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Item 7. Management’s Discussion and Analysis

2023-03-01 compared with 2022-03-02 · 196 added, 262 removed, 347 unchanged (57% of the section changed)

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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.

Beginning in the second quarter of 2022, we began to see deaths directly attributable from COVID-19 largely decrease to have minimal impact on the overall death rate, which accelerated during the third and fourth quarter of 2022.

However, the overall death rate remains slightly higher than the pre-COVID-19 pandemic period, though we are unable to predict or forecast the duration or variation of this increased death rate with any certainty.

As a result of the normalization of the death rate, during the latter half of 2022, we experienced lower volumes, revenues, earnings and margins when compared to the fourth quarter of 2021, but overall financial performance remains at or above prior reporting periods during and prior to the COVID-19 pandemic.

Although we expect these death rate fluctuation trends to continue, we will continue to assess these impacts, including the potential impacts of new variants of COVID-19, its sub-variants and any other new variants, and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related regulatory mandates and restrictions, if any, evolves.

Historically cremation trends have increased year over year and while that continued to be the case in 2022 and we expect will continue to be the case moving forward, we view this as an opportunity to put greater focus on educating our client families on available cremation memorialization options.

Beginning in the second quarter of 2022, we began to experience modest cost increases and surcharges from our vendors and suppliers on merchandise and goods due to broader inflationary, raw material cost increases, and global supply chain impacts.

This trend in modest cost increases continued during the fourth quarter of 2022, with the Company experiencing, for example, higher costs related to full-time hourly base rates, utilities, funeral supplies, merchandise costs and insurance.

Although we have taken steps to mitigate these cost increases and we expect these impacts to continue throughout the current year, the ultimate scope and duration of these impacts are unknown at this time.

More broadly, the U.S.

economy continues to experience higher rates of inflation, which has impacted a wide variety of industries and sectors, with consumers facing rising prices.

Such inflation may negatively impact consumers or discretionary spending, including the amount that consumers are able to spend on our services, although we have not experienced such impacts to date and our industry has been largely resilient to similar adverse economic and market environments in the past.

Although we expect these trends to continue throughout the current year, we will continue to assess these impacts and take the appropriate steps, if necessary, to mitigate these cost increases, if possible.

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.

Funeral Home Operations, which currently accounts for approximately 70% of our revenue, and Cemetery Operations, which currently 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.

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LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.

Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility (defined below).

We generate cash in our operations primarily from atneed sales and delivery of preneed sales.

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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.

However, if our capital expenditures or acquisition plans change, we may need to access the capital markets or seek further borrowing capacity from our lenders to obtain additional funding and we may not be able to obtain such funding on terms and conditions that are acceptable to us.

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.

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.

For 2023, our plan is to remain focused on integrating our recently acquired businesses, along with closing and integrating one pending acquisition, and prioritizing our capital allocation for debt repayments, the payment of dividends and debt obligations and internal growth capital expenditures, which we expect to fund using cash on hand and borrowings under our Credit Facility, along with general corporate purposes and strategic acquisitions, as allowed under our Credit Facility.

We believe that our existing and anticipated cash resources, including, as needed, additional borrowings or other financings that we may be able to obtain, 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.

We began 2022 with $1.1 million in cash and ended the year with $1.2 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.

At December 31, 2022, we had borrowings of $190.7 million outstanding on our Credit Facility compared to $155.4 million as of December 31, 2021 and $47.2 million as of December 31, 2020.

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

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Acquisition of businesses and real estate (28,011) (3,285) (33,876)

Deposit on pending acquisition (5,000) — —

Proceeds from divestiture and sale of other assets 8,541 7,875 5,027

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Net cash used in investing activities (34,420) (12,535) (52,490)

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 borrowings (payments) on our Credit Facility, acquisition debt and finance lease obligations (38,345) 106,869 34,418

Payment to redeem the 6.625% senior notes due 2026 — (400,000) —

Payment of call premium related to the 6.625% senior notes due 2026 — (19,876) —

Proceeds from the issuance of the 4.25% senior notes due 2029 — 395,500 —

Payment of debt issuance costs for the Credit Facility and 4.25% senior notes due 2029 (78) (2,197) (922)

Conversions and maturity of the Convertible Notes (4,563) (3,980) —

Net proceeds from employee equity plans 881 (3) 1,418

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Other financing costs (169) (461) —

Net cash provided by (used in) financing activities 115,742 (48,322) (71,452)

Net cash used in financing activities (48,322) (71,452) (8,512)

Cash at end of year $ 889 $ 1,148 $ 1,170

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For the year ended December 31, 2022, cash provided by operating activities was $61.0 million compared to $84.2 million for the year ended December 31, 2021 and $82.9 million for the year ended December 31, 2020.

