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Table of Contents

 

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
June 30, 2019
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 number)
 
 
 
 
 
1929 Allen Parkway
 
 
77019
 
Houston
 
 
(Zip code)
 
Texas
 
(713)
522-5141
 
(Address of principal executive offices)
 
(Registrant’s telephone number, including area code)
 
 
 
 
 
None
 
 
 
(Former name, former address, or former fiscal year, if changed since last report)
Title of Each Class
 
Trading Symbol(s)
 
Name of Each Exchange on Which Registered
Common Stock ($1 par value)
 
SCI
 
New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required 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 No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act. (Check one):


Large accelerated filer


Accelerated filer


Non-accelerated filer
Smaller reporting company
Emerging growth company
 
 
 
 
 
(Do not check if smaller reporting company)
 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). Yes No
The number of shares outstanding of the registrant’s common stock as of July 26, 2019 was 182,360,782 (net of treasury shares).
 



Table of Contents

SERVICE CORPORATION INTERNATIONAL
INDEX
 
 
 
Page
 
 
 
 
 

2

Table of Contents

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

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


 

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands, except per share amounts)
Revenue:
 
 
 
 
 
 
 
Property and merchandise revenue
$
415,492

 
$
397,600

 
$
796,701

 
$
765,814

Service revenue
339,090

 
334,450

 
694,461

 
712,548

Other revenue
57,990

 
64,042

 
119,622

 
112,212

Total revenue
812,572

 
796,092

 
1,610,784

 
1,590,574

Costs and expenses:






 

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


188,127

 
382,980

 
383,889

General and administrative expenses
(29,370
)

(31,136
)

(71,900
)

(65,920
)
(Losses) gains on divestitures and impairment charges, net
(11,823
)

6,865


(13,701
)

7,347

Hurricane recoveries (expenses), net
152

 
(1,902
)
 
(296
)
 
330

Operating income
150,105


161,954

 
297,083

 
325,646

Interest expense
(47,317
)

(44,519
)

(94,707
)

(88,095
)
Loss on early extinguishment of debt, net
(7,579
)



(7,579
)

(10,131
)
Other income, net
874


1,880


1,594


2,264

Income before income taxes
96,083


119,315

 
196,391

 
229,684

Provision for income taxes
(23,570
)

(16,034
)

(44,665
)

(44,355
)
Net income
72,513


103,281

 
151,726

 
185,329

Net income attributable to noncontrolling interests
(184
)

(42
)

(74
)

(102
)
Net income attributable to common stockholders
$
72,329


$
103,239

 
$
151,652


$
185,227

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


$
0.57


$
0.83


$
1.01

Basic weighted average number of shares
182,369


182,637


182,048


183,877

Diluted earnings per share:


 

 
 
 
Net income attributable to common stockholders
$
0.39


$
0.55


$
0.82


$
0.98

Diluted weighted average number of shares
185,690


187,188


185,517


188,547


(See notes to unaudited condensed consolidated financial statements)

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

 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Net income
$
72,513

 
$
103,281

 
$
151,726

 
$
185,329

Other comprehensive income:
 
 
 
 
 
 
 
Foreign currency translation adjustments
6,998

 
(5,909
)
 
14,399

 
(15,501
)
Total comprehensive income
79,511

 
97,372

 
166,125

 
169,828

Total comprehensive income attributable to noncontrolling interests
(36
)
 
(41
)
 
(76
)
 
(98
)
Total comprehensive income attributable to common stockholders
$
79,475

 
$
97,331

 
$
166,049

 
$
169,730


(See notes to unaudited condensed consolidated financial statements)



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SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED BALANCE SHEET
(UNAUDITED)
 
June 30, 2019
 
December 31, 2018
 
(In thousands, except share amounts)
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
243,684

 
$
198,850

Receivables, net
82,261

 
73,825

Inventories
25,669

 
24,950

Other
42,603

 
33,607

Total current assets
394,217

 
331,232

Preneed receivables, net and trust investments
4,613,523

 
4,271,392

Cemetery property
1,834,745

 
1,837,464

Property and equipment, net
2,027,417

 
1,977,364

Goodwill
1,846,627

 
1,863,842

Deferred charges and other assets
1,019,105

 
934,151

Cemetery perpetual care trust investments
1,624,709

 
1,477,798

Total assets
$
13,360,343

 
$
12,693,243

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


$
479,768

Current maturities of long-term debt
167,084


69,896

Income taxes payable


5,936

Total current liabilities
614,472


555,600

Long-term debt
3,464,902


3,532,182

Deferred revenue, net
1,444,564


1,418,814

Deferred tax liability
404,230


404,627

Other liabilities
370,507


297,302

Deferred receipts held in trust
3,693,355


3,371,738

Care trusts’ corpus
1,624,097


1,471,165

Commitments and contingencies (Note 10)





Equity:
 

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


181,471

Capital in excess of par value
998,794


972,710

Retained earnings
535,173


474,327

Accumulated other comprehensive income
27,792


13,395

Total common stockholders’ equity
1,744,228


1,641,903

Noncontrolling interests
(12
)

(88
)
Total equity
1,744,216


1,641,815

Total liabilities and equity
$
13,360,343


$
12,693,243

(See notes to unaudited condensed consolidated financial statements)

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

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

 
Net income
$
151,726


$
185,329

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



Loss on early extinguishment of debt
7,579


10,131

Depreciation and amortization
74,244


78,069

Amortization of intangibles
13,653


13,645

Amortization of cemetery property
33,523


29,813

Amortization of loan costs
2,989


3,017

Provision for doubtful accounts
4,273


4,494

Provision for deferred income taxes
6,090


22,011

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


(7,347
)
Gain on sale of investments

 
(2,636
)
Share-based compensation
8,013


7,544

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



(Increase) decrease in receivables
(11,608
)

965

Increase in other assets
(18,643
)

(10,635
)
Decrease in payables and other liabilities
(55,148
)

(37,817
)
Effect of preneed sales production and maturities:



Increase in preneed receivables, net and trust investments
(1,594
)

(23,494
)
Increase in deferred revenue, net
55,441


56,342

Decrease in deferred receipts held in trust
(21,346
)

(14,055
)
Net cash provided by operating activities
262,893


315,376

Cash flows from investing activities:



Capital expenditures
(112,714
)

(102,890
)
Acquisitions, net of cash acquired
(32,755
)

(167,622
)
Proceeds from divestitures and sales of property and equipment
11,380


18,305

Proceeds from sale of investments

 
2,900

Payments on Company-owned life insurance policies
(8,586
)
 
(11,733
)
Proceeds from Company-owned life insurance policies

 
2,810

Other

 
(14,525
)
Net cash used in investing activities
(142,675
)

(272,755
)
Cash flows from financing activities:



Proceeds from issuance of long-term debt
854,263


370,000

Debt issuance costs
(15,536
)


Scheduled payments of debt
(8,712
)

(8,631
)
Early payments of debt
(828,121
)

(259,590
)
Principal payments on finance leases
(21,807
)

(19,270
)
Proceeds from exercise of stock options
23,101


7,302

Purchase of Company common stock
(29,574
)

(228,866
)
Payments of dividends
(65,691
)

(62,241
)
Bank overdrafts and other
12,307


(8,820
)
Net cash used in financing activities
(79,770
)

(210,116
)
Effect of foreign currency on cash, cash equivalents, and restricted cash
3,113


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


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


340,601

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


$
170,973

(See notes to unaudited condensed consolidated financial statements)

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SERVICE CORPORATION INTERNATIONAL
CONDENSED CONSOLIDATED STATEMENT OF EQUITY
(UNAUDITED)
(In thousands)
 
Common
Stock
 
Treasury Stock
 
Capital in
Excess of
Par Value
 
Retained Earnings (Accumulated
Deficit)
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2018
$
184,721

 
$
(3,250
)
 
$
972,710

 
$
474,327

 
$
13,395

 
$
(88
)
 
$
1,641,815

Comprehensive income

 

 

 
79,323

 
7,251

 
40

 
86,614

Dividends declared on common stock ($0.18 per share)

 

 

 
(32,820
)
 

 

 
(32,820
)
Employee share-based compensation earned

 

 
4,568

 

 

 

 
4,568

Stock option exercises
950

 

 
15,012

 

 

 

 
15,962

Restricted stock awards, net of forfeitures
126

 

 
(126
)
 

 

 

 

Purchase of Company common stock

 
(355
)
 
(1,935
)
 
(12,252
)
 

 

 
(14,542
)
Other
59

 

 
(1,251
)
 

 

 

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

 
(3,605
)
 
988,978

 
508,578

 
20,646

 
(48
)
 
1,700,405

Comprehensive income

 

 

 
72,329

 
7,146

 
36

 
79,511

Dividends declared on common stock ($0.18 per share)

 

 

 
(32,871
)
 

 

 
(32,871
)
Employee share-based compensation earned

 

 
3,445

 

 

 

 
3,445

Stock option exercises
513

 

 
6,626

 

 

 

 
7,139

Purchase of Company common stock

 
(337
)
 
(1,832
)
 
(12,863
)
 

 

 
(15,032
)
Other
42

 

 
1,577

 

 

 

 
1,619

Balance at June 30, 2019
$
186,411

 
$
(3,942
)
 
$
998,794

 
$
535,173

 
$
27,792

 
$
(12
)
 
$
1,744,216


 
Common
Stock
 
Treasury Stock
 
Capital in
Excess of
Par Value
 
Retained Earnings
 
Accumulated
Other
Comprehensive
Income
 
Noncontrolling
Interests
 
Total
Balance at December 31, 2017
$
191,936

 
$
(5,321
)
 
$
970,468

 
$
210,364

 
$
41,943

 
$
47

 
$
1,409,437

Cumulative effect of accounting changes

 

 

 
172,461

 
(229
)
 

 
172,232

Comprehensive income

 

 

 
81,988

 
(9,589
)
 
57

 
72,456

Dividends declared on common stock ($0.17 per share)

 

 

 
(31,348
)
 

 

 
(31,348
)
Employee share-based compensation earned

 

 
3,699

 

 

 

 
3,699

Stock option exercises
282

 

 
4,707

 

 

 

 
4,989

Restricted stock awards, net of forfeitures
163

 

 
(163
)
 

 

 

 

Purchase of Company common stock

 
(3,095
)
 
(16,101
)
 
(99,601
)
 

 

 
(118,797
)
Other
47

 

 
(866
)
 

 

 

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

 
$
(8,416
)
 
$
961,744

 
$
333,864

 
$
32,125

 
$
104

 
$
1,511,849

Comprehensive income

 

 

 
103,239

 
(5,908
)
 
41

 
97,372

Dividends declared on common stock ($0.17 per share)

 

 

 
(30,893
)
 

 

 
(30,893
)
Employee share-based compensation earned

 

 
3,845

 

 

 

 
3,845

Stock option exercises
129

 

 
2,184

 

 

 

 
2,313

Restricted stock awards, net of forfeitures
15

 

 
(15
)
 

 

 

 

Purchase of Company common stock

 
(2,971
)
 
(15,557
)
 
(91,541
)
 

 

 
(110,069
)
Other
53

 

 
1,927

 

 

 

 
1,980

Balance at June 30, 2018
$
192,625

 
$
(11,387
)
 
$
954,128

 
$
314,669

 
$
26,217

 
$
145

 
$
1,476,397


(See notes to unaudited condensed consolidated financial statements)

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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 consolidated financial statements also include the accounts of the merchandise and service trusts and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. We have retained the specialized industry accounting principles when consolidating the trusts. Our trusts are variable interest entities, for which we have determined that we are the primary beneficiary as we absorb a majority of the losses and returns associated with these trusts. Although we consolidate the trusts, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these trusts; therefore, their interests in these trusts represent a liability to us.
Our interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair statement of our results for these periods. Our unaudited condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2018, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end Condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.
Use of Estimates in the Preparation of Financial Statements
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in our Annual Report on Form 10-K for the year ended December 31, 2018. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from these estimates.
Leases
We have operating and finance leases. Our operating leases primarily include funeral service real estate and office equipment for funeral service locations, cemetery locations, and administrative offices. Our finance leases primarily include transportation equipment but also include real estate and office equipment. Lease terms related to real estate generally range from one to forty years with options to renew at varying terms. Lease terms related to office and transportation equipment generally range from one to eight years with options to renew at varying terms.
We determine whether an arrangement is or contains a lease at the inception of the arrangement based on the unique facts and circumstances present. Right-of-use (ROU) assets represent our right to use an underlying asset for the lease term, and lease liabilities represent our obligation to make lease payments arising from the lease. Leases with a term greater than one year are recognized on the balance sheet as ROU assets and lease liabilities. We have elected not to recognize on the balance sheet leases with terms of one year or less.
Lease liabilities and their corresponding ROU assets are recorded at commencement date based on the present value of

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lease payments over the expected lease term. For transportation equipment, we use the rate implicit in each lease to calculate the present value. For real estate and non-transportation equipment leases, the interest rate implicit in lease contracts is typically not readily determinable. Therefore, we use the appropriate collateralized incremental borrowing rate based on the information available at commencement date in determining the present value of future payments for real estate and non-transportation equipment leases. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.
We calculate operating lease expense ratably over the lease term plus any reasonably assured renewal periods. We consider reasonably assured renewal options and fixed escalation provisions in our calculation. Generally, our leases do not include options to terminate the lease prior to the contractual lease expiration date, but future renewal periods are generally cancelable. The majority of our contractually available renewal periods for leases of buildings and land are considered reasonably certain of being exercised. This determination is made by our real estate team based on facts and circumstances surrounding each property. Leases with a term of 12 months or less are not recorded on the balance sheet. The majority of our lease arrangements contain options to (i) purchase the property at fair value on the exercise date, (ii) purchase the property for a value determined at the inception of the lease, or (iii) renew the lease for the fair rental value at the end of the primary lease term. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.
Certain of our lease agreements include variable rental payments based on a percentage of sales over base contractual levels and others include rental payments adjusted periodically for inflation. Our lease agreements do not contain any material residual value guarantees or material restrictive covenants. We generally do not have sublease arrangements, sale-leaseback arrangements, or leveraged leases.
We have lease agreements with lease and non-lease components, which are generally accounted for separately. For leases commencing before January 1, 2019, we have elected the practical expedient to not separate lease and non-lease components on certain equipment leases, such as copiers where the cost-per-copy maintenance charges are included in the lease charge. On these leases, we have elected to account for the lease and non-lease components as a single component. For leases commencing on or after January 1, 2019, we account for the maintenance charges (non-lease components) separate from the lease components.
Cash, Cash Equivalents, and Restricted Cash
The components of cash, cash equivalents, and restricted cash at June 30, 2019 and December 31, 2018 are as follows:
 
June 30, 2019
 
December 31, 2018
 
(In thousands)
Cash and cash equivalents
$
243,684

 
$
198,850

Restricted cash(1):
 
 
 
Included in Other current assets
5,716

 
7,007

Included in Deferred charges and other assets
1,745

 
1,727

Total restricted cash
7,461

 
8,734

Total cash, cash equivalents, and restricted cash
$
251,145

 
$
207,584


(1)
Restricted cash in both periods primarily consists of proceeds from divestitures deposited into escrow accounts under IRS code section 1031 and collateralized obligations under certain insurance policies.
Property and equipment, net
During the fourth quarter of 2018, based on a review of our historical usage patterns for similar assets, we increased our estimate of the remaining useful life of certain building improvements and equipment by one to three years. For the three and six months ended June 30, 2019, these changes in useful life, which were made prospectively, reduced depreciation expense by $4.1 million ($0.02 per basic and diluted share) and $8.0 million ($0.04 per basic and diluted share).
Accounting Standards Adopted in 2019
Leases
In February 2016 and in January, July, and December 2018, the Financial Accounting Standards Board (FASB) issued and amended new guidance on "Leases" to increase transparency and comparability among organizations. Under the new guidance, we are required to recognize right-of-use (ROU) lease assets and liabilities on our balance sheet and disclose key information about leasing arrangements. In addition, the new guidance offers specific accounting considerations for lessees, lessors, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
We adopted the new guidance on January 1, 2019 using the modified retrospective transition method. As a result of the adoption, we recorded:

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a $0.7 million reclass from Other current assets to Accounts payable and accrued liabilities for prepaid operating lease expenses,
a $2.7 million reclass from Accounts payable and accrued liabilities to Deferred charges and other assets for accrued operating lease expenses,
a $62.6 million increase to Deferred charges and other assets for operating lease right-of-use assets, and
a $9.4 million and $53.2 million increase to Accounts payable and accrued liabilities and Other liabilities, respectively, for operating lease liabilities.
The modified retrospective transition method includes a number of optional practical expedients and accounting policy elections:
1.We elected a package of practical expedients to not reassess:
whether a contract is or contains a lease,
lease classification, or
initial direct costs.
2.We did not elect a practical expedient to use hindsight when determining lease term.
3.We elected the short-term lease recognition exemption.
4.The remaining practical expedients do not apply or do not have a material impact.
We established a project team to implement the new guidance. We implemented a new enterprise-wide lease management system in the form of a pre-configured software-as-a-service cloud-based application to support the adoption and ongoing lease requirements under the new guidance. This system serves as a lease database to manage our lease inventory centrally and ensure completeness of our lease inventory. The system also produces accounting entries and financial reporting disclosures required under the new guidance and provides lease activity business intelligence reporting. We thoroughly tested the new system to ensure it produces accurate data to prepare the required accounting entries and disclosures under the new guidance upon adoption and on an ongoing basis. We evaluated and implemented additional changes to our processes and internal controls to facilitate adoption on January 1, 2019 and to meet the standard’s ongoing reporting and disclosure requirements.
Our current operating lease portfolio is primarily composed of real estate and equipment. As a result of the adoption, we recognized ROU assets and lease liabilities related to substantially all operating lease arrangements. The adoption of "Leases" did not have an impact on our consolidated results of operations or cash flows. We made the required enhanced lease-related disclosures above and in Note 9 of this Form 10-Q.
Internal Use Software
In August 2018, the FASB amended "Internal Use Software" to align the requirements for capitalizing implementation costs incurred in a hosting arrangement for software-as-a-service with the requirements for capitalizing those costs in a hosting arrangement that includes a software license. Costs for implementation activities in the application development stage are capitalized, depending on the nature of the costs, while costs incurred during the preliminary project and post-implementation stages are expensed. Any capitalized costs are amortized over the term of the hosting arrangement. Cash payments for the implementation costs, whether capitalized or not, are presented as operating outflows as that is consistent with the presentation of the fees in the hosting arrangement. We adopted the new guidance on a prospective basis to implementation costs incurred after January 1, 2019 with an immaterial impact on our consolidated results of operations and consolidated financial position and no impact on cash flows.
Recently Issued Accounting Standards
Financial Instruments
In June 2016, the FASB amended "Financial Instruments" to provide financial statement users with more decision-useful information about the expected credit losses on debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. 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 current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates.
The new guidance is effective for us on January 1, 2020, and in the first half of 2019, we established an implementation team and began analyzing the impact on our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard. The implementation team reports findings and progress of the project to management on a frequent basis. Through this process, we have identified appropriate changes to our processes, systems, and controls to support recognition and disclosure under the new standard. We are still evaluating the impact of the new standard on our consolidated results of operations, consolidated financial position, and cash flows.

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Goodwill
In January 2017, the FASB amended "Goodwill" to simplify the subsequent measurement of goodwill. The amended guidance eliminates Step 2 from the goodwill impairment test. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill of the reporting unit. The new guidance is effective for us on January 1, 2020, and is not expected to have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Fair Value Measurements
In August 2018, the FASB amended "Fair Value Measurements" to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in level 3 measurements. It clarifies that, for investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the timing either to us or publicly. It also clarifies that the narrative disclosure of the effect of changes in level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of significant unobservable inputs used in level 3 measurements. The guidance is effective for us with our quarterly filing for the period ended March 31, 2020 and we will make the required disclosure changes in that filing. Adoption will not have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Retirement Plans
In August 2018, the FASB amended "Retirement Plans" to modify the disclosure requirements for defined benefit plans. For us, the amendment requires the disclosure of the weighted average interest crediting rate used for cash balance plans and an explanation of the reasons for significant gains and losses related to changes in the benefit obligation for the period. It removes the requirement to disclose the approximate amount of future benefits covered by insurance contracts. The guidance is effective for us with our annual filing for the year ended December 31, 2020 and we will make the required disclosure changes in that filing. Adoption will not have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
3. Preneed Activities
Preneed receivables, net and trust investments
The components of Preneed receivables, net and trust investments in our unaudited Condensed Consolidated Balance Sheet at June 30, 2019 and December 31, 2018 are as follows:
 
June 30, 2019
 
December 31, 2018
 
(In thousands)
Preneed funeral receivables
$
120,424

 
$
107,612

Preneed cemetery receivables
896,550

 
883,432

Preneed receivables from customers
1,016,974

 
991,044

Unearned finance charge
(50,402
)
 
(44,981
)
Allowance for cancellation
(50,520
)
 
(48,380
)
Preneed receivables, net
$
916,052

 
$
897,683

 
 
 
 
Trust investments, at market
$
5,058,591

 
$
4,585,720

Insurance-backed fixed income securities and other
263,589

 
265,787

Trust investments
5,322,180

 
4,851,507

Less: Cemetery perpetual care trust investments
(1,624,709
)
 
(1,477,798
)
Preneed trust investments
$
3,697,471

 
$
3,373,709

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

 
$
4,271,392



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The table below sets forth certain investment-related activities associated with our trusts:
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2019
 
2018
 
2019
 
2018
 
(In thousands)
Deposits
$
112,905

 
$
106,843

 
$
213,357

 
$
200,112

Withdrawals
$
116,680

 
$
114,524

 
$
224,036

 
$
221,293

Purchases of securities
$
240,376

 
$
407,859

 
$
689,534

 
$
1,007,748

Sales of securities
$
240,599

 
$
419,357

 
$
562,390

 
$
1,035,357

Realized gains (1)
$
54,756

 
$
87,840

 
$
98,281

 
$
146,146

Realized losses (1)
$
(16,251
)
 
$
(17,552
)
 
$
(48,882
)
 
$
(29,852
)

(1)
All realized gains and losses are recognized in Other income, net for our trust investments and are offset by a corresponding reclassification in Other income, net to Deferred receipts held in trust and Care trusts' corpus.
The costs and values associated with trust investments recorded at fair value at June 30, 2019 and December 31, 2018 are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Fair value represents the value of the underlying securities held by the trusts.
 
June 30, 2019
 
Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Value
 
 
 
 
 
(In thousands)
 
 
Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. Treasury
2
 
$
49,425

 
$
666

 
$
(141
)
 
$
49,950

Canadian government
2
 
49,627

 
118

 
(1,196
)
 
48,549

Corporate
2
 
13,194

 
53

 
(233
)
 
13,014

Residential mortgage-backed
2
 
3,311

 
48

 
(1
)
 
3,358

Asset-backed
2
 
134

 
3

 
(7
)
 
130

Equity securities:
 
 
 
 
 
 
 
 
 
Preferred stock
2
 
6,114

 
498

 
(116
)
 
6,496

Common stock:
 
 
 
 
 
 
 
 
 
United States
1
 
1,280,063

 
272,490

 
(60,342
)
 
1,492,211

Canada
1
 
38,568

 
10,489

 
(1,824
)
 
47,233

Other international
1
 
83,107

 
14,817

 
(2,952
)
 
94,972

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
842,772

 
27,898

 
(82,654
)
 
788,016

Fixed income
1
 
1,235,660

 
12,608

 
(38,365
)
 
1,209,903

Other
3
 
6,010

 
578

 

 
6,588

Trust investments, at fair value
 
 
3,607,985

 
340,266

 
(187,831
)
 
3,760,420

Commingled funds
 
 
 
 
 
 
 
 
 
Fixed income
 
 
432,113

 
5,185

 
(3,083
)
 
434,215

Equity
 
 
209,194

 
48,175

 

 
257,369

Money market funds
 
 
343,467

 

 

 
343,467

Private equity
 
 
189,107

 
74,110

 
(97
)
 
263,120

Trust investments, at net asset value
 
 
1,173,881

 
127,470

 
(3,180
)
 
1,298,171

Trust investments, at market
 
 
$
4,781,866

 
$
467,736

 
$
(191,011
)
 
$
5,058,591


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

 
$
153