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SERVICE CORP INTERNATIONAL - Quarter Report: 2014 March (Form 10-Q)

Table of Contents

 

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

FORM 10-Q
R
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the quarterly period ended March 31, 2014
or
o     
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934
 
 
 
For the transition period from                      to                       
Commission file number 1-6402-1
SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)
Texas
 
74-1488375
(State or other jurisdiction of incorporation or organization)
 
(I. R. S. employer identification number)
 
 
 
1929 Allen Parkway, Houston, Texas
 
77019
(Address of principal executive offices)
 
(Zip code)
 
 
 
 
713-522-5141
 
(Registrant’s telephone number, including area code)
 
 
 
 
None
 
(Former name, former address, or former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
Accelerated filer o
Non-accelerated filer o
Smaller reporting company o
 
 
(Do not check if smaller reporting company)
 
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES o NO þ
The number of shares outstanding of the registrant’s common stock as of April 23, 2014 was 213,532,818 (net of treasury shares).

 


Table of Contents

SERVICE CORPORATION INTERNATIONAL
INDEX
 
 
 
Page
 
 
 
 
 

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GLOSSARY
The following terms are common to the deathcare industry, are used throughout this report, and have the following meanings:
Atneed — Funeral and cemetery arrangements sold after a death has occurred.
Burial Vaults — A reinforced container intended to inhibit the subsidence of the earth and house the casket after it is placed in the ground.
Cemetery Perpetual Care or Endowment Care Fund — A trust fund established for the purpose of maintaining cemetery grounds and property into perpetuity.
Cemetery Property — Developed lots, lawn crypts, and mausoleum spaces and undeveloped land we intend to develop.
Cemetery Property Revenue — Recognized sales of cemetery property when a minimum of 10% of the sales price has been collected and the property has been constructed or is available for interment.
Cemetery Merchandise and Services — Stone and bronze memorials, markers, merchandise installations, and burial openings and closings.
Cremation — The reduction of human remains to bone fragments by intense heat.
Funeral Merchandise and Services — Professional services relating to funerals and cremations and funeral-related merchandise, including caskets, casket memorialization products, burial vaults, cremation receptacles, cremation memorial products, and flowers.
Funeral Recognized Preneed Revenue — Funeral merchandise and products sold on a preneed contract and delivered before a death has occurred, including funeral merchandise and travel protection insurance, which primarily represents sales by SCI Direct.
Funeral Service Performed — The number of funeral services provided after the date of death, sometimes referred to as funeral volume.
General Agency (GA) Revenues — Commissions we receive from third-party life insurance companies for life insurance policies or annuities 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, in mausoleums, or in cremation niches.
Lawn Crypt — An underground outer burial receptacle constructed of concrete and reinforced steel, which is usually pre-installed in predetermined designated areas.
Marker — A method of identifying a deceased person in a particular burial space, crypt, or niche. Permanent burial markers are usually made of bronze or stone.
Maturity — When the underlying contracted service is performed or merchandise is delivered, typically at death. This is the point at which preneed 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 cremation urns.
Preneed — Purchase of products and services prior to a death occurring.
Preneed Backlog — Future revenues from unfulfilled preneed funeral and cemetery contractual arrangements.
Preneed Cemetery Production — Sales of preneed or atneed cemetery contracts. These earnings are recorded in Deferred preneed cemetery revenues until the service is performed or the merchandise is delivered.
Preneed Funeral Production — Sales of preneed funeral trust-funded and insurance-funded contracts. Preneed funeral trust-funded contracts are recorded in Deferred preneed funeral revenues until the service is performed or the merchandise is delivered. We do not reflect the unfulfilled insurance-funded preneed funeral contract amounts in our consolidated balance sheet. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenues as these funerals are performed by the Company.
Sales Average — Average revenue per funeral service performed, excluding the impact of funeral recognized preneed revenue, GA revenue, and certain other revenues.
Trust Fund Income — Recognized 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.

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PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(UNAUDITED)

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands, except per share amounts)
Revenues
$
747,123

 
$
652,352

Costs and expenses
(580,741
)
 
(492,695
)
Gross profits
166,382

 
159,657

General and administrative expenses
(56,010
)
 
(30,923
)
Losses on divestitures and impairment charges, net
(2,812
)
 
(969
)
Operating income
107,560

 
127,765

Interest expense
(44,996
)
 
(32,769
)
Other income (expense), net
1,534

 
(984
)
Income before income taxes
64,098

 
94,012

Provision for income taxes
(22,707
)
 
(35,290
)
Net income
41,391

 
58,722

Net income attributable to noncontrolling interests
(289
)
 
(1,102
)
Net income attributable to common stockholders
$
41,102

 
$
57,620

Basic earnings per share:
 
 
 
Net income attributable to common stockholders
$
0.19

 
$
0.27

Basic weighted average number of shares
212,838

 
211,380

Diluted earnings per share:
 
 
 
Net income attributable to common stockholders
$
0.19

 
$
0.27

Diluted weighted average number of shares
217,231

 
215,208

Dividends declared per share
$
0.08

 
$
0.06


(See notes to unaudited condensed consolidated financial statements)

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

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Net income
$
41,391

 
$
58,722

Other comprehensive income:
 
 
 
Foreign currency translation adjustments
(11,200
)
 
(5,516
)
Total comprehensive income
30,191

 
53,206

Total comprehensive income attributable to noncontrolling interests
(315
)
 
(1,098
)
Total comprehensive income attributable to common stockholders
$
29,876

 
$
52,108


(See notes to unaudited condensed consolidated financial statements)



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SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
March 31, 2014
 
December 31, 2013
 
(In thousands, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
148,619

 
$
144,873

Receivables, net
105,813

 
105,899

Deferred tax assets
39,476

 
39,074

Inventories, net
34,508

 
34,668

Current assets held for sale
5,740

 
4,569

Other
41,848

 
65,524

Total current assets
376,004

 
394,607

Preneed funeral receivables, net and trust investments
1,871,539

 
1,870,874

Preneed cemetery receivables, net and trust investments
2,301,633

 
2,300,911

Cemetery property, at cost
1,721,446

 
1,747,125

Property and equipment, net
1,887,019

 
1,920,868

Non-current assets held for sale
795,001

 
746,474

Goodwill, net
1,978,621

 
1,968,235

Deferred charges and other assets
631,759

 
632,088

Cemetery perpetual care trust investments
1,342,589

 
1,347,622

Total assets
$
12,905,611

 
$
12,928,804

 
 
 
 
LIABILITIES & EQUITY
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
477,368

 
$
486,648

Current maturities of long-term debt
105,705

 
176,362

Current liabilities held for sale
4,850

 
3,183

Income taxes
3,301

 
6,391

Total current liabilities
591,224

 
672,584

Long-term debt
3,133,925

 
3,125,548

Deferred preneed funeral revenues
672,631

 
686,160

Deferred preneed cemetery revenues
986,538

 
974,757

Deferred tax liability
586,991

 
581,440

Non-current liabilities held for sale
504,423

 
437,084

Other liabilities
404,693

 
430,393

Deferred preneed funeral and cemetery receipts held in trust
3,245,629

 
3,250,586

Care trusts’ corpus
1,340,361

 
1,345,874

Commitments and contingencies (Note 15)

 

Equity:
 
 
 
Common stock, $1 per share par value, 500,000,000 shares authorized, 213,605,552 and 212,326,642 shares issued, respectively, and 213,531,666 and 212,316,642 shares outstanding, respectively
213,532

 
212,317

Capital in excess of par value
1,251,573

 
1,259,348

Accumulated deficit
(105,893
)
 
(145,876
)
Accumulated other comprehensive income
77,215

 
88,441

Total common stockholders’ equity
1,436,427

 
1,414,230


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Noncontrolling interests
2,769

 
10,148

Total equity
1,439,196

 
1,424,378

Total liabilities and equity
$
12,905,611

 
$
12,928,804

(See notes to unaudited condensed consolidated financial statements)

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

 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Cash flows from operating activities:
 
 
 
Net income
$
41,391

 
$
58,722

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
36,120

 
30,447

Amortization of intangible assets
10,080

 
5,808

Amortization of cemetery property
11,339

 
8,975

Amortization of loan costs
1,844

 
1,235

Provision for doubtful accounts
2,155

 
1,720

Provision for deferred income taxes
10,124

 
26,134

Losses on divestitures and impairment charges, net
2,812

 
969

Share-based compensation
3,130

 
2,830

Excess tax benefits from share based awards
(6,744
)
 
(772
)
Change in assets and liabilities, net of effects from acquisitions and divestitures:
 
 
 
(Increase) decrease in receivables
(3,761
)
 
5,962

Increase in other assets
(931
)
 
(5,882
)
Increase in payables and other liabilities
5,966

 
12,215

Effect of preneed funeral production and maturities:
 
 
 
Decrease in preneed funeral receivables, net and trust investments
12,852

 
13,738

Decrease in deferred preneed funeral revenue
(531
)
 
(4,000
)
Decrease in deferred preneed funeral receipts held in trust
(14,768
)
 
(14,176
)
Effect of cemetery production and deliveries:
 
 
 
Decrease (increase) in preneed cemetery receivables, net and trust investments
2,160

 
(6,359
)
Increase in deferred preneed cemetery revenue
19,421

 
15,912

Decrease in deferred preneed cemetery receipts held in trust
(6,262
)
 
(3,419
)
Other
1,490

 
1,065

Net cash provided by operating activities
127,887

 
151,124

Cash flows from investing activities:
 
 
 
Capital expenditures
(25,222
)
 
(22,569
)
Acquisitions
(779
)
 

Proceeds from divestitures and sales of property and equipment
2,639

 
1,816

Net (deposits) withdrawals of restricted funds and other
(12,225
)
 
339

Net cash used in investing activities
(35,587
)
 
(20,414
)
Cash flows from financing activities:
 
 
 
Proceeds from issuance of long-term debt
110,000

 

Payments of debt
(7,579
)
 
(4,948
)
Principal payments on capital leases
(7,231
)
 
(6,468
)
Proceeds from exercise of stock options
7,915

 
3,094

Early extinguishment of debt
(167,093
)
 

Excess tax benefits from share based awards
6,744

 
772

Purchase of Company common stock
(1,053
)
 
(1,708
)
Payments of dividends
(17,080
)
 
(12,698
)
Purchase of noncontrolling interest
(15,000
)
 
(8,333
)
Bank overdrafts and other
3,762

 
(4,004
)
Net cash used in financing activities
(86,615
)
 
(34,293
)
Effect of foreign currency on cash and cash equivalents
(1,939
)
 
(579
)
Net increase in cash and cash equivalents
3,746

 
95,838

Cash and cash equivalents at beginning of period
144,873

 
92,708

Cash and cash equivalents at end of period
$
148,619

 
$
188,546

(See notes to unaudited condensed consolidated financial statements)

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SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(UNAUDITED)
(In thousands)
 
Common
Stock
 
Treasury Stock
 
Capital in
Excess of
Par Value
 
Accumulated
Deficit
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2012
$
211,057

 
$
(10
)
 
$
1,307,058

 
$
(286,795
)
 
$
111,717

 
$
19,800

 
$
1,362,827

Comprehensive income

 

 

 
57,620

 
(5,512
)
 
1,098

 
53,206

Dividends declared on common stock ($.06 per share)

 

 
(12,698
)
 

 

 

 
(12,698
)
Employee share-based compensation earned

 

 
2,830

 

 

 

 
2,830

Stock option exercises
350

 

 
2,744

 

 

 

 
3,094

Tax Benefits Related to Share-Based Awards

 

 
772

 

 

 

 
772

Restricted stock awards, net of forfeitures
378

 
(3
)
 
(375
)
 

 

 

 

Purchase of Company common stock

 
(109
)
 
(676
)
 
(923
)
 

 

 
(1,708
)
Purchase of noncontrolling interest

 

 
(1,696
)
 

 

 
(6,637
)
 
(8,333
)
Noncontrolling interest payment

 

 

 

 

 
(900
)
 
(900
)
Other
1

 

 
(10
)
 

 

 

 
(9
)
Balance at March 31, 2013
$
211,786

 
$
(122
)
 
$
1,297,949

 
$
(230,098
)
 
$
106,205

 
$
13,361

 
$
1,399,081

 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
$
212,327

 
$
(10
)
 
$
1,259,348

 
$
(145,876
)
 
$
88,441

 
$
10,148

 
$
1,424,378

Comprehensive income

 

 

 
41,102

 
(11,226
)
 
315

 
30,191

Dividends declared on common stock ($.08 per share)

 

 
(17,080
)
 

 

 

 
(17,080
)
Employee share-based compensation earned

 

 
3,130

 

 

 

 
3,130

Stock option exercises
964

 

 
7,712

 

 

 

 
8,676

Tax Benefits Related to Share-Based Awards

 

 
6,743

 

 

 

 
6,743

Restricted stock awards, net of forfeitures
344

 

 
(344
)
 

 

 

 

Purchase of Company common stock

 
(106
)
 
(589
)
 
(1,119
)
 

 

 
(1,814
)
Purchase of noncontrolling interest

 

 
(7,441
)
 

 

 
(7,559
)
 
(15,000
)
Noncontrolling interest payment

 

 

 

 

 
(135
)
 
(135
)
Retirement of treasury shares
(42
)
 
42

 

 

 

 

 

Other
13

 

 
94

 

 

 

 
107

Balance at March 31, 2014
$
213,606

 
$
(74
)
 
$
1,251,573

 
$
(105,893
)
 
$
77,215

 
$
2,769

 
$
1,439,196


(See notes to unaudited condensed consolidated financial statements)


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SERVICE CORPORATION INTERNATIONAL
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Nature of Operations
We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries primarily operating in the United States and Canada. Our operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses.
Funeral service locations provide all professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles and preparation and embalming services. Funeral-related merchandise, including caskets, casket memorialization products, burial vaults, cremation receptacles, cremation memorial products, flowers, and other ancillary products and services, is sold at funeral service locations. Cemeteries provide cemetery property interment rights, including developed lots, lawn crypts, and mausoleum spaces and sell cemetery-related merchandise and services, including stone and bronze memorials, markers, merchandise installations, and burial openings and closings. We also sell preneed funeral and cemetery merchandise and services whereby a customer contractually agrees to the terms of certain merchandise and services to be provided in the future.

2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
Our unaudited condensed consolidated financial statements include the accounts of Service Corporation International (SCI) and all subsidiaries in which we hold a controlling financial interest. Our financial statements also include the accounts of the funeral merchandise and service trusts, cemetery merchandise and service trusts, and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. Our interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair statement of our results for these periods. Our unaudited condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2013, 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
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. In this filing we revised our consolidated balance sheet as of December 31, 2013 to reclassify $30.0 million from Long-term debt to Current maturities of long-term debt. The original misclassification relates to amounts payable in 2014 for our Term Loan due July 2018. Our previously issued December 31, 2013 financial statements are not materially misstated by this misclassification.
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, 2013. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. As a result, actual results could differ from these estimates.
Preneed Funeral and Cemetery Receivables
We sell preneed funeral and cemetery contracts whereby the customer enters into arrangements for future merchandise and services prior to the time of need. As these contracts are entered into prior to the delivery of the related goods and services, the preneed funeral and cemetery receivables are offset by a comparable deferred revenue amount. These receivables generally have an interest component for which interest income is recorded when the interest amount is considered collectible and realizable, which typically coincides with cash payment. We do not accrue interest on financing receivables that are not paid in accordance with the contractual payment date given the nature of our goods and services, the nature of our contracts with customers, and the timing of the delivery of our services. We do not consider receivables to be past due until the service or goods are required to be delivered at which time the preneed receivable is paid or reclassified as a trade receivable with payment terms of less than 30

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days. As the preneed funeral and cemetery receivables are offset by comparable deferred revenue amounts, we have no risk of loss related to these receivables.
If a preneed contract is canceled prior to delivery, state or provincial law governs the amount of the refund owed to the customer, if any, including the amount of the attributed investment earnings. Upon cancellation, we receive the amount of principal deposited to the trust and previously undistributed net investment earnings and, where required, issue a refund to the customer. We retain excess funds, if any, and recognize the attributed investment earnings (net of any investment earnings payable to the customer) as revenue in the consolidated statement of operations. In certain jurisdictions, we may be obligated to fund any shortfall if the amount deposited by the customers exceed the funds in trust. Based on our historical experience, we have provided an allowance for cancellation of these receivables, which is recorded as a reduction in receivables with a corresponding offset to deferred revenue.
Income Taxes
In July 2013, the Financial Accounting Standards Board (FASB) amended the Income Taxes Topic of the Accounting Standards Codification (ASC) to eliminate a diversity in practice for the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendment requires that the unrecognized tax benefit be presented as a reduction of the deferred tax assets associated with the carryforwards except in certain circumstances when it would be reflected as a liability. We adopted this amendment effective January 1, 2014 with no impact on our consolidated results of operations, consolidated financial position, or cash flows.
Foreign Currency
In March 2013, the FASB amended the Foreign Currency Matters Topic of the ASC to clarify the appropriate accounting when a parent ceases to have a controlling interest in a subsidiary or group of assets that is a business within a foreign entity. This clarification provides that the cumulative translation adjustment should only be released into net income if the loss of controlling interest represents complete or substantially complete liquidation of the foreign entity in which the subsidiary or asset group had resided. We adopted this amendment effective January 1, 2014 with no impact on our consolidated results of operations, consolidated financial position, or cash flows.

3. Recently Issued Accounting Standards

Discontinued Operations
In April 2014, the FASB amended the Presentation of Financial Statements and Property, Plant and Equipment Topics of the ASC to change the requirement for reporting discontinued operations. Under the new guidance, a disposal of a component of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results. Fewer disposals are expected to qualify as discontinued operations under the new guidance. It also requires the disclosure of pretax income of disposals that do not qualify as discontinued operations. The new guidance is effective for us with disposals that occur after January 1, 2015.


4. Preneed Funeral Activities
Preneed funeral receivables, net and trust investments represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, related to unperformed, price-guaranteed preneed funeral contracts. Our funeral merchandise and service trusts are variable interest entities as defined in the Consolidation Topic of the ASC. In accordance with this guidance, we have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. Our cemetery trust investments detailed in Notes 5 and 6 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from Deferred preneed funeral revenues into Deferred preneed funeral and cemetery receipts held in trust. Amounts are withdrawn from the trusts after the contract obligations are performed. Cash flows from preneed funeral contracts are presented as operating cash flows in our unaudited condensed consolidated statement of cash flows.
 Preneed funeral receivables, net and trust investments are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in Deferred preneed funeral revenues until the service is performed or the merchandise is delivered.
The table below sets forth certain investment-related activities associated with our preneed funeral merchandise and service trusts:

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Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Deposits
$
27,923

 
$
22,199

Withdrawals
43,737

 
32,705

Purchases of available-for-sale securities
61,485

 
60,979

Sales of available-for-sale securities
64,051

 
96,704

Realized gains from sales of available-for-sale securities
16,101

 
11,371

Realized losses from sales of available-for-sale securities
(1,474
)
 
(1,721
)
The components of Preneed funeral receivables, net and trust investments in our unaudited condensed consolidated balance sheet at March 31, 2014 and December 31, 2013 are as follows:
 
March 31, 2014
 
December 31, 2013
 
(In thousands)
Trust investments, at fair value
$
1,415,235

 
$
1,422,942

Cash and cash equivalents
132,471

 
128,216

Assets associated with businesses held for sale
(159,808
)
 
(163,436
)
Insurance-backed fixed income securities
279,236

 
280,969

Trust investments
1,667,134

 
1,668,691

Receivables from customers
255,606

 
254,294

Unearned finance charge
(6,826
)
 
(6,772
)
 
1,915,914

 
1,916,213

Allowance for cancellation
(44,375
)
 
(45,339
)
Preneed funeral receivables, net and trust investments
$
1,871,539

 
$
1,870,874

The cost and fair values associated with our funeral merchandise and service trust investments recorded at fair value at March 31, 2014 and December 31, 2013 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair value represents the market value of the underlying securities held by the common trust funds, mutual funds at published values, and the estimated fair value of private equity investments (including debt as well as the estimated fair value related to the contract holder’s equity in majority-owned real estate investments).

12

Table of Contents

 
March 31, 2014
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
99,924

 
$
1,435

 
$
(4,221
)
 
$
97,138

Canadian government
2
 
94,793

 
151

 
(1,066
)
 
93,878

Corporate
2
 
56,892

 
3,965

 
(361
)
 
60,496

Residential mortgage-backed
2
 
2,424

 
26

 
(33
)
 
2,417

Asset-backed
2
 
3,358

 
65

 

 
3,423

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
29,322

 
1,921

 
(45
)
 
31,198

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
369,338

 
75,887

 
(6,397
)
 
438,828

Canada
1
 
25,182

 
4,721

 
(970
)
 
28,933

Other international
1
 
34,811

 
4,904

 
(480
)
 
39,235

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
262,636

 
23,887

 
(2,132
)
 
284,391

Fixed income
1
 
313,960

 
5,785

 
(15,800
)
 
303,945

Private equity
3
 
32,568

 
3,069

 
(8,123
)
 
27,514

Other
3
 
3,455

 
384

 

 
3,839

Trust investments
 
 
$
1,328,663

 
$
126,200

 
$
(39,628
)
 
$
1,415,235


 
December 31, 2013
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
110,511

 
$
1,299

 
$
(5,599
)
 
$
106,211

Canadian government
2
 
100,263

 
81

 
(1,113
)
 
99,231

Corporate
2
 
64,042

 
3,515

 
(691
)
 
66,866

Residential mortgage-backed
2
 
2,408

 
23

 
(33
)
 
2,398

Asset-backed
2
 
3,366

 

 
(10
)
 
3,356

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
30,107

 
754

 
(235
)
 
30,626

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
364,721

 
77,963

 
(2,928
)
 
439,756

Canada
1
 
27,634

 
4,346

 
(1,216
)
 
30,764

Other international
1
 
35,519

 
4,986

 
(199
)
 
40,306

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
257,256

 
22,530

 
(2,303
)
 
277,483

Fixed income
1
 
313,606

 
3,228

 
(19,577
)
 
297,257

Private equity
3
 
32,909

 
2,702

 
(8,726
)
 
26,885

Other
3
 
1,545

 
291

 
(33
)
 
1,803

Trust investments
 
 
$
1,343,887

 
$
121,718

 
$
(42,663
)
 
$
1,422,942


13

Table of Contents

Where quoted prices are available in an active market, securities held by the common trust funds and mutual funds are classified as Level 1 investments pursuant to the three-level valuation hierarchy as required by the Fair Value Measurements and Disclosure (FVM&D) Topic of the ASC.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
The valuation of private equity and other alternative investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity investments. The underlying real estate value is determined using the most recent available appraisals. Private equity instruments are valued based on reported net asset values discounted by 0% to 20% for risk and 0% to 10% for liquidity. A significant increase (decrease) in the discounts results in a directionally opposite change in the fair value of the instruments. Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer.  Additionally, valuations are reviewed by our investment committee quarterly. These funds are classified as Level 3 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
As of March 31, 2014, our unfunded commitment for our private equity and other investments was $7.5 million which, if called, would be funded by the assets of the trusts. Our private equity and other investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, the nature of the investments in this category is that the distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next 2 to 10 years.
The change in our market-based funeral merchandise and service trust investments with significant unobservable inputs (Level 3) is as follows (in thousands):
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
 
Private Equity
 
Other
 
Private Equity
 
Other
Fair value, beginning balance
$
26,885

 
$
1,803

 
$
17,879

 
$
744

Net unrealized gains (losses) included in Accumulated other comprehensive income(1)
(470
)
 
2,036

 
10,850

 
509

Net realized losses included in Other income (expense), net(2)
(8
)
 

 
(5
)
 
(1
)
Purchases
1,887

 

 

 

Contributions
467

 

 
637

 

Distributions
(1,247
)
 

 
(3,630
)
 

Fair value, ending balance
$
27,514

 
$
3,839

 
$
25,731

 
$
1,252

                                                                               
(1)
All unrealized gains (losses) recognized in Accumulated other comprehensive income for our funeral merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Accumulated other comprehensive income to Deferred preneed funeral and cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.
(2)
All losses recognized in Other income (expense), net for our funeral merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other income (expense), net to Deferred preneed funeral and cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.
Maturity dates of our fixed income securities range from 2014 to 2043. Maturities of fixed income securities, excluding mutual funds, at March 31, 2014 are estimated as follows:

14

Table of Contents

 
Fair Value
 
(In thousands)
Due in one year or less
$
132,873

Due in one to five years
54,732

Due in five to ten years
40,276

Thereafter
29,471

 
$
257,352

Earnings from all our funeral merchandise and service trust investments are recognized in funeral revenues when a service is performed or merchandise is delivered. Fees charged by our wholly-owned registered investment advisor are also included in current revenues in the period in which they are earned. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenues. Recognized trust fund income (realized and unrealized) related to these trust investments were $16.1 million and $12.3 million for the three months ended March 31, 2014 and 2013, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in Other income (expense), net and a decrease to Preneed funeral receivables, net and trust investments. These investment losses, if any, are offset by the corresponding reclassification in Other income (expense), net, which reduces Deferred preneed funeral receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral receipts held in trust. For the three months ended March 31, 2014 and 2013, we recorded a $0.3 million and a $0.2 million impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments.
We have determined that the remaining unrealized losses in our funeral merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining 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 sector exposures, credit ratings and the severity and duration of the unrealized losses. Our funeral merchandise and service trust investment unrealized losses, their associated fair values, and the duration of unrealized losses as of March 31, 2014 and December 31, 2013, respectively, are shown in the following tables:
 
March 31, 2014
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
22,414

 
$
(2,141
)
 
$
19,008

 
$
(2,080
)
 
$
41,422

 
$
(4,221
)
Canadian government
4,831

 
(44
)
 
16,869

 
(1,022
)
 
21,700

 
(1,066
)
Corporate
17,003

 
(288
)
 
1,182

 
(73
)
 
18,185

 
(361
)
Residential mortgage-backed
1,250

 
(24
)
 
138

 
(9
)
 
1,388

 
(33
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
1,395

 
(45
)
 

 

 
1,395

 
(45
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
87,310

 
(5,886
)
 
2,539

 
(511
)
 
89,849

 
(6,397
)
Canada
7,257

 
(349
)
 
1,720

 
(621
)
 
8,977

 
(970
)
Other international
4,373

 
(450
)
 
307

 
(30
)
 
4,680

 
(480
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
19,712

 
(400
)
 
12,319

 
(1,732
)
 
32,031

 
(2,132
)
Fixed income
52,303

 
(1,978
)
 
54,279

 
(13,822
)
 
106,582

 
(15,800
)
Private equity

 

 
13,265

 
(8,123
)
 
13,265

 
(8,123
)
Total temporarily impaired securities
$
217,848

 
$
(11,605
)
 
$
121,626

 
$
(28,023
)
 
$
339,474

 
$
(39,628
)


15

Table of Contents

 
December 31, 2013
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
28,693

 
$
(3,595
)
 
$
19,351

 
$
(2,004
)
 
$
48,044

 
$
(5,599
)
Canadian government
9,546

 
(120
)
 
18,981

 
(993
)
 
28,527

 
(1,113
)
Corporate
21,357

 
(346
)
 
5,654

 
(345
)
 
27,011

 
(691
)
Residential mortgage-backed
1,381

 
(25
)
 
172

 
(8
)
 
1,553

 
(33
)
  Asset-backed
3,275

 
(10
)
 

 

 
3,275

 
(10
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
14,028

 
(235
)
 

 

 
14,028

 
(235
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
46,544

 
(2,153
)
 
3,327

 
(775
)
 
49,871

 
(2,928
)
Canada
2,433

 
(576
)
 
1,992

 
(641
)
 
4,425

 
(1,217
)
Other international
3,396

 
(138
)
 
369

 
(60
)
 
3,765

 
(198
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
16,206

 
(337
)
 
12,456

 
(1,966
)
 
28,662

 
(2,303
)
Fixed income
143,846

 
(4,984
)
 
38,217

 
(14,593
)
 
182,063

 
(19,577
)
Private equity

 

 
13,002

 
(8,726
)
 
13,002

 
(8,726
)
Other

 

 
527

 
(33
)
 
527

 
(33
)
Total temporarily impaired securities
$
290,705

 
$
(12,519
)
 
$
114,048

 
$
(30,144
)
 
$
404,753

 
$
(42,663
)

5. Preneed Cemetery Activities
 Preneed cemetery receivables, net and trust investments represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, for contracts sold in advance of when the property interment rights, merchandise, or services are needed. Our cemetery merchandise and service trusts are variable interest entities as defined in the Consolidation Topic of the ASC. In accordance with this guidance, we have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The trust investments detailed in Notes 4 and 6 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from Deferred preneed cemetery revenues into Deferred preneed funeral and cemetery receipts held in trust. Amounts are withdrawn from the trusts when the contract obligations are performed. Cash flows from preneed cemetery contracts are presented as operating cash flows in our unaudited condensed consolidated statement of cash flows.
Preneed cemetery receivables, net and trust investments are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in Deferred preneed cemetery revenues until the service is performed or the merchandise is delivered.
The table below sets forth certain investment-related activities associated with our preneed cemetery merchandise and service trusts:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Deposits
$
28,271

 
$
25,268

Withdrawals
34,348

 
29,881

Purchases of available-for-sale securities
98,758

 
105,722

Sales of available-for-sale securities
92,317

 
125,743

Realized gains from sales of available-for-sale securities
25,532

 
16,576

Realized losses from sales of available-for-sale securities
(2,299
)
 
(2,170
)
The components of Preneed cemetery receivables, net and trust investments in our unaudited condensed consolidated balance sheet at March 31, 2014 and December 31, 2013 are as follows:

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Table of Contents

 
March 31, 2014
 
December 31, 2013
 
(In thousands)
Trust investments, at fair value
$
1,551,178

 
$
1,553,719

Cash and cash equivalents
144,265

 
138,459

Assets associated with businesses held for sale
(112,275
)
 
(107,481
)
Insurance-backed fixed income securities
4

 
4

Trust investments
1,583,172

 
1,584,701

Receivables from customers
799,992

 
800,005

Unearned finance charges
(28,163
)
 
(27,873
)
 
2,355,001

 
2,356,833

Allowance for cancellation
(53,368
)
 
(55,922
)
Preneed cemetery receivables, net and trust investments
$
2,301,633

 
$
2,300,911

The cost and fair values associated with our cemetery merchandise and service trust investments recorded at fair value at March 31, 2014 and December 31, 2013 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair value represents the market value of the underlying securities held by the common trust funds, mutual funds at published values, and the estimated fair value of private equity investments.
 
March 31, 2014
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
95,784

 
$
1,889

 
$
(6,555
)
 
$
91,118

Canadian government
2
 
17,872

 
197

 
(115
)
 
17,954

Corporate
2
 
45,148

 
6,188

 
(401
)
 
50,935

Residential mortgage-backed
2
 
395

 
3

 
(3
)
 
395

Asset-backed
2
 
3,317

 
81

 

 
3,398

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
14,871

 
1,216

 
(45
)
 
16,042

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
434,792

 
138,660

 
(5,770
)
 
567,682

Canada
1
 
14,972

 
4,235

 
(891
)
 
18,316

Other international
1
 
42,993

 
9,336

 
(779
)
 
51,550

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
333,407

 
51,731

 
(1,485
)
 
383,653

Fixed income
1
 
341,016

 
7,690

 
(27,343
)
 
321,363

Private equity
3
 
28,281

 
3,924

 
(4,686
)
 
27,519

Other
3
 
1,043

 
216

 
(6
)
 
1,253

Trust investments
 
 
$
1,373,891

 
$
225,366

 
$
(48,079
)
 
$
1,551,178



17

Table of Contents

 
December 31, 2013
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
113,621

 
$
1,714

 
$
(8,876
)
 
$
106,459

Canadian government
2
 
17,073

 
170

 
(261
)
 
16,982

Corporate
2
 
48,970

 
5,262

 
(646
)
 
53,586

Residential mortgage-backed
2
 
408

 
2

 
(2
)
 
408

Asset-backed
2
 
3,346

 

 
(13
)
 
3,333

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
16,708

 
1,106

 
(123
)
 
17,691

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
425,246

 
147,258

 
(3,231
)
 
569,273

Canada
1
 
15,368

 
4,063

 
(935
)
 
18,496

Other international
1
 
44,184

 
10,079

 
(200
)
 
54,063

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
327,084

 
49,428

 
(1,704
)
 
374,808

Fixed income
1
 
338,944

 
5,236

 
(33,649
)
 
310,531

Private equity
3
 
28,625

 
3,372

 
(5,153
)
 
26,844

Other
3
 
1,078

 
200

 
(33
)
 
1,245

Trust investments
 
 
$
1,380,655

 
$
227,890

 
$
(54,826
)
 
$
1,553,719

Where quoted prices are available in an active market, securities held by the common trust funds and mutual funds are classified as Level 1 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
The valuation of private equity and other alternative investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity investments. The underlying real estate value is determined using the most recent available appraisals. Private equity instruments are valued based on reported net asset values discounted by 0% to 20% for risk and 0% to 10% for liquidity. A significant increase (decrease) in the discounts results in a directionally opposite change in the fair value of the instruments. Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer.  Additionally, valuations are reviewed by our investment committee quarterly. These funds are classified as Level 3 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
As of March 31, 2014, our unfunded commitment for our private equity and other investments was $7.8 million which, if called, would be funded by the assets of the trusts. Our private equity and other investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, the nature of the investments in this category is that the distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next 2 to 10 years.
The change in our market-based cemetery merchandise and service trust investments with significant unobservable inputs (Level 3) is as follows (in thousands):

18

Table of Contents

 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
 
Private Equity
 
Other
 
Private Equity
 
Other
Fair value, beginning balance
$
26,844

 
$
1,245

 
$
17,687

 
$
450

Net unrealized gains included in Accumulated other comprehensive income(1)
1,487

 
9

 
11,400

 
587

Net realized losses included in Other income (expense), net(2)
(8
)
 
(1
)
 
(7
)
 
(2
)
Contributions
499

 

 
662

 

Distributions
(1,303
)
 

 
(3,785
)
 

Fair value, ending balance
$
27,519

 
$
1,253

 
$
25,957

 
$
1,035

                                                                               
(1)
All unrealized gains (losses) recognized in Accumulated other comprehensive income for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Accumulated other comprehensive income to Deferred preneed funeral and cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.
(2)
All losses recognized in Other income (expense), net for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other income (expense), net to Deferred preneed funeral and cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.
Maturity dates of our fixed income securities range from 2014 to 2043. Maturities of fixed income securities, excluding mutual funds, at March 31, 2014 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
8,842

Due in one to five years
71,928

Due in five to ten years
36,756

Thereafter
46,274

 
$
163,800

Earnings from all our cemetery merchandise and service trust investments are recognized in current cemetery revenues when a service is performed or merchandise is delivered. Fees charged by our wholly-owned registered investment advisor are also included in current revenues in the period in which they are earned. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenues. Recognized trust fund income (realized and unrealized) related to these trust investments were $11.5 million and $9.2 million for the three months ended March 31, 2014 and 2013, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in Other income (expense), net and a decrease to Preneed cemetery receivables, net and trust investments. These investment losses, if any, are offset by the corresponding reclassification in Other income (expense), net, which reduces Deferred preneed cemetery receipts held in trust. See Note 7 for further information related to our Deferred preneed cemetery receipts held in trust. For the three months ended March 31, 2014 and 2013, we recorded a $0.3 million and a $0.4 million impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments.
We have determined that the remaining unrealized losses in our cemetery merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining 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 sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our cemetery merchandise and service trust investment unrealized losses, their associated fair values and the duration of unrealized losses as of March 31, 2014 are shown in the following tables:

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Table of Contents

 
March 31, 2014
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
38,848

 
$
(4,286
)
 
$
19,559

 
$
(2,269
)
 
58,407

 
(6,555
)
Canadian government
11,259

 
(82
)
 
1,113

 
(33
)
 
12,372

 
(115
)
Corporate
10,154

 
(271
)
 
2,718

 
(130
)
 
12,872

 
(401
)
Residential mortgage-backed
169

 
(3
)
 
4

 

 
173

 
(3
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
2,260

 
(45
)
 

 

 
2,260

 
(45
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
82,419

 
(5,575
)
 
2,909

 
(195
)
 
85,328

 
(5,770
)
Canada
1,843

 
(123
)
 
2,395

 
(768
)
 
4,238

 
(891
)
Other international
8,190

 
(699
)
 
625

 
(80
)
 
8,815

 
(779
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
2,199

 
(27
)
 
14,643

 
(1,458
)
 
16,842

 
(1,485
)
Fixed income
84,375

 
(2,637
)
 
69,182

 
(24,706
)
 
153,557

 
(27,343
)
Private equity

 

 
6,707

 
(4,686
)
 
6,707

 
(4,686
)
Other

 

 
279

 
(6
)
 
279

 
(6
)
Total temporarily impaired securities
$
241,716

 
$
(13,748
)
 
$
120,134

 
$
(34,331
)
 
$
361,850

 
$
(48,079
)


 
December 31, 2013
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
45,120

 
$
(6,040
)
 
$
25,043

 
$
(2,836
)
 
$
70,163

 
$
(8,876
)
Canadian government
9,424

 
(120
)
 
3,066

 
(141
)
 
12,490

 
(261
)
Corporate
15,050

 
(424
)
 
3,073

 
(222
)
 
18,123

 
(646
)
Residential mortgage-backed
145

 
(2
)
 
2

 

 
147

 
(2
)
Asset-backed
3,257

 
(13
)
 

 

 
3,257

 
(13
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
5,604

 
(123
)
 

 

 
5,604

 
(123
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
46,317

 
(2,648
)
 
3,489

 
(583
)
 
49,806

 
(3,231
)
Canada
1,569

 
(502
)
 
1,935

 
(433
)
 
3,504

 
(935
)
Other international
4,344

 
(124
)
 
702

 
(76
)
 
5,046

 
(200
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
3,858

 
(54
)
 
14,477

 
(1,650
)
 
18,335

 
(1,704
)
Fixed income
134,669

 
(5,527
)
 
64,009

 
(28,122
)
 
198,678

 
(33,649
)
Private equity

 

 
6,589

 
(5,153
)
 
6,589

 
(5,153
)
Other

 

 
282

 
(33
)
 
282

 
(33
)
Total temporarily impaired securities
$
269,357

 
$
(15,577
)
 
$
122,667

 
$
(39,249
)
 
$
392,024

 
$
(54,826
)

6. Cemetery Perpetual Care Trusts

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Table of Contents

We are required by state and provincial law to pay into cemetery perpetual care trusts a portion of the proceeds from the sale of cemetery property interment rights. Our cemetery perpetual care trusts are variable interest entities as defined in the Consolidation Topic of the ASC. In accordance with this guidance, we have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The merchandise and service trust investments detailed in Notes 4 and 5 are also accounted for as variable interest entities. We consolidate our cemetery perpetual care trust investments with a corresponding amount recorded as Care trusts’ corpus. Cash flows from cemetery perpetual care trusts are presented as operating cash flows in our unaudited condensed consolidated statement of cash flows.
The table below sets forth certain investment-related activities associated with our cemetery perpetual care trusts:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Deposits
$
11,837

 
$
8,228

Withdrawals
5,885

 
9,569

Purchases of available-for-sale securities
38,895

 
35,052

Sales of available-for-sale securities
30,072

 
27,490

Realized gains from sales of available-for-sale securities
5,045

 
3,782

Realized losses from sales of available-for-sale securities
(337
)
 
(322
)
The components of Cemetery perpetual care trust investments in our unaudited condensed consolidated balance sheet at March 31, 2014 and December 31, 2013 are as follows:
 
March 31, 2014
 
December 31, 2013
 
(In thousands)
Trust investments, at fair value
$
1,373,613

 
$
1,352,539

Cash and cash equivalents
81,773

 
78,509

Assets associated with businesses held for sale
(112,797
)
 
(83,426
)
Cemetery perpetual care trust investments
$
1,342,589

 
$
1,347,622

The cost and fair values associated with our cemetery perpetual care trust investments recorded at fair value at March 31, 2014 and December 31, 2013 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair value represents the value of the underlying securities or cash held by the common trust funds, mutual funds at published values, and the estimated fair value of private equity investments.

21

Table of Contents

 
March 31, 2014
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
1,675

 
$
18

 
$
(11
)
 
$
1,682

Canadian government
2
 
29,208

 
346

 
(204
)
 
29,350

Corporate
2
 
41,561

 
733

 
(309
)
 
41,985

Residential mortgage-backed
2
 
4,280

 
34

 
(15
)
 
4,299

Asset-backed
2
 
3,001

 
67

 
(4
)
 
3,064

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
26,495

 
1,431

 
(62
)
 
27,864

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
232,619

 
54,271

 
(2,301
)
 
284,589

Canada
1
 
8,446

 
2,389

 
(579
)
 
10,256

Other international
1
 
21,341

 
1,863

 
(166
)
 
23,038

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
40,452

 
7,385

 
(27
)
 
47,810

Fixed income
1
 
822,406

 
45,882

 
(1,130
)
 
867,158

Private equity
3
 
29,074

 
485

 
(8,753
)
 
20,806

Other
3
 
10,571

 
1,151

 
(10
)
 
11,712

Cemetery perpetual care trust investments
 
 
$
1,271,129

 
$
116,055

 
$
(13,571
)
 
$
1,373,613


 
December 31, 2013
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
1,588

 
$
9

 
$
(14
)
 
$
1,583

Canadian government
2
 
28,487

 
301

 
(459
)
 
28,329

Corporate
2
 
43,196

 
312

 
(263
)
 
43,245

Residential mortgage-backed
2
 
4,258

 
14

 
(19
)
 
4,253

Asset-backed
2
 
3,006

 
5

 
(11
)
 
3,000

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
25,952

 
192

 
(252
)
 
25,892

Common stock:
 
 
 
 
 
 
 
 


United States
1
 
231,156

 
53,782

 
(2,087
)
 
282,851

Canada
1
 
8,846

 
2,222

 
(623
)
 
10,445

Other international
1
 
20,676

 
1,319

 
(167
)
 
21,828

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
41,282

 
5,693

 
(35
)
 
46,940

Fixed income
1
 
819,439

 
35,963

 
(2,598
)
 
852,804

Private equity
3
 
28,309

 
472

 
(9,002
)
 
19,779

Other
3
 
10,521

 
1,153

 
(84
)
 
11,590

Cemetery perpetual care trust investments
 
 
$
1,266,716

 
$
101,437

 
$
(15,614
)
 
$
1,352,539

Where quoted prices are available in an active market, securities held by the common trust funds and mutual funds are classified as Level 1 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.

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Table of Contents

Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
The valuation of private equity and other alternative investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity investments. The underlying real estate value is determined using the most recent available appraisals. Private equity instruments are valued based on reported net asset values discounted by 0% to 20% for risk and 0% to 10% for liquidity. A significant increase (decrease) in the discounts results in a directionally opposite change in the fair value of the instruments.Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer.  Additionally, valuations are reviewed by our investment committee quarterly. These funds are classified as Level 3 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.
As of March 31, 2014, our unfunded commitment for our private equity and other investments was $0.7 million which, if called, would be funded by the assets of the trusts. Our private equity and other investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, the nature of the investments in this category is that the distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next 2 to 10 years.
The change in our market-based cemetery perpetual care trust investments with significant unobservable inputs (Level 3) is as follows (in thousands):
 
Three Months Ended
 
March 31, 2014
 
March 31, 2013
 
Private Equity
 
Other
 
Private Equity
 
Other
Fair value, beginning balance
$
19,779

 
$
11,590

 
$
11,122

 
$
7,659

Net unrealized gains included in Accumulated other comprehensive income(1)
727

 
128

 
6,069

 
2,729

Net realized losses included in Other income (expense), net(2)
(12
)
 
(6
)
 
(82
)
 
(46
)
Sales
(17
)
 

 

 

Contributions
694

 

 
1

 

Distributions
(365
)
 

 
(656
)
 

Fair value, ending balance
$
20,806

 
$
11,712

 
$
16,454

 
$
10,342

                                                                               
(1)
All unrealized gains recognized in Accumulated other comprehensive income for our cemetery perpetual care trust investments are offset by a corresponding reclassification in Accumulated other comprehensive income to Care trusts’ corpus. See Note 7 for further information related to our Care trusts’ corpus.
(2)
All losses recognized in Other income (expense), net for our cemetery perpetual care trust investments are offset by a corresponding reclassification in Other income (expense), net to Care trusts’ corpus. See Note 7 for further information related to our Care trusts’ corpus.
Maturity dates of our fixed income securities range from 2014 to 2043. Maturities of fixed income securities at March 31, 2014 are estimated as follows:
 
Fair Value
 
(In thousands)
Due in one year or less
$
15,236

Due in one to five years
35,515

Due in five to ten years
24,753

Thereafter
4,876

 
$
80,380

Distributable earnings from these cemetery perpetual care trust investments are recognized in current cemetery revenues to the extent we incur qualifying cemetery maintenance costs. Fees charged by our wholly-owned registered investment advisor are

23

Table of Contents

also included in current revenues in the period in which they are earned. Recognized trust fund income related to these trust investments were $13.3 million and $10.0 million for the three months ended March 31, 2014 and 2013, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in Other income (expense), net and a decrease to Cemetery perpetual care trust investments. These investment losses, if any, are offset by the corresponding reclassification in Other income (expense), net, which reduces Care trusts’ corpus. See Note 7 for further information related to our Care trusts’ corpus. For the three months ended March 31, 2014 there was no impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain investments. For the three months ended March 31, 2013, we recorded a $0.1 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain investments.
We have determined that the remaining unrealized losses in our cemetery perpetual care trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining 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 sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our cemetery perpetual care trust investment unrealized losses, their associated fair values and the duration of unrealized losses, are shown in the following tables.
 
March 31, 2014
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,247

 
$
(11
)
 
$
2

 
$

 
$
1,249

 
$
(11
)
Canadian government
18,422

 
(146
)
 
1,818

 
(58
)
 
20,240

 
(204
)
Corporate
15,687

 
(148
)
 
3,204

 
(161
)
 
18,891

 
(309
)
Residential mortgage-backed
685

 
(14
)
 
11

 
(1
)
 
696

 
(15
)
Asset-backed
391

 
(4
)
 
15

 

 
406

 
(4
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
3,362

 
(57
)
 
46

 
(5
)
 
3,408

 
(62
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
25,383

 
(1,519
)
 
2,755

 
(782
)
 
28,138

 
(2,301
)
Canada
1,233

 
(35
)
 
1,664

 
(544
)
 
2,897

 
(579
)
Other international
1,847

 
(21
)
 
1,020

 
(145
)
 
2,867

 
(166
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
397

 
(15
)
 
118

 
(12
)
 
515

 
(27
)
Fixed income
49,171

 
(893
)
 
9,632

 
(237
)
 
58,803

 
(1,130
)
Private equity

 

 
20,256

 
(8,753
)
 
20,256

 
(8,753
)
Other
14

 
(10
)
 
9,891

 

 
9,905

 
(10
)
Total temporarily impaired securities
$
117,839

 
$
(2,873
)
 
$
50,432

 
$
(10,698
)
 
$
168,271

 
$
(13,571
)


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Table of Contents

 
December 31, 2013
 
In Loss Position
Less Than 12 Months
 
In Loss Position
Greater Than 12 Months
 
Total
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
 
 
 
 
(In thousands)
 
 
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. Treasury
$
1,339

 
$
(14
)
 
$
20

 
$

 
$
1,359

 
$
(14
)
Canadian government
15,777

 
(214
)
 
5,131

 
(245
)
 
20,908

 
(459
)
Corporate
22,534

 
(129
)
 
3,299

 
(134
)
 
25,833

 
(263
)
Residential mortgage-backed
2,960

 
(18
)
 
10

 
(1
)
 
2,970

 
(19
)
Asset-backed
2,835

 
(10
)
 
15

 
(1
)
 
2,850

 
(11
)
Equity securities:
 
 
 
 
 
 
 
 
 
 
 
Preferred stock
14,650

 
(245
)
 
44

 
(7
)
 
14,694

 
(252
)
Common stock:
 
 
 
 
 
 
 
 
 
 
 
United States
23,825

 
(1,561
)
 
3,254

 
(526
)
 
27,079

 
(2,087
)
Canada
667

 
(129
)
 
1,794

 
(494
)
 
2,461

 
(623
)
Other international
1,540

 
(54
)
 
525

 
(113
)
 
2,065

 
(167
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
391

 
(14
)
 
163

 
(21
)
 
554

 
(35
)
Fixed income
181,701

 
(2,090
)
 
28,507

 
(508
)
 
210,208

 
(2,598
)
Private equity

 

 
19,242

 
(9,002
)
 
19,242

 
(9,002
)
Other

 

 
9,738

 
(84
)
 
9,738

 
(84
)
Total temporarily impaired securities
$
268,219

 
$
(4,478
)
 
$
71,742

 
$
(11,136
)
 
$
339,961

 
$
(15,614
)

7. Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Care Trusts’ Corpus
Deferred Preneed Funeral and Cemetery Receipts Held in Trust
We consolidate the merchandise and service trusts associated with our preneed funeral and cemetery activities in accordance with the Consolidation Topic of the ASC. Although the guidance requires the consolidation of the merchandise and service trusts, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these merchandise and service trusts, and therefore their interests in these trusts represent a liability to us.
The components of Deferred preneed funeral and cemetery receipts held in trust in our unaudited condensed consolidated balance sheet at March 31, 2014 and December 31, 2013 are detailed below.
 
March 31, 2014
 
December 31, 2013
 
Preneed
Funeral
 
Preneed
Cemetery
 
Total
 
Preneed
Funeral
 
Preneed
Cemetery
 
Total
 
(In thousands)
 
(In thousands)
Trust investments
$
1,667,134

 
$
1,583,172

 
$
3,250,306

 
$
1,668,691

 
$
1,584,701

 
$
3,253,392

Accrued trust operating payables and other
(1,934
)
 
(2,743
)
 
(4,677
)
 
(1,108
)
 
(1,698
)
 
(2,806
)
Deferred preneed funeral and cemetery receipts held in trust
$
1,665,200

 
$
1,580,429

 
$
3,245,629

 
$
1,667,583

 
$
1,583,003

 
$
3,250,586

Care Trusts’ Corpus
The Care trusts’ corpus reflected in our unaudited condensed consolidated balance sheet represents the cemetery perpetual care trusts, including the related accrued expenses.
The components of Care trusts’ corpus in our unaudited condensed consolidated balance sheet at March 31, 2014 and December 31, 2013 are detailed below.

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Table of Contents

 
March 31, 2014
 
December 31, 2013
 
(In thousands)
Cemetery perpetual care trust investments
$
1,342,589

 
$
1,347,622

Accrued trust operating payables and other
(2,228
)
 
(1,748
)
Care trusts’ corpus
$
1,340,361

 
$
1,345,874

Other Income (Expense), Net
The components of Other income (expense), net in our unaudited condensed consolidated statement of operations for the three months ended March 31, 2014 and 2013 are detailed below. See Notes 4, 5, and 6 for further discussion of the amounts related to the funeral, cemetery, and cemetery perpetual care trusts.

 
Three Months Ended March 31, 2014
 
Funeral
Trusts
 
Cemetery
Trusts
 
Cemetery Perpetual
Care Trusts
 
Other, Net
 
Total
 
 
 
(In thousands)
 
 
Realized gains
$
16,101

 
$
25,532

 
$
5,045

 
$

 
$
46,678

Realized losses
(1,474
)
 
(2,299
)
 
(337
)
 

 
(4,110
)
Impairment charges
(251
)
 
(339
)
 
(40
)
 

 
(630
)
Interest, dividend, and other ordinary income
5,574

 
2,495

 
9,586

 

 
17,655

Trust expenses and income taxes
(4,467
)
 
(4,815
)
 
(1,547
)
 

 
(10,829
)
Net trust investment income
15,483

 
20,574

 
12,707

 

 
48,764

Reclassification to deferred preneed funeral and cemetery receipts held in trust and care trusts’ corpus
(15,483
)
 
(20,574
)
 
(12,707
)
 

 
(48,764
)
Other income (expense), net

 

 

 
1,534

 
1,534

Total other income, net
$

 
$

 
$

 
$
1,534

 
$
1,534




 
Three Months Ended March 31, 2013
 
Funeral
Trusts
 
Cemetery
Trusts
 
Cemetery Perpetual
Care Trusts
 
Other, Net
 
Total
 
 
 
(In thousands)
 
 
Realized gains
$
11,371

 
$
16,576

 
$
3,782

 
$

 
$
31,729

Realized losses
(1,721
)
 
(2,170
)
 
(322
)
 

 
(4,213
)
Impairment charges
(200
)
 
(357
)
 
(63
)
 

 
(620
)
Interest, dividend, and other ordinary income
1,817

 
1,529

 
6,089

 

 
9,435

Trust expenses and income taxes
(2,381
)
 
(3,669
)
 
(575
)
 

 
(6,625
)
Net trust investment income
8,886

 
11,909

 
8,911

 

 
29,706

Reclassification to deferred preneed funeral and cemetery receipts held in trust and care trusts’ corpus
(8,886
)
 
(11,909
)
 
(8,911
)
 

 
(29,706
)
Other income (expense), net

 

 

 
(984
)
 
(984
)
Total other income, net
$

 
$

 
$

 
$
(984
)
 
$
(984
)


8. 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 statute of limitations, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was 35.4% and 37.5% for the three months ended March 31, 2014 and 2013, respectively. The lower effective tax rate for the three months ended March 31, 2014 is primarily due to the benefits associated with the Stewart acquisition coupled with state legislative changes partially offset by an increase in our liability related to

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unrecognized tax benefits. The effective tax rate for the first quarter of 2014 is above the 35% federal statutory tax rate due to state tax expense which is partially offset by state legislative changes and foreign earnings taxed at lower rates.
Unrecognized Tax Benefits
As of March 31, 2014, the gross amount of our unrecognized tax benefits was $136.9 million and the gross amount of our accrued interest was $45.3 million. Additional interest expense of $0.7 million was accrued.
A number of years may elapse before particular tax matters, for which we have unrecognized tax benefits, are settled. While we have effectively concluded our 2003 through 2005 tax years with respect to our affiliate the COOP, SCI and Subsidiaries' tax years 1999 through 2005 remain under review at the IRS Appeals level. SCI and Subsidiaries received a letter of no change to its tax liability for the years 2008 through 2010. Furthermore, SCI and its affiliates are under audit by various state and foreign jurisdictions for years through 2012. The outcome of each of these audits cannot be predicted at this time. It is reasonably possible that the amount of our unrecognized tax benefits could significantly increase or decrease over the next twelve months either because we prevail on positions or because the tax authorities prevail. Due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.

9. Debt
Debt as of March 31, 2014 and December 31, 2013 was as follows:
 
March 31, 2014
 
December 31, 2013
 
(In thousands)
3.125% Senior Convertible Notes due July 2014
$
95

 
$
85,256

6.75% Senior Notes due April 2015
136,465

 
136,465

6.75% Senior Notes due April 2016
197,377

 
197,377

3.375% Senior Convertible Notes due July 2016
154

 
46,279

7.0% Senior Notes due June 2017
295,000

 
295,000

7.625% Senior Notes due October 2018
250,000

 
250,000

6.5% Senior Notes due April 2019
200,000

 
200,000

7.0% Senior Notes due May 2019
250,000

 
250,000

4.5% Senior Notes due November 2020
200,000

 
200,000

8.0% Senior Notes due November 2021
150,000

 
150,000

5.375% Senior Notes due January 2022
425,000

 
425,000

7.5% Senior Notes due April 2027
200,000

 
200,000

Term Loan due July 2018
592,500

 
600,000

Bank credit facility due July 2018
140,000

 
30,000

Obligations under capital leases
192,528

 
189,697

Mortgage notes and other debt, maturities through 2050
4,672

 
4,752

Unamortized premiums and other, net
5,839

 
42,084

Total debt
3,239,630

 
3,301,910

 Less:
 
 
 
 Current maturities of debt, capital lease obligations, and mortgage notes
(104,284
)
 
(153,738
)
 Current maturities of unamortized premiums and other, net
(1,421
)
 
(22,624
)
     Total current maturities
(105,705
)
 
(176,362
)
Total long-term debt
$
3,133,925

 
$
3,125,548

Current maturities of debt at March 31, 2014 primarily comprise our capital leases and amounts due under our term loan. Our consolidated debt had a weighted average interest rate of 5.38% and 5.25% at March 31, 2014 and December 31, 2013, respectively. Approximately 72% and 76% of our total debt had a fixed interest rate at March 31, 2014 and December 31, 2013, respectively.
Bank Credit Facility
The Company has a $500 million bank credit facility due July 2018 with a syndicate of banks, including a sublimit of $175 million for letters of credit.

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As of March 31, 2014, we have $140.0 million outstanding under our Bank credit facility and $31.6 million of letters of credit. The 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 facility contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, and certain dividend and share repurchase restrictions. We pay a quarterly fee on the unused commitment, which was 0.40% at March 31, 2014. As of March 31, 2014, we have $328.4 million in borrowing capacity under the bank credit facility.
Debt Extinguishments and Reductions
During the three months ended March 31, 2014, we made debt payments of $181.9 million, including the following scheduled payments and convertible debt payments:

$86.3 million aggregate principal amount of our 3.125% Senior Convertible Notes due July 2014;
$45.0 million aggregate principal amount of our 3.375% Senior Convertible Notes due July 2016;
$21.7 million aggregate unamortized premiums associated with our 3.125% Senior Convertible Notes due July 2014;
$14.2 million aggregate unamortized premiums associated with our 3.375% Senior Convertible Notes due July 2016;
$7.5 million aggregate principal amount of our Term Loan due July 2018; and
$7.2 million in scheduled payments for our capital lease obligations.

We did not incur any gains or losses as a result of these transactions.
During the three months ended March 31, 2013, we paid an aggregate of $11.4 million, to repay our remaining 7.875% Debentures due February 2013 and our capital lease obligations.
Capital Leases
During the three months ended March 31, 2014 and 2013, we acquired $10.7 million and $14.9 million, respectively, of primarily transportation equipment capital leases.

10. 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 values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms.
The fair value of our debt instruments at March 31, 2014 and December 31, 2013 was as follows:

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March 31, 2014
 
December 31, 2013
 
(In thousands)
3.125% Senior Convertible Notes due July 2014
$
121

 
$
106,939

6.75% Senior Notes due April 2015
143,179

 
144,653

6.75% Senior Notes due April 2016
214,647

 
214,904

3.375% Senior Convertible Notes due July 2016
185

 
60,487

7.0% Senior Notes due June 2017
331,285

 
333,259

7.625% Senior Notes due October 2018
288,438

 
288,875

6.5% Senior Notes due April 2019
210,000

 
210,000

7.0% Senior Notes due May 2019
266,250

 
270,000

4.5% Senior Notes due November 2020
196,000

 
192,610

8.0% Senior Notes due November 2021
173,625

 
173,625

5.375% Senior Notes due January 2022
434,563

 
431,588

7.5% Senior Notes due April 2027
216,500

 
215,750

Term Loan due July 2018
592,500

 
600,000

Bank credit facility due July 2018
140,000

 
30,000

Mortgage notes and other debt, maturities through 2050
4,672

 
4,752

Total fair value of debt instruments
$
3,211,965

 
$
3,277,442

The fair values of our long-term, fixed rate loans were estimated using market prices for those loans, and therefore they are classified within Level 1 of the Fair Value Measurements hierarchy as required by the FVM&D Topic of the ASC. The bank credit agreement and the mortgage and other debt are classified within Level 3 of the Fair Value Measurements hierarchy. The fair values of these instruments have been estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. A significant increase (decrease) in the inputs results in a directionally opposite change in the fair value of the instruments.

11. Share-Based Compensation
Stock Benefit Plans
We utilize the Black-Scholes option valuation model for estimating the fair value of our stock options. This model uses a range of assumptions related to volatility, the risk-free interest rate, the expected life, and the dividend yield. The fair values of our stock options are calculated using the following weighted average assumptions for the three months ended March 31, 2014:
 
 
Three Months Ended
Assumptions
 
March 31, 2014
Dividend yield
 
1.8
%
Expected volatility
 
27.1
%
Risk-free interest rate
 
1.1
%
Expected holding period (in years)
 
4.0

Stock Options
The following table sets forth stock option activity for the three months ended March 31, 2014:
 
Options
 
Weighted-Average
Exercise Price
Outstanding at December 31, 2013
13,319,750

 
$
9.84

Granted
2,495,850

 
$
17.41

Exercised
(964,403
)
 
$
8.82

Outstanding at March 31, 2014
14,851,197

 
$
11.18

Exercisable at March 31, 2014
10,339,379

 
$
9.14

As of March 31, 2014, the unrecognized compensation expense related to stock options of $14.6 million is expected to be recognized over a weighted average period of 1.6 years.

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Restricted Shares
Restricted share activity for the three months ended March 31, 2014 was as follows:
 
Restricted
shares
 
Weighted-Average
Grant-Date
Fair Value
Nonvested restricted shares at December 31, 2013
1,183,229

 
$
11.81

Granted
344,570

 
$
17.41

Vested
(187,549
)
 
$
11.44

Nonvested restricted shares at March 31, 2014
1,340,250

 
$
13.30

As of March 31, 2014, the unrecognized compensation expense related to restricted shares of $10.8 million is expected to be recognized over a weighted average period of 1.6 years.

12. Equity
(All shares reported in whole numbers)
Our components of Accumulated other comprehensive income are as follows:
 
Foreign
Currency
Translation
Adjustment
 
Unrealized
Gains and
Losses
 
Accumulated
Other
Comprehensive
Income
 
 
 
(In thousands)
 
 
Balance at December 31, 2013
$
88,441

 
$

 
$
88,441

Activity in 2014
(11,226
)
 

 
(11,226
)
Reduction in net unrealized gains associated with available-for-sale securities of the trusts, net of taxes

 
17,039

 
17,039

Reclassification of net unrealized losses activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus, net of taxes

 
(17,039
)
 
(17,039
)
Balance at March 31, 2014
$
77,215

 
$

 
$
77,215

The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. The U.S. dollar amount that arises from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the foreign currency translation adjustment in Accumulated other comprehensive income.
Cash Dividends
On February 12, 2014, our Board of Directors approved a cash dividend of $.08 per common share. This dividend, totaling $17.1 million, was paid on March 28, 2014.
Share Repurchases

Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our stock repurchase program. During the three months ended March 31, 2014, there were no share repurchases under our share repurchase program. The remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $190.1 million at March 31, 2014.

During the three months ended March 31, 2014, we made $1.1 million of share repurchases that were not part of the publicly announced programs. These shares represent restricted stock that was redeemed by certain employees in lieu of tax liability withholdings and stock option exercises by attestation, which do not affect our share repurchase program.

13. 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 United States, Canada, and Germany. We conduct both funeral and cemetery operations in the United States and Canada and funeral operations in Germany.
Our reportable segment information is as follows:

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Funeral
 
Cemetery
 
Reportable
Segments
 
(In thousands)
Three Months Ended March 31,
 
 
 
 
 
Revenues from external customers:
 
 
 
 
 
2014
$
510,668

 
$
236,455

 
$
747,123

2013
$
462,019

 
$
190,333

 
$
652,352

Gross profits:
 
 
 
 
 
2014
$
119,389

 
$
46,993

 
$
166,382

2013
$
120,131

 
$
39,526

 
$
159,657

The following table reconciles gross profits from reportable segments to our consolidated income before income taxes:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Gross profits from reportable segments
$
166,382

 
$
159,657

General and administrative expenses
(56,010
)
 
(30,923
)
Losses on divestitures and impairment charges, net
(2,812
)
 
(969
)
Operating income
107,560

 
127,765

Interest expense
(44,996
)
 
(32,769
)
Other income (expense), net
1,534

 
(984
)
Income before income taxes
$
64,098

 
$
94,012

Our geographic area information is as follows:
 
United
States
 
Canada
 
Germany
 
Total
 
 
 
(In thousands)
 
 
Three Months Ended March 31,
 
 
 
 
 
 
 
Revenues from external customers:
 
 
 
 
 
 
 
2014
$
694,383

 
$
51,126

 
$
1,614

 
$
747,123

2013
$
595,437

 
$
54,981

 
$
1,934

 
$
652,352


14. Supplementary Information
The detail of certain income statement accounts as presented in the unaudited condensed consolidated statement of operations is as follows:

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Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands)
Merchandise revenues:
 
 
 
Funeral
$
164,735

 
$
160,329

Cemetery
155,392

 
129,476

Total merchandise revenues
320,127

 
289,805

Services revenues:
 
 
 
Funeral
311,160

 
273,830

Cemetery
71,383

 
54,568

Total services revenues
382,543

 
328,398

Other revenues
44,453

 
34,149

Total revenues
$
747,123

 
$
652,352

Merchandise costs and expenses:
 
 
 
Funeral
$
81,954

 
$
75,781

Cemetery
69,537

 
56,553

Total cost of merchandise
151,491

 
132,334

Services costs and expenses:
 
 
 
Funeral
159,505

 
136,124

Cemetery
37,038

 
26,331

Total cost of services
196,543

 
162,455

Overhead and other expenses
232,707

 
197,906

Total costs and expenses
$
580,741

 
$
492,695

Certain Non-Cash Financing Transactions
 
Three Months Ended March 31,
 
2014
 
2013
 
(In thousands)
Options exercised by attestation
$
761

 
$

Shares repurchased
$
(761
)
 
$



15. Commitments and Contingencies
Insurance Loss Reserves
We purchase comprehensive general liability, morticians’ and cemetery professional liability, automobile liability, and workers’ compensation insurance coverage structured with high deductibles. The high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. As of March 31, 2014 and December 31, 2013, we have self-insurance reserves of $80.0 million and $78.0 million, respectively.

Litigation

We are a party to various litigation matters, investigations, and proceedings. 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 lawsuits 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 litigation matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.


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Burial Practices Claims. We are named as a defendant in various lawsuits alleging improper burial practices at certain of our cemetery locations. These lawsuits include but are not limited to the Scott and Schwartz lawsuits described in the following paragraphs.

Robert Scott, individually and on behalf of all others similarly situated, v. Eden Memorial Park, et al. (previously styled F. Charles Sands, et al. v. Eden Memorial Park, et al.) Case No. BC421528; in the Superior Court of the State of California for the County of Los Angeles - Central District. This case was filed in September 2009 against SCI and certain subsidiaries regarding our Eden Memorial Park cemetery in Mission Hills, California. The plaintiff seeks compensatory, consequential, and punitive damages as well as the appointment of a receiver to oversee cemetery operations. The plaintiff alleges the cemetery engaged in wrongful burial practices and did not disclose them to customers. After a hearing in February 2012, the court in May 2012 issued an order certifying classes of cemetery plot owners and their families based on alleged Company misrepresentation, concealment or nondisclosure of material facts regarding alleged improper burial practices pertaining to the period from February 1985 to September 2009. Trial proceedings commenced in January 2014. On February 27, 2014, the Company announced a settlement of the lawsuit and the trial court preliminarily approved the settlement agreement. All claims under the lawsuit will be released if final court approval of the settlement is obtained. The terms of the settlement call for the establishment of a settlement fund of $35,250,000, to which various SCI insurance carriers will contribute $25,250,000 and the Company will contribute the balance. Other provisions call for, among other things, the Company to contribute up to $250,000 toward claims administration costs and take certain actions in performing future burials. In addition, the Company reserves the right to cancel the settlement in the event a certain number of class members opt out of the settlement. The trial court is scheduled to conduct a hearing on May 15, 2014 to consider the final approval of the settlement. We cannot quantify our ultimate liability, if any, for the payment of any damages.

Barbara Schwartz & Carol Neitlich, Individually and on behalf of all others similarly situated v. SCI Funeral Services of Florida, Inc., et al.; Case No. 2012CA015954, In the Circuit Court of the 15th Judicial District in and for Palm Beach County, Florida. This lawsuit has been removed to the U.S. District Court for the Southern District of Florida and is now Case No. 9:12-CV-80180-DMM. This case was filed by counsel for plaintiffs in the Sands case regarding our Star of David Memorial Gardens Cemetery and Funeral Chapel and Bailey Memorial Gardens located in North Lauderdale, Florida. Plaintiffs seek to certify a class of cemetery plot owners and their families. Plaintiffs allege the cemetery engaged in wrongful burial practices and did not disclose them to customers. Plaintiffs seek compensatory, consequential, and punitive damages as well as the appointment of a receiver to oversee the cemetery operations. On our motion, the court dismissed the plaintiffs' claims in March 2013. The plaintiffs appealed the dismissal. On February 5, 2014, the 11th Circuit Court of Appeals affirmed the dismissal of the plaintiffs’ claims. We cannot quantify our ultimate liability, if any, for the payment of any damages.

Wage and Hour Claims. We are named a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour overtime pay, including but not limited to the Bryant and Helm lawsuits described below.

 Bryant, et al. v. Service Corporation International, et al.; Case No. RG-07359593; and Helm, et al. v. AWGI & SCI; Case No. RG-07359602; in the Superior Court of the State of California, County of Alameda. These cases were filed on December 5, 2007. These cases were removed to federal court in the U.S. District Court for the Northern District of California, San Francisco/Oakland Division. The Bryant case is now Case No. 3:08-CV-01190-SI and the Helm case is now Case No. C 08-01184-SI. On December 29, 2009, the court in the Helm case denied the plaintiffs’ motion to certify the case as a class action. The plaintiffs modified and refiled their motion for certification. On March 9, 2011, the court denied plaintiffs’ renewed motions to certify a class in both of the Bryant and Helm cases and dismissed the Helm case. The Helm plaintiff is appealing the court's order decertifying her claims. The individual claims in the Bryant case are still pending. The plaintiffs have also (i) filed additional lawsuits with similar allegations seeking class certification of state law claims in different states, and (ii) made a large number of demands for arbitration. We cannot quantify our ultimate liability, if any, in these lawsuits.

Claims Regarding Acquisition of Stewart Enterprises. We are named as a defendant in the following lawsuit.

Karen Moulton, Individually and on behalf of all others similarly situated v. Stewart Enterprises, Inc., Service Corporation International and others Case No. 2013-5636; in the Civil District Court Parish of New Orleans. This case was filed as a class action in June 2013 against SCI and our subsidiary in connection with SCI's acquisition of Stewart Enterprises, Inc. The plaintiffs allege that SCI aided and abetted breaches of fiduciary duties by Stewart Enterprises and its board of directors in negotiating the combination of Stewart Enterprises with a subsidiary of SCI. The plaintiffs seek damages concerning the combination. We have filed exceptions to the plaintiffs’ complaint that are set for oral hearing on June 12, 2014. We cannot quantify our ultimate liability, if any, for the payment of damages.

The ultimate outcome of the matters described above cannot be determined at this time. We intend to vigorously defend all of the above lawsuits; 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.

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16. Earnings Per Share
Basic earnings per common share (EPS) excludes dilution and is computed by dividing Net income attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common shares that then shared in our earnings.
A reconciliation of the numerators and denominators of the basic and diluted EPS computations is presented below:
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(In thousands, except per
share amounts)
Amounts attributable to common stockholders:
 
 
 
Net income:
 
 
 
Net income — basic
$
41,102

 
$
57,620

After tax interest on convertible debt
13

 
13

Net income — diluted
$
41,115

 
$
57,633

Weighted average shares (denominator):
 
 
 
Weighted average shares — basic
212,838

 
211,380

Stock options
4,272

 
3,707

Convertible debt
121

 
121

Weighted average shares — diluted
217,231

 
215,208

Net income per share:
 
 
 
Basic
$
0.19

 
$
0.27

Diluted
$
0.19

 
$
0.27

The computation of diluted EPS excludes outstanding stock options and convertible debt in certain periods in which the inclusion of such options and debt would be anti-dilutive in the periods presented. For the three months ended March 31, 2014 and March 31, 2013, total options not currently included in the computation of dilutive EPS were 2.7 million and 1.1 million, respectively.

17. Acquisition
Stewart
On December 23, 2013, pursuant to a tender offer, we acquired Stewart Enterprises, Inc. (Stewart) for 13.25 per share in cash, resulting in a purchase price of $1.5 billion, which includes the assumption of $331.5 million of Stewart’s debt.
The primary reasons for the merger and the principal factors that contributed to the recognition of goodwill in this acquisition were:
the acquisition of Stewart enhances our network footprint, enabling us to serve a number of new, complementary areas;
combining the two companies’ operations provides synergies and related cost savings through the elimination of duplicate home office functions and economies of scale; and
the acquisition of Stewart’s preneed backlog of deferred revenues enhances our long-term stability.

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The following table summarizes the adjusted fair values of the assets acquired and liabilities assumed as of December 23, 2013:
 
(In thousands)
Accounts receivable
$
14,638

Other current assets
198,760

Cemetery property
282,524

Property and equipment, net
338,363

Preneed funeral and cemetery receivables and trust investments
654,805

Finite-lived intangible assets
77,134

Indefinite-lived intangible assets
79,400

Acquired assets held for sale
443,169

Deferred charges and other assets
278,319

Goodwill
625,295

Total assets acquired
2,992,407

Current liabilities
217,175

Long-term debt
270,668

Deferred preneed funeral and cemetery revenues and deferred receipts held in trusts
834,320

Assumed liabilities held for sale
162,668

Deferred income taxes
62,409

Other liabilities
279,694

Total liabilities assumed
1,826,934

Noncontrolling interest
118

Net assets acquired
$
1,165,355

We have not finalized our assessment of the fair values as there has been insufficient time between the acquisition date and the issuance of these financial statements to complete our review and final determination of fair value. We made the following adjustments to our estimates of the fair value of assets and liabilities in the first quarter of 2014 and revised the consolidated balance sheet for the year-ended December 31, 2013 included in this filing to reflect these adjustments:
 
(In thousands)
Decrease in the fair value of cemetery property
1,942

Decrease in the fair value of property and equipment, net
2,093

Decrease in the fair value of finite-lived intangible assets
29,146

Increase in the fair value of deferred preneed funeral and cemetery revenues and deferred receipts held in trust
51,463

Decrease in the fair value of deferred income taxes
(37,760
)
Other
(751
)
Total adjustment to goodwill
46,133

Goodwill, land, and certain identifiable intangible assets recorded in the acquisition are not subject to amortization; however, the goodwill and intangible assets will be tested periodically for impairment as required by the Intangible Assets Topic of the ASC. Of the $625.3 million in goodwill recognized, $281.4 million was allocated to our cemetery segment and $343.9 million was allocated to our funeral segment. As a result of the carryover of Stewart’s tax basis, $3.0 million of this goodwill is deductible for tax purposes. The identified intangible assets comprise the following:

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Useful life
 
 
 
Minimum
 
Maximum
 
Fair Value
 
(Years)
 
(In thousands)
Preneed customer relationships related to insurance claims
10
 
20
 
$
28,500

Other preneed customer relationships
10
 
14
 
21,960

Selling and management agreements
20
 
40
 
5,900

Covenants-not-to-compete
5
 
15
 
5,480

Operating leases
26
 
34
 
6,144

Tradenames
5
 
5
 
9,150

Tradenames
 
 
Indefinite
 
77,900

Licenses and permits
 
 
Indefinite
 
1,500

Total intangible assets
 
 
 
 
$
156,534

The condensed statement of operations for the three months ended March 31, 2014 includes the results of operations of Stewart. For the three months ended March 31, 2013, the following unaudited pro forma information presents information as if the merger occurred on January 1, 2013:
 
2013
 
(In thousands)
 
(unaudited)
Revenue
$
750,105

Net income
$
64,218


SCI Direct
During 2013, we acquired an additional 20% of the outstanding shares of The Neptune Society, Inc. increasing our ownership from 70% to 90%. On January 1, 2014 The Neptune Society, Inc. changed its legal name to SCI Direct, Inc. During 2014, the Company acquired the remaining 10% of the outstanding shares of SCI Direct (formerly The Neptune Society, Inc.). SCI Direct is our direct cremation business and manages operations under various brand names, including Neptune Society, National Cremation Service, Trident Society, and Cremation Society of Virginia. This activity expands our footprint into a sector of the market that will continue to grow and that we do not currently target through our traditional funeral service and cemetery network.

18. Divestiture-Related Activities
As divestitures occur in the normal course of business, gains or losses on the sale of such locations are recognized in the income statement line item (Losses) gains on divestitures and impairment charges, net, which consist of the following for the three months ended March 31, :
 
Three Months Ended
 
March 31
 
2014
 
2013
 
 
 
 
(Losses) gains on divestitures, net
$
1,927

 
$
(891
)
Impairment losses
(4,739
)
 
(78
)
 
$
(2,812
)
 
$
(969
)
Assets Held for Sale
In connection with the acquisition of Stewart, we have agreed to a consent order with the staff of the Federal Trade Commission (FTC) that identifies certain properties the FTC will require us to divest as a result of the acquisition. The consent order has been approved by the FTC commissioners. As a result, these properties have been classified as assets held for sale in our condensed consolidated balance sheet.
Net assets held for sale at March 31, 2014 and December 31, 2013 were as follows:

36

Table of Contents

 
March 31
December 31
 
2014
2013
 
(In thousands)
Current assets
$
5,740

$
4,569

Preneed funeral and cemetery receivables and trust investments
346,690

342,728

Cemetery property
103,391

83,115

Property and equipment, net
82,631

63,356

Goodwill
127,138

140,860

Deferred charges and other assets
22,954

32,989

Cemetery perpetual care trust investments

112,197

83,426

Total assets
$
800,741

$
751,043

Accounts payable and accrued liabilities
4,850

3,183

Deferred preneed funeral and cemetery revenues and deferred receipts held in trusts
387,620

349,449

Care trusts' corpus
112,197

83,426

Other long term liabilities
4,606

4,209

Total liabilities
509,273

440,267

Net assets held for sale
$
291,468

$
310,776


19. Condensed Consolidating Financial Statements of Guarantors of Senior Notes
In conjunction with the Stewart acquisition, we assumed $200.0 million in aggregate principal amount of 6.5% senior notes due 2019 that were originally issued by Stewart Enterprises, Inc. ('Subsidiary Issuer') and issued a parent guarantee of the notes.
The following tables present the condensed consolidating historical financial statements as of March 31, 2014 and December 31, 2013 and for the three months ended March 31, 2014 and 2013, for SCI ('Parent') on a parent only basis; the Subsidiary Issuer on a parent only basis; the Guarantor subsidiaries, which serve as guarantors for all three notes, on a combined basis; all other non-guarantor subsidiaries on a combined basis; the eliminations necessary to arrive at the information for the Company on a consolidated basis; and the Company on a consolidated basis.
Non-guarantor subsidiaries of the three notes include the Puerto Rican subsidiaries of the Subsidiary Issuer; Investors Trust, Inc.; certain immaterial domestic subsidiaries of the Subsidiary Issuer, which are not 100 percent-owned, or are prohibited by law from guaranteeing the notes; and all subsidiaries of the Parent that are not subsidiaries of Stewart Enterprises, Inc. The guarantor subsidiaries of the notes are 100 percent-owned directly or indirectly by the Parent and the Subsidiary Issuer. The guarantees are full and unconditional and joint and several. The Issuer and Guarantor amounts are not reflected in the Statement of Operations, Comprehensive Income, and Cash Flows information for the three months ended March 31, 2013 as they were not owned by the Company during that period.
Condensed Consolidating Statements of Operations
 
Three Months Ended March 31, 2014
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$

 
$
110,165

 
$
636,958

 
$

 
$
747,123

Costs and expenses

 

 
(78,197
)
 
(502,544
)
 

 
(580,741
)
Gross profits

 

 
31,968

 
134,414

 

 
166,382

General and administrative expenses
(267
)
 
(8,979
)
 

 
(46,764
)
 

 
(56,010
)
Losses on divestitures and impairment charges, net

 

 
(66
)
 
(2,746
)
 

 
(2,812
)
Operating income
$
(267
)
 
$
(8,979
)
 
$
31,902

 
$
84,904

 
$

 
$
107,560

Interest expense
(40,593
)
 
(2,652
)
 

 
(1,751
)
 

 
(44,996
)
Equity in subsidiaries
66,917

 
19,394

 
384

 

 
(86,695
)
 

Other (expense) income, net

 
(2
)
 
1

 
1,535

 

 
1,534

Income from continuing operations before income taxes
$
26,057

 
$
7,761

 
$
32,287

 
$
84,688

 
$
(86,695
)
 
$
64,098

Benefit (provision) for income taxes
15,045

 
4,691

 
(12,863
)
 
(29,580
)
 

 
(22,707
)
Net income
41,102

 
12,452

 
19,424

 
55,108

 
(86,695
)
 
41,391

Net income attributable to noncontrolling interests

 

 

 

 
(289
)
 
$
(289
)
Net income attributable to common stockholders
$
41,102

 
$
12,452

 
$
19,424

 
$
55,108

 
$
(86,984
)
 
$
41,102


Condensed Consolidating Statements of Operations

 
Three Months Ended March 31, 2013
 
Parent
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Revenues
$

 
$
652,352

 
$

 
$
652,352

Costs and expenses

 
(492,695
)
 

 
(492,695
)
Gross profits

 
159,657

 

 
159,657

General and administrative expenses
(262
)
 
(30,661
)
 

 
(30,923
)
Losses on divestitures and impairment charges, net

 
(969
)
 

 
(969
)
Operating income
(262
)
 
128,027

 

 
127,765

Interest expense
(31,035
)
 
(1,734
)
 

 
(32,769
)
Equity in subsidiaries
77,420

 

 
(77,420
)
 

Other (expense) income, net

 
(984
)
 

 
(984
)
Income from continuing operations before income taxes
46,123

 
125,309

 
(77,420
)
 
94,012

Benefit (provision) for income taxes
11,497

 
(46,787
)
 

 
(35,290
)
Net income
57,620

 
78,522

 
(77,420
)
 
58,722

Net income attributable to noncontrolling interests

 

 
(1,102
)
 
(1,102
)
Net income attributable to common stockholders
$
57,620

 
$
78,522

 
$
(78,522
)
 
$
57,620



37

Table of Contents



Condensed Consolidating Statements of Comprehensive Income

Three Months Ended March 31, 2014

Parent

Subsidiary Issuer

Guarantor Subsidiaries

Non-Guarantor Subsidiaries

Eliminations

Consolidated
Net income
$
41,102

 
$
12,452

 
$
19,424

 
$
55,108

 
$
(86,695
)
 
$
41,391

Other comprehensive income
(11,226
)
 

 

 
(11,226
)
 
10,937

 
(11,515
)
Total comprehensive income attributable to common stockholders
$
29,876

 
$
12,452

 
$
19,424

 
$
43,882

 
$
(75,758
)
 
$
29,876



Condensed Consolidating Statements of Comprehensive Income
 
Three Months Ended March 31, 2013
 
Parent
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
Net income
$
57,620

 
$
78,522

 
$
(77,420
)
 
$
58,722

Other comprehensive income
(5,512
)
 
(5,512
)
 
4,410

 
(6,614
)
Total comprehensive income attributable to common stockholders
$
52,108

 
$
73,010

 
$
(73,010
)
 
$
52,108








38

Table of Contents

Condensed Consolidating Balance Sheets

March 31, 2014

Parent

Subsidiary Issuer

Guarantor Subsidiaries

Non-Guarantor Subsidiaries

Eliminations

Consolidated
ASSETS
Current assets:











Cash and cash equivalents
$

 
$
21,341

 
$
753

 
$
126,525

 
$

 
$
148,619

Receivables, net

 
909

 
5,536

 
99,368

 

 
105,813

Inventories, net

 

 
10,194

 
24,314

 

 
34,508

Current assets held for sale

 

 
4,164

 
1,576

 

 
5,740

Other
9,176

 
7,668

 
34,403

 
30,077

 

 
81,324

Total current assets
$
9,176

 
$
29,918

 
$
55,050

 
$
281,860

 
$

 
$
376,004

Equity in subsidiaries
4,280,493

 
657,543

 
4,546

 

 
(4,942,582
)
 

Preneed funeral receivables, net and trust investments

 

 
376,292

 
1,495,247

 

 
1,871,539

Preneed cemetery receivables, net and trust investments

 

 
255,305

 
2,046,328

 

 
2,301,633

Cemetery property, at cost

 

 
233,661

 
1,487,785

 

 
1,721,446

Property and equipment, net

 
13,900

 
294,574

 
1,578,545

 

 
1,887,019

Non-current assets held for sale

 

 
451,409

 
343,592

 

 
795,001

Deferred charges and other assets
39,887

 
17,684

 
171,703

 
402,485

 

 
631,759

Goodwill, net

 
647,890

 

 
1,330,731

 

 
1,978,621

Cemetery perpetual care trust investments

 

 
206,859

 
1,135,730

 

 
1,342,589

Total assets
$
4,329,556

 
$
1,366,935

 
$
2,049,399

 
$
10,102,303

 
$
(4,942,582
)
 
$
12,905,611

LIABILITIES & EQUITY
Current liabilities:











Accounts payable and accrued liabilities
$
54,039

 
$
25,723

 
$
25,955

 
$
371,651

 
$

 
$
477,368

Current maturities of long-term debt

 
95

 
291

 
105,319

 

 
105,705

Current liabilities held for sale

 

 
3,484

 
1,366

 

 
4,850

Income taxes

 
74

 
90

 
3,137

 

 
3,301

Total current liabilities
$
54,039

 
$
25,892

 
$
29,820

 
$
481,473

 
$

 
$
591,224

Long-term debt
2,833,690

 
209,418

 
172

 
90,645

 

 
3,133,925

Deferred preneed funeral revenues

 

 
177,046

 
495,585

 

 
672,631

Deferred preneed cemetery revenues

 

 
106,168

 
880,370

 

 
986,538

Deferred tax liability
1,082

 

 
152,608

 
433,301

 

 
586,991

Non-current liabilities held for sale

 

 
208,029

 
296,394

 

 
504,423

Other liabilities
4,318

 
14,779

 
7,168

 
378,428

 

 
404,693

Deferred preneed funeral and cemetery receipts held in trust

 

 
473,606

 
2,772,023

 

 
3,245,629

Care trusts’ corpus

 

 
207,309

 
1,133,052

 

 
1,340,361

Equity:











Common stock
213,532

 
85,175

 
102

 
25

 
(85,302
)
 
213,532

Other equity
1,145,680

 
1,031,671

 
687,371

 
3,141,007

 
(4,860,049
)
 
1,145,680

Accumulated other comprehensive income
77,215

 

 

 

 

 
77,215

Total common stockholders’ equity
1,436,427

 
1,116,846

 
687,473

 
3,141,032

 
(4,945,351
)
 
1,436,427

Noncontrolling interests

 

 

 

 
2,769

 
2,769

Total equity
1,436,427

 
1,116,846

 
687,473

 
3,141,032

 
(4,942,582
)
 
1,439,196

Total liabilities and equity
$
4,329,556

 
$
1,366,935

 
$
2,049,399

 
$
10,102,303

 
$
(4,942,582
)
 
$
12,905,611




39

Table of Contents

Condensed Consolidating Balance Sheets
 
December 31, 2013
 
Parent
 
Subsidiary Issuer
 
Guarantor Subsidiaries
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
ASSETS
Current assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$

 
$
53,543

 
$
1,898

 
$
89,432

 
$

 
$
144,873

Receivables, net

 
442

 
23,908

 
81,549

 

 
105,899

Inventories, net

 

 
10,925

 
23,743

 

 
34,668

Current assets held for sale

 

 
3,333

 
1,236

 

 
4,569

Other
9,083

 
29,133

 
35,368

 
31,014

 

 
104,598

Total current assets
9,083

 
83,118

 
75,432

 
226,974

 

 
394,607

Equity in subsidiaries
4,132,098

 
828,457

 
4,546

 

 
(4,965,101
)
 

Preneed funeral receivables, net and trust investments

 

 
358,567

 
1,512,307

 

 
1,870,874

Preneed cemetery receivables, net and trust investments

 

 
265,346

 
2,035,565

 

 
2,300,911

Cemetery property, at cost

 

 
264,226

 
1,482,899

 

 
1,747,125

Property and equipment, net

 
15,243

 
306,174

 
1,599,451

 

 
1,920,868

Non-current assets held for sale

 

 
443,170

 
303,304

 

 
746,474

Deferred charges and other assets
42,068

 
31,807

 
150,665

 
407,548

 

 
632,088

Goodwill, net

 
624,711

 

 
1,343,524

 

 
1,968,235

Cemetery perpetual care trust investments

 

 
223,903

 
1,123,719

 

 
1,347,622

Total assets
$
4,183,249

 
$
1,583,336

 
$
2,092,029

 
$
10,035,291

 
$
(4,965,101
)
 
$
12,928,804

LIABILITIES & EQUITY
Current liabilities:
 
 
 
 
 
 
 
 
 
 
 
Accounts payable and accrued liabilities
$
31,914

 
$
46,020

 
$
43,706

 
$
365,008

 
$

 
$
486,648

Current maturities of long-term debt
30,000

 
106,939

 

 
39,423

 

 
176,362

Current liabilities held for sale

 

 
1,647

 
1,536

 

 
3,183

Income taxes

 
560

 
1,427

 
4,404

 

 
6,391

Total current liabilities
61,914

 
153,519

 
46,780

 
410,371

 

 
672,584

Long-term debt
2,701,611

 
270,578

 
89

 
153,270

 

 
3,125,548

Deferred preneed funeral revenues

 

 
176,958

 
509,202

 

 
686,160

Deferred preneed cemetery revenues

 

 
85,163

 
889,594

 

 
974,757

Deferred tax liability
1,092

 

 
61,835

 
518,513

 

 
581,440

Non-current liabilities held for sale

 

 
162,668

 
274,416

 

 
437,084

Other liabilities
4,402

 
29,944

 
11,116

 
384,931

 

 
430,393

Deferred preneed funeral and cemetery receipts held in trust

 

 
503,667

 
2,746,919

 

 
3,250,586

Care trusts’ corpus

 

 
223,903

 
1,121,971

 

 
1,345,874

Equity:
 
 
 
 
 
 
 
 
 
 
 
Common stock
212,317

 
85,175

 
102

 
25

 
(85,302
)
 
212,317

Other equity
1,113,472

 
1,044,120

 
819,748

 
2,937,638

 
(4,801,506
)
 
1,113,472

Accumulated other comprehensive income
88,441

 

 

 
88,441

 
(88,441
)
 
88,441

Total common stockholders’ equity
1,414,230

 
1,129,295

 
819,850

 
3,026,104

 
(4,975,249
)
 
1,414,230

Noncontrolling interests

 

 

 

 
10,148

 
10,148

Total equity
1,414,230

 
1,129,295

 
819,850

 
3,026,104

 
(4,965,101
)
 
1,424,378

Total liabilities and equity
$
4,183,249

 
$
1,583,336

 
$
2,092,029

 
$
10,035,291

 
$
(4,965,101
)
 
$
12,928,804



40

Table of Contents

Condensed Consolidating Statements of Cash Flows

Three Months Ended March 31, 2014

Parent

Subsidiary Issuer

Guarantor Subsidiaries

Non-Guarantor Subsidiaries

Eliminations

Consolidated












Net cash (used in) provided by operating activities
$
(28,168
)
 
$
(32,202
)
 
$
47,998

 
$
140,259

 
$

 
$
127,887

Cash flows from investing activities:











Capital expenditures

 

 
(4,120
)
 
(21,102
)
 

 
(25,222
)
Acquisitions, net of cash acquired

 

 

 
(779
)
 

 
(779
)
Proceeds from divestitures and sales of property and equipment

 

 

 
2,639

 

 
2,639

Net withdrawals (deposits) of restricted funds and other

 
2,035

 
(14,260
)
 

 

 
(12,225
)
Contributions to subsidiaries
(70,858
)
 

 

 

 
70,858

 

Net cash (used in) provided by investing activities
(70,858
)
 
2,035

 
(18,380
)
 
(19,242
)
 
70,858

 
(35,587
)
Cash flows from financing activities:











Proceeds from issuance of long-term debt
110,000

 

 

 

 

 
110,000

Payments of debt
(7,500
)
 

 

 
(79
)
 

 
(7,579
)
Early extinguishment of debt

 
(167,093
)
 

 

 

 
(167,093
)
Principal payments on capital leases

 

 
(23
)
 
(7,208
)
 

 
(7,231
)
Proceeds from exercise of stock options
7,915

 

 

 

 

 
7,915

Excess tax benefits from share based awards
6,744

 

 

 

 

 
6,744

Purchase of Company common stock
(1,053
)
 

 

 

 

 
(1,053
)
Payments of dividends
(17,080
)
 

 

 

 

 
(17,080
)
Purchase of noncontrolling interest

 

 

 
(15,000
)
 

 
(15,000
)
Bank overdrafts and other

 

 

 
3,762

 

 
3,762

Contributions from (distributions to) parent

 
165,058

 
(30,740
)
 
(63,460
)
 
(70,858
)
 

Net cash provided by (used in) financing activities
99,026

 
(2,035
)
 
(30,763
)
 
(81,985
)
 
(70,858
)
 
(86,615
)
Effect of foreign currency

 

 

 
(1,939
)
 

 
(1,939
)
Net decrease (increase) in cash and cash equivalents

 
(32,202
)
 
(1,145
)
 
37,093

 

 
3,746

Cash and cash equivalents at beginning of period

 
53,543

 
1,898

 
89,432

 

 
144,873

Cash and cash equivalents at end of period
$

 
$
21,341

 
$
753

 
$
126,525

 
$

 
$
148,619




























41

Table of Contents

Condensed Consolidating Statements of Cash Flows
 
Three Months Ended March 31, 2013
 
Parent
 
Non-Guarantor Subsidiaries
 
Eliminations
 
Consolidated
 
 
 
 
 
 
 
 
Net cash (used in) provided by operating activities
$
(1,261
)
 
$
152,385

 
$

 
$
151,124

Cash flows from investing activities:
 
 
 
 
 
 
 
Capital expenditures

 
(22,569
)
 

 
(22,569
)
Proceeds from divestitures and sales of property and equipment

 
1,816

 

 
1,816

Net withdrawals (deposits) of restricted funds and other

 
339

 

 
339

Distributions from subsidiaries
16,558

 

 
(16,558
)
 

Net cash provided by (used in) investing activities
16,558

 
(20,414
)
 
(16,558
)
 
(20,414
)
Cash flows from financing activities:
 
 
 
 
 
 
 
Payments of debt
(4,757
)
 
(191
)
 

 
(4,948
)
Principal payments on capital leases

 
(6,468
)
 

 
(6,468
)
Proceeds from exercise of stock options
3,094

 

 

 
3,094

Excess tax benefits from share based awards
772

 

 

 
772

Purchase of Company common stock
(1,708
)
 

 

 
(1,708
)
Payments of dividends
(12,698
)
 

 

 
(12,698
)
Distributions to parent

 
(16,558
)
 
16,558

 

Purchase of noncontrolling interest

 
(8,333
)
 

 
(8,333
)
Bank overdrafts and other

 
(4,004
)
 

 
(4,004
)
Net cash (used in) provided by financing activities
(15,297
)
 
(35,554
)
 
16,558

 
(34,293
)
Effect of foreign currency

 
(579
)
 

 
(579
)
Net increase in cash and cash equivalents

 
95,838

 

 
95,838

Cash and cash equivalents at beginning of period

 
92,708

 

 
92,708

Cash and cash equivalents at end of period
$

 
$
188,546

 
$

 
$
188,546







42

Table of Contents

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

The Company
We are North America’s largest provider of deathcare products and services, with a network of funeral homes and cemeteries unequalled in geographic scale and reach. At March 31, 2014, we operated 1,638 funeral service locations and 515 cemeteries (including 283 combination locations) in North America, which are geographically diversified across 43 states, 8 Canadian provinces, the District of Columbia, and Puerto Rico. Our funeral segment also includes the operations of 12 funeral homes in Germany that we intend to exit when economic values and conditions are conducive to a sale. Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses. We sell cemetery property and funeral and cemetery products and services at the time of need and on a preneed basis.
Our financial position is enhanced by our $9.1 billion backlog of future revenues from both trust and insurance-funded sales at March 31, 2014, which is the result of preneed funeral and cemetery sales. Preneed selling provides us with a current opportunity to lock-in future market share while deterring the customer from going to a competitor in the future. We believe it adds to the stability and predictability of our revenue and cash flows. While revenue on the majority of preneed funeral sales is deferred until the time of need, sales of preneed cemetery property provides opportunities for full current revenue recognition (to the extent we collect 10% from the customer and the property is developed).
We believe we have the financial strength and flexibility to reward shareholders through dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth. We currently have approximately $190.1 million authorized to repurchase our common stock.
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 at-need revenues. The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately half of the average revenue earned from a traditional burial service. To further enhance revenue opportunities we are developing memorialization products and services that specifically appeal to cremation customers. We believe that these additional products and services will help drive increases in the average revenue for a cremation in future periods.
For further discussion of our key operating metrics, see our Results of Operations and Cash Flow sections below.

Financial Condition, Liquidity and Capital Resources
Capital Allocation Considerations
We rely on cash flow from operations as a significant source of liquidity. Our cash flow from operating activities provided $127.9 million in the three months ended March 31, 2014. In addition, we have $328.4 million in excess borrowing capacity under our bank credit facility which expires in March 2016. We currently have no significant maturities of long-term debt until April 2015.
Our bank credit facility requires us to maintain certain leverage and interest coverage ratios. As of March 31, 2014, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of March 31, 2014 are as follows:
 
Per Credit Agreement
 
Actual
Leverage ratio
5.00 (Max)
 
3.95
Interest coverage ratio
3.00 (Min)
 
5.69
We believe the sources of liquidity can be supplemented by our ability to access the capital markets for additional debt or equity securities. We believe that our $148.6 million of cash on hand, future operating cash flows, and the available capacity under our credit facility will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations.
It is our intention to 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:
Reinvest in the core business. We expect to continue to focus on funding growth initiatives that generate increased profitability, revenue, and cash flows. Our primary internal growth initiative is to increase our funeral and cemetery preneed backlog to grow the Company over the long-term. We will also invest in the construction of funeral home facilities and in the construction of

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cemetery property to promote future cemetery sales growth. Lastly, from time to time we may have other smaller capital projects, primarily related to the improvement of processes and systems.
Invest in acquisitions. We intend to make acquisitions of funeral homes and cemeteries when pricing and terms are favorable. We expect an acquisition investment to earn an after-tax cash return that is in excess of our weighted average cost of capital with room for execution risk. We target businesses with favorable consumer segments and/or where we can achieve additional economies of scale.
Repurchase shares. Absent a strategic acquisition opportunity, we believe share repurchases are attractive at the appropriate price. Currently, we have approximately $190.1 million authorized under our share repurchase program. We intend to make purchases from time to time in the open market or through privately negotiated transactions, subject to market conditions, debt covenants, and normal trading restrictions. Our credit agreement 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 share repurchase program in the future.
Pay a dividend. Beginning in November 2007, we began to pay quarterly dividends of $0.04 per common share. The quarterly dividend has steadily increased over the past few years with the latest increase to $0.08 per common share approved by the Board of Directors on February 12, 2014. We intend to continue to grow our cash dividend commensurate with the growth of our free cash flow. 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.
Repurchase debt. We will seek to make open market debt repurchases when it is opportunistic to do so relative to other capital deployment opportunities in order to manage our near-term debt maturity profile.
The Company has a relatively consistent annual cash flow stream which is generally resistant to down economic cycles. This cash flow stream is available to substantially reduce our long-term debt maturities should we choose to do so. Furthermore, the Company's 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 operating and investing needs.
Operating Activities
Net cash provided by operating activities decreased $23.2 million to $127.9 million in the first quarter of 2014 from $151.1 million in the same period of 2013. Included in 2014 are acquisition costs related to the Stewart acquisition of $28.4 million and a $5.9 million increase in excess tax benefits from share based awards, partially offset by a $1.3 million decrease in system and process transition costs and a $1.0 million decrease in legal defense fees.
Excluding the above items, cash flow from operations increased $8.8 million as a result of the following. The increases and decreases described below primarily resulted from the increase in the Company's size due to the Stewart acquisition.
a $90.2 million increase in cash receipts from customers as a result of higher atneed and preneed sales; and
a $4.3 million increase in General Agency (GA) receipts, partially offset by
a $35.8 million increase in vendor payments;
a $28.5 million increase in employee compensation;
a $13.9 million increase in cash interest paid; and
an $8.1 million increase in cash tax payments.
Investing Activities
Cash flows from investing activities used $35.6 million in the first quarter of 2014 compared to using $20.4 million in the same period of 2013. This increase was primarily attributable to:
a $12.6 million increase in net deposits of restricted funds;
a $2.7 million increase in capital expenditures; and
a $0.8 million increase in cash spent on acquisitions; partially offset by
a $0.8 million increase in cash receipts from divestitures and asset sales.

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Financing Activities
Financing activities used $86.6 million in the first quarter of 2014 compared to using $34.3 million in the same period of 2013. This increase was primarily due to the increase in net debt payments in 2014.
Financial Assurances
In support of our operations, we have entered into arrangements with certain surety companies whereby such companies agree to issue surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our preneed funeral and cemetery sales activities. The obligations underlying these surety bonds are recorded on the unaudited condensed consolidated balance sheet as Deferred preneed funeral revenues and Deferred preneed cemetery revenues. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.
 
March 31, 2014
 
December 31, 2013
 
(Dollars in millions)
Preneed funeral
$
114.8

 
$
120.3

Preneed cemetery:

 
 
 Merchandise and services
129.4

 
131.3

 Pre-construction
4.4

 
2.9

Bonds supporting preneed funeral and cemetery obligations
248.6

 
254.5

Bonds supporting preneed business permits
4.4

 
2.8

Other bonds
18.4

 
17.9

Total surety bonds outstanding
$
271.4

 
$
275.2

When selling preneed funeral and cemetery contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law. For both the three months ended March 31, 2014 and 2013, we had $4.4 million of cash receipts attributable to bonded sales. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.
Surety bond premiums are paid annually and are automatically renewable until maturity of the underlying preneed contracts, unless we are given prior notice of cancellation. Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company were to cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. Management does not expect that we will be required to fund material future amounts related to these surety bonds because of lack of surety capacity or surety company non-performance.
Preneed Funeral and Cemetery Activities and Backlog of Contracts
In addition to selling our products and services to client families at the time of need, we sell price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery services and merchandise. Since preneed funeral and cemetery services or merchandise will not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into merchandise and service trusts until the merchandise is delivered or the service is performed. These trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. In certain situations, as described above, where permitted by state or provincial laws, we post a surety bond as financial assurance for a certain amount of the preneed funeral or cemetery contract in lieu of placing funds into trust accounts. Trust-Funded Preneed Funeral and Cemetery Contracts: The funds are deposited into trust and invested by independent trustees in accordance with state and provincial laws. 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.
The table below details our results of preneed funeral and cemetery production and maturities, excluding insurance contracts, for the three months ended March 31, 2014 and 2013.

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North America
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(Dollars in millions)
Funeral:
 
 
 
Preneed trust-funded (including bonded):
 
 
 
Sales production
$
59.3

 
$
46.3

Sales production (number of contracts)
20,400

 
17,253

Maturities
$
58.1

 
$
50.9

Maturities (number of contracts)
15,365

 
14,636

Cemetery:
 
 
 
Sales production:
 
 
 
Preneed
$
151.7

 
$
133.2

Atneed
81.0

 
63.3

Total sales production
$
232.7

 
$
196.5

Sales production deferred to backlog:
 
 
 
Preneed
$
60.9

 
$
49.2

Atneed
62.7

 
47.7

Total sales production deferred to backlog
$
123.6

 
$
96.9

Revenue recognized from backlog:
 
 
 
Preneed
$
42.3

 
$
35.9

Atneed
59.9

 
45.5

Total revenue recognized from backlog
$
102.2

 
$
81.4


Insurance-Funded Preneed Funeral Contracts: Where permitted by state or provincial law, customers may arrange their preneed funeral contract by purchasing a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. The policy amount of the insurance contract between the customer and the third-party insurance company generally equals the amount of the preneed funeral contract. As the insurance contract is between the insurance company and the customer, we do not reflect the unfulfilled insurance-funded preneed funeral contract amounts in our unaudited condensed consolidated balance sheet.
The table below details the results of insurance-funded preneed funeral production and maturities for the three months ended March 31, 2014 and 2013, and the number of contracts associated with those transactions.
 
North America
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(Dollars in millions)
Preneed funeral insurance-funded:
 
 
 
Sales production (1)
$
155.1

 
$
137.9

Sales production (number of contracts) (1)
26,331

 
24,134

General Agency revenue
$
29.4

 
$
25.2

Maturities
$
101.0

 
$
92.7

Maturities (number of contracts)
18,519

 
16,305

(1)
Amounts are not included in our unaudited condensed consolidated balance sheet.
North America Backlog of Preneed Funeral and Cemetery Contracts: The following table reflects our North America backlog of trust-funded deferred preneed funeral and cemetery contract revenues, including amounts related to Deferred preneed funeral and cemetery receipts held in trust at March 31, 2014 and December 31, 2013. Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our unaudited condensed consolidated balance sheet) at March 31,

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2014 and December 31, 2013. The backlog amounts presented are reduced by an amount that we believe will cancel before maturity based on historical experience.
The table also reflects our preneed funeral and cemetery receivables and trust investments (fair value and cost basis) associated with the backlog of deferred preneed funeral and cemetery contract revenues, net of the estimated cancellation allowance. We believe that the table below is meaningful because it sets forth the aggregate amount of future revenues we expect to recognize as a result of preneed sales, as well as the amount of assets associated with those revenues. Because the future revenues exceed the asset amounts, future revenues will exceed the cash distributions actually received from the associated trusts.
 
March 31, 2014
 
December 31, 2013
 
Fair Value
 
Cost
 
Fair Value
 
Cost
 
 
 
(Dollars in billions)
 
 
Deferred preneed funeral revenues
$
0.67

 
$
0.67

 
$
0.69


$
0.69

Deferred preneed funeral receipts held in trust
1.67

 
1.58

 
1.67

 
1.59

 
$
2.34

 
$
2.25

 
$
2.36

 
$
2.28

Allowance for cancellation on trust investments
(0.19
)
 
(0.19
)
 
(0.22
)
 
(0.22
)
Backlog of trust-funded preneed funeral revenues
$
2.15

 
$
2.06

 
$
2.14

 
$
2.06

Backlog of insurance-funded preneed funeral revenues (1)
4.49

 
4.49

 
4.45

 
4.45

Total backlog of preneed funeral revenues
$
6.64

 
$
6.55

 
$
6.59

 
$
6.51

Preneed funeral receivables, net and trust investments
$
1.87

 
$
1.78

 
$
1.87

 
$
1.79

Allowance for cancellation on trust investments
(0.16
)
 
(0.16
)
 
(0.18
)
 
(0.18
)
Assets associated with backlog of trust-funded deferred preneed funeral revenues, net of estimated allowance for cancellation
$
1.71

 
$
1.62

 
$
1.69

 
$
1.61

Insurance policies associated with insurance-funded deferred preneed funeral revenues, net of estimated allowance for cancellation (1)
4.49

 
4.49

 
4.45

 
4.45

Total assets associated with backlog of preneed funeral revenues, net of estimated allowance for cancellation
$
6.20

 
$
6.11

 
$
6.14

 
$
6.06

Deferred preneed cemetery revenues
$
0.99

 
$
0.99

 
$
0.97

 
$
0.97

Deferred preneed cemetery receipts held in trust
1.58

 
1.40

 
1.58

 
1.41

 
$
2.57

 
$
2.39

 
$
2.55

 
$
2.38

Allowance for cancellation on trust investments
(0.12
)
 
(0.12
)
 
(0.19
)
 
(0.19
)
Total backlog of deferred cemetery revenues
$
2.45

 
$
2.27

 
$
2.36

 
$
2.19

Preneed cemetery receivables, net and trust investments
$
2.30

 
$
2.13

 
$
2.29

 
$
2.12

Allowance for cancellation on trust investments
(0.13
)
 
(0.13
)
 
(0.19
)
 
(0.19
)
Total assets associated with backlog of deferred cemetery revenues, net of estimated allowance for cancellation
$
2.17

 
$
2.00

 
$
2.10

 
$
1.93


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

The fair value of our funeral and cemetery trust investments was based on a combination of quoted market prices, observable inputs such as interest rates or yield curves, and appraisals. The difference between the backlog and asset amounts represents the contracts for which we have posted surety bonds as financial assurance in lieu of trusting, the amounts collected from customers that were not required to be deposited into trust, and allowable cash distributions from trust assets. The table also reflects the amounts expected to be received from insurance companies through the assignment of policy proceeds related to insurance-funded funeral contracts.
Trust Investments
In addition to selling our products and services to client families at the time of need, we sell price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery services and merchandise. Since preneed funeral and cemetery services or merchandise will not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into trusts and/or preneed 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 services and merchandise in the future for the prices that were guaranteed at the time of sale.

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Also, we are required by state and provincial law to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus remains in the trust in perpetuity and the net ordinary earnings are intended to offset the expense to maintain the cemetery property. The majority of states require that net gains or losses are retained and added to the corpus, but certain states allow the net realized gains and losses to be included in the income that is distributed.
Independent trustees manage and invest all of the funds deposited into the funeral and cemetery merchandise and service trusts as well as the cemetery perpetual care trusts. The trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. All of the trustees engage the same independent investment advisor indirectly through SCI's wholly-owned registered investment advisor. The trustees, with input from the investment advisor, establish an investment policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection. The investments are also governed by state and provincial guidelines. Asset allocation is based on the liability structure of each funeral, cemetery, and perpetual care trust. The investment advisor recommends investment managers to the trustees that are selected on the basis of various criteria set forth in the investment policy. The primary investment objectives for the funeral and cemetery merchandise and service trusts include (1) achieving growth of principal over time sufficient to preserve and increase the purchasing power of the assets, and (2) preserving capital within acceptable levels of volatility. Preneed funeral and cemetery contracts generally take years to mature. Therefore, the funds associated with these contracts are often invested for several market cycles. While cemetery perpetual care trusts share the same investment objectives as listed above, these trusts emphasize providing a steady stream of investment income with some capital appreciation. The trusts seek to control risk and volatility through a combination of asset styles, asset classes, and institutional investment managers.
As of March 31, 2014, 82% of our trusts were under the control and custody of two large financial institutions engaged as preferred trustees. The U.S. trustees primarily use common trust fund structures as the investment vehicle for their trusts. Through the common trust fund structure, each respective trustee manages the allocation of assets through individual managed accounts or institutional mutual funds. In the event a particular state prohibits the use of a common trust fund as a qualified investment, the trustee utilizes institutional mutual funds. The U.S. trusts include a modest allocation to alternative investments, which are comprised primarily of private equity and real estate investments. These investments are structured as limited liability companies (LLCs) and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective LLCs.
Fixed Income Securities
Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility. The SCI trusts have direct investments primarily in government fixed income securities. Insurance backed fixed income investments preserve the principal, guarantee annual appreciation, and reduce overall portfolio volatility.
Canadian government fixed income securities are investments in Canadian federal and provincial government instruments. In many cases, regulatory restrictions mandate that the funds from the sales of preneed funeral and cemetery products sold in certain Canadian jurisdictions must be invested in these instruments.
Equity Securities
Equity investments have historically provided long-term capital appreciation in excess of inflation. The SCI trusts have direct investments primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment objectives (i.e., growth and value). The majority of the equity portfolio is managed by multiple institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, these securities are well-diversified. As of March 31, 2014, the largest single equity position represented less than 1% of the total equity securities portfolio.
Mutual Funds
The SCI trust funds employ institutional mutual funds where operationally or economically efficient. Institutional mutual funds are utilized to invest in various asset classes including US equities, non-US equities, convertible bonds, corporate bonds, government bonds, Treasury inflation protected securities (TIPS), high yield bonds, real estate investment trusts (REITs), and commodities. The mutual funds are governed by guidelines outlined in their individual prospectuses.
Private Equity
The objective of these investments is to provide high rates of return with controlled volatility. These investments are typically long-term in duration. These investments are diversified by strategy, sector, manager, and vintage year. Private equity exposure is accessed through limited liability companies (LLCs) established by certain preferred trustees. These LLCs invest in numerous

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limited partnerships, including private equity, fund of funds, distressed debt, and mezzanine financing. The trustees that have oversight of their respective LLCs work closely with the investment advisor in making all current investments.
Trust Performance
The trust fund income recognized from these investment assets continues to be volatile. During the twelve months ended March 31, 2014, the Standard and Poor’s 500 Index increased approximately 21.9% and the Barclay’s Aggregate Index decreased approximately 0.1%, while the combined SCI trusts increased approximately 10.8%.
SCI, its trustees, and its investment advisor continue to monitor the capital markets and the trusts on an ongoing basis. The trustees, with input from the investment advisor, will take prudent action as needed to achieve the investment goals and objectives of the trusts.

Results of Operations — Three Months Ended March 31, 2014 and 2013
Management Summary
Key highlights in the first quarter of 2014 were as follows:
Higher operating results generated from the addition of our legacy Stewart properties essentially offset the lower comparable funeral volumes in the current year quarter. The first quarter of 2013 had exceptionally strong funeral volume as a result of the elevated flu season in 2013.
Funeral gross profit decreased $0.8 million, or 0.7%, primarily due primarily to an expected decline in comparable funeral services performed, partially offset by gross profits contributed by the Stewart acquisition.
Cemetery gross profit increased $7.5 million, or 19.0%, due primarily to gross profits contributed by the Stewart acquisition, which helped offset lower comparable preneed sales.

Results of Operations
In the first quarter of 2014, we reported net income attributable to common stockholders of $41.1 million ($0.19 per diluted share) compared to net income attributable to common stockholders in the first quarter of 2013 of $57.6 million ($0.27 per diluted share). These results were impacted by the following items:
 
2014
 
2013
 
(Dollars in thousands)
Net after-tax losses from the sale of assets
$
(1,407
)
 
$
(573
)
After-tax expenses related to system and process transition costs
$
(1,898
)
 
$
(695
)
After tax expenses related to Stewart acquisition and transition costs
$
(10,092
)
 
$

After-tax expenses related to legal defense fees and labor matters
$
(7,100
)
 
$
(804
)
Change in certain tax reserves and other
$
817

 
$
(890
)
Consolidated Versus Comparable Results
The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the three months ended March 31, 2014 and 2013. We define comparable operations (or same store operations) as those funeral and cemetery locations that were owned for the entire period beginning January 1, 2013 and ending March 31, 2014. The following tables present operating results for funeral and cemetery locations that were owned by us during this period.

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Three Months Ended March 31, 2014
 
Consolidated
 
Less:
Results Associated with Acquisition/New Construction
 
Less:
Results Associated with Divestitures
 
Comparable
 
 
 
 
(Dollars in millions)
 
 
North America Revenue
 
 
 
 
 
 
 
 
Funeral revenue
 
$
509.0

 
$
73.3

 
$
0.6

 
$
435.1

Cemetery revenue
 
236.5

 
44.4

 
0.6

 
191.5

 
 
745.5

 
117.7

 
1.2

 
626.6

Germany revenue
 
1.6

 

 

 
1.6

Total revenue
 
$
747.1

 
$
117.7

 
$
1.2

 
$
628.2

North America Gross Profits
 
 
 
 
 
 
 
 
Funeral gross profits
 
$
119.3

 
$
21.1

 
$
0.3

 
$
97.9

Cemetery gross profits
 
47.0

 
10.1

 
0.1

 
36.8

 
 
166.3

 
31.2

 
0.4

 
134.7

Germany gross profits
 
0.1

 

 

 
0.1

Total gross profits
 
$
166.4

 
$
31.2

 
$
0.4

 
$
134.8

Three Months Ended March 31, 2013
 
Consolidated
 
Less:
Results Associated with Acquisition/New Construction
 
Less:
Results Associated with Divestitures
 
Comparable
 
 
 
 
(Dollars in millions)
 
 
North America Revenue
 
 
 
 
 
 
 
 
Funeral revenue
 
$
460.2

 
$
0.3

 
$
2.2

 
$
457.7

Cemetery revenue
 
190.3

 

 
(0.1
)
 
190.4

 
 
650.5

 
0.3

 
2.1

 
648.1

Germany revenue
 
1.9

 

 

 
1.9

Total revenue
 
$
652.4

 
$
0.3

 
$
2.1

 
$
650.0

North America Gross Profits
 
 
 
 
 
 
 
 
Funeral gross profits
 
$
119.9

 
$

 
$
0.1

 
$
119.8

Cemetery gross profits (losses)
 
39.5

 

 
(0.1
)
 
39.6

 
 
159.4

 

 

 
159.4

Germany gross profits
 
0.3

 

 

 
0.3

Total gross profits (losses)
 
$
159.7

 
$

 
$

 
$
159.7


The following table provides the data necessary to calculate our consolidated average revenue per funeral service for the three months ended March 31, 2014 and 2013. We calculate average revenue per funeral service by dividing consolidated funeral revenue, excluding General Agency (GA) revenues, recognized preneed revenues and certain other revenues, to avoid distorting our averages of normal funeral services revenue, by the number of consolidated funeral services performed during the period. Recognized preneed revenues are preneed sales of items that are delivered at the time of sale, including memorial merchandise and travel protection insurance and are excluded from our calculation of consolidated average revenue per funeral service because the associated service has not yet been performed.

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Three Months Ended
 
March 31,
 
2014
 
2013
 
(Dollars in millions,
except average
revenue per funeral service)
Consolidated funeral revenue
$
510.6

 
$
462.1

Less: Funeral consolidated recognized preneed revenue
21.7

 
18.9

Less: Consolidated GA revenue
29.4

 
25.2

Less: Other revenue
4.8

 
4.6

Adjusted consolidated funeral revenue
$
454.7

 
$
413.4

Consolidated funeral services performed
88,064

 
79,788

Consolidated average revenue per funeral service
$
5,163

 
$
5,181


The following table provides the data necessary to calculate our comparable average revenue per funeral service for the three months ended March 31, 2014 and 2013. We calculate average revenue per funeral service by dividing comparable funeral revenue, excluding comparable GA revenues, recognized preneed revenues and certain other revenues, to avoid distorting our averages of normal funeral services revenue, by the number of comparable funeral services performed during the period. Recognized preneed revenues are preneed sales of items that are delivered at the time of sale, including memorial merchandise and travel protection insurance and are excluded from our calculation of consolidated average revenue per funeral service because the associated service has not yet been performed.
 
Three Months Ended
 
March 31,
 
2014
 
2013
 
(Dollars in millions,
except average
revenue per funeral service)
Comparable funeral revenue
$
436.7

 
$
459.6

Less: Funeral comparable recognized preneed revenue
21.4

 
18.5

Less: Comparable GA revenue
24.8

 
25.2

Less: Other revenue
4.4

 
4.5

Adjusted comparable funeral revenue
$
386.1

 
$
411.4

Comparable funeral services performed
73,509

 
79,248

Comparable average revenue per funeral service
$
5,252

 
$
5,191

Funeral Results
Funeral Revenue
Consolidated revenues from funeral operations were $510.6 million in the first quarter of 2014 compared to $462.1 million for the same period in 2013. This increase is primarily attributable to an increase of $73.0 million of additional revenues as a result of the Stewart acquisition in 2013. These increases were partially offset by a decrease of $22.9 million in comparable revenues described below and a decline of $1.6 million in revenues contributed by non-strategic assets that were divested throughout 2014 and 2013.
Comparable revenues from funeral operations were $436.7 million in the first quarter of 2014 compared to $459.6 million for the same period in 2013. This decrease was primarily due to a decline in atneed and preneed revenues impacted by a 7.2% decrease in the number of comparable funeral services described below. These decreases were partially offset by a 1.2% increase in average funeral revenue per funeral service described below as well as higher recognized preneed revenues of $2.9 million mostly from the sales of SCI Direct.
Funeral Services Performed
Our consolidated funeral services performed increased 10.4% during the first quarter of 2014 compared to the same period in 2013, primarily as the result of the Stewart acquisition in 2013. Our comparable funeral services performed decreased by 7.2%, largely as a result of the strong flu season in 2013 not recurring. We believe this decrease in comparable funeral services is consistent

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with trends experienced by other funeral service providers and industry vendors. Our comparable cremation rate of 51.3% in the first quarter of 2014 increased from 49.3% in 2013. This growth in comparable cremations was generated equally by cremations with service and direct cremations. While the average revenue for cremations of either type is lower than that for traditional burials, we continue to expand our cremation memorialization product and service offerings, which have resulted in higher average sales for cremation services.
Average Revenue Per Funeral Service
Our consolidated average revenue per funeral service decreased $18, or 0.3%, in the first quarter of 2014 compared to 2013, primarily due to an increase in the number of cremations couple with lower average from acquired locations. Our comparable average revenue per funeral service increased $61, or 1.2%, in the first quarter of 2014 compared to the same period in 2013. This increase in comparable average revenue per funeral service is primarily from initiatives centered around better consumer choice and flexibility, such as enhanced Dignity packaging, increased receptions and events offerings, and expansion of floral offerings through e-commerce solutions. Excluding an unfavorable Canadian currency impact and higher funeral trust fund income, the average revenue per funeral service grew approximately 1.8% despite an increase in cremation rates.
Funeral Gross Profits
Consolidated funeral gross profits decreased $0.8 million, or 0.7%, in the first quarter of 2014 compared to the same period in 2013. This decrease is primarily attributable to a $22.1 million decrease in comparable gross profits described below and a $0.2 million decrease in losses by non-strategic assets that were divested throughout 2014 and 2013. These losses were partially offset by a $21.1 million increase of additional gross profits primarily related to the Stewart acquisition that occurred in 2013.
Comparable funeral gross profits decreased $22.1 million, or 18.4%, and the comparable gross margin percentage decreased from 26.1% to 22.4% in the first quarter of 2014 when compared to the same period in 2013 primarily as a result of the decrease in comparable revenue described above.
Cemetery Results
Cemetery Revenue
Consolidated revenues from our cemetery operations increased $46.2 million, or 24.3%, in the first quarter of 2014 compared to the same period in 2013. This increase is primarily attributable to an increase of $44.4 million of additional revenues as a result of the Stewart acquisition in 2013. This increase was partially offset by a decline of $0.7 million in revenues contributed by non-strategic assets that were divested throughout 2014 and 2013. Comparable cemetery revenues increased $1.1 million, or 0.6%, primarily as a result of increased trust fund income partially offset by a decrease in both cemetery atneed and preneed property and merchandise revenues.
Cemetery Gross Profits
Consolidated cemetery gross profits increased $7.5 million, or 19.0%, in the first quarter of 2014 compared to the same period in 2013. This increase is primarily the result of the increase of $10.1 million of additional gross profit as a result of the Stewart acquisition in 2013, partially offset by a decline of $0.2 million in profits contributed by non-strategic assets that were divested throughout 2014 and 2013 and a $2.8 million decline in comparable gross profit.
Comparable cemetery gross profits decreased $2.8 million, or 7.1%, and gross margin percentage decreased from 20.8% to 19.2% in the first quarter of 2014 compared to the same period in 2013. This decrease is primarily the result of higher cemetery revenues described above, more than offset by the following:
a $1.9 million benefit for insurance claim settlements in 2013 that did not recur in 2014;
a $1.0 million increase in general and administrative expenses;
a $0.4 million increase in comparable selling costs resulting from increased advertising and increased commissions for preneed production. Selling costs are recognized in the period incurred; however, the revenue associated with the preneed production is not recognized until the services are performed as described in Critical Accounting Policies, Recent Accounting Pronouncements and Accounting Changes below; and
a $0.3 million increase in overhead expenses which includes investments in our sales support infrastructure.
Other Financial Statement Items
General and Administrative Expenses

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General and administrative expenses increased $25.1 million to $56.0 million during the first quarter of 2014 compared to $30.9 million for the same period in 2013. The current quarter included $16.0 million in acquisition and transition costs related to Stewart, $11.1 million in legal settlements and defense fees primarily related to the proposed settlement of the Eden litigation matter, and $2.9 million of system and process transition costs. The prior year included $1.3 million of legal defense fees and $1.0 million of system and process transition costs. Excluding these costs in both periods, general and administrative expenses decreased $2.6 million over the prior year which was primarily due to lower professional fees and lower compensation expenses.
Losses on Divestitures and Impairment Charges, net
     We recognized a $2.8 million net pre-tax loss on divestitures and impairment charges in the first quarter of 2014 due to the sale of non-strategic assets in North America. In the first quarter of 2013, we recognized a $1.0 million net pre-tax loss on divestitures and impairment charges on the final settlement of an indemnification liability related to our former operations in Spain.
Interest Expense
Interest expense increased $12.2 million to $45.0 million during the first quarter of 2014 compared to $32.8 million for the same period in 2013. The increase in interest expense is primarily due to the our 5.375% Senior Notes due January 2022, 6.5% Senior Notes due April 2019, and Term Loan due July 2018 which we did not have in the first quarter of 2013.
Other Income (Expense), Net
Other income (expense), net increased $2.5 million to income of $1.5 million during first quarter of 2014, primarily due to a favorable foreign currency impact from liability settlements between the U.S. and Canadian subsidiaries in the first quarter of 2014.
Provision for Income Taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statute of limitations, and increases or decreases in valuation allowances. Our effective tax rate was 35.4% and 37.5% for the three months ended March 31, 2014 and 2013, respectively. The lower effective tax rate for the three months ended March 31, 2014 is primarily due to the benefits associated with the Stewart acquisition coupled with state legislative changes partially offset by an increase in our liability related to unrecognized tax benefits. The effective tax rate for the first quarter of 2014 is above the 35% federal statutory tax rate due to state tax expense which is partially offset by state legislative changes and foreign earnings taxed at lower rates.
Weighted Average Shares
The diluted weighted average number of shares outstanding was 217.2 million during the first three months ended March 31, 2014, compared to 215.2 million in the same period of 2013. The increase in the number of shares primarily reflects the impact of stock option exercises.

Critical Accounting Policies
The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2013.
No other significant changes to our accounting policies have occurred subsequent to December 31, 2013, except as described below within Recent Accounting Pronouncements and Accounting Changes.
Recent Accounting Pronouncements and Accounting Changes
For discussion of recent accounting pronouncements and accounting changes, see Part I, Item 1. Financial Statements, Note 3.

Cautionary Statement on Forward-Looking Statements

The statements in this Form 10-Q that are not historical facts are forward-looking statements made in reliance on the “safe harbor” protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as “believe,” “estimate,” “project,” “expect,” “anticipate,” or “predict,” that convey the uncertainty of future events

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or outcomes. These statements are based on assumptions that we believe are reasonable; however, many important factors could cause our actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by us, or on our behalf. Important factors, which could cause actual results to differ materially from those in forward-looking statements include, among others, the following:
Our affiliated funeral and cemetery trust funds own investments in equity securities, fixed income securities, and mutual funds, which are affected by market conditions that are beyond our control.
We may be required to replenish our affiliated funeral and cemetery trust funds in order 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 home and cemetery industry continues to be increasingly competitive.
Increasing death benefits related to preneed funeral contracts funded through life insurance or annuity contracts may not cover future increases in the cost of providing a price-guaranteed funeral service. 
The financial condition of third-party insurance companies that fund our preneed funeral contracts may impact our future revenues.
Unfavorable results of litigation, including currently pending class action cases concerning cemetery or burial practices, 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 declines, our cash flows and revenues may decrease.
If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.
The continuing upward trend in the number of cremations performed in North America could result in lower revenues and gross profit. 
Our funeral home and cemetery businesses are high fixed-cost businesses. 
Regulation and compliance could have a material adverse impact on our financial results.
Increased costs, including potential increased health care costs, may have a negative impact on earnings and cash flows.
Cemetery burial practice claims could have a material adverse impact on our financial results. 
A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.
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.
We may fail to realize the anticipated benefits of the acquisition of Stewart Enterprises.
The acquisition of Stewart Enterprises may result in unexpected consequences to our business and results of operations.
Our level of indebtedness following the completion of the acquisition of Stewart Enterprises 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 prevent us from fulfilling our obligations under our indebtedness.
For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2013 Annual Report on Form 10-K, which was filed February 14, 2014. 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.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk
Marketable Equity and Debt Securities — Price Risk
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices.
Cost and market values as of March 31, 2014 are presented in Part I, Item 1. Financial Statements and Notes 4, 5, and 6 of this Form 10-Q. Also, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Conditions, Liquidity and Capital Resources, for discussion of trust investments.

Item 4. Controls and Procedures
Disclosure Controls and Procedures
As of March 31, 2014, 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. The officers have concluded that our disclosure controls and procedures were effective as of March 31, 2014 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with US GAAP.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings
Information regarding legal proceedings is set forth in Note 15 in Item 1 of Part I of this Form 10-Q, which information is hereby incorporated by reference herein.

Item 1A. Risk Factors
There have been no material changes in our Risk Factors as set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2013.


Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
On March 28, 2014, we issued 1,143 deferred common stock equivalents, or units, pursuant to provisions regarding dividends under the Amended and Restated Director Fee Plan to four non-employee directors. We did not receive any monetary consideration for the issuances. These issuances were unregistered because they did not constitute a “sale” within the meaning of Section 2(3) of the Securities Act of 1933, as amended.
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 programs
January 1, 2014 - January 31, 2014(1)
41,905

 
$
18.11

 

 
$
190,132,279

February 1, 2014 - February 28, 2014

 
$

 

 
$
190,132,279

March 1, 2014 - March 31, 2014(2)
63,886

 
$
19.04

 

 
$
190,132,279

 
105,791

 
 
 

 
 

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(1)    The 41,905 shares purchased in January 2014 that were not part of the publicly announced programs represent shares acquired through the exercise of stock options by attestation, which do not affect our share repurchase program.
(2)    The 63,886 shares purchased in March 2014 that were not part of the publicly announced programs represent restricted stock that was redeemed by certain employees in lieu of tax liability withholdings, which do not affect our share repurchase program.
As of March 31, 2014, the remaining dollar value of shares that may yet be purchased under our currently approved share repurchase program was approximately $190.1 million.


Item 6. Exhibits
12.1
 
Ratio of earnings to fixed charges for the three months ended March 31, 2014 and 2013.
 
 
 
23.1
 
Consent of Independent Registered Public Accounting Firm
 
 
 
31.1
 
Certification of Thomas L. Ryan as Chief 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 Chief 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


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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.
April 25, 2014
 
SERVICE CORPORATION INTERNATIONAL
 
By:  
/s/ Tammy Moore
 
 
Tammy Moore
 
 
Vice President and Corporate Controller
(Principal Accounting Officer)


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Index to Exhibits
12.1
Ratio of earnings to fixed charges for the three months ended March 31, 2014 and 2013.
 
 
23.1
Consent of Independent Registered Public Accounting Firm
 
 
31.1
Certification of Thomas L. Ryan as Chief 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 Chief 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.


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