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.

The decrease of $23.2 million for the year ended December 31, 2022 compared to the same period in 2021 was primarily due to the unfavorable working capital changes in accrued liabilities, which were partially offset by favorable changes in income tax receivables.

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

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.

During the year ended December 31, 2022, we acquired a business consisting of two funeral homes in Kissimmee, Florida for $6.3 million in cash and a business consisting of three funeral homes, one cemetery and one cremation focused business in the Charlotte, North Carolina area for $25.0 million in cash.

In addition, we sold four funeral homes for $1.5 million, sold real property for $3.3 million and purchased real property for $2.6 million.

We also received proceeds of $2.4 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, 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

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953 4,541 5,048

Streaming equipment and cemetery sales software 42 636 687

Crematory projects 46 495 788

Other 732 687 782

Total Growth $ 6,436 $ 11,568 $ 14,297

(1) During the year ended December 31, 2022, we spent $2.4 million for renovations on two businesses that were affected by Hurricane Ida, all of which was reimbursed by our property insurance.

During the year ended December 31, 2021, we spent $1.6 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,

2020 2021 2022

Facility repairs and improvements $ 1,820 $ 2,053 $ 2,543

General equipment and furniture $ 3,536 $ 7,027 $ 4,834

Facility repairs and improvements 2,053 2,543 3,207

Vehicles 1,493 2,329 2,062

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Information technology infrastructure improvements 949 230 524

Other 221 644 880

Total Maintenance $ 8,762 $ 13,315 $ 11,784

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.

Our financing activities resulted in a net cash outflow of $8.5 million for the year ended December 31, 2022 compared to a net cash outflow of $71.5 million for the year ended December 31, 2021 and a net cash outflow of $48.3 million for the year ended December 31, 2020.

For the year ended December 31, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $34.4 million, offset by the following payments:

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

i) $36.7 million for the purchase of treasury stock;

ii) $6.8 million in dividends;

and iii) $0.9 million for debt issuance and transactions costs related to our Credit Facility.

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 6.625% senior notes due 2026;

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;

iii) $2.2 million for debt issuance and transactions costs related to our 4.25% senior notes due 2029 and Credit Facility;

iv) $4.0 million for the conversions and maturity of our 2.75% convertible subordinated 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.

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.

In addition, we paid $6.0 million in dividends and $4.6 million for the repurchase of a portion of our 2.75% convertible subordinated notes.

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

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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.

On February 23, 2022, our Board authorized an increase in our share repurchase program to permit us to purchase up to an additional $75.0 million under our share repurchase program, in addition to amounts previously authorized and outstanding in accordance with Rule 10b-18 of the Exchange Act, which totaled up to $265.0 million in share repurchase authorizations.

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

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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.

At December 31, 2022, our share repurchase program had $48.9 million authorized for additional repurchases.

Credit Facility, Lease Obligations and Acquisition Debt

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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.

At December 31, 2022, our senior secured revolving credit facility (as previously amended, including the Second Credit Facility Amendment and Third Credit Facility Amendment, the “Credit Facility”) was comprised of:

(i) a $250.0 million senior secured 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 aggregate in the form of increased revolving commitments or incremental term loans.

On May 27, 2022, we entered into a second amendment and commitment increase (the “Second Credit Facility Amendment”) to our Credit Facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent.

The Second Credit Facility Amendment provided, among other things, for (i) an increase to the Revolving Credit Commitments (as defined in the Credit Facility) from $200.0 million to $250.0 million in the aggregate;

(ii) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid;

(iii) the establishment of the BSBY as a benchmark rate and the removal of LIBOR;

(iv) an increase in the maximum Total Leverage Ratio (as defined in the Credit Facility) to 5.25 to 1.00;

and (v) modifications to the restricted payments covenant to allow us to make additional stock repurchases, subject to the satisfaction of certain conditions therein.

