What changed in this filing

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Item 1A. Risk Factors

2022-03-02 compared with 2021-03-02 · 35 added, 24 removed, 242 unchanged (20% of the section changed)

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We believe this incentive program will result in improved field-level margins, market share and overall financial performance.

Our “Good To Great II” incentive program could result in the issuance of a significant number of shares of common

stock to certain critical employees.

Our Good To Great II incentive program rewards certain employees who are not Managing Partners in alignment with the incentive programs for our Managing Partners.

Specifically, the Good To Great II incentive program is tied to the future performance of the Company and requires the Company’s share price to reach one of five predetermined Common Stock Price Averages (as defined by the program) through a performance period ending December 31, 2024 in order for the award to be earned by the participants of the program.

While the program aligns our incentives with long-term value creation, there is a potential risk of dilution to our shareholders if we achieve the highest performance tier under the Good To Great II incentive program, which equals a Common Stock Price Average (as defined by the program) of $77.34 per share.

At December 31, 2021, under such a scenario, a total of 1,052,532 shares of common stock would be awarded to participants under the program.

We believe this incentive program will result in improved overall financial performance.

Strategic Business Execution and Performance

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We also incentivize our location Managing Partners by giving them the opportunity to earn a fixed percentage of the field-level earnings before interest, taxes, depreciation and amortization based upon the number and weighting of the standards achieved.

Our expectation is that, over time, the Standards Operating Model will result in improving field-level margins, market share, customer satisfaction and overall financial performance, but there is no assurance that these goals will be met.

Our expectation is that, over time, the Standards Operating Model will result in improving field-level margins, market share, customer satisfaction and overall financial performance, but

there is no assurance that these goals will be met.

Failure to successfully implement our Standards Operating Model in our funeral and cemetery operations could have a material adverse effect on our financial condition, results of operations and cash flows.

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From time to time, we engage in discussions with third parties about potential divestitures of one or more of our businesses that, if fully consummated, could result in the divestiture of a material amount of assets and contribution to our results of operations that have historically contributed to our results of operations.

Divestitures pose risks and challenges that could negatively

impact our business, including disputes with buyers or potential impairment charges.

Divestitures pose risks and challenges that could negatively impact our business, including disputes with buyers or potential impairment charges.

For example, when we decide to sell a business, we may be unable to do so on our terms and within our anticipated time-frame, and even after reaching a definitive agreement to sell a business, the sale may be subject to satisfaction of pre-closing conditions, which may not be satisfied, as well as regulatory and governmental approvals, which may prevent us from completing a transaction on acceptable terms.

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In the past, this price competition has resulted in our losing market share in some markets.

In other markets, we have had to reduce prices or offer discounts thereby reducing profit margins in order to retain or recapture market share.

In other markets, we have had to reduce prices or offer discounts thereby

reducing profit margins in order to retain or recapture market share.

Increased price competition in the future could further reduce revenue, profits and our preneed backlog.

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economy, among other things, and provide emergency assistance to qualifying businesses and individuals.

Based on available guidance, we anticipate that the legislative changes will have a positive impact on our earnings and cash flow.

As the enacted legislation includes provisions that would expire after certain periods of time, the fact that our business has the potential to change its operating situation, and the existence of potential changes by state tax authorities related to conformity with federal tax regulations, the possibility exists that the future benefit of the legislation could change.

In addition, it is uncertain if, and to what extent, various states will conform to the CARES Act, or any newly enacted or revised federal tax legislation.

Under the CARES Act, the primary areas that should be considered for future earnings and cash impact are the changes to the interest expense limitation threshold and the technical correction to the Tax Cuts and Jobs Act regarding the qualified improvement property now being eligible for full expensing.

For more information related to the CARES Act, see Part II, Item 8, Financial Statements and Supplementary Data, Note 1.

Based on available guidance, we believe that the legislative changes will have a positive impact on our earnings and cash flow.

addition, it is uncertain if, and to what extent, various states will conform to the CARES Act, or any new or revised federal tax legislation will be enacted.

Litigation and Claims

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make capital expenditures;

enter into transactions with affiliates;

transactions with affiliates;

enter into sale-leaseback transactions;

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If we are unable to repay amounts owed under the terms of our Credit Facility, the lenders thereunder may choose to exercise their remedies in respect of the collateral, including a foreclosure of their lien which results in a sale of certain of our funeral assets to satisfy our obligations under the Credit Facility.

Pursuant to the terms of our Credit Facility, we must comply with, amongst other things, a maximum Total Leverage Ratio covenant which is measured quarterly.

Pursuant to the terms of our Credit Facility, we must comply with, amongst other things, a maximum Total Leverage Ratio covenant that is measured quarterly.

If we are unable to comply with the maximum Total Leverage Ratio, we will be in immediate default under the Credit Facility.

The COVID-19 pandemic may have a future impact on our business which could result in our inability to comply with this Total Leverage Ratio covenant and other covenants in our Credit Facility.

For example, although we have not currently experienced any material negative impacts to our liquidity position, access to capital, or cash flows as a result of COVID-19, the expected duration of the pandemic is unknown and may have a future impact on our business that could result in our inability to comply with this Total Leverage Ratio covenant and other covenants in our Credit Facility.

There can be no assurance that the lenders will agree to amend the Credit Facility in the future to adjust or eliminate this covenant or whether the lenders may agree to waive any non-compliance with this financial covenant or any other covenant in the future.

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Our indebtedness requires significant interest and principal payments.

