NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Nature of Operations
We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries operating in the United States and Canada. Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.
Funeral service locations provide all professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles, arranging and directing services, removal, preparation, embalming, cremations, memorialization, and catering. Funeral merchandise, including burial caskets and related accessories, urns and other cremation receptacles, outer burial containers, flowers, online and video tributes, stationery products, casket and cremation memorialization products, and other ancillary merchandise, is sold at funeral service locations.
Our cemeteries provide cemetery property interment rights, including developed lots, lawn crypts, mausoleum spaces, niches, and other cremation memorialization and interment options. Cemetery merchandise and services, including memorial markers and bases, outer burial containers, flowers and floral placement, other ancillary merchandise, graveside services, merchandise installation, travel protection, and burial openings and closings, are sold at our cemeteries.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
Our unaudited condensed consolidated financial statements include the accounts of Service Corporation International (SCI) and all subsidiaries in which we hold a controlling financial interest. Our financial statements also include the accounts of the merchandise and service trusts and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. Our interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair statement of our results for these periods. Our unaudited condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended
December 31, 2016
, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period. The Company has two reportable segments: Funeral and Cemetery. See Note 8 for further detail on the Company's segments.
Reclassifications to Prior Period Financial Statements and Adjustments
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Use of Estimates in the Preparation of Financial Statements
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in our Annual Report on Form 10-K for the year ended
December 31, 2016
. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from these estimates.
Accounting Standards Adopted in 2017
Stock Compensation
In March 2016, the FASB amended
"Stock Compensation",
modifying certain aspects of the accounting for share-based payment transactions, which requires the tax effects related to share-based payments to be recorded through the income statement, simplifies the accounting requirements for forfeitures and employers' tax withholding requirements, and modifies the presentation of certain items on the statement of cash flows. The guidance requires the tax effect related to the settlement of share-based awards be included in income tax benefit or expense in the statement of operations rather than in additional paid-in-capital. This guidance also eliminates the requirement to reclassify excess tax benefits from operating activities to financing activities within the statement of cash flows. We adopted the new guidance in the first quarter of 2017, as required, and the impact of the restricted stock deliveries and option exercises in the first six months and the second quarter of 2017 was a reduction to our provision for income taxes of
$9.3 million
and
$2.9 million
, respectively. Prior periods have not been retrospectively adjusted for adoption of this guidance. The remaining amendments to this standard, as noted above, are either
not applicable or do not change our current accounting practices and thus do not impact our consolidated financial statements, including our consolidated statement of cash flows.
Inventory
In July 2015, the FASB amended
"Inventory"
to state that an entity using an inventory method other than last-in, first out ("LIFO") or the retail inventory method should measure inventory at the lower of cost or net realizable value. The new guidance clarifies that net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance was effective for us on January 1, 2017 and our adoption did not materially impact our consolidated results of operations, consolidated financial position, or cash flows.
Recently Issued Accounting Standards
Revenue Recognition
In May 2014, the FASB issued
"Revenue from Contracts with Customers",
which replaces most existing revenue recognition guidance. During 2016, the FASB made several amendments to the new standard that clarified guidance on several matters, including principal vs. agent considerations, identifying performance obligations, sales taxes, and licensing.
The new standard, as amended, requires that we recognize revenue in the amount to which we expect to be entitled for delivery of promised goods and services to our customers. The new standard will also result in enhanced revenue-related disclosures, including any significant judgments and changes in judgments. Additionally, the new standard requires the deferral of incremental selling costs to the period in which the related revenue is recognized. The new standard will be effective for us beginning January 1, 2018 and we intend to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date.
We established a cross-functional team and analyzed the impact on our contract portfolio by reviewing our revenue streams and our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard to our contracts. The implementation team reports findings and progress of the project to management on a frequent basis. Through this process, we have identified appropriate changes to our processes, systems, and controls to support recognition and disclosure under the new standard.
In the first half of 2017, we made significant progress towards completing our evaluation of the potential changes from adopting the new standard on our future reporting and disclosures. We also made progress on our contract reviews and policy amendments, including progress on developing a process for the systemic application of the standard to existing undelivered performance obligations at adoption. Additionally, we began making programming changes to our point of sale system to accommodate recognition and disclosure under the new standard.
We have not fully determined the financial impact of the new standard to our consolidated results of operations, consolidated financial position, and cash flows. However, we believe the standard primarily impacts the manner in which we recognize a) certain nonrefundable up-front fees and b) incremental costs to acquire new preneed funeral trust contracts and preneed and atneed cemetery contracts (i.e., selling costs). The nonrefundable fees will be deferred and recognized as revenue when the related goods and services are delivered to the customer. The incremental selling costs will be deferred and recognized by specific identification based on the delivery of the respective goods and services.
We will continue to expense costs to acquire new preneed funeral insurance contracts in the period incurred. The insurance contracts are not, and will not be, reflected in our Consolidated Balance Sheet because they do not represent assets or liabilities, as we have no claim to the insurance proceeds until the contract is fulfilled and no obligation under the contract until the benefits are assigned to us at the time of need.