We incurred $0.3 million in transactions costs related to the Second Credit Facility Amendment, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.

On December 9, 2022, we entered into a third amendment (the “Third Credit Facility Amendment”), to our Credit Facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent.

The Third Credit Facility Amendment provides, among other things, for (i) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid;

(ii) an increase in the maximum Total Leverage Ratio (as defined in the Credit Facility) covenant as follows:

a Total Leverage Ratio not to exceed (a) 6.00 to 1.00 from the effective date of the Third Credit Facility Amendment through the quarter ended June 30, 2023, (b) 5.75 to 1.00 for the quarters ended September 30, 2023, and December 31, 2023, (c) 5.50 to 1.00 for the quarters ended March 31, 2024 and June 30, 2024, (d) 5.25 to 1.00 for the quarter ended September 30, 2024, and (e) 5.00 and 1.00 for the quarter ended December 31, 2024 and each quarter ended thereafter;

(iii) modifications to the permitted investments covenant, relating to the Company’s ability to make certain acquisitions, subject to the satisfaction of certain conditions therein;

(iv) modifications to the restricted payments covenant related to the Company’s ability to make stock repurchases, subject to the satisfaction of certain conditions therein;

and (v) a modification to the Total Leverage Ratio level which constitutes a Real Property Collateral Trigger Event (as defined in the Credit Facility).

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.

Prior to the execution of the Third Credit Facility Amendment, we recognized a loss on the write-off of $0.2 million in unamortized debt issuance costs, which was recorded in Loss on extinguishment of debt .

We also incurred $0.6 million in transactions costs related to the execution of the Third Credit Facility 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 (as defined below) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”).

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.

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At December 31, 2022, 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.

(A) a Total Leverage Ratio not to exceed 6.00 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.

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At December 31, 2022, we had outstanding borrowings under the Credit Facility of $190.7 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.

We also had one letter of credit for $2.3 million under the Credit Facility.

The letter of credit will expire on November 27, 2023 and is expected to automatically renew annually and secures our obligations under our various self-insured policies.

At December 31, 2022, we had $57.0 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.

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

At December 31, 2022, the prime rate margin was equivalent to 2.375% and the BSBY rate margin

The weighted average interest rate on our Credit Facility was 3.8% and 4.0% for the years ended December 31, 2021 and 2022, respectively.

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

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

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Interest on lease liabilities 496 471 442

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

At December 31, 2022, non-cancelable operating and finance lease obligations were $36.4 million, with $4.7 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.

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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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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.

During the year ended December 31, 2021, we converted $2.4 million in aggregate principal amount of our 2.75% convertible subordinated notes due 2021 (the “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.

Therefore, no Convertible Notes remain outstanding at December 31, 2021 and 2022.

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 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.

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 effective interest rate on the unamortized debt discount and debt issuance costs for the year ended December 31, 2021 was 3.1%.

At December 31, 2022, we had $400.0 million in aggregate principal amount of 4.25% Senior Notes due 2029 (the “Senior Notes”) and related guarantees by the Subsidiary Guarantors, which were issued in a private offering under Rule 144A and Regulation S of the Securities Act.

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

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.

The Senior Notes mature on May 15, 2029, unless earlier redeemed or purchased and bear interest at 4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021.

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.

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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;

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

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 debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of 77 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 effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes for both the years ended December 31, 2021 and 2022 was 4.42% and 4.30%, respectively.

The fair value of the Senior Notes, which are Level 2 measurements, was $322.3 million at December 31, 2022.

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We have future payments on our consulting agreements of $2.2 million, with $0.9 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.

Employment agreements - We have employment agreements with our executive officers.

These agreements are generally for three to six 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.

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Net income $ 16,090 $ 33,159 $ 41,381

Revenue in 2022 decreased $5.7 million compared to 2021, as we experienced a 3.6% decrease in funeral contract volume, a 4.6% decrease in the number of preneed interment rights (property) sold and a 3.0% decrease in the average price per interment right sold, which were slightly offset by a 2.5% increase in average revenue per funeral contract.

The decrease in funeral contract volume and the number of interment rights sold correspond to the decline in COVID-19 related cases in 2022 compared to 2021, as deaths directly attributable from COVID-19 have now largely decreased to have minimal impact on the overall death rate.

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;

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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

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.”

