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Item 7. Management’s Discussion and Analysis

2022-03-02 compared with 2021-03-02 · 273 added, 364 removed, 336 unchanged (65% of the section changed)

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

Recent Trends

During the initial phase of the COVID-19 pandemic, we experienced an increase in volume that corresponded with the initial increase in COVID-related deaths.

While we have seen the trend in COVID-related deaths begin to significantly decrease during the last half of 2021, we have not seen an adverse impact to our overall financial performance.

However, we continue to closely monitor these death rates.

Historically cremation trends have increased year over year and while that continues to be the case, we view this an opportunity to put greater focus on educating our client families on available cremation memorialization options.

We operate in two business segments:

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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 believe that our existing and anticipated cash resources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months.

For 2022, our plan is to remain focused on integrating our recently 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, strategic acquisitions, internal growth capital expenditures, share repurchases, dividend increases and further debt repayments.

We also expect continued divestiture activity for the next three-six months, which could yield an aggregate of approximately $3-4 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 and in the Indenture governing our Senior Notes.

We began 2021 with $0.9 million in cash and ended the year with $1.1 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.

At December 31, 2021, we had borrowings of $155.4 million outstanding on our Credit Facility compared to $47.2 million on our Former Credit Facility as of December 31, 2020 and $83.8 million as of December 31, 2019.

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

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Net cash provided by operating activities 43,216 82,915 84,246

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

Acquisition of businesses and real estate (140,907) (28,011) (3,285)

Deposit on pending acquisition (5,000) — —

Proceeds from insurance reimbursements — 1,433 248

Proceeds from divestiture and sale of other assets 967 8,541 7,875

Proceeds from insurance reimbursements 1,433 248 7,758

Capital expenditures (15,379) (15,198) (24,883)

Net cash used in investing activities (158,886) (34,420) (12,535)

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) —

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

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

Net borrowings on our Credit Facility, acquisition debt and finance lease obligations 54,413 (38,345) 106,869

Payment to redeem the Original Senior Notes (400,000)

Payment of call premium related to the Original Senior Notes — — (19,876)

Proceeds from the issuance of the Senior Notes 395,500

Payment of debt issuance costs related to the Senior Notes (1,367) (980) (66)

Dividends paid on common stock (5,513) (5,398) (6,048)

Payment of debt issuance costs for the Credit Facility and Senior Notes (1,871) (78) (2,197)

Conversion and maturity of the Convertible Notes (27) (4,563) (3,980)

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

Net proceeds from employee equity plans 1,251 881 (3)

Dividends paid on common stock (5,398) (6,048) (7,264)

Purchase of treasury stock (9,152) — (140,040)

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For the year ended December 31, 2021, cash provided by operating activities was $84.2 million compared to $82.9 million for the year ended December 31, 2020 and $43.2 million for the year ended December 31, 2019.

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.

The increase of $1.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 is primarily due to the increase in net income, offset by unfavorable working capital changes in income tax receivables, accounts payable and accrued liabilities.

The increase of $39.7 million for the year ended December 31, 2020 compared to the year ended December 31, 2019 was primarily due to the increase in operating income (excluding the non-cash impact of the divestitures and impairment charges) of $26.4 million in addition to other favorable working capital changes.

Investing Activities

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Acquisition and Divestiture Activity

During the year ended December 31, 2021, we sold two funeral homes and one cemetery for $2.5 million, sold real property for $5.2 million and purchased real property for $3.3 million.

We also received proceeds of $7.8 million from our property insurance policy for the reimbursement of renovation costs for our funeral and cemetery businesses that were damaged by Hurricane Ida.

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.

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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

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Cemetery development $ 4,111 $ 4,705 $ 5,845

Construction for new funeral facilities 11 — —

Live streaming equipment — 42 636

Renovations at certain businesses (1)

2,236 953 4,541

Streaming equipment and cemetery sales software 42 636 687

Other 195 142 495

Total Growth $ 6,584 $ 6,436 $ 11,568

(1) During the year ended December 31, 2021, we spent $2.0 million for renovations on four businesses that were affected by Hurricane Ida, all of which was reimbursed by our property insurance.

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.

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Financing Activities

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.

Our financing activities resulted in a net cash outflow of $71.5 million for the year ended December 31, 2021 compared to a net cash outflow of $48.3 million for the year ended December 31, 2020 and a net cash inflow of $115.7 million for the year ended December 31, 2019.