Financial Instruments
In January 2016, the FASB amended
"Financial Instruments"
to provide additional guidance on the recognition and measurement of financial assets and liabilities. The amendment requires investments in equity instruments to be measured at fair value with changes in fair value reflected in net income. The new guidance is effective for us on January 1, 2018, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
In June 2016, the FASB amended
"Financial Instruments"
to provide financial statement users with more decision-useful information about the expected credit losses on debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. This amendment replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to support credit loss estimates. The new guidance is effective for us on January 1, 2020, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Leases
In February 2016, the FASB amended
"Leases"
to increase transparency and comparability among organizations. Under the new standard, an entity will be required to recognize lease assets and liabilities on its balance sheet and disclose key information about leasing arrangements. In addition, the new standard offers specific accounting guidance for a lessee, a lessor,
and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This new standard will be effective for us on January 1, 2019. We are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Cash Flow
In August and November 2016, the FASB amended
"Statement of Cash Flows"
to clarify guidance on the classification of certain cash receipts and cash payments. Additionally, the guidance requires that the statement of cash flows reflects changes in restricted cash in addition to cash and cash equivalents. Amended guidance includes clarification on debt prepayment and extinguishment costs, contingent consideration in business combinations, proceeds from insurance claims, and premium payments on company-owned life insurance. The new guidance is effective for us on January 1, 2018, and we are still evaluating the impact of adoption on our consolidated statement of cash flows.
Goodwill
In January 2017, the FASB amended
"Goodwill"
to simplify the subsequent measurement of goodwill. Amended guidance eliminates Step 2 from the goodwill impairment test. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill. The new guidance is effective for us on January 1, 2020, and is not expected to have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
Retirement Plans
In March 2017, the FASB amended
"Retirement Plans"
to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by requiring the classification of interest costs and actuarial gains and losses separately from operating income. The new guidance is effective for us on January 1, 2018, and we are still evaluating the impact on our consolidated results of operations, consolidated financial position, and cash flows.
Stock Compensation
In May 2017, the FASB amended
"Stock Compensation"
to clarify which changes in terms and conditions of share-based awards require accounting for as modifications. Under the new guidance, modification accounting is required only if the fair value, vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions.
The new guidance is effective for us on January 1, 2018 and is not expected to have an impact on our consolidated results of operations, consolidated financial position, and cash flows.
3. Preneed Activities
Preneed receivables, net and trust investments
The components of
Preneed receivables, net and trust investments
in our unaudited condensed Consolidated Balance Sheet at
June 30, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Preneed funeral receivables
|
$
|
327,138
|
|
|
$
|
312,556
|
|
Preneed cemetery receivables
|
1,091,264
|
|
|
1,038,592
|
|
Preneed receivables from customers
|
1,418,402
|
|
|
1,351,148
|
|
Unearned finance charge
|
(46,488
|
)
|
|
(45,989
|
)
|
Allowance for cancellation
|
(108,411
|
)
|
|
(104,740
|
)
|
Preneed receivables, net
|
$
|
1,263,503
|
|
|
$
|
1,200,419
|
|
|
|
|
|
Trust investments, at market
|
$
|
3,857,858
|
|
|
$
|
3,936,908
|
|
Cash held in trust
(1)
|
648,003
|
|
|
304,055
|
|
Insurance-backed fixed income securities and other
|
268,721
|
|
|
271,248
|
|
Trust investments
|
4,774,582
|
|
|
4,512,211
|
|
Less: Cemetery perpetual care trust investments
|
(1,465,563
|
)
|
|
(1,407,465
|
)
|
Preneed trust investments
|
$
|
3,309,019
|
|
|
$
|
3,104,746
|
|
|
|
|
|
Preneed receivables, net and trust investments
|
$
|
4,572,522
|
|
|
$
|
4,305,165
|
|
|
|
(1)
|
The higher cash balance at June 30, 2017 reflects the liquidation of certain trust assets for realignment within our trust structures that were reinvested subsequent to quarter end.
|
The table below sets forth certain investment-related activities associated with our trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
(In thousands)
|
Deposits
|
$
|
106,771
|
|
|
$
|
87,152
|
|
|
$
|
191,258
|
|
|
$
|
161,671
|
|
Withdrawals
|
$
|
104,641
|
|
|
$
|
86,168
|
|
|
$
|
197,723
|
|
|
$
|
170,043
|
|
Purchases of available-for-sale securities
|
$
|
387,415
|
|
|
$
|
349,789
|
|
|
$
|
904,571
|
|
|
$
|
641,471
|
|
Sales of available-for-sale securities
(1)
|
$
|
738,302
|
|
|
$
|
336,491
|
|
|
$
|
1,227,167
|
|
|
$
|
601,070
|
|
|
|
(1)
|
The higher activity in the second quarter reflects the liquidation of certain trust assets for realignment within our trust structures that were reinvested subsequent to quarter end.
|
The costs and values associated with trust investments recorded at fair value at
June 30, 2017
and
December 31, 2016
are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Fair value represents the value of the underlying securities held by the trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
39,324
|
|
|
$
|
26
|
|
|
$
|
(10
|
)
|
|
$
|
39,340
|
|
Canadian government
|
2
|
|
81,661
|
|
|
327
|
|
|
(364
|
)
|
|
81,624
|
|
Corporate
|
2
|
|
17,859
|
|
|
326
|
|
|
(3
|
)
|
|
18,182
|
|
Residential mortgage-backed
|
2
|
|
426
|
|
|
17
|
|
|
(1
|
)
|
|
442
|
|
Asset-backed
|
2
|
|
318
|
|
|
19
|
|
|
(7
|
)
|
|
330
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
6,716
|
|
|
186
|
|
|
(155
|
)
|
|
6,747
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
1,059,056
|
|
|
178,940
|
|
|
(24,327
|
)
|
|
1,213,669
|
|
Canada
|
1
|
|
29,392
|
|
|
11,524
|
|
|
(451
|
)
|
|
40,465
|
|
Other international
|
1
|
|
58,284
|
|
|
8,454
|
|
|
(4,338
|
)
|
|
62,400
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
683,976
|
|
|
59,066
|
|
|
(15,324
|
)
|
|
727,718
|
|
Fixed income
|
1
|
|
957,617
|
|
|
11,705
|
|
|
(29,715
|
)
|
|
939,607
|
|
Other
|
3
|
|
4,921
|
|
|
3,004
|
|
|
(1
|
)
|
|
7,924
|
|
Trust investments, at fair value
|
|
|
2,939,550
|
|
|
273,594
|
|
|
(74,696
|
)
|
|
3,138,448
|
|
Fixed income commingled funds
|
|
|
529,020
|
|
|
12,607
|
|
|
(5,507
|
)
|
|
536,120
|
|
Private equity
|
|
|
185,549
|
|
|
13,243
|
|
|
(15,502
|
)
|
|
183,290
|
|
Trust investments, at net asset value
|
|
|
714,569
|
|
|
25,850
|
|
|
(21,009
|
)
|
|
719,410
|
|
Trust investments, at market
|
|
|
$
|
3,654,119
|
|
|
$
|
299,444
|
|
|
$
|
(95,705
|
)
|
|
$
|
3,857,858
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
145,315
|
|
|
$
|
884
|
|
|
$
|
(838
|
)
|
|
$
|
145,361
|
|
Canadian government
|
2
|
|
79,141
|
|
|
409
|
|
|
(222
|
)
|
|
79,328
|
|
Corporate
|
2
|
|
18,934
|
|
|
295
|
|
|
(227
|
)
|
|
19,002
|
|
Residential mortgage-backed
|
2
|
|
333
|
|
|
1
|
|
|
(1
|
)
|
|
333
|
|
Asset-backed
|
2
|
|
448
|
|
|
16
|
|
|
(31
|
)
|
|
433
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
2,907
|
|
|
83
|
|
|
(156
|
)
|
|
2,834
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
1,107,942
|
|
|
151,146
|
|
|
(35,542
|
)
|
|
1,223,546
|
|
Canada
|
1
|
|
25,708
|
|
|
10,030
|
|
|
(455
|
)
|
|
35,283
|
|
Other international
|
1
|
|
83,238
|
|
|
4,995
|
|
|
(10,632
|
)
|
|
77,601
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
688,120
|
|
|
19,962
|
|
|
(56,857
|
)
|
|
651,225
|
|
Fixed income
|
1
|
|
875,615
|
|
|
6,203
|
|
|
(46,219
|
)
|
|
835,599
|
|
Other
|
3
|
|
4,712
|
|
|
2,468
|
|
|
(17
|
)
|
|
7,163
|
|
Trust investments, at fair value
|
|
|
3,032,413
|
|
|
196,492
|
|
|
(151,197
|
)
|
|
3,077,708
|
|
Fixed income commingled funds
|
|
|
692,434
|
|
|
8,524
|
|
|
(12,234
|
)
|
|
688,724
|
|
Private equity
|
|
|
175,881
|
|
|
9,812
|
|
|
(15,217
|
)
|
|
170,476
|
|
Trust investments, at net asset value
|
|
|
868,315
|
|
|
18,336
|
|
|
(27,451
|
)
|
|
859,200
|
|
Trust investments, at market
|
|
|
$
|
3,900,728
|
|
|
$
|
214,828
|
|
|
$
|
(178,648
|
)
|
|
$
|
3,936,908
|
|
As of
June 30, 2017
, our unfunded commitment for our private equity and other investments was
$124.3 million
which, if called, would be funded by the assets of the trusts.
The change in our market-based trust investments with significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
(In thousands)
|
Fair value, beginning balance
|
$
|
7,313
|
|
|
$
|
7,991
|
|
|
$
|
7,163
|
|
|
$
|
8,162
|
|
Net unrealized gains included in
Accumulated other comprehensive income
(1)
|
660
|
|
|
555
|
|
|
810
|
|
|
384
|
|
Purchases
|
28
|
|
|
25
|
|
|
28
|
|
|
25
|
|
Sales
|
(77
|
)
|
|
(18
|
)
|
|
(77
|
)
|
|
(18
|
)
|
Fair value, ending balance
|
$
|
7,924
|
|
|
$
|
8,553
|
|
|
$
|
7,924
|
|
|
$
|
8,553
|
|
|
|
(1)
|
All net unrealized gains recognized in
Accumulated other comprehensive income
for our trust investments are offset by a corresponding reclassification in
Accumulated other comprehensive income
to
Deferred preneed receipts held in trust
and
Care trusts' corpus
.
|
Maturity dates of our fixed income securities range from
2017
to
2040
. Maturities of fixed income securities (excluding mutual funds) at
June 30, 2017
are estimated as follows:
|
|
|
|
|
|
Fair Value
|
|
(In thousands)
|
Due in one year or less
|
$
|
84,885
|
|
Due in one to five years
|
50,412
|
|
Due in five to ten years
|
4,211
|
|
Thereafter
|
410
|
|
|
$
|
139,918
|
|
Recognized trust fund income (realized and unrealized) related to these trust investments was $
45.2 million
and $
40.3 million
for the
three
months ended
June 30, 2017
and
2016
, respectively. Recognized trust fund income (realized and unrealized) related to these trust investments was $
83.3 million
and $
80.5 million
for the
six
months ended
June 30, 2017
and
2016
, respectively.
We have determined that the remaining unrealized losses in our trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our trust investment unrealized losses, their associated values, and the duration of unrealized losses as of
June 30, 2017
and
December 31, 2016
, respectively, are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
4,879
|
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,879
|
|
|
$
|
(10
|
)
|
Canadian government
|
13,702
|
|
|
(116
|
)
|
|
3,576
|
|
|
(248
|
)
|
|
17,278
|
|
|
(364
|
)
|
Corporate
|
3,774
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
3,774
|
|
|
(3
|
)
|
Residential mortgage-backed
|
152
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
152
|
|
|
(1
|
)
|
Asset-backed
|
76
|
|
|
(7
|
)
|
|
—
|
|
|
—
|
|
|
76
|
|
|
(7
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
1,817
|
|
|
(58
|
)
|
|
523
|
|
|
(97
|
)
|
|
2,340
|
|
|
(155
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
237,944
|
|
|
(21,780
|
)
|
|
19,785
|
|
|
(2,547
|
)
|
|
257,729
|
|
|
(24,327
|
)
|
Canada
|
2,175
|
|
|
(359
|
)
|
|
924
|
|
|
(92
|
)
|
|
3,099
|
|
|
(451
|
)
|
Other international
|
6,198
|
|
|
(856
|
)
|
|
9,868
|
|
|
(3,482
|
)
|
|
16,066
|
|
|
(4,338
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
267,609
|
|
|
(8,139
|
)
|
|
31,384
|
|
|
(7,185
|
)
|
|
298,993
|
|
|
(15,324
|
)
|
Fixed income
|
102,861
|
|
|
(1,578
|
)
|
|
299,472
|
|
|
(28,137
|
)
|
|
402,333
|
|
|
(29,715
|
)
|
Other
|
—
|
|
|
—
|
|
|
16
|
|
|
(1
|
)
|
|
16
|
|
|
(1
|
)
|
Trust investments, at fair value
|
641,187
|
|
|
(32,907
|
)
|
|
365,548
|
|
|
(41,789
|
)
|
|
1,006,735
|
|
|
(74,696
|
)
|
Fixed income commingled funds
|
248,507
|
|
|
(5,114
|
)
|
|
17,589
|
|
|
(393
|
)
|
|
266,096
|
|
|
(5,507
|
)
|
Private equity
|
4,509
|
|
|
(777
|
)
|
|
72,022
|
|
|
(14,725
|
)
|
|
76,531
|
|
|
(15,502
|
)
|
Trust investments, at net asset value
|
253,016
|
|
|
(5,891
|
)
|
|
89,611
|
|
|
(15,118
|
)
|
|
342,627
|
|
|
(21,009
|
)
|
Total temporarily impaired securities
|
$
|
894,203
|
|
|
$
|
(38,798
|
)
|
|
$
|
455,159
|
|
|
$
|
(56,907
|
)
|
|
$
|
1,349,362
|
|
|
$
|
(95,705
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
41,409
|
|
|
$
|
(838
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
41,409
|
|
|
$
|
(838
|
)
|
Canadian government
|
2,913
|
|
|
(31
|
)
|
|
3,344
|
|
|
(191
|
)
|
|
6,257
|
|
|
(222
|
)
|
Corporate
|
2,107
|
|
|
(22
|
)
|
|
6,162
|
|
|
(205
|
)
|
|
8,269
|
|
|
(227
|
)
|
Residential mortgage-backed
|
303
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
303
|
|
|
(1
|
)
|
Asset-backed
|
28
|
|
|
(22
|
)
|
|
156
|
|
|
(9
|
)
|
|
184
|
|
|
(31
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
971
|
|
|
(53
|
)
|
|
515
|
|
|
(103
|
)
|
|
1,486
|
|
|
(156
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
271,433
|
|
|
(23,168
|
)
|
|
50,923
|
|
|
(12,374
|
)
|
|
322,356
|
|
|
(35,542
|
)
|
Canada
|
3,318
|
|
|
(383
|
)
|
|
1,078
|
|
|
(72
|
)
|
|
4,396
|
|
|
(455
|
)
|
Other international
|
19,274
|
|
|
(4,139
|
)
|
|
24,525
|
|
|
(6,493
|
)
|
|
43,799
|
|
|
(10,632
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
234,714
|
|
|
(9,825
|
)
|
|
276,504
|
|
|
(47,032
|
)
|
|
511,218
|
|
|
(56,857
|
)
|
Fixed income
|
323,917
|
|
|
(5,941
|
)
|
|
425,614
|
|
|
(40,278
|
)
|
|
749,531
|
|
|
(46,219
|
)
|
Other
|
26
|
|
|
(2
|
)
|
|
1,160
|
|
|
(15
|
)
|
|
1,186
|
|
|
(17
|
)
|
Trust investments, at fair value
|
900,413
|
|
|
(44,425
|
)
|
|
789,981
|
|
|
(106,772
|
)
|
|
1,690,394
|
|
|
(151,197
|
)
|
Fixed income commingled funds
|
473,550
|
|
|
(11,714
|
)
|
|
20,587
|
|
|
(520
|
)
|
|
494,137
|
|
|
(12,234
|
)
|
Private equity
|
22,677
|
|
|
(750
|
)
|
|
73,100
|
|
|
(14,467
|
)
|
|
95,777
|
|
|
(15,217
|
)
|
Trust investments, at net asset value
|
496,227
|
|
|
(12,464
|
)
|
|
93,687
|
|
|
(14,987
|
)
|
|
589,914
|
|
|
(27,451
|
)
|
Total temporarily impaired securities
|
$
|
1,396,640
|
|
|
$
|
(56,889
|
)
|
|
$
|
883,668
|
|
|
$
|
(121,759
|
)
|
|
$
|
2,280,308
|
|
|
$
|
(178,648
|
)
|
4. Income Taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitation, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was
32.5%
and
51.3%
for the three months ended
June 30, 2017
and
2016
, respectively. Our effective tax rate was a benefit of
21.6%
and expense of
43.6%
for the
six
months ended
June 30, 2017
and
2016
, respectively. The effective tax rate for the
three and six months ended
June 30, 2017
is lower than the federal statutory tax rate of
35%
primarily due to the recent IRS tax settlement discussed below and a result of tax benefits recognized on the settlement of employee share-based awards.
Unrecognized Tax Benefits
As of June 30, 2017, the total amount of our unrecognized tax benefits was
$79.5 million
and the total amount of our accrued interest was
$7.9 million
.
We reached an agreement with the Internal Revenue Service (IRS) to resolve the issues under audit with respect to tax years
1999 through 2005
. In March 2017, we received from the IRS Office of Appeals the fully executed Form 870-AD, which, subject to finalization of computations, effectively settles the issues under audit for those years. As a result of this resolution, we recognized a reduction in our unrecognized tax benefits of
$143.0 million
, of which
$102.5 million
was recognized as an income tax benefit for the matters that were effectively settled with an increase in our taxes payable of
$40.5 million
.
In June 2017
, we made
$34.2 million
in settlement payments and associated interest to the IRS.
We remain under audit for years 2006 and 2007 as a result of carryback claims. In addition, we are under audit by various state jurisdictions for years
2000 through 2015
. There are currently no federal or provincial audits in Canada. It is reasonably possible that the amount of unrecognized tax benefits could significantly decrease over the next 12 months. However, due to the uncertainty regarding the timing of completion and possible outcomes on the outstanding audits, a current estimate of the range of decrease that may occur within the next 12 months cannot be made.
5. Debt
Debt as of
June 30, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
7.625% Senior Notes due October 2018
|
$
|
250,000
|
|
|
$
|
250,000
|
|
4.5% Senior Notes due November 2020
|
200,000
|
|
|
200,000
|
|
8.0% Senior Notes due November 2021
|
150,000
|
|
|
150,000
|
|
5.375% Senior Notes due January 2022
|
425,000
|
|
|
425,000
|
|
5.375% Senior Notes due May 2024
|
850,000
|
|
|
850,000
|
|
7.5% Senior Notes due April 2027
|
200,000
|
|
|
200,000
|
|
Term Loan due March 2021
|
656,250
|
|
|
673,750
|
|
Bank Credit Facility due March 2021
|
460,000
|
|
|
350,000
|
|
Obligations under capital leases
|
189,058
|
|
|
208,758
|
|
Mortgage notes and other debt, maturities through 2050
|
3,687
|
|
|
3,753
|
|
Unamortized premiums, net
|
7,889
|
|
|
8,313
|
|
Unamortized debt issuance costs
|
(30,215
|
)
|
|
(32,984
|
)
|
Total debt
|
3,361,669
|
|
|
3,286,590
|
|
Less: Current maturities of long-term debt
|
(70,725
|
)
|
|
(89,974
|
)
|
Total long-term debt
|
$
|
3,290,944
|
|
|
$
|
3,196,616
|
|
Current maturities of debt at
June 30, 2017
include amounts due under our Term Loan, mortgage notes and other debt, and capital leases within the next year.
Our consolidated debt had a weighted average interest rate of
4.80%
and
4.68%
at
June 30, 2017
and
December 31, 2016
, respectively. Approximately
62%
and
63%
of our total debt had a fixed interest rate at both
June 30, 2017
and
December 31, 2016
, respectively.
During the
six months ended June 30, 2017
and
2016
, we paid
$79.9 million
and
$80.2 million
in cash interest, respectively.
Bank Credit Agreement
As of
June 30, 2017
, we have
$460.0 million
of outstanding borrowings under our Bank Credit Facility due
March 2021
;
$656.3 million
of outstanding borrowings under our Term Loan due
March 2021
; and issued
$34.3 million
of letters of credit.
The bank credit agreement provides us with flexibility for working capital, if needed, and is guaranteed by a majority of our domestic subsidiaries. The subsidiary guaranty is a guaranty of payment of the outstanding amount of the total lending commitment, including letters of credit. The bank credit agreement contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, and certain dividend and share repurchase restrictions. As of
June 30, 2017
, we were in compliance with all of our debt covenants. We pay a quarterly fee on the unused commitment, which was
0.30%
at
June 30, 2017
. As of
June 30, 2017
, we have
$205.7 million
in borrowing capacity under the Bank Credit Facility.
