Item 7. Management’s Discussion and Analysis
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
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.
General
We operate in two business segments: funeral home operations, which accounts for approximately 70% of our revenue, and cemetery operations, which accounts for approximately 30% of our revenue. Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
At December 31, 2021, we operated 170 funeral homes in 26 states and 31 cemeteries in 11 states within the United States. For additional discussion about our overall business strategy, see Part I, Item 1, Business – Business Strategy.
Funeral Home Operations
Factors affecting our funeral operating results include: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed business to increase average revenue per contract. In simple terms, volume and price are the two variables that affect funeral revenue. The average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure.
Cemetery Operations
Factors affecting our cemetery operating results include: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.
We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item 1A, Risk Factors.
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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 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 as well as our long-term financial obligations.
Cash Flows
We began 2021 with $0.9 million in cash and ended the year with $1.1 million in cash. 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):
Years Ended December 31,
2019 2020 2021
Cash at beginning of year $ 644 $ 716 $ 889
Net cash provided by operating activities 43,216 82,915 84,246
Acquisition of businesses and real estate (140,907) (28,011) (3,285)
Deposit on pending acquisition (5,000) — —
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 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 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)
Other financing costs (162) (169) (461)
Net cash provided by (used in) financing activities 115,742 (48,322) (71,452)
Cash at end of year $ 716 $ 889 $ 1,148
Operating Activities
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 $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.
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Investing Activities
Our investing activities resulted in a net cash outflow of $12.5 million f or the year ended December 31, 2021 compared to $34.4 million for the year ended December 31, 2020 and $158.9 million for the year ended December 31, 2019.
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. In addition, we sold eight funeral homes for $8.4 million and we sold real property for $0.1 million.
During the year ended December 31, 2019, we acquired, in three separate transactions, two funeral home and cemetery combination businesses, seven funeral home businesses and three ancillary service businesses for an aggregate purchase price of $140.9 million. In addition, we also paid a $5.0 million deposit for a funeral home and cemetery combination business that we acquired in January 2020. In addition, we sold a funeral home business for $0.9 million and we sold real property for $0.1 million related to a funeral home we merged with another business in an existing market.
Capital Expenditures
For the year ended December 31, 2021, our capital expenditures (comprising of growth and maintenance spend) totaled $24.9 million compared to $15.2 million for the year ended December 31, 2020, and $15.4 million for the year ended December 31, 2019.
The following tables present our growth and maintenance capital expenditures (in thousands):
Years Ended December 31,
2019 2020 2021
Growth
Cemetery development $ 4,111 $ 4,705 $ 5,845
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.
Years Ended December 31,
2019 2020 2021
Maintenance
Facility repairs and improvements $ 1,820 $ 2,053 $ 2,543
General equipment and furniture 3,032 2,892 6,377
Vehicles 1,950 1,493 2,329
Paving roads and parking lots 795 731 1,186
Information technology infrastructure improvements 977 949 —
Other 221 644 880
Total Maintenance $ 8,795 $ 8,762 $ 13,315
Financing Activities
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
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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 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.
Dividends
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):
2021 Per Share Dollar Value
March 1st $ 0.1000 $ 1,799
June 1st $ 0.1000 $ 1,808
September 1st $ 0.1000 $ 1,783
December 1st $ 0.1125 $ 1,873
2020 Per Share Dollar Value
March 1st $ 0.0750 $ 1,339
June 1st $ 0.0750 $ 1,343
September 1st $ 0.0875 $ 1,569
December 1st $ 0.1000 $ 1,797
2019 Per Share Dollar Value
March 1st $ 0.0750 $ 1,360
June 1st $ 0.0750 $ 1,365
September 1st $ 0.0750 $ 1,336
December 1st $ 0.0750 $ 1,337
Share Repurchases
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 stock. At December 31, 2021, we had $8.1 million remaining available for repurchase under our authorized program.
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Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our long-term debt and lease obligations is as follows (in thousands):
December 31, 2020 December 31, 2021
Credit Facility $ 47,200 $ 155,400
Finance leases 5,854 5,532
Operating leases 22,384 20,433
Acquisition debt 5,509 4,500
Total $ 80,947 $ 185,865
Credit Facility
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 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 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) 5.00 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.
We were in compliance with all of the covenants contained in our Credit Facility at December 31, 2021.
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At December 31, 2021, we had outstanding borrowings under the Credit Facility of $155.4 million. 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 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):
Years Ended December 31,
2019 2020 2021
Credit Facility interest expense $ 1,601 $ 3,738 $ 1,820
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 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.
The lease cost related to our operating leases and short-term leases and depreciation expense and interest expense related to our finance leases are as follows (in thousands):
Years Ended December 31,
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:
Depreciation of leased assets $ 498 $ 439 $ 438
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
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. 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 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):
Years Ended December 31,
2019 2020 2021
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.
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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 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):
Years Ended December 31,
2019 2020 2021
Convertible Notes interest expense $ 174 $ 149 $ 18
Convertible Notes accretion of debt discount 241 216 20
Convertible Notes amortization of debt issuance costs 24 20 1
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.
Senior Notes
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 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 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
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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. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest.
The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. 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):
Years Ended December 31,
2019 2020 2021
Senior Notes interest expense $ 21,711 $ 26,500 $ 21,767
Senior Notes amortization of debt discount 493 528 504
Senior Notes amortization of debt premium — 221 85
Senior Notes amortization of debt issuance costs 139 280 195
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.
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Off-Balance Sheet Arrangements
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 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 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, 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; however, although we can provide no assurances, we anticipate that these obligations will be funded from cash provided from our operating activities. 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
Below are our financial highlights (in thousands except for volumes and averages):
Years Ended December 31,
2019 2020 2021
Revenue $ 274,107 $ 329,448 $ 375,886
Funeral contracts 38,940 47,190 49,249
Average revenue per funeral contract $ 5,499 $ 5,145 $ 5,360
Preneed interment rights (property) sold 7,205 9,503 11,408
Average price per interment right sold $ 3,653 $ 4,033 $ 4,718
Gross profit $ 79,585 $ 105,923 $ 129,516
Net income $ 14,533 $ 16,090 $ 33,159
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.
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
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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. Further discussion of Revenue for our funeral home and cemetery segments is presented herein under “Results of Operations.”
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.
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
We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the year ending December 31, 2021, dated February 23, 2022 and discussed in the corresponding earnings conference call. This Trend Report is used as a supplemental financial statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
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Below is a reconciliation of Net income, a GAAP measure to Adjusted net income, a non-GAAP measure, (in thousands):
Years Ended December 31,
2019 2020 2021
Net income $ 14,533 $ 16,090 $ 33,159
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)
241 216 20
Loss on early extinguishment of debt (3)
— — 23,807
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
Litigation reserve (4)
750 270 1,050
Tax expense related to divested business (1)
911 — —
Gain on insurance reimbursements (885) — —
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)
— 400 —
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)
$ 22,532 $ 33,683 $ 55,263
(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. 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.
Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) (in thousands):
Years Ended December 31,
2019 2020 2021
Gross profit $ 79,585 $ 105,923 $ 129,516
Cemetery property amortization 3,985 4,956 6,670
Field depreciation expense 12,370 13,006 12,609
Regional and unallocated funeral and cemetery costs 13,827 18,057 25,846
Operating profit (1)
$ 109,767 $ 141,942 $ 174,641
(1) Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs.
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Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP measure) by Segment (in thousands):
Years Ended December 31,
2019 2020 2021
Funeral Home $ 85,737 $ 104,998 $ 119,007
Cemetery 24,030 36,944 55,634
Operating profit $ 109,767 $ 141,942 $ 174,641
Operating profit margin (1)
40.0% 43.1% 46.5%
(1) Operating profit margin is defined as Operating profit as a percentage of Revenue.
Further discussion of Operating profit for our funeral home and cemetery segments is presented herein under “Results of Operations.”
YEAR ENDED DECEMBER 31, 2021 COMPARED TO YEAR ENDED DECEMBER 31, 2020
Results of Operations
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, 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” 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. Adding back these items will result in Gross profit, a GAAP financial measure.
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Funeral Home Segment
The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):
Years Ended December 31,
2020 2021
Revenue:
Same store operating revenue $ 191,757 $ 215,039
Acquired operating revenue 35,461 38,031
Divested/planned divested revenue 8,082 3,174
Ancillary revenue 4,661 4,437
Preneed funeral insurance commissions 1,349 1,262
Preneed funeral trust and insurance 7,828 8,144
Total $ 249,138 $ 270,087
Operating profit:
Same store operating profit $ 79,850 $ 93,025
Acquired operating profit 13,628 16,017
Divested/planned divested operating profit 2,067 605
Ancillary operating profit 1,186 1,006
Preneed funeral insurance commissions 564 359
Preneed funeral trust and insurance 7,703 7,995
Total $ 104,998 $ 119,007
The following measures reflect the significant metrics over this comparative period:
Years Ended December 31,
2020 2021
Same store:
Contract volume 37,802 41,307
Average revenue per contract, excluding preneed funeral trust earnings $ 5,073 $ 5,206
Average revenue per contract, including preneed funeral trust earnings $ 5,258 $ 5,382
Burial rate 36.6% 35.2%
Cremation rate 56.3% 57.1%
Acquired:
Contract volume 7,218 7,243
Average revenue per contract, excluding preneed funeral trust earnings $ 4,913 $ 5,251
Average revenue per contract, including preneed funeral trust earnings $ 4,980 $ 5,317
Burial rate 40.4% 39.9%
Cremation rate 55.4% 54.3%
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. 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.
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%. The
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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. 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.
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
The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):
Years Ended December 31,
2020 2021
Revenue:
Same store operating revenue $ 51,767 $ 64,171
Acquired operating revenue 17,584 27,829
Divested revenue 246 288
Preneed cemetery trust earnings 9,797 12,487
Preneed cemetery finance charges 916 1,024
Total $ 80,310 $ 105,799
Operating profit:
Same store operating profit $ 19,501 $ 27,015
Acquired operating profit 7,128 15,526
Divested operating profit 23 82
Preneed cemetery trust operating profit 9,376 11,987
Preneed cemetery finance charges 916 1,024
Total $ 36,944 $ 55,634
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The following measures reflect the significant metrics over this comparative period:
Years Ended December 31,
2020 2021
Same store:
Preneed revenue as a percentage of operating revenue 61% 61%
Preneed revenue (in thousands) $ 31,407 $ 39,291
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
Acquired:
Preneed revenue as a percentage of operating revenue 66% 67%
Preneed revenue (in thousands) $ 11,552 $ 18,536
Atneed revenue (in thousands) $ 6,032 $ 9,293
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.
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Cemetery property amortization. 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 $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 $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 $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; (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 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,
2020 2021
Goodwill impairment $ 13,632 $ —
Tradenames impairment 1,061 —
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
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.
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Interest expense . Interest expense related to its respective debt arrangement is as follows (in thousands):
Years Ended December 31,
2020 2021
Senior Notes $ 27,087 $ 22,381
Credit Facility 4,220 2,200
Convertible Notes 169 19
Finance leases 496 471
Acquisition debt 489 364
Other 54 10
Total $ 32,515 $ 25,445
Other, net. The components of Other, net are as follows (in thousands):
Years Ended December 31,
2020 2021
Gain on insurance reimbursements related to Hurricane Michael $ (97) $ —
Loss on land donation — 61
Other (income) expense (55) 23
Total $ (152) $ 84
Income taxes. Our income tax provision was $11.1 million for the year ended December 31, 2021, compared to our income tax provision of $8.6 million for the year ended December 31, 2020. Our operating tax rate before discrete items was 27.8% and 32.4% for the years ended December 31, 2021 and 2020, respectively.
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 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. 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.
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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 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. 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 period to period. 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.
Goodwill
Our quantitative goodwill impairment test involves estimates and management judgment. In the quantitative analysis, we compare the fair value of each reporting unit to its carrying value, including goodwill. We determine fair value for each reporting unit using both an income approach, weighted 90%, and a market approach, weighted 10%. Our methodology for determining an income-based fair value is based on discounting projected future cash flows. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows. Our methodology for determining a market approach fair value utilizes the guideline public company method, in which we rely on market multiples of comparable companies operating in the same industry as the individual reporting units. In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount an impairment charge is recorded in an amount equal to the difference.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 4 for additional information related to goodwill.
Business Combinations
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.
When we acquire a cemetery, we utilize an internal and external approach to determine the fair value of the cemetery property. From an external perspective, we obtain an accredited appraisal to provide reasonable assurance for property existence, property availability (unrestricted) for development, property lines, available spaces to sell, identifiable obstacles or easements and general valuation inclusive of known variables in that market. From an internal perspective, we conduct a detailed analysis of the acquired cemetery property using other cemeteries in our portfolio as a benchmark. This provides the added benefit of relevant data that is not available to third party appraisers. Through this thorough internal process, the Company is able to identify viable costs of property based on historical experience, particular markets and demographics, reasonable margins, practical retail prices and park infrastructure and condition.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 for additional information related to business combinations.
RECENT ACCOUNTING PRONOUNCEMENTS, ACCOUNTING CHANGES AND OTHER REGULATIONS
For discussion of recent accounting pronouncements and accounting changes, see Note 2 in Part II, Item 8. Financial Statements and Supplementary Data.
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