For the year ended December 31, 2021, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $106.9 million , offset by the following payments:

i) $19.9 million for the call premium to redeem our Original Senior Notes;

ii) $140.0 million for the purchase of treasury stock;

iii) $2.2 million for debt issuance and transactions costs related to our

Senior Notes and Credit Facility;

iv) $4.0 million for the conversions and maturity of our Convertible Notes;

and v) $7.3 million in dividends.

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.

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.

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

In addition, we purchased treasury stock for $9.2 million and paid $5.4 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.

On October 27, 2021, our Board approved an increase of $0.05 per share for a total annual dividend of $0.45 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):

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Share Repurchases

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.

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.

Subject to market conditions, normal trading restrictions and satisfying certain financial covenants in our Credit Facility, and in the Indenture governing our Senior Notes, we may make purchases in the open market or through privately negotiated transactions under our Board authorized share repurchase program, in accordance with Rule 10b-18 of the Securities Exchange Act.

On May 18, 2021, July 26, 2021 and October 27, 2021, our Board increased our share repurchase authorization by an additional $25.0 million, $25.0 million and $75.0 million, respectively, that including amounts previously authorized and outstanding, totaled up to $190.0 million in share repurchase authorizations.

Share repurchase activity is as follows (dollar value of shares repurchased in thousands):

Years Ended December 31,

2019 2020 2021

Number of Shares Repurchased (1)

400,000 — 2,906,983

Average Price Paid Per Share $ 19.39 $ — $ 49.01

Dollar Value of Shares Repurchased (1)

$ 7,756 $ — $ 142,469

(1) These amounts may differ from the repurchases of common stock amounts in the consolidated statements of cash flows due to unsettled share repurchases at the end of a period.

In December 2021, we repurchased 37,408 shares for $2.4 million, the settlement of which occurred in January 2022.

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.

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

At December 31, 2021, we had $8.1 million remaining available for repurchase under our authorized program.

Credit Facility, Lease Obligations and Acquisition Debt

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Credit Facility

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:

At December 31, 2020, our senior secured revolving credit facility (the "Former 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 Former Credit Facility was to occur on May 31, 2023.

On May 13, 2021, in connection with the issuance of the Senior Notes (defined in Senior Notes section below), we entered into an amended and restated $150.0 million senior secured revolving credit facility (the “Credit Facility”) with the Subsidiary Guarantors (as defined below), the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent.

We incurred $0.8 million in transactions costs related to the Credit Facility, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.

On May 13, 2021, we used $21.4 million of the availability under the Credit Facility to repay the then outstanding balances under our Former Credit Facility and all commitments thereunder were terminated.

In connection with the repayment in full of all amounts due thereunder, the Former Credit Facility was retired and $2.1 million of letters of credit previously issued under the Former Credit Facility were deemed issued under (and remain outstanding under) the Credit Facility.

In connection with the termination of the Former Credit Facility, we recognized a loss on the write-off of $0.1 million in unamortized debt issuance costs, which was recorded in Loss on extinguishment of debt .

On November 22, 2021, we entered into a first amendment and commitment increase to the Credit Facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent.

Pursuant to this amendment, the revolving credit commitment was increased from $150.0 million to $200.0 million.

We incurred $0.1 million in transactions costs related to this amendment, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.

Our 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 our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”).

The Credit Facility allows for future increases in the facility size in the form of increased revolving commitments or new incremental term loans by an additional amount of up to $75.0 million in the aggregate.

The final maturity of the Credit Facility will occur on May 13, 2026.

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.

In the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level, at the discretion of the Administrative Agent, the Administrative Agent may unilaterally compel the Company and the Credit Facility Guarantors to grant and perfect first-priority mortgage liens on fee-owned real property assets which account for no less than 50% of funeral operations EBITDA.

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 Subsidiary Guarantors.

In addition, the Credit Facility includes provisions which require the Company and the Subsidiary Guarantors, upon the occurrence of an event of default or in the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level under the Credit Facility, to grant additional liens on real property assets accounting for no less than 50% of the Company’s and the Subsidiary Guarantors’ funeral operations if requested by the administrative agent.

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 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.

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 Subsidiary Guarantors to incur indebtedness, grant liens, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial maintenance covenants.

At December 31, 2021, 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.

(A) a Total Leverage Ratio not to exceed, (i) 5.00 to 1.00 and (B) 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.

We were in compliance with all of the covenants contained in our Credit Facility at December 31, 2021.

At December 31, 2021, we had outstanding borrowings under the Credit Facility of $155.4 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.

We also had one letter of credit for $2.1 million under the Credit Facility, which was increased to $2.3 million on September 1, 2021.

