What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-15 compared with 2021-02-16 · 116 added, 212 removed, 377 unchanged (47% of the section changed)

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We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.

Our Dignity Memorial® brand serves over 500,000 families each year with professionalism, compassion, and attention to detail.

Our financial position is enhanced by our $13.7 billion backlog of future revenue from both trust and insurance-funded preneed sales at December 31, 2021.

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While revenue on the majority of preneed merchandise and service sales is deferred until the time of need, sales of preneed cemetery property provide opportunities for full current revenue recognition to the extent that the property is developed and available for use.

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

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

Factors affecting our operating results include:

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Recent Trends

During 2020, an outbreak of a novel strain of coronavirus (COVID-19) spread worldwide and was declared a global pandemic by the World Health Organization on March 11, 2020.

COVID-19 poses a threat to the health and economic well-being of our employees, customers, and vendors.

Our dedicated associates are acting as first responders and providing essential services for our client families and communities.

The operation of all our facilities is critically dependent on our employees who operate these locations.

To ensure the well-being of all our employees and their families, we provided them with detailed health and safety literature on COVID-19, such as the Center for Disease Control (the “CDC”)’s industry-specific guidelines for working with the deceased who were and may have been infected with COVID-19.

In addition, we provide personal protection equipment to those employees whose positions require such equipment.

We continue to add measures to help ensure client families can safely visit our facilities and celebrate the life of their loved ones.

We have implemented work from home policies at our corporate offices consistent with CDC and local government guidance to reduce the risks of exposure to COVID-19, while continuing to support our locations and the customers they serve.

Like most businesses world-wide, COVID-19 has impacted various aspects of our business operations;

however, we cannot, with certainty, presently predict the scope, severity, or duration with which COVID-19 will continue to impact our business, financial condition, results of operations, and cash flows.

As recently as the middle of March 2020, sales growth was continuing to trend in-line and consistent with our forecast for the first quarter of 2020 and when compared to the first quarter of 2019.

However, during the last two weeks of March and through April, we saw our preneed sales activity and our sales averages precipitously decline as North Americans began to practice social distancing to comply with multiple state and provincial shelter-in-place orders.

Due to the impacts of COVID-19 and uncertainty about the duration of the effects, we took a variety of actions to preserve capital, including but not limited to, reducing the base salaries for officers from the peak of the COVID-19 effects in late April 2020 until late May when the impacts eased.

As the world continues to experience the effects of COVID-19, we remain reliant on the values and capabilities of our organization to meet the needs of our client families and while ensuring our associates and customers are safe.

As community restrictions have lifted, we have experienced unprecedented growth in our preneed cemetery sales and increased funeral services and burials performed.

We have also experienced a return to full memorial services or celebrations in many markets which fluctuates with the varying local restrictions placed on gatherings.

We view this as further evidence that a considerable number of our customers continue to value what our team does best, which is helping our client families gain closure and healing through the process of grieving, remembrance, and celebration.

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The rigorous restrictions placed on gathering, mandated by state, provincial, and local governments have posed a unique challenge for our locations.

In mid-March, we quickly implemented technology solutions, including leveraging Facebook Live, which allows extended family and friends to virtually participate in the ceremony alongside the immediate family.

In addition, certain locations found other ways to include families and friends in services, including giving guests the opportunity to leave condolences on balloons that are tied to chapel chairs so families can feel connected to those unable to attend in person.

We also carefully designed outdoor venues to allow guests to be present, while remaining at a safe distance and even offer customers the ability to broadcast cemetery services through radio transmitters at certain locations.

Atneed funeral directors are also using virtual meeting platforms to discuss and plan service details with client families.

Our preneed sales teams have continued to overcome social distancing obstacles in certain areas of the country by leveraging technology with customers who may prefer to purchase cemetery property and merchandise from the safety of their home or setting up outdoor pop-up canopies to discuss pre-planning from a safe distance.

Although they may face challenges to meet face-to-face, our funeral directors continue to listen, understand, suggest, and plan important details for honoring a loved one’s life.

Like most businesses world-wide, COVID-19 is still impacting various aspects of our business operations;

however, we cannot, with certainty, predict the scope, severity, or duration with which COVID-19 will continue to impact our business, financial condition, results of operations, and cash flows.

In 2021, we continued to experience the impact of COVID-19 variants.

However, we have seen community restrictions lifted and vaccine distribution more widespread.

As restrictions have lifted, we have seen an increase in the number of families who

desire memorial services which has driven significant growth in our preneed sales as well as positively affected our average revenue per funeral service.

We view this as further evidence that our customers continue to value what our team does best, which is helping our client families gain closure and healing through the process of grieving, remembrance, and celebration.

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

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Our cash flow from operating activities provided $920.6 million in 2021.

In addition, as of December 31, 2020, we have $441.0 million in remaining borrowing capacity under our Bank Credit Facility.

