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Item 7. Management’s Discussion and Analysis

2021-03-02 compared with 2020-02-28 · 407 added, 341 removed, 293 unchanged (72% of the section changed)

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establishing and maintaining leading market share positions supported by strong local heritage and relationships;

effectively responding to increasing cremation trends by selling complementary services and

effectively responding to increasing cremation trends by selling complementary services and merchandise;

controlling salary and merchandise costs;

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Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future.

We have the ability to draw on our Credit Facility, subject to its customary terms and conditions.

However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding.

Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected.

Please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019 .

During 2020, we intend to focus on integrating our newly acquired businesses and to use cash on hand and borrowings under our Credit Facility primarily for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends and our debt obligations.

From time to time we may also use available cash resources (including borrowings under our Credit Facility) to repurchase shares of our common stock and our remaining 2.75% convertible subordinated notes due 2021 (“Convertible Notes”) in open market or privately-negotiated transactions.

We have the ability to draw on our Credit Facility, subject to its customary terms and conditions.

We believe that our existing and anticipated cash resources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividends and acquisitions for the foreseeable future.

We began 2019 with $0.6 million in cash and other liquid investments and ended the year with $0.7 million in cash.

Please read Part I, Item 1A, Risk Factors.

For 2021, our plan is to remain focused on integrating our newly acquired businesses and to use cash on hand and borrowings under our Credit Facility primarily for general corporate purposes, payment of dividends and debt obligations and the redemption of our Convertible Notes due March 2021.

However, if we were to refinance our Senior Notes when they become callable, it may provide us the ability, from a capital allocation perspective, to potentially resume strategic acquisitions, internal growth capital expenditures, share repurchases, dividend increases and further debt repayments.

We also expect continued divestiture activity for the next 6-12 months, which could yield approximately $10-11 million of cash from the proceeds of the sale.

From time to time we may also use available cash resources (including borrowings under our Credit

Facility) to repurchase shares of our common stock, subject to satisfying certain financial covenants in our Credit Facility.

We began 2020 with $0.7 million in cash and ended the year with $0.9 million in cash.

At December 31, 2020, we had borrowings of $47.2 million outstanding on our Credit Facility compared to $83.8 million as of December 31, 2019 and $27.1 million as of December 31, 2018.

The following table sets forth the elements of cash flow for the years ended December 31, 2017 , 2018 and 2019 (in thousands):

The following table sets forth the elements of cash flow (in thousands):

Years Ended December 31,

2018 2019 2020

Cash at beginning of year $ 952 $ 644 $ 716

Cash flow from operating activities

Acquisitions and land for new construction

Net cash provided by operating activities 48,994 43,216 82,915

Acquisitions (37,970) (140,907) (28,011)

Deposit on pending acquisition — (5,000) —

Proceeds from insurance reimbursements — 1,433 248

Net proceeds from the sale of businesses and other assets

Growth capital expenditures

Maintenance capital expenditures

Cash flow from investing activities

Net borrowings (payments) on long-term debt obligations

Proceeds from divestiture and sale of other assets — 967 8,541

Capital expenditures (13,526) (15,379) (15,198)

Net cash used in investing activities (51,496) (158,886) (34,420)

Net borrowings (payments) on our Credit Facility, acquisition debt and finance lease obligations (194,340) 54,413 (38,345)

Payment of debt issuance costs related to long-term debt (1,751) (891) —

Acquisition of Convertible Notes

Transaction costs related to the acquisition of Convertible Notes

Repurchase of Convertible Notes (98,266) (27) (4,563)

Payment of transaction costs related to the repurchase of Convertible Notes (885) — (12)

Proceeds from the issuance of the Senior Notes 320,125 76,688 —

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Other financing costs (138) (162) (169)

Cash flow from financing activities

Net cash provided by (used in) financing activities 2,194 115,742 (48,322)

Cash at end of year $ 644 $ 716 $ 889

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For the year ended December 31, 2020, cash provided by operating activities was $82.9 million compared to $43.2 million for the year ended December 31, 2019 and $49.0 million for the year ended December 31, 2018.

The decrease of $5.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was due primarily to approximately $5.0 million in more cash interest paid in 2019 compared to 2018, as well as additional unfavorable working capital changes.

The increase of $3.8 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily due to the favorable impact of working capital changes.

The increase of $39.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 is a reflection of the resilient cash generating ability of our portfolio of high-quality funeral home and cemetery operations.

Our operating income (excluding the non-cash impact of the divestitures and impairment charges) increased $26.4 million in addition to other favorable working capital changes.

The decrease of $5.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was primarily due to approximately $5.0 million in more cash interest paid in 2019 compared to 2018, as well as additional unfavorable working capital changes.

Investing Activities

Our investing activities resulted in a net cash outflow of $158.9 million f or the year ended December 31, 2019 compared to $51.5 million for the year ended December 31, 2018 and $39.5 million for the year ended December 31, 2017 , an increase of $107.4 million and $12.0 million , respectively.

Our investing activities resulted in a net cash outflow of $34.4 million f or the year ended December 31, 2020 compared to $158.9 million for the year ended December 31, 2019 and $51.5 million for the year ended December 31, 2018.

Acquisition and Divestiture Activity

During the year ended December 31, 2020, we acquired one funeral home and cemetery combination business in Lafayette, California for $33.0 million in cash, of which $5.0 million was deposited in escrow in 2019 and $28.0 million was paid at closing in 2020.

In addition, we sold eight funeral homes for $8.4 million and we sold real property for $0.1 million.

During the year ended December 31, 2019, we acquired, in three separate transactions, two funeral home and cemetery combination businesses, seven funeral home businesses and three ancillary service businesses for an aggregate purchase price of $140.9 million.

In October 2019, we acquired the following:

(i) four funeral home businesses in Buffalo, New York;

and (ii) one funeral home and cemetery combination business, three funeral home businesses and three ancillary service businesses, which consist of a flower shop, a pet cremation business and an online cremation business in the Dallas, Texas area.

In December 2019, we acquired one funeral home and cemetery combination business in Fairfax, Virginia.

During the year ended December 31, 2019 , we paid a $5.0 million deposit for a funeral home and cemetery combination business that we acquired in January 2020.

During the year ended December 31, 2019 , we received proceeds of $1.4 million from our property insurance policy for the reimbursement of renovation costs for our funeral and cemetery businesses that were damaged by Hurricane Michael.

During the year ended December 31, 2019 , we sold a funeral home business for $0.9 million and we sold real property for $0.1 million related to a funeral home we merged with another business in an existing market.

During the year ended December 31, 2018 , we acquired four funeral home businesses, two in Virginia, one in Tennessee, and one in North Carolina, for an aggregate purchase price of $38.0 million .

During the year ended December 31, 2017 , we acquired seven funeral home businesses, two in Colorado and five in New York, for the aggregate purchase price of $27.5 million.

We also purchased real estate for a funeral home parking lot expansion projects for $1.3 million.

Additionally, we sold a funeral home business for $0.6 million and land for $5.1 million.

For the year ended December 31, 2019 , capital expenditures totaled $15.4 million compared to $13.5 million for the year ended December 31, 2018 , and $16.4 million for the year ended December 31, 2017 , an increase of $1.9 million and a decrease of $2.9 million , respectively.

In addition, we also paid a $5.0 million deposit for a funeral home and cemetery combination business that we acquired in January 2020.

In addition, we sold a funeral home business for $0.9 million and we sold real property for $0.1 million related to a funeral home we merged with another business in an existing market.

During the year ended December 31, 2018, we acquired four funeral home businesses for an aggregate purchase price of $38.0 million.

Capital Expenditures

For the year ended December 31, 2020, our capital expenditures (comprising of growth and maintenance spend) totaled $15.2 million compared to $15.4 million for the year ended December 31, 2019, and $13.5 million for the year ended December 31, 2018.

The following tables present our growth and maintenance capital expenditures (in thousands):

Years Ended December 31,

2018 2019 2020

Cemetery development $ 3,149 $ 4,111 $ 4,705

Construction for new funeral facilities 11 — —

Live streaming equipment — 42 636

Renovations at certain businesses (1)

1,100 2,236 953

Other — 195 142

Total Growth $ 4,260 $ 6,584 $ 6,436

(1) During the year ended December 31, 2019, we spent $1.6 million for renovations on four businesses that were affected by Hurricane Michael, of which $1.4 million was reimbursed by our property insurance policy.

Years Ended December 31,

2018 2019 2020

Facility repairs and improvements $ 2,591 $ 1,820 $ 2,053

General equipment and furniture 2,247 3,032 2,892

Vehicles 2,556 1,950 1,493

Paving roads and parking lots 674 795 731

Information technology infrastructure improvements 1,172 977 949

Other 26 221 644

Total Maintenance $ 9,266 $ 8,795 $ 8,762

Financing Activities

Our financing activities resulted in a net cash inflow of $115.7 million for the year ended December 31, 2019 compared to $2.2 million for the year ended December 31, 2018 and net cash outflow of $8.1 million for the year ended December 31, 2017 , an increase of $113.5 million and $10.3 million , respectively.

Our financing activities resulted in a net cash outflow of $48.3 million for the year ended December 31, 2020 compared to net cash inflow of $115.7 million for the year ended December 31, 2019 and net cash inflow of $2.2 million for the year ended December 31, 2018.

For the year ended December 31, 2020, we had net payments on our Credit Facility, acquisition debt and finance leases of $38.3 million.

In addition, we paid $6.0 million in dividends and $4.6 million for the repurchase of a portion of our Convertibles Notes.

For the year ended December 31, 2019, we had net proceeds related to the issuance of our Additional Senior Notes of $75.7 million and net borrowing on our long-term debt obligations of $53.5 million.

We purchased treasury stock for $9.2 million and paid $5.4 million in dividends on our common stock.

For the year ended December 31, 2018 , we had net proceeds related to the issuance of our Initial Senior Notes of $318.8 million , offset by net payments on our long-term debt obligations of $196.1 million and payments of $99.2 million to acquire our Convertible Notes.

