CARRIAGE SERVICES, INC. OVERVIEW
General
We operate in two business segments: funeral home operations, which accounts for approximately 75% of our revenue, and cemetery operations, which accounts for approximately 25% 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. AtDecember 31, 2020 , we operated 178 funeral homes in 26 states and 32 cemeteries in 12 states withinthe United States . For additional discussion about our overall business strategy, see Part I, Item 1, Business - Business Strategy. Funeral Home Operations Factors affecting our funeral operating results include: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed business to increase average revenue per contract. In simple terms, volume and price are the two variables that affect funeral revenue. The average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. Cemetery Operations Factors affecting our cemetery operating results include: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds. LIQUIDITY AND CAPITAL RESOURCES Overview Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility. We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item 1A, Risk Factors. For 2021, our plan is to remain focused on integrating our newly acquired businesses and to use cash on hand and borrowings under our Credit Facility primarily for general corporate purposes, payment of dividends and debt obligations and the redemption of our Convertible Notes dueMarch 2021 . However, if we were to refinance our Senior Notes when they become callable, it may provide us the ability, from a capital allocation perspective, to potentially resume strategic acquisitions, internal growth capital expenditures, share repurchases, dividend increases and further debt repayments. We also expect continued divestiture activity for the next 6-12 months, which could yield approximately$10-11 million of cash from the proceeds of the sale. From time to time we may also use available cash resources (including borrowings under our Credit 24 -------------------------------------------------------------------------------- Table of Contents Facility) to repurchase shares of our common stock, subject to satisfying certain financial covenants in our Credit Facility. We believe that our existing and anticipated cash resources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months. Cash Flows We began 2020 with$0.7 million in cash and ended the year with$0.9 million in cash. AtDecember 31, 2020 , we had borrowings of$47.2 million outstanding on our Credit Facility compared to$83.8 million as ofDecember 31, 2019 and$27.1 million as ofDecember 31, 2018 . The following table sets forth the elements of cash flow (in thousands): Years Ended December 31, 2018 2019 2020 Cash at beginning of year$ 952 $ 644 $ 716 Net cash provided by operating activities 48,994 43,216 82,915 Acquisitions (37,970) (140,907) (28,011) Deposit on pending acquisition - (5,000) - Proceeds from insurance reimbursements - 1,433 248 Proceeds from divestiture and sale of other assets - 967 8,541 Capital expenditures (13,526) (15,379) (15,198) Net cash used in investing activities (51,496) (158,886) (34,420) Net borrowings (payments) on our Credit Facility, acquisition debt and finance lease obligations (194,340) 54,413 (38,345)
Payment of debt issuance costs related to long-term debt
(1,751) (891) -
Repurchase of Convertible Notes (98,266) (27) (4,563)
Payment of transaction costs related to the
repurchase of Convertible Notes (885) - (12)
Proceeds from the issuance of the Senior Notes 320,125 76,688 -
Payment of debt issuance costs related to the Senior Notes
(1,367) (980) (66)
Dividends paid on common stock (5,513) (5,398) (6,048)
Net proceeds from employee equity plans 595 1,251 881
Purchase of treasury stock (16,266) (9,152) -
Other financing costs (138) (162) (169)
Net cash provided by (used in) financing activities 2,194
115,742 (48,322)
Cash at end of year $ 644 $ 716 $ 889
Operating Activities
For the year ended December 31, 2020 , cash provided by operating activities was
$82.9 million compared to $43.2 million for the year ended December 31, 2019 and
$49.0 million for the year ended December 31, 2018 . The increase of $39.7
million for the year ended December 31, 2020 compared to the year ended
December 31, 2019 is a reflection of the resilient cash generating ability of
our portfolio of high-quality funeral home and cemetery operations. Our
operating income (excluding the non-cash impact of the divestitures and
impairment charges) increased $26.4 million in addition to other favorable
working capital changes.
The decrease of $5.8 million for the year ended December 31, 2019 compared to
the year ended December 31, 2018 was primarily due to approximately $5.0 million
in more cash interest paid in 2019 compared to 2018, as well as additional
unfavorable working capital changes.
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Investing Activities
Our investing activities resulted in a net cash outflow of $34.4 million for the
year ended December 31, 2020 compared to $158.9 million for the year ended
December 31, 2019 and $51.5 million for the year ended December 31, 2018 .
Acquisition and Divestiture Activity
During the year ended December 31, 2020 , we acquired one funeral home and
cemetery combination business in Lafayette, California for $33.0 million in
cash, of which $5.0 million was deposited in escrow in 2019 and $28.0 million
was paid at closing in 2020. In addition, we sold eight funeral homes for $8.4
million and we sold real property for $0.1 million .
During the year ended December 31, 2019 , we acquired, in three separate
transactions, two funeral home and cemetery combination businesses, seven
funeral home businesses and three ancillary service businesses for an aggregate
purchase price of $140.9 million . In addition, we also paid a $5.0 million
deposit for a funeral home and cemetery combination business that we acquired in
January 2020 . In addition, we sold a funeral home business for $0.9 million and
we sold real property for $0.1 million related to a funeral home we merged with
another business in an existing market.
During the year ended December 31, 2018 , we acquired four funeral home
businesses for an aggregate purchase price of $38.0 million .
Capital Expenditures
For the year ended December 31, 2020 , our capital expenditures (comprising of
growth and maintenance spend) totaled $15.2 million compared to $15.4 million
for the year ended December 31, 2019 , and $13.5 million for the year ended
December 31, 2018 .
The following tables present our growth and maintenance capital expenditures (in
thousands):
Years Ended December 31,
2018 2019 2020
Growth
Cemetery development $ 3,149 $ 4,111 $ 4,705
Construction for new funeral facilities 11 - -
Live streaming equipment - 42 636
Renovations at certain businesses(1) 1,100 2,236 953
Other - 195 142
Total Growth $ 4,260 $ 6,584 $ 6,436 (1) During the year ended
businesses that were affected by Hurricane Michael, of which
our property insurance policy.
