SCI 10-Q Quarterly Report Sept. 30, 2010

SCI 10-Q Quarter ended Sept. 30, 2010

Exhibits

Exhibits

SERVICE CORP INTERNATIONAL

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10-Q 1 h77017e10vq.htm FORM 10-Q e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2010


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number 1-6402-1

SERVICE CORPORATION INTERNATIONAL

(Exact name of registrant as specified in its charter)


Texas		74-1488375
(State or other jurisdiction of incorporation or organization)		(I. R. S. employer identification number)

1929 Allen Parkway, Houston, Texas		77019
(Address of principal executive offices)		(Zip code)

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

None
(Former name, former address, or former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES þ NO o

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

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act). YES o NO þ

The number of shares outstanding of the registrant’s common stock as of October 25, 2010 was 244,426,592 (net of treasury shares).

SERVICE CORPORATION INTERNATIONAL

INDEX


	Page
Glossary		3
Part I. Financial Information		4
Item 1. Financial Statements		4
Unaudited Condensed Consolidated Statement of Operations — Three and Nine Months Ended September 30, 2010 and 2009		4
Unaudited Condensed Consolidated Balance Sheet — September 30, 2010 and December 31, 2009		5
Unaudited Condensed Consolidated Statement of Cash Flows — Nine Months Ended September 30, 2010 and 2009		6
Unaudited Condensed Consolidated Statement of Equity — Nine Months Ended September 30, 2010 and 2009		7
Notes to Unaudited Condensed Consolidated Financial Statements		8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		35
The Company		35
Financial Condition, Liquidity, and Capital Resources		36
Results of Operations — Three and Nine Months Ended September 30, 2010 and 2009		41
Critical Accounting Policies		47
Cautionary Statement on Forward-Looking Statements		48
Item 3. Quantitative and Qualitative Disclosures About Market Risk		49
Item 4. Controls and Procedures		49
Part II. Other Information		50
Item 1. Legal Proceedings		50
Item 1A. Risk Factors		50
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		50
Item 6. Exhibits		50
Signature		51
EX-12.1
EX-31.1
EX-31.2
EX-32.1
EX-32.2
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

GLOSSARY

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

Atneed — Funeral and cemetery arrangements after a death has occurred.

Burial Vaults — A reinforced container intended to house and protect the casket before it is placed in the ground.

Cemetery Perpetual Care or Endowment Care Fund — A trust fund established for the purpose of maintaining cemetery grounds and property into perpetuity.

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

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

Interment — The burial or final placement of human remains in the ground.

Lawn Crypt — An underground outer burial receptacle constructed of concrete and reinforced steel, which is usually pre-installed in predetermined designated areas.

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

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

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

Preneed — Purchase of products and services prior to a death occurring.

Preneed Backlog — Future revenues from unfulfilled preneed funeral and cemetery contractual arrangements.

Production — Sales of preneed funeral and preneed or atneed cemetery contracts.

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.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

SERVICE CORPORATION INTERNATIONAL

CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS

(UNAUDITED)

(In thousands, except per share amounts)


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
Revenues	$	533,165		$	497,217		$	1,619,301		$	1,521,761
Costs and expenses		(430,518	)		(396,054	)		(1,295,049	)		(1,218,653	)

Gross profit		102,647			101,163			324,252			303,108
General and administrative expenses		(26,860	)		(20,961	)		(80,035	)		(69,213	)
(Losses) gains on divestitures and impairment charges, net		(7,291	)		(2,221	)		5,831			(1,280	)

Operating income		68,496			77,981			250,048			232,615
Interest expense		(31,497	)		(29,383	)		(96,281	)		(93,439	)
(Losses) gains on early extinguishment of debt		(9,066	)		482			(9,357	)		3,922
Other income, net		688			885			3,077			1,430

Income before income taxes		28,621			49,965			147,487			144,528
Provision for income taxes		(9,941	)		(19,403	)		(57,255	)		(56,006	)

Net income		18,680			30,562			90,232			88,522
Net loss (income) attributable to noncontrolling interests		85			600			(270	)		274

Net income attributable to common stockholders		18,765			31,162			89,962			88,796

Basic earnings per share	$	.08		$	.12		$	.36		$	.35
Diluted earnings per share	$	.08		$	.12		$	.36		$	.35
Basic weighted average number of shares		246,214			251,765			250,762			250,858

Diluted weighted average number of shares		247,523			253,048			252,486			251,272

Dividends declared per share	$	.04		$	.04		$	.12		$	.12

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

CONDENSED CONSOLIDATED BALANCE SHEET

(UNAUDITED)

(In thousands, except share amounts)


	September 30, 2010			December 31, 2009
Current assets:
Cash and cash equivalents	$	135,813		$	179,745
Receivables, net		88,554			92,189
Deferred tax assets		53,254			51,534
Inventories		33,713			31,117
Current assets held for sale		1,112			1,197
Other		32,049			21,640

Total current assets		344,495			377,422

Preneed funeral receivables, net and trust investments		1,371,536			1,356,353
Preneed cemetery receivables, net and trust investments		1,459,201			1,382,717
Cemetery property, at cost		1,502,771			1,489,065
Property and equipment, net		1,620,484			1,591,074
Non-current assets held for sale		5,376			80,901
Goodwill		1,288,261			1,201,332
Deferred charges and other assets		395,615			522,389
Cemetery perpetual care trust investments		962,758			889,689

Total assets	$	8,950,497		$	8,890,942

Current liabilities:
Accounts payable and accrued liabilities	$	320,860		$	314,277
Current maturities of long-term debt		22,319			49,957
Current liabilities held for sale		138			501
Income taxes		266			2,236

Total current liabilities		343,583			366,971

Long-term debt		1,798,542			1,840,532
Deferred preneed funeral revenues		591,360			596,966
Deferred preneed cemetery revenues		819,950			817,543
Deferred tax liability		303,982			246,730
Non-current liabilities held for sale		2,583			68,332
Other liabilities		384,960			378,768
Deferred preneed funeral and cemetery receipts held in trust		2,272,087			2,201,403
Care trusts’ corpus		962,706			890,909
Commitments and contingencies (Note 16)
Equity:
Common stock, $1 per share par value, 500,000,000 shares authorized, 254,950,906 and 254,027,384 shares issued, respectively, and 244,642,892 and 254,017,384 shares outstanding, respectively		244,643			254,017
Capital in excess of par value		1,637,828			1,735,493
Accumulated deficit		(513,914	)		(603,876	)
Accumulated other comprehensive income		101,903			97,142

Total common stockholders’ equity		1,470,460			1,482,776

Noncontrolling interests		284			12

Total equity		1,470,744			1,482,788

Total liabilities and equity	$	8,950,497		$	8,890,942

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

(In thousands)


	Nine Months Ended
	September 30,
	2010			2009
Cash flows from operating activities:
Net income	$	90,232		$	88,522
Adjustments to reconcile net income to net cash provided by operating activities:
Losses (gains) on early extinguishment of debt		9,357			(3,922	)
Depreciation and amortization		87,676			82,821
Amortization of intangible assets		18,816			16,148
Amortization of cemetery property		23,438			21,723
Amortization of loan costs		3,223			2,526
Provision for doubtful accounts		4,137			8,606
Provision for deferred income taxes		39,273			42,418
(Gains) losses on divestitures and impairment charges, net		(5,831	)		1,280
Share-based compensation		6,714			7,505
Excess tax benefits from share-based awards		(831	)		—
Change in assets and liabilities, net of effects from acquisitions and divestitures:
Decrease in receivables		6,793			13,296
(Increase) decrease in other assets		(1,094	)		12,916
Increase in payables and other liabilities		7,687			21,285
Effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables, net and trust investments		30,434			18,645
(Decrease) increase in deferred preneed funeral revenue		(4,218	)		8,679
Decrease in deferred preneed funeral receipts held in trust		(27,240	)		(24,858	)
Effect of cemetery production and deliveries:
Increase in preneed cemetery receivables, net and trust investments		(29,849	)		(27,019	)
Increase in deferred preneed cemetery revenue		7,369			20,590
Increase (decrease) in deferred preneed cemetery receipts held in trust		1,496			(5,811	)
Other		(1,471	)		(1	)

Net cash provided by operating activities		266,111			305,349
Cash flows from investing activities:
Capital expenditures		(67,443	)		(62,460	)
Proceeds from divestitures and sales of property and equipment, net		82,866			20,984
Acquisitions		(281,800	)		(3,359	)
Net withdrawals (deposits) of restricted funds and other		26,440			(1,023	)

Net cash used in investing activities		(239,937	)		(45,858	)
Cash flows from financing activities:
Proceeds from issuance of long-term debt		245,000			—
Debt issuance costs		(6,203	)		—
Payments of debt		(32,398	)		(32,322	)
Early extinguishment of debt		(118,562	)		(86,114	)
Principal payments on capital leases		(40,716	)		(18,704	)
Proceeds from exercise of stock options		1,469			13,405
Excess tax benefits from share-based awards		831			—
Purchase of Company common stock		(86,871	)		—
Payments of dividends		(30,224	)		(30,060	)
Bank overdrafts and other		(5,655	)		(9,240	)

Net cash used in financing activities		(73,329	)		(163,035	)
Effect of foreign currency on cash and cash equivalents		3,223			8,632

Net (decrease) increase in cash and cash equivalents		(43,932	)		105,088
Cash and cash equivalents at beginning of period		179,745			128,397

Cash and cash equivalents at end of period	$	135,813		$	233,485

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

CONDENSED CONSOLIDATED STATEMENT OF EQUITY

(UNAUDITED)

(In thousands)


												Accumulated
						Capital in						Other
	Common					Excess of			Accumulated			Comprehensive		Noncontrolling
	Stock		Treasury Stock			Par Value			Deficit			Income		Interests			Total
Balance at December 31, 2008	$	249,953	$	(481	)	$	1,733,814		$	(726,756	)	$	36,649	$	—		$	1,293,179
Net income										88,796					(274	)		88,522
Dividends declared on common stock ($.12 per share)							(30,212	)										(30,212	)
Foreign currency translation													46,244					46,244
Employee share-based compensation earned							7,505											7,505
Stock option exercises		2,811					10,594											13,405
Restricted stock awards, net of forfeitures		830					(830	)										—
Noncontrolling interest payments															(106	)		(106	)
Other		1		71			382											454

Balance at September 30, 2009	$	253,595	$	(410	)	$	1,721,253		$	(637,960	)	$	82,893	$	(380	)	$	1,418,991


Balance at December 31, 2009	$	254,027	$	(10	)	$	1,735,493		$	(603,876	)	$	97,142	$	12		$	1,482,788
Net income										89,962					270			90,232
Dividends declared on common stock ($.12 per share)							(29,830	)										(29,830	)
Foreign currency translation													4,761		2			4,763
Employee share-based compensation earned							6,714											6,714
Stock option exercises		389					1,080											1,469
Tax benefits related to share based awards							868											868
Restricted stock awards, net of forfeitures		532					(532	)										—
Purchase of Company common stock				(10,358	)		(76,513	)										(86,871	)
Other		3		60			548											611

Balance at September 30, 2010	$	254,951	$	(10,308	)	$	1,637,828		$	(513,914	)	$	101,903	$	284		$	1,470,744

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Dollars in thousands, except per share amounts)

1. Nature of Operations

We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries primarily operating in the United States and Canada. Our operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses.

Funeral service locations provide all professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles and preparation and embalming services. Funeral-related merchandise, including caskets, casket memorialization products, burial vaults, cremation receptacles, cremation memorial products, flowers, and other ancillary products and services, is sold at funeral service locations. Cemeteries provide cemetery property interment rights, including mausoleum spaces, lots, and lawn crypts, and sell cemetery-related merchandise and services, including stone and bronze memorials, markers, merchandise installations, and burial openings and closings. We also sell preneed funeral and cemetery products and services whereby a customer contractually agrees to the terms of certain products and services to be provided in the future.

2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

Our unaudited condensed consolidated financial statements include the accounts of Service Corporation International and all subsidiaries in which we hold a controlling financial interest. Our financial statements also include the accounts of the funeral merchandise and service trusts, cemetery merchandise and service trusts, and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. Our interim unaudited 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 presentation 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, 2009, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end condensed consolidated balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.

Reclassifications 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.

We recorded several immaterial adjustments to correct errors related to prior accounting periods during the nine months ended September 30, 2010. There were no adjustments related to prior accounting periods during the three months ended September 30, 2010. We do not believe these adjustments are quantitatively or qualitatively material to our unaudited condensed consolidated financial statements for the nine months ended September 30, 2010, after considering our expected 2010 annual financial results nor were such items quantitatively or qualitatively material to any of our prior annual or quarterly financial statements. The net impact of these adjustments was a decrease to our pre-tax income and net income in the amount of $1.3 million and $1.0 million, respectively, for the nine months ended September 30, 2010.

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 Form 10-K for the year ended December 31, 2009. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. As a result, actual results could differ from these estimates.

Variable Interest Entities

In June 2009, the Financial Accounting Standards Board (FASB) amended its authoritative guidance to improve financial reporting by enterprises involved with variable interest entities (VIE). Specifically, the amended guidance addresses: (1) the impact resulting from the elimination of the qualifying special-purpose entity concept in previously issued guidance, and (2) constituent concerns about the application of certain key provisions of the existing guidance on the consolidation of variable interest entities, including those in which the accounting and disclosures under the existing guidance do not always provide timely and useful information about an enterprise’s involvement in a VIE. The amended guidance was effective for us on January 1, 2010, and we have included all the required disclosures.

In December 2009, the FASB issued additional guidance on improving financial reporting by enterprises involved with variable interest entities by clarifying the principal objectives of required disclosures, which include: (1) the significant judgments and assumptions made by a reporting unit, (2) the nature of restrictions on a consolidated VIE’s assets reported by a reporting entity in its statement of financial position, including the carrying amounts of such assets and liabilities, (3) the nature of, and changes in, the risks associated with a reporting entity’s involvement with the VIE, and (4) how a reporting entity’s involvement with the VIE affects the reporting entity’s financial position, financial performance, and cash flows. The amended guidance was effective for us on January 1, 2010, and we have included all the required disclosures.

Fair Value Measurements

In January 2010, the FASB amended the Fair Value Measurements Topic of the Accounting Standards Codification (ASC) to require additional disclosures on (1) transfers between levels, (2) Level 3 activity presented on a gross basis, (3) valuation technique, and (4) inputs into the valuation. We adopted Items 1, 3, and 4 during the three months ended March 31, 2010, and the adoption did not impact our unaudited condensed unaudited condensed consolidated financial statements. Item 2 will be effective for us in the first quarter of 2011, and we do not believe this guidance will have a significant impact on our unaudited condensed consolidated financial statements.

Equity

In January 2010, the FASB provided additional guidance under the Equity Topic of the ASC to eliminate multiple approaches to accounting for elective distributions to shareholders. The additional guidance clarifies that the stock performance of a distribution to shareholders that allows them to elect to receive cash or shares with a potential limitation on the total amount of cash that all shareholders can elect to receive in aggregate is considered a share issuance. This guidance was effective for us on January 1, 2010, and retroactive application is required. The adoption changed our calculation for weighted average shares.

Consolidation

In January 2010, the FASB amended the guidance under the Consolidation Topic of the ASC to clarify the scope of a decrease in ownership of a subsidiary. The amended guidance was effective for us on January 1, 2010, and its adoption did not significantly impact our unaudited condensed consolidated financial statements.

3. Recently Issued Accounting Standards

Receivables

In July 2010, the FASB amended the Receivables Topic of the ASC to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses. The guidance also requires disclosing credit quality indicators, past due information, and modifications of its financing receivables. The amended guidance is effective for us on December 15, 2010. The amended guidance is effective for us on December 15, 2010. We are still assessing the impact on our unaudited condensed consolidated financial condition or results of operations.