We purchased treasury stock for $16.3 million and paid $5.5 million in dividends on our common stock.

For the year ended December 31, 2017 , we had net borrowings on our long-term debt obligations of $11.1 million .

We purchased treasury stock for $16.4 million and paid $3.7 million in dividends on our common stock.

On October 25, 2017, our Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075 per share, effective with respect to dividends payable on December 1, 2017 and later.

For the years ended December 31, 2019 , 2018 and 2017 , our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):

In addition, we purchased treasury stock for $9.2 million and paid $5.4 million in dividends on our common stock.

For the year ended December 31, 2018, we had net proceeds related to the issuance of our Initial Senior Notes of $318.8 million, offset by net payments on our long-term debt obligations of $196.1 million and payments of $99.2 million in connection with our exchange of a portion of our Convertible Notes.

In addition, we purchased treasury stock for $16.3 million and paid $5.5 million in dividends on our common stock.

On May 19, 2020, the Board approved an increase of $0.05 per share to our annual dividend beginning with the dividend declaration in the third quarter.

On October 27, 2020, the Board approved an additional increase of $0.0125 per share for a total annual dividend of $0.40 per share beginning with the dividend declaration in the fourth quarter.

Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):

2020 Per Share Dollar Value

March 1st $ 0.0750 $ 1,339

June 1st $ 0.0750 $ 1,343

September 1st $ 0.0875 $ 1,569

December 1st $ 0.1000 $ 1,797

2019 Per Share Dollar Value

March 1st $ 0.0750 $ 1,360

June 1st $ 0.0750 $ 1,365

September 1st $ 0.0750 $ 1,336

December 1st $ 0.0750 $ 1,337

2018 Per Share Dollar Value

March 1st $ 0.0750 $ 1,207

June 1st $ 0.0750 $ 1,433

September 1st $ 0.0750 $ 1,436

December 1st $ 0.0750 $ 1,430

Share Repurchases

On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Exchange Act.

On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases bringing the total authorized repurchase amount to $40.0 million .

On July 31, 2019, our Board approved an additional $25.0 million for repurchases of our common stock in accordance with the Exchange Act.

During the year ended December 31, 2018, we repurchased 1,101,969 shares of common stock for a total cost of $17.7 million at an average cost of $16.03 per share pursuant to our share repurchase program.

During the year ended December 31, 2018 , we repurchased 1,101,969 shares of common stock for a total cost of approximately $17.7 million at an average cost of $16.03 per share pursuant to our share repurchase program.

On July 31, 2019, our Board approved an additional $25.0 million under our share repurchase program in accordance with Rule 10b-18 of the Exchange Act.

During the year ended December 31, 2019, we repurchased 400,000 shares of common stock for a total cost of $7.8 million at an average cost of $19.39 per share pursuant to our share repurchase program.

Our shares were purchased in the open market.

Purchases were at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations.

Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations.

Shares purchased pursuant to the repurchase program are currently held as treasury shares.

During the year ended December 31, 2020, we did not repurchase any common shares.

At December 31, 2020, we had approximately $25.6 million available for repurchase under our share repurchase program.

Long-term Debt and Lease Obligations

The outstanding principal of our long-term debt and lease obligations at December 31, 2018 and 2019 is as follows (in thousands):

December 31, 2018

December 31, 2019

Credit Facility, Lease Obligations and Acquisition Debt

The outstanding principal of our long-term debt and lease obligations is as follows (in thousands):

December 31, 2019 December 31, 2020

Credit Facility $ 83,800 $ 47,200

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Acquisition debt 6,964 5,509

Total long-term debt and lease obligations

Total $ 119,995 $ 80,947

Credit Facility

On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our Initial Senior Notes.

We used $291.4 million of the net proceeds from the sale of the Initial Senior Notes to repay all amounts outstanding under our former credit agreement.

In connection with the repayment in full of all amounts due thereunder, the former credit agreement was retired and $2.0 million of letters of credit previously issued under the former credit agreement were deemed issued under (and remain outstanding under) the senior secured revolving credit facility (as defined below).

On May 31, 2018, we entered into a $150.0 million senior secured revolving credit facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent, which we subsequently amend in November 2018 and July 2019.

For the year ended December 31, 2018 , we recognized a loss of $1.6 million , recorded in Net loss on early extinguishment of debt, related to the termination of our former credit agreement, which consisted of a write-off of $0.7 million of transaction costs and a write-off of $0.9 million of unamortized debt issuance costs.

Additionally, we incurred $1.1 million in transaction costs related to our senior secured revolving credit facility, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.

On December 19, 2019, we entered into a third amendment and commitment increase (“Credit Facility”) to our $150.0 million senior secured revolving credit facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent (in such capacity, the “Administrative Agent”) to increase our commitment to $190.0 million .

The Credit Facility is comprised of:

(i) a $190.0 million revolving credit facility, which includes a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and

(ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans.

On December 19, 2019, we entered into a third amendment and commitment increase to our $150.0 million senior secured revolving credit facility (“Credit Facility”) with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent (in such capacity, the “Administrative Agent”) to increase our commitment to $190.0 million and incurred $0.9 million in transactions costs, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.

At December 31, 2020, our Credit Facility was comprised of:

(i) a $190.0 million revolving credit facility, including a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans.

The final maturity of the Credit Facility will occur on May 31, 2023.

For the year ended December 31, 2019 , we incurred $0.9 million in transactions costs related to our Credit Facility, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.

The Company’s obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes and certain of the Company’s Credit Facility Guarantors.

The Company’s obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (as defined in Part II, Item 8, Financial Statements and Supplementary Data, Note 14) and certain of the Company’s Credit Facility Guarantors.

The Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of the Company’s personal property assets and those of the Credit Facility Guarantors.

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The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations, continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, amongst others.

In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and the Credit Facility Guarantors to incur indebtedness, grant liens, make investments, engage in acquisitions, mergers or consolidations, and pay dividends and other restricted payments, and the following financial maintenance covenants:

(A) a Total Leverage Ratio not to exceed (i) 6.00 to 1.00 for the quarter ended December 31, 2019, (ii) 5.75 to 1.00 for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and (iii) 5.50 to 1.00 for the quarter ended December 31, 2020 and each quarter ended thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit Facility) not to exceed 2.00 to 1.00 as of the end of any period of four consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters.

Effective with the Credit Facility, an applicable rate premium shall be set forth in reference to the Total Leverage Ratio and increases by 0.500% whenever the most recent compliance certificate delivered indicates that the Total Leverage Ratio is greater than 5.00 to 1.00.

The financial maintenance covenants will be calculated for the Company and its subsidiaries on a consolidated basis.

As of December 31, 2019 , we had outstanding borrowings under our Credit Facility of $83.8 million .

We had one letter of credit issued on November 25, 2019 and outstanding under the Credit Facility for approximately $2.0 million , which bears interest at 2.125% and will expire on November 25, 2020.

In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and its subsidiaries and party thereto as guarantors (the “Credit Facility Guarantors”) to incur additional indebtedness, grant liens on assets, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial covenants.

At December 31, 2020, we were subject to the following financial covenants under our Credit Facility:

(A) a Total Leverage Ratio not to exceed, (i) 5.75 to 1.00 for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and (ii) 5.50 to 1.00 for the quarter ended December 31, 2020 and each quarter ended thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit Facility) not to exceed 2.00 to 1.00 as of the end of any period of four consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters.

These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis.

On May 18 2020, we received a limited waiver under our Credit Facility for the failure to comply with the Total Leverage Ratio covenant for the fiscal quarter ended March 31, 2020.

In connection with the waiver, we also entered into a fourth amendment to the Credit Facility which increased the interest rate margin applicable to borrowings by up to 0.625% at each pricing level based on the Total Leverage Ratio.

We did not incur any transaction costs related to the limited waiver and fourth amendment to the Credit Facility.

On August 7, 2020, we obtained a limited consent from the lenders under our Credit Facility in connection with our privately-negotiated repurchases of our Convertible Notes (as defined in Part II, Item 8, Financial Statements and Supplementary Data, Note 13).

See Part II, Item 8, Financial Statements and Supplementary Data, Note 13 for a discussion of our privately-negotiated repurchases.

We were in compliance with the total leverage ratio, fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility at December 31, 2020.

At December 31, 2020, we had outstanding borrowings under the Credit Facility of $47.2 million.

We had one letter of credit for $2.0 million issued on November 30, 2019 and outstanding under the Credit Facility, which was increased to $2.1 million on September 29, 2020.

The letter of credit bears interest at 3.125% and will expire on November 26, 2021.

The letter of credit automatically renews annually and secures our obligations under our various self-insured policies.

Outstanding borrowings under our Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio.

As of December 31, 2019 , the prime rate margin was

equivalent to 1.500% and the LIBOR rate margin was 2.500% .

At December 31, 2020, the prime rate margin was equivalent to 1.5% and the LIBOR rate margin was 2.5%.

The weighted average interest rate on our Credit Facility for the years ended December 31, 2019 and 2020 was 2.9% and 3.8%, respectively.

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Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any Credit Facility Guarantors.

We are in compliance with the covenants contained in our Credit Facility as of December 31, 2019 , with a leverage ratio of 5.66 to 1.00 , a fixed charge coverage ratio of 2.70 to 1.00 and a senior secured leverage ratio of 0.94 to 1.00 .

Interest expense related to our Credit Facility was $6.9 million , $4.3 million and $1.6 million for the years ended December 31, 2017 , 2018 and 2019 , respectively.

Amortization of debt issuance costs related to our Credit Facility was $0.3 million , $0.2 million and $0.2 million for the years ended December 31, 2017 , 2018 and 2019 , respectively.

The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):

Years Ended December 31,

2018 2019 2020

Credit Facility interest expense $ 4,351 $ 1,601 $ 3,738

Credit Facility amortization of debt issuance costs 234 229 482

Lease Obligations

On January 1, 2019, we adopted Topic 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption.