Years Ended December 31,
2018 2019 2020
Maintenance
Facility repairs and improvements $ 2,591 $
1,820
General equipment and furniture 2,247
3,032 2,892
Vehicles 2,556
1,950 1,493
Paving roads and parking lots 674
795 731
Information technology infrastructure improvements 1,172 977 949 Other 26 221 644 Total Maintenance$ 9,266 $ 8,795 $ 8,762 Financing Activities Our financing activities resulted in a net cash outflow of$48.3 million for the year endedDecember 31, 2020 compared to net cash inflow of$115.7 million for the year endedDecember 31, 2019 and net cash inflow of$2.2 million for the year endedDecember 31, 2018 . For the year endedDecember 31, 2020 , we had net payments on our Credit Facility, acquisition debt and finance leases of$38.3 million . In addition, we paid$6.0 million in dividends and$4.6 million for the repurchase of a portion of our Convertibles Notes. 26 -------------------------------------------------------------------------------- Table of Contents For the year endedDecember 31, 2019 , we had net proceeds related to the issuance of our Additional Senior Notes of$75.7 million and net borrowing on our long-term debt obligations of$53.5 million . In addition, we purchased treasury stock for$9.2 million and paid$5.4 million in dividends on our common stock. For the year endedDecember 31, 2018 , we had net proceeds related to the issuance of our Initial Senior Notes of$318.8 million , offset by net payments on our long-term debt obligations of$196.1 million and payments of$99.2 million in connection with our exchange of a portion of our Convertible Notes. In addition, we purchased treasury stock for$16.3 million and paid$5.5 million in dividends on our common stock. Dividends OnMay 19, 2020 , the Board approved an increase of$0.05 per share to our annual dividend beginning with the dividend declaration in the third quarter. OnOctober 27, 2020 , the Board approved an additional increase of$0.0125 per share for a total annual dividend of$0.40 per share beginning with the dividend declaration in the fourth quarter. Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2020 Per Share Dollar Value March 1st$ 0.0750 $ 1,339 June 1st$ 0.0750 $ 1,343 September 1st$ 0.0875 $ 1,569 December 1st$ 0.1000 $ 1,797 2019 Per Share Dollar Value March 1st$ 0.0750 $ 1,360 June 1st$ 0.0750 $ 1,365 September 1st$ 0.0750 $ 1,336 December 1st$ 0.0750 $ 1,337 2018 Per Share Dollar Value March 1st$ 0.0750 $ 1,207 June 1st$ 0.0750 $ 1,433 September 1st$ 0.0750 $ 1,436 December 1st$ 0.0750 $ 1,430 Share Repurchases During the year endedDecember 31, 2018 , we repurchased 1,101,969 shares of common stock for a total cost of$17.7 million at an average cost of$16.03 per share pursuant to our share repurchase program. OnJuly 31, 2019 , our Board approved an additional$25.0 million under our share repurchase program in accordance with Rule 10b-18 of the Exchange Act. During the year endedDecember 31, 2019 , we repurchased 400,000 shares of common stock for a total cost of$7.8 million at an average cost of$19.39 per share pursuant to our share repurchase program. Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares. During the year endedDecember 31, 2020 , we did not repurchase any common shares. AtDecember 31, 2020 , we had approximately$25.6 million available for repurchase under our share repurchase program. 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, 2019 December 31, 2020 Credit Facility $ 83,800 $ 47,200 Finance leases 6,144 5,854 Operating leases 23,087 22,384 Acquisition debt 6,964 5,509 Total $ 119,995 $ 80,947 27
-------------------------------------------------------------------------------- Table of Contents Credit Facility OnDecember 19, 2019 , we entered into a third amendment and commitment increase to our$150.0 million senior secured revolving credit facility ("Credit Facility") with the financial institutions party thereto, as lenders, andBank of America, N.A ., as administrative agent (in such capacity, the "Administrative Agent") to increase our commitment to$190.0 million and incurred$0.9 million in transactions costs, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method. AtDecember 31, 2020 , our Credit Facility was comprised of: (i) a$190.0 million revolving credit facility, including a$15.0 million subfacility for letters of credit and a$10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to$75.0 million in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur onMay 31, 2023 . The Company's obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (as defined in Part II, Item 8, Financial Statements and Supplementary Data, Note 14) and certain of the Company's Credit Facility Guarantors. The Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of the Company's personal property assets and those of the Credit Facility Guarantors. In the event the Company's actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level, at the discretion of the Administrative Agent, the Administrative Agent may unilaterally compel the Company and the Credit Facility Guarantors to grant and perfect first-priority mortgage liens on fee-owned real property assets which account for no less than 50% of funeral operations EBITDA. The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations, continuation of the Company's business and the maintenance of existing rights and privileges, the maintenance of property and insurance, amongst others. In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and its subsidiaries and party thereto as guarantors (the "Credit Facility Guarantors") to incur additional indebtedness, grant liens on assets, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial covenants. AtDecember 31, 2020 , we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed, (i) 5.75 to 1.00 for the quarters endedMarch 31, 2020 ,June 30, 2020 andSeptember 30, 2020 and (ii) 5.50 to 1.00 for the quarter endedDecember 31, 2020 and each quarter ended thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit Facility) not to exceed 2.00 to 1.00 as of the end of any period of four consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. OnMay 18 2020 , we received a limited waiver under our Credit Facility for the failure to comply with the Total Leverage Ratio covenant for the fiscal quarter endedMarch 31, 2020 . In connection with the waiver, we also entered into a fourth amendment to the Credit Facility which increased the interest rate margin applicable to borrowings by up to 0.625% at each pricing level based on the Total Leverage Ratio. We did not incur any transaction costs related to the limited waiver and fourth amendment to the Credit Facility. OnAugust 7, 2020 , we obtained a limited consent from the lenders under our Credit Facility in connection with our privately-negotiated repurchases of our Convertible Notes (as defined in Part II, Item 8, Financial Statements and Supplementary Data, Note 13). See Part II, Item 8, Financial Statements and Supplementary Data, Note 13 for a discussion of our privately-negotiated repurchases. We were in compliance with the total leverage ratio, fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility atDecember 31, 2020 . AtDecember 31, 2020 , we had outstanding borrowings under the Credit Facility of$47.2 million . We had one letter of credit for$2.0 million issued onNovember 30, 2019 and outstanding under the Credit Facility, which was increased to$2.1 million onSeptember 29, 2020 . The letter of credit bears interest at 3.125% and will expire onNovember 26, 2021 . The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under our Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. AtDecember 31, 2020 , the prime rate margin was equivalent to 1.5% and the LIBOR rate margin was 2.5%. The weighted average interest rate on our Credit Facility for the years endedDecember 31, 2019 and 2020 was 2.9% and 3.8%, respectively. We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Facility. 28
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Table of Contents Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any Credit Facility Guarantors. The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
Years Ended
2018 2019 2020
Credit Facility interest expense $ 4,351 $ 1,601 $ 3,738
Credit Facility amortization of debt issuance costs 234 229 482
Lease Obligations
Our lease obligations consist of operating and finance leases. We lease certain
office facilities, certain funeral homes and equipment under operating leases
with original terms ranging from one to nineteen years. Many leases include one
or more options to renew, some of which include options to extend the leases for
up to 26 years. We lease certain funeral homes under finance leases with
original terms ranging from ten to forty years.
The lease cost related to our operating leases and short-term leases and
depreciation expense and interest expense related to our finance leases are as
follows (in thousands):
Years Ended December 31,
2019 2020
Operating lease cost $ 3,722 $ 3,795
Short-term lease cost 277 224
Finance lease cost:
Depreciation of leased assets $ 498 $ 439
Interest on lease liabilities 520 496
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 range from five to twenty years.
