CARRIAGE SERVICES INC 10-K

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. 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. General We operate in two business segments: 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. 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, 2022, we operated 171 funeral homes in 26 states and 32 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. 26 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 (defined below). 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 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 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. 27 Cash Flows We began 2022 with $1.1 million in cash and ended the year with $1.2 million in cash. 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): Years Ended December 31, 2020 2021 2022 Cash at beginning of year $ 716 $ 889 $ 1,148 Net cash provided by operating activities 82,915 84,246 61,024 Acquisition of businesses and real estate (28,011) (3,285) (33,876) Proceeds from divestiture and sale of other assets 8,541 7,875 5,027 Proceeds from insurance reimbursements 248 7,758 2,440 Capital expenditures (15,198) (24,883) (26,081) Net cash used in investing activities (34,420) (12,535) (52,490) 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 Dividends paid on common stock (6,048) (7,264) (6,763) Purchase of treasury stock — (140,040) (36,663) Other financing costs (169) (461) — Net cash used in financing activities (48,322) (71,452) (8,512) Cash at end of year $ 889 $ 1,148 $ 1,170 Operating Activities 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 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 Our investing activities resulted in a net cash outflow of $52.5 million f or the year ended December 31, 2022 compared to $12.5 million for the year ended December 31, 2021 and $34.4 million for the year ended December 31, 2020. Acquisition and Divestiture Activity 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 28 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. Capital Expenditures For the year ended December 31, 2022, our capital expenditures (comprising of growth and maintenance spend) totaled $26.1 million compared to $24.9 million for the year ended December 31, 2021, and $15.2 million for the year ended December 31, 2020. The following tables present our growth and maintenance capital expenditures (in thousands): Years Ended December 31, 2020 2021 2022 Growth Cemetery development $ 4,705 $ 5,845 $ 7,679 Renovations at certain businesses (1) 953 4,541 5,048 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. Years Ended December 31, 2020 2021 2022 Maintenance 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 Paving roads and parking lots 731 1,186 1,157 Information technology infrastructure improvements 949 230 524 Total Maintenance $ 8,762 $ 13,315 $ 11,784 Financing Activities 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) $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 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 2.75% convertible subordinated notes. 29 Dividends Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2022 Per Share Dollar Value March 1st $ 0.1125 $ 1,725 June 1st $ 0.1125 $ 1,730 September 1st $ 0.1125 $ 1,653 December 1st $ 0.1125 $ 1,655 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 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, as amended (the “Exchange Act”). 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): Years Ended December 31, 2020 2021 2022 Number of Shares Repurchased (1) — 2,906,983 695,496 Average Price Paid Per Share $ — $ 49.01 $ 49.22 Dollar Value of Shares Repurchased (1) $ — $ 142,469 $ 34,234 (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, 2022, our share repurchase program had $48.9 million authorized for additional repurchases. 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, 2021 December 31, 2022 Credit Facility $ 155,400 $ 190,700 Finance leases 5,532 5,157 Operating leases 20,433 19,518 Acquisition debt 4,500 3,993 Total $ 185,865 $ 219,368 30 Credit Facility 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. 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. 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, 2022, we were subject to the following financial covenants under our Credit Facility: (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. We were in compliance with all of the covenants contained in our Credit Facility at December 31, 2022. At December 31, 2022, we had outstanding borrowings under the Credit Facility of $190.7 million. We also had one letter of credit for $2.3 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 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 31 was 3.375%. 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. The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands): Years Ended December 31, 2020 2021 2022 Credit Facility interest expense $ 3,738 $ 1,820 $ 7,105 Credit Facility amortization of debt issuance costs 482 380 412 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, 2020 2021 2022 Operating lease cost $ 3,795 $ 3,762 $ 3,375 Short-term lease cost 185 193 329 Variable lease cost 39 160 324 Finance lease cost: Depreciation of leased assets $ 439 $ 438 $ 438 Interest on lease liabilities 496 471 442 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. 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. The imputed interest expense related to our acquisition debt is as follows (in thousands): Years Ended December 31, 2020 2021 2022 Acquisition debt imputed interest expense $ 489 $ 364 $ 311 At December 31, 2022, acquisition debt obligations were $5.7 million, with $0.8 million payable within 12 months. See Part II, Item 8, Financial Statements and Supplementary Data, Note 12 to our Consolidated Financial Statements for further detail of our debt payments. Convertible Subordinated Notes due 2021 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 and 2022. 32 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, 2020 2021 2022 Convertible Notes interest expense $ 149 $ 18 $ — Convertible Notes accretion of debt discount 216 20 — Convertible Notes amortization of debt issuance costs 20 1 — The effective interest rate on the unamortized debt discount and debt issuance costs for the year ended December 31, 2021 was 3.1%. Senior Notes 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. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. In addition, before May 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Senior Notes outstanding using an amount of cash equal to the net proceeds of certain equity offerings, at a price of 104.25% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption; provided that (1) at least 50% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes) outstanding under the Indenture remain outstanding immediately after the occurrence of such redemption (unless all Senior Notes are redeemed concurrently), and (2) each such redemption must occur within 180 days of the date of the consummation of any such equity offering. If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest. 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 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 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. 33 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, 2020 2021 2022 Senior Notes interest expense $ 26,500 $ 21,767 $ 16,980 Senior Notes amortization of debt discount 528 504 493 Senior Notes amortization of debt premium 221 85 — Senior Notes amortization of debt issuance costs 280 195 140 We have future interest payments on our outstanding balance of $108.3 million, with $17.0 million payable within 12 months. See Part II, Item 8, Financial Statements and Supplementary Data, Note 14 to our Consolidated Financial Statements for further detail of our debt and interest payments. Off-Balance Sheet Arrangements At December 31, 2022, 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 $8.0 million, with $2.5 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 $2.2 million, with $0.9 million payable within 12 months. 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. We have future payments on our employment agreements of $15.1 million, with $4.8 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 27, 2023 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. 34 FINANCIAL HIGHLIGHTS Below are our financial highlights (in thousands except for volumes and averages): Years Ended December 31, 2020 2021 2022 Revenue $ 329,448 $ 375,886 $ 370,174 Funeral contracts 47,190 49,249 47,498 Average revenue per funeral contract $ 5,145 $ 5,360 $ 5,493 Preneed interment rights (property) sold 9,503 11,408 10,878 Average price per interment right sold $ 4,033 $ 4,718 $ 4,576 Gross profit $ 105,923 $ 129,516 $ 119,226 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; (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 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. 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) 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.” 35 REPORTING AND NON-GAAP FINANCIAL MEASURES 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. 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. Below is a reconciliation of Net income, a GAAP measure to Adjusted net income, a non-GAAP measure, (in thousands): Years Ended December 31, 2020 2021 2022 Net income $ 16,090 $ 33,159 $ 41,381 Special items (1) Acquisition expenses (11) — — Severance and separation costs (2) 563 1,575 1,431 Performance awards cancellation and exchange 288 — — Accretion of discount on Convertible Notes (1) 216 20 — Loss on extinguishment of debt (3) — 23,807 190 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 Net gain on insurance reimbursements (5) — — (3,471) Disaster recovery and pandemic costs (6) 1,627 2,157 168 Other special items (7) 410 2,354 — Change in uncertain tax reserves and other (1) — — (533) Tax adjustment related to certain discrete items (1) 400 — — Sum of special items $ 25,579 $ 30,607 $ (200) Tax effect on special items (1) 7,986 8,503 95 Adjusted net income (8) $ 33,683 $ 55,263 $ 41,086 (1) Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special items are taxed at the 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) 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. 36 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, 2020 2021 2022 Gross profit $ 105,923 $ 129,516 $ 119,226 Cemetery property amortization 4,956 6,670 5,859 Field depreciation expense 13,006 12,609 13,316 Regional and unallocated funeral and cemetery costs 18,057 25,846 22,960 Operating profit (1) $ 141,942 $ 174,641 $ 161,361 (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 financial measure) by Segment (in thousands): Years Ended December 31, 2020 2021 2022 Funeral Home $ 104,998 $ 119,007 $ 111,471 Cemetery 36,944 55,634 49,890 Operating profit $ 141,942 $ 174,641 $ 161,361 Operating profit margin (1) 43.1% 46.5% 43.6% (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 under “Results of Operations.” YEAR ENDED DECEMBER 31, 2022 COMPARED TO YEAR ENDED DECEMBER 31, 2021 Results of Operations 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. 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 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. 37 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. Funeral Home Segment The following table sets forth certain information regarding our Revenue and Operating profit for our funeral home operations (in thousands): Years Ended December 31, 2021 2022 Revenue: 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: 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: Contract volume 49,249 47,498 Average revenue per contract, excluding preneed funeral trust earnings $ 5,200 $ 5,326 Average revenue per contract, including preneed funeral trust earnings $ 5,360 $ 5,493 Cremation rate 56.7% 57.7% 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 38 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 for our cemetery operations (in thousands): Years Ended December 31, 2021 2022 Revenue: Operating $ 91,330 $ 90,033 Divested/planned divested 858 252 Other 13,611 12,986 Total $ 105,799 $ 103,271 Operating Profit: 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: Preneed revenue as a percentage of operating revenue 63% 62% Preneed revenue (in thousands) $ 57,886 $ 56,099 Atneed revenue (in thousands) $ 34,302 $ 34,186 Number of preneed interment rights sold 11,408 10,878 Average price per interment right sold $ 4,718 $ 4,576 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 $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 $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. 39 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 $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 $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; 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. The components of Net loss on divestitures, disposals and impairment charges are as follows (in thousands): Years Ended December 31, 2021 2022 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, 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, 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 . Interest expense related to its respective debt arrangement is as follows (in thousands): Years Ended December 31, 2021 2022 Senior Notes $ 22,381 $ 17,614 Credit Facility 2,200 7,517 Finance leases 471 442 Acquisition debt 364 311 Convertible Notes 19 — Other 10 11 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 $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. 40 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. See Part II, Item 8, Financial Statements and Supplementary Data, Notes 1 and 17 for additional information regarding income taxes. 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. 41 RECENT ACCOUNTING PRONOUNCEMENTS, ACCOUNTING CHANGES AND OTHER REGULATIONS For discussion of recent accounting pronouncements and accounting changes, see Part II, Item 8, Financial Statements and Supplementary Data, Note 2.