The letter of credit will expire on November 25, 2022 and is expected to automatically renew annually and secures our obligations under our various self-insured policies.

At December 31, 2021, we had $42.3 million of availability under the Credit Facility.

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.

At December 31, 2021, the prime rate margin was equivalent to 0.75% and the LIBOR rate margin was 1.75%.

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.

We have no material assets or operations independent of our subsidiaries.

All assets and operations are held and conducted by subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Facility.

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

The weighted average interest rate on our Credit Facility for the year ended December 31, 2021 was 2.4%.

The weighted average interest rate on our Former Credit Facility for the year ended December 31, 2020 was 3.8%.

We have no material assets or operations independent of the Subsidiary Guarantors, as all of our assets and operations are held and conducted by Subsidiary Guarantors.

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

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

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Credit Facility amortization of debt issuance costs 229 482 380

The interest payments on our remaining borrowings under the Credit Facility will be determined based on the average outstanding balance of our borrowings and the prevailing interest rate during that time.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 12 to our Consolidated Financial Statements for further detail of our debt and interest payments.

Lease Obligations

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

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

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

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Years Ended December 31,

2019 2020 2021

Operating lease cost $ 3,722 $ 3,795 $ 3,762

Short-term lease cost 250 185 193

Variable lease cost 27 39 160

Finance lease cost:

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Interest on lease liabilities 520 496 471

At December 31, 2021, operating and finance lease obligations were $48.3 million, with $6.0 million payable within 12 months.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 15 to our Consolidated Financial Statements for further detail of our lease payments.

Acquisition Debt

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A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%.

Original maturities range from five to twenty years.

Original maturities typically range from five to twenty years.

Acquisition debt obligations were $4.5 million, with $0.5 million payable within 12 months.

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

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Acquisition debt imputed interest expense $ 622 $ 489 $ 364

At December 31, 2021, acquisition debt obligations were $4.5 million, with $0.5 million payable within 12 months.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 12 to our Consolidated Financial Statements for further detail of our debt payments.

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.

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

In May 2018, we exchanged $115.0 million in aggregate principal amount of Convertible Notes in a privately-negotiated exchange with a limited number of convertible noteholders.

We completed privately-negotiated repurchases of $22.4 million, $25,000 and $3.8 million in aggregate principal amount of Convertible Notes in December 2018, April 2019 and September 2020, respectively.

During the year ended December 31, 2021, we converted $2.4 million in aggregate principal amount of our Convertible Notes held by certain holders for $3.8 million in cash and recorded $1.4 million for the reacquisition of the equity component.

The Convertible Notes matured on March 15, 2021, at which time all Convertible Notes outstanding, $0.2 million in aggregate principal amount, were paid in full in cash at par value.

Therefore, no Convertible Notes remain outstanding at December 31, 2021.

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

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Convertible Notes amortization of debt issuance costs 24 20 1

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 two months of the Convertible Notes.

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.

On December 19, 2019, we issued an additional $75.0 million in aggregate principal amount of our Initial Senior Notes (the “Additional Senior Notes” and, together with the Initial Senior Notes, the “Senior Notes”) and related guarantees by the Subsidiary Guarantors in a private offering under Rule 144A and Regulation S of the Securities Act.

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

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 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.

The effective interest rate on the unamortized debt discount and debt issuance costs for both years ended December 31, 2020 and 2021 was 11.4% and 3.1%, respectively.

On May 13, 2021, we issued $400.0 million in aggregate principal amount of 4.25% Senior Notes due in May 2029 (the “Senior Notes”) and related guarantees by the Subsidiary Guarantors in a private offering under Rule 144A and Regulation S of the Securities Act.

We used the proceeds of $395.5 million from the offering of the Senior Notes, which are net of a 1.125% debt discount of $4.5 million, together with cash on hand and borrowings under the Credit Facility, to redeem all of our existing $400.0 million in aggregate principal amount of 6.625% senior notes due 2026 (the “Original Senior Notes”).

We paid a premium of $19.9 million to redeem the Original Senior Notes on June 1, 2021 at a redemption price of 104.97% of the principal amount thereof, plus accrued and unpaid interest of $13.25 million.

During the year ended December 31, 2021, we incurred $1.3 million in transaction costs related to the Senior Notes.

For the year ended December 31, 2021, we recognized a net loss of $23.7 million related to the redemption of the Original Senior Notes, which was recorded in Loss on extinguishment of debt .

The loss is composed of the $19.9 million call premium, the write-off of $3.4 million in unamortized debt discount, the write-off of $1.8 million in unamortized debt issuance costs, offset by the write-off of $1.4 million in unamortized debt premium.

