What changed in this filing

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Item 7. Management’s Discussion and Analysis

2025-02-13 compared with 2024-02-13 · 75 added, 85 removed, 408 unchanged (28% of the section changed)

17 unchanged sentences

and exercising pricing leverage related to our atneed revenue.

The average revenue per funeral contract is influenced by the mix of traditional and cremation services because our average revenue for cremations is lower than that for traditional burials.

The average revenue per funeral contract is influenced by the mix of traditional and cremation services as our average revenue for cremations is lower than that for traditional burials.

To further enhance revenue opportunities, we continue to focus on our cremation customers' preferences and remaining relevant by developing additional memorialization merchandise and services that specifically appeal to cremation customers.

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In addition, as of December 31, 2024, we have $1,341.0 million in borrowing capacity under our revolving credit facility.

As of December 31, 2023, we had $63.3 million in current maturities of long-term debt, which primarily consist of the current amounts due on our term loan and finance leases.

As of December 31, 2024, we had $83.9 million in current maturities of long-term debt, which primarily consist of the current amounts due on our term loan, mortgage notes and other debt, and finance leases.

Our Bank Credit Facility requires us to maintain a certain leverage ratio with which we were in compliance at December 31, 2024.

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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.

We target businesses with favorable customer dynamics and/or where we can achieve additional economies of scale.

We target businesses with favorable customer dynamics and/or where we can achieve the benefits of economies of scale.

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

We invested $72.5 million in acquiring 17 funeral service locations and 2 cemeteries in 2023.

In 2024, w e invested $181.2 million in acquiring 26 funeral service locations and 6 cemeteries, which included 3 combination locations.

Return Excess Cash to Shareholders.

Absent strategic acquisitions or new opportunities, we intend to return excess cash to shareholders through dividends and our share repurchase program.

In addition to any strategic acquisition or new build opportunities, we continue to return cash to shareholders through dividends and our share repurchase program.

Our quarterly dividend rate has steadily grown from $0.025 per common share in 2005 to $0.30 per common share at the end of 2024.

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This cash flow stream and our significant liquidity allow us to opportunistically manage our debt maturity profile as we maintain a target leverage ratio of 3.5x to 4.0x.

Bolstering our flexible capital strategy, we entered into a new bank credit agreement in January 2023 that consists of a $675.0 million term loan due January 2028 and a revolving credit facility due January 2028 providing for borrowings of up to $1.5 billion, an increase of $500.0 million from our previous facility.

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 $944.9 million and $869.0 million for the years ended December 31, 2024, and 2023, respectively.

This $43.3 million increase in operating cash flow is primarily driven by a $95.8 million decrease in cash tax payments partially offset by $66.3 million increase in cash interest payments and lower operating income of $47.5 million (excluding the impact of certain significant items) as the prior year was positively impacted by the pronounced effects of the COVID-19 pandemic.

The 2023 increase in operating cash flows over 2022 is primarily due to the following:

• a $95.8 million decrease in cash tax payments which is primarily related to a change in tax accounting method for our cemetery segment and will defer cash taxes into future years,

• a $41.3 million decrease in vendor and other payments,

• a $28.5 million increase in net trust withdrawals, and

• a $19.5 million increase in General Agency (GA) commission and other receipts, partially offset by

• a $66.3 million increase in cash interest payments,

The $75.9 million increase in operating cash flow during 2024 comprises:

• a $66.4 million increase in General Agency (GA) commission and other receipts,

• a $62.9 million decrease in cash tax payments, and

• a $54.6 million increase in cash receipts from customers, partially offset by

• a $35.4 million increase in net trust deposits,

• a $30.0 million increase in employee compensation payments,

• a $29.2 million decrease in cash receipts from customers, and

• a $13.3 million increase in payments for certain legal matters that were expensed in the prior year.

• a $16.2 million increase in payments for certain legal matters,

• a $13.0 million increase in vendor and other payments,

• a $11.1 million increase in cash interest payments, and

• a $2.3 million increase in restructuring payments.

