What changed in this filing

/stocks — the workspaceLOADING

Item 8. Financial Statements and Supplementary Data

2023-02-15 compared with 2022-02-15 · 157 added, 112 removed, 1523 unchanged (15% of the section changed)

24 unchanged sentences

All other schedules have been omitted because the required information is not applicable or is not present in amounts sufficient to require submission or because the information required is included in the consolidated financial statements or the related notes thereto.

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Report of Independent Registered Public Accounting Firm

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The critical audit matter communicated below is a matter arising from the current period audit of the consolidated financial statements that was communicated or required to be communicated to the audit committee and that (i) relates to accounts or disclosures that are material to the consolidated financial statements and (ii) involved our especially challenging, subjective, or complex judgments.

The communication of critical audit matters does not alter in any way our opinion on the consolidated

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financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

The communication of critical audit matters does not alter in any way our opinion on the consolidated financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.

Goodwill Impairment Assessment - Funeral Reporting Unit

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Service Corporation International

Consolidated Statement of Operations

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Service Corporation International

Consolidated Statement of Comprehensive Income

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Service Corporation International

Consolidated Balance Sheet

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Service Corporation International

Consolidated Statement of Cash Flows

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Provision for expected credit losses 16,700 11,362 13,558

(Benefit from) provision for deferred income taxes ( 5,837 ) 7,884 23,030

Provision for (benefit from) deferred income taxes 3,471 ( 5,837 ) 7,884

Gains on divestitures and impairment charges, net ( 9,962 ) ( 25,169 ) ( 7,009 )

Gain on sale of investments ( 1,169 ) — —

Share-based compensation 14,709 14,168 14,103

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

Increase in receivables ( 20,215 ) ( 14,518 ) ( 12,711 )

Decrease (increase) in receivables 4,151 ( 20,215 ) ( 14,518 )

Increase in other assets ( 8,206 ) ( 54,883 ) ( 35,739 )

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Increase in deferred revenue, net 195,358 119,730 61,807

Increase (decrease) in deferred receipts held in trust 43,451 2,390 ( 42,306 )

Increase in deferred receipts held in trust 20,781 43,451 2,390

Net cash provided by operating activities 825,725 920,608 804,351

4 unchanged sentences

Proceeds from divestitures and sales of property and equipment 42,093 40,696 21,916

Proceeds from sale of investments and other 1,330 — —

Payments for Company-owned life insurance policies ( 1,910 ) ( 3,982 ) ( 5,352 )

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Effect of foreign currency ( 3,878 ) ( 111 ) 2,788

Net increase (decrease) in cash, cash equivalents, and restricted cash 39,945 ( 4,010 ) 35,036

Net (decrease) increase in cash, cash equivalents, and restricted cash ( 74,031 ) 39,945 ( 4,010 )

Cash, cash equivalents, and restricted cash at beginning of period 278,555 238,610 242,620

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Service Corporation International

Consolidated Statement of Equity

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Balance at December 31, 2019 185,101 ( 3,916 ) 1,010,361 601,903 29,864 ( 58 ) 1,823,255

Cumulative effect of accounting changes — — — 16,989 — — 16,989

Comprehensive income — — — 515,907 9,502 235 525,644

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Balance at December 31, 2020 $ 174,792 $ ( 4,075 ) $ 981,934 $ 560,731 $ 39,366 $ ( 127 ) $ 1,752,621

Cumulative effect of accounting changes — — — 16,989 — — 16,989

Comprehensive income — — — 802,939 848 311 804,098

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Service Corporation International

Notes to Consolidated Financial Statements

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therefore, their interests in these trusts represent a liability to us.

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our consolidated net income or cash flows.

As a result, for the years ended December 31, 2021 and 2020, $ 19.5 million and $ 15.6 million, respectively, of expenses were reclassified from Costs of revenue to Corporate general and administrative expenses .

This reclassification results from strategic changes in how we operate certain centralized functions .

Use of Estimates in the Preparation of Financial Statements

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The carrying amounts of our cash and cash equivalents approximate fair value due to the short-term nature of these instruments.

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The components of cash, cash equivalents, and restricted cash were as follows:

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Long-term miscellaneous receivables, net $ 6,937 $ 6,993

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Our atneed trade receivables primarily consist of amounts due for funeral and cemetery services already performed.

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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.

During 2020, we increased our reserve for credit losses on trade and miscellaneous receivables as a result of the economic impact of the COVID-19 pandemic (COVID-19).

Due to the ongoing nature of the pandemic, we have maintained these higher reserves in 2021.

Cemetery preneed receivables are collateralized by cemetery property to the extent of the fair value of the property.