Debt Issuances and Additions
In the first six months of 2017, we drew
$110.0 million
on our Bank Credit Facility to make required payments on our term loan, to fund our IRS settlement payments, and for general corporate purposes.
Debt Extinguishments and Reductions
During the
six months ended June 30, 2017
, we made aggregate principal debt payments of
$17.6 million
, including
$17.5 million
for scheduled payments towards our Term Loan.
6. Fair Value of Financial Instruments
Fair Value Estimates
The fair value estimates of the following financial instruments have been determined using available market information and appropriate valuation methodologies. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair value of receivables on preneed contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms.
The fair value of our debt instruments at
June 30, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
7.625% Senior Notes due October 2018
|
$
|
267,203
|
|
|
$
|
272,353
|
|
4.5% Senior Notes due November 2020
|
204,000
|
|
|
205,000
|
|
8.0% Senior Notes due November 2021
|
178,500
|
|
|
175,500
|
|
5.375% Senior Notes due January 2022
|
438,298
|
|
|
444,614
|
|
5.375% Senior Notes due May 2024
|
896,920
|
|
|
884,000
|
|
7.5% Senior Notes due April 2027
|
239,286
|
|
|
231,590
|
|
Term Loan due March 2021
|
656,250
|
|
|
673,750
|
|
Bank Credit Facility due March 2021
|
460,000
|
|
|
350,000
|
|
Mortgage notes and other debt, maturities through 2050
|
3,687
|
|
|
3,753
|
|
Total fair value of debt instruments
|
$
|
3,344,144
|
|
|
$
|
3,240,560
|
|
The fair value of our long-term, fixed-rate loans were estimated using market prices for those loans, and therefore they are classified within Level 2 of the fair value measurements hierarchy. The Term Loan, Bank Credit Facility agreement, and the mortgage and other debt are classified within Level 3 of the fair value measurements hierarchy. The fair value of these instruments has been estimated using a discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. An increase (decrease) in the inputs results in a directionally opposite change in the fair value of the instruments.
7. Equity
(All shares reported in whole numbers)
Our components of
Accumulated other comprehensive income
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Unrealized
Gains and
Losses
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2016
|
$
|
16,492
|
|
|
$
|
—
|
|
|
$
|
16,492
|
|
Activity in 2017
|
13,598
|
|
|
—
|
|
|
13,598
|
|
Net unrealized gains associated with available-for-sale securities of the trusts, net of taxes
|
—
|
|
|
107,499
|
|
|
107,499
|
|
Reclassification of net unrealized gain activity attributable to the
Deferred preneed receipts held in trust
and
Care trusts’ corpus,
net of taxes
|
—
|
|
|
(107,499
|
)
|
|
(107,499
|
)
|
Balance at June 30, 2017
|
$
|
30,090
|
|
|
$
|
—
|
|
|
$
|
30,090
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
6,164
|
|
|
$
|
—
|
|
|
$
|
6,164
|
|
Activity in 2016
|
23,125
|
|
|
—
|
|
|
23,125
|
|
Net unrealized gains associated with available-for-sale securities of the trusts, net of taxes
|
—
|
|
|
70,208
|
|
|
70,208
|
|
Reclassification of net unrealized gains activity attributable to the
Deferred preneed receipts held in trust
and
Care trusts’ corpus
, net of taxes
|
—
|
|
|
(70,208
|
)
|
|
(70,208
|
)
|
Balance at June 30, 2016
|
$
|
29,289
|
|
|
$
|
—
|
|
|
$
|
29,289
|
|
The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. The U.S. dollar amount that arises from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the foreign currency translation adjustment in
Accumulated other comprehensive income
.
Share Repurchases
Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our stock repurchase program. During the
six
months ended
June 30, 2017
, we repurchased
3,969,544
shares of common stock at an aggregate cost of
$120.1 million
, which is an average cost per share of
$30.25
. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately
$248.2 million
at
June 30, 2017
.
Subsequent to
June 30, 2017
, we repurchased
103,599
shares of common stock at an aggregate cost of
$3.5 million
, which is an average cost per share of
$33.45
. After these subsequent repurchases, the remaining dollar value of shares authorized to be repurchased under our repurchase program is
$244.7 million
.
Noncontrolling Interest
In May 2017, we purchased the remaining
11%
of the common stock of our consolidated subsidiary, Wilson Financial Group, Inc. for
$4.6 million
.
8. Segment Reporting
Our operations are both product-based and geographically-based, and the reportable operating segments presented below include our funeral and cemetery operations. Our geographic areas include the United States and Canada, where we conduct both funeral and cemetery operations.
Our reportable segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral
|
|
Cemetery
|
|
Reportable
Segments
|
|
(In thousands)
|
Three months ended June 30,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2017
|
$
|
458,874
|
|
|
$
|
314,368
|
|
|
$
|
773,242
|
|
2016
|
$
|
467,104
|
|
|
$
|
284,292
|
|
|
$
|
751,396
|
|
Operating profit:
|
|
|
|
|
|
2017
|
$
|
92,077
|
|
|
$
|
91,368
|
|
|
$
|
183,445
|
|
2016
|
$
|
89,432
|
|
|
$
|
72,557
|
|
|
$
|
161,989
|
|
Six Months Ended June 30,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2017
|
$
|
957,638
|
|
|
$
|
593,314
|
|
|
$
|
1,550,952
|
|
2016
|
$
|
959,293
|
|
|
$
|
541,322
|
|
|
$
|
1,500,615
|
|
Operating profit:
|
|
|
|
|
|
2017
|
$
|
204,684
|
|
|
$
|
155,926
|
|
|
$
|
360,610
|
|
2016
|
$
|
196,643
|
|
|
$
|
128,269
|
|
|
$
|
324,912
|
|
The following table reconciles operating profit from reportable segments to our consolidated income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
|
Operating profit from reportable segments
|
$
|
183,445
|
|
|
$
|
161,989
|
|
|
$
|
360,610
|
|
|
$
|
324,912
|
|
General and administrative expenses
|
(40,590
|
)
|
|
(36,849
|
)
|
|
(83,094
|
)
|
|
(75,753
|
)
|
Gains (losses) on divestitures and impairment charges, net
|
753
|
|
|
(30,641
|
)
|
|
5,688
|
|
|
(30,988
|
)
|
Operating income
|
143,608
|
|
|
94,499
|
|
|
283,204
|
|
|
218,171
|
|
Interest expense
|
(42,083
|
)
|
|
(39,398
|
)
|
|
(82,719
|
)
|
|
(82,480
|
)
|
Loss on early extinguishment of debt
|
—
|
|
|
(21,898
|
)
|
|
—
|
|
|
(22,479
|
)
|
Other expense, net
|
(7
|
)
|
|
(564
|
)
|
|
(441
|
)
|
|
(806
|
)
|
Income before income taxes
|
$
|
101,518
|
|
|
$
|
32,639
|
|
|
$
|
200,044
|
|
|
$
|
112,406
|
|
Our geographic area information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2017
|
$
|
728,370
|
|
|
$
|
44,872
|
|
|
$
|
773,242
|
|
2016
|
$
|
707,434
|
|
|
$
|
43,962
|
|
|
$
|
751,396
|
|
Six Months Ended June 30,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2017
|
$
|
1,455,610
|
|
|
$
|
95,342
|
|
|
$
|
1,550,952
|
|
2016
|
$
|
1,416,322
|
|
|
$
|
84,293
|
|
|
$
|
1,500,615
|
|
9. Commitments and Contingencies
Insurance Loss Reserves
We purchase comprehensive general liability, morticians’ and cemetery professional liability, automobile liability, and workers’ compensation insurance coverage, all of which are structured with high deductibles. The high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. As of
June 30, 2017
and
December 31, 2016
, we have self-insurance reserves of
$80.9 million
and
$78.0 million
, respectively.
Litigation and Regulatory Matters
We are a party to various litigation and regulatory matters, investigations, and proceedings. Some of the more frequent routine litigations incidental to our business are based on burial practices claims and employment-related matters, including discrimination, harassment, and wage and hour laws and regulations. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to vigorously defend ourselves in the matters described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.
Wage and Hour Claims
. We are named a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour pay, including but not limited to the Samborsky, Vasquez, and Romano lawsuits described below.
Charles Samborsky, et al, individually and on behalf of those persons similarly situated, v. SCI California Funeral Services, Inc., et al ;
Case No. BC544180; in the Superior Court of the State of California for the County of Los Angeles, Central District-Central Civil West Courthouse. This lawsuit was filed in April 2014 against an SCI subsidiary and purports to have been brought on behalf of employees who worked as family service counselors in California since April 2010. The plaintiffs allege causes of action for various violations of state laws regulating wage and hour pay. The plaintiffs seek unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The claims have been sent to arbitration. In July 2017, the arbitrator entered an award rejecting the plantiffs' claims, ruling that they did not sue the correct party. We cannot quantify our ultimate liability, if any, in this lawsuit.
Adrian Mercedes Vasquez, an individual and on behalf of others similarly situated, v. California Cemetery and Funeral Services, LLC, et al;
Case No. BC58837; in the Superior Court of the State of California for the County of Los Angeles. This lawsuit was filed in July 2015 against SCI subsidiaries and purports to be brought on behalf of current and former non-exempt California employees of defendants during the four years preceding the filing of the complaint. The plaintiff alleges numerous causes of action for alleged wage and hour pay violations. The plaintiff seeks unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The claims have been ordered to arbitration, with the arbitrator to determine whether the claims will proceed as a class or individual claims. In addition, the plaintiff filed an unfair labor practice charge against defendants with the National Labor Relations Board alleging that by enforcing a mandatory arbitration provision, defendants allegedly violated the National Labor Relations Act. We cannot quantify our ultimate liability, if any, in this lawsuit.
Nicole Romano, individually and on behalf of all others similarly situated v. SCI Direct, Inc., et al;
Case No. BC656654; in the Superior Court of California for the County of Los Angeles. This lawsuit was filed in April 2017 against an SCI subsidiary and purports to have been brought on behalf of persons who worked as independent sales representatives in California during the four years preceding the filing of the complaint. The plaintiff alleges numerous causes of action for alleged wage and hour pay violations, including misclassifying the independent sales representatives as independent contractors instead of employees. The plaintiff seeks unpaid wages, compulsory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. We cannot quantify our ultimate liability, if any, in the lawsuit.
Claims Regarding Acquisition of Stewart Enterprises
. We are involved in the following lawsuit.
Karen Moulton, Individually and on behalf of all others similarly situated v. Stewart Enterprises, Inc., Service Corporation International and others ;
Case No. 2013-5636; in the Civil District Court Parish of New Orleans. This case was filed as a class action in June 2013 against SCI and our subsidiary in connection with SCI's acquisition of Stewart Enterprises, Inc. The plaintiffs allege that SCI aided and abetted breaches of fiduciary duties by Stewart Enterprises and its board of directors in negotiating the combination of Stewart Enterprises with a subsidiary of SCI. The plaintiffs seek damages concerning the combination. We filed exceptions to the plaintiffs’ complaint that were granted in June 2014. Thus, subject to appeals, SCI will no longer be party to the suit. The case has continued against our subsidiary Stewart Enterprises and its former individual directors. However, in October 2016, the court entered a judgment dismissing all of plaintiffs’ claims. Plaintiffs have filed documents indicating that they are appealing the dismissal. We cannot quantify our ultimate liability, if any, for the payment of damages.
Operational Claims.
We are subject to the following lawsuit.
Linda Allard, on behalf of herself and all others similarly situated v. SCI Direct, Inc.,
Case No 16-1033; In the United States District Court, Middle District of Tennessee. This case was filed in June 2016 as a class action under the Telephone Consumer Protection Act (the Act). Plaintiff alleges she received telemarketing telephone calls that were made with a prerecorded voice or made by an automatic telephone dialing system in violation of the Act. Plaintiff seeks actual and statutory damages, as well as attorney’s fees and costs. In July 2017, the court denied our subsidiary's motion for summary judgment. The parties have scheduled a mediation for August 1, 2017. We cannot quantify our ultimate liability, if any, in this lawsuit.
Unclaimed Property Audit.
We are involved in the following matter.
We received notices from a third party auditor representing unclaimed property departments of
36
states regarding preneed funeral and cemetery contracts that were not funded by the purchase and assignment of the proceeds of insurance policies. The auditor claims that we are subject to the laws of those states concerning escheatment of unclaimed funds. The auditor seeks escheatment of funds from the portion of such contracts for which it claims that we will probably not be required to provide services or merchandise in the future. No actual audits have commenced at this time. We cannot quantify our ultimate liability, if any, in this matter.
The ultimate outcome of the matters described above cannot be determined at this time. We intend to vigorously defend all of the above matters; however, an adverse decision in one or more of such matters could have a material effect on us, our financial condition, results of operations, and cash flows.
10. Earnings Per Share
Basic earnings per common share (EPS) excludes dilution and is computed by dividing
Net income attributable to common stockholders
by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common shares that then shared in our earnings.
A reconciliation of the numerators and denominators of the basic and diluted EPS computations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands, except per share amounts)
|
Amounts attributable to common stockholders:
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
Net income — basic
|
$
|
68,481
|
|
|
$
|
15,620
|
|
|
$
|
243,183
|
|
|
$
|
63,065
|
|
After tax interest on convertible debt
|
13
|
|
|
10
|
|
|
25
|
|
|
22
|
|
Net income — diluted
|
$
|
68,494
|
|
|
$
|
15,630
|
|
|
$
|
243,208
|
|
|
$
|
63,087
|
|
Weighted average shares (denominator):
|
|
|
|
|
|
|
|
Weighted average shares — basic
|
187,597
|
|
|
193,806
|
|
|
187,927
|
|
|
194,366
|
|
Stock options
|
4,333
|
|
|
2,788
|
|
|
4,389
|
|
|
2,975
|
|
Restricted stock units
|
87
|
|
|
3
|
|
|
74
|
|
|
1
|
|
Convertible debt
|
121
|
|
|
121
|
|
|
121
|
|
|
121
|
|
Weighted average shares — diluted
|
192,138
|
|
|
196,718
|
|
|
192,511
|
|
|
197,463
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.37
|
|
|
$
|
0.08
|
|
|
$
|
1.29
|
|
|
$
|
0.32
|
|
Diluted
|
$
|
0.36
|
|
|
$
|
0.08
|
|
|
$
|
1.26
|
|
|
$
|
0.32
|
|
The computation of diluted EPS excludes outstanding stock options and restricted stock units in certain periods in which the inclusion of such options or restricted stock units would be anti-dilutive in the periods presented. Total options not included in the computation of dilutive EPS are as follows (in shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
|
|
|
|
Antidilutive options
|
1,523
|
|
|
1,799
|
|
|
1,212
|
|
|
2,338
|
|
Antidilutive restricted stock units
|
—
|
|
|
—
|
|
|
—
|
|
|
24
|
|
Total common stock equivalents excluded from computation
|
1,523
|
|
|
1,799
|
|
|
1,212
|
|
|
2,362
|
|
11. Divestiture-Related Activities
As divestitures occur in the normal course of business, gains or losses on the sale of such assets are recognized in the income statement line item
Gains
(
losses) on divestitures and impairment charges, net,
which consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2017
|
|
2016
|
|
2017
|
|
2016
|
|
(In thousands)
|
Gains on divestitures, net
|
$
|
5,922
|
|
|
$
|
685
|
|
|
$
|
22,673
|
|
|
$
|
2,111
|
|
Impairment losses
|
(5,169
|
)
|
|
(31,326
|
)
|
|
(16,985
|
)
|
|
(33,099
|
)
|
Gains (losses) on divestitures and impairment charges, net
|
$
|
753
|
|
|
$
|
(30,641
|
)
|
|
$
|
5,688
|
|
|
$
|
(30,988
|
)
|