Investing Activities

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The $151.5 million increased outflow from 2024 over 2023 is primarily due to the following:

• a $39.3 million increase in cash spent on real estate acquisitions,

• a $16.2 million decrease in cash receipts from divestitures and asset sales,

• a $7.9 million increase in other investing activities, partially offset by

• a $30.0 million decrease in cash spent on business acquisitions,

• a $7.9 million decrease in total capital expenditures, which comprises:

• $10.5 million decrease in maintenance capital expenditures:

• a $46.1 million decrease in expenditures for capital improvements at existing field locations,

• a $108.7 million increase in cash spent on business acquisitions,

• a $27.3 million increase in total capital expenditures, which comprises:

• a $23.4 million increase in maintenance capital expenditures, consisting of:

• a $20.2 million increase in expenditures for capital improvements at existing field locations,

• a $11.8 million increase in expenditures for cemetery property development,

• a $7.2 million increase in expenditures for digital investments and corporate,

• a $2.6 million increase in expenditures for growth capital expenditures/construction of new funeral service locations, and

• a $4.0 million increase in proceeds for Company-owned life insurance policies, net of repayments.

• a $8.6 million decrease in expenditures for digital investments and corporate,

• a $3.9 million increase for growth capital expenditures/construction of new funeral service locations

• a $7.3 million increase in other investing activities primarily for investments in renewable energy tax credits,

• a $5.7 million increase in cash spent on real estate acquisitions,

• a $1.4 million decrease in cash receipts from divestitures and asset sales, and

• a $1.1 million decrease in proceeds for Company-owned life insurance policies, net of repayments.

Financing Activities

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The $61.5 million decreased outflow from 2024 over 2023 is primarily due to the following:

• a $116.0 million decrease in the purchase of Company common stock, partially offset by

• a $291.1 million decrease in the purchase of Company common stock, and

• a $32.5 million increase in proceeds from exercises of stock options, partially offset by

• a $253.3 million increase in debt repayments, net of proceeds,

• a $7.9 million increase in payments of dividends,

• a $3.8 million change in bank overdrafts and other, and

• a $3.6 million decrease in proceeds from exercises of stock options.

• a $6.3 million increase in payments of dividends, and

• a $2.5 million change in bank overdrafts and other.

Material Cash Requirements

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Debt & Finance Leases

As of December 31, 2023, we had $4.7 billion in aggregate principal outstanding on our notes, term loan, revolving credit facility, finance leases, mortgages, and other debt (collectively "debt and finance leases"), of which $63.3 million is payable in the next twelve months.

As of December 31, 2024, we had $4.8 billion in aggregate principal outstanding on our notes, term loan, revolving credit facility, finance leases, mortgage notes, and other debt (collectively "debt and finance leases"), of which $83.9 million is payable in the next twelve months.

The aggregate principal excludes $44.0 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 $1.2

Future interest payments associated with the debt and finance leases

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billion, of which $250.9 million is payable in the next twelve months.

total $1.2 billion, of which $239.2 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.

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Management does not expect that we will be required to fund material future amounts related to these surety bonds due to a lack of surety capacity or surety company non-performance.

As of December 31, 2024, we had an increase of $161.7 million in surety bonds supporting preneed funeral obligations related to certain legal matters discussed in Note 9 in Part II, Item 8.

Financial Statements and Supplementary Data.

Preneed Activities and Backlog of Contracts

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All selling costs incurred pursuant to the sale of insurance-funded preneed contracts are expensed as incurred.

We do not reflect the unfulfilled insurance-funded preneed contract amounts in our Consolidated Balance Sheet.

We do not reflect the

unfulfilled insurance-funded preneed contract amounts in our Consolidated Balance Sheet.

The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenue as we perform these funerals.

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Additionally, the table reflects our backlog of unfulfilled insurance-funded contracts (which are not included in our Consolidated Balance Sheet) at December 31, 2024 and 2023.

The backlog amounts presented include amounts due from customers for undelivered performance obligations on cancelable preneed contracts to arrive at our total backlog of deferred revenue.

The table does not include the backlog associated with businesses that are held for sale.

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backlog amounts presented include amounts due from customers for undelivered performance obligations on cancelable preneed contracts to arrive at our total backlog of deferred revenue.

The table does not include the backlog associated with businesses that are held for sale.

The table also reflects our preneed receivables and trust investments associated with the backlog of deferred preneed contract revenue including the amounts due from customers for undelivered performance obligations on cancelable preneed contracts.

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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.

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.

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Recognized trust fund income (realized and unrealized) related to our cemetery perpetual care trust investments was $96.4 million and $86.6 million for the years ended December 31, 2024 and 2023, respectively.

The increase in recognized trust fund income is in part due to earnings retained related to unclaimed property audits and cancellations.

Information regarding the applicable unclaimed property audit is set forth in Part II, Item 8.

Financial Statements, Note 9 of this Form 10-K.

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

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(In millions)

Pre-tax gains on divestitures and impairment charges, net $ 9.8 $ 10.0

Pre-tax losses on early extinguishment of debt, net $ (1.1) $ (1.2)

Pre-tax foreign currency exchange loss $ — $ (1.5)

Pre-tax estimate of certain legal matters (1)

Pre-tax (loss) gain on divestitures and impairment charges, net $ (12.5) $ 9.8

Pre-tax loss on early extinguishment of debt, net $ — $ (1.1)

Pre-tax estimate of reduction in legal reserve (1)

Pre-tax estimate of restructuring charge $ (11.5) $ —

Tax effect from significant items $ 0.4 $ (2.3)

Change in uncertain tax reserves and other (2)

(1) Estimate of certain legal matters in the fourth quarter of 2022 included an estimate of $64.6 million related to a private litigation matter in Florida and settlement discussions with the California Attorney General.

Both matters relate to previously disclosed litigation.

(1) The fourth quarter of 2024 includes a reduction of our legal reserve of $20.3 million related to previously disclosed legal matters in California that have now been resolved.

(2) 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 decrease over the prior year is due to an expected decline in gross profit primarily due to decreases in COVID-19 related activity.

Additionally, fewer shares outstanding and a lower tax rate helped to offset the impact of higher interest expense primarily due to rising interest rates.

In addition to the above items, the decrease over the prior year is due to lower gross profit from lower services performed combined with higher expenses, including facility and maintenance expenses from natural disasters.

Additionally, fewer shares outstanding and a lower tax rate helped to offset the impact of higher interest.

Funeral Results

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gross profit associated with acquisitions/new construction 1.5 0.5

gross losses associated with divestitures — (3.1)

gross loss associated with divestitures (0.3) (0.1)

Comparable (1) funeral gross profit

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Consolidated revenue from funeral operations was $2,324.2 million for the year ended December 31, 2024, compared to $2,303.0 million in 2023.

This $29.0 million, or 1.2%, decrease in revenue is primarily attributable to a $54.9 million decrease in comparable funeral revenue, partially offset by a $26.6 million increase in revenue contributed from newly constructed and acquired properties.

This $21.2 million, or 0.9%, increase in revenue is primarily attributable to a $25.8 million increase in revenue contributed by newly constructed and acquired properties, partially offset by a $1.1 million decrease in comparable funeral revenue.

Comparable revenue from funeral operations was $2,287.6 million for the year ended December 31, 2024 compared to $2,288.7 million in 2023.

This $54.9 million decrease was primarily driven by the decrease in core revenue of $67.1 million as the prior year was impacted by the COVID-19 pandemic.

Our comparable funeral services performed decreased 5.6% which comprised of a 6.9% decrease in funeral services performed by our funeral service locations offset by a 1.9% increase in cremations performed by our non-funeral home channel.

This decrease was partially offset by a $18.2 million increase in comparable core general agency and other revenue as a result of higher comparable preneed insurance sales production.

Average revenue per funeral service increased 2.8% for the year ended December 31, 2023 compared to the same period in 2022.

This average revenue growth was primarily attributable to our consumer preferences for enhanced product and service offerings as well as an increase in trust fund income.

Our comparable funeral services performed decreased 2.5%, which was primarily offset by a 2.5% growth in the comparable average revenue per service.

Our total comparable cremation rate increased 70 basis points to 63.8% for the year ended December 31, 2024.

Non-funeral home preneed sales revenue decreased by $31.1 million primarily due to a decline of non-funeral home preneed sales production impacted by our transition from trust to insurance-funded contracts.

Core general agency and other revenue grew $31.1 million, primarily due to growth in general agency revenue from higher commission rates, primarily as a result of our new preneed insurance marketing agreement.

Funeral Gross Profit

Consolidated funeral gross profit decreased $48.6 million, or 8.9%, in 2023 compared to 2022 as the prior year was positively impacted by COVID-19.

Consolidated funeral gross profit decreased $31.8 million, or 6.4%, in 2024 compared to 2023.

This decrease is primarily attributable to the decrease in comparable funeral gross profit of $32.6 million, or 6.6%.

Comparable funeral gross profit decreased $52.2 million to $494.6 million and the comparable gross profit percentage decreased from 23.6% to 21.8%.

This decrease in gross profit is due to the expected decline in revenue mentioned above combined with higher selling costs on higher preneed insurance sales production during the current year.

Comparable funeral gross profit decreased $32.6 million to $464.1 million and the comparable gross profit percentage decreased 140 basis points from 21.7% to 20.3%.

This decrease in gross profit is due to the decline in revenue mentioned above combined with higher employee-related inflationary costs, higher overhead costs including incentive compensation costs, and higher facility costs on increased maintenance expenses from damages incurred at locations impacted by natural disasters during the year.

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Consolidated cemetery gross profit $ 625.4 $ 594.7

gross (loss) profit associated with acquisitions/new construction (1.5) (0.1)

gross profit (loss) associated with acquisitions/new construction 7.5 (2.0)

gross (loss) profit associated with divestitures (0.3) 1.0

Comparable (1) cemetery gross profit

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Consolidated revenue from our cemetery operations increased $65.5 million, or 3.6%, in 2024 compared to 2023 primarily due to a $53.2 million, or 3.0%, increase in comparable cemetery revenue and a $14.3 million increase in revenue contributed by newly constructed and acquired properties.

The increase in comparable cemetery revenue was primarily attributable to a $15.0 million increase in comparable cemetery core revenue, which was driven by a $31.2 million increase in recognized preneed revenue, partially offset by a $16.2 million decline in atneed revenue.

The recognized preneed revenue growth benefited from increases in property, merchandise, and service revenue, as well as higher trust fund income.

The decline in comparable cemetery atneed revenue was due to an expected decrease in contract velocity compared to 2022 that was heavily impacted by the COVID-19 pandemic.

The $53.2 million increase in comparable cemetery revenue was primarily attributable to a $42.0 million increase in comparable cemetery core revenue.

This increase was primarily a result of a $45.1 million increase in recognized preneed revenue, which benefited from growth in comparable preneed sales production and trust fund income.

Additionally, comparable other revenue increased $11.3 million, primarily from higher endowment care trust fund income.

Cemetery Gross Profit

Consolidated cemetery gross profit decreased $14.2 million, or 2.3%, in 2023 compared to 2022 and is primarily attributable to the decrease in comparable cemetery gross profit of $12.8 million, or 2.1%, and a $1.4 million decrease in gross profit due to an increase in gross losses contributed by newly constructed and acquired properties.

Comparable cemetery gross profit decreased $12.8 million to $596.2 million, and the gross profit percentage decreased 100 basis points to 33.3%.

The decrease in gross profit is due to the decline in cemetery atneed revenue mentioned above combined with higher selling, maintenance and employee-related costs.

Consolidated cemetery gross profit increased $30.7 million, or 5.2%, in 2024 compared to 2023 and is primarily attributable to an increase in comparable cemetery gross profit of $22.5 million, and an increase in gross profit contributed by newly constructed and acquired properties of $9.5 million.

Comparable cemetery gross profit increased $22.5 million to $618.2 million, and the gross profit percentage increased 30 basis points from 33.2% to 33.5% as the growth in comparable cemetery revenue more than offset higher overhead costs, including incentive compensation, and increased maintenance expenses from damages incurred at locations impacted by natural disasters during the year.

Other Financial Statement Items

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Corporate general and administrative expenses were $139.0 million in 2024 compared to $157.4 million in 2023.

Excluding an estimated charge for certain legal matters of $64.6 million in the prior year, corporate general and administrative expenses decreased $15.2 million, primarily related to our incentive compensation plan.

Gains on Divestitures and Impairment Charges, Net

We recognized a $9.8 million and a $10.0 million net pre-tax gain on asset divestitures and impairments in 2023 and 2022, respectively, primarily as the result of asset divestitures associated with non-strategic funeral and cemetery locations in the United States and Canada partially offset by impairment losses.

During the fourth quarter, we recognized a $20.3 million reduction in our California legal reserve as the primary claim period expired.

Adjusting for the $20.3 million, corporate general and administrative expenses grew $1.9 million due to higher employee-related inflationary costs.

Restructuring Charge

During the fourth quarter of 2024, we recognized $11.5 million in restructuring charges, which included the retirements and position eliminations of various home office positions as part of ongoing cost management.

Gain and Loss on Divestitures and Impairment Charges, Net

We recognized a $12.5 million net pre-tax loss and a $9.8 million net pre-tax gain on asset divestitures and impairments in 2024 and 2023, respectively, which includes the net impact from the sale of non-essential real estate and businesses as well as impairment of long-lived assets and intangibles.

Interest Expense

Interest expense increased $67.3 million to $239.4 million in 2023 primarily due to higher interest on our floating rate debt as well as higher balances.

Interest expense increased $18.3 million to $257.8 million in 2024 primarily due to higher interest rates on our floating rate debt as well as higher debt balances.

Our floating rate debt carried a weighted average interest rate of 7.34% for the full year 2024, which is 23 basis points higher than the weighted average rate for our floating rate debt for the full year 2023 of 7.11%.

Losses on Early Extinguishment of Debt, Net

During 2023, we made aggregate debt payments of $603.2 million for scheduled and early extinguishment payments primarily associated with our new bank credit agreement.

During 2022, we made aggregate debt payments of $101.9 million for scheduled and early extinguishment payments.

Certain of these transactions resulted in the recognition of pre-tax losses of $1.1 million and $1.2 million in 2023 and 2022, respectively, recorded in Losses on early extinguishment of debt, net in our Consolidated Statement of Operations.

Provision for Income Taxes

The 2024 consolidated effective tax rate was 23.2%, compared to 24.1% in 2023.

The decrease in the effective tax rate in 2023 was primarily due to the non-taxable gains arising from the cash surrender value of certain life insurance policies.

The decrease in the effective tax rate in 2024 was primarily due to an increase in excess tax benefits recognized on the settlement of employee share-based awards .

The effective tax rate for the year ended December 31, 2024 was higher than the federal statutory tax rate of 21% primarily due to state and foreign income taxes.

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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

We determine fair value of each reporting unit using an income approach.

The income approach, which is a discounted cash flow method, uses projections of

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projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows.

future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows.

We do not record an impairment of goodwill in instances where the fair value of a reporting unit exceeds its carrying amount.

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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 limitation have expired for all tax years prior to 2020, 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 2021.

There are currently no federal or provincial audits in Canada;

however, years subsequent to 2017 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 by $1.3 million within the next twelve months as a result of concluding various state tax matters.

The federal statutes of limitations have expired for all tax years prior to 2021, and we are not currently under audit by the IRS.

Various state and foreign jurisdictions are auditing years 2020 through 2022.

We believe that it is reasonably possible that the recorded amount of gross unrecognized tax benefits may decrease by $0.4 million within the next twelve months as a result of the resolution of certain state tax matters.

Insurance Loss Reserves

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Historical insurance industry experience indicates a high degree of inherent variability in assessing the ultimate amount of losses associated with casualty insurance claims.

This is especially true with respect to liability and workers’ compensation exposures due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, which is often many years.

This is especially true with respect to liability and workers’ compensation exposures due to the extended period of time that transpires between the time claim occurs and the full settlement of such claim, which is often many years.

We continually evaluate loss estimates associated with claims and losses related to these insurance coverages falling within the deductible of each coverage.

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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