Prior to adoption of the guidance on credit losses for financial instruments on January 1, 2020, we provided allowances for doubtful accounts on our receivables based on an analysis of historical trends of collection activity.

Payment on atneed contracts is generally due at the time the merchandise is delivered or the services are performed.

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Notes receivable $ — $ — $ — $ 26 $ — $ 4,673 $ 4,854 $ 9,553

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At December 31, 2022, the payment status of our miscellaneous and notes receivables was as follows:

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Depreciation and amortization expense related to property and equipment was $ 175.3 million, $ 159.3 million, and $ 155.3 million for the years ended December 31, 2022, 2021, and 2020, respectively.

When property or equipment is sold or retired, the cost and related accumulated depreciation are removed from the Consolidated Balance Sheet;

resulting gains and losses are included in the Consolidated Statement of Operations in the period of sale or disposal.

When property or equipment is sold or retired, the cost and related accumulated depreciation are removed from the Consolidated Balance Sheet and the resulting gains and losses are included in the Consolidated Statement of Operations in the period of sale or disposal.

We have operating and finance leases.

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As an accounting policy election, we include reasonably certain renewal periods when determining the rate to use as the incremental borrowing rate for each lease.

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We calculate operating lease expense ratably over the lease term.

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We also assumed a terminal growth rate of 1.0 % and 2.8 % for our funeral and cemetery segments ( 1.7 % weighted average using carrying value), respectively, and discounted the cash flows at a 6.45 % discount rate based on the relative risk of these assets to our overall business.

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In addition to our annual review, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value may be greater than the fair value.

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Certain of our intangible assets associated with prior acquisitions are relieved using specific identification in fulfillment of performance obligations on our contracts with customers.

We amortize all other finite-lived intangible assets on a straight-line basis over their estimated useful lives, which range from two years to eighty-nine years .

We amortize all other finite-lived intangible assets on a straight-line basis over their estimated useful lives, which range from five years to eighty-nine years .

For more information related to intangible assets, see Note 4 .

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Sales taxes collected are recognized on a net basis in our consolidated financial statements.

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On our atneed contracts, we generally deliver the merchandise and perform the services at the time of need.

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Travel protection is a service that provides shipment of remains to the servicing funeral home or cemetery of choice if the purchaser passes away outside of a certain radius of their residence, without any additional expense to the family.

We do not provide travel protection services, and we are not primarily obligated to provide such services under these arrangements.

We do not provide these travel protection services, and we are not primarily obligated to provide such services under these arrangements.

Therefore, we record revenues, net of amounts due to the third-party, at the time of sale.

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Fixed income securities held by these trust funds are classified as trading securities.

Investment earnings from these trusts are distributed to us regularly and recognized in current cemetery revenue.

Investment earnings from these trusts

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are distributed to us regularly and recognized in current cemetery revenue.

These distributions are intended to defray cemetery maintenance costs incurred by us for our cemetery properties, which are expensed as incurred.

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All deferred tax assets and liabilities, along with any related valuation allowances are classified as non-current on our Consolidated Balance Sheet.

In December 2019, the Financial Accounting Standards Board ("FASB") amended "Income Taxes" to eliminate certain exceptions to the general principles of the guidance.

We adopted the amendment on January 1, 2021 with no impact to our consolidated results of operations, consolidated financial position, or cash flows.

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On August 16, 2022, the Inflation Reduction Act was enacted into U.S.

We do not currently expect that the Inflation Reduction Act will have a material impact on our income taxes.

Recently Issued Accounting Standards

Reference Rate Reform

In March 2020, the FASB issued "Reference Rate Reform" to provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform.

The new guidance provides optional expedients and exceptions for applying U.S.

GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met.

The amendments apply only to contracts and hedging relationships that reference LIBOR or another reference rate expected to be discontinued due to reference rate reform.

These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022.

We currently have no hedging relationships.

We have completed our evaluation of our contracts and have a population of contracts that reference LIBOR and either have an alternative reference rate or will be renegotiated in 2022.

We do not currently anticipate that use of the optional expedients, if any, will have a material impact on our consolidated results of operations, consolidated financial position, or cash flows.

Business Combinations

In October 2021, the FASB amended guidance to require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606.

In October 2021, the Financial Accounting Standards Board ("FASB") amended guidance to require that an acquirer recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with Topic 606.

Generally, this new guidance will result in the Company recognizing contract assets and contract liabilities consistent with those reported by the acquiree immediately before the acquisition date.

The standard will be effective for all acquisitions after December 31, 2022, although early adoption is permitted.

We are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.