We believe the increase in volume during 2021 is due not only to COVID-19 deaths, but is also the 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 services in 2021 began to return to pre-COVID-19 levels.

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

Gross profit in 2022 decreased $10.3 million compared to 2021, due to the decrease in revenue, as well as increases in operating expenses, in both our funeral and cemetery segments.

These increases are partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies, and merchandise costs.

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;

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

Net income in 2022 increased $8.2 million compared to 2021, primarily due to the following:

(1) a $23.6 million loss on extinguishment of debt in 2021;

(2) a $3.5 million gain on insurance reimbursements in 2022;

offset by (3) the decrease in gross profit of $10.3 million;

(4) a $4.7 million increase in tax expense;

(5) a $2.3 million increase in general and administrative expenses;

and (6) a $1.4 million decrease in net loss on divestitures, disposals and impairments charges.

Net income in 2021 increased $17.1 million compared to 2020, primarily due to the following:

(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.”

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

Further discussion of General, administrative and other expenses, Net loss on divestitures, disposals and impairment charges, Interest expense, Income taxes and other components of income and expenses are presented 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.

We also present our financial performance in our “Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the year ending December 31, 2022, 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.

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Accretion of discount on Convertible Notes (1)

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

Loss on extinguishment of debt (3)

Net (gain) loss on divestitures 6,864 (856) (543)

Impairment of goodwill, intangibles and PPE 14,952 500 2,358

Litigation reserve (4)

270 1,050 200

Tax expense related to divested business (1)

Gain on insurance reimbursements (885) — —

Net gain on insurance reimbursements (5)

Disaster recovery and pandemic costs (6)

Other special items (5)

1,627 2,157 168

Other special items (7)

Change in uncertain tax reserves and other (1)

Tax adjustment related to certain discrete items (1)

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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.

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.

Special items are taxed at the operating tax rate for the period except for the Accretion of the discount on Convertible Notes, the Change in uncertain tax reserves and other and the Tax adjustment related to certain discrete items, as these items are not tax effected.

(2) Costs related to the departure of certain key members of leadership.

(3) Loss on the redemption of our 6.625% senior notes due 2026 in 2021 and the write-off of unamortized debt issuance costs related to the Credit Facility in 2022.

(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.

(5) Net gain recognized on insurance reimbursements for property damage caused by Hurricane Ida that occurred during the third quarter of 2021.

(6) Relates to health and safety expenses, including personal protective equipment (“PPE”) due to COVID-19.

We purchased more PPE during 2020 and 2021 compared to 2022.

(7) Relates to the write-off of certain fixed assets and interest paid on our 6.625% senior notes due 2026 for the two-week period during which our Senior Notes were issued prior to the redemption of our 6.625% senior notes due 2026.

(8) 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):

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

Years Ended December 31,

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$ 141,942 $ 174,641 $ 161,361

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

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

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):

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

Years Ended December 31,

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(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.”

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

YEAR ENDED DECEMBER 31, 2022 COMPARED TO YEAR ENDED DECEMBER 31, 2021

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The following is a discussion of our results of operations for the year ended December 31, 2022 compared to the year ended December 31, 2021.

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.

We previously classified our funeral homes and cemeteries as “same store” or “acquired” in our results of operations discussion in our quarterly and annual filings prior to December 31, 2022.

Same store generally referred to funeral homes and cemeteries acquired at least five years before the reporting period being presented, while acquired generally referred to funeral homes and cemeteries acquired within the preceding five years of the reporting period being presented, both of which excluded certain funeral homes and cemeteries that we intended to divest.

In an effort to simplify the discussion of our results of operations, provide meaningful metrics to investors to compare our results to previous periods and provide more insight into the underlying long-term performance trends in our business, we have combined both the same store and acquired categories and now refer to this combination as “operating”.

The term “operating” in the Funeral Home and Cemetery Segment simply refers to all our funeral homes and cemeteries owned and operated in the current reporting period, excluding certain funeral home and cemetery businesses that we have divested or intend to divest in the near future.

The term “divested” when discussed in the Funeral Home Segment, refers to four funeral homes we sold and one funeral home we merged with another business we own in an existing market during the year ended December 31, 2022 and 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.

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.