As a result, we recorded operating lease right-of-use (“ROU”) assets of $16.5 million and operating lease liabilities of $17.3 million related to real estate and equipment leases, based on the present value of the future lease payments on the date of adoption.

Lease expense related to our operating leases and short-term leases was $3.7 million and $0.3 million , respectively for the year ended December 31, 2019 .

Depreciation expense related to our finance leases was $0.5 million for the year ended December 31, 2019 .

Interest expense related to our finance leases was $0.5 million for the year ended December 31, 2019 .

During the year ended December 31, 2019 , we modified an existing operating lease to extend the term through 2030.

As a result of this modification, we increased our lease liabilities and right-of-use assets by $8.2 million .

Our lease obligations consist of operating and finance leases.

We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to nineteen years.

Many leases include one or more options to renew, some of which include options to extend the leases for up to 26 years.

We lease certain funeral homes under finance leases with original terms ranging from ten to forty years.

The lease cost related to our operating leases and short-term leases and depreciation expense and interest expense related to our finance leases are as follows (in thousands):

Years Ended December 31,

Operating lease cost $ 3,722 $ 3,795

Short-term lease cost 277 224

Finance lease cost:

Depreciation of leased assets $ 498 $ 439

Interest on lease liabilities 520 496

Acquisition Debt

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Original maturities range from five to twenty years.

Imputed interest expense related to our acquisition debt was $0.9 million , $0.8 million and $0.6 million for the years ended December 31, 2017 , 2018 and 2019 , respectively.

Convertible Notes

On March 19, 2014, we issued $143.75 million aggregate principal amount of our Convertible Notes.

The Convertible Notes bear interest at 2.75% per year.

Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.

On May 7, 2018, we completed our exchange (the “Exchange”) of approximately $115.0 million in aggregate principal amount of Convertible Notes in privately-negotiated exchange agreements with a limited number of convertible noteholders for $74.8 million in cash (plus accrued interest of $0.4 million totaling $75.2 million ) and 2,822,859 newly issued shares of our common stock, par value $.01 per share, pursuant to a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”).

On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes for $22.9 million in cash (plus accrued interest of approximately $0.2 million totaling $23.0 million ).

Following the Exchange and the December 2018 repurchases, the aggregate principal amount of our Convertible Notes outstanding was reduced to $6.3 million .

For the year ended December 31, 2018 , we recognized a net gain of $1.7 million , recorded in Net loss on early extinguishment of debt, related to the Exchange and December 2018 repurchases of our Convertible Notes, which consisted of a gain of $3.1 million on the difference between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding each exchange and repurchase, and a loss of $1.4 million related to the write-off of unamortized debt issuance costs due to the exchange and repurchase of our Convertible Notes.

We incurred $0.9 million in transactions costs related to the Exchange and December 2018 repurchases of our Convertible Notes, of which $0.6 million was expensed and recorded in Net loss on early extinguishment of debt and $0.3 million was allocated to the equity component and recorded in Additional paid-in capital.

On April 4, 2019, we completed a privately-negotiated repurchase of an additional $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163 .

The Convertible Notes are general unsecured obligations and are subordinated in the right of payment to all of our existing and future senior indebtedness and equal in right of payment with our other existing and future subordinated indebtedness.

The initial conversion rate of the Convertible Notes as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal

amount of Convertible Notes, equivalent to an initial conversion price of $22.56 per share of common stock.

The conversion rate is subject to adjustment upon the occurrence of certain events, as described in the indenture governing the Convertible Notes.

During 2018 , an adjustment to the conversion rate of the Convertible Notes was triggered when our Board increased the dividends declared per common share from $0.05 per share to $0.075 per share.

The imputed interest expense related to our acquisition debt is as follows (in thousands):

Years Ended December 31,

2018 2019 2020

Acquisition debt imputed interest expense $ 791 $ 622 $ 489

Convertible Subordinated Notes due 2021

On March 19, 2014, we issued $143.75 million aggregate principal amount of our 2.75% convertible subordinated notes due 2021 (the “Convertible Notes”).

The Convertible Notes are due on March 15, 2021 and bear interest at 2.75% per year, which is payable semi-annually in arrears on March 15 and September 15 of each year.

On May 7, 2018, we completed our exchange of approximately $115.0 million in aggregate principal amount of Convertible Notes in a privately-negotiated exchange agreement with a limited number of convertible noteholders.

On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes.

On April 4, 2019, we completed a privately-negotiated repurchase of $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163.

On September 9, 2020, we completed privately-negotiated repurchases of $3.8 million in aggregate principal amount of our Convertible Notes for $4.6 million in cash (which included accrued interest of $0.1 million) and recorded $0.8 million for the reacquisition of the equity component.

The September 2020 repurchases represented approximately 60% of the aggregate principal amount of Convertible Notes then outstanding.

Following the settlement of the September 2020 repurchases, the aggregate principal amount of the Convertible Notes was reduced to approximately $2.6 million.

The fair value of the Convertible Notes, which are Level 2 measurements, was $3.7 million at December 31, 2020.

At December 31, 2020, the adjusted conversion rate of the Convertible Notes is 45.9712 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of $21.75 per share of common stock.

At December 31, 2019 , the carrying amount of the equity component was $0.8 million , the principal amount of the liability component was $6.3 million and the net carrying amount was $6.0 million .

The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 14 months of the Convertible Notes.

The effective interest rate on the unamortized debt discount for the years ended December 31, 2018 and 2019 was 11.3% and 11.4% , respectively.

The effective interest rate on the debt issuance costs for both years ended December 31, 2018 and 2019 was 3.2% .

Interest expense on the Convertible Notes included contractual coupon interest expense of $4.0 million , $1.9 million and $0.2 million for the years ended December 31, 2017 , 2018 and 2019 , respectively.

Accretion of the discount on the Convertible Notes was $4.3 million , $2.2 million and $0.2 million for the years ended December 31, 2017 , 2018 and 2019 , respectively.

Amortization of debt issuance costs related to our Convertible Notes was $517,000 , $245,000 and $24,000 for the years ended December 31, 2017 , 2018 and 2019 , respectively.

On May 31, 2018, we issued $325.0 million in aggregate principal amount of our Initial Senior Notes and related guarantees in a private offering under Rule 144A and Regulation S under the Securities Act.

We received proceeds of $320.1 million , net of a 1.5% debt discount of $4.9 million , of which we used $291.4 million to repay our existing indebtedness under our former credit agreement.

We incurred $1.4 million in debt issuance costs related to the Initial Senior Notes.

The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes are as follows (in thousands):

Years Ended December 31,

2018 2019 2020

Convertible Notes interest expense $ 1,878 $ 174 $ 149

Convertible Notes accretion of debt discount 2,192 241 216

Convertible Notes amortization of debt issuance costs 245 24 20

The effective interest rate on the unamortized debt discount for both years ended December 31, 2019 and 2020 was 11.4%.

The effective interest rate on the debt issuance costs for the years ended December 31, 2019 and 2020 was 3.2% and 3.1%, respectively.

Senior Notes due 2026

On May 31, 2018, we issued $325.0 million in aggregate principal amount of our 6.625% senior notes due 2026 (the “Initial Senior Notes”) and related guarantees in a private offering under Rule 144A and Regulations S under the Securities Act.

The Initial Senior Notes were issued under an indenture, dated as of May 31, 2018 (the “Indenture”), among us, certain of our existing subsidiaries (collectively, the “Subsidiary Guarantors”), as guarantors, and Wilmington Trust, National Association., as trustee.

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The Additional Senior Notes were issued as additional securities under the Indenture.

We received proceeds of $76.9 million , net of a debt premium of $1.7 million (plus accrued interest of $0.2 million ).

We received proceeds of $76.9 million from the issuance of Additional Senior Notes, net of a debt premium of $1.7 million (plus accrued interest of $0.2 million).

We incurred $1.0 million in debt issuance costs related to the Additional Senior Notes.

The additional issuance brings the total principal amount of Senior Notes outstanding to $400.0 million .

The Senior Notes are treated as a single class of securities under the Indenture, and the Additional Senior Notes have identical terms to the Initial Senior Notes, except with respect to the date of issuance, the issue price, the initial interest accrual date and the initial interest payment date.

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and (2) each such redemption must occur within 180 days of the date of the closing of each such equity offering.

If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a

portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest.

If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest.

In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest.

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The Indenture also contains customary events of default.

At December 31, 2019 , the debt discount of $4.1 million , the debt premium of $1.7 million and the debt issuance costs of $2.1 million are being amortized using the effective interest method over the remaining term of approximately 77 months of the Senior Notes.

The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Initial Senior Notes for the year ended December 31, 2019 was 6.87% and 6.69% , respectively.

The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the Additional Senior Notes for the year ended December 31, 2019 was 6.20% and 6.88% , respectively.

Interest expense on the Senior Notes included contractual coupon interest expense of $12.6 million and $21.7 million for the years ended December 31, 2018 and 2019 , respectively.

Amortization of the debt discount on the Senior Notes was $0.3 million and $0.5 million for the years ended December 31, 2018 and 2019 , respectively and amortization of debt issuance costs on the Senior Notes was $0.1 million for both the years ended December 31, 2018 and 2019 .

The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes are as follows (in thousands):

Years Ended December 31,

2018 2019 2020

Senior Notes interest expense $ 12,620 $ 21,711 $ 26,500

Senior Notes amortization of debt discount 273 493 528

Senior Notes amortization of debt premium — — 221

Senior Notes amortization of debt issuance costs 77 139 280

The fair value of the Senior Notes, which are Level 2 measurements, was $427.9 million at December 31, 2020.

The debt discount, the debt premium and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 65 months of the Senior Notes.

The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Initial Senior Notes (issued in May 2018) was 6.87% and 6.69%, respectively, for the year ended December 31, 2020.

The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the Additional Senior Notes (issued in December 2019) was 6.20% and 6.90%, respectively, for year ended December 31, 2020.

