diluted share).~~tradenames, based primarily on our research of intellectual property valuation and licensing databases. We also assumed a terminal growth rate of 1.0% and 2.4% for our funeral and cemetery segments, respectively, and discounted the cash flows at a 6.95% discount rate based on the relative risk of these assets to the overall business.

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 "~~2020~~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.

~~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 - Credit Losses

In June 2016, the FASB ~~amended "Financial~~issued "Financial Instruments" - Credit Losses" 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. During November 2018 and April 2019, the FASB made

FORM 10-Q 13

PART I

amendments to the new standard that clarified guidance on several matters, including accrued interest, recoveries, and various codification improvements. The new standard, as amended, 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~~We adopted the new guidance ~~is effective for us on~~as of January 1, 2020, ~~and in the first half of 2019, we established an implementation team and began analyzing the impact~~applying a modified retrospective approach to credit loss reserves on our ~~current policies~~atneed, preneed, miscellaneous, and ~~procedures to identify potential differences that would~~notes receivable and a prospective approach for credit loss reserves on our fixed income investments. As a result ~~from applying the requirements~~ of the ~~new standard.~~adoption, we recorded a $17.1 million increase to Retained earnings, which comprises a $26.4 million and a $5.9 million increase in Preneed receivables, netand trust investments and Deferred tax liability, respectively, and a $2.7 million and a $0.7 million decrease to Receivables, net and Deferred charges and other assets, net, respectively. The ~~implementation team reports findings~~ increase in Preneed receivables, netand ~~progress~~trust investments is primarily the result of reducing the reserve for receivables that are collateralized by cemetery property down to the amount at which the amortized cost basis of the ~~project to management on a frequent basis. Through this process, we have identified appropriate changes to our processes, systems, and controls to support recognition and disclosure under~~receivable exceeds the ~~new standard. We are still evaluating the impact~~fair value of the ~~new standard on our consolidated results of operations, consolidated financial position, and cash flows.~~

property less costs to re-sell.

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~~We adopted the new ~~guidance is effective for us on~~standard as of January 1, 2020 and ~~is not expected to have an~~it had no 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 the significant unobservable inputs used in level 3 measurements. ~~The guidance is effective for us with our quarterly filing for~~We adopted the ~~period ended March 31,~~new standard as of January 1, 2020 and ~~we will make the required disclosure changes in that filing. Adoption will not have an~~it had no impact on our consolidated results of operations, consolidated financial position, and cash flows.

Recently Issued Accounting Standards

Compensation - Retirement ~~Plans~~Benefits

In August 2018, the FASB amended "Compensation - Retirement ~~Plans"~~Benefits" 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.

Reference Rate Reform

In March 2020, the FASB issued "Reference Rate Reform" to provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We are currently evaluating our contracts and the optional expedients provided by the new standard.

14 Service Corporation International

PART I

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 June 30, 2019 and December 31, 2018 are~~were as follows:

June 30, 2019 December 31, 2018
(In thousands)
Preneed funeral receivables $ 120,424
$ 107,612
Preneed cemetery receivables 896,550
883,432
Preneed receivables from customers 1,016,974
991,044
Unearned finance charge (50,402 ) (44,981 )
Allowance for cancellation (50,520 ) (48,380 )
Preneed receivables, net $ 916,052
$ 897,683

Trust investments, at market $ 5,058,591
$ 4,585,720
Insurance-backed fixed income securities and other 263,589
265,787
Trust investments 5,322,180
4,851,507
Less: Cemetery perpetual care trust investments (1,624,709 ) (1,477,798 )
Preneed trust investments $ 3,697,471
$ 3,373,709

Preneed receivables, net and trust investments $ 4,613,523
$ 4,271,392




	March 31, 2020			December 31, 2019
	(In thousands)

Preneed receivables, net	$	952,989		$	947,232

Trust investments, at market	4,333,117			5,258,319
Insurance-backed fixed income securities and other	253,571			265,160
Trust investments	4,586,688			5,523,479
Less: Cemetery perpetual care trust investments	(1,417,652		)	(1,681,149		)
Preneed trust investments	3,169,036			3,842,330

Preneed receivables, net and trust investments	$	4,122,025		$	4,789,562

Preneed receivables, net comprised the following:



	March 31, 2020
	Funeral			Cemetery			Total
	(In thousands)
Preneed receivables	$	134,456		$	882,141		$	1,016,597
Unearned finance charges	(16,643		)	(31,741		)	(48,384		)
Preneed receivables, at amortized cost	117,813			850,400			968,213
Reserve for credit losses	(8,432		)	(6,792		)	(15,224		)
Preneed receivables, net	$	109,381		$	843,608		$	952,989

	December 31, 2019
	Funeral			Cemetery			Total
	(In thousands)
Preneed receivables	$	130,971		$	907,973		$	1,038,944
Unearned finance charges	(16,328		)	(34,242		)	(50,570		)
Preneed receivables, at amortized cost	114,643			873,731			988,374
Allowance for cancellation	(1,452		)	(39,690		)	(41,142		)
Preneed receivables, net	$	113,191		$	834,041		$	947,232

FORM 10-Q 15

PART I

At March 31, 2020, the amortized cost basis of our preneed receivables by year of origination was as follows:



	2020		2019		2018		2017		2016		Prior		Total
	(In thousands)
Preneed receivables, at amortized cost:
Funeral	$	17,961	$	52,966	$	21,401	$	10,957	$	4,200	$	10,328	$	117,813
Cemetery	72,342		314,130		209,268		133,146		72,190		49,324		850,400
Total preneed receivables, at amortized cost	$	90,303	$	367,096	$	230,669	$	144,103	$	76,390	$	59,652	$	968,213

At March 31, 2020, the payment status of our preneed receivables was as follows:



	Past Due
	<30 Days		30-90 Days		90-180 Days		>180 Days		Total		Current		Total
	(In thousands)
Preneed receivables, at amortized cost:
Funeral	$	3,537	$	1,828	$	1,321	$	12,993	$	19,679	$	98,134	$	117,813
Cemetery	34,056		18,312		7,155		4,484		64,007		786,393		850,400
Total preneed receivables, at amortized cost	$	37,593	$	20,140	$	8,476	$	17,477	$	83,686	$	884,527	$	968,213

The following table summarizes the activity for the reserve for credit losses on preneed receivables for the three months ended March 31, 2020:



	January 1, 2020			Provision for Expected Credit Losses			Acquisitions (Divestitures), Net		Write Offs		Effect of Foreign Currency		March 31, 2020
	(In thousands)
Funeral	$	(8,057	)	$	(1,423	)	$	4	$	1,019	$	25	$	(8,432	)
Cemetery	(6,700		)	(221		)	—		109		20		(6,792		)
Total reserve for credit losses on preneed receivables	(14,757		)	$	(1,644	)	$	4	$	1,128	$	45	$	(15,224	)

The table below sets forth certain investment-related activities associated with our trusts:


	Three Months Ended						Six Months Ended
	June 30,						June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
	(In thousands)												(In thousands)
Deposits	$	112,905		$	106,843		$	213,357		$	200,112		$	105,553		$	100,452
Withdrawals	$	116,680		$	114,524		$	224,036		$	221,293		$	114,592		$	107,356
Purchases of securities	$	240,376		$	407,859		$	689,534		$	1,007,748		$	434,367		$	446,761
Sales of securities	$	240,599		$	419,357		$	562,390		$	1,035,357		$	334,140		$	317,855
Realized gains ⁽¹⁾	$	54,756		$	87,840		$	98,281		$	146,146
Realized losses ⁽¹⁾	$	(16,251	)	$	(17,552	)	$	(48,882	)	$	(29,852	)
Realized gains from sales of securities⁽¹⁾													$	52,157		$	43,525
Realized losses from sales of securities⁽¹⁾													$	(85,402	)	$	(32,631	)


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

16 Service Corporation International

PART I

The ~~costs~~cost and market values associated with trust investments recorded at ~~fair~~market value ~~at June 30, 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.

June 30, 2019
Value Hierarchy Level Cost
Unrealized
Gains

Unrealized
Losses
Value
(In thousands)
Fixed income securities:
U.S. Treasury 2 $ 49,425
$ 666
$ (141 ) $ 49,950
Canadian government 2 49,627
118
(1,196 ) 48,549
Corporate 2 13,194
53
(233 ) 13,014
Residential mortgage-backed 2 3,311
48
(1 ) 3,358
Asset-backed 2 134
3
(7 ) 130
Equity securities:
Preferred stock 2 6,114
498
(116 ) 6,496
Common stock:
United States 1 1,280,063
272,490
(60,342 ) 1,492,211
Canada 1 38,568
10,489
(1,824 ) 47,233
Other international 1 83,107
14,817
(2,952 ) 94,972
Mutual funds:
Equity 1 842,772
27,898
(82,654 ) 788,016
Fixed income 1 1,235,660
12,608
(38,365 ) 1,209,903
Other 3 6,010
578
—
6,588
Trust investments, at fair value 3,607,985
340,266
(187,831 ) 3,760,420
Commingled funds
Fixed income 432,113
5,185
(3,083 ) 434,215
Equity 209,194
48,175
—
257,369
Money market funds 343,467
—
—
343,467
Private equity 189,107
74,110
(97 ) 263,120
Trust investments, at net asset value 1,173,881
127,470
(3,180 ) 1,298,171
Trust investments, at market $ 4,781,866
$ 467,736
$ (191,011 ) $ 5,058,591


	December 31, 2018											March 31, 2020
	Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Value		Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Value
				(In thousands)										(In thousands)
Fixed income securities:
U.S. Treasury	2	$	49,187	$	153	$	(448	)	$	48,892	2	$	48,320	$	1,882	$	(101	)	$	50,101
Canadian government	2	56,343		23		(1,797		)	54,569		2	36,771		94		(802		)	36,063
Corporate	2	19,869		13		(516		)	19,366		2	6,647		60		(104		)	6,603
Residential mortgage-backed	2	3,611		10		(50		)	3,571		2	3,221		162		—			3,383
Asset-backed	2	142		2		(11		)	133		2	128		4		(2		)	130
Equity securities:
Preferred stock	2	9,058		180		(412		)	8,826		2	685		—		(192		)	493
Common stock:
United States	1	1,236,513		149,233		(138,141		)	1,247,605		1	1,355,659		139,724		(259,124		)	1,236,259
Canada	1	34,821		9,082		(3,026		)	40,877		1	35,161		8,039		(5,461		)	37,739
Other international	1	77,676		6,057		(10,275		)	73,458		1	89,939		6,865		(9,211		)	87,593
Mutual funds:
Equity	1	760,887		7,104		(151,853		)	616,138		1	777,284		1,673		(249,187		)	529,770
Fixed income	1	1,180,325		800		(89,179		)	1,091,946		1	1,273,438		3,732		(159,609		)	1,117,561
Other	3	6,548		3,210		(3		)	9,755		3	386		32		—			418
Trust investments, at fair value		3,434,980		175,867		(395,711		)	3,215,136			3,627,639		162,267		(683,793		)	3,106,113
Commingled funds
Fixed income		419,206		2,419		(18,981		)	402,644			443,215		959		(4,927		)	439,247
Equity		205,789		19,567		(11,723		)	213,633			255,846		1,012		(8,230		)	248,628
Money market funds		466,429		—		—			466,429			290,028		—		—			290,028
Private equity		215,618		72,897		(637		)	287,878			178,766		79,960		(9,625		)	249,101
Trust investments, at net asset value		1,307,042		94,883		(31,341		)	1,370,584			1,167,855		81,931		(22,782		)	1,227,004
Trust investments, at market		$	4,742,022	$	270,750	$	(427,052	)	$	4,585,720		$	4,795,494	$	244,198	$	(706,575	)	$	4,333,117

~~As of June 30, 2019, our unfunded commitment for our~~

FORM 10-Q 17

PART I



		December 31, 2019
	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Value
				(In thousands)
Fixed income securities:
U.S. Treasury	2	$	49,728	$	752	$	(130	)	$	50,350
Canadian government	2	41,093		76		(850		)	40,319
Corporate	2	9,694		28		(172		)	9,550
Residential mortgage-backed	2	3,210		59		(1		)	3,268
Asset-backed	2	129		3		(4		)	128
Equity securities:
Preferred stock	2	6,338		804		(115		)	7,027
Common stock:
United States	1	1,349,828		303,766		(36,507		)	1,617,087
Canada	1	43,866		12,369		(2,075		)	54,160
Other international	1	95,257		18,227		(522		)	112,962
Mutual funds:
Equity	1	746,581		31,511		(54,020		)	724,072
Fixed income	1	1,247,930		16,424		(32,587		)	1,231,767
Other	3	7,034		1,184		—			8,218
Trust investments, at fair value		3,600,688		385,203		(126,983		)	3,858,908
Commingled funds
Fixed income		444,744		5,077		(1,731		)	448,090
Equity		249,980		47,631		—			297,611
Money market funds		397,461		—		—			397,461
Private equity		176,388		80,283		(422		)	256,249
Trust investments, at net asset value		1,268,573		132,991		(2,153		)	1,399,411
Trust investments, at market		$	4,869,261	$	518,194	$	(129,136	)	$	5,258,319

Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and ~~other~~mezzanine financing. These investments ~~was $141.9 million which, if called, would~~can never be ~~funded~~redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the ~~trusts.~~funds. The funds have not communicated the timing of any liquidations.

