SERVICE CORP INTERNATIONAL - Quarter Report: 2020 September (Form 10-Q)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended	SEPTEMBER 30, 2020
		OR
☐	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 no.)

1929 Allen Parkway

Houston

Texas

77019

(Address of principal executive offices)

(Zip code)

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

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

Title of Each Class

Trading Symbol (s)

Name of Each Exchange on Which Registered

Common Stock ($1 par value)

SCI

New York Stock Exchange

Securities registered pursuant to Section 12(g) of the Act: None

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer

Accelerated filer

Non-accelerated filer

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

Indicate by check mark whether the registrant is a shell company (as defined in 12b-2 of the act).

Yes

☐

The number of shares outstanding of the registrant’s common stock as of October 27, 2020 was 172,743,629 (net of treasury shares).


SERVICE CORPORATION INTERNATIONAL INDEX

		Page
GLOSSARY		3
PART I. FINANCIAL INFORMATION		5
Item 1.	Financial Statements	5
	Unaudited Condensed Consolidated Statement of Operations - Three and Nine Months Ended September 30, 2020 and 2019	5
	Unaudited Condensed Consolidated Statement of Comprehensive Income - Three and Nine Months Ended September 30, 2020 and 2019	6
	Unaudited Condensed Consolidated Balance Sheet - September 30, 2020 and December 31, 2019	7
	Unaudited Condensed Consolidated Statement of Cash Flows - Nine Months Ended September 30, 2020 and 2019	8
	Unaudited Condensed Consolidated Statement of Equity — Three and Nine Months Ended September 30, 2020 and 2019	9
	Notes to Consolidated Financial Statements	11
	1. Nature of Operations	11
	2. Summary of Significant Accounting Policies	11
	3. Preneed Activities	16
	4. Income Taxes	21
	5. Debt	22
	6. Credit Risk and Fair Value of Financial Instruments	24
	7. Equity	24
	8. Segment Reporting	25
	9. Commitments and Contingencies	26

	10. Earnings Per Share	27
	11. Acquisitions and Divestiture-Related Activities	28
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
	The Company	29
	Financial Condition, Liquidity, and Capital Resources	30
	Results of Operations - Three and Nine Months Ended September 30, 2020 and 2019	36
	Critical Accounting Policies	42
	Cautionary Statement on Forward-Looking Statements	42
Item 3.	Quantitative and Qualitative Disclosures about Market Risk	43
Item 4.	Controls and Procedures	44
PART II. OTHER INFORMATION		45
Item 1.	Legal Proceedings	45
Item 1A.	Risk Factors	45
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	46
Item 3.	Defaults Upon Senior Securities	46
Item 4.	Mine Safety Disclosures	46
Item 5.	Other Information	46
Item 6.	Exhibits	47
SIGNATURE		48

2 Service Corporation International

Glossary

The following terms are common to the deathcare industry, are used throughout this report, and have the following meanings:

Atneed — Funeral, including cremation, and cemetery arrangements sold once death has occurred.

Cancellation — Termination of a preneed contract, which relieves us of the obligation to provide the goods and services included in the contract. Cancellations may be requested by the customer or be initiated by us for failure to comply with the contractual terms of payment. State or provincial laws govern the amount of refund, if any, owed to the customer.

Care Trus' Corpus — The deposits and net realized capital gains and losses included in a perpetual care trust that cannot be withdrawn. In certain states, some or all of the net realized capital gains can be distributed, so they are not included in the corpus.

Cemetery Merchandise and Services — Stone and bronze memorials, markers, outer burial containers, floral placement, graveside services, merchandise installations, urns, and interments.

Cemetery Perpetual Care Trust or Endowment Care Fund (ECF) — A trust fund established for the purpose of maintaining cemetery grounds and property into perpetuity. For these trusts, the corpus remains in the trust in perpetuity and the investment earnings or elected distributions are withdrawn regularly and are intended to defray our expenses incurred to maintain the cemetery. In certain states, some or all of the net realized capital gains can also be distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.

Cemetery Property — Developed lots, lawn crypts, mausoleum spaces, niches, and cremation memorialization property items (constructed and ready to accept interments) and undeveloped land we intend to develop for the sale of interment rights. Includes the construction-in-progress balance during the pre-construction and construction phases of projects creating new developed property items.

Cemetery Property Amortization or Amortization of Cemetery Property — The non-cash recognized expenses of cemetery property interment rights, which are recorded by specific identification with the cemetery property revenue for each contract.

Cemetery Property Interment Rights — The exclusive right to determine the human remains that will be interred in a specific cemetery property space. See also Cemetery Property Revenue below.

Cemetery Property Revenue — Recognized sales of interment rights in cemetery property when the receivable is deemed collectible and the property is fully constructed and available for interment.

Combination Location (Combos) — Locations where a funeral service location is physically located within or adjoining an SCI-owned cemetery location.

Cremation — The reduction of human remains to bone fragments by intense heat.

Cremation Memorialization — Products specifically designed to commemorate and honor the life of an individual that has been cremated. These products include cemetery property items that provide for the disposition of cremated remains within our cemeteries such as benches, boulders, statues, etc. They also include memorial walls and books where the name of the individual is inscribed but the remains have been scattered or kept by the family.

Funeral Merchandise and Services — Merchandise such as burial caskets and related accessories, outer burial containers, urns and other cremation receptacles, casket and cremation memorialization products, flowers, and professional services relating to funerals including arranging and directing services, use of funeral facilities and motor vehicles, removal, preparation, embalming, cremations, memorialization, visitations, travel protection, and catering.

Funeral Recognized Preneed Revenue — Funeral merchandise and travel protection, net sold on a preneed contract and delivered before a death has occurred.

Funeral Services Performed — The number of funeral services, including cremations, provided after the date of death, sometimes referred to as funeral volume.

General Agency (GA) Revenue — Commissions we receive from third-party life insurance companies for life insurance policies sold to preneed customers for the purpose of funding preneed funeral arrangements. The commission rate paid is determined based on the product type sold, the length of payment terms, and the age of the insured/annuitant.

Interment — The burial or final placement of human remains in the ground (interment), in mausoleums (entombment), in niches (inurnment), or in cremation memorialization property (inurnment).

Lawn Crypt — Cemetery property in which an underground outer burial receptacle constructed of concrete and reinforced steel has been pre-installed in predetermined designated areas.

Marker — A method of identifying a deceased person in a particular burial space, crypt, niche, or cremation memorialization property. Permanent burial and cremation memorialization markers are usually made of bronze or stone.

FORM 10-Q 3

Maturity — When the underlying contracted merchandise is delivered or service is performed, typically at death. This is the point at which preneed funeral contracts are converted to atneed contracts (note — delivery of certain merchandise and services can occur prior to death).

Mausoleum — An above ground structure that is designed to house caskets and/or cremation urns.

Merchandise and Service Trust — A trust account established in accordance with state or provincial law into which we deposit the required percentage of customers’ payments for preneed funeral, cremation, or cemetery merchandise and services to be delivered or performed by us in the future. The amounts deposited can be withdrawn only after we have completed our obligations under the preneed contract or the cancellation of the contract. Also referred to as a preneed trust.

Outer Burial Container — A reinforced container intended to inhibit the subsidence of the earth and house the casket after it is placed in the ground, also known as a burial vault.

Preneed — Purchase of cemetery property interment rights or any merchandise and services prior to death occurring.

Preneed Backlog — Future revenue from unfulfilled preneed funeral, cremation, and cemetery contractual arrangements.

Preneed Cemetery Sales Production — Sales of preneed cemetery contracts. These sales are recorded in Deferred revenue, net until the merchandise is delivered, the service is performed, and the property has been constructed and is available for interment.

Preneed Funeral Sales Production — Sales of preneed funeral trust-funded and insurance-funded contracts. Preneed funeral trust-funded contracts are recorded in Deferred revenue, net until the merchandise is delivered or the service is performed. We do not reflect the unfulfilled insurance-funded preneed funeral contract amounts in our Consolidated Balance Sheet. The proceeds of the life insurance policies will be reflected in revenue as these funerals are performed by us in the future.

Preneed Receivables, Net — Amounts due from customers when we have delivered the merchandise, performed the service, or transferred control of the cemetery property interment rights prior to a death occurring or amounts due from customers on irrevocable preneed contracts.

Sales Average — Average revenue per funeral service performed, excluding the impact of funeral recognized preneed revenue, GA revenue, and certain other revenue.

Travel Protection — A product that provides shipment of remains to the servicing funeral home or cemetery of choice if the purchaser passes away outside of a certain radius of their residence, without any additional expense to the family.

Trust Fund Income — Recognized investment earnings from our merchandise and service and perpetual care trust investments.

As used herein, “SCI”, “Company”, “we”, “our”, and “us” refer to Service Corporation International and companies owned directly or indirectly by Service Corporation International, unless the context requires otherwise. Management has published a white paper on the corporate website for further understanding of accounting for preneed sales. You can view the white paper at http://investors.sci-corp.com under Featured Documents. Documents and information on our website are not incorporated by reference herein.

4 Service Corporation International


PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

Service Corporation International

Condensed Consolidated Statement of Operations (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(in thousands, except per share amounts)
Revenue
Property and merchandise revenue	$	479,521	$	375,398	$	1,272,000	$	1,172,099
Service revenue	382,466		332,838		1,104,793		1,027,299
Other revenue	56,254		61,005		164,448		180,627
Total revenue	918,241		769,241		2,541,241		2,380,025

Costs of revenue
Cost of property and merchandise	(230,568)		(197,544)		(634,118)		(609,073)
Cost of service	(190,000)		(192,262)		(561,039)		(576,453)
Overhead and other expenses	(234,017)		(219,703)		(684,617)		(651,787)
Costs of revenue	(654,585)		(609,509)		(1,879,774)		(1,837,313)
Gross profit	263,656		159,732		661,467		542,712
Corporate general and administrative expenses	(40,986)		(29,668)		(109,968)		(101,864)
Gains (losses) on divestitures and impairment charges, net	543		(1,479)		5,825		(15,180)



Operating income	223,213		128,585		557,324		425,668
Interest expense	(40,721)		(46,678)		(126,839)		(141,385)
Losses on early extinguishment of debt, net	(18,278)		(9,058)		(18,428)		(16,637)
Other income, net	629		20		548		1,614
Income before income taxes	164,843		72,869		412,605		269,260
Provision for income taxes	(37,351)		(1,997)		(97,559)		(46,662)


Net income	127,492		70,872		315,046		222,598
Net income attributable to noncontrolling interests	(77)		(80)		(182)		(154)
Net income attributable to common stockholders	$	127,415	$	70,792	$	314,864	$	222,444
Basic earnings per share:
Net income attributable to common stockholders	$	0.72	$	0.39	$	1.77	$	1.22
Basic weighted average number of shares	175,982		182,551		178,238		182,218
Diluted earnings per share:
Net income attributable to common stockholders	$	0.72	$	0.38	$	1.74	$	1.20
Diluted weighted average number of shares	178,140		185,843		180,463		185,635

(See notes to unaudited condensed consolidated financial statements)

FORM 10-Q 5

PART I

Service Corporation International

Condensed Consolidated Statement of Comprehensive Income (Unaudited)


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(In thousands)
Net income	$	127,492	$	70,872	$	315,046	$	222,598
Other comprehensive income:
Foreign currency translation adjustments	7,870		(4,266)		(9,594)		10,133

Total comprehensive income	135,362		66,606		305,452		232,731
Total comprehensive income attributable to noncontrolling interests	(77)		(79)		(182)		(155)
Total comprehensive income attributable to common stockholders	$	135,285	$	66,527	$	305,270	$	232,576

(See notes to unaudited condensed consolidated financial statements)

6 Service Corporation International

PART I

Service Corporation International

Condensed Consolidated Balance Sheet (Unaudited)


	September 30, 2020		December 31, 2019
	(In thousands, except share amounts)

ASSETS
Current assets:
Cash and cash equivalents	$	220,304	$	186,276
Receivables, net of reserves of $6,433 and $2,262, respectively	79,980		81,671
Inventories	25,830		25,118
Other	39,944		80,488
Total current assets	366,058		373,553
Preneed receivables, net of reserves of $19,332 and $41,142, respectively, and trust investments	4,835,434		4,789,562
Cemetery property	1,882,849		1,873,602
Property and equipment, net	2,113,077		2,065,433
Goodwill	1,867,885		1,864,223
Deferred charges and other assets, net of reserves of $7,493 and $8,374, respectively	1,050,785		1,029,908
Cemetery perpetual care trust investments	1,671,052		1,681,149
Total assets	$	13,787,140	$	13,677,430

LIABILITIES & EQUITY
Current liabilities:
Accounts payable and accrued liabilities	$	524,691	$	478,545
Current maturities of long-term debt	95,862		69,821
Income taxes payable	1,581		8,353
Total current liabilities	622,134		556,719
Long-term debt	3,584,506		3,513,530
Deferred revenue, net	1,501,167		1,467,103
Deferred tax liability	444,686		421,482
Other liabilities	407,079		378,074
Deferred receipts held in trust	3,813,644		3,839,376
Care trusts’ corpus	1,670,788		1,677,891
Commitments and contingencies (Note 9)
Equity:
Common stock, $1 per share par value, 500,000,000 shares authorized, 186,185,845 and 185,100,789 shares issued, respectively, and 174,235,023 and 181,184,963 shares outstanding, respectively	174,235		181,185
Capital in excess of par value	992,072		1,010,361
Retained earnings	556,495		601,903
Accumulated other comprehensive income	20,270		29,864
Total common stockholders’ equity	1,743,072		1,823,313
Noncontrolling interests	64		(58)
Total equity	1,743,136		1,823,255
Total liabilities and equity	$	13,787,140	$	13,677,430

(See notes to unaudited condensed consolidated financial statements)

FORM 10-Q 7

PART I

Service Corporation International

Condensed Consolidated Statement of Cash Flows (Unaudited)


	Nine months ended September 30,
	2020		2019
	(In thousands)
Cash flows from operating activities:
Net income	$	315,046	$	222,598
Adjustments to reconcile net income to net cash provided by operating activities:

Losses on early extinguishment of debt, net	18,428		16,637

Depreciation and amortization	116,453		112,616
Amortization of intangibles	17,056		19,374
Amortization of cemetery property	56,854		48,648
Amortization of loan costs	3,971		4,410
Provision for expected credit losses	12,016		6,886
Provision for deferred income taxes	17,217		18,335
(Gains) losses on divestitures and impairment charges, net	(5,825)		15,180

Share-based compensation	10,571		11,563

Change in assets and liabilities, net of effects from acquisitions and dispositions:
Increase in receivables	(1,231)		(6,030)
Increase in other assets	(24,262)		(22,499)
Increase (decrease) in payables and other liabilities	51,989		(16,023)
Effect of preneed sales production and maturities:
(Increase) decrease in preneed receivables, net and trust investments	(89,220)		1,055
Increase in deferred revenue, net	65,982		56,078
Decrease in deferred receipts held in trust	(5,608)		(16,631)



Net cash provided by operating activities	559,437		472,197
Cash flows from investing activities:
Capital expenditures	(155,597)		(177,173)
Business acquisitions, net of cash acquired	(29,801)		(21,453)
Real estate acquisitions	(51,434)		(45,988)
Proceeds from divestitures and sales of property and equipment	12,946		13,949

Payments for Company-owned life insurance policies	(5,036)		(9,017)
Proceeds from Company-owned life insurance policies and other	3,519		—



Net cash used in investing activities	(225,403)		(239,682)
Cash flows from financing activities:
Proceeds from issuance of long-term debt	1,495,000		1,089,263
Debt issuance costs	(14,501)		(15,537)
Scheduled payments of debt	(25,467)		(16,906)
Early payments of debt	(1,371,840)		(1,164,977)
Principal payments on finance leases	(30,612)		(32,258)
Proceeds from exercise of stock options	16,999		39,831

Purchase of Company common stock	(329,123)		(52,183)
Payments of dividends	(101,472)		(98,581)

Bank overdrafts and other	9,800		9,341

Net cash used in financing activities	(351,216)		(242,007)


Effect of foreign currency	(2,329)		2,201
Net decrease in cash, cash equivalents, and restricted cash	(19,511)		(7,291)
Cash, cash equivalents, and restricted cash at beginning of period	242,620		207,584
Cash, cash equivalents, and restricted cash at end of period	$	223,109	$	200,293

(See notes to unaudited condensed consolidated financial statements)

8 Service Corporation International

PART I

Service Corporation International

Condensed Consolidated Statement of Equity (Unaudited)


	Common Stock		Treasury Stock, Par Value		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Income (Deficit)		Noncontrolling Interest		Total
	(In thousands, except per share amounts)
Balance at December 31, 2018	$	184,721	$	(3,250)	$	972,710	$	474,327	$	13,395	$	(88)	$	1,641,815
Comprehensive income	—		—		—		79,323		7,251		40		86,614
Dividends declared on common stock ($0.18 per share)	—		—		—		(32,820)		—		—		(32,820)
Employee share-based compensation earned	—		—		4,568		—		—		—		4,568
Stock option exercises	950		—		15,012		—		—		—		15,962
Restricted stock awards, net of forfeitures	126		—		(126)		—		—		—		—
Purchase of Company common stock	—		(355)		(1,935)		(12,252)		—		—		(14,542)
Other	59		—		(1,251)		—		—		—		(1,192)
Balance at March 31, 2019	$	185,856	$	(3,605)	$	988,978	$	508,578	$	20,646	$	(48)	$	1,700,405
Comprehensive income	—		—		—		72,329		7,146		36		79,511
Dividends declared on common stock ($0.18 per share)	—		—		—		(32,871)		—		—		(32,871)
Employee share-based compensation earned	—		—		3,445		—		—		—		3,445
Stock option exercises	513		—		6,626		—		—		—		7,139

Purchase of Company common stock	—		(337)		(1,832)		(12,863)		—		—		(15,032)
Other	42		—		1,577		—		—		—		1,619
Balance at June 30, 2019	$	186,411	$	(3,942)	$	998,794	$	535,173	$	27,792	$	(12)	$	1,744,216
Comprehensive income	—		—		—		70,792		(4,265)		79		66,606
Dividends declared on common stock ($0.18 per share)	—		—		—		(32,890)		—		—		(32,890)
Employee share-based compensation earned	—		—		3,550		—		—		—		3,550
Stock option exercises	844		—		15,886		—		—		—		16,730
Noncontrolling interest payments	—		—				—		—		(40)		(40)
Purchase of Company common stock	—		(484)		(2,660)		(19,465)		—		—		(22,609)
Other	2		—		(45)		—		—		—		(43)
Balance at September 30, 2019	$	187,257	$	(4,426)	$	1,015,525	$	553,610	$	23,527	$	27	$	1,775,520

(See notes to unaudited condensed consolidated financial statements)

FORM 10-Q 9

PART I

Service Corporation International

Condensed Consolidated Statement of Equity (Unaudited)


	Common Stock		Treasury Stock, Par Value		Capital in Excess of Par Value		Retained Earnings		Accumulated Other Comprehensive Income (Deficit)		Noncontrolling Interest		Total
	(In thousands, except per share amounts)
Balance at December 31, 2019	$	185,101	$	(3,916)	$	1,010,361	$	601,903	$	29,864	$	(58)	$	1,823,255
Cumulative effect of accounting changes	—		—		—		17,118		—		—		17,118
Comprehensive income	—		—		—		81,941		(31,200)		58		50,799
Dividends declared on common stock ($0.19 per share)	—		—		—		(34,414)		—		—		(34,414)
Employee share-based compensation earned	—		—		3,406		—		—		—		3,406
Stock option exercises	789		—		14,337		—		—		—		15,126
Restricted stock awards and units, net of forfeitures	168		—		(168)		—		—		—		—
Purchase of Company common stock	—		(2,901)		(16,202)		(103,999)		—		—		(123,102)
Other	—		—		(1,095)		—		—		—		(1,095)
Balance at March 31, 2020	$	186,058	$	(6,817)	$	1,010,639	$	562,549	$	(1,336)	$	—	$	1,751,093
Cumulative effect of accounting changes	—		—		—		(129)		—		—		(129)
Comprehensive income	—		—		—		105,508		13,736		47		119,291
Dividends declared on common stock ($0.19 per share)	—		—		—		(33,719)		—		—		(33,719)


Employee share-based compensation earned	—		—		3,638		—		—		—		3,638
Purchase of Company common stock	—		(2,277)		(12,862)		(72,327)		—		—		(87,466)
Other	47		—		1,573		—		—		—		1,620
Balance at June 30, 2020	$	186,105	$	(9,094)	$	1,002,988	$	561,882	$	12,400	$	47	$	1,754,328
Comprehensive income	—		—		—		127,415		7,870		77		135,362
Dividends declared on common stock ($0.19 per share)	—		—		—		(33,339)		—		—		(33,339)
Employee share-based compensation earned	—		—		3,527		—		—		—		3,527
Stock option exercises	82		—		1,791		—		—		—		1,873
Restricted stock awards and units, net of forfeitures	2		—		(2)		—		—		—		—
Noncontrolling interest payments	—		—		—		—		—		(60)		(60)
Purchase of Company common stock	—		(2,857)		(16,235)		(99,463)		—		—		(118,555)
Other	(3)		—		3		—		—		—		—
Balance at September 30, 2020	$	186,186	$	(11,951)	$	992,072	$	556,495	$	20,270	$	64	$	1,743,136

(See notes to unaudited condensed consolidated financial statements)

10 Service Corporation International

PART I

Service Corporation International

Notes to Unaudited Condensed Consolidated Financial Statements

1. Nature of Operations

We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries operating in the United States and Canada. Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.

Funeral service locations provide all professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles, arranging and directing services, removal, preparation, embalming, cremations, memorialization, travel protection, and catering. Funeral merchandise, including burial caskets and related accessories, urns and other cremation receptacles, outer burial containers, flowers, online and video tributes, stationery products, casket and cremation memorialization products, and other ancillary merchandise, is sold at funeral service locations.

Our cemeteries provide cemetery property interment rights, including developed lots, lawn crypts, mausoleum spaces, niches, and other cremation memorialization and interment options. Cemetery merchandise and services, including memorial markers and bases, outer burial containers, flowers and floral placement, other ancillary merchandise, graveside services, merchandise installation, and interments, are sold at our cemeteries.

2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

Our consolidated financial statements include the accounts of Service Corporation International (SCI) and all subsidiaries in which we hold a controlling financial interest. Intercompany balances and transactions have been eliminated in consolidation.

Our unaudited condensed consolidated financial statements also include the accounts of the merchandise and service trusts and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. We have retained the specialized industry accounting principles when consolidating the trusts. Our trusts are variable interest entities, for which we have determined that we are the primary beneficiary as we absorb a majority of the losses and returns associated with these trusts. Although we consolidate the trusts, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these trusts; therefore, their interests in these trusts represent a liability to us.

Our interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair statement of our results for these periods. Our unaudited condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2019, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.

Reclassifications to Prior Period Financial Statements and Adjustments

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows, except as described below under "Accounting Standards Adopted in 2020."

Use of Estimates in the Preparation of Financial Statements

The preparation of the consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. As a result, actual results could differ from these estimates.

FORM 10-Q 11

PART I

Cash, Cash Equivalents, and Restricted Cash

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

The components of cash, cash equivalents, and restricted cash were as follows:


	September 30, 2020		December 31, 2019
	(In thousands)
Cash and cash equivalents	$	220,304	$	186,276
Restricted cash (1)
Included in Other current assets	750		54,293
Included in Deferred charges and other assets, net	2,055		2,051
Total restricted cash	2,805		56,344
Total cash, cash equivalents, and restricted cash	$	223,109	$	242,620

(1) Restricted cash in both periods primarily consists of proceeds from divestitures deposited into escrow accounts under IRS code section 1031 and collateralized obligations under certain insurance policies.

Receivables, net

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


	September 30, 2020
	Atneed Funeral		Atneed Cemetery		Miscellaneous		Current Portion of Notes		Total
	(In thousands)
Receivables	$	40,370	$	21,806	$	22,754	$	1,483	$	86,413
Reserve for credit losses	(3,868)		(1,672)		(357)		(536)		(6,433)
Receivables, net	$	36,502	$	20,134	$	22,397	$	947	$	79,980


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

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


	September 30, 2020		December 31, 2019
	(In thousands)
Notes receivable	$	12,644	$	14,997
Reserve for credit losses	(6,534)		—
Allowance for doubtful accounts	—		(8,374)
Notes receivable, net	$	6,110	$	6,623

Long-term miscellaneous receivables	$	6,485	$	7,287
Reserve for credit losses	(959)		—
Long-term miscellaneous receivables, net	$	5,526	$	7,287

12 Service Corporation International

PART I

Our atneed trade receivables primarily consist of amounts due for funeral and cemetery services already performed. We provide reserves for credit losses for our receivables. These reserves are based on an analysis of historical trends of collection activity adjusted for current conditions and forecasts. These estimates are impacted by a number of factors, including changes in the economy and demographic or competitive changes in our areas of operation. In the nine months ended September 30, 2020, we increased our reserve for credit losses on trade and miscellaneous receivables as a result of the economic impact of the COVID-19 pandemic (COVID-19). Cemetery preneed receivables are collateralized by cemetery property to the extent of the fair value of the property. Prior to adoption of the guidance on credit losses for financial instruments on January 1, 2020, we provided allowances for doubtful accounts on our receivables based on an analysis of historical trends of collection activity.

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

The following table summarizes the activity in our reserve for credit losses by portfolio segment, excluding preneed receivables which are presented in Note 3, for the nine months ended September 30, 2020:


	January 1, 2020		Provision for Expected Credit Losses		Write Offs		Recoveries		Effect of Foreign Currency		September 30, 2020
	(In thousands)
Trade receivables:
Funeral	$	(2,690)	$	(3,867)	$	3,837	$	(1,393)	$	245	$	(3,868)
Cemetery	(1,424)		(977)		783		(58)		4		(1,672)
Total reserve for credit losses on trade receivables	$	(4,114)	$	(4,844)	$	4,620	$	(1,451)	$	249	$	(5,540)

Miscellaneous receivables:
Current	$	(203)	$	(163)	$	—	$	—	$	9	$	(357)
Long-term	(715)		(244)		—		—		—		(959)
Total reserve for credit losses on miscellaneous receivables	$	(918)	$	(407)	$	—	$	—	$	9	$	(1,316)

Notes receivable	$	(9,031)	$	121	$	1,840	$	—	$	—	$	(7,070)

At September 30, 2020, the amortized cost basis of our miscellaneous and notes receivables by year of origination was as follows:


	2020		2019		2018		2017		2016		Prior		Revolving Line of Credit		Total
	(In thousands)
Miscellaneous receivables:
Current	$	21,583	$	633	$	367	$	135	$	33	$	3	$	—	$	22,754
Long-term	1,831		2,614		1,326		564		139		11		—		6,485
Total miscellaneous receivables	$	23,414	$	3,247	$	1,693	$	699	$	172	$	14	$	—	$	29,239

Notes receivable	$	—	$	—	$	216	$	—	$	—	$	6,263	$	7,648	$	14,127

FORM 10-Q 13

PART I

At September 30, 2020, the payment status of our miscellaneous and notes receivables was as follows:


	Past Due
	<30 Days		30-90 Days		90-180 Days		>180 Days		Total		Current		Total
	(In thousands)
Miscellaneous receivables:
Current	$	—	$	31	$	38	$	—	$	69	$	22,685	$	22,754
Long-term	—		—		—		—		—		6,485		6,485
Total miscellaneous receivables	$	—	$	31	$	38	$	—	$	69	$	29,170	$	29,239

Notes receivable	$	1	$	—	$	—	$	1,116	$	1,117	$	13,010	$	14,127

Funeral and Cemetery Operations

Revenue is recognized when control of the merchandise or services is transferred to the customer. Our performance obligations include the delivery of funeral and cemetery merchandise and services and cemetery property interment rights. Control transfers when merchandise is delivered or services are performed. For cemetery property interment rights, control transfers to the customer when the property is developed and the interment right has been sold and can no longer be marketed or sold to another customer. Sales taxes collected are recognized on a net basis in our consolidated financial statements.

On our atneed contracts, we generally deliver the merchandise and perform the services at the time of need. Due to limitations on gatherings imposed to mitigate the spread of COVID-19, some customers have requested that we delay the memorial service until after the limitations are over. For these customers, we defer the revenue for the memorial service until it is performed. Memorial services frequently include promises to direct the service, provide facilities and motor vehicles, catering, flowers, and stationery products. All other promises on these contracts, including arrangement, removal, preparation, embalming, cremation, interment, and delivery of urns and caskets and related memorialization merchandise are fulfilled at the time of need. Personalized marker merchandise and marker installation services sold on atneed contracts are recognized when control is transferred to the customer, generally when the marker is delivered and installed in the cemetery.

Goodwill and Intangible Assets

In addition to our annual review, we assess the impairment of goodwill and indefinite-lived intangible assets whenever events or changes in circumstances indicate that the carrying value may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant underperformance relative to historical or projected future operating results and significant negative industry or economic trends. During 2020, the challenging economic conditions caused by the response to COVID-19 were also considered. Based on our consideration of these factors, no interim triggering events for impairment of our goodwill or indefinite-lived intangibles were determined during 2020 or as of September 30, 2020.

However, during the first quarter of 2020, we performed a quantitative assessment on certain of our tradenames as a result of local market conditions where these businesses reside. We recorded a $3.0 million impairment charge for certain of our tradenames during the first quarter of 2020. In determining the fair value of the tradenames, we used the relief from royalty method whereby we determine the fair value of the assets by discounting the cash flows that represent a savings over having to pay a royalty fee for use of the tradenames. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows. For our first quarter of 2020 test, we estimated that the pre-tax savings would range from 2.0% to 5.0% of the revenue associated with the trademarks and tradenames, based primarily on our research of intellectual property valuation and licensing databases. We also assumed a terminal growth rate of 1.0% and 2.4% for our funeral and cemetery tradenames, respectively, and discounted the cash flows at a 6.95% discount rate based on the relative risk of these assets to the overall business.

Leases

We have 63 operating leases where we are the lessor and the non-cancelable term is greater than one year, resulting in $1.1 million and $2.4 million in lease income for the three and nine months ended September 30, 2020, respectively. We determine whether an arrangement is or contains a lease at the inception of the arrangement based on the terms of the arrangement. We lease retail space, office space and land, and we are party to cellular agreements and land easements. The underlying assets of these lease agreements are buildings and land. We generally do not have sales-type leases, direct financing leases, or lease receivables. Certain of our agreements include variable rental income based on a percentage of sales over base contractual levels. Renewal options that can be cancelled by the lessees are not included in our disclosure of future lease income, which includes only the non-cancelable terms and fixed escalation provisions. Certain lease arrangements

14 Service Corporation International

PART I

contain options to purchase the property at fair value at the conclusion of the lease term. Non-lease components are excluded from rental income disclosures. Future undiscounted lease income from operating leases as of September 30, 2020 was as follows (in thousands):



2020 (excluding the nine months ended September 30, 2020)	$	1,129
2021	4,399
2022	3,999
2023	3,291
2024	2,874
2025 and thereafter	24,526
Total future undiscounted lease income	$	40,218

Accounting Standards Adopted in 2020

Financial Instruments - Credit Losses

In June 2016, the FASB issued "Financial Instruments - Credit Losses" to provide financial statement users with more decision-useful information about the expected credit losses on debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. During November 2018 and April 2019, the FASB made amendments to the new standard that clarified guidance on several matters, including accrued interest, recoveries, and various codification improvements. The new standard, as amended, replaces the incurred loss impairment methodology in the previous standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates.

We adopted the new guidance as of January 1, 2020, applying a modified retrospective approach to credit loss reserves on our atneed, preneed, miscellaneous, and notes receivable and a prospective approach for credit loss reserves on our fixed income investments. As a result of the adoption, we recorded a $17.0 million increase to Retained earnings, which comprises a $26.4 million and a $5.8 million increase in Preneed receivables, net and trust investments and Deferred tax liability, respectively, and a $2.7 million and a $0.9 million decrease to Receivables, net and Deferred charges and other assets, net, respectively. The increase in Preneed receivables, net and trust investments is primarily the result of reducing the reserve for receivables that are collateralized by cemetery property down to the amount at which the amortized cost basis of the receivable exceeds the fair value of the property less costs to resell.

Goodwill

In January 2017, the FASB amended "Goodwill" to simplify the subsequent measurement of goodwill. The amended

guidance eliminates Step 2 from the goodwill impairment test. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill of the reporting unit. We adopted the new standard as of January 1, 2020 and it had no impact on our consolidated results of operations, consolidated financial position, and cash flows.

Fair Value Measurements

In August 2018, the FASB amended "Fair Value Measurements" to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in level 3 measurements. It clarifies that, for investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the timing either to us or publicly. It also clarifies that the narrative disclosure of the effect of changes in level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of the significant unobservable inputs used in level 3 measurements. We adopted the new standard as of January 1, 2020 and it had no impact on our consolidated results of operations, consolidated financial position, and cash flows.

Recently Issued Accounting Standards

Compensation - Retirement Benefits

In August 2018, the FASB amended "Compensation - Retirement Benefits" to modify the disclosure requirements for defined benefit plans. For us, the amendment requires the disclosure of the weighted average interest crediting rate used for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. It removes the requirement to disclose the approximate amount of future benefits covered by insurance contracts. The guidance is effective for us with our annual filing for the year ended December 31, 2020, and we will make the required disclosure changes in that filing. Adoption will not have an impact on our consolidated results of operations, consolidated financial position, and cash flows.

FORM 10-Q 15

PART I

Reference Rate Reform

In March 2020, the FASB issued "Reference Rate Reform" to provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. We currently have no hedging relationships and are evaluating our contracts and the optional expedients provided by the new standard.

3. Preneed Activities

Preneed receivables, net and trust investments

The components of Preneed receivables, net and trust investments in our unaudited Condensed Consolidated Balance Sheet were as follows:



	September 30, 2020		December 31, 2019
	(In thousands)

Preneed receivables, net	$	1,019,163	$	947,232

Trust investments, at market	5,238,589		5,258,319

Insurance-backed fixed income securities and other	248,734		265,160
Trust investments	5,487,323		5,523,479
Less: Cemetery perpetual care trust investments	(1,671,052)		(1,681,149)
Preneed trust investments	3,816,271		3,842,330

Preneed receivables, net and trust investments	$	4,835,434	$	4,789,562

Preneed receivables, net comprised the following:


	September 30, 2020
	Funeral		Cemetery		Total
	(In thousands)
Preneed receivables	$	141,267	$	935,191	$	1,076,458
Unearned finance charges	(14,843)		(23,120)		(37,963)
Preneed receivables, at amortized cost	126,424		912,071		1,038,495
Reserve for credit losses	(10,928)		(8,404)		(19,332)
Preneed receivables, net	$	115,496	$	903,667	$	1,019,163

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

16 Service Corporation International

PART I

At September 30, 2020, the amortized cost basis of our preneed receivables by year of origination was as follows:



	2020		2019		2018		2017		2016		Prior		Total
	(In thousands)
Preneed receivables, at amortized cost:
Funeral	$	47,560	$	42,161	$	15,654	$	7,622	$	3,391	$	10,036	$	126,424
Cemetery	304,218		258,869		167,616		101,848		50,474		29,046		912,071
Total preneed receivables, at amortized cost	$	351,778	$	301,030	$	183,270	$	109,470	$	53,865	$	39,082	$	1,038,495

At September 30, 2020, the payment status of our preneed receivables was as follows:


	Past Due
	<30 Days		30-90 Days		90-180 Days		>180 Days		Total		Current		Total
	(In thousands)
Preneed receivables, at amortized cost:
Funeral	$	2,464	$	1,925	$	1,617	$	16,587	$	22,593	$	103,831	$	126,424
Cemetery	28,534		19,195		5,986		820		54,535		857,536		912,071
Total preneed receivables, at amortized cost	$	30,998	$	21,120	$	7,603	$	17,407	$	77,128	$	961,367	$	1,038,495

The following table summarizes the activity for the reserve for credit losses on preneed receivables for the nine months ended September 30, 2020:



	January 1, 2020		Provision for Expected Credit Losses		Acquisitions (Divestitures), Net		Write Offs		Effect of Foreign Currency		September 30, 2020
	(In thousands)
Funeral	$	(8,057)	$	(4,757)	$	9	$	1,861	$	16	$	(10,928)
Cemetery	(6,700)		(2,129)		—		407		18		(8,404)
Total reserve for credit losses on preneed receivables	$	(14,757)	$	(6,886)	$	9	$	2,268	$	34	$	(19,332)

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


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(In thousands)
Deposits	$	113,444	$	104,964	$	317,338	$	318,321
Withdrawals	$	102,873	$	100,194	$	316,729	$	324,230
Purchases of securities	$	452,009	$	545,926	$	1,358,005	$	1,236,839
Sales of securities	$	423,762	$	546,172	$	1,217,713	$	1,109,589
Realized gains from sales of securities(1)	$	60,772	$	71,531	$	205,364	$	169,812
Realized losses from sales of securities(1)	$	(43,243)	$	(39,176)	$	(190,401)	$	(88,058)

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

FORM 10-Q 17

PART I

The cost and market values associated with trust investments recorded at market value are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Fair value represents the value of the underlying securities held by the trusts.


		September 30, 2020
	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses		Value
				(In thousands)
Fixed income securities:
U.S. Treasury	2	$	45,115	$	1,724	$	(249)	$	46,590
Canadian government	2	36,603		56		(838)		35,821
Corporate	2	1,505		13		(6)		1,512
Residential mortgage-backed	2	3,240		160		—		3,400
Asset-backed	2	113		3		(5)		111
Equity securities:
Preferred stock	2	370		—		(27)		343
Common stock:
United States	1	1,387,811		359,603		(125,062)		1,622,352
Canada	1	36,415		9,954		(3,290)		43,079
Other international	1	94,253		31,725		(4,683)		121,295
Mutual funds:
Equity	1	814,380		27,013		(101,299)		740,094
Fixed income	1	1,123,379		29,373		(52,897)		1,099,855
Other	3	200		—		(135)		65
Trust investments, at fair value		3,543,384		459,624		(288,491)		3,714,517
Commingled funds
Fixed income		651,554		21,916		(432)		673,038
Equity		260,214		60,893		(20)		321,087
Money market funds		280,325		—		—		280,325
Private equity		205,452		55,077		(10,907)		249,622
Trust investments, at net asset value		1,397,545		137,886		(11,359)		1,524,072
Trust investments, at market		$	4,940,929	$	597,510	$	(299,850)	$	5,238,589

18 Service Corporation International

PART I


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

Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds. The funds' managers have not communicated the timing of any liquidations.

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


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(in thousands)
Fair value, beginning balance	$	423	$	6,588	$	8,218	$	9,755
Net realized and unrealized gains (losses) included in Other income, net(1)	(355)		(54)		(612)		(1,518)
Purchases	57		850		4,626		855
Sales	(60)		(58)		(5,356)		(1,766)


Transfers	—		—		(6,811)		—

Fair value, ending balance	$	65	$	7,326	$	65	$	7,326

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

FORM 10-Q 19

PART I

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


	Fair Value
	(In thousands)
Due in one year or less	$	54,490
Due in one to five years	24,892
Due in five to ten years	7,990
Thereafter	62
Total estimated maturities of fixed income securities	$	87,434

Recognized trust fund income (realized and unrealized) related to our preneed trust investments was $33.9 million and $30.2 million, for the three months ended September 30, 2020 and 2019, respectively. Recognized trust fund income (realized and unrealized) related to our cemetery perpetual care trust investments was $15.9 million and $18.8 million for the three months ended September 30, 2020 and 2019, respectively.

Recognized trust fund income (realized and unrealized) related to our preneed trust investments was $93.1 million and $87.4 million, for the nine months ended September 30, 2020 and 2019, respectively. Recognized trust fund income (realized and unrealized) related to our cemetery perpetual care trust investments was $52.7 million and $56.7 million for the nine months ended September 30, 2020 and 2019, respectively.

Our fixed income investment unrealized losses, their associated fair values, and the duration of unrealized losses are shown in the following tables:


	September 30, 2020
	In Loss Position Less Than 12 Months				In Loss Position Greater Than 12 Months				Total
	Fair Market Value		Unrealized Losses		Fair Market Value		Unrealized Losses		Fair Market Value		Unrealized Losses
					(In thousands)
U.S. Treasury	$	2,361	$	(3)	$	749	$	(246)	$	3,110	$	(249)
Canadian government	—		—		11,675		(838)		11,675		(838)
Corporate	45		—		803		(6)		848		(6)

Asset-backed	—		—		36		(5)		36		(5)
Total fixed income securities with an unrealized loss	$	2,406	$	(3)	$	13,263	$	(1,095)	$	15,669	$	(1,098)


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

Deferred revenue, net

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

20 Service Corporation International

PART I

The components of Deferred revenue, net in our unaudited Condensed Consolidated Balance Sheet were as follows:


	September 30, 2020		December 31, 2019
	(In thousands)
Deferred revenue	$	2,126,034	$	2,046,000
Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts	(624,867)		(578,897)
Deferred revenue, net	$	1,501,167	$	1,467,103

The following table summarizes the activity for our contract liabilities, which are reflected in Deferred revenue, net and Deferred receipts held in trust:


	Nine months ended September 30,
	2020		2019
	(In thousands)
Beginning balance — Deferred revenue, net and Deferred receipts held in trust	$	5,306,479	$	4,790,552
Net preneed contract sales	801,064		734,998
Acquisitions (dispositions) of businesses, net	14,201		(27,737)
Net investment (losses) gains(1)	(32,410)		288,703
Recognized revenue from backlog(2)	(324,117)		(292,653)
Recognized revenue from current period sales	(407,666)		(389,463)
Change in amounts due on unfulfilled performance obligations	(42,300)		(3,849)
Change in cancellation reserve	1,070		(842)
Effect of foreign currency and other	(1,510)		6,451
Ending balance — Deferred revenue, net and Deferred receipts held in trust	$	5,314,811	$	5,106,160

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

(2)Includes current year trust fund income through the date of performance.

4. Income Taxes

Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete

items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitation, and increases or

decreases in valuation allowances on deferred tax assets. Our effective tax rate was 22.7% and 2.7% for the three months ended September 30, 2020 and 2019, respectively. Our effective tax rate was 23.6% and 17.3% for the nine months ended September 30, 2020 and 2019, respectively. The lower effective tax rate for the three and nine months ended September 30, 2019 was primarily due to the reduction in tax liability as a result of the expiration of statutes of limitation and higher excess tax benefits on the settlement of employee share-based awards.

Unrecognized Tax Benefits

As of September 30, 2020, the total amount of our unrecognized tax benefits was $1.3 million and the total amount of our

accrued interest was $0.7 million.

The federal statutes of limitation have expired for all tax years prior to 2017, and we are not currently under audit by the IRS. Various state jurisdictions are auditing years 2013 through 2018. There are currently no federal or provincial audits in Canada; however, years subsequent to 2015 remain open and could be subject to examination. It is reasonably possible that the amount of unrecognized tax benefits may change within the next twelve months. However, given the number of years that remain subject to examination and the number of matters being examined, an estimate of the range of the possible increase or decrease cannot be made.

FORM 10-Q 21

PART I

5. Debt

The components of Debt are:


	September 30, 2020		December 31, 2019
	(In thousands)
8.0% Senior Notes due November 2021	$	150,000	$	150,000
5.375% Senior Notes due May 2024	—		850,000
7.5% Senior Notes due April 2027	152,710		153,465
4.625% Senior Notes due December 2027	550,000		550,000
5.125% Senior Notes due June 2029	750,000		750,000
3.375% Senior Notes due August 2030	850,000		—
Term Loan due May 2024	609,375		633,750
Bank Credit Facility due May 2024	435,000		295,000
Obligations under finance leases	170,077		185,252
Mortgage notes and other debt, maturities through 2050	51,483		45,104
Unamortized premiums and discounts, net	(404)		5,634
Unamortized debt issuance costs	(37,873)		(34,854)
Total debt	3,680,368		3,583,351
Less: Current maturities of long-term debt	(95,862)		(69,821)
Total long-term debt	$	3,584,506	$	3,513,530

Current maturities of debt at September 30, 2020 include amounts due under our term loan, mortgage notes and other debt, and finance leases within the next year as well as the portion of unamortized premiums and discounts and debt issuance costs expected to be recognized in the next twelve months.

Our consolidated debt had a weighted average interest rate of 3.73% and 4.72% at September 30, 2020 and December 31, 2019, respectively. Approximately 67% and 69% of our total debt had a fixed interest rate at September 30, 2020 and December 31, 2019, respectively.

During the nine months ended September 30, 2020 and 2019, we paid $102.9 million and $113.0 million in cash interest, respectively.

Bank Credit Facility

As of September 30, 2020, we had $435.0 million outstanding borrowings under our Bank Credit Facility due May 2024, $609.4 million of outstanding borrowings under our Term Loan due May 2024, and $34.0 million of letters of credit issued. 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 agreement contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, and certain dividend and share repurchase restrictions. As of September 30, 2020, we were in compliance with all of our debt covenants. We pay a quarterly fee on the unused commitment, which was 0.20% at September 30, 2020. As of September 30, 2020, we have $531.0 million in borrowing capacity under the Bank Credit Facility.

Debt Issuances and Additions

During the nine months ended September 30, 2020, we issued or added $1.5 billion of debt including:

•$850.0 million unsecured 3.375% Senior Notes due August 2030; and

•$645.0 million on our Bank Credit Facility due May 2024.

Newly issued debt during the first nine months of 2020 was used to pay down our Bank Credit Facility due May 2024, to redeem our 5.375% Senior Notes due May 2024, and for general corporate purposes. These transactions resulted in additional debt issuance costs of $14.5 million.

During the nine months ended September 30, 2019, we issued or added $1.1 billion of debt including:

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

22 Service Corporation International

PART I

•$55.0 million on our Bank Credit Facility due December 2022;

•$235.0 million on our Bank Credit Facility due May 2024; and

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

Newly issued debt during the first nine months of 2019 was used to pay down our Bank Credit Facility due December 2022, to redeem our 5.375% Senior Notes due January 2022, to redeem our 4.5% Senior Notes due November 2020, to fund acquisition activity, and for general corporate purposes. These transactions resulted in additional debt issuance costs of $15.5 million.

Debt Extinguishments and Reductions

During the nine months ended September 30, 2020, we made aggregate debt payments of $1.4 billion for scheduled and early extinguishment payments including:

•$505.0 million in aggregate principal of our Bank Credit Facility due May 2024;

•$24.4 million in aggregate principal of our Term Loan due May 2024;

•$0.8 million in aggregate principal of 7.5% Senior Notes due April 2027 repurchased on the open market;

•$850.0 million in aggregate principal of 5.375% Senior Notes due May 2024;

•$16.1 million of premiums paid on early extinguishment; and

•$1.1 million in other debt.

Certain of the above transactions resulted in the recognition of a loss of $18.4 million recorded in Losses on early extinguishment of debt, net in our unaudited Condensed Consolidated Statement of Operations for the nine months ended September 30, 2020.

During the nine months ended September 30, 2019, we made aggregate debt payments of $1.2 billion for scheduled and early extinguishment payments including:

•$450.0 million in aggregate principal of our Bank Credit Facility due December 2022;

•$8.5 million in aggregate principal of our Term Loan due December 2022;

•$32.1 million in aggregate principal payments to other members of our Term Loan due December 2022;

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

•$425.0 million in aggregate principal of 5.375% Senior Notes due January 2022;

•$200.0 million in aggregate principal of 4.5% Senior Notes due November 2020;

•$46.5 million in aggregate principal of 7.5% Senior Notes due April 2027;

•$11.4 million of premiums paid on early extinguishment; and

•$0.3 million in other debt.

Certain of the above transactions resulted in the recognition of a loss of $16.6 million recorded in Losses on early extinguishment of debt, net in our Consolidated Statement of Operations for the nine months ended September 30, 2019.

FORM 10-Q 23

PART I

6. Credit Risk and Fair Value of Financial Instruments

Fair Value Estimates

The fair value estimates of the following financial instruments have been determined using available market information and appropriate valuation methodologies. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The carrying values of receivables on preneed funeral and cemetery contracts approximate fair value due to the large number of diverse individual contracts with varying terms.

The fair value of our debt instruments at September 30, 2020 and December 31, 2019 was as follows:


	September 30, 2020		December 31, 2019
	(In thousands)
8.0% Senior Notes due November 2021	$	160,125	$	165,375
5.375% Senior Notes due May 2024	—		879,606
7.5% Notes due April 2027	178,492		188,381
4.625% Senior Notes due December 2027	585,228		577,500
5.125% Senior Notes due June 2029	828,285		798,525
3.375% Senior Notes due August 2030	855,168		—
Term Loan due May 2024	609,375		633,750
Bank Credit Facility due May 2024	435,000		295,000
Mortgage notes and other debt, maturities through 2050	51,530		45,104
Total fair value of debt instruments	$	3,703,203	$	3,583,241

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 2 of the fair value measurements hierarchy. The Term Loan, Bank Credit Facility, 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. An increase (decrease) in the inputs results in a directionally opposite change in the fair value of the instruments.

7. Equity

(All shares reported in whole numbers)

Share Repurchase Program

Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our share repurchase program. During the nine months ended September 30, 2020, we repurchased 8,034,996 shares of common stock at an aggregate cost of $329.1 million, which is an average cost per share of $40.96. During August 2020, our Board of Directors increased our share repurchase authorization to $500 million. After these repurchases and the increase in our share repurchase authorization, the remaining dollar value of shares authorized to be purchased under the share repurchase program was $418.4 million at September 30, 2020.

Subsequent to September 30, 2020, we repurchased 1,491,394 shares for $65.4 million at an average cost per share of $43.85. After these repurchases, the remaining dollar value of shares authorized to be purchased under the share repurchase program is $353.0 million.

24 Service Corporation International

PART I

8. Segment Reporting

Our operations are both product-based and geographically-based, and the reportable operating segments presented below include our funeral and cemetery operations. Our geographic areas include the United States and Canada, where we conduct both funeral and cemetery operations.

Our reportable segment information, including disaggregated revenue, was as follows and includes a reconciliation of gross profit to our consolidated income before income taxes.


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(In thousands)
Revenue from customers:
Funeral revenue:
Atneed revenue	$	275,060	$	236,178	$	796,014	$	740,326
Matured preneed revenue	164,245		144,388		486,185		449,422
Core funeral revenue	439,305		380,566		1,282,199		1,189,748
Non-funeral home revenue	15,592		12,592		44,189		38,686
Recognized preneed revenue	32,744		33,561		93,207		104,614
Other revenue	30,993		33,404		84,882		98,847
Total funeral revenue	518,634		460,123		1,504,477		1,431,895
Cemetery revenue:
Atneed revenue	103,330		79,928		279,475		243,665
Recognized preneed property revenue	190,068		129,364		458,267		409,851



Recognized preneed merchandise and services revenue	80,948		72,225		219,456		212,834
Core cemetery revenue	374,346		281,517		957,198		866,350
Other revenue	25,261		27,601		79,566		81,780
Total cemetery revenue	399,607		309,118		1,036,764		948,130
Total revenue from customers	$	918,241	$	769,241	$	2,541,241	$	2,380,025
Gross profit:
Funeral gross profit	$	124,135	$	74,354	$	343,668	$	270,362
Cemetery gross profit	139,521		85,378		317,799		272,350
Gross profit from reportable segments	263,656		159,732		661,467		542,712
Corporate general and administrative expenses	(40,986)		(29,668)		(109,968)		(101,864)
Gains (losses) on divestitures and impairment charges, net	543		(1,479)		5,825		(15,180)

Operating income	223,213		128,585		557,324		425,668
Interest expense	(40,721)		(46,678)		(126,839)		(141,385)
Losses on early extinguishment of debt, net	(18,278)		(9,058)		(18,428)		(16,637)
Other income, net	629		20		548		1,614
Income before income taxes	$	164,843	$	72,869	$	412,605	$	269,260

Our geographic area information was as follows:


	United States		Canada		Total
	(In thousands)
Three months ended September 30,
Revenue from external customers:
2020	$	878,723	$	39,518	$	918,241
2019	$	726,702	$	42,539	$	769,241
Nine months ended September 30,
Revenue from external customers:
2020	$	2,419,837	$	121,404	$	2,541,241
2019	$	2,248,176	$	131,849	$	2,380,025

FORM 10-Q 25

PART I

9. 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 September 30, 2020 and December 31, 2019, we have self-insurance reserves of $92.6 million and $84.3 million, respectively.

Litigation and Regulatory Matters

We are a party to various litigation and regulatory matters, investigations, and proceedings. Some of the more frequent routine litigations incidental to our business are based on burial practices claims and employment-related matters, including discrimination, harassment, and wage and hour laws and regulations. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to vigorously defend ourselves in the matters described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.

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

Lisa Fredeen, an aggrieved employee and on behalf of other aggrieved employees v. California Cemetery and Funeral Services, LLC, et al; Case No. BC706930; in the Superior Court of the State of California for the County of Los Angeles. This lawsuit was filed against SCI subsidiaries on May 18, 2018 and purports to be brought on behalf of the defendants' current and former non-exempt California employees during the four years preceding the filing of the complaint. This lawsuit asserts numerous claims for alleged wage and hour pay violations under the California Labor Code and the California Private Attorneys General Act. The plaintiff seeks unpaid wages, compensatory and punitive damages, civil penalties, attorneys’ fees and costs, and interest. Given the nature of this lawsuit, we are unable to reasonably estimate the possible loss or ranges of loss, if any.

Claims Regarding Acquisition of Stewart Enterprises. We are involved in the following lawsuit.

Karen Moulton, Individually and on behalf of all others similarly situated v. Stewart Enterprises, Inc., Service Corporation International and others; Case No. 2013-5636; in the Civil District Court Parish of New Orleans, Louisiana. This case was filed as a class action in June 2013 against an SCI subsidiary in connection with SCI's acquisition of Stewart Enterprises, Inc. The plaintiffs allege that SCI aided and abetted breaches of fiduciary duties by Stewart Enterprises and its board of directors in negotiating the combination of Stewart Enterprises with a subsidiary of SCI. The plaintiffs seek damages concerning the combination. We filed exceptions to the plaintiffs’ complaint that were granted in June 2014. Thus, subject to appeals, SCI will no longer be party to the suit. The case has continued against our subsidiary Stewart Enterprises and its former individual directors. However, in October 2016, the court entered a judgment dismissing all of plaintiffs’ claims. Plaintiffs have appealed the dismissal. Given the nature of this lawsuit, we are unable to reasonably estimate the possible loss or ranges of loss, if any.

Operational Claims. We are named a defendant in various lawsuits alleging operational claims, including but not limited to the State of California and Taylor lawsuits described below.

The People of the State of California v. Service Corporation International, a Texas corporation, SCI Direct, Inc. a Florida Corporation, S.E. Acquisition of California, Inc., a California corporation dba Neptune Society of Northern California, Neptune Management Corp., a California corporation, Trident Society, Inc. a California corporation, and Does 1 through 100, inclusive, Case No. RG 19045103; in the Superior Court of the State of California in and for the County of Alameda. In July 2019, we received a letter from the Attorney General, State of California, Department of Justice (“CAAG") alleging that the allocation of prices among certain of our cremation service contracts and cremation merchandise contracts, and the related preneed trust funding, violates section 7735 of the California Business and Professions Code and that provisions of these same contracts constitute false advertising and deceptive sales practices in violation of California consumer protection laws. On November 21, 2019, we filed a complaint, S.E. Combined Services of California, Inc., a California Corporation dba Neptune Society of Northern California, Neptune Management Corp. a California Corporation, and Trident Society, Inc. v. Xavier Becerra, Attorney General of the State of California, and Does 1-50, Case No. 34-2019-00269617; in the Sacramento County Superior Court seeking declaratory relief holding, in general, that our practices, methods, and documentation utilized in the sale of preneed funeral goods and services are in all respects compliant with California law. On December 2, 2019, the CAAG filed the complaint, referenced above, seeking permanent injunction from making false statements and engaging in unfair competition, a placement of funds into preneed trusts, civil penalties, customer refunds, attorneys’ fees, and costs. We believe our contracts comply with applicable laws. Given the nature of this matter, we are unable to reasonably estimate the possible loss or ranges of loss, if any.

Nancy Taylor, on behalf of herself and others similarly situated v. Service Corporation International and others, Case No. 20-cv-60709; in the United States District Court Southern District of Florida Fort Lauderdale Division. This case was filed in April

26 Service Corporation International

PART I

2020 as a Florida class action alleging that the allocation of prices among certain of our cremation service contracts and cremation merchandise contracts, and the related preneed trust funding, and the failure to disclose commissions paid and sales practices associated with the sale of third-party travel protection plans, violate the Florida Deceptive and Unfair Trade Practices Act and constitute unjust enrichment. Plaintiff seeks refunds, general, actual, compensatory and exemplary damages, civil penalties, interest, and attorney fees. Given the nature of this lawsuit, we are unable to reasonably estimate the possible loss or ranges of loss, if any.

Unclaimed Property Audit

We received notices from a third-party auditor representing the unclaimed property departments of certain states regarding preneed funeral and cemetery contracts that were not funded by the purchase and assignment of the proceeds of insurance policies. The auditor claims that we are subject to the laws of those states concerning escheatment of unclaimed funds. The auditor seeks escheatment of funds from the portion of such contracts for which it claims that we will probably not be required to provide services or merchandise in the future. No actual audits have commenced at this time. Given the nature of this matter, we are unable to reasonably estimate the possible loss or ranges of loss, if any.

Other Potential Contingencies

In October 2018, we received a letter from the Illinois Office of the Comptroller claiming that our subsidiary improperly withdrew a total of $13.6 million from perpetual care trusts covering 24 of our cemeteries in Illinois. We believe these withdrawals were entirely proper for the ongoing care of those cemeteries under Illinois law.

We intend to vigorously defend all of the above matters; however, an adverse decision in one or more of such matters could have a material effect on us, our financial condition, results of operations, and cash flows.

10. Earnings Per Share

Basic earnings per common share 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 earnings per share reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that participated in our earnings.

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


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(In thousands, except per share amounts)
Amounts attributable to common stockholders:







Net income — basic and diluted	$	127,415	$	70,792	$	314,864	$	222,444
Weighted average shares:
Weighted average shares — basic	175,982		182,551		178,238		182,218
Stock options	2,115		3,225		2,184		3,370
Restricted share units	43		67		41		47

Weighted average shares — diluted	$	178,140	$	185,843	$	180,463	$	185,635
Amounts attributable to common stockholders:






Earnings per share:
Basic	$	0.72	$	0.39	$	1.77	$	1.22
Diluted	$	0.72	$	0.38	$	1.74	$	1.20

FORM 10-Q 27

PART I

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


	Three months ended September 30,		Nine months ended September 30,
	2020	2019	2020	2019
	(In thousands)

Antidilutive options	1,739	785	1,572	641
Antidilutive restricted share units	—	—	54	58

11. Acquisitions and Divestiture-Related Activities

Acquisitions

We spent $29.8 million and $21.5 million, for several business acquisitions, and $51.4 million and $46.0 million, for several real estate acquisitions during the nine months ended September 30, 2020 and 2019, respectively.

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 unaudited Condensed Consolidated Statement of Operations line item Gains (losses) on divestitures and impairment charges, net, which comprised the following:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(In thousands)
Gains (losses) on divestitures, net	$	614	$	(587)	$	8,980	$	(9,683)
Impairment losses	(71)		(892)		(3,155)		(5,497)
Gains (losses) on divestitures and impairment charges, net	$	543	$	(1,479)	$	5,825	$	(15,180)

28 Service Corporation International

PART I

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

The Company

We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries unequaled in geographic scale and reach. At September 30, 2020, we operated 1,470 funeral service locations and 483 cemeteries (including 296 funeral service/cemetery combination locations), which are geographically diversified across 44 states, eight Canadian provinces, the District of Columbia, and Puerto Rico. Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.

Our financial position is enhanced by our $12.2 billion backlog of future revenue from both trust and insurance-funded preneed sales at September 30, 2020. Preneed selling provides us with a strategic opportunity to gain future market share. We also believe it adds to the stability and predictability of our revenue and cash flows. While revenue on the majority of preneed merchandise and service sales is deferred until the time of need, sales of preneed cemetery property provide opportunities for full current revenue recognition to the extent that the property is developed and available for use.

We have adequate liquidity and a favorable debt maturity profile, which allow us to return capital to shareholders through share repurchases and dividends.

Factors affecting our operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed revenue. The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average revenue for cremations is lower than that for traditional burials. To further enhance revenue opportunities, we continue to focus on our cremation customers' preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers. We believe the presentation of these additional merchandise and services through our customer-facing technology improves our customers' experience by reducing administrative burdens and allowing them to visualize the enhanced product and service offerings, which we believe will help drive increases in the average revenue for a cremation in future periods.

Recent Trends

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

Like most businesses world-wide, COVID-19 has impacted various aspects of our business operations; however, we cannot, with certainty, presently predict the scope, severity, or duration with which COVID-19 will continue to impact our business, financial condition, results of operations, and cash flows. As recently as the middle of March 2020, sales growth was continuing to trend in line and consistent with our forecast for the first quarter of 2020 and when compared to the first quarter of 2019. However, during the last two weeks of March and through April, we saw our preneed sales activity precipitously decline as North Americans began to practice social distancing, while complying with multiple state and provincial shelter-in-place orders. Due to the impacts of COVID-19 and uncertainty about the duration of the effects, we took a variety of actions to preserve capital, including but not limited to, reducing the base salaries for officers from the peak of the COVID-19 effects in late April 2020 until late May when the impacts eased. As the world continues to experience the effects of COVID-19, we remain reliant on the values and capabilities of our organization to meet the needs of our client families and to ensure our associates and customers are safe. As community restrictions lifted over the last few months, we have experienced unprecedented growth in our preneed cemetery sales as well as a significant improvement in the number of families who are desiring memorial services. We view this as further evidence that a considerable number of our customers continue to value

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what our team does best, which is helping our client families gain closure and healing through the process of grieving, remembrance, and celebration.

The rigorous restrictions placed on gatherings and mandated by state, provincial, and local governments have posed a unique challenge for our locations. In mid-March, we quickly implemented technology solutions, including leveraging Facebook Live, which allows extended family and friends to virtually participate in the ceremony alongside the immediate family. In addition, certain locations found other ways to include families and friends in services, including giving guests the opportunity to leave condolences on balloons that are tied to chapel chairs so families can feel connected to those unable to attend in person. We also carefully designed outdoor venues to allow guests to be present, yet remain at a safe distance and even offer customers the ability to broadcast cemetery services through radio transmitters at certain locations. Atneed funeral directors are also using virtual meeting platforms to discuss and plan service details with client families. Our preneed sales teams have continued to overcome social distancing obstacles in certain areas of the country by leveraging technology with customers who may prefer to purchase cemetery property and merchandise from the safety of their home or setting up outdoor pop-up tents to discuss pre-planning from a safe distance. Although they may face challenges to meet face-to-face, our funeral directors continue to listen, understand, suggest, and plan important details for honoring a loved one’s life.

For further discussion of our key operating metrics, see our "Cash Flow" and “Results of Operations” sections below.

Financial Condition, Liquidity, and Capital Resources

Capital Allocation Considerations

We rely on cash flow from operations as a significant source of liquidity. Our cash flow from operating activities provided $559.4 million in the first nine months of 2020. As of September 30, 2020, we have $531.0 million in excess borrowing capacity under our Bank Credit Facility.

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


	Per Credit Agreement	Actual
Leverage ratio	4.75 (Max)	3.44
Interest coverage ratio	3.00 (Min)	6.13

We believe we have the financial strength and flexibility to reward shareholders through share repurchases and dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth.

We believe that our unencumbered cash on hand, future operating cash flows, and the available capacity under our bank credit agreement will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations. Due to cash balances residing in Canada and minimum operating cash requirements, a portion of our cash on hand is encumbered.

We consistently evaluate the best uses of our cash flow that will yield the highest value and return on capital. Our capital deployment strategy is prioritized as follows:

Investing in Acquisitions and Building New Funeral Service Locations. We manage our footprint by focusing on strategic acquisitions and building new funeral service locations where the expected returns are attractive and exceed our weighted average cost of capital by a meaningful margin. We target businesses with favorable customer dynamics and/or where we can achieve additional economies of scale. We continue to pursue strategic acquisitions and build new funeral service locations in areas that provide us with the potential for scale.

Paying Dividends. Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.19 per common share in 2020. We target a payout ratio of 30% to 40% of after-tax earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter upon review of our financial performance.

Repurchasing Shares. Absent opportunities for strategic acquisitions, we expect to continue to repurchase shares of our common stock in the open market or through privately negotiated transactions, subject to market conditions, debt covenants, and normal trading restrictions. There can be no assurance that we will buy our common stock under our repurchase program in the future.

During the nine months ended September 30, 2020, we repurchased 8,034,996 shares of common stock at an aggregate cost of $329.1 million, which is an average cost per share of $40.96. During August 2020, our Board of Directors increased our share repurchase authorization to $500.0 million. After these repurchases and the increase in our share repurchase authorization, the remaining dollar value of shares authorized to be purchased under the share repurchase program was $418.4 million at September 30, 2020.

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

Cash Flow

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

Operating Activities

Net cash provided by operating activities was $559.4 million and $472.2 million for the nine months ended September 30, 2020 and 2019, respectively.

Excluding $6.4 million in legal settlements in the prior period, cash flow from operations increased $80.8 million for the nine months ended September 30, 2020 versus the same period in 2019. The 2020 increase over 2019 comprises:

•a $119.3 million increase in cash receipts from customers,

•a $36.2 million decrease in vendor and other payments, and

•a $10.1 million decrease in cash interest payments, partially offset by

•a $41.7 million increase in cash tax payments,

•a $22.9 million increase in employee compensation payments,

•a $13.2 million decrease in General Agency (GA) and other receipts, and

•a $7.0 million decrease in net trust withdrawals.

Investing Activities

Cash flows from investing activities used $225.4 million and $239.7 million for the nine months ended September 30, 2020 and 2019, respectively. The $14.3 million decrease from 2020 over 2019 is primarily due to the following:

•a $21.6 million decrease in capital expenditures, primarily due to the temporary deferral of certain capital expenditures as we navigate the impact of the COVID-19 pandemic, and

•a $7.5 million decrease in payments for Company-owned life insurance policies, net of proceeds, partially offset by

•a $8.3 million increase in cash spent on business acquisitions,

•a $5.5 million increase in cash spent on real estate acquisitions, and

•a $1.0 million decrease in cash receipts from divestitures and asset sales.

Financing Activities

Financing activities used $351.2 million for the nine months ended September 30, 2020 compared to using $242.0 million for the same period in 2019. The $109.2 million increase from 2020 over 2019 is primarily due to:

•a $276.9 million increase in purchase of Company common stock,

•a $22.8 million decrease in proceeds from exercises of stock options, and

•a $2.9 million increase in payments of dividends, partially offset by

•a $192.9 million decrease in debt payments, net of proceeds, and

•a $0.5 million change in bank overdrafts and acquisition-related financing.

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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 sales activities. The obligations underlying these surety bonds are recorded on our Consolidated Balance Sheet as Deferred revenue, net. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.


	September 30, 2020		December 31, 2019
	(In millions)
Preneed funeral	$	94.4	$	94.6
Preneed cemetery:
Merchandise and services	149.4		147.6
Pre-construction	23.2		20.3
Bonds supporting preneed funeral and cemetery obligations	267.0		262.5
Bonds supporting preneed business permits	5.5		5.5
Other bonds	20.2		19.7
Total surety bonds outstanding	$	292.7	$	287.7

When selling preneed contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law. For the nine months ended September 30, 2020 and 2019, we had $5.2 million and $18.6 million, respectively, of cash receipts from sales attributable to bonded contracts. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.

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

Preneed Activities and Backlog of Contracts

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

Insurance-Funded Preneed Contracts: Where permitted by state or provincial law, we may sell a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. These general agency commissions (GA revenue) are based on a percentage per contract sold and are recognized as funeral revenue when the insurance purchase transaction between the preneed purchaser and third-party insurance provider is completed. All selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred. We do not reflect the unfulfilled insurance-funded preneed contract amounts in our Consolidated Balance Sheet. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenue as we perform these funerals.

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The table below details our results of insurance-funded preneed production and maturities.


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(Dollars in millions)
Preneed insurance-funded:
Sales production(1)	$	138.5	$	145.6	$	368.4	$	431.2
Sales production (number of contracts) (1)	24,700		25,437		66,148		75,564
General agency revenue	$	34.3	$	35.6	$	94.0	$	105.7
Maturities	$	92.6	$	82.2	$	281.3	$	256.8
Maturities (number of contracts)	15,915		13,753		48,447		43,590

(1) Amounts are not included in our Consolidated Balance Sheet

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

The tables below detail our results of preneed production and maturities, excluding insurance contracts:


	Three months ended September 30,				Nine months ended September 30,
	2020		2019		2020		2019
	(Dollars in millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production	$	95.6	$	93.7	$	264.6	$	289.8
Sales production (number of contracts)	25,027		25,259		69,883		78,608
Maturities	$	80.7	$	69.7	$	230.7	$	215.9
Maturities (number of contracts)	20,607		17,137		59,658		54,157
Cemetery:
Sales production:
Preneed	$	298.8	$	203.8	$	758.1	$	661.0
Atneed	108.6		79.9		287.0		245.4
Total sales production	$	407.4	$	283.7	$	1,045.1	$	906.4
Sales production deferred to backlog:
Preneed	$	141.0	$	94.1	$	352.4	$	290.3
Atneed	76.4		59.1		205.7		181.4
Total sales production deferred to backlog	$	217.4	$	153.2	$	558.1	$	471.7
Revenue recognized from backlog:
Preneed	$	89.7	$	73.8	$	232.1	$	211.3
Atneed	70.7		58.4		196.3		177.4
Total revenue recognized from backlog	$	160.4	$	132.2	$	428.4	$	388.7

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

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


	September 30, 2020				December 31, 2019
	Fair Value		Cost		Fair Value		Cost
	(In billions)
Deferred revenue, net	$	1.50	$	1.50	$	1.47	$	1.47
Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts	0.62		0.62		0.58		0.58
Deferred receipts held in trust	3.81		3.57		3.84		3.54
Allowance for cancellation on trust investments	(0.26)		(0.24)		(0.27)		(0.25)
Backlog of trust-funded deferred revenue, net of estimated allowance for cancellation	5.67		5.45		5.62		5.34
Backlog of insurance-funded revenue (1)	6.50		6.50		6.37		6.37
Total backlog of deferred revenue	$	12.17	$	11.95	$	11.99	$	11.71

Preneed receivables, net and trust investments	$	4.84	$	4.60	$	4.79	$	4.49
Amounts due from customers for unfulfilled performance obligations on cancelable preneed contracts	0.62		0.62		0.58		0.58
Allowance for cancellation on trust investments	(0.26)		(0.24)		(0.27)		(0.25)
Assets associated with backlog of trust-funded deferred revenue, net of estimated allowance for cancellation	5.20		4.98		5.10		4.82
Insurance policies associated with insurance-funded deferred revenue (1)	6.50		6.50		6.37		6.37
Total assets associated with backlog of preneed revenue	$	11.70	$	11.48	$	11.47	$	11.19

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

The fair value of our trust investments was based on a combination of quoted market prices, observable inputs such as interest rates or yield curves, and appraisals. As of September 30, 2020, the difference between the backlog and asset market amounts represents $0.23 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $0.05 billion collected from customers that were not required to be deposited into trusts, and $0.19 billion in allowable cash distributions from trust assets. As of September 30, 2020, the fair value of the total backlog comprised $3.24 billion related to cemetery contracts and $8.93 billion related to funeral contracts. As of September 30, 2020, the fair value of the assets associated with the backlog of trust-funded deferred revenue comprised $3.04 billion related to cemetery contracts and $2.16 billion related to funeral contracts. As of September 30, 2020, the backlog of insurance-funded contracts of $6.50 billion is equal to the proceeds we expect to receive from the associated insurance policies.

Trust Investments

In addition to selling our products and services to client families at the time of need, we enter into price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery merchandise and services. Since preneed funeral and cemetery merchandise or services will generally not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into trusts and/or escrow accounts until the merchandise is delivered or the service is performed. Investment earnings associated with the trust investments are expected to mitigate the inflationary costs of providing the preneed funeral and cemetery merchandise and services in the future at the prices that were guaranteed at the time of sale. Also, we are required by state and provincial law to pay a portion of the proceeds from the preneed or atneed sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus generally remains in the trust in perpetuity and the earnings or elected distributions are withdrawn as allowed to defray the expense to maintain the cemetery property. While many states require that net capital gains or losses be retained and added to the corpus, certain states allow the net realized capital gains and losses to be included in the earnings that are distributed. Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.

Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and service trusts as well as the cemetery perpetual care trusts. The majority of the trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. Most of the trustees engage the same

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independent investment managers. These trustees, with input from SCI's wholly-owned registered investment advisor, establish an investment policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection. The investments are also governed by state and provincial guidelines. All of the trusts seek to control risk and volatility through a combination of asset classes, investment styles, and a diverse mix of investment managers.

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

Historically, the cemetery perpetual care trusts' investment objectives, in accordance with state and provincial regulations, have emphasized providing a steady stream of current investment income with some capital appreciation in order to provide for the current and future maintenance and beautification of cemetery properties. However, during 2016, SCI worked with several state legislatures to adjust laws and regulations to allow for a fixed distribution rate from cemetery perpetual care trusts' assets regardless of the level of ordinary income, similar to university endowments. As a result, beginning in 2017, a significant portion of our cemetery perpetual care trust assets were liquidated and reinvested in a more growth-oriented asset allocation with investment objectives similar to the funeral and cemetery merchandise and service trusts. As of September 30, 2020, the asset allocation is almost evenly split between income and growth orientations. We expect this asset allocation shift to enhance asset growth and provide further protection to our customers. Additionally, we expect more states to adopt total return distribution legislation in the coming years.

As of September 30, 2020, approximately 89% of our trusts were under the control and custody of three large financial institutions. The U.S. trustees primarily use four managed limited liability companies (LLCs), one for each merchandise and service trust type and two for the cemetery perpetual care trust type, each with an independent trustee as custodian. Each financial institution acting as trustee manages its allocation of trust assets in accordance with the investment policy through the purchase of the appropriate LLCs' units. For those accounts not eligible for participation in the LLCs or where a particular state's regulations contain other investment restrictions, the trustee utilizes institutional mutual funds that comply with our investment policy or with such state restrictions. The U.S. trusts include a modest allocation to alternative investments. These alternative investments are held in vehicles structured as LLCs and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective alternative investment LLCs.

Investment Structures

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

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

Mutual Funds. The trust funds employ institutional share class mutual funds where operationally or economically efficient. These mutual funds are utilized to invest in various asset classes including U.S. equities, non-U.S. equities, corporate bonds, government bonds, high yield bonds, and commodities, all of which are governed by guidelines outlined in their individual prospectuses.

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

Asset Classes

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

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

Equity investments have historically provided long-term capital appreciation in excess of inflation. The trusts have direct investments in individual equity securities primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment styles (i.e., growth and value). The majority of the equity allocation is managed by institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities

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are exposed to market risk; however, we believe these securities are well-diversified. As of September 30, 2020, the largest single equity position represented less than 1% of the total securities portfolio.

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

Trust Performance

During the nine months ended September 30, 2020, the Standard and Poor’s 500 Index increased 5.6% and the Barclay’s Aggregate Index increased 6.8%. This compares to the SCI trusts that increased 2.2% during the same period. SCI trusts have a diversified allocation of approximately 56% equities, 31% fixed income securities, 9% alternative and other investments with the remaining 4% available in cash.

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

Results of Operations — Three and Nine Months Ended September 30, 2020 and 2019

Three Months Ended September 30, 2020 and 2019

Management Summary

In the third quarter of 2020, we reported consolidated net income attributable to common stockholders of $127.4 million ($0.72 per diluted share) compared to net income attributable to common stockholders in the third quarter of 2019 of $70.8 million ($0.38 per diluted share). These results were impacted by certain significant items including:


	Three months ended September 30,
	2020		2019
	(In millions)
Pre-tax gains (losses) on divestitures and impairment charges, net	$	0.5	$	(1.5)
Pre-tax loss on early extinguishment of debt, net	$	(18.3)	$	(9.1)




Tax effect from special items	$	4.6	$	2.4
Change in uncertain tax reserves and other	$	—	$	11.1

In addition to the above items, the increase over the prior year quarter can be attributed to higher gross profit, primarily related to higher funeral services and burials performed as well as strong recognized preneed revenue growth in our cemetery business.

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Funeral Results


	Three months ended September 30,
	2020		2019
	(Dollars in millions, except average revenue per service)
Consolidated funeral revenue	$	518.6	$	460.1
Less: revenue associated with acquisitions/new construction	9.5		3.0
Less: revenue associated with divestitures	0.1		1.3
Comparable(1) funeral revenue	509.0		455.8
Less: comparable recognized preneed revenue	32.4		33.5
Less: comparable general agency and other revenue	30.8		33.3
Adjusted comparable funeral revenue	$	445.8	$	389.0
Comparable services performed	88,812		74,628
Comparable average revenue per service(2)	$	5,020	$	5,213

Consolidated funeral gross profit	$	124.1	$	74.4
Less: gross profit associated with acquisitions/new construction	2.5		0.6
Less: gross losses associated with divestitures	(0.4)		(1.2)
Comparable(1) funeral gross profit	$	122.0	$	75.0

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

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

Funeral Revenue

Consolidated revenue from funeral operations was $518.6 million for the three months ended September 30, 2020 compared to $460.1 million for the same period in 2019. This $58.5 million increase is primarily attributable to the $6.5 million increase in revenue contributed by acquired and newly constructed properties and a $53.2 million increase in comparable revenue as described below offset by the loss of $1.2 million in revenue contributed by properties that have been subsequently divested.

Comparable revenue from funeral operations was $509.0 million for the three months ended September 30, 2020 compared to $455.8 million for the same period in 2019. This $53.2 million, or 11.7%, increase was primarily attributable to a 19.0% increase in services performed during the third quarter of 2020 compared to 2019. The 19.0% increase in services performed comprised an 18.5% increase in services performed by our funeral service locations and a 22.1% increase in cremations performed by our non-funeral home channel. These revenue increases were partially offset by $1.1 million decrease in recognized preneed revenue and a $2.5 million decrease in comparable general agency and other revenue as both revenue decreases resulted from lower preneed funeral sales production.

Average revenue per funeral service decreased 3.7% for the three months ended September 30, 2020 compared to the same period in 2019. The comparable average revenue per service continues to be negatively impacted by the social distancing effects from the pandemic resulting in fewer and smaller funeral memorial services. Our total comparable cremation rate increased to 58.5% in 2020 from 57.3% in 2019 as a result of an increase in direct cremations.

Funeral Gross Profit

Consolidated funeral gross profit increased $49.7 million, or 66.8%, for the three months ended September 30, 2020 compared to 2019. This increase is primarily attributable to the increase in comparable funeral gross profit of $47.0 million, or 62.7%, as well as a $1.9 million increase in gross profit from acquired and newly constructed properties. Comparable funeral gross profit increased $47.0 million to $122.0 million and the gross profit percentage increased 750 basis points to 24.0%. This increase in comparable gross profit was primarily due to growth in higher margin core business coupled with a leaner cost structure that is partially due to the fewer and smaller memorial services mentioned above.

FORM 10-Q 37

PART I

Cemetery Results


	Three months ended September 30,
	2020		2019
	(In millions)
Consolidated cemetery revenue	$	399.6	$	309.1
Less: revenue associated with acquisitions/new construction	0.1		0.1
Less: revenue associated with divestitures	0.1		0.3
Comparable(1) cemetery revenue	$	399.4	$	308.7

Consolidated cemetery gross profit	$	139.5	$	85.4
Less: gross loss associated with acquisitions/new construction	(0.4)		—
Less: gross profit associated with divestitures	—		0.1
Comparable(1) cemetery gross profit	$	139.9	$	85.3

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

Cemetery Revenue

Consolidated revenue from our cemetery operations increased $90.5 million, or 29.3%, for the three months ended September 30, 2020 compared to the same period in 2019 primarily due to an increase in comparable revenue. The $90.7 million, or 29.4%, increase in comparable revenue was primarily attributable to a $93.1 million increase in comparable core revenue. The increase in comparable core revenue was led by $69.6 million growth in recognized preneed revenue as a result of strong comparable preneed cemetery property sales production for the period as well a $23.5 million, or 29.4%, increase in atneed revenue driven by an increase in services performed.

Cemetery Gross Profit

Consolidated cemetery gross profit increased $54.1 million, or 63.3%, in the three months ended September 30, 2020 compared to the same period in 2019, which is primarily attributable to the increase in comparable gross profit of $54.6 million, or 64.0%. Comparable cemetery gross profit increased $54.6 million to $139.9 million, and the gross profit percentage increased 740 basis points to 35.0%, resulting from the cemetery revenue increases described above coupled with a leaner cost structure. These benefits to margin were somewhat offset by higher selling compensation-related costs driven by the increase in our comparable preneed cemetery sales production.

Other Financial Statement Items

Corporate General and Administrative Expenses

Corporate general and administrative expenses increased $11.3 million to $41.0 million for the third quarter of 2020. This was primarily due to increases in our healthcare self-insurance reserves and increases in charitable contribution funding related to our community outreach efforts. The 2019 third quarter was favorably impacted by a prior year pension termination settlement.

Gains (Losses) on Divestitures and Impairment Charges, Net

We recognized a $0.5 million net pre-tax gain on asset divestitures and impairments, net in the third quarter of 2020 compared to a $1.5 million pre-tax loss on asset divestitures associated with non-strategic funeral and cemetery locations in the United States and Canada.

Losses on Early Extinguishment of Debt, Net

We incurred losses of $18.3 million on early extinguishment of debt related to debt refinancing transactions that occurred during the quarter. We issued $850.0 million of new unsecured 3.375% Senior Notes due August 2030 primarily to redeem our 5.375% Senior Notes due May 2024.

Interest Expense

Interest expense decreased $6.0 million to $40.7 million for three months ended September 30, 2020 primarily due to lower interest rates on our floating rate debt and other debt refinancing activities over the last twelve months.

FORM 10-Q 38

PART I

Provision for Income Taxes

The GAAP effective income tax rate for the third quarter of 2020 was 22.7% up from 2.7% in the prior year quarter primarily due to the prior year reduction in a tax liability as a result of the expiration of the statute of limitations. Our adjusted effective income tax rate was 22.9% in the third quarter of 2020 compared to 18.5% in the prior year quarter. The current year effective tax rates are higher compared to the prior year quarter primarily due to lower excess tax benefits on fewer exercises of stock options during the current year.

Weighted Average Shares

The diluted weighted average number of shares outstanding was 178.1 million for the three months ended September 30, 2020 compared to 185.8 million for the same period in 2019. The decrease primarily reflects the impact of shares repurchased under our share repurchase program.

Nine Months Ended September 30, 2020 and 2019

Management Summary

In the first nine months of 2020, we reported consolidated net income attributable to common stockholders of $314.9 million ($1.74 per diluted share) compared to net income attributable to common stockholders for the same period in 2019 of $222.4 million ($1.20 per diluted share). These results were impacted by certain significant items including:


	Nine months ended September 30,
	2020		2019
	(In millions)
Pre-tax gains (losses) on divestitures and impairment charges, net	$	5.8	$	(15.2)
Pre-tax losses on early extinguishment of debt, net	$	(18.4)	$	(16.6)



Pre-tax legal settlements	$	—	$	(6.4)
Tax effect from special items	$	3.2	$	8.9
Change in uncertain tax reserves and other	$	0.2	$	10.0

In addition to the above items, the increase over the prior year can be attributed to higher funeral and cemetery gross profit and lower interest expense, which was partially offset by higher corporate general and administrative expense and income taxes.

FORM 10-Q 39

PART I

Funeral Results


	Nine months ended September 30,
	2020		2019
	(Dollars in millions, except average revenue per service)
Consolidated funeral revenue	$	1,504.5	$	1,431.9
Less: revenue associated with acquisitions/new construction	26.8		5.4
Less: revenue associated with divestitures	0.7		5.1
Comparable(1) funeral revenue	1,477.0		1,421.4
Less: comparable recognized preneed revenue	92.4		104.6
Less: comparable general agency and other revenue	84.5		98.4
Adjusted comparable funeral revenue	$	1,300.1	$	1,218.4
Comparable services performed	262,316		236,287
Comparable average revenue per service(2)	$	4,956	$	5,156

Consolidated funeral gross profit	$	343.7	$	270.4
Less: gross profit associated with acquisitions/new construction	6.9		0.9
Less: gross losses associated with divestitures	(1.0)		(2.9)
Comparable(1) funeral gross profit	$	337.8	$	272.4

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

Funeral Revenue

Consolidated revenue from funeral operations was $1,504.5 million for the nine months ended September 30, 2020, compared to $1,431.9 million for the same period in 2019. This $72.6 million increase is primarily attributable to the $21.4 million increase in revenue contributed by acquired and newly constructed properties and a $55.6 million increase in comparable revenue as described below, partially offset by the loss of $4.4 million in revenue contributed by properties that have been subsequently divested.

Comparable revenue from funeral operations was $1,477.0 million for the nine months ended September 30, 2020 compared to $1,421.4 million for the same period in 2019. This $55.6 million, or 3.9%, increase was primarily attributable to a 11.0% increase in services performed compared to 2019. The increase in services performed comprised an 10.8% increase in services performed by our funeral service locations and a 12.7% increase in cremations performed by our non-funeral home channel. These revenue increases were partially offset by a $12.2 million decrease in recognized preneed revenue and a $13.9 million decrease in general agency and other revenue as both revenue declines resulted from lower preneed funeral sales production.

Average revenue per funeral service decreased 3.9% for the nine months ended September 30, 2020 compared to the same period in 2019. The comparable average revenue per service continues to be negatively impacted by the social distancing effects from the pandemic resulting in fewer and smaller funeral memorial services. Our total comparable cremation rate increased 140 basis points to 58.5% in the first nine months of 2020 as the COVID-19 pandemic created a temporary shift towards direct cremation, particularly in the first half of the year, when there were more widespread restrictions on social distancing and gathering sizes.

Funeral Gross Profit

Consolidated funeral gross profit increased $73.3 million, or 27.1%, in the first nine months of 2020 compared to 2019. This increase is primarily attributable to increases in comparable funeral gross profit of $65.4 million, or 24.0%, as well as a $6.0 million increase in gross profit contributed by acquired and newly constructed properties. Comparable funeral gross profit increased $65.4 million to $337.8 million and the gross profit percentage increased 370 basis points to 22.9%. This increase in comparable gross profit was primarily due to growth in higher margin core business coupled with a leaner cost structure that is partially due to the fewer and smaller memorial services mentioned above.

40 Service Corporation International

PART I

Cemetery Results


	Nine months ended September 30,
	2020		2019
	(In millions)
Consolidated cemetery revenue	$	1,036.8	$	948.1
Less: revenue associated with acquisitions/new construction	0.8		0.3
Less: revenue associated with divestitures	0.2		1.2
Comparable(1) cemetery revenue	$	1,035.8	$	946.6

Consolidated cemetery gross profit	$	317.8	$	272.4
Less: gross (loss) profit associated with acquisitions/new construction	(0.3)		0.1
Less: gross profit associated with divestitures	0.1		0.3
Comparable(1) cemetery gross profit	$	318.0	$	272.0

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

Cemetery Revenue

Consolidated revenue from our cemetery operations increased $88.7 million, or 9.4%, for the nine months ended September 30, 2020 compared to the same period in 2019 primarily due to an increase in comparable revenue. The $89.2 million, or 9.4%, increase in comparable revenue was primarily attributable to a $55.2 million increase in recognized preneed revenue as a result of strong comparable preneed cemetery property sales production for the period as well as a $36.2 million, or 14.9%, increase in atneed revenue driven by an increase in services performed.

Cemetery Gross Profit

Consolidated cemetery gross profit increased $45.4 million, or 16.7%, in the nine months ended September 30, 2020 compared to the same period in 2019, which is primarily attributable to the increase in comparable gross profit of $46.0 million, or 16.9%. Comparable cemetery gross profit increased $46.0 million to $318.0 million, and the gross profit percentage increased 200 basis points to 30.7%, which was primarily driven by the increase in the revenue described above coupled with a leaner cost structure. This benefit to margin was partially offset by higher selling compensation-related costs driven by the $95.4 million, or 46.9%, increase in our comparable preneed cemetery sales production during the third quarter.

Other Financial Statement Items

Corporate General and Administrative Expenses

Corporate general and administrative expenses were $110.0 million in the first nine months of 2020 compared to $101.9 million in 2019. Excluding a $6.4 million legal settlement recorded in the prior year, Corporate general and administrative expenses increased $14.5 million primarily related to charitable contributions for community outreach efforts, incentive compensation expenses, including hero bonuses for certain front line associates, and a prior year pension termination settlement.

Gains (Losses) on Divestitures and Impairment Charges, Net

We recognized a $5.8 million net pre-tax gain and a $15.2 million net pre-tax loss on asset divestitures and impairments, for the nine months ended September 30, 2020, and 2019, respectively. The nine months ended September 30, 2020 included $9.0 million in gains from asset divestitures associated with non-strategic funeral and cemetery locations in the United States and Canada were partially offset by $3.2 million in impairment charges, primarily related to certain tradenames. The nine months ended September 30, 2019 included $9.7 million in losses from asset divestitures associated with non-strategic funeral and cemetery locations and $5.5 million in impairment charges.

Losses on Early Extinguishment of Debt, Net

We incurred losses of $18.4 million during the nine months ended September 30, 2020 and $16.6 million in the same period of 2019 on the early extinguishment of debt associated with the execution of strategic refinancing transactions. During the three months ended September 30, 2020, we completed the refinancing of our 5.375% Senior Notes due 2024 as well as open market repurchases of our 7.5% Senior Notes due 2027. During the nine months ended September 30, 2019, these transactions include the open market repurchases of our 7.5% Senior Notes due 2027 along with the refinancing of our 4.5% Senior Notes due November 2020 and our 5.375% Senior Notes due January 2022.

FORM 10-Q 41

PART I

Interest Expense

Interest expense decreased $14.5 million to $126.8 million for the nine months ended September 30, 2020 primarily due to lower interest rates on our floating rate debt and other debt refinancing activities over the last twelve months.

Provision for Income Taxes

Our effective tax rate was 23.6% and 17.3% for the nine months ended September 30, 2020 and 2019, respectively. The lower effective tax rate for the nine months ended September 30, 2019 is primarily due to the reduction in tax liability as a result of the expiration of statutes of limitation and higher excess tax benefits on the settlement of employee share-based awards.

Weighted Average Shares

The diluted weighted average number of shares outstanding was 180.5 million for the nine months ended September 30, 2020 compared to 185.6 million for the same period in 2019. The decrease primarily reflects the impact of shares repurchased under our share repurchase program.

Critical Accounting Policies, Recent Accounting Pronouncements, and Accounting Changes

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

Recent Accounting Pronouncements and Accounting Changes

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

Cautionary Statement on Forward-Looking Statements

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

•Unforeseen effects from the COVID-19 pandemic could have material adverse consequences for our business and results of operations.

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

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

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

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

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

42 Service Corporation International

PART I

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

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

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

•Unfavorable publicity could affect our reputation and business.

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

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

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

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

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

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

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

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

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

•The funeral and cemetery industry is competitive.

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

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

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

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

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

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

Marketable Equity and Debt Securities — Price Risk

In connection with our preneed operations and sales, the related trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values as of September 30, 2020 are presented in Part I, Item 1. Financial Statements, Note 3 of this Form 10-Q. Also, see Item 2, Management’s Discussion and

FORM 10-Q 43

PART I

Analysis of Financial Condition and Results of Operations "Financial Condition, Liquidity and Capital Resources" section for discussion of trust investments.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

Changes in Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended September 30, 2020 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

44 Service Corporation International


PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings is set forth in Part I, Item 1. Financial Statements, Note 9 of this Form 10-Q, which information is hereby incorporated by reference herein.

Item 1A. Risk Factors

The COVID-19 pandemic has impacted the global economy and has had an adverse effect on certain aspects of our business and results of operations while having a positive effect on others as described in Item 2 of Part I, "Management Discussion and Analysis of Financial Condition and Results of Operations." Future public health threats could have material adverse consequences for our business and results of operations.

As a result of the COVID-19 pandemic and the related adverse economic and health consequences, we have experienced and may continue to be subject to any of the following risks:

•our preneed funeral sales have decreased and our preneed cemetery sales temporarily decreased;

•our preneed installment contract defaults have increased;

•the value of our preneed trust investments and related net investment income temporarily diminished due to the disruption in the financial markets;

•our funeral sales average has decreased

We may also experience the following COVID-19 related risks:

•our funeral and cemetery revenues may decrease due to reduced and deferred services, actual or perceived consumer financial constraints, government restrictions on gathering sizes, and voluntary social distancing;

•illness may disrupt our workforce;

•our supply chain could be disrupted;

•our operating costs may increase due to increased overtime, health insurance claims, worker’s compensation claims, supply costs, or other effects related to COVID-19.

Any of the foregoing risks could have a material, adverse effect on our business, financial condition, and results of operations. Given the ongoing and dynamic nature of the spread of COVID-19, it is difficult to predict the full impact of the COVID-19 outbreak on our business. The extent of such impact will depend on future developments, which are highly uncertain and largely outside of our control.

To the extent the COVID-19 pandemic adversely affects our business, operations, financial condition and results of operation, it may also have the effect of heightening many of the other risks. Other Risk Factors are set forth in Item 1A of our Annual Report on Form 10-K for the fiscal year ended December 31, 2019.

FORM 10-Q 45

PART II

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

The following table summarizes our share repurchases during the three months ended September 30, 2020:


Period	Total Number of Shares Purchased	Average Price Paid per Share		Total Number of Shares Purchased as Part of Publicly Announced Programs	Approximate Dollar Value of Shares That May Yet be Purchased Under the Program (1)
July 1, 2020 — July 31, 2020	894,191	$	38.52	894,191	$	71,784,780
August 1, 2020 — August 31, 2020 (2)	252,015	$	46.06	251,996	$	490,892,129
September 1, 2020 — September 30, 2020	1,710,983	$	42.37	1,710,983	$	418,392,980
	2,857,189			2,857,170

(1) In August 2020, our Board of Directors increased our repurchase authorization for up to $500.0 million

(2) 19 shares were purchased in August 2020 in connection with the surrender of shares by associates to satisfy certain tax withholding obligations under compensation plans. These repurchases were not part of our publicly announced program and do not affect our share repurchase program.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

No other information.

46 Service Corporation International

PART II

Item 6. Exhibits


Exhibit Number		Description
3.1	—	Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Registration Statement No. 333-10867 on Form S-3).
3.2	—	Articles of Amendment to Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1996).
3.3	—	Certificate of Amendment to Restated Articles of Incorporation (Incorporated by reference to Exhibit 3.1 to Form 8-K filed May 25, 2018).
3.4	—	Statement of Resolution Establishing Series of Shares of Series D Junior Participating Preferred Stock, dated July 27, 1998 (Incorporated by reference to Exhibit 3.2 to Form 10-Q for the fiscal quarter ended June 30, 1998).
3.5	—	Bylaws of the Company. (Incorporated by reference to Exhibit 3.4 to Form 8-K filed May 25, 2018).
4.1	—	Senior Indenture dated as of February 1, 1993 by and between the Company and The Bank of New York, as trustee (Incorporated by reference as Exhibit 4.1 to Form S-4 filed September 2, 2004 (File No. 333-118763)).
4.2	—	Agreement of Resignation, Appointment of Acceptance, dated December 12, 2005, among the Company, The Bank of New York and The Bank of New York Trust Company, N.A., appointing a successor trustee for the Senior Indenture dated as of February 1, 1993 (Incorporated by reference to Exhibit 4.1 to Form 10-Q for the fiscal quarter ended June 30, 2005).
4.3	—	Seventh Supplemental Indenture dated as of August 10, 2020 by and between the Company and The Bank of New York Mellon Trust Company, N.A., as trustee (Incorporated by reference to Exhibit 4.2 to Form 8-K filed August 10, 2020).
31.1	—	Certification of Thomas L. Ryan as Principal Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.
31.2	—	Certification of Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.
32.1	—	Certification of Periodic Financial Reports by Thomas L. Ryan as Principal Executive Officer in satisfaction of Section 906 of the Sarbanes- Oxley Act of 2002.
32.2	—	Certification of Periodic Financial Reports by Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.
101	—	Interactive data file formatted Inline XBRL.
104	—	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

FORM 10-Q 47

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.


October 29, 2020	SERVICE CORPORATION INTERNATIONAL
	By:	/s/ TAMMY MOORE
		Tammy Moore, Vice President and Corporate Controller (Principal Accounting Officer)

48 Service Corporation International