The Senior Notes were issued under an indenture, dated as of May 13, 2021 (the “Indenture”), among the Company, the Subsidiary Guarantors (as defined therein) and Wilmington Trust, National Association, as trustee (“Collateral Trustee”).

The Senior Notes bear interest at 4.25% per year.

Interest on the Senior Notes began to accrue on May 31, 2018 and is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018 with respect to the Initial Senior Notes and June 1, 2020 with respect to the Additional Senior Notes to holders of record on each May 15 and November 15 preceding an interest payment date.

The Senior Notes mature on June 1, 2026, unless earlier redeemed or repurchased.

Interest on the Senior Notes is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021.

The Senior Notes mature on May 15, 2029, unless earlier redeemed or purchased.

The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally by each of the Subsidiary Guarantors.

We may redeem all or part of the Senior Notes at any time prior to June 1, 2021 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed, plus a “make whole” premium, and accrued and unpaid interest, if any, to the date of redemption.

We have the right to redeem the Senior Notes at any time on or after June 1, 2021 at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption.

Additionally, at any time before June 1, 2021, we may redeem up to 40% of the aggregate principal amount of the Senior Notes issued with an amount equal to the net proceeds of certain equity offerings, at a price equal to 106.625% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption;

provided that (1) at least 60% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes ) originally issued under the Indenture remain outstanding immediately after the occurrence of such redemption (excluding Senior Notes held by us);

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

We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date.

At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption.

In addition, before May 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Senior Notes outstanding using an amount of cash equal to the net proceeds of certain equity offerings, at a price of 104.25% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption;

provided that (1) at least 50% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes) outstanding under the Indenture remain outstanding immediately after the occurrence of such redemption (unless all Senior Notes are redeemed

concurrently), and (2) each such redemption must occur within 180 days of the date of the consummation of any 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.

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The Indenture also contains customary events of default.

The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of 89 months of the Senior Notes.

The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes for the year ended December 31, 2021 was 4.42% and 4.30%, respectively.

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

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

The fair value of the Senior Notes, which are Level 2 measurements, was $401.6 million at December 31, 2021.

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

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Senior Notes amortization of debt issuance costs 139 280 195

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

The following table summarizes the known future payments required for the debt on our Consolidated Balance Sheet as of December 31, 2020.

Where appropriate we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements where additional information is available.

Payments Due By Period (in thousands)

Financial Note

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

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

(b) Matures March 15, 2021.

We have future interest payments on our outstanding balance of $125.3 million, with $17.0 million payable within 12 months.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 14 to our Consolidated Financial Statements for further detail of our debt and interest payments.

Off-Balance Sheet Arrangements

The following table summarizes our off-balance sheet arrangements as of December 31, 2020.

Where appropriate, we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements where additional information is available.

We have various non-compete agreements with former owners and employees of businesses we have acquired.

At December 31, 2021, our off-balance sheet arrangements were as follows:

Non-compete agreements - We have various non-compete agreements with former owners and employees of businesses we have acquired.

These agreements are generally for one to ten years and provide for periodic payments over the term of the agreements.

We have various consulting agreements with former owners of businesses we have acquired.

We have future payments on our non-compete agreements of $6.8 million, with $2.3 million payable within 12 months.

Consulting agreements - We have various consulting agreements with former owners of businesses we have acquired.

Payments for such agreements are generally not made in advance.

These agreements are generally for one to five years and provide for bi-weekly or monthly payments.

We have employment agreements with our executive officers and certain senior leadership.

We have future payments on our consulting agreements of $1.2 million, with $0.7 million payable within 12 months.

Employment agreements - We have employment agreements with our executive officers and certain senior leadership.

These agreements are generally for three to five years and provide for participation in various incentive compensation arrangements.

These agreements generally renew automatically on an annual basis after their initial term has expired.

Payments Due By Period (in thousands)

Financial Note

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

Consulting agreements 16 1,847 879 537 266 114 51 —

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

(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.

These agreements generally renew automatically on an annual basis after their initial term has expired, with the exception of our Chairman of the Board and Chief Executive Officer, which does not renew after the current term expiring in February 2028.

We have future payments on our employment agreements of $8.3 million, with $3.3 million payable within 12 months.

Letter of credit - We have one letter of credit for $2.3 million under the Credit Facility, which secures our obligations under our various self-insurance policies in the event we are unable to meet the self-insurance portion of our claim payment obligations.

As we already have reserves recorded for our self-insurance claims costs, these do not represent additional liabilities.

The letter of credit will expire on November 25, 2022 and is expected to automatically renew annually.

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

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If we are not able to meet these obligations with cash provided by our operating activities, we may be required to access the capital markets or draw down on our Credit Facility, both of which may be more difficult to access.

See Part II, Item 8, Financial Statements and Supplementary Data, Notes 12 and 16 to our Consolidated Financial Statements for further detail of our letter of credit and off-balance sheet agreements, respectively.

FINANCIAL HIGHLIGHTS

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Net income $ 14,533 $ 16,090 $ 33,159

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.

Revenue in 2021 increased $46.4 million compared to 2020, as we experienced a 20.0% increase in the number of preneed interment rights (property) sold, as well as a 17.0% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19;

(2) the full integration of the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020;

and (3) the execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

We also experienced a 4.4% increase in total funeral contracts and a 4.2% increase in the average revenue per funeral contract for 2021 compared to 2020.

We believe the increase in volume during 2021 is due not only to COVID-19 deaths, but also due to a result of our ability to adapt to the continued changing consumer environment with new and innovative ways to serve families.

We believe the increase in the average revenue per contract is a further reflection of our ability to creatively serve our families, as the number of contracts for which we provided memorial services in 2021 began to return to pre-COVID-19 levels.

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.

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 2021 increased $23.6 million compared to 2020, primarily due to the increase in revenue from both our funeral home and cemetery segments, as well as decreases in funeral home and cemetery operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel.

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 as disciplined expense and cost management by leaders at each business.

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

Net income for the 2021 increased $17.1 million compared to 2020, primarily due to (1) the increase in gross profit of $23.6 million;

(2) a $20.8 million decrease in net loss on divestitures, disposals and impairments charges and (3) a $7.1 million decrease in interest expense;

offset by (4) a $23.8 million loss on extinguishment of debt;

(5) a $8.1 million increase in general, administrative and other expenses and (6) a $2.6 million increase in tax expense.

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.

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.”

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

REPORTING AND NON-GAAP FINANCIAL MEASURES

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Net income $ 14,533 $ 16,090 $ 33,159

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

Acquisition and divestiture expenses — 1,646 (9)

Special items (1)

Acquisition expenses 2,083 (11) —

Severance and separation costs (2)

1,205 563 1,575

Performance awards cancellation and exchange — 288 —

Accretion of discount on Convertible Notes (1)

2,192 241 216

Net loss on early extinguishment of debt 397 — —

Net loss on divestitures and other costs (2)

439 3,331 4,562

Loss on early extinguishment of debt (3)

Net (gain) loss on divestitures and other costs 4,217 6,864 (856)

Net impact of impairment of goodwill and other intangibles 963 14,952 500

805 761 9,932

Litigation reserve (4)

750 270 1,050

Tax expense related to divested business (1)

Gain on insurance reimbursements (885) — —

Natural disaster and pandemic costs 345 — 1,286

Disaster recovery and pandemic costs — 1,627 2,157

Other special items (5)

336 410 2,354

Tax adjustment related to certain discrete items (1)

Sum of special items $ 9,821 $ 25,579 $ 30,607

Tax effect on special items (1)

1,822 7,986 8,503

Adjusted net income (6)

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(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 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.

In 2019 and 2020, Special items are taxed at the federal statutory rate of 21.0%, except the Net (gain) loss on divestitures and other costs and the Net impact of impairment of goodwill and other intangibles, which are taxed at the operating tax rate for the period.

In 2021, Special items are taxed at the operating tax rate for the period.

The Accretion of discount on Convertible Notes, the Tax expense related to divested business and the Tax adjustment related to certain discrete items are not tax effected.

(2) Costs related to the termination or resignation of certain key members of leadership.

(3) Loss on the redemption of our Original Senior Notes during the second quarter of 2021.

(4) Costs related to litigation matters.

(5) In 2019, the amount is related to costs associated with recruitment of a former member of the senior leadership team.

In 2020, this is related to the costs associated with a state audit assessment.

In, 2021, this is related to (1) write-off of certain fixed assets;

(2) a one-time $1.0 million payment in September 2021 for residual insurance claims;

and (3) interest paid on our Original Senior Notes for the two-week period during which our Senior Notes were issued prior to the redemption of our Original Senior Notes.

(6) 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.

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The following is a discussion of our results of operations for the year ended December 31, 2021 compared to the year ended December 31, 2020.

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.

The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2017 and owned and operated for the entirety of each period being presented, excluding certain funeral home and cemetery businesses that we intend to divest in the near future.