We have adopted the new guidance and will apply it to customer contracts acquired in business combinations, if any, after January 1, 2022.

The adoption had no impact on our consolidated results of operations, consolidated financial position, and cash flows.

Financial Instruments

In March 2022, the FASB amended guidance to require public companies to disclose the vintage year of receivable write-offs during the reporting period.

This new disclosure is required for us beginning with our Form 10-Q for the three months ended March 31, 2023 and we will add the additional disclosures if write-offs during the period are material.

The amended guidance is not expected to have any impact on our consolidated results of operations, consolidated financial position, and cash flows.

Fair Value Measurements

In June 2022, the FASB amended guidance to clarify that the fair value of investments in equity instruments with contractual sale restrictions should not be discounted as a result of the contractual restrictions.

Additionally, the new guidance mandated disclosure of the fair value of any such securities, a description of the nature and duration of the restrictions, and circumstances that could cause a lapse in the restrictions.

The new guidance is effective for us beginning with valuations that occur after January 1, 2024 and is not expected to have any impact on our consolidated results of operations, consolidated financial position, and cash flows.

Preneed Activities

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Preneed receivables, net $ 137,423 $ 1,106,358 $ 1,243,781

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At December 31, 2022, the amortized cost basis of our preneed receivables by year of origination was as follows:

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The following table summarizes the activity for the reserve for credit losses on preneed receivables for the twelve months ended December 31, 2022.

January 1, 2021 Provision for Expected Credit Losses Acquisitions (Divestitures), Net Write Offs Effect of Foreign Currency December 31, 2021

December 31, 2021 Provision for Expected Credit Losses Acquisitions (Divestitures), Net Write Offs Effect of Foreign Currency December 31, 2022

(In thousands)

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Total reserve for credit losses on preneed receivables $ ( 20,727 ) $ ( 10,246 ) $ — $ 3,638 $ 21 $ ( 27,314 )

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

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Acquisitions of businesses, net 15,860 4,912 19,299

Net undistributed investment earnings (1)

Net undistributed investment (losses) earnings (1)

( 611,057 ) 448,469 407,770

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(1) Includes both realized and unrealized investment earnings.

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The cost and fair values associated with trust investments recorded at fair value at December 31, 2022 and 2021 are detailed below.

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Fixed income 1 1,135,815 1,231 ( 166,286 ) 970,760

Other 3 187 1 — 188

Trust investments, at fair value 4,013,319 371,897 ( 521,853 ) 3,863,363

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As of December 31, 2022, our unfunded commitment for our private equity investments was $ 292.3 million which, if called, would be funded by the assets of the trusts.

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December 31, 2021

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Trust investments, at market $ 5,396,678 $ 1,245,745 $ ( 105,572 ) $ 6,536,851

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

Years Ended December 31,

2021 2020 2019

(In thousands)

Fair value, beginning balance at January 1 $ 190 $ 8,218 $ 9,755

Net realized and unrealized (losses) included in Other income, net (1)

( 2 ) ( 1,215 ) ( 761 )

Purchases — — 1,006

Sales — ( 2 ) ( 1,782 )

Transfers — ( 6,811 ) —

Fair value, ending balance at December 31 $ 188 $ 190 $ 8,218

(1) All net realized and unrealized (losses) recognized in Other income, net for our trust investments are offset by a corresponding reclassification in Other income, net to Deferred receipts held in trust and Care trusts' corpus .

Our alternative investments include funds invested in limited partnerships with interests in private equity, private market real estate, energy and natural resources, infrastructure, transportation, and private debt including both distressed debt and mezzanine financing.

These investments can never be redeemed by the funds.

Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds.

The funds' managers have not communicated the timing of any liquidations.

Maturity dates of our fixed income securities range from 2023 to 2040 .

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Recognized trust fund income (realized and unrealized) related to our cemetery perpetual care trust investments was $ 85.1 million, $ 96.1 million, and $ 77.8 million for the years ended December 31, 2022, 2021, and 2020, respectively.

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Deferred Revenue, Net

At December 31, 2021 and 2020, Deferred revenue, net represents future revenue, including distributed trust investment earnings associated with unperformed trust-funded preneed contracts that are not held in trust accounts.

Deferred revenue, net represents future revenue, including distributed trust investment earnings associated with unperformed trust-funded preneed contracts that are not held in trust accounts.

Future revenue and net trust investment earnings that are held in trust accounts are included in Deferred receipts held in trust .