Stock-Based Compensation

In April 2010, the FASB issued additional guidance for the Compensation — Stock Compensation Topic of the ASC to clarify classification of an employee stock-based payment award when the exercise price is denominated in the currency of a market in which the underlying equity security trades. This guidance becomes effective for us on January 1, 2011. We do not believe this guidance will have any impact on our unaudited condensed consolidated financial condition or results of operations.

4. Preneed Funeral Activities

Preneed funeral receivables, net and trust investments represent trust investments, including investment earnings and customer receivables, net of unearned finance charges, related to unperformed, price-guaranteed preneed funeral contracts. Our funeral merchandise and service trusts are variable interest entities as defined in the Consolidation Topic of the ASC. In accordance with this guidance, we have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. Our cemetery trust investments detailed in Notes 5 and 6 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from Deferred preneed funeral revenues into Deferred preneed funeral and cemetery receipts held in trust. Amounts are withdrawn from the trusts after the contract obligations are performed. Cash flows from preneed funeral contracts are presented as operating cash flows in our unaudited condensed consolidated statement of cash flows.

Preneed funeral receivables, net and trust investments are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in Deferred preneed funeral revenues until the service is performed or the merchandise is delivered.

The table below sets forth certain investment-related activities associated with our preneed funeral merchandise and service trusts:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(In thousands)
Deposits	$	18,771		$	22,015		$	61,294		$	62,402
Withdrawals		25,546			27,296			85,284			81,237
Purchases of available-for-sale securities		77,042			124,939			390,345			255,423
Sales of available-for-sale securities		86,754			138,777			401,253			314,322
Realized gains from sales of available-for-sale securities		5,963			5,599			26,461			12,957
Realized losses from sales of available-for-sale securities		(8,360	)		(8,746	)		(42,017	)		(49,939	)

The components of Preneed funeral receivables, net and trust investments in our unaudited condensed consolidated balance sheet at September 30, 2010 and December 31, 2009 are as follows:


	September 30, 2010			December 31, 2009
	(In thousands)
Trust investments, at market	$	821,647		$	771,945
Cash and cash equivalents		123,510			153,126
Insurance-backed fixed income securities		216,309			214,255
Assets associated with businesses held for sale		(1,967	)		(377	)

Trust investments		1,159,499			1,138,949
Receivables from customers		251,914			256,009
Unearned finance charge		(5,685	)		(6,129	)

		1,405,728			1,388,829
Allowance for cancellation		(34,192	)		(32,476	)

Preneed funeral receivables and trust investments	$	1,371,536		$	1,356,353

The cost and market values associated with our funeral merchandise and service trust investments recorded at fair market value at September 30, 2010 and December 31, 2009 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair market value represents the value of the underlying securities held by the common trust funds, mutual funds at published values, and the estimated market value of private equity investments (including debt as well as the estimated fair value related to the contract holder’s equity in majority-owned real estate investments).

The fair market value of our funeral merchandise and service trust investments, in the aggregate, was 99% and 96% of the related cost basis of such investments as of September 30, 2010 and December 31, 2009, respectively.


	September 30, 2010
			Unrealized		Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(In thousands)
Fixed income securities:
U.S. Treasury	$	69,829	$	2,769	$	(312	)	$	72,286
Canadian government		121,260		1,614		(25	)		122,849
Corporate		32,436		2,213		(415	)		34,234
Residential mortgage-backed		5,681		145		(14	)		5,812
Asset-backed		2,904		136		—			3,040
Equity securities:
Preferred stock		2,795		159		(54	)		2,900
Common stock:
United States		265,271		40,100		(16,569	)		288,802
Canada		20,471		3,161		(1,082	)		22,550
Other International		18,907		1,166		(3,174	)		16,899
Mutual funds:
Equity		117,345		3,485		(23,016	)		97,814
Fixed income		135,188		6,756		(7,529	)		134,415
Private equity		25,684		1,500		(15,915	)		11,269
Other		9,145		580		(948	)		8,777

Trust investments	$	826,916	$	63,784	$	(69,053	)	$	821,647


	December 31, 2009
			Unrealized		Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(In thousands)
Fixed income securities:
U.S. Treasury	$	40,065	$	1,258	$	(65	)	$	41,258
Canadian government		104,713		1,430		(47	)		106,096
Corporate		29,778		2,091		(21	)		31,848
Residential mortgage-backed		6,573		119		(10	)		6,682
Asset-backed		3,188		76		—			3,264
Equity securities:
Common stock:
United States		284,392		37,212		(22,811	)		298,793
Canada		25,535		2,707		(873	)		27,369
Other International		17,336		1,324		(2,686	)		15,974
Mutual funds:
Equity		118,018		2,277		(27,153	)		93,142
Fixed income		151,918		2,135		(18,586	)		135,467
Private equity		24,445		1,529		(14,808	)		11,166
Other		1,503		359		(976	)		886

Trust investments	$	807,464	$	52,517	$	(88,036	)	$	771,945

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

Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.

The valuation of private equity and other alternative investments requires 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 investments. The underlying real estate value is determined using the most recent available appraisals. Private equity investments are valued using market appraisals or a discounted cash flow methodology, which is an income approach for fair value model, depending on the nature of the underlying assets. The appraisals assess value based on a combination of replacement cost, comparative sales analysis, and discounted cash flow analysis. These funds are classified as Level 3 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.

As of September 30, 2010, our unfunded commitment for our private equity and other investments was $11.0 million which, if called, would be funded by the assets of the trusts. Our private equity and other investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, the nature of the investments in this category is that the distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next 2 to 10 years.

Our investments classified as Level 1 securities include common stock and mutual funds. Level 2 securities include U.S. Treasury, Canadian government, corporate, residential mortgage-backed fixed income securities, asset-backed, and preferred stock equity securities. Our private equity and other alternative investments are classified as Level 3 securities.

The inputs into the fair value of our market-based funeral merchandise and service trust investments are categorized as follows:


	Quoted Market		Significant
	Prices in Active		Other		Significant
	Markets		Observable		Unobservable		Fair Market
	(Level 1)		Inputs (Level 2)		Inputs (Level 3)		Value
	(In thousands)
Trust investments at September 30, 2010	$	560,480	$	241,121	$	20,046	$	821,647
Trust investments at December 31, 2009	$	570,745	$	189,148	$	12,052	$	771,945

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(in thousands)
Fair market value, beginning balance	$	19,707		$	12,346		$	12,052		$	40,880
Net unrealized gains (losses) included in Accumulated other comprehensive income (1)		501			(237	)		(569	)		(7,447	)
Net realized (losses) gains included in Other income, net (2)		(43	)		(2	)		(66	)		17
Purchases, sales, contributions, and distributions, net		(119	)		102			8,629			650
Transfers out of Level 3		—			—			—			(21,891	)

Fair market value, ending balance	$	20,046		$	12,209		$	20,046		$	12,209


(1)		All losses recognized in Accumulated other comprehensive income for our funeral merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Accumulated other comprehensive income to Deferred preneed funeral and cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.

(2)		All (losses) gains recognized in Other income, net for our funeral merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other income, net to Deferred preneed funeral and cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust .

Maturity dates of our fixed income securities range from 2010 to 2040. Maturities of fixed income securities at September 30, 2010 are estimated as follows:


	Fair Market
	Value
	(In thousands)
Due in one year or less	$	134,598
Due in one to five years		47,783
Due in five to ten years		37,794
Thereafter		18,046

	$	238,221

Earnings from all trust investments are recognized in current funeral revenues when a service is performed or merchandise is delivered. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenues. Recognized earnings (realized and unrealized) related to these trust investments were $6.7 million and $5.9 million for the three months ended September 30, 2010 and 2009, respectively. Recognized earnings (realized and unrealized) related to these trust investments were $22.5 million and $16.8 million for the nine months ended September 30, 2010 and 2009, respectively.

We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in Other income, net and a decrease to Preneed funeral receivables, net and trust investments . These investment losses, if any, are offset by the corresponding reclassification in Other income, net, which reduces Deferred preneed funeral receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral receipts held in trust . We recorded a $1.1 million and $7.3 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain equity securities for the three and nine months ended September 30, 2010, respectively. We recorded a $6.3 million and $16.7 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain equity securities for the three and nine months ended September 30, 2009, respectively.

We have determined that the remaining unrealized losses in our funeral merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our funeral merchandise and service trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2010 and December 31, 2009, respectively, are shown in the following tables.


	September 30, 2010
	In Loss Position					In Loss Position
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair					Fair					Fair
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Fixed income securities:
U.S. Treasury	$	9,230	$	(291	)	$	445	$	(21	)	$	9,675	$	(312	)
Canadian government		1,411		(25	)		—		—			1,411		(25	)
Corporate		7,558		(415	)		208		—			7,766		(415	)
Residential mortgage-backed		530		(8	)		146		(6	)		676		(14	)
Equity securities:
Preferred Stock		699		(54	)		—		—			699		(54	)
Common stock:
United States		75,540		(7,932	)		30,147		(8,637	)		105,687		(16,569	)
Canada		3,742		(491	)		1,412		(591	)		5,154		(1,082	)
Other International		7,269		(1,459	)		3,703		(1,715	)		10,972		(3,174	)
Mutual funds:
Equity		17,407		(806	)		56,273		(22,210	)		73,680		(23,016	)
Fixed income		10,757		(343	)		8,603		(7,186	)		19,360		(7,529	)
Private equity		3,348		(919	)		20,418		(14,996	)		23,766		(15,915	)
Other		322		(223	)		797		(725	)		1,119		(948	)

Total temporarily impaired securities	$	137,813	$	(12,966	)	$	122,152	$	(56,087	)	$	259,965	$	(69,053	)


	December 31, 2009
	In Loss Position					In Loss Position
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair					Fair					Fair
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Fixed income securities:
U.S. Treasury	$	2,707	$	(40	)	$	2,296	$	(25	)	$	5,003	$	(65	)
Canadian government		5,367		(47	)		—		—			5,367		(47	)
Corporate		1,517		(21	)		—		—			1,517		(21	)
Residential mortgage-backed		1,494		(10	)		—		—			1,494		(10	)
Equity securities:
Common stock:
United States		67,044		(6,031	)		56,926		(16,780	)		123,970		(22,811	)
Canada		4,153		(480	)		2,879		(393	)		7,032		(873	)
Other International		3,491		(362	)		6,115		(2,324	)		9,606		(2,686	)
Mutual funds:
Equity		60,413		(24,928	)		20,945		(2,225	)		81,358		(27,153	)
Fixed income		46,542		(10,471	)		22,684		(8,115	)		69,226		(18,586	)
Private equity		9,657		(1,743	)		16,454		(13,065	)		26,111		(14,808	)
Other		585		(203	)		765		(773	)		1,350		(976	)

Total temporarily impaired securities	$	202,970	$	(44,336	)	$	129,064	$	(43,700	)	$	332,034	$	(88,036	)

5. Preneed Cemetery Activities

Preneed cemetery receivables, net and trust investments represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, for contracts sold in advance of when the property interment rights, merchandise, or services are needed. Our cemetery merchandise and service trusts are variable interest entities as defined in the Consolidation Topic of the ASC. In accordance with this guidance, we have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The trust investments detailed in Notes 4 and 6 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from Deferred preneed cemetery revenues into Deferred preneed funeral and cemetery receipts held in trust. Amounts are withdrawn from the trusts when the contract obligations are performed. Cash flows from preneed cemetery contracts are presented as operating cash flows in our unaudited condensed consolidated statement of cash flows.

Preneed cemetery receivables, net and trust investments are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in Deferred preneed cemetery revenues until the service is performed or the merchandise is delivered.

The table below sets forth certain investment-related activities associated with our preneed cemetery merchandise and service trusts:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(In thousands)
Deposits	$	30,565		$	25,297		$	79,984		$	68,960
Withdrawals		26,303			22,844			79,080			76,702
Purchases of available-for-sale securities		77,625			124,312			542,829			308,627
Sales of available-for-sale securities		90,148			128,440			502,508			276,361
Realized gains from sales of available-for-sale securities		6,838			6,585			31,899			12,615
Realized losses from sales of available-for-sale securities		(9,828	)		(8,915	)		(47,093	)		(48,245	)

The components of Preneed cemetery receivables, net and trust investments in our unaudited condensed consolidated balance sheet at September 30, 2010 and December 31, 2009 are as follows:


	September 30,			December 31,
	2010			2009
	(In thousands)
Trust investments, at market	$	981,110		$	957,608
Cash and cash equivalents		125,594			145,668
Insurance backed fixed income securities		9,299			10,492
Assets associated with businesses held for sale		(578	)		(47,726	)

Trust investments		1,115,425			1,066,042
Receivables from customers		427,459			396,918
Unearned finance charges		(41,791	)		(41,517	)

		1,501,093			1,421,443
Allowance for cancellation		(41,892	)		(38,726	)

Preneed cemetery receivables and trust investments	$	1,459,201		$	1,382,717

The cost and market values associated with our cemetery merchandise and service trust investments recorded at fair market value at September 30, 2010 and December 31, 2009 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair market value represents the value of the underlying securities by the common trust funds, mutual funds at published values, and the estimated market value of private equity investments (including debt as well as the estimated fair value related to the contract holder’s equity in majority-owned real estate investments). The fair market value of our cemetery merchandise and service trust investments, in the aggregate, was 100% and 95% of the related cost basis of such investments as of September 30, 2010 and December 31, 2009, respectively.


	September 30, 2010
			Unrealized		Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(In thousands)
Fixed income securities:
U.S. Treasury	$	48,551	$	3,099	$	(288	)	$	51,362
Canadian government		15,549		542		(31	)		16,060
Corporate		38,138		2,277		(690	)		39,725
Residential mortgage-backed		1,466		35		(1	)		1,500
Asset-backed		6,327		356		—			6,683
Equity securities:
Preferred Stock		4,542		218		(88	)		4,672
Common stock:
United States		379,431		51,621		(21,112	)		409,940
Canada		15,903		2,351		(1,184	)		17,070
Other International		26,944		1,270		(4,648	)		23,566
Mutual funds:
Equity		203,240		5,553		(25,827	)		182,966
Fixed income		225,459		9,027		(11,897	)		222,589
Private equity		17,429		17		(12,902	)		4,544
Other		1,311		45		(923	)		433

Trust investments	$	984,290	$	76,411	$	(79,591	)	$	981,110


	December 31, 2009
			Unrealized		Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(In thousands)
Fixed income securities:
U.S. Treasury	$	32,084	$	1,169	$	(81	)	$	33,172
Canadian government		15,664		224		(53	)		15,835
Corporate		9,065		438		(3	)		9,500
Residential mortgage-backed		1,460		19		(2	)		1,477
Asset-backed		6,476		193		—			6,669
Equity securities:
Common stock:
United States		403,208		47,040		(26,962	)		423,286
Canada		18,653		2,021		(1,183	)		19,491
Other International		26,567		1,433		(3,841	)		24,159
Mutual funds:
Equity		241,763		4,028		(38,093	)		207,698
Fixed income		233,999		2,699		(24,718	)		211,980
Private equity		14,968		8		(11,000	)		3,976
Other		1,230		34		(899	)		365

Trust investments	$	1,005,137	$	59,306	$	(106,835	)	$	957,608

The valuation of private equity and other alternative 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 investments. The underlying real estate value is determined using the most recent available appraisals. Private equity investments are valued using market appraisals or a discounted cash flow methodology, which is an income approach fair value model, depending on the nature of the underlying assets. The appraisals assess value based on a combination of replacement cost, comparative sales analysis, and discounted cash flow analysis. These funds are classified as Level 3 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.