The imputed interest expense related to our acquisition debt is as follows (in
thousands):
Years Ended December 31,
2018 2019 2020
Acquisition debt imputed interest expense $ 791 $ 622 Convertible Subordinated Notes due 2021 OnMarch 19, 2014 , we issued$143.75 million aggregate principal amount of our 2.75% convertible subordinated notes due 2021 (the "Convertible Notes"). The Convertible Notes are due onMarch 15, 2021 and bear interest at 2.75% per year, which is payable semi-annually in arrears onMarch 15 andSeptember 15 of each year. OnMay 7, 2018 , we completed our exchange of approximately$115.0 million in aggregate principal amount of Convertible Notes in a privately-negotiated exchange agreement with a limited number of convertible noteholders. OnDecember 24, 2018 , we completed privately-negotiated repurchases of an additional$22.4 million in aggregate principal amount of Convertible Notes. OnApril 4, 2019 , we completed a privately-negotiated repurchase of$25,000 in aggregate principal amount of Convertible Notes then outstanding for$27,163 . OnSeptember 9, 2020 , we completed privately-negotiated repurchases of$3.8 million in aggregate principal amount of our Convertible Notes for$4.6 million in cash (which included accrued interest of$0.1 million ) and recorded$0.8 million for the reacquisition of the equity component. TheSeptember 2020 repurchases represented approximately 60% of the aggregate principal amount of Convertible Notes then outstanding. Following the settlement of theSeptember 2020 repurchases, the aggregate principal amount of the Convertible Notes was reduced to approximately$2.6 million . The fair value of the Convertible Notes, which are Level 2 measurements, was$3.7 million atDecember 31, 2020 . AtDecember 31, 2020 , the adjusted conversion rate of the Convertible Notes is 45.9712 shares of our common stock per$1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of$21.75 per share of common stock. 29
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Table of Contents The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes are as follows (in thousands):
Years
Ended
2018 2019 2020
Convertible Notes interest expense $ 1,878 $ 174 $ 149
Convertible Notes accretion of debt discount 2,192 241 216
Convertible Notes amortization of debt issuance
costs 245 24 20
The remaining unamortized debt discount and the remaining unamortized debt
issuance costs are being amortized using the effective interest method over the
remaining term of approximately two months of the Convertible Notes. The
effective interest rate on the unamortized debt discount for both years ended
December 31, 2019 and 2020 was 11.4%. The effective interest rate on the debt
issuance costs for the years ended December 31, 2019 and 2020 was 3.2% and 3.1%,
respectively.
Senior Notes due 2026
On May 31, 2018 , we issued $325.0 million in aggregate principal amount of our
6.625% senior notes due 2026 (the "Initial Senior Notes") and related guarantees
in a private offering under Rule 144A and Regulations S under the Securities
Act. The Initial Senior Notes were issued under an indenture, dated as of May
31, 2018 (the "Indenture"), among us, certain of our existing subsidiaries
(collectively, the "Subsidiary Guarantors"), as guarantors, and Wilmington
Trust, National Association ., as trustee.
On December 19, 2019 , we issued an additional $75.0 million in aggregate
principal amount of our Initial Senior Notes (the "Additional Senior Notes" and,
together with the Initial Senior Notes, the "Senior Notes") and related
guarantees by the Subsidiary Guarantors in a private offering under Rule 144A
and Regulation S of the Securities Act. The Additional Senior Notes were issued
as additional securities under the Indenture.
We received proceeds of $76.9 million from the issuance of Additional Senior
Notes, net of a debt premium of $1.7 million (plus accrued interest of $0.2
million ). We incurred $1.0 million in debt issuance costs related to the
Additional Senior Notes. The Senior Notes are treated as a single class of
securities under the Indenture, and the Additional Senior Notes have identical
terms to the Initial Senior Notes, except with respect to the date of issuance,
the issue price, the initial interest accrual date and the initial interest
payment date.
The Senior Notes bear interest at 6.625% per year. Interest on the Senior Notes
began to accrue on May 31, 2018 and is payable semi-annually in arrears on June
1 and December 1 of each year, beginning on December 1, 2018 with respect to the
Initial Senior Notes and June 1, 2020 with respect to the Additional Senior
Notes to holders of record on each May 15 and November 15 preceding an interest
payment date. The Senior Notes mature on June 1, 2026 , unless earlier redeemed
or repurchased. The Senior Notes are unsecured, senior obligations and are fully
and unconditionally guaranteed on a senior unsecured basis, jointly and
severally, by each of the Subsidiary Guarantors.
We may redeem all or part of the Senior Notes at any time prior to June 1, 2021
at a redemption price equal to 100% of the principal amount of Senior Notes
redeemed, plus a "make whole" premium, and accrued and unpaid interest, if any,
to the date of redemption. We have the right to redeem the Senior Notes at any
time on or after June 1, 2021 at the redemption prices described in the
Indenture, plus accrued and unpaid interest, if any, to the date of redemption.
Additionally, at any time before June 1, 2021 , we may redeem up to 40% of the
aggregate principal amount of the Senior Notes issued with an amount equal to
the net proceeds of certain equity offerings, at a price equal to 106.625% of
the principal amount of the Senior Notes, plus accrued and unpaid interest, if
any, to the date of redemption; provided that (1) at least 60% of the aggregate
principal amount of the Senior Notes (including any additional Senior Notes )
originally issued under the Indenture remain outstanding immediately after the
occurrence of such redemption (excluding Senior Notes held by us); and (2) each
such redemption must occur within 180 days of the date of the closing of each
such equity offering.
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.
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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
2018 2019 2020
Senior Notes interest expense$ 12,620 $ 21,711 $ 26,500 Senior Notes amortization of debt discount 273 493
528
Senior Notes amortization of debt premium - -
221
Senior Notes amortization of debt issuance costs 77 139
280
The fair value of the Senior Notes, which are Level 2 measurements, was$427.9 million atDecember 31, 2020 . The debt discount, the debt premium and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 65 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Initial Senior Notes (issued inMay 2018 ) was 6.87% and 6.69%, respectively, for the year endedDecember 31, 2020 . The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the Additional Senior Notes (issued inDecember 2019 ) was 6.20% and 6.90%, respectively, for year endedDecember 31, 2020 . CONTRACTUAL OBLIGATIONS The following table summarizes the known future payments required for the debt on our Consolidated Balance Sheet as ofDecember 31, 2020 . Where appropriate we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements where additional information is available. Payments Due By Period (in thousands) Financial Note Reference Total 2021 2022 2023 2024 2025 After 5 Years Credit Facility and acquisition debt obligations 12$ 52,709 $ 1,027 $ 503 $ 47,741 $ 527 $ 566 $ 2,345 Interest obligation on Credit Facility and acquisition debt (a) 12 6,154 1,911 1,874 931 245 207 986 Convertible Notes (b) 13 2,559 2,559 - - - - - Interest on Convertible Notes 13 15 15 - - - - - Senior Notes (c) 14 400,000 - - - - - 400,000 Interest on Senior Notes 14 143,542 26,500 26,500 26,500 26,500 26,500 11,042 Finance lease obligations, including interest 15 9,638 836 860 860 791 736 5,555 Operating lease obligations, including interest 15 33,153 3,794 3,422 3,301 3,292 3,156 16,188 Total contractual obligations$ 647,770
(a) Based on interest rates in effect atDecember 31, 2020 . (b) MaturesMarch 15, 2021 . (c) Matures June 1, 2026. 31
-------------------------------------------------------------------------------- Table of Contents OFF-BALANCE SHEET ARRANGEMENTS The following table summarizes our off-balance sheet arrangements as ofDecember 31, 2020 . Where appropriate, we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements where additional information is available. We have various non-compete agreements with former owners and employees of businesses we have acquired. These agreements are generally for one to ten years and provide for periodic payments over the term of the agreements. We have various consulting agreements with former owners of businesses we have acquired. Payments for such agreements are generally not made in advance. These agreements are generally for one to five years and provide for bi-weekly or monthly payments. We have employment agreements with our executive officers and certain senior leadership. These agreements are generally for three to five years and provide for participation in various incentive compensation arrangements. These agreements generally renew automatically on an annual basis after their initial term has expired. Payments Due By Period (in thousands) Financial Note After 5 Reference Total 2021 2022 2023 2024 2025 Years Non-compete agreements 16$ 6,296 $ 2,103 $ 1,569 $ 1,063 $ 691 $
431$ 439 Consulting agreements 16 1,847 879 537 266 114 51 - Employment agreements (a) 16 12,078 3,729 3,456 1,181 900 900 1,912 Total contractual cash obligations$ 20,221
(a)
employment agreement that does not renew after the initial term. See Part II, Item 8,
Financial Statements and Supplementary Data, Note 16 for additional information
regarding
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.