As of December 31, 2020, we had $455.3 million of total debt (excluding debt issuance costs, debt discounts, debt premium and lease obligations), consisting of $5.5 million of acquisition debt (consisting of deferred purchase price and promissory notes payable to sellers of businesses we purchased), $2.6 million of our Convertible Notes, $400.0 million of our Senior Notes and $47.2 million of outstanding borrowings under our Credit Facility, with $140.7 million of availability under our Credit Facility after giving effect to $2.1 million of outstanding letters of credit.

As of December 31, 2021, we had $559.9 million of total debt (excluding debt issuance costs, debt discounts and lease obligations), consisting of $4.5 million of acquisition debt (consisting of deferred purchase price and promissory notes payable to sellers of businesses we purchased), $400.0 million of our Senior Notes and $155.4 million of outstanding borrowings under our Credit Facility, with $42.3 million of availability under our Credit Facility after giving effect to $2.3 million of outstanding letters of credit.

Our and our subsidiaries’ level of indebtedness could have important consequences to us, including:

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We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations.

If we are not able to repay or refinance our debt as it becomes due, we may be forced to take certain actions, including reducing spending on day-to-day operations, reducing future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness.

our indebtedness.

In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired.

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GENERAL RISKS

Economic Conditions

Economic Conditions and Natural Disasters

Unfavorable economic conditions, including those resulting from health and safety concerns, could adversely affect our business, financial condition or results of operations.

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Factors that could trigger an interim impairment review include, but are not limited to, a significant decline in the market value of our stock or debt values, significant under-performance relative to historical or projected future operating results, and significant negative industry or economic trends.

If these factors occur, we may have a triggering event, which could result in an impairment of our goodwill.

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 for 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.

We also performed a quantitative assessment of our tradenames at March 31, 2020 and we recorded an impairment for certain of our tradenames of $1.1 million during the quarter ended March 31, 2020 as the carrying amount of these tradenames exceeded the fair value.

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 and leases of our funeral homes in the Eastern Region Reporting Unit and concluded that there was no impairment to our long-lived assets and leases.

Based on the results of our annual goodwill and intangible assets impairment test we performed as of August 31, 2020 and our annual review of long-lived assets and leases as of December 31, 2020, we concluded that there were no additional impairments of our goodwill, intangible assets or other long-lived assets and leases.

If these factors occur, we may have a triggering event, which could result in an impairment of our goodwill, intangible assets and other long-lived assets.

Based on the results of our annual goodwill and intangible assets impairment test we performed as of August 31, 2021 and our annual review of long-lived assets and leases at December 31, 2021, we concluded that there were no impairments of our goodwill, intangible assets or other long-lived assets and leases.

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

We also performed a quantitative assessment of our tradenames 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 connection with the goodwill impairment recorded for the Eastern Region Reporting Unit, we also evaluated the long-lived assets and leases of our funeral homes in the Eastern Region Reporting Unit and concluded that there was no impairment to our long-lived assets and leases.

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 additional quantitative goodwill and tradenames impairment tests.

We concluded that there was no additional impairment to goodwill or tradenames.

Additionally, if current economic conditions weaken causing deterioration in our operating revenue, operating margins and cash flows, we may have a triggering event that could result in a material impairment of our goodwill, intangible assets and/or long-lived assets and leases.

Significant weather events, natural disasters, or catastrophic events could adversely affect our business, financial condition or results of operations.

Over thirty-five percent of the businesses we operate are located in California, Texas and Florida, areas where natural disasters are more prevalent.

Significant weather events, natural disasters or catastrophic events in these states or other key areas where our operations are concentrated could disrupt our business through injury to our employees or client families, physical damage, closure or destruction of one or more of our locations, data centers or office facilities, or disrupt the delivery of goods or services by one or more of our vendors, any or all of which could adversely impact our operations or increase our costs, which would adversely affect our financial results.

Information Technology and Internal Controls

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For example, in January 2021, we detected that our information technology system was affected by a ransomware attack.

Upon learning of the incident, we undertook immediate steps to address the incident, including engaging information technology security and forensics experts and working diligently with these experts to assess the impact on our information technology systems, implement additional and enhanced security measures to help prevent a similar incident in the future, and

to restore any of our information technology systems that were impacted by the incident.

The restoration of any impacted systems is complete.

We maintain insurance coverage for various cybersecurity risks, which covered the costs associated with the January 2021 ransomware attack, but it is possible that such insurance coverage may not fully insure all future costs or losses associated with other cybersecurity incidents.

For additional information regarding the January 2021 ransomware incident, see Part II, Item 8, Financial Statements and Supplementary Data, Note 25.

We maintain insurance coverage for various cybersecurity risks, which covered substantially all of the costs associated with the January 2021 ransomware attack, but it is possible that such insurance coverage may not fully insure all future costs or losses associated with other cybersecurity incidents.

While we determined, based on our assessment of the information known to us, that the January 2021 ransomware incident did not have, nor do we expect it will have, a material impact on our business, operations or financial results, if we fail to protect our own information from any future breaches in data security, we could experience significant costs and expenses as well as damage to our reputation.

Additionally, as the sophistication and frequency of attacks increase, our information technology security costs, including cybersecurity insurance, which are significant, may rise.

Additionally, legislation relating to cyber security threats could impose additional requirements on our operations.

Additionally, legislation relating to cybersecurity threats could impose additional requirements on our operations.

Various state governments, notably California, New York and Nevada, have enacted or enhanced data privacy regulations, and other state governments are considering establishing similar or stronger protections.

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

What changed 10-K

Item 1A. Risk Factors