The change in our market-based trust investments with significant unobservable inputs (Level 3) is as follows:


	Three Months Ended					Six Months Ended
	June 30,					June 30,						Three Months Ended March 31,
	2019			2018		2019			2018			2020			2019
	(In thousands)											(In thousands)
Fair value, beginning balance	$	7,108		$	8,533	$	9,755		$	9,067		$	8,218		$	9,755
Net unrealized (losses) gains included in Other income, net⁽¹⁾	(322		)	264		(1,464		)	(270		)
Net realized and unrealized losses included in Other (expense) income, net⁽¹⁾												(974		)	(1,142		)
Purchases	5			7		5			7			10			—
Sales	(203		)	—		(1,708		)	—			(25		)	(1,505		)
Acquisitions	—			11,390		—			11,390
Transfers												(6,811		)	—
Fair value, ending balance	$	6,588		$	20,194	$	6,588		$	20,194		$	418		$	7,108


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

18 Service Corporation International

PART I

Maturity dates of our fixed income securities range from ~~2019~~2020 to 2040. Maturities of fixed income securities (excluding mutual funds) at ~~June 30, 2019~~March 31, 2020 are estimated as follows:


	Fair Value		Fair Value
	(In thousands)		(In thousands)
Due in one year or less	$	53,448	$	54,159
Due in one to five years	52,187		33,570
Due in five to ten years	9,253		8,478
Thereafter	113		73
Total estimated maturities of fixed income securities	$	115,001	$	96,280

Recognized trust fund income (realized and unrealized) related to ~~these~~our preneed trust investments was ~~$47.1~~$32.2 million and ~~$52.2~~$27.5 million, for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. Recognized trust fund income (realized and unrealized) related to ~~these~~our cemetery perpetual care trust investments was ~~$95.1~~$19.5 million and ~~$97.1~~$20.5 million for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 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 fair values, and the duration of unrealized losses ~~as of June 30, 2019 and December 31, 2018, respectively,~~ are shown in the following tables:

June 30, 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 $ 2,898
$ (113 ) $ 4,830
$ (28 ) $ 7,728
$ (141 )
Canadian government —
—
18,246
(1,196 ) 18,246
(1,196 )
Corporate 979
(2 ) 7,384
(231 ) 8,363
(233 )
Residential mortgage-backed —
—
50
(1 ) 50
(1 )
Asset-backed —
—
24
(7 ) 24
(7 )
Total temporarily impaired fixed income securities $ 3,877
$ (115 ) $ 30,534
$ (1,463 ) $ 34,411
$ (1,578 )


	December 31, 2018															March 31, 2020
	In Loss Position Less Than 12 Months					In Loss Position Greater Than 12 Months					Total					In Loss Position Less Than 12 Months					In Loss Position Greater Than 12 Months					Total
	Value		Unrealized Losses			Value		Unrealized Losses			Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
						(In thousands)															(In thousands)
Fixed income securities:
U.S. Treasury	$	6,899	$	(226	)	$	16,374	$	(222	)	$	23,273	$	(448	)	$	491	$	(1	)	$	1,447	$	(100	)	$	1,938	$	(101	)
Canadian government	2,254		(9		)	25,330		(1,788		)	27,584		(1,797		)	—		—			11,466		(802		)	11,466		(802		)
Corporate	11,579		(206		)	6,563		(310		)	18,142		(516		)	—		—			2,750		(104		)	2,750		(104		)
Residential mortgage-backed	351		(4		)	3,010		(46		)	3,361		(50		)
Asset-backed	—		—			79		(11		)	79		(11		)	—		—			14		(2		)	14		(2		)
Total temporarily impaired fixed income securities	$	21,083	$	(445	)	$	51,356	$	(2,377	)	$	72,439	$	(2,822	)
Total fixed income securities with an unrealized loss																$	491	$	(1	)	$	15,677	$	(1,008	)	$	16,168	$	(1,009	)



	December 31, 2019
	In Loss Position Less Than 12 Months					In Loss Position Greater Than 12 Months					Total
	Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
						(In thousands)
U.S. Treasury	$	3,023	$	(36	)	$	1,947	$	(94	)	$	4,970	$	(130	)
Canadian government	—		—			13,804		(850		)	13,804		(850		)
Corporate	30		—			4,826		(172		)	4,856		(172		)
Residential mortgage-backed	—		—			51		(1		)	51		(1		)
Asset-backed	—		—			28		(4		)	28		(4		)
Total fixed income securities with an unrealized loss	$	3,053	$	(36	)	$	20,656	$	(1,121	)	$	23,709	$	(1,157	)

FORM 10-Q 19

PART I

Deferred revenue, net

Deferred revenue, net represents future revenue, including distributed trust investment earnings associated with unperformed trust-funded preneed contracts that are not held in trust accounts. Future revenue and net trust investment earnings that are held in trust accounts are included in Deferred receipts held in trust.

The components of Deferred revenue, net in our unaudited Condensed Consolidated Balance Sheet ~~at June 30, 2019 and December 31, 2018 are~~were as follows:


	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(In thousands)						(In thousands)
Deferred revenue	$	2,020,663		$	1,989,232		$	2,058,152		$	2,046,000
Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts	(576,099		)	(570,418		)	(579,632		)	(578,897		)
Deferred revenue, net	$	1,444,564		$	1,418,814		$	1,478,520		$	1,467,103

The following table summarizes the activity infor our contract liabilities, which are ~~recorded~~reflected in Deferred revenue, net and Deferred receipts held in trust ~~for the six months ended June 30, 2019:~~:


	Six Months Ended
	June 30,						Three Months Ended March 31,
	2019			2018			2020			2019
	(In thousands)						(In thousands)
Beginning balance — Deferred revenue, net and Deferred receipts held in trust	$	4,790,552		$	5,265,206		$	5,306,479		$	4,790,552
Cumulative effect of accounting changes	—			37,991
Net preneed contract sales	496,842			505,146			238,471			240,388
(Divestitures) acquisitions of businesses, net	(29,665		)	148,048
Net investment gains ⁽¹⁾	327,819			20,720
Acquisitions (dispositions) of businesses, net							12,743			(12,310		)
Net investment (losses) gains⁽¹⁾							(665,127		)	230,540
Recognized revenue from backlog ⁽²⁾	(212,912		)	(212,195		)	(121,611		)	(115,103		)
Recognized revenue from current period sales	(241,589		)	(242,438		)	(107,821		)	(101,242		)
Change in amounts due on unfulfilled performance obligations	(3,770		)	(551,092		)	(2,555		)	(6,178		)
Change in cancellation reserve	(206		)	62,147			1,095			148
Effect of foreign currency and other	10,848			(12,554		)	(17,468		)	2,807
Ending balance — Deferred revenue, net and Deferred receipts held in trust	$	5,137,919		$	5,020,979		$	4,644,206		$	5,029,602


⁽¹⁾	Includes both realized and unrealized investment ~~earnings.~~(losses) gains.


⁽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 ~~24.5%~~22.7% and ~~13.4%~~21.0% for the three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018, respectively. Our effective tax rate was 22.7% and 19.3% for the six months ended June 30, 2019 and 2018,~~ respectively. The ~~higher~~ effective tax rate for the three ~~and six~~ months ended ~~June 30, 2019 was~~March 31, 2020 is above the 21.0% federal statutory tax rate primarily due to ~~favorable adjustments allowed under SAB 118 in the prior year,~~state tax expense and permanent differences, partially offset ~~with the higher excess~~by tax benefits ~~from increased exercises~~recognized during the quarter on the settlement of ~~stock options in 2019.~~employee share-based awards.

Unrecognized Tax Benefits

As of ~~June 30, 2019,~~March 31, 2020, the total amount of our unrecognized tax benefits was ~~$1.4~~$1.3 million and the total amount of our

accrued interest was ~~$0.6~~$0.7 million.

The federal statutes of limitations have expired for all tax years prior to ~~2015,~~2016, and we are not currently under audit by the IRS. Various state jurisdictions are auditing years ~~2009~~2013 through 2017. There are currently no federal or provincial audits in Canada; however, years subsequent to 2014 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.

20 Service Corporation International

PART I

5. Debt

The components of Debt ~~as of June 30, 2019 and December 31, 2018 was as follows:~~are:


	June 30, 2019			December 31, 2018			March 31, 2020			December 31, 2019
	(In thousands)						(In thousands)
4.5% Senior Notes due November 2020	$	200,000		$	200,000
8.0% Senior Notes due November 2021	150,000			150,000			$	150,000		$	150,000
5.375% Senior Notes due January 2022	98,906			425,000
5.375% Senior Notes due May 2024	850,000			850,000			850,000			850,000
7.5% Senior Notes due April 2027	184,350			200,000			152,805			153,465
4.625% Senior Notes due December 2027	550,000			550,000			550,000			550,000
5.125% Senior Notes due June 2029	750,000			—			750,000			750,000
Term Loan due December 2022	—			641,250
Term Loan due May 2024	650,000			—			625,625			633,750
Bank Credit Facility due December 2022	—			395,000
Bank Credit Facility due May 2024							345,000			295,000
Obligations under finance leases	197,230			211,952			180,728			185,252
Mortgage notes and other debt, maturities through 2050	34,825			4,076			45,707			45,104
Unamortized premiums, net	6,103			6,562
Unamortized premiums and discounts, net							5,396			5,634
Unamortized debt issuance costs	(39,428		)	(31,762		)	(33,622		)	(34,854		)
Total debt	3,631,986			3,602,078			3,621,639			3,583,351
Less: Current maturities of long-term debt	(167,084		)	(69,896		)	(85,885		)	(69,821		)
Total long-term debt	$	3,464,902		$	3,532,182		$	3,535,754		$	3,513,530

Current maturities of debt at ~~June 30, 2019~~March 31, 2020 include amounts due ~~within the next year~~ under our ~~Term Loan,~~term loan, senior notes, mortgage notes and other debt, and finance leases within the next year as well as the portion of unamortized premiums and ~~our 5.375% Senior Notes due January 2022, which we redeemed~~discounts and debt issuance costs expected to be recognized in ~~July 2019.~~the next twelve months.

Our consolidated debt had a weighted average interest rate of ~~4.94%~~4.64% and ~~4.99%~~4.72% at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, respectively. Approximately ~~77% and 66%~~69% of our total debt had a fixed interest rate at ~~June 30, 2019~~both March 31, 2020 and December 31, ~~2018, respectively.~~2019.

During the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we paid ~~$97.3~~$10.1 million and ~~$89.1~~$24.9 million in cash interest, respectively.

Bank Credit ~~Agreement~~

~~In May 2019, we entered into a new $1.7 billion bank credit agreement due May 2024 with a syndicate of banks. The $1.7 billion bank credit agreement comprises a $1.0 billion Bank Credit~~ Facility and a $0.7 billion Term Loan, both due May 2024, including a sublimit of $100.0 million for letters of credit. We accounted for this transaction as a modification of the agreement. Through modifying the Term Loan, we received $49.3 million in proceeds from certain members of the syndicate of banks and paid $32.1 million in principal payments to other members, netting to a $17.2 million increase in our outstanding Term Loan balance.

As of ~~June 30, 2019,~~March 31, 2020, we have no$345.0 million outstanding borrowings under our Bank Credit Facility due May 2024, ~~$650.0~~$625.6 million of outstanding borrowings under our Term Loan due May 2024, and ~~$32.9~~$34.0 million of letters of credit issued. The ~~bank credit agreement~~Bank Credit Facility 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 ~~June 30, 2019,~~March 31, 2020, we were in compliance with all of our debt covenants. We pay a quarterly fee on the unused commitment, which was 0.20% at ~~June 30, 2019.~~March 31, 2020. As of ~~June 30, 2019,~~March 31, 2020, we have ~~$967.1~~$621.0 million in borrowing capacity under the Bank Credit Facility.

Subsequent to March 31, 2020, we increased our outstanding borrowings by $45.0 million to $390.0 million under our Bank Credit Facility due May 2024.

Debt Issuances and Additions

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, we ~~issued $854.3 million of debt including:~~

•~~$750.0 million unsecured 5.125% Senior Notes due June 2029~~

•~~$55.0~~drew $75.0 million on our Bank Credit Facility

•~~$49.3 million in additional proceeds from certain members of the syndicate of banks in our Bank Credit Facility~~

~~Newly issued debt was used to pay off our Bank Credit Facility due December 2022, to partially redeem our 5.375% Senior Notes due January 2022, to fund acquisition activity, and~~ for general corporate purposes. ~~These transactions resulted in additional debt issuance costs of $15.5 million.~~

During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we drew ~~a total of $370.0~~$15.0 million on our Bank Credit Facility ~~to fund the redemption of our 7.625% Senior Notes due October 2018, to make required principal payments on our Term Loan due December 2022, to fund acquisition activity, and~~ for general corporate purposes.

FORM 10-Q 21

PART I

Debt Extinguishments and Reductions

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, we made aggregate debt payments of ~~$836.8~~$34.0 million for scheduled and early extinguishment payments including:


•	$25.0 million in aggregate principal of our Bank Credit Facility May 2024;


•	$8.1 million in aggregate principal of our Term Loan due May 2024;


•	$0.7 million in aggregate principal of 7.5% Senior Notes due April 2027 repurchased on the open market;


•	$0.1 million of premiums paid on early extinguishment; and

•

$0.1 million~~$450.0 million in aggregate principal of our Bank Credit Facility;~~

•~~$40.5 million in aggregate principal payments to other members of our Term Loan;~~

•~~$326.1 million in aggregate principal 5.375% Senior Notes due January 2022;~~

•~~$15.7 million in aggregate principal of 7.5% Senior Notes due April 2027;~~

•~~$4.3 million of premiums paid on early extinguishment; and~~

•~~$0.2 million~~ in other debt.