As of December 31, 2020, we have $228.4 million in long-term debt current maturities, which primarily consist of $150.0 million on our 2021 senior notes, current amounts due on the term loan, and finance leases.

In addition, as of December 31, 2021, we have $811.0 million in borrowing capacity under our Bank Credit Facility.

As of December 31, 2021, we had $65.0 million in current maturities of long-term debt, which primarily consist of the current amounts due on our term loan and finance leases.

Our Bank Credit Facility requires us to maintain certain leverage and interest coverage ratios.

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Interest coverage ratio 3.00 (Min) 10.12

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

We target a leverage ratio of 3.5- 4.0x, however increased earnings over the last two years have resulted in a ratio much lower than our target.

We expect leverage to naturally increase in future quarters as we expect earnings to be less impacted by the COVID-19 pandemic.

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

Our unencumbered cash on hand, future operating cash flows, and the available capacity under our bank credit agreement will give us adequate liquidity to meet our short-term needs as well as our long-term financial obligations.

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Our capital deployment strategy is prioritized as follows:

Investing in Acquisitions and Building New Funeral Service Locations.

Investing in Acquisitions and Building New Funeral Service and Cemetery Locations.

We manage our footprint by focusing on strategic acquisitions and building new funeral service locations where the expected returns are attractive and exceed our weighted average cost of capital by a meaningful margin.

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We continue to pursue strategic acquisitions and build new funeral service locations in areas that provide us with the potential for scale.

Paying Dividends.

Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.21 per common share at the end of 2020.

We target a payout ratio of 30% to 40% of after tax earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business.

While we intend to pay regular quarterly cash dividends for the foreseeable future, all future dividends are subject to limitations in our debt covenants and final determination by our Board of Directors each quarter upon review of our financial performance.

Repurchasing Shares.

Absent opportunities for strategic acquisitions, we expect to continue to repurchase shares of our common stock in the open market or through privately negotiated transactions, subject to market conditions, debt covenants, and normal trading restrictions.

There can be no assurance that we will buy our common stock under our repurchase program in the future.

During the year ended December 31, 2020, we repurchased 12,043,347 shares of common stock at an aggregate cost of $516.9 million, which is an average cost per share of $42.92.

During August 2020, our Board of Directors increased our share repurchase authorization to $500.0 million.

After these repurchases and the increase in our share repurchase authorization, the remaining dollar value of shares authorized to be purchased under the share repurchase program was $231.0 million at December 31, 2020.

Since 2010, we have reduced the number of our shares outstanding by 29%.

Subsequent to December 31, 2020, we repurchased 802,146 shares for $40.7 million at an average cost per share of $50.74.

We were able to invest $121.4 million in acquiring 30 funeral homes and 2 cemeteries during 2021.

Managing Debt.

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This cash flow stream and our significant liquidity are available to substantially reduce our long-term debt maturities should we choose to do so.

Return Excess Cash to Shareholders.

Absent strategic acquisition or new opportunities, we intend to return excess cash to shareholders.

Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.23 per common share at the end of 2021.

We target a payout ratio of 30% to 40% of after tax earnings excluding special items and intend to grow our cash dividend commensurate with the growth in our business.

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.

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Net cash provided by operating activities was $920.6 million and $804.4 million for the years ended December 31, 2021, and 2020, respectively.

Excluding $6.4 million in legal settlements in the prior year, cash flow from operations increased $169.2 million for 2020 versus 2019.

Excluding an $8.3 million cash receipt from a vendor waiver and release agreement in the current period , cash flow from operations increased $107.9 million for 2021 versus 2020.

The 2021 increase over 2020 comprises:

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• a $600.7 million increase in cash receipts from customers,

• a $38.1 million decrease in cash interest payments,

• a $10.4 million decrease in vendor and other payments, and

• a $7.8 million decrease in employee compensation;

• a $24.2 million increase in General Agency (GA) and other receipts, and

• a $10.4 million decrease in cash interest payments primarily due to reductions in our long-term debt;

partially offset by

• a $235.3 million increase in employee compensation payments,

• a $132.7 million increase in cash tax payments,

• a $19.9 million decrease in General Agency (GA) and other receipts, and

• a $19.0 million decrease in net trust withdrawals.

• a $120.2 million increase in vendor and other payments, and

• a $39.2 million increase in net trust deposits.

Investing Activities

Cash flows from investing activities used $414.9 million, and $318.4 million, in 2021, and 2020, respectively.

The $39.9 million higher outflow from 2020 over 2019 is primarily due to the following:

• a $55.2 million decrease in cash received from divestitures and asset sales,

• a $8.5 million increase in cash spent on business acquisitions, and

• a $0.7 million increase in cash spent on real estate acquisitions, partially offset by

• a $17.7 million decrease in capital expenditures, primarily due to the temporary deferral of certain capital expenditures as we navigate the impact of the COVID-19 pandemic, and

• a $6.8 million decrease in payments for Company-owned life insurance policies, net of proceeds.