The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2016, excluding any funeral home and cemetery businesses 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” 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.

The term “divested” when discussed in the Funeral Home Segment, refers to two funeral homes we sold and six funeral homes we merged with other businesses we own in existing markets during the year ended December 31, 2021 and eight funeral homes we sold during the year ended December 31, 2020.

The term “divested” when discussed in the Cemetery Segment, refers to one cemetery we sold during the year ended December 31, 2021.

“Planned divested” refers to the funeral home businesses that we intend to divest.

“Ancillary” in the Funeral Home Segment 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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Divested/planned divested revenue 8,082 3,174

Ancillary funeral services revenue 748 4,661

Ancillary revenue 4,661 4,437

Preneed funeral insurance commissions 1,349 1,262

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Divested/planned divested operating profit 2,067 605

Ancillary funeral services operating profit 298 1,186

Ancillary operating profit 1,186 1,006

Preneed funeral insurance commissions 564 359

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Cremation rate 55.4% 54.3%

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%.

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.

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

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.

Funeral home same store operating revenue increased $23.3 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase in operating revenue is primarily driven by a 9.3% increase in same store contract volume, as well as a 2.6% increase in the average revenue per contract excluding preneed interest.

The increase in volume is not only due to COVID-19 deaths during 2021, but also a result of our ability to adapt to the continued changing environment with new and innovative ways to serve families.

Funeral home same store operating profit for the year ended December 31, 2021 increased $13.2 million when compared to the year ended December 31, 2020.

The comparable operating profit margin increased 170 basis points to 43.3%.

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

Overall same store operating expenses as a percent of operating revenue decreased 1.7% with the largest decrease in salaries and benefits expense of 1.2% as a percent of operating revenue, as we focused on optimizing the inherent operating leverage in each business by increasing revenue without adding extra personnel.

Funeral home acquired operating revenue for the year ended December 31, 2021 increased $2.6 million compared to the year ended December 31, 2020.

The increase in operating revenue is primarily driven by a 6.9% increase in the average revenue per contract excluding preneed interest, while the acquired contract volume was relatively flat.

Acquired operating profit for the year ended December 31, 2021, increased $2.4 million when compared to the year ended December 31, 2020.

The comparable operating profit margin increased 370 basis points to 42.1%.

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

Overall acquired operating expenses as a percent of operating revenue decreased 3.7% with the largest decrease in salaries and benefits expense of 3.2% as a percent of operating revenue, as we focused on optimizing the inherent operating leverage in each business by increasing revenue without adding extra personnel.

Ancillary revenue, which is recorded in Other revenue , represents revenue from our flower shop, pet cremation and online cremation businesses and Ancillary operating profit both decreased $0.2 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Preneed funeral insurance commissions and preneed funeral trust and insurance (recorded in Other revenue ) on a combined basis, increased $0.2 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase is primarily from trust and insurance earnings on preneed contracts.

Recognition of trust and insurance earnings is triggered at the time a preneed contract matures to atneed.

For the year ended December 31, 2021, the average trust and insurance earnings per preneed contract increased 7.8% compared to the year ended December 31, 2020.

Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.1 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the increase in revenue.

Cemetery Segment

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Acquired operating revenue 17,584 27,829

Planned divested revenue 313 394

Divested revenue 246 288

Preneed cemetery trust earnings 9,797 12,487

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Acquired operating profit 7,128 15,526

Planned divested operating profit 13 129

Divested operating profit 23 82

Preneed cemetery trust operating profit 9,376 11,987

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Preneed revenue (in thousands) $ 31,407 $ 39,291

Number of preneed interment rights sold 7,130 7,096

Atneed revenue (in thousands) $ 20,360 $ 24,880

Number of preneed interment rights sold 7,104 8,330

Average price per interment right sold $ 3,771 $ 4,209

Preneed revenue as a percentage of operating revenue 66% 67%

Preneed revenue (in thousands) $ 11,552 $ 18,536

Number of preneed interment rights sold 60 2,353

Atneed revenue (in thousands) $ 6,032 $ 9,293

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 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.

Number of preneed interment rights sold 2,353 3,044

Average price per interment right sold $ 4,889 $ 6,155

Cemetery same store preneed revenue increased $7.9 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, as we experienced a 17.3% increase in the number of interments rights sold, as well as an 11.6% increase in the average price per interment right sold.

The increase is primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19;

and (2) the continuous execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, increased $4.5 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase was a result of a 12.6% increase in same store atneed contracts and an 8.5% increase in the average sale per contract, primarily due to the increased deaths in 2021 related to COVID-19.

