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Item 7. Management’s Discussion and Analysis

2024-03-01 compared with 2023-03-01 · 115 added, 177 removed, 366 unchanged (44% of the section changed)

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

Recent Trends

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

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 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, which currently accounts for approximately 70% of our total revenue and Cemetery Operations, which currently accounts for approximately 30% of our total revenue.

At December 31, 2023, we operated 171 funeral homes in 26 states and 32 cemeteries in 11 states.

Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns.

Funeral services include consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and memorial services and transportation services.

We provide funeral services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.

Our cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as memorial markers, outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise).

We provide cemetery services and products on both an atneed and preneed basis.

Funeral Home Operations

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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.

controlling salary, merchandise and other controllable costs;

exercising pricing leverage related to our atneed business to increase average revenue per contract;

and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, which would offset lower pricing power as preneed contracts mature.

In simple terms, volume and price are the two variables that affect funeral revenue.

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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.

Inflationary and Macroeconomic Trends

During 2023, we continued to experience cost increases from our vendors and suppliers on merchandise and goods due to increases in the cost of raw materials, as well as inflationary impacts and rising interest rates.

For example, we experienced higher costs related to full-time hourly base rates, utilities, funeral supplies, merchandise costs, insurance, and increased borrowing costs due to higher variable interest rates under our Credit Facility.

Although we have taken steps to mitigate these cost increases and we expect these impacts to continue throughout the next 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 consumer discretionary spending, including the amount that consumers are able to spend on our services, although we have not experienced any material 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 next year, we will continue to assess these impacts and take the appropriate steps, if necessary, to mitigate these cost increases, if possible.

During 2023, we experienced lower volumes as compared to prior years due to fluctuations in the death rate, although overall financial performance remains at or above prior reporting periods.

Although we expect fluctuations in the death rate to continue, we are unable to predict or forecast the duration or variation of the death rate with any certainty.

Regardless of these fluctuations in the death rate, we continue to focus on expanding market share, cost management and executing on our strategic operational plans.

LIQUIDITY AND CAPITAL RESOURCES

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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 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.

However, if our capital allocations and 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.

For additional information regarding known material factors that could cause cash flow or access to and cost of finance sources to differ from our expectations, please read Part I, Item 1A, Risk Factors.

For 2024, our plan is to remain focused on integrating our recently acquired business 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, 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.

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Net cash provided by operating activities 84,246 61,024 75,590

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

Acquisitions of businesses and real estate (3,285) (33,876) (44,500)

Proceeds from divestitures and sale of other assets 7,875 5,027 4,132

Proceeds from insurance claims 7,758 2,440 1,403

Capital expenditures (24,883) (26,081) (18,039)

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For the year ended December 31, 2023, cash provided by operating activities was $75.6 million compared to $61.0 million for the year ended December 31, 2022 and $84.2 million for the year ended December 31, 2021.

The increase of $14.6 million for the year ended December 31, 2023 compared to the same period in 2022 was primarily due to an $8.6 million withdrawal of realized capital gains and earnings from our preneed funeral and cemetery trust investments and receiving a $6.0 million incentive payment from a vendor related to a strategic partnership agreement to market and sell prearranged funeral services.

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, 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.

During the year ended December 31, 2023, we acquired a business consisting of three funeral homes, two cemeteries and one cremation focused business for $44.0 million and real estate for $3.1 million of which $0.5 million was paid in cash and the remainder financed over fifteen years.

In addition, we sold two funeral homes and two cemeteries for an aggregate of $1.1 million and real estate for $3.1 million.

We also received proceeds of $1.4 million from our property insurance policy for the reimbursement of renovation costs for certain of our funeral businesses damaged by Hurricane Ian that occurred during the third quarter of 2022 and a fire that occurred during the first quarter of 2023.

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

In addition, we sold four funeral homes for $1.5 million, sold real estate for $3.3 million and purchased real estate 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, 2021, we sold two funeral homes and one cemetery for $2.5 million, sold real estate for $5.2 million and purchased real estate 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.

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.

For the year ended December 31, 2023, our capital expenditures (comprised of growth and maintenance spend) totaled $18.0 million compared to $26.1 million for the year ended December 31, 2022, and $24.9 million for the year ended December 31, 2021.

The following tables present our growth and maintenance capital expenditures (in thousands):

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Total Growth $ 11,568 $ 14,297 $ 9,963

(1) During the year ended December 31, 2023, we spent $0.8 million for renovations to two businesses that were affected by Hurricane Ian, which occurred during the third quarter of 2022 and $0.4 million for renovations to one business that was damaged by a fire, which occurred during the first quarter of 2023, all of which was reimbursed by our property insurance.

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.

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Our financing activities resulted in a net cash outflow of $18.2 million for the year ended December 31, 2023 compared to a net cash outflow of $8.5 million for the year ended December 31, 2022 and a net cash outflow of $71.5 million for the year ended December 31, 2021.

For the year ended December 31, 2023, we had net payments on our Credit Facility, acquisition debt and finance leases of $12.8 million and paid dividends of $6.7 million.

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:

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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.

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

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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.

At December 31, 2023, our share repurchase program had $48.9 million authorized for repurchases.

Credit Facility, Lease Obligations and Acquisition Debt

The outstanding principal of our long-term debt and lease obligations is as follows (in thousands):

The outstanding principal of our Credit Facility, lease obligations and acquisition debt at December 31, 2023 is as follows (in thousands):

December 31, 2022 December 31, 2023

Credit Facility $ 190,700 $ 179,100

Finance leases 5,532 5,157

Operating leases 19,518 18,510

Finance leases 5,157 6,423

Acquisition debt 3,993 5,998

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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).

At December 31, 2023, our senior secured revolving credit facility (the “Credit Facility”) was comprised of:

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

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.

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 in Note 14 to our Consolidated Financial Statements in Part II, Item 8, Financial Statements and Supplementary Data) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”).

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.

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At December 31, 2023, we had outstanding borrowings under the Credit Facility of $179.1 million.

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

We also had one letter of credit for $2.3 million under the Credit Facility, which was increased to $2.6 million on July 7, 2023.

The letter of credit will expire on November 27, 2024 and is expected to automatically renew annually and secures our obligations under our various self-insured policies.

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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

At December 31, 2023, the prime rate margin was equivalent to 2.375% and the BSBY rate margin was 3.375%.

The weighted average interest rate on our Credit Facility was 4.0% and 8.6% for the years ended December 31, 2022 and 2023, respectively.

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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.

We lease certain office facilities, certain funeral homes, vehicles 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):

We lease certain funeral homes, vehicles and equipment under finance leases with original terms ranging from three and a half to forty years.

The components of lease cost are as follows (in thousands):

Years Ended December 31,

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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.

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

We have future payments on our employment agreements of $13.3 million, with $5.5 million payable within 12 months.

In connection with Mr.

Payne’s transition from Executive Chairman of the Board to serving as a special advisor to the Board, his employment agreement with the Company was terminated and he entered into a transition agreement, effective February 22, 2024.

For more information on this transition see Part II, Item 8, Financial Statements and Supplementary Data, Note 24 to our Consolidated Financial Statements.

Letter of credit - We have one letter of credit for $2.6 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.

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Preneed interment rights (property) sold 11,408 10,878 11,813

Average price per interment right sold $ 4,033 $ 4,718 $ 4,576

Average price per preneed interment right sold $ 4,718 $ 4,576 $ 5,007

Gross profit $ 129,516 $ 119,226 $ 124,295

Net income $ 33,159 $ 41,381 $ 33,413

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.

Revenue in 2023 increased $12.3 million compared to 2022, primarily as a result of a 9.4% increase in the average price per preneed interment right sold, an 8.6% increase in the number of preneed interment rights (property) sold and a 0.9% increase in the average revenue per funeral contract, offset by a 2.4% decrease in the funeral contract volume.

The funeral contract volume decrease is primarily a result of the lower impact of COVID-19 related deaths in the first quarter of 2023 as compared to the same period in 2022.

Revenue in 2022 decreased $5.7 million compared to 2021, primarily as a result of 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 largely decreased during that period to have minimal impact on the overall death rate.

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

Gross profit in 2023 increased $5.1 million compared to 2022, primarily due to the increase in revenue from our cemetery segment, offset by an increase in operating expenses in our cemetery segment.

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 2023 decreased $8.0 million compared to 2022, primarily due to the following:

(1) a $10.4 million increase in interest expense;

(2) a $4.7 million increase in general, administrative and other expenses;

and (3) a $1.0 million increase in divestitures, disposals, impairment charges and insurance reimbursements, offset by (4) the increase in gross profit of $5.1 million;

and (5) a $2.8 million decrease in tax expense.

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;

(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;

(5) a $2.3 million increase in general, administrative and other 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.”

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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)

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

Net gain on insurance reimbursements (5)

Disaster recovery and pandemic costs (6)

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)

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.

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

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The following is a discussion of our results of operations for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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.

The term “operating” in the Funeral Home and Cemetery segments refers to all funeral homes and cemeteries that we owned and operated in the current reporting period, excluding certain funeral home and cemetery businesses that we have divested in such period.

The term “divested” when discussed in the Funeral Home segment, refers to two funeral home we sold during the year ended December 31, 2023 and two funeral homes we sold during the year ended December 31, 2022.

The term “divested” when discussed in the Cemetery segment, refers to two cemeteries we sold during the year ended December 31, 2023.

The term “ancillary” in the Funeral Home segment represents our flower shop, monument business, pet cremation business and online cremation businesses.

Cemetery property amortization, field depreciation expense and regional and unallocated funeral and cemetery costs, are not included in operating profit, a non-GAAP financial measure.

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Operating $ 251,396 $ 249,180

Divested/planned divested 3,179 1,560

Divested 1,560 215

Ancillary 4,193 4,588

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Operating $ 101,951 $ 94,949

Divested/planned divested 300 53

Divested 53 (17)

Ancillary 841 455

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The decrease in operating revenue is primarily driven by a 2.4% decrease in contract volume, which was partially offset by a 1.0% 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.

The contract volume decrease is primarily a result of the significant decline in COVID-19 related deaths in the first quarter of 2023 as compared to the same period in 2022, as these deaths now have a minimal impact on the overall death rate.

The increase in average revenue per contract is 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, 2023 decreased $7.0 million when compared to the same period in 2022, primarily due to an increase in operating expenses as a percentage of revenue.

The comparable operating profit margin decreased 250 basis points to 38.1%.

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.

Operating expenses as a percentage of revenue increased 2.4%, with the largest increases in salary and benefits expenses of 1.3%, general and administrative expenses of 0.4%, facilities and grounds expenses of 0.4% and other funeral costs of 0.3%.

The increase in operating expenses is primarily due to our Bakersfield, CA business acquired during the first quarter of 2023.

As we continue to integrate this business into our Standards Operating Model, we expect to see their operating expenses as a percentage of revenue become more consistent with our remaining portfolio of businesses.

Ancillary revenue, which represents revenue from our flower shop, monument business, pet cremation business and online cremation businesses increased $0.4 million, while ancillary operating profit decreased $0.4 million for the year ended December 31, 2023 compared to the year ended December 31, 2022.

The increase in revenue is primarily due to our Bakersfield, CA business acquired during the first quarter of 2023, as it was not present in the comparative period of 2022.

Similarly, the decrease in operating profit is primarily due to this same business, as its operating profit margins were lower compared to our other ancillary businesses, particularly with regard to higher salaries and benefits expenses.

Other revenue and other operating profit, which consist of preneed funeral insurance commissions and preneed funeral trust earnings, both increased $1.0 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to the recognition of additional general agency commission revenue in 2023 as we entered into an exclusive partnership agreement with a national insurance provider to market and sell prearranged funeral services in the future.

Cemetery Segment

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Operating $ 90,033 $ 102,216

Divested/planned divested 858 252

Divested 252 45

Other 12,986 15,483

Total $ 103,271 $ 117,744

Operating Profit:

Operating profit (loss):

Operating $ 37,509 $ 41,096

Divested/planned divested 365 (47)

Divested (47) 12

Other 12,428 14,971

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Average price per interment right sold $ 4,576 $ 5,007

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 operating revenue increased $12.2 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily as a result of a 9.4% increase in the average price per preneed interment right sold, as well as an 8.6% increase in preneed interment rights sold.

Cemetery atneed revenue, which represents 37.0% of our total operating revenue, increased $3.6 million for the year ended December 31, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services from our newly acquired cemetery businesses, which were not present in the year ended 2022.

Cemetery operating profit increased $3.6 million for the year ended December 31, 2023, compared to the year ended December 31, 2022.

The increase in operating profit is primarily due to the increase in operating revenue, offset by an increase in operating expenses as a percentage of revenue.

The comparable operating profit margin decreased 150 basis point to 40.2%.

Operating expenses as a percentage of operating revenue increased 1.5%, with the largest increases in salary and benefits expenses of 0.8% and promotional expenses, which includes sales commissions, of 0.8%.

Other revenue and other operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, both increased $2.5 million for the year ended December 31, 2023, compared to the year ended December 31, 2022, primarily due to a $2.1 million increase in perpetual care trust fund income and a $0.2 million increase in finance charges on preneed sales.

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.

Cemetery property amortization totaled $6.0 million for the year ended December 31, 2023, an increase of $0.2 million compared to the year ended December 31, 2022, primarily due to the increase 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.

Depreciation expense for our field businesses totaled $14.2 million for the year ended December 31, 2023, an increase of $0.9 million compared to the year ended December 31, 2022, primarily due to the business acquisitions made in the latter half of 2022 and the first quarter of 2023.

Regional and unallocated funeral and cemetery costs.

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(1) a $4.6 million decrease in cash incentives and equity compensation;

(2) a $1.2 million decrease in incentive award trips and annual managing partner meetings;

(3) a $0.4 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.

and (4) a $0.2 million decrease in all other expenses.

Other Financial Statement Items

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General, administrative and other expenses totaled $42.1 million for the year ended December 31, 2023, an increase of $4.7 million compared to the year ended December 31, 2022, 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.

(1) a $3.7 million increase in salary and benefits expense and cash and equity incentive compensation, as a result of changes to our senior leadership team, including current year executive promotions;

and (2) a $2.2 million increase in consulting fees related to the Board’s review of strategic alternatives, offset by (3) a $0.6 million decrease in online marketing costs;

and (4) a $0.6 million decrease in all other expenses.

Net loss on divestitures, disposals and impairment charges.

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Years Ended December 31,

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

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

Impairment of goodwill, intangibles and PPE $ 2,358 $ 454

Net (gain) loss on divestitures (543) 106

Net loss on disposals of fixed assets 214 631

Total $ 2,029 $ 1,191

During the year ended December 31, 2023, we sold two funeral homes and two cemeteries for a loss of $0.1 million.

We also recognized an impairment of $0.2 million as a result of our 2023 qualitative assessment of tradenames and an impairment of $0.2 million related to property, plant and equipment for 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 .

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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 .

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Acquisition debt 311 291

Convertible Notes 19 —

Total $ 25,895 $ 36,266

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.

Net gain on property damage, net of insurance claims.

The components of Net gain on property damage, net of insurance claims are as follows (in thousands):

Years Ended December 31,

Gain on property damaged by Hurricane Ida $ (3,455) $ (28)

Gain on property damaged by Hurricane Ian — (379)

(Gain) loss on other property damage (16) 64

Total $ (3,471) $ (343)

During the year ended December 31, 2023, we recorded a $1.4 million gain on the sale of other real estate not used in business operations.

We did not record any gain or loss activity during the year ended December 31, 2022.

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.

Income tax expense totaled $13.0 million for the year ended December 31, 2023, a decrease of $3.1 million compared to the year ended December 31, 2022.

Our operating tax rate before discrete items was 28.4% for both the years ended December 31, 2023 and 2022.

We recorded a net discrete tax benefit of $0.2 million for the year ended December 31, 2023, a decrease of $0.3 million compared to the year ended December 31, 2022.

The net discrete tax benefit for the year ended December 31, 2023, includes benefit related to equity compensation and other adjustments including return to provision analysis and state legislative changes.

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

What changed 10-K

Item 7. Management’s Discussion and Analysis