The $96.5 million increased outflow from 2021 over 2020 is primarily due to the following:

• a $81.4 million increase in capital expenditures,

• a $57.2 million increase in cash spent on business acquisitions,

• a $2.1 million increase in payments for Company-owned life insurance policies, net of proceeds;

partially offset by

• a $25.5 million decrease in cash spent on real estate acquisitions, and

• a $18.7 million increase in cash received from divestitures and asset sales.

Financing Activities

Financing activities used $465.6 million in 2021 compared to using $492.8 million in 2020.

The $173.7 million higher outflow from 2020 over 2019 is primarily due to:

• a $387.3 million increase in purchase of our common stock,

• a $14.3 million decrease in proceeds from exercises of stock options, and

• a $6.0 million increase in payments of dividends, partially offset by

• a $220.0 million increase in debt proceeds, net of payments, and

• a $13.9 million change in bank overdrafts and acquisition-related financing.

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Off-Balance Sheet Arrangements, Contractual Obligations, and Commercial and Contingent Commitments

We have assumed various financial obligations and commitments in the ordinary course of conducting our business.

We have contractual obligations requiring future cash payments under existing contractual arrangements, such as debt maturities, interest on long-term debt, operating lease agreements, and employment, consulting, and non-competition agreements.

We also have commercial and contingent obligations that result in cash payments only if certain events occur requiring our performance pursuant to a funding commitment.

The following table details our known future cash payments (on an undiscounted basis) related to various contractual obligations as of December 31, 2020.

Payments Due by Period

Contractual Obligations 2021 2022-2023 2024-2025 Thereafter Total

(In millions)

Debt maturities (including finance leases) (1) (2) (3)

$ 228.4 $ 130.9 $ 1,077.7 $ 2,305.5 $ 3,742.5

Interest obligation on long-term debt (4)

135.3 246.4 217.7 331.1 930.5

Operating lease agreements (5)

10.8 16.9 11.3 37.5 76.5

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

7.2 8.6 4.8 3.9 24.5

Benefit cost obligation (7)

2.5 4.5 3.7 8.0 18.7

Firm purchase agreement (8)

7.7 1.7 — — 9.4

Total contractual obligations $ 391.9 $ 409.0 $ 1,315.2 $ 2,686.0 $ 4,802.1

(1) Our outstanding indebtedness contains standard provisions, such as payment delinquency default clauses and change of control clauses.

In addition, our Bank Credit Facility contains a maximum leverage ratio and a minimum interest coverage ratio.

See “ Capital Allocation Consideration s ” and Note 6 in Part II, Item 8.

Financial Statements and Supplementary Data, for additional details related to our long-term debt.

(2) Excludes non-cash net premiums and original issuance discounts recorded on the debt.

The unamortized balance of the net premiums and original issuance discounts at December 31, 2020 is $0.3 million.

(3) Excludes non-cash debt issuance costs on the debt.

The unamortized balance of debt issuance costs at December 31, 2020 is $36.7 million.

(4) Approximately 66% of our total debt is fixed rate debt for which the interest obligation was calculated at the stated rate.

Future interest obligations on our floating rate debt are based on the current forward rate curve of the underlying index.

See Note 6 in Part II, Item 8.

Financial Statements and Supplementary Data for additional information related to our future interest obligations.

(5) Our operating leases primarily include funeral service real estate and office equipment for funeral service locations, cemetery locations, and administrative offices.

The $27.2 million decreased outflow from 2021 over 2020 is primarily due to:

• a $70.2 million decrease in debt payments, net of proceeds, and

• a $12.6 million increase in proceeds from exercises of stock options;

partially offset by

• a $37.4 million increase in the purchase of Company common stock,

• a $9.5 million increase in payments of dividends, and

• a $8.7 million change in bank overdrafts and other.

Material Cash Requirements

Our material cash requirements include the following contractual and other obligations.

Debt & Finance Leases

As of December 31, 2021, we had $4.0 billion in aggregate principal outstanding on our notes, term loan, Bank Credit Facility, finance leases, mortgages, and other debt (collectively "debt and finance leases"), of which $65.0 million is payable in the next twelve months.

The aggregate principal excludes $45.1 million in unamortized non-cash debt issuance costs and original issuance discounts and premiums.

Future interest payments associated with the debt and finance leases total $1,079.3 million, of which $148.5 million is payable in the next twelve months.

For further information on our debt and finance leases see Note 6 and Note 8 of Part II, Item 8.

Financial Statements and Supplementary Data.

Operating Leases

We have operating lease agreements for funeral service real estate and office equipment for funeral service locations, cemetery locations, and administrative offices.

As of December 31, 2021, we had fixed lease payment obligations of $73.9 million, of which $10.1 million is payable in the next twelve months.

See Note 8 in Part II, Item 8.