FINANCIAL HIGHLIGHTS
Below are our financial highlights (in thousands except for volumes and
averages):
Years Ended December 31,
2018 2019 2020
Revenue $ 267,992 $ 274,107 $ 329,448
Funeral contracts 36,816 38,940 47,190
Average revenue per funeral contract
5,145
Preneed interment rights (property) sold 7,063 7,205
9,503
Average price per interment right sold
4,033 Gross profit$ 75,947 $ 79,585 $ 105,923 Net income$ 11,645 $ 14,533 $ 16,090 Revenue in 2020 increased$55.3 million compared to 2019, as we experienced a 21.2% increase in total funeral contracts primarily due to the funeral home acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well as increases from broad market share gains and increases in the number of deaths related to the COVID-19 pandemic. Volume growth was offset by a decrease in the average revenue per funeral contract of 6.4% primarily due to the decrease in services performed as restrictions mandated by state and local governments were placed on social gatherings. In addition, we experienced an increase of 31.9% in the number of preneed interment rights (property) sold primarily due to the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well as an increase of 10.4% in the average price per interment right sold. Revenue in 2019 increased$6.1 million compared to 2018, as we experienced a 5.8% increase in total funeral contracts, offset by a decrease in the average revenue per funeral contract of 3.1%. In addition, the average price per interment right (property) sold increased 5.2% and we experienced an increase of 2.0% in the number of preneed interment rights sold. Further discussion of Revenue for our funeral home and cemetery segments is presented herein under "Results of Operations." Gross profit in 2020 increased$26.3 million compared to 2019, primarily due to the increase in revenue from both our funeral home and cemetery segments due to the acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well disciplined expense and cost management by leaders at each business. 32 -------------------------------------------------------------------------------- Table of Contents Gross profit in 2019 increased$3.6 million compared to 2018, primarily due to an increase in revenue from our funeral home segment due to the acquisitions made in the fourth quarter of 2019 and the second half of 2018. Further discussion of the components of Gross profit for our funeral home and cemetery segments, is presented herein under "Results of Operations." Net income in 2020 increased$1.6 million compared to 2019 primarily due to the increase in gross profit, offset by the$16.6 million increase in charges related to the net loss on divestitures and impairments and$7.0 million increase in interest expense related to our Senior Notes and Credit Facility. Net income in 2019 increased$2.9 million compared to 2018 primarily due to the increase in gross profit, as well as a$5.0 million decrease in general and administrative expenses, offset by a$2.5 million increase in interest expense primarily related to our Senior Notes and a$2.9 million increase in the loss on divested businesses. Further discussion of General, administrative and other expenses, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under "Other Financial Statement Items." REPORTING AND NON-GAAP FINANCIAL MEASURES We also present our financial performance in our "Operating and Financial Trend Report" ("Trend Report") as reported in our earnings release for the year endingDecember 31, 2020 , datedFebruary 17, 2021 and discussed in the corresponding earnings conference call. This Trend Report is used as a supplemental financial statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance withUnited States generally accepted accounting principles ("GAAP"). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business. Below is a reconciliation of Net income (a GAAP measure) to Adjusted net income (a non-GAAP measure) (in thousands): Years Ended December 31, 2018 2019 2020 Net income$ 11,645 $ 14,533 $ 16,090 Special items, net of tax except for items noted by(1) Acquisition and divestiture expenses - 1,646 (9) Severance and separation costs 1,134 951 445 Performance awards cancellation and exchange 2,594 - 224 Accretion of discount on Convertible Notes(1) 2,192 241 216 Net loss on early extinguishment of debt 397 - - Net loss on divestitures and other costs(2) 439 3,331 4,562 Net impact of impairment of goodwill and other intangibles(2) 805 761 9,932 Litigation reserve 790 592 213 Tax expense related to divested business(1) - 911 - Gain on insurance reimbursements - (699) - Natural disaster and pandemic costs 345 - 1,286 Other special items - 265 324 Tax adjustment related to certain discrete items(1) 1,225 - 400 Adjusted net income(3)$ 21,566 $ 22,532 $ 33,683
(1) Special items are defined as charges or credits included in our GAAP financial
statements that can vary from period to period and are not reflective of costs incurred
in the ordinary course of our operations. Special items are taxed at the federal
statutory rate of 21.0% for the years ended
for the Accretion of the discount on the Convertible Notes and the Tax adjustment
related to certain discrete items and the Tax expense related to divested business, as
these are non-tax deductible items and the Net impact of impairment of goodwill and
other intangibles and the Net loss on divestitures and other costs (described below). (2) The Net loss on divestitures and other costs and the Net impact of impairment of
goodwill and other intangibles special items are net of the federal statutory rate of
21.0% in 2018 and 2019 and are net of the operating tax rate of 32.4% in 2020. (3) Adjusted net income is defined as Net income plus adjustments for Special items and
other expenses or gains that we believe do not directly reflect our core operations and
may not be indicative of our normal business operations.
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Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit
(a non-GAAP measure) (in thousands):
Years Ended December 31,
2018 2019 2020
Gross profit $ 75,947 $ 79,585 $ 105,923
Cemetery property amortization 3,602 3,985 4,956
Field depreciation expense 12,015 12,370 13,006
Regional and unallocated funeral and cemetery costs 12,749 13,827 18,057
Operating profit(1) $ 104,313 $ 109,767 $ 141,942 (1) Operating profit is defined as Gross profit less Cemetery property amortization, Field
depreciation expense and Regional and unallocated funeral and cemetery costs.
Our operations are reported in two business segments: Funeral Home and Cemetery.
Below is a breakdown of Operating profit (a non-GAAP measure) by Segment (in
thousands):
Years Ended December 31,
2018 2019 2020
Funeral Home $ 82,154 $ 85,737 $ 104,998
Cemetery 22,159 24,030 36,944
Operating profit $ 104,313 $ 109,767 $ 141,942
Operating profit margin(1) 38.9% 40.0% 43.1%
(1) Operating profit margin is defined as Operating profit as a percentage of Revenue.