Cemetery same store operating profit increased $7.5 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The comparable operating profit margin increased 440 basis points to 42.1% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business.

Operating expenses as a percent of operating revenue decreased 4.4% with the largest decreases in the following areas:

(1) salaries and benefits expense decreased 2.6%, as we increased revenue without adding extra personnel;

and (2) facilities and grounds expenses decreased 1.0%.

There are three businesses in our acquired cemetery portfolio, two of which were acquired in the fourth quarter of 2019 and one acquired in the first quarter of 2020.

In the first quarter of 2020, we hired new sales leadership at two of our recently acquired cemeteries and continue to build their respective sales teams as we execute our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

As a result, our acquired cemetery portfolio experienced a $7.0 million increase in preneed revenue and a $3.3 million increase in atneed revenue for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Cemetery acquired operating profit increased $8.4 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The comparable operating profit margin increased 1,530 basis points to 55.8% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business.

Operating expenses as a percent of operating revenue decreased 15.2% with the largest decreases in the following areas:

(1) salaries and benefits expense decreased 7.1%, as we increased revenue without adding extra personnel;

(2) promotional costs decreased 3.4%;

(3) preneed merchandise and service costs decreased 1.9%;

and (4) facilities and grounds expenses decreased 1.2%.

Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue ) on a combined basis increased $2.8 million for the year ended December 31, 2021 compared to the year ended December 31, 2020.

The increase in our trust fund income is primarily due to our execution of a major repositioning strategy beginning at the height of the COVID-19 market crisis in March 2020, substantially increasing our preneed cemetery trust revenue and operating profit.

We experienced a $1.9 million increase in income and a $0.3 million increase in realized capital gains within our perpetual care trusts for the year ended December 31, 2021 compared to the year ended December 31, 2020.

Additionally, income from delivered merchandise and service contracts increased $0.3 million.

Operating profit for the two categories of Other revenue , on a combined basis, increased $2.7 million for the year ended December 31, 2021 compared to the year ended December 31, 2020 primarily due to the increase in revenue.

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 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.

Cemetery property amortization totaled $6.7 million for the year ended December 31, 2021, an increase of $1.7 million compared to the year ended December 31, 2020, primarily due to the increase in property sold across our cemetery portfolio.

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 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.

Depreciation expense for our field businesses totaled $12.6 million for the year ended December 31, 2021, a decrease of $0.4 million compared to the year ended December 31, 2020, primarily due to building structures and older vehicles becoming fully depreciated.

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 $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.

Regional and unallocated funeral and cemetery costs totaled $25.8 million for the year ended December 31, 2021, an increase of $7.8 million compared to the year ended December 31, 2020, primarily due to the following:

(1) a $5.3 million increase in cash and other incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation;

(2) $1.0 million increase in compensation expenses, which includes our Chief Operating Officer hired in June 2020 and six additional cemetery sales employees hired in 2021 and the latter half of 2020;

(3) a $0.9 million increase in other general administrative costs, which includes higher travel costs;

(4) a $0.7 million increase in natural disaster costs due to Hurricane Ida impacting several Louisiana businesses;

and (5) a $0.2 million increase in health and safety expenses related to the COVID-19 pandemic;

offset by (6) a $0.3 million decrease in state audit assessments.

Other Financial Statement Items

General, administrative and other.

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:

General, administrative and other expenses totaled $33.9 million for the year ended December 31, 2021, a decrease of $8.1 million compared to the year ended December 31, 2020, 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;

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

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

(2) a $1.7 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology;

(3) a $1.2 million increase in separation expenses related to the resignation of two members of senior leadership;

(4) a $1.2 million increase in insurance claims expense, which includes a one-time $1.0 million payment for residual insurance claims;

and (5) a $0.4 million increase in acquisition costs.

Home office depreciation and amortization.

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):

Home office depreciation and amortization expense totaled $1.2 million for the year ended December 31, 2021, a decrease of $0.2 million compared to the year ended December 31, 2020, primarily due to equipment at the home office becoming fully depreciated in the latter half of the prior year.

Net loss on divestitures, disposals and impairment charges.

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

Years Ended December 31,

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Tradenames impairment 1,061 —

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

Assets held for sale impairment — 500

Net (gain) loss on divestitures and real property 6,749 (856)

Net loss on disposals of fixed assets — 1,022

Total $ 21,442 $ 666

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.