Financial Statements and Supplementary Data for additional details related to our leases.

(6) We have entered into employment and management, consulting, and non-competition agreements that require us to make cash payments over the contractual period.

The agreements have been primarily entered into with certain officers and associates and former owners of businesses acquired.

Agreements with contractual periods less than one year are excluded.

See Note 9 in Part II, Item 8.

Financial Statements and Supplementary Data for additional details related to these agreements.

Benefit Obligations

As of December 31, 2021, we have several frozen benefit plans with an aggregate benefit obligation of $17.8 million, of which we expect to pay $2.4 million in the next twelve months.

See Note 12 in Part II, Item 8.

Financial Statements and Supplementary Data for discussion of our pension plans.

Purchase Commitment

We have entered into a purchase commitment for certain merchandise for resale.

The agreement is through 2025 and includes annual minimum volume purchase commitments.

The following table details our known potential or possible future cash payments (on an undiscounted basis) related to various commercial and contingent obligations as of December 31, 2020.

Expiration by Period

Commercial and Contingent Obligations 2021 2022-2023 2024-2025 Thereafter Total

(In millions)

Surety obligations (1)

$ 145.3 $ — $ — $ — $ 145.3

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

2.1 — — — 2.1

Letters of credit (3)

34.0 — — — 34.0

Total commercial and contingent obligations $ 181.4 $ — $ — $ — $ 181.4

(1) Represents the aggregate funding obligation associated with our surety bond arrangements assuming our surety partners did not renew any of our surety obligations and we could not find replacement surety assurance.

See the section titled “ Financial Assurances ” following this table in this Form 10-K for more information related to our surety bonds.

(2) We have recorded a liability for unrecognized tax benefits and related interest and penalties of $2.1 million as of December 31, 2020.

See Note 5 in Part II, Item 8.

Financial Statements and Supplementary Data for additional information related to our uncertain tax positions.

(3) We are occasionally required to post letters of credit, issued by a financial institution, to secure certain insurance programs or other obligations.

Letters of credit generally authorize the financial institution to make a payment to the beneficiary upon the satisfaction of a certain event or the failure to satisfy an obligation.

The letters of credit are generally posted for one-year terms and are usually automatically renewed upon maturity until such time as we have satisfied the commitment secured by the letter of credit.

We are obligated to reimburse the issuer only if the beneficiary collects on the letter of credit.

We believe it is unlikely we will be required to fund a claim under our outstanding letters of credit.

As of December 31, 2020, $34.0 million of our letters of credit were supported by our Bank Credit Facility, which expires in May 2024.

Not included in the above table are potential funding obligations related to our merchandise and service trusts.

In certain states and provinces, we have withdrawn allowable distributable earnings including unrealized gains prior to the maturity or

cancellation of the related contract.

Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions when trust fund values drop below certain prescribed amounts.

In the event that our trust investments do not recover from market declines, we may be required to deposit portions or all of these amounts into the respective trusts in some future period.

As of December 31, 2020, we had unrealized losses of $6.9 million in the various trusts within these states.

As of December 31, 2021, the undiscounted purchase commitment was $29.1 million, of which $9.1 million is committed to be purchased in the next twelve months.

Financial Assurances

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We post the surety bonds in lieu of trusting a certain amount of funds received from the customer.

The $268.0 million in bonds supporting preneed funeral and cemetery obligations differs from the $145.3 million potential funding obligation disclosed in our “Commercial and Contingent Obligations” table above because the amount of the bond posted is generally determined by the total amount of the preneed contract that would otherwise be required to be trusted, in accordance with applicable state law, at the time we enter into the contract.

We would only be required to fund the trust for the portion of the preneed contract for which we have received payment from the customer, less any applicable retainage, in accordance with state law.

For the years ended December 31, 2020, 2019, and 2018, we had $6.2 million, $24.2 million, and $23.4 million, respectively, of cash receipts from sales attributable to bonded contracts.

These amounts do not consider reductions associated with taxes, obtaining costs, or other costs.

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.

Surety bond premiums are paid annually and the bonds are automatically renewable until maturity of the underlying preneed contracts, unless we are given prior notice of cancellation.

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The funds in trust are then invested by professional money managers with oversight by independent trustees in accordance with state and provincial laws.

The tables below detail our results of preneed production and maturities, excluding insurance contracts, for years ended December 31, 2020 and 2019.

The tables below detail our results of preneed production and maturities, excluding insurance contracts, for the years ended December 31, 2021 and 2020.

Years Ended December 31,

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The fair value of our trust investments was based on a combination of quoted market prices, observable inputs such as interest rates or yield curves and appraisals.

As of December 31, 2020, the difference between the backlog and asset market amounts represents $0.21 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $0.01 billion collected from customers that were not required to be deposited into trusts, and $0.19 billion in allowable cash distributions from trust assets.