As of September 30, 2010, our unfunded commitment for our private equity and other investments was $11.6 million which, if called, would be funded by the assets of the trusts. Our private equity and other investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, the nature of the investments in this category is that the distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next 2 to 10 years.

The inputs into the fair value of our market-based cemetery merchandise and service trust investments are categorized as follows:


	Quoted Market
	Prices in Active		Significant Other		Significant
	Markets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Fair Market Value
	(In thousands)
Trust investments at September 30, 2010	$	856,131	$	120,002	$	4,977	$	981,110
Trust investments at December 31, 2009	$	886,614	$	66,653	$	4,341	$	957,608

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(in thousands)
Fair market value, beginning balance	$	4,930		$	5,388		$	4,341		$	31,837
Net unrealized losses included in Accumulated other comprehensive income (1)		(81	)		(336	)		(446	)		(11,779	)
Net realized (losses) gains included in Other income, net (2)		(18	)		(3	)		(41	)		15
Purchases, sales, contributions, and distributions, net		146			85			1,123			654
Transfers out of Level 3		—			—			—			(15,593	)

Fair market value, ending balance	$	4,977		$	5,134		$	4,977		$	5,134


(1)		All losses recognized in Accumulated other comprehensive income for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Accumulated other comprehensive income to Deferred preneed funeral and cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust.

(2)		All (losses) gains recognized in Other income, net for our cemetery merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in Other income, net to Deferred preneed funeral and cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed funeral and cemetery receipts held in trust .

Maturity dates of our fixed income securities range from 2010 to 2040. Maturities of fixed income securities at September 30, 2010 are estimated as follows:


	Fair Market
	Value
	(In thousands)
Due in one year or less	$	1,592
Due in one to five years		54,888
Due in five to ten years		34,448
Thereafter		24,402

	$	115,330

Earnings from all our cemetery merchandise and service trust investments are recognized in current cemetery revenues when the service is performed or the merchandise is delivered. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenues. Recognized earnings (realized and unrealized) related to our cemetery merchandise and service trust investments were $2.8 million and $3.1 million for the three months ended September 30, 2010 and 2009, respectively. Recognized earnings (realized and unrealized) related to our cemetery merchandise and service trust investments were $9.4 million and $4.9 million for the nine months ended September 30, 2010 and 2009, respectively.

We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in Other income, net and a decrease to Preneed cemetery receivables, net and trust investments . These investment losses, if any, are offset by the corresponding reclassification in Other income, net, which reduces Deferred preneed cemetery receipts held in trust . See Note 7 for further information related to our Deferred preneed cemetery receipts held in trust . We recorded a $1.5 million and $4.9 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain equity securities for the three and nine months ended September 30, 2010, respectively. We recorded a $20.6 million and $33.5 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain equity securities for the three and nine months ended September 30, 2009, respectively.

We have determined that the remaining unrealized losses in our cemetery merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and, discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our cemetery merchandise and service trust investment unrealized losses, their associated fair market value, and the duration of unrealized losses as of September 30, 2010 are shown in the tables below.


	September 30, 2010
	In Loss Position					In Loss Position
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair Market		Unrealized			Fair Market		Unrealized			Fair Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Fixed income securities:
U.S. Treasury	$	4,220	$	(263	)	$	809	$	(25	)	$	5,029	$	(288	)
Canadian government		1,252		(31	)		—		—			1,252		(31	)
Corporate		12,350		(690	)		—		—			12,350		(690	)
Mortgage-backed		20		(1	)		—		—			20		(1	)
Asset-backed		78		—			—		—			78		—
Equity securities:
Preferred Stock		1,437		(88	)		—		—			1,437		(88	)
Common stock (based on country):
United States		113,460		(11,267	)		39,212		(9,845	)		152,672		(21,112	)
Canada		1,895		(218	)		1,433		(966	)		3,328		(1,184	)
Other International		11,225		(2,076	)		5,395		(2,572	)		16,620		(4,648	)
Mutual funds:
Equity		37,666		(1,594	)		80,952		(24,233	)		118,618		(25,827	)
Fixed income		21,016		(668	)		12,833		(11,229	)		33,849		(11,897	)
Private equity		9,955		(4,520	)		13,126		(8,382	)		23,081		(12,902	)
Other		444		(216	)		838		(707	)		1,282		(923	)

Total temporarily impaired securities	$	215,018	$	(21,632	)	$	154,598	$	(57,959	)	$	369,616	$	(79,591	)


	December 31, 2009
	In Loss Position					In Loss Position
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair Market		Unrealized			Fair Market		Unrealized			Fair Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Fixed income securities:
U.S. Treasury	$	2,624	$	(65	)	$	1,171	$	(16	)	$	3,795	$	(81	)
Canadian government		5,262		(53	)		—		—			5,262		(53	)
Corporate		212		(3	)		—		—			212		(3	)
Residential mortgage-backed		267		(2	)		—		—			267		(2	)
Equity securities:
Common stock
United States		106,741		(7,151	)		69,731		(19,811	)		176,472		(26,962	)
Canada		4,445		(407	)		2,587		(776	)		7,032		(1,183	)
Other International		7,453		(830	)		9,177		(3,011	)		16,630		(3,841	)
Mutual funds:
Equity		123,439		(33,152	)		44,463		(4,941	)		167,902		(38,093	)
Fixed income		131,246		(16,036	)		28,203		(8,682	)		159,449		(24,718	)
Private equity		14,048		(4,056	)		9,204		(6,944	)		23,252		(11,000	)
Other		863		(252	)		552		(647	)		1,415		(899	)

Total temporarily impaired securities	$	396,600	$	(62,007	)	$	165,088	$	(44,828	)	$	561,688	$	(106,835	)

6. Cemetery Perpetual Care Trusts

We are required by state and provincial law to pay into cemetery perpetual care trusts a portion of the proceeds from the sale of cemetery property interment rights. Our cemetery perpetual care trusts are variable interest entities as defined in the Consolidation Topic of the ASC. In accordance with this guidance, we have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The merchandise and service trust investments detailed in Notes 4 and 5 are also accounted for as variable interest entities. We consolidate our cemetery perpetual care trust investments with a corresponding amount recorded as Care trusts’ corpus. Cash flows from cemetery perpetual care trusts are presented as operating cash flows in our unaudited condensed consolidated statement of cash flows.

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(In thousands)
Deposits	$	5,381		$	5,878		$	17,282		$	17,208
Withdrawals		7,581			9,321			26,858			24,428
Purchases of available-for-sale securities		135,544			114,283			315,986			218,526
Sales of available-for-sale securities		137,354			122,468			247,125			191,463
Realized gains from sales of available-for-sale securities		4,244			1,358			8,937			5,082
Realized losses from sales of available-for-sale securities		(2,068	)		(1,947	)		(7,524	)		(13,068	)

The components of Cemetery perpetual care trust investments in our unaudited condensed consolidated balance sheet at September 30, 2010 and December 31, 2009 are as follows:


	September 30, 2010			December 31, 2009
	(In thousands)
Trust investments, at market	$	900,392		$	814,640
Cash and cash equivalents		62,599			92,153
Assets associated with businesses held for sale		(233	)		(17,104	)

Cemetery perpetual care trust investments	$	962,758		$	889,689

The cost and market values associated with our cemetery perpetual care trust investments recorded at fair market value at September 30, 2010 and December 31, 2009 are detailed below. Cost reflects the investment (net of redemptions) of control holders in common trust funds, mutual funds, and private equity investments. Fair market value represents the value of the underlying securities or cash held by the common trust funds, mutual funds at published values, and the estimated market value of private equity investments. The fair market value of our cemetery perpetual care trust investments was 101% and 95% of the related cost basis of such investments as of September 30, 2010 and December 31, 2009, respectively.


	September 30, 2010
			Unrealized		Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(In thousands)
Fixed income securities:
U.S. Treasury	$	14,164	$	884	$	(1	)	$	15,047
Canadian government		26,625		958		(54	)		27,529
Corporate		45,873		4,078		(454	)		49,497
Residential mortgage-backed		1,785		58		(4	)		1,839
Asset-backed		361		9		—			370
Equity securities:
Preferred stock		6,349		756		(133	)		6,972
Common stock:
United States		116,758		10,100		(9,961	)		116,897
Canada		11,739		1,408		(987	)		12,160
Other International		16,340		1,238		(2,189	)		15,389
Mutual funds:
Equity		65,949		4,792		(10,088	)		60,653
Fixed income		550,302		32,264		(2,530	)		580,036


	September 30, 2010
			Unrealized		Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(In thousands)
Private equity		21,666		365		(13,381	)		8,650
Other		12,038		831		(7,516	)		5,353

Cemetery perpetual care trust investments	$	889,949	$	57,741	$	(47,298	)	$	900,392


	December 31, 2009
			Unrealized		Unrealized			Fair Market
	Cost		Gains		Losses			Value
	(In thousands)
Fixed income securities:
U.S. Treasury	$	5,031	$	852	$	(9	)	$	5,874
Canadian government		26,688		378		(92	)		26,974
Corporate		40,703		3,079		(367	)		43,415
Residential mortgage-backed		1,923		35		(9	)		1,949
Asset-backed		520		8		—			528
Equity securities:
Preferred stock		5,803		1,389		(259	)		6,933
Common stock:
United States		113,147		7,348		(12,016	)		108,479
Canada		10,016		677		(970	)		9,723
Other International		12,558		1,237		(2,450	)		11,345
Mutual funds:
Equity		69,376		2,023		(15,598	)		55,801
Fixed income		534,137		4,384		(9,845	)		528,676
Private equity		28,853		394		(18,235	)		11,012
Other		8,568		748		(5,385	)		3,931

Cemetery perpetual care trust investments	$	857,323	$	22,552	$	(65,235	)	$	814,640

The valuation of private equity and other alternative 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 investments. The underlying real estate value is determined using the most recent available appraisals. Private equity investments are valued using market appraisals or a discounted cash flow methodology, which is an income approach fair value model, depending on the nature of the underlying assets. The appraisals assess value based on a combination of replacement cost, comparative sales analysis, and discounted cash flow analysis. These funds are classified as Level 3 investments pursuant to the three-level valuation hierarchy as required by the FVM&D Topic of the ASC.

As of September 30, 2010, our unfunded commitment for our private equity and other investments was $11.2 million which, if called, would be funded by the assets of the trusts. Our private equity and other investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, the nature of the investments in this category is that the distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next 2 to 10 years.

The inputs into the fair value of our market-based cemetery perpetual care trust investments are categorized as follows:


	Quoted Market
	Prices in Active		Significant Other		Significant
	Markets		Observable Inputs		Unobservable Inputs
	(Level 1)		(Level 2)		(Level 3)		Fair Market Value
	(In thousands)
Trust investments at September 30, 2010	$	785,135	$	101,254	$	14,003	$	900,392
Trust investments at December 31, 2009	$	714,024	$	85,673	$	14,943	$	814,640

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


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(in thousands)
Fair market value, beginning balance	$	14,209		$	14,397		$	14,943		$	48,276
Net unrealized gains (losses) included in Accumulated other comprehensive income (1)		1,225			633			5,350			(28,086	)
Net realized losses included in Other income, net (2)		1,313			(38	)		1,236			(43	)
Purchases, sales, contributions, and distributions, net		(2,744	)		(213	)		(7,526	)		1,844
Transfers out of Level 3		—			—			—			(7,212	)

Fair market value, ending balance	$	14,003		$	14,779		$	14,003		$	14,779


(1)		All gains (losses) recognized in Accumulated other comprehensive income for our cemetery perpetual care trust investments are offset by a corresponding reclassification in Accumulated other comprehensive income to Care trusts’ corpus . See Note 7 for further information related to our Care trusts’ corpus.

(2)		All losses recognized in Other income, net for our cemetery perpetual care trust investments are offset by a corresponding reclassification in Other income, net to Care trusts’ corpus. See Note 7 for further information related to our Care trusts’ corpus.

Maturity dates of our fixed income securities range from 2010 to 2040. Maturities of fixed income securities at September 30, 2010 are estimated as follows:


	Fair Market Value
	(In thousands)
Due in one year or less	$	13,391
Due in one to five years		45,242
Due in five to ten years		21,748
Thereafter		13,901

	$	94,282

Distributable earnings from these cemetery perpetual care trust investments are recognized in current cemetery revenues to the extent we incur qualifying cemetery maintenance costs. Recognized earnings related to these cemetery perpetual care trust investments were $10.4 million and $8.8 million for the three months ended September 30, 2010 and 2009, respectively. Recognized earnings related to these cemetery perpetual care trust investments were $29.2 million and $26.9 million for the nine months ended September 30, 2010 and 2009, respectively.

We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in Other income, net and a decrease to Cemetery perpetual care trust investments . These investment losses, if any, are offset by the corresponding reclassification in Other income, net, which reduces Care trusts’ corpus . See Note 7 for further information related to our Care trusts’ corpus . We recorded a $0.2 million and $1.8 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain equity securities for the three and nine months ended September 30, 2010, respectively. We recorded a $6.7 million and $12.6 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain equity securities for the three and nine months ended September 30, 2009, respectively.

We have determined that the remaining unrealized losses in our cemetery perpetual care trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings, and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our cemetery perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2010, are shown in the following tables.


	September 30, 2010
	In Loss Position					In Loss Position
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair					Fair					Fair
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Fixed income securities:
U.S. Treasury		163		(1	)		—		—			163		(1	)
Canadian government		2,149		(54	)		—		—			2,149		(54	)
Corporate		8,223		(383	)		675		(71	)		8,898		(454	)
Residential mortgage-backed		161		(4	)		—		—			161		(4	)
Equity securities:
Preferred stock		486		(61	)		590		(72	)		1,076		(133	)
Common stock
United States		22,966		(2,717	)		20,700		(7,244	)		43,666		(9,961	)
Canada		1,308		(105	)		1,564		(882	)		2,872		(987	)
Other International		4,369		(422	)		2,195		(1,767	)		6,564		(2,189	)
Mutual funds:
Equity		936		(108	)		29,624		(9,980	)		30,560		(10,088	)
Fixed income		136		(1	)		54,394		(2,529	)		54,530		(2,530	)
Private equity		3,134		(2,877	)		16,754		(10,504	)		19,888		(13,381	)
Other		1,625		(1,493	)		8,667		(6,023	)		10,292		(7,516	)

Total temporarily impaired securities	$	45,656	$	(8,226	)	$	135,163	$	(39,072	)	$	180,819	$	(47,298	)


	December 31, 2009
	In Loss Position					In Loss Position
	Less Than 12 Months					Greater Than 12 Months					Total
	Fair					Fair					Fair
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
	(In thousands)
Fixed income securities:
U.S. Treasury	$	1,029	$	(9	)	$	—	$	—		$	1,029	$	(9	)
Canadian Government		9,053		(92	)		—		—			9,053		(92	)
Corporate		4,739		(92	)		2,780		(275	)		7,519		(367	)
Residential mortgage-backed		1,426		(9	)		—		—			1,426		(9	)
Equity securities:
Preferred stock		511		(47	)		734		(212	)		1,245		(259	)
Common stock
United States		19,069		(1,529	)		31,553		(10,487	)		50,622		(12,016	)
Canada		1,253		(229	)		2,637		(741	)		3,890		(970	)
Other International		1,102		(17	)		3,086		(2,433	)		4,188		(2,450	)
Mutual funds:
Equity		21,152		(9,290	)		16,051		(6,308	)		37,203		(15,598	)
Fixed income		285,936		(7,512	)		36,141		(2,333	)		322,077		(9,845	)
Private equity		8,973		(7,249	)		12,689		(10,986	)		21,662		(18,235	)
Other		2,497		(2,017	)		3,519		(3,368	)		6,016		(5,385	)

Total temporarily impaired securities	$	356,740	$	(28,092	)	$	109,190	$	(37,143	)	$	465,930	$	(65,235	)

7. Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Care Trusts’ Corpus

Deferred Preneed Funeral and Cemetery Receipts Held in Trust

We consolidate the merchandise and service trusts associated with our preneed funeral and cemetery activities in accordance with the Consolidation Topic of the ASC. Although the guidance requires the consolidation of the merchandise and service trusts, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these merchandise and service trusts, and therefore their interests in these trusts represent a liability to us.

The components of Deferred preneed funeral and cemetery receipts held in trust in our unaudited condensed consolidated balance sheet at September 30, 2010 and December 31, 2009 are detailed below.


	September 30, 2010									December 31, 2009
	Preneed			Preneed						Preneed			Preneed
	Funeral			Cemetery			Total			Funeral			Cemetery			Total
				(In thousands)									(in thousands)
Trust investments	$	1,159,499		$	1,115,425		$	2,274,924		$	1,138,949		$	1,066,042		$	2,204,991
Accrued trust operating payables and other		(890	)		(1,947	)		(2,837	)		(1,449	)		(2,139	)		(3,588	)

Deferred preneed funeral and cemetery receipts held in trust	$	1,158,609		$	1,113,478		$	2,272,087		$	1,137,500		$	1,063,903		$	2,201,403

Care Trusts’ Corpus

The Care trusts’ corpus reflected in our unaudited condensed consolidated balance sheet represents the cemetery perpetual care trusts, including the related accrued expenses.

The components of Care trusts’ corpus in our unaudited condensed consolidated balance sheet at September 30, 2010 and December 31, 2009 are detailed below.


	September 30, 2010			December 31, 2009
	(In thousands)
Cemetery perpetual care trust investments	$	962,758		$	889,689
Accrued trust operating payables and other		(52	)		1,220

Care trusts’ corpus	$	962,706		$	890,909

Other Income, Net

The components of Other income, net in our unaudited condensed consolidated statement of operations for the three and nine months ended September 30, 2010 and 2009 are detailed below. See Notes 4, 5, and 6 for further discussion of the amounts related to the funeral, cemetery, and cemetery perpetual care trusts.


	Three Months Ended September 30, 2010
	Funeral			Cemetery			Cemetery Perpetual
	Trusts			Trusts			Care Trusts			Other, Net		Total
	(In thousands)
Realized gains	$	5,963		$	6,838		$	4,244		$	—	$	17,045
Realized losses and impairment charges		(9,489	)		(11,364	)		(2,319	)		—		(23,172	)
Interest, dividend, and other ordinary income		3,291			5,491			9,174			—		17,956
Trust expenses and income taxes		(1,324	)		(2,555	)		(114	)		—		(3,993	)

Net trust investment (loss) income		(1,559	)		(1,590	)		10,985			—		7,836
Reclassification to deferred preneed funeral and cemetery receipts held in trust and care trusts’ corpus		1,559			1,590			(10,985	)		—		(7,836	)
Other income, net		—			—			—			688		688

Total other income, net	$	—		$	—		$	—		$	688	$	688


	Nine Months Ended September 30, 2010
	Funeral			Cemetery			Cemetery Perpetual
	Trusts			Trusts			Care Trusts			Other, Net		Total
	(In thousands)
Realized gains	$	26,461		$	31,899		$	8,937		$	—	$	67,297
Realized losses and impairment charges		(49,315	)		(52,012	)		(9,348	)		—		(110,675	)
Interest, dividend, and other ordinary income		13,223			14,914			25,249			—		53,386


	Nine Months Ended September 30, 2010
	Funeral			Cemetery			Cemetery Perpetual
	Trusts			Trusts			Care Trusts			Other, Net		Total
	(In thousands)
Trust expenses and income taxes		(3,150	)		(7,024	)		(1,661	)		—		(11,835	)

Net trust investment (loss) income		(12,781	)		(12,223	)		23,177			—		(1,827	)
Reclassification to deferred preneed funeral and cemetery receipts held in trust and care trusts’ corpus		12,781			12,223			(23,177	)		—		1,827
Other income, net		—			—			—			3,077		3,077

Total other income, net	$	—		$	—		$	—		$	3,077	$	3,077


	Three Months Ended September 30, 2009
	Funeral			Cemetery			Cemetery Perpetual
	Trusts			Trusts			Care Trusts			Other, Net		Total
	(In thousands)
Realized gains	$	5,599		$	6,585		$	1,358		$	—	$	13,542
Realized losses and impairment charges		(15,132	)		(29,544	)		(8,732	)		—		(53,408	)
Interest, dividend, and other ordinary income		4,928			4,310			7,199			—		16,437
Trust expenses and income taxes		(1,337	)		(1,583	)		1,309			—		(1,611	)

Net trust investment (loss) income		(5,942	)		(20,232	)		1,134			—		(25,040	)
Reclassification to deferred preneed funeral and cemetery receipts held in trust and care trusts’ corpus		5,942			20,232			(1,134	)		—		25,040
Other income, net		—			—			—			885		885

Total other income, net	$	—		$	—		$	—		$	885	$	885


	Nine Months Ended September 30, 2009
	Funeral			Cemetery			Cemetery Perpetual
	Trusts			Trusts			Care Trusts			Other, Net		Total
	(In thousands)
Realized gains	$	12,957		$	12,615		$	5,082		$	—	$	30,654
Realized losses and impairment charges		(66,659	)		(81,792	)		(25,704	)		—		(174,155	)
Interest, dividend, and other ordinary income		15,786			15,815			28,071			—		59,672
Trust expenses and income taxes		(2,315	)		(1,602	)		(4,381	)		—		(8,298	)

Net trust investment (loss) income		(40,231	)		(54,964	)		3,068			—		(92,127	)
Reclassification to deferred preneed funeral and cemetery receipts held in trust and care trusts’ corpus		40,231			54,964			(3,068	)		—		92,127
Other income, net		—			—			—			1,430		1,430

Total other income, net	$	—		$	—		$	—		$	1,430	$	1,430

8. Keystone Acquisition

On March 26, 2010, pursuant to a tender offer, we acquired approximately 91% of the outstanding common stock of Keystone North America, Inc. (Keystone) for C$8.07 per share in cash, resulting in a purchase price of $288.9 million, which includes the refinancing of $80.7 million of Keystone’s debt and a liability for the expected cost of the remaining shares of $17.5 million at the C$8.07 share offered price (using currency conversion rates as of March 31, 2010). This liability was recorded because we acquired all of the Keystone common shares that were not deposited in the tender offer pursuant to the compulsory acquisition provisions of the Ontario Business Corporations Act in April 2010. During the second quarter of 2010, we settled this liability using our available cash balance.

We incurred acquisition costs of $7.0 million of which $0.6 million and $3.6 million is included in General and Administrative Expenses for the three and nine months ended September 30, 2010, respectively, and the remainder was incurred in prior periods.

The primary reasons for the merger and the principal factors that contributed to the recognition of goodwill in this acquisition were:

•

the acquisition of Keystone enhances our network footprint, enabling us to serve a number of new, complementary areas;

•

combining the two companies’ operations provides synergies and related cost savings through the elimination of duplicate home office functions and economies of scale; and

•

the acquisition of Keystone’s preneed backlog of deferred revenues enhances our long-term stability.

The following table summarizes the adjusted fair values of the assets acquired and liabilities assumed as of March 26, 2010, for various purchase price allocation adjustments made subsequent to our first quarter results:


	(In thousands)
Accounts receivable	$	6,197
Other current assets		20,816
Cemetery property		19,946
Property and equipment, net		105,888
Preneed funeral and cemetery receivables and trust investments		66,699
Intangible assets		68,019
Deferred charges and other assets		5,697
Goodwill		106,953

Total assets acquired		400,215
Current liabilities		11,401
Long-term debt		2,548
Deferred preneed funeral and cemetery revenues and deferred receipts held in trusts		66,352
Deferred tax liability		17,823
Other liabilities		13,229

Total liabilities assumed		111,353

Net assets acquired	$	288,862

The allocation of the purchase price, as reflected above, has not been adjusted for divestitures as described in Note 18.

We have not finalized our assessment of the fair values as there has been insufficient time between the acquisition date and the issuance of this Form 10-Q to complete our review of individual contracts, agreements, and accounting records of Keystone. However, we have completed our analysis of certain preneed contracts, as reflected in the above table. This analysis resulted in a $4.3 million addition in goodwill associated with the acquisition from our initial assessment reported in our Form 10-Q as of March 31, 2010.

The gross amount of accounts receivable is $8.1 million, of which $1.9 million is not expected to be collected. Included in Preneed funeral and cemetery receivables and trust investments are receivables under preneed contracts with a fair value of $4.9 million. The gross amount due under the contracts is $5.2 million, of which $0.3 million is not expected to be collected.

Goodwill, land, and certain identifiable intangible assets recorded in the acquisition are not subject to amortization; however, the goodwill and intangible assets will be tested periodically for impairment as required by the Intangible Assets Topic of the ASC. Of the $107.0 million in goodwill recognized, $4.3 million was allocated to our cemetery segment and $102.7 million was allocated to our funeral segment. As a result of the carryover of Keystone’s tax basis, $26.0 million of this goodwill is deductible for tax purposes. The $68.0 million in identified intangible assets consists of the following:


	Useful life	Fair Value
	(In thousands)
Preneed customer relationships related to insurance claims	10 years	$	15,200
Preneed deferred revenue	10-14 years		1,747
Covenants-not-to-compete	5 - 15 years		13,332
Operating leases	5 - 15 years		440
Tradenames	5 years		3,600
Tradenames	Indefinite		33,200
Licenses and permits	Indefinite		500

Total intangible assets		$	68,019

Included in our results of operations for the three and nine months ended September 30, 2010 is revenue of $25.2 million and $56.9 million, respectively, and net income of $4.1 million and $10.6 million, respectively, for the period from the acquisition date (March 26, 2010) through September 30, 2010. The following unaudited pro forma summary presents financial information as if the acquisition had occurred at the beginning of each year presented for the consolidated company:


	Three months ended				Nine months ended
	September 30,				September 30,
	2010		2009		2010		2009
			(In thousands)
Revenue	$	533,165	$	525,701	$	1,648,953	$	1,613,335
Net income	$	18,680	$	34,318	$	93,201	$	102,344

9. 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 as a result of finalizing income tax returns and income tax audits, expiration of statute of limitations, and increases or decreases in valuation allowances. Our effective tax rate was 34.7% and 38.8% for the three months ended September 30, 2010 and 2009, respectively. Our effective tax rate was 38.8% for the nine months ended both on September 30, 2010 and 2009. The decrease in the effective tax rate for the three months ended September 30, 2010 compared to the previous year is due primarily to release of state valuation allowances due to the restructuring of our legal entity structure in certain states, lower non-deductible goodwill related to dispositions, and a decrease in Canadian provincial statutory income tax rates.

We file numerous federal, state, and foreign income tax returns. A number of years may elapse before particular tax matters, for which we have unrecognized tax benefits, are audited and finally settled. In the United States, the tax years 1999 through 2002 remain under examination by the Internal Revenue Service and we are at the IRS Appeals administrative level on certain disputed issues that came out of its examination of tax years 2003 through 2005. Various state and foreign jurisdictions are auditing years through 2008. The outcome of each of these audits cannot be predicted at this time. It is reasonably possible that changes to our global unrecognized tax benefits could be significant; however, due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.

10. Debt

Debt as of September 30, 2010 and December 31, 2009 was as follows:


	September 30, 2010			December 31, 2009
	(In thousands)
7.875% Debentures due February 2013	$	9,057		$	32,127
7.375% Senior Notes due October 2014		180,692			245,000
6.75% Notes due April 2015		157,250			160,250
6.75% Notes due April 2016		212,927			233,143
7.0% Notes due June 2017		295,000			295,000
7.625% Senior Notes due October 2018		250,000			250,000
8.0% Notes due November 2021		150,000			150,000
7.5% Notes due April 2027		200,000			200,000
Bank credit facility due November 2013		215,000			150,000
Obligations under capital leases		118,481			142,946
Mortgage notes and other debt, maturities through 2047		38,589			38,631
Unamortized pricing discounts and other		(6,135	)		(6,608	)

Total debt		1,820,861			1,890,489
Less current maturities		(22,319	)		(49,957	)

Total long-term debt	$	1,798,542		$	1,840,532

Current maturities of debt at September 30, 2010 were primarily composed of our capital leases. Our consolidated debt had a weighted average interest rate of 6.36% and 6.52% at September 30, 2010 and December 31, 2009, respectively. Approximately 81% and 85% of our total debt had a fixed interest rate at September 30, 2010 and December 31, 2009, respectively.

Bank Credit Facility

As of September 30, 2010, we have $215 million outstanding under our bank credit facility and have used it to support $44.1 million of letters of credit. The bank credit facility provides us with flexibility for refinancing debt and acquisitions, if needed, and is guaranteed by our domestic subsidiaries. The subsidiary guaranty is a guaranty of payment of the outstanding amount of the total lending commitment, including letters of credit. The bank credit facility contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, and certain dividend and share repurchase restrictions. We pay a quarterly fee on the unused commitment. As of September 30, 2010, we have $140.9 million in borrowing capacity under the facility.

Debt Issuances and Additions

In November 2009, we issued $150.0 million of unsecured 8.0% Senior Notes due 2021, which were held in escrow at December 31, 2009. On March 26, 2010, the net proceeds of these notes were released from escrow and used in connection with the closing of the Keystone acquisition. As a result, the proceeds were classified as Proceeds from issuance of long-term debt in our unaudited condensed consolidated Statement of Cash Flows for the nine months ended September 30, 2010. The notes are subject to the provisions of the Company’s Senior Indenture dated as of February 1, 1993, as amended, which includes covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions.

In addition to the funds from escrow, we drew down $25.0 million on our bank credit facility to finance our Keystone acquisition in the first quarter of 2010.

Debt Extinguishments and Reductions

During the nine months ended September 30, 2010, we repaid $30.0 million of amounts drawn on our bank credit facility and made debt payments of $121.0 million, which included the following purchases on the open market:

•

$23.1 million aggregate principal amount of our 7.875% Notes due 2013;

•

$64.3 million aggregate principal amount of our 7.375% Notes due 2014;

•

$3.0 million aggregate principal amount of our 6.75% Notes due 2015; and,

•

$20.2 million aggregate principal amount of our 6.75% Notes due 2016.

Certain of the above transactions resulted in the recognition of a loss of $9.3 million recorded in (Losses) gains on early extinguishment of debt in our unaudited condensed statement of operations, which represents the write-off of unamortized deferred loan costs of $1.4 million and $7.9 million in premium on the purchase of these notes.

During the nine months ended September 30, 2009, we made debt payments of $118.4 million which included scheduled payments and repurchases of debt in the open market. Certain of the above transactions resulted in the recognition of a $3.9 million gain recorded in (Losses) gains on early extinguishment of debt during the nine months ended September 30, 2009, which represents the write-off of unamortized deferred loan costs of $1.3 million and a $5.2 million discount on the purchase of the notes.

Capital Leases

During the nine months ended September 30, 2010 and 2009, we acquired $17.3 million and $15.0 million, respectively, of primarily transportation equipment using capital leases.

11. Fair Value of Financial Instruments

Fair Value Estimates

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

The fair value of our debt instruments at September 30, 2010 and December 31, 2009 was as follows:


	September 30, 2010		December 31, 2009
	(In thousands)
7.875% Debentures due February 2013	$	9,804	$	31,330
7.375% Senior Notes due October 2014		198,197		247,450
6.75% Notes due April 2015		164,719		157,846
6.75% Notes due April 2016		221,444		222,069
7.0% Notes due June 2017		311,225		289,100
7.625% Senior Notes due October 2018		268,750		250,625
8.0% Notes due November 2021		160,545		148,500
7.5% Notes due April 2027		192,000		179,000
Bank credit facility due November 2013		214,050		148,875
Mortgage notes and other debt, maturities through 2047		38,028		34,898

Total fair value of debt instruments	$	1,778,762	$	1,709,693

The fair values of our long-term, fixed rate securities were estimated using market prices for those securities, and therefore they are classified within Level 1 of the Fair Value Measurements hierarchy as required by the FVM&D Topic of the ASC. The bank credit agreement and the mortgage and other debt are classified within Level 3 of the Fair Value Measurements hierarchy. The fair values of these instruments have been estimated using discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements.

12. Share-Based Compensation

Stock Benefit Plans

We utilize the Black-Scholes option valuation model for estimating the fair value of our stock options. This model allows the use of a range of assumptions related to volatility, the risk-free interest rate, the expected life, and the dividend yield. The fair values of our stock options are calculated using the following weighted average assumptions:


	Nine Months Ended
Assumptions	September 30, 2010
Dividend yield		1.9	%
Expected volatility		37.5	%
Risk-free interest rate		2.3	%
Expected holding period	5 years

Stock Options

The following table sets forth stock option activity for the nine months ended September 30, 2010:


				Weighted-Average
	Options			Exercise Price
Outstanding at December 31, 2009		10,495,142		$	7.36
Granted		2,255,120			7.66
Expired		(21,010	)		7.28
Exercised		(374,319	)		3.72

Outstanding at September 30, 2010		12,354,933		$	7.52

Exercisable at September 30, 2010		7,032,882		$	8.46

As of September 30, 2010, the unrecognized compensation expense related to stock options of $6.5 million is expected to be recognized over a weighted average period of 1.3 years.

Restricted Shares

Restricted share activity for the nine months ended September 30, 2010 was as follows:


				Weighted-Average
	Restricted			Grant-Date
	shares			Fair Value
Nonvested restricted shares at December 31, 2009		1,101,440		$	6.01
Granted		532,050			7.66
Vested		(466,217	)		7.05

Nonvested restricted shares at September 30, 2010		1,167,273		$	6.35

As of September 30, 2010, the unrecognized compensation expense related to restricted shares of $5.2 million is expected to be recognized over a weighted average period of 1.4 years.

13. Equity

Our components of Accumulated other comprehensive income are as follows:


	Foreign					Accumulated
	Currency		Unrealized			Other
	Translation		Gains and			Comprehensive
	Adjustment		Losses			Income
	(In thousands)
Balance at December 31, 2009	$	97,142	$	—		$	97,142
Activity in 2010		4,761		—			4,761
Decrease in net unrealized losses associated with available-for-sale securities of the trusts, net of taxes		—		75,128			75,128
Reclassification of net unrealized losses activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus’ , net of taxes		—		(75,128	)		(75,128	)

Balance at September 30, 2010	$	101,903	$	—		$	101,903

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 . Income taxes are generally not provided on foreign currency translation adjustments.

The components of comprehensive income are as follows for the three and nine months ended September 30, 2010 and 2009:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010		2009
	(In thousands)						(In thousands)
Comprehensive income:
Amounts attributable to common stockholders:
Net income	$	18,765		$	31,162		$	89,962	$	88,796
Foreign currency translation		7,266			24,986			4,761		46,244
Amounts attributable to noncontrolling interests:
Net (loss) income		(85	)		(600	)		270		(274	)
Foreign currency translation		3			—			2		—

Total comprehensive income	$	25,949		$	55,548		$	94,995	$	134,766

Cash Dividends

On August 11, 2010, our Board of Directors approved a cash dividend of $.04 per common share. At September 30, 2010, this dividend totaling $9.8 million was recorded in Accounts payable and accrued liabilities and Capital in excess of par value in our unaudited condensed consolidated balance sheet. This dividend will be paid on October 29, 2010.

Share Repurchase Program

Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our stock repurchase program. During the nine months ended September 30, 2010, we repurchased 10.3 million shares of common stock at an aggregate cost of $86.2 million, which is an average cost per share of $8.39. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $37.3 million at September 30, 2010.

Subsequent to September 30, 2010, we repurchased an additional 0.3 million shares of common stock at an aggregate cost of $2.3 million, which is an average cost per share of $8.48. After these fourth quarter repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program is approximately $34.9 million.

14. 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, Canada, and Germany. We conduct both funeral and cemetery operations in the United States and Canada and funeral operations in Germany.

Our reportable segment information is as follows:


					Reportable
	Funeral		Cemetery		Segments
	(In thousands)
Three months ended September 30,
Revenues from external customers:
2010	$	358,931	$	174,234	$	533,165
2009	$	328,932	$	168,285	$	497,217
Gross profit:
2010	$	69,058	$	33,589	$	102,647
2009	$	68,705	$	32,458	$	101,163
Nine months ended September 30,
Revenues from external customers:
2010	$	1,105,687	$	513,614	$	1,619,301
2009	$	1,036,546	$	485,215	$	1,521,761
Gross profit:
2010	$	231,134	$	93,118	$	324,252
2009	$	223,946	$	79,162	$	303,108

The following table reconciles gross profit from reportable segments to our consolidated income before income taxes:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(In thousands)						(In thousands)
Gross profit from reportable segments	$	102,647		$	101,163		$	324,252		$	303,108
General and administrative expenses		(26,860	)		(20,961	)		(80,035	)		(69,213	)
(Losses) gains on divestitures and impairment charges, net		(7,291	)		(2,221	)		5,831			(1,280	)

Operating income		68,496			77,981			250,048			232,615
Interest expense		(31,497	)		(29,383	)		(96,281	)		(93,439	)
(Losses) gains on early extinguishment of debt		(9,066	)		482			(9,357	)		3,922
Other income, net		688			885			3,077			1,430

Income before income taxes	$	28,621		$	49,965		$	147,487		$	144,528

Our geographic area information is as follows:


	United
	States		Canada		Germany		Total
	(In thousands)
Three months ended September 30,
Revenues from external customers:
2010	$	479,120	$	52,399	$	1,646	$	533,165
2009	$	449,978	$	45,680	$	1,559	$	497,217
Nine months ended September 30,
Revenues from external customers:
2010	$	1,458,883	$	155,497	$	4,921	$	1,619,301
2009	$	1,387,219	$	129,747	$	4,795	$	1,521,761

15. Supplementary Information

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


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
	(In thousands)				(In thousands)
Merchandise revenues:
Funeral	$	117,674	$	105,916	$	362,145	$	335,181
Cemetery		121,131		115,882		352,009		324,530

Total merchandise revenues		238,805		221,798		714,154		659,711
Services revenues:
Funeral		220,913		206,955		688,866		657,848
Cemetery		45,617		44,359		138,669		135,773

Total services revenues		266,530		251,314		827,535		793,621

Other revenues		27,830		24,105		77,612		68,429

Total revenues	$	533,165	$	497,217	$	1,619,301	$	1,521,761

Merchandise costs and expenses:
Funeral	$	58,520	$	52,804	$	185,994	$	170,014
Cemetery		51,551		48,750		151,358		140,658

Total cost of merchandise		110,071		101,554		337,352		310,672
Services costs and expenses:
Funeral		114,662		102,321		335,425		311,953
Cemetery		22,882		23,880		70,990		74,908

Total cost of services		137,544		126,201		406,415		386,861

Overhead and other expenses		182,903		168,299		551,282		521,120

Total costs and expenses	$	430,518	$	396,054	$	1,295,049	$	1,218,653

16. Commitments and Contingencies

Insurance Loss Reserves

We purchase comprehensive general liability, morticians and cemetery professional liability, automobile liability, and workers’ compensation insurance coverage structured with high deductibles. The high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. As of September 30, 2010 and December 31, 2009, we have self-insurance reserves of $55.2 million and $57.9 million, respectively.

Litigation

We are a party to various litigation matters, investigations, and proceedings. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to vigorously defend ourselves in the lawsuits described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.

Conley Investment Counsel v. Service Corporation International, et al. ; Civil Action 04-MD-1609; in the United States District Court for the Southern District of Texas, Houston Division (the “2003 Securities Lawsuit”). The 2003 Securities Lawsuit resulted from the transfer and consolidation by the Judicial Panel on Multidistrict Litigation of three lawsuits — Edgar Neufeld v. Service Corporation International, et al. ; Cause No. CV-S-03-1561-HDM-PAL; in the United States District Court for the District of Nevada; and Rujira Srisythemp v. Service Corporation International, et al .; Cause No. CV-S-03-1392-LDG-LRL; in the United States District Court for the District of Nevada; and Joshua Ackerman v. Service Corporation International, et al .; Cause No. 04-CV-20114; in the United States District Court for the Southern District of Florida. The 2003 Securities Lawsuit names as defendants SCI and several of SCI’s current and former executive officers or directors. The 2003 Securities Lawsuit is a purported class action alleging that the defendants failed to disclose the unlawful treatment of human remains and burial sites at two cemeteries in Fort Lauderdale and West Palm Beach, Florida. The court dismissed plaintiffs’ claims on August 31, 2010, and this lawsuit has been terminated.

Burial Practices Claims. We are named as a defendant in various lawsuits alleging improper burial practices at certain of our cemetery locations. These lawsuits include the Garcia and Sands lawsuits described in the following paragraphs.

Reyvis Garcia and Alicia Garcia v. Alderwoods Group, Inc., Osiris Holding of Florida, Inc, a Florida corporation, d/b/a Graceland Memorial Park South, f/k/a Paradise Memorial Gardens, Inc. , was filed in December 2004, in the Circuit Court of the Eleventh Judicial Circuit in and for Miami-Dade County, Florida, Case No.; 04-25646 CA 32. Plaintiffs are the son and sister of the decedent, Eloisa Garcia, who was buried at Graceland Memorial Park South in March 1986, when the cemetery was owned by Paradise Memorial Gardens, Inc. Initially, the suit sought damages on the individual claims of the plaintiffs relating to the burial of Eloisa Garcia. Plaintiffs claimed that due to poor record keeping, spacing issues and maps, and the fact that the family could not afford to purchase a marker for the grave, the burial location of the decedent could not be readily located. Subsequently, the decedent’s grave was located and verified. In July 2006, plaintiffs amended their complaint, seeking to certify a class of all persons buried at this cemetery whose burial sites cannot be located, claiming that this was due to poor record keeping, maps, and surveys at the cemetery. Plaintiffs subsequently filed a third amended class action complaint and added two additional named plaintiffs. The plaintiffs are seeking unspecified monetary damages, as well as equitable and injunctive relief. No class has been certified in this matter. We cannot quantify our ultimate liability, if any, for the payment of any damages.

F. Charles Sands, individually and on behalf of all others similarly situated, v. Eden Memorial Park, et al.; Case No. BC421528; in the Superior Court of the State of California for the County of Los Angeles — Central District. This case was filed in September 2009 against SCI and certain subsidiaries regarding our Eden Memorial Park cemetery in Mission Hills, California. The plaintiff seeks to certify a class of cemetery plot owners and their families. The plaintiff also seeks the appointment of a receiver to oversee cemetery operations. The plaintiff claims the cemetery damaged and desecrated burials in order to prepare adjoining graves for subsequent burials. Since the case is in its preliminary stages, we cannot quantify our ultimate liability, if any, for the payment of any damages.

Antitrust Claims. We are named as a defendant in an antitrust case filed in 2005. The case is Cause No 4:05-CV-03394; Funeral Consumers Alliance, Inc. v. Service Corporation International, et al .; in the United States District Court for the Southern District of Texas — Houston (“Funeral Consumers Case”). This was a purported class action on behalf of casket consumers throughout the United States alleging that we and several other companies involved in the funeral industry violated federal antitrust laws and state consumer laws by engaging in various anti-competitive conduct associated with the sale of caskets. Based on the case proceeding as a class action, the plaintiffs filed an expert report indicating that the damages sought from all defendants range from approximately $950 million to $1.5 billion, before trebling. However, the trial court denied the plaintiffs’ motion to certify the case as a class action. We deny that we engaged in anticompetitive practices related to our casket sales and we have filed reports of our experts, which vigorously dispute the validity of the plaintiffs’ damages theories and calculations. The trial court dismissed plaintiffs’ claims on September 24, 2010, and the plaintiffs filed an appeal on October 19, 2010.

Wage and Hour Claims. We are named a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour overtime pay, including the Prise, Bryant, Bryant, Helm, and Stickle lawsuits described in the following paragraphs.

Prise, et al., v. Alderwoods Group, Inc., and Service Corporation International ; Cause No. 06-164; in the United States District

Court for the Western District of Pennsylvania (the “Wage and Hour Lawsuit”). The Wage and Hour Lawsuit was filed by two former Alderwoods (Pennsylvania), Inc. employees in December 2006 and purports to have been brought under the Fair Labor Standards Act (“FLSA”) on behalf of all Alderwoods and SCI-affiliated employees who performed work for which they were not fully compensated, including work for which overtime pay was owed. The court has conditionally certified a class of claims as to certain job positions for Alderwoods employees.

Plaintiffs allege causes of action for violations of the FLSA, failure to maintain proper records, breach of contract, violations of state wage and hour laws, unjust enrichment, fraud and deceit, quantum meruit, negligent misrepresentation, and negligence. Plaintiffs seek injunctive relief, unpaid wages, liquidated, compensatory, consequential and punitive damages, attorneys’ fees and costs, and pre- and post-judgment interest. We cannot quantify our ultimate liability, if any, in this lawsuit.

Bryant, et al. v. Alderwoods Group, Inc., Service Corporation International, et al .; Case No. 3:07-CV-5696-SI; in the U.S. District Court for the Northern District of California. This lawsuit was filed on November 8, 2007 against SCI and various subsidiaries and individuals. It is related to the Wage and Hour Lawsuit, raising similar claims and brought by the same attorneys. This lawsuit has been transferred to the U.S. District Court for the Western District of Pennsylvania and is now Case No. 08-CV-00891-JFC. We cannot quantify our ultimate liability, if any, in this lawsuit.

Bryant, et al. v. Service Corporation International, et al .; Case No. RG-07359593; and Helm, et al. v. AWGI & SCI ; Case No. RG-07359602; in the Superior Court of the State of California, County of Almeda. These cases were filed on December 5, 2007 by counsel for plaintiffs in the Wage and Hour Lawsuit. These cases assert state law claims similar to the federal claims asserted in the Wage and Hour Lawsuit. These cases were removed to federal court in the U.S. District Court for the Northern District of California, San Francisco/Oakland Division. The Bryant case is now Case No. 3:08-CV-01190-SI and the Helm case is now Case No. C 08-01184-SI. On December 29, 2009, the court in the Helm case denied the plaintiffs’ motion to certify the case as a class action. The plaintiffs have modified and refiled their motion to seek certification of a class consisting of California employees only, but the plaintiffs have also filed 13 additional lawsuits with similar allegations seeking class certification of state law claims in different states. We cannot quantify our ultimate liability, if any, in these lawsuits.

Stickle, et al. v. Service Corporation International, et al .; Case No. 08-CV-83; in the U.S. District Court for Arizona, Phoenix Division. Counsel for plaintiffs in the Wage and Hour Lawsuit filed this case on January 17, 2008, against SCI and various related entities and individuals asserting FLSA and other ancillary claims based on the alleged failure to pay for overtime. In September 2009, the Court conditionally certified a class of claims as to certain job positions of SCI affiliated employees. We cannot quantify our ultimate liability, if any, in this lawsuit.

The ultimate outcome of the matters described above cannot be determined at this time. We intend to vigorously defend all of the above lawsuits; however, an adverse decision in one or more of such matters could have a material effect on us, our financial condition, results of operations, and cash flows.

17. 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				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
	(In thousands, except per				(In thousands, except per
	share amounts)				share amounts)
Amounts attributable to common stockholders:
Net income:
Net income — basic	$	18,765	$	31,162	$	89,962	$	88,796
After tax interest on convertible debt		—		13		38		38

Net income — diluted	$	18,765	$	31,175	$	90,000	$	88,834

Weighted average shares (denominator):
Weighted average shares — Basic		246,214		251,765		250,762		250,858
Stock options		1,309		1,162		1,603		293
Convertible debt		—		121		121		121

Weighted average shares — diluted		247,523		253,048		252,486		251,272

Net income per share:
Basic	$	.08	$	.12	$	.36	$	.35
Diluted	$	.08	$	.12	$	.36	$	.35

The computation of diluted EPS excludes outstanding stock options and convertible debt in certain periods in which the inclusion of such options and debt would be anti-dilutive in the periods presented. For the three months ended September 30, 2010 and 2009, total options and convertible debentures not currently included in the computation of dilutive EPS were 6.6 million and 6.2 million, respectively. For the nine months ended September 30, 2010 and 2009, total options and convertible debentures not currently included in the computation of dilutive EPS were 5.4 million and 6.2 million, respectively.

18. Divestiture-Related Activities

As divestitures occur in the normal course of business, gains or losses on the sale of such businesses are recognized in the income statement line item (Losses) gains on divestitures and impairment charges, net. Additionally, as divestitures occur pursuant to our ongoing asset sale programs, adjustments are made through this income statement line item to reflect the difference between actual proceeds received from the sale compared to the original estimates.

(Losses) gains on divestitures and impairment charges, net consists of the following for the three and nine months ended September 30:


	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2010			2009			2010			2009
	(In thousands)						(In thousands)
(Losses) gains on divestitures, net	$	(1,205	)	$	(72	)	$	13,266		$	11,753
Impairment losses		(6,086	)		(2,149	)		(7,435	)		(13,033	)

	$	(7,291	)	$	(2,221	)	$	5,831		$	(1,280	)

Keystone

In conjunction with our acquisition of Keystone, we entered into an agreement with the Federal Trade Commission to sell 22 funeral homes and five cemeteries, which were sold for $34.9 million in the second quarter of 2010. We recognized a gain on divestitures of $6.0 million associated with the former SCI properties.

Assets Held for Sale

We committed to a plan to sell certain operating properties as of September 30, 2010 and December 31, 2009.

Net assets held for sale were as follows:


	September 30, 2010		December 31, 2009
	(in thousands)
Assets:
Current assets	$	1,112	$	1,197
Preneed funeral receivables, net and trust investments		2,007		377
Preneed cemetery receivables, net and trust investments		689		50,952
Cemetery property, at cost		1,027		2,111
Property and equipment, net		373		120
Deferred charges and other assets		1,047		10,237
Cemetery perpetual care trust investments		233		17,104

Total assets		6,488		82,098

Liabilities:
Accounts payable and accrued liabilities		138		501
Deferred preneed funeral revenues		1,927		—
Deferred preneed cemetery revenues		416		49,346
Other liabilities		7		1,882
Care trusts’ corpus		233		17,104

Total liabilities		2,721		68,833

Net assets held for sale	$	3,767	$	13,265

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

The Company

We are North America’s largest provider of deathcare products and services, with a network of funeral homes and cemeteries unequalled in geographic scale and reach. At September 30, 2010, we operated 1,405 funeral service locations and 382 cemeteries (including 218 combination locations) in North America, which are geographically diversified across 43 states, eight Canadian provinces, the District of Columbia, and Puerto Rico. Our funeral segment also includes the operations of 12 funeral homes in Germany that we intend to exit when economic values and conditions are conducive to a sale. Our funeral service and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses. We sell cemetery property and funeral and cemetery products and services at the time of need and on a preneed basis.

Our financial position is enhanced by our $6.6 billion backlog of future revenues from both trust and insurance-funded sales at September 30, 2010, which is the result of preneed funeral and cemetery sales. We believe we have the financial strength and flexibility to reward shareholders through dividends while maintaining a prudent capital structure and pursuing new opportunities for profitable growth. We currently have approximately $34.9 million authorized to repurchase our common stock.

On March 26, 2010, pursuant to a tender offer, we acquired approximately 91% of the outstanding common stock of Keystone for C$8.07 per share in cash, resulting in a purchase price of $288.9 million, which included the refinancing of $80.7 million of Keystone’s debt and our purchase of the remaining shares of Keystone for $17.5 million, which was completed during the second quarter of 2010 using available cash balance.

Financial Condition, Liquidity and Capital Resources

Trust Investments

In addition to selling our products and services to client families at the time of need, we sell price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery services and merchandise. Since preneed funeral and cemetery services or merchandise will not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into trusts and/or preneed escrow accounts until the merchandise is delivered or the service is performed. Investment earnings associated with the trust investments are expected to mitigate the inflationary costs of providing the preneed funeral and cemetery services and merchandise in the future for the prices that were guaranteed at the time of sale.

Also, we are required by state and provincial law to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trusts. For these investments, the original corpus remains in the trust in perpetuity and the net ordinary earnings are intended to offset the expense to maintain the cemetery property. The majority of states require that net gains or losses are retained and added to the corpus, but certain states allow the net realized gains and losses to be included in the income that is distributed.

Independent trustees manage and invest all of the funds deposited into the funeral and cemetery merchandise and service trusts as well as the cemetery perpetual care trusts. The trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations. All of the trustees engage the same independent investment advisor. The trustees, with input from the investment advisor, establish an investment policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection. The investments are also governed by state and provincial guidelines. Asset allocation for the funeral and cemetery merchandise and service trusts is generally based on matching the time period that we expect the funeral or cemetery preneed contract to be outstanding. Since net ordinary earnings are distributed monthly from the cemetery perpetual care trusts to offset cemetery maintenance costs, the cemetery perpetual care trusts contain a higher fixed income allocation than the funeral and cemetery merchandise and service trusts. The investment advisor recommends investment managers to the trustees that are selected on the basis of various criteria set forth in the investment policy. The primary investment objectives for the funeral and cemetery merchandise and service trusts include (1) achieving growth of principal over time sufficient to preserve and increase the purchasing power of the assets, and (2) preserving capital within acceptable levels of volatility. Preneed funeral and cemetery contracts generally take years to mature. Therefore, the funds associated with these contracts are often invested for several market cycles. While cemetery perpetual care trusts share the same investment objectives as listed above, these trusts emphasize providing a steady stream of investment income with some capital appreciation. The trusts seek to control risk and volatility through a combination of asset styles, asset classes, and institutional investment managers.

As of September 30, 2010, approximately 90% of our trusts were under the control and custody of two large financial institutions engaged as preferred trustees. The U.S. trustees primarily use common trust fund structures as the investment vehicle for their trusts. Through the common trust fund structure, each respective trustee manages the allocation of assets through individual managed accounts or institutional mutual funds. In the event a particular state prohibits the use of a common trust fund as a qualified investment, the trustee utilizes institutional mutual funds. The U.S. trusts include a modest allocation to alternative investments, which are comprised primarily of private equity and real estate investments. These investments are structured as limited liability companies (LLCs) and are managed by certain trustees. The trusts that are eligible to allocate a portion of their investments to alternative investments purchase units of the respective LLCs.

Fixed Income Securities

Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility. The SCI trusts have direct investments primarily in government fixed income securities.

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

Equity Securities

Equity investments have historically provided long-term capital appreciation in excess of inflation. The SCI trusts have direct investments primarily in domestic equity portfolios that include large, mid, and small capitalization companies of different investment objectives (i.e., growth and value). The majority of the equity portfolio is managed by multiple institutional investment managers that specialize in an objective-specific area of expertise. Our equity securities are exposed to market risk; however, these securities are well-diversified. As of September 30, 2010, the largest single equity position represented less than 1% of the total portfolio.

Mutual Funds

The SCI trust funds employ institutional mutual funds where operationally or economically efficient. Institutional mutual funds are utilized to invest in various asset classes including US equities, non-US equities, convertible bonds, corporate bonds, government bonds, Treasury inflation protected securities (TIPS), high yield bonds, real estate investment trusts (REITs), and commodities. The mutual funds are governed by guidelines outlined in their individual prospectuses.

Private Equity

The objective of these investments is to provide high rates of return with controlled volatility. These investments are typically long-term in duration. These investments are diversified by strategy, sector, manager, and vintage year. Private equity exposure is accessed through LLCs established by certain preferred trustees. These LLCs invest in numerous limited partnerships, including private equity, fund of funds, distressed debt, and mezzanine financing. The trustees that have oversight of their respective LLCs work closely with the investment advisor in making all current investments.

Trust Investment Performance

The trust fund income recognized from these investment assets continues to be volatile. During the twelve months ended September 30, 2010, the Standard and Poor’s 500 Index increased approximately 10.2% and the Barclay’s Aggregate Index increased approximately 8.2%, while the combined SCI trusts increased approximately 11.5%.

Capital Allocation Considerations

We believe that our cash on hand, future operating cash flows, and the available capacity under our credit facility will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations.

While we have no significant debt maturities until November 2013, we have chosen to make open market debt repurchases when it is opportunistic to do so relative to other capital deployment opportunities. During 2010 and 2009, we bought our debt securities in the open market totaling $111 million and $91 million, respectively.

As a result of the acquisition of Keystone in March 2010, we incurred $150 million of new debt and we also refinanced debt of approximately $81 million, which was settled in cash concurrent with the acquisition closing. We do not believe this additional acquisition-related debt of $150 million added meaningfully to our long term debt obligations as the debt repurchases in 2009 of $91 million were completed partly in anticipation of this new debt.

Our current bank credit facility expires in November 2013, and we believe we will be able to successfully renew the bank credit facility at the appropriate time. Our long term liquidity profile assumes that we will have access to the capital markets to refinance our long term debt if, and when, we choose to do so. We have a relatively consistent annual cash flow stream which is generally resistant to down economic cycles. This cash flow stream is available to substantially reduce our long-term debt maturities should we choose to do so. Furthermore, our capital expenditures are generally discretionary in nature and can be managed based on the availability of operating cash flow.

Our bank credit facility requires us to maintain certain leverage and interest coverage ratios. As of September 30, 2010 we were in compliance with all of our debt covenants. Our financial covenant requirements and actual ratios as of September 30, 2010 are as follows:


	Per Credit Agreement	Actual
Leverage ratio	4.00 (Max)		3.30
Interest coverage ratio	3.00 (Min)		4.03

From time to time we have business growth initiatives such as Dignity Memorial, Dignity Planning, and DignityMemorial.com. These growth initiatives are generally not capital intensive. As such, we plan to fund these initiatives using our cash flow from operations. Additionally, we do not believe that these aforementioned initiatives materially impact our short term or long term liquidity needs.

Cash Flow

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

Operating Activities — Net cash provided by operating activities decreased approximately $39.2 million in the first nine months ended September 30, 2010, compared to the nine months ended September 30, 2009. This decrease primarily resulted from higher payments toward incentive compensation and trade payables made during the current year, and proceeds received in the prior year from liquidating certain life insurance assets, which was partially offset by an increase attributable to higher atneed cash receipts resulting from initiatives that improved collection rates in the current period.

Investing Activities — Net cash used in investing activities increased $194.1 million in the first nine months ended September 30, 2010, compared to the first nine months ended September 30, 2009, primarily due to $278.4 million in acquisitions primarily related to the acquisition of Keystone, partially offset by $27.5 million in withdrawals of restricted funds and $61.9 million in proceeds from divestitures.

Financing Activities — Net cash used in financing activities decreased by $89.7 million in the first nine months ended September 30, 2010, compared to the first nine months ended September 30, 2009, primarily due to a $238.8 million increase in proceeds from issuance of long-term debt (net of debt issuance costs), which was partially offset by $86.9 million in purchases of company stock, $32.5 million increase in debt payments due to increased purchases of debt in the open market, and $22.0 million increase in capital lease payments primarily associated with the termination of certain transportation leases.

Financial Assurances

In support of our operations, we have entered into arrangements with certain surety companies whereby such companies agree to issue surety bonds on our behalf as financial assurance and/or as required by existing state and local regulations. The surety bonds are used for various business purposes; however, the majority of the surety bonds issued and outstanding have been used to support our preneed funeral and cemetery sales activities. The obligations underlying these surety bonds are recorded on the unaudited condensed consolidated balance sheet as Deferred preneed funeral revenues and Deferred preneed cemetery revenues. The breakdown of surety bonds between funeral and cemetery preneed arrangements, as well as surety bonds for other activities, is described below.


	September 30, 2010		December 31, 2009
	(Dollars in millions)
Preneed funeral	$	121.0	$	126.6
Preneed cemetery:
Merchandise and services		120.1		126.0
Pre-construction		5.8		3.3

Bonds supporting preneed funeral and cemetery obligations	$	246.9	$	255.9

Bonds supporting preneed business permits		5.3		4.6
Other bonds		15.3		22.1

Total surety bonds outstanding	$	267.5	$	282.6

When selling preneed funeral and cemetery contracts, we may post surety bonds where allowed by state law. We post the surety bonds in lieu of trusting a certain amount of funds received from the customer. The amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law. For the three months ended September 30, 2010 and 2009, we had $4.8 million and $6.0 million, respectively, of cash receipts attributable to bonded sales. For the nine months ended September 30, 2010 and 2009, we had $14.7 million and $18.6 million, respectively, of cash receipts attributable to bonded sales. These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.

Surety bond premiums are paid annually and are automatically renewable until maturity of the underlying preneed contracts, unless we are given prior notice of cancellation. Except for cemetery pre-construction bonds (which are irrevocable), the surety companies generally have the right to cancel the surety bonds at any time with appropriate notice. In the event a surety company

would cancel the surety bond, we are required to obtain replacement surety assurance from another surety company or fund a trust for an amount generally less than the posted bond amount. Management does not expect that we will be required to fund material future amounts related to these surety bonds because of lack of surety capacity or surety company non-performance.

Preneed Funeral and Cemetery Activities and Backlog of Contracts

In addition to selling our products and services to client families at the time of need, we sell price-guaranteed preneed funeral and cemetery contracts, which provide for future funeral or cemetery services and merchandise. Since preneed funeral and cemetery services or merchandise will not be provided until sometime in the future, most states and provinces require that all or a portion of the funds collected from customers on preneed funeral and cemetery contracts be paid into merchandise and service trusts until the merchandise is delivered or the service is performed. These trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. In certain situations, as described above, where permitted by state or provincial laws, we post a surety bond as financial assurance for a certain amount of the preneed funeral or cemetery contract in lieu of placing funds into trust accounts.

Trust-Funded Preneed Funeral and Cemetery Contracts: The funds are deposited into trust and invested by independent trustees in accordance with state and provincial laws. We retain any funds above the amounts required to be deposited into trust accounts and use them for working capital purposes, generally to offset the selling and administrative costs of our preneed programs.

The tables below detail our results of preneed funeral and cemetery production and maturities, excluding insurance contracts, for the three and nine months ended September 30, 2010 and 2009.


	North America
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
	(Dollars in millions)				(Dollars in millions)
Funeral:
Preneed trust-funded (including bonded):
Sales production	$	30.3	$	33.7	$	93.4	$	109.7

Sales production (number of contracts)		6,978		8,396		21,632		25,127

Maturities	$	42.6	$	41.4	$	135.8	$	130.6

Maturities (number of contracts)		9,786		9,872		31,080		32,394

Cemetery:
Sales production:
Preneed	$	94.5	$	101.7	$	301.2	$	289.4
Atneed		56.5		58.0		181.5		179.7

Total sales production	$	151.0	$	159.7	$	482.7	$	469.1

Sales production deferred to backlog:
Preneed	$	39.3	$	41.4	$	129.1	$	120.2
Atneed		43.1		43.8		136.5		137.9

Total sales production deferred to backlog	$	82.4	$	85.2	$	265.6	$	258.1

Revenue recognized from backlog:
Preneed	$	41.1	$	30.7	$	109.2	$	98.6
Atneed		43.5		44.8		135.5		137.0

Total revenue recognized from backlog	$	84.6	$	75.5	$	244.7	$	235.6

Insurance-Funded Preneed Funeral Contracts: Where permitted by state or provincial law, customers may arrange their preneed funeral contract by purchasing a life insurance or annuity policy from third-party insurance companies, for which we earn a commission as general sales agent for the insurance company. The policy amount of the insurance contract between the customer and the third-party insurance company generally equals the amount of the preneed funeral contract. We do not reflect the unfulfilled insurance-funded preneed funeral contract amounts in our unaudited condensed consolidated balance sheet.

The table below details the results of insurance-funded preneed funeral production and maturities for the three and nine months ended September 30, 2010 and 2009, and the number of contracts associated with those transactions.


	North America
	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2010		2009		2010		2009
	(Dollars in millions)				(Dollars in millions)
Preneed funeral insurance-funded:
Sales production (1)	$	102.0	$	88.4	$	313.8	$	240.0

Sales production (number of contracts) (1)		17,664		15,364		54,375		41,378

General agency revenue	$	19.7	$	15.8	$	51.0	$	42.4

Maturities	$	68.3	$	58.2	$	209.9	$	182.5

Maturities (number of contracts)		12,676		10,998		39,094		34,173


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

North America Backlog of Preneed Funeral and Cemetery Contracts: The following table reflects our North America backlog of trust-funded deferred preneed funeral and cemetery contract revenues, including amounts related to Deferred preneed funeral and cemetery receipts held in trust at September 30, 2010 and December 31, 2009. Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our unaudited condensed consolidated balance sheet) at September 30, 2010 and December 31, 2009. The backlog amounts presented are reduced by an amount that we believe will cancel before maturity based on historical experience.

The table also reflects our preneed funeral and cemetery receivables and trust investments (market and cost bases) associated with the backlog of deferred preneed funeral and cemetery contract revenues, net of the estimated cancellation allowance. We believe that the table below is meaningful because it sets forth the aggregate amount of future revenues we expect to recognize as a result of preneed sales, as well as the amount of assets associated with those revenues. Because the future revenues exceed the asset amounts, future revenues will exceed the cash distributions actually received from the associated trusts.


	September 30, 2010						December 31, 2009
	Market			Cost			Market			Cost
				(Dollars in billions)
Deferred preneed funeral revenues	$	0.59		$	0.59		$	0.59		$	0.59
Deferred preneed funeral receipts held in trust		1.16			1.17			1.14			1.17

	$	1.75		$	1.76		$	1.73		$	1.76
Allowance for cancellation on trust investments		(0.13	)		(0.13	)		(0.12	)		(0.12	)

Backlog of trust-funded preneed funeral revenues	$	1.62		$	1.63		$	1.61		$	1.64
Backlog of insurance-funded preneed funeral revenues		3.23			3.23			3.03			3.03

Total backlog of preneed funeral revenues	$	4.85		$	4.86		$	4.64		$	4.67

Preneed funeral receivables and trust investments	$	1.37		$	1.38		$	1.35		$	1.39
Allowance for cancellation on trust investments		(0.11	)		(0.11	)		(0.11	)		(0.11	)

Assets associated with backlog of trust-funded deferred preneed funeral revenues, net of estimated allowance for cancellation	$	1.26		$	1.27		$	1.24		$	1.28
Insurance policies associated with insurance-funded deferred preneed funeral revenues, net of estimated allowance for cancellation		3.23			3.23			3.03			3.03

Total assets associated with backlog of preneed funeral revenues, net of estimated allowance for cancellation	$	4.49		$	4.50		$	4.27		$	4.31

Deferred preneed cemetery revenues	$	0.82		$	0.82		$	0.82		$	0.82
Deferred preneed cemetery receipts held in trust		1.11			1.12			1.06			1.11

	$	1.93		$	1.94		$	1.88		$	1.93
Allowance for cancellation on trust investments		(0.16	)		(0.16	)		(0.16	)		(0.16	)

Total backlog of deferred cemetery revenues	$	1.77		$	1.78		$	1.72		$	1.77

Preneed cemetery receivables and trust investments	$	1.46		$	1.46		$	1.38		$	1.43
Allowance for cancellation on trust investments		(0.15	)		(0.15	)		(0.14	)		(0.14	)

Total assets associated with backlog of deferred cemetery revenues, net of estimated allowance for cancellation	$	1.31		$	1.31		$	1.24		$	1.29

The market value of our funeral and cemetery trust investments was based on a combination of quoted market prices, observable inputs such as interest rates or yield curves, and appraisals. For more information on how market values are estimated, see Critical Accounting Policies below. The difference between the backlog and asset amounts represents the contracts for which we have posted surety bonds as financial assurance in lieu of trusting, the amounts collected from customers that were not required to be deposited into trust, and allowable cash distributions from trust assets. The table also reflects the amounts expected to be received from insurance companies through the assignment of policy proceeds related to insurance-funded funeral contracts.

Results of Operations — Three Months Ended September 30, 2010 and 2009

Management Summary

Key highlights in the third quarter of 2010 were as follows:

	•		Funeral gross profit increased $0.3 million, or 0.4%, due to an increase in funeral case volume and profits from the Keystone and Palm Mortuaries acquisitions partially offset by higher selling costs; and,

	•		Cemetery gross profit increased $1.1 million due to an increase in preneed cemetery property sales and preneed merchandise sales offset by higher selling costs.

Results of Operations

In the third quarter of 2010, we reported net income attributable to common stockholders of $18.8 million ($.08 per diluted share) compared to net income attributable to common stockholders in the third quarter of 2009 of $31.2 million ($.12 per diluted share). These results were impacted by the following items:

	•		a net after-tax loss on asset sales of $8.5 million in the third quarter of 2010 and an after-tax loss of $2.3 million in the third quarter of 2009;

	•		a decrease in certain tax reserves of $2.5 million in the third quarter of 2010 as compared to a decrease of $0.8 million in the third quarter of 2009;

	•		an after-tax loss from the early extinguishment of debt of $5.3 million in the third quarter of 2010 and an after-tax gain of $0.3 million in the third quarter of 2009; and,

	•		after-tax expenses related to our acquisition and integration of Keystone of $1.8 million in the third quarter of 2010.

Consolidated Versus Comparable Results

The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the three months ended September 30, 2010 and 2009. We define comparable operations (or same store operations) as those funeral and cemetery locations that were owned for the entire period beginning January 1, 2009 and ending September 30, 2010. The following tables present operating results for funeral and cemetery locations that were owned by us during this period.


			Less:
			Results Associated		Less:
Three Months Ended			with Acquisition/		Results Associated
September 30, 2010	Consolidated		New Construction		with Divestitures			Comparable
	(Dollars in millions)
North America Revenue
Funeral revenue	$	357.4	$	29.9	$	0.3		$	327.2
Cemetery revenue		174.2		3.0		0.1			171.1

		531.6		32.9		0.4			498.3
Germany revenue		1.6		—		—			1.6

Total revenue	$	533.2	$	32.9	$	0.4		$	499.9

North America Gross Profits
Funeral gross profits	$	68.8	$	6.1	$	(0.1	)	$	62.8
Cemetery gross profits		33.6		0.3		(0.1	)		33.4

		102.4		6.4		(0.2	)		96.2
Germany gross profits		0.2		—		—			0.2

Total gross profits	$	102.6	$	6.4	$	(0.2	)	$	96.4


			Less:
			Results Associated			Less:
Three Months Ended			with Acquisition/			Results Associated
September 30, 2009	Consolidated		New Construction			with Divestitures		Comparable
	(Dollars in millions)
North America Revenue
Funeral revenue	$	327.4	$	0.1		$	4.0	$	323.3
Cemetery revenue		168.3		—			3.1		165.2

		495.7		0.1			7.1		488.5
Germany revenue		1.5		—			—		1.5

Total revenue	$	497.2	$	0.1		$	7.1	$	490.0


North America Gross Profits
Funeral gross profits	$	68.7	$	(0.2	)	$	0.1	$	68.8
Cemetery gross profits		32.5		(0.2	)		0.5		32.2

		101.2		(0.4	)		0.6		101.0
Germany gross profits		—		—			—		—

Total gross profits	$	101.2	$	(0.4	)	$	0.6	$	101.0

The following table provides the data necessary to calculate our consolidated average revenue per funeral service for the three months ended September 30, 2010 and 2009. We calculate average revenue per funeral service by dividing consolidated funeral revenue, excluding General Agency (GA) revenues and certain other revenues to avoid distorting our averages of normal funeral services revenue, by the number of consolidated funeral services performed during the period.


	Three Months Ended
	September 30,
	2010		2009
	(Dollars in millions,
	except average
	revenue per funeral service)
Consolidated funeral revenue	$	359.0	$	328.9
Less: Consolidated GA revenue		19.7		15.8
Less: Other revenue		2.3		1.8

Adjusted consolidated funeral revenue	$	337.0	$	311.3

Consolidated funeral services performed		64,680		60,494
Consolidated average revenue per funeral service	$	5,210	$	5,146

The following table provides the data necessary to calculate our comparable average revenue per funeral service for the three months ended September 30, 2010 and 2009. We calculate average revenue per funeral service by dividing comparable funeral revenue, excluding comparable GA revenues and certain other revenues to avoid distorting our averages of normal funeral services revenue, by the number of comparable funeral services performed during the period.


	Three Months Ended
	September 30,
	2010		2009
	(Dollars in millions,
	except average
	revenue per funeral service)
Comparable funeral revenue	$	328.8	$	324.8
Less: Comparable GA revenue		18.8		15.7
Less: Other revenue		2.3		1.8

Adjusted comparable funeral revenue	$	307.7	$	307.3

Comparable funeral services performed		58,676		59,632
Comparable average revenue per funeral service	$	5,244	$	5,153

Funeral Results

Funeral Revenue

Our consolidated revenues from funeral operations were $359.0 million in the third quarter of 2010 compared to $328.9 million in the same period of 2009. This increase is primarily due to a 6.9% increase in funeral services performed combined with an increase of 1.2% in the average revenue per funeral. Our comparable funeral revenues increased by $4.0 million, as higher General Agency revenues and higher average revenues per funeral service more than offset a decline in funeral services performed.

Funeral Services Performed

Our consolidated funeral services performed increased 6.9% during the third quarter of 2010 compared to the same period in 2009. Our comparable funeral services performed decreased 1.6% during the third quarter of 2010 compared to the same period in 2009, which we believe is consistent with trends experienced by other funeral service providers and industry vendors. Our comparable cremation rate of 41.6% in the third quarter of 2010 increased from 41.0% in the same period of 2009. We continue to expand our cremation memorialization products and services, which have resulted in higher average sales for cremation services.

Average Revenue Per Funeral

Our consolidated average revenue per funeral service increased $64, or 1.2%, in the third quarter of 2010 over the same period of 2009. Our comparable average revenue per funeral service increased $91, or 1.8%, per funeral service. Higher average revenue per funeral service and higher general agency revenues more than offset a decline in funeral services performed. Excluding a favorable Canadian currency impact and higher funeral trust fund income, the comparable average revenue per funeral service grew approximately 0.9%.

Funeral Gross Profit

Consolidated funeral gross profits increased $0.3 million and the funeral gross margin percentage decreased by 1.7% in the third quarter of 2010 compared to the third quarter of 2009. Comparable funeral gross profits decreased $5.8 million in comparison to the prior year quarter and the gross margin decreased from 21.2% to 19.2%, primarily attributable to lower costs in the prior year that resulted from a $4.5 million reduction in insurance reserves. The remaining decrease in profits is due to higher preneed selling costs and higher field overhead costs associated with our new operating structure in the current period.

Cemetery Results

Cemetery Revenue

Consolidated revenues from our cemetery operations increased $5.9 million, or 3.5%, in the third quarter of 2010 compared to the third quarter of 2009. This increase was primarily a result of increased new construction property and higher merchandise deliveries in the current period, offset by lower than expected sales of developed property.

Cemetery Gross Profits

Consolidated cemetery gross profit increased $1.1 million, or 3.4%, and cemetery gross margin percentage remained flat at 19.3% compared to the prior year quarter. This increase was due to higher comparable cemetery revenues being offset by higher expenses in the current quarter compared to the prior year quarter, which included the benefit from a $2.7 million reduction in insurance reserves.

Other Financial Statement Items

General and Administrative Expenses

General and administrative expenses were $26.9 million in the third quarter of 2010 compared to $21.0 million in the third quarter of 2009. This $5.9 increase was primarily due to current quarter acquisition and transition expenses of $2.2 million, and an increase in legal costs and employee benefit expenses.

(Losses) Gains on Divestitures and Impairment Charges, net

We recognized a $7.3 million net pre-tax loss on divestitures and impairment charges in the third quarter of 2010. This loss is due to the impairment of certain assets and other losses on the dispositions of various businesses in North America. In the third quarter of 2009, we recognized a $2.2 million net pre-tax loss on divestitures and impairment charges. This loss was due primarily to impairment charges on various locations in North America.

Weighted Average Shares

The diluted weighted average number of shares outstanding was 247.5 million in the third quarter of 2010, compared to 253.0 million in the third quarter of 2009.

Results of Operations — Nine Months Ended September 30, 2010 and 2009

Management Summary

Key highlights in the first nine months of 2010 were as follows:

	•		Funeral gross profit increased $7.3 million, or 3.3%, due to an increase in funeral case volume and profits from the Keystone and Palm Mortuaries acquisitions partially offset by higher selling costs; and,

	•		Cemetery gross profit increased $13.9 million, or 17.6%, due to an increase in preneed cemetery property sales and preneed merchandise sales, partially offset by higher selling costs.

Results of Operations

In the first nine months of 2010, we reported net income attributable to common stockholders of $90.0 million ($.36 per diluted share) compared to net income attributable to common stockholders in the first nine months of 2009 of $88.8 million ($.35 per diluted share). These results were impacted by the following items:

	•		a net after-tax loss on asset sales of $3.2 million in the first nine months of 2010 and an after-tax loss of $5.3 million in the first nine months of 2009;

	•		decrease in certain tax reserves of $1.1 million in the first nine months of 2010 as compared to an increase of $1.6 million in the first nine months of 2009;

	•		an after-tax loss from the early extinguishment of debt of $5.5 million in the first nine months of 2010 and an after-tax gain of $2.4 million in the first nine months of 2009; and,

	•		after-tax expenses related to our acquisition and integration of Keystone of $6.4 million in the first nine months of 2010.

Consolidated Versus Comparable Results

The table below reconciles our consolidated GAAP results to our comparable, or “same store,” results for the nine months ended September 30, 2010 and 2009. We define comparable operations (or same store operations) as those funeral and cemetery locations that were owned for the entire period beginning January 1, 2009 and ending September 30, 2010. The following tables present operating results for funeral and cemetery locations that were owned by us during this period.


			Less:
			Results Associated		Less:
Nine Months Ended			with Acquisition/		Results Associated
September 30, 2010	Consolidated		New Construction		with Divestitures			Comparable
	(Dollars in millions)
North America Revenue
Funeral revenue	$	1,100.8	$	67.0	$	8.0		$	1,025.8
Cemetery revenue		513.6		9.1		3.0			501.5

		1,614.4		76.1		11.0			1,527.3
Germany revenue		4.9		—		—			4.9

Total revenue	$	1,619.3	$	76.1	$	11.0		$	1,532.2

North America Gross Profits
Funeral gross profits	$	230.8	$	15.8	$	1.0		$	214.0
Cemetery gross profits		93.1		2.0		(0.2	)		91.3

		323.9		17.8		0.8			305.3
Germany gross profits		0.4		—		—			0.4

Total gross profits	$	324.3	$	17.8	$	0.8		$	305.7


			Less:
			Results Associated			Less:
Nine Months Ended			with Acquisition/			Results Associated
September 30, 2009	Consolidated		New Construction			with Divestitures		Comparable
	(Dollars in millions)
North America Revenue
Funeral revenue	$	1,031.8	$	0.4		$	16.0	$	1,015.4
Cemetery revenue		485.2		—			8.7		476.5

		1,517.0		0.4			24.7		1,491.9
Germany revenue		4.8		—			—		4.8

Total revenue	$	1,521.8	$	0.4		$	24.7	$	1,496.7


North America Gross Profits
Funeral gross profits	$	223.7	$	(0.6	)	$	1.1	$	223.2
Cemetery gross profits		79.2		(0.3	)		0.6		78.9

		302.9		(0.9	)		1.7		302.1
Germany gross profits		0.2		—			—		0.2

Total gross profits	$	303.1	$	(0.9	)	$	1.7	$	302.3

The following table provides the data necessary to calculate our consolidated average revenue per funeral service for the nine months ended September 30, 2010 and 2009. We calculate average revenue per funeral service by dividing consolidated funeral revenue, excluding General Agency (GA) revenues and certain other revenues to avoid distorting our averages of normal funeral services revenue, by the number of consolidated funeral services performed during the period.


	Nine Months Ended
	September 30,
	2010		2009
	(Dollars in millions,
	except average
	revenue per funeral service)
Consolidated funeral revenue	$	1,105.7	$	1,036.6
Less: Consolidated GA revenue		51.0		42.4
Less: Other revenue		8.6		6.0

Adjusted consolidated funeral revenue	$	1,046.1	$	988.2

Consolidated funeral services performed		200,672		193,572
Consolidated average revenue per funeral service	$	5,213	$	5,105

The following table provides the data necessary to calculate our comparable average revenue per funeral service for the nine months ended September 30, 2010 and 2009. We calculate average revenue per funeral service by dividing comparable funeral revenue, excluding comparable GA revenues and certain other revenues to avoid distorting our averages of normal funeral services revenue, by the number of comparable funeral services performed during the period.


	Nine Months Ended
	September 30,
	2010		2009
	(Dollars in millions,
	except average
	revenue per funeral service)
Comparable funeral revenue	$	1,030.7	$	1,020.2
Less: Comparable GA revenue		49.0		42.0
Less: Other revenue		6.7		6.0

Adjusted comparable funeral revenue	$	975.0	$	972.2

Comparable funeral services performed		185,476		190,067
Comparable average revenue per funeral service	$	5,257	$	5,115

Funeral Results

Funeral Revenue

Our consolidated revenues from funeral operations were $1,105.7 million in the first nine months of 2010 compared to $1,036.6 million in the same period of 2009. This increase is primarily due to a $53.9 million increase resulting from the acquisition of Keystone, a $8.7 million increase in GA revenue, and a 3.7% increase in funeral services performed combined with an increase of 2.1% in the average revenue per funeral.

Funeral Services Performed

Our consolidated funeral services performed increased 3.7% during the first nine months of 2010 compared to the same period in 2009 due to acquisitions. Our comparable funeral services performed decreased 2.4% during the first nine months of 2010 compared to the same period in 2009, primarily related to soft demand in our relevant markets. We believe the decline in deaths in our comparable markets is consistent with trends experienced by other funeral service providers and industry vendors compared to the third quarter of 2009. Our comparable cremation rate of 41.5% in the first nine months of 2010 increased from 40.8% in the same period of 2009. We continue to expand our cremation memorialization products and services, which have resulted in higher average sales for cremation services.

Average Revenue Per Funeral

Our consolidated average revenue per funeral service increased $108, or 2.1%, in the first nine months of 2010 over the same period of 2009. Higher average revenue per funeral service and higher general agency revenues more than offset a decline in funeral services performed. Our comparable average revenue per funeral service increased $142, or 2.8%, per funeral service. Excluding a favorable Canadian currency impact and higher funeral trust fund income, the average comparable revenue per funeral service grew approximately 0.9%.

Funeral Gross Profit

Consolidated funeral gross profits increased $7.3 million, or 3.3%, and the funeral gross margin percentage was relatively flat at approximately 21% in the first nine months of 2010 compared to the first nine months of 2009. Comparable funeral gross profits decreased $9.0 million, or 4.0%, primarily reflecting the impact of higher selling compensation from increased preneed funeral sales production.

Cemetery Results

Cemetery Revenue

Consolidated revenues from our cemetery operations increased $28.4 million, or 5.9%, in the first nine months of 2010 compared to the first nine months of 2009. Comparable cemetery revenues increased $25.0 million, or 5.2%, when compared with the same

period in 2009. This comparable increase was primarily due to a $19.9 million increase in preneed property sales and merchandise deliveries and a $6.8 million increase in cemetery trust fund income.

Cemetery Gross Profits

Consolidated cemetery gross profit increased $13.9 million, or 17.6%, and cemetery gross margin percentage improved to approximately 18.1% from 16.3% due to a significant increase in cemetery property sales and increases in cemetery trust fund income compared to prior year levels. We are also beginning to see some benefit from initiatives to reduce maintenance expenses implemented last year, which helped to offset increased selling costs as a result of higher sales production.

Other Financial Statement Items

General and Administrative Expenses

General and administrative expenses were $80.0 million in the first nine months of 2010 compared to $69.2 million in the first nine months of 2009. This $10.8 million increase was primarily due to $8.3 million increase in acquisition and transition expenses and $6.6 million increase in employee related compensation plans expenses and insurance-related expenses, partially offset by a $6.7 million decrease in legal costs and employee benefit expenses.

(Losses) Gains on Divestitures and Impairment Charges, net

We recognized a $5.8 million net pre-tax gain on divestitures and impairment charges in the first nine months of 2010. This gain was due to gains incurred on various divestitures, primarily the sale of former SCI properties included in the 22 funeral homes and five cemeteries divested as a result of our agreement with the Federal Trade Commission in conjunction with our recent Keystone acquisition. In the first nine months of 2009, we recognized a $1.3 million net pre-tax loss composed of divestitures and impairment charges of $19.0 million, offset by a $17.7 million release of VAT, social security, and litigation indemnifications related to our former French operations.

Other income, net

Other income, net increased $1.7 million to $3.1 million in the first nine months of 2010 compared to $1.4 million in the first nine months of 2009. This increase is primarily due to a favorable foreign currency exchange impact from liability settlements between U.S. and Canadian subsidiaries.

Weighted Average Shares

The diluted weighted average number of shares outstanding was 252.5 million in the first nine months of 2010, compared to 251.3 million in the first nine months of 2009.

Critical Accounting Policies

The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed consolidated financial statements and accompanying notes. Actual results could differ from those estimates. Our critical accounting policies are disclosed in our Annual Report on Form 10-K for the year ended December 31, 2009.

No other significant changes to our accounting policies have occurred subsequent to December 31, 2009, except as described below within Recent Accounting Pronouncements and Accounting Changes .

Recent Accounting Pronouncements and Accounting Changes

For discussion of recent accounting pronouncements and accounting changes, see Part I, Item 1. Financial Statements, Note 3.

Cautionary Statement on Forward-Looking Statements

The statements in this Form 10-Q that are not historical facts are forward-looking statements made in reliance on the “safe harbor” protections provided under the Private Securities Litigation Reform Act of 1995. These statements may be accompanied by words such as “believe,” “estimate,” “project,” “expect,” “anticipate,” or “predict,” that convey the uncertainty of future events or outcomes. These statements are based on assumptions that we believe are reasonable; however, many important factors could cause our actual results in the future to differ materially from the forward-looking statements made herein and in any other documents or oral presentations made by us, or on our behalf. Important factors, which could cause actual results to differ materially from those in forward-looking statements include, among others, the following:

	•		Changes in general economic conditions, both domestically and internationally, impacting financial markets (e.g., marketable security values, access to capital markets, as well as currency and interest rate fluctuations) that could negatively affect us, particularly, but not limited to, levels of trust fund income, interest expense, and negative currency translation effects.

	•		Changes in operating conditions such as supply disruptions and labor disputes.

	•		Our inability to achieve the level of cost savings, productivity improvements or earnings growth anticipated by management, whether due to significant increases in energy costs (e.g., electricity, natural gas and fuel oil), costs of other materials, employee-related costs or other factors.

	•		Our inability to complete acquisitions, divestitures or strategic alliances as planned or to realize expected synergies and strategic benefits.

	•		The outcomes of pending lawsuits, proceedings, and claims against us and the possibility that insurance coverage is deemed not to apply to these matters or that an insurance carrier is unable to pay any covered amounts to us.

	•		Allegations regarding compliance with laws, regulations, industry standards, and customs regarding burial procedures and practices.

	•		The amounts payable by us with respect to our outstanding legal matters exceed our established reserves.

	•		Amounts that we may be required to replenish into our affiliated funeral and cemetery trust funds in order to meet minimum funding requirements.

	•		The outcome of pending Internal Revenue Service audits. We maintain accruals for tax liabilities that relate to uncertain tax matters. If these tax matters are unfavorably resolved, we will make any required payments to tax authorities. While such payments would affect our cash flow, we do not believe it would impair our ability to service debt or our overall liquidity. If these tax matters are favorably resolved, the accruals maintained by us will no longer be required, and these amounts will be reversed through the tax provision at the time of resolution.

	•		Our ability to manage changes in consumer demand and/or pricing for our products and services due to several factors, such as changes in numbers of deaths, cremation rates, competitive pressures, and local economic conditions.

	•		Changes in domestic and international political and/or regulatory environments in which we operate, including potential changes in tax, accounting, and trusting policies.

	•		Changes in credit relationships impacting the availability of credit and the general availability of credit in the marketplace.

	•		Our ability to successfully access surety and insurance markets at a reasonable cost.

	•		Our ability to successfully leverage our substantial purchasing power with certain of our vendors.

	•		The effectiveness of our internal control over financial reporting, and our ability to certify the effectiveness of the internal controls and to obtain an unqualified attestation report of our auditors regarding the effectiveness of our internal control over financial reporting.

	•		The possibility that restrictive covenants in our credit agreement and debt securities may prevent us from engaging in certain transactions.

	•		Our ability to buy our common stock under our share repurchase programs, which could be impacted by, among others, restrictive covenants in our bank agreements, unfavorable market conditions, the market price of our common stock, the nature of other investment opportunities presented to us from time to time, and the availability of funds necessary to continue purchasing common stock.

	•		The financial condition of third-party insurance companies that fund our preneed funeral contracts may impact our future revenues.

	•		Declines in overall economic conditions beyond our control could reduce future potential earnings and cash flows and could result in future goodwill impairments.

	•		Our funeral and cemetery trust funds’ investments in equity securities, fixed income securities, and mutual funds may be impacted by market conditions that are beyond our control.

	•		Failure to realize the anticipated benefits and/or successful implementation of the acquisition of Keystone, which could prove to be disruptive and could result in the combined business failing to meet our expectations.

			For further information on these and other risks and uncertainties, see our Securities and Exchange Commission filings, including our 2009 Annual Report on Form 10-K. Copies of this document as well as other SEC filings can be obtained from our website at www.sci-corp.com. We assume no obligation to publicly update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Marketable Equity and Debt Securities — Price Risk

In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices.

Cost and market values as of September 30, 2010 are presented in Part I, Item 1. Financial Statements and Notes 4, 5, and 6 of this Form 10-Q. Also, see Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Financial Conditions, Liquidity and Capital Resources , for discussion of volatility in financial markets.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

As of September 30, 2010, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Our disclosure controls and procedures are designed to ensure that information required to be disclosed in the Securities and Exchange Commission (“SEC”) reports we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time period specified by the SEC’s rules and forms and that such information is accumulated and communicated to management, including our CEO and CFO, as appropriate, to allow timely decisions regarding required disclosure. The officers have concluded that our disclosure controls and procedures were effective as of September 30, 2010 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented in conformity with US GAAP.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting during the most recently completed fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Information regarding legal proceedings is set forth in Note 16 in Item 1 of Part I of this Form 10-Q, which information is hereby incorporated by reference herein.

Item 1A. Risk Factors

There have been no material changes in our Risk Factors as set forth in Item 1A of our Form 10-K for the fiscal year ended December 31, 2009, except that the Risk Factor relating to failure to consummate the acquisition of Keystone is no longer applicable because we have acquired Keystone.

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

On July 30, 2010, we issued 1,201 deferred common stock equivalents, or units, pursuant to provisions regarding dividends under the Amended and Restated Director Fee Plan to four non-employee directors. We did not receive any monetary consideration for the issuances. These issuances were unregistered because they did not constitute a “sale” within the meaning of Section 2(3) of the Securities Act of 1933, as amended.

As of September 30, 2010, the aggregate purchases pursuant to our share repurchase program totaled $1.1 billion. As of September 30, 2010, the remaining dollar value of shares that may yet be purchased under our currently approved share repurchase program was approximately $37.3 million.


					Total number of
					shares purchased as		Dollar value of shares that
	Total number of		Average price		part of publicly		may yet be purchased under
Period	shares purchased		paid per share		announced programs		the programs
July 1, 2010 — July 31, 2010		2,388,358	$	7.54		2,388,358	$	50,908,723
August 1, 2010 — August 31, 2010		519,401	$	7.91		519,401	$	46,800,850
September 1, 2010 — September 30, 2010		1,160,159	$	8.22		1,160,159	$	37,262,421

		4,067,918				4,067,918

Subsequent to September 30, 2010, we repurchased an additional 0.3 million shares of common stock at an aggregate cost of $2.3 million, which is an average cost per share of $8.48. After these third quarter repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately $34.9 million.

Item 6. Exhibits

12.1		Ratio of earnings to fixed charges for the three and nine months ended September 30, 2010 and 2009.

31.1		Certification of Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Periodic Financial Reports by Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Periodic Financial Reports by Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from Service Corporation International’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheet (ii) Condensed Consolidated Statement of Operations, (iii) Condensed Consolidated Statement of Equity (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

Undertaking

We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph (4) (iii), to furnish to the U.S. Securities and Exchange Commission, upon request, all constituent instruments defining the rights of holders of our long-term debt not filed herewith for the reason that the total amount of securities authorized under any of such instruments does not exceed 10 percent of our total consolidated assets.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


October 28, 2010	SERVICE CORPORATION INTERNATIONAL
	By:	/s/ Tammy Moore
		Tammy Moore
		Vice President and Corporate Controller (Principal Accounting Officer)

Index to Exhibits

12.1		Ratio of earnings to fixed charges for the three and nine months ended September 30, 2010 and 2009.

31.1		Certification of Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

31.2		Certification of Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certification of Periodic Financial Reports by Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Periodic Financial Reports by Eric D. Tanzberger as Principal Financial Officer in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002.

101		The following materials from Service Corporation International’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2010, formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Balance Sheet (ii) Condensed Consolidated Statement of Operations, (iii) Condensed Consolidated Statement of Equity (iv) Condensed Consolidated Statement of Cash Flows and (v) Notes to Condensed Consolidated Financial Statements, tagged as blocks of text.

TABLE OF CONTENTS

Part I. Financial Information Item 1. Financial Statements Item 2. Management S Discussion and Analysis Of Financial Condition and Results Of Operations Item 3. Quantitative and Qualitative Disclosures About Market Risk Item 4. Controls and Procedures Part II. Other Information Item 1. Legal Proceedings Item 1A. Risk Factors Item 2. Unregistered Sales Of Equity Securities and Use Of Proceeds Item 6. Exhibits

EX-12.1 EX-31.1 EX-31.2 EX-32.1 EX-32.2

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o

Smaller reporting company o

(Do not check if a smaller reporting company)