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

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

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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):

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

Years Ended December 31,

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

Operating $ 252,926 $ 251,396

Divested/planned divested 3,179 1,560

Ancillary 4,437 4,193

Other 9,545 9,754

Total $ 270,087 $ 266,903

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

Operating $ 109,204 $ 101,951

Divested/planned divested 300 53

Ancillary 1,006 841

Other 8,497 8,626

Total $ 119,007 $ 111,471

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

Years Ended December 31,

Contract volume 49,249 47,498

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Average revenue per contract, including preneed funeral trust earnings $ 5,360 $ 5,493

Burial rate 36.6% 35.2%

Cremation rate 56.7% 57.7%

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.

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.

Funeral home operating revenue decreased $1.5 million for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The decrease in operating revenue is primarily driven by a 3.6% decrease in contract volume, which was partially offset by a 2.4% increase in the average revenue per contract excluding preneed interest.

The contract volume decrease is primarily a result of the significant decline in COVID-19 related cases in 2022 as compared to 2021, as deaths directly attributable from COVID-19 have now largely decreased to have minimal impact on the overall death rate.

The increase in average revenue per contract for 2022 reflects increases of 2.0% and 0.8% in cremations and burials with services, respectively.

These increases are primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.

Funeral home operating profit for the year ended December 31, 2022 decreased $7.3 million when compared to the same period in 2021, primarily due to an increase in operating expenses as a percentage of revenue.

The comparable operating profit margin decreased 260 basis points to 40.6%.

Operating expenses as a percentage of revenue increased 2.6% with the largest increase in salaries and benefits expenses of 0.9%, general and administrative expenses of 0.4%, facilities and grounds expenses of 0.3% and transportation costs of 0.2%.

The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities and funeral supplies.

Ancillary revenue, which 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, 2022 compared to the year ended December 31, 2021.

Other revenue, which consists of preneed funeral insurance commissions and preneed funeral trust and insurance increased $0.2 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The increase is primarily due to a 3.2% and 1.4% increase in number of contracts that matured to atneed and the earnings on those preneed contracts, respectively, for 2022 compared to the same period in 2021, as revenue recognition is driven by preneed contracts

maturing to atneed.

Other operating profit increased $0.2 million for the same comparative period, 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):

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

Years Ended December 31,

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

Operating $ 91,330 $ 90,033

Divested/planned divested 858 252

Other 13,611 12,986

Total $ 105,799 $ 103,271

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

Operating $ 42,158 $ 37,509

Divested/planned divested 365 (47)

Other 13,111 12,428

Total $ 55,634 $ 49,890

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

Years Ended December 31,

Preneed revenue as a percentage of operating revenue 63% 62%

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Average price per interment right sold $ 4,718 $ 4,576

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.

Cemetery operating revenue decreased $1.3 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, as we experienced a 4.6% decline in the number of preneed interment rights sold, as well as a 3.0% decline in the average price per preneed interment right sold.

The decline in the number of preneed interment rights sold is partially due to turnover we experienced at certain cemeteries in our preneed sales organization, as we continue to focus on recruiting the right sales leadership teams.

The decrease in the average price per preneed internment right sold is primarily due to a decline of higher-end property sales at certain cemeteries during 2022 compared to 2021.

Cemetery atneed revenue, which represents 38% of our total operating revenue, remained flat for the year ended December 31, 2022, compared to the prior year.

Cemetery operating profit decreased $4.6 million for the year ended December 31, 2022 compared to the year ended December 31, 2021, primarily due to an increase in operating expenses as a percentage of revenue.

The comparable operating profit margin decreased 450 basis points to 41.7%.

Operating expenses as a percent of operating revenue increased 4.5%, which was primarily comprised of an increase in facilities and grounds expenses of 1.0%, an increase in the allowance for credit losses of 0.8%, due to a change in estimate in the second quarter of 2021, which resulted in lower credit loss expense in the prior period, and an increase in merchandise costs of 0.6%.

The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our utilities and merchandise costs.

Other revenue, which consists of preneed cemetery trust revenue and preneed cemetery finance charges decreased $0.5 million for the year ended December 31, 2022, compared to the year ended December 31, 2021.

The decrease is primarily due to a decrease in realized capital gains from our perpetual care trust fund.

Other operating profit decreased $0.5 million for the same comparative period, primarily due to the decrease in revenue.

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.

Cemetery property amortization totaled $5.9 million for the year ended December 31, 2022, a decrease of $0.8 million compared to the year ended December 31, 2021, primarily due to the decrease 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.

Depreciation expense for our field businesses totaled $13.3 million for the year ended December 31, 2022, an increase of $0.7 million compared to the year ended December 31, 2021, primarily due to depreciation from computer and hardware equipment added in the last twelve months, as well as from assets added as a result of our 2022 acquisitions.

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.

Regional and unallocated funeral and cemetery costs totaled $23.0 million for the year ended December 31, 2022, a decrease of $2.9 million compared to the year ended December 31, 2021, primarily due to the following:

(1) a $3.1 million decrease in cash incentives and equity compensation;

(2) a $1.4 million decrease in health and safety expenses related to COVID-19;

(3) a $0.2 million decrease in salary and benefits expenses;

offset by (4) a $1.1 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19;

and (5) a $0.8 million increase in other general administrative costs.

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;

General, administrative and other expenses totaled $36.8 million for the year ended December 31, 2022, an increase of $2.9 million compared to the year ended December 31, 2021, primarily due to the following:

(1) a $3.2 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a Chief Information Officer;

(2) a $2.0 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.

offset by (3) a $1.4 million decrease in cash incentives and equity compensation;

(4) a $1.3 million decrease in insurance claims expense, which includes a one-time $1.0 million payment for residual insurance claims in 2021;

(5) a $0.6 million decrease in separation expense related to the departure of certain key members of leadership;

and (6) a $0.2 million decrease in divestiture expenses.

Net loss on divestitures, disposals and impairment charges.

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Years Ended December 31,

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)

Impairments related to assets held for sale $ 500 $ 2,358

Net gain on divestitures and real property (856) (543)

Net loss on disposals of fixed assets 1,022 214

Total $ 666 $ 2,029

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 .

During the year ended December 31, 2022, we recognized impairments of $1.0 million related to property, plant and equipment, $0.9 million related to cemetery property and $0.4 million related to goodwill for assets held for sale .

In addition, we divested four funeral homes and sold real property for a net gain of $0.7 million, of which $0.2 million was recorded in Other, net .

We also disposed of damaged and obsolete property, plant and equipment that had a carrying value of $0.2 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.

During the year ended December 31, 2021, we recognized an impairment of $0.5 million related to property, plant and equipment assets held for sale .

In addition, we sold two funeral homes and one cemetery and sold real property for a net gain of $0.9 million.

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

Interest expense .

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Credit Facility 2,200 7,517

Convertible Notes 169 19

Finance leases 471 442

Acquisition debt 364 311

Total $ 32,515 $ 25,445

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

Years Ended December 31,

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

Loss on land donation — 61

Other (income) expense (55) 23

Convertible Notes 19 —

Total $ 25,445 $ 25,895

Gain on insurance reimbursements.

During the year ended December 31, 2022, we recorded a gain on the reimbursements received from insurance for property damaged by Hurricane Ida that occurred during the third quarter of 2021.

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.

Our income tax provision was $15.8 million and $11.1 million for the years ended December 31, 2022 and 2021, respectively, and our operating tax rate before discrete items was 28.4% and 27.8% for the years ended December 31, 2022 and 2021, respectively.

We recorded a net discrete tax benefit of $0.4 million and $1.2 million for the years ended December 31, 2022 and 2021, respectively.

The net discrete tax benefit for the year ended December 31, 2022, includes benefit related to equity compensation and other adjustments including return to provision analysis and state legislative changes.

Our effective tax rate was 27.6% and 25.2% for years ended December 31, 2022 and 2021, 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.

At December 31, 2022, our unrecognized tax benefit reserve for uncertain tax positions primarily relates to the uncertainty of receiving audit protection for revenue recognition of cemetery property for the benefit derived from carrying back losses to tax years with a higher effective tax rate than the current 21.0% rate.

Our unrecognized tax benefit reserve for the years ended December 31, 2022 and 2021 was $3.3 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.

See Part II, Item 8, Financial Statements and Supplementary Data, Notes 1 and 17 for additional information regarding income taxes.

CRITICAL ACCOUNTING ESTIMATES

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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.

For discussion of recent accounting pronouncements and accounting changes, see Part II, Item 8, Financial Statements and Supplementary Data, Note 2.

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