As of December 31, 2021, the difference between the backlog and asset market amounts represents $0.20 billion related to contracts for which we have posted surety bonds as financial assurance in lieu of trusting, $1.17 billion collected from customers that were not required to be deposited into trusts, and $0.17 billion in allowable cash distributions from trust assets partially offset by $1.25 billion in amounts due on delivered property and merchandise.

As of December 31, 2021, the fair value of the total backlog comprised $3.93 billion related to cemetery contracts and $9.73 billion related to funeral contracts.

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Additionally, some states allow a total return distribution that may contain elements of income, capital appreciation, and principal.

Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and services trusts as well as the cemetery perpetual care trusts.

Independent trustees manage and invest the majority of the funds deposited into the funeral and cemetery merchandise and service trusts as well as the cemetery perpetual care trusts.

The majority of the trustees are selected based on their respective geographic footprint and qualifications per state and provincial regulations.

Most of the trustees engage the same independent investment managers.

These trustees, with input from SCI's wholly-owned registered investment advisor, establish an investment policy that serves as an operating document to guide the investment activities of the trusts including asset allocation and manager selection.

The investments are also governed by state and provincial guidelines.

All of the trusts

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seek to control risk and volatility through a combination of asset classes, investment styles, and a diverse mix of investment managers.

asset allocation and manager selection.

The investments are also governed by state and provincial guidelines.

All of the trusts seek to control risk and volatility through a combination of asset classes, investment styles, and a diverse mix of investment managers.

Asset allocation is based on the liability structure of each funeral, cemetery, and perpetual care trust.

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therefore, the funds associated with these contracts are often invested through several market cycles.

Historically, the cemetery perpetual care trusts' investment objectives, in accordance with state and provincial regulations, have emphasized providing a steady stream of current investment income with some capital appreciation in order to provide for the maintenance and beautification of cemetery properties.

However, during 2016, SCI worked with several state legislatures to adjust laws and regulations to allow for a fixed distribution rate from cemetery perpetual care trusts' assets regardless of the level of ordinary income, similar to university endowments.

As a result, beginning in 2017, a significant portion of our cemetery perpetual care trust assets were liquidated and reinvested in a more growth-oriented asset allocation with investment objectives similar to the funeral and cemetery merchandise and service trusts.

As of December 31, 2020, the asset allocation is now approximately 60% growth-oriented.

We expect this asset allocation shift to enhance asset growth and provide further protection to our customers.

Additionally, we expect more states to adopt total return distribution legislation in the coming years.

As of December 31, 2020, approximately 89% of our trusts were under the control and custody of three large financial institutions.

Where total return distributions are allowed by state and provincial regulations, the cemetery perpetual care trusts’ primary investment objectives are growth-oriented to provide for a fixed distribution rate from the trusts’ assets, similar to university endowments.

Where such distributions are limited to ordinary income, the cemetery perpetual care trusts’ investment objectives emphasize providing a steady stream of current investment income with some capital appreciation.

Both types of distributions are used to provide for the current and future maintenance and beautification of the cemetery properties.

As of December 31, 2021, approximately 94% of our trusts were under the control and custody of four large financial institutions.

trustees primarily use four managed limited liability companies (LLCs), one for each merchandise and service trust type and two for the cemetery perpetual care trust type, each with an independent trustee as custodian.

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Asset Classes

Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility.

The majority of the fixed income allocation for the trusts is invested in institutional share class mutual funds.

Where the trusts have direct investments in individual fixed income securities, these are primarily in government and corporate instruments.

Canadian government fixed income securities are investments in Canadian federal and provincial government instruments.

In many cases, regulatory restrictions mandate that the funds from the sales of preneed funeral and cemetery contracts sold in certain Canadian jurisdictions must be invested in these instruments.

Equity investments have historically provided long-term capital appreciation in excess of inflation.

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As of December 31, 2021, the largest single equity position represented less than 1% of the total securities portfolio.

Private equity fund investments serve to provide high rates of return with reduced volatility and lower correlation.

These investments are typically long term in duration.

These investments are diversified by strategy, sector, manager, and vintage year.

The investments consist of numerous limited partnerships, including but not limited to private equity, real estate, energy, infrastructure, transportation, distressed debt, and mezzanine financing.

Fixed income investments are intended to preserve principal, provide a source of current income, and reduce overall portfolio volatility.

The majority of the fixed income allocation for the trusts is invested in institutional share class mutual funds.

Where the trusts have direct investments in individual fixed income securities, these are primarily in government and corporate instruments.

Canadian government fixed income securities are investments in Canadian federal and provincial government instruments.

In many cases, regulatory restrictions mandate that the funds from the sales of preneed funeral and cemetery contracts sold in certain Canadian jurisdictions must be invested in these instruments.

Alternative investments serve to provide high rates of return with reduced volatility and lower correlation to publicly-traded securities.

These investments are typically longer term in duration and are diversified by strategy, sector, manager, geography and vintage year.