During the year ended December 31, 2021, we divested two funeral homes and one cemetery and sold real property for a net gain of $0.9 million.

In addition, we recognized an impairment loss of $0.5 million related to property, plant and equipment assets held for sale .

We also disposed of damaged and obsolete property, plant and equipment that had a carrying value of $1.0 million.

During the year ended December 31, 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 addition, we divested eight funeral homes for a net loss of $6.7 million.

Interest expense .

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Total $ 32,515 $ 25,445

Accretion of discount on convertible subordinated notes .

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):

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Gain on insurance reimbursements related to Hurricane Michael $ (97) $ —

Loss on land donation — 61

Other (income) expense (55) 23

Other loss — (3)

Total $ (152) $ 84

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Our operating tax rate before discrete items was 27.8% and 32.4% for the years ended December 31, 2021 and 2020, respectively.

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.

We recorded a net discrete tax benefit of $1.2 million and a discrete tax expense of $0.6 million for the years ended December 31, 2021 and 2020, respectively.

The net discrete tax benefit for the year ended December 31, 2021, includes benefit related to equity compensation and other adjustments including return to provision analysis and state legislative changes.

Our effective tax rate was 25.2% and 34.7% for years ended December 31, 2021 and 2020, 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.

In connection with the CARES Act, we filed a claim for a refund on June 30, 2020, to carryback the 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.

As our refund claim filed for tax year 2018 exceeded $5.0 million, our 2018 federal return is under audit by the Internal Revenue Service (“IRS”), as required in order to receive Joint Committee approval.

An additional carryback claim for a refund was filed on November 3, 2020 for the tax year ended December 31, 2019, which has not yet been received.

On December 4, 2020, we filed an amended federal return for the tax year ended December 31, 2018, in order to take full advantage of the CARES Act legislative changes.

The changes reported in the amended return resulted in additional $2.3 million of losses.

The additional losses generated from the amended filing will be administratively carried back and processed as part of the Joint Committee review of the 2018 carryback claim.

The majority of the NOLs generated in tax years 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.

Our unrecognized tax benefit reserve for the years ended December 31, 2020 and 2021 was $3.7 million and $3.8 million, respectively.

On October 11, 2021, we received an adverse ruling from the IRS for the accounting method change filed in 2018 for revenue recognition of cemetery property.

Approval is still pending for the accounting method change filed for revenue recognition of cemetery merchandise and services.

Upon receiving the adverse ruling on the revenue recognition of cemetery property accounting method change, we filed an automatic method change on Form 3115, to adopt the IRS’ preferred revenue recognition method for cemetery property.

The accounting method change application was submitted under the “three-month window” rule, which would grant audit protection for the cumulative effect of the adverse ruling for revenue recognition of cemetery property, at the discretion of the IRS agent conducting the audit.

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

OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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 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.

The results of these considerations form the basis for making judgments about the amount and timing of revenue and expenses, the carrying value of assets and the recorded amounts of liabilities.

Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change.

Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from year to year.

“Management's Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with United States GAAP.

CRITICAL ACCOUNTING ESTIMATES

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

Understanding our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies is integral to understanding our Consolidated Financial Statements.

Our critical accounting policies are more fully described in Part II, Item 8, Financial Statements and Supplementary Data, Note 1.

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 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.

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 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.

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.

We have identified the following accounting policies as those that require significant judgments, assumptions and estimates and that have a significant impact on our financial condition and results of operations.

These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations.

Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change.

We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.

Our quantitative goodwill impairment test involves estimates and management judgment.

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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.

Intangible Assets

Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets, net on our Consolidated Balance Sheet.

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 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.

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.

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 and the determination and application of an appropriate royalty rate and discount rate.

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.

Determining the fair value of identifiable assets, particularly intangibles and liabilities acquired also requires management to make estimates, which are based on all available information and in some cases assumptions with respect to the timing and amount of future revenues and expenses associated with an asset.

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.

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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.

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.

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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 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).

The guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements.

The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.

The three levels are defined as follows:

• Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;

• Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument;

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

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

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 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.

We classify our deferred tax liabilities and assets as non-current on our Consolidated Balance Sheet.

We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain.

Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.

We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in the financial statements;

provide certain disclosures of uncertain tax matters;

and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheet.

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

RECENT ACCOUNTING PRONOUNCEMENTS, ACCOUNTING CHANGES AND OTHER REGULATIONS

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Financial Statements and Supplementary Data.

Our business can be affected by seasonal fluctuations in the death rate.

Generally, the number of deaths is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.

Inflation has not had a material impact on our results of operations over the last three fiscal years.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis