10-K 1 sci-12312016x10k.htm 10-K Document


 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K
þ
 
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2016
OR
o
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from          to          
Commission file number 1-6402-1
Service Corporation International
(Exact name of registrant as specified in its charter)
Texas
 
74-1488375
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. employer
identification no.)
1929 Allen Parkway
Houston, Texas
(Address of principal executive offices)
 
77019
(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
 
Name of Each Exchange on Which Registered
Common Stock ($1 par value)
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.  Yes þ     No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.  Yes o     No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes þ     No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes þ     No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.  þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer þ
 
Accelerated filer o
Non-accelerated filer o (Do not check if a smaller reporting company)
 
Smaller Reporting company o
Indicate by check mark whether the registrant is a shell company (as defined in the Securities Exchange Act of 1934 Rule 12b-2).  Yes o     No þ
The aggregate market value of the common stock held by non-affiliates of the registrant (assuming that the registrant’s only affiliates are its executive officers and directors) was $5,043,314,251 based upon a closing market price of $27.04 on June 30, 2016 of a share of common stock as reported on the New York Stock Exchange.
The number of shares outstanding of the registrant’s common stock as of February 13, 2017 was 188,227,807 (net of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement in connection with its 2017 Annual Meeting of Stockholders (Part III).
 




SERVICE CORPORATION INTERNATIONAL
INDEX
 
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
Mine Safety Disclosures
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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GLOSSARY
The following terms are common to the deathcare industry, are used throughout this report, and have the following meanings:
Atneed — Funeral, including cremation, and cemetery arrangements sold once death has occurred.
Burial Vault — 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 outer burial containers.
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 Perpetual Care or Endowment Care Fund (ECF) — A trust fund established for the purpose of maintaining cemetery grounds and property into perpetuity, also referred to as a cemetery perpetual care trust. For these trusts, the corpus remains in the trust in perpetuity and the net ordinary investment earnings are distributed to us 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.
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 Revenue — Recognized sales of interment rights in cemetery property when a minimum of 10% of the sales price has been collected and the property has been constructed and is available for interment.
Cemetery Merchandise and Services — Stone and bronze memorials, markers, burial vaults, floral placement, graveside services, merchandise installations, urns, outer burial containers, and burial openings and closings.
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 inventory types 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, burial vaults, urns and other cremation receptacles, casket and cremation memorialization products, and 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, and catering.
Funeral Recognized Preneed Revenue — Funeral merchandise and travel protection 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, in mausoleums, in niches, or in cremation memorialization property.
Lawn Crypt — An underground outer burial receptacle constructed of concrete and reinforced steel, which is usually pre-installed in predetermined designated areas.
Marker — A method of identifying a deceased person in a particular burial space, crypt, 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 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 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.
Preneed — Purchase of cemetery property interment rights and 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 or atneed cemetery contracts. These sales are recorded in Deferred preneed cemetery revenue until the merchandise is delivered, the service is performed, or when a minimum of 10% of the sales price has been collected 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 preneed funeral revenue 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.
Sales Average — Average revenue per funeral service performed, excluding the impact of funeral recognized preneed revenue, GA revenue, and certain other revenue.
Travel Protection — A product that provides shipment of remains to the servicing funeral home or cemetery of choice if the purchaser passes away outside of a certain radius of their residence, without any additional expense to the family.
Trust Fund Income — Recognized investment earnings from our merchandise and service and perpetual care trust investments.
As used herein, “SCI”, “Company”, “we”, “our”, and “us” refer to Service Corporation International and companies owned directly or indirectly by Service Corporation International, unless the context requires otherwise.

4



PART I
Item 1.
Business.
General
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 December 31, 2016, we operated 1,502 funeral service locations and 470 cemeteries (including 281 funeral service/cemetery combination locations), which are geographically diversified across 45 states, eight Canadian provinces, the District of Columbia, and Puerto Rico.
We are well known for our Dignity Memorial® brand, North America's first transcontinental brand of deathcare products and services. Our other brands are Dignity Planning, National Cremation Society®, Advantage® Funeral and Cremation Services, Funeraria del Angel, Making Everlasting Memories®, Neptune Society and Trident Society. Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.
History
We were incorporated in Texas in July of 1962. Our original business plan was based on efficiencies of scale, specifically reducing overhead costs by sharing resources such as preparation services, accounting, transportation, and personnel among funeral service locations in a business “cluster.” After proving the plan’s effectiveness in Houston in the early 1960s, we set out to apply this operating strategy through the acquisition of deathcare businesses in other markets over the next three decades. Beginning in 1993, we expanded beyond North America, acquiring major deathcare companies in Australia, the United Kingdom, and France, plus smaller holdings in other European countries and South America.
During the mid to late 1990s, acquisitions of deathcare facilities became extremely competitive, resulting in increased prices for acquisitions and substantially reduced returns on invested capital. In 1999, we significantly reduced our level of acquisition activity and over the next several years implemented various initiatives to pay down debt, increase cash flow, reduce overhead costs, and increase efficiency. We divested our international businesses and many North American funeral service locations and cemeteries that were either underperforming or did not fit our long-term strategy. At the same time, we began to capitalize on the strength of our network by introducing to North America the first transcontinental brand of deathcare services and products — Dignity Memorial® (See www.dignitymemorial.com). Information contained on our website is not part of this report.
In late 2006, having arrived at a position of significant financial strength and improved operating efficiency, we acquired the then second largest company in the North American deathcare industry, Alderwoods Group. In early 2010, we acquired the then fifth largest company in the North American deathcare industry, Keystone North America. In June of 2011, we acquired 70% of the outstanding shares of The Neptune Society, Inc. (Neptune), which is the nation's largest direct cremation organization, now known as SCI Direct. Subsequently, in 2013 and 2014, we acquired the remaining 30% of the outstanding shares of Neptune. In December 2013, we purchased Stewart Enterprises, Inc. (Stewart), the then second largest operator of funeral service locations and cemeteries in North America.
Funeral and Cemetery Operations
Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral/cemetery combination locations, crematoria, and other related businesses. See Note 15 in Part II, Item 8. Financial Statements and Supplementary Data, for financial information about our business segments and geographic areas.
Funeral service/cemetery combination locations are those businesses in which a funeral service location is physically located within or adjoining a cemetery that we own. Combination locations allow certain facility, personnel, and equipment costs to be shared between the funeral service location and cemetery. Such combination facilities typically can be more cost competitive and have higher gross margins than if the funeral and cemetery operations are operated separately. Combination locations also create synergies between funeral and cemetery preneed sales force personnel and give families added convenience to purchase both funeral and cemetery merchandise and services at a single location. We have the largest number of combination locations in North America. Sixty percent of our cemeteries are part of a combination location. Our combination operations include Rose Hills®, the largest combination operation in the United States, performing over 4,400 funeral services and 7,800 cemetery interments per year.
Funeral service locations provide all professional services related to funerals and cremations, including the use of funeral home facilities and motor vehicles, arranging and directing services, removal, preparation, embalming, cremations, memorialization, and catering. Funeral merchandise, including burial caskets and related accessories, urns and other cremation receptacles, outer burial containers, flowers, on-line and video tributes, stationery products, casket and cremation memorialization products, travel protection and other ancillary merchandise, is sold at funeral service locations.

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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 burial openings and closings, are sold at our cemeteries.
We also sell preneed cemetery property interment rights and funeral and cemetery merchandise and services whereby a customer contractually agrees to the terms of certain products and services to be delivered and performed in the future. We define these sales as preneed sales. As a result of such preneed sales, our backlog of unfulfilled preneed funeral and cemetery contracts was $10.0 billion and $9.5 billion at December 31, 2016 and 2015, respectively.
In 2016, our operations in the United States and Canada were organized into 33 major markets, 35 metro markets, and 55 main street markets. Each market is led by a market manager or director with responsibility for funeral and/or cemetery operations and preneed sales. Within each market, the funeral service locations and cemeteries share common resources such as personnel, preparation services, and vehicles.
The following table at December 31, 2016 provides the number of our funeral service locations and cemeteries by country, and by state, territory, or province:
Country, State/Territory/Province
 
Number of Funeral Service Locations
 
Number of Cemeteries
 
Total
United States
 
 

 
 

 
 

Alabama
 
37

 
14

 
51

Arizona
 
33

 
11

 
44

Arkansas
 
12

 
3

 
15

California
 
163

 
38

 
201

Colorado
 
24

 
10

 
34

Connecticut
 
20

 

 
20

Delaware
 

 
1

 
1

District of Columbia
 
1

 

 
1

Florida
 
130

 
59

 
189

Georgia
 
35

 
19

 
54

Hawaii
 
2

 
2

 
4

Idaho
 
6

 
1

 
7

Illinois
 
44

 
24

 
68

Indiana
 
49

 
10

 
59

Iowa
 
4

 
2

 
6

Kansas
 
8

 
5

 
13

Kentucky
 
13

 
5

 
18

Louisiana
 
27

 
10

 
37

Maine
 
11

 

 
11

Maryland
 
16

 
13

 
29

Massachusetts
 
26

 

 
26

Michigan
 
35

 

 
35

Minnesota
 
12

 
2

 
14

Mississippi
 
16

 
4

 
20

Missouri
 
26

 
10

 
36

Nebraska
 
4

 
2

 
6

Nevada
 
15

 
6

 
21

New Hamshire
 
6

 

 
6

New Jersey
 
21

 

 
21

New Mexico
 
1

 

 
1

New York
 
69

 

 
69

North Carolina
 
60

 
17

 
77

Ohio
 
35

 
14

 
49

Oklahoma
 
13

 
7

 
20

Oregon
 
16

 
4

 
20

Pennsylvania
 
21

 
16

 
37

Puerto Rico
 
10

 
8

 
18

Rhode Island
 
4

 

 
4


6



South Carolina
 
12

 
9

 
21

Tennessee
 
39

 
18

 
57

Texas
 
167

 
63

 
230

Utah
 
4

 
3

 
7

Vermont
 
3

 

 
3

Virginia
 
38

 
23

 
61

Washington
 
44

 
14

 
58

West Virginia
 
9

 
10

 
19

Wisconsin
 

 
3

 
3

Canada
 
 

 
 

 
 

Alberta
 
9

 

 
9

British Columbia
 
36

 
7

 
43

MB
 
4

 
3

 
7

New Brunswick
 
5

 

 
5

Nova Scotia
 
12

 

 
12

Ontario
 
42

 

 
42

Quebec
 
40

 

 
40

Saskatchawan
 
13

 

 
13

Total (1)
 
1,502

 
470

 
1,972

(1)
Includes businesses held for sale at December 31, 2016.
We believe we have satisfactory title to the properties owned and used in our business, subject to various liens, encumbrances, and easements that are incidental to ownership rights and uses and do not materially detract from the value of the property. We also lease a number of facilities that we use in our business under both capital and operating leases.
At December 31, 2016, we owned approximately 83% of the real estate and buildings used at our facilities, and the remainder of the facilities were leased. At December 31, 2016, our 470 cemeteries contained a total of approximately 34,646 acres, of which approximately 65% was developed.

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A map of our locations in North America is presented below:

americanmapv2.jpg
Competition
Although there are several public companies that own funeral service locations and cemeteries, the majority of deathcare businesses in North America are locally-owned, independent operations. We estimate that our funeral and cemetery market share in North America is approximately 16% based on estimated total industry revenue. The position of a single funeral service location or cemetery in any community is a function of the name, reputation, and location of that funeral service location or cemetery, although competitive pricing, professional service and attention, and well-maintained locations are also important.
We believe we have an unparalleled network of funeral service locations and cemeteries that offer high-quality products and services at prices that are competitive with local competing funeral service locations, cemeteries, and retail locations. Within this network, the funeral service locations and cemeteries operate under various names as most operations were acquired as existing businesses. We have co-branded our funeral operations under the name Dignity Memorial®. We believe our transcontinental branding strategy gives us a strategic advantage and identity in the industry. While this branding process is intended to emphasize our seamless national network of funeral service locations and cemeteries, the original names associated with acquired operations, and their inherent goodwill and heritage, generally remain the same. For example, Geo. H. Lewis & Sons Funeral Directors is now Geo. H. Lewis & Sons Funeral Directors, a Dignity Memorial® provider.
Strategies for Growth
We believe we are well-positioned for long-term profitable growth. We are the largest company in the North American deathcare industry with unparalleled scale on both a national and local basis and are poised to benefit from the aging of America. The demographic landscape is driving our company strategy. The average age of our preneed cemetery consumer is the early sixties. The average age of our preneed funeral consumer is the early seventies. And the average age of our atneed consumer is late seventies/early eighties. We know that the Baby Boomers, who in 2016 are aged 52 to 70, are already impacting our business today through the growth in our preneed cemetery sales programs. Next, we anticipate seeing a similar impact on our preneed funeral results. And ultimately, we will experience an impact on our atneed financial results.
We have three core strategies designed to grow the company and enhance shareholder value: 1) Grow revenue, 2) Leverage our unparalleled scale, and 3) Deploy capital. These strategies are centered on the consumer and our competitive advantages.

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Grow Revenue
We have a three-pronged approach to grow revenue that is focused on the customer and consists of: 1) remaining relevant to the customer, 2) growing our preneed sales, and 3) managing our footprint.
Remaining Relevant to the Customer. Remaining relevant to our customer is key to generating revenue growth in a changing customer environment. We work to meet the varying needs of our customers to give them what they want. In our funeral segment, we focus on memorialization services that will be meaningful to the customer and their family members and friends. We continue to offer contemporary product and service offerings. We also focus on the ethnic traditions and customs important to our customers. Additionally, we emphasize the simplicity and convenience of our packaged offerings.
In our cemetery segment, we have created tiers within our cemetery product offerings to provide more choices for our customers. As with our funeral home segment, we also cater to the ethnic traditions and customs important to our customers. We continue to develop innovative products such as recurring floral placements and customized cemetery property offerings. We have also simplified the decision-making process.
Growing Preneed Sales. Our preneed sales program drives current year and future revenue growth in both segments of our business. We believe we have a unique competitive advantage in growing preneed sales due to our size and scale. Within the funeral segment, our prearranged funeral program creates greater brand awareness, secures future market share and builds our backlog of future revenue to be recognized at time of fulfillment. We leverage our scale through a highly trained preneed sales force of approximately 4,000 counselors who provide customers informed guidance about various service and merchandise options designed to fit the needs of today’s consumer.
Within the cemetery segment, we offer a variety of property, merchandise, and service options designed to meet the needs of various cultural, regional, or religious preferences. Over the past three years we have substantially increased our property options by implementing a tiering strategy which might offer as many as five unique choices for ground burial, mausoleum, or cremation memorialization. Our scale enables us to synchronize the construction of contemporary inventory with customer demand.
Managing Our Footprint. We will continue to manage our footprint with a customer-driven focus. Within our funeral segment, we continue to pursue strategic acquisitions and to build new funeral homes in areas that provide us with the potential for scale and areas with the highest return customer categories and market traits. Within our cemetery segment, we plan to pursue strategic acquisitions to create more opportunities to sell to Baby Boomers through our customer-driven strategy. We believe our unparalleled business footprint and geographic diversity uniquely position us to benefit from the aging Baby Boomer population.
Leverage Our Unparalleled Scale
We also leverage our unparalleled scale using a three-pronged approach, which consists of: 1) developing our sales organization, 2) optimizing our network, and 3) using our scale with our preneed trust and insurance backlog. Our size and broad geographic network of businesses gives us a significant advantage in the industry.
Developing Our Sales Organization. Over the past several years, we have invested in the infrastructure and training of our sales organization. We completed the implementation of Salesforce.com during 2016, our new customer relationship management system. During 2017, we will continue our focus on enhancing the productivity and effectiveness of the sales team and growing the number sales counselors while getting more traction with the Salesforce tool. We believe that our scale allows us to operate, finance, and expand our sales organization in a manner that our competitors cannot afford to replicate.
Optimizing Our Network. We continue to drive operating discipline and leverage our scale through standardizing processes and capitalizing on new technologies. We regularly examine our purchasing spend to look for opportunities to consolidate our supplier base, modify processes and policies for more efficient purchasing, and employ metrics to manage and improve supplier performance. Additionally, many of our accounting and administrative functions use third-party providers, who demonstrate scale and execution excellence, allowing for greater efficiency.
Using Our Scale with Our Preneed Trust and Insurance Backlog. Due to our $10.0 billion backlog, we benefit from having access to premier financial partners in the industry. For our trust investments, we have access to preeminent money managers and lower fee structures, which we believe is a low risk structure that will provide us with higher returns and lower costs of administration over time. We also enjoy favorable terms with our third party insurance provider. These arrangements with third party partners and the favorable terms we receive cannot be duplicated by the independent operator, and give us a competitive advantage in funding growth as well as enhanced profitability over time.
Deploy Capital
Our third core strategy is to maximize capital deployment opportunities in a disciplined and balanced manner, to the highest and best use. Our strong liquidity and robust cash flow generation enables us to continue our long-standing commitment to use capital deployment to grow our business and enhance shareholder value. Our priority for capital deployment: is 1)

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investing in acquisitions and building new funeral service locations, 2) paying dividends, 3) repurchasing shares, and 4) repurchasing debt.
Investing in Acquisitions and Building New Funeral Homes. As noted above, we plan to use our capital to manage our footprint by focusing on strategic acquisitions and building new funeral homes where the expected returns are attractive and exceed our weighted average cost of capital plus a risk premium. We target businesses with favorable customer categories and/or where we can achieve additional economies of scale. We have a successful track record of integrating these new businesses and achieving favorable returns on the capital deployed.
Paying Dividends. Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.13 per common share in 2016. We target a payout ratio of 35% to 45% of earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter upon review of our financial performance.
Repurchasing Shares. Absent opportunities for strategic acquisitions, we expect to continue to repurchase shares of our common stock from time to time in the open market or through privately negotiated transactions, subject to market conditions, debt covenants, and normal trading restrictions. The velocity of our purchases is determined as we opportunity to capture value for our shareholders. Since 2010, we have reduced the number of shares outstanding by 21%.
Repurchasing Debt. With a focus on maintaining liquidity and financial flexibility, we may seek to make open market debt repurchases when it is opportunistic to do so relative to other capital deployment opportunities in order to manage our near-term debt maturity profile.
Associates
At December 31, 2016, we employed 15,361 individuals on a full-time basis and 8,102 individuals on a part-time basis. Of the full-time associates, 13,439 were employed in the funeral and cemetery operations and 1,922 were employed in corporate or other overhead activities and services. All eligible associates in the United States who so elect are covered by our group health and life insurance plans. Associates covered by a collective bargaining agreement are typically covered by union health plans and are not eligible to participate in our health insurance plan. At December 31, 2016 and 2015, there were 9,491 and 9,447 associates, respectively, who had elected to participate in our group health insurance plans. Eligible associates in the United States are covered by retirement plans of SCI or various subsidiaries, while international associates are covered by other SCI (or SCI subsidiary) defined or government-mandated benefit plans. Approximately 2.5% of our associates are represented by unions. Although labor disputes occur from time to time, relations with associates are generally considered favorable.
Regulation
Our funeral operations are regulated by the Federal Trade Commission (the “FTC”) under the FTC’s Trade Regulation Rule on Funeral Industry Practices (the “Funeral Rule”), which went into effect in 1984. The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized price information and various other disclosures about funeral merchandise and services and prohibit a funeral provider from: 1) misrepresenting legal, crematory, and cemetery requirements; 2) embalming for a fee without permission; 3) requiring the purchase of a casket for direct cremation; and 4) requiring consumers to buy certain funeral merchandise or services as a condition for furnishing other funeral merchandise or services.
Our operations are also subject to regulation, supervision, and licensing under numerous federal, state, and local laws and regulations as well as Canadian and provincial laws and regulations. For example, state laws impose licensing requirements for funeral service locations and funeral directors and regulate preneed sales including our preneed trust activities. Our facilities are subject to environmental, health, and safety regulations. We take various measures to comply with the Funeral Rule and all laws and regulations. For example, we have established and maintain policies, procedures, and practices; we engage in training of our personnel; and we carry out ongoing reviews of our compliance efforts. We believe that we are in substantial compliance with the Funeral Rule and all laws and regulations.
Federal, state, and local legislative bodies and regulatory agencies (including Canadian legislative bodies and agencies) frequently propose new laws and regulations, some of which could have a material effect on our operations and on the deathcare industry in general. We cannot accurately predict the outcome of any proposed legislation or regulation or the effect that any such legislation or regulation might have on us.
Other
Our corporate headquarters are located at 1929 Allen Parkway, Houston, Texas 77019. The property consists of approximately 120,000 square feet of office space and 185,000 square feet of parking space. We own and utilize an additional building located in Houston, Texas for corporate activities containing a total of approximately 38,000 square feet of office space. We also lease approximately 29,000 square feet of office space in Houston, Texas, which we utilize for corporate

10



activities. We own a building in Jefferson, Louisiana with approximately 98,200 square feet of office space that we use, in part, for corporate activities.
We make available free of charge, on or through our website, our annual, quarterly, and current reports and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission (SEC). Our website is http://www.sci-corp.com and our telephone number is (713) 522-5141. The SEC also maintains an internet site at http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically. The public may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Each of our Board of Directors’ standing committee charters, our Corporate Governance Guidelines, our Code of Ethics for Board Members, and our Code of Conduct for Officers and Employees are available, free of charge, through our website or, upon request, in print. We will post on our internet website all waivers to or amendments of our Code of Conduct for Officers and Employees, which are required to be disclosed by applicable law and rules of the New York Stock Exchange listing standards. Information contained on our website is not part of this report.
Item 1A.    Risk Factors.
Cautionary Statement on Forward-Looking Statements
The statements in this Form 10-K 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 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.
Our affiliated funeral and cemetery trust funds own investments in equity securities, fixed income securities, and mutual funds, which are affected by market conditions that are beyond our control.
In connection with our preneed merchandise and service sales, most affiliated trust funds own investments in equity securities, fixed income securities, commingled funds, and mutual funds. The fair value of these investments and our earnings and investment gains and losses on these securities and funds are affected by financial market conditions that are beyond our control.
The following table summarizes our investment returns (realized and unrealized), excluding certain fees, on our trust funds for the years ended December 31:
 
2016
 
2015
 
2014
Preneed funeral merchandise and service trust funds
7.1
%
 
(1.5
)%
 
3.7
%
Preneed cemetery merchandise and service trust funds
7.2
%
 
(1.0
)%
 
3.4
%
Cemetery perpetual care trust funds
9.1
%
 
(0.3
)%
 
5.2
%
Generally, earnings or gains and losses on our trust investments are recognized and we withdraw cash when the underlying merchandise is delivered, service is performed, or upon contract cancellation. Our cemetery perpetual care trusts recognize earnings, and in certain states capital gains and losses, and we withdraw cash when we incur qualifying cemetery maintenance costs.
If the investments in our trust funds experience significant declines in 2017 or subsequent years, there could be insufficient funds in the trusts to cover the costs of delivering merchandise and services or maintaining cemeteries in the future. We may be required to cover any such shortfall with cash flows from operations, which could have a material adverse effect on our financial condition, results of operations, or cash flows. For more information related to our trust investments, see Notes 3, 4, and 5 in Part II, Item 8. Financial Statements and Supplementary Data.
If the fair value of these trusts, plus any other amount due to us upon delivery of the associated contracts, were to decline below the estimated costs to deliver the underlying products and services, we would record a charge to earnings to record a liability for the expected losses on the delivery of the associated contracts. As of December 31, 2016, no such charge was required. For additional information, see Critical Accounting Policies, Recent Accounting Pronouncements, and Accounting Changes in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.

11



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.
In certain states and provinces, we have withdrawn allowable distributable earnings, including unrealized gains, prior to the maturity or cancellation of the related contract. Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions on withdrawals of future earnings when trust fund values drop below certain prescribed amounts. In the event of market declines that result in a severe decrease in trust fund value, we may be required to replenish amounts in the respective trusts in some future period. As of December 31, 2016, we had unrealized losses of $8.1 million in the various trusts within these states. See Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial and Contingent Commitments in Part II, Item 7.
Our ability to execute our strategic plan depends on many factors, some of which are beyond our control.
Our strategic plan is focused on growing our revenue, leveraging our scale, and deploying our capital. Many of the factors that impact our ability to execute our strategic plan, such as the number of deaths and general economic conditions, are beyond our control. Changes in operating conditions, such as supply disruptions and labor disputes, could negatively impact our operations. Our inability to leverage scale to drive cost savings, productivity improvements, preneed production, or earnings growth anticipated by management could affect our financial performance. Our inability to identify acquisition candidates and to complete acquisitions, divestitures, or strategic alliances as planned or to realize expected synergies and strategic benefits could impact our financial performance. Our inability to deploy capital to maximize shareholder value could impact our financial performance. We cannot give assurance that we will be able to execute any or all of our strategic plan. Failure to execute any or all of our strategic plan could have a material adverse effect on our financial condition, results of operations, and cash flows.
Our credit agreements contain covenants that may prevent us from engaging in certain transactions.
Our Bank Credit Facility contains, among other things, various affirmative and negative covenants that may prevent us from engaging in certain transactions that might otherwise be considered beneficial to us. The covenants limit, among other things, our and our subsidiaries’ ability to:
Incur additional indebtedness (including guarantee obligations);
Create liens on assets;
Engage in certain transactions with affiliates;
Enter into sale-leaseback transactions;
Engage in mergers, liquidations, and dissolutions;
Sell assets;
Pay dividends, distributions, and other payments in respect of our capital stock;
Purchase our capital stock in the open market;
Make investments, loans, or advances;
Repay indebtedness or amend the agreements relating thereto;
Create restrictions on our ability to receive distributions from subsidiaries; and
Change our lines of business.
Our Bank Credit Facility requires us to maintain certain leverage and interest coverage ratios. These covenants and coverage ratios may require us to take actions to reduce our indebtedness or act in a manner contrary to our strategic plan and business objectives. In addition, events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy these covenants. A breach of any of these covenants could result in a default of our indebtedness. If an event of default under our Bank Credit Facility occurs, and such event of default continues unremedied for 30 days after we receive notice thereof, the lenders party thereto could elect to declare all amounts outstanding thereunder, together with accrued interest, immediately due and payable. Any such declaration would also result in an event of default under our Senior Indenture governing our various senior notes. For additional information, see Financial Condition, Liquidity and Capital Resources in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations and Note 9 in Part II, Item 8. Financial Statements and Supplementary Data.

12



If we lost the ability to use surety bonding to support our preneed funeral and cemetery activities, we may be required to make material cash payments to fund certain trust funds.
We have entered into arrangements with certain surety companies whereby such companies agree to issue surety bonds on our behalf as financial assurance 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 issued to support our preneed funeral and cemetery activities. In the event all of the surety companies canceled or did not renew our surety bonds, which generally have twelve-month renewal periods, we would be required to either obtain replacement coverage or fund approximately $169.4 million into state-mandated trust accounts as of December 31, 2016. There can be no assurance that we would be able to obtain replacement coverage at a similar cost or at all.
The funeral and cemetery industry is competitive.
In North America, the funeral and cemetery industry is characterized by a large number of locally-owned, independent operations. To compete successfully, our funeral service locations and cemeteries must maintain good reputations and high professional standards, as well as offer attractive products and services at competitive prices. In addition, we must market ourselves in such a manner as to distinguish us from our competitors. We have historically experienced price competition from independent funeral service location and cemetery operators, monument dealers, casket retailers, low-cost funeral providers, and other nontraditional providers of merchandise and services. If we are unable to successfully compete, our financial condition, results of operations, and cash flows could be materially adversely affected.
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.
We sell price-guaranteed preneed contracts through various programs providing for future services at prices prevailing when the agreements are signed. For preneed contracts funded through life insurance or annuity contracts, we receive in cash a general agency commission from the third-party insurance company that typically averages approximately 25% of the total sale. Additionally, we receive an increasing death benefit associated with the contract of approximately 1% per year in cash at the time the service is performed. There is no guarantee that the increasing death benefit will cover future increases in the cost of providing a price-guaranteed service, and any such excess cost could be materially adverse to our financial condition, results of operations, and cash flows.
The financial condition of third-party insurance companies that fund our preneed contracts may impact our future revenue.
Where permitted, customers may arrange their preneed contract by purchasing a life insurance or annuity policy from third-party insurance companies. The customer/policy holder assigns the policy benefits to us to pay for the preneed contract at the time of need. If the financial condition of the third-party insurance companies were to deteriorate materially because of market conditions or otherwise, there could be an adverse effect on our ability to collect all or part of the proceeds of the life insurance policy, including the annual increase in the death benefit, if we fulfill the preneed contract at the time of need. Failure to collect such proceeds could have a material adverse effect on our financial condition, results of operations, and cash flows.
Unfavorable results of litigation could have a material adverse impact on our financial statements.
As discussed in Note 11 of Part II, Item 8. Financial Statements and Supplementary Data, we are subject to a variety of claims and lawsuits in the ordinary course of our business. Adverse outcomes in some or all of the pending cases may result in significant monetary damages or injunctive relief against us, as litigation and other claims are subject to inherent uncertainties. Any such adverse outcomes, in pending cases or other lawsuits that may arise in the future, could have a material adverse impact on our financial position, results of operations, and cash flows.
Unfavorable publicity could affect our reputation and business.
Since our operations relate to life events involving emotional stress for our client families, our business is dependent on customer trust and confidence. Unfavorable publicity about our business generally or in relation to any specific location could affect our reputation and customers’ trust and confidence in our products and services, thereby having an adverse impact upon our sales and financial results as well as the price of our common stock.
If the number of deaths in our markets decline, our cash flows and revenue may decrease.
If the number of deaths in our markets decline, the number of funeral services and interments performed by us could decrease and our financial condition, results of operations, and cash flows could be materially adversely affected. Variations in the death rate and seasonality of deaths throughout each year may also cause revenue to fluctuate between quarters or years.
If we are not able to respond effectively to changing consumer preferences, our market share, revenue, and/or profitability could decrease.

13



Future market share, revenue, and profit will depend in part on our ability to anticipate, identify, and respond to changing consumer preferences. We may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.
The continuing upward trend in the number of cremations performed in North America could result in lower revenue and gross profit.
There is a continuing upward trend in the number of cremations performed in North America as an alternative to traditional funeral service dispositions. In our operations during 2016, 52.4% of the comparable services we performed were cremation cases compared to 51.7% and 50.9% performed in 2015 and 2014, respectively. Our average revenue for cremations with service is lower than that for traditional burials. If we are unable to continue to expand our cremation memorialization products and services, and cremations remain a significant percentage of our services, our financial condition, results of operations, and cash flows could be materially adversely affected.
Our funeral and cemetery businesses are high fixed-cost businesses.
The majority of our operations are managed in groups called “markets”. Markets are geographical groups of funeral service locations and cemeteries that share common resources such as operating personnel, preparation services, clerical staff, motor vehicles, and preneed sales personnel. Personnel costs, the largest component of our operating expenses, are the cost components most beneficially affected by this grouping. We must incur many of these costs regardless of the number of services or interments performed. Because we cannot necessarily decrease these costs when we experience lower sales volumes, a sales decline may cause our margin percentages to decline at a greater rate than the decline in revenue.
Regulation and compliance could have a material adverse impact on our financial results.
Our operations are subject to regulation, supervision, and licensing under numerous foreign, federal, state, and local laws, ordinances, and regulations, including extensive regulations concerning trust funds, preneed sales of funeral and cemetery merchandise and services, and various other aspects of our business. For example, the funeral industry is regulated at the federal level by the FTC, which requires funeral service locations to take actions designed to protect consumers. Our facilities are also subject to stringent health, safety, and environmental regulations. Our pay practices, including wage and hour overtime pay, are subject to federal and state regulations. Violations of applicable laws could result in fines or sanctions against us.
Businesses in general are subject to the impact of regulation and major legislation, including healthcare reform. We may experience significant increases in costs as a result of business regulations and laws, which are beyond our control, including increases in the cost of healthcare. Although we seek to control increases in these costs, continued upward pressure on costs could reduce the profitability of our business.
In addition, from time to time, governments and agencies propose to amend or add regulations or reinterpret existing regulations, which could increase costs and decrease cash flows. For example, foreign, federal, state, local, and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the deathcare industry. These include regulations that require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, increase trust requirements, require the deposit of funds or collateral to offset unrealized losses of trusts, and/or prohibit the common ownership of funeral service locations and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on our financial condition, results of operations, and cash flows.
Compliance with laws, regulations, industry standards, and customs concerning burial procedures and the handling and care of human remains is critical to the continued success of our business and any operations we may acquire. We are continually monitoring and reviewing our operations in an effort to ensure that we are in compliance with these laws, regulations, and standards and, where appropriate, taking appropriate corrective action. However, litigation and regulatory proceedings regarding these issues could have a material adverse effect on our financial condition, results of operations, and cash flows.
Cemetery burial practice claims could have a material adverse impact on our financial results.
Our cemetery practices have evolved and improved over time. Most of our cemeteries have been operating for decades and, therefore, may have used practices and procedures that are outdated in comparison to today's standards. When cemetery disputes occur, we may be subjected to litigation and liability for improper burial practices, including 1) burial practices of a different era that are judged today in hindsight as being outdated and 2) alleged violations of our practices and procedures by one or more of our associates. In addition, since we acquired most of our cemeteries through various acquisitions, we may be subject to litigation and liability based upon actions or events that occurred before we acquired or managed the cemeteries. Claims or litigation based upon our cemetery burial practices could have a material adverse impact on our financial condition, results of operations, and cash flows.

14



We use a combination of insurance, self-insurance, and large deductibles in managing our exposure to certain inherent risks, as such, we could be exposed to unexpected costs that could negatively affect our financial performance.
 Our insurance coverage is subject to deductibles, self-insured retentions, limits of liability, and similar provisions that we believe are prudent based on our operations. Because we self-insure a significant portion of expected losses under our workers' compensation, auto, and general and professional liability insurance programs, unanticipated changes in any applicable actuarial assumptions, trends and interpretations, or management estimates underlying our recorded liabilities for these losses, including potential increases in costs, could result in materially different amounts of expense than expected under these programs. These unanticipated changes could have a material adverse effect on our financial condition, results of operations or cash flows.
A number of years may elapse before particular tax matters, for which we have established accruals, are audited and finally resolved.
The number of tax years with open tax audits varies depending on the tax jurisdiction. We have reached an agreement in principle with the IRS to resolve the issues under audit with respect to tax years 1999 through 2005 which cleared the Joint Committee on Taxation without change on February 7, 2017.  Final resolution with the IRS is subject to, among other things, the execution of certain agreements and the closing of the case.  There can be no assurance that the resolution will be finalized on the terms currently contemplated, or at all.  Additionally, SCI and Subsidiaries received a letter of no change to its federal tax liability for the tax years 2008-2010, and its tax years 2006-2007 remain under audit as a result of carryback claims. Various state jurisdictions are auditing years through 2015. While it is often difficult to predict the final outcome or the timing of resolution of any particular tax matter, we believe that our accruals reflect the probable outcome of known tax contingencies. However, unfavorable settlement of any particular issue may reduce a deferred tax asset or require the use of cash, which may have a material adverse impact to our financial statements. Favorable resolution could result in reduced income tax expense reported in the financial statements in the future. See Note 8 of Part II, Item 8. Financial Statements and Supplementary Data for additional information.
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.
In addition to an annual review, we assess the impairment of goodwill and/or other intangible assets whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, a significant decline in our stock price, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. If these factors occur, we may have a triggering event, which could result in an impairment of our goodwill and/or other intangible assets. If economic conditions worsen causing deterioration in our operating revenue, operating margins, and cash flows, we may have a triggering event that could result in an impairment of our goodwill and/or other intangible assets. Our cemetery segment, which has a goodwill balance of $305.4 million as of December 31, 2016, is more sensitive to market conditions and goodwill impairments because it is more reliant on preneed sales, which are impacted by customer discretionary spending. For additional information, see Critical Accounting Policies, Recent Accounting Pronouncements, and Accounting Changes in Part II, Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
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.
In the ordinary course of our business, we receive certain personal information, in both physical and electronic formats, about our customers, their loved ones, our associates, and our vendors. In addition, our online operations at our websites depend upon the secure transmission of confidential information over public networks, including information permitting electronic payments. We maintain substantial security measures and data backup systems to protect, store, and prevent unauthorized access to such information. Nevertheless, it is possible that computer hackers and others (through cyberattacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means) might defeat our security measures in the future and obtain the personal information of customers, their loved ones, our associates, and our vendors that we hold. Further, our associates, contractors, or third parties with whom we do business may attempt to circumvent our security measures to misappropriate such information and may purposefully or inadvertently cause a breach, corruption, or data loss involving such information. A breach of our security measures or failure in our backup systems could adversely affect our reputation with our customers and their loved ones, our associates, and our vendors; as well as our operations, results of operations, financial condition, and cash flows; and could result in litigation against us or the imposition of penalties. Moreover, a security breach could require that we expend significant additional resources to upgrade further the security measures that we employ to guard such important personal information against cyberattacks and other attempts to access such information and could result in a disruption of our operations.
Our Canadian business exposes us to operational, economic, and currency risks.

15



Our Canadian operations represent a significant portion of our revenue. Our ability to successfully conduct operations in Canada is affected by many of the same risks we face in our U.S. operations, as well as unique costs and difficulties of managing Canadian operations. Our Canadian operations may be adversely affected by local laws, customs, and regulations, as well as political and economic conditions. Significant fluctuations in exchange rates between the U.S. dollar and the Canadian dollar may adversely affect our results of operations and cash flows.
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.
We have a significant amount of indebtedness, which could have important consequences, including the following:
it may limit our ability to obtain additional debt or equity financing for working capital, capital expenditures, acquisitions, debt service requirements, and general corporate or other purposes;
a portion of our cash flows from operations will be dedicated to the payment of principal and interest on our indebtedness, including indebtedness we may incur in the future, and will not be available for other purposes, including to finance our working capital, capital expenditures, acquisitions, and general corporate costs or other purposes;
it could limit our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate and place us at a competitive disadvantage compared to our competitors that have less debt;
it could make us more vulnerable to downturns in general economic or industry conditions or in our business, or prevent us from carrying out activities that are important to our growth;
it could increase our interest expense if interest rates in general increase because a portion of our indebtedness, including all of our indebtedness under our senior credit facilities, bears interest at floating rates; and
it could make it more difficult for us to satisfy our obligations with respect to our indebtedness, and any failure to comply with the obligations of any of our debt instruments, including any financial and other restrictive covenants, could result in an event of default under the agreements governing our other indebtedness which, if not cured or waived, could result in the acceleration of our indebtedness.
Any of the above listed factors could materially affect our business, financial condition, results of operations, and cash flows.
In addition to our high level of indebtedness, we also have significant rental and other obligations under our operating and capital leases for funeral service locations, cemetery operating and maintenance equipment, and transportation equipment. These obligations could further increase the risks described above.
Failure to maintain effective internal control over financial reporting could adversely affect our results of operations, investor confidence, and our stock price.
The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements because of its inherent limitations. If we do not maintain effective internal control over financial reporting or implement controls sufficient to provide reasonable assurance with respect to the preparation and fair presentation of our financial statements, we could be unable to file accurate financial reports on a timely basis, and our results of operations, investor confidence, and stock price could be materially adversely affected.
Item 1B.    Unresolved Staff Comments.
None.
Item 2.
Properties.
Information regarding properties is set forth in Part I, Item 1. Business.
Item 3.
Legal Proceedings.
Information regarding legal proceedings is set forth in Note 11 of Part II, Item 8. Financial Statements and Supplementary Data.
EXECUTIVE OFFICERS OF THE COMPANY
The following table sets forth as of February 15, 2017, the name and age of each executive officer of the Company, the office held, and the year first elected an officer.

16



Officer Name
 
Age
 
Position
 
Year First
Became Officer
Thomas L. Ryan
 
51

 
Chairman of the Board and Chief Executive Officer
 
 
1999
Michael R. Webb
 
58

 
President and Chief Operating Officer
 
 
1998
Eric D. Tanzberger
 
48

 
Senior Vice President, Chief Financial Officer
 
 
2000
Gregory T. Sangalis
 
61

 
Senior Vice President, General Counsel and Secretary
 
 
2007
Sumner J. Waring, III
 
48

 
Senior Vice President, Operations
 
 
2002
Steven A. Tidwell
 
55

 
Senior Vice President, Sales and Merchandising
 
 
2010
Tammy R. Moore
 
49

 
Vice President and Corporate Controller
 
 
2010
R. L. Waltrip
 
86

 
Founder and Chairman Emeritus
 
 
1962
Mr. Ryan was elected Chairman of the Board of SCI effective in January 2016 and, previously, he had been appointed Chief Executive Officer in February 2005. He joined the Company in 1996 and served in a variety of financial management roles until November 2000, when he was asked to serve as Chief Executive Officer of European Operations based in Paris, France. In July 2002, Mr. Ryan returned to the United States where he was appointed President and Chief Operating Officer of SCI. Before joining SCI, Mr. Ryan was a certified public accountant with Coopers & Lybrand LLP for eight years. He holds a bachelor's degree in business administration from the University of Texas at Austin. Mr. Ryan serves as a member of the Board of Trustees of the United Way of Greater Houston. Mr. Ryan also serves on the Board of Directors of the Greater Houston Partnership, the Greater Houston Community Foundation Governing Council, the Board of Directors of Genesys Works, and the University of Texas McCombs Business School Advisory Council. Mr. Ryan is a member of the Board of Trust Managers of Weingarten Realty Investors (NYSE: WRI) and serves as a director of Chesapeake Energy (NYSE: CHK).
Mr. Webb was elected President and Chief Operating Officer of Service Corporation International in February 2016. Prior to that he served as Executive Vice President and Chief Operating Officer beginning in February 2005. Mr. Webb joined the Company in 1991 when SCI acquired Arlington Corp., a regional funeral and cemetery consolidator, where he served as Chief Financial Officer. In 1993, Mr. Webb joined the Company's corporate development group, which he later led on a global basis. Prior to joining Arlington Corp., Mr. Webb held various executive financial and development roles at Days Inns of America and Telemundo Group Inc. He holds a bachelor's degree in business administration from the University of Georgia.
Mr. Tanzberger was appointed Senior Vice President and Chief Financial Officer in June 2006 and also served as Treasurer from July 2007 to February 2017. Mr. Tanzberger joined the Company in August 1996 and held various management positions prior to being promoted to Corporate Controller in August 2002. Before joining SCI, Mr. Tanzberger served as Assistant Corporate Controller at Kirby Marine Transportation Corp., an inland waterway barge and tanker company. He was also a certified public accountant with Coopers and Lybrand LLP. Mr. Tanzberger holds a bachelor's in business administration from the University of Notre Dame. He serves on the Board of Directors of New Orleans Medical Mission Services.
Mr. Sangalis joined the Company in 2007 as Senior Vice President, General Counsel and Secretary. In 2012, his responsibilities were expanded to include Human Resources. He previously served as Senior Vice President, Law and Administration for Team Inc., a leading provider of specialty industrial maintenance and construction services. Prior to that, Mr. Sangalis served as Managing Director and General Counsel of Main Street Equity Ventures II, a private equity investment firm, and as Senior Vice President, General Counsel and Secretary for Waste Management Inc., a leading provider of waste management services in North America.  Mr. Sangalis holds a bachelor's degree in finance from Indiana University and a master's in business administration from the University of Minnesota. He earned his juris doctorate from the University of Minnesota Law School where he graduated Cum Laude.
Mr. Waring, Senior Vice President, is responsible for North American Operations. He joined SCI in 1996 as Area Vice President of Operations when SCI acquired his family's funeral business. He was appointed President of the Northeast Region in 1999 and President of the Pacific Region in September 2001. In September 2002, Mr. Waring was appointed Vice President, Western Operations, a position he held until May 2004 when he was appointed Vice President, Major Market Operations. He was promoted to Senior Vice President in 2006. In May 2015, Mr. Waring's responsibilities were expanded to include all operations in North America. Mr. Waring holds a bachelor's degree in business administration from Stetson University, a degree in mortuary science from Mount Ida College, and a master's in business administration from the University of Massachusetts Dartmouth. Mr. Waring serves on the Board of Directors of BankFive and the Board of Trustees of Tabor Academy.
Mr. Tidwell joined SCI as Vice President, Main Street Market Operations, in March 2010 and was promoted to Senior Vice President of Sales and Merchandising in 2012. As a co-founder of Keystone North America, Inc., Mr. Tidwell served as its President and Chief Executive Officer from May 2007 until it was acquired by SCI in March 2010. In his role, Mr. Tidwell worked closely with Keystone's Senior Leadership Team to develop and implement organic growth strategies as well as external growth and acquisition strategies. He began his career as a licensed Funeral Director and Embalmer in Nashville,

17



Tennessee, and has been actively involved in the funeral, and cemetery profession for thirty-five years. He holds an AA degree from John A. Gupton College and has attended Executive Management and Leadership programs at the Harvard Business School, The Owen School of Business at Vanderbilt University and the Center for Creative Leadership.
Mrs. Moore joined the Company in August 2002 as Manager of Financial Reporting. She was promoted to Director of Financial Reporting in 2004 and Managing Director and Assistant Controller in June 2006. In February 2010, she was promoted to Vice President and Corporate Controller and oversees trust, general accounting, internal and external reporting, customer service, and strategic planning and analysis. Prior to joining the Company, Mrs. Moore was a Certified Public Accountant with PricewaterhouseCoopers LLP. She holds a bachelor's in business administration degree in accounting from the University of Texas at San Antonio.
Mr. Waltrip was appointed the Founder and Chairman Emeritus of SCI effective in January 2016. Prior thereto, he was Chairman of the Board and provided invaluable leadership to the Company for over 50 years. A licensed funeral director, Mr. Waltrip grew up in his family's funeral business and assumed management of the firm in the 1950s. He began buying additional funeral service locations in the 1960s and achieved significant cost efficiencies through the “cluster” strategy of sharing pooled resources among numerous locations. At the end of 2016, the network he began had grown to include more than 1,900 funeral service locations and cemeteries. Mr. Waltrip took SCI public in 1969. Mr. Waltrip holds a bachelor's degree in business administration from the University of Houston.
Item 4.
Mine Safety Disclosures.
Not applicable.

18



PART II
Item 5.
Market for Registrant's Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Our common stock has been traded on the New York Stock Exchange since May 14, 1974. On December 31, 2016, there were 4,367 holders of record of our common stock. In calculating the number of stockholders, we consider clearing agencies and security position listings as one stockholder for each agency or listing. At December 31, 2016, we had 189,405,244 shares outstanding, net of 5,998,400 treasury shares.
In 2016 and 2015 we paid quarterly cash dividends totaling $98.4 million and $87.6 million, respectively. While we intend to pay regular quarterly cash dividends for the foreseeable future, all subsequent dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter after its review of our financial performance.
The table below shows our quarterly high and low closing common stock prices for the two years ended December 31:
 
2016
 
2015
 
High
 
Low
 
High
 
Low
First quarter
$
25.66

 
$
21.65

 
$
27.04

 
$
22.29

Second quarter
$
28.01

 
$
24.49

 
$
30.07

 
$
26.25

Third quarter
$
28.67

 
$
25.99

 
$
31.94

 
$
26.64

Fourth quarter
$
28.62

 
$
24.90

 
$
29.68

 
$
25.36

Options in our common stock are primarily traded on the Boston Exchange, the Chicago Board Options Exchange, Philadelphia Stock Exchange and the NASDAQ Options Market. Our common stock is traded on the New York Stock Exchange under the symbol SCI.
Stock Performance Graph. This graph assumes the total return on $100 invested on December 31, 2010, in SCI Common Stock, the S&P 500 Index, and a peer group selected by the Company (the “Peer Group”). The Peer Group comprises Carriage Services, Inc., Hillenbrand Inc., and Matthews International Corp. Stewart Enterprises, Inc. was included in the Peer Group until December 31, 2013 when it was acquired by us. Total return data assumes reinvestment of dividends.
TOTAL STOCKHOLDER RETURNS
INDEXED RETURNS
Years Ending
sp.jpg


19




For equity compensation plan information, see Part III of this Form 10-K.
On December 31, 2016, we issued 1,583 deferred common stock equivalents or units pursuant to provisions regarding the receipt of dividends under the Amended and Restated Director Fee Plan to five non-employee directors. These issuances were unregistered as they did not constitute a “sale” within the meaning of Section 2(a)(3) of the Securities Act of 1933, as amended.
Since August 2004, we have repurchased a total of $2.3 billion of common stock at an average cost per share of $12.29. Under our share repurchase program, during the year ended December 31, 2016, we repurchased 8,811,847 shares at an aggregate cost of $227.9 million, which is an average cost per share of $25.87. During the year ended December 31, 2015, we repurchased 12,455,281 shares at an aggregate cost of $345.3 million, which is an average cost per share of $27.72. On November 8, 2016, our Board of Directors increased our repurchase authorization to $400.0 million. After these repurchases and increase in authorization, the remaining dollar value of shares authorized to be purchased under the share repurchase program was $366.6 million at December 31, 2016. As discussed in Item 1A, our Bank Credit Agreement contains covenants that may restrict our ability to repurchase our common stock.
Period
 
Total Number of
Shares Purchased
 
Average
Price Paid per Share
 
Total Number
of Shares
Purchased as
Part of Publicly
Announced Programs
 
Dollar Value of
Shares That
May Yet be
Purchased Under the Program
October 1, 2016 — October 31, 2016
 

 
$

 

 
$
87,979,735

November 1, 2016 — November 30, 2016
 
233,635

 
$
25.62

 
233,635

 
395,513,217

December 1, 2016 — December 31, 2016
 
1,035,400

 
$
27.96

 
1,035,400

 
366,561,760

 
 
1,269,035

 
 
 
1,269,035

 
 
Subsequent to December 31, 2016, we repurchased 1,969,289 shares for $57.1 million at an average cost per share of $29.00.

20



Item 6.
Selected Financial Data.
The data set forth below should be read in conjunction with our consolidated financial statements and accompanying notes to these consolidated financial statements. This historical information is not necessarily indicative of future results. The table below contains selected consolidated financial data as of and for the years ended December 31, 2012 through December 31, 2016.

 
Years Ended December 31,
 
2016
 
2015
 
2014
 
2013
 
2012
 
(Dollars in millions, except per share amounts)
Selected Consolidated Statements of Operations Data:
 
 

 
 

 
 

Revenue
$
3,031.1

 
$
2,986.0

 
$
2,994.0

 
$
2,550.5

 
$
2,404.4

Net income
$
177.3

 
$
234.9

 
$
178.8

 
$
152.6

 
$
155.4

Net income attributable to noncontrolling interests
(0.3
)
 
(1.2
)
 
(6.3
)
 
(5.3
)
 
(1.6
)
Net income attributable to common stockholders
$
177.0

 
$
233.8

 
$
172.5

 
$
147.3

 
$
153.8

Earnings per share:
 
 
 

 
 

 
 

 
 

Net income attributable to common stockholders
 
 
 
 
 
 
 
 
 
Basic
$
0.92

 
$
1.17

 
$
0.82

 
$
0.70

 
$
0.71

Diluted
$
0.90

 
$
1.14

 
$
0.81

 
$
0.68

 
$
0.70

Cash dividends declared per share
$
0.51

 
$
0.44

 
$
0.34

 
$
0.27

 
$
0.23

Selected Consolidated Balance Sheet Data (at December 31):
 
 
 
 

 
 

Total assets
$
12,038.1

 
$
11,676.4

 
$
11,923.6

 
$
12,833.6

 
$
9,588.5

Long-term debt (less current maturities), including capital leases
$
3,196.6

 
$
3,037.6

 
$
2,963.8

 
$
3,125.5

 
$
1,916.6

Equity
$
1,095.2

 
$
1,189.4

 
$
1,377.4

 
$
1,480.2

 
$
1,415.2

Selected Consolidated Statement of Cash Flows Data:
 
 
 
 
 
 
Net cash provided by operating activities
$
463.6

 
$
472.2

 
$
317.4

 
$
384.7

 
$
369.2

Item 7.
Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The Company
We are North America’s largest provider of deathcare products and services, with a network of funeral homes and cemeteries unequaled in geographic scale and reach. At December 31, 2016, we operated 1,502 funeral service locations and 470 cemeteries (including 281 combination locations), which are geographically diversified across 45 states, eight Canadian provinces, the District of Columbia, and Puerto Rico. Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and various other related businesses. 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 $10.0 billion backlog of future revenue from both trust and insurance-funded preneed funeral and cemetery sales at December 31, 2016, Preneed arrangements provide us with a current opportunity to secure future market share while deterring the customer from going to a competitor in the future. We believe it adds to the stability and predictability of our revenue and cash flows. While revenue on the majority of preneed funeral sales is deferred until the time of need, sales of preneed cemetery property interment rights provide opportunities for full current revenue recognition (to the extent we collect 10% from the customer and the property is fully developed).
Our revenue depends upon the demand for funeral and cemetery services and merchandise, which can be influenced by a variety of factors, some of which are beyond our control including: demographic trends including population growth, average age, death rates, and number of deaths.
Our operating results and cash flows could be influenced by our ability to remain relevant to the customer. We provide a variety of unique product and service offerings to meet the needs of our client families allowing a personalized memorialization and celebration of life events. The mix of burial and cremation services could influence operating results, as it influences the average revenue per funeral contract. Our average cremation service revenue is approximately half of the average revenue earned from a burial service. To further enhance cremation revenue opportunities we offer memorialization products and services that specifically appeal to cremation customers. We believe that these additional products and services will help drive increases in the average revenue for a cremation in future periods.

21



We exercise purchasing power by leveraging our scale impacting local and national levels using our size to positively effect our purchases of goods and services. Operating results and cash flows could be impacted by expense management including controlling salaries, merchandise costs, and other expense categories. Our network of funeral homes and cemeteries allow us to share resources, create cost savings and allows national portability for our customers.
Lastly, economic conditions, legislative and regulatory changes, and tax law changes, which are beyond our control could impact our operating results including cash flow.
For further discussion of our key operating metrics, see our Results of Operations and Cash Flow sections below.
Financial Condition, Liquidity and Capital Resources
Capital Allocation Considerations
We rely on cash flow from operations as a significant source of liquidity. Our cash flow from operating activities provided $463.6 million in 2016. In addition, as of December 31, 2016, we have $317.3 million in excess borrowing capacity under our Bank Credit Facility. As of December 31, 2016, we have $90.0 million in current maturities of long-term debt, which primarily consists of the current amounts due on the Term Loan and capital leases.
Our Bank Credit Facility requires us to maintain certain leverage and interest coverage ratios. As of December 31, 2016, we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of December 31, 2016 are as follows:
 
Per Credit Agreement
 
Actual
Leverage ratio
 4.25 (Max)
 
3.83

Interest coverage ratio
3.00 (Min)
 
5.21

We believe our sources of liquidity can be supplemented by our ability to access the capital markets for additional debt or equity securities. In March 2016, we entered into a new $1.4 billion bank credit agreement due March 2021 with a syndicate of banks. The credit agreement consists of a $700.0 million Bank Credit Facility and a $700.0 million Term Loan. We used $550.0 million of the Term Loan due March 2021 and $30.0 million of the Bank Credit Facility due March 2021 to repay $270.0 million outstanding borrowings on the Bank Credit Facility due July 2018 and $310.0 million outstanding borrowings on the Term Loan due July 2018. In April 2016, we drew $170.0 million on our Bank Credit Facility due March 2021, and $150.0 million on our Term Loan due March 2021, to repay our $295.0 million 7.0% Senior Notes due June 2017 and associated transaction costs, which resulted in the recognition of a $21.7 million loss on early on extinguishment of debt.
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 expected minimum operating cash in transit, 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:
Invest in acquisitions and new builds. We intend to make acquisitions of funeral service locations and cemeteries when pricing and terms are favorable. We expect an acquisition investment to earn an after-tax cash return that is in excess of our weighted average cost of capital with room for execution risk. We will also invest in the construction of funeral service locations. We target businesses with favorable customer categories and/or where we can achieve additional economies of scale.
Pay a dividend. Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.13 per common share at the end of 2016, an 8% increase over 2015. We target a payout ratio of 35% to 45% of earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business. While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter upon review of our financial performance.
Repurchase shares. Absent a strategic acquisition opportunity, we believe share repurchases are attractive at the appropriate price. During the year ended December 31, 2016, we repurchased 8,811,847 shares of common stock at an aggregate cost of $227.9 million, which is an average cost per share of $25.87. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $366.6 million at December 31, 2016. We intend to make purchases from time to time in the open market or through privately negotiated transactions, subject to market conditions, debt covenants, and normal trading restrictions. Our Bank Credit Facility contains covenants that limit our ability to

22



repurchase our common stock. There can be no assurance that we will buy our common stock under our repurchase program in the future.
Repurchase debt. We will seek to make open market debt repurchases when it is opportunistic to do so relative to other capital deployment opportunities in order to manage our near-term debt maturity profile. We have a relatively consistent annual cash flow stream that is generally resistant to down economic cycles. This cash flow stream and our significant liquidity is available to substantially reduce our long-term debt maturities should we choose to do so. Furthermore, our capital expenditures are generally discretionary in nature and can be managed based on the availability of operating cash flow.
Cash Flow
We believe our ability to generate strong operating cash flow is one of our fundamental financial strengths and provides us with substantial flexibility in meeting operating and investing needs.
Operating Activities
Net cash provided by operating activities was $463.6 million, $472.2 million, and $317.4 million for the years ended December 31, 2016, 2015, and 2014 respectively.
Included in operating cash flows are the following:
 
Years Ended December 31,
 
2016
 
2015
 
2014
 
(In millions)
Excess tax benefits from share-based awards
$
(12.7
)
 
$
(18.1
)
 
$
(30.1
)
Payments related to tax structure changes
$

 
$
(10.5
)
 
$

Legal defense fees
$

 
$

 
$
(10.3
)
Premium paid on early extinguishment of debt
$
(20.5
)
 
$
(6.5
)
 
$
(24.8
)
Acquisition, integration, and system transition costs
$
(11.7
)
 
$
(6.6
)
 
$
(62.2
)
Taxes paid on divestitures
$

 
$

 
$
(63.8
)
Excluding the above items, cash flow from operations decreased $5.4 million for 2016 versus 2015 and increased $5.3 million for 2015 versus 2014. The 2016 decrease comprises:
a $19.7 million increase in tax payments,
a $15.9 million increase in payroll, and
a $21.9 million increase in net trust fund deposits: partially offset by
a $29.9 million decrease in vendor and other payments,
a $7.8 million decrease in cash interest paid, and
a $14.4 million increase in cash receipts from customers
The 2015 increase comprises:
a $41.0 million increase in cash receipts from customers,
a $12.7 million decrease in vendor and other payments, and
a $10.6 million decrease in cash interest paid, partially offset by
a $51.1 million increase in tax payments, and
a $7.9 million increase in payroll.
Investing Activities
Cash flows from investing activities used $216.1 million in 2016 compared to using $166.4 million in 2015 and providing $257.3 million in 2014. The $49.7 million increase from 2016 over 2015 is primarily due to increased capital expenditures and acquisition costs. Partially offsetting these increases, proceeds from divestitures increased $24.5 million in 2016 over 2015. The $423.7 million decrease in 2015 from 2014 is primarily due to the 2014 sales proceeds of divested locations from the required sale of locations under our consent decree with the Federal Trade Commission.
Capital expenditures grew $42.5 million in 2016 compared to 2015 after having increased $6.5 million in 2015 from 2014. The 2016 increase in capital expenditures primarily relates to the development of contemporary cemetery property, which

23



enables our sales force to drive sustainable growth in our preneed cemetery property sales, and the construction of new funeral homes.
Financing Activities
Financing activities used $188.9 million in 2016 compared to using $338.5 million in 2015 and using $538.0 million in 2014.
During 2016 we borrowed $110.1 million, net of repayments. In 2015, we borrowed $54.0 million, net of repayments. In 2014, we repaid $278.2 million of our debt, net of issuances. Outside of payments made when due under the terms of the debt instruments, our major activity in 2014 was to refinance portions of our debt related to the Stewart acquisition.
We spent $227.9 million, $345.3 million, and $242.9 million on share repurchases in 2016, 2015, and 2014, respectively.
Our dividend rate has steadily increased since 2005. We paid $98.4 million, $87.6 million, and $71.5 million of dividends in 2016, 2015, and 2014, respectively.
Proceeds from stock option exercises decreased $14.1 million in 2016 compared to 2015 after decreasing $0.6 million in 2015 compared to 2014.
Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial and Contingent Commitments
We have assumed various financial obligations and commitments in the ordinary course of conducting our business. We have contractual obligations requiring future cash payments under existing contractual arrangements, such as debt maturities, interest on long-term debt, operating lease agreements, and employment, consulting, and non-competition agreements. We also have commercial and contingent obligations that result in cash payments only if certain events occur requiring our performance pursuant to a funding commitment.
The following table details our known future cash payments (on an undiscounted basis) related to various contractual obligations as of December 31, 2016.
 
 
Payments Due by Period
Contractual Obligations
 
2017
 
2018-2019
 
2020-2021
 
Thereafter
 
Total
 
 
 
 
(In millions)
 
 
Debt maturities (including capital leases)(1) (2) (3)
 
$
94.7

 
$
424.8

 
$
943.0

 
$
1,848.8

 
$
3,311.3

Interest obligation on long-term debt(4)
 
152.7

 
279.6

 
230.2

 
197.1

 
859.6

Operating lease agreements(5)
 
14.2

 
22.1

 
16.1

 
67.7

 
120.1

Employment and management, consulting, and non-competition agreements(6)
 
6.5

 
10.7

 
5.6

 
4.3

 
27.1

Pension obligation(7)
 
3.4

 
6.4

 
5.2

 
10.0

 
25.0

Total contractual obligations
 
$
271.5

 
$
743.6

 
$
1,200.1

 
$
2,127.9

 
$
4,343.1

(1)
Our outstanding indebtedness contains standard provisions, such as payment delinquency default clauses and change of control clauses. In addition, our Bank Credit Facility contains a maximum leverage ratio and a minimum interest coverage ratio. See “Capital Allocation Considerations” and Note 9 in Part II, Item 8. Financial Statements and Supplementary Data, for additional details related to our long-term debt.
(2)
Excludes non-cash net premiums and original issuance discounts recorded on the debt. The unamortized balance of the net premiums and original issuance discounts at December 31, 2016, is $8.3 million.
(3)
Excludes non-cash debt issuance costs on the debt. The unamortized balance of debt issuance costs at December 31, 2016, is $33.0 million.
(4)
Approximately 63% of our total debt is fixed rate debt for which the interest obligation was calculated at the stated rate. Future interest obligations on our floating rate debt are based on the current forward rate curve of the underlying index. See Note 9 in Part II, Item 8. Financial Statements and Supplementary Data, for additional information related to our future interest obligations.
(5)
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 leases, or iii) renew for the fair rental value at the end of the primary lease term. Our leases primarily relate to funeral and cemetery operating and maintenance equipment. See Note 11 in Part II, Item 8. Financial Statements and Supplementary Data, for additional details related to our leases.
(6)
We have entered into employment and management, consulting, and non-competition agreements that require us to make cash payments over the contractual period. The agreements have been primarily entered into with certain officers and employees and former owners of businesses acquired. Agreements with contractual periods less than one year are excluded. See Note 11 in Part II, Item 8. Financial Statements and Supplementary Data, for additional details related to these agreements.

24



(7)
See Note 14 in Part II, Item 8. Financial Statements and Supplementary Data, for discussion of our pension plans.
The following table details our known potential or possible future cash payments (on an undiscounted basis) related to various commercial and contingent obligations as of December 31, 2016.
 
 
Expiration by Period
Commercial and Contingent Obligations
 
2017
 
2018-2019
 
2020-2021
 
Thereafter
 
Total
 
 
 
 
(In millions)
 
 
Surety obligations(1)
 
$
169.4

 
$

 
$

 
$

 
$
169.4

Long-term obligations related to uncertain tax positions(2)
 
235.3

 
0.3

 

 

 
235.6

Letters of credit(3)
 
32.9

 

 

 

 
32.9

Total commercial and contingent obligations
 
$
437.6

 
$
0.3

 
$

 
$

 
$
437.9

(1)
Represents the aggregate funding obligation associated with our surety bond arrangements assuming our surety partners did not renew any of our surety obligations and we could not find replacement surety assurance. See the section titled “Financial Assurances” following this table in this Form 10-K for more information related to our surety bonds.
(2)
We have recorded a liability for unrecognized tax benefits and related interest and penalties of $235.6 million as of December 31, 2016. See Note 8 in Part II, Item 8. Financial Statements and Supplementary Data, for additional information related to our uncertain tax positions. These amounts are reflected in the periods when the statutes of limitations expire.
(3)
We are occasionally required to post letters of credit, issued by a financial institution, to secure certain insurance programs or other obligations. Letters of credit generally authorize the financial institution to make a payment to the beneficiary upon the satisfaction of a certain event or the failure to satisfy an obligation. The letters of credit are generally posted for one-year terms and are usually automatically renewed upon maturity until such time as we have satisfied the commitment secured by the letter of credit. We are obligated to reimburse the issuer only if the beneficiary collects on the letter of credit. We believe it is unlikely we will be required to fund a claim under our outstanding letters of credit. As of December 31, 2016, $32.7 million of our letters of credit were supported by our Bank Credit Facility, which expires in March 2021, and $0.2 million of our letters of credit are outside of our credit facility.
Not included in the above table are potential funding obligations related to our merchandise and service trusts. In certain states and provinces, we have withdrawn allowable distributable earnings including unrealized gains prior to the maturity or cancellation of the related contract. Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions when trust fund values drop below certain prescribed amounts. In the event that our trust investments do not recover from market declines, we may be required to deposit portions or all of these amounts into the respective trusts in some future period. As of December 31, 2016, we had unrealized losses of $8.1 million in the various trusts within these states.
Financial Assurances
In support of our operations, we have entered into arrangements with certain surety companies whereby such companies agree to issue surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our preneed funeral and cemetery sales activities. The obligations underlying these surety bonds are recorded on our Consolidated Balance Sheet as Deferred preneed funeral revenue and Deferred preneed cemetery revenue. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.
 
December 31, 2016
 
December 31, 2015
 
(In millions)
Preneed funeral
$
118.6

 
$
112.7

Preneed cemetery:
 

 
 

Merchandise and services
141.6

 
136.7

Pre-construction
7.8

 
5.9

Bonds supporting preneed funeral and cemetery obligations
268.0

 
255.3

Bonds supporting preneed business permits
4.5

 
4.5

Other bonds
18.4

 
17.9

Total surety bonds outstanding
$
290.9

 
$
277.7


25



When selling preneed funeral and cemetery contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The $268.0 million in bonds supporting preneed funeral and cemetery obligations differs from the $169.4 million potential funding obligation disclosed in our “Commercial and Contingent Obligations” table above because 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, at the time we enter into the contract. We would only be required to fund the trust for the portion of the preneed contract for which we have received payment from the customer, less any applicable retainage, in accordance with state law. For the year ended December 31, 2016, we had $20.9 million and for each of the years ended December 31, 2015, and 2014, we had $19.6 million 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 Funeral and Cemetery Activities and Backlog of Contracts
In addition to selling our products and services to client families at the time of need, we sell price-guaranteed preneed 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 contracts be paid 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 post a surety bond as financial assurance for a certain amount of the preneed contract in lieu of placing funds into trust accounts. Where permitted by state or provincial law, customers may arrange their preneed contract by purchasing a life insurance or annuity policy from third-party insurance companies.
Trust-funded Preneed Contracts
The funds collected from customers are deposited into trust and primarily invested by independent trustees in accordance with state and provincial laws. We retain any funds above the amounts required to be deposited into trust accounts and use them for working capital purposes, generally to offset the selling and administrative costs of our preneed programs.
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 for the prices that were guaranteed at the time of sale. Our preneed funeral and cemetery trust assets are consolidated and recorded in our Consolidated Balance Sheet at fair value. Investment earnings on trust assets are generally accumulated in the trust and distributed as the revenue associated with the preneed funeral or cemetery contract is recognized or canceled by the customer. In certain states and provinces, the trusts are allowed to distribute a portion of the investment earnings to us prior to that date.
If a preneed contract is canceled prior to delivery, state or provincial law determines the amount of the refund owed to the customer, if any, including the amount of the attributed investment earnings. Upon cancellation, we receive the amount of principal deposited to trust and previously undistributed net investment earnings and, where required, issue a refund to the customer. We retain excess funds, if any, and recognize the attributed investment earnings (net of any investment earnings payable to the customer) as trust fund income revenue in our Consolidated Statement of Operations. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust. Funds in trust assets exceeded customer deposits at December 31, 2016. See Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial and Contingent Commitments for additional information about potential funding obligations related to our merchandise and service trusts. Based on our historical experience, we have included a cancellation reserve for preneed contracts in our Consolidated Balance Sheet of $116.9 million and $121.5 million as of December 31, 2016 and 2015, respectively.
While the contract is outstanding, cash flow is provided by the amount retained from funds collected from the customer and any distributed investment earnings. At the time of death maturity, we receive the principal and undistributed investment earnings from the funeral trust and any remaining receivable due from the customer. At the time of delivery or storage of cemetery merchandise and service items for which we were required to deposit funds to trust, we receive the principal and undistributed investment earnings from the cemetery trust. There is generally no remaining receivable due from the customer, as our policy is to deliver preneed cemetery merchandise and service items only upon payment of the contract balance in full. This cash flow at the time of service, delivery, or storage is generally less than the associated revenue recognized, thus reducing cash flow from operating activities.

26



The tables below detail our results of preneed funeral and cemetery production and maturities, excluding insurance contracts. Maturities represent merchandise and service sold on a preneed contract at our funeral homes which is delivered or performed once death has occurred and includes recognized earnings (realized and unrealized).
 
Years Ended December 31,
 
2016
 
2015
 
(Dollars in millions)
Funeral:
 

 
 

Preneed trust-funded (including bonded):
 

 
 

Sales production
$
285.5

 
$
258.3

Sales production (number of contracts)
89,529

 
83,060

Maturities(1)
$
239.4

 
$
237.9

Maturities (number of contracts)
65,047

 
64,560

Cemetery:
 

 
 

Sales production:
 

 
 

Preneed
$
800.3

 
$
769.3

Atneed
305.7

 
304.4

Total sales production
$
1,106.0

 
$
1,073.7

Sales production deferred to backlog:
 

 
 

Preneed
$
369.3

 
$
336.1

Atneed
227.7

 
226.0

Total sales production deferred to backlog
$
597.0

 
$
562.1

Revenue recognized from backlog:
 

 
 

Preneed
$
294.6

 
$
255.7

Atneed
226.3

 
222.8

Total revenue recognized from backlog
$
520.9

 
$
478.5

(1)
Funeral home matured preneed revenue represents merchandise and services sold on a preneed contract through one of our funeral homes and delivered or performed once death has occurred and includes fees charged by our wholly-owned registered investment advisor.
Insurance-funded Preneed Contracts
Where permitted by state or provincial law, customers may arrange their preneed contract by purchasing a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. These general agency commissions (GA revenue) are based on a percentage per contract sold and are recognized as revenue when the insurance purchase transaction between the customer and third-party insurance provider is complete. Direct selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred. The policy amount of the insurance contract between the customer and the third-party insurance company generally equals the amount of the preneed contract. As the insurance contract is between the insurance company and the customer, we do not reflect the unfulfilled insurance-funded preneed contract amounts in our Consolidated Balance Sheet.
The third-party insurance company collects funds related to the insurance contract directly from the customer. The life insurance contracts include a death benefit escalation provision, general agency commissions received at the time of sale, and have lower ongoing administrative costs; all of which are expected to mitigate the inflationary costs of providing the preneed merchandise and services in the future at the prices that were guaranteed at the time of the preneed sale. The customer/policy holder assigns the policy benefits to us to pay for the preneed contract at the time of need.

27



The table below details the results of insurance-funded preneed production and maturities and the number of contracts associated with those transactions.
 
Years Ended December 31,
 
2016
 
2015
 
(Dollars in millions)
Preneed insurance-funded:
 

 
 

Sales production(1)
$
552.0

 
$
543.8

Sales production (number of contracts)
90,395

 
90,609

General agency revenue
$
135.8

 
$
137.0

Maturities
$
323.2

 
$
318.3

Maturities (number of contracts)
55,085

 
55,615

(1)
Amounts are not included in our Consolidated Balance Sheet.
Backlog of Preneed Contracts
The following table reflects our backlog of trust-funded deferred preneed contract revenue, including amounts related to Deferred preneed receipts held in trust at December 31, 2016 and 2015. Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our Consolidated Balance Sheet) at December 31, 2016 and 2015. The backlog amounts presented are reduced by an amount that we believe will cancel before maturity based on historical experience. The table does not include the backlog associated with businesses that are held for sale.
The table also reflects our preneed funeral and cemetery receivables and trust investments (fair value and cost bases) associated with the backlog of deferred preneed funeral and cemetery contract revenue, net of the estimated cancellation allowance. 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 maturities of preneed sales in the future, as well as the amount of assets associated with those revenue. Because the future revenue exceeds the asset amounts, future revenue will exceed the cash distributions actually received from the associated trusts.
 
December 31, 2016
 
December 31, 2015
 
Fair Value
 
Cost
 
Fair Value
 
Cost
 
(In billions)
Deferred preneed funeral revenue
$
0.58

 
$
0.58

 
$
0.56

 
$
0.56

Deferred preneed funeral receipts held in trust
1.54

 
1.52

 
1.51

 
1.56

 
2.12

 
2.10

 
2.07

 
2.12

Allowance for cancellation on trust investments
(0.12
)
 
(0.12
)
 
(0.16
)
 
(0.16
)
Backlog of trust-funded preneed funeral revenue
2.00

 
1.98

 
1.91

 
1.96

Backlog of insurance-funded preneed revenue (1)
5.37

 
5.37

 
5.10

 
5.10

Total backlog of preneed funeral revenue
$
7.37

 
$
7.35

 
$
7.01

 
$
7.06

 
 
 
 
 
 
 
 
Preneed funeral receivables, net and trust investments
$
1.82

 
$
1.80

 
$
1.76

 
$
1.81

Allowance for cancellation on trust investments
(0.11
)
 
(0.11
)
 
(0.15
)
 
(0.15
)
Assets associated with backlog of trust-funded deferred preneed funeral revenue, net of estimated allowance for cancellation
1.71

 
1.69

 
1.61

 
1.66

Insurance policies associated with insurance-funded deferred preneed revenue, net of estimated allowance for cancellation (1)
5.37

 
5.37

 
5.10

 
5.10

Total assets associated with backlog of preneed funeral revenue, net of estimated allowance for cancellation
$
7.08

 
$
7.06

 
$
6.71

 
$
6.76

 
 
 
 
 
 
 
 

28



 
December 31, 2016
 
December 31, 2015
 
Fair Value
 
Cost
 
Fair Value
 
Cost
 
(In billions)
Deferred preneed cemetery revenue
$
1.15

 
$
1.15

 
$
1.12

 
$
1.12

Deferred preneed cemetery receipts held in trust
1.56

 
1.53

 
1.46

 
1.51

 
2.71

 
2.68

 
2.58

 
2.63

Allowance for cancellation on trust investments
(0.13
)
 
(0.13
)
 
(0.11
)
 
(0.11
)
Total backlog of deferred cemetery revenue
$
2.58

 
$
2.55

 
$
2.47

 
$
2.52

 
 
 
 
 
 
 
 
Preneed cemetery receivables, net and trust investments
$
2.49

 
$
2.46

 
$
2.32

 
$
2.37

Allowance for cancellation on trust investments
(0.14
)
 
(0.14
)
 
(0.12
)
 
(0.12
)
Total assets associated with backlog of deferred cemetery revenue, net of estimated allowance for cancellation
$
2.35

 
$
2.32

 
$
2.20

 
$
2.25

(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, reported net asset values, and appraisals. As of December 31, 2016, the difference between the backlog and asset market amounts represents $0.26 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $0.06 billion collected from customers that were not required to be deposited into trusts, and $0.20 billion in allowable cash distributions from trust assets.
The table also reflects the amounts expected to be received from insurance companies through the assignment of policy proceeds related to insurance-funded contracts. We do not reflect the unfulfilled insurance-funded preneed amounts in our Consolidated Balance Sheet because they are not assets or liabilities as defined in Statement of Accounting Concepts No. 6 as we have no claim to the insurance proceeds until the contract is fulfilled and no obligation under the contract until the benefits are assigned to us after the time of need.
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 for 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 remains in the trust in perpetuity and the net ordinary earnings are distributed and are intended to offset the expense to maintain the cemetery property. While many states require that net capital gains or losses be retained and added to the corpus, certain states allow the net realized capital gains and losses to be included in the net ordinary earnings that are distributed.
Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and services trusts as well as the cemetery perpetual care trusts. The majority of trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. Most of the trustees engage the same independent investment managers. These trustees, with input from SCI's wholly owned registered investment advisor, establish an investment policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection. The investments are also governed by state and provincial guidelines. Asset allocation is based on the liability structure of each funeral, cemetery, and perpetual care trust. The investment advisor recommends investment managers to the trustees that are selected on the basis of various criteria set forth in the investment policy. The primary investment objectives for the funeral and cemetery merchandise and service trusts include 1) 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 years to mature; therefore, the funds associated with these contracts are often invested through several market cycles. The cemetery perpetual care trusts' investment objectives emphasize providing a steady stream of current investment income with some capital appreciation. 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.
As of December 31, 2016, 87% of our trusts were under the control and custody of three large financial institutions engaged as preferred trustees. The U.S. trustees primarily use common trust fund structures as the investment vehicle for their trusts. Through

29



the common trust fund structure, each respective trustee manages the allocation of assets through individual managed accounts or institutional mutual funds. In the event a particular state prohibits the use of a common trust fund as a qualified investment, the trustee utilizes institutional mutual funds. The U.S. trusts include a modest allocation to alternative investments, which are comprised primarily of private equity and real estate investments. These investments are structured as limited liability companies (LLCs) and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective LLCs.
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 three managed limited liability companies (LLCs), one or each 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, 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 and are governed by guidelines outlined in their individual prospectuses.
Separately Managed Accounts. In order to reduce costs to the investment portfolios, the trusts utilize separately managed accounts where appropriate.
For those accounts not eligible for participation in the managed LLCs, the trustee utilizes institutional share class mutual funds that comply with our investment policy statement or with applicable state or provincial regulation. The U.S. trusts also include a modest allocation to alternative investments, which comprise primarily private equity investments. These investments are also held in LLCs and are managed by certain trustees.
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 in institutional share class mutual funds. Where the trusts have direct investments in individual fixed income securities, these are primarily in government and corporate instruments.
Canadian government fixed income securities are investments in Canadian federal and provincial government instruments. In many cases, regulatory restrictions mandate that the funds from the sales of preneed funeral and cemetery products sold in certain Canadian jurisdictions must be invested in these instruments.
Equity investments have historically provided long-term capital appreciation in excess of inflation. The trusts have direct investments in individual equity securities primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment styles (i.e., growth and value). The majority of the equity allocation is managed by institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, we believe these securities are well-diversified. As of December 31, 2016, the largest single equity position represented less than 1% of the total securities portfolio.
The objective of Private Equity investments is to provide high rates of return with reduced volatility. 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 private equity, real estate, fund of funds, 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 Investment Performance
The trust fund returns recognized over a period of years from these investment assets can be volatile. During the year ended December 31, 2016, the Standard and Poor’s 500 Index increased 12% and the Barclay’s Aggregate Index increased 2.7% and the combined SCI trust assets increased 7.9%.
SCI, its trustees, and the investment advisor continue to monitor the capital markets and the trusts on an ongoing basis. The trustees, with input from the investment advisor, will take prudent action as needed to achieve the investment goals and objectives of the trusts.

30



Results of Operations — Years Ended December 31, 2016, 2015, and 2014
Management Summary
In 2016, we reported consolidated net income attributable to common stockholders of $177.0 million ($0.90 per diluted share) compared to net income attributable to common stockholders in 2015 of $233.8 million ($1.14 per diluted share) and net income attributable to common stockholders in 2014 of $172.5 million ($0.81 per diluted share). These results were impacted by certain significant items that impacted earnings, including:
 
2016
 
2015
 
2014
 
(In millions)
Pre-tax (losses) gains from divestitures and impairment, net (1)
$
(26.8
)
 
$
6.0

 
$
113.5

Pre-tax losses from the early extinguishment of debt
$
(22.5
)
 
$
(6.9
)
 
$
(29.7
)
Pre-tax acquisition and integration costs
$
(5.5
)
 
$
(3.0
)
 
$
(45.5
)
Pre-tax expenses related to system transition costs
$
(12.0
)
 
$
(3.8
)
 
$
(9.5
)
Pre-tax pension termination settlement
$
(5.6
)
 
$

 
$

Pre-tax expenses related to legal defense fees
$

 
$

 
$
(12.4
)
Tax benefit (provision) from above items
$
17.2

 
$
2.3

 
$
(77.8
)
Change in certain tax reserves
$
(20.9
)
 
$
(3.0
)
 
$
(3.2
)
(1)
Includes Net (loss) income from discontinued operations and the portion of noncontrolling interest related to divestitures.
In addition to the above items, growth in cemetery revenue, higher recognized preneed funeral revenue, lower interest expense, and effective management of our back office overhead were partially offset by lower funeral services performed and increases in cemetery administrative and maintenance costs.
Funeral Results
 
2016
 
2015
 
2014
 
(Dollars in millions, except average revenue per service)
Consolidated funeral revenue
$
1,868.9

 
$
1,888.8

 
$
1,920.5

Less: revenue associated with acquisitions/new construction
22.3

 
6.3

 

Less: revenue associated with divestitures
30.7

 
45.9

 
111.2

Comparable1 funeral revenue
1,815.9

 
1,836.6

 
1,809.3

Less: Comparable recognized preneed revenue
109.8

 
97.4

 
85.3

Less: Comparable general agency revenue
130.2

 
131.4

 
116.3

Less: Other revenue
(4.4
)
 
(1.7
)
 
(0.5
)
Adjusted comparable funeral revenue
$
1,580.3

 
$
1,609.5

 
$
1,608.2

Comparable services performed
300,028

 
308,462

 
306,129

Comparable average revenue per service2
$
5,267

 
$
5,218

 
$
5,253

 
 
 
 
 
 
Consolidated funeral gross profit
$
364.2

 
$
393.2

 
$
409.7

Less: gross profit (loss) associated with acquisitions/new construction
3.0

 

 

Less: gross profit associated with divestitures
3.6

 
4.4

 
21.5

Comparable1 funeral gross profit
$
357.6

 
$
388.8

 
$
388.2

(1)
We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2015 and ending December 31, 2016.
(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 are preneed sales of merchandise that are delivered at the time of sale, including memorial merchandise and travel protection, and are excluded from our calculation of comparable average revenue per service because the associated service has not yet been performed.
Funeral Revenue

31



Consolidated revenue from funeral operations was $1,868.9 million for the year ended December 31, 2016 compared to $1,888.8 million for the same period in 2015. This decrease is primarily attributable to a $20.7 million decrease in comparable revenue as described below.
Comparable revenue from funeral operations was $1,815.9 million for the year ended December 31, 2016 compared to $1,836.6 million for the same period in 2015. This decrease was primarily due to a 2.7% decrease in comparable services performed, impacted by an unusually strong flu season in the first half of 2015. This decrease was partially offset by a $12.4 million increase in recognized preneed revenue driven by an increase in both the number of contracts sold through our non-funeral home channel and the average price per contract.
The decrease in services performed comprises a 3.2% decrease in services performed by our funeral homes partially offset by a 2.4% increase in cremation services performed by our non-funeral home channel.
Average revenue per funeral service increased 0.9% for the year ended December 31, 2016 compared to the same period in 2015. Organic growth at the customer level of 2.7% was largely offset by the increase in our cremation mix, lower trust fund income, and an unfavorable Canadian currency impact. Our total comparable cremation rate increased to 52.4% in 2016 from 51.7% in 2015 as a result of an increase in both direct cremations and cremations with service.
Consolidated revenue from funeral operations decreased $31.7 million in 2015 compared to 2014. This decrease is primarily attributable to the loss of $65.3 million in revenue contributed by properties that have been subsequently divested partially offset by a $12.1 million increase in comparable recognized preneed revenue, a $15.1 million increase in comparable general agency revenue, $6.3 million in revenue contributed by acquired properties, and a 0.8% increase in comparable services performed. Our comparable cremation rate increased to 51.7% in 2015 from 50.9% in 2014 as a result of an increase in direct cremations.
Funeral Gross Profit
Consolidated funeral gross profit decreased $29.0 million, or 7.4% in 2016 compared to 2015. This decrease is primarily attributable to a decrease in comparable funeral gross profit of $31.2 million. The decline in higher margin revenue from funeral services performed by our funeral homes, increases in selling costs associated with our preneed selling efforts, and inflationary increases in fixed costs were partially offset by increased gross profit from recognized preneed revenue.
Consolidated funeral gross profit decreased $16.5 million, or 4.0%, in 2015 as compared to 2014 primarily attributable to the loss of $17.1 million in revenue contributed by properties that have been subsequently divested partially offset by a $0.6 million increase in comparable gross profit.
Cemetery Results
 
2016
 
2015
 
2014
 
(In millions)
Consolidated cemetery revenue
$
1,162.3

 
$
1,097.2

 
$
1,073.5

Less: revenue associated with acquisitions/new construction
9.5

 
5.5

 

Less: revenue associated with divestitures
0.2

 
1.3

 
35.6

Comparable1 cemetery revenue
$
1,152.6

 
$
1,090.4

 
$
1,037.9

 
 
 
 
 
 
Consolidated cemetery gross profit
$
312.2

 
$
281.4

 
$
266.0

Less: gross profit associated with acquisitions/new construction
2.9

 
1.8

 

Less: gross (loss) profit associated with divestitures
(0.9
)
 
0.2

 
5.6

Comparable1 cemetery gross profit
$
310.2

 
$
279.4

 
$
260.4

(1)
We define comparable (or same store) operations as those cemetery locations owned by us for the entire period beginning January 1, 2015 and ending December 31, 2016.
Cemetery Revenue
Consolidated revenue from our cemetery operations increased $65.1 million, or 5.9%, in 2016 compared to 2015 primarily attributable to the $62.2 million increase in comparable revenue. The increase in comparable revenue is primarily the result of a $48.2 million increase in recognized preneed revenue, higher preneed property production, and an increase in cash distributions of capital gains received from perpetual care trusts.
Consolidated revenue from our cemetery operations increased $23.7 million, or 2.2%, in 2015 compared to 2014 primarily as a result of the increase in comparable revenue of $52.5 million partially offset by the loss of $34.3 million in properties that

32



have been subsequently divested. Comparable cemetery revenue increased $52.5 million, or 5.1%, primarily as a result of an increase in preneed property sales recognition, which was partially offset by an expected decrease in trust fund income.
Cemetery Gross Profit
Consolidated cemetery gross profit increased $30.8 million, or 10.9%, in 2016 compared to 2015 as a result of the increase in comparable gross profit. The comparable gross profit increase was driven by growth in recognized preneed and atneed revenue and higher preneed production of developed and completed cemetery property, partially offset by increased selling commissions from higher sales production and increases in cemetery administrative and maintenance costs.
Consolidated cemetery gross profit increased $15.4 million, or 5.8%, in 2015 compared to 2014. This increase is the result of the increase in comparable gross profit of $19.0 million, or 7.3% partially offset by the loss of $5.4 million in properties that have been subsequently divested.
Other Financial Statement Items
General and Administrative Expenses
General and administrative expenses were $137.7 million in 2016 compared to $130.8 million in 2015 and $184.7 million in 2014. The 2016 amounts include $5.5 million of acquisition costs, $12.0 million in system transition costs primarily related to the 2016 implementation of a new general ledger system, and $5.6 million related to a pension termination settlement. The 2015 amounts include $6.7 million in acquisition and integration and system transition costs. The 2014 amounts included $45.5 million in acquisition and transition costs primarily related to Stewart, $12.3 million in legal settlements and defense fees related to the settlement of the Eden matter and $9.5 million in system transition costs. Excluding these costs, general and administrative expenses decreased $9.5 million in 2016 compared to 2015 as we effectively managed our back office overhead expenses, after increasing $6.7 million in 2015 compared to 2014 due to higher legal costs.
Losses (Gains) on Divestitures and Impairment Charges, Net
In 2016, we recognized a $26.8 million net pre-tax loss on asset divestitures and impairments. This loss includes $31.2 million of impairment charges related to the divestiture of certain funeral homes in Los Angeles, California in November 2016.
In 2015, we recognized a $6.5 million net pre-tax gain on asset divestitures and impairments primarily as the result of asset divestitures, partially offset by impairment losses associated with non-strategic funeral and cemetery locations in the United States and Canada.
In 2014, we recognized a $116.6 million net pre-tax gain on asset divestitures and impairments primarily as a result of the required Federal Trade Commission divestitures on funeral and cemetery locations in the United States as a result of the Stewart acquisition.
Interest Expense
Interest expense decreased $10.8 million to $162.1 million in 2016 compared to $172.9 million in 2015 as we benefited from the debt refinancings over the past year by lowering interest on our Senior Notes and increasing our proportion of lower rate variable debt.
Interest expense decreased $4.7 million to $172.9 million in 2015 compared to $177.6 million in 2014. The decrease in interest expense is primarily due to the refinancing of our 6.75% Senior Notes due 2015, our 6.5% Senior Notes due 2019, and our 7.0% Senior Notes due 2019 in the first half of 2014. We also refinanced our 6.75% Senior Notes due April 2016 in August 2015.
Losses on Early Extinguishment of Debt, Net
During 2016, we paid an aggregate of $310.0 million on our Term Loan due July 2018, $295.0 million on our 7.0% Senior Notes due 2017, $280.0 million on our Bank Credit Facility due July 2018, $26.3 million on our Term Loan due March 2021, and $10.0 million on our Bank Credit Facility due March 2021. Certain of the above transactions resulted in the recognition of a loss of $22.5 million recorded in Losses on early extinguishment of debt, net in our Consolidated Statement of Operations.
During 2015, we paid an aggregate of $197.4 million on our 6.75% Senior Notes due April 2016, $100.0 million on our Bank Credit Facility, and $60.0 million on our Term Loan due July 2018. Certain of the above transactions resulted in the recognition of a loss of $6.9 million recorded in Losses on early extinguishment of debt, net in our Consolidated Statement of Operations.
During 2014, we recognized a $29.2 million loss on early extinguishment of debt as we took advantage of historically low interest rates to refinance our 6.75% Senior Notes due 2015, our 6.5% Senior Notes due 2019, and our 7.0% Senior Notes due 2019.



33



Provision for Income Taxes
The 2016 consolidated effective tax rate was 45.7%, compared to 36.5% and 56.1% in 2015 and 2014, respectively. The higher effective tax rate for the twelve months ended December 31, 2016 was a result of a valuation allowance recorded against foreign net deferred tax assets for which a future net benefit may not be realized, and non-deductible goodwill resulting from gains on divestitures. The higher effective tax rate for the twelve months ended December 31, 2014 was primarily due to the non-deductible goodwill resulting from the gains on required divestitures associated with the Stewart acquisition.
Weighted Average Shares
The diluted weighted average number of shares outstanding was 196.0 million in 2016, compared to 204.5 million in 2015, and 214.2 million in 2014. The decrease in all years primarily reflects the impact of shares repurchased under our share repurchase program.
Critical Accounting Policies, Recent Accounting Pronouncements, and Accounting Changes
Our consolidated financial statements are impacted by the accounting policies used and the estimates and assumptions made by management during their preparation. See Note 2 in Part II, Item 8. Financial Statements and Supplementary Data, for more information. Estimates and assumptions affect the carrying values of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date. Actual results could differ from such estimates due to uncertainties associated with the methods and assumptions underlying our critical accounting measurements. The following is a discussion of our critical accounting policies pertaining to revenue recognition, valuation of goodwill, valuation of intangible assets, fair value measurements, loss contract analysis, and the use of estimates.
Revenue Recognition
Funeral revenue is recognized when funeral merchandise is delivered or funeral services are performed. Merchandise delivery and service performance generally take place shortly after the time of need. Delivery of some preneed items, primarily certain memorial merchandise and travel protection, are delivered prior to the time of need. We refer to these items as recognized preneed revenue. Our trade receivables primarily consist of amounts due for funeral services already performed.
Revenue associated with cemetery merchandise and services is recognized when merchandise is delivered or the service is performed. For non-personalized merchandise (such as vaults) and services, we defer the revenue until the merchandise is delivered and the services are performed, generally after the time of need. For personalized marker merchandise, with the customer’s direction generally obtained at the time of sale, we can choose to order, store, and transfer title to the customer. In situations in which we have no further obligation or involvement related to the merchandise, we recognize revenue and record the cost of sales upon the earlier of vendor storage of these items or delivery in our cemetery. Preneed sales of cemetery interment rights (cemetery burial property) are recognized when a minimum of 10% of the sales price has been collected and the property has been constructed and is available for interment.
Pursuant to state or provincial law, all or a portion of the proceeds from funeral and cemetery merchandise or services sold on a preneed basis may be required to be paid into trust funds. We defer investment earnings related to these merchandise and service trusts until the associated merchandise is delivered or services are performed.
Valuation of Goodwill
We record the excess of purchase price over the fair value of identifiable net assets acquired in business combinations as goodwill. Goodwill is tested annually during the fourth quarter for impairment by assessing the fair value of each of our reporting units.
Our goodwill impairment test involves estimates and management judgment. In the first step of our goodwill impairment test, we compare the fair value of a reporting unit to its carrying amount, including goodwill. We determine fair value of each reporting unit using both a market and income approach. Our methodology considers discounted cash flows and multiples of EBITDA (earnings before interest, taxes, depreciation, and amortization). 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. We do not record an impairment of goodwill in instances where the fair value of a reporting unit exceeds its carrying amount. If the aggregate fair value is less than the related carrying amount for a reporting unit, we compare the implied fair value of goodwill to the carrying amount of goodwill. If the carrying amount of reporting unit goodwill exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that excess.
For our most recent annual impairment test performed in the fourth quarter, we used a 6.5% discount rate, growth rates ranging from 1.2% to 5.7% over a five-year period, plus a terminal value determined using the constant growth method in projecting our future cash flows. Fair value was calculated as the sum of the projected discounted cash flows of our reporting units over the next five years plus terminal value at the end of those five years. Our terminal value was calculated using long-term growth rates of 2.5% and 2.9% for our funeral and cemetery reporting units, respectively.

34



In addition to our annual review, we assess the impairment of goodwill whenever certain events or changes in circumstances indicate that the carrying value may be greater than 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. No interim goodwill impairments reviews were performed in 2016 or 2015.
Valuation of Intangible Assets
Our intangible assets include customer relationships, trademarks and tradenames, and other intangible assets primarily resulting from acquisitions. Our trademark and tradenames and certain other intangible assets are considered to have an indefinite life and are not subject to amortization. We test for impairment of intangible assets annually during the fourth quarter.
Our intangible assets impairment tests involve estimates and management judgment. For trademark and tradenames, our test uses 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 trademark and 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 most recent annual impairment test performed in the fourth quarter, we estimated that the pre-tax savings would range from 1.0% to 4.0% of the revenue associated with the trademark and tradenames, based primarily on our research of intellectual property valuation and licensing databases. We also assumed a terminal growth rate of 2.5% and 2.9% for our funeral and cemetery segments, respectively, and discounted the cash flows at a 6.7% discount rate based on the relative risk of these assets to our overall business.
In addition to our annual review, we assess the impairment of intangible assets whenever certain 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. No interim intangible impairment reviews were performed in 2016 or 2015.
Fair Value Measurements
We measure the available-for-sale securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. We utilize a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.
An asset’s or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Certain available-for-sale securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts have been classified in Level 3 of the hierarchy due to the significant management judgment required as a result of the absence of quoted market prices, inherent lack of liquidity, or the long-term nature of the securities. For additional disclosures for all of our available-for-sale securities, see Notes 3, 4, and 5 in Part II, Item 8. Financial Statements and Supplementary Data.
Loss Contract Analysis
We perform an analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. For this analysis, we add the sales prices of the underlying contracts and net realized earnings, then subtract net unrealized losses to derive the net amount of estimated proceeds for contracts as of the balance sheet date. We consider unrealized gains and losses based on current market prices quoted for the investments, and we do not include future expected returns on the investments in our analysis. We compare our estimated proceeds to the estimated direct costs to deliver our contracts, which consist primarily of funeral and cemetery merchandise costs and salaries, supplies, and equipment related to the delivery of a preneed contract. If a deficiency were to exist, we may record a charge to earnings and a corresponding liability for the expected loss on delivery of those contracts from our backlog. As of December 31, 2016, no such charge was required. Due to the positive margins of our preneed contracts and the trust portfolio returns we have experienced in prior years, we believe there is currently capacity for additional market depreciation before a loss contract would result.

35



Use of Estimates
The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States (GAAP) requires management to make certain estimates and assumptions. These estimates and assumptions affect the carrying values of assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet date. Actual results could differ from such estimates due to uncertainties associated with the methods and assumptions underlying our critical accounting measurements. Key estimates used by management include:
Allowances. We provide various allowances and/or cancellation reserves for our funeral and cemetery preneed and atneed receivables, as well as for our preneed funeral and preneed cemetery deferred revenue. These allowances are based on an analysis of historical trends and include, where applicable, collection and cancellation activity. We also record an estimate of general agency revenue that may be canceled in their first year and revenue would be charged back by the insurance company. These estimates are impacted by a number of factors, including changes in economy, relocation, and demographic or competitive changes in our areas of operation.
Valuation of trust investments. The trust investments include marketable securities that are classified as available-for-sale. When available, we use quoted market prices for specific securities. When quoted market prices are not available for the specific security, fair values are estimated by using either quoted market prices for securities with similar characteristics or a fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment terms, rating, and tax exempt status.
The valuation of private equity and other investments requires significant management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. The fair value of these investments is estimated based on the market value of the underlying real estate and private equity instruments. The underlying real estate value is determined using the most recent appraisals. The private equity instruments are valued based on reported net asset values.
Legal liability reserves. Contingent liabilities, principally for legal matters, are recorded when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Liabilities accrued for legal matters require judgments regarding projected outcomes and a range of loss based on historical experience and recommendations of legal counsel. However, litigation is inherently unpredictable and excessive verdicts do occur. As disclosed in Note 11 in Part II, Item 8. Financial Statements and Supplementary Data, our legal exposures and the ultimate outcome of these legal proceedings could be material to operating results or cash flows in any given quarter or year.
Depreciation of long-lived assets. We depreciate our long-lived assets ratably over their estimated useful lives. These estimates of useful lives may be affected by such factors as changing market conditions or changes in regulatory requirements.
Valuation of assets acquired and liabilities assumed. Tangible and intangible assets acquired and liabilities assumed are recorded at their fair value and goodwill is recognized for any difference between the price of acquisition and our fair value determination. We have customarily estimated our purchase costs and other related transactions known to us at closing of the acquisition. To the extent that information not available to us at the closing date subsequently became available during the measurement period, we have adjusted our goodwill, assets, or liabilities associated with the acquisition.
Income taxes. We compute income taxes using the liability method. Our ability to realize the benefit of our deferred tax assets requires us to achieve certain future earnings levels. We have established a valuation allowance against a portion of our deferred tax assets and we could be required to further adjust that valuation allowance in the near term if market conditions change materially and future earnings are, or are projected to be, significantly different than our current estimates. An increase in the valuation allowance would result in additional income tax expense in such period.
At December 31, 2016 and 2015, U.S. income taxes had not been provided on $308.6 million and $259.8 million, respectively, of the remaining undistributed earnings of our foreign subsidiaries. We intend to permanently reinvest these undistributed foreign earnings in those businesses outside the United States. It is not practicable to determine the amount of federal income taxes, if any, that might become due if such earnings are repatriated.
We file income tax returns, including tax returns for our subsidiaries, with federal, state, local and foreign jurisdictions. We consider the United States to be our most significant jurisdiction; however, all tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business.
We have reached an agreement in principle with the IRS to resolve the issues under audit with respect to tax years 1999 through 2005 which cleared the Joint Committee on Taxation without change on February 7, 2017. Final resolution with the IRS is subject to, among other things, the execution of certain agreements and the closing of the case. There can be no assurance that the resolution will be finalized on the terms currently contemplated, or at all. Additionally, SCI and Subsidiaries received a letter of no change to its federal tax liability for the tax years 2008-2010, and its tax years 2006-2007 remain under audit as a result of carryback claims. Our Canadian affiliate, Service Corporation International Canada ULC, concluded the

36



audit of its Canadian income tax returns during 2016 for the years 2010-2012 with no material impact. Furthermore, we are under audit by various state jurisdictions for years 2000 through 2015.
It is reasonably possible that the amount of unrecognized tax benefits could significantly decrease over the next 12 months as a result of the agreement in principle reached with the IRS on the audit with respect to tax years 1999 through 2005. However, due to the uncertainty regarding the timing and amount of the final resolution on this specific audit and possible outcomes on the other outstanding audits, a current estimate of the range of decrease that may occur within the next 12 months cannot be made.
Pension cost. Our pension plans are frozen with no benefits accruing to participants except interest. Pension costs and liabilities are actuarially determined based on certain assumptions, including the discount rate used to compute future benefit obligations. Weighted-average discount rates used to determine net periodic pension cost were 3.96% and 2.47% as of December 31, 2016 and 2015, respectively. We verify the reasonableness of the discount rate by comparing our rate to the rate earned on high-quality fixed income investments, such as the Moody’s Aa index.
Insurance loss reserves. We purchase comprehensive general liability, morticians and cemetery professional liability, automobile liability, and workers’ compensation insurance coverages structured with high deductibles. This high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. Historical insurance industry experience indicates a high degree of inherent variability in assessing the ultimate amount of losses associated with casualty insurance claims. This is especially true with respect to liability and workers’ compensation exposures due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, which is often many years. We continually evaluate loss estimates associated with claims and losses related to these insurance coverages falling within the deductible of each coverage. Assumptions based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends, and data reasonableness will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to both analyze and adjust our insurance loss reserves.
As of December 31, 2016, reported losses for workers’ compensation, general liability, and auto liability incurred during the period May 1, 1991 through December 31, 2016 were approximately $523.3 million over 25.7 years. The selected fully developed ultimate settlement value estimated was $578.9 million for the same period. Paid losses were $500.9 million indicating a reserve requirement of $78.0 million.
Recent Accounting Pronouncements and Accounting Changes
For discussion of recent accounting pronouncements and accounting changes, see Note 2 in Part II, Item 8. Financial Statements and Supplementary Data.
Item 7A.
Quantitative and Qualitative Disclosures About Market Risk.
The market risk inherent in our financial instruments and positions includes the price risk associated with the marketable equity and debt securities included in our portfolio of trust investments, the interest rate risk associated with our floating rate debt, and the currency risk associated with our Canadian operations. Our market-sensitive instruments and positions are considered to be “other-than-trading”. Our exposure to market risk as discussed below includes forward-looking statements and represents an estimate of possible changes in fair value or future earnings that might occur, assuming hypothetical changes in equity markets, interest rates, and currencies. Our views on market risk are not necessarily indicative of actual results that may occur, and they do not represent the maximum possible gains or losses that may occur. Actual fair value movements related to changes in equity markets, interest rates and currencies, along with the timing of such movements, may differ from those estimated.
Marketable Equity and Debt Securities — Price Risk
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices.
Cost and market values as of December 31, 2016 are presented in Notes 3, 4, and 5 in Part II, Item 8, Financial Statements and Supplementary Data. Also, see Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Conditions, Liquidity, and Capital Resources, for discussion of trust investments.
Market-Rate Sensitive Instruments — Interest Rate Risk
At December 31, 2016 and 2015, approximately 63% and 76%, respectively, of our total debt consisted of fixed rate debt at a weighted average rate of 4.68% and 5.18%, respectively. The fair value of our debt was $162.7 million more than its carrying value at December 31, 2016. A hypothetical 10% increase in interest rates associated with our floating rate debt would increase our interest expense by $3.0 million. See Note 9 and 10 in Part II, Item 8. Financial Statements and Supplementary Data, for additional information.

37



Market-Rate Sensitive Instruments — Currency Risk
At December 31, 2016 and 2015, our foreign currency exposure was primarily associated with the Canadian dollar. A hypothetical 10% adverse change in the strength of the U.S. dollar relative to our foreign currency instruments would have negatively affected our income from our continuing operations, on an annual basis, by $4.1 million for each of the years ended December 31, 2016 and 2015.
At December 31, 2016, approximately 6% of our stockholders’ equity and debt and 10% of our operating income was denominated in the Canadian dollar. Approximately 5% of our stockholders’ equity and debt and 9% of our operating income was denominated in foreign currencies, primarily the Canadian dollar, at December 31, 2015. We do not have an investment in foreign operations considered to be in highly inflationary economies.

38



Item 8.
Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
 
Page
Financial Statements:
 
Report of Independent Registered Public Accounting Firm
Consolidated Statement of Operations for the years ended December 31, 2016, 2015, and 2014
Consolidated Statement of Comprehensive Income for the years ended December 31, 2016, 2015, and 2014
Consolidated Balance Sheet as of December 31, 2016 and 2015
Consolidated Statement of Cash Flows for the years ended December 31, 2016, 2015, and 2014
Consolidated Statement of Equity for the three years ended December 31, 2016, 2015, and 2014
Notes to Consolidated Financial Statements
1. Nature of Operations
2. Summary of Significant Accounting Policies
3. Preneed Funeral Activities
4. Preneed Cemetery Activities
5. Cemetery Perpetual Care Trusts
6. Deferred Preneed Receipts Held in Trust and Care Trusts’ Corpus
7. Goodwill and Intangible Assets
8. Income Taxes
9. Debt
10. Credit Risk and Fair Value of Financial Instruments
11. Commitments and Contingencies
12. Equity
13. Share-Based Compensation
14. Retirement Plans
15. Segment Reporting
16. Supplementary Information
17. Earnings Per Share
18. Acquisitions
19. Divestiture-Related Activities
20. Quarterly Financial Data (Unaudited)
Financial Statement Schedule:
 
II — Valuation and Qualifying Accounts
All other schedules have been omitted because the required information is not applicable or is not present in amounts sufficient to require submission or because the information required is included in the consolidated financial statements or the related notes thereto.

39




Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Service Corporation International
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Service Corporation International and its subsidiaries at December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Houston, Texas
February 15, 2017



40



SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
 
Years Ended December 31,
 
2016
 
2015
 
2014
 
(In thousands, except per share amounts)
Revenue
$
3,031,137


$
2,986,041

 
$
2,994,011

Costs and expenses
(2,354,703
)

(2,311,452
)
 
(2,318,326
)
Gross profit
676,434


674,589

 
675,685

General and administrative expenses
(137,730
)

(130,813
)
 
(184,749
)
(Losses) gains on divestitures and impairment charges, net
(26,819
)

6,522

 
116,613

Operating income
511,885

 
550,298

 
607,549

Interest expense
(162,093
)

(172,897
)
 
(177,571
)
Losses on early extinguishment of debt, net
(22,503
)

(6,918
)
 
(29,158
)
Other (expense) income, net
(631
)

(132
)
 
1,780

Income from continuing operations before income taxes
326,658

 
370,351

 
402,600

Provision for income taxes
(149,353
)

(135,027
)
 
(225,980
)
Income from continuing operations
177,305


235,324

 
176,620

Net (loss) income from discontinued operations, net of tax


(390
)
 
2,186

Net income
177,305


234,934

 
178,806

Net income attributable to noncontrolling interests
(267
)

(1,162
)
 
(6,337
)
Net income attributable to common stockholders
$
177,038


$
233,772

 
$
172,469

Basic earnings per share:
 

 
 

 
 

Net income attributable to common stockholders
$
0.92

 
$
1.17

 
$
0.82

Basic weighted average number of shares
193,086


200,356

 
210,741

Diluted earnings per share:
 

 
 

 
 

Net income attributable to common stockholders
$
0.90

 
$
1.14

 
$
0.81

Diluted weighted average number of shares
196,042


204,450

 
214,200

Dividends declared per share
$
0.51

 
$
0.44

 
$
0.34


(See notes to consolidated financial statements)

41



SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
 
 
 
 
 
 
 
Years Ended December 31,
 
2016
 
2015
 
2014
 
(In thousands)
Net income
$
177,305

 
$
234,934

 
$
178,806

Other comprehensive income:
 
 
 
 
 
Foreign currency translation adjustments
10,331

 
(53,283
)
 
(32,096
)
Reclassification of foreign currency translation adjustments to discontinued operations

 

 
3,114

Total comprehensive income
187,636

 
181,651

 
149,824

Total comprehensive income attributable to noncontrolling interests
(270
)
 
(1,129
)
 
(6,382
)
Total comprehensive income attributable to common stockholders
$
187,366

 
$
180,522

 
$
143,442

(See notes to consolidated financial statements)

42



SERVICE CORPORATION INTERNATIONAL

CONSOLIDATED BALANCE SHEET
 
December 31,
 
2016
 
2015
 
(In thousands, except share amounts)
ASSETS
Current assets:
 

 
 

Cash and cash equivalents
$
194,986

 
$
134,599

Receivables, net
98,455

 
90,462

Inventories
26,431

 
27,835

Other
34,524

 
47,155

Total current assets
354,396

 
300,051

Preneed funeral receivables, net and trust investments
1,817,445

 
1,760,297

Preneed cemetery receivables, net and trust investments
2,487,720

 
2,318,167

Cemetery property
1,776,935

 
1,753,015

Property and equipment, net
1,827,587

 
1,846,722

Goodwill
1,799,081

 
1,796,340

Deferred charges and other assets
567,520

 
582,378

Cemetery perpetual care trust investments
1,407,465

 
1,319,427

Total assets
$
12,038,149

 
$
11,676,397

LIABILITIES & EQUITY
Current liabilities:
 

 
 

Accounts payable and accrued liabilities
$
439,936

 
$
422,816

Current maturities of long-term debt
89,974

 
86,823

Income taxes payable
7,960

 
1,373

Total current liabilities
537,870

 
511,012

Long-term debt
3,196,616

 
3,037,605

Deferred preneed funeral revenue
581,280

 
557,897

Deferred preneed cemetery revenue
1,150,137

 
1,120,001

Deferred tax liability
454,638

 
470,584

Other liabilities
510,322

 
496,947

Deferred preneed receipts held in trust
3,103,796

 
2,973,386

Care trusts’ corpus
1,408,243

 
1,319,564

Commitments and contingencies (Note 11)


 


Equity:
 
 
 
Common stock, $1 per share par value, 500,000,000 shares authorized, 195,403,644 and 200,859,676 shares issued, respectively, and 189,405,244 and 195,772,876 shares outstanding, respectively
189,405

 
195,773

Capital in excess of par value
990,203

 
1,092,106

Accumulated deficit
(103,387
)
 
(109,351
)
Accumulated other comprehensive income
16,492

 
6,164

Total common stockholders’ equity
1,092,713

 
1,184,692