The investments consist of numerous limited partnerships, invested in private equity, private market real estate, energy and natural resources, infrastructure, transportation, and private debt including both distressed debt and mezzanine financing.

The trustees that have oversight of their respective alternative LLCs work closely with the investment advisor in making all investment decisions.

Trust Performance

During the year ended December 31, 2020, the Standard and Poor’s 500 Index increased 18.4% and the Barclay’s Aggregate Index increased 7.5%.

During the year ended December 31, 2021, the Standard and Poor’s 500 Index increased 28.7% and the Barclay’s Aggregate Index decreased 1.5%.

This compares to the SCI trusts that increased 14.4% during the same year-end period, which have a diversified allocation of approximately 59% equities, 28% fixed income securities, 8% alternative and other investments with the remaining 5% available in cash.

Recognized trust fund income (realized and unrealized) related to our preneed trust investments was $179.7 million, $129.1 million, and $119.0 million for the years ended December 31, 2021, 2020, and 2019, respectively.

Recognized trust fund income (realized and unrealized) related to our cemetery perpetual care trust investments was $96.1 million, $77.8 million, and $77.5 million for the years ended December 31, 2021, 2020, and 2019, respectively.

SCI, the trustees, and the investment advisor monitor the capital markets and the trusts on an on-going basis.

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Pre-tax losses on early extinguishment of debt, net $ (5.2) $ (18.4)

Pre-tax legal settlements $ — $ (6.4)

Tax effect from special items $ 2.6 $ (4.1)

Change in uncertain tax reserves and other income tax adjustments (1)

Pre-tax income from vendor waiver and release agreement cash receipts $ 8.3 $ —

Tax effect from significant items $ (7.3) $ 2.6

Change in uncertain tax reserves and other (1)

(1) See Note 5 in Part II, Item 8.

Financial Statements and Supplementary Data, for additional information related to change in uncertain tax reserves and other.

In addition to the above items, the growth in the current year can be attributed to higher funeral and cemetery revenue, lower interest expense due to refinancing activities, and the favorable impact of a lower share count in 2020.

This growth is slightly offset by increased corporate general and administration expenses related to performance based incentive compensation, legal reserves, and charitable contributions.

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

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Funeral Results

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(1) We define comparable (or same store) operations as those funeral locations owned by us for the entire period beginning January 1, 2020 and ending December 31, 2021.

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(2) We calculate comparable average revenue per service by dividing comparable funeral revenue, excluding general agency revenue, recognized preneed revenue, and other revenue to avoid distorting our average of normal funeral services revenue, by the comparable number of funeral services performed during the period.

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This $274.5 million increase was primarily attributable to a 4.4% increase in funeral services performed compared to 2020 primarily due to COVID-19 pandemic-related deaths.

The increase in funeral services performed comprised a 12.4% increase in funeral services performed by our funeral service locations and a 15.0% increase in cremations performed by our non-funeral home channel.

Average revenue per funeral service decreased 3.8% for the year ended December 31, 2020 compared to the same period in 2019.

The comparable average revenue per service was negatively impacted by the social distancing effects from the pandemic resulting in fewer and smaller funeral memorial services.

Our total comparable cremation rate increased 140 basis points to 58.6% primarily as a result of an increase in direct cremations.

The increase in funeral services performed comprised a 3.8% increase in funeral services performed by our funeral service locations and an 8.4% increase in cremations performed by our non-funeral home channel.

Additionally, we experienced a $28.4 million increase in comparable general agency and other revenue and a $33.6 million increase in comparable recognized preneed revenue, as a result of higher comparable preneed funeral sales production.

Average revenue per funeral service increased 7.1% for the year ended December 31, 2021 compared to the same period in 2020.

In 2020, the social distancing effects from the pandemic resulted in fewer and smaller memorial funeral services, which negatively impacted our average revenue per funeral service in the prior year.

Our total comparable cremation rate increased 70 basis points to 59.3% primarily as a result of an increase in cremations with service.

Funeral Gross Profit

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This increase is primarily attributable to a $3.1 million increase in gross profit contributed from acquired and newly constructed properties and an increase in comparable funeral gross profit of $127.8 million, or 26.0%.

The comparable funeral gross profit percentage increased 440 basis points to 24.1% as comparable funeral gross profit was positively impacted by growth in higher margin core business activities coupled with more efficient cost structure.

The comparable funeral gross profit percentage increased 270 basis points to 26.9% as the growth in comparable funeral revenue more than offset higher fixed costs in the current year relative to the prior year as staffing and service levels normalized, driven by our customers desire for more robust remembrances and celebrations as social distancing measures alleviated.

Additionally, maintenance expenses were temporarily higher associated with various storms and hurricanes as well as catch up on deferred maintenance needs from 2020.

Cemetery Results

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Consolidated revenue from our cemetery operations increased $340.8 million, or 23.4%, in 2021 compared to 2020 primarily due to an increase in comparable cemetery revenue of $340.6 million, or 23.3%.

The increase in comparable cemetery revenue was primarily attributable to a $89.8 million, or 10.3%, increase in recognized preneed revenue as a result of strong comparable preneed cemetery property sales production for the period and a $61.1 million, or 18.8%, increase in atneed revenue driven by an increase in burials performed.

The increase in comparable cemetery revenue was primarily attributable to a $231.5 million, or 24.2%, increase in recognized preneed revenue as a result of strong comparable preneed cemetery property sales production for the period as well as a $91.1 million, or 23.5%, increase in comparable cemetery atneed revenue driven by both higher sales averages and contract velocity across service, merchandise, and property sales.

Additionally, comparable other revenue grew $18.1 million, or 15.9%, primarily from higher endowment care trust fund income due to higher capital gains and other distributions.

Cemetery Gross Profit

Consolidated cemetery gross profit increased $195.8 million, or 40.6%, in 2021 compared to 2020 primarily attributable to the increase in comparable cemetery gross profit of $195.5 million, or 40.5%.

Comparable cemetery gross profit increased 340 basis points to 33.1% driven by the increase in comparable cemetery revenue described above coupled with a more efficient cost structure.

Comparable cemetery gross profit increased 460 basis points to 37.7% as the growth in comparable cemetery revenue more than offset higher fixed costs in the current year relative to the prior year as staffing and service levels continued to normalize driven by customer interaction and increased maintenance expenses.

Other Financial Statement Items

Corporate General and Administrative Expenses

Corporate general and administrative expenses were $141.1 million in 2020 compared to $126.9 million in 2019.

Excluding a $6.4 million legal settlement in 2019, corporate general and administrative expenses increased $20.6 million in 2020 compared to 2019 due to performance-based incentive compensation, legal reserves, and charitable contributions for community outreach efforts.

Corporate general and administrative expenses decreased $3.0 million to $138.1 million in 2021 compared to $141.1 million in 2020.

This decrease was primarily due to fewer workers compensation, general liability, and auto liability insurance claims in the current year and higher charitable contributions in the prior year.

Gains on Divestitures and Impairment Charges, Net

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Interest Expense

Interest expense decreased $22.7 million to $163.1 million in 2020 compared to $185.8 million in 2019 primarily due to lower interest rates on our floating rate debt and other debt refinancing activities over the last two years.

Interest expense decreased $12.5 million to $150.6 million in 2021 compared to $163.1 million in 2020 primarily due to lower balances and interest rates on our floating rate debt along with debt refinancing activities over the last twelve months.

Other Income, Net

Other income, net increased $9.9 million to $10.7 million in 2021 primarily due to a $8.3 million cash receipt from a vendor waiver and release agreement.

Losses on Early Extinguishment of Debt, Net

During 2020, we made aggregate debt payments of $1.4 billion for scheduled and early extinguishment payments.

During 2019, we made aggregate debt payments of $1.2 billion for scheduled and early extinguishment payments.

During 2021, we made aggregate debt payments of $736.0 million for scheduled and early extinguishment payments.

During 2020, we made aggregate debt payments of $1,406.4 million for scheduled and early extinguishment payments.

Certain of these transactions resulted in the recognition of pre-tax losses of $5.2 million and $18.4 million in 2021 and 2020, respectively, recorded in Losses on early extinguishment of debt, net in our Consolidated Statement of Operations.

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Provision for Income Taxes

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The effective tax rate for the year ended December 31, 2021 was higher than the federal statutory tax rate of 21% primarily due to state income taxes partially offset by tax benefits from share-based compensation.

The effective tax rate for the year ended December 31, 2019 was lower than the federal statutory tax rate of 21% primarily due to the reduction in tax liabilities as a result of the expiration of statutes of limitation and higher tax benefits of share-based compensation.

Weighted Average Shares

The diluted weighted average number of our shares outstanding was 179.0 million in 2020, compared to 185.5 million in 2019.

The decrease primarily reflects the impact of shares repurchased under our share repurchase program.

Critical Accounting Policies, Recent Accounting Pronouncements, and Accounting Changes

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Revenue associated with sales of preneed contracts is deferred until control of the merchandise or the services is transferred to the customer, which is upon delivery of the merchandise or as services are performed, generally at the time of need.

On certain preneed contracts, we sell memorialization merchandise, which consists

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of urns and urn-related products, that we deliver to the customer at the time of sale.

On certain preneed contracts, we sell memorialization merchandise, which consists of urns and urn-related products, that we deliver to the customer at the time of sale.

Revenue is recognized at the time of delivery when control of the memorialization merchandise is transferred.

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Our goodwill impairment test involves certain estimates and management judgment.

In the first step of our goodwill impairment test, we compare the fair value of a reporting unit to its carrying amount, including goodwill.