CONTRACTUAL OBLIGATIONS

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Financial Note

After 5 Years

Long-term debt obligations

Interest obligation on long-term debt (a)

Finance lease obligations, including interest

Senior Notes (b)

Convertible Notes (c)

Interest on Senior Notes

Reference Total 2021 2022 2023 2024 2025 After 5 Years

Credit Facility and acquisition debt obligations 12 $ 52,709 $ 1,027 $ 503 $ 47,741 $ 527 $ 566 $ 2,345

Interest obligation on Credit Facility and acquisition debt (a)

12 6,154 1,911 1,874 931 245 207 986

Convertible Notes (b)

13 2,559 2,559 — — — — —

Interest on Convertible Notes 13 15 15 — — — — —

Senior Notes (c)

14 400,000 — — — — — 400,000

Interest on Senior Notes 14 143,542 26,500 26,500 26,500 26,500 26,500 11,042

Finance lease obligations, including interest 15 9,638 836 860 860 791 736 5,555

Operating lease obligations, including interest 15 33,153 3,794 3,422 3,301 3,292 3,156 16,188

Total contractual obligations $ 647,770 $ 36,642 $ 33,159 $ 79,333 $ 31,355 $ 31,165 $ 436,116

Based on interest rates in effect at December 31, 2019.

Matures June 1, 2026.

Matures March 15, 2021.

(a) Based on interest rates in effect at December 31, 2020.

(b) Matures March 15, 2021.

OFF-BALANCE SHEET ARRANGEMENTS

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Financial Note

After 5 Years

Reference Total 2021 2022 2023 2024 2025 After 5 Years

Non-compete agreements 16 $ 6,296 $ 2,103 $ 1,569 $ 1,063 $ 691 $ 431 $ 439

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Employment agreements (a)

16 12,078 3,729 3,456 1,181 900 900 1,912

Total contractual cash obligations $ 20,221 $ 6,711 $ 5,562 $ 2,510 $ 1,705 $ 1,382 $ 2,351

Payne, our Chairman of the Board and Chief Executive Officer, has an employment agreement that does not renew after the initial term of five years.

(a) Melvin C.

Payne, our Chairman of the Board and Chief Executive Officer, has an employment agreement that does not renew after the initial term.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 16 for additional information regarding Mr.

Payne's employment agreement.

The obligations related to our off-balance sheet arrangements are significant to our future liquidity;

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FINANCIAL HIGHLIGHTS

Below are our financial highlights for the years ended December 31, 2017, 2018 and 2019 (in thousands except for volumes and averages):

Below are our financial highlights (in thousands except for volumes and averages):

Years Ended December 31,

2018 2019 2020

Revenue $ 267,992 $ 274,107 $ 329,448

Funeral contracts 36,816 38,940 47,190

Average revenue per contract

Average revenue per funeral contract $ 5,674 $ 5,499 $ 5,145

Preneed interment rights (property) sold 7,063 7,205 9,503

Average price per interment right sold $ 3,472 $ 3,653 $ 4,033

Gross profit $ 75,947 $ 79,585 $ 105,923

Net income $ 11,645 $ 14,533 $ 16,090

Revenue in 2020 increased $55.3 million compared to 2019, as we experienced a 21.2% increase in total funeral contracts primarily due to the funeral home acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well as increases from broad market share gains and increases in the number of deaths related to the COVID-19 pandemic.

Volume growth was offset by a decrease in the average revenue per funeral contract of 6.4% primarily due to the decrease in services performed as restrictions mandated by state and local governments were placed on social gatherings.

In addition, we experienced an increase of 31.9% in the number of preneed interment rights (property) sold primarily due to the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well as an increase of 10.4% in the average price per interment right sold.

Revenue in 2019 increased $6.1 million compared to 2018, as we experienced a 5.8% increase in total funeral contracts, offset by a decrease in the average revenue per funeral contract of 3.1%.

In addition, the average price per interment right (property) sold increased 5.2% and we experienced an increase of 2.0% in the number of preneed interment rights sold.

Revenue in 2018 increased $9.9 million compared to 2017, as we experienced a 5.5% increase in total funeral contracts, offset by a slight decrease in the average revenue per funeral contract of 0.5% .

In addition, the average price per interment right (property) sold increased 5.4% and we experienced an increase of 1.5% in the number of preneed interment rights sold.

Further discussion of Revenue for our funeral home and cemetery segments is presented herein under “Results of Operations.”

Gross profit in 2020 increased $26.3 million compared to 2019, primarily due to the increase in revenue from both our funeral home and cemetery segments due to the acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well disciplined expense and cost management by leaders at each business.

Gross profit in 2019 increased $3.6 million compared to 2018, primarily due to an increase in revenue from our funeral home segment due to the acquisitions made in the fourth quarter of 2019 and the second half of 2018.

Gross profit in 2018 decreased $0.9 million compared to 2017, primarily due to a decline in revenue from our funeral home segment and higher salaries and benefits costs, including higher health care costs, across all businesses.

Further discussion of the components of Gross profit for our funeral home and cemetery segments, is presented herein under “Results of Operations.”

Net income in 2020 increased $1.6 million compared to 2019 primarily due to the increase in gross profit, offset by the $16.6 million increase in charges related to the net loss on divestitures and impairments and $7.0 million increase in interest expense related to our Senior Notes and Credit Facility.

Net income in 2019 increased $2.9 million compared to 2018 primarily due to the increase in gross profit, as well as a $5.0 million decrease in general and administrative expenses, offset by a $2.5 million increase in interest expense primarily related to our Senior Notes and a $2.9 million increase in the loss on divested businesses.

Net income in 2018 decreased $25.5 million compared to 2017 primarily due to a $17.5 million discrete tax benefit recorded due to the re-measurement of our deferred tax assets and liabilities to reflect the impact of the recent tax law change.

Additionally, we experienced an increase of $8.2 million in interest expense related to our Senior Notes.

Further discussion of General, administrative and other expenses, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”

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The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.

Below is a reconciliation of Net Income (a GAAP measure) to Adjusted Net Income (a non-GAAP measure) for the years ended December 31, 2017 , 2018 , and 2019 (in thousands):

Below is a reconciliation of Net income (a GAAP measure) to Adjusted net income (a non-GAAP measure) (in thousands):

Years Ended December 31,

2018 2019 2020

Net income $ 11,645 $ 14,533 $ 16,090

Special items, net of tax except for items noted by (1)

Acquisition and divestiture expenses — 1,646 (9)

Severance and retirement costs

Performance awards cancellation write-off

Severance and separation costs 1,134 951 445

Performance awards cancellation and exchange 2,594 — 224

Accretion of discount on Convertible Notes (1)

2,192 241 216

Net loss on early extinguishment of debt 397 — —

Loss on sale of business and other costs

Goodwill and other impairments

Net loss on divestitures and other costs (2)

439 3,331 4,562

Net impact of impairment of goodwill and other intangibles (2)

805 761 9,932

Litigation reserve 790 592 213

Natural disaster costs

Tax expense related to divested business (1)

Gain on insurance proceeds

Gain on insurance reimbursements — (699) —

Natural disaster and pandemic costs 345 — 1,286

Other special items — 265 324

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Adjusted net income (3)

$ 21,566 $ 22,532 $ 33,683

(1) Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations.

Special Items are taxed at the federal statutory rate of 35 percent for the year ended December 31, 2017 and 21 percent for the years ended December 31, 2018 and 2019, except for the Accretion of the discount on the Convertible Notes, the Tax expense related to divested business and the Tax adjustment related to certain discrete items, as these are non-tax deductible items.

Special items are taxed at the federal statutory rate of 21.0% for the years ended December 31, 2018, 2019 and 2020, except for the Accretion of the discount on the Convertible Notes and the Tax adjustment related to certain discrete items and the Tax expense related to divested business, as these are non-tax deductible items and the Net impact of impairment of goodwill and other intangibles and the Net loss on divestitures and other costs (described below).

(2) The Net loss on divestitures and other costs and the Net impact of impairment of goodwill and other intangibles special items are net of the federal statutory rate of 21.0% in 2018 and 2019 and are net of the operating tax rate of 32.4% in 2020.

(3) Adjusted net income is defined as Net income plus adjustments for Special items and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations.

Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the years ended December 31, 2017 , 2018 , and 2019 (in thousands):

Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) (in thousands):

Years Ended December 31,

2018 2019 2020

Gross profit $ 75,947 $ 79,585 $ 105,923

Cemetery property amortization 3,602 3,985 4,956

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Operating profit (1)

$ 104,313 $ 109,767 $ 141,942

(1) Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs.

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Funeral Home and Cemetery.

Below is a breakdown of Operating profit (a non-GAAP measure) by Segment for the years ended December 31, 2017 , 2018 , and 2019 (in thousands):

Below is a breakdown of Operating profit (a non-GAAP measure) by Segment (in thousands):

Years Ended December 31,

2018 2019 2020

Funeral Home $ 82,154 $ 85,737 $ 104,998

Cemetery 22,159 24,030 36,944

Operating profit $ 104,313 $ 109,767 $ 141,942

Operating profit margin (1)

38.9% 40.0% 43.1%

(1) Operating profit margin is defined as Operating profit as a percentage of Revenue.

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Results of Operations

The following is a discussion of our results of operations for the years ended December 31, 2019 and 2018 .

The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2015 and owned and operated for the entirety of each period being presented, excluding certain funeral home businesses that we intend to divest in the near future.

The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2014, excluding any funeral home businesses that the we intend to divest in the near future.

The following is a discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019.

The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2016 and owned and operated for the entirety of each period being presented, excluding certain funeral homes and cemeteries that we intend to divest in the near future.

The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2015, excluding any funeral homes and cemeteries that we intend to divest in the near future.

This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance.

The term “divested” when discussed in the Funeral Home Segment, refers to the three funeral home businesses whose building leases expired, one funeral home business we sold and a funeral home business we merged with a business in an existing market in 2019 .

The term “divested” when discussed in the Cemetery Segment, refers to three cemetery businesses that we divested as a result of a management agreement that expired on September 30, 2018.

“Planned divested” in the Funeral Home Segment refers to the funeral home businesses that we intend to divest in the near future.

“Ancillary” in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business.

The term “divested” refers to the eight funeral homes we sold in 2020 and three funeral homes whose building leases expired, one funeral home we sold and a funeral home we merged with a funeral home in an existing market in 2019.

“Planned divested” refers to funeral homes and cemeteries that we intend to divest in the near future.

“Ancillary” represents our flower shop, pet cremation business and online cremation business.

Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure.

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Funeral Home Segment

The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 (in thousands):

The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):

Years Ended December 31,

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Preneed funeral trust and insurance 6,951 7,747

Total $ 216,868 $ 249,138

Operating profit:

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Preneed funeral trust and insurance 6,778 7,621

Total $ 85,737 $ 104,998

The following measures reflect the significant metrics over this comparative period:

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Average revenue per contract, including preneed funeral trust earnings $ 5,511 $ 5,207

Burial rate 38.1% 36.3%

Cremation rate 54.1% 56.7%

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Average revenue per contract, including preneed funeral trust earnings $ 6,144 $ 5,226

Burial rate 45.4% 40.5%

Cremation rate 47.9% 54.3%

Funeral home same store operating revenue for the year ended December 31, 2019 increased $0.3 million , primarily due to the increase in same store contract volume, offset by the decrease in the average revenue per contract compared to year ended December 31, 2018.

In spite of the high contract volume we had in the first quarter of 2018 due to a severe flu season, we experienced a 2.3% increase in contract volume in the twelve months ended December 31, 2019 compared to the same period in 2018, primarily due to the revision of our funeral home standards operating model to emphasize our focus on growing operating revenue and serving more families.

Funeral home same store operating revenue for the year ended December 31, 2020 increased $10.9 million, compared to the year ended December 31, 2019.

The increase in operating revenue is due to a 12.9% same store contract volume increase which is due to broad market share gains and increased deaths related to the COVID-19 pandemic.

This increase was offset by a 5.7% decrease in average revenue per contract, excluding preneed interest, due to a 180 basis point decrease in the burial rate along with a decrease of both burial and cremation contracts with services.

Beginning in the latter half of March 2020, we saw a decrease in services performed due to the restrictions placed on gatherings mandated by state and local governments as the COVID-19 pandemic became more prominent and individuals began to practice social distancing to comply with applicable shelter in place and related orders.

Although social distancing restrictions were gradually eased in certain jurisdictions during the latter half of 2020, these restrictions contributed to the

overall decrease in the average revenue per contract in the current year.

Our Managing Partners continued to show innovation by creating high value, uniquely customized personal services and sales amid challenging restrictions in local environments.

Same store operating profit for the year ended December 31, 2020 increased $9.7 million when compared to the year ended December 31, 2019 and the comparable operating profit margin increased 300 basis points to 41.6%.

Operating expenses decreased

$0.5 million primarily due to a decrease in salaries and benefits of $0.8 million, or 0.5% as a percentage of operating revenue, offset by a $0.2 million increase in promotional costs, or 0.1% as a percentage of operating revenue.

This is a result of changes implemented in the fourth quarter in 2018, which included assessing leadership and support teams at each business to ensure an optimal personnel mix, improving social media presence and reviewing pricing on merchandise and services to maximize operational efficiencies.

Funeral home acquired operating revenue for the year ended December 31, 2019 increased $6.3 million, as our funeral home acquired portfolio for the year ended December 31, 2019 included four businesses acquired in the third quarter of 2018, and nine businesses in the fourth quarter of 2019 not fully present in the year ended December 31, 2018.

Although we experienced an increase in acquired contract volumes, we experienced decreases in acquired average revenue per burial and cremation contracts due to increased discounts.

Acquired operating profit for the year ended December 31, 2019 increased $2.8 million when compared to the year ended December 31, 2018 .

Operating profit margin increased by 160 basis points to 37.9% for the year ended December 31, 2019 compared to the same period in 2018.

The increase is primarily due to the increase in acquired revenue and better management of expenses as operating expenses increased $3.5 million for the comparable period.

We experienced significant savings in salaries and benefits which decreased 2.2% as a percentage of operating revenue, as a result of changes implemented in the fourth quarter of 2018 described above.

Ancillary funeral services revenue, which is recorded in Other revenue , represents revenue from our flower shop, pet cremation business and online cremation business, which was acquired in the fourth quarter of 2019.

Preneed funeral insurance and preneed funeral trust earnings, also recorded in Other revenue , on a combined basis, remained flat for the year ended December 31, 2019 compared to the same period in 2018.

Operating profit from our ancillary funeral service businesses was $0.3 million for the year ended December 31, 2019 , with an operating profit margin of 39.8%.

Operating profit for preneed funeral insurance commission and preneed trust earnings, on a combined basis, also remained flat for the same comparative period primarily due to the increase in funeral commission revenue, offset by the decrease in preneed trust earnings.

The increase in operating margin is primarily due to the increase in same store operating revenue along with disciplined expense and cost management by leaders at each business.

Although same store operating expenses increased $1.2 million primarily due to an increase of $1.0 million in group health care costs related to higher claims experience during the current year, we experienced decreases in the majority of our other operating costs as a percentage of operating revenue for the year ended December 31, 2020 compared to the same period in 2019.

Funeral home acquired operating revenue for the year ended December 31, 2020 increased $19.4 million, as our funeral home acquired portfolio for the year ended December 31, 2020 included nine funeral home businesses added in the fourth quarter of 2019 and one business added in the first quarter of 2020 not fully present in the year ended December 31, 2019.

Acquired operating profit for the year ended December 31, 2020 increased $8.0 million when compared to the year ended December 31, 2019 and the comparable operating profit margin increased 130 basis points to 39.7%.

The increase is primarily due to the increase in acquired operating revenue along with disciplined expense and cost management by leaders at each business.

Operating profit from our ancillary funeral service businesses for the year ended December 31, 2020, increased $0.9 million when compared to the year ended December 31, 2019, with an operating profit margin of 25.4%.

Preneed funeral insurance commissions and preneed funeral trust and insurance, also recorded in Other revenue , on a combined basis, increased $0.7 million or 8.0% for the year ended December 31, 2020 compared to the same period in 2019.

The increase is primarily due to an 11.5% increase in preneed contracts maturing to atneed during the year ended December 31, 2020 compared to the same period in 2019, which triggers the recognition of trust earnings on the matured contracts.

Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.8 million or 10.5% for the same comparative period in 2019, primarily due to the increase in revenue and reduction of preneed trust and insurance expenses.

Cemetery Segment

The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations for the year ended December 31, 2018 compared to the year ended December 31, 2019 (in thousands):

The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):

Years Ended December 31,

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Acquired operating revenue 295 17,583

Divested revenue

Preneed cemetery trust and insurance

Planned divested revenue 313 394

Preneed cemetery trust earnings 5,960 9,722

Preneed cemetery finance charges 1,453 917

Total $ 57,239 $ 80,310

Operating profit:

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Acquired operating profit 73 7,128

Divested operating profit

Preneed cemetery trust and insurance

Planned divested operating profit 13 129

Preneed cemetery trust operating profit 5,373 9,301

Preneed cemetery finance charges 1,453 917

Total $ 24,030 $ 36,944

The following measures reflect the significant metrics over this comparative period:

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Atneed revenue (in thousands) $ 103 $ 6,032

Cemetery same store operating revenue for the year ended December 31, 2019 increased $4.3 million , as we experienced a 10.3% increase in the number of preneed interment rights sold and a 2.9% increase in the average price of interments sold for the year ended December 31, 2019 compared to the same period in 2018 .

Same store atneed revenue, which represents approximately 39% of our same store operating revenue increased $0.5 million , as we experienced a 4.0% increase in the average sale per contract, offset by a 1.2% decrease in the number of atneed contracts sold.

Cemetery same store operating profit for the year ended December 31, 2019 increased $3.2 million from the same period in 2018 .

The comparable operating profit margin increased 370 basis points to 34.5% for the year ended December 31, 2019 from 30.8% in the same period in 2018 .

The improvement in operating profit margin is a result of changes implemented in the fourth quarter of 2018 and continuing in the first half of 2019, which included a larger focus on the growth of revenue and market share, the hiring of talented sales managers for our larger cemeteries, and the investment in new product inventory for sale.

As a result, we gained significant operational efficiencies throughout 2019, as same store cemetery operating costs only increased 4.0% compared to the 9.6% increase in operating revenue.

Our acquired cemetery portfolio includes two businesses acquired during the fourth quarter of 2019.

These two businesses contributed $0.3 million in revenue and $0.1 million in operating profit for the year ended December 31, 2019 .

Cemetery same store operating revenue increased $2.5 million for the year ended December 31, 2020 compared to the year ended December 31, 2019.

We experienced a $0.4 million or 1.6% increase in preneed property revenue as a result of a 3.1% increase in the average price per interment right sold, slightly offset by a 0.5% decrease in the number of interment rights sold.

The decrease in the number of preneed interment rights sold was primarily due to the COVID-19 pandemic as individuals practiced social distancing to comply with applicable shelter in place and related orders in certain areas of the country, which limited our preneed sales employees from meeting with families in person.

This was most evident in the second quarter of 2020 as these restrictions affected our ability to host certain annual events such as the Ching Ming festival during April and Memorial Day festivities during May.

We also experienced an $0.8 million increase in preneed merchandise and service revenue due to a 22.9% increase in the deliveries of merchandise and service contracts during the year ended December 31, 2020.

Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, increased $1.3 million as we experienced a 10.2% increase in the number of atneed contracts due to the increased deaths related to the COVID-19 pandemic, offset by a 3.3% decrease in the average sales per contract.

Cemetery same store operating profit for the year ended December 31, 2020 increased $2.4 million compared to the year ended December 31, 2019.

The comparable operating profit margin increased 290 basis points to 37.7%, primarily because of disciplined expense and cost management by leaders at each business throughout the year.

Operating expense as a percentage of operating revenue decreased in categories such as promotional expense, general and administrative expenses and maintenance salary expenses in the year ended December 31, 2020 compared to the same period in 2019.

We saw increases in two categories as a percentage of operating revenue, allowance for credit losses due to slower payments on financed receivables particularly in the states most affected by COVID-19 and atneed commissions due to the introduction of performance-based rewards and sales incentives in the current year.

Our acquired cemetery portfolio includes two cemeteries added during the fourth quarter of 2019 and one cemetery added during the first quarter of 2020.

These three cemeteries contributed $17.6 million in revenue and $7.1 million in operating profit for the year ended December 31, 2020.

Preneed cemetery trust earnings and preneed cemetery finance charges, which are recorded in Other revenue , on a combined basis, increased $3.2 million for the year ended December 31, 2020 compared to the same period in 2019.

The increase is due to a $0.3 million increase in realized capital gains in our perpetual care trust funds in 2019 compared to 2018, partially offset by a $0.2 million decrease in finance charge revenue for the same comparable period.

The decrease in finance charge revenue is due to our enhanced preneed cemetery property sales strategy of reducing interest rates on preneed contracts which has led to the increase in our cemetery same store operating revenue in 2019.

Operating profit for the two categories of Other revenue , on a combined basis, remained flat for the same comparative period.

The increase was primarily due to a $3.7 million increase in perpetual care trust fund earnings of which (1) $2.2 million was from our acquired cemeteries;

(2) $0.9 million increase in earnings as a result of the execution of our trust fund repositioning strategy beginning at the height of the COVID-19 market crisis in March 2020;

and (3) $0.6 million increase in realized gains.

These increases were partially offset by a $0.5 million decrease in finance charge revenue.

The decrease in finance charge revenue is primarily due to our enhanced preneed cemetery property sales strategy of reducing interest rates on preneed contracts.

Operating profit for the two categories of Other revenue , on a combined basis, increased $3.4 million for the year ended December 31, 2020 compared to the same period in 2019, primarily due to the increase in our perpetual care trust fund earnings discussed above.

Cemetery property amortization.

Cemetery property amortization totaled $5.0 million for the year ended December 31, 2020, an increase of $1.0 million compared to the year ended December 31, 2019.

The increase was primarily attributable to additional sales of cemetery property in 2019 compared to 2018.

The increase in property sold due to our recently acquired cemeteries, resulted in a $1.1 million increase in amortization expense for the year ended December 31, 2020, while the amortization expense for our same store businesses decreased $0.1 million due to a decrease in property sales in the period.

Field depreciation.

Depreciation expense for our field businesses totaled $13.0 million for the year ended December 31, 2020, an increase of $0.6 million compared to the year ended December 31, 2019.

The increase was primarily attributable to additional depreciation expense from the assets acquired through our 2018 and 2019 acquisitions.

The increase was primarily due to additional depreciation expense from assets added as a result of our acquisitions during the fourth quarter of 2019 and first quarter of 2020.

Regional and unallocated funeral and cemetery costs.

Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure.

Regional and unallocated funeral and cemetery costs totaled $13.8 million for the year ended December 31, 2019 , an increase of $1.1 million primarily due to an increase of $0.9 million in severance expense from the separation of certain operational leadership, $0.3 million increase in benefits provided to employees and a $0.5 million increase in incentive compensation, offset by a decrease of $0.5 million in natural disaster costs and a decrease of $0.1 million in other general administrative costs.

Regional and unallocated funeral and cemetery costs totaled $18.1 million for the year ended December 31, 2020, an increase of $4.2 million primarily due to the following:

(1) a $3.6 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation;

(2) a $1.0 million increase in health and safety expenses due to the COVID-19 pandemic;

and (3) a $0.7 million increase in salaries and benefits;

offset by (4) a $1.1 million decrease in severance expense.

Other Financial Statement Items

General, administrative and other.

General, administrative and other expenses totaled $25.9 million for the year ended December 31, 2019 , a decrease of $4.9 million compared to the year ended December 31, 2018 .

The decrease was attributable to the following:

(1) a $4.4 million decrease in incentive and equity compensation primarily related to the cancellation of performance awards in 2018;

(2) a $1.1 million decrease in severance costs and a $1.1 million decrease in salaries and benefits related to the separation of executive operating leadership in 2018;

(3) an $0.8 million decrease in litigation reserves related to the payment of a class action settlement agreement in the fourth quarter of 2019;

and (4) a $0.4 million decrease in group health insurance, offset by (5) a $2.1 million increase in acquisition costs;

and (6) an $0.8 million increase in other general administrative costs.

General, administrative and other expenses totaled $25.8 million for the year ended December 31, 2020, a decrease of $0.1 million primarily due to the following:

(1) a $2.0 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation;

and (2) a $0.2 million increase in salaries and benefits;

offset by (3) a $2.3 million decrease in acquisition costs.

Home office depreciation and amortization.

Home office depreciation and amortization expense totaled $1.4 million for the year ended December 31, 2019 , a decrease of $0.4 million compared to the year ended December 31, 2018 .

The decrease was primarily attributable to machinery and equipment at the home office becoming fully depreciated in the first quarter of 2019.

Home office depreciation and amortization expense remained flat at $1.4 million for both the years ended December 31, 2020 and 2019, primarily due to machinery and equipment at the home office becoming fully depreciated in the latter half of 2019, offset by additional software assets purchased during the fourth quarter of 2019.

Net loss on divestitures and impairment charges.

The components of Net loss on divestitures and impairment charges are as follows (in thousands):

Years Ended December 31,

Goodwill impairment $ (742) $ (13,632)

Tradenames impairment (221) (1,061)

Net loss on divestitures (3,883) (6,749)

Total $ (4,846) $ (21,442)

As a result of economic conditions caused by COVID-19, we performed a quantitative assessment of our goodwill and tradenames at March 31, 2020.

We recorded an impairment for goodwill of $13.6 million as the carrying amount of our funeral homes in the Eastern Region Reporting Unit exceeded the fair value and we recorded an impairment for certain of our tradenames of $1.1 million as the carrying amount of these tradenames exceeded the fair value.

In addition, we divested eight funeral homes at a net loss of $6.7 million.

During 2019, we recorded a goodwill impairment of $0.7 million related to two funeral homes that we divested.

During 2019, we recorded an impairment to tradenames of $0.2 million as a result of our 2019 annual impairment test as the carrying amount of certain tradenames exceeded the fair value.

In addition, we divested three funeral homes whose building leases expired and sold a funeral home at a net loss of $3.9 million.

Interest expense .

Interest expense related to its respective debt arrangement for the years ended December 31, 2018 and 2019 is as follows (in thousands):

Interest expense related to its respective debt arrangement is as follows (in thousands):

Years Ended December 31,

Senior Notes $ 22,343 $ 27,087

Credit Facility 1,830 4,220

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Acquisition debt 622 489

Miscellaneous

Total $ 25,522 $ 32,515

Accretion of discount on convertible subordinated notes .

For the year ended December 31, 2019 , we recognized accretion of the discount on our Convertible Notes of $0.2 million compared to $2.2 million for the same period in 2018 , a decrease of $2.0 million , which was attributable to the Exchange and December 2018 repurchases of our Convertible Notes.

Loss on early extinguishment of debt, net.

For the year ended December 31, 2018 , we recognized a net loss of $0.5 million on the early extinguishment of debt for the following transactions:

(i) a loss of $1.6 million related to the termination of our Former Credit Agreement, which consisted of a write-off of $0.7 million of transaction costs related to the Eighth Amendment and a write-off of $0.9 million of unamortized debt issuance costs related to the Former Credit Agreement;

(ii) a net gain of $1.7 million related to the May exchanges and the December repurchases of our Convertible Notes, which consisted of a gain of $3.1 million on the difference between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding each exchange and repurchase, and a loss of $1.4 million related to the write-off of unamortized debt issuance costs due to the exchange and repurchase of our Convertible Notes;

(iii) a loss of $0.6 million related to transaction costs incurred for the exchange and repurchase of our Convertible Notes.

The components of Other, net for the years ended December 31, 2018 and 2019 are as follows (in thousands):

We recognized accretion of the discount on our Convertible Notes of $0.2 million for both years ended December 31, 2020, and 2019.

The components of Other, net are as follows (in thousands):

Years Ended December 31,

Loss on sale of business and other assets

Goodwill impairment

Tradenames impairment

Gain on insurance reimbursements

Gain on insurance reimbursements related to Hurricane Michael $ 885 $ 97

Other income (expense) (149) 58

Other loss — (3)

Total $ 736 $ 152

Income taxes.

Our income tax provision was $7.9 million for the year ended December 31, 2019 compared to $6.6 million for the year ended December 31, 2018.

Our income tax provision was $8.6 million for the year ended December 31, 2020, compared to our income tax provision of $7.9 million for the year ended December 31, 2019.

Our operating tax rate before discrete items was 32.4% and 33.0% for the years ended December 31, 2020 and 2019, respectively.

During the year ended December 31, 2019, we recorded additional tax expense of $0.9 million related to a divested business previously acquired as a stock acquisition.

We also recorded discrete tax expense of

$0.5 million and $0.9 million for the years ended December 31, 2019 and 2018, respectively, related primarily to share-based compensation.

During the year ended December 31, 2020, we recorded tax expense of $0.8 million related to divested businesses.

We also recorded discrete tax expense of $0.6 million and $0.5 million for the years ended December 31, 2020 and 2019, respectively.

Discrete tax expense for the year ended December 31, 2020 includes expense related to equity compensation and other adjustments including return to provision analysis and state legislative changes.

Our effective tax rate was 34.7% and 35.1% for years ended December 31, 2020 and 2019, respectively.

In connection with the CARES Act, we filed a claim for a refund on June 30, 2020, to carryback the net operating losses (“NOLs”) generated in the tax year ended December 31, 2018.

The refund claim for $7.0 million from the 2018 tax year was received on August 7, 2020.

An additional carryback claim for a refund of $1.2 million was filed on November 3, 2020 for the tax year ended December 31, 2019.

The refund from this filing has not yet been received.

The majority of the NOLs generated in tax year 2018 and 2019 are the result of filing non-automatic accounting method changes relating to the recognition of revenue from our cemetery property and merchandise and services sales.

Due to the uncertainty of the timing of receiving Internal Revenue Service approval of the method change applications, a reserve has been recorded against the net cash tax benefit derived from carrying back the NOLs generated to tax years in which the enacted federal rate was 35%.

The Company’s unrecognized tax benefit reserve for the years ended December 31, 2020 and 2019 were $3.7 million and $0.7 million, respectively.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 17 for additional information regarding income taxes.

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The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses.

On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, inventories, goodwill, other intangible assets, property and equipment and deferred tax assets and liabilities.

On an ongoing basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, inventories, goodwill, other intangible assets, property and equipment and deferred tax assets and liabilities.

We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances.

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We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Revenue Recognition - Funeral Home Operations

Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns.

Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and remembrance services and transportation services.

We provide funeral services and products on both an atneed and preneed basis.

Funeral arrangements sold at the time of death are referred to as atneed funeral contracts.

The performance obligation on these atneed contracts for both merchandise and services are bundled as a single performance obligation, as the performance of these obligations occur within a short time frame (usually within a few days) from the time of death to the funeral service.

Although our performance activities are transferred in sequence such as, embalming the body, delivering the casket, obtaining service related items like flowers and performing the service, these are all essential to satisfy our contractual obligation to the customer, thus, bundled into a single performance obligation.

Revenue is recognized on the date of funeral service, as all performance obligations have been satisfied.

Payment is due at or before time of transfer.

Outstanding balances due from customers, if any, on atneed funeral contracts are included in Accounts receivable on our Consolidated Balance Sheet.

Funeral arrangements sold prior to death occurring are referred to as preneed funeral contracts.

In many instances, the customer pays for the preneed contract over a period of time.

For preneed funeral merchandise and service contracts, the performance obligation occurs at the time of need (when death occurs) and revenue is recognized on the date of delivery of merchandise or performance of service.

We do not deliver merchandise on preneed contracts or provide service prior to the time of death.

The performance obligation for preneed funeral contracts is similar to the elements of the performance obligation of atneed funeral contracts.

For preneed funeral services, all preneed funeral contracts are re-written upon the date of death as an atneed contract.

The performance obligation is satisfied at the date of the service.

Revenue from preneed funeral contracts, along with accumulated earnings, is deferred until the time the merchandise is delivered or the service is performed.

The principal and accumulated earnings of the trusts are withdrawn at maturity (death) or cancellation.

The cumulative trust income earned and the increases in insurance benefits on the insurance products are recognized when the service is performed.

The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheet.

Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet.

Our funeral receivables recorded in Accounts Receivable, net primarily consist of amounts due for funeral services already performed.

We estimate an allowance for doubtful accounts on these receivables based on our historical experience and we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.

When preneed funeral contracts are funded through third-party insurance policies, we earn a commission on the sale of the policies.

Insurance commissions are subject to refund (charge-back) if the preneed policy is cancelled within a year or if there is an imminent death of beneficiary before the first year anniversary of the policy.

We record these insurance commissions as Other revenue when the commission is no longer subject to refund, which is typically one year after the policy is issued.

All selling costs

incurred pursuant to the sale of the insurance funded preneed contracts are expensed as incurred.

Preneed funeral contracts to be funded at maturity by third-party insurance policies are not recorded as assets or liabilities on our Consolidated Balance Sheet.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 6 for additional information related to revenue.

Revenue Recognition - Cemetery Operations

Our cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise).

We provide cemetery services and products on both an atneed and preneed basis.

Cemetery arrangements sold at the time of death are referred to as atneed cemetery contracts.

The performance obligation on these atneed contracts for cemetery property, merchandise and services are distinct.

The performance obligations from the time of death to the disposition of the remains, include delivering cemetery property, unearthing the ground, interring remains and installing merchandise on the cemetery grounds.

Each item on the contract is recognized as a distinct good or service.

The performance obligation is satisfied and revenue is recognized on the purchase date of the interment right, on the date of the cemetery service, and on the date of delivery of the merchandise (set on cemetery grounds).

Payment is due at or before time of transfer.

Outstanding balances due from customers, if any, on completed atneed contracts are included in Accounts receivable on our Consolidated Balance Sheet.

Cemetery arrangements sold prior to death occurring are referred to as preneed cemetery contracts.

For preneed cemetery interment rights, the performance obligation is the sale of the interment right and revenue is recognized at the time the contract is signed.

Control of cemetery interment rights is transferred to the customer upon execution of the contract as customers select a specific location and space for their interment right, thus, restricting us from other use or transfer of the contracted cemetery property.

The interment right is deeded to the customer when the contract is paid in full.

For preneed cemetery merchandise and service, the performance obligation occurs at the time of need (when death occurs) and revenue is recognized on the date of delivery of merchandise or performance of service.

We do not deliver merchandise on preneed contracts or provide service prior to the time of death.

The performance obligation for preneed cemetery merchandise and service is similar to the elements of the performance obligation of atneed cemetery merchandise and service.

Preneed cemetery contracts are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years.

In substantially all cases, we receive an initial down payment at the time the contract is signed.

Earnings on these installment contracts are not recognized until the time the merchandise is transferred or the service is performed and are recorded as Other revenue .

The performance of the preneed cemetery contracts is secured by placing the funds collected, less amounts that we may retain under state regulations, in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need.

This method is intended to fund preneed contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases.

The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheet.

Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable and Preneed receivables on our Consolidated Balance Sheet.

Balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance Sheet.

Allowances for bad debts and customer cancellations on cemetery financed receivables are provided at the date that the sale is recognized as revenue and are based on our historical experience.

We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.

We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received.

We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more.

Revenue Recognition

Funeral and Cemetery Operations Revenue is recognized when control of the merchandise or services is transferred to the customer.

Our performance obligations include the delivery of funeral and cemetery merchandise and services and cemetery property interment rights.

Control transfers when merchandise is delivered or services are performed.

For cemetery property interment rights, control transfers to the customer when the property is developed and the interment right has been sold and can no longer be marketed or sold to another customer.

Sales taxes collected are recognized on a net basis on our Consolidated Financial Statements.

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

Some of our contracts with customers include multiple performance obligations.

For these contracts, we allocate the transaction price to each performance obligation based on its relative standalone selling price, which is based on prices charged to customers per our general price list.

Packages for service and ancillary items are offered to help the customer make decisions during emotional and stressful times.

Package discounts are reflected net in Revenue .

We recognize revenue when the merchandise is transferred or the service is performed, in satisfaction of the corresponding performance obligation.

Sales taxes collected are recognized on a net basis on our Consolidated Financial Statements.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 21 for additional information related to revenue.

Preneed Funeral and Cemetery Trust Funds

Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”).

In the case of preneed trusts, the customers are the legal beneficiaries.

In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts.

The investments of such trust funds are classified as available-for-sale and are reported at fair market value.

Our future obligations to deliver merchandise and services are reported at estimated settlement amounts.

Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity.

In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold.

Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums.

Such trust fund income is recognized as revenue when realized by the trust and distributable to us.

We are restricted from withdrawing any of the principal balances of these funds.

Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”) and are recorded as Other revenue .

As of December 31, 2019 , CSV RIA provided these services to approximately 71% of our trust assets, for a fee based on the market value of trust assets.

Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.

We determine whether or not the assets in the preneed trusts have an other-than-temporary impairment on a security-by-security basis.

This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer.

There will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.

See Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 9 and 11 for additional related disclosures related to preneed funeral and cemetery trust funds.

Long-Lived Assets

Long-lived assets, such as property, plant and equipment subject to depreciation and amortization, are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the Property, Plant and Equipment topic of the Accounting Standards Codification (“ASC”) 360.

This guidance requires that long-lived assets to be held and used are reported at the lower of their carrying amount or fair value.

We assess long-lived assets for impairment whenever events or circumstances indicate that the carrying value may be greater than the fair value.

We evaluate our long-lived assets for impairment when a funeral home or cemetery business has negative earnings before interest, taxes, depreciation and amortization (“EBITDA”) for four consecutive years and if there has been a decline in EBITDA in that same period.

We review our long-lived assets deemed held-for-sale to the point of recoverability.

Assets to be disposed of and assets not expected to provide any future service potential are recorded at the lower of their carrying amount or fair value less estimated cost to sell.

If we determine that the carrying value is not recoverable from the proceeds of the sale, we record an impairment at that time.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 for additional information related to long-lived assets.

Business Combinations

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

We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date.

Acquisition related costs are recognized separately from the acquisition and are expensed as incurred.

We customarily estimate related transaction costs known at closing.

To the extent that information not available to us at the closing date subsequently becomes available during the allocation period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 for additional information related to business combinations.

The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses and cemeteries acquired is recorded as goodwill.

Goodwill has an indefinite life and is not subject to amortization.

As such, we test goodwill for impairment on an annual basis.

Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years.

We perform our annual goodwill impairment test as of August 31 st each year.

As such, we test goodwill for impairment on an annual basis as of August 31 st each year.

Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test.

We conducted qualitative assessments in 2017 and 2018;

however, we performed a quantitative assessment in 2019 .

Our intent is to perform a quantitative impairment test at least once every three years and perform a qualitative assessment during the remaining two years.

In addition to our annual test, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value.

Our quantitative goodwill impairment test involves estimates and management judgment.

In the quantitative analysis, we compare the fair value of each reporting unit to its carrying value, including goodwill.We determine fair value for each reporting unit using both an income approach, weighted 90% , and a market approach, weighted 10% .

In the quantitative analysis, we compare the fair value of each reporting unit to its carrying value, including goodwill.

We determine fair value for each reporting unit using both an income approach, weighted 90%, and a market approach, weighted 10%.

Our methodology for determining an income-based fair value is based on discounting projected future cash flows.

The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows.

Our methodology for determining a market approach fair value utilizes the guideline public company method, in which we rely on market multiples of comparable companies operating in the same industry as the individual reporting units.

In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount an impairment charge is recorded in an amount equal to the difference.

As a result of economic conditions caused by COVID-19, we performed a quantitative assessment of our goodwill at March 31, 2020 and we recorded an impairment to goodwill of $13.6 million during the quarter ended March 31, 2020, as the carrying amount of our funeral homes in the Eastern Region Reporting Unit exceeded the fair value.

For our 2020 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform an additional quantitative goodwill impairment test.

We concluded that it is more-likely-than not that the fair value of our reporting units is greater than their carrying value and thus there was no additional impairment to goodwill.

When we divest a portion of a reporting unit that constitutes a business in accordance with U.S.

GAAP, we allocate goodwill associated with that business to be included in the gain or loss on divestiture.

When divesting a business, goodwill is allocated based on the relative fair values of the business being divested and the portion of the reporting unit that will be retained.

Additionally, after each divestiture, we will test the goodwill remaining in the portion of the reporting unit to be retained for impairment using a qualitative assessment unless we deem a quantitative assessment to be appropriate.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 4 for additional information related to goodwill.

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Our tradenames are considered to have an indefinite life and are not subject to amortization.

As such, we test our intangible assets for impairment on an annual basis.

We perform our annual intangible assets impairment test as of August 31 st each year.

As such, we test our intangible assets for impairment on an annual basis as of August 31 st each year.

Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of the tradename is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test.

Our intent is to perform a quantitative impairment test at least once every three years and perform a qualitative assessment during the remaining two years.

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

Our quantitative intangible asset impairment test involves estimates and management judgment.

Our quantitative analysis is performed using the relief from royalty method, which measures the tradenames by determining the value of the royalties that we are relieved from paying due to our ownership of the asset.

We determine the fair value of the asset by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename.

We determine the fair value of the asset by discounting the cash

flows that represent a savings in lieu of paying a royalty fee for use of the tradename.

In accordance with the guidance, if the fair value of the tradename is less than its carrying amount, then an impairment charge is recorded in an amount equal to the difference.

As a result of economic conditions caused by COVID-19, we performed a quantitative assessment of our tradenames at March 31, 2020 and we recorded an impairment to tradenames for certain of our funeral homes of $1.1 million during the quarter ended March 31, 2020 as the carrying amount of these tradenames exceeded the fair value.

We concluded that it is more-likely-than not that the fair value of our intangible assets is greater than its carrying value and thus there was no additional impairment to our intangible assets.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 11 for additional information related to intangible assets.

Funeral and Cemetery Receivables

Our funeral receivables are recorded in Accounts receivable, net and primarily consist of amounts due for funeral services already performed.

Our cemetery receivables generally consist of preneed sales of cemetery interment rights and related products and services, which are typically financed through interest-bearing installment sales contracts, generally with terms of up to five years, with such interest income reflected as Other revenue .

In substantially all cases, we receive an initial down payment at the time the contract is signed.

Atneed cemetery receivables and preneed cemetery receivables with payments expected to be received within one year from the balance sheet date are recorded in Accounts receivable, net.

Preneed cemetery receivables with payments expected to be received beyond one year from the balance sheet date are recorded in Preneed cemetery receivables, net.

In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Financial Instruments – Credit Losses:

Measurement of Credit Losses on Financial Instruments and subsequent amendments collectively known as (“Topic 326”).

Topic 326 applies to all entities holding financial assets measured at amortized cost, including loans, trade and financed receivables and other financial instruments.

The guidance introduces a new credit reserving model known as Current Expected Credit Loss (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk.

The CECL model requires all expected credit losses to be measured based on historical experience, current conditions and reasonable and supportable forecasts about collectability.

Prior to adoption of Topic 326, we provided allowances for bad debt and contract cancellations on our receivables based on an analysis of historical trends of collection activity.

For both funeral and cemetery receivables, we determine our allowance for credit losses by using a loss-rate methodology, in which we assess our historical write-off of receivables against our total receivables over several years.

From this historical loss-rate approach, we also consider the current and forecasted economic conditions expected to be in place over the life of our receivables.

These estimates are impacted by a number of factors, including changes in the economy, demographics and competition in our local communities.

We monitor any change in our historical write-off of receivables utilized in our loss-rate methodology and assess forecasted changes in market conditions within our credit reserve.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 6 for additional information related to funeral and cemetery receivables.

Business Combinations

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

We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date.

Acquisition related costs are recognized separately from the acquisition and are expensed as incurred.

We customarily estimate related transaction costs known at closing.

When we acquire a cemetery, we utilize an internal and external approach to determine the fair value of the cemetery property.

From an external perspective, we obtain an accredited appraisal to provide reasonable assurance for property existence, property availability (unrestricted) for development, property lines, available spaces to sell, identifiable obstacles or easements and general valuation inclusive of known variables in that market.

From an internal perspective, we conduct a

detailed analysis of the acquired cemetery property using other cemeteries in our portfolio as a benchmark.

This provides the added benefit of relevant data that is not available to third party appraisers.

Through this thorough internal process, the Company is able to identify viable costs of property based on historical experience, particular markets and demographics, reasonable margins, practical retail prices and park infrastructure and condition.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 for additional information related to business combinations.

Divested Operations

Prior to divesting a funeral home or cemetery, we first determine whether the sale of the net assets and activities (together referred to as a “set”) qualifies as a business.

First, we perform a screen test to determine if the set is not a business.

The principle of the screen is that a set is not a business if substantially all of the fair value of the gross assets sold resides in a single asset or group of similar assets.

If the screen is not met then we evaluate whether the set has both inputs and a substantive process that together significantly contribute to the ability to create outputs.

When both inputs and a substantive process are present then the set is determined to be a business and we apply the guidance in ASC 350 – Intangibles – Goodwill and Other to determine the accounting treatment of goodwill for that set (see discussion of Goodwill below).

Goodwill is not allocated to the sale if the set is not considered to be a business.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 5 for additional information related to divestitures.

Preneed and Perpetual Care Trust Funds

Preneed sales generally require deposits to a trust or purchase of a third-party insurance product.

We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state laws.

Such trusts include (i) preneed funeral trusts;

(ii) preneed cemetery merchandise and service trusts;

and (iii) cemetery perpetual care trusts.

Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIEs”).

In the case of preneed trusts, the customers are the legal beneficiaries.

In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts.

Our trust fund assets are reflected in our financial statements as Preneed cemetery trust investments, Preneed funeral trust investments and Cemetery perpetual care trust investments.

We have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus .

The fair value of our trust fund assets are accounted for as Collateralized Financing Entities (“CFEs”) in ASC 810.

The accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities using the more observable of the fair value of the financial assets or fair value of the financial liabilities.

Pursuant to this guidance, we have determined the fair value of the financial assets of the trust are more observable and we first measure those financial assets at fair value.

Our fair value of the financial liabilities mirror the fair value of the financial assets, in accordance with the ASC.

Any changes in fair value are recognized in earnings.

Topic 326 made changes to the accounting for fixed income securities.

One such change is to require credit losses to be presented as an allowance rather than as a write-down on fixed income securities management does not intend to sell or believes that it is more likely than not will be required to sell.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 7 for additional related disclosures related to preneed and perpetual trust funds.

Fair Value Measurements

We measure the available-for-sale securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis in accordance with the Fair Value Measurements Topic of the ASC.

We measure the securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis in accordance with the Fair Value Measurements Topic of the ASC.

This guidance defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually).

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• Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.

We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date.

We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value.

We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.

See Part II, Item 8, Financial Statements and Supplementary Data, Notes 7 and 10 for additional information related to fair value measurements.

Long-Lived Assets

Long-lived assets, such as property, plant and equipment and right-of-use assets are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with ASC 360 – Property, Plant and Equipment.

This guidance requires that long-lived assets to be held and used are reported at the lower of their carrying amount or fair value.

We assess long-lived assets for impairment whenever events or circumstances indicate that the carrying value may be greater than the fair value.

We review our long-lived assets deemed held-for-sale to the point of recoverability.

Assets to be disposed of and assets not expected to provide any future service potential are recorded at the lower of their carrying amount or fair value less estimated cost to sell.

If we determine that the carrying value is not recoverable from the proceeds of the sale, we record an impairment at that time.

In connection with the goodwill impairment recorded for the Eastern Region Reporting Unit during the quarter ended March 31, 2020, we also evaluated the long-lived assets of our funeral homes in the Eastern Region Reporting Unit and concluded that there was no impairment to our long-lived assets.

Subsequent to our impairment tests performed at March 31, 2020, we did not identify any new factors or events that would trigger us to perform an additional assessment of our long-lived assets.

For our 2020 annual impairment test, no impairment was identified on our long-lived assets at December 31, 2020.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 for additional information related to long-lived assets.

We and our subsidiaries file a consolidated U.

federal income tax return, separate income tax returns in 15 states in which we operate and combined or unitary income tax returns in 14 states in which we operate.

federal income tax return, separate income tax returns in 15 states and combined or unitary income tax returns in 14 states.

We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities.

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See Part II, Item 8, Financial Statements and Supplementary Data, Note 17 for additional information related to income taxes.

Stock Plans and Stock-Based Compensation

We have stock-based employee and director compensation plans under which we grant stock, restricted stock, stock options and performance awards.

We also have an employee stock purchase plan (“ESPP”).

We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period.

Fair value is determined on the date of the grant.

The fair value of restricted stock is determined using the stock price on the grant date.

The fair value of options or awards containing options is determined using the Black-Scholes valuation model.

The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model.

The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date.

The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 20 for additional information related to stock-based compensation plans.

Computation of Earnings per Common Share

Basic earnings per share is computed using the weighted average number of common shares outstanding during the period.

Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period.

Dilutive common equivalent shares consist of stock options and our Convertible Notes (as defined in Note 15).

Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share.

Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 22 for additional information related to computation of earnings per share.

RECENT ACCOUNTING PRONOUNCEMENTS, ACCOUNTING CHANGES AND OTHER REGULATIONS

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What changed 10-K

Item 7. Management’s Discussion and Analysis