Certain of the above transactions resulted in the recognition of a loss of ~~$7.6~~$0.1 million recorded in ~~Losses~~Loss on earlyextinguishment of debt, netin our unaudited Condensed Consolidated Statement of Operations for the ~~six~~three months ended ~~June 30, 2019.~~March 31, 2020.

During the ~~six~~three months ended ~~June 30, 2018,~~March 31, 2019, we made aggregate debt payments of ~~$268.2~~$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~~$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; and~~ •~~$0.2 million~~ in other debt.

6. Credit Risk and 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~~carrying values of receivables on preneed funeral and cemetery contracts ~~are impracticable~~approximate fair value due to ~~estimate because of~~ the ~~lack of a trading market and the diverse~~large number of diverse individual contracts with varying terms.

The fair value of our debt instruments at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018~~2019 was as follows:


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In thousands)				(In thousands)
4.5% Senior Notes due November 2020	$	200,376	$	198,930
8.0% Senior Notes due November 2021	164,437		160,800		$	153,375	$	165,375
5.375% Senior Notes due January 2022	99,212		428,188
5.375% Senior Notes due May 2024	876,724		851,275		858,585		879,606
7.5% Senior Notes due April 2027	221,275		214,940
7.5% Notes due April 2027					169,614		188,381
4.625% Senior Notes due December 2027	566,671		517,077		546,035		577,500
5.125% Senior Notes due June 2029	793,125		—		825,975		798,525
Term Loan due December 2022	—		629,579
Term Loan due May 2024	650,000		—		625,625		633,750
Bank Credit Facility due December 2022	—		387,061
Bank Credit Facility due May 2024					345,000		295,000
Mortgage notes and other debt, maturities through 2050	34,824		4,076		45,707		45,104
Total fair value of debt instruments	$	3,606,644	$	3,391,926	$	3,569,916	$	3,583,241

The fair ~~value~~values of our long-term, ~~fixed-rate~~fixed rate loans ~~was~~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~~values of these instruments ~~has~~have 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.

22 Service Corporation International

PART I

7. Equity

(All shares reported in whole numbers)

Share ~~Repurchases~~Repurchase Program

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~~share repurchase program. During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, we repurchased ~~692,325~~2,900,722 shares of common stock at an aggregate cost of ~~$29.6~~$123.1 million, which is an average cost per share of ~~$42.72.~~$42.44. After these repurchases, the remaining dollar value of shares authorized to be purchased under ~~our~~the share repurchase program was ~~approximately $165.7~~$193.7 million at ~~June 30, 2019.~~March 31, 2020.

Subsequent to ~~June 30, 2019,~~March 31, 2020, we repurchased ~~142,492~~1,097,361 shares ~~of common stock~~for $41.8 million at ~~an aggregate cost of $6.7 million, which is~~ an average cost per share of ~~$46.78.~~$38.09. After these ~~subsequent~~ repurchases, the remaining dollar value of shares authorized to be ~~repurchased~~purchased under ~~our~~the share repurchase program is ~~$159.0~~$151.9 million.

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.

FORM 10-Q 23

PART I

Our reportable segment, including disaggregated revenue, information iswas as ~~follows:~~

follows and includes a reconciliation of gross profit to our consolidated income before income taxes.


	Three Months Ended						Six Months Ended
	June 30,						June 30,						Three Months Ended March 31,
	2019			2018			2019			2018			2020			2019
	(In thousands)												(In thousands)
Revenue from customers:
Funeral revenue:
Atneed revenue	$	245,418		$	243,013		$	504,148		$	517,512		$	264,788		$	258,730
Matured preneed revenue	148,584			146,045			305,034			311,374			163,583			156,450
Core funeral revenue	394,002			389,058			809,182			828,886			428,371			415,180
Non-funeral home revenue	13,121			11,836			26,094			25,513			14,451			12,973
Recognized preneed revenue	39,728			33,919			71,053			66,379			32,800			31,325
Other revenue	32,127			33,835			65,443			62,235			29,274			33,316
Total funeral revenue	478,978			468,648			971,772			983,013			504,896			492,794
Cemetery revenue:
Atneed revenue	82,286			80,941			163,737			163,985			85,043			81,451
Recognized preneed property revenue	151,875			143,166			280,487			252,106			116,082			128,612
Recognized preneed merchandise and service revenue	73,570			73,130			140,609			141,493
Core revenue	307,731			297,237			584,833			557,584
Recognized preneed merchandise and services revenue													68,664			67,039
Core cemetery revenue													269,789			277,102
Other revenue	25,863			30,207			54,179			49,977			28,280			28,316
Total cemetery revenue	333,594			327,444			639,012			607,561			298,069			305,418
Total revenue from customers	$	812,572		$	796,092		$	1,610,784		$	1,590,574		$	802,965		$	798,212
Operating profit:
Funeral operating profit	$	90,590		$	90,421		$	196,008		$	210,876
Cemetery operating profit	100,556			97,706			186,972			173,013
Operating profit from reportable segments	191,146			188,127			382,980			383,889
General and administrative expenses	(29,370		)	(31,136		)	(71,900		)	(65,920		)
(Losses) gains on divestitures and impairment charges, net	(11,823		)	6,865			(13,701		)	7,347
Hurricane recoveries (expenses), net	152			(1,902		)	(296		)	330
Gross profit:
Funeral gross profit													$	103,576		$	105,418
Cemetery gross profit													75,468			86,416
Gross profit from reportable segments													179,044			191,834
Corporate general and administrative expenses													(31,813		)	(42,978		)
Gains (losses) on divestitures and impairment charges, net													4,545			(1,878		)
Operating income	150,105			161,954			297,083			325,646			151,776			146,978
Interest expense	(47,317		)	(44,519		)	(94,707		)	(88,095		)	(44,351		)	(47,390		)
Loss on early extinguishment of debt, net	(7,579		)	—			(7,579		)	(10,131		)	(139		)	—
Other income, net	874			1,880			1,594			2,264
Other (expense) income, net													(1,247		)	720
Income before income taxes	$	96,083		$	119,315		$	196,391		$	229,684		$	106,039		$	100,308

Our geographic area information is as follows:

United States Canada Total
(In thousands)
Three Months Ended June 30,
Revenue from external customers:
2019 $ 767,394
$ 45,178
$ 812,572
2018 $ 750,445
$ 45,647
$ 796,092
Six Months Ended June 30,
Revenue from external customers:
2019 $ 1,521,474
$ 89,310
$ 1,610,784
2018 $ 1,494,558
$ 96,016
$ 1,590,574



	United States		Canada		Total
	(In thousands)
Three Months Ended March 31,
Revenue from external customers
2020	$	759,272	$	43,693	$	802,965
2019	$	754,080	$	44,132	$	798,212

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 June 30, 2019 was as follows:~~

Operating Finance Total
(In thousands)
2019 (excluding the six months ended June 30, 2019) $ 5,408
$ 23,722
$ 29,130
2020 11,343
43,681
55,024
2021 10,056
61,946
72,002
2022 8,928
25,721
34,649
2023 6,759
18,614
25,373
Thereafter 45,164
47,754
92,918
Total lease payments $ 87,658
$ 221,438
$ 309,096
Less: Interest (23,051 ) (24,208 ) (47,259 )
Present value of lease liabilities $ 64,607
$ 197,230
$ 261,837

~~As of December 31, 2018, we disclosed the following future lease payments for non-cancelable operating and finance leases exceeding one year:~~

Operating Finance
(In thousands)
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

~~The components of lease cost for the three and six months ended June 30, 2019 were as follows:~~

Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
(In thousands)
Amortization of leased assets $ 10,348
$ 21,312
Interest on lease liabilities 1,453
3,284
Total finance lease cost 11,801
24,596
Operating lease cost 3,074
6,268
Variable lease cost 420
792
Total lease cost $ 15,295
$ 31,656

~~Supplemental balance sheet information as of June 30, 2019 related to leases was as follows:~~

Lease Type Balance Sheet Classification June 30, 2019
(In thousands)
Operating lease right-of-use assets⁽¹⁾
Deferred charges and other assets $ 62,383
Finance lease right-of-use assets ⁽¹⁾
Property and equipment, net 190,889
Total right-of-use assets ⁽¹⁾
$ 253,272

Operating Accounts payable and accrued liabilities $ 8,472
Finance Current maturities of long-term debt 39,940
Total current lease liabilities 48,412
Operating Other liabilities 56,135
Finance Long-term debt 157,290
Total non-current lease liabilities 213,425
Total lease liabilities $ 261,837


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

~~The weighted-average life remaining and discount rates of our leases as of June 30, 2019 were as follows:~~

Operating Finance
Weighted-average remaining lease term (years) 12.2
5.2
Weighted-average discount rate 4.7 % 3.5 %

~~Supplemental cash flow information related to leases for the three and six months ended June 30, 2019 were as follows:~~

Three Months Ended June 30, 2019 Six Months Ended June 30, 2019
(In thousands)
Cash paid for amounts in the measurement of lease liabilities
Operating cash flows for operating leases $ 3,124
$ 6,217
Operating cash flows for finance leases 1,773
3,721
Financing cash flows for finance leases 11,163
21,820
Total cash paid for amounts included in the measurement of lease liabilities

$ 16,060
$ 31,758

Right-of-use assets obtained in exchange for new finance lease liabilities $ 15,308
$ 34,474
Right-of-use assets obtained in exchange for new operating lease liabilities $ 2,125
$ 6,365

We have 64 operating leases where we are the lessor and the non-cancelable term is greater than one year, resulting in $0.7 million and $1.4 million in lease income for the three and six months ended June 30, 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 June 30, 2019 were as follows (in thousands):

2019 (excluding the six months ended June 30, 2019) $ 1,341
2020 1,772
2021 1,417
2022 1,092
2023 504
Thereafter 243
Total cash receipts $ 6,369

~~10.~~ Commitments and Contingencies

Insurance Loss Reserves

We purchase comprehensive general liability, ~~morticians’~~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 ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018,~~2019, we have self-insurance reserves of ~~$80.3~~$86.3 million and ~~$80.1~~$84.3 million, respectively.

24 Service Corporation International

PART I

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 as a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour pay, including but not limited to the ~~Samborsky,~~ Fredeen ~~Horton, Quismundo, and Kallweit lawsuits~~lawsuit 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~~Lisa Fredeen, an aggrieved employee 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 ofother aggrieved 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;~~BC706930; 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 on May 18, 2018 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~~This lawsuit asserts numerous ~~causes of action~~claims for alleged wage and hour pay ~~violations.~~violations under the California Labor Code and the California Private Attorneys General Act. The plaintiff seeks unpaid wages, compensatory and punitive damages, civil penalties, attorneys’ fees and costs, ~~interest,~~ and injunctive relief. The claims were ordered to arbitration, and the arbitrator has determined that the claims would proceed as a bilateral arbitration. On May 24, 2019, the arbitrator issued an opinion rejecting plaintiff’s claims in their entirety. 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. That action is currently pending.

~~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. On May 21, 2019, the Court granted the parties' Motion for Preliminary Approval of Class Action Settlement.

~~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 fromCase 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. On December 26, 2019, this matter was consolidated into the Romano lawsuit. The settlement agreement, noted above, 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 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 individual and PAGA claim 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.~~ ~~Sandra Dorian v. SCI Direct, Inc., et al; Case No 37-2018-0061985-CU-OE-CTL; in the Superior Court of California for the County of San Diego, and~~ ~~Holly Karpiak v. SCI Direct, Inc., et al;~~ Case No. 37-2019-00031328-CU-OE-CTL, in the Superior Court 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.interest.

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 ;~~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 an 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~~Taylor 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;~~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. The court granted our motion for summary judgment on the named plaintiff’s individual claims in January 2020.This lawsuit was settled in April 2020. The financial terms of the settlement call for SCI Pennsylvania Funeral Services, Inc. to pay an immaterial amount.

The People of the State of California v. Service Corporation International, a Texas corporation, SCI Direct, Inc. a Florida Corporation, S.E. Acquisition of California, Inc., a California corporation dba Neptune Society of Northern California, Neptune Management Corp., a California corporation, Trident Society, Inc. a California corporation, and Does 1 through 100, inclusive, Case No. RG 19045103;in the Superior Court of the State of California in and for the County of Alameda. In July 2019, we received a letter from the Attorney General, State of California, Department of Justice (“CAAG") alleging that the allocation of prices among certain of our cremation service contracts and cremation merchandise contracts, and the related preneed trust funding, violates section 7735 of the California Business and Professions Code and that provisions of these same contracts constitute false advertising and deceptive sales practices in violation of California consumer protection laws. On November 21, 2019, we filed a complaint,S.E. Combined Services of California, Inc., a California Corporation dba Neptune Society of Northern California, Neptune Management Corp. a California Corporation, and Trident Society, Inc. v. Xavier Becerra, Attorney General of the State of California, and Does 1-50, Case No. 34-2019-00269617;in the Sacramento County Superior Court seeking declaratory relief holding, in general, that our practices, methods and documentation utilized in the sale of pre-need funeral goods and services are in all respects

FORM 10-Q 25

PART I

compliant with California law. On December 2, 2019, the CAAG filed the complaint, referenced above, seeking permanent injunction from making false statements and engaging in unfair competition, a placement of funds into preneed trusts, civil penalties, customer refunds, attorneys’ fees, and costs. We believe our contracts comply with applicable laws. Given the nature of this matter, we are unable to reasonably estimate the possible loss or ranges of loss, if any.

Nancy Taylor, on behalf of herself and others similarly situated v. Service Corporation International and others, Case No. 20-cv-60709; in the United States District Court Southern District of Florida Fort Lauderdale Division. This case was filed in April 2020 as a Florida class action alleging that the allocation of prices among certain of our cremation service contracts and cremation merchandise contracts, and the related preneed trust funding, and the failure to disclose commissions paid and sales practices associated with the sale of third party travel protection plans, violate the Florida Deceptive and Unfair Trade Practices Act and constitute unjust enrichment. Plaintiff seeks refunds, general, actual, compensatory and exemplary damages, civil penalties, interest and attorney fees. 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 sought compensatory and punitive damages. The plaintiff

~~was awarded compensatory and punitive damages after a jury trial. This matter has settled for a confidential, non-material amount.~~

Unclaimed Property Audit. ~~We are involved in the following matter.~~

We received notices from a third party auditor representing the 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,~~matter, we are unable to reasonably estimate the possible loss or ranges of loss, if any.

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.

In July of 2019, we received a letter from the State of California, Department of Justice alleging that the allocation of prices among certain of our cremation service contracts and cremation merchandise contracts violates section 7735 of the Business and Professions Code and that provisions of these same contracts constitute false advertising and deceptive sales practices in violation of California consumer protection laws. The State of California, Department of Justice has requested various injunctive terms, monetary relief of $15.0 million and modified refunds for certain California consumers. We believe our contracts comply with applicable laws.

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.

26 Service Corporation International

~~11.~~

PART I

10. 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~~earnings per share 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~~stock that ~~then~~ shared in our earnings.

A reconciliation of the numerators and denominators of ~~the~~ basic and diluted ~~EPS computations~~earnings per share is presented below:

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
(In thousands, except per share amounts)
Amounts attributable to common stockholders:
Net income:
Net income — basic $ 72,329
$ 103,239
$ 151,652
$ 185,227
After tax interest on convertible debt —
15
—
30
Net income — diluted $ 72,329
$ 103,254
$ 151,652
$ 185,257
Weighted average shares (denominator):
Weighted average shares — basic 182,369
182,637
182,048
183,877
Stock options 3,278
4,265
3,418
4,391
Restricted stock units 43
165
51
158
Convertible debt —
121
—
121
Weighted average shares — diluted 185,690
187,188
185,517
188,547
Net income per share:
Basic $ 0.40
$ 0.57
$ 0.83
$ 1.01
Diluted $ 0.39
$ 0.55
$ 0.82
$ 0.98



	Three Months Ended March 31,
	2020		2019
	(In thousands, except per share amounts)
Amounts attributable to common stockholders:
Net income — basic and diluted	$	81,941	$	79,323
Weighted average shares:
Weighted average shares — basic	180,854		181,696
Stock options	2,675		3,562
Restricted share units	56		59
Weighted average shares — diluted	183,585		185,317
Amounts attributable to common stockholders:
Earnings per share:
Basic	$	0.45	$	0.44
Diluted	$	0.45	$	0.43

The computation of diluted ~~EPS~~earnings per share excludes outstanding stock options and restricted ~~share~~stock units in certain periods in which the inclusion of such equity awards would be ~~anti-dilutive in~~antidilutive to the periods presented. Total ~~equity awards~~antidilutive options and restricted stock units not currently included in the computation of ~~dilutive EPS~~diluted earnings per share are as follows (in shares):

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
(In thousands)
Antidilutive options 105
1,155
—
868



	Three Months Ended March 31,
	2020	2019
	(In thousands)
Antidilutive options	1,228	—
Antidilutive restricted stock units	31	37

~~12.~~11. Acquisitions and Divestiture-Related Activities

Acquisitions

In June 2018, we acquired fifteen funeral homes and seven cemeteries in four states (the “acquired businesses”) for $82.2 million in cash. Additionally, we paid $49.8 million of the acquired businesses existing debt in conjunction with the closing of the acquisition. We ~~have completed our purchase price allocation. During 2019, we made the following adjustments to our estimates of the fair value of assets and liabilities (in thousands):~~

Increase in the fair value of preneed receivables, net and trust investments $ (3,056 )
Increase in the fair value of cemetery property (3,511 )
Decrease in the fair value of preneed customer relationship intangible assets 11,996
Increase in the fair value of current liabilities 3,019
Decrease in the fair value of deferred revenue and deferred receipts held in trust (14,156 )
Decrease in the fair value of deferred income taxes (6,883 )
Other (191 )
Total adjustment to goodwill $ (12,782 )

~~Excluding the June 2018 acquisition described above, we~~ spent ~~$32.8~~$28.5 million and ~~$35.6~~$19.2 million, for ~~several smaller, tuck-in acquisitions~~real estate, funeral service, and cemetery locations for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively.

Divestiture-Related Activities

As divestitures occur in the normal course of business, gains or losses on the sale of such ~~assets~~locations are recognized in the ~~income statement~~unaudited Condensed Consolidated Statement of Operations line item ~~(Losses) gains~~Gains (losses) on divestitures and impairment charges, net, which consist of the following:

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
(In thousands)
(Losses) gains on divestitures, net $ (9,643 ) $ 6,865
$ (9,097 ) $ 8,141
Impairment losses (2,180 ) —
(4,604 ) (794 )
(Losses) gains on divestitures and impairment charges, net $ (11,823 ) $ 6,865
$ (13,701 ) $ 7,347



	Three Months Ended March 31,
	2020			2019
	(In thousands)
Gains on divestitures, net	$	7,629		$	546
Impairment losses	(3,084		)	(2,424		)
Gains (losses) on divestitures and impairment charges, net	$	4,545		$	(1,878	)

FORM 10-Q 27

PART II

Item 2. ~~Management's~~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 ~~June 30, 2019,~~March 31, 2020, we operated ~~1,478~~1,475 funeral service locations and ~~481~~483 cemeteries (including ~~287~~296 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 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.

Our financial position is enhanced by our ~~approximately $11.6~~$11.5 billion backlog of future revenue from both trust and insurance-funded preneed sales at ~~June 30, 2019.~~March 31, 2020. Preneed selling provides us with a ~~current~~strategic opportunity to ~~lock-in~~gain future market ~~share while deterring the customer from going to a competitor in the future.~~share. 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~~allow 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'~~customer’s preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers. We believe the presentation of these additional merchandise and services through our customer-facing technology enhances our ~~customers'~~customer’s experience by reducing administrative burdens and allowing them to visualize the product offerings and services, which will help drive increases in the average revenue for a cremation in future periods.

Recent Trends

During the first quarter of 2020, an outbreak of a novel strain of coronavirus (COVID-19) has spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020. COVID-19 poses a threat to the health and economic well-being of our employees, customers, and vendors. Our dedicated team of associates on the front lines are acting as first responders and providing essential services for the well-being of our client families and communities. The operation of all of our facilities is critically dependent on our employees who staff these locations. To ensure the well-being of all our employees and their families, we have provided them with detailed health and safety literature on COVID-19, such as the Center for Disease Control (the “CDC”)’s industry-specific guidelines for working with the deceased who were and may have been infected with COVID-19. In addition, we provide personal protection equipment to those employees whose positions require them. We have implemented work from home policies at our corporate offices consistent with CDC guidance to reduce the risks of exposure to COVID-19, while still supporting our 1,953 North American locations and the customers they serve.

Like most businesses world-wide, COVID-19 has impacted us financially; however, we cannot, with certainty, presently predict the scope, severity, or duration with which COVID-19 will impact our business, financial condition, results of operations, and cash flows. As recently as early March 2020, sales growth was continuing to trend in line and consistent with our forecast for the first quarter of 2020 and when compared to the first quarter of 2019. However, over the last two weeks of March, we saw our preneed sales activity precipitously decline as North Americans began to practice social distancing and complying with multiple state and provincial shelter in place orders. The weakened economy has also negatively impacted our cemetery property sales. In the first quarter of 2020, comparable preneed and atneed cemetery property production declined 8.4%, which decreased our cemetery revenue. In addition, our preneed customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from COVID-19. Our sales teams are beginning to overcome social distancing obstacles by further leveraging technology and arranging virtual sales presentations with customers who currently prefer to participate from their home. Our sales teams are also utilizing various other tools and techniques such as virtual on-demand preneed sales seminars and setting up

28 Service Corporation International

PART I

informational pop-up tents to discuss pre-planning from a safe distance. Once this crisis is over, we believe we can leverage on many of the technological solutions that are helping us manage through these unprecedented times.

The rigorous restrictions placed on gatherings and mandated by state, provincial, and local governments has posed a unique challenge for our locations. In mid-March, we quickly developed a technology solution by leveraging Facebook Live, which allows extended family and friends to virtually participate in the ceremony alongside the immediate family. We now have over 1,000 locations offering this service and we have trained approximately 1,000 associates in less than a month. In addition, guests are given the opportunity to leave condolences on balloons that are tied to chapel chairs so families can feel connected to those unable to attend in person and carefully designed outdoor venues are also allowing guests to be present, yet remain at a safe distance. Also, several locations now offer customers the ability to broadcast cemetery services through radio transmitters. As we have continued to ramp up and train more locations on streaming services through Dignity Memorial® Facebook pages, we are beginning to see an increase in the number of families choosing this option resulting in tens of thousands of views. Atneed funeral directors are also using virtual meeting platforms to discuss and plan service details with client families. Although they may be unable to meet face-to-face, our funeral directors continue to listen, understand, suggest, and plan important details for honoring a loved one’s life.

For further discussion of our key operating metrics, see our ~~Results~~"Cash Flow" and “Results of ~~Operations~~ ~~and~~ ~~Cash Flow~~Operations” 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 ~~$262.9~~$180.0 million in the first ~~six~~three months of ~~2019. We had $967.1~~2020. As of March 31, 2020, we have $621.0 million in excess borrowing capacity under our Bank Credit Facility.

Subsequent to March 31, 2020, we increased our outstanding borrowings by $45.0 million which decreased our borrowing capacity under our Bank Credit Facility ~~at June 30, 2019.~~to $576.0 million.

Our ~~bank credit agreement~~Bank Credit Facility requires us to maintain certain leverage and interest coverage ratios. As of ~~June 30, 2019,~~March 31, 2020, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of ~~June 30, 2019~~March 31, 2020 are as follows:



	Per Credit Agreement	Actual
Leverage ratio	4.75 (Max)	~~3.89~~3.88
Interest coverage ratio	3.00 (Min)	~~4.83~~5.04

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~~Locations.. We ~~intend to make~~manage our footprint by focusing on strategic acquisitions ofand building new funeral service locations where the expected returns are attractive 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~~exceed our weighted average cost of capital ~~with room for execution risk. We will also invest in the construction of additional funeral service locations.~~by a meaningful margin. We target businesses with favorable customer ~~categories~~dynamics and/or where we can achieve additional economies of scale. We continue to pursue strategic acquisitions and build new funeral service locations in areas that provide us with the potential for scale.

Paying ~~Dividends~~Dividends.. Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to ~~$0.18~~$0.19 per common share in ~~2019.~~2020. We target a payout ratio of 30% to 40% of after tax 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~~.Shares. Absent aopportunities for strategic ~~acquisition opportunity,~~acquisitions, we ~~believe share repurchases are attractive at the appropriate price. We intend~~expect to ~~make purchases from time~~continue to ~~time~~repurchase shares of our common stock in the open market or through privately negotiated transactions, subject to market conditions, debt

FORM 10-Q 29

PART I

covenants, and normal trading restrictions. ~~Our Bank Credit Facility contains covenants that limit our ability to repurchase our common stock.~~ There can be no assurance that we will buy our common stock under our repurchase program in the future.

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, we repurchased ~~692,325~~2,900,722 shares of common stock at an aggregate cost of ~~$29.6~~$123.1 million, which is an average cost per share of ~~$42.72.~~$42.44. After these repurchases, the remaining dollar value of shares authorized to be purchased under ~~our~~the share repurchase program was ~~approximately $165.7~~$193.7 million at ~~June 30, 2019.~~ March 31, 2020.

Subsequent to March 31, 2020, we repurchased 1,097,361 shares for $41.8 million at an average cost per share of $38.09. After these repurchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program is $151.9 million.

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

Cash Flow

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

Operating Activities

Net cash provided by operating activities ~~decreased $52.5~~was $180.0 million, ~~to $262.9~~and $184.9 million infor the ~~first six~~three months ofended March 31, 2020, and 2019, ~~compared to $315.4 million in the first six months of 2018. Excluding $6.4 million in legal settlements in the current period and a $5.6 million tax refund in the prior period, cash~~respectively.

Cash flow from operations decreased ~~by $40.5~~$4.9 million ~~from prior year.~~for 2020 versus 2019. The 2020 decrease over 2019 ~~decrease~~ comprises:


•	a $25.8 million increase in employee compensation, and


•	a $8.1 million increase in vendor and other payments. partially offset by


•	a $14.8 million decrease in cash interest payments,


•	a $6.8 million increase in cash receipts from customers,


•	a $6.0 million increase in General Agency (GA) and other receipts,


•	a $1.3 million decrease in net trust deposits, and

a ~~$22.4~~$0.1 million ~~increase in vendor and other payments,~~

~~a $21.1 million increase in employee compensation,~~

~~a $18.7 million increase~~decrease in cash tax ~~recurring payments,~~

~~a $11.8 million increase in net trust deposits, and~~

~~a $8.2 million increase in cash interest paid, partially offset by~~

~~a $31.0 million increase in cash receipts from customers, and~~

~~a $10.7 million increase in General Agency (GA) and other receipts.~~payments.

Investing Activities

Cash flows from investing activities used ~~$142.7~~$69.7 million and $70.9 million, in ~~the first six months of~~2020, and 2019, ~~compared to using $272.8 million in the same period of 2018.~~respectively. The ~~$130.1~~$1.2 million decrease from ~~2019~~2020 over ~~2018~~2019 is primarily due to the following:

•

a $7.6 million decrease in payments for Company-owned life insurance policies, net of proceeds,~~a $134.9 million decrease in cash spent on acquisitions,~~

•~~a $14.5 million decrease primarily for the purchase of land,~~

•~~a $0.3 million decrease in payments on Company-owned life insurance policies, net of proceeds, partially offset by~~

~~a $9.8 million increase in capital expenditures primarily due to improvements at existing funeral homes,~~

~~a $6.9 million decrease in cash receipts from divestitures and asset sales, and~~

~~a $2.9 million decrease in proceeds from sale of other investments.~~


•	a $3.6 million increase in cash receipts from divestitures and asset sales, and


•	a $3.2 million decrease in cash spent on real estate acquisitions for cemetery development, partially offset by


•	a $12.5 million increase in cash spent on business acquisitions, and


•	a $0.7 million increase in capital expenditures, primarily due to construction of new funeral service locations.

Financing Activities

Financing activities used ~~$79.8~~$110.1 million in ~~the first six months of 2019~~2020 compared to using ~~$210.1~~$162.7 million in ~~the same period of 2018.~~2019. The ~~$130.3~~$52.6 million decrease from ~~2019~~2020 over ~~2018~~2019 is primarily due to:


•	a $169.9 million decrease in debt payments, net of proceeds, partially offset by


•	a $108.6 million increase in purchase of Company common stock,


•	a $6.3 million change in bank overdrafts and acquisition related financing,


•	a $1.6 million increase in payments of dividends, and

•30~~a $199.3 million decrease in purchase of Company common stock,~~ Service Corporation International

•~~a $21.1 million change in bank overdrafts and other,~~

•~~a $15.8 million increase in proceeds from exercises of stock options partially offset by~~

~~a $102.4 million decrease in proceeds from the issuance of debt, net of payments, and~~PART I

~~a $3.5 million increase in payments of dividends.~~


•	a $0.8 million decrease in proceeds from exercises of stock options.

Financial Assurances

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


	June 30, 2019		December 31, 2018		March 31, 2020		December 31, 2019
	(In millions)				(In millions)
Preneed funeral	$	91.9	$	106.9	$	91.4	$	94.6
Preneed cemetery:
Merchandise and services	143.6		137.9		154.0		147.6
Pre-construction	16.4		15.4		20.5		20.3
Bonds supporting preneed obligations	251.9		260.2
Bonds supporting preneed funeral and cemetery obligations					265.9		262.5
Bonds supporting preneed business permits	4.7		4.2		5.6		5.5
Other bonds	18.8		18.9		19.7		19.7
Total surety bonds outstanding	$	275.4	$	283.3	$	291.2	$	287.7

When selling preneed contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law. For the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ we had ~~$12.4~~$2.2 million and ~~$12.3~~$5.7 million, respectively, of cash receipts from sales attributable to bonded ~~sales.~~contracts. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.

Surety bond premiums are paid annually and the bonds are automatically renewable until maturity of the underlying preneed contracts, unless we are given prior notice of cancellation. Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. Management does not expect that we will be required to fund material future amounts related to these surety bonds ~~because of~~due to a lack of surety capacity or surety company non-performance.

Preneed ~~Funeral and Cemetery~~ Activities and Backlog of Contracts

In addition to selling our products and services to client families at the time of need, we enter into price-guaranteed preneed contracts, which provide for future funeral or cemetery merchandise and services. Because preneed funeral and cemetery merchandise or services will generally not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed contracts be deposited into merchandise and service trusts until the merchandise is delivered or the service is performed. In certain situations, as described above, where permitted by state or provincial laws, we may post a surety bond as financial assurance for a certain amount of the preneed contract in lieu of placing funds into trust accounts. Alternatively, we may sell a life insurance or annuity policy from third-party insurance companies.

Insurance-Funded Preneed Contracts: Where permitted by state or provincial law, we may sell a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. These general agency commissions (GA revenue) are based on a percentage per contract sold and are recognized as funeral revenue when the insurance purchase transaction between the preneed purchaser and third-party insurance provider is completed. All selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred. We do not reflect the unfulfilled insurance-funded preneed contract amounts in our ~~unaudited Condensed~~ Consolidated Balance ~~Sheet because they are not assets and liabilities as defined in~~ ~~Statement of Accounting Concepts No. 6~~ ~~as we have no claim to the insurance proceeds until the contract is fulfilled and no obligation under the contract until the benefits are assigned to us at the time of need.~~Sheet. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenue as we perform these funerals.

FORM 10-Q 31

PART I

The table below details ~~the~~our results of insurance-funded preneed production and ~~maturities for the three and six months ended June 30, 2019 and 2018, and the number of contracts associated with those transactions.~~

maturities.


	Three Months Ended				Six Months Ended
	June 30,				June 30,				Three Months Ended March 31,
	2019		2018		2019		2018		2020		2019
	(In millions)								(Dollars in millions)
Preneed insurance-funded:
Sales production ⁽¹⁾	$	149.5	$	148.1	$	285.6	$	274.7	$	125.0	$	134.8
Sales production (number of contracts) ⁽¹⁾	26,215		25,232		50,127		46,821		22,095		23,799
General agency revenue	$	34.2	$	36.1	$	70.2	$	67.6	$	32.4	$	36.0
Maturities	$	84.2	$	82.7	$	175.3	$	179.1	$	93.8	$	90.4
Maturities (number of contracts)	14,365		14,020		29,978		30,251		15,919		15,472


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

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

The tables below detail our results of preneed production and maturities, excluding insurance contracts ~~for the three and six months ended June 30, 2019 and 2018.~~are as follows:

Three Months Ended Six Months Ended
June 30, June 30,
2019 2018 2019 2018
(In millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production $ 102.9
$ 92.3
$ 196.1
$ 185.0
Sales production (number of contracts) 28,257
25,123
53,349
50,996
Maturities $ 72.4
$ 70.5
$ 145.5
$ 147.6
Maturities (number of contracts) 18,140
17,182
36,843
36,843
Cemetery:
Sales production:
Preneed $ 240.5
$ 245.6
$ 457.2
$ 447.1
Atneed 83.5
79.9
165.5
165.0
Total sales production $ 324.0
$ 325.5
$ 622.7
$ 612.1
Sales production deferred to backlog:
Preneed $ 102.3
$ 120.2
$ 196.2
$ 217.4
Atneed 61.5
59.4
122.3
122.7
Total sales production deferred to backlog $ 163.8
$ 179.6
$ 318.5
$ 340.1
Revenue recognized from backlog:
Preneed $ 74.3
$ 81.2
$ 137.5
$ 138.2
Atneed 59.4
59.5
119.0
120.4
Total revenue recognized from backlog $ 133.7
$ 140.7
$ 256.5
$ 258.6



	Three Months Ended March 31,
	2020		2019
	(Dollars in millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production	$	89.2	$	94.5
Sales production (number of contracts)	23,179		25,327
Maturities	$	78.4	$	73.8
Maturities (number of contracts)	19,591		18,844
Cemetery:
Sales production:
Preneed	$	194.1	$	216.7
Atneed	84.6		82.0
Total sales production	$	278.7	$	298.7
Sales production deferred to backlog:
Preneed	$	94.6	$	93.9
Atneed	62.3		60.8
Total sales production deferred to backlog	$	156.9	$	154.7
Revenue recognized from backlog:
Preneed	$	65.9	$	63.2
Atneed	61.8		59.6
Total revenue recognized from backlog	$	127.7	$	122.8

Backlog of Preneed Contracts: The following table reflects our backlog of trust-funded deferred preneed contract revenue, including amounts related to Deferred receipts held in trust at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our ~~unaudited Condensed~~ Consolidated Balance Sheet) at ~~June 30, 2019~~March 31, 2020 and December 31, ~~2018.~~2019. The backlog amounts presented include amounts due from customers for undelivered performance obligations on cancelable preneed contracts to arrive at our total backlog of deferred revenue. The table does not include the backlog associated with businesses that are held for sale.

32 Service Corporation International

PART I

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


	June 30, 2019						December 31, 2018						March 31, 2020						December 31, 2019
	Fair Value			Cost			Fair Value			Cost			Fair Value			Cost			Fair Value			Cost
				(In billions)									(In billions)
Deferred revenue, net	$	1.44		$	1.44		$	1.42		$	1.42		$	1.48		$	1.48		$	1.47		$	1.47
Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts	0.58			0.58			0.57			0.57			0.58			0.58			0.58			0.58
Deferred receipts held in trust	3.69			3.49			3.37			3.47			3.17			3.48			3.84			3.54
Allowance for cancellation	(0.27		)	(0.25		)	(0.24		)	(0.25		)
Allowance for cancellation on trust investments													(0.21		)	(0.24		)	(0.27		)	(0.25		)
Backlog of trust-funded deferred revenue, net of estimated allowance for cancellation	$	5.44		$	5.26		$	5.12		$	5.21		5.02			5.30			5.62			5.34
Backlog of insurance-funded deferred revenue⁽¹⁾	6.16			6.16			5.97			5.97
Backlog of insurance-funded revenue ⁽¹⁾													6.43			6.43			6.37			6.37
Total backlog of deferred revenue	$	11.60		$	11.42		$	11.09		$	11.18		$	11.45		$	11.73		$	11.99		$	11.71

Preneed receivables, net and trust investments	$	4.61		$	4.41		$	4.27		$	4.37		$	4.12		$	4.43		$	4.79		$	4.49
Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts	0.58			0.58			0.57			0.57			0.58			0.58			0.58			0.58
Allowance for cancellation on trust investments	(0.27		)	(0.25		)	(0.24		)	(0.25		)	(0.21		)	(0.24		)	(0.27		)	(0.25		)
Assets associated with backlog of trust-funded deferred revenue, net of estimated allowance for cancellation	$	4.92		$	4.74		$	4.60		$	4.69		4.49			4.77			5.10			4.82
Insurance policies associated with insurance-funded deferred revenue⁽¹⁾	6.16			6.16			5.97			5.97			6.43			6.43			6.37			6.37
Total assets associated with backlog of preneed deferred revenue	$	11.08		$	10.90		$	10.57		$	10.66
Total assets associated with backlog of preneed revenue													$	10.92		$	11.20		$	11.47		$	11.19


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

The fair value of our trust investments was based on a combination of quoted market prices, observable inputs such as interest rates or yield curves ~~and/or~~and appraisals. As of ~~June 30, 2019,~~March 31, 2020, the difference between the backlog and asset ~~fair value~~market amounts ~~totaled $0.52 billion, consisting of~~represents $0.23 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, ~~$0.06~~$0.09 billion collected from customers that were not required to be deposited into ~~trust,~~trusts, and ~~$0.23~~$0.21 billion in allowable cash distributions from trust assets. As of ~~June 30, 2019,~~March 31, 2020, the fair value of the total backlog comprised ~~$3.07~~$2.85 billion related to cemetery contracts and ~~$8.53~~$8.60 billion related to funeral contracts. As of ~~June 30, 2019,~~March 31, 2020, the fair value of the assets associated with the backlog of trust-funded deferred revenue comprised ~~$2.82~~$2.60 billion related to cemetery contracts and ~~$2.1~~$1.89 billion related to funeral contracts. As of March 31, 2020, the backlog of insurance-funded contracts of $6.43 billion is equal to the proceeds we expect to receive from the associated insurance policies.

Trust Investments

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

Also, we are required by state and provincial law to pay a portion of the proceeds from the preneed or atneed sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus generally remains in the trust in perpetuity and the ~~net ordinary~~ earnings or elected distributions are withdrawn ~~with the intention of offsetting~~as allowed to defray the expense to maintain the cemetery property. While many states require that net capital gains or losses be retained and added to the corpus, certain states allow the net realized capital gains and losses to be included in the ~~net ordinary~~ earnings that are distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.

FORM 10-Q 33

PART I

Our trusts have been and continue to be impacted by adverse conditions in the U.S. and global financial markets primarily as a result of COVID-19. The fair market value of our trust investments declined sharply in March 2020.

As of March 31, 2020, we have net unrealized losses of $462.4 million in our trusts, as discussed in Note 3. At March 31, 2020, these net unrealized losses represented 9.6% of our original cost basis of $4.8 billion. As explained in “Critical Accounting Policies, Fair Value Measurements” in our 2019 annual report on Form 10-K, changes in unrealized gains and/or losses related to these securities are reflected in Other comprehensive income (loss) or Other income (loss) and offset by the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus interests in those unrealized gains and/or losses. Therefore, the majority of these net unrealized losses have no net impact on our unaudited Condensed Consolidated Statement of Operations for the three months ended March 31, 2020. We do, however, rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations.

Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and services trusts as well as the cemetery perpetual care trusts. The majority of the trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. Most of the trustees engage the same independent investment managers. These trustees, with input from SCI's wholly-owned registered investment advisor, establish an

investment policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection. The investments are also governed by state and provincial guidelines. All of the trusts seek to control risk and volatility through a combination of asset classes, investment styles, and a diverse mix of investment managers.

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

Historically, the cemetery perpetual care trusts' investment objectives, in accordance with state and provincial regulations, have emphasized providing a steady stream of current investment income with some capital appreciation in order to provide for the maintenance and beautification of cemetery properties. However, during 2016, SCI worked with several state legislatures to adjust laws and regulations to allow for a fixed distribution rate from cemetery perpetual care trusts' assets regardless of the level of ordinary income, similar to university endowments. As a result, beginning in 2017, a significant portion of our cemetery perpetual care trust assets were liquidated and reinvested in a more growth-oriented asset allocation with investment objectives similar to the funeral and cemetery merchandise and service trusts. ~~Currently,~~As of March 31, 2020, the asset allocation is almost evenly split ~~approximately evenly~~ between income and growth orientations. We expect this asset allocation shift to enhance asset growth and provide further protection to our customers. Additionally, we expect more states to adopt total return distribution legislation in the coming years.

As of ~~June 30, 2019,~~March 31, 2020, approximately 87% of our trusts were under the control and custody of three large financial institutions. The U.S. trustees primarily use four managed limited liability companies (LLCs), one for each merchandise and service trust type and two for the cemetery perpetual care trust type, ~~and~~ each with an independent trustee as custodian. Each financial institution acting as trustee manages its allocation of trust assets in accordance with the investment policy through the purchase of the appropriate LLCs' units. For those accounts not eligible for participation in the LLCs or ~~in the event~~where a particular state's regulations contain other investment restrictions, the trustee utilizes institutional mutual funds that comply with our investment policy or with such state restrictions. The U.S. trusts include a modest allocation to alternative investments. These alternative investments are held in vehicles structured as LLCs and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective alternative investment LLCs.

Investment Structures

Each financial institution, acting as trustee, manages its allocation of trust assets in compliance with the investment policy primarily through the purchase of one of four managed LLCs, ~~one for each~~matched to their trust type and each with a different, independent trustee acting as custodian. The managed LLCs use the following structures for investments:

Commingled ~~funds.~~Funds. These funds allow the trusts to access, at a reduced cost, some of the same investment managers and strategies used elsewhere in the portfolios.

Mutual ~~funds.~~Funds. The trust funds employ institutional share class mutual funds where operationally or economically efficient. These mutual funds are utilized to invest in various asset classes including U.S. equities, non-U.S. equities, corporate bonds,

34 Service Corporation International

PART I

government bonds, high yield bonds, and commodities, all of which are governed by guidelines outlined in their individual prospectuses.

Separately ~~managed accounts.~~Managed Accounts. To reduce the costs to the investment portfolios, the trusts utilize separately managed accounts where appropriate.

Asset Classes

Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility. The majority of the fixed income allocation for the trusts is invested in institutional share class mutual funds. Where the trusts have direct investments in individual fixed income securities, these are primarily in government and corporate instruments.

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

Equity investments have historically provided long-term capital appreciation in excess of inflation. The trusts have direct investments in individual equity securities primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment styles (i.e., growth and value). The majority of the equity allocation is managed by institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, we believe these securities are well-diversified.As of ~~June 30, 2019,~~March 31, 2020, the largest single equity position represented less than 1% of the total securities portfolio.

~~The objective of~~ ~~private~~Private equity fund investments isserve to provide high rates of return with reduced volatility and lower correlation. These investments are typically long term in duration. These investments are diversified by strategy, sector, manager, and vintage year. The investments consist of numerous limited partnerships, including but not limited to private equity, real estate, ~~fund of funds,~~energy, infrastructure, transportation, distressed debt, and mezzanine financing. The trustees that have oversight of their respective alternative LLCs work closely with the investment advisor in making all investment decisions.

Trust Performance

During the ~~six~~three months ended ~~June 30, 2019,~~March 31, 2020, the Standard and Poor’s 500 Index ~~increased 18.5%~~decreased 19.6% and the Barclay’s Aggregate Index increased ~~6.1%, and~~3.2%. This compares to the ~~combined~~ SCI trusts ~~increased by 13.1%.~~that decreased 15.9% during the same period, which have a diversified allocation of approximately 50% equities, 36% fixed income securities, 8% alternative and other investments with remaining 6% available in cash.

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

Results of Operations — Three Months Ended ~~June 30,~~ March 31, 2020 and2019 ~~and 2018~~

Management Summary

In the ~~three months ended June 30, 2019,~~first quarter of 2020, we reported consolidated net income attributable to common stockholders of ~~$72.3~~$81.9 million ($~~0.39~~0.45 per diluted share) compared to net income attributable to common stockholders ~~for the same period~~ in ~~2018~~2019 of ~~$103.2~~$79.3 million ($~~0.55~~0.43 per diluted share). These results were ~~affected~~impacted by ~~the following items:~~certain significant items including:

Three Months Ended June 30,
2019 2018
(In millions)
Pre-tax (losses) gains from divestitures and impairment, net $ (11.8 ) $ 6.9
Pre-tax loss from the early extinguishment of debt $ (7.6 ) $ —
Pre-tax legal settlement $ 1.6
$ —
Tax effect from above items $ 4.2
$ (2.2 )
Change in certain tax reserves $ (1.2 ) $ 16.1



	Three Months Ended March 31,
	2020			2019
	(In millions)
Pre-tax gains (losses) on divestitures and impairment charges, net	$	4.5		$	(1.9	)
Pre-tax loss on early extinguishment of debt, net	$	(0.1	)	$	—
Pre-tax legal matters	$	—		$	(8.0	)
Tax effect from special items	$	(1.2	)	$	2.5
Change in uncertain tax reserves and other	$	0.2		$	—

In addition to the above items, ~~referenced in~~ the ~~table above, growth in our cemetery segment coupled with a favorable adjusted effective tax rate more than offset an anticipated increase in interest expense~~decrease over the prior year quarter can be attributed to lower gross profit primarily related to less preneed cemetery property sales due to the ~~timing~~effects of ~~our recent debt refinancing.~~the COVID-19 pandemic, which was partially offset by reductions in corporate general and administrative expenses and lower interest expense.

FORM 10-Q 35

PART I

Funeral Results

Three Months Ended June 30,
2019 2018
(Dollars in millions, except average revenue per service)
Consolidated funeral revenue $ 479.0
$ 468.6
Less: Revenue associated with acquisitions/new construction 9.2
2.6
Less: Revenue associated with divestitures 0.3
1.7
Comparable⁽¹⁾ funeral revenue
469.5
464.3
Less: Comparable recognized preneed revenue 39.1
33.8
Less: Comparable general agency and other revenue 31.6
33.9
Adjusted comparable funeral revenue $ 398.8
$ 396.6
Comparable services performed 76,439
74,913
Comparable average revenue per service⁽²⁾
$ 5,217
$ 5,294

Consolidated funeral operating profit $ 90.6
$ 90.4
Less: Operating loss associated with acquisitions/new construction (0.6 ) 0.1
Less: Operating loss associated with divestitures (0.2 ) (1.5 )
Comparablefuneral operating profit
$ 91.4
$ 91.8



	Three Months Ended March 31,
	2020			2019
	(Dollars in millions, except average revenue per service)
Consolidated funeral revenue	$	504.9		$	492.8
Less: revenue associated with acquisitions/new construction	7.0			0.9
Less: revenue associated with divestitures	—			1.9
Comparable⁽¹⁾ funeral revenue	497.9			490.0
Less: comparable recognized preneed revenue	32.6			31.3
Less: comparable general agency and other revenue	29.2			33.1
Adjusted comparable funeral revenue	$	436.1		$	425.6
Comparable services performed	85,169			83,294
Comparable average revenue per service⁽²⁾	$	5,120		$	5,110

Consolidated funeral gross profit	$	103.6		$	105.4
Less: gross profit associated with acquisitions/new construction	1.0			0.4
Less: gross losses associated with divestitures	(0.3		)	(0.8		)
Comparable⁽¹⁾funeral gross profit	$	102.9		$	105.8


⁽¹⁾	We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, ~~2018~~2019 and ending ~~June 30, 2019.~~March 31, 2020 .

⁽²⁾

We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding general agency revenue, recognized preneed ~~revenue, general agency~~ revenue, and other revenue to avoid distorting our average of normal funeral services revenue, by the comparable number of services performed during the period. Recognized preneed revenue ~~are~~is preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, net, and ~~are~~ excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed.

Funeral Revenue

Consolidated revenue from funeral operations was ~~$479.0~~$504.9 million for the three months ended ~~June 30, 2019~~March 31, 2020, compared to ~~$468.6~~$492.8 million for the same period in ~~2018.~~2019. This increase is primarily attributable to the $6.1 million increase ~~of $6.6 million~~ in revenue contributed by acquired and newly constructed properties and ~~a $5.2~~the $7.9 million increase in comparable revenue as described below, partially offset by ~~$1.4~~the loss of $1.9 million in revenue contributed by properties that have been subsequently divested.

Comparable revenue from funeral operations was ~~$469.5~~$497.9 million for the three months ended ~~June 30, 2019~~March 31, 2020 compared to ~~$464.3~~$490.0 million for the same period in ~~2018.~~2019. This ~~$5.2~~$7.9 million, or 1.6% increase ~~is due~~was primarily attributable to ~~2.0% higher comparable~~a 2.3% increase in services performed compared to 2019. The increase in services performed comprises a 1.5% increase in services performed by our funeral service locations and a ~~$5.3~~7.1% increase in cremation services performed by our non-funeral home channel. We also experienced a $1.3 million increase in recognized preneed revenue. These revenue ~~partially~~increases were somewhat offset by ~~1.5%~~a $3.9 million decrease in ~~average~~other revenue ~~per funeral service and lower other revenue. Other revenue decreased $2.3 million,~~ primarily due to lower ~~General Agency (GA)~~comparable general agency revenue as a result of a decrease in insurance-funded preneed sales ~~production.~~production due to the social distancing effects of the pandemic.

~~Organic~~Average revenue per funeral service increased 0.2% for the three months ended March 31, 2020 compared to the same period in 2019 as a 1.4% increase in the organic sales average ~~growth of 1.5%~~ was ~~more than~~ offset by ~~190~~a 130 basis point increase in the total cremation rate. Our total comparable cremation rate ~~which~~ increased to ~~56.7%~~58.2% in ~~the three months ended June 30,~~2020 from 56.9% in 2019 ~~from 54.8% in 2018~~primarily as a result of an increase in ~~both~~ direct ~~cremations and cremations with service.~~cremations.

Funeral ~~Operating~~Gross Profit

Consolidated funeral ~~operating~~gross profit ~~was essentially flat~~decreased $1.8 million, or 1.7%, in 2020 compared to 2019. This decrease is primarily attributable to a decrease in comparable funeral gross profit of $2.9 million, or 2.7%. Comparable funeral gross profit decreased $2.9 million to $102.9 million and the ~~prior year~~gross profit percentage decreased 90 basis points to 20.7%, as ~~we focused~~the revenue increases described above were more than offset by an increase in inflationary employee-related expenses and an increase in provision for expected credit losses based on ~~managing our fixed cost structure against limited revenue growth.~~current and projected economic conditions surrounding COVID-19.

36 Service Corporation International

PART I

Cemetery Results

Three Months Ended June 30,
2019 2018
(In millions)
Consolidated cemetery revenue $ 333.6
$ 327.4
Less: Revenue associated with acquisitions/new construction 5.3
1.3
Less: Revenue associated with divestitures 0.3
0.5
Comparable⁽¹⁾ cemetery revenue
$ 328.0
$ 325.6

Consolidated cemetery operating profit $ 100.6
$ 97.7
Less: Operating profit associated with acquisitions/new construction 0.9
0.3
Less: Operating profit associated with divestitures 0.1
0.1
Comparable cemetery operating profit $ 99.6
$ 97.3



	Three Months Ended March 31,
	2020		2019
	(In millions)
Consolidated cemetery revenue	$	298.1	$	305.4
Less: revenue associated with acquisitions	0.4		—
Less: revenue associated with divestitures	0.1		0.5
Comparable⁽¹⁾ cemetery revenue	$	297.6	$	304.9

Consolidated cemetery gross profit	$	75.5	$	86.4
Less: gross profit associated with acquisitions	0.2		—
Less: gross profit associated with divestitures	—		—
Comparable⁽¹⁾ cemetery gross profit	$	75.3	$	86.4


⁽¹⁾	We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, ~~2018~~2019 and ending ~~June 30, 2019.~~March 31, 2020.

Cemetery Revenue

Consolidated revenue from our cemetery operations ~~increased $6.2~~decreased $7.3 million, or ~~1.9%~~2.4%, infor the ~~second quarter of 2019~~three months ended March 31, 2020 compared to the same period in ~~2018~~2019 primarily due to a ~~$4.0 million increase in revenue contributed by acquired properties and a $2.4 million increase~~decrease in comparable ~~cemetery~~ revenue, The $7.3 million, or 2.4% decrease in comparable revenue ~~growth over the prior year quarter is~~was primarily ~~due~~attributable to ~~an increase~~a $12.9 million, or 10.0%, decrease in recognized preneed property revenue ~~from sales into existing developed~~as a result of a 8.4% decline in comparable preneed and atneed cemetery property ~~projects~~sales production due to the social distancing effects of the pandemic. These revenue decreases were partially offset by ~~lower other~~a $3.9 million, or 4.8%, increase in atneed revenue ~~(primarily endowment care trust fund income) due to the timing of capital gains~~ and ~~other distributions.~~a $1.8 million, or 2.7%, increase in recognized preneed merchandise and service revenue.

Cemetery ~~Operating~~Gross Profit

Consolidated cemetery ~~operating~~gross profit ~~increased $2.9~~decreased $10.9 million, or ~~3.0%~~12.6%, in the ~~second quarter of 2019~~three months ended March 31, 2020 compared to the same period in ~~2018~~2019, which is primarily ~~due~~attributable to ~~a $0.6~~the decrease in comparable gross profit of $11.1 million, or 12.8%. Comparable cemetery gross profit decreased $11.1 million to $75.3 million, and the gross profit percentage decreased 300 basis points to 25.3%, which was primarily driven by the decrease in revenue described above coupled with an increase in ~~operating profit contributed by acquired properties~~inflationary employee-related expenses, increased maintenance expenses, and ~~a $2.3 million~~an increase in ~~comparable operating profit to $99.6 million. The $2.3 million increase in comparable cemetery operating profit is primarily reflecting higher recognized preneed property revenue~~provision for expected credit losses based on current and ~~the impact of cost reduction initiatives which more than offset the anticipated decline of high margin trust fund income.~~projected economic conditions surrounding COVID-19.

Other Financial Statement Items

Corporate General and Administrative Expenses

Corporate General and administrative expenses

~~General and administrative expenses decreased $1.8~~ were $31.8 million first three months of 2020 compared to ~~$29.4~~$43.0 million in ~~the second quarter of~~ 2019. ~~The current year quarter included~~Excluding a ~~reduction in~~$8.0 million legal expenses of 1.6 million. Excluding these costs, general and administrative expenses were relatively flat compared to the second quarter of 2018 due to continued effective cost management offsetting normal fixed cost growth.

~~(Losses) gains on divestitures and impairment charges, net~~

Losses on divestitures were $11.8 million in 2019, decreasing $18.7 million from the gain of $6.9 million in 2018. This is the result of divestitures of non-strategic funeral and cemetery locations in the United States and Canada.

~~Interest expense~~

~~Interest expense increased $2.8 million to $47.3 million in the second quarter of 2019. This increase is primarily due to higher interest rates related to our floating rate debt.~~

~~Loss on early extinguishment of debt~~

~~We incurred a $7.6 million loss on early extinguishment of debt in the second quarter of 2019 associated with the execution of strategic refinancing transactions.~~

~~Provision for income taxes~~

~~Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are~~reserve 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 24.5% and 13.4% for the three months ended June 30, 2019 and 2018, respectively. The higher effective tax rate for the three months ended June 30, 2019 was primarily due to favorable adjustments allowed under SAB 118 in the prior year ~~partially offset with the higher excess tax benefits from increased exercises of stock options in 2019.~~

~~Weighted average shares~~

The diluted weighted average number of shares outstanding was 185.7 million in the three months ended June 30, 2019, compared to 187.2 million in the same period in 2018. The decrease in the number of shares reflects the impact of shares repurchased under our share repurchase program.

~~Management Summary~~

In the six months ended June 30, 2019, we reported net income attributable to common stockholders of $151.7 million ($0.82 per diluted share) compared to net income attributable to common stockholders for the same period in 2018 of $185.2 million ($0.98 per diluted share). These results were affected by the following items:

Six Months Ended June 30,
2019 2018
(In millions)
Pre-tax (losses) gains from divestitures and impairment charges, net $ (13.7 ) $ 7.3
Pre-tax losses from the early extinguishment of debt, net $ (7.6 ) $ (10.1 )
Pre-tax legal settlements $ (6.4 ) $ —
Tax benefit from above items $ 6.8
$ (0.6 )
Change in certain tax reserves and other $ (1.2 ) $ 17.3

In addition to the items referenced in the table above, growth in our cemetery segment coupled with a favorable adjusted effective tax rate more than offset an anticipated increase in interest expense related to the timing of our recent debt refinancing and decreased revenue from fewer funeral services performed due to a weaker 2019 flu season.

~~Funeral Results~~

Six Months Ended June 30,
2019 2018
(Dollars in millions, except average revenue per service)
Consolidated funeral revenue $ 971.8
$ 983.0
Less: revenue associated with acquisitions/new construction 17.7
2.9
Less: revenue associated with divestitures 1.1
4.2
Comparable⁽¹⁾ funeral revenue
953.0
975.9
Less: comparable recognized preneed revenue 69.9
66.3
Less: comparable general agency and other revenue 64.7
62.1
Adjusted comparable funeral revenue $ 818.4
$ 847.5
Comparable services performed 157,460
160,796
Comparable average revenue per service⁽²⁾
$ 5,198
$ 5,271

Consolidated funeral operating profit $ 196.0
$ 210.9
Less: operating profit (loss) associated with acquisitions/new construction 0.1
(0.2 )
Less: operating loss associated with divestitures (0.6 ) (2.4 )
Comparablefuneral operating profit
$ 196.5
$ 213.5


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

~~(2)~~

We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding recognized preneed revenue, general agency revenue, and other revenue to avoid distorting our average of normal funeral services revenue, by the comparable number of services performed during the period. Recognized preneed revenue are preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, net and are excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed.

~~Funeral Revenue~~

Consolidated revenue from funeral operations was $971.8 million for the six months ended June 30, 2019 compared to $983.0 million for the same period in 2018. This decrease is primarily attributable to a $22.9 million decrease in comparable

revenue as described below and $3.1 million in revenue contributed by properties that have been subsequently divested partially offset by a $14.8 million increase in revenue contributed by acquired and newly constructed properties.

Comparable revenue from funeral operations was $953.0 million for the six months ended June 30, 2019 compared to $975.9 million for the same period in 2018. The $22.9 million decrease was primarily due to a 2.1% decrease in comparable services performed, resulting from a weaker 2019 flu season, and a 1.4% decrease in the average revenue per service.

Comparable average revenue per service declined $73, or 1.4%, as a 1.1% increase in the organic sales average was offset by a 180 basis point increase in the total comparable cremation rate, which increased to 56.5% in the first six months of 2019 from 54.7% in 2018 as a result of an increase in both direct cremations and cremations with service.

~~Funeral Operating Profit~~

Consolidated funeral operating profit decreased $14.9 million, or 7.1%, in the first six months of 2019 compared to the same period in 2018. This decrease is primarily attributable to a decrease in comparable funeral operating profit of $17.0 million, or 8.0%. Comparable funeral operating profit decreased $17.0 million to $196.5 million and the operating margin percentage decreased 130 basis points to 20.6%, which is primarily due to the decreased revenue from funeral services performed resulting from a weaker 2019 flu season coupled with effectively managing our fixed cost structure.

~~Cemetery Results~~

Six Months Ended June 30,
2019 2018
(In millions)
Consolidated cemetery revenue $ 639.0
$ 607.6
Less: revenue associated with acquisitions 9.8
1.4
Less: revenue associated with divestitures 0.6
1.0
Comparable⁽¹⁾ cemetery revenue
$ 628.6
$ 605.2

Consolidated cemetery operating profit $ 187.0
$ 173.0
Less: operating profit associated with acquisitions 0.8
0.4
Less: operating profit associated with divestitures 0.2
—
Comparable cemetery operating profit $ 186.0
$ 172.6


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

~~Cemetery Revenue~~

Consolidated revenue from our cemetery operations increased $31.4 million, or 5.2%, in the six months ended June 30, 2019 compared to the same period in 2018, primarily attributable to a $23.4 million increase in comparable revenue and $8.4 million in revenue contributed by acquired properties. The comparable revenue growth over the prior year is due to increased recognized preneed property revenue from sales into existing developed cemetery property projects and higher endowment care trust fund income. These increases were partially offset by lower atneed cemetery revenue as activities were reduced from a milder flu season compared to the prior year.

~~Cemetery Operating Profit~~

Consolidated cemetery operating profit increased $14.0 million, or 8.1%, in the six months ended June 30, 2019 compared to the same period in 2018 primarily as a result of a $13.4 million increase in comparable operating profit. Comparable cemetery operating profit increased $13.4 million to $186.0 million primarily due to the revenue increases described above as well as the impact of cost reduction initiatives. The operating margin percentage increased 110 basis points to 29.6%.

~~Other Financial Statement Items~~

~~General and Administrative Expenses~~

General and administrative expenses increased $6.0 million to $71.9 million in the six months ended June 30, 2019 compared to $65.9 million in the same period of 2018. The current year period includes $6.4 million related to a legal reserve established for future settlements. Excluding these costs,quarter, corporate general and administrative expenses decreased ~~$0.4~~$3.2 million ~~due~~primarily related to ~~effective cost management.~~lower long-term incentive compensation and self-insurance reserves in 2020.

Gains (Losses) ~~Gains~~ on Divestitures and Impairment Charges, Net

~~(Losses) gains~~We recognized a $4.5 million net pre-tax gain on asset divestitures and ~~impairment charges,~~impairments, net ~~declined $21.0~~in the first quarter of 2020 as $7.6 million in ~~the six months ended June 30, 2019 compared to the same period of 2018. These losses and~~ gains ~~were~~from asset divestitures associated with ~~the divestitures of~~ non-strategic funeral and cemetery locations in the United States and Canada ~~and the disposal of~~were partially offset by $3.1 million in impairment charges, primarily related to certain ~~transportation assets.~~tradenames.

Interest Expense

Interest expense ~~increased $6.6~~ decreased $3.0 million to ~~$94.7~~$44.4 million ~~in the six~~for three three months ended ~~June 30,~~March 31, 2020 compared to $47.4 million for three months ended March 31, 2019 primarily due to ~~increased~~lower interest rates on our floating rate debt.

~~Loss on Early Extinguishment of Debt, Net~~

We incurred losses of $7.6 million in the six months ended June 30, 2019 and $10.1 million in the same period of 2018 on the early extinguishment of debt associated with the execution of strategic refinancing transactions.

Provision for Income Taxes

Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, events such as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitations, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was 22.7% and ~~19.3%~~21.0% for the ~~six~~three months ended ~~June 30,~~March 31, 2020 and 2019, ~~and 2018,~~ respectively. The ~~higher~~ effective tax rate for the ~~six~~three months ended ~~June 30, 2019 was~~March 31, 2020 is above the 21% federal statutory tax rate primarily due to ~~favorable adjustments allowed under SAB 118 in the prior year,~~state tax expense and permanent differences, partially offset ~~with the higher excess~~by tax benefits ~~from increased exercises~~recognized during the quarter on the settlement of ~~stock options in 2019.~~employee share-based awards.

FORM 10-Q 37

PART II

Weighted Average Shares

The diluted weighted average number of shares outstanding was ~~185.5~~183.6 million infor the ~~first six~~three months ~~of 2019,~~ended March 31, 2020 compared to ~~188.5~~185.3 million infor the same period in ~~2018.~~2019, The decrease ~~in the number of shares~~primarily reflects the impact of shares repurchased under our share repurchase program.

Critical Accounting Policies, Recent Accounting Pronouncements, and Accounting Changes

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Although we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from the estimates on which our financial statements are prepared at any given point of time. Changes in these estimates could materially affect our consolidated financial position, consolidated results of operations, or cash flows. Significant items that are subject to such estimates and assumptions include revenue and expense accruals, fair value of merchandise and perpetual care trust assets, and the allocation of purchase price to the fair value of assets acquired. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, ~~2018.~~2019.

There were no significant changes to our accounting policies that have occurred subsequent to December 31, ~~2018,~~2019, except as described below within ~~Recent~~"Recent Accounting Pronouncements and Accounting ~~Changes~~Changes".

Recent Accounting Pronouncements and Accounting Changes

For discussion of recent accounting pronouncements and accounting changes, see Part I, Item 1. Financial Statements, Note 2 of this Form 10-Q.

Cautionary Statement on Forward-Looking Statements

The statements in this Form 10-Q that are not historical facts are forward-looking statements made in reliance on the ~~"safe harbor"~~safe harbor protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as ~~"believe," "estimate," "project," "expect," "anticipate,"~~“believe”, “estimate”, “project”, “expect”, “anticipate”, or ~~"predict,"~~“predict” that convey the uncertainty of future events or outcomes. These statements are based on assumptions that we believe are reasonable; however, many important factors could cause our actual consolidated results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by, ~~us,~~ or on ~~our behalf. Important~~behalf of, the Company. These factors ~~which could cause actual results~~are discussed below. We assume no obligation and make no undertaking to ~~differ materially from those in~~publicly update or revise any forward-looking statements ~~include, among others,~~made herein or any other forward-looking statements made by the ~~following:~~Company, whether as a result of new information, future events, or otherwise.

Our affiliated ~~funeral and cemetery~~ trust funds own investments in securities, which are affected by market conditions that are beyond our control.

We may be required to replenish our affiliated funeral and cemetery trust funds to meet minimum funding requirements, which would have a negative effect on our earnings and cash flow.

Our ability to execute our strategic plan depends on many factors, some of which are beyond our control.

Our credit agreements contain covenants that may prevent us from engaging in certain transactions.

If we lost the ability to use surety bonding to support our preneed ~~funeral and preneed cemetery~~ activities, we may be required to make material cash payments to fund certain trust funds.

~~The funeral and cemetery industry is competitive.~~

Increasing death benefits related to preneed contracts funded through life insurance or annuity contracts may not cover future increases in the cost of providing a price-guaranteed service.

FORM 10-Q 38

PART I

The financial condition of third-party insurance companies that fund our preneed contracts may impact our future revenue.

Unfavorable results of litigation could have a material adverse impact on our financial statements.

Unfavorable publicity could affect our reputation and business.

~~If the number of deaths in our markets decline, our cash flows and revenue may decrease.~~

~~If we are not able to respond effectively to changing consumer preferences, our market share, revenue, cash flows, and/or profitability could decrease.~~

~~The continuing upward trend in the number of cremations performed in North America could result in lower revenue, operating profit, and cash flows.~~

~~Our funeral home and cemetery businesses are high fixed-cost businesses.~~

~~Regulation and compliance could have a material adverse impact on our financial results.~~

~~Cemetery burial practice claims could have a material adverse impact on our financial results.~~

We use a combination of insurance, self-insurance, and large deductibles in managing our exposure to certain inherent risks; therefore, we could be exposed to unexpected costs that could negatively affect our financial performance.

~~A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.~~

Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could have a material adverse effect on the results of our operations, financial condition, or cash flows.

Declines in overall economic conditions beyond our control could reduce future potential earnings and cash flows and could result in future impairments to goodwill and/or other intangible assets.

Any failure to maintain the security of the information relating to our customers, their loved ones, our associates, and our vendors could damage our reputation, could cause us to incur substantial additional costs and to become subject to litigation, and could adversely affect our operating results, financial condition, or cash flow.

Our Canadian business exposes us to operational, economic, and currency risks.

Our level of indebtedness could adversely affect our ability to raise additional capital to fund our operations, limit our ability to react to changes in the economy or our industry, and may prevent us from fulfilling our obligations under our indebtedness.

A failure of a key information technology ~~systems~~system or ~~processes~~process could disrupt and adversely affect our business.

Failure to maintain effective internal control over financial reporting could adversely affect our results of operations, investor confidence, and our stock price.

The application of unclaimed property laws by certain states to our preneed funeral and cemetery backlog could have a material adverse impact on our liquidity, cash flows, and financial results.

The funeral and cemetery industry is competitive.

If the number of deaths in our markets declines, our cash flows and revenue may decrease. Changes in the number of deaths are not predictable from market to market or over the short term.

If we are not able to respond effectively to changing consumer preferences, our market share, operating results, financial condition, or cash flow could decrease.

The continuing upward trend in the number of cremations performed in North America could result in lower revenue, operating profit, and cash flows.

Our funeral and cemetery businesses are high fixed-cost businesses.

Regulation and compliance could have a material adverse impact on our financial results.

~~For further information~~Cemetery burial practice claims could have a material adverse impact on ~~these and other risks and uncertainties, see~~ our Securities and Exchange Commission filings, including our 2018 Annual Report on Form 10-K. Copies of this document as well as other SEC filings can be obtained from our website at www.sci-corp.com. We assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events, or otherwise.financial results.


•	The COVID-19 pandemic has had an adverse effect on our business and results of operations and future public health threats could have additional material adverse consequences for our business and results of operations.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

FORM 10-Q 39

PART I

Marketable Equity and Debt Securities — Price Risk

In connection with our preneed operations and sales, the related trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values as of ~~June 30, 2019~~March 31, 2020 are presented in

Part I, Item 1. Financial Statements, Note 3 of this Form 10-Q. Also, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations ~~Financial Conditions,~~"Financial Condition, Liquidity and Capital ~~Resources~~,Resources" section for discussion of trust investments.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of ~~June 30, 2019,~~March 31, 2020, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (CEO) and Chief Financial Officer (CFO), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (SEC) reports we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. Based on our evaluation, our CEO and CFO have concluded that our disclosure controls and procedures are effective as of ~~June 30, 2019~~March 31, 2020 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our consolidated financial condition, consolidated results of operations, and cash flows for the periods presented in conformity with US GAAP.

Changes in Internal Control Over Financial Reporting

NoDuring the quarter ended March 31, 2020, the Company implemented new controls as part of the efforts to adopt the new current expected credit losses standard (ASC 326). In particular, new controls related to gathering information and evaluating the analysis used in the development of disclosures required and accumulating and maintaining the information necessary to comply with the ongoing requirements were implemented. We evaluated the design of these new controls before adoption during the quarter ended March 31, 2020. We will continue to evaluate the need for additional internal controls over financial reporting. However, there were no additional changes in our internal control over financial reporting ~~occurred~~ during the quarter ended ~~June 30, 2019~~March 31, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

40 Service Corporation International

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings is set forth in Part I, Item 1. Financial Statements, Note 109 of this Form 10-Q, which information is hereby incorporated by reference herein.

Item 1A. Risk Factors

~~There~~The COVID-19 pandemic has had an adverse effect on our business and results of operations and future public health threats could have ~~been no~~additional material ~~changes~~adverse consequences for our business and results of operations.

The recent spread of COVID-19 has impacted the global economy and our business and results of operations. As the result of the COVID-19 pandemic and the related adverse economic and health consequences, we have experienced and could continue to be subject to any of the following risks, any of which could have a material, adverse effect on our business, financial condition, and results of operations: our preneed sales may decrease, our preneed installment contract defaults may increase, and our funeral and cemetery revenues may decrease due to reduced and deferred services, as a result of actual or perceived consumer financial constraints, government restrictions on gathering sizes and voluntary social distancing; the value of our preneed trust investments and related net investment income may diminish due to the disruption in the financial markets; illnesses could disrupt our workforce; our supply chain could be disrupted; our operating costs may increase due to increased overtime, supply costs, health insurance, worker’s compensation claims, or other effects related to COVID-19.

Given the ongoing and dynamic nature of the spread of COVID-19, it is difficult to predict, with certainty, the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain and largely outside of our control.

Other Risk Factors asare set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, ~~2018.~~2019.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

The following table summarizes our share repurchases during the three months ended ~~June 30, 2019:~~March 31, 2020:

Period Total number of shares purchased Average price paid per share Total number of shares purchased as part of publicly announced programs Dollar value of shares that may yet be purchased under the program
April 1, 2019 - April 30, 2019 12,486
$ 39.91
12,486
$ 180,167,864
May 1, 2019 - May 31, 2019 104,539
$ 42.99
104,539
$ 175,673,783
June 1, 2019 - June 30, 2019 220,403
$ 45.36
220,403
$ 165,676,767
337,428
337,428



Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares That May Yet be Purchased Under the Program
January 1, 2020 — January 31, 2020 ⁽¹⁾	389,755	$	46.33	314,398	$	297,477,873
February 1, 2020 — February 29, 2020	220,401	$	50.01	220,401	286,456,080
March 1, 2020 — March 31, 2020 ⁽²⁾	2,290,566	$	40.90	2,268,317	193,678,239
	2,900,722			2,803,116

⁽¹⁾ 75,357 shares purchased in January 2020 in connection with the surrender of shares by an associate to satisfy certain tax withholding obligations under compensation plans. These repurchases were not part of our publicly announced program and do not affect our share repurchase program.

⁽²⁾ 22,249 shares purchased in March 2020 in connection with the surrender of shares by an associate to satisfy certain tax withholding obligations under compensation plans. These repurchases were not part of our publicly announced program and do not affect our share repurchase program.

FORM 10-Q 41

PART II

Item 3. Defaults Upon Senior ~~Securities.~~Securities

None.

Item 4. Mine Safety ~~Disclosures.~~Disclosures

Not applicable.

Item 5. Other ~~Information.~~Information

~~None.~~

No other information.

Item 6. Exhibits



Exhibit Number		Description
3.1	—	Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-10867 on Form S-3).
3.2	—	Articles of Amendment to Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1996).
3.3	—	Certificate of Amendment to Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 8-K filed May 25, 2018).
3.4	—	Statement of Resolution Establishing Series of Shares of Series D Junior Participating Preferred Stock, dated July 27, 1998 (Incorporated by reference to Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 1998).
3.5	—	Bylaws of the Company. (Incorporated by reference to Exhibit 3.4 to Form 8-K filed May 25, 2018).
4.1		—		~~Fifteenth Supplemental~~Senior Indenture dated as of ~~May 21, 2019~~February 1, 1993 by and between ~~Service Corporation International, The Bank of New York Mellon Trust~~the Company ~~N.A., as successor to~~and The Bank of New York, as ~~original~~ trustee (Incorporated by reference as Exhibit 4.1 to Form S-4 filed September 2, 2004 (File No. 333-118763)).
4.2	—	Agreement of Resignation, Appointment of Acceptance, dated December 12, 2005, among the Company, The Bank of New York and ~~BOKF, NA,~~The Bank of New York Trust Company, N.A., appointing a successor trustee for the Senior Indenture dated as ~~series trustee.~~of February 1, 1993 (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the fiscal quarter ended June 30, 2005).
10.1		—		~~Seventh Amendment to the 401(k) Retirement Savings Plan.~~Form of Performance Unit Grant Award Agreement
~~10.2~~		—		Credit Agreement, dated May 22, 2019, between Service Corporation International, JPMorgan Chase Bank, N.A., as administrative agent, and certain other financial institutions, as lenders party thereto (Incorporated by reference to Exhibit 10.1 to Form 8-K filed May 23, 2019).
31.1		—		Certification of Thomas L. Ryan as Principal Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		—		Certification of Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		—		Certification of Periodic Financial Reports by Thomas L. Ryan as Principal Executive Officer in satisfaction of Section 906 of the Sarbanes- Oxley Act of 2002.
32.2		—		Certification of Periodic Financial Reports by Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.
101	—	Interactive data file formatted Inline XBRL.
104	—		Cover Page Interactive ~~data file.~~Data File (formatted as Inline XBRL and contained in Exhibit 101).

42 Service Corporation International

~~SIGNATURE~~

Signature

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



~~July~~April 30, ~~2019~~2020		SERVICE CORPORATION INTERNATIONAL
	By:	/s/ ~~Tammy Moore~~TAMMY MOORE
		Tammy Moore,
		Vice President and Corporate Controller (Principal Accounting Officer)

42FORM 10-Q 43



	Common Stock		Treasury Stock			Capital in Excess of Par Value			Retained Earnings (Accumulated Deficit)			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
Comprehensive income	—		—			—			72,329			7,146		36			79,511
Dividends declared on common stock ($0.18 per share)	—		—			—			(32,871		)	—		—			(32,871		)
Employee share-based compensation earned	—		—			3,445			—			—		—			3,445
Stock option exercises	513		—			6,626			—			—		—			7,139
Purchase of Company common stock	—		(337		)	(1,832		)	(12,863		)	—		—			(15,032		)
Other	42		—			1,577			—			—		—			1,619
Balance at June 30, 2019	$	186,411	$	(3,942	)	$	998,794		$	535,173		$	27,792	$	(12	)	$	1,744,216



	Operating			Finance			Total
	(In thousands)
2019 (excluding the six months ended June 30, 2019)	$	5,408		$	23,722		$	29,130
2020	11,343			43,681			55,024
2021	10,056			61,946			72,002
2022	8,928			25,721			34,649
2023	6,759			18,614			25,373
Thereafter	45,164			47,754			92,918
Total lease payments	$	87,658		$	221,438		$	309,096
Less: Interest	(23,051		)	(24,208		)	(47,259		)
Present value of lease liabilities	$	64,607		$	197,230		$	261,837



	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
	(In thousands)
Amortization of leased assets	$	10,348	$	21,312
Interest on lease liabilities	1,453		3,284
Total finance lease cost	11,801		24,596
Operating lease cost	3,074		6,268
Variable lease cost	420		792
Total lease cost	$	15,295	$	31,656



Lease Type	Balance Sheet Classification	June 30, 2019
		(In thousands)
Operating lease right-of-use assets⁽¹⁾	Deferred charges and other assets	$	62,383
Finance lease right-of-use assets ⁽¹⁾	Property and equipment, net	190,889
Total right-of-use assets ⁽¹⁾		$	253,272

Operating	Accounts payable and accrued liabilities	$	8,472
Finance	Current maturities of long-term debt	39,940
Total current lease liabilities		48,412
Operating	Other liabilities	56,135
Finance	Long-term debt	157,290
Total non-current lease liabilities		213,425
Total lease liabilities		$	261,837



	Operating		Finance
Weighted-average remaining lease term (years)	12.2		5.2
Weighted-average discount rate	4.7	%	3.5	%



2019 (excluding the six months ended June 30, 2019)	$	1,341
2020	1,772
2021	1,417
2022	1,092
2023	504
Thereafter	243
Total cash receipts	$	6,369



Increase in the fair value of preneed receivables, net and trust investments	$	(3,056	)
Increase in the fair value of cemetery property	(3,511		)
Decrease in the fair value of preneed customer relationship intangible assets	11,996
Increase in the fair value of current liabilities	3,019
Decrease in the fair value of deferred revenue and deferred receipts held in trust	(14,156		)
Decrease in the fair value of deferred income taxes	(6,883		)
Other	(191		)
Total adjustment to goodwill	$	(12,782	)



	Three Months Ended June 30,
	2019			2018
	(In millions)
Pre-tax (losses) gains from divestitures and impairment, net	$	(11.8	)	$	6.9
Pre-tax loss from the early extinguishment of debt	$	(7.6	)	$	—
Pre-tax legal settlement	$	1.6		$	—
Tax effect from above items	$	4.2		$	(2.2	)
Change in certain tax reserves	$	(1.2	)	$	16.1



	Six Months Ended June 30,
	2019			2018
	(In millions)
Pre-tax (losses) gains from divestitures and impairment charges, net	$	(13.7	)	$	7.3
Pre-tax losses from the early extinguishment of debt, net	$	(7.6	)	$	(10.1	)
Pre-tax legal settlements	$	(6.4	)	$	—
Tax benefit from above items	$	6.8		$	(0.6	)
Change in certain tax reserves and other	$	(1.2	)	$	17.3



Period	Total number of shares purchased	Average price paid per share		Total number of shares purchased as part of publicly announced programs	Dollar value of shares that may yet be purchased under the program
April 1, 2019 - April 30, 2019	12,486	$	39.91	12,486	$	180,167,864
May 1, 2019 - May 31, 2019	104,539	$	42.99	104,539	$	175,673,783
June 1, 2019 - June 30, 2019	220,403	$	45.36	220,403	$	165,676,767
	337,428			337,428