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Deferred revenue, net $ 1,624,028 $ 1,532,749

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The following table summarizes the activity for our contract liabilities, which are reflected in Deferred revenue, net and Deferred receipts held in trust :

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Acquisitions (dispositions) of businesses, net 10,824 4,707 19,664

Net investment gains (losses) (1)

Net investment (losses) gains (1)

( 618,760 ) 443,088 402,048

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412,155 411,708

accumulated amortization:

Less accumulated amortization:

Covenants-not-to-compete 205,450 203,935

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federal income taxes (determined on a consolidated return basis), foreign income taxes, and state income taxes.

On August 16, 2022, the Inflation Reduction Act was enacted into U.S.

We do not currently expect that the Inflation Reduction Act will have a material impact on our income taxes.

Income before income taxes was composed of the following components:

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Foreign $ 52,497 50,868 28,452

Total income before income taxes

$ 755,628 $ 1,045,500 $ 662,060

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Total consolidated effective tax rate 25.1 % 23.2 % 22.0 %

The 2022 consolidated effective tax rate was 25.1 %, compared to 23.2 % in 2021.

The lower effective tax rate in 2021 was primarily due to non-taxable gains on the cash surrender value of certain life insurance policies and the release of a Puerto Rican valuation allowance.

Deferred taxes are determined based on differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax rates.

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However, if we were to repatriate such foreign E&P, the foreign withholding tax liability is estimated to be $ 11.0 million.

Additionally, if we were to repatriate E&P in excess of our previously taxed income under the Tax Cuts and Jobs Act of 2017, such excess repatriation may cause us to incur an additional U.S.

federal income tax of approximately $ 7.7 million related to the Company’s hybrid debt accounting between Canada and the United States.

The following table summarizes the activity related to our gross unrecognized tax benefits from January 1, 2020 to December 31, 2022 (in thousands):

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We recorded an increase of interest and penalties of $ 0.1 million for each of the years ended December 31, 2022, 2021 and 2020, respectively.

To the extent interest and penalties are not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

To the extent interest and penalties are

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not assessed with respect to uncertain tax positions or the uncertainty of deductions in the future, amounts accrued will be reduced and reflected as a reduction of the overall income tax provision.

We file income tax returns, including tax returns for our subsidiaries, with federal, state, local, and foreign jurisdictions.

1 unchanged sentence

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.

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The federal statutes of limitations have expired for all tax years prior to 2019, and we are not currently under audit by the IRS.

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Thereafter — 1,495,467 6,598 1,502,065

Total $ — $ 2,673,264 $ 11,477 $ 2,684,741

Total loss carryforwards $ — $ 2,572,781 $ 9,335 $ 2,582,116

I n addition to the above loss carryforwards, we have $2.5 million of foreign alternative minimum tax credits that can be carried forward indefinitely.

In assessing the usefulness of deferred tax assets, we consider whether it is more likely than not that some portion or all of the net deferred tax assets will not be realized.

The future realization of net deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible.

During 2021, we recorded a net $ 17.6 million increase in our state valuation allowance due to state legislative changes and a net $ 4.9 million decrease in our foreign valuation allowance resulting from increased income in Puerto Rico.

During 2022, we recorded a net $ 1.8 million decrease in our valuation allowance primarily due to state legislative changes.

The valuation allowances can be affected in future periods by changes to tax laws, changes to statutory tax rates, and changes in estimates of future taxable income .

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(In thousands)

8.000% Senior Notes due November 2021 $ — $ 150,000

7.500% Senior Notes due April 2027 $ 138,274 $ 152,710

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Mortgage notes and other debt, maturities through 2050 66,248 48,113

Unamortized premiums and discounts, net — ( 317 )

Unamortized debt issuance costs ( 39,865 ) ( 45,100 )

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Current maturities of debt at December 31, 2022 include amounts due under our term loan, mortgage notes and other debt, and finance leases within the next year as well as the portion of unamortized debt issuance costs expected to be recognized in the next twelve months.

Our consolidated debt had a weighted average interest rate of 3.70 % and 3.62 % at December 31, 2021 and 2020, respectively.

Approximately 72 % and 79 % of our total debt had a fixed interest rate at December 31, 2022 and 2021, respectively.

The components of our weighted average interest rate are as follows:

Years Ended December 31,

Fixed Debt 4.32 % 4.33 %

Floating Debt 2.95 % 1.29 %

Total Debt 4.00 % 3.70 %

The following table summarizes the aggregate maturities of our debt for the five years subsequent to December 31, 2022 and thereafter, excluding unamortized premiums and debt issuance costs (in thousands):

2023 $ 90,661

2024 1,094,558

2028 and thereafter 2,403,470

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As of December 31, 2022, we are in compliance with all of our debt covenants.

At December 31, 2021 we have issued $ 34.0 million of letters of credit and pay a quarterly fee on the unused commitment, which was 0.10 %.

At December 31, 2022, we issued $ 33.5 million of letters of credit and pay a quarterly fee on the unused commitment, which was 0.15 %.

As of December 31, 2022, we have $ 396.5 million in borrowing capacity under the facility.

As of December 31, 2021, we issued $ 34.0 million of letters of credit.

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Debt Issuances and Additions

During the year ended December 31, 2022, we issued or added $ 484.0 million of debt including:

• $ 800.0 million unsecured 4.0% Senior Notes due May 2031;

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• $ 465.0 million on our Bank Credit Facility due May 2024;

Newly issued debt was used to pay down our Bank Credit Facility due May 2024, to redeem our 8.0% Senior Notes due November 2021, and for general corporate purposes.

These transactions resulted in additional debt issuance costs of $ 13.6 million.

• $ 19.0 million in other debt.

The debt proceeds were used primarily for general corporate purposes.

During the year ended December 31, 2021, we issued or added $ 975.0 million of debt including:

• $ 850.0 million unsecured 3.375% Senior Notes due August 2030;

• $ 800.0 million unsecured 4.0% Senior Notes due May 2031;

• $ 175.0 million on our Bank Credit Facility due May 2024.

Newly issued debt was used to pay down our Bank Credit Facility due May 2024, to redeem our 5.375% Senior Notes due May 2024, and for general corporate purposes.

Newly issued debt was used to pay down our Bank Credit Facility due May 2024, to redeem our 8.0% Senior Notes due November 2021, and for general corporate purposes.

These transactions resulted in additional debt issuance costs of $ 13.6 million.

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• $ 32.5 million in aggregate principal of our Term Loan due May 2024;

• $150.0 million in aggregate principal of 8.0% Senior Notes due November 2021;

• $ 14.4 million in aggregate principal of 7.5% Senior Notes due April 2027 repurchased on the open market;

• $ 1.2 million of premiums paid on early extinguishment;

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• $ 32.5 million in aggregate principal of our Term Loan due May 2024;

• $ 0.8 million in aggregate principal of 7.5% Senior Notes due April 2027 repurchased on the open market;

• $850.0 million in aggregate principal of 5.375% Senior Notes due May 2024;

• $ 150.0 million in aggregate principal of 8.0% Senior Notes due November 2021;

• $ 4.8 million of premiums paid on early extinguishment;

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Total expected cash interest payments $ 1,011,608

Subsequent Event

In January 2023, we entered into a new bank credit agreement that consists of a $ 675.0 million Term Loan due January 2028 and a Bank Credit Facility due January 2028 providing for borrowings of up to $ 1.5 billion.

Proceeds from this new bank credit agreement were used to settle our existing Term Loan due May 2024 and Bank Credit Facility due May 2024.

The new bank credit agreement provides us with flexibility for working capital and other general corporate purposes, if needed, and is guaranteed by a majority of our domestic subsidiaries.

The subsidiary guaranty is a guaranty of payment of the outstanding amount of the total lending commitment, including letters of credit.

The bank credit agreement contains certain financial covenants, including a maximum leverage ratio and certain dividend and share repurchase restrictions.

Currently, we have issued $ 33.5 million of letters of credit on the Bank Credit Facility due January 2028 and we have $ 1.0 billion in borrowing capacity under the facility.

Credit Risk and Fair Value of Financial Instruments

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(In thousands)

8.000% Senior Notes due November 2021 $ — $ 159,000

7.500% Notes due April 2027 $ 141,499 $ 181,511

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The fair values of our long-term, fixed rate loans were estimated using market prices for those loans, and therefore they are classified within Level 2 of the fair value measurements hierarchy.

The Term Loan, Bank Credit Facility agreement, and the mortgage and other debt are classified within Level 3 of the fair value measurements hierarchy.

The Term Loan, the revolving credit facility 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.

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Years Ended December 31,

2022 2021 2020

(In thousands)

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Years Ended December 31,

2022 2021 2020

(In thousands)

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The underlying assets of these lease agreements are buildings and land.

We generally do not have sales-type leases, direct financing leases,

We generally do not have sales-type leases, direct financing leases, or lease receivables.

Certain of our agreements include variable rental income based on a percentage of sales over base

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or lease receivables.

Certain of our agreements include variable rental income based on a percentage of sales over base contractual levels.

contractual levels.

Renewal options that can be cancelled by the lessees are not included in our disclosure of future lease income, which includes only the non-cancelable terms and fixed escalation provisions.

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Buildings and improvements are depreciated over a period ranging from ten years to forty years.

For these properties, we recorded depreciation expense of $ 0.7 million, $ 0.5 million, and $ 0.2 million for the years ended December 31, 2021, 2020, and 2019, respectively.

For these properties, we recorded depreciation expense of $ 0.7 million for each of the years ended December 31, 2022 and 2021 and $ 0.5 million for the year ended December 31, 2020.

As of December 31, 2022, our Consolidated Balance Sheet includes Land of $ 23.8 million, and Buildings and improvements of $ 19.7 million, net of $ 2.4 million accumulated depreciation, related to these properties.

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Acquisition of California, Inc., a California corporation dba Neptune Society of Northern California, Neptune Management Corp., a California corporation, Trident Society, Inc.

a California corporation, and Does 1 through 100, inclusive,

a California corporation, and Does 1 through 100, inclusive, Case No.

in the Superior Court of the State of California in and for the County of Alameda.

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a California Corporation, and Trident Society, Inc.

Xavier Becerra, Attorney General of the State of California, and Does 1-50, Case No.

Xavier Becerra, Attorney

General of the State of California, and Does 1-50, Case No.

34-2019-00269617;

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On December 2, 2019, the CAAG filed the complaint, referenced above, seeking permanent injunction from making false statements and engaging in unfair competition, a placement of funds into preneed trusts, civil penalties, customer refunds, attorneys’ fees, and costs.

We believe our contracts comply with applicable laws.

Given the nature of this lawsuit, we are unable to estimate a reasonably possible loss or range of loss, if any.

While we believe our contracts comply with applicable laws, the parties have engaged in settlement discussions in an effort to resolve this dispute, which may or may not be successful.

We anticipate any settlement in connection with this matter may include preneed contract refunds, governmental investigative costs and other legal expenses.

Nancy Taylor, on behalf of herself and others similarly situated v.

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Plaintiff seeks refunds, general, actual, compensatory and exemplary damages, civil penalties, interest, and attorney fees.

Given the nature of this lawsuit, we are unable to estimate a reasonably possible loss or range of loss, if any.

The parties have reached a tentative settlement of the lawsuit that would include an immaterial payment of attorney fees and provide consumers enhanced cancellation rights for a period of sixty days.

The impact of these enhanced cancellation rights is not expected to be material.

The court conditionally certified the class and granted preliminary approval of the settlement.

Unclaimed Property Audit

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In 2022, we repurchased 10,356,250 shares of our common stock at an aggregate cost of $ 661.1 million, which is an average cost per share of $ 63.84 .

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

During November 2021, our Board of Directors increased our share repurchase authorization to $ 600.0 million.

In 2021, we repurchased 9,437,446 shares of our common stock at an aggregate cost of $ 554.6 million, which is an average cost per share of $ 58.77 .

Additionally, in November 2022, our Board of Directors increased our share repurchase authorization to $ 600.0 million.

After these repurchases and the increase in authorization, the remaining dollar value of shares authorized to be purchased under the share repurchase program was $ 584.2 million at December 31, 2022.

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Subsequent to December 31, 2022, we repurchased 914,022 shares for $ 64.4 million at an average cost per share of $ 70.46 .

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Share-Based Compensation

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Outstanding at December 31, 2021

5,922,692 $ 36.50

Granted 561,200 $ 59.76

Exercised ( 1,010,366 ) $ 27.81

Cancelled ( 12,421 ) $ 50.80

Outstanding at December 31, 2022

5,461,105 $ 40.47

Exercisable at December 31, 2022

4,164,190 $ 36.17

The aggregate intrinsic value for stock options outstanding and exercisable was $ 156.6 million and $ 137.3 million, respectively, at December 31, 2022.

3 unchanged sentences

Outstanding at

December 31, 2021 Weighted-Average Remaining Contractual Life

December 31, 2022

Weighted-Average Remaining Contractual Life

(in years) Weighted-

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Exercisable at

December 31, 2021 Weighted-

December 31, 2022

Average Exercise Price

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$0.00 — 65.00

5,461,105 3.9 $ 40.47 4,164,190 $ 36.17

Other information pertaining to stock options was as follows (in thousands, except weighted-average grant date fair value):

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Nonvested restricted share awards at December 31, 2021

229,910 $ 48.76

Granted 101,543 $ 59.76

Vested ( 116,561 ) $ 36.15

Forfeited and other ( 2,777 ) $ 53.97

Nonvested restricted share awards at December 31, 2022

212,115 $ 54.66

Other information pertaining to restricted share awards was as follows (in thousands, except weighted-average grant date fair value):

14 unchanged sentences

Nonvested restricted share units at December 31, 2021

128,171 $ 47.87

Granted 58,012 $ 59.76

2 unchanged sentences

Nonvested restricted share units at December 31, 2022

118,936 $ 54.31

Other information pertaining to restricted share units was as follows (in thousands, except weighted-average grant date fair value):

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Total compensation expense for performance units was $ 14.6 million, $ 19.5 million, and $ 8.6 million for the years ended December 31, 2022, 2021, and 2020, respectively.

For the year ended December 31, 2021, cash paid to settle performance units was $ 12.4 million.

For the year ended December 31, 2022 and 2021, cash paid to settle performance units was $ 10.9 million and $ 12.4 million, respectively.

The fair value of the liability for these awards is calculated using a Monte Carlo simulation.

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Retirement Plans

We currently have a supplemental retirement plan for certain current and former key employees (SERP), a supplemental retirement plan for officers and certain key employees (Senior SERP), a retirement plan for certain non-employee directors (Directors’ Plan), a Retirement Plan for Rose Hills ® Trustees, a Rose Hills ® Supplemental Retirement Plan, and a Stewart Supplemental Retirement Plan (collectively, the “Plans”).

All of our Plans are unfunded and have a measurement date of December 31.

3 unchanged sentences

The Senior SERP provides retirement benefits based on years of service and position.

The Directors’ Plan provides for an annual benefit to directors following retirement, based on a vesting schedule.

In October 2022, we terminated our retirement plan for certain non-employee directors and paid out, in a discounted lump sum, all benefits to the participants or their heirs in the amount of $ 0.8 million.

In December 2022, we amended the Senior SERP to terminate the participation of all our active employees and those participants were paid their benefits, in a discounted lump sum, in the amount of $ 0.7 million.

We recognize pension related gains and losses in Other income, net on our Consolidated Statement of Operations in the year such gains and losses are incurred.

12 unchanged sentences

Interest cost 535 482

Actuarial (gain) loss ( 353 ) 1,641

Actuarial gain ( 3,254 ) ( 353 )

Benefits paid (1)

( 3,756 ) ( 2,383 )

Benefit obligation at end of year $ 15,906 $ 22,381

3 unchanged sentences

Benefits paid, including expenses (1)

( 3,756 ) ( 2,383 )

Fair value of plan assets at end of year $ — $ —

1 unchanged sentence

Funding Summary:

Projected benefit obligations $ 22,381 $ 24,635

Projected benefit obligation $ 15,906 $ 22,381

Accumulated benefit obligation $ 15,906 $ 22,381

4 unchanged sentences

( 13,670 ) ( 19,950 )

Total accrued benefit (liability) $ ( 22,381 ) $ ( 24,635 )

Total accrued liability $ ( 15,906 ) $ ( 22,381 )

( 1) In 2022, we terminated our Directors' Plan and amended Senior SERP to terminate the participation of all our active employees and paid out, in a discounted lump sum, all benefits to the participants or their heirs in the amount of $1.5 million.

The retirement benefits under the Plans are unfunded obligations of the Company.

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Operating income $ 795,461 $ 47,309 $ 842,770

Gains (losses) on divestitures and impairment charges, net $ 33,200 $ ( 281 ) $ 32,919

Gains on divestitures and impairment charges, net $ 6,935 $ 74 $ 7,009

Supplementary Information

45 unchanged sentences

Self-insurance reserves 99,252 94,268

Legal reserves 76,866 10,315

Bank overdrafts 39,695 39,043

45 unchanged sentences

Acquisitions and Divestiture-Related Activities

In the fourth quarter of 2022, we acquired ten funeral homes and three cemeteries in California as part of two acquisitions (the "2022 California Businesses") for $ 71.2 million in cash.

This amount includes the use of $ 13.2 million in IRS Section 1031 exchange funds.

The primary reasons for the acquisitions and the principal factors that contributed to the recognition of goodwill in these acquisitions were:

• the acquisitions enhance our network footprint, enabling us to serve a number of new, complementary areas;

• the acquisitions of the preneed backlog of deferred revenues enhance our long-term stability.

The following table summarizes the fair values of the assets acquired and liabilities assumed in the acquisitions (in thousands):

Other current assets $ 241

Cemetery property 5,840

Property and equipment, net 19,194

Preneed receivables, net and trust investments 8,099

Indefinite-lived intangible assets 17,149

Deferred charges and other assets 158

Cemetery perpetual care trust investments 6,461

Goodwill 26,098

Total assets acquired 83,240

Current liabilities 439

Deferred revenue and deferred receipts held in trust 3,183

Care trusts' corpus 6,461

Other liabilities 1,937

Total liabilities assumed 12,020

Net assets acquired $ 71,220

Purchase accounting is preliminary because we have not finalized our assessment of the fair value because there has been insufficient time between the acquisition date and the issuance of these financial statements to complete our review and final determination of fair value.

Goodwill, land, and certain identifiable intangible assets recorded in the acquisitions are not subject to amortization;

however, the goodwill and intangible assets will be tested periodically for impairment.

Of the $ 26.1 million in goodwill recognized, all of which is deductible for tax purposes, $ 11.3 million was allocated to our cemetery segment and $ 14.8 million was allocated to our funeral segment.

The identified intangible assets are indefinite lived tradenames with a fair value of $17.1 million.

We incurred acquisition costs of $ 0.2 million, which is included in Corporate general and administrative expenses in our Consolidated Statement of Operations for the year ended December 31, 2022.

The 2022 California Businesses contributed revenue of $ 1.9 million and net income of $ 0.5 million from acquisition through December 31, 2022.

In December 2021, we acquired twenty-one funeral homes and one cemetery in two states as part of two acquisitions (the "Ohio and California Businesses") for $ 94.8 million in cash.

3 unchanged sentences

• the acquisitions of the preneed backlog of deferred revenues enhance our long-term stability.

The following table summarizes the preliminary fair values of the assets acquired and liabilities assumed in the acquisitions (in thousands):

The following table summarizes the fair values of the assets acquired and liabilities assumed in the acquisitions (in thousands):

Other current assets $ 140

14 unchanged sentences

Net assets acquired $ 94,803

The purchase accounting is preliminary because we have not finalized our assessment of the fair value because there has been insufficient time between the acquisition date and the issuance of these financial statements to complete our review and final determination of fair value.

Goodwill, land, and certain identifiable intangible assets recorded in the acquisitions are not subject to amortization;

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Total intangible assets $ 28,634

We incurred acquisition costs of $ 0.3 million, which is included in Corporate general and administrative expenses in our Consolidated Statement of Operations.

We incurred acquisition costs of $ 0.3 million, which is included in Corporate general and administrative expenses in our Consolidated Statement of Operations for the year ended December 31, 2021.

The Ohio and California Businesses contributed revenue of $ 1.1 million and net income of $ 0.3 million from acquisition through December 31, 2021.

The following unaudited pro forma summary presents financial information as if the acquisition of the Ohio and California Businesses had occurred on January 1, 2020 and the acquisition costs of $ 0.3 million were included in 2020:

(In thousands)

Revenue $ 4,172,574 $ 3,536,915

Net income $ 807,040 $ 517,933

Excluding the December 2021 acquisitions described above, we spent $ 26.3 million, $ 64.2 million, and $ 55.6 million, net of cash acquired, for several business acquisitions, and $ 26.6 million, $ 52.1 million, and $ 51.4 million, net of cash acquired, for several real estate acquisitions for the three years ended December 31, 2021, 2020, and 2019, respectively.

Excluding the acquisitions described above, we spent $ 31.2 million, $ 26.3 million, and $ 64.2 million, net of cash acquired, for several business acquisitions, and $ 17.1 million, $ 26.6 million, and $ 52.1 million, net of cash acquired, for several real estate acquisitions for the three years ended December 31, 2022, 2021, and 2020, respectively.

These amounts include the use of $ 21.7 million, $ 10.9 million, and $ 55.1 million in IRS Section 1031 exchange funds for the three years ended December 31, 2022, 2021, and 2020, respectively.

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Year Ended December 31, 2021 $ 6,031 $ 6,393 $ ( 6,086 ) $ 6,338

Allowance For Doubtful Accounts:

Year Ended December 31, 2020 $ — $ 5,756 $ 275 $ 6,031

Year Ended December 31, 2019 $ 1,578 $ 9,146 $ ( 8,494 ) $ 2,230

Due After One Year:

2 unchanged sentences

Year Ended December 31, 2021 $ 6,902 $ ( 117 ) $ ( 2,208 ) $ 4,577

Allowance For Doubtful Accounts:

Year Ended December 31, 2020 $ — $ 88 $ 6,814 $ 6,902

Year Ended December 31, 2019 $ 10,814 $ — $ ( 2,440 ) $ 8,374

Preneed Receivables, Net:

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Year Ended December 31, 2021 $ 19,204 $ 5,086 $ ( 3,563 ) $ 20,727

Asset Allowance For Cancellation:

Year Ended December 31, 2020 $ — $ 7,739 $ 11,465 $ 19,204

Year Ended December 31, 2019 $ 48,380 $ 1,617 $ 5,343 $ 55,340

Deferred Tax Valuation Allowance:

4 unchanged sentences

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 8. Financial Statements and Supplementary Data