Further discussion of Operating profit for our funeral home and cemetery segments is presented herein under "Results of Operations." YEAR ENDEDDECEMBER 31, 2020 COMPARED TO YEAR ENDEDDECEMBER 31, 2019 Results of Operations The following is a discussion of our results of operations for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . The term "same store" refers to funeral homes and cemeteries acquired prior toJanuary 1, 2016 and owned and operated for the entirety of each period being presented, excluding certain funeral homes and cemeteries that we intend to divest in the near future. The term "acquired" refers to funeral homes and cemeteries purchased afterDecember 31, 2015 , excluding any funeral homes and cemeteries that we intend to divest in the near future. This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. The term "divested" refers to the eight funeral homes we sold in 2020 and three funeral homes whose building leases expired, one funeral home we sold and a funeral home we merged with a funeral home in an existing market in 2019. "Planned divested" refers to funeral homes and cemeteries that we intend to divest in the near future. "Ancillary" represents our flower shop, pet cremation business and online cremation business. 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. 34 -------------------------------------------------------------------------------- Table of Contents Funeral Home Segment The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands): Years Ended December 31, 2019 2020 Revenue: Same store operating revenue$ 168,884 $ 179,779 Acquired operating revenue 27,547 46,897 Divested/planned divested revenue 11,263
8,705
Ancillary funeral services revenue 748
4,661
Preneed funeral insurance commissions 1,475
1,349
Preneed funeral trust and insurance 6,951 7,747 Total$ 216,868 $ 249,138 Operating profit: Same store operating profit$ 65,109 $ 74,817 Acquired operating profit 10,579 18,617 Divested/planned divested operating profit 2,342
2,192
Ancillary funeral services operating profit 298
1,186
Preneed funeral insurance commissions 631
565
Preneed funeral trust and insurance 6,778 7,621 Total$ 85,737 $ 104,998 The following measures reflect the significant metrics over this comparative period: Years Ended December 31, 2019 2020 Same store: Contract volume 31,729 35,815
Average revenue per contract, excluding preneed funeral trust earnings
$ 5,323 $ 5,020
Average revenue per contract, including preneed funeral trust
earnings $ 5,511 $ 5,207
Burial rate 38.1% 36.3%
Cremation rate 54.1% 56.7%
Acquired:
Contract volume 4,559 9,109Average revenue per contract, excluding preneed funeral trust earnings
$ 6,042 $ 5,148
Average revenue per contract, including preneed funeral trust
earnings $ 6,144 $ 5,226
Burial rate 45.4% 40.5%
Cremation rate 47.9% 54.3%
Funeral home same store operating revenue for the year ended December 31, 2020
increased $10.9 million , compared to the year ended December 31, 2019 . The
increase in operating revenue is due to a 12.9% same store contract volume
increase which is due to broad market share gains and increased deaths related
to the COVID-19 pandemic. This increase was offset by a 5.7% decrease in average
revenue per contract, excluding preneed interest, due to a 180 basis point
decrease in the burial rate along with a decrease of both burial and cremation
contracts with services.
Beginning in the latter half of March 2020 , we saw a decrease in services
performed due to the restrictions placed on gatherings mandated by state and
local governments as the COVID-19 pandemic became more prominent and individuals
began to practice social distancing to comply with applicable shelter in place
and related orders. Although social distancing restrictions were gradually eased
in certain jurisdictions during the latter half of 2020, these restrictions
contributed to the
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overall decrease in the average revenue per contract in the current year. Our
Managing Partners continued to show innovation by creating high value, uniquely
customized personal services and sales amid challenging restrictions in local
environments.
Same store operating profit for the year ended December 31, 2020 increased $9.7
million when compared to the year ended December 31, 2019 and the comparable
operating profit margin increased 300 basis points to 41.6%. The increase in
operating margin is primarily due to the increase in same store operating
revenue along with disciplined expense and cost management by leaders at each
business. Although same store operating expenses increased $1.2 million
primarily due to an increase of $1.0 million in group health care costs related
to higher claims experience during the current year, we experienced decreases in
the majority of our other operating costs as a percentage of operating revenue
for the year ended December 31, 2020 compared to the same period in 2019.
Funeral home acquired operating revenue for the year ended December 31, 2020
increased $19.4 million , as our funeral home acquired portfolio for the year
ended December 31, 2020 included nine funeral home businesses added in the
fourth quarter of 2019 and one business added in the first quarter of 2020 not
fully present in the year ended December 31, 2019 .
Acquired operating profit for the year ended December 31, 2020 increased $8.0
million when compared to the year ended December 31, 2019 and the comparable
operating profit margin increased 130 basis points to 39.7%. The increase is
primarily due to the increase in acquired operating revenue along with
disciplined expense and cost management by leaders at each business.
Ancillary funeral services revenue, which is recorded in Other revenue,
represents revenue from our flower shop, pet cremation business and online
cremation business, which were acquired in the fourth quarter of 2019. Operating
profit from our ancillary funeral service businesses for the year ended
December 31, 2020 , increased $0.9 million when compared to the year ended
December 31, 2019 , with an operating profit margin of 25.4%.
Preneed funeral insurance commissions and preneed funeral trust and insurance,
also recorded in Other revenue, on a combined basis, increased $0.7 million or
8.0% for the year ended December 31, 2020 compared to the same period in 2019.
The increase is primarily due to an 11.5% increase in preneed contracts maturing
to atneed during the year ended December 31, 2020 compared to the same period in
2019, which triggers the recognition of trust earnings on the matured contracts.
Operating profit for preneed funeral insurance commissions and preneed trust and
insurance, on a combined basis, increased $0.8 million or 10.5% for the same
comparative period in 2019, primarily due to the increase in revenue and
reduction of preneed trust and insurance expenses.
Cemetery Segment
The following table sets forth certain information regarding our Revenue and
Operating profit from our cemetery operations (in thousands):
Years Ended December 31,
2019 2020
Revenue:
Same store operating revenue $ 49,218 $ 51,694
Acquired operating revenue 295 17,583
Planned divested revenue 313 394
Preneed cemetery trust earnings 5,960 9,722
Preneed cemetery finance charges 1,453 917 Total$ 57,239 $ 80,310 Operating profit: Same store operating profit$ 17,118 $ 19,469 Acquired operating profit 73 7,128 Planned divested operating profit 13
129
Preneed cemetery trust operating profit 5,373
9,301
Preneed cemetery finance charges 1,453 917 Total$ 24,030 $ 36,944 36
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The following measures reflect the significant metrics over this comparative
period:
Years Ended December 31,
2019 2020
Same store:
Preneed revenue as a percentage of operating revenue 61 % 61 %
Preneed revenue (in thousands) $ 30,170 $ 31,393
Number of preneed interment rights sold 7,130 7,096
Atneed revenue (in thousands) $
19,048
Acquired:
Preneed revenue as a percentage of operating revenue 65 % 66 % Preneed revenue (in thousands) $ 192$ 11,551 Number of preneed interment rights sold 60 2,353 Atneed revenue (in thousands) $
103 $ 6,032
Cemetery same store operating revenue increased$2.5 million for the year endedDecember 31, 2020 compared to the year endedDecember 31, 2019 . We experienced a$0.4 million or 1.6% increase in preneed property revenue as a result of a 3.1% increase in the average price per interment right sold, slightly offset by a 0.5% decrease in the number of interment rights sold. The decrease in the number of preneed interment rights sold was primarily due to the COVID-19 pandemic as individuals practiced social distancing to comply with applicable shelter in place and related orders in certain areas of the country, which limited our preneed sales employees from meeting with families in person. This was most evident in the second quarter of 2020 as these restrictions affected our ability to host certain annual events such as the Ching Ming festival during April andMemorial Day festivities during May. We also experienced an$0.8 million increase in preneed merchandise and service revenue due to a 22.9% increase in the deliveries of merchandise and service contracts during the year endedDecember 31, 2020 . Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, increased$1.3 million as we experienced a 10.2% increase in the number of atneed contracts due to the increased deaths related to the COVID-19 pandemic, offset by a 3.3% decrease in the average sales per contract. Cemetery same store operating profit for the year endedDecember 31, 2020 increased$2.4 million compared to the year endedDecember 31, 2019 . The comparable operating profit margin increased 290 basis points to 37.7%, primarily because of disciplined expense and cost management by leaders at each business throughout the year. Operating expense as a percentage of operating revenue decreased in categories such as promotional expense, general and administrative expenses and maintenance salary expenses in the year endedDecember 31, 2020 compared to the same period in 2019. We saw increases in two categories as a percentage of operating revenue, allowance for credit losses due to slower payments on financed receivables particularly in the states most affected by COVID-19 and atneed commissions due to the introduction of performance-based rewards and sales incentives in the current year. Our acquired cemetery portfolio includes two cemeteries added during the fourth quarter of 2019 and one cemetery added during the first quarter of 2020. These three cemeteries contributed$17.6 million in revenue and$7.1 million in operating profit for the year endedDecember 31, 2020 . Preneed cemetery trust earnings and preneed cemetery finance charges, which are recorded in Other revenue, on a combined basis, increased$3.2 million for the year endedDecember 31, 2020 compared to the same period in 2019. The increase was primarily due to a$3.7 million increase in perpetual care trust fund earnings of which (1)$2.2 million was from our acquired cemeteries; (2)$0.9 million increase in earnings as a result of the execution of our trust fund repositioning strategy beginning at the height of the COVID-19 market crisis inMarch 2020 ; and (3)$0.6 million increase in realized gains. These increases were partially offset by a$0.5 million decrease in finance charge revenue. The decrease in finance charge revenue is primarily due to our enhanced preneed cemetery property sales strategy of reducing interest rates on preneed contracts. Operating profit for the two categories of Other revenue, on a combined basis, increased$3.4 million for the year endedDecember 31, 2020 compared to the same period in 2019, primarily due to the increase in our perpetual care trust fund earnings discussed above. Cemetery property amortization. Cemetery property amortization totaled$5.0 million for the year endedDecember 31, 2020 , an increase of$1.0 million compared to the year endedDecember 31, 2019 . The increase in property sold due to our recently acquired cemeteries, resulted in a$1.1 million increase in amortization expense for the year endedDecember 31, 2020 , while the amortization expense for our same store businesses decreased$0.1 million due to a decrease in property sales in the period. 37 -------------------------------------------------------------------------------- Table of Contents Field depreciation. Depreciation expense for our field businesses totaled$13.0 million for the year endedDecember 31, 2020 , an increase of$0.6 million compared to the year endedDecember 31, 2019 . The increase was primarily due to additional depreciation expense from assets added as a result of our acquisitions during the fourth quarter of 2019 and first quarter of 2020. Regional and unallocated funeral and cemetery costs. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled$18.1 million for the year endedDecember 31, 2020 , an increase of$4.2 million primarily due to the following: (1) a$3.6 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (2) a$1.0 million increase in health and safety expenses due to the COVID-19 pandemic; and (3) a$0.7 million increase in salaries and benefits; offset by (4) a$1.1 million decrease in severance expense. Other Financial Statement Items General, administrative and other. General, administrative and other expenses totaled$25.8 million for the year endedDecember 31, 2020 , a decrease of$0.1 million primarily due to the following: (1) a$2.0 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; and (2) a$0.2 million increase in salaries and benefits; offset by (3) a$2.3 million decrease in acquisition costs. Home office depreciation and amortization. Home office depreciation and amortization expense remained flat at$1.4 million for both the years endedDecember 31, 2020 and 2019, primarily due to machinery and equipment at the home office becoming fully depreciated in the latter half of 2019, offset by additional software assets purchased during the fourth quarter of 2019. Net loss on divestitures and impairment charges. The components of Net loss on divestitures and impairment charges are as follows (in thousands): Years Ended December 31, 2019 2020 Goodwill impairment$ (742) $ (13,632) Tradenames impairment (221) (1,061) Net loss on divestitures (3,883) (6,749) Total$ (4,846) $ (21,442) As a result of economic conditions caused by COVID-19, we performed a quantitative assessment of our goodwill and tradenames atMarch 31, 2020 . We recorded an impairment for goodwill of$13.6 million as the carrying amount of our funeral homes in the Eastern Region Reporting Unit exceeded the fair value and we recorded an impairment for certain of our tradenames of$1.1 million as the carrying amount of these tradenames exceeded the fair value. In addition, we divested eight funeral homes at a net loss of$6.7 million . During 2019, we recorded a goodwill impairment of$0.7 million related to two funeral homes that we divested. During 2019, we recorded an impairment to tradenames of$0.2 million as a result of our 2019 annual impairment test as the carrying amount of certain tradenames exceeded the fair value. In addition, we divested three funeral homes whose building leases expired and sold a funeral home at a net loss of$3.9 million . Interest expense. Interest expense related to its respective debt arrangement is as follows (in thousands): Years Ended December 31, 2019 2020 Senior Notes$ 22,343 $ 27,087 Credit Facility 1,830
4,220
Convertible Notes 198 169
Finance leases 520 496
Acquisition debt 622 489
Other 9 54
Total $ 25,522 $ 32,515
Accretion of discount on convertible subordinated notes. We recognized accretion
of the discount on our Convertible Notes of $0.2 million for both years ended
December 31, 2020 , and 2019.
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Other, net. The components of Other, net are as follows (in thousands):
Years
Ended
2019 2020
Gain on insurance reimbursements related to Hurricane
Michael $ 885 $ 97
Other income (expense) (149) 58
Other loss - (3)
Total $ 736 $ 152
Income taxes. Our income tax provision was $8.6 million for the year ended
December 31, 2020 , compared to our income tax provision of $7.9 million for the
year ended December 31, 2019 . Our operating tax rate before discrete items was
32.4% and 33.0% for the years ended December 31, 2020 and 2019, respectively.
During the year ended December 31, 2020 , we recorded tax expense of $0.8 million
related to divested businesses. We also recorded discrete tax expense of $0.6
million and $0.5 million for the years ended December 31, 2020 and 2019,
respectively. Discrete tax expense for the year ended December 31, 2020 includes
expense related to equity compensation and other adjustments including return to
provision analysis and state legislative changes. Our effective tax rate was
34.7% and 35.1% for years ended December 31, 2020 and 2019, respectively.
In connection with the CARES Act, we filed a claim for a refund on June 30,
2020 , to carryback the net operating losses ("NOLs") generated in the tax year
ended December 31, 2018 . The refund claim for $7.0 million from the 2018 tax
year was received on August 7, 2020 . An additional carryback claim for a refund
of $1.2 million was filed on November 3, 2020 for the tax year ended December
31, 2019 . The refund from this filing has not yet been received. The majority of
the NOLs generated in tax year 2018 and 2019 are the result of filing
non-automatic accounting method changes relating to the recognition of revenue
from our cemetery property and merchandise and services sales. Due to the
uncertainty of the timing of receiving Internal Revenue Service approval of the
method change applications, a reserve has been recorded against the net cash tax
benefit derived from carrying back the NOLs generated to tax years in which the
enacted federal rate was 35%. The Company's unrecognized tax benefit reserve for
the years ended December 31, 2020 and 2019 were $3.7 million and $0.7 million ,
respectively.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 17 for
additional information regarding income taxes.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Consolidated Financial Statements requires us to make
estimates and judgments that affect the reported amounts of assets, liabilities,
revenue and expenses. On an ongoing basis, we evaluate estimates and judgments,
including those related to revenue recognition, realization of accounts
receivable, inventories, goodwill, other intangible assets, property and
equipment and deferred tax assets and liabilities. We base our estimates on
historical experience, third party data and assumptions that we believe to be
reasonable under the circumstances. The results of these considerations form the
basis for making judgments about the amount and timing of revenue and expenses,
the carrying value of assets and the recorded amounts of liabilities. Actual
results may differ from these estimates and such estimates may change if the
underlying conditions or assumptions change. Historical performance should not
be viewed as indicative of future performance because there can be no assurance
the margins, operating income and net earnings, as a percentage of revenue, will
be consistent from year to year.
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" ("MD&A") is based upon our Consolidated Financial Statements
presented herewith, which have been prepared in accordance with United States
GAAP. Our critical accounting policies are more fully described in Part II, Item
8, Financial Statements and Supplementary Data, Note 1. We believe the following
critical accounting policies affect our more significant judgments and estimates
used in the preparation of our Consolidated Financial Statements.
Revenue Recognition
Funeral and Cemetery Operations Revenue is recognized when control of the
merchandise or services is transferred to the customer. Our performance
obligations include the delivery of funeral and cemetery merchandise and
services and cemetery property interment rights. Control transfers when
merchandise is delivered or services are performed. For cemetery property
interment rights, control transfers to the customer when the property is
developed and the interment right has been sold and can no longer be marketed or
sold to another customer. Sales taxes collected are recognized on a net basis on
our Consolidated Financial Statements. On our atneed contracts, we generally
deliver the merchandise and perform the services at the time of need.
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Some of our contracts with customers include multiple performance obligations.
For these contracts, we allocate the transaction price to each performance
obligation based on its relative standalone selling price, which is based on
prices charged to customers per our general price list. Packages for service and
ancillary items are offered to help the customer make decisions during emotional
and stressful times. Package discounts are reflected net in Revenue. We
recognize revenue when the merchandise is transferred or the service is
performed, in satisfaction of the corresponding performance obligation. Sales
taxes collected are recognized on a net basis on our Consolidated Financial
Statements.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 21 for
additional information related to revenue.
Goodwill
The excess of the purchase price over the fair value of identifiable net assets
of funeral home businesses and cemeteries acquired is recorded as goodwill.
Goodwill has an indefinite life and is not subject to amortization. As such, we
test goodwill for impairment on an annual basis as of August 31st each year.
Under current guidance, we are permitted to first assess qualitative factors to
determine whether it is more-likely-than not that the fair value of a reporting
unit is less than its carrying amount as a basis for determining whether it is
necessary to perform a quantitative goodwill impairment test.
Our intent is to perform a quantitative impairment test at least once every
three years and perform a qualitative assessment during the remaining two years.
In addition to our annual test, we assess the impairment of goodwill whenever
events or changes in circumstances indicate that the carrying value of a
reporting unit may be greater than fair value.
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.
As a result of economic conditions caused by COVID-19, we performed a
quantitative assessment of our goodwill at March 31, 2020 and we recorded an
impairment to goodwill of $13.6 million during the quarter ended March 31, 2020 ,
as the carrying amount of our funeral homes in the Eastern Region Reporting Unit
exceeded the fair value.
For our 2020 annual impairment test, we performed a qualitative assessment and
determined that there were no factors that would indicate the need to perform an
additional quantitative goodwill impairment test. We concluded that it is
more-likely-than not that the fair value of our reporting units is greater than
their carrying value and thus there was no additional impairment to goodwill.
When we divest a portion of a reporting unit that constitutes a business in
accordance with U.S. GAAP, we allocate goodwill associated with that business to
be included in the gain or loss on divestiture. When divesting a business,
goodwill is allocated based on the relative fair values of the business being
divested and the portion of the reporting unit that will be retained.
Additionally, after each divestiture, we will test the goodwill remaining in the
portion of the reporting unit to be retained for impairment using a qualitative
assessment unless we deem a quantitative assessment to be appropriate.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 4 for
additional information related to goodwill.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are
included in Intangible and other non-current assets, net on our Consolidated
Balance Sheet. Our tradenames are considered to have an indefinite life and are
not subject to amortization. As such, we test our intangible assets for
impairment on an annual basis as of August 31st each year. Under current
guidance, we are permitted to first assess qualitative factors to determine
whether it is more-likely-than not that the fair value of the tradename is less
than its carrying amount as a basis for determining whether it is necessary to
perform a quantitative impairment test.
Our intent is to perform a quantitative impairment test at least once every
three years and perform a qualitative assessment during the remaining two years.
In addition to our annual test, we assess the impairment of intangible assets
whenever certain events or changes in circumstances indicate that the carrying
value of the intangible asset may be greater than the fair value.
Our quantitative intangible asset impairment test involves estimates and
management judgment. Our quantitative analysis is performed using the relief
from royalty method, which measures the tradenames by determining the value of
the royalties that we are relieved from paying due to our ownership of the
asset. We determine the fair value of the asset by discounting the cash
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flows that represent a savings in lieu of paying a royalty fee for use of the
tradename. In accordance with the guidance, if the fair value of the tradename
is less than its carrying amount, then an impairment charge is recorded in an
amount equal to the difference.
As a result of economic conditions caused by COVID-19, we performed a
quantitative assessment of our tradenames at March 31, 2020 and we recorded an
impairment to tradenames for certain of our funeral homes of $1.1 million during
the quarter ended March 31, 2020 as the carrying amount of these tradenames
exceeded the fair value. The discounted cash flow valuation uses projections of
future cash flows and includes assumptions concerning future operating
performance and economic conditions that may differ from actual future cash
flows and the determination and application of an appropriate royalty rate and
discount rate.
For our 2020 annual impairment test, we performed a qualitative assessment and
determined that there were no factors that would indicate the need to perform an
additional quantitative impairment test. We concluded that it is
more-likely-than not that the fair value of our intangible assets is greater
than its carrying value and thus there was no additional impairment to our
intangible assets.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 11 for
additional information related to intangible assets.
Funeral and Cemetery Receivables
Our funeral receivables are recorded in Accounts receivable, net and primarily
consist of amounts due for funeral services already performed. Our cemetery
receivables generally consist of preneed sales of cemetery interment rights and
related products and services, which are typically financed through
interest-bearing installment sales contracts, generally with terms of up to five
years, with such interest income reflected as Other revenue. In substantially
all cases, we receive an initial down payment at the time the contract is
signed. Atneed cemetery receivables and preneed cemetery receivables with
payments expected to be received within one year from the balance sheet date are
recorded in Accounts receivable, net. Preneed cemetery receivables with payments
expected to be received beyond one year from the balance sheet date are recorded
in Preneed cemetery receivables, net.
In June 2016 , the Financial Accounting Standards Board ("FASB") issued
Accounting Standards Update ("ASU"), Financial Instruments - Credit Losses:
Measurement of Credit Losses on Financial Instruments and subsequent amendments
collectively known as ("Topic 326"). Topic 326 applies to all entities holding
financial assets measured at amortized cost, including loans, trade and financed
receivables and other financial instruments. The guidance introduces a new
credit reserving model known as Current Expected Credit Loss ("CECL"), which
requires earlier recognition of credit losses, while also providing additional
transparency about credit risk. The CECL model requires all expected credit
losses to be measured based on historical experience, current conditions and
reasonable and supportable forecasts about collectability. Prior to adoption of
Topic 326, we provided allowances for bad debt and contract cancellations on our
receivables based on an analysis of historical trends of collection activity.
For both funeral and cemetery receivables, we determine our allowance for credit
losses by using a loss-rate methodology, in which we assess our historical
write-off of receivables against our total receivables over several years. From
this historical loss-rate approach, we also consider the current and forecasted
economic conditions expected to be in place over the life of our receivables.
These estimates are impacted by a number of factors, including changes in the
economy, demographics and competition in our local communities. We monitor any
change in our historical write-off of receivables utilized in our loss-rate
methodology and assess forecasted changes in market conditions within our credit
reserve.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 6 for
additional information related to funeral and cemetery receivables.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at
fair value and goodwill is recognized for any difference between the price of
the acquisition and fair value. We recognize the assets acquired, the
liabilities assumed and any non-controlling interest in the acquiree at the
acquisition date, measured at the fair value as of that date. Acquisition
related costs are recognized separately from the acquisition and are expensed as
incurred. We customarily estimate related transaction costs known at closing. 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
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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.
Divested Operations
Prior to divesting a funeral home or cemetery, we first determine whether the
sale of the net assets and activities (together referred to as a "set")
qualifies as a business. First, we perform a screen test to determine if the set
is not a business. The principle of the screen is that a set is not a business
if substantially all of the fair value of the gross assets sold resides in a
single asset or group of similar assets. If the screen is not met then we
evaluate whether the set has both inputs and a substantive process that together
significantly contribute to the ability to create outputs. When both inputs and
a substantive process are present then the set is determined to be a business
and we apply the guidance in ASC 350 - Intangibles - Goodwill and Other to
determine the accounting treatment of goodwill for that set (see discussion of
Goodwill below). Goodwill is not allocated to the sale if the set is not
considered to be a business.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 5 for
additional information related to divestitures.
Preneed and Perpetual Care Trust Funds
Preneed sales generally require deposits to a trust or purchase of a third-party
insurance product. We have established a variety of trusts in connection with
funeral home and cemetery operations as required under applicable state laws.
Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery
merchandise and service trusts; and (iii) cemetery perpetual care trusts.
Our preneed and perpetual care trust funds are reported in accordance with the
principles of consolidating Variable Interest Entities ("VIEs"). In the case of
preneed trusts, the customers are the legal beneficiaries. In the case of
perpetual care trusts, we do not have a right to access the corpus in the
perpetual care trusts.
Our trust fund assets are reflected in our financial statements as Preneed
cemetery trust investments, Preneed funeral trust investments and Cemetery
perpetual care trust investments. We have recognized financial interests of
third parties in the trust funds in our financial statements as Deferred preneed
funeral and cemetery receipts held in trust and Care trusts' corpus.
The fair value of our trust fund assets are accounted for as Collateralized
Financing Entities ("CFEs") in ASC 810. The accounting guidance for CFEs allows
companies to elect to measure both the financial assets and financial
liabilities using the more observable of the fair value of the financial assets
or fair value of the financial liabilities. Pursuant to this guidance, we have
determined the fair value of the financial assets of the trust are more
observable and we first measure those financial assets at fair value. Our fair
value of the financial liabilities mirror the fair value of the financial
assets, in accordance with the ASC. Any changes in fair value are recognized in
earnings.
Topic 326 made changes to the accounting for fixed income securities. One such
change is to require credit losses to be presented as an allowance rather than
as a write-down on fixed income securities management does not intend to sell or
believes that it is more likely than not will be required to sell.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 7 for
additional related disclosures related to preneed and perpetual trust funds.
Fair Value Measurements
We measure the securities held by our funeral merchandise and service, cemetery
merchandise and service, and cemetery perpetual care trusts at fair value on a
recurring basis in accordance with the Fair Value Measurements Topic of the ASC.
This guidance defines fair value as the price that would be received in the sale
of an asset or paid to transfer a liability in an orderly transaction between
market participants at the measurement date for items that are recognized or
disclosed at fair value in the financial statements on a recurring basis (at
least annually). The guidance establishes a three-level valuation hierarchy for
disclosure of fair value measurements. The valuation hierarchy is based upon the
transparency of inputs to the valuation of an asset or liability as of the
measurement date. The three levels are defined as follows:
• Level 1 - inputs to the valuation methodology are quoted prices (unadjusted)
for identical assets or liabilities in active markets;
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• Level 2 - inputs to the valuation methodology include quoted prices for
similar assets or liabilities in active markets, and inputs that are observable
for the asset or liability, either directly or indirectly, for substantially the
full term of the financial instrument; and
• Level 3 - inputs to the valuation methodology are unobservable and significant
to the fair value measurement. We currently do not have any assets that have
fair values determined by Level 3 inputs and no liabilities measured at fair
value.
See Part II, Item 8, Financial Statements and Supplementary Data, Notes 7 and 10
for additional information related to fair value measurements.
Long-Lived Assets
Long-lived assets, such as property, plant and equipment and right-of-use assets
are reviewed for impairment at least annually or whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be
recoverable in accordance with ASC 360 - Property, Plant and Equipment. This
guidance requires that long-lived assets to be held and used are reported at the
lower of their carrying amount or fair value. We assess long-lived assets for
impairment whenever events or circumstances indicate that the carrying value may
be greater than the fair value. We evaluate our long-lived assets for impairment
when a funeral home or cemetery business has negative earnings before interest,
taxes, depreciation and amortization ("EBITDA") for four consecutive years and
if there has been a decline in EBITDA in that same period. We review our
long-lived assets deemed held-for-sale to the point of recoverability. Assets to
be disposed of and assets not expected to provide any future service potential
are recorded at the lower of their carrying amount or fair value less estimated
cost to sell. If we determine that the carrying value is not recoverable from
the proceeds of the sale, we record an impairment at that time.
In connection with the goodwill impairment recorded for the Eastern Region
Reporting Unit during the quarter ended March 31, 2020 , we also evaluated the
long-lived assets of our funeral homes in the Eastern Region Reporting Unit and
concluded that there was no impairment to our long-lived assets. Subsequent to
our impairment tests performed at March 31, 2020 , we did not identify any new
factors or events that would trigger us to perform an additional assessment of
our long-lived assets. For our 2020 annual impairment test, no impairment was
identified on our long-lived assets at December 31, 2020 .
See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 for
additional information related to long-lived assets.
Income Taxes
We and our subsidiaries file a consolidated U. S. federal income tax return,
separate income tax returns in 15 states and combined or unitary income tax
returns in 14 states. We record deferred taxes for temporary differences between
the tax basis and financial reporting basis of assets and liabilities. We
classify our deferred tax liabilities and assets as non-current on our
Consolidated Balance Sheet.
We record a valuation allowance to reflect the estimated amount of deferred tax
assets for which realization is uncertain. Management reviews the valuation
allowance at the end of each quarter and makes adjustments if it is determined
that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be
recognized, measured, and derecognized in the financial statements; provide
certain disclosures of uncertain tax matters; and specify how reserves for
uncertain tax positions should be classified on our Consolidated Balance Sheet.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 17 for
additional information related to income taxes.
RECENT ACCOUNTING PRONOUNCEMENTS, ACCOUNTING CHANGES AND OTHER REGULATIONS
For discussion of recent accounting pronouncements and accounting changes, see
Note 2 in Part II, Item 8. Financial Statements and Supplementary Data.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate.
Generally, the number of deaths is higher during the winter months because the
incidences of death from influenza and pneumonia are higher during this period
than other periods of the year.
INFLATION
Inflation has not had a material impact on our results of operations over the
last three fiscal years.
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