We determine fair value of each reporting unit using both a market and income approach.

We perform our goodwill impairment test by comparing the fair value of a reporting unit to its carrying amount, including goodwill.

We determine fair value of each

reporting unit using both a market and income approach.

The income approach, which is a discounted cash flow method, uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows.

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These securities are classified as Level 3 investments.

An asset’s or liability’s categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Certain securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts have been classified as Level 3 of the hierarchy due to the significant management judgment required as a result of the absence of quoted market prices, inherent lack of liquidity, or the long-term nature of the securities.

Categorization within the valuation hierarchy is based upon the lowest level of input that is significant to the fair value measurement.

Certain securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts have been classified as Level 3 of the hierarchy due to the significant management judgment required because of the absence of quoted market prices, inherent lack of liquidity, or the long-term nature of the securities.

For more information related to our fair value measurements, see Notes 2 , 3 , and 7 in Part II, Item 8.

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Actual results could differ from such estimates due to uncertainties associated with the methods and assumptions underlying our critical accounting measurements.

Key estimates used by management include:

Critical estimates used by management include:

Reserves and Allowances

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These estimates are impacted by a number of factors, including changes in the economy and demographic or competitive changes in our areas of operation.

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Valuation of Trust Investments

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Financial Statements and Supplementary Data, our legal exposures and the ultimate outcome of these legal proceedings could be material to operating results or cash flows in any given quarter or year.

Depreciation of long-lived assets.

We depreciate our long-lived assets ratably over their estimated useful lives.

These estimates of useful lives may be affected by such factors as changing market conditions, changes in our expected use, or changes in regulatory requirements.

Amortization of certain intangible assets.

We amortize certain intangible assets ratably over their estimated useful lives.

These estimates of useful lives may be affected by such factors as contractual terms, changing market conditions, or changes in regulatory requirements.

Valuation of assets acquired and liabilities assumed.

Tangible and intangible assets acquired and liabilities assumed are recorded at their fair value and goodwill is recognized for any difference between the price of acquisition and our fair value determination.

We have customarily estimated our purchase costs and other related transactions known to us at closing of the acquisition.

To the extent that information not available to us at the closing date subsequently became available during the measurement period, we have adjusted our goodwill, assets, or liabilities associated with the acquisition.

Income taxes.

We compute income taxes using the liability method.

Our ability to realize the benefit of our deferred tax assets requires us to achieve certain future earnings levels.

We have established a valuation allowance against a portion of our deferred tax assets, and we could be required to further adjust that valuation allowance in the near term if market conditions

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change materially and future earnings are, or are projected to be, significantly different than our current estimates.

We have established a valuation allowance against a portion of our deferred tax assets in certain jurisdictions, and we could be required to further adjust that valuation allowance in the near term if market conditions change materially and future earnings are, or are projected to be, significantly different than our current estimates.

An increase in the valuation allowance would result in additional income tax expense in such period.

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however, all tax returns are subject to routine compliance review by the taxing authorities in the jurisdictions in which we file tax returns in the ordinary course of business.

The federal statutes of limitations have expired for all tax years prior to 2017, and we are not currently under audit by the Internal Revenue Service.

The federal statutes of limitation have expired for all tax years prior to 2018, and we are not currently under audit by the IRS.

However, pursuant to the 2017 Tax Cuts and Jobs Act, the statute of limitations on the transition tax for the 2017 tax year does not expire until 2024.

Various state jurisdictions are auditing years 2013 through 2020.

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however, years subsequent to 2015 remain open and could be subject to examination.

We believe that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease up to $1.4 million within the next twelve months as a result of concluding various state tax matters.

Retirement plans.

Certain retirement plans are frozen with no benefits accruing to participants except interest.

Benefit costs and liabilities are actuarially determined based on certain assumptions, including the discount rate used to compute future benefit obligations.

Weighted-average discount rates used to determine net periodic benefit cost were 2.98% and 4.15% as of December 31, 2020 and 2019, respectively.

We verify the reasonableness of the discount rate by comparing our rate to the rate earned on high-quality fixed income investments, such as the Moody’s Aa index.

See Note 12 in Part II, Item 8.

Financial Statements and Supplementary Data for more information.

We believe that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by $1.3 million within the next twelve months as a result of concluding various state tax matters.

Insurance Loss Reserves

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The results of these evaluations are used to both analyze and adjust our insurance loss reserves.

As of December 31, 2020, reported losses for workers' compensation, general liability, and auto liability incurred during the period May 1, 1991 through December 31, 2020 were approximately $631.1 million over 29.8 years.

The fully developed ultimate settlement value estimated was $704.3 million for the same period.

Paid losses were $611.5 million indicating a reserve requirement of $92.8 million.

As of December 31, 2021, insurance loss reserves were $94.3 million.

Recent Accounting Pronouncements and Accounting Changes

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis