UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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| ☒ | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the year ended, December 31, 2020
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| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the fiscal year ended, December 31, 2017 |
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¨ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
| For the transition period from ______________ to _____________ |
Commission file number: 1-11961
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CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
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| Delaware | | 76-0423828 |
(State or other jurisdiction of
incorporation or organization)
| | (I.R.S. Employer
Identification No.)
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3040 Post Oak Boulevard, Suite 300 |
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3040 Post Oak Blvd., Suite 300, Houston, Texas | | Houston, Texas, 77056 |
(Address of principal executive offices) | | (Zip Code) |
(Address of principal executive offices)
(713) 332-8400
(Registrant’s telephone number, including area code: (713) 332-8400code)
Securities registered pursuant to Section 12(b) of the Act:
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(Title of each class)class | Trading Symbol | (Name of each exchange on which registered)registered |
Common Stock, $.01 Par Value $.01 Per Share | CSV | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act:
None
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Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes ¨☐ No ý☒
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes ¨☐ No ý☒
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý☒ No ¨☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ý☒ No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
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| Large accelerated filer | o☐ | Accelerated filer | x☒ |
| Non-accelerated filer | o☐ (Do not check if a smaller reporting company)
| Smaller reporting company | o☐ |
| | Emerging growth company | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
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| Indicate by check mark whether the registrant has filed a report on and attestation to its management’s assessment of the effectiveness of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered public accounting firm that prepared or issued its audit report. | ☒ |
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes ¨☐ No ý☒
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 20172020 was approximately $413.2$295.5 million based on the closing price of $26.96$18.12 per share on the New York Stock Exchange.
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of February 16, 201826, 2021 was 16,181,876.17,994,717.
DOCUMENTS INCORPORATED BY REFERENCE
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PortionsCertain information required to be disclosed in Part III of this report is incorporated by reference from the registrant'sregistrant’s definitive proxy statement for its 2018 annual meeting of stockholders,or an amendment to this report, which will be filed with the Securities and Exchange Commission withinSEC not later than 120 days after the end of December 31, 2017, are incorporated in Part III ofthe fiscal year covered by this Annual Report on Form 10-K.report.
Table of Contents
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CAUTIONARY NOTE
Certain statements and information in this Annual Report on Form 10-K (this “Form 10-K”) may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical information, should be deemed to be forward-looking statements. The words “may,” “will,” “estimate,” “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements include, but are not limited to, statements regarding any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements of the plans, timing and objectives of management for acquisition and divestiture activities; any statements of the plans, timing, expectations and objectives of management for future financing activities; any statements regarding future economic and market conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenuesrevenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
the•our ability to find and retain skilled personnel;
•the effects of our incentive and compensation plans and programs, including such effects on our Standards Operating Model and the Company’s operational and financial performance;
•our ability to execute our growth strategy;
•the execution of our Standards Operating, 4E leadershipLeadership and Standard Acquisition Models;
•the effects of competition;
•changes in the number of deaths in our markets;
•changes in consumer preferences;preferences and our ability to adapt to or meet those changes;
•our ability to generate preneed sales;sales, including implementing our cemetery portfolio sales strategy;
•the investment performance of our funeral and cemetery trust funds;
•fluctuations in interest rates;
•our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
•our ability to meet the timing, objectives and cost saving expectations related to anticipated financing activities, including our deleveraging program, forecasts and planned uses of free cash flow, expected plans and projections for refinancing our senior notes, and future capital allocation, including potential acquisitions, share repurchases, dividend increases, or debt repayment plans;
•our ability to meet the projected financial performance metrics included in our updated two-year scenario, if at all;
•the timely and full payment of death benefits related to preneed funeral contracts funded through life insurance contracts;
•the financial condition of third-party insurance companies that fund our preneed funeral contracts;
•increased or unanticipated costs, such as insurance or taxes;
recent •our level of indebtedness and the cash required to service our indebtedness;
•changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service;
•effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;
•the potential impact of epidemics and pandemics, including the COVID-19 coronavirus (“COVID-19”), on customer preferences and on our business;
•effects of litigation;
•consolidation of the funeral and cemetery industry;
•our ability to consummate the divestiture of low performing businesses as currently expected, if at all, including expected use of proceeds related thereto;
•our ability to integrate acquired businesses with our existing businesses, including expected performance and financial improvements related thereto;
•economic, financial and stock market fluctuations;
•interruptions or security lapses of our information technology, including any cybersecurity or ransomware incidents;
•our failure to maintain effective control over financial reporting; and
•other factors and uncertainties inherent in the funeral and cemetery industry.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see Part I, Item 1A, Risk Factors.
Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
PART I
ITEM 1. BUSINESS.
GENERAL
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading provider of funeral and cemetery services and merchandise in the United States. We operate in two business segments: funeral home operations, which currently accountaccounts for approximately 78%75% of our total revenue, and cemetery operations, which currently accountaccounts for approximately 22%25% of our total revenues.revenue.
At December 31, 2017,2020, we operated 178 funeral homes in 2926 states and 32 cemeteries in 1112 states. We compete with other publicly held and independent operators of funeral and cemetery companies and smaller, independent operators.companies. We believe we are a market leader in most of our markets.
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.
CURRENT YEAR DEVELOPMENTS
Acquisitions. During 2017, we acquired seven funeral home businesses. We acquired one funeral home business in Longmont, Colorado and one funeral home business in Loveland, Colorado in November 2017 and five funeral home businesses on Long Island, New York in December 2017. The pro forma impact of the acquisitions on prior periods is not presented as the impact is not material to our reported results. The results of the acquired businesses are included in our results of operations from the date of acquisition.
Construction of New Funeral Homes. During 2017, we completed the construction of and began operating two new funeral homes, one in Ohio and one in Pennsylvania.
Share Repurchase Program. On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases of our common stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act. During the year ended December 31, 2017, we repurchased 574,054 shares of common stock for a total cost of $14.0 million at an average cost of $24.35 per share pursuant to this share repurchase program. Based on all repurchases to the date of this Current Report on Form 10-K, we have $26.0 million available for repurchase under our approved program.
Dividends. October 25, 2017, our Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075 per share, effective with respect to dividends payable on December 1, 2017 and later. For our 2017 fiscal year, we paid approximately $3.7 million in dividends.
Advisory Board Member. On February 14, 2018, the Board approved Mr. Greg Brudnicki, an individual with extensive experience in the funeral and cemetery industry, who is also a former owner of a funeral home business and current consultant to the Company, to serve as an advisor to the Board from time-to-time.
FUNERAL AND CEMETERY INDUSTRY
Funeral home and cemetery businesses provide products and services to families in three principal areas: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions.
Our funeral homes offer a complete range of 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 memorial services and transportation services. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and services to take place at one location and thereby reduces transportation costs and inconvenience to the family.
Our cemeteries provide interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise).
We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
CURRENT YEAR DEVELOPMENTS
Acquisitions
On January 3, 2020, we acquired one funeral home and cemetery combination business in Lafayette, California.
Performance Awards
On May 19, 2020, we cancelled all the performance awards previously awarded to all individuals in 2019 and February 2020 and the Compensation Committee of the Board of Directors (the “Board”) approved a new performance award agreement (the “New Agreement”) for certain eligible employees. Pursuant to the New Agreement, the target share awards for each of the eligible employees will vest on December 31, 2024 if the Company’s common stock reaches one of five predetermined growth targets for a sustained period beginning on the grant date of May 19, 2020 and ending on December 31, 2024.
Convertible Notes Repurchases
On September 9, 2020, we repurchased $3.76 million in aggregate principal amount 2.75% convertible subordinated notes due 2021 (“Convertible Notes”) for $4.6 million in cash.
Dividends
On May 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. On October 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.During 2020, we paid $6.0 million in dividends.
Divestitures
During 2020, we divested eight funeral homes for a total of $8.4 million, at a net loss of $6.7 million.
Business Impact under the Macroeconomic Environment of COVID-19
On March 11, 2020, COVID-19 was deemed a global pandemic and since then, the Company has continued to proactively monitor and assess the pandemic’s current and potential impact to the Company’s operations. Since early March 2020, the Company’s senior leadership team has taken certain steps to assist our businesses in appropriately adjusting and adapting to the conditions resulting from the COVID-19 pandemic. Our businesses have been designated as essential services and, therefore, each one of the Company’s business locations remains open and ready to provide service to their communities in this time of need. While our businesses provide an essential public function, along with a critical responsibility to the communities and families they serve, the health and safety of our employees and the families we serve remain our top priority. The Company has taken additional steps during this time to continually review and update our processes and procedures to comply with all regulatory mandates and procure additional supplies to ensure that each of our businesses have appropriate personal protective equipment to provide these essential services. Additionally, in many of our business locations, we have also updated staffing and service guidelines, such as reducing the number of team members present for a service, restricting the size and number of attendees and adjusting other operating procedures. The Company has also implemented additional safety and precautionary measures as it concerns our businesses’ day-to-day interaction with the families and communities they serve.
The overall impact of the macroeconomic environment to the deathcare industry from COVID-19 may provide varying results as compared to other industries. Our industry’s revenues are impacted by various factors, including the number of funeral services performed, the average price for a service and the mix of traditional burial versus cremation contracts. Changes in the macroeconomic environment as a result of the pandemic have, to this point, led to an increase in volume and may create situations where people choose to spend less on funerals by purchasing less expensive caskets, minimize the scale of services and visitations, or elect not to make a preneed funeral or cemetery arrangement. During this time, our businesses have been focused on being innovative and resourceful, providing some type of immediate service as part of the grieving process. Gathering and travel restrictions across many areas of the country have, in some cases, limited our ability to provide large, in-person memorialization services and we have seen client families elect webcasting and livestreaming services, hold services with smaller attendance or rotating visitors, outdoor services, or in some cases, choose to delay services to a future date.
Within our financial reporting environment, we have considered various areas that could affect the results of our operations, though the scope, severity and duration of these impacts remain uncertain at this time because the COVID-19 pandemic is continually evolving and the ultimate impact of COVID-19 remains uncertain. Certain estimates inherently involve assumptions about future events and annual results, making reliable estimates for those matters challenging in periods of economic instability. We do not believe we are vulnerable to certain concentrations, whether by geographic area, revenue for specific products or our relationships with our vendors. Our relationships with our vendors and suppliers have remained consistent and we continue to receive reliable service. Remote working arrangements, when utilized, have not materially affected our ability to maintain and support operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.
We believe our access to capital, the cost of our capital, or the sources and uses of our cash should be relatively consistent in the near term, but given the unprecedented nature of COVID-19, we also believe, it is prudent for us to take a broad-based approach to ensuring we maintain financial flexibility throughout the expected duration of the pandemic. As part of a larger plan, we took steps to reduce overall expenses. For example, discretionary spending, such as growth capital expenditures (primarily cemetery inventory development) was tightly managed and minimized during this time. While the expected duration of the pandemic is unknown, we have not currently experienced any material negative impacts to our liquidity position, access to capital, or cash flows as a result of COVID-19. See Liquidity and Capital Resources within Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information related to our liquidity position.
We have also applied certain measures of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, which has provided a cash benefit in the form of tax payment refunds (we received the 2018 tax year refund on August 7, 2020 and anticipate a further refund for tax year 2019), tax credits related to employee retention, cash deferral for the employer portion of the Social Security tax and anticipated minimal cash taxes for 2020. Although we expect to take advantage of certain tax relief provisions of the CARES Act, we do not believe it will have a significant impact on our short-term or long-term liquidity position. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 for additional information related to the CARES Act.
The COVID-19 pandemic, and related gathering restrictions issued by state and local officials, did impact aspects of our financial results, including revenue, volume, preneed cemetery sales, and average revenue per contract. We will continue to assess these impacts and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related gathering restrictions evolves.
OUR OPERATIONS
See Part II, Item 8, Financial Statements and Supplementary Data, Note 21 for segment data related to our operations.
Funeral Home and Cemetery Operations
Our funeral home and cemetery operations are managed by a team of experienced industry and sales professionals with substantial leadership experience.
Given the high fixed-cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:
•our ability to establish and maintain market share positions supported by strong local heritage and relationships;
•our ability to effectively respond to the increasing trends towards cremation by bundling complimentary services and merchandise;
•our ability to control salary, merchandise and other controllable costs;
•our ability to exercise pricing leverage related to our atneed business to increase average revenue per contract;
•demographic trends in terms of population growth and average age, which impact death rates and number of deaths; and
•our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds and our securities portfolio within the trust funds, which would offset lower pricing power as preneed contracts mature.
Our cemetery operations are subject to many of the same profitability factors as our funeral home business, as well as the following key factors:
•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.
Personalization and pre-planning continue to be two important trends in the funeral and cemetery industry, inbut the United States is characterized bynational trend toward more cremations may be the following fundamental attributes (the industry statistics and information included inmost significant. While this Form 10-K are from reports compiled by Sundale Research based on information as of September 30, 2017 from the U.S. Department of Commerce).
Deaths and Death Trends
During 2017, the number of deaths in the United States increased by approximately 2.1% following a 1.2% and a 3.3% increase in 2016 and 2015, respectively. The rapidly growing and aging population is expected to result in an increase in the number of deaths in the future. The number of Americans age 55 to 64 totaled 41.2 million in 2016 and is expected to grow 1.9% to 45.3 million by 2021, making this the second fastest-growing age group. Americans 65 and older is the fastest-growing segment of the population with 48.2 million in 2016 and is expected to increase to 55.7 million in 2021, reflecting an average annual growth rate of 2.9%. Overall, from 2016 to 2021, the number of deaths in the United States is expected to increase by an average of 1.8% per year, reaching an estimated 3.0 million in 2021.
Burial and Cremation Trends
While the number of deaths is expected to increase over the next few years, the burial ratetrend is expected to continue, to decline. In 2017, the number of burials in the United States decreased by an estimated 0.8%, following declines of 1.7% and 0.3% in 2016 and 2015, respectively. The number of burials in the United States is estimated to fall by an average of 1.1% per year from 2016 through 2021, as the burial rate isother factors are expected to decrease by more than six percentage points during this time. In 2017, the burial rate was estimatedlead to be 48.5%rising industry revenue, including an increase in spending on additional or unique funeral and is estimated to fall to 43.3% in 2021. It is estimated that therecremation services. Shifting preferences will be approximately 1.30 million burials in 2021, declining from 1.36 million in 2017.
In 2017, the number of cremations in the United States increased by an estimated 5.0%, following increases of 4.3% and 7.4% in 2016 and 2015, respectively. Slower growth is expected through 2021, due in part to the sheer size of the market for cremations; however, shifting preferences willlikely continue to lead to a considerable rise in cremations. The numbercremations; as such, we are focused on educating and providing our cremation customers with additional services and products that are available. All of cremations inour funeral homes offer cremation products and services. While the United Statesaverage revenue for a cremation service is expected to grow bygenerally lower than that of an average traditional burial service, we have found that this revenue can be substantially enhanced by offering additional services and merchandise, including video tributes, flowers, burial garments and memorial items such as urns, keepsake jewelry and other items that hold a portion of 4.3% per year from 2016 through 2021. In 2021, it is estimated that there will be approximately 1.70 million cremations in the United States and a cremation rate of 56.7%.cremated remains.
Highly Fragmented Ownership
Our industry, after over 50 years of consolidation, remains highly fragmented, and succession planning issues for privately-owned funeral and cemetery businesses have become more difficult and complex than ever. We believe Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solutionthe following are our key strengths for owners who want their legacy family business to remain operationally prosperous in their local communities. We also believe that our decentralized operating model will continue to attract the top entrepreneurial talent in our industry. Our focus is on partnering with the best of the remaining independent funeral home and cemetery owners in major strategic markets around the country where the potential for future revenue growth is the highest.operations:
The largestMarket Leader. We compete with other publicly held funeral and cemetery companies and smaller, independent operators and believe we are a market leader in termsmost of revenue, of bothour markets. We focus on markets that perform better than the industry average and are less subject to material economic and demographic changes.
High Performance, Decentralized, Partnership Culture. Our funeral homes and cemeteries in the United States are Service Corporation International (“SCI”), StoneMormanaged by entrepreneurially focused Managing Partners L.P. (“StoneMor”) and Carriage. We believe these three companies collectively represent approximately 20% ofwith extensive funeral and cemetery revenuesindustry experience, often within their local markets. They are responsible for day-to-day operations and for growing the business by hiring, training and developing highly motivated and productive local teams. Our businesses are supported by a broader team of High Performance leaders across multiple disciplines in our support center located in Houston, Texas. This promotes more cooperation and synergy between our funeral and cemetery operations and supports the United States. Independentgoal of market-share and volume growth in our most significant markets. We believe our decentralized and partnership culture is very attractive to owners of premier independent businesses alongthat fit our profile of suitable acquisition candidates.
Flexible Capital Structure and Strong Cash Flows. We believe our capital structure provides us with financial flexibility by allowing us to invest our cash in growth opportunities, such as business acquisitions and cemetery inventory projects. While we reassess our capital allocation strategy annually, we currently believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our cash in growth opportunities that generate a return on invested capital in excess of our weighted average cost of
capital. For additional information regarding our capital structure, please see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.
Strong Field-Level Gross Profit Margins. We believe that we have strong field-level gross profit margins and that this performance is a testament to the success of our business strategies. Our strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure. We will continue to seek ways to improve our financial performance, and we believe that our Standards Operating Model will continue to yield long-term improvement in our financial results.
Integrated Information Systems. We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards. Additionally, we have innovative technological and digital tools which enhance our ability to serve our client families in a remote environment. All of our funeral homes and cemeteries are connected to our support center located in Houston, Texas, which allows us to monitor and assess critical operating and financial data and analyze the performance of individual locations on a timely basis. Furthermore, our information system infrastructure provides senior management with a few privately-owned consolidators, represent the remaining amount of industry revenue, accountingcritical tool for an estimated 80% share of revenues.
Heritagemonitoring and Tradition
Funeral homeadhering to our established internal controls, which is critical given our decentralized model and cemetery businesses have traditionally been family-owned businesses that have built a local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals. Given the sensitive nature of our business weoperations.
Proven Leadership Team. Our leadership team, headed by our founder, Chairman and Chief Executive Officer, Melvin C. Payne, is characterized by a dynamic culture that focuses on addressing changing market conditions and emerging trends in the funeral services industry. We believe that relationships fosteredour culture of emphasizing the 4E (Energy, Energize Others, Edge and Execution) leadership characteristics is critical and will provide an important advantage as the funeral and cemetery industry evolves. We are committed to continue operating an efficient organization and strengthening our corporate and local business leadership.
Preneed Programs
Funeral and cemetery arrangements sold prior to death occurring are referred to as preneed contracts.We market funeral and cemetery services and products on a preneed basis at the local level buildlevel. We operate under a decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs.
Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services. Preneed contracts permit families to eliminate the burden of making deathcare plans at the time of need and allow input from other family members before the death occurs. We guarantee the price and performance of the preneed contracts to the customer.
Approximately 15% of our funeral services performed are funded through preneed contracts, which are usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. Insurance-funded contracts allow us to earn commission income to improve our near-term cash flow and offset a significant amount of the up-front costs associated with preneed sales. Trust funded contracts typically provide cash that is invested in various securities with the expectation that returns will exceed the growth factor in the communityinsurance contracts. The cash flow and earnings from insurance contracts are more stable, but are generally lower than traditional trust fund investments. In markets that depend on preneed sales for market share, we supplement the arrangements written by our local funeral directors with sales sourced by our own sales counselors and by third party sellers. We sold 8,410 and 7,525 preneed funeral contracts, net of cancellations, during the years ended December 31, 2019 and 2020, respectively. At December 31, 2020, we had a key driverbacklog of market share. While new entrants may enter97,294 preneed funeral contracts to be delivered in the future.
In addition to preneed funeral contracts, we also offer “pre-planned” funeral arrangements whereby a customer determines in advance substantially all of the details of a funeral service without any given market,financial commitment or other obligation on the part of the client until the actual time of need. Pre-planned funeral arrangements permit a family to avoid the burden of making deathcare plans at the time of need and resourcesenable a funeral home to establish relationships with a client that may eventually lead to an atneed sale.
Approximately 50% of our cemetery operating revenue is derived from preneed property sales. Our preneed cemetery strategy is to build family heritage in our cemeteries by selling property and interment rights prior to death through full time, highly motivated and entrepreneurial local sales teams. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales. Cemetery merchandise and services are often purchased in addition to cemetery property at the time of sale. The performance of these preneed cemetery contracts is secured by placing the funds collected in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. General consumer confidence and discretionary income may have a significant impact on our preneed sales success rate. Cemetery revenue that originated from preneed contracts represented approximately 66% and 67% of our total cemetery revenue for 2019 and 2020, respectively. At December 31, 2020, we had a backlog of 64,820 preneed cemetery contracts to be delivered in the future.
Trust Funds and Insurance Contracts
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. These trusts are typically administered by independent financial institutions which we select. Investment management and advisory services are provided either by our wholly-owned registered investment advisory firm (“CSV RIA”) or by independent financial advisors. As of December 31, 2020, CSV RIA provided these services to develop local heritageapproximately 80% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and tradition servethese fees are recognized as important barriersincome in the period in which services are provided. The investment advisors establish an investment policy that provides guidance on asset allocation, investment requirements, investment manager selection and performance monitoring. The investment objectives are tailored to entry.generate long-term investment returns without assuming undue risk, while ensuring the management of assets is in compliance with applicable laws.
Preneed sales generally require deposits to a trust or purchase of a third-party insurance product. Trust fund income earned, along with the receipt and recognition of any insurance benefits, are not reflected in our revenue until the service is performed or the merchandise is delivered. Trust fund holdings and deferred revenue are reflected on our Consolidated Balance Sheet, while our insurance funded contracts are not reflected on our Consolidated Balance Sheet. In most states, we are not permitted to withdraw principal or investment income from such trusts until the service is performed. Additionally, in most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust. The income from these perpetual care trusts provides funds necessary to maintain cemetery property and memorials in perpetuity.
For additional information with respect to our trusts, see Part II, Item 8, Financial Statements and Supplementary Data, Note 7.
BUSINESS STRATEGYOUR OPERATIONS
See Part II, Item 8, Financial Statements and Supplementary Data, Note 21 for segment data related to our operations.
Funeral Home and Cemetery Operations
Our business strategy is based onfuneral home and cemetery operations are managed by a team of experienced industry and sales professionals with substantial leadership experience.
Given the high fixed-cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:
•our ability to establish and maintain market share positions supported by strong local leadership with entrepreneurial principles that is focusedheritage and relationships;
•our ability to effectively respond to the increasing trends towards cremation by bundling complimentary services and merchandise;
•our ability to control salary, merchandise and other controllable costs;
•our ability to exercise pricing leverage related to our atneed business to increase average revenue per contract;
•demographic trends in terms of population growth and average age, which impact death rates and number of deaths; and
•our response to fluctuations in capital markets and interest rates, which affect investment earnings on sustainable long term market share, revenue,trust funds and our securities portfolio within the trust funds, which would offset lower pricing power as preneed contracts mature.
Our cemetery operations are subject to many of the same profitability growth in each factors as our funeral home business, as well as the following key factors:
•size and success of our sales organization;
•local business. We believe Carriage has the most innovative operating modelperceptions and heritage of our cemeteries;
•our ability to adapt to changes in the funeraleconomy and cemetery industry,consumer confidence; and
•our response to fluctuations in capital markets and interest rates, which we are able to achieve through a decentralized, high-performance culture operating framework linked with incentive compensation programs that attract top-quality industry talent to our organization.
Our Mission Statement states that “we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry”affect investment earnings on trust funds, finance charges on installment contracts and our Guiding Principles state our core values, which are comprised of: securities portfolio within the trust funds.
Honesty, integrity and quality in all that we do;
Hard work, pride of accomplishment and shared success through employee ownership;
Belief in the power of people through individual initiative and teamwork;
Outstanding service and profitability go hand-in-hand; and
Growth of the Company is driven by decentralization and partnership.
Our five Guiding Principles collectively embody our Being The Best high-performance cultural, operating framework. Our operations and business strategy are built upon the execution of the following three models:
Standards Operating Model;
4E Leadership Model; and
Strategic Acquisition Model.
Standards Operating Model
Our Standards Operating Model is focused on growing local market share, people development, and the key operating and financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenues and earnings.
Important elements of our Standards Operating Model include:
Balanced Operating Model – We believe a decentralized structure works best in the funeral and cemetery industry. Successful execution of our Standards Operating Model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial drive and corporate support aligned with the key drivers of a successful operation organized around three primary areas - market share, people and operating financial metrics.
Incentives Aligned with Standards – Empowering local managers, who we call Managing Partners, to do the right things in their operations and local communities, and providing appropriate support with operating and financial practices, will enable long-term growth and sustainable profitability. Each Managing Partner participates in a variable bonus plan whereby he or she earns a percentage of his or her respective business’ earnings based upon the actual standards achieved as long as the performance exceeds our minimum standards. In 2012, we began a five year incentive plan, called “Good to Great,” which rewards Managing Partners with a bonus at the end of five years, equal to a ratio of four to six times their average annual bonus, if they are able to achieve an annual compound growth rate of 2% over a five year period. After each five year incentive plan is achieved and paid out, five year plan begins. To date, we have had two performance periods in which we have paid approximately $2.9 million to 15 Managing Partners who earned a bonus under this program. The current period commenced on January 1, 2017 and will end on December 31, 2021.
The Right Local Leadership – Successful execution of our operating model is highly dependent on strong local leadership as defined by our 4E Leadership Model, intelligent risk taking and entrepreneurial empowerment. A Managing Partner’s performance is judged according to achievement of the standards for that business.
4E Leadership Model
Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high-performance culture: Energy to get the job done; the ability to Energize others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams.
Strategic Acquisition Model
Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. We believe that both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic ranking criteria to assess acquisition candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses.
We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenues and sustainable field-level earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins (a non-GAAP measure). We use the following criteria, to name a few, to rank the strategic position of each potential acquisition:
cultural alignment;
volume and price trends;
size of business;
size of market;
competitive standing;
demographics;
strength of brand; and
barriers to entry.
The valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital.
Our belief in our Mission Statement and Guiding Principles that define us and proper execution of the three models that define our strategy have given us the competitive advantage in any market in which we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin.
Other elements of our overall business strategy include the following:
Enhancement of Funeral and Cremation Services.Personalization and pre-planning continue to be two of the most important trends in the funeral and cremation services and merchandisecemetery industry, but the movenational trend toward more cremations may be the most significant. While this trend is expected to continue, other factors are expected to lead to rising industry revenues,revenue, including an increase in spending on additional or unique funeral and cremation services.
The percentage of funeral services performed by our funeral homes for which cremation was chosen was 48.9% for the year ended December 31, 2015, 50.7% for the year ended December 31, 2016 and 51.4% for the year ended December 31, 2017. Shifting preferences will likely continue to lead to a considerable rise in cremations; as such, we are focused on educating and providing our cremation customers with additional services and products that are available. All of our funeral homes offer cremation products and services. While the average revenue for a cremation service is generally lower than that of an average traditional full-service funeral,burial service, we have found that these revenuesthis revenue can be substantially enhanced by our emphasis on offering additional services and merchandise, including counseling referrals, video tributes, flowers, burial garments and memorial items such as urns, keepsake jewelry and other items that hold a portion of the cremated remains.
We believe the following are our key strengths for our funeral home and cemetery operations:
Market Leader. We compete with other publicly held funeral and cemetery companies and smaller, independent operators and believe we are a market leader in most of our markets. We focus on markets that perform better than the industry average and are less subject to material economic and demographic changes.
High Performance, Decentralized, Partnership Culture. Our funeral homes and cemeteries are managed by entrepreneurially focused Managing Partners with extensive funeral and cemetery industry experience, often within their local markets. They are responsible for day-to-day operations and for growing the business by hiring, training and developing highly motivated and productive local teams. Our businesses are supported by a broader team of High Performance leaders across multiple disciplines in our support center located in Houston, Texas. This promotes more cooperation and synergy between our funeral and cemetery operations and supports the goal of market-share and volume growth in our most significant markets. We believe our decentralized and partnership culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.
Flexible Capital Structure and Strong Cash Flows. We believe our capital structure provides us with financial flexibility by allowing us to invest our cash in growth opportunities, such as business acquisitions and cemetery inventory projects. While we reassess our capital allocation strategy annually, we currently believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our cash in growth opportunities that generate a return on invested capital in excess of our weighted average cost of
capital. For additional information regarding our capital structure, please see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.
Strong Field-Level Gross Profit Margins. We believe that we have strong field-level gross profit margins and that this performance is a testament to the success of our business strategies. Our strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure. We will continue to seek ways to improve our financial performance, and we believe that our Standards Operating Model will continue to yield long-term improvement in our financial results.
Integrated Information Systems. We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards. Additionally, we have innovative technological and digital tools which enhance our ability to serve our client families in a remote environment. All of our funeral homes and cemeteries are connected to our support center located in Houston, Texas, which allows us to monitor and assess critical operating and financial data and analyze the performance of individual locations on a timely basis. Furthermore, our information system infrastructure provides senior management with a critical tool for monitoring and adhering to our established internal controls, which is critical given our decentralized model and the sensitive nature of our business operations.
Proven Leadership Team. Our leadership team, headed by our founder, Chairman and Chief Executive Officer, Melvin C. Payne, is characterized by a dynamic culture that focuses on addressing changing market conditions and emerging trends in the funeral services industry. We believe our culture of emphasizing the 4E (Energy, Energize Others, Edge and Execution) leadership characteristics is critical and will provide an important advantage as the funeral and cemetery industry evolves. We are committed to continue operating an efficient organization and strengthening our corporate and local business leadership.
Preneed Programs
Funeral Sales Program.and cemetery arrangements sold prior to death occurring are referred to as preneed contracts.We market funeral and cemetery services and products on a preneed basis at the local level. We operate under a local, decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs.
Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services. Preneed contracts permit families to eliminate the burden of making deathcare plans at the time of need and allow input from other family members before the death occurs. We guarantee the price and performance of the preneed contracts to the customer.
Approximately 20%15% of our funeral services performed are funded through preneed contracts, which are usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. Insurance-funded
contracts allow us to earn commission income to improve our near-term cash flow and offset a significant amount of the up-front costs associated with preneed sales. Trust funded contracts typically provide cash that is invested in various securities with the expectation that returns will exceed the growth factor in the insurance contracts. The cash flow and earnings from insurance contracts are more stable, but are generally lower than traditional trust fund investments. In markets that depend on preneed sales for market share, we supplement the arrangements written by our local funeral directors with sales sourced by our own sales counselors and by third party sellers. We sold 8,410 and 7,525 preneed funeral contracts, net of cancellations, during the years ended December 31, 2019 and 2020, respectively. At December 31, 2020, we had a backlog of 97,294 preneed funeral contracts to be delivered in the future.
Preneed Cemetery Sales Program.In addition to preneed funeral contracts, we also offer “pre-planned” funeral arrangements whereby a customer determines in advance substantially all of the details of a funeral service without any financial commitment or other obligation on the part of the client until the actual time of need. Pre-planned funeral arrangements permit a family to avoid the burden of making deathcare plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an atneed sale.
Approximately 50% of our cemetery operating revenue is derived from preneed property sales. Our preneed cemetery strategy is to build family heritage in our cemeteries by selling property and internmentinterment rights prior to death through full time, highly motivated and entrepreneurial local sales teams. Approximately 40% of our cemetery revenues are derived from preneed property sales. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales. Cemetery merchandise and services are often purchased in addition to cemetery property at the time of sale. The performance of these preneed cemetery contracts is secured by placing the funds collected in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. General consumer confidence and discretionary income may have a significant impact on our preneed sales success rate. Cemetery revenue that originated from preneed contracts represented approximately 66% and 67% of our total cemetery revenue for 2019 and 2020, respectively. At December 31, 2020, we had a backlog of 64,820 preneed cemetery contracts to be delivered in the future.
Market Leader.Trust Funds and Insurance Contracts
We competehave established a variety of trusts in connection with other public funeral home and cemetery companiesoperations as required under applicable state laws. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and smaller,service trusts; and (iii) cemetery perpetual care trusts. These trusts are typically administered by independent operatorsfinancial institutions which we select. Investment management and believe weadvisory services are a market leader in mostprovided either by our wholly-owned registered investment advisory firm (“CSV RIA”) or by independent financial advisors. As of December 31, 2020, CSV RIA provided these services to approximately 80% of our markets. We focus on markets that perform better than the industry average and are generally insulated from material economic and demographic changes.
High Performance, Decentralized, Partnership Culture. Our funeral homes and cemeteries are managed by Managing Partners with extensive funeral and cemetery industry experience, often within their local markets. Our Managing Partners have responsibilitytrust assets, for day-to-day operations, but are required to follow operating and financial standards based on our Standards Operating Model that are custom designed for each of our four business groupings which isa fee based on the size (numbermarket value of funerals)trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and averagethese fees are recognized as income in the period in which services are provided. The investment advisors establish an investment policy that provides guidance on asset allocation, investment requirements, investment manager selection and performance monitoring. The investment objectives are tailored to generate long-term investment returns without assuming undue risk, while ensuring the management of assets is in compliance with applicable laws.
Preneed sales generally require deposits to a trust or purchase of a third-party insurance product. Trust fund income earned, along with the receipt and recognition of any insurance benefits, are not reflected in our revenue per funeral. This strategy allows each local businessuntil the service is performed or the merchandise is delivered. Trust fund holdings and deferred revenue are reflected on our Consolidated Balance Sheet, while our insurance funded contracts are not reflected on our Consolidated Balance Sheet. In most states, we are not permitted to withdraw principal or investment income from such trusts until the service is performed. Additionally, in most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust. The income from these perpetual care trusts provides funds necessary to maintain its unique identity within its local marketcemetery property and to capitalize on its reputation and heritage while our senior leadership provides support services from our corporate headquartersmemorials in Houston, Texas. We believe our culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.perpetuity.
Flexible Capital Structure. We have no short-term debt maturity issues. We believe that our capital structure provides us with financial flexibility by allowing us to invest our cash flow in growth opportunities, such as business acquisitions and cemetery inventory projects. For additional information regardingwith respect to our capital structure, pleasetrusts, see Part II, Item 7, Management's Discussion8, Financial Statements and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.Supplementary Data, Note 7.
Stable Cash Flow. We have demonstrated the ability to generate strong and stable cash flow. Cash flow from operations for 2017 totaled $45.2 million, which was used primarily for the acquisition of seven funeral home businesses, capital expenditures and our working capital needs. We intend to use our cash flow to acquire funeral home and cemetery businesses and to fund internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends. Our growth strategy is the primary way we expect to increase stockholder value. We may also use available cash flow to repurchase shares of our common stock from time to time. While we reassess our capital allocation strategy annually, we currently believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our net cash flow in growth opportunities that generate a return on invested capital in excess of our weighted average cost of capital.
Strong Field-Level Gross Profit Margins. We believe that we have strong field-level gross profit margins and that this performance is a testament to the success of our business strategies. Our strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure. We will continue to seek ways to improve our financial performance, and we believe that our Standards Operating Model will continue to yield long-term improvement in our financial results.
Integrated Information Systems. We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards. All of our funeral homes and cemeteries are connected to our Houston support home office, which allows us to monitor and assess critical operating and financial data and analyze the performance of individual locations on a timely basis. Furthermore, our information system infrastructure provides senior management with a critical tool for monitoring and adhering to our established internal controls, which is critical given our decentralized model and the sensitive nature of our business operations.
Proven Leadership Team. Our leadership team is comprised of ten members, which we refer to as our Operations and Strategic Growth Leadership Team (“OSGLT”), headed by our founder, Chairman and Chief Executive Officer, Melvin C. Payne and nine leaders of our support functions and is characterized by a dynamic culture that focuses on addressing changing market conditions and emerging trends in the funeral services industry. We believe our culture of emphasizing the 4Es (Energy, Energize Others, Edge and Execution) leadership characteristics is critical and will provide an important advantage as the funeral and cemetery industry evolves. We are committed to continue operating an efficient organization and strengthening our corporate and local business leadership. Our businesses are led by a Regional Partner who is a member of the OSGLT. This promotes more cooperation and synergy between our funeral and cemetery operations and supports the goal of market-share and volume growth in our most significant markets.
OUR OPERATIONS
We conduct our funeral and cemetery operations only in the United States. Our operations are reported in two segments: funeral home operations and cemetery operations. Information for each of our segments is presented below and in our financial statements set forth herein.
Funeral Home Operations
At December 31, 2017, we operated 178 funeral homes in 29 states. Funeral home revenues currently account for approximately 78% of our total revenues. The funeral home operations are managed by a team of experienced industry professionals and regional leadership with substantial management experience in our industry. See Part II, Item 8, Financial Statements and Supplementary Data, Note 2021 for segment data related to our funeral home operations.
Funeral Home and Cemetery Operations
Our funeral homes offerhome and cemetery operations are managed by a complete rangeteam of services to meet a family’s funeral needs, including consultation, the removalexperienced industry 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. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and services to take place at one location and thereby reduces transportation costs and inconvenience to the family.sales professionals with substantial leadership experience.
Funeral homes are principally service businesses that provide burial and cremation services and sell related merchandise, such as caskets and urns. The sources and availability of caskets and urns are from a small number of national providers that have distribution centers near our businesses. We typically order and receive the merchandise within 24 hours. Given the high fixed-cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:
•our ability to establish and maintain market share positions supported by strong local heritage and relationships;
•our ability to effectively respond to the increasing trends towards cremation packagingby bundling complimentary services and merchandise;
•our ability to control salary, merchandise and other controllable costs;
•our ability to exercise pricing leverage related to our atneed business to increase average revenuesrevenue per contract; and
•demographic trends in terms of population growth and average age, which impact death rates and number of deaths; and
•our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds and our securities portfolio within the trust funds, which would offset lower pricing power as preneed contracts mature.
Cemetery Operations
At December 31, 2017, we operated 32 cemeteries in 11 states. Cemetery revenues currently account for approximately 22% of our total revenues. The cemetery operations are managed by a team of experienced industry and sales professionals and regional leadership with substantial management experience in our industry. See Part II, Item 8, Financial Statements and Supplementary Data, Note 20 for segment data related to our cemetery operations.
Our cemetery products and services include interment services, the rights to interment in cemetery sites (primarily grave sites, mausoleum crypts and niches) and related cemetery merchandise, such as memorials and vaults. Cemetery operations generate revenues through sales of interment rights and memorials, installation fees, fees for interment and cremation memorialization products, finance charges from installment sales contracts and investment income from preneed cemetery merchandise trusts and perpetual care trusts. Cemetery revenues generated from atneed services and merchandise sales generally are subject to many of the same key profitability factors as our funeral home business. Our cemetery operating results are affected bybusiness, as well as the following key factors:
•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.
Personalization and pre-planning continue to be two important trends in the funeral and cemetery industry, but the national trend toward more cremations may be the most significant. While this trend is expected to continue, other factors are expected to lead to rising industry revenue, including an increase in spending on additional or unique funeral and cremation services. Shifting preferences will likely continue to lead to a considerable rise in cremations; as such, we are focused on educating and providing our cremation customers with additional services and products that are available. All of our funeral homes offer cremation products and services. While the average revenue for a cremation service is generally lower than that of an average traditional burial service, we have found that this revenue can be substantially enhanced by offering additional services and merchandise, including video tributes, flowers, burial garments and memorial items such as urns, keepsake jewelry and other items that hold a portion of the cremated remains.
We believe the following are our key strengths for our funeral home and cemetery operations:
Market Leader. We compete with other publicly held funeral and cemetery companies and smaller, independent operators and believe we are a market leader in most of our markets. We focus on markets that perform better than the industry average and are less subject to material economic and demographic changes.
High Performance, Decentralized, Partnership Culture. Our funeral homes and cemeteries are managed by entrepreneurially focused Managing Partners with extensive funeral and cemetery industry experience, often within their local markets. They are responsible for day-to-day operations and for growing the business by hiring, training and developing highly motivated and productive local teams. Our businesses are supported by a broader team of High Performance leaders across multiple disciplines in our support center located in Houston, Texas. This promotes more cooperation and synergy between our funeral and cemetery operations and supports the goal of market-share and volume growth in our most significant markets. We believe our decentralized and partnership culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.
Flexible Capital Structure and Strong Cash Flows. We believe our capital structure provides us with financial flexibility by allowing us to invest our cash in growth opportunities, such as business acquisitions and cemetery inventory projects. While we reassess our capital allocation strategy annually, we currently believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our cash in growth opportunities that generate a return on invested capital in excess of our weighted average cost of
capital. For additional information regarding our capital structure, please see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.
Strong Field-Level Gross Profit Margins. We believe that we have strong field-level gross profit margins and that this performance is a testament to the success of our business strategies. Our strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure. We will continue to seek ways to improve our financial performance, and we believe that our Standards Operating Model will continue to yield long-term improvement in our financial results.
Integrated Information Systems. We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards. Additionally, we have innovative technological and digital tools which enhance our ability to serve our client families in a remote environment. All of our funeral homes and cemeteries are connected to our support center located in Houston, Texas, which allows us to monitor and assess critical operating and financial data and analyze the performance of individual locations on a timely basis. Furthermore, our information system infrastructure provides senior management with a critical tool for monitoring and adhering to our established internal controls, which is critical given our decentralized model and the sensitive nature of our business operations.
Proven Leadership Team. Our leadership team, headed by our founder, Chairman and Chief Executive Officer, Melvin C. Payne, is characterized by a dynamic culture that focuses on addressing changing market conditions and emerging trends in the funeral services industry. We believe our culture of emphasizing the 4E (Energy, Energize Others, Edge and Execution) leadership characteristics is critical and will provide an important advantage as the funeral and cemetery industry evolves. We are committed to continue operating an efficient organization and strengthening our corporate and local business leadership.
Preneed Programs
WeFuneral and cemetery arrangements sold prior to death occurring are referred to as preneed contracts.We market funeral and cemetery services and products on a preneed basis at the local level. We operate under a decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs.
Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services. Preneed contracts permit families to eliminate issuesthe burden of making deathcare plans at the time of need and allow input from other family members before the death occurs. We guarantee the price and performance of the preneed contracts to the customer.
PreneedApproximately 15% of our funeral services performed are funded through preneed contracts, which are usually paid on an installment basis. The performance of preneed funeral contracts is usually secured by placing the funds collected in trust for the benefit of the customer or by the customer's purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. These methodsInsurance-funded contracts allow us to earn commission income to improve our near-term cash flow and offset a significant amount of the up-front costs associated with preneed sales. Trust funded contracts typically provide cash that is invested in various securities with the expectation that returns will exceed the growth factor in the insurance contracts. The cash flow and earnings from insurance contracts are intended tomore stable, but are generally lower than traditional trust fund investments. In markets that depend on preneed sales for market share, we supplement the arrangements written by our local funeral directors with sales sourced by our own sales counselors and by third party sellers. We sold 8,410 and 7,525 preneed funeral contracts, covernet of cancellations, during the original contract priceyears ended December 31, 2019 and generally include an element2020, respectively. At December 31, 2020, we had a backlog of growth (earnings) designed to offset future inflationary cost increases. Revenue from97,294 preneed funeral contracts along with accumulated earnings, is not recognized untilto be delivered in the time the funeral service is performed. The accumulated earnings from the trust investments and insurance policies are intended to offset the inflation in funeral prices. Additionally, we generally earn a commission from the insurance company from the sale of insurance-funded policies reflected in our Consolidated Financial Statements as Preneed funeral insurance commission within Revenues: Funeral. The commission income is recognized as revenue when the period of refund expires (generally one year), which helps us defray the costs we incur to originate the preneed contract (primarily commissions we pay to our sales counselors).future.
In addition to preneed funeral contracts, we also offer “pre-planned” funeral arrangements whereby a customer determines in advance substantially all of the details of a funeral service without any financial commitment or other obligation on the part of the client until the actual time of need. Pre-planned funeral arrangements permit a family to avoid issuesthe burden of making deathcare plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an atneed sale.
Preneed salesApproximately 50% of our cemetery operating revenue is derived from preneed property sales. Our preneed cemetery strategy is to build family heritage in our cemeteries by selling property and interment rights are usually financedprior to death through interest-bearing installmentfull time, highly motivated and entrepreneurial local sales contracts, generally with termsteams. Our goal is to build broader and deeper teams of up to five years with such earnings reflectedsales leaders and counselors in our Consolidated Financial Statements as Preneed cemetery finance chargeswithin Revenues: Cemetery. In substantially all cases, we receive an initial down payment at the time the contract is signed. Preneed saleslarger and more strategically located cemeteries in order to focus on growth of cemetery interment rights are recorded as revenue when 10% of the contract amount related to the interment right has been collected.our preneed property sales. Cemetery merchandise and services may similarly be sold on an installment basis, but revenue is recorded when delivery has occurred. Allowances for bad debts and customer cancellations are recordedoften purchased in addition to cemetery property at the datetime of sale. The performance of these preneed cemetery contracts is secured by placing the funds collected in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. General consumer confidence and discretionary income may have a significant impact on our preneed sales success rate. Cemetery revenue that the contract is executedoriginated from preneed contracts represented approximately 66% and periodically evaluated thereafter based upon historical experience.
We sold 7,63967% of our total cemetery revenue for 2019 and 7,444 preneed funeral contracts, net of cancellations, during the years ended December 31, 2016 and 2017,2020, respectively. At December 31, 2017,2020, we had a backlog of 93,712 preneed funeral contracts and 63,52364,820 preneed cemetery contracts to be delivered in the future. Approximately 20%
At December 31, 2017, we employed a staff of 208 advance-planning and family service representatives for the sale of preneed products and services. Our advance-planning and family service representatives primarily assist families in making atneed and preneed funeral, memorialization and cemetery arrangements through the selection and purchase of cemetery property, merchandise and services and ensuring that the expectations of our client families and their guests are exceeded.
Trust Funds and Insurance Contracts
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. These trusts are typically administered by independent financial institutions selected by us.which we select. Investment management and advisory services are provided either by our wholly-owned registered investment advisory firm (“CSV RIA,RIA”) or by independent financial advisors. As of December 31, 2017,2020, CSV RIA provided these services to one institution, which has custody of approximately 80% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided. The investment advisors establish an investment policy that givesprovides guidance on asset allocation, investment requirements, investment manager selection and performance monitoring. The investment objectives are tailored to generate long-term investment returns without assuming undue risk, while ensuring the management of assets is in compliance with applicable laws.
Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. Trust fund income earned, along with the receipt and recognition of any insurance benefits, are deferrednot reflected in our revenue until the service is performed or the merchandise is delivered. Trust fund holdings and deferred revenue are reflected on our Consolidated Balance Sheets,Sheet, while theour insurance funded contracts are not reflected on our Consolidated Balance Sheets.Sheet. In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed. Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses. The aggregate balance of our preneed funeral contracts heldAdditionally, in trust, insurance contracts and receivables from preneed trusts was approximately $477.5 million as of December 31, 2017.
We are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of the selling price) into a merchandise and service trust fund for preneed cemetery merchandise and services sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. We are generally permitted to withdraw the trust principal and accrued income when the merchandise is actually delivered, when the service is provided or when the contract is canceled. However, certain states allow the withdrawal of income prior to delivery when the regulations identify excess earnings in the trusts. We did not withdraw any trust income in 2016 and 2017. Cemetery merchandise and service trust fund balances totaled approximately $73.9 million as of December 31, 2017.
In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust. The income from these perpetual care trusts provides funds necessary to maintain cemetery property and memorials in perpetuity. This trust fund income is recognized, as earned and is reflected in our Consolidated Financial Statements as Revenues: Cemetery. While we are entitled to withdraw the income from perpetual care trusts to provide for maintenance of cemetery property and memorials, we are restricted from withdrawing any of the principal balances of the trust fund. Perpetual care trust balances totaled approximately $50.2 million at December 31, 2017.
For additional information with respect to our trusts, see Part II, Item 8, Financial Statements and Supplementary Data, Notes 6, 8 and 10.Note 7.
SEASONALITYBUSINESS STRATEGY
Our business can be affected by seasonal fluctuationsstrategy is based on strong, local leadership with entrepreneurial principles that is focused on sustainable long term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the death rate. Generally,funeral and cemetery industry, which we are able to achieve through a decentralized, high-performance culture operating framework linked with incentive compensation programs that attract top-quality industry talent to our organization. We also believe that Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for owners who want their legacy family business to remain operationally prosperous in their local communities.
Our Mission Statement states that “we are committed to being the numbermost professional, ethical and highest quality funeral and cemetery service organization in our industry” and our Guiding Principles state our core values, which are comprised of:
•Honesty, integrity and quality in all that we do;
•Hard work, pride of deaths is higher duringaccomplishment and shared success through employee ownership;
•Belief in the winter months because the incidencespower of death from influenzapeople through individual initiative and pneumonia are higher during this period than other periodsteamwork;
•Outstanding service and profitability go hand-in-hand; and
•Growth of the year.Company is driven by decentralization and partnership.
Our five Guiding Principles collectively embody our Being The Best high-performance culture and operating framework. Our operations and business strategy are built upon the execution of the following three models:
•Standards Operating Model;
•4E Leadership Model; and
•Strategic Acquisition Model.
Standards Operating Model
Our Standards Operating Model is focused on growing local market share, providing personalized high-value services to our client families and guests, and operating financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenue and earnings.
Important elements of our Standards Operating Model include:
•Balanced Operating Model – We believe a decentralized structure works best in the funeral and cemetery industry. Successful execution of our Standards Operating Model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial drive and corporate support aligned with the key drivers of a successful operation organized around three primary areas - market share, high-value services and operating financial metrics.
•Incentives Aligned with Standards – Empowering local managers, who we call Managing Partners, to do the right things in their operations and local communities, and providing appropriate support with operating and financial practices, will enable long-term growth and sustainable profitability. Each Managing Partner participates in a variable bonus plan whereby he or she earns a percentage of his or her respective business’ earnings based upon the actual standards achieved as long as the performance exceeds our minimum standards.
•The Right Local Leadership – Successful execution of our operating model is highly dependent on strong local leadership as defined by our 4E Leadership Model, intelligent risk taking and entrepreneurial empowerment. A Managing Partner’s performance is judged according to achievement of the standards for that business.
4E Leadership Model
Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high-performance culture: Energy to get the job done; the ability to Energize others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams.
Strategic Acquisition Model
Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. We believe that both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic ranking criteria to assess acquisition candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses.
We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins (a non-GAAP measure). We use criteria such as cultural alignment, volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry to evaluate the strategic position of potential acquisition candidates. Our financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital.
Our belief in our Mission Statement and Guiding Principles and proper execution of the three models that define our strategy have given us a competitive advantage in every market where we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin.
COMPETITION
The operating environment in the funeral and cemetery industry has been highly competitive. Publicly traded companies operatingThe largest publicly held operators, in terms of revenue, of both funeral homes and cemeteries with operations in the United States include SCI,are Service Corporation International (“SCI”), StoneMor, Inc. (“StoneMor”), Park Lawn Corporation (“Park Lawn”) and Carriage. In addition,We believe these four companies collectively represent approximately 20% of funeral and cemetery revenue in the United States. Independent businesses, along with a numberfew privately-owned consolidators, represent the remaining amount of smaller private consolidators have been active in acquiring and operating funeral homes and cemeteries.industry revenue, accounting for an estimated 80% share of revenue.
Our funeral home and cemetery operations face competition in the markets that they serve. Our primary competition in most of our markets is from local independent operators. We have observed new start-up competition in certain areas of the country, which may impact our profitability in certain markets, because of the high fixed cost nature of our funeral home operations.markets. Market share for funeral homes and cemeteries is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important. Because of the importance of reputation and heritage, market share increases
are usually gained over a long period of time. The sale of preneed funeral services and cemetery property has increasingly been used by many companies as a marketing tool to build market share.
There has been increasing competition from providers specializing in specific services, such as cremations, who offer minimal service and low-end pricing. We also face competition from companies that market products and related merchandise over the
internet and non-traditional casket stores in certain markets. These competitors have been successful in capturing a portion of the low-end market and product sales.
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.
REGULATION
General. Our operations are subject to regulations, supervision and licensing under numerous federal, state and local laws, ordinances and regulations, including extensive regulations concerning trust funds, preneed sales of funeral and cemetery products and services and various other aspects of our business. We believe that we comply in all material respects with the provisions of these laws, ordinances and regulations. Legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which could have a material impact on our business. We cannot predict the impact of any future laws and regulations or changes to existing laws and regulations.
Federal Trade Commission. Our funeral home operations are comprehensively regulated by the Federal Trade Commission (“FTC”) under Section 5 of the Federal Trade Commission Act and a trade regulation rule for the funeral industry promulgated thereunder referred to as the “Funeral Rule.” The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized pricing information and various other disclosures about funeral goods and services and prohibit a funeral provider from: (i) misrepresenting legal, crematory and cemetery requirements; (ii) embalming for a fee without permission; (iii) requiring the purchase of a casket for direct cremation; (iv) requiring consumers to buy certain funeral goods or services as condition for furnishing other funeral goods or services; (v) misrepresenting state and local requirements for an outer burial container; and (vi) representing that funeral goods and services have preservative and protective value. Additionally, the Funeral Rule requires the disclosure of mark-ups, commissions, additional charges and rebates related to cash advance items. The FTC has announced that it is reviewing the Funeral Rule, which may result in changes to the Funeral Rule. Among the subjects under review by the FTC is whether the scope of the Funeral Rule should be expanded to cover cemetery sales and merchandise and mandated disclosure of online pricing. We cannot predict what changes, if any, may be made to the Funeral Rule or the impact of any such changes on our business.
State Trust Laws. 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. These trusts are typically administered by independent financial institutions which we select. Under state trust laws, our wholly owned registered investment advisor is allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided. Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed. Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses. Additionally, we are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of the selling price) into a merchandise and service trust fund for preneed cemetery merchandise and services sales.
Environmental. Our operations are also subject to stringentcertain federal, regional, state and local laws and regulations relating to environmental protection, including legal requirements governing air emissions, waste management and disposal and wastewater discharges. For instance, the federal Clean Air Act and analogous state laws, which restrict the emission of pollutants from many sources, including crematories, may require us to apply for and obtain air emissions permits, install costly emissions control equipment, and conduct monitoring and reporting tasks. Also, in the course of our operations, we store and use chemicals and other regulated substances as well as generate wastes that may subject us to strict liability under the federal Resource Conservation and Recovery Act and comparable state laws, which govern the treatment, storage, and disposal of nonhazardous and hazardous wastes, and the federal Comprehensive Environmental Response, Compensation and Liability Act, a remedial statute that imposes cleanup obligations on current and past owners or operators of facilities where hazardous substance releases occurred and anyone who transported or disposed or arranged for the transportation or disposal of hazardous substances released into the environment from such sites. In addition, the Federal Water Pollution Control Act, also known as
the federal Clean Water Act, and analogous state laws regulate discharges of pollutants to state and federal waters. Underground and abovegroundabove ground storage tanks that store chemicals and fuels for vehicle maintenance or general operations are located at certain of our facilities and any spills or releases from those facilities may cause us to incur remedial liabilities under the Clean Water Act or analogous state laws as well as potential liabilities for damages to properties or persons. Failure to comply with environmental laws and regulations could result in the assessment of sanctions, including administrative, civil, and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, delays in permitting or performance of projects and the issuance of injunctions restricting or prohibiting some or all of our activities in affected areas. Moreover, accidental releases or spills may occur in the course of our operations, and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including any third party claims for damages to property, natural resources or persons. Also, it is possible that implementation of stricter environmental laws and regulations or more stringent enforcement of existing environmental requirements could result in additional, currently unidentifiable costs or liabilities to us, such as requirements to purchase pollution control equipment or implement operational changes or improvements. While we believe we are in substantial compliance with existing environmental laws and regulations, we cannot assure that we will not incur substantial costs in the future.
Worker Health and Safety. We are subject to the requirements of the federal Occupational Safety and Health Act, as amended (“OSHA”), and comparable state statutes whose purpose is to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and implementing regulations and similar state statutes and regulations require that we organize and/or disclose information about hazardous materials used or produced in our operations and that this information be provided to employees, state and local governmental authorities and citizens. We believe that we are in substantial compliance with all applicable laws and regulations relating to worker health and safety.
EMPLOYEESHUMAN CAPITAL
Our funeral homes and cemeteries are managed by entrepreneurially focused Managing Partners with extensive funeral and cemetery industry experience. They have responsibility for day-to-day operations and follow operating and financial metrics called “Standards” within our Standards Operating Model. Standards Achievement is the measure by which we judge the Managing Partner's performance and how we incentivize our Managing Partners and their teams. To achieve a high level within our Standards in a business year after year, we require local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams. See Part I, Item 1, Business Strategy for additional details about our Standards Operating Model and 4E Leadership Model.
As of December 31, 2017,2020, we and our subsidiaries employed 2,6592,718 employees, of whom 1,1451,126 were full-time and 1,5141,592 were part-time. All of our funeral directors and embalmers possess licenses required by applicable regulatory agencies. None of our employees are represented by unions.
AVAILABLE INFORMATION
We file annual, quarterly and other reports, and any amendments to those reports, and information with the United States Securities and Exchange Commission (“SEC”). You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. You may obtain additional information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, theThe SEC maintains a website at www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.
Our website address is www.carriageservices.com. Available on thisour website under “Investors – SEC Filings,” free of charge, are Carriage’s annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, current reports on Form 8-K, insider reports on Forms 3, 4 and 5 filed on behalf of directors and officers and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.
Also posted on our website, and available in print upon request, are charters for our Audit Committee, Compensation Committee and Corporate Governance Committee. Copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines are also posted on our website under “Investors – Corporate Governance.” Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any modifications to the charters and any waivers applicable to senior officers as defined in the applicable charters, as required by the Sarbanes-Oxley Act of 2002. Information contained on our website is not part of this Annual Report on Form 10-K.
ITEM 1A. RISK FACTORS
RISKS RELATED TO OUR BUSINESS
Key Employees and Compensation
The success of our businesses is typically dependent upon one or a few key employees for success because of the localized and personal nature of our business.
Funeral home and cemetery businesses have built local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals. We believe these relationships build trust in the community and are a key driver to market share. Our businesses, which tend to serve small local markets, usually have one or a few key employees that drive our relationships. Our ability to attract and retain Managing Partners, sales force and other personnel is an important factor in achieving future success. We can give no assurance that we can retain these employees or that these relationships will drive market share. Our inability to attract and maintain qualified and productive Managing Partners and sales force could have a material adverse effect on our financial condition, results of operations and cash flows.
Our “Good To Great” incentive program could result in significant future payments to our Managing Partners.
Our Good To Great incentive program rewards our Managing Partners for achieving an average net revenue compounded annual growth rate equal to at least 1% (the “Minimum Growth Rate”) over a five year performance period (the “Performance Period”) with respect to our funeral homes that they operate, which aligns our incentives with long-term value creation. Each Managing Partner that achieves the Minimum Growth Rate during the applicable Performance Period and remains continuously employed as a Managing Partner of the same business throughout the Performance Period will receive a one-time bonus, payable in a combination of cash and shares of our common stock, determined at our discretion. We believe this incentive program will result in improved field-level margins, market share and overall financial performance.
Strategic Business Execution and Performance
Improved performance in our funeral and cemetery segments is dependent upon successful execution of our Standards Operating Model.
We have implemented our Standards Operating Model to improve and better measure performance in our funeral and cemetery operations. We developed standards according to criteria, each with a different weighting, designed around market share, high-value services and operational and financial metrics. We also incentivize our location Managing Partners by giving them the opportunity to earn a fixed percentage of the field-level earnings before interest, taxes, depreciation and amortization based upon the number and weighting of the standards achieved. Our expectation is that, over time, the Standards Operating Model will result in improving field-level margins, market share, customer satisfaction and overall financial performance, but there is no assurance that these goals will be met. Failure to successfully implement our Standards Operating Model in our funeral and cemetery operations could have a material adverse effect on our financial condition, results of operations and cash flows.
Our ability to execute our growth strategy is highly dependent upon our ability to successfully identify suitable acquisition candidates and negotiate transactions on favorable terms.
Our growth strategy is the primary way we expect to increase stockholder value. There is no assurance that we will be able to continue to identify acquisition candidates that meet our criteria or that we will be able to reach terms with identified candidates for transactions that are acceptable to us, and even if we do, we may not be able to successfully complete the transaction or integrate the new business into our existing business. We intend to apply standards established under our Strategic Acquisition Model to evaluate acquisition candidates, and there is no assurance that we will continue to be successful in doing so or that we will find attractive candidates that satisfy these standards. Due in part to the presence of competitors who have been in certain markets longer than we have, such acquisitions or investments may be more difficult or expensive than we anticipate.
Improved performance inDivestitures could negatively impact our funeralbusiness and cemetery segments is dependent upon successful executionretained liabilities from businesses that we sell could adversely affect our financial results.
As part of our Standards Operating Model.
We have implementedgrowth strategy, we periodically review our Standards Operating Modelbusinesses which may no longer be aligned with our strategic business plan and long-term objectives and, as a result of these reviews of our businesses we may pursue additional divestitures. From time to improve and better measure performancetime, we engage in discussions with third parties about potential divestitures of one or more of our funeral and cemetery operations. We developed standards according to criteria, each with a different weighting, designed around market share, people and operational and financial metrics. We also incentivize our location Managing Partners by giving them the opportunity to earn a fixed percentage of the field-level earnings before interest, taxes, depreciation and amortization based upon the number and weighting of the standards achieved. Our expectation isbusinesses that, over time, the Standards Operating Model willif fully consummated, could result in improving field-level margins, market share, customer satisfaction and overall financial performance, but there is no assurance that these goals will be met. Failure to successfully implement our Standards Operating Model in our funeral and cemetery operations could havethe divestiture of a material adverse effectamount of assets and contribution to our results of operations that have historically contributed to our results of operations. Divestitures pose risks and challenges that could negatively
impact our business, including disputes with buyers or potential impairment charges. For example, when we decide to sell a business, we may be unable to do so on our terms and within our anticipated time-frame, and even after reaching a definitive agreement to sell a business, the sale may be subject to satisfaction of pre-closing conditions, which may not be satisfied, as well as regulatory and governmental approvals, which may prevent us from completing a transaction on acceptable terms. If we do not realize the expected benefits of any divestiture transaction, our financial condition, results of operations, and cash flows.flows could be materially adversely affected. For more information related to our divestitures, see Part II, Item 8, Financial Statements and Supplementary Data, Note 5.
Competitive Marketplace
The funeral and cemetery industry is competitive.
The funeral and cemetery industry is characterized by a large number of locally-owned, independent operations in the United States and a large number of operations owned by publicly and privately-held funeral home and cemetery consolidators. To compete successfully, our funeral service locations and cemeteries must maintain good reputations and high professional standards, as well as offer attractive products and services at competitive prices. In addition, we must market ourselves in such a manner as to distinguish us from our competitors. We have historically experienced price competition from independent and publicly held funeral service and cemetery operators, monument dealers, casket retailers, low-cost providers, and other nontraditional providers of merchandise and services. If we are unable to successfully compete, our financial condition, results of operations, and cash flows could be materially adversely affected.
Marketing and sales activities by existing and new competitors could cause us to lose market share and lead to lower revenuesrevenue and margins.
We face competition in all of our markets. Most of our competitors are independently owned, and some are relatively recent market entrants. Some of the recent entrants are individuals who were formerly employed by us or by our competitors and have
relationships and name recognition within our markets. As a group, independent competitors tend to be aggressive in distinguishing themselves by their independent ownership, and they promote their independence through television, radio and print advertising, direct mailings and personal contact. Increasing pressures from new market entrants and continued advertising and marketing by competitors in local markets could cause us to lose market share and revenues. In addition,revenue. The types of services and the prices offered for such services by our competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue as well as to incur costs in response to competition to vary the types or mix of products or services offered by us. Also, increased use of the internet by customers to research and/or purchase products and services could cause us to lose potential revenue.
Our “Good to Great” incentive program could result in significant future payments to our Managing Partners.
In January, 2012, in order to continue to align our Managing Partners’ incentives with the long-term interests of our stockholders, we implemented our “Good to Great” incentive program, which rewards our Managing Partners for achieving an average net revenue compounded annual growth rate equal to at least 2% (the “Minimum Growth Rate”) over a five-year performance period (the “Performance Period”) with respect to our funeral homes that they operate. To date, we have had two Performance Periods ended December 31, 2016 and December 31, 2017. Each Managing Partner that achieves the Minimum Growth Rate during the applicable Performance Period and remains continuously employed as a Managing Partner of the same business throughout the Performance Period will receive a one-time bonus, payable in a combination of cash and shares our common stock, determined at our discretion. We believe this incentive program will result in improved field-level margins, market share and overall financial performance.
Price competition could also reduce our market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenuesrevenue and margins.
We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products. New market entrants tend to attempt to build market share by offering lower cost alternatives. In the past, this price competition has resulted in our losing market share in some markets. In other markets, we have had to reduce prices or offer discounts thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could further reduce revenues,revenue, profits and our preneed backlog.
Change in Preneed Sales
Our ability to generate preneed sales depends on a number of factors, including sales incentives and local and general economic conditions.
Significant declines in preneed sales would reduce our backlog and revenue and could reduce our future market share. On the other hand, a significant increase in preneed sales can have a negative impact on cash flow as a result of commissions and other costs incurred initially without corresponding revenues.revenue.
As we have localized our preneed sales strategies, we are continuing to refine the mix of service and product offerings in both our funeral and cemetery segments, including changes in our sales commission and incentive structure. These changes could cause us to experience declines in preneed sales in the short-run.near term. In addition, economic conditions at the local or national level could cause declines in preneed sales either as a result of less discretionary income or lower consumer confidence. Declines in preneed cemetery property sales reduces current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.
Increased preneed sales could have a negative impact on our cash flows.
Preneed sales of funeral and cemetery products and services generally have an initial negative impact on our cash flows, as we are required in certain states to deposit a portion of the sales proceeds into trusts or escrow accounts and often incur other expenses at the time of sale. Furthermore, many preneed purchases are paid for in installments over a period of several years, further reducinglimiting our cash flows at the time of sale. Because preneed sales generally provide positive cash flows over the long term, we market the sale of such contracts at the local level. If our efforts to increase such sales are successful, however, our current cash flows could be materially and adversely affected.affected, in the near term.
Trust Fund and Life Insurance Contracts
Our funeral and cemetery trust funds own investments in equity securities, fixed income securities, and mutual funds, which are affected by market conditions that are beyond our control.
In connection with our backlog of preneed funeral and preneed cemetery merchandise and service contracts, funeral and cemetery trust funds own investments in equity securities, fixed income securities and mutual funds. Our returns on these investments are affected by financial market conditions that are beyond our control.
The following table summarizes our investment returns (realized and unrealized), excluding certain fees, on our trust funds for the years ended December 31, 2015, 20162018, 2019 and 2017:2020:
| | | | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Preneed funeral trust funds | (2.2 | )% | | 17.0 | % | | 11.5 | % | Preneed funeral trust funds | (6.5) | % | | 21.2 | % | | 13.5 | % |
| Preneed cemetery trust funds | (3.0 | )% | | 19.6 | % | | 13.1 | % | Preneed cemetery trust funds | (8.4) | % | | 26.0 | % | | 15.5 | % |
| Perpetual care trust funds | (3.3 | )% | | 19.2 | % | | 12.8 | % | Perpetual care trust funds | (8.0) | % | | 25.2 | % | | 16.8 | % |
Generally, earnings or gains and losses on our preneed funeral and cemetery trust investments are recognized, and we withdraw cash, when the underlying service is performed, merchandise is delivered, or upon contract cancellation. Our cemetery perpetual care trusts recognize earnings, and in certain states, capital gains and losses, and we withdraw cash when we incur qualifying cemetery maintenance costs. If the investments in our trust funds experience significant, recurring and sustained declines in subsequent years, there could be insufficient funds in the trusts to cover the costs of delivering services and merchandise or maintaining cemeteries in the future. We may be required to cover any such shortfall with cash flows from operations or other sources of cash, which could have a material adverse effect on our financial condition, results of operations or cash flows. For more information related to our trust investments, see Part II, Item 8, Financial Statements and Supplementary Data, Notes 6 and 10.Note 7.
If the fair market value of these trusts, plus any other amount due to us upon delivery of the associated contracts, were to decline below the estimated costs to deliver the underlying products and services at maturity, we would record a charge to earnings to record a liability for the expected losses on the delivery of the associated contracts. For additional information, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies and Estimates.
Earnings from and principal of trust funds could be reduced by changes in financial markets and the mix of securities owned.
Earnings and investment gains and losses on trust funds are affected by financial market conditions and the specific fixed-income and equity securities that we choose to maintain in the funds. We may not choose the optimal mix for any particular market condition. Declines in earnings from perpetual care trust funds would cause a decline in current revenues,revenue, while declines in earnings from other trust funds could cause a decline in future cash flows and revenues.revenue.
We may be required to replenish our funeral and cemetery trust funds in order to meet minimum funding requirements, which would have a negative effect on our earnings and cash flow.
In certain states, we have withdrawn allowable distributable earnings including gains prior to the maturity or cancellation of the related contract. Additionally, someSome states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions on withdrawals of future earnings when trust fund values drop below certain prescribed amounts. In the event of realized losses or market declines, we may be required to deposit portions or all of these amounts into the respective trusts in some future period.
Increasing death benefits related to preneed funeral contracts funded through life insurance contracts may not cover future increases in the cost of providing a price-guaranteed funeral service.
We sell price-guaranteed preneed funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. For preneed funeral contracts funded through life insurance contracts, we receive in cash a general agency commission from the third-party insurance company. Additionally, there is an increasing death benefit associated with the contract that may vary over the contract life. There is no guarantee that the increasing death benefit will cover future increases in the cost of providing a price-guaranteed funeral service, and any such excess cost could be materially adverse to our future cash flows, revenues,revenue, and operating margins.
The financial condition of third-party insurance companies that fund our preneed funeral contracts may impact our future revenues.revenue.
Where permitted by state law, our customers may arrange their preneed funeral contract by purchasing a life insurance policy from third-party insurance companies. The customer/policy holder assigns the policy benefits to our funeral home to pay for the preneed funeral contract at the time of need. If the financial condition of the third-party insurance companies were to deteriorate materially because of market conditions or otherwise, there could be an adverse effect on our ability to collect all or part of the proceeds of the life insurance policy, including the annual increase in the death benefit, when we fulfill the preneed contract at the time of need. Failure to collect such proceeds could have a material adverse effect on our financial condition, results of operations, or cash flows.
Tax Changes
Increased or unanticipated costs, suchChanges in taxation as insurance or other taxes, maywell as the inherent difficulty in quantifying potential tax effects of business decisions could have a negative impactmaterial adverse effect on the results of our earnings andoperations, financial condition, or cash flow.flows.
We may experience material increases in certain costs, such as insurance or other taxes. Future cost increases are difficult to quantifymake judgments regarding the utilization of existing income tax credits and could materiallythe potential tax effects of various financial transactions and adversely affect our results of operations to estimate our obligations to taxing authorities. Tax obligations include income, franchise, real estate, sales and use, and employment-related taxes. These judgments include reserves for potential adverse outcomes regarding our tax positions. Changes in federal, state, or local tax laws, adverse tax audit results, or adverse tax rulings on positions taken could have a material adverse effect on the results of our operations, financial condition, or cash flows.
New or revised tax regulations could have a material effect on our financial results.statements
TheNew tax environmentlaws or regulations could be enacted at any time, and existing tax laws or regulations could be interpreted, amended, or applied in which we operate is evolving rapidly with the recent enactment of sweeping corporate tax changes. The President signed into law tax legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”) on December 22, 2017. The Tax Act, among other things, contains significant changes to corporate taxation, including: (1) a reduction of the corporate tax rate frommanner that has a top marginal rate of 35% to a flat rate of 21%; (2) a limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses); (3) a limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks; (4) immediate deductions for certain new investments (instead of deductions for depreciation expense over time); (5) limitations of certain executive compensation deductions; and (6) limitations or repeals of many business deductions and credits.Thematerial effect of the Tax Act on us, may also be affected by future regulationswhich could materially impact our business and interpretations offinancial condition. For example, on March 27, 2020, the IRS regarding the Tax Act. Additionally, we operate in many states and are subject to the tax laws of those states. We are unable to predict how we may be affected by changes, or lack of changes, to state tax laws that may be madeCARES Act was enacted in response to the Taxmacroeconomic environment conditions posed by COVID-19. The CARES Act byis a sweeping stimulus bill intended to bolster the states in whichU.S. economy, among other things, and provide emergency assistance to qualifying businesses and individuals. Based on available guidance, we operate. Althoughanticipate that the Tax Act had an overalllegislative changes will have a positive impact on our earnings and cash flow for 2017 and, we believe it will have an overall beneficial impact on us for 2018,flow. As the longer term effectenacted legislation includes provisions that would expire after certain periods of time, the Tax Act onfact that our business cash flow, resultshas the potential to change its operating situation, and the existence of operations and financial condition is difficultpotential changes by state tax authorities related to predict. Accordingly,conformity with federal tax regulations, the riskpossibility exists that the Tax Act, IRS regulations and interpretationsfuture benefit of the Taxlegislation could change. In addition, it is uncertain if, and to what extent, various states will conform to the CARES Act, and changes in, or lack of changes in, stateany newly enacted or revised federal tax laws could materially and adversely affect our business cash flows, results of operations and financial condition.
Covenant restrictions under our debt instruments may limit our flexibility in operating and growing our business.
The terms of our Credit Agreement andlegislation. Under the Convertible Notes may limit our ability andCARES Act, the ability of our subsidiaries to, among other things: incur additional debt; pay dividends or make distributions or redeem or repurchase stock; make investments; grant liens; make capital expenditures; enter into transactions with affiliates; enter into sale-leaseback transactions; sell assets; and acquire the assets of, or merge or consolidate with, other companies.
Our Credit Agreement also requires us to maintain certain financial ratios. Complying with these restrictive covenants and financial ratios, as well as thoseprimary areas that mayshould be contained in anyconsidered for future debt agreements, may limit our ability to finance our future operations or capital needs or to take advantage of other favorable business opportunities. Our ability to comply with these restrictive covenants and financial ratios will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with any of these covenants or restrictions when they apply could result in a default under any future debt instrument, which could result in acceleration of the debt under that instrument and, in some cases, the acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. In the case of an event of default, or in the event of a cross-default or cross-acceleration, we may not have sufficient funds available to make the required payments under our debt instruments. If we are unable to repay amounts owed under the terms of our Credit Agreement, the lenders thereunder may be entitled to sell certain of our funeral assets to satisfy our obligations under the agreement.
Economic, financial and stock market fluctuations could affect future potential earnings and cash flowsimpact are the changes to the interest expense limitation threshold and the technical correction to the Tax Cuts and Jobs Act regarding the qualified improvement property now being eligible for full expensing. For more information related to the CARES Act, see Part II, Item 8, Financial Statements and Supplementary Data, Note 1.
Litigation and Claims
Unfavorable results of litigation could result in future goodwill, intangible assets and long-lived asset impairments.have a material adverse impact on our financial statements.
In addition to an annual review, we assess the impairment of goodwill, intangible assets and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, butWe are not limitedsubject to a significant declinevariety of claims and lawsuits in the market value of our stock or debt values, significant under-performance relative to historical or projected future operating results, and significant negative industry or economic trends. If these factors occur, we may have a triggering event, which could result in an impairment of our goodwill. Based on the results of our annual goodwill and intangible assets impairment test we performed as of August 31, 2016 and our annual review of long-lived assets as of December 31, 2017, we concluded that there was no impairment of our goodwill, intangible assets or other long-lived assets. However, if current economic conditions weaken causing deterioration in our operating revenues, operating margins and cash flows, we may have a triggering event that could result in a material impairment of our goodwill, intangible assets and/or long-lived assets.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.
In the ordinary course of our business. Adverse outcomes in potential litigation related to our business we receive certain personal information,may result in both physicalsignificant monetary damages or injunctive relief against us, as litigation and electronic formats, about our customers, their loved ones, our associates, and our vendors. We maintain substantial security measures and data backup systemsother claims are subject to protect, store, and prevent unauthorized access toinherent uncertainties. Any such information. Nevertheless, it is possibleadverse outcomes that computer hackers and others (through cyberattacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means) might
defeat our security measuresmay arise in the future, and obtain the personal information of customers, their loved ones, our associates, and our vendors that we hold. If we fail to protect our own information, we could experience significant costs and expenses as well as damage to our reputation. Additionally, legislation relating to cyber security threats could impose additional requirementshave a material adverse impact on our operations.
Our ability to manage and maintain our internal reports effectively and integrationfinancial position, results of new business acquisitions depends significantly on our enterprise resource planning system and other information systems. Some of our information technology systems may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. The failure of our systems to operate effectively or to integrate with other systems, or a breach in security or other unauthorized access of these systems, may also result in reduced efficiency of our operations, and could require significant capital investments to remediate any such failure, problem or breach and to comply with applicable regulations, allcash flows.
RISKS RELATED TO THE FUNERAL AND CEMETERY INDUSTRY
Changes in Death Rates and Consumer Preferences
Declines in the number of deaths in our markets can cause a decrease in revenues.revenue. Changes in the number of deaths are not predictable from market to market or over the short term.
Declines in the number of deaths could cause atneed sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenues.revenue. Although the United States Bureau of the Census estimates that the number of deaths in the United States will increase in the future, longer life spans could reduce the rate of deaths. In addition, changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. For example, we have seen the COVID-19 pandemic affect the death rate, with a result of increased deaths. These variations may cause our revenuesrevenue to fluctuate and our results of operations to lack predictability.
The increasing number of cremations in the United States could cause revenuesrevenue to decline because we could lose market share to firms specializing in cremations.cremations and because our average revenue for cremations is lower than that for traditional burials.
Our traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has increased every year and this trend is expected to continue into the future. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenuesrevenue to firms specializing in cremations. Additionally, our average revenue for cremations is lower than that for traditional burials. If we are unable to continue to expand our cremation memorialization products and services, and cremations remain or increase as a significant percentage of our services, our financial condition, results of operations, and cash flows could be materially adversely affected.
If we are not able to respond effectively to changing consumer preferences, our market share, revenuesrevenue and profitability could decrease.
Future market share, revenuesrevenue and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. In past years, we have implemented new product and service strategies based on results of customer surveys that we conduct on a continuous basis. However, we may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do.competitors. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.
Because the funeral and cemetery businesses are high fixed-cost businesses, changes in revenue can have a disproportionately large effect on cash flow and profits.
Companies in the funeralFuneral home and cemetery business mustbusinesses incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because we cannot decrease these costs significantly or rapidly when we experience declines in sales, those declines in sales can cause margins, profits and cash flow to declinedecrease at a greater rate than the decline in revenues.revenue.
Regulatory Changes
Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.
The funeral and cemetery industry is subject to extensive and evolving regulation and licensing requirements under federal, state and local laws. For example, the funeral home industry is regulated by the FTC, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales. As such, we are subject to state trust fund and preneed sales practice audits, which could result in audit adjustments as a result of non-compliance. In addition, we may assume the liability for any audit adjustments for our acquired businesses for periods under audit that were prior to our ownership of the business.business depending upon the obligations outlined in the agreement. These audit adjustments could have a material adverse impact on our financial condition, results of operations and cash flows.
Embalming and cremation facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome, and we are always at risk of not complying with the regulations or facing costly and burdensome investigations from regulatory authorities.
In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. Several states and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, increase trust requirements and/or prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on us, our financial condition, our results of operations and our future prospects. For additional information regarding the regulation of the funeral and cemetery industry, see Part I, Item 1, Business, Regulation.
We are subject to environmental and worker health and safety laws and regulations that may expose us to significant costs and liabilities.
Our cemetery and funeral home operations are subject to stringentcertain federal, regional, state and local laws and regulations governing worker health and safety aspects of the operations, the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations may restrict or impact our business in many ways, including requiring the acquisition of a permit before conducting regulated activities, restricting the types, quantities and concentration of substances that can be released into the environment, applying specific health and safety criteria addressing worker protection, and imposing substantial liabilities for any pollution resulting from our operations. We may be required to make significant capital and operating expenditures to comply with these laws and regulations and any failure to comply may result in the assessment of sanctions, including administrative, civil and criminal penalties, imposition of investigatory, remedial or corrective action obligations, delays in permitting or performance of projects and the issuance of injunctions restricting or prohibiting our activities. Failure to appropriately transport and dispose of generated wastes, used chemicals or other regulated substances, or any spills or other unauthorized releases of regulated substances in the course of our operations could expose us to material losses, expenditures and liabilities under applicable environmental laws and regulations, and result in neighboring landowners and other third parties filing claims for personal injury, property damage and natural resource damage allegedly caused by such non-compliant activities or spills or releases. Certain of these laws may impose strict, joint and several liabilities upon us for the remediation of contaminated property resulting from our or a predecessor owner's or operator's operations. We may not be able to recover some or any of these costs from insurance or contractual indemnifications. Moreover, changes in environmental laws, regulations and enforcement policies occur frequently, and any changes that result in more stringent or costly emissions control or waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our results of operations, competitive position or financial condition.
Burial practice claimsRISKS RELATED TO OUR CREDIT FACILITY AND FINANCIAL ACTIVITIES
Credit Facility and Debt Obligations
Covenant restrictions in our debt instruments may limit our flexibility to operate and grow our business, and if we are not able to comply with such covenants, our lenders could accelerate our indebtedness, proceed against certain collateral or exercise other remedies, which could have a material adverse impacteffect on us.
The covenants in our Credit Facility and the Indenture governing our Senior Notes contain a number of provisions that impose operating and financial restrictions which, subject to certain exceptions, limit our ability and the ability of our subsidiaries to, among other things: incur additional indebtedness (including guarantees); pay dividends or make distributions or redeem or repurchase our common stock; make investments; grant liens on assets; make capital expenditures; enter into transactions with affiliates; enter into sale-leaseback transactions; sell or dispose assets; and acquire the assets of, or merge or consolidate with, other companies.
We are required to comply with certain financial covenants in our Credit Facility. Complying with these financial covenants and other restrictive covenants, as well as those that may be contained in any future debt agreements, may limit our ability to finance our future operations or working capital needs or to take advantage of future business opportunities. Our ability to comply with these covenants will depend on our financial results.
From time to time, we are party to various claims and legal proceedings, including burial practices. When cemetery disputes occur, wefuture performance, which may be subjectedaffected by events beyond our control. Our failure to litigationcomply with any of these covenants or restrictions could result in a default under any future debt instrument, which could lead to an acceleration of the debt under that instrument and, liability for improper burial practices. In addition, since we acquired mostin some cases, the acceleration of our cemeteries through various acquisitions, we may be subject to litigation and liability based upon actionsdebt under other instruments that contain cross-default or events that occurred before we acquired or managed the cemeteries. Claims or litigation based upon our cemetery burial practicescross-acceleration provisions, each of which could have a material adverse effect on us. In the case of an event of default, or in the event of a cross-default or cross-acceleration, we may not have sufficient funds available to make the required payments under our debt instruments. If we are unable to repay amounts owed under the terms of our Credit Facility, the lenders thereunder may choose to exercise their remedies in respect of the collateral, including a foreclosure of their lien which results in a sale of certain of our funeral assets to satisfy our obligations under the Credit Facility.
Pursuant to the terms of our Credit Facility, we must comply with, amongst other things, a maximum Total Leverage Ratio covenant which is measured quarterly. If we are unable to comply with the maximum Total Leverage Ratio, we will be in immediate default under the Credit Facility. The COVID-19 pandemic may have a future impact on our business which could result in our inability to comply with this Total Leverage Ratio covenant and other covenants in our Credit Facility. There can be no assurance that the lenders will agree to amend the Credit Facility in the future to adjust or eliminate this covenant or whether the lenders may agree to waive any non-compliance with this financial condition,covenant or any other covenant in the future.
Moreover, if we do not maintain compliance with our continuing obligations or any covenants, terms and conditions of the Credit Facility, we could be in default and required to repay outstanding borrowings on an accelerated basis, which could subject us to decreased liquidity and other negative impacts on our business, results of operations and financial condition. It may be difficult for us to find an alternative lending source under these circumstances. Without access to borrowings under the Credit Facility, our liquidity would be adversely affected and we would lack sufficient working capital to operate our business as presently conducted. Any disruption in access to credit could force us to take measures to conserve cash.
Our level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.
Our indebtedness requires significant interest and principal payments. As of December 31, 2020, we had $455.3 million of total debt (excluding debt issuance costs, debt discounts, debt premium and lease obligations), consisting of $5.5 million of acquisition debt (consisting of deferred purchase price and promissory notes payable to sellers of businesses we purchased), $2.6 million of our Convertible Notes, $400.0 million of our Senior Notes and $47.2 million of outstanding borrowings under our Credit Facility, with $140.7 million of availability under our Credit Facility after giving effect to $2.1 million of outstanding letters of credit.
Our and our subsidiaries’ level of indebtedness could have important consequences to us, including:
•continuing to require us and certain of our subsidiaries to dedicate a substantial portion of our cash flows.flow from operations to the payment of our indebtedness, thereby reducing the funds available for operations and any future business opportunities;
•limiting flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;
•placing us at a competitive disadvantage compared to our competitors that have less indebtedness;
•increasing our vulnerability to adverse general economic or industry conditions;
•making us and our subsidiaries more vulnerable to increases in interest rates, as borrowings under our Credit Facility are at variable rates; and
•limiting our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing.
Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take certain actions, including reducing spending on day-to-day operations, reducing future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt, including the notes.
Additionally, our leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the economy in general.
Despite our current levels of indebtedness, we may still incur additional indebtedness. This could further exacerbate the risks associated with our indebtedness.
We may incur additional indebtedness in the future. The terms of our Credit Facility and the Indenture governing our Senior Notes will limit, but not prohibit, us from incurring additional indebtedness. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us or our subsidiaries from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt agreements. To the extent new debt is added to our current debt levels, the leverage risks associated with our indebtedness would increase.
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ITEM 1B. | UNRESOLVED STAFF COMMENTS. |
GENERAL RISKS
Economic Conditions
Unfavorable economic conditions, including those resulting from health and safety concerns, could adversely affect our business, financial condition or results of operations.
Our business and operational results could be adversely affected by general conditions in the U.S. economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the COVID-19 pandemic. The initial U.S. and global economic and financial conditions related to COVID-19 resulted in extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, and the related adverse economic and health consequences could result in a variety of risks to our business, financial condition or results from operations, including weakened demand from our client families, decreased preneed sales, increased preneed installment contract defaults, increased cremation rates, reduced access to capital and credit markets or delays in obtaining client family payments. A weak or declining economy could also strain our supply partners. Additionally, our business relies heavily on our employees, including key employees due to the localized and personal nature of our business, and adverse events such as health-related concerns, the inability to travel and other matters affecting the general work environment could harm our business. In the event of a major disruption caused by the outbreak of pandemic diseases such as COVID-19, we may lose the services of a number of our key employees or experience system interruptions, which could lead to impacts to our regular business operations, inefficiencies and reputational harm. Due to the uncertainty around the ultimate impact of COVID-19 to our business and operations, the impact on our business and operational results cannot be reasonably estimated at this time. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current COVID-19 pandemic and financial market conditions could adversely impact our business.
Economic, financial and stock market fluctuations could affect future potential earnings and cash flows and could result in future goodwill, intangible assets and long-lived asset impairments.
In addition to an annual review, we assess the impairment of goodwill, intangible assets and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, a significant decline in the market value of our stock or debt values, significant under-performance relative to historical or projected future operating results, and significant negative industry or economic trends. If these factors occur, we may have a triggering event, which could result in an impairment of our goodwill. 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 for 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. We also performed a quantitative assessment of our tradenames at March 31, 2020 and we recorded an impairment for certain of our tradenames of $1.1 million during the quarter ended March 31, 2020 as the carrying amount of these tradenames exceeded the fair value. 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 and leases of our funeral homes in the Eastern Region Reporting Unit and concluded that there was no impairment to our long-lived assets and leases. Based on the results of our annual goodwill and intangible assets impairment test we performed as of August 31, 2020 and our annual review of long-lived assets and leases as of December 31, 2020, we concluded that there were no additional impairments of our goodwill, intangible assets or other long-lived assets and leases. Additionally, if current economic conditions weaken causing deterioration in our operating revenue, operating margins and cash flows, we may have a triggering event that could result in a material impairment of our goodwill, intangible assets and/or long-lived assets and leases.
Information Technology and Internal Controls
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents could harm our ability to operate our business effectively.
In the ordinary course of our business, we receive certain personal information, in both physical and electronic formats, about our customers, their loved ones, our employees, and our vendors. We maintain security measures and data backup systems to protect, store, and prevent unauthorized access to such information. Nevertheless, it is possible that computer hackers and others (through increasingly sophisticated cyberattacks or by other means) might circumvent our security measures in the future and obtain the personal information of customers, their loved ones, our employees or our vendors.
For example, in January 2021, we detected that our information technology system was affected by a ransomware attack. Upon learning of the incident, we undertook immediate steps to address the incident, including engaging information technology security and forensics experts and working diligently with these experts to assess the impact on our information technology systems, implement additional and enhanced security measures to help prevent a similar incident in the future, and
to restore any of our information technology systems that were impacted by the incident. The restoration of any impacted systems is complete. We maintain insurance coverage for various cybersecurity risks, which covered the costs associated with the January 2021 ransomware attack, but it is possible that such insurance coverage may not fully insure all future costs or losses associated with other cybersecurity incidents. For additional information regarding the January 2021 ransomware incident, see Part II, Item 8, Financial Statements and Supplementary Data, Note 25.
While we determined, based on our assessment of the information known to us, that the January 2021 ransomware incident did not have, nor do we expect it will have, a material impact on our business, operations or financial results, if we fail to protect our own information from any future breaches in data security, we could experience significant costs and expenses as well as damage to our reputation. Additionally, as the sophistication and frequency of attacks increase, our information technology security costs, including cybersecurity insurance, which are significant, may rise.
Additionally, legislation relating to cyber security threats could impose additional requirements on our operations. Various state governments, notably California, New York and Nevada, have enacted or enhanced data privacy regulations, and other state governments are considering establishing similar or stronger protections. These regulations impose certain obligations for securing, and potentially removing, specified personal information in our systems, and for apprising individuals of the information we have collected about them. We have incurred costs in an effort to comply with these data privacy risks and requirements, and our costs may increase significantly as risks become increasingly complex or if new or changing requirements are enacted, and based on how individuals exercise their rights. For example, in November 2020, California voters approved Proposition 24 (Consumer Personal Information Law and Agency Initiative), which will increase data privacy requirements for our business when its provisions take effect in 2023. Despite our efforts, any noncompliance could result in our incurring substantial penalties and reputational damage.
Our ability to manage and maintain our internal reports effectively and integration of new business acquisitions depends significantly on our enterprise resource planning system and other information systems. Some of our information technology systems may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. The failure of our systems to operate effectively or to integrate with other systems, or a breach in security or other unauthorized access of these systems, may also result in reduced efficiency of our operations and could require significant capital investments to remediate any such failure, problem or breach and to comply with applicable regulations, all of which could adversely affect our business, financial condition and results of operations.
Failure to maintain effective internal control over financial reporting could adversely affect our results of operations, investor confidence, and our stock price.
The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements because of its inherent limitations. If we do not maintain effective internal control over financial reporting or implement controls sufficient to provide reasonable assurance with respect to the preparation and fair presentation of our financial statements, we could be unable to file accurate financial reports on a timely basis, and our results of operations, investor confidence, and stock price could be materially adversely affected.
ITEM 1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM 2. PROPERTIES.
At December 31, 2017,2020, we operated 178 funeral homes in 2926 states and 32 cemeteries in 1112 states. We own the real estate and buildings for 155157 of our funeral homes and lease 2321 facilities. We own 2831 cemeteries and operate four cemeteriesone cemetery under a long-term contractscontract with municipalities and non-profit organizations,a municipality, which we refer to as a managed properties.property. We operate 1319 funeral homes in combination with cemeteries as these locations are physically located on the same property or in very close proximity and are under the same leadership.
The 32 cemeteries operated by usthat we operate have an inventorydeveloped cemetery property of unsold developed lots totaling approximately 144,000152,000 and 146,000155,000 units available-for-sale at December 31, 20162019 and 2017,2020, respectively. In addition, we own approximately 450500 acres that are available for future development or sale. We anticipate having a sufficient inventory of lots to maintain our property sales for the foreseeable future.
The following table sets forth certain information as of December 31, 2017,2020, regarding our properties used by the funeral home segment and by the cemetery segment identified by state:
|
| | | | | | | | | | | | |
| | | Number of Funeral Homes | | Number of Cemeteries |
| State | | Owned | | Leased(1) | | Owned | | Managed |
| California | | 23 |
| | 5 |
| | 4 |
| | — |
|
| Colorado | | 2 |
| | — |
| | — |
| | — |
|
| Connecticut | | 8 |
| | 2 |
| | — |
| | — |
|
| Florida | | 11 |
| | 5 |
| | 5 |
| | 3 |
|
| Georgia | | 4 |
| | — |
| | — |
| | — |
|
| Idaho | | 5 |
| | 1 |
| | 3 |
| | — |
|
| Illinois | | 2 |
| | 1 |
| | 1 |
| | — |
|
| Kansas | | 2 |
| | — |
| | — |
| | — |
|
| Kentucky | | 8 |
| | 1 |
| | 1 |
| | — |
|
| Louisiana | | 3 |
| | 1 |
| | 1 |
| | — |
|
| Maryland | | 1 |
| | — |
| | — |
| | — |
|
| Massachusetts | | 12 |
| | — |
| | — |
| | — |
|
| Michigan | | 2 |
| | — |
| | — |
| | — |
|
| Montana | | 2 |
| | 1 |
| | 1 |
| | — |
|
| Nevada | | 2 |
| | — |
| | 2 |
| | 1 |
|
| New Jersey | | 4 |
| | 1 |
| | — |
| | — |
|
| New Mexico | | 1 |
| | — |
| | — |
| | — |
|
| New York | | 6 |
| | 1 |
| | — |
| | — |
|
| North Carolina | | 6 |
| | 1 |
| | 1 |
| | — |
|
| Ohio | | 5 |
| | — |
| | — |
| | — |
|
| Oklahoma | | 6 |
| | — |
| | 2 |
| | — |
|
| Pennsylvania | | 2 |
| | — |
| | — |
| | — |
|
| Rhode Island | | 4 |
| | — |
| | — |
| | — |
|
| Tennessee | | 4 |
| | — |
| | — |
| | — |
|
| Texas | | 21 |
| | 1 |
| | 7 |
| | — |
|
| Virginia | | 5 |
| | 1 |
| | — |
| | — |
|
| Washington | | 2 |
| | — |
| | — |
| | — |
|
| West Virginia | | 1 |
| | 1 |
| | — |
| | — |
|
| Wisconsin | | 1 |
| | — |
| | — |
| | — |
|
| Total | | 155 |
| | 23 |
| | 28 |
| | 4 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of
Funeral Homes | | Number of
Cemeteries |
| State | | Owned | | Leased(1) | | Owned | | Managed |
| California | | 23 | | | 5 | | | 5 | | | — | |
| Connecticut | | 7 | | | 2 | | | — | | | — | |
| Florida | | 10 | | | 5 | | | 5 | | | — | |
| Georgia | | 3 | | | — | | | — | | | — | |
| Idaho | | 4 | | | 1 | | | 3 | | | — | |
| Illinois | | 2 | | | — | | | 1 | | | — | |
| Kansas | | 2 | | | — | | | — | | | — | |
| Kentucky | | 7 | | | 1 | | | 1 | | | — | |
| Louisiana | | 3 | | | 1 | | | 1 | | | — | |
| Massachusetts | | 12 | | | — | | | — | | | — | |
| Michigan | | 2 | | | — | | | — | | | — | |
| Montana | | 2 | | | 1 | | | 1 | | | — | |
| Nevada | | 2 | | | — | | | 2 | | | 1 | |
| New Jersey | | 4 | | | 1 | | | — | | | — | |
| New Mexico | | 1 | | | — | | | — | | | — | |
| New York | | 10 | | | 1 | | | — | | | — | |
| North Carolina | | 7 | | | 1 | | | 1 | | | — | |
| Ohio | | 5 | | | — | | | — | | | — | |
| Oklahoma | | 6 | | | — | | | 2 | | | — | |
| Pennsylvania | | 2 | | | — | | | — | | | — | |
| Rhode Island | | 4 | | | — | | | — | | | — | |
| Tennessee | | 4 | | | — | | | — | | | — | |
| Texas | | 24 | | | 1 | | | 8 | | | — | |
| Virginia | | 8 | | | 1 | | | 1 | | | — | |
| Washington | | 2 | | | — | | | — | | | — | |
| Wisconsin | | 1 | | | — | | | — | | | — | |
| Total | | 157 | | | 21 | | | 31 | | | 1 | |
| | | | | | | | | | | | | | |
| | | | |
| (1) | | | | |
(1) | The leases, with respect to these funeral homes, generally have remaining terms ranging from one to tenfifteen years, and generally, we have the right to renew past the initial terms and have a right of first refusal on any proposed sale of the property where these funeral homes are located. |
Our Houston support home officecenter occupies approximately 48,000 square feet of leased office space in Houston, Texas. At December 31, 2017,2020, we owned and operated 708788 vehicles.
| |
ITEM 3. | LEGAL PROCEEDINGS. |
We and our subsidiaries are parties to aThe following table sets forth the number of funeral homes and cemeteries owned and operated by us for the periods presented:
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Funeral homes at beginning of period | 178 | | | 182 | | | 186 | |
| Acquisitions | 4 | | | 9 | | | 1 | |
| Divestitures | — | | | (4) | | | (8) | |
| Mergers of funeral homes | — | | | (1) | | | (1) | |
| Funeral homes at end of period | 182 | | | 186 | | | 178 | |
| | | | | |
| Cemeteries at beginning of period | 32 | | | 29 | | | 31 | |
| Acquisitions | — | | | 2 | | | 1 | |
| Divestitures | (3) | | | — | | | — | |
| Cemeteries at end of period | 29 | | | 31 | | | 32 | |
ITEM 3. LEGAL PROCEEDINGS.
For more information regarding legal proceedings that arise from time to time in the ordinary course of our business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial statements. Information regarding litigation is set forth insee Part II, Item 8, Financial Statements and Supplementary Data, Note 15.16.
We self-insure against certain risks and carry insurance with coverage and coverage limits for risks in excess of the coverage amounts consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there
ITEM 4. MINE SAFETY DISCLOSURES.
can be no assurance that self-insurance reserves and insurance will be sufficient to mitigate all damages, claims or contingencies, we believe that the reserves and our insurance provide reasonable coverage for known asserted and unasserted claims. In the event we sustain a loss from a claim and the insurance carrier disputes coverage or coverage limits, we may record a charge in a different period than the recovery, if any, from the insurance carrier.
| |
ITEM 4. | MINE SAFETY DISCLOSURES. |
Not applicable.
PART II
| |
ITEM 5. | MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES. |
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
Our common stock is traded on the New York Stock Exchange under the symbol “CSV.” The following table presents the quarterly high and low sale prices as reported by the New York Stock Exchange:
|
| | | | | | | |
| 2017 | High | | Low |
| First Quarter | $ | 28.88 |
| | $ | 25.44 |
|
| Second Quarter | $ | 28.96 |
| | $ | 25.27 |
|
| Third Quarter | $ | 27.42 |
| | $ | 23.15 |
|
| Fourth Quarter | $ | 26.78 |
| | $ | 23.60 |
|
| | | | |
| 2016 | High | | Low |
| First Quarter | $ | 23.85 |
| | $ | 19.03 |
|
| Second Quarter | $ | 24.94 |
| | $ | 21.25 |
|
| Third Quarter | $ | 24.97 |
| | $ | 22.53 |
|
| Fourth Quarter | $ | 29.11 |
| | $ | 23.06 |
|
As of February 16, 2018,26, 2021, there were 16,181,87617,994,717 shares of our common stock outstanding and the closing price as reported by the New York Stock Exchange was $27.64 per share.outstanding. The shares of common stock outstanding are held by approximately 400320 stockholders of record. Each share is entitled to one vote on matters requiring the vote of stockholders. We believe there are approximately 6,0005,300 beneficial owners of our common stock.
RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 2017,2020, we did not have any sales of securities in transactions that were not registered under the Securities Act that have not been reported in a Form 8-K or Form 10-Q.
DIVIDENDS
The following table sets forth certain information with respect to the payment of cash dividends on our common stock:
|
| | | | | | | |
| 2017 | Per Share | | Dollar Value |
| First Quarter | $ | 0.050 |
| | $ | 833,000 |
|
| Second Quarter | $ | 0.050 |
| | $ | 835,000 |
|
| Third Quarter | $ | 0.050 |
| | $ | 835,000 |
|
| Fourth Quarter | $ | 0.075 |
| | $ | 1,206,000 |
|
| | | | |
| 2016 | Per Share | | Dollar Value |
| First Quarter | $ | 0.025 |
| | $ | 415,000 |
|
| Second Quarter | $ | 0.025 |
| | $ | 415,000 |
|
| Third Quarter | $ | 0.050 |
| | $ | 831,000 |
|
| Fourth Quarter | $ | 0.050 |
| | $ | 830,000 |
|
While we intend to pay regular quarterly cash dividends for the foreseeable future, covenant restrictions under our Credit AgreementFacility and the Indenture governing our Senior Notes may limit our ability to pay dividends in the future.
EQUITY PLANS
For information regarding securities authorized for issuance under our equity compensation plans, see Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER
During the year ended December 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. On February 25, 2016,July 31, 2019, our Board approved aan additional $25.0 million under our share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases of our common stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act.
During the year ended December 31, 2017,2019, we repurchased 574,054400,000 shares of common stock for a total cost of $14.0$7.8 million at an average cost of $24.35$19.39 per share pursuant to thisour share repurchase program. Our shares were purchased in the open market. Purchases weremarket 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 ended December 31, 2020, we did not repurchase any common shares. At December 31, 2017,2020, we had approximately $26.0$25.6 million available for repurchase under thisour share repurchase program.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price we paid for these shares was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.
The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended December 31, 2017:
|
| | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Dollar Value of Shares That May Yet Be Purchased Under the Program (1) |
| | | | | | | | | |
| October 1, 2017 - October 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | 26,019,052 |
|
| November 1, 2017 - November 30, 2017 | | — |
| | $ | — |
| | — |
| | $ | 26,019,052 |
|
| December 1, 2017 - December 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | 26,019,052 |
|
| Total for quarter ended December 31, 2017 | | — |
| | | | — |
| | |
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Dollar Value of Shares That May Yet Be Purchased Under the Program (1) |
| | | | | | | | |
| October 1, 2020 - October 31, 2020 | | — | | | $ | — | | | — | | | $ | 25,601,446 | |
| November 1, 2020 - November 30, 2020 | | — | | | $ | — | | | — | | | $ | 25,601,446 | |
| December 1, 2020 - December 31, 2020 | | — | | | $ | — | | | — | | | $ | 25,601,446 | |
| Total for quarter ended December 31, 2020 | | — | | | | | — | | | |
| | | | | | | | | | | | | | |
| | | | |
| | | | |
| (1) | See the first paragraph under the caption “– Purchases of Equity Securities by the Issuer” for more information on our publicly announced share repurchase program. |
PERFORMANCE
The following graph compares the cumulative 5-year total shareholder return provided to shareholders on our common stock relative to the cumulative total returns of the Russell 3000 Index, and a customized peer group of two companies that includesselected by the Company comprising SCI and StoneMor.StoneMor (the “Peer Group”). The returns of each member of the peer groupPeer Group are weighted according to each member’stheir respective stock market capitalization as of the beginning of each period measured. The graph assumes that the value of the investment in our common stock, the Russell 3000 Index and the peer group was $100 on the last trading day of December 2012,2015, and that all dividends were reinvested. Performance data for Carriage, the Russell 3000 Index and the peer groupPeer Group is provided as of the last trading day of each of our last five fiscal years.
The following graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933, as amended, or the Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*RETURN(1)
Among Carriage, Services, Inc., the Russell 3000 Index and athe Peer Group
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 12/15 | | 12/16 | | 12/17 | | 12/18 | | 12/19 | | 12/20 |
| Carriage Services, Inc. | $ | 100.00 | | | $ | 119.60 | | | $ | 108.32 | | | $ | 66.18 | | | $ | 110.86 | | | $ | 137.73 | |
| Russell 3000 | 100.00 | | | 112.72 | | | 136.53 | | | 129.37 | | | 169.48 | | | 204.86 | |
| Peer Group | 100.00 | | | 107.22 | | | 144.69 | | | 161.61 | | | 188.39 | | | 199.24 | |
| | | | | | | | | | | | | | |
| | | | |
*(1) | $100Fiscal year ending December 31. $100 invested on December 31, 20122015 in stock or index, including reinvestment of dividends. Peer Group above includes SCI and StoneMor. The stock price performance included in this graph is not necessarily indicative of future stock price performance. |
Fiscal year ending December 31. Peer Group includes SCI and StoneMor.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | 12/12 | | 12/13 | | 12/14 | | 12/15 | | 12/16 | | 12/17 |
| Carriage Services, Inc. | $ | 100.00 |
| | $ | 165.43 |
| | $ | 178.39 |
| | $ | 206.07 |
| | $ | 246.43 |
| | $ | 223.17 |
|
| Russell 3000 | 100.00 |
| | 133.55 |
| | 150.29 |
| | 151.01 |
| | 170.19 |
| | 206.09 |
|
| Peer Group | 100.00 |
| | 133.43 |
| | 167.12 |
| | 193.64 |
| | 197.57 |
| | 280.49 |
|
The stock price performance included in this graph is not necessarily indicative
| |
ITEM 6. | SELECTED FINANCIAL DATA. |
The table on the following page sets forth selected consolidated financial information for us that has been derived from the audited Consolidated Financial Statements of the Company as of and for each of the years ended December 31, 2013, 2014, 2015, 2016 and 2017. These historical results are not indicative of our future performance.
You should read this historical financial data together with “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-K and our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.
Selected Consolidated Financial Information
|
| | | | | | | | | | | | | | | | | | | |
| | Year ended December 31, |
| | 2013 | | 2014 | | 2015 | | 2016 | | 2017 |
| | (dollars in thousands, except per share amounts) |
| INCOME STATEMENT DATA: | |
| Revenues: | | | | | | | |
| Funeral | $ | 163,082 |
| | $ | 173,735 |
| | $ | 185,818 |
| | $ | 189,401 |
| | $ | 200,886 |
|
| Cemetery | 49,992 |
| | 52,389 |
| | 56,684 |
| | 58,799 |
| | 57,253 |
|
| Total revenues | 213,074 |
| | 226,124 |
| | 242,502 |
| | 248,200 |
| | 258,139 |
|
| Gross profit: | | | | | | | | | |
| Funeral | 48,874 |
| | 54,102 |
| | 59,434 |
| | 61,620 |
| | 61,369 |
|
| Cemetery | 15,411 |
| | 15,906 |
| | 18,074 |
| | 18,030 |
| | 15,430 |
|
| Total gross profit | 64,285 |
| | 70,008 |
| | 77,508 |
| | 79,650 |
| | 76,799 |
|
| Corporate costs and expenses | 27,379 |
| | 30,293 |
| | 28,860 |
| | 29,446 |
| | 27,858 |
|
| Operating income | 36,906 |
| | 39,715 |
| | 48,648 |
| | 50,204 |
| | 48,941 |
|
| Interest expense | (12,622 | ) | | (10,308 | ) | | (10,559 | ) | | (11,738 | ) | | (12,948 | ) |
| Accretion of discount on convertible subordinated notes | — |
| | (2,452 | ) | | (3,454 | ) | | (3,870 | ) | | (4,329 | ) |
| Loss on early extinguishment of debt and other costs | — |
| | (1,042 | ) | | — |
| | (567 | ) | | — |
|
| Loss on redemption of convertible junior subordinated debentures | — |
| | (3,779 | ) | | — |
| | — |
| | — |
|
| Other, net | 81 |
| | 567 |
| | (45 | ) | | (1,788 | ) | | 1,118 |
|
| Income before income taxes | 24,365 |
| | 22,701 |
| | 34,590 |
| | 32,241 |
| | 32,782 |
|
| Net (provision) benefit for income taxes | (9,245 | ) | | (7,255 | ) | | (13,737 | ) | | (12,660 | ) | | 4,411 |
|
| Net income from continuing operations | 15,120 |
| | 15,446 |
| | 20,853 |
| | 19,581 |
| | 37,193 |
|
| Income from discontinued operations | 4,176 |
| | 392 |
| | — |
| | — |
| | — |
|
| Preferred stock dividend | 4 |
| | — |
| | — |
| | — |
| | — |
|
| Net income attributable to common shareholders | $ | 19,292 |
| | $ | 15,838 |
| | $ | 20,853 |
| | $ | 19,581 |
| | $ | 37,193 |
|
| Earnings per share | | | | | | | | | |
| Basic: | | | | | | | | | |
| Continuing operations | $ | 0.83 |
| | $ | 0.84 |
| | $ | 1.16 |
| | $ | 1.18 |
| | $ | 2.25 |
|
| Discontinued operations | 0.23 |
| | 0.02 |
| | — |
| | — |
| | — |
|
| Basic earnings per share | $ | 1.06 |
| | $ | 0.86 |
| | $ | 1.16 |
| | $ | 1.18 |
| | $ | 2.25 |
|
| Diluted: | | | | | | | | | |
| Continuing operations | $ | 0.82 |
| | $ | 0.83 |
| | $ | 1.12 |
| | $ | 1.12 |
| | $ | 2.09 |
|
| Discontinued operations | 0.18 |
| | 0.02 |
| | — |
| | — |
| | — |
|
| Diluted earnings per share | $ | 1.00 |
| | $ | 0.85 |
| | $ | 1.12 |
| | $ | 1.12 |
| | $ | 2.09 |
|
| Dividends declared per share | $ | 0.100 |
| | $ | 0.100 |
| | $ | 0.100 |
| | $ | 0.150 |
| | $ | 0.225 |
|
| Weighted average number of common and common equivalent shares outstanding: | | | | | | | | | |
| Basic | 17,826 |
| | 18,108 |
| | 17,791 |
| | 16,515 |
| | 16,438 |
|
| Diluted | 22,393 |
| | 18,257 |
| | 18,317 |
| | 17,460 |
| | 17,715 |
|
| OPERATING AND FINANCIAL DATA: | | | | | | | | | |
| Funeral homes at end of period | 161 |
| | 164 |
| | 167 |
| | 170 |
| | 178 |
|
| Cemeteries at end of period | 32 |
| | 32 |
| | 32 |
| | 32 |
| | 32 |
|
| Funeral services performed | 29,854 |
| | 31,402 |
| | 32,627 |
| | 33,160 |
| | 34,894 |
|
| Preneed funeral contracts sold | 8,125 |
| | 6,940 |
| | 7,797 |
| | 7,639 |
| | 7,444 |
|
| Backlog of preneed funeral contracts | 80,714 |
| | 82,842 |
| | 84,353 |
| | 91,402 |
| | 93,712 |
|
| Backlog of preneed cemetery contracts | 63,453 |
| | 63,322 |
| | 63,178 |
| | 63,254 |
| | 63,523 |
|
| Average revenue per funeral contract | $ | 5,365 |
| | $ | 5,453 |
| | $ | 5,621 |
| | $ | 5,642 |
| | $ | 5,705 |
|
| Cremation rate | 46.9 | % | | 47.3 | % | | 48.9 | % | | 50.7 | % | | 51.4 | % |
| Depreciation and amortization | $ | 11,635 |
| | $ | 11,923 |
| | $ | 13,780 |
| | $ | 15,421 |
| | $ | 15,979 |
|
| BALANCE SHEET DATA: | | | | | | | | | |
| Total assets | $ | 746,599 |
| | $ | 827,528 |
| | $ | 833,139 |
| | $ | 885,069 |
| | $ | 921,533 |
|
| Long-term debt, net of current maturities | 142,542 |
| | 152,387 |
| | 195,009 |
| | 204,404 |
| | 212,154 |
|
| Convertible junior subordinated debenture | 89,770 |
| | — |
| | — |
| | — |
| | — |
|
| Convertible subordinated notes | — |
| | 114,542 |
| | 115,227 |
| | 119,596 |
| | 124,441 |
|
| Stockholders’ equity | 155,973 |
| | 179,875 |
| | 157,594 |
| | 175,734 |
| | 197,656 |
|
Omitted pursuant to amendments to Item 301 of Regulations S-K effective February 10, 2021.
| |
ITEM 7. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. |
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
General
We operate in two business segments: funeral home operations, which accountaccounts for approximately 78%75% of our revenues,revenue, and cemetery operations, which accountaccounts for approximately 22%25% of our revenues.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, 2017,2020, we operated 178 funeral homes in 2926 states and 32 cemeteries in 1112 states within the United States. For additional discussion about our overall business strategy, see Part I, Item 1, Business – Business Strategy.
Funeral Home Operations
Factors affecting our funeral operating results include: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed business to increase average revenue per contract. In simple terms, volume and price are the two variables that affect funeral revenues.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.
Our funeral contract volumes, including contracts from acquisitions, have increased from 29,854 in 2013 to 34,894 in 2017, a compound annual increaseCemetery Operations
Factors affecting our cemetery operating results include: the size and success of 4.0%. Our funeral operating revenue, excluding financial revenue, has increased from $153.9 million in 2013 to $192.4 million in 2017, a compound annual increaseour sales organization; local perceptions and heritage of 5.7%. The increases are primarily a result of businesses we have acquired in the last five years andour cemeteries; our ability to increaseadapt to changes in the average revenue per funeral through expanded service offeringseconomy and packages. Additional funeral revenueconsumer 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 commissionssales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and preneed funeral trust earnings has decreasedanticipated 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 due March 2021. However, if we were to refinance our Senior Notes when they become callable, it may provide us the ability, from $9.2a 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
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 2013 to $8.5cash and ended the year with $0.9 million in 2017. We experienced a 5.2% increase in volumes in comparingcash. At December 31, 2020, we had borrowings of $47.2 million outstanding on our Credit Facility compared to $83.8 million as of December 31, 2019 and $27.1 million as of December 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, 20172020, cash provided by operating activities was $82.9 million compared to the year ended December 31, 2016 and the average revenue per contract$43.2 million for the year ended December 31, 2017 increased 1.1%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, 2016.2019 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.
Cemetery OperationsThe 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.
Cemetery operating results
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 December 31, 2019, we spent $1.6 million for renovations on four businesses that were affected by Hurricane Michael, of which $1.4 million was reimbursed by our property insurance policy. |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2019 | | 2020 |
| Maintenance | | | | | |
| Facility repairs and improvements | $ | 2,591 | | | $ | 1,820 | | | $ | 2,053 | |
| 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 ended December 31, 2020 compared to net cash inflow of $115.7 million for the year ended December 31, 2019 and net cash inflow of $2.2 million for the year ended December 31, 2018.
For the year ended December 31, 2020, we had net payments on our Credit Facility, acquisition debt and finance leases of $38.3 million. In addition, we paid $6.0 million in dividends and $4.6 million for the repurchase of a portion of our Convertibles Notes.
For the year ended December 31, 2019, we had net proceeds related to the 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 ended December 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
On May 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. On October 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 ended December 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. On July 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 ended December 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 affectedcurrently held as treasury shares.
During the year ended December 31, 2020, we did not repurchase any common shares. At December 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 | |
Credit Facility
On December 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, and Bank 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.
At December 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 on May 31, 2023.
The Company’s obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the sizesame subsidiaries which guarantee the Senior Notes (as defined in Part II, Item 8, Financial Statements and successSupplementary 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. At December 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 ended March 31, 2020, June 30, 2020 and September 30, 2020 and (ii) 5.50 to 1.00 for the quarter ended December 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.
On May 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 ended March 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.
On August 7, 2020, we obtained a limited consent from the lenders under our Credit Facility in connection with our privately-negotiated repurchases of our sales organization. Approximately 65.0%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 cemetery revenues relatedleverage ratio, fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility at December 31, 2020.
At December 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 on November 30, 2019 and outstanding under the Credit Facility, which was increased to preneed sales$2.1 million on September 29, 2020. The letter of interment rightscredit bears interest at 3.125% and related merchandisewill expire on November 26, 2021. The letter of credit automatically renews annually and servicessecures 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. At December 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 ended December 31, 20162019 and 2017,2020 was 2.9% and 3.8%, respectively.
We believe that changeshave 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.
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 December 31, |
| 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 | | | $ | 489 | |
Convertible Subordinated Notes due 2021
On March 19, 2014, we issued $143.75 million aggregate principal amount of our 2.75% convertible subordinated notes due 2021 (the “Convertible Notes”). The Convertible Notes are due on March 15, 2021 and bear interest at 2.75% per year, which is payable semi-annually in arrears on March 15 and September 15 of each year.
On May 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. On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes. On April 4, 2019, we completed a privately-negotiated repurchase of $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163.
On September 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. The September 2020 repurchases represented approximately 60% of the aggregate principal amount of Convertible Notes then outstanding. Following the settlement of the September 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 at December 31, 2020.
At December 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.
The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 economyIndenture, plus accrued and consumer confidence affectunpaid 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 preneed cemetery operating revenues. Our cemetery financial performance from 2013 through 2017 was characterizedthe 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 increasing levelsus); and (2) each such redemption must occur within 180 days of operating revenuesthe 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 field-level cemetery profit margins. Cemetery operating revenue, excluding financial revenue, increased from $40.5 million in 2013unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to $48.2 million in 2017,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 compound annual increaseprice equal to 100% of 4.5%the principal amount of the Senior Notes, plus accrued and decreased 1.4% over 2016. Additional cemetery revenue from preneed finance chargesunpaid interest.
The Indenture contains restrictive covenants limiting our ability and trust earnings has decreased from $9.5 million in 2013 to $9.0 million in 2017, a compound annual decrease of 1.3%. Changesour 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 marketsstock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default.
The interest expense and interest rates affect this componentamortization of debt discount, debt premium and debt issuance costs related to our cemetery revenues.Senior Notes are as follows (in thousands):
Financial Revenue | | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 | |
Income recognized fromThe fair value of the investments inSenior Notes, which are Level 2 measurements, was $427.9 million at December 31, 2020.
The debt discount, the preneed funeral trust funds, the cemetery merchandise and services trust fundsdebt premium and the perpetual care trust funds decreased $0.9 million, or 6.0%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 in May 2018) was 6.87% and 6.69%, respectively, for the year ended December 31, 2017,2020. The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the Additional Senior Notes (issued in December 2019) was 6.20% and 6.90%, respectively, for year ended December 31, 2020.
CONTRACTUAL OBLIGATIONS
The following table summarizes the known future payments required for the debt on our Consolidated Balance Sheet as of December 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 | | | $ | 36,642 | | | $ | 33,159 | | | $ | 79,333 | | | $ | 31,355 | | | $ | 31,165 | | | $ | 436,116 | | | |
| | | | | | | | |
| | |
| (a) | Based on interest rates in effect at December 31, 2020. |
| (b) | Matures March 15, 2021. |
| (c) | Matures June 1, 2026. |
OFF-BALANCE SHEET ARRANGEMENTS
The following table summarizes our off-balance sheet arrangements as of December 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
Reference | | Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | After 5 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 | | | $ | 6,711 | | | $ | 5,562 | | | $ | 2,510 | | | $ | 1,705 | | | $ | 1,382 | | | $ | 2,351 | | | |
| | | | | | | | |
| | |
| (a) | Melvin C. Payne, our Chairman of the Board and Chief Executive Officer, has an 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 Mr. Payne's employment agreement. |
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 | $ | 5,674 | | | $ | 5,499 | | | $ | 5,145 | | | | | | |
| Preneed interment rights (property) sold | 7,063 | | | 7,205 | | | 9,503 | | | | | | |
| Average price per interment right sold | $ | 3,472 | | | $ | 3,653 | | | $ | 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.
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 ending December 31, 2020, dated February 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 with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
Below is a reconciliation of Net income (a GAAP measure) to Adjusted net income (a non-GAAP measure) (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 December 31, 2018, 2019 and 2020, except 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. |
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 ENDED DECEMBER 31, 2020 COMPARED TO YEAR ENDED DECEMBER 31, 2019
Results of Operations
The following is a discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019.
The term “same store” refers to funeral homes and cemeteries acquired prior to January 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 after December 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.
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 | | 9,109 |
| Average 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
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 | | | | | |
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 | | $ | 20,302 |
| | | |
| 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 ended December 31, 2020 compared to the year ended December 31, 2019. We experienced a $0.4 million or 1.6% increase in preneed property revenue as a result of fewera 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 contract maturitiesinterment rights sold was primarily due to the COVID-19 pandemic as individuals practiced social distancing to comply with applicable shelter in place and lower averagerelated 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 and Memorial Day festivities during May. We also experienced an $0.8 million increase in preneed merchandise and service revenue per preneed contract. Fordue to a 22.9% increase in the fivedeliveries of merchandise and service contracts during the year period ended December 31, 2017,2020. 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 performancenumber 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 ended December 31, 2020 increased $2.4 million compared to the year ended December 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 ended December 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 ended December 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 ended December 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 funds, which includesexecution of our trust fund repositioning strategy beginning at the height of the COVID-19 market crisis in March 2020; and (3) $0.6 million increase in realized income and unrealized appreciation,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 ended December 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 ended December 31, 2020, an increase of $1.0 million compared to the year ended December 31, 2019. The increase in property sold due to our recently acquired cemeteries, resulted in a 58.6% return. Investment income realized$1.1 million increase in amortization expense for the year ended December 31, 2020, while the amortization expense for our same store businesses decreased $0.1 million due to a decrease in property sales in the perpetual care trust funds (exceptperiod.
Field depreciation. Depreciation expense for capital gains) is recognizedour field businesses totaled $13.0 million for the year ended December 31, 2020, an increase of $0.6 million compared to the year ended December 31, 2019. The increase was primarily due to additional depreciation expense from assets added as income when earneda 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 ended December 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 ended December 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 ended December 31, 2020 and 2019, primarily due to machinery and equipment at the home office becoming fully depreciated in the portfolio. Investment income realizedlatter 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 at March 31, 2020. We recorded an impairment for goodwill of $13.6 million as the carrying amount of our funeral homes in the preneedEastern 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 trust fundshomes 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.
Other, net. The components of Other, net are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 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 trust funds is allocatedsales. Due to the individual preneed contractsuncertainty 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 deferred from revenue until the time that the services2019 were $3.7 million and merchandise are delivered to the customer.$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, revenuesrevenue and expenses. On an on-goingongoing 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 revenuesrevenue 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 revenues,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 generally accepted accounting principles (“GAAP”).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.
Revenues from Revenue Recognition
Funeral and Cemetery Operations
We record Revenue is recognized when control of the revenue from salesmerchandise 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 the merchandise is delivered or the service isservices are performed. CemeteryFor cemetery property interment rights, are recorded as revenue in accordance withcontrol transfers to the accounting provisions for real estate sales. This method provides forcustomer when the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% ofproperty is developed and the interment right contract price. Interment right costs, which include real propertyhas been sold and other costs relatedcan no longer be marketed or sold to cemetery development, are expensed using the specific identification method in the period in which the sale of the interment right is recognized as revenue.another customer. Sales taxes collected are recognized on a net basis inon our Consolidated Financial Statements.
Allowances for bad debts On our atneed contracts, we generally deliver the merchandise and customer cancellations are providedperform the services at the datetime of need.
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 salefair value of a reporting unit is recognizedless than its carrying amount as revenuea 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
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 our historical experience. We also monitor changes in delinquency ratesexperience, current conditions and provide additionalreasonable and supportable forecasts about collectability. Prior to adoption of Topic 326, we provided allowances for bad debt and cancellation reserves when warranted.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 preneed saleswe acquire a cemetery, we utilize an internal and external approach to determine the fair value of the cemetery property. From an external perspective, we obtain an accredited appraisal to provide reasonable assurance for property existence, property availability (unrestricted) for development, property lines, available spaces to sell, identifiable obstacles or easements and general valuation inclusive of known variables in that market. From an internal perspective, we conduct a
detailed analysis of the acquired cemetery property using other cemeteries in our portfolio as a benchmark. This provides the added benefit of relevant data that is not available to third party appraisers. Through this thorough internal process, the Company is able to identify viable costs of property based on historical experience, particular markets and demographics, reasonable margins, practical retail prices and park infrastructure and condition.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 for additional information related to business combinations.
Divested Operations
Prior to divesting a funeral services and merchandise are funded through third-party insurance policies,home or cemetery, we earn a commission onfirst determine whether the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselorsnet assets and other direct related costs of originating preneed sales contracts. These costs are expensed when incurred
Preneed Contracts
We sell interment rights, merchandise and services prior to the time of need, which isactivities (together referred to as preneed. In many instancesa “set”) qualifies as a business. First, we perform a screen test to determine if the customer paysset 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 preneed contract oversale if the set is not considered to be a period of time. Cash proceeds from preneedbusiness.
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 less amounts that we may retain under state regulations are depositedgenerally require deposits to a trust or used to purchase of a third-party insurance policy. The principalproduct. We have established a variety of trusts in connection with funeral home and accumulated earnings of thecemetery operations as required under applicable state laws. Such trusts are generally withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in insurance benefits on the insurance products are deferred until the service is performed. The customer receivables and amounts deposited in trusts that we control are primarily included in the non-current asset section of our Consolidated Balance Sheets. Theinclude (i) preneed funeral contracts to be funded at maturity by third party insurance policies are not recorded as assets or liabilities of the Company.trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) cemetery perpetual care trusts.
In the opinion of management, the proceeds from the trust funds and the insurance policies at the time the preneed contracts mature will exceed the estimated future costs to perform services and provide products under such arrangements. The types of securities in which the trusts may invest are regulated by state agencies.
Preneed Funeral and Cemetery Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”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 investmentsguidance establishes a three-level valuation hierarchy for disclosure of such trust fundsfair 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 classifieddefined as available-for-salefollows:
• Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
• Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheets. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments
are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provideobservable for the care and maintenanceasset or liability, either directly or indirectly, for substantially the full term of the cemeteriesfinancial instrument; and mausoleums. Such trust fund income is recognized as revenue when realized by
• Level 3 — inputs to the trustvaluation methodology are unobservable and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entityfair value measurement. We currently do not have any assets that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in the majority of our funeralhave fair values determined by Level 3 inputs and cemetery trust funds.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of December 31, 2017, CSV RIA provided these services to one institution, which has custody of approximately 80% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
We determine whether or not the assets in the preneed trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to itsno liabilities measured at fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheets. There will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
See Part II, Item 8, Financial Statements and Supplementary Data, Notes 67 and 10 for additional information related disclosures.to fair value measurements.
Long-Lived AssetsFair Value Measurements
Long-lived assets, such as property, plantWe measure the securities held by our funeral merchandise and equipment subject to depreciationservice, cemetery merchandise and amortization, are reviewed for impairmentservice, and cemetery perpetual care trusts at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverablefair value on a recurring basis in accordance with the Property, Plant and Equipment topicFair Value Measurements Topic of the Accounting Standards Codification (“ASC”) 360.ASC. This guidance requiresdefines fair value as the price that long-lived assetswould be received in the sale of an asset or paid to be held and used are reportedtransfer a liability in an orderly transaction between market participants at the lower of their carrying amountmeasurement date for items that are recognized 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. For the years ended December 31, 2015, 2016 and 2017, no impairments were identified on our long-lived assets.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 for additional information.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recordeddisclosed at fair value and goodwillin 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 recognized for any difference betweenbased upon the pricetransparency of inputs to the valuation of an asset or liability as of the acquisitionmeasurement 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;
• Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and fair value. We recognizeinputs that are observable for the assets acquired,asset or liability, either directly or indirectly, for substantially the liabilities assumedfull term of the financial instrument; and any non-controlling interest in
• Level 3 — inputs to the acquiree at the acquisition date, measured atvaluation methodology are unobservable and significant to the fair value as of that date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred.measurement. 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.
During 2017, we acquired seven funeral home businesses. We acquired one funeral home business in Longmont, Colorado and one funeral home business in Loveland, Colorado in November 2017 and five funeral home businesses on Long Island, New York in December 2017. The pro forma impact of the acquisitions on prior periods is not presented as the impact is not material to our reported results. The results of the acquired businesses are included in our results of operations from the date of acquisition.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 for additional information.
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral home businesses. Effective January 1, 2017, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”), Intangibles (Topic 350): Goodwill and Other. The guidance simplifies subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill.
Goodwill has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years.
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. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired. 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 projected future cash flows include assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows discounted at a weighted average cost of capital for the Company based on market participant assumptions. 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.
For our 2017 annual impairment test, we performed a qualitative assessment, using information as of August 31, 2017. 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. We determined that there were no factors that would indicate the need to perform a quantitative goodwill impairment test and 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 impairment to goodwill.
For our 2016 annual impairment test, we performed a quantitative goodwill impairment test and concluded that the fair value of our reporting units was greater than their carrying value and thus there was no impairment to goodwill.
In addition to our annual review, 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. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results.
No impairments were recorded to our goodwill during the years ended December 31, 2015, 2016 and 2017. No such events or changes occurred between the testing date and year end to trigger a subsequent impairment review.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 4 for additional information.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets on our Consolidated Balance Sheets. 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. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years.
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 the Company is relieved from paying due to its ownership of the asset. We determine the fair value of the asset by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename. 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. To estimate the royalty rates for the individual tradename, we mainly rely on the profit split method, but also consider the comparable third-party license agreements and the return on asset method. A scorecard is used to assess the relative strength of the individual tradename to further adjust the royalty rates selected under the profit-split method for qualitative factors. In accordance with the guidance, if the fair value of the tradename is less than its carrying amount an impairment charge is recorded in an amount equal to the difference.
For our 2017 annual impairment test, we performed a qualitative assessment, using information as of August 31, 2017. 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. We determined that there were no factors that would indicate the need to perform a quantitative impairment test and 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 impairment to our intangible assets.
For our 2016 annual impairment test, we performed a quantitative impairment test as of August 31, 2016 using the relief from royalty method for each location that had a tradename balance at August 31, 2016 and concluded that there was no impairment to our intangible assets.
In addition to our annual review, 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. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. During 2016, we recorded an impairment to tradenames of $145,000 related to a funeral home business held for sale as the carrying value exceeded fair value. No other impairments were recorded to our intangible assets during the years ended December 31, 2015, 2016 and 2017.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 12 for additional information.
Divested and Discontinued Operations
Effective January 1, 2015, we adopted the FASB's guidance for reporting discontinued operations, which amended the definition of “discontinued operations” to include only disposals or held-for-sale classifications for components or groups of components of an entity that represent a strategic shift that either has or will have a major effect on an entity's operations or financial results. Examples of a strategic shift that has or will have a major effect on an entity's operations and financial results include a disposal of a major geographical area, line of business, equity method of investment or other parts of an entity. The new guidance also requires the disclosure of pre-tax income of disposals thatcurrently do not qualify as discontinued operations.
We did not sellhave any of our funeral home or cemetery businesses in 2015. During 2016, we sold a funeral home business in Tennessee for $1.35 million. During 2017, we sold a funeral home business in Kentucky for $0.6 million. The businesses sold during 2016assets that have fair values determined by Level 3 inputs and 2017 do not meet the definition of discontinued operations under the FASB guidance. As such, the operating results of these businesses, as well as the gain or loss on the sale are included within net income on our Consolidated Statements of Operations.
We continually review locations to optimize the sustainable earning power and return on our invested capital. These reviews could entail selling certain non-strategic businesses.no liabilities measured at fair value.
See Part II, Item 8, Financial Statements and Supplementary Data, Notes 57 and 10 for additional information.information related to fair value measurements.
Fair Value MeasurementsLIQUIDITY 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 measure the available-for-sale securities held bygenerate cash in our funeral merchandiseoperations primarily from atneed sales and service, cemetery merchandise and service, anddelivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts at fair valuetrusts. Based 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 receivedour recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the sale of an assetforeseeable future. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or paidacquisition plans change, we may need to transfer a liability in an orderly transaction between market participants ataccess 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 inputscapital markets to obtain additional funding. Further, to the valuationextent operating cash flow or access to and cost of an asset or liability asfinancing 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 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;
• Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets,dividends 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 disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements,debt obligations and the effectredemption of our Convertible Notes due March 2021. However, if we were to refinance our Senior Notes when they become callable, it may provide us the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. The fair value disclosures of transfers inability, from a capital allocation perspective, to potentially resume strategic acquisitions, internal growth capital expenditures, share repurchases, dividend increases and out of Levels 1 and 2 and the gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy arefurther debt repayments. We also presented in Notes 6 and 10 to the Consolidated Financial Statements included herein. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
To determine the fair value of assets and liabilities in an environment where the volume and level ofexpect continued divestiture activity for the asset or liability have significantly decreased,next 6-12 months, which could yield approximately $10-11 million of cash from the exit price is usedproceeds of the sale. From time to time we may also use available cash resources (including borrowings under our Credit
Facility) to repurchase shares of our common stock, subject to satisfying certain financial covenants in our Credit Facility. 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. At December 31, 2020, we had borrowings of $47.2 million outstanding on our Credit Facility compared to $83.8 million as of December 31, 2019 and $27.1 million as of December 31, 2018.
The following table sets forth the fair value measurement. 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, 2017, we did not incur significant decreases in the volume or level of activity of any asset or liability. We consider an impairment of debt and equity securities other-than-temporary unless (a) we have the ability and intent2020, cash provided by operating activities was $82.9 million compared to hold an investment and (b) evidence indicating the cost of the investment is recoverable before we are more likely than not required to sell the investment. If an impairment is indicated, then an adjustment is made to reduce the carrying amount to fair value which is recorded as a reduction to either Deferred preneed cemetery receipts held in trust, Deferred preneed funeral receipts held in trust or Care trusts’ corpus on our Consolidated Balance Sheets. For the years ended December 31, 2016, we recorded an impairment charge of $2.3$43.2 million for other-than-temporary declines in fair value related to unrealized losses on certain investments. We did not record any impairments during the year ended December 31, 2017.2019 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.
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 December 31, 2019, we spent $1.6 million for renovations on four businesses that were affected by Hurricane Michael, of which $1.4 million was reimbursed by our property insurance policy. |
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2019 | | 2020 |
| Maintenance | | | | | |
| Facility repairs and improvements | $ | 2,591 | | | $ | 1,820 | | | $ | 2,053 | |
| 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 ended December 31, 2020 compared to net cash inflow of $115.7 million for the year ended December 31, 2019 and net cash inflow of $2.2 million for the year ended December 31, 2018.
For the year ended December 31, 2020, we had net payments on our Credit Facility, acquisition debt and finance leases of $38.3 million. In addition, we paid $6.0 million in dividends and $4.6 million for the repurchase of a portion of our Convertibles Notes.
For the year ended December 31, 2019, we had net proceeds related to the 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 ended December 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
On May 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. On October 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 ended December 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. On July 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 ended December 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 ended December 31, 2020, we did not repurchase any common shares. At December 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 | |
Credit Facility
On December 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, and Bank 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.
At December 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 on May 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 ordinary courseCredit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of business,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. At December 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 ended March 31, 2020, June 30, 2020 and September 30, 2020 and (ii) 5.50 to 1.00 for the quarter ended December 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 typically exposedcalculated for the Company and its subsidiaries on a consolidated basis.
On May 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 ended March 31, 2020. In connection with the waiver, we also entered into a variety of market risks. Currently, these are primarilyfourth 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 changesthe limited waiver and fourth amendment to the Credit Facility.
On August 7, 2020, we obtained a limited consent from the lenders under our Credit Facility in fair market values related to outstanding debtsconnection with our privately-negotiated repurchases of our Convertible Notes (as defined in Part II, Item 8, Financial Statements and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing risk management techniques when appropriate and when available for a reasonable price.
Supplementary Data, Note 13). See Part II, Item 8, Financial Statements and Supplementary Data, Note 1113 for additional information.a discussion of our privately-negotiated repurchases.
PresentationWe were in compliance with the total leverage ratio, fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility at December 31, 2020.
At December 31, 2020, we had outstanding borrowings under the Credit Facility of Debt Issuance Costs$47.2 million. We had one letter of credit for $2.0 million issued on November 30, 2019 and outstanding under the Credit Facility, which was increased to $2.1 million on September 29, 2020. The letter of credit bears interest at 3.125% and will expire on November 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. At December 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 ended December 31, 2019 and 2020 was 2.9% and 3.8%, respectively.
Effective January 1, 2016,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.
Additionally, we adopted the FASB’s new guidancedo not currently have any significant restrictions on simplifying the presentationour ability to receive dividends or loans from any Credit Facility Guarantors.
The interest expense and amortization of debt issuance costs. The guidance requires that entities that have historically presented debt issuance costs as an asset, related to a recognized debt liability, will be required to present those costs as a direct deduction from the carrying value of the related debt liability. This presentation resulted in debt issuance costs being presented in the same way debt discounts have historically been addressed. Debt issuance costs of $3.6 million and $2.7 million have been presented as a deduction from the carrying value of the related liabilities in our Consolidated Balance Sheets as of December 31, 2016 and 2017, respectively. The amounts related to our Credit Facility were $1.3are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 | | | $ | 489 | |
Convertible Subordinated Notes due 2021
On March 19, 2014, we issued $143.75 million aggregate principal amount of our 2.75% convertible subordinated notes due 2021 (the “Convertible Notes”). The Convertible Notes are due on March 15, 2021 and $1.0bear interest at 2.75% per year, which is payable semi-annually in arrears on March 15 and September 15 of each year.
On May 7, 2018, we completed our exchange of approximately $115.0 million asin aggregate principal amount of Convertible Notes in a privately-negotiated exchange agreement with a limited number of convertible noteholders. On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes. On April 4, 2019, we completed a privately-negotiated repurchase of $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163.
On September 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. The September 2020 repurchases represented approximately 60% of the aggregate principal amount of Convertible Notes then outstanding. Following the settlement of the September 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 at December 31, 20162020.
At December 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.
The interest expense and 2017, respectively. The amountsaccretion of debt discount and debt issuance costs related to our Convertible Notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 $2.3issued 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.
The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 at December 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 in May 2018) was 6.87% and 6.69%, respectively, for the year ended December 31, 2020. The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the Additional Senior Notes (issued in December 2019) was 6.20% and 6.90%, respectively, for year ended December 31, 2020.
CONTRACTUAL OBLIGATIONS
The following table summarizes the known future payments required for the debt on our Consolidated Balance Sheet as of December 31, 2016 and 2017, respectively.
See2020. Where appropriate we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes 13 and 14 forto Consolidated Financial Statements where additional information.information is available.
Income Taxes | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | | | $ | 36,642 | | | $ | 33,159 | | | $ | 79,333 | | | $ | 31,355 | | | $ | 31,165 | | | $ | 436,116 | | | |
| | | | | | | | |
| | |
| (a) | Based on interest rates in effect at December 31, 2020. |
| (b) | Matures March 15, 2021. |
| (c) | Matures June 1, 2026. |
We and our subsidiaries file a consolidated U. S. federal income tax return, separate income tax returns in 16 states in which we operate and combined or unitary income tax returns in 13 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis
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 the Consolidated Balance Sheets.
On May 10, 2017, we filed amended federal returns for the tax years ending December 31, 2013, 2014 and 2015, which generated significant refunds. As a result, on July 18, 2017, we received notification that the Internal Revenue Service (“IRS”) selected our tax years ended December 31, 2013, 2014 and 2015 for a limited scope examination to verify the refunds due. The examinations are expected to conclude during 2018.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including but not limited to bonus depreciation changes that will allow for full expensing of qualified property placed in service on or after September 27, 2017.OFF-BALANCE SHEET ARRANGEMENTS
The Tax Act also establishes new tax laws that will affect 2018, including but not limited to (1) a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; (2) a limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses); (3) a limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks; (4) immediate deductions for certain new investments (instead of deductions for depreciation expense over time); (5) limitations of certain executive compensation deductions; and (6) limitations or repeals of many business deductions and credits.
The SEC staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provision estimate in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Our analysis of the impact of the Tax Act is complete. The Tax Act reduces the corporate tax rate to 21% and as a result we have recorded a decrease infollowing table summarizes our net deferred tax liability and a corresponding discrete tax benefit item of $17.2 million. In addition to the rate reduction, approximately $2.9 million of qualifying assets placed in service on or after September 27, 2017 have been fully expensedoff-balance sheet arrangements as of December 31, 2017.
We do not have any unrecognized tax benefits recorded as of December 31, 2017 and we do not anticipate a material change in our unrecognized tax benefits during the next twelve months.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 16 for additional information.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we grant stock, restricted stock, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period.
Fair value is determined on the date of the grant. The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date. The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
Effective January 1, 2017, we adopted the FASB’s ASU, Compensation: (Topic 718): Stock Compensation. The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The guidance requires that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. Entities are required to record a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the beginning of the annual period of adoption, with a cumulative-effect adjustment to retained earnings. At January 1, 2017, we performed an analysis for unrecognized excess tax benefits and deficiencies and determined that there were no adjustments to retained earnings, as there are no unrecognized excess tax benefits.
The guidance also requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement on a prospective basis. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. For the year ended December 31, 2017, the excess tax deficiency related to share-based payments was approximately $94,000, recorded within Tax adjustment related to certain discrete items on our Consolidated Statements of Operations. In addition, excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows.
The guidance also allows for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.
The guidance also requires that the presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and applied retrospectively. This resulted in $1.6 million, $0.6 million, and $0.5 million of employee taxes paid from withheld shares being presented as financing activities on our Consolidated Statement of Cash Flows for the years ended December 31, 2015, 2016 and 2017, respectively. Prior to January 1, 2017, these amounts were presented as operating activities on our Consolidated Statement of Cash Flows.
We adopted all of the provisions of this amendment in accordance with the transition requirements and it did not have a material effect on our Consolidated Financial Statements.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 17 for additional information.
Computation of Earnings per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and our Convertible Notes.
Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and2020. Where appropriate, we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, usingindicated the two-class method, in both the basic and diluted weighted average shares outstanding calculation.
The fully diluted weighted average shares outstanding for the years ended December 31, 2015, 2016 and 2017, and the corresponding calculation of fully diluted earnings per share, included approximately 0.3 million, 0.5 million and 0.9 million shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260.
The calculations for basic and diluted earnings per share for the three years ended December 31, 2015, 2016 and 2017 are presentedfootnote in Part II, Item 8, Financial Statements and Supplementary Data, Note 19.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.
Correction of Immaterial Error | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due By Period (in thousands) |
| Financial Note
Reference | | Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | After 5 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 | | | $ | 6,711 | | | $ | 5,562 | | | $ | 2,510 | | | $ | 1,705 | | | $ | 1,382 | | | $ | 2,351 | | | |
During the year ended December 31, 2017, we corrected an immaterial error | | | | | | | | |
| | |
| (a) | Melvin C. Payne, our Chairman of the Board and Chief Executive Officer, has an 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 Mr. Payne's employment agreement. |
The obligations related to 2013. The adjustmentour 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 | $ | 5,674 | | | $ | 5,499 | | | $ | 5,145 | | | | | | |
| Preneed interment rights (property) sold | 7,063 | | | 7,205 | | | 9,503 | | | | | | |
| Average price per interment right sold | $ | 3,472 | | | $ | 3,653 | | | $ | 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 correctionCOVID-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.
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 deferred tax liabilitycomponents of Gross profit for the difference in bookour funeral home and tax basiscemetery segments, is presented herein under “Results of certain assets. The error had the impact of understating the deferred tax liability and overstating netOperations.”
Net income in 2013. Management evaluated the effect of the adjustment on previously issued interim and annual consolidated financial statements in accordance with the SEC's SAB No. 99 and SAB 108 and concluded that it was immaterial2020 increased $1.6 million compared to 2019 primarily due to the interim and annual periods. As a result,increase in accordance with SAB No. 108, we corrected our Consolidated Balance Sheets as of January 1, 2015.
The effect of this adjustment on our Consolidated Balance Sheets as of December 31, 2016 and 2017 is as follows (dollarsgross profit, offset by the $16.6 million increase in thousands):
|
| | | | | | | | |
| | | December 31, 2016 | | December 31, 2017 |
| | | % Change |
| Increase in Deferred tax liability | $ | 2,255 |
| 5.6 | % | | 7.8 | % |
| Increase in Total liabilities | $ | 2,255 |
| 0.3 | % | | 0.3 | % |
| Decrease in Retained earnings | $ | 2,255 |
| 9.8 | % | | 3.7 | % |
| Decrease in Total stockholders' equity | $ | 2,255 |
| 1.3 | % | | 1.1 | % |
This adjustment had no impact on our Consolidated Statements of Operations or Consolidated Statement of Cash Flows for any periods presented.
Related Party Transactions
Management evaluated reportable events and transactions that occurred between us and related persons during the year ended December 31, 2017.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 24 for additional information.
Subsequent Events
We have evaluated events and transactions during the period subsequent to December 31, 2017 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
RECENT ACCOUNTING PRONOUNCEMENTS, ACCOUNTING CHANGES AND OTHER REGULATIONS
Revenue Recognition
In May 2014, the FASB issued ASU, Revenue from Contracts with Customers (Topic 606). FASB ASC Topic 606 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We will adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 using the modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application.
Currently, our sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract pricecharges related to the interment right. We have analyzed the impactnet loss on our contract portfolio by reviewing our revenue streamsdivestitures and our current policiesimpairments and procedures to identify potential differences that would result from applying the requirements of the new standard$7.0 million increase in interest expense related to our contractsSenior Notes and we do not expectCredit Facility.
Net income in 2019 increased $2.9 million compared to 2018 primarily due to the new accounting standard to significantly impact our current accounting for the cemetery interment rights. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.
We expect the adoption of this new accounting standard to affect our accounting for the selling costsincrease 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 preneed cemetery merchandiseour Senior Notes and services and preneed funeral trust contracts. Currently, these costs are charged to operations using the specific identification methoda $2.9 million increase in the period incurred. Under the new accounting standard, we will capitalize and amortize these costs over the average preneed maturity period for our preneed cemetery merchandise and services contracts and preneed funeral trust contracts.loss on divested businesses.
The selling costs related to the salesFurther discussion of cemetery interment rights, which include real propertyGeneral, administrative and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts will continue to be charged to operations using the specific identification method in the period incurred.
Additionally, we believe the amounts due from customers for undelivered performance obligations on preneed contracts represent contract assets, which are required to be netted with Deferred preneed funeral revenueexpenses, Home office depreciation and Deferred preneed cemetery revenue, instead of Preneed receivables on our Consolidated Balance Sheets.
We are adopting this standard using the modified retrospective method, which recognizes the cumulative effect of applying the standard at the date of initial application, with no restatement of the comparative periods presented. Based on our assessments, we do not expect the change to have a material impact on our Consolidated Financial Statements. We have modified our financial systems to provide accounting under the new guidance.
Stock-Based Compensation
In May 2017, the FASB issued ASU, Compensation: (Topic 718): Stock Compensation - Scope of Modification Accounting. The amendments provide guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the award is modified. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. The amendments should be applied prospectively to an award modified on or after the adoption date. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Business Combinations
In January 2017, the FASB issued ASU, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU applies to all entities that must determine whether they have acquired or sold a business. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for fiscal years beginning after December 15, 2017, including the interim periods within those periods, with earlier application permitted. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Cash Flows
In August 2016, the FASB issued ASU, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU applies to all entities that are required to present a statement of cash flows under Topic 230. The amendments provide guidance on eight specific cash flow issues and includes clarification on how these items should be classified in the statement of cash flows and is designed to help eliminate diversity in practice as to where items are classified in the cash flow statement.
In November 2016, the FASB issued additional guidance on this topic that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Financial Instruments
In January 2016, the FASB issued ASU, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and apply to all entities that hold financial assets or owe financial liabilities. The amendments in this ASU also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. That impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite-lived intangible assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with earlier application permitted for financial statements that have not been issued. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
In June 2016, the FASB issued ASU, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instrumentsamortization expense, Interest expense, Income taxes and other commitments to extend credit held by a reporting entity at each reporting date. This amendment replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit lossescomponents of income and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2020 andexpenses are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidatedpresented herein under “Other Financial Statements.
Leases
In February 2016, the FASB issued ASU, Leases (Topic 842). This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
SELECTED INCOME AND OPERATIONAL DATA
The following table sets forth certain income statement data expressed as a percentage of net revenues for the periods presented:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2015 |
| | 2016 |
| | 2017 |
|
| Total gross profit | 32.0 | % | | 32.1 | % | | 29.8 | % |
| General and administrative expenses | 11.9 | % | | 11.9 | % | | 10.8 | % |
| Operating income | 20.1 | % | | 20.2 | % | | 19.0 | % |
| Interest expense | 4.4 | % | | 4.7 | % | | 5.0 | % |
The following table sets forth the number of funeral homes and cemeteries owned and operated by us for the periods presented:
|
| | | | | | | | |
| | Year Ended December 31, |
| | 2015 |
| | 2016 |
| | 2017 |
|
| Funeral homes at beginning of period | 164 |
| | 167 |
| | 170 |
|
| Acquisitions | 2 |
| | 6 |
| | 7 |
|
| Constructed funeral homes | 3 |
| | — |
| | 2 |
|
| Divestitures | — |
| | (1 | ) | | (1 | ) |
| Mergers and relocation of funeral homes | (2 | ) | | (2 | ) | | — |
|
| Funeral homes at end of period | 167 |
| | 170 |
| | 178 |
|
| | | | | | |
| Cemeteries at beginning of period | 32 |
| | 32 |
| | 32 |
|
| Acquisitions | — |
| | — |
| | — |
|
| Divestitures | — |
| | — |
| | — |
|
| Cemeteries at end of period | 32 |
| | 32 |
| | 32 |
|
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the year ending December 31, 20172020, dated February 14, 201817, 2021 and discussed in the corresponding earnings conference call. This Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
Historically, the dynamic nature of the evolutionary process of building our culture, especially since launching the Good To Great Journey in the beginning of 2012, has led to a large number of charges such as severance and retirement, consulting and other activities, which are not core to our operations and as such, have been added back to GAAP earnings as “Special Items”. The Special Items are important to add back because of the transformational nature of major changes over the last several years within our OSGLT.
Accordingly, these non-GAAP Special Items will be comprised of only those charges materially outside the normal course of business. The number of these Special Items were minimal in 2016 and should continue to be minimal thereafter, which should result in major shrinkage of “the gap” between our GAAP and non-GAAP reported performance.
Below is a reconciliation of Net Incomeincome (a GAAP measure) to Adjusted Net Incomenet income (a non-GAAP measure) for the years ended December 31, 2016 and 2017 (in thousands).:
|
| | | | | | | |
| | 2016 |
| | 2017 |
|
| Net Income | $ | 19,581 |
| | $ | 37,193 |
|
Special Items, net of tax except for items noted by**(1) | | | |
| Acquisition and Divestiture Expenses | 456 |
| | — |
|
| Severance and Retirement Costs | 2,587 |
| | — |
|
| Consulting Fees | 323 |
| | — |
|
| Accretion of Discount on Convertible Subordinated Notes** | 3,870 |
| | 4,329 |
|
| Loss on Extinguishment of Debt | 369 |
| | — |
|
| Net Loss on Sale of Assets | 1,152 |
| | — |
|
| Natural Disaster Costs | — |
| | 403 |
|
| Tax Adjustment Related to Certain Discrete Items** | — |
| | (17,176 | ) |
Adjusted Net Income(2) | $ | 28,338 |
| | $ | 24,749 |
|
| | | | | | | | | | | | | | | | | |
| 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) | | | | |
(1) | Special Itemsitems 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 Itemsitems are taxed at the federal statutory rate of 35 percent21.0% for both the years ended December 31, 20162018, 2019 and 2017,2020, except for the accretionAccretion 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 this is athese are non-tax deductible item.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 Incomenet income is defined as netNet income plus adjustments for Special Itemsitems and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations. |
Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the years ended December 31, 2016 and 2017 (in thousands):
|
| | | | | | | |
| | 2016 |
| | 2017 |
|
| Gross profit | $ | 79,650 |
| | $ | 76,799 |
|
| | | | |
| Field depreciation and amortization | 13,919 |
| | 14,374 |
|
| Regional and unallocated funeral and cemetery costs | 10,844 |
| | 13,339 |
|
| Operating profit | $ | 104,413 |
| | $ | 104,512 |
|
| | | | | | | | | | | | | | | | | |
| 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) | | | | |
(1) | Operating Profitprofit is defined as Gross Profitprofit less Cemetery property amortization, Field depreciation and amortizationexpense 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 for the years ended December 31, 2016 and 2017 (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% |
|
| | | | | | | |
| | 2016 |
| | 2017 |
|
| Funeral Home Segment | $ | 79,183 |
| | $ | 81,981 |
|
| Cemetery Segment | 25,230 |
| | 22,531 |
|
| Operating profit | $ | 104,413 |
| | $ | 104,512 |
|
| | | | | | | | | | | | | | |
| | | | |
| (1) | Operating profit margin is defined as Operating profit as a percentage of Revenue. |
Further discussion of Operating profit for our Funeral Homefuneral home and Cemetery Segmentscemetery segments is presented herein under “– Results“Results of Operations.”
YEAR ENDED DECEMBER 31, 20172020 COMPARED TO YEAR ENDED DECEMBER 31, 2016
Financial Highlights
Total revenue for the year ended December 31, 2017 and 2016 was $258.1 million and $248.2 million, respectively, which represents an increase of approximately $9.9 million, or 4.0%. Funeral revenue increased $11.5 million to $200.9 million, while cemetery revenue decreased $1.5 million to $57.3 million for the year ended December 31, 2017 compared to the same period in 2016. For the year comparatives, we experienced a 5.2% increase in total funeral contracts and an increase in the average revenue per funeral contract of 1.1%. In addition, while we experienced a decrease of 8.5% in the number of preneed interment rights (property) sold, the average price per interment right sold increased 3.8%. Further discussion of revenue for our funeral home and cemetery segments on a same store and acquired basis is presented herein under “– Results of Operations.”
Gross profit for the year ended December 31, 2017 decreased $2.9 million, or 3.6%, to $76.8 million from $79.7 million primarily due to a decline in preneed cemetery revenue, higher insurance costs and higher costs as a percentage of revenue in the six businesses we acquired in 2016. As these acquired businesses transition into our Standards Operating Model, we expect to see their gross profit margins rise towards those on a same store basis.
Further discussion of the components of Gross profit, excluding Field depreciation and amortization and Regional and unallocated funeral and cemetery costs is presented herein under “– Results of Operations” within our funeral home and cemetery segments. Further discussion of Field depreciation and amortization and Regional and unallocated funeral and cemetery costs are presented herein under “– Other Financial Statement Items.”
Net income for the year ended December 31, 2017 increased $17.6 million to $37.2 million, equal to $2.09 per diluted share, compared to net income of $19.6 million, equal to $1.12 per diluted share, for the year ended December 31, 2016, primarily due to a $17.2 million discrete tax benefit recorded due to the re-measurement of our deferred tax assets and liabilities to reflect the impact of the recent tax law change. 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.”2019
Results of Operations
The following is a discussion of our results of operations for the yearsyear ended December 31, 2017 and 2016. 2020 compared to the year ended December 31, 2019.
The term “same store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 20132016 and owned and operated for the entirety of each period being presented. Funeralpresented, 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 after December 31, 2012 are referred2015, excluding any funeral homes and cemeteries that we intend to as “acquired.”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. Depreciation
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 regionalRegional and unallocated funeral and cemetery costs, are not included in operating profit.Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure.
Funeral Home Segment.
The following table sets forth certain information regarding our revenuesRevenue and operatingOperating 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 | | 9,109 |
| Average 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, 20162020 increased $10.9 million, compared to the year ended December 31, 2017 (dollars2019. The increase in thousands):
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2016 |
| | 2017 |
| | Amount | | Percent |
| Revenues: | | | | | | | |
| Same store operating revenue | $ | 155,710 |
| | $ | 158,106 |
| | $ | 2,396 |
| | 1.5 | % |
| Acquired operating revenue | 24,914 |
| | 34,294 |
| | 9,380 |
| | 37.6 | % |
| Preneed funeral insurance commissions | 1,429 |
| | 1,254 |
| | (175 | ) | | (12.2 | )% |
| Preneed funeral trust earnings | 7,348 |
| | 7,232 |
| | (116 | ) | | (1.6 | )% |
| Total | $ | 189,401 |
| | $ | 200,886 |
| | $ | 11,485 |
| | 6.1 | % |
| | | | | | | | |
| Operating profit: | | | | | | | |
| Same store operating profit | $ | 60,823 |
| | $ | 60,864 |
| | $ | 41 |
| | 0.1 | % |
| Acquired operating profit | 10,419 |
| | 13,565 |
| | 3,146 |
| | 30.2 | % |
| Preneed funeral insurance commissions | 682 |
| | 436 |
| | (246 | ) | | (36.1 | )% |
| Preneed funeral trust earnings | 7,259 |
| | 7,116 |
| | (143 | ) | | (2.0 | )% |
| Total | $ | 79,183 |
| | $ | 81,981 |
| | $ | 2,798 |
| | 3.5 | % |
Funeral homeoperating revenue is due to a 12.9% same store operating revenues for the year ended December 31, 2017contract volume increase which is due to broad market share gains and increased $2.4 million, or 1.5%, when compareddeaths related to the year ended December 31, 2016.COVID-19 pandemic. This increase was primarilyoffset by a 5.7% decrease in average revenue per contract, excluding preneed interest, due to a 1.1% increase180 basis point decrease in same store contract volumesthe 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 29,587the restrictions placed on gatherings mandated by state and a 0.5% increaselocal 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
overall decrease in the average revenue per contract in the current year. Our Managing Partners continued to $5,344. The average revenue per contract excludes the impact of preneed funeral trust earnings (separately reflectedshow innovation by creating high value, uniquely customized personal services and sales amid challenging restrictions in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 0.4% to $5,535 for the year ended December 31, 2017. The average revenue per burial contract increased 1.0% to $8,886, while the number of burial contracts decreased 1.2% to 11,914. The number of cremation contracts increased 3.1% to 15,536 and the average revenue per cremation contract increased 1.4% to $3,376.
The burial rate for our same store businesses decreased 90 basis points to 40.3%, while the cremation rate increased 100 basis points to 52.5% for the year ended December 31, 2017 when compared to the year ended December 31, 2016. The average revenue for “other” contracts, which are charges for merchandise and services for which we do not perform a funeral service and which made up 7.2% of the total number of contracts for the year ended December 31, 2017, increased 9.2% to $2,549.local environments.
Same store operating profit for the year ended December 31, 2017 remained flat at $60.92020 increased $9.7 million when compared to the year ended December 31, 2016, despite2019 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 operating revenues. Samesame store operating margin decreased 60 basis pointsrevenue along with disciplined expense and cost management by leaders at each business. Although same store operating expenses increased $1.2 million primarily due to 38.5%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, 20172020 compared to the same period in 2016. This is primarily the result of our focus on hiring additional managing partners to increase market share and grow2019.
Funeral home acquired operating revenue in our same store businesses. In 2017, we began a process of de-clustering business in certain markets by adding managing partners to a business that may have been grouped with two or more businesses led by a single managing partner. While this results in shorter-term higher salaries and benefits, we believe that having the right managing partners in these businesses will increase market share and grow same store revenue. Same store salaries and benefits for the year ended December 31, 20172020 increased $1.4$19.4 million, when compared to same period in 2016. Additionally, general liability and other insurance related expenses increased $0.6 million for the year ended December 31, 2017 over the same period in 2016.
Funeral home acquired operating revenues for the year ended December 31, 2017 increased $9.4 million, or 37.6%, when compared to the year ended December 31, 2016. Theas our funeral home acquired portfolio for the year ended December 31, 2017, includes six2020 included nine funeral home businesses acquired duringadded in the second halffourth quarter of 2016,2019 and one business added in the first quarter of 2020 not fully present in the year ended December 31, 2016. Additionally, we acquired seven businesses in the fourth quarter of 2017. We experienced a 36.6% increase in acquired contract volume to 5,307 and an average revenue per contract increase of 0.8% to $6,462. The average revenue per contract excludes the impact of preneed funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract increased 0.4% to $6,654 for the year ended December 31, 2017. The average revenue per burial contract decreased 0.5% to $9,619, while the number of traditional burial contracts increased 35.3% to 2,467. The number of cremation contracts increased 37.7% to 2,391, and the average revenue per cremation contract increased 2.8% to $4,345. Our 2016 and 2017 acquired businesses accounted for approximately 90% of the total increase in acquired revenue and volume for the year ended December 31, 2017.2019.
Acquired operating profit for the year ended December 31, 20172020 increased $3.1$8.0 million or 30.2%, fromwhen compared to the year ended December 31, 2016,2019 and the comparable operating profit margin increased 130 basis points to 39.7%. The increase is primarily due to the sixincrease 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 acquired during 2016, not fully present infor the year ended December 31, 2016. Although revenue2020, increased $0.9 million when compared to the year ended December 31, 2019, with an operating profit margin decreased 220of 25.4%.
Preneed funeral insurance commissions and preneed funeral trust and insurance, also recorded in Other revenue, on a combined basis, points to 39.6%increased $0.7 million or 8.0% for the year endingended December 31, 20172020 compared to the same period in 2016.2019. The decreaseincrease is primarily due to the businesses acquiredan 11.5% increase in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses become fully integrated into our Being the Best Standards Operating Model, we expectpreneed contracts maturing to see their operating profit margins rise.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings on matured preneed contracts. Preneed funeral insurance commission revenue decreased by approximately $0.2 million, or 12.2%, foratneed during the year ended December 31, 2017 as2020 compared to the same period in 2016. Preneed funeral commission revenue is deferred for one year after2019, which triggers the preneed funeral contracts are sold. The numberrecognition of preneed insurance contracts sold for the year ended December 31, 2016 decreased 3.2% and the face value of the insurance products that earned commissions decreased 15.9% compared to the contracts sold during the same period of the prior year. Preneed funeral trust earnings decreased by approximately $0.1 million, or 1.6%, inon the year ended December 31, 2017. The decrease is comprised of a 3.0% decrease in earnings from the maturity of preneed contracts, offset by a 20.7% increase in earnings from trust management fees.
matured contracts. Operating profit for the two categories of financial revenue,preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, decreased 4.9% in the year ended December 31, 2017 compared toincreased $0.8 million or 10.5% for the same comparative period in 20162019, primarily due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commissionrevenue and reduction of preneed sellingtrust and insurance expenses.
Cemetery Segment
Cemetery Segment.The following table sets forth certain information regarding our revenuesRevenue and operatingOperating 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 | | | | | |
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 | | $ | 20,302 |
| | | |
| 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 ended December 31, 20162020 compared to the year ended December 31, 2017 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2016 |
| | 2017 |
| | Amount | | Percent |
| Revenues: | | | | | | | |
| Same store operating revenue | $ | 45,893 |
| | $ | 45,044 |
| | $ | (849 | ) | | (1.8 | )% |
| Acquired operating revenue | 3,054 |
| | 3,194 |
| | 140 |
| | 4.6 | % |
| Preneed cemetery trust earnings | 8,004 |
| | 7,193 |
| | (811 | ) | | (10.1 | )% |
| Preneed cemetery finance charges | 1,848 |
| | 1,822 |
| | (26 | ) | | (1.4 | )% |
| Total | $ | 58,799 |
| | $ | 57,253 |
| | $ | (1,546 | ) | | (2.6 | )% |
| | | | | | | | |
| Operating Profit: | | | | | | | |
| Same store operating profit | $ | 14,613 |
| | $ | 12,864 |
| | $ | (1,749 | ) | | (12.0 | )% |
| Acquired operating profit | 1,054 |
| | 1,039 |
| | (15 | ) | | (1.4 | )% |
| Preneed cemetery trust earnings | 7,715 |
| | 6,806 |
| | (909 | ) | | (11.8 | )% |
| Preneed cemetery finance charges | 1,848 |
| | 1,822 |
| | (26 | ) | | (1.4 | )% |
| Total | $ | 25,230 |
| | $ | 22,531 |
| | $ | (2,699 | ) | | (10.7 | )% |
Cemetery same store operating revenues for the year ended December 31, 2017 decreased $0.82019. We experienced a $0.4 million or 1.8%, when compared to1.6% increase in preneed property revenue as a result of a 3.1% increase in the year ended December 31, 2016. Approximately 55% of our same store operating revenues were related to preneed salesaverage price per interment right sold, slightly offset by a 0.5% decrease in the number of interment rights and related merchandise and services for the year ended December 31, 2017. Preneed revenue decreased $2.2 million, or 8.0%, as we experienced a 9.0%sold. The decrease in the number of preneed interment rights sold was primarily due to 6,436the 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 and Memorial 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 ended December 31, 2017 from the2020. Cemetery same period in 2016. The decrease was primarily a result of the attrition of key sales personnel at certain businesses during the period. In addition, preneed sales were negatively impacted in our Texas and Florida businesses due to the hurricanes affecting those areas in the third quarter of 2017, as well as the absence of approximately $0.5 million of large cemetery property sales we had in 2016. Same store atneed revenue, which represents approximately 45%39% of our same store operating revenues,revenue, increased $1.5$1.3 million or 8.1%, due primarily toas we experienced a 10.1%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 salesales per contract to $1,504.contract.
Cemetery same store operating profit for the year ended December 31, 2017 decreased $1.72020 increased $2.4 million or 12.0% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 28.6% in the year ended December 31, 2017 from 31.8% in the same period in 2016. The decrease in operating profit was primarily a result of the decrease in revenue, combined with significant increases in certain expenses, including $0.3 million of facilities and grounds expenses, $0.3 million of salaries and benefits and $0.3 million of general liability and other insurance related expenses.
Cemetery acquired operating profit margin decreased to 32.5% for the year ended December 31, 2017 from 34.5% in the same period in 2016, despite a $0.1 million or 4.6% increase in Cemetery acquired revenue, as we experienced increases in salaries and benefits and bad debt expense.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Total trust earnings decreased $0.8 million or 10.1%, primarily due to decreased interest revenue and capital gains from our perpetual care trust in the year ended December 31, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts remained flat at $1.8 million in the year ended December 31, 2017 compared to the same period in 2016.
Other Financial Statement Items
Depreciation and Amortization Costs. Depreciation and Amortization costs for the field and home office totaled $16.0 million for year the ended December 31, 2017, an increase of $0.6 million, or 3.6%, compared to the year ended December 31, 2016.2019. 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 ended December 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 ended December 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 ended December 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 in March 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 attributabledue 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 ended December 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 ended December 31, 2020, an increase of $1.0 million compared to the year ended December 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 ended December 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.
Field depreciation. Depreciation expense for our field businesses totaled $13.0 million for the year ended December 31, 2020, an increase of $0.6 million compared to the year ended December 31, 2019. The increase was primarily due to additional depreciation expense from assets acquired inadded as a result of our recent acquisitions as well as from our newly constructed funeral homes which began operating induring the 2017.fourth quarter of 2019 and first quarter of 2020.
Regional and Unallocated Funeralunallocated funeral and Cemetery Costs. 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 $13.3$18.1 million for the year ended December 31, 2017,2020, an increase of $2.5$4.2 million or 23.0%, primarily due to the following: (1) a $1.2$3.6 million increase in field incentivecash incentives and equity compensation, as a $0.6result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (2) a $1.0 million increase in natural disaster related costs,health and safety expenses due to the COVID-19 pandemic; and (3) a $0.5 million increase in other general administrative costs and $0.2$0.7 million increase in salaries and benefits.benefits; offset by (4) a $1.1 million decrease in severance expense.
Other Financial Statement Items
On Friday, August 25, 2017General, administrative and Sunday, September 10, 2017, hurricanes Harvey and Irma struck Texas and Florida, respectively. Thirteen of our funeral homes and six of our cemeteries were impacted by either or both property damage and business interruption. For the year ended December 31, 2017, we have spent approximately $0.9 million for employee assistance and property repair costs, of which we have recognized approximately $0.6 million in expenses and received approximately $0.3 million in insurance proceeds.
General, Administrative and Other.other. General, administrative and other expenses totaled $26.3$25.8 million for the year ended December 31, 2017,2020, a decrease of $1.7$0.1 million or 6.1%, comparedprimarily due to the year ended December 31, 2016. The decrease was attributable tofollowing: (1) a $3.5$2.0 million decreaseincrease in retirement expenses primarily related to the retirementcash incentives and equity compensation, as a result of two former executives during 2016,our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; and (2) a $0.7 million decrease in acquisition costs, offset by a $1.1$0.2 million increase in salaries and benefitsbenefits; 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 leadership investments in our Houston supportboth the years ended December 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 at March 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 increase in public company, regulatory and legal costs related to tax planning, filingtwo funeral homes that we divested. During 2019, we recorded an impairment to tradenames of $0.2 million as a result of our current shelf registration statement2019 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 adoptingsold a new long-term incentive plan,funeral home at a $0.4 million increase in other general administrative costs and a $0.3 million increase in incentive and equity compensation.net loss of $3.9 million.
Interest Expenseexpense. 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.
Other, net. The components of Other, net are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 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 $12.9$8.6 million for the year ended December 31, 20172020, compared to $11.7our income tax provision of $7.9 million for the year ended December 31, 2016, an increase of $1.2 million. 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, 2017, interest2020, we recorded tax expense increased by approximatelyof $0.8 million related to our term notedivested businesses. We also recorded discrete tax expense of $0.6 million and revolving credit facility and by approximately $0.4$0.5 million related to our deferred purchase obligations for our 2016 acquisitions. During the yearyears ended December 31, 2017, the weighted average interest rate increased 0.4% compared to the same period in 2016.
Accretion of Discount on Convertible Subordinated Notes. For the year ended December 31, 2017, we recognized accretion of the discount on our convertible subordinated notes of $4.3 million compared to $3.9 million for the same period in 2016. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%2020 and will increase each year through to maturity.
Other, net. For the year ended December 31, 2017, we recognized a net gain of $1.1 million on the following transactions: (i) $0.9 million gain on the sale of land and (ii) $0.2 million gain on the sale of a funeral home business and other assets.
Income taxes. Our income2019, respectively. Discrete tax benefit was approximately $4.4 millionexpense for the year ended December 31, 2017 compared2020 includes expense related to our incomeequity compensation and other adjustments including return to provision analysis and state legislative changes. Our effective tax provision of $12.7 millionrate 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, 2016. Our2018. 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 before discrete items was 40.0% and 39.7%35%. The Company’s unrecognized tax benefit reserve for the years ended December 31, 20172020 and 2016,2019 were $3.7 million and $0.7 million, respectively. We recorded a $17.2 million discrete tax benefit due to the re-measurement of our deferred tax assets and liabilities to reflect the impact of the recent tax law change that was enacted on December 22, 2017. At December 31, 2017, no uncertain tax positions were identified.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 1617 for additional information regarding our income taxes.
YEAR ENDED DECEMBER 31, 2016 COMPARED TO YEAR ENDED DECEMBER 31, 2015
Financial Highlights
Total revenue for the year ended December 31, 2016 and 2015 was $248.2 million and $242.5 million, respectively, which represents an increase of approximately $5.7 million, or 2.3%. For the year comparatives, we experienced a 1.6% increase in total funeral contracts and a slight increase in the average revenue per funeral contract of 0.4%. In addition, while we experienced a decrease of 6.3% in the number of preneed interment rights (property) sold, the average price per interment right sold increased 5.7%. Further discussion of revenue for our funeral home and cemetery segments as well as the contract mix is presented herein under “– Results of Operations.”
Operating income increased $1.6 million, or 3.2%, due primarily to better cost management in our same store funeral home operations, increases in funeral acquisition revenues as well as increases in preneed property revenue in our cemetery operations. Further discussion of operating income is presented herein under “– Results of Operations” within our funeral home and cemetery segments.
Net income for the year ended December 31, 2016 decreased $1.3 million to $19.6 million, equal to $1.12 per diluted share, compared to net income of $20.8 million, equal to $1.12 per diluted share, for the year ended December 31, 2015. Further discussion of depreciation and amortization expense, general and administrative costs, interest expense, income taxes and other components of income and expenses are presented herein under “– Other Financial Statement Items.”
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The following is a discussionpreparation 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 results of operations forestimates on historical experience, third party data and assumptions that we believe to be reasonable under the years ended December 31, 2016 and 2015.circumstances. The term “same store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 2012 and owned and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2011 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businessesconsiderations form the basis for making judgments about the amount and to gaugetiming of revenue and expenses, the leveraging performance contribution that a selective acquisition program can have on total company performance. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in operating profit.
Resultscarrying value of Operations
Funeral Home Segment. The following table sets forth certain information regarding our revenues and operating profit from funeral home continuing operations for the year ended December 31, 2015 compared to the year ended December 31, 2016.
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2015 |
| | 2016 |
| | Amount | | Percent |
| | (dollars in thousands) |
| Revenues: | | | | | | | |
| Same store operating revenue | $ | 142,690 |
| | $ | 140,459 |
| | $ | (2,231 | ) | | (1.6 | )% |
| Acquired operating revenue | 33,678 |
| | 40,165 |
| | 6,487 |
| | 19.3 | % |
| Preneed funeral insurance commissions | 1,484 |
| | 1,429 |
| | (55 | ) | | (3.7 | )% |
| Preneed funeral trust earnings | 7,966 |
| | 7,348 |
| | (618 | ) | | (7.8 | )% |
| Revenues from continuing operations | $ | 185,818 |
| | $ | 189,401 |
| | $ | 3,583 |
| | 1.9 | % |
| | | | | | | | |
| Operating profit: | | | | | | | |
| Same store operating profit | $ | 54,620 |
| | $ | 54,706 |
| | $ | 86 |
| | 0.2 | % |
| Acquired operating profit | 13,693 |
| | 16,536 |
| | 2,843 |
| | 20.8 | % |
| Preneed funeral insurance commissions | 454 |
| | 682 |
| | 228 |
| | 50.2 | % |
| Preneed funeral trust earnings | 7,885 |
| | 7,259 |
| | (626 | ) | | (7.9 | )% |
| Gross profit from continuing operations | $ | 76,652 |
| | $ | 79,183 |
| | $ | 2,531 |
| | 3.3 | % |
Funeral home same store operating revenues for the year ended December 31, 2016 decreased $2.2 million, or 1.6%, when compared to the year ended December 31, 2015. This decrease was primarily due to a 1.9% decrease in same store contract volume to 26,636, while the average revenue per contract remained flat at $5,273. The average revenue per contract excludes the impact of preneed funeral trust earnings (separately reflected in Revenue above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract remained flat at $5,471 for the year ended December 31, 2016. The average revenue per burial contract increased 1.8% to $8,819, while the number of traditional burial contracts decreased 5.6% to 10,875. The number of cremation contracts increased 1.3% to 13,801,assets and the average revenue per cremation contract increased 1.0% to $3,274. The burial rate decreased 170 basis points to 40.8%recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the cremation rate increased 160 basis points to 51.8% forunderlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the year ended December 31, 2016 when compared to the year ended December 31, 2015. The average revenue for “other” contracts, which are charges for merchandisemargins, operating income and services for which we do not perform a funeral service and which make up approximately 7.4% of the total number of contracts for the year ended December 31, 2016, increased 3.1% to $2,371.
Same store operating profit for the year ended December 31, 2016 increased $0.1 million, or 0.2%, from the year ended December 31, 2015, despite the decrease in operating revenues. This is primarily the result of better management of expenses, which decreased $1.5 million or 2.1% when compared to the same period in 2015. Those expenses with significant decreases include facilities and grounds expenses, which decreased by $0.9 million, general liability and other insurance expenses, which decreased by $0.4 million, and salaries and benefits expense, which decreased by $0.2 million.
Funeral home acquired revenues for the year ended December 31, 2016 increased $6.5 million, or 19.3%, when compared to the year ended December 31, 2015, as we experienced a 19.1% increase in the acquired contract volume to 6,524, while the average revenue per contract increased 0.2% to $6,157. The average revenue per contract excludes the impact of preneed funeral trustnet earnings, (separately reflected in Revenue above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract remained flat at $6,342 for the year ended December 31, 2016. The average revenue per burial contract increased 3.4% to $9,258, and the number of traditional burial contracts increased 10.5% to $3,012. The number of cremation contracts increased 28.3% to 3,003, and the average revenue per cremation contract increased 4.0% to $4,110. The 2016 funeral home acquired portfolio includes six businesses acquired during 2016 not present in
2015. These businesses increased revenue by $3.0 million and contract volume by 500 contracts in the year ended December 31, 2016.
Acquired operating profit for the year ended December 31, 2016 increased $2.8 million, or 20.8%, from the year ended December 31, 2015. This increase is a result of an increase in revenues, offset by a $2.9 million or 18.4% increase in expenses. The operating profit for the year ended December 31, 2016 includes $1.1 million related to the 2016 funeral home acquired portfolio. The most significant change was in salaries and benefits (the largest controllable expense), which increased $1.8 million, general and administrative expenses increased $0.7 million, facilities and grounds expenses increased $0.2 million and general liability and other insurance expenses increased $0.2 million. Expenses as a percentage of revenue, however, remained flat forwill 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 year ended December 31, 2016 comparedfollowing 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 same period in 2015.
The two categoriescustomer. Our performance obligations include the delivery of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings on matured preneed contracts. Preneed funeral insurance commission revenue decreased by approximately $0.1 million, or 3.7%, for the year ended December 31, 2016 as compared to the same period in 2015. Preneed funeral commission revenue is deferred for one year after the preneed funeral contracts are sold. For the year ended December 31, 2015, we sold less preneed funeral contracts for which we earn a commission than in the same period of the previous year. Preneed funeral trust earnings decreased by approximately $0.6 million, or 7.8%, in the year ended December 31, 2016. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Operating profit for the two categories of financial revenue, on a combined basis, decreased 4.8% in the year ended December 31, 2016 compared to the same period in 2015 due primarily to the decrease in preneed funeral trust revenue.
Cemetery Segment. The following table sets forth certain information regarding our revenues and operating profit from the cemetery continuing operations for the year ended December 31, 2015 compared to the year ended December 31, 2016:
|
| | | | | | | | | | | | | | |
| | Year Ended December 31, | | Change |
| | 2015 |
| | 2016 |
| | Amount | | Percent |
| | (dollars in thousands) |
| Revenues: | | | | | | | |
| Same store operating revenue | $ | 43,336 |
| | $ | 45,441 |
| | $ | 2,105 |
| | 4.9 | % |
| Acquired operating revenue | 3,321 |
| | 3,506 |
| | 185 |
| | 5.6 | % |
| Cemetery trust earnings | 8,440 |
| | 8,004 |
| | (436 | ) | | (5.2 | )% |
| Preneed cemetery finance charges | 1,587 |
| | 1,848 |
| | 261 |
| | 16.4 | % |
| Revenues from continuing operations | $ | 56,684 |
| | $ | 58,799 |
| | $ | 2,115 |
| | 3.7 | % |
| | | | | | | | |
| Operating Profit: | | | | | | | |
| Same store operating profit | $ | 14,045 |
| | $ | 14,499 |
| | $ | 454 |
| | 3.2 | % |
| Acquired operating profit | 1,088 |
| | 1,168 |
| | 80 |
| | 7.4 | % |
| Cemetery trust earnings | 8,167 |
| | 7,715 |
| | (452 | ) | | (5.5 | )% |
| Preneed cemetery finance charges | 1,587 |
| | 1,848 |
| | 261 |
| | 16.4 | % |
| Gross profit from continuing operations | $ | 24,887 |
| | $ | 25,230 |
| | $ | 343 |
| | 1.4 | % |
Cemetery same store operating revenues for the year ended December 31, 2016 increased $2.1 million, or 4.9%, when compared to the year ended December 31, 2015. Approximately 60% of our same store operating revenues were related to preneed sales of interment rights (property) and related merchandise and services for the year ending December 31, 2016. Preneedand cemetery property revenue increased $1.5 million,interment rights. Control transfers when merchandise is delivered or 6.8% as we experienced a 6.1% increase in the average price per interment to $3,169, while the number of preneedservices are performed. For cemetery property interment rights, control transfers to the customer when the property is developed and the interment right has been sold decreased 7.3%and can no longer be marketed or sold to 7,035 inanother customer. Sales taxes collected are recognized on a net basis on our Consolidated Financial Statements. On our atneed contracts, we generally deliver the year ending December 31, 2016 frommerchandise and perform the same period in 2015. The increase inservices at the average price per interment was a resulttime of salesneed.
Some of our same store locations. Same store atneedcontracts 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 which represents approximately 40% of our same store operating revenues, increased 4.3%, primarily due to a 2.5% increasewhen the merchandise is transferred or the service is performed, in the number of contracts to 13,322 and a 1.9% increase in the average sales per contract to $1,369.
Cemetery same store operating profit for the year ended December 31, 2016 increased $0.5 million, or 3.2%. As a percentage of same store revenue, cemetery same store operating profit decreased to 31.9% in the year ended December 31, 2016 from 32.4% in the same period in 2015. The increase in operating profit was primarily a resultsatisfaction of the increase in revenue, offset by $1.5 million or 6.1% increase in operating costs for the year ended December 31, 2016 compared with the same period in 2015. Those expenses with significant increases include $0.7 million of promotional expenses, $0.4 million of bad debt expense, $0.3 million of salaries and benefits and $0.1 million of general and administrative expenses.
Cemetery acquired revenue and operating profit increased in the year ended December 31, 2016 primarily due tocorresponding performance obligation. Sales taxes collected are recognized on a 3.8% increase in preneed property revenue, as operating costs slightly increased by $0.1 million compared with the same period in 2015. Cemetery acquired operating profit margin increased 55net basis points to 33.31% for the year ended December 31, 2016 compared to the same period in 2015.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Total trust earnings decreased 5.2% primarily due to a $0.5 million decrease in merchandise and service trust income in the year ended December 31, 2016 compared to the same period in 2015. Financial revenue earned from finance charges on the preneed contracts increased 16.4% in the year ended December 31, 2016 compared to the same period in 2015, primarily as a result of our increased collection efforts.
Other Financial Statement Items
Depreciation and Amortization Costs. Depreciation and Amortization costs for the field and home office totaled $15.4 million for year the ended December 31, 2016, an increase of $1.6 million, or 11.9%, compared to the year ended December 31, 2015. These increases were primarily attributable to additional depreciation expense from assets acquired in our recent acquisitions, as well as from our newly constructed funeral homes which began operating in the latter half of 2015.
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 decreased $1.2 million, or 9.6%, primarily due to a $1.1 million decrease in field incentive compensation, a $0.2 million decrease in salaries and benefits and a $0.1 million decrease in other administrative expenses, offset by $0.2 million increase in severance costs.
General, Administrative and Other. General, administrative and other expenses totaled $27.9 million for the year ended December 31, 2016, an increase of $0.8 million, or 3.1%, compared to the year ended December 31, 2015. The increase was partially attributable to the retirement of two former executives as we incurred $3.5 million in severance costs, which was offset by a $1.2 million decrease in non-cash stock compensation expense and a $0.7 decrease in salaries and benefits related to their retirement.
In addition, we incurred a $0.5 million increase in acquisition and divestiture expenses, offset by other changes which include a $0.4 million decrease in salaries and benefits, a $0.4 million decrease in non-cash stock compensation expense, a $0.3 million decrease in severance costs and a $0.2 million decrease in other general and administrative expense.
Interest Expense. Interest expense was $11.7 million for the year ended December 31, 2016 compared to $10.6 million for the year ended December 31, 2015, an increase of $1.2 million. During the year ended December 31, 2016, interest expense related to our term note and revolving credit facility increased by approximately $1.1 million, as a result of a higher principal balance and higher interest rate during the current period. Interest expense related to deferred purchase price increased by approximately $0.2 million, as a result of our 2016 acquisitions. These increases were offset by a $0.1 million decrease in the amortization of debt issuance costs related to the credit facility compared to the same period in 2015.
Accretion of Discount on Convertible Subordinated Notes. For the year ended December 31, 2016, we recognized accretion of the discount on our convertible subordinated notes of $3.9 million compared to $3.5 million for the same period in 2015. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75% and will increase each year through to maturity.Consolidated Financial Statements.
Loss on Early Extinguishment of Debt. In February 2016, we entered into the Seventh Amendment (as defined below under Debt Obligations) to our Credit Facility. As a result, we recognized a loss of $0.6 million to write-off the related unamortized debt issuance costs during the year ended December 31, 2016.
Other, net. For the year ended December 31, 2016, we recognized a net loss of $1.8 million on the following transactions: (i) $1.8 million loss on the sale of land; (ii) $0.1 million loss related to an impairment of tradenames for a funeral home business sold during the year ended December 31, 2016; offset by, (iii) $0.1 million gain on the sale of a funeral home business and other assets.
Income taxes. Our income tax provision was approximately $12.7 million for the year ended December 31, 2016 compared to $13.7 million for the year ended December 31, 2015. Our effective tax rate was 39.7% and 39.3% for the years ended December 31, 2015 and 2016, respectively. During 2016, the re-measurement of the tax liability for unrecognized tax benefits arising from the finalization of our IRS and California Franchise Tax Board exams, resulted in a $0.8 million reduction to our liability related to uncertain tax positions. At December 31, 2016, no uncertain tax positions were identified. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1621 for additional information regardingrelated 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 taxes.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
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
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.
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” inRisk Factors.
For 2021, our Annual Reportplan is to remain focused on Form 10-K for the year ended December 31, 2017.
We intendintegrating 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 due March 2021. However, if we were to acquire funeral home and cemetery businesses and forrefinance 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 projects, such as cemetery inventory developmentcapital expenditures, share repurchases, dividend increases and funeral home expansion projects, andfurther debt repayments. We also expect continued divestiture activity for paymentthe next 6-12 months, which could yield approximately $10-11 million of dividends.cash from the proceeds of the sale. From time to time we may also use available cash resources (including borrowings under our Credit
Facility) to repurchase shares of our common stock, in open market or privately negotiated transactions.We have the ability to draw on our revolving credit facility, subject to customary terms and conditions of thesatisfying certain financial covenants in our Credit Agreement.Facility. We believe that our existing and anticipated cash balances, future cash flows from operations and borrowings under our Credit Facility described aboveresources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments dividends and acquisitionsdividends for the foreseeable future.next 12 months.
Cash Flows
We began 20172020 with $3.3$0.7 million in cash and other liquid investments and ended the year with $1.0$0.9 million in cash. At December 31, 2017,2020, we had borrowings of $92.0$47.2 million outstanding on our revolving credit facilityCredit Facility compared to $67.7$83.8 million outstanding as of December 31, 2016.2019 and $27.1 million as of December 31, 2018.
The following table sets forth the elements of cash flow for the years ended December 31, 2016 and 2017 (in millions)thousands):
|
| | | | | | | |
| | 2016 | | 2017 |
| Cash at beginning of year | $ | 0.5 |
| | $ | 3.3 |
|
| Cash flow from operating activities | 50.0 |
| | 45.2 |
|
| Acquisitions and land for new construction | (26.6 | ) | | (28.8 | ) |
| Purchase of land and buildings previously leased | (6.3 | ) | | — |
|
| Net proceeds from the sale of businesses and other assets | 4.4 |
| | 5.7 |
|
| Growth capital expenditures | (9.4 | ) | | (8.0 | ) |
| Maintenance capital expenditures | (7.4 | ) | | (8.4 | ) |
| Net borrowings on our revolving credit facility, term loan and long-term debt obligations | 1.1 |
| | 11.1 |
|
| Dividends paid on common stock | (2.5 | ) | | (3.7 | ) |
| Taxes paid on restricted stock vestings and exercises of non-qualified options | (0.6 | ) | | (0.5 | ) |
| Proceeds from the exercise of stock options and employee stock purchase plan contributions | 0.9 |
| | 1.5 |
|
| Purchase of treasury stock | — |
| | (16.4 | ) |
| Payment of loan origination costs related to the credit facility | (0.7 | ) | | — |
|
| Other financing costs | (0.1 | ) | | — |
|
| Cash at end of year | $ | 3.3 |
| | $ | 1.0 |
|
| | | | | | | | | | | | | | | | | |
| 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, 2017,2020, cash provided by operating activities was $45.2$82.9 million compared to cash provided by operating activities of $50.0$43.2 million for the year ended December 31, 2016,2019 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 $4.8$5.8 million due primarilyfor the year ended December 31, 2019 compared to the declineyear ended December 31, 2018 was primarily due to approximately $5.0 million in preneed cemetery revenue and acquired funeral home operating profitmore cash interest paid in 2017 and2019 compared to 2018, as well as additional unfavorable working capital changes, which include, the timingchanges.
Investing Activities
Our investing activities resulted in a net cash outflow of approximately $39.5$34.4 million for the year endedDecember 31, 20172020 compared to a net cash outflow of approximately $45.3$158.9 million for the year ended December 31, 2016, a decrease of $5.8 million.2019 and $51.5 million for the year ended December 31, 2018.
Acquisition and Divestiture Activity
During the year ended December 31, 2017,2020, we acquired sevenone funeral home businesses, twoand cemetery combination business in ColoradoLafayette, California for $33.0 million in cash, of which $5.0 million was deposited in escrow in 2019 and five$28.0 million was paid at closing in New York2020. In addition, we sold eight funeral homes for the purchase price of $27.5 million. We also purchased$8.4 million and we sold real estateproperty for funeral home parking lot expansion projects for approximately $1.3$0.1 million.
During the year ended December 31, 2016,2019, we acquired, sixin three separate transactions, two funeral home and cemetery combination businesses, seven funeral home businesses two in Houston, Texas, one in Madera, California, one in Brookfield, Wisconsin, one in Burlington, North Carolina and one in Graham, North Carolinathree ancillary service businesses for thean aggregate purchase price of approximately $32.8$140.9 million. TheIn 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 for the businesses consisted of approximately (i) $23.9 million paid in cash at closing and (ii) $8.9 million, the net present value of future deferred payments totaling $13.5 million.We also purchased land and buildings at four funeral homes that were previously leased for approximately $6.3 million as well as purchasing land for future development of $2.6$38.0 million.
Capital Expenditures
For the year ended December 31, 2017,2020, our capital expenditures (comprising of growth and maintenance spend) totaled $16.4$15.2 million compared to $16.8$15.4 million for the year ended December 31, 2016, a decrease of $0.4 million. 2019, and $13.5 million for the year ended December 31, 2018.
The following tables present our growth and maintenance capital expenditures (in millions)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 | |
|
| | | | | | | |
| | 2016 | | 2017 |
| Growth | | | |
| Cemetery development | $ | 4.0 |
| | $ | 3.7 |
|
| Construction for new funeral facilities | 3.1 |
| | 3.1 |
|
| Renovations at certain businesses | 2.3 |
| | 1.2 |
|
| Total Growth | $ | 9.4 |
| | $ | 8.0 |
|
| | | | | | | | | | | | | | |
| | | | |
| (1) | During the year ended December 31, 2019, we spent $1.6 million for renovations on four businesses that were affected by Hurricane Michael, of which $1.4 million was reimbursed by our property insurance policy. |
| | | | | | | | | | Years Ended December 31, |
| | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Maintenance | | | | Maintenance | | | | | |
| Facility repairs and improvements | $ | 2.4 |
| | $ | 2.2 |
| Facility repairs and improvements | $ | 2,591 | | | $ | 1,820 | | | $ | 2,053 | |
| General equipment and furniture | 2.1 |
| | 2.0 |
| General equipment and furniture | 2,247 | | | 3,032 | | | 2,892 | |
| Vehicles | 1.5 |
| | 1.9 |
| Vehicles | 2,556 | | | 1,950 | | | 1,493 | |
| Paving roads and parking lots | 0.7 |
| | 1.3 |
| Paving roads and parking lots | 674 | | | 795 | | | 731 | |
| Information technology infrastructure improvements | 0.7 |
| | 1.0 |
| Information technology infrastructure improvements | 1,172 | | | 977 | | | 949 | |
| Other | | Other | 26 | | | 221 | | | 644 | |
| Total Maintenance | $ | 7.4 |
| | $ | 8.4 |
| Total Maintenance | $ | 9,266 | | | $ | 8,795 | | | $ | 8,762 | |
Financing Activities
Our financing activities resulted in a net cash outflow of $8.1$48.3 million for the year ended December 31, 20172020 compared to a net cash outflowinflow of $2.0$115.7 million for the year ended December 31, 2016. 2019 and net cash inflow of $2.2 million for the year ended December 31, 2018.
For the year ended December 31, 2017,2020, we had net borrowingspayments on our revolving credit facilityCredit Facility, acquisition debt and term loanfinance leases of approximately $11.1$38.3 million. WeIn addition, we paid $6.0 million in dividends and $4.6 million for the repurchase of a portion of our Convertibles Notes.
For the year ended December 31, 2019, we had net proceeds related to the 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 approximately $16.4$9.2 million and paid approximately $3.7$5.4 million in dividends on our common stock.
For the year ended December 31, 2016,2018, we had net borrowingsproceeds related to the issuance of our Initial Senior Notes of $318.8 million, offset by net payments on our revolving credit facilitylong-term debt obligations of $196.1 million and term loanpayments of approximately $1.1 million. We$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 approximately $2.5$5.5 million in dividends on our common stock and paid transactions costs of approximately $0.7 million related to the Seventh Amendment of our Credit Facility.
stock.
Dividends
On October 25, 2017, ourMay 19, 2020, the Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075of $0.05 per share effectiveto our annual dividend beginning with respect to dividends payable on December 1, 2017 and later.the dividend declaration in the third quarter. On October 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.
For the years ended December 31, 2016 and 2017, ourOur Board declared the following dividends payable on the dates below (in millions,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 | |
|
| | | | | | | |
| 2017 | Per Share | | Dollar Value |
| March 1st | $ | 0.050 |
| | $ | 0.8 |
|
| June 1st | $ | 0.050 |
| | $ | 0.8 |
|
| September 1st | $ | 0.050 |
| | $ | 0.8 |
|
| December 1st | $ | 0.075 |
| | $ | 1.2 |
|
| | | | |
| 2016 | Per Share | | Dollar Value |
| March 1st | $ | 0.025 |
| | $ | 0.4 |
|
| June 1st | $ | 0.025 |
| | $ | 0.4 |
|
| September 1st | $ | 0.050 |
| | $ | 0.8 |
|
| December 1st | $ | 0.050 |
| | $ | 0.8 |
|
Share Repurchase
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases of our common stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act.Repurchases
During the year ended December 31, 2017,2018, we repurchased 574,0541,101,969 shares of common stock for a total cost of $14.0$17.7 million at an average cost of $24.35$16.03 per share pursuant to thisour share repurchase program. On July 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 ended December 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. Purchases weremarket 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 ended December 31, 2020, we did not repurchase any common shares. At December 31, 2017,2020, we had approximately $26.0$25.6 million available for repurchase under thisour share repurchase program.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the BoardCredit Facility, Lease Obligations and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price for these shares was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. See Note 24 to our Consolidated Financial Statements included herein for additional information on our related party transactions.Acquisition Debt
We did not purchase any shares of our common stock during 2016. During 2015, we purchased 1,927,665 shares of our common stock for a total cost of $45.0 million, at an average cost of $23.34 per share under a previous share repurchase program.
Debt Obligations
The outstanding principal balance of our long-term debt and capital lease obligations totaled $236.7is 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 | |
Credit Facility
On December 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, and Bank 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.
At December 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 on May 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. At December 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 ended March 31, 2020, June 30, 2020 and September 30, 2020 and (ii) 5.50 to 1.00 for the quarter ended December 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.
On May 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 ended March 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.
On August 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 at December 31, 2017 and consisted2020.
At December 31, 2020, we had outstanding borrowings under the Credit Facility of $127.5 million under our term loan, $92.0 million outstanding under our revolving credit facility and $17.2 million in acquisition indebtedness and capital lease obligations.$47.2 million. We havehad one letter of credit for $2.0 million issued on November 30, 20172019 and outstanding under the Credit Facility, for approximately $2.0which was increased to $2.1 million whichon September 29, 2020. The letter of credit bears interest at 2.125%3.125% and will expire on November 27, 2018.
At December 31, 2017, we had a $300 million secured bank26, 2021. The letter of credit facility with Bank of America, N.A. as Administrative Agent comprised of a $150 million revolving credit facilityautomatically renews annually and a $150 million term loan. Thesecures our obligations under our various self-insured policies. Outstanding borrowings under our Credit Facility contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility matures on February 9, 2021 and is collateralized by all personal property and funeral home real property in certain states. Under the Credit Agreement, outstanding borrowings bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon the Company'sour leverage ratio. As ofAt December 31, 2017,2020, the prime rate margin was equivalent to 1.550%1.5% and the LIBOR rate margin was 2.125%2.5%. The weighted average interest rate on theour Credit Facility for the yearyears ended December 31, 20172019 and 2020 was 3.2%.
On February 9, 2016, we entered into a seventh amendment (the “Seventh Amendment”) to our Credit Facility. The Seventh Amendment resulted in, among other things, (i) reducing our LIBOR based variable interest rate 37.5 basis points, (ii) extending
the maturity so that the Credit Agreement will mature at the earlier of (a) any date that is 91 days prior to the maturity of any subordinated debt (including the $143.75 million in principal amount of the Convertible Notes, as defined in Note 14 to the Consolidated Financial Statements included herein) or (b) February 9, 2021, (iii) increasing2.9% and funding the term loan so that $150 million was outstanding upon the effectiveness of the Seventh Amendment, (iv) reducing the size of the revolver to $150 million, (v) increasing the accordion to $75 million and (vi) updating the amortization payments for the term loan facility so that the borrowings under the term loan facility are subject to amortization payments of (a) $2.81 million at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2016 through the fiscal quarter ending December 31, 2017, (b) $3.75 million at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2018 through the fiscal quarter ending March 31, 2020 and (c) $4.69 million at the end of each fiscal quarter beginning with the fiscal quarter ending June 30, 2020 through the fiscal quarter ending December 31, 2020. In connection with the Seventh Amendment, we recognized a loss of $0.6 million to write-off the related unamortized debt issuance costs.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 Agreement. Facility.
Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Agreement.Facility Guarantors.
We were in compliance with the covenants contained inThe interest expense and amortization of debt issuance costs related to our Credit AgreementFacility are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 December 31, 2016operating and 2017. 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 Credit Agreement contains key ratios that we must comply with including a requirementlease cost related to maintain a leverage ratioour 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 more than 3.50interest and are discounted at imputed interest rates ranging from 7.3% to 1.00 and a covenant10.0%. Original maturities range from five to maintain a fixed charge coverage ratio of no less than 1.20twenty years.
The imputed interest expense related to 1.00. As of December 31, 2017, the leverage ratio was 3.15 to 1.00 and the fixed charge coverage ratio was 2.14 to 1.00.our acquisition debt is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2019 | | 2020 |
| Acquisition debt imputed interest expense | $ | 791 | | | $ | 622 | | | $ | 489 | |
Convertible Subordinated Notes due 2021
The Convertible Notes have not been registered under the Securities Act, and were offered only to “qualified institutional buyers” in compliance with Rule 144A under the Securities Act. The Convertible Notes are governed by an indenture dated as ofOn March 19, 2014, between Wilmington Trust, National Association, as Trustee, and uswe issued $143.75 million aggregate principal amount of our 2.75% convertible subordinated notes due 2021 (the “Indenture”“Convertible Notes”). The Convertible Notes are general unsecured obligationsdue on March 15, 2021 and will be subordinated in the right of payment to all of our existing and future senior indebtedness and equal in right of payment with our other existing and future subordinated indebtedness. The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 andyear, which is payable semi-annually in arrears on March 15 and September 15 of each year.
The initial conversion rateOn May 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. On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes. On April 4, 2019, we completed a privately-negotiated repurchase of $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163.
On September 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. The September 2020 repurchases represented approximately 60% of the aggregate principal amount of Convertible Notes was 44.3169 sharesthen outstanding. Following the settlement of our common stock per $1,000the September 2020 repurchases, the aggregate principal amount of the Convertible Notes equivalentwas reduced to an initial conversion price of approximately $22.56 per share of common stock. $2.6 million.
The conversion rate is subject to adjustment upon the occurrence of certain events, as described in the Indenture. During the year ended December 31, 2017, an adjustment to the conversion ratefair value of the Convertible Notes, which are Level 2 measurements, was triggered when our Board increased the dividends declared per common share from $0.05 per share to $0.075 per share. $3.7 million at December 31, 2020.
At December 31, 2017,2020, the adjusted conversion rate of the Convertible Notes is 44.626645.9712 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.41$21.75 per share of common stock.
The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 March 15, 2021,June 1, 2026, unless earlier convertedredeemed or purchasedrepurchased. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by us. The conversion optioneach of the Convertible Notes is not an embedded derivative. HoldersSubsidiary Guarantors.
We may redeem all or part of the ConvertibleSenior Notes may convert their Convertible Notes at their option at any time prior to December 15, 2020,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 certain conditions are met.any, to the date of redemption. We may nothave the right to redeem the ConvertibleSenior Notes prior to maturity. However,at any time on or after June 1, 2021 at the redemption prices described in the eventIndenture, plus accrued and unpaid interest, if any, to the date of a fundamental change (as defined in the Indenture), subjectredemption. Additionally, at any time before June 1, 2021, we may redeem up to certain conditions, a holder40% of the Convertibleaggregate 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 its Convertibletheir Senior Notes for cash. The fundamental changeat 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 will equal to 100% of the principal amount of the ConvertibleSenior Notes, to be purchased, plus any accrued and unpaid interest.
The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default.
The interest upexpense and amortization of debt discount, debt premium and debt issuance costs related to but excluding,our Senior Notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 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 fundamental change purchase date.
AtSenior Notes, which are Level 2 measurements, was $427.9 million at December 31, 2017,2020.
The debt discount, the carrying amount of the equity component was approximately $18.0 million. At December 31, 2017, the principal amount of the liability component was $143.75 milliondebt premium and the net carrying amount was $126.2 million. The unamortized discount of $17.6 million as of December 31, 2017 isdebt issuance costs are being amortized using the effective interest method over the remaining term of approximately 38 months.
Interest expense on the Convertible Notes included contractual coupon interest expense of $4.0 million for both the years ended December 31, 2016 and 2017. Accretion65 months of the discount on the Convertible Notes was approximately $3.9 million and $4.3 million for the years ended December 31, 2016 and 2017, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $0.5 million for both the years ended December 31, 2016 and 2017.Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the years ended December 31, 2016Initial Senior Notes (issued in May 2018) was 6.87% and 2017 was 6.75% and 2.75%6.69%, respectively.
We may from time to time seek to retire or purchase our Convertible Notes through cash purchases and/or exchangesrespectively, for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. During the year ended December 31, 2017, we did not repurchase any Convertible Notes.2020. The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the Additional Senior Notes (issued in December 2019) was 6.20% and 6.90%, respectively, for year ended December 31, 2020.
CONTRACTUAL OBLIGATIONS
The following table summarizes the known future payments required for the debt on our Consolidated Balance Sheet as of December 31, 2017.2020. 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 millions) |
| Financial Note Reference | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | After 5 Years |
| Long-term debt obligations | 13 | | $ | 230.0 |
| | $ | 16.9 |
| | $ | 16.9 |
| | $ | 19.1 |
| | $ | 172.7 |
| | $ | 0.5 |
| | $ | 3.9 |
|
Interest obligation on long-term debt (a) | | | 27.8 |
| | 8.7 |
| | 8.1 |
| | 7.3 |
| | 1.6 |
| | 0.3 |
| | 1.8 |
|
| Capital lease obligations, including interest | 15 | | 11.8 |
| | 0.8 |
| | 0.8 |
| | 0.8 |
| | 0.8 |
| | 0.8 |
| | 7.8 |
|
Convertible subordinated notes (b) | 14 | | 143.8 |
| | — |
| | — |
| | — |
| | — |
| | 143.8 |
| | — |
|
| Interest on convertible subordinated notes | 14 | | 12.7 |
| | 4.0 |
| | 4.0 |
| | 3.9 |
| | 0.8 |
| | — |
| | — |
|
| Operating lease obligations | 15 | | 12.1 |
| | 3.4 |
| | 3.1 |
| | 2.5 |
| | 2.2 |
| | 0.3 |
| | 0.6 |
|
| Total contractual obligations | | | $ | 438.2 |
| | $ | 33.8 |
| | $ | 32.9 |
| | $ | 33.6 |
| | $ | 178.1 |
| | $ | 145.7 |
| | $ | 14.1 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | 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 | | | $ | 36,642 | | | $ | 33,159 | | | $ | 79,333 | | | $ | 31,355 | | | $ | 31,165 | | | $ | 436,116 | | | |
| | | | | | | | |
| | |
| (a) | | |
(a) | Based on interest rates in effect at December 31, 2017.2020. |
| (b) | Matures inMarch 15, 2021. |
| (c) | Matures June 1, 2026. |
OFF-BALANCE SHEET ARRANGEMENTS
The following table summarizes our off-balance sheet arrangements as of December 31, 2017.2020. 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 tenfive years and provide for bi-weekly or monthly payments. We have employment agreements with certain of our executive officers and certain senior leadership. These agreements are generally for three to fourfive years and provide for participation in various incentive compensation arrangements. These agreements generally renew automatically renew on an annual basis after their initial term has expired.
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due By Period (in millions) |
| Financial Note Reference | | Total | | 2018 | | 2019 | | 2020 | | 2021 | | 2022 | | After
5 Years |
| Non-compete agreements | 15 | | $ | 8.0 |
| | $ | 1.7 |
| | $ | 1.6 |
| | $ | 1.3 |
| | $ | 1.2 |
| | $ | 0.8 |
| | $ | 1.4 |
|
| Consulting agreements | 15 | | 2.4 |
| | 0.9 |
| | 0.6 |
| | 0.5 |
| | 0.3 |
| | 0.1 |
| | — |
|
Employment agreements (a) | 15 | | 4.3 |
| | 2.0 |
| | 1.0 |
| | 1.0 |
| | 0.3 |
| | — |
| | — |
|
| Total contractual cash obligations | | | $ | 14.7 |
| | $ | 4.6 |
| | $ | 3.2 |
| | $ | 2.8 |
| | $ | 1.8 |
| | $ | 0.9 |
| | $ | 1.4 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due By Period (in thousands) |
| Financial Note
Reference | | Total | | 2021 | | 2022 | | 2023 | | 2024 | | 2025 | | After 5 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 | | | $ | 6,711 | | | $ | 5,562 | | | $ | 2,510 | | | $ | 1,705 | | | $ | 1,382 | | | $ | 2,351 | | | |
| | | | | | | | |
| | |
| (a) | | |
(a) | Melvin C. Payne, our Chairman of the Board and Chief Executive Officer, has an employment agreement that renewsdoes not renew after the initial term. See Part II, Item 8, Financial Statements and Supplementary Data, Note 16 for one additional year on each anniversary of the effective date, such that at any given time between three and four years remain in the term of theinformation regarding Mr. Payne's employment agreement. |
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 revolving credit facility,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 | $ | 5,674 | | | $ | 5,499 | | | $ | 5,145 | | | | | | |
| Preneed interment rights (property) sold | 7,063 | | | 7,205 | | | 9,503 | | | | | | |
| Average price per interment right sold | $ | 3,472 | | | $ | 3,653 | | | $ | 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.
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 ending December 31, 2020, dated February 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 with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
Below is a reconciliation of Net income (a GAAP measure) to Adjusted net income (a non-GAAP measure) (in thousands):
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| 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 | |
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| (1) | Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special items are taxed at the federal statutory rate of 21.0% for the years ended December 31, 2018, 2019 and 2020, except 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. |
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 | |
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| (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):
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| 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% |
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| (1) | Operating profit margin is defined as Operating profit as a percentage of Revenue. |
Further discussion of Operating profit for our funeral home and cemetery segments is presented herein under “Results of Operations.”
YEAR ENDED DECEMBER 31, 2020 COMPARED TO YEAR ENDED DECEMBER 31, 2019
Results of Operations
The following is a discussion of our results of operations for the year ended December 31, 2020 compared to the year ended December 31, 2019.
The term “same store” refers to funeral homes and cemeteries acquired prior to January 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 after December 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.
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 | | 9,109 |
| Average 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
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 | | | | | |
The following measures reflect the significant metrics over this comparative period:
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| | 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 | | $ | 20,302 |
| | | |
| 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 ended December 31, 2020 compared to the year ended December 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 and Memorial 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 ended December 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 ended December 31, 2020 increased $2.4 million compared to the year ended December 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 ended December 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 ended December 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 ended December 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 in March 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 ended December 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 ended December 31, 2020, an increase of $1.0 million compared to the year ended December 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 ended December 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.
Field depreciation. Depreciation expense for our field businesses totaled $13.0 million for the year ended December 31, 2020, an increase of $0.6 million compared to the year ended December 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 ended December 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 ended December 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 ended December 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 at March 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.
Other, net. The components of Other, net are as follows (in thousands):
| | | | | | | | | | | | | | | |
| | | Years Ended December 31, |
| | | | | 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.
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
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
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;
• 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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ITEM 7A. | QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. |
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks.appropriate.
The following quantitative and qualitative information is provided about financial instruments to which we are a party at December 31, 20172020 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.
Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as of December 31, 20172020 are presented in Part II, Item 8, Financial Statements and Supplementary Data, Notes 6, 8 and 10.Note 7. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.51%1.45% change in the value of the fixed income securities.
We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of December 31, 2017,2020, we had outstanding borrowings under the Credit Facility of $92.0 million under our $150.0 million revolving credit facility and $127.5 million outstanding on our term loan.$47.2 million. Any further borrowings or voluntary prepayments against the revolving credit facilityCredit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under our Credit Facility at either the prime rate or the LIBOR rate plus a margin. At December 31, 2017,2020, the prime rate margin was equivalent to 1.550%1.50% and the LIBOR rate margin was 2.125%2.50%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of $2.2$0.5 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.
Our Convertible Notes bear interest at the fixed annual rate of 2.75%. The Convertible Notes do not contain a call feature. At December 31, 2017,2020, the costcarrying value of the Convertible Notes on our Consolidated Balance SheetsSheet was approximately $126.2$2.5 million and the fair value of the Convertible Notes was approximately $180.3$3.7 million based on the last traded or broker quoted price, as reported by the Financial Industry Regulatory Authority, Inc. (“FINRA).” Increases in market interest rates may cause the value of the Convertible Notes to decrease, but such changes will not affect our interest costs.
Our Senior Notes bear interest at the fixed annual rate of 6.625%. 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 governing the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption. At December 31, 2020, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $396.0 million and the fair value of the Senior Notes was $427.9 million based on the last traded or broker quoted price as reported by FINRA. Increases in market interest rates may cause the value of the Senior Notes to decrease, but such changes will not affect our interest costs.
The remainder of our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease, but such changes will not affect our interest costs.
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ITEM 8. | FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. |
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CARRIAGE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Carriage Services, Inc.:
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Carriage Services Inc. (a, a Delaware corporation)corporation and subsidiaries (the “Company”) as of December 31, 20162020 and 2017 and2019, the related consolidated statements of operations, changes in stockholders'stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2017,2020, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 20162020 and 2017,2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017,2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2017,2020, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated February 21, 2018March 2, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence supportingregarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill and Tradename quantitative impairment assessment
As described further in Note 1 to the financial statements, the Company is required to evaluate goodwill and intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of a reporting unit or the intangible asset may be greater than fair value. The Company first assesses qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit or the tradenames is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. The Company determined that as a result of the economic conditions caused by the response to COVID-19, a quantitative impairment assessment was necessary for each of the Company’s reporting units as well as the Company’s tradenames. As a result of the analysis, the Company determined that the Company’s Eastern Region Reporting Unit exceeded the fair value, as well as certain of the Company’s tradenames were impaired, and an impairment charge was recorded. We identified the Goodwill and Tradenames quantitative impairment assessment as a critical audit matter.
The principal consideration for our determination that the Goodwill and Tradenames quantitative impairment assessment is a critical audit matter is that the assessment includes a high degree of estimation uncertainty due to significant management judgments in regards to assumptions used within the assessment, including the long-term growth rate, royalty rate, discount rate and forecasted reporting unit cash flow, for which management also utilized an independent valuations specialist (referred to as
“management’s specialists”). In turn, auditing management’s assumptions involved significant auditor judgment and subjectivity.
Our audit procedures related to the Goodwill and Tradenames quantitative impairment assessment included the following, among others.
• We tested the design and operating effectiveness of controls relating to the Company’s quantitative impairment analysis processes, including controls related to the forecasted reporting unit cash flow and management’s review of the key assumptions which were prepared by managements specialists.
• We evaluated the level of knowledge, skill, and ability of management’s specialists and their relationship to the Company.
• We compared the Company’s reporting unit cash flows used in the forecast model to historical actual results.
• With the assistance of internal valuation specialists, we performed audit procedures over the data, methods and assumptions utilized in performing the quantitative impairment assessment, which included reviewing supporting documents and assessing reasonableness by comparing to historical trends and industry expectations. Certain key inputs/assumptions tested by us included the following:
◦Long-term growth rate
◦Discount rates
◦Royalty rates
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2014.
Houston,Dallas, Texas
February 21, 2018March 2, 2021
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Carriage Services, Inc.:
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Carriage Services, Inc., (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2017,2020, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2017,2020, based on criteria established in the 2013 Internal Control-IntegratedControl—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2017,2020, and our report dated February 21, 2018March 2, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Houston,Dallas, Texas
February 21, 2018March 2, 2021
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETSSHEET
(in thousands, except share data) |
| | | | | | | |
| | December 31, |
| | 2016 | | 2017 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 3,286 |
| | $ | 952 |
|
| Accounts receivable, net of allowance for bad debts of $746 in 2016 and $835 in 2017 | 18,860 |
| | 19,655 |
|
| Inventories | 6,147 |
| | 6,519 |
|
| Prepaid expenses | 2,640 |
| | 2,028 |
|
| Other current assets | 2,034 |
| | 986 |
|
| Total current assets | 32,967 |
| | 30,140 |
|
| Preneed cemetery trust investments | 69,696 |
| | 73,853 |
|
| Preneed funeral trust investments | 89,240 |
| | 90,682 |
|
| Preneed receivables, net of allowance for bad debts of $2,166 in 2016 and $2,278 in 2017 | 30,383 |
| | 31,644 |
|
| Receivables from preneed trusts | 14,218 |
| | 15,287 |
|
| Property, plant and equipment, net of accumulated depreciation of $110,509 in 2016 and $115,776 in 2017 | 235,113 |
| | 247,294 |
|
| Cemetery property, net of accumulated amortization of $34,194 in 2016 and $37,543 in 2017 | 76,119 |
| | 76,331 |
|
| Goodwill | 275,487 |
| | 287,956 |
|
| Intangible and other non-current assets | 14,957 |
| | 18,117 |
|
| Cemetery perpetual care trust investments | 46,889 |
| | 50,229 |
|
| Total assets | $ | 885,069 |
| | $ | 921,533 |
|
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| Current portion of long-term debt and capital lease obligations | $ | 13,267 |
| | $ | 17,251 |
|
| Accounts payable | 10,198 |
| | 6,547 |
|
| Other liabilities | 717 |
| | 1,361 |
|
| Accrued liabilities | 20,091 |
| | 17,559 |
|
| Total current liabilities | 44,273 |
| | 42,718 |
|
| Long-term debt, net of current portion | 137,862 |
| | 121,034 |
|
| Revolving credit facility | 66,542 |
| | 91,120 |
|
| Convertible subordinated notes due 2021 | 119,596 |
| | 124,441 |
|
| Obligations under capital leases, net of current portion | 2,630 |
| | 6,361 |
|
| Deferred preneed cemetery revenue | 54,631 |
| | 54,690 |
|
| Deferred preneed funeral revenue | 33,198 |
| | 34,585 |
|
| Deferred tax liability | 42,810 |
| | 31,159 |
|
| Other long-term liabilities | 2,567 |
| | 3,378 |
|
| Deferred preneed cemetery receipts held in trust | 69,696 |
| | 73,853 |
|
| Deferred preneed funeral receipts held in trust | 89,240 |
| | 90,682 |
|
| Care trusts’ corpus | 46,290 |
| | 49,856 |
|
| Total liabilities | 709,335 |
| | 723,877 |
|
| Commitments and contingencies: |
|
| |
|
|
| Stockholders’ equity: | | | |
| Common stock, $.01 par value; 80,000,000 shares authorized; 22,490,855 and 22,622,242 issued as of December 31, 2016 and 2017, respectively | 225 |
| | 226 |
|
| Additional paid-in capital | 215,064 |
| | 216,158 |
|
| Retained earnings | 20,711 |
| | 57,904 |
|
| Treasury stock, at cost; 5,849,316 and 6,523,370 shares at December 31, 2016 and 2017, respectively | (60,266 | ) | | (76,632 | ) |
| Total stockholders’ equity | 175,734 |
| | 197,656 |
|
| Total liabilities and stockholders’ equity | $ | 885,069 |
| | $ | 921,533 |
|
| | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 716 | | | $ | 889 | |
| Accounts receivable, net | 21,478 | | | 25,103 | |
| Inventories | 6,989 | | | 7,259 | |
| Prepaid and other current assets | 10,667 | | | 2,076 | |
| Total current assets | 39,850 | | | 35,327 | |
| Preneed cemetery trust investments | 72,382 | | | 86,604 | |
| Preneed funeral trust investments | 96,335 | | | 101,235 | |
| Preneed cemetery receivables, net | 20,173 | | | 21,081 | |
| Receivables from preneed trusts, net | 18,024 | | | 16,844 | |
| Property, plant and equipment, net | 279,200 | | | 269,051 | |
| Cemetery property, net | 87,032 | | | 101,134 | |
| Goodwill | 398,292 | | | 392,978 | |
| Intangible and other non-current assets, net | 32,116 | | | 29,542 | |
| Operating lease right-of-use assets | 22,304 | | | 21,201 | |
| Cemetery perpetual care trust investments | 64,047 | | | 70,828 | |
| Total assets | $ | 1,129,755 | | | $ | 1,145,825 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| | | |
| | | |
| | | |
| Current portion of debt and lease obligations | $ | 3,150 | | | $ | 3,432 | |
| Accounts payable | 8,413 | | | 11,259 | |
| Accrued and other liabilities | 24,026 | | | 31,138 | |
| Convertible subordinated notes due 2021 | 0 | | | 2,538 | |
| Total current liabilities | 35,589 | | | 48,367 | |
| Acquisition debt, net of current portion | 5,658 | | | 4,482 | |
| Credit facility | 82,182 | | | 46,064 | |
| Convertible subordinated notes due 2021 | 5,971 | | | 0 | |
| Senior notes due 2026 | 395,447 | | | 395,968 | |
| Obligations under finance leases, net of current portion | 5,854 | | | 5,531 | |
| Obligations under operating leases, net of current portion | 21,533 | | | 20,302 | |
| Deferred preneed cemetery revenue | 46,569 | | | 47,846 | |
| Deferred preneed funeral revenue | 29,145 | | | 27,992 | |
| Deferred tax liability | 41,368 | | | 46,477 | |
| Other long-term liabilities | 1,737 | | | 4,748 | |
| Deferred preneed cemetery receipts held in trust | 72,382 | | | 86,604 | |
| Deferred preneed funeral receipts held in trust | 96,335 | | | 101,235 | |
| Care trusts’ corpus | 63,416 | | | 69,707 | |
| Total liabilities | 903,186 | | | 905,323 | |
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity: | | | |
| Common stock, $0.01 par value; 80,000,000 shares authorized and 25,880,362 and 26,020,494 shares issued, respectively and 17,855,023 and 17,995,155 shares outstanding, respectively | 259 | | | 260 | |
| Additional paid-in capital | 242,147 | | | 239,989 | |
| Retained earnings | 86,213 | | | 102,303 | |
| Treasury stock, at cost; 8,025,339 shares at both December 31, 2019 and 2020 | (102,050) | | | (102,050) | |
| Total stockholders’ equity | 226,569 | | | 240,502 | |
| Total liabilities and stockholders’ equity | $ | 1,129,755 | | | $ | 1,145,825 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Revenues: | | | | | |
| Funeral | $ | 185,818 |
| | $ | 189,401 |
| | $ | 200,886 |
|
| Cemetery | 56,684 |
| | 58,799 |
| | 57,253 |
|
| | 242,502 |
| | 248,200 |
| | 258,139 |
|
| Field costs and expenses: | | | | | |
| Funeral | 109,166 |
| | 110,218 |
| | 118,905 |
|
| Cemetery | 31,797 |
| | 33,569 |
| | 34,722 |
|
| Depreciation and amortization | 12,034 |
| | 13,919 |
| | 14,374 |
|
| Regional and unallocated funeral and cemetery costs | 11,997 |
| | 10,844 |
| | 13,339 |
|
| | 164,994 |
| | 168,550 |
| | 181,340 |
|
| Gross profit | 77,508 |
| | 79,650 |
| | 76,799 |
|
| Corporate costs and expenses: | | | | | |
| General, administrative and other | 27,114 |
| | 27,944 |
| | 26,253 |
|
| Home office depreciation and amortization | 1,746 |
| | 1,502 |
| | 1,605 |
|
| | 28,860 |
| | 29,446 |
| | 27,858 |
|
| Operating income | 48,648 |
| | 50,204 |
| | 48,941 |
|
| Interest expense | (10,559 | ) | | (11,738 | ) | | (12,948 | ) |
| Accretion of discount on convertible subordinated notes | (3,454 | ) | | (3,870 | ) | | (4,329 | ) |
| Loss on early extinguishment of debt | — |
| | (567 | ) | | — |
|
| Other, net | (45 | ) | | (1,788 | ) | | 1,118 |
|
| Income before income taxes | 34,590 |
| | 32,241 |
| | 32,782 |
|
| Provision for income taxes | (13,737 | ) | | (12,682 | ) | | (13,100 | ) |
| Tax adjustment related to certain discrete items | — |
| | 22 |
| | 17,511 |
|
| Total (provision) benefit for income taxes | $ | (13,737 | ) | | $ | (12,660 | ) | | $ | 4,411 |
|
| Net income | $ | 20,853 |
| | $ | 19,581 |
| | $ | 37,193 |
|
| | | | | | |
| Basic earnings per common share | $ | 1.16 |
| | $ | 1.18 |
| | $ | 2.25 |
|
| Diluted earnings per common share | $ | 1.12 |
| | $ | 1.12 |
| | $ | 2.09 |
|
| | | | | | |
| Dividends declared per share | $ | 0.10 |
| | $ | 0.15 |
| | $ | 0.225 |
|
| Weighted average number of common and common equivalent shares outstanding: | | | | | |
| Basic | 17,791 |
| | 16,515 |
| | 16,438 |
|
| Diluted | 18,313 |
| | 17,460 |
| | 17,715 |
|
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Revenue: | | | | | |
| Service revenue | $ | 138,604 | | | $ | 142,554 | | | $ | 164,984 | |
| Property and merchandise revenue | 112,253 | | | 114,514 | | | 139,630 | |
| Other revenue | 17,135 | | | 17,039 | | | 24,834 | |
| 267,992 | | | 274,107 | | | 329,448 | |
| Field costs and expenses: | | | | | |
| Cost of service | 72,123 | | | 72,991 | | | 79,634 | |
| Cost of merchandise | 90,008 | | | 89,294 | | | 103,064 | |
| 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 | |
| Other expenses | 1,548 | | | 2,055 | | | 4,808 | |
| 192,045 | | | 194,522 | | | 223,525 | |
| Gross profit | 75,947 | | | 79,585 | | | 105,923 | |
| Corporate costs and expenses: | | | | | |
| General, administrative and other | 30,827 | | | 25,880 | | | 25,827 | |
| Home office depreciation and amortization | 1,813 | | | 1,416 | | | 1,427 | |
| Net loss on divestitures and impairment charges | 1,195 | | | 4,846 | | | 21,442 | |
| Operating income | 42,112 | | | 47,443 | | | 57,227 | |
| | | | | |
| Interest expense | (21,109) | | | (25,522) | | | (32,515) | |
| Accretion of discount on convertible subordinated notes | (2,192) | | | (241) | | | (216) | |
| Net loss on early extinguishment of debt | (502) | | | 0 | | | (6) | |
| Other, net | (43) | | | 736 | | | 152 | |
| Income before income taxes | 18,266 | | | 22,416 | | | 24,642 | |
| Expense for income taxes | (5,754) | | | (7,395) | | | (7,985) | |
| Tax adjustment related to discrete items | (867) | | | (488) | | | (567) | |
| Total expense for income taxes | $ | (6,621) | | | $ | (7,883) | | | $ | (8,552) | |
| Net income | $ | 11,645 | | | $ | 14,533 | | | $ | 16,090 | |
| | | | | |
| Basic earnings per common share | $ | 0.64 | | | $ | 0.81 | | | $ | 0.90 | |
| Diluted earnings per common share | $ | 0.63 | | | $ | 0.80 | | | $ | 0.89 | |
| | | | | |
| Dividends declared per share | $ | 0.3000 | | | $ | 0.3000 | | | $ | 0.3375 | |
| Weighted average number of common and common equivalent shares outstanding: | | | | | |
| Basic | 17,971 | | | 17,877 | | | 17,872 | |
| Diluted | 18,374 | | | 18,005 | | | 18,077 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
|
| | | | | | | | | | | | | | | | | | | | | | |
| | Shares Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings (Deficit) | | Treasury Stock | | Total |
| Balance – December 31, 2014 | 18,512 |
| | $ | 224 |
| | $ | 212,386 |
| | $ | (17,468 | ) | | $ | (15,267 | ) | | $ | 179,875 |
|
| Adjustment to correct immaterial error | — |
| | — |
| | — |
| | (2,255 | ) | | — |
| | (2,255 | ) |
| Net Income – 2015 | — |
| | — |
| | — |
| | 20,853 |
| | — |
| | 20,853 |
|
| Issuance of common stock | 53 |
| | 1 |
| | 981 |
| | — |
| | — |
| | 982 |
|
| Exercise of stock options | 43 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Issuance of restricted common stock | 43 |
| | 1 |
| | 50 |
| | — |
| | — |
| | 51 |
|
| Cancellation and retirement of restricted common stock and stock options | (75 | ) | | (1 | ) | | (1,607 | ) | | — |
| | — |
| | (1,608 | ) |
| Stock-based compensation expense | — |
| | — |
| | 4,195 |
| | — |
| | — |
| | 4,195 |
|
| Dividends on common stock | — |
| | — |
| | (1,819 | ) | | — |
| | — |
| | (1,819 | ) |
| Treasury Stock acquired | (1,928 | ) | | — |
| | — |
| | — |
| | (44,999 | ) | | (44,999 | ) |
| Excess tax benefit on equity compensation | — |
| | — |
| | 64 |
| | — |
| | — |
| | 64 |
|
| Balance – December 31, 2015 | 16,648 |
| | $ | 225 |
| | $ | 214,250 |
| | $ | 1,130 |
| | $ | (60,266 | ) | | $ | 155,339 |
|
| Net Income – 2016 | — |
| | — |
| | — |
| | 19,581 |
| | — |
| | 19,581 |
|
| Issuance of common stock | 45 |
| | — |
| | 872 |
| | — |
| | — |
| | 872 |
|
| Exercise of stock options | 48 |
| | 1 |
| | — |
| | — |
| | — |
| | 1 |
|
| Issuance of restricted common stock | 18 |
| | — |
| | 12 |
| | — |
| | — |
| | 12 |
|
| Cancellation and retirement of restricted common stock and stock options | (118 | ) | | (1 | ) | | (888 | ) | | — |
| | — |
| | (889 | ) |
| Stock-based compensation expense | — |
| | — |
| | 3,526 |
| | — |
| | — |
| | 3,526 |
|
| Dividends on common stock | — |
| | — |
| | (2,492 | ) | | — |
| | — |
| | (2,492 | ) |
| Excess tax benefit on equity compensation | — |
| | — |
| | (216 | ) | | — |
| | — |
| | (216 | ) |
| Balance – December 31, 2016 | 16,641 |
| | $ | 225 |
| | $ | 215,064 |
| | $ | 20,711 |
| | $ | (60,266 | ) | | $ | 175,734 |
|
| Net Income – 2017 | — |
| | — |
| | — |
| | 37,193 |
| | — |
| | 37,193 |
|
| Issuance of common stock | 68 |
| | 1 |
| | 1,637 |
| | — |
| | — |
| | 1,638 |
|
| Exercise of stock options | 61 |
| | — |
| | 514 |
| | — |
| | — |
| | 514 |
|
| Issuance of restricted common stock | 27 |
| | — |
| | — |
| | — |
| | — |
| | — |
|
| Cancellation and retirement of restricted common stock and stock options | (25 | ) | | — |
| | (551 | ) | | — |
| | — |
| | (551 | ) |
| Stock-based compensation expense | — |
| | — |
| | 3,203 |
| | — |
| | — |
| | 3,203 |
|
| Dividends on common stock | — |
| | — |
| | (3,709 | ) | | — |
| | — |
| | (3,709 | ) |
| Treasury Stock acquired | (674 | ) | | — |
| | — |
| | — |
| | (16,366 | ) | | (16,366 | ) |
| Balance – December 31, 2017 | 16,098 |
| | $ | 226 |
| | $ | 216,158 |
| | $ | 57,904 |
| | $ | (76,632 | ) | | $ | 197,656 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares
Outstanding | | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury
Stock | | Total |
| Balance – December 31, 2017 | 16,098 | | | $ | 226 | | | $ | 216,158 | | | $ | 57,904 | | | $ | (76,632) | | | $ | 197,656 | |
| Effect of adoption of topic 606 | — | | | — | | | — | | | 2,131 | | | — | | | 2,131 | |
| Balance – January 1, 2018 | 16,098 | | | $ | 226 | | | $ | 216,158 | | | $ | 60,035 | | | $ | (76,632) | | | $ | 199,787 | |
| Net Income – 2018 | — | | | — | | | — | | | 11,645 | | | — | | | 11,645 | |
| Issuance of common stock | 62 | | | 1 | | | 1,199 | | | — | | | — | | | 1,200 | |
| Exercise of stock options | 140 | | | 1 | | | (34) | | | — | | | — | | | (33) | |
| Issuance of restricted common stock | 87 | | | 1 | | | 24 | | | — | | | — | | | 25 | |
| Cancellation and surrender of restricted common stock and stock options | (30) | | | — | | | (398) | | | — | | | — | | | (398) | |
| Stock-based compensation expense | — | | | — | | | 6,531 | | | — | | | — | | | 6,531 | |
| Dividends on common stock | — | | | — | | | (5,514) | | | — | | | — | | | (5,514) | |
| Convertible notes exchange | 2,823 | | | 28 | | | 25,883 | | | — | | | — | | | 25,911 | |
| Treasury stock acquired | (1,102) | | | — | | | — | | | — | | | (17,662) | | | (17,662) | |
| | | | | | | | | | | |
| Balance – December 31, 2018 | 18,078 | | | $ | 257 | | | $ | 243,849 | | | $ | 71,680 | | | $ | (94,294) | | | $ | 221,492 | |
| Net Income – 2019 | — | | | — | | | — | | | 14,533 | | | — | | | 14,533 | |
| Issuance of common stock | 81 | | | 1 | | | 971 | | | — | | | — | | | 972 | |
| Exercise of stock options | 76 | | | 1 | | | 471 | | | — | | | — | | | 472 | |
| Issuance of restricted common stock | 26 | | | — | | | — | | | — | | | — | | | 0 | |
| Cancellation and surrender of restricted common stock and stock options | (21) | | | — | | | (194) | | | — | | | — | | | (194) | |
| Stock-based compensation expense | — | | | — | | | 2,153 | | | — | | | — | | | 2,153 | |
| Dividends on common stock | — | | | — | | | (5,398) | | | — | | | — | | | (5,398) | |
| | | | | | | | | | | |
| Treasury stock acquired | (400) | | | — | | | — | | | — | | | (7,756) | | | (7,756) | |
| Other | 15 | | | — | | | 295 | | | — | | | — | | | 295 | |
| Balance – December 31, 2019 | 17,855 | | | $ | 259 | | | $ | 242,147 | | | $ | 86,213 | | | $ | (102,050) | | | $ | 226,569 | |
| Net Income – 2020 | — | | | — | | | — | | | 16,090 | | | — | | | 16,090 | |
| Issuance of common stock from employee stock purchase plan | 72 | | | 1 | | | 1,201 | | | — | | | — | | | 1,202 | |
| Issuance of common stock to directors | 31 | | | — | | | 653 | | | — | | | — | | | 653 | |
| Exercise of stock options | 20 | | | — | | | (70) | | | — | | | — | | | (70) | |
| Issuance of restricted common stock | 10 | | | — | | | — | | | — | | | — | | | 0 | |
| Cancellation and surrender of restricted common stock | (11) | | | — | | | (250) | | | — | | | — | | | (250) | |
| Stock-based compensation expense | — | | | — | | | 2,717 | | | — | | | — | | | 2,717 | |
| Dividends on common stock | — | | | — | | | (6,048) | | | — | | | — | | | (6,048) | |
| Convertible notes repurchase | — | | | — | | | (828) | | | — | | | — | | | (828) | |
| | | | | | | | | | | |
| Other | 18 | | | — | | | 467 | | | — | | | — | | | 467 | |
| Balance – December 31, 2020 | 17,995 | | | $ | 260 | | | $ | 239,989 | | | $ | 102,303 | | | $ | (102,050) | | | $ | 240,502 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | For the Years Ended December 31, | | Years Ended December 31, |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Cash flows from operating activities: | | | | | | Cash flows from operating activities: | | | | | |
| Net income | $ | 20,853 |
| | $ | 19,581 |
| | $ | 37,193 |
| Net income | $ | 11,645 | | | $ | 14,533 | | | $ | 16,090 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | Adjustments to reconcile net income to net cash provided by operating activities: | |
| Depreciation and amortization | 13,780 |
| | 15,421 |
| | 15,979 |
| Depreciation and amortization | 17,430 | | | 17,771 | | | 19,389 | |
| Provision for losses on accounts receivable | 1,679 |
| | 2,098 |
| | 2,198 |
| |
| Provision for bad debt and credit losses | | Provision for bad debt and credit losses | 1,841 | | | 1,618 | | | 2,318 | |
| Stock-based compensation expense | 4,444 |
| | 3,229 |
| | 3,162 |
| Stock-based compensation expense | 6,583 | | | 2,153 | | | 3,370 | |
| Deferred income tax expense (benefit) | 3,035 |
| | 4,855 |
| | (11,651 | ) | |
| Deferred income tax expense | | Deferred income tax expense | 3,823 | | | 10,117 | | | 4,597 | |
| Amortization of deferred financing costs | 921 |
| | 824 |
| | 820 |
| Amortization of deferred financing costs | 532 | | | 392 | | | 782 | |
| Amortization of capitalized commissions and non-compete agreements | | Amortization of capitalized commissions and non-compete agreements | 1,219 | | | 1,231 | | | 1,299 | |
| Accretion of discount on convertible subordinated notes | 3,454 |
| | 3,870 |
| | 4,329 |
| Accretion of discount on convertible subordinated notes | 2,192 | | | 241 | | | 216 | |
| Loss on early extinguishment of debt | — |
| | 567 |
| | — |
| |
| Net (gain) loss on sale of businesses and disposal of other assets | (49 | ) | | 2,077 |
| | (710 | ) | |
| Impairment of intangible assets | — |
| | 145 |
| | — |
| |
| Accretion of debt discount, net of debt premium on senior notes | | Accretion of debt discount, net of debt premium on senior notes | 272 | | | 492 | | | 307 | |
| Net loss on extinguishment of debt | | Net loss on extinguishment of debt | 502 | | | 0 | | | 6 | |
| Net loss on divestitures and impairment charges | | Net loss on divestitures and impairment charges | 1,195 | | | 4,846 | | | 21,442 | |
| Net loss on sale of other assets | | Net loss on sale of other assets | 876 | | | 213 | | | 251 | |
| Gain on insurance reimbursements | | Gain on insurance reimbursements | 0 | | | (879) | | | (97) | |
| Other | | Other | 0 | | | 121 | | | 19 | |
| Changes in operating assets and liabilities that provided (required) cash: | | | | | | Changes in operating assets and liabilities that provided (required) cash: | |
| Accounts and preneed receivables | (2,310 | ) | | (5,162 | ) | | (4,254 | ) | Accounts and preneed receivables | (5,061) | | | (5,801) | | | (4,279) | |
| Inventories and other current assets | 2,582 |
| | 1,995 |
| | 1,446 |
| |
| Inventories, prepaid and other current assets | | Inventories, prepaid and other current assets | (159) | | | (2,762) | | | 3,516 | |
| Intangible and other non-current assets | 150 |
| | (1,155 | ) | | 149 |
| Intangible and other non-current assets | (1,010) | | | (924) | | | (1,015) | |
| Preneed funeral and cemetery trust investments | 25,543 |
| | (14,528 | ) | | (10,008 | ) | Preneed funeral and cemetery trust investments | 488 | | | (6,500) | | | (5,043) | |
| Accounts payable | 1,445 |
| | 2,112 |
| | (3,649 | ) | Accounts payable | 2,044 | | | (580) | | | 2,702 | |
| Accrued and other liabilities | 2,091 |
| | 780 |
| | (385 | ) | Accrued and other liabilities | 3,990 | | | 1,271 | | | 10,784 | |
| Deferred preneed funeral and cemetery revenue | 329 |
| | (640 | ) | | 1,446 |
| Deferred preneed funeral and cemetery revenue | 6,546 | | | 168 | | | 528 | |
| Deferred preneed funeral and cemetery receipts held in trust | (26,461 | ) | | 13,966 |
| | 9,165 |
| Deferred preneed funeral and cemetery receipts held in trust | (5,954) | | | 5,495 | | | 5,733 | |
| Net cash provided by operating activities | 51,486 |
| | 50,035 |
| | 45,230 |
| Net cash provided by operating activities | 48,994 | | | 43,216 | | | 82,915 | |
| | | | | | | |
| Cash flows from investing activities: | | | | | | Cash flows from investing activities: | |
| Acquisitions and land for new construction | (9,725 | ) | | (26,556 | ) | | (28,799 | ) | |
| Purchase of land and buildings previously leased | (6,080 | ) | | (6,258 | ) | | — |
| |
| Net proceeds from sale of businesses and other assets | 65 |
| | 4,385 |
| | 5,731 |
| |
| Acquisitions | | Acquisitions | (37,970) | | | (140,907) | | | (28,011) | |
| Deposit on pending acquisition | | Deposit on pending acquisition | 0 | | | (5,000) | | | 0 | |
| Proceeds from insurance reimbursements | | Proceeds from insurance reimbursements | 0 | | | 1,433 | | | 248 | |
| | Proceeds from divestitures and sale of other assets | | Proceeds from divestitures and sale of other assets | 0 | | | 967 | | | 8,541 | |
| Capital expenditures | (29,744 | ) | | (16,846 | ) | | (16,395 | ) | Capital expenditures | (13,526) | | | (15,379) | | | (15,198) | |
| Net cash used in investing activities | (45,484 | ) | | (45,275 | ) | | (39,463 | ) | Net cash used in investing activities | (51,496) | | | (158,886) | | | (34,420) | |
| | | | | | | |
| Cash flows from financing activities: | | | | | | Cash flows from financing activities: | |
| Borrowings from the revolving credit facility | 103,600 |
| | 71,200 |
| | 106,900 |
| |
| Payments against the revolving credit facility | (51,500 | ) | | (96,100 | ) | | (82,600 | ) | |
| Borrowings from the term loan | 1,562 |
| | 39,063 |
| | — |
| |
| Payments against the term loan | (10,937 | ) | | (11,250 | ) | | (11,250 | ) | Payments against the term loan | (127,500) | | | 0 | | | 0 | |
| Payments on long-term debt and obligations under capital leases | (1,014 | ) | | (1,789 | ) | | (1,962 | ) | |
| Borrowings from the credit facility | | Borrowings from the credit facility | 124,500 | | | 174,961 | | | 109,500 | |
| Payments against the credit facility | | Payments against the credit facility | (189,400) | | | (118,261) | | | (146,100) | |
| | Payment of debt issuance costs related to the credit facility | | Payment of debt issuance costs related to the credit facility | (1,751) | | | (891) | | | 0 | |
| Repurchase of the convertible subordinated notes due 2021 | | Repurchase of the convertible subordinated notes due 2021 | (98,266) | | | (27) | | | (4,563) | |
| Payment of transaction costs related to the repurchase of the convertible subordinated notes due 2021 | | Payment of transaction costs related to the repurchase of the convertible subordinated notes due 2021 | (885) | | | 0 | | | (12) | |
| Proceeds from the issuance of the senior notes due 2026 | | Proceeds from the issuance of the senior notes due 2026 | 320,125 | | | 76,688 | | | 0 | |
| Payment of debt issuance costs related to the senior notes due 2026 | | Payment of debt issuance costs related to the senior notes due 2026 | (1,367) | | | (980) | | | (66) | |
| Payments on acquisition debt and obligations under finance leases | | Payments on acquisition debt and obligations under finance leases | (1,940) | | | (2,287) | | | (1,745) | |
| Payments on contingent consideration recorded at acquisition date | — |
| | — |
| | (101 | ) | Payments on contingent consideration recorded at acquisition date | (138) | | | (162) | | | (169) | |
| Proceeds from the exercise of stock options and employee stock purchase plan contributions | 758 |
| | 870 |
| | 1,496 |
| Proceeds from the exercise of stock options and employee stock purchase plan contributions | 1,246 | | | 1,445 | | | 1,229 | |
| Taxes paid on restricted stock vestings and exercises of non-qualified options | (1,582 | ) | | (578 | ) | | (509 | ) | |
| Taxes paid on restricted stock vestings and exercise of stock options | | Taxes paid on restricted stock vestings and exercise of stock options | (651) | | | (194) | | | (348) | |
| Dividends paid on common stock | (1,819 | ) | | (2,492 | ) | | (3,709 | ) | Dividends paid on common stock | (5,513) | | | (5,398) | | | (6,048) | |
| Purchase of treasury stock | (44,999 | ) | | — |
| | (16,366 | ) | Purchase of treasury stock | (16,266) | | | (9,152) | | | 0 | |
| Payment of loan origination costs related to the credit facility | (13 | ) | | (717 | ) | | — |
| |
| Excess tax benefit (deficiency) of equity compensation | 64 |
| | (216 | ) | | — |
| |
| Net cash used in financing activities | (5,880 | ) | | (2,009 | ) | | (8,101 | ) | |
| | | | | | | |
| Net (decrease) increase in cash and cash equivalents | 122 |
| | 2,751 |
| | (2,334 | ) | |
| | Net cash provided by (used in) financing activities | | Net cash provided by (used in) financing activities | 2,194 | | | 115,742 | | | (48,322) | |
| | Net increase (decrease) in cash and cash equivalents | | Net increase (decrease) in cash and cash equivalents | (308) | | | 72 | | | 173 | |
| Cash and cash equivalents at beginning of year | 413 |
| | 535 |
| | 3,286 |
| Cash and cash equivalents at beginning of year | 952 | | | 644 | | | 716 | |
| Cash and cash equivalents at end of year | $ | 535 |
| | $ | 3,286 |
| | $ | 952 |
| Cash and cash equivalents at end of year | $ | 644 | | | $ | 716 | | | $ | 889 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The CompanyIntangible Assets
Carriage Services, Inc. (“Carriage,”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 “Company,” “we,” “us,” or “our”)fair value of the tradename is less than its carrying amount as a leading provider of funeral and cemetery services and merchandise in the United States. At December 31, 2017, we operated 178 funeral homes in 29 states and 32 cemeteries in 11 states.basis for determining whether it is necessary to perform a quantitative impairment test.
Our operations are reported inintent is to perform a quantitative impairment test at least once every three years and perform a qualitative assessment during the remaining two business segments: Funeral Home Operations and Cemetery Operations. Our funeral homes offer a complete rangeyears. In addition to our annual test, we assess the impairment 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.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third party data and assumptionswhenever certain events or changes in circumstances indicate 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 revenues and expenses, the carrying value of assetsthe 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
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 amountsin an amount equal to the difference.
As a result of liabilities. Actual resultseconomic 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 these estimatesactual future cash flows and such estimates may change if the underlying conditions or assumptions change. Historical performance shoulddetermination 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 be viewed as indicativethat the fair value of future performance, asour intangible assets is greater than its carrying value and thus there can bewas no assurance thatadditional impairment to our results of operations will be consistent from yearintangible assets.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 11 for additional information related to year.
Inventory
Inventory consists primarily of caskets, outer burial containers and cemetery monuments and markers and is recorded at the lower of its cost basis (determined by the specific identification method) or net realizable value.intangible assets.
Funeral and Cemetery OperationsReceivables
We record the revenue from sales ofOur funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Cemetery interment rightsreceivables are recorded as revenue in accordance with the accounting provisionsAccounts receivable, net and primarily consist of amounts due for real estate sales. This method provides for the recognitionfuneral services already performed. Our cemetery receivables generally consist of revenue in the period in which the customer’s cumulative payments exceed 10% of the interment right contract price. Interment right costs, which include real property and other costs related to cemetery development, are expensed using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery property of approximately $3.4 million, $3.9 million and $3.3 million for 2015, 2016 and 2017, respectively. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
When preneed sales of funeralcemetery interment rights and related products and services, and merchandisewhich are fundedtypically financed through third-party insurance policies,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 earn a commission on the sale of the policies. Insurance commissions are recognized as revenuesreceive an initial down payment at the point at whichtime the commissioncontract is no longer subjectsigned. Atneed cemetery receivables and preneed cemetery receivables with payments expected to refund, which is typicallybe received within one year afterfrom the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costsbalance sheet date are expensed when incurred.
recorded in Accounts receivable, was comprised of the following at December 31, 2016 and December 31, 2017 (in thousands):
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Funeral receivables, net of allowance for bad debt of $189 and $213, respectively | $ | 8,664 |
| | $ | 9,061 |
|
| Cemetery receivables, net of allowance for bad debt of $557 and $622, respectively | 9,862 |
| | 10,331 |
|
| Other receivables | 334 |
| | 263 |
|
| Accounts receivable, net | $ | 18,860 |
| | $ | 19,655 |
|
Non-current preneednet. Preneed cemetery receivables representwith payments expected to be received beyond one year from the balance sheet date. date are recorded in Preneed cemetery receivables, were comprisednet.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Financial Instruments – Credit Losses: Measurement of the followingCredit Losses on Financial Instruments and subsequent amendments collectively known as (“Topic 326”). Topic 326 applies to all entities holding financial assets measured at December 31, 2016amortized cost, including loans, trade and December 31, 2017 (in thousands):
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Funeral receivables, net of allowance for bad debt of $862 and $882, respectively | $ | 7,761 |
| | $ | 7,934 |
|
| Cemetery receivables, net of allowance for bad debt of $1,304 and $1,396, respectively | 22,622 |
| | 23,710 |
|
| Preneed receivable, net | $ | 30,383 |
| | $ | 31,644 |
|
Bad debt expense totaled approximately $1.7 million, $2.1 million and $2.2 million for 2015, 2016 and 2017, respectively.
Preneed Contracts
We sell interment rights, merchandise and services prior to the time of need, which is referred to as preneed. In many instances the customer pays for the preneed contract over a period of time. Cash proceeds from preneed sales less amounts that we may retain under state regulations are deposited to a trust or used to purchase a third-party insurance policy. The principal and accumulated earnings of the trusts are generally withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in insurance benefits on the insurance products are deferred until the service is performed. The customerfinanced receivables and amounts deposited in trusts that we control are primarily included in the non-current asset sectionother financial instruments. The guidance introduces a new credit reserving model known as Current Expected Credit Loss (“CECL”), which requires earlier recognition of our Consolidated Balance Sheets.credit losses, while also providing additional transparency about credit risk. The preneed funeral contractsCECL model requires all expected credit losses to be funded at maturity by third party insurance policies are not recorded as assets or liabilitiesmeasured based on historical experience, current conditions and reasonable and supportable forecasts about collectability. Prior to adoption of the Company. See Note 9 to the Consolidated Financial Statements hereinTopic 326, we provided allowances for further information regarding estimated revenues associated with preneed funeral contracts funded by third party insurance policies.bad debt and contract cancellations on our receivables based on an analysis of historical trends of collection activity.
In the opinion of management, the proceeds from the trust funds and the insurance policies at the time the preneed contracts mature will exceed the estimated future costs to perform services and provide products under such arrangements. The types of securities in which the trusts may invest are regulated by state agencies.
Preneed Funeral and Cemetery Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”). 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. We have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneedFor both funeral and cemetery receipts heldreceivables, we determine our allowance for credit losses by using a loss-rate methodology, in trustwhich 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 Care trusts’ corpus. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheets. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not requiredforecasted economic conditions expected to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue untilplace over the service is performed or the merchandise is delivered.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in the majoritylife of our funeral and cemetery trust funds.
Trust management feesreceivables. These estimates are earnedimpacted by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of December 31, 2017, CSV RIA provided these services to one institution, which has custody of approximately 80% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
We determine whether or not the assets in the preneed trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteriafactors, including changes in the lengtheconomy, demographics and competition in our local communities. We monitor any change in our historical write-off of time a security has beenreceivables utilized in a loss position,our loss-rate methodology and assess forecasted changes in market conditions within our credit reserve.
See Part II, Item 8, Financial Statements and concernsSupplementary Data, Note 6 for additional information related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheets. There will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
Property, Plant and Equipment
Property, plant and equipment (including equipment under capital leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method over the following estimated useful lives of the assets:
|
| |
| Years |
Buildings and improvements | 15 to 40 |
Furniture and fixtures | 5 to 10 |
Machinery and equipment | 3 to 15 |
Automobiles | 5 to 70
|
Property, plant and equipment was comprised of the following at December 31, 2016 and 2017 (in thousands):
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Land | $ | 73,744 |
| | $ | 74,981 |
|
| Buildings and improvements | 195,214 |
| | 211,934 |
|
| Furniture, equipment and automobiles | 76,664 |
| | 76,155 |
|
| Property, plant and equipment, at cost | 345,622 |
| | 363,070 |
|
| Less: accumulated depreciation | (110,509 | ) | | (115,776 | ) |
| Property, plant and equipment, net | $ | 235,113 |
| | $ | 247,294 |
|
Depreciation expense was approximately $10.4 million, $11.5 million and $12.6 million for the years ended December 31, 2015, 2016 and 2017, respectively. During 2017, we acquired real estate for approximately $1.3 million for funeral home expansion projects. In addition, we acquired approximately $12.2 million of property, plant and equipment in connection with the seven funeral home businesses we acquired during 2017, as further discussed in Note 3 to the Consolidated Financial Statements included herein.
During 2016, we acquired real estate for approximately $2.7 million for funeral home expansion projects and we purchased land and buildings at four funeral homes that were previously leased for approximately $6.3 million. In addition, we acquired approximately $16.0 million of property, plant and equipment in connection with the six funeral home businesses we acquired during 2016.
Long-lived assets, such as property, plant and equipment subject to depreciation and amortization, 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 the Property, Plant and Equipment topic of the Accounting Standards Codification (“ASC”) 360. 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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. For the years ended December 31, 2015, 2016 and 2017, no impairments were identified on our long-lived assets.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.
During 2017,When we acquired seven funeral home businesses. We acquired one funeral home business in Longmont, Coloradoacquire a cemetery, we utilize an internal and one funeral home business in Loveland, Colorado in November 2017 and five funeral home businesses on Long Island, New York in December 2017.
During 2016, we acquired six funeral home businesses. We acquired two funeral home businesses in Houston, Texas in May 2016, one funeral home business in Madera, California in September 2016, one funeral home business in Brookfield, Wisconsin in November 2016 and two funeral home businesses in Burlington, North Carolina and Graham, North Carolina in November 2016.
See Note 3external approach to the Consolidated Financial Statements herein for further information concerning these acquisitions.
Goodwill
The excess of the purchase price overdetermine the fair value of the cemetery property. From an external perspective, we obtain an accredited appraisal to provide reasonable assurance for property existence, property availability (unrestricted) for development, property lines, available spaces to sell, identifiable obstacles or easements and general valuation inclusive of known variables in that market. From an internal perspective, we conduct a
detailed analysis of the acquired cemetery property using other cemeteries in our portfolio as a benchmark. This provides the added benefit of relevant data that is not available to third party appraisers. Through this thorough internal process, the Company is able to identify viable costs of property based on historical experience, particular markets and demographics, reasonable margins, practical retail prices and park infrastructure and condition.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 for additional information related to business combinations.
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 funeral home businesses acquiredthe screen is recorded as goodwill.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 has primarily been recordedand 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 the acquisition of funeral home businesses. Effective January 1, 2017,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 adopteddo 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 Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”), Intangibles (Topic 350): GoodwillStatements and Other. 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 simplifies subsequentestablishes 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;
• Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and eliminates Step 2inputs 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 reducebe 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate.
The following quantitative and qualitative information is provided about financial instruments to which we are a party at December 31, 2020 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.
Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as of December 31, 2020 are presented in Part II, Item 8, Financial Statements and Supplementary Data, Note 7. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.45% change in the value of the fixed income securities.
We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of December 31, 2020, we had outstanding borrowings under the Credit Facility of $47.2 million. Any further borrowings or voluntary prepayments against the Credit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under our Credit Facility at either the prime rate or the LIBOR rate plus a margin. At December 31, 2020, the prime rate margin was equivalent to 1.50% and the LIBOR rate margin was 2.50%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of $0.5 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and complexitypotential benefits of evaluating goodwill for impairment. An entity no longer will determine goodwill impairment by calculatinginterest rate hedging arrangements.
Our Convertible Notes bear interest at the impliedfixed annual rate of 2.75%. The Convertible Notes do not contain a call feature. At December 31, 2020, the carrying value of the Convertible Notes on our Consolidated Balance Sheet was $2.5 million and the fair value of goodwillthe Convertible Notes was $3.7 million based on the last traded or broker quoted price, as reported by assigningthe Financial Industry Regulatory Authority, Inc. (“FINRA).” Increases in market interest rates may cause the value of the Convertible Notes to decrease, but such changes will not affect our interest costs.
Our Senior Notes bear interest at the fixed annual rate of 6.625%. 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 governing the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption. At December 31, 2020, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $396.0 million and the fair value of the Senior Notes was $427.9 million based on the last traded or broker quoted price as reported by FINRA. Increases in market interest rates may cause the value of the Senior Notes to decrease, but such changes will not affect our interest costs.
The remainder of our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease, but such changes will not affect our interest costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CARRIAGE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Carriage Services, Inc.:
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Carriage Services Inc., a Delaware corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 2, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill and Tradename quantitative impairment assessment
As described further in Note 1 to the financial statements, the Company is required to evaluate goodwill and intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined asor the amount by which the carrying value of the reporting unit exceeds itsintangible asset may be greater than fair value, up to the total amount of goodwill.
Goodwill has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years.
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. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired. 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.value. The projected future cash flows include assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows discounted at a weighted average cost of capital for the Company based on market participant assumptions. 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.
For our 2017 annual impairment test, we performed a qualitative assessment, using information as of August 31, 2017. Under current guidance, we are permitted to first assessassesses qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit or the tradenames is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. WeThe Company determined that there were no factors that would indicateas a result of the needeconomic conditions caused by the response to performCOVID-19, a quantitative goodwill impairment test and concludedassessment was necessary for each of the Company’s reporting units as well as the Company’s tradenames. As a result of the analysis, the Company determined that it is more likely than not thatthe Company’s Eastern Region Reporting Unit exceeded the fair value, as well as certain of the Company’s tradenames were impaired, and an impairment charge was recorded. We identified the Goodwill and Tradenames quantitative impairment assessment as a critical audit matter.
The principal consideration for our reporting units is greater than their carrying value and thus there was no impairment to goodwill.
For our 2016 annual impairment test, we performed a quantitative goodwill impairment test and concludeddetermination that the fair valueGoodwill and Tradenames quantitative impairment assessment is a critical audit matter is that the assessment includes a high degree of ourestimation uncertainty due to significant management judgments in regards to assumptions used within the assessment, including the long-term growth rate, royalty rate, discount rate and forecasted reporting units was greater than their carrying value and thus there was no impairmentunit cash flow, for which management also utilized an independent valuations specialist (referred to goodwill.
as
“management’s specialists”). In turn, auditing management’s assumptions involved significant auditor judgment and subjectivity.
Our audit procedures related to the Goodwill and Tradenames quantitative impairment assessment included the following, among others.
• We tested the design and operating effectiveness of controls relating to the Company’s quantitative impairment analysis processes, including controls related to the forecasted reporting unit cash flow and management’s review of the key assumptions which were prepared by managements specialists.
• We evaluated the level of knowledge, skill, and ability of management’s specialists and their relationship to the Company.
• We compared the Company’s reporting unit cash flows used in the forecast model to historical actual results.
• With the assistance of internal valuation specialists, we performed audit procedures over the data, methods and assumptions utilized in performing the quantitative impairment assessment, which included reviewing supporting documents and assessing reasonableness by comparing to historical trends and industry expectations. Certain key inputs/assumptions tested by us included the following:
◦Long-term growth rate
◦Discount rates
◦Royalty rates
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2014.
Dallas, Texas
March 2, 2021
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Carriage Services, Inc.:
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Carriage Services, Inc., (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated March 2, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 2, 2021
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data) | | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 716 | | | $ | 889 | |
| Accounts receivable, net | 21,478 | | | 25,103 | |
| Inventories | 6,989 | | | 7,259 | |
| Prepaid and other current assets | 10,667 | | | 2,076 | |
| Total current assets | 39,850 | | | 35,327 | |
| Preneed cemetery trust investments | 72,382 | | | 86,604 | |
| Preneed funeral trust investments | 96,335 | | | 101,235 | |
| Preneed cemetery receivables, net | 20,173 | | | 21,081 | |
| Receivables from preneed trusts, net | 18,024 | | | 16,844 | |
| Property, plant and equipment, net | 279,200 | | | 269,051 | |
| Cemetery property, net | 87,032 | | | 101,134 | |
| Goodwill | 398,292 | | | 392,978 | |
| Intangible and other non-current assets, net | 32,116 | | | 29,542 | |
| Operating lease right-of-use assets | 22,304 | | | 21,201 | |
| Cemetery perpetual care trust investments | 64,047 | | | 70,828 | |
| Total assets | $ | 1,129,755 | | | $ | 1,145,825 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| | | |
| | | |
| | | |
| Current portion of debt and lease obligations | $ | 3,150 | | | $ | 3,432 | |
| Accounts payable | 8,413 | | | 11,259 | |
| Accrued and other liabilities | 24,026 | | | 31,138 | |
| Convertible subordinated notes due 2021 | 0 | | | 2,538 | |
| Total current liabilities | 35,589 | | | 48,367 | |
| Acquisition debt, net of current portion | 5,658 | | | 4,482 | |
| Credit facility | 82,182 | | | 46,064 | |
| Convertible subordinated notes due 2021 | 5,971 | | | 0 | |
| Senior notes due 2026 | 395,447 | | | 395,968 | |
| Obligations under finance leases, net of current portion | 5,854 | | | 5,531 | |
| Obligations under operating leases, net of current portion | 21,533 | | | 20,302 | |
| Deferred preneed cemetery revenue | 46,569 | | | 47,846 | |
| Deferred preneed funeral revenue | 29,145 | | | 27,992 | |
| Deferred tax liability | 41,368 | | | 46,477 | |
| Other long-term liabilities | 1,737 | | | 4,748 | |
| Deferred preneed cemetery receipts held in trust | 72,382 | | | 86,604 | |
| Deferred preneed funeral receipts held in trust | 96,335 | | | 101,235 | |
| Care trusts’ corpus | 63,416 | | | 69,707 | |
| Total liabilities | 903,186 | | | 905,323 | |
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity: | | | |
| Common stock, $0.01 par value; 80,000,000 shares authorized and 25,880,362 and 26,020,494 shares issued, respectively and 17,855,023 and 17,995,155 shares outstanding, respectively | 259 | | | 260 | |
| Additional paid-in capital | 242,147 | | | 239,989 | |
| Retained earnings | 86,213 | | | 102,303 | |
| Treasury stock, at cost; 8,025,339 shares at both December 31, 2019 and 2020 | (102,050) | | | (102,050) | |
| Total stockholders’ equity | 226,569 | | | 240,502 | |
| Total liabilities and stockholders’ equity | $ | 1,129,755 | | | $ | 1,145,825 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Revenue: | | | | | |
| Service revenue | $ | 138,604 | | | $ | 142,554 | | | $ | 164,984 | |
| Property and merchandise revenue | 112,253 | | | 114,514 | | | 139,630 | |
| Other revenue | 17,135 | | | 17,039 | | | 24,834 | |
| 267,992 | | | 274,107 | | | 329,448 | |
| Field costs and expenses: | | | | | |
| Cost of service | 72,123 | | | 72,991 | | | 79,634 | |
| Cost of merchandise | 90,008 | | | 89,294 | | | 103,064 | |
| 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 | |
| Other expenses | 1,548 | | | 2,055 | | | 4,808 | |
| 192,045 | | | 194,522 | | | 223,525 | |
| Gross profit | 75,947 | | | 79,585 | | | 105,923 | |
| Corporate costs and expenses: | | | | | |
| General, administrative and other | 30,827 | | | 25,880 | | | 25,827 | |
| Home office depreciation and amortization | 1,813 | | | 1,416 | | | 1,427 | |
| Net loss on divestitures and impairment charges | 1,195 | | | 4,846 | | | 21,442 | |
| Operating income | 42,112 | | | 47,443 | | | 57,227 | |
| | | | | |
| Interest expense | (21,109) | | | (25,522) | | | (32,515) | |
| Accretion of discount on convertible subordinated notes | (2,192) | | | (241) | | | (216) | |
| Net loss on early extinguishment of debt | (502) | | | 0 | | | (6) | |
| Other, net | (43) | | | 736 | | | 152 | |
| Income before income taxes | 18,266 | | | 22,416 | | | 24,642 | |
| Expense for income taxes | (5,754) | | | (7,395) | | | (7,985) | |
| Tax adjustment related to discrete items | (867) | | | (488) | | | (567) | |
| Total expense for income taxes | $ | (6,621) | | | $ | (7,883) | | | $ | (8,552) | |
| Net income | $ | 11,645 | | | $ | 14,533 | | | $ | 16,090 | |
| | | | | |
| Basic earnings per common share | $ | 0.64 | | | $ | 0.81 | | | $ | 0.90 | |
| Diluted earnings per common share | $ | 0.63 | | | $ | 0.80 | | | $ | 0.89 | |
| | | | | |
| Dividends declared per share | $ | 0.3000 | | | $ | 0.3000 | | | $ | 0.3375 | |
| Weighted average number of common and common equivalent shares outstanding: | | | | | |
| Basic | 17,971 | | | 17,877 | | | 17,872 | |
| Diluted | 18,374 | | | 18,005 | | | 18,077 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares
Outstanding | | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury
Stock | | Total |
| Balance – December 31, 2017 | 16,098 | | | $ | 226 | | | $ | 216,158 | | | $ | 57,904 | | | $ | (76,632) | | | $ | 197,656 | |
| Effect of adoption of topic 606 | — | | | — | | | — | | | 2,131 | | | — | | | 2,131 | |
| Balance – January 1, 2018 | 16,098 | | | $ | 226 | | | $ | 216,158 | | | $ | 60,035 | | | $ | (76,632) | | | $ | 199,787 | |
| Net Income – 2018 | — | | | — | | | — | | | 11,645 | | | — | | | 11,645 | |
| Issuance of common stock | 62 | | | 1 | | | 1,199 | | | — | | | — | | | 1,200 | |
| Exercise of stock options | 140 | | | 1 | | | (34) | | | — | | | — | | | (33) | |
| Issuance of restricted common stock | 87 | | | 1 | | | 24 | | | — | | | — | | | 25 | |
| Cancellation and surrender of restricted common stock and stock options | (30) | | | — | | | (398) | | | — | | | — | | | (398) | |
| Stock-based compensation expense | — | | | — | | | 6,531 | | | — | | | — | | | 6,531 | |
| Dividends on common stock | — | | | — | | | (5,514) | | | — | | | — | | | (5,514) | |
| Convertible notes exchange | 2,823 | | | 28 | | | 25,883 | | | — | | | — | | | 25,911 | |
| Treasury stock acquired | (1,102) | | | — | | | — | | | — | | | (17,662) | | | (17,662) | |
| | | | | | | | | | | |
| Balance – December 31, 2018 | 18,078 | | | $ | 257 | | | $ | 243,849 | | | $ | 71,680 | | | $ | (94,294) | | | $ | 221,492 | |
| Net Income – 2019 | — | | | — | | | — | | | 14,533 | | | — | | | 14,533 | |
| Issuance of common stock | 81 | | | 1 | | | 971 | | | — | | | — | | | 972 | |
| Exercise of stock options | 76 | | | 1 | | | 471 | | | — | | | — | | | 472 | |
| Issuance of restricted common stock | 26 | | | — | | | — | | | — | | | — | | | 0 | |
| Cancellation and surrender of restricted common stock and stock options | (21) | | | — | | | (194) | | | — | | | — | | | (194) | |
| Stock-based compensation expense | — | | | — | | | 2,153 | | | — | | | — | | | 2,153 | |
| Dividends on common stock | — | | | — | | | (5,398) | | | — | | | — | | | (5,398) | |
| | | | | | | | | | | |
| Treasury stock acquired | (400) | | | — | | | — | | | — | | | (7,756) | | | (7,756) | |
| Other | 15 | | | — | | | 295 | | | — | | | — | | | 295 | |
| Balance – December 31, 2019 | 17,855 | | | $ | 259 | | | $ | 242,147 | | | $ | 86,213 | | | $ | (102,050) | | | $ | 226,569 | |
| Net Income – 2020 | — | | | — | | | — | | | 16,090 | | | — | | | 16,090 | |
| Issuance of common stock from employee stock purchase plan | 72 | | | 1 | | | 1,201 | | | — | | | — | | | 1,202 | |
| Issuance of common stock to directors | 31 | | | — | | | 653 | | | — | | | — | | | 653 | |
| Exercise of stock options | 20 | | | — | | | (70) | | | — | | | — | | | (70) | |
| Issuance of restricted common stock | 10 | | | — | | | — | | | — | | | — | | | 0 | |
| Cancellation and surrender of restricted common stock | (11) | | | — | | | (250) | | | — | | | — | | | (250) | |
| Stock-based compensation expense | — | | | — | | | 2,717 | | | — | | | — | | | 2,717 | |
| Dividends on common stock | — | | | — | | | (6,048) | | | — | | | — | | | (6,048) | |
| Convertible notes repurchase | — | | | — | | | (828) | | | — | | | — | | | (828) | |
| | | | | | | | | | | |
| Other | 18 | | | — | | | 467 | | | — | | | — | | | 467 | |
| Balance – December 31, 2020 | 17,995 | | | $ | 260 | | | $ | 239,989 | | | $ | 102,303 | | | $ | (102,050) | | | $ | 240,502 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 11,645 | | | $ | 14,533 | | | $ | 16,090 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 17,430 | | | 17,771 | | | 19,389 | |
| Provision for bad debt and credit losses | 1,841 | | | 1,618 | | | 2,318 | |
| Stock-based compensation expense | 6,583 | | | 2,153 | | | 3,370 | |
| Deferred income tax expense | 3,823 | | | 10,117 | | | 4,597 | |
| Amortization of deferred financing costs | 532 | | | 392 | | | 782 | |
| Amortization of capitalized commissions and non-compete agreements | 1,219 | | | 1,231 | | | 1,299 | |
| Accretion of discount on convertible subordinated notes | 2,192 | | | 241 | | | 216 | |
| Accretion of debt discount, net of debt premium on senior notes | 272 | | | 492 | | | 307 | |
| Net loss on extinguishment of debt | 502 | | | 0 | | | 6 | |
| Net loss on divestitures and impairment charges | 1,195 | | | 4,846 | | | 21,442 | |
| Net loss on sale of other assets | 876 | | | 213 | | | 251 | |
| Gain on insurance reimbursements | 0 | | | (879) | | | (97) | |
| Other | 0 | | | 121 | | | 19 | |
| Changes in operating assets and liabilities that provided (required) cash: | | | | | |
| Accounts and preneed receivables | (5,061) | | | (5,801) | | | (4,279) | |
| Inventories, prepaid and other current assets | (159) | | | (2,762) | | | 3,516 | |
| Intangible and other non-current assets | (1,010) | | | (924) | | | (1,015) | |
| Preneed funeral and cemetery trust investments | 488 | | | (6,500) | | | (5,043) | |
| Accounts payable | 2,044 | | | (580) | | | 2,702 | |
| Accrued and other liabilities | 3,990 | | | 1,271 | | | 10,784 | |
| Deferred preneed funeral and cemetery revenue | 6,546 | | | 168 | | | 528 | |
| Deferred preneed funeral and cemetery receipts held in trust | (5,954) | | | 5,495 | | | 5,733 | |
| Net cash provided by operating activities | 48,994 | | | 43,216 | | | 82,915 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Acquisitions | (37,970) | | | (140,907) | | | (28,011) | |
| Deposit on pending acquisition | 0 | | | (5,000) | | | 0 | |
| Proceeds from insurance reimbursements | 0 | | | 1,433 | | | 248 | |
| | | | | |
| Proceeds from divestitures and sale of other assets | 0 | | | 967 | | | 8,541 | |
| Capital expenditures | (13,526) | | | (15,379) | | | (15,198) | |
| Net cash used in investing activities | (51,496) | | | (158,886) | | | (34,420) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Payments against the term loan | (127,500) | | | 0 | | | 0 | |
| Borrowings from the credit facility | 124,500 | | | 174,961 | | | 109,500 | |
| Payments against the credit facility | (189,400) | | | (118,261) | | | (146,100) | |
| | | | | |
| Payment of debt issuance costs related to the credit facility | (1,751) | | | (891) | | | 0 | |
| Repurchase of the convertible subordinated notes due 2021 | (98,266) | | | (27) | | | (4,563) | |
| Payment of transaction costs related to the repurchase of the convertible subordinated notes due 2021 | (885) | | | 0 | | | (12) | |
| Proceeds from the issuance of the senior notes due 2026 | 320,125 | | | 76,688 | | | 0 | |
| Payment of debt issuance costs related to the senior notes due 2026 | (1,367) | | | (980) | | | (66) | |
| Payments on acquisition debt and obligations under finance leases | (1,940) | | | (2,287) | | | (1,745) | |
| Payments on contingent consideration recorded at acquisition date | (138) | | | (162) | | | (169) | |
| Proceeds from the exercise of stock options and employee stock purchase plan contributions | 1,246 | | | 1,445 | | | 1,229 | |
| Taxes paid on restricted stock vestings and exercise of stock options | (651) | | | (194) | | | (348) | |
| Dividends paid on common stock | (5,513) | | | (5,398) | | | (6,048) | |
| Purchase of treasury stock | (16,266) | | | (9,152) | | | 0 | |
| | | | | |
| | | | | |
| Net cash provided by (used in) financing activities | 2,194 | | | 115,742 | | | (48,322) | |
| | | | | |
| Net increase (decrease) in cash and cash equivalents | (308) | | | 72 | | | 173 | |
| Cash and cash equivalents at beginning of year | 952 | | | 644 | | | 716 | |
| Cash and cash equivalents at end of year | $ | 644 | | | $ | 716 | | | $ | 889 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In addition to our annual review, 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. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results.
No impairments were recorded to our goodwill during the years ended December 31, 2015, 2016 and 2017. No such events or changes occurred between the testing date and year end to trigger a subsequent impairment review.1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
See Note 4 to the Consolidated Financial Statements herein for additional information related to our 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 Sheets.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. 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 unless certain indicators or events suggest otherwise 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 the Company iswe are relieved from paying due to our ownership of the asset. We determine the fair value of the asset by discounting the cash
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
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;
• 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.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate.
The following quantitative and qualitative information is provided about financial instruments to which we are a party at December 31, 2020 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.
Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as of December 31, 2020 are presented in Part II, Item 8, Financial Statements and Supplementary Data, Note 7. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.45% change in the value of the fixed income securities.
We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of December 31, 2020, we had outstanding borrowings under the Credit Facility of $47.2 million. Any further borrowings or voluntary prepayments against the Credit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under our Credit Facility at either the prime rate or the LIBOR rate plus a margin. At December 31, 2020, the prime rate margin was equivalent to 1.50% and the LIBOR rate margin was 2.50%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of $0.5 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.
Our Convertible Notes bear interest at the fixed annual rate of 2.75%. The Convertible Notes do not contain a call feature. At December 31, 2020, the carrying value of the Convertible Notes on our Consolidated Balance Sheet was $2.5 million and the fair value of the Convertible Notes was $3.7 million based on the last traded or broker quoted price, as reported by the Financial Industry Regulatory Authority, Inc. (“FINRA).” Increases in market interest rates may cause the value of the Convertible Notes to decrease, but such changes will not affect our interest costs.
Our Senior Notes bear interest at the fixed annual rate of 6.625%. 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 governing the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption. At December 31, 2020, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $396.0 million and the fair value of the Senior Notes was $427.9 million based on the last traded or broker quoted price as reported by FINRA. Increases in market interest rates may cause the value of the Senior Notes to decrease, but such changes will not affect our interest costs.
The remainder of our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease, but such changes will not affect our interest costs.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
CARRIAGE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
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Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Carriage Services, Inc.:
Opinion on the financial statements
We have audited the accompanying consolidated balance sheets of Carriage Services Inc., a Delaware corporation and subsidiaries (the “Company”) as of December 31, 2020 and 2019, the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the three years in the period ended December 31, 2020, and the related notes and financial statement schedule included under Item 15(a) (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the Company’s internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”), and our report dated March 2, 2021 expressed an unqualified opinion.
Basis for opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.
Critical audit matter
The critical audit matter communicated below is a matter arising from the current period audit of the financial statements that was communicated or required to be communicated to the audit committee and that: (1) relates to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matter below, providing a separate opinion on the critical audit matter or on the accounts or disclosures to which it relates.
Goodwill and Tradename quantitative impairment assessment
As described further in Note 1 to the financial statements, the Company is required to evaluate goodwill and intangible assets for impairment annually or whenever events or changes in circumstances indicate that the carrying value of a reporting unit or the intangible asset may be greater than fair value. The Company first assesses qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit or the tradenames is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. The Company determined that as a result of the economic conditions caused by the response to COVID-19, a quantitative impairment assessment was necessary for each of the Company’s reporting units as well as the Company’s tradenames. As a result of the analysis, the Company determined that the Company’s Eastern Region Reporting Unit exceeded the fair value, as well as certain of the Company’s tradenames were impaired, and an impairment charge was recorded. We identified the Goodwill and Tradenames quantitative impairment assessment as a critical audit matter.
The principal consideration for our determination that the Goodwill and Tradenames quantitative impairment assessment is a critical audit matter is that the assessment includes a high degree of estimation uncertainty due to significant management judgments in regards to assumptions used within the assessment, including the long-term growth rate, royalty rate, discount rate and forecasted reporting unit cash flow, for which management also utilized an independent valuations specialist (referred to as
“management’s specialists”). In turn, auditing management’s assumptions involved significant auditor judgment and subjectivity.
Our audit procedures related to the Goodwill and Tradenames quantitative impairment assessment included the following, among others.
• We tested the design and operating effectiveness of controls relating to the Company’s quantitative impairment analysis processes, including controls related to the forecasted reporting unit cash flow and management’s review of the key assumptions which were prepared by managements specialists.
• We evaluated the level of knowledge, skill, and ability of management’s specialists and their relationship to the Company.
• We compared the Company’s reporting unit cash flows used in the forecast model to historical actual results.
• With the assistance of internal valuation specialists, we performed audit procedures over the data, methods and assumptions utilized in performing the quantitative impairment assessment, which included reviewing supporting documents and assessing reasonableness by comparing to historical trends and industry expectations. Certain key inputs/assumptions tested by us included the following:
◦Long-term growth rate
◦Discount rates
◦Royalty rates
/s/ GRANT THORNTON LLP
We have served as the Company's auditor since 2014.
Dallas, Texas
March 2, 2021
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Carriage Services, Inc.:
Opinion on internal control over financial reporting
We have audited the internal control over financial reporting of Carriage Services, Inc., (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2020, based on criteria established in the 2013 Internal Control—Integrated Framework issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) (“PCAOB”), the consolidated financial statements of the Company as of and for the year ended December 31, 2020, and our report dated March 2, 2021 expressed an unqualified opinion on those financial statements.
Basis for opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
Definition and limitations of internal control over financial reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ GRANT THORNTON LLP
Dallas, Texas
March 2, 2021
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data) | | | | | | | | | | | |
| | December 31, |
| | 2019 | | 2020 |
| ASSETS | | | |
| Current assets: | | | |
| Cash and cash equivalents | $ | 716 | | | $ | 889 | |
| Accounts receivable, net | 21,478 | | | 25,103 | |
| Inventories | 6,989 | | | 7,259 | |
| Prepaid and other current assets | 10,667 | | | 2,076 | |
| Total current assets | 39,850 | | | 35,327 | |
| Preneed cemetery trust investments | 72,382 | | | 86,604 | |
| Preneed funeral trust investments | 96,335 | | | 101,235 | |
| Preneed cemetery receivables, net | 20,173 | | | 21,081 | |
| Receivables from preneed trusts, net | 18,024 | | | 16,844 | |
| Property, plant and equipment, net | 279,200 | | | 269,051 | |
| Cemetery property, net | 87,032 | | | 101,134 | |
| Goodwill | 398,292 | | | 392,978 | |
| Intangible and other non-current assets, net | 32,116 | | | 29,542 | |
| Operating lease right-of-use assets | 22,304 | | | 21,201 | |
| Cemetery perpetual care trust investments | 64,047 | | | 70,828 | |
| Total assets | $ | 1,129,755 | | | $ | 1,145,825 | |
| LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
| Current liabilities: | | | |
| | | |
| | | |
| | | |
| Current portion of debt and lease obligations | $ | 3,150 | | | $ | 3,432 | |
| Accounts payable | 8,413 | | | 11,259 | |
| Accrued and other liabilities | 24,026 | | | 31,138 | |
| Convertible subordinated notes due 2021 | 0 | | | 2,538 | |
| Total current liabilities | 35,589 | | | 48,367 | |
| Acquisition debt, net of current portion | 5,658 | | | 4,482 | |
| Credit facility | 82,182 | | | 46,064 | |
| Convertible subordinated notes due 2021 | 5,971 | | | 0 | |
| Senior notes due 2026 | 395,447 | | | 395,968 | |
| Obligations under finance leases, net of current portion | 5,854 | | | 5,531 | |
| Obligations under operating leases, net of current portion | 21,533 | | | 20,302 | |
| Deferred preneed cemetery revenue | 46,569 | | | 47,846 | |
| Deferred preneed funeral revenue | 29,145 | | | 27,992 | |
| Deferred tax liability | 41,368 | | | 46,477 | |
| Other long-term liabilities | 1,737 | | | 4,748 | |
| Deferred preneed cemetery receipts held in trust | 72,382 | | | 86,604 | |
| Deferred preneed funeral receipts held in trust | 96,335 | | | 101,235 | |
| Care trusts’ corpus | 63,416 | | | 69,707 | |
| Total liabilities | 903,186 | | | 905,323 | |
| Commitments and contingencies | 0 | | 0 |
| Stockholders’ equity: | | | |
| Common stock, $0.01 par value; 80,000,000 shares authorized and 25,880,362 and 26,020,494 shares issued, respectively and 17,855,023 and 17,995,155 shares outstanding, respectively | 259 | | | 260 | |
| Additional paid-in capital | 242,147 | | | 239,989 | |
| Retained earnings | 86,213 | | | 102,303 | |
| Treasury stock, at cost; 8,025,339 shares at both December 31, 2019 and 2020 | (102,050) | | | (102,050) | |
| Total stockholders’ equity | 226,569 | | | 240,502 | |
| Total liabilities and stockholders’ equity | $ | 1,129,755 | | | $ | 1,145,825 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Revenue: | | | | | |
| Service revenue | $ | 138,604 | | | $ | 142,554 | | | $ | 164,984 | |
| Property and merchandise revenue | 112,253 | | | 114,514 | | | 139,630 | |
| Other revenue | 17,135 | | | 17,039 | | | 24,834 | |
| 267,992 | | | 274,107 | | | 329,448 | |
| Field costs and expenses: | | | | | |
| Cost of service | 72,123 | | | 72,991 | | | 79,634 | |
| Cost of merchandise | 90,008 | | | 89,294 | | | 103,064 | |
| 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 | |
| Other expenses | 1,548 | | | 2,055 | | | 4,808 | |
| 192,045 | | | 194,522 | | | 223,525 | |
| Gross profit | 75,947 | | | 79,585 | | | 105,923 | |
| Corporate costs and expenses: | | | | | |
| General, administrative and other | 30,827 | | | 25,880 | | | 25,827 | |
| Home office depreciation and amortization | 1,813 | | | 1,416 | | | 1,427 | |
| Net loss on divestitures and impairment charges | 1,195 | | | 4,846 | | | 21,442 | |
| Operating income | 42,112 | | | 47,443 | | | 57,227 | |
| | | | | |
| Interest expense | (21,109) | | | (25,522) | | | (32,515) | |
| Accretion of discount on convertible subordinated notes | (2,192) | | | (241) | | | (216) | |
| Net loss on early extinguishment of debt | (502) | | | 0 | | | (6) | |
| Other, net | (43) | | | 736 | | | 152 | |
| Income before income taxes | 18,266 | | | 22,416 | | | 24,642 | |
| Expense for income taxes | (5,754) | | | (7,395) | | | (7,985) | |
| Tax adjustment related to discrete items | (867) | | | (488) | | | (567) | |
| Total expense for income taxes | $ | (6,621) | | | $ | (7,883) | | | $ | (8,552) | |
| Net income | $ | 11,645 | | | $ | 14,533 | | | $ | 16,090 | |
| | | | | |
| Basic earnings per common share | $ | 0.64 | | | $ | 0.81 | | | $ | 0.90 | |
| Diluted earnings per common share | $ | 0.63 | | | $ | 0.80 | | | $ | 0.89 | |
| | | | | |
| Dividends declared per share | $ | 0.3000 | | | $ | 0.3000 | | | $ | 0.3375 | |
| Weighted average number of common and common equivalent shares outstanding: | | | | | |
| Basic | 17,971 | | | 17,877 | | | 17,872 | |
| Diluted | 18,374 | | | 18,005 | | | 18,077 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Shares
Outstanding | | Common
Stock | | Additional
Paid-in
Capital | | Retained
Earnings | | Treasury
Stock | | Total |
| Balance – December 31, 2017 | 16,098 | | | $ | 226 | | | $ | 216,158 | | | $ | 57,904 | | | $ | (76,632) | | | $ | 197,656 | |
| Effect of adoption of topic 606 | — | | | — | | | — | | | 2,131 | | | — | | | 2,131 | |
| Balance – January 1, 2018 | 16,098 | | | $ | 226 | | | $ | 216,158 | | | $ | 60,035 | | | $ | (76,632) | | | $ | 199,787 | |
| Net Income – 2018 | — | | | — | | | — | | | 11,645 | | | — | | | 11,645 | |
| Issuance of common stock | 62 | | | 1 | | | 1,199 | | | — | | | — | | | 1,200 | |
| Exercise of stock options | 140 | | | 1 | | | (34) | | | — | | | — | | | (33) | |
| Issuance of restricted common stock | 87 | | | 1 | | | 24 | | | — | | | — | | | 25 | |
| Cancellation and surrender of restricted common stock and stock options | (30) | | | — | | | (398) | | | — | | | — | | | (398) | |
| Stock-based compensation expense | — | | | — | | | 6,531 | | | — | | | — | | | 6,531 | |
| Dividends on common stock | — | | | — | | | (5,514) | | | — | | | — | | | (5,514) | |
| Convertible notes exchange | 2,823 | | | 28 | | | 25,883 | | | — | | | — | | | 25,911 | |
| Treasury stock acquired | (1,102) | | | — | | | — | | | — | | | (17,662) | | | (17,662) | |
| | | | | | | | | | | |
| Balance – December 31, 2018 | 18,078 | | | $ | 257 | | | $ | 243,849 | | | $ | 71,680 | | | $ | (94,294) | | | $ | 221,492 | |
| Net Income – 2019 | — | | | — | | | — | | | 14,533 | | | — | | | 14,533 | |
| Issuance of common stock | 81 | | | 1 | | | 971 | | | — | | | — | | | 972 | |
| Exercise of stock options | 76 | | | 1 | | | 471 | | | — | | | — | | | 472 | |
| Issuance of restricted common stock | 26 | | | — | | | — | | | — | | | — | | | 0 | |
| Cancellation and surrender of restricted common stock and stock options | (21) | | | — | | | (194) | | | — | | | — | | | (194) | |
| Stock-based compensation expense | — | | | — | | | 2,153 | | | — | | | — | | | 2,153 | |
| Dividends on common stock | — | | | — | | | (5,398) | | | — | | | — | | | (5,398) | |
| | | | | | | | | | | |
| Treasury stock acquired | (400) | | | — | | | — | | | — | | | (7,756) | | | (7,756) | |
| Other | 15 | | | — | | | 295 | | | — | | | — | | | 295 | |
| Balance – December 31, 2019 | 17,855 | | | $ | 259 | | | $ | 242,147 | | | $ | 86,213 | | | $ | (102,050) | | | $ | 226,569 | |
| Net Income – 2020 | — | | | — | | | — | | | 16,090 | | | — | | | 16,090 | |
| Issuance of common stock from employee stock purchase plan | 72 | | | 1 | | | 1,201 | | | — | | | — | | | 1,202 | |
| Issuance of common stock to directors | 31 | | | — | | | 653 | | | — | | | — | | | 653 | |
| Exercise of stock options | 20 | | | — | | | (70) | | | — | | | — | | | (70) | |
| Issuance of restricted common stock | 10 | | | — | | | — | | | — | | | — | | | 0 | |
| Cancellation and surrender of restricted common stock | (11) | | | — | | | (250) | | | — | | | — | | | (250) | |
| Stock-based compensation expense | — | | | — | | | 2,717 | | | — | | | — | | | 2,717 | |
| Dividends on common stock | — | | | — | | | (6,048) | | | — | | | — | | | (6,048) | |
| Convertible notes repurchase | — | | | — | | | (828) | | | — | | | — | | | (828) | |
| | | | | | | | | | | |
| Other | 18 | | | — | | | 467 | | | — | | | — | | | 467 | |
| Balance – December 31, 2020 | 17,995 | | | $ | 260 | | | $ | 239,989 | | | $ | 102,303 | | | $ | (102,050) | | | $ | 240,502 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Cash flows from operating activities: | | | | | |
| Net income | $ | 11,645 | | | $ | 14,533 | | | $ | 16,090 | |
| Adjustments to reconcile net income to net cash provided by operating activities: | | | | | |
| Depreciation and amortization | 17,430 | | | 17,771 | | | 19,389 | |
| Provision for bad debt and credit losses | 1,841 | | | 1,618 | | | 2,318 | |
| Stock-based compensation expense | 6,583 | | | 2,153 | | | 3,370 | |
| Deferred income tax expense | 3,823 | | | 10,117 | | | 4,597 | |
| Amortization of deferred financing costs | 532 | | | 392 | | | 782 | |
| Amortization of capitalized commissions and non-compete agreements | 1,219 | | | 1,231 | | | 1,299 | |
| Accretion of discount on convertible subordinated notes | 2,192 | | | 241 | | | 216 | |
| Accretion of debt discount, net of debt premium on senior notes | 272 | | | 492 | | | 307 | |
| Net loss on extinguishment of debt | 502 | | | 0 | | | 6 | |
| Net loss on divestitures and impairment charges | 1,195 | | | 4,846 | | | 21,442 | |
| Net loss on sale of other assets | 876 | | | 213 | | | 251 | |
| Gain on insurance reimbursements | 0 | | | (879) | | | (97) | |
| Other | 0 | | | 121 | | | 19 | |
| Changes in operating assets and liabilities that provided (required) cash: | | | | | |
| Accounts and preneed receivables | (5,061) | | | (5,801) | | | (4,279) | |
| Inventories, prepaid and other current assets | (159) | | | (2,762) | | | 3,516 | |
| Intangible and other non-current assets | (1,010) | | | (924) | | | (1,015) | |
| Preneed funeral and cemetery trust investments | 488 | | | (6,500) | | | (5,043) | |
| Accounts payable | 2,044 | | | (580) | | | 2,702 | |
| Accrued and other liabilities | 3,990 | | | 1,271 | | | 10,784 | |
| Deferred preneed funeral and cemetery revenue | 6,546 | | | 168 | | | 528 | |
| Deferred preneed funeral and cemetery receipts held in trust | (5,954) | | | 5,495 | | | 5,733 | |
| Net cash provided by operating activities | 48,994 | | | 43,216 | | | 82,915 | |
| | | | | |
| Cash flows from investing activities: | | | | | |
| Acquisitions | (37,970) | | | (140,907) | | | (28,011) | |
| Deposit on pending acquisition | 0 | | | (5,000) | | | 0 | |
| Proceeds from insurance reimbursements | 0 | | | 1,433 | | | 248 | |
| | | | | |
| Proceeds from divestitures and sale of other assets | 0 | | | 967 | | | 8,541 | |
| Capital expenditures | (13,526) | | | (15,379) | | | (15,198) | |
| Net cash used in investing activities | (51,496) | | | (158,886) | | | (34,420) | |
| | | | | |
| Cash flows from financing activities: | | | | | |
| Payments against the term loan | (127,500) | | | 0 | | | 0 | |
| Borrowings from the credit facility | 124,500 | | | 174,961 | | | 109,500 | |
| Payments against the credit facility | (189,400) | | | (118,261) | | | (146,100) | |
| | | | | |
| Payment of debt issuance costs related to the credit facility | (1,751) | | | (891) | | | 0 | |
| Repurchase of the convertible subordinated notes due 2021 | (98,266) | | | (27) | | | (4,563) | |
| Payment of transaction costs related to the repurchase of the convertible subordinated notes due 2021 | (885) | | | 0 | | | (12) | |
| Proceeds from the issuance of the senior notes due 2026 | 320,125 | | | 76,688 | | | 0 | |
| Payment of debt issuance costs related to the senior notes due 2026 | (1,367) | | | (980) | | | (66) | |
| Payments on acquisition debt and obligations under finance leases | (1,940) | | | (2,287) | | | (1,745) | |
| Payments on contingent consideration recorded at acquisition date | (138) | | | (162) | | | (169) | |
| Proceeds from the exercise of stock options and employee stock purchase plan contributions | 1,246 | | | 1,445 | | | 1,229 | |
| Taxes paid on restricted stock vestings and exercise of stock options | (651) | | | (194) | | | (348) | |
| Dividends paid on common stock | (5,513) | | | (5,398) | | | (6,048) | |
| Purchase of treasury stock | (16,266) | | | (9,152) | | | 0 | |
| | | | | |
| | | | | |
| Net cash provided by (used in) financing activities | 2,194 | | | 115,742 | | | (48,322) | |
| | | | | |
| Net increase (decrease) in cash and cash equivalents | (308) | | | 72 | | | 173 | |
| Cash and cash equivalents at beginning of year | 952 | | | 644 | | | 716 | |
| Cash and cash equivalents at end of year | $ | 644 | | | $ | 716 | | | $ | 889 | |
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of funeral and cemetery services and merchandise in the United States. At December 31, 2020, we operated 178 funeral homes in 26 states and 32 cemeteries in 12 states. Our operations are reported in 2 business segments: Funeral Home Operations, which currently accounts for approximately 75% of our revenue and Cemetery Operations, which currently accounts for approximately 25% of our revenue.
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 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.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation. Impairments and net loss on divestitures, which were previously reported in Other, net, have been reclassed to Net loss on divestitures and impairment charges within operating income on our Consolidated Statements of Operations with no effect on our previously reported net income, Consolidated Balance Sheet and Consolidated Statements of Cash Flows.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets and liabilities, revenue and expenses. On an ongoing basis, we evaluate our significant estimates and judgments, which include those related to the realization of our accounts receivable, valuation of goodwill, intangible assets, deferred tax assets and liabilities and depreciation of property and equipment. 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, as there can be no assurance that our results of operations will be consistent from year to year.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Funeral and Cemetery Receivables
Our funeral receivables are recorded in Accounts receivable, net and primarily consist of amounts due for funeral services already performed.
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. 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.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For our funeral and atneed cemetery receivables, we have a collections policy where statements are sent to the customer at 30 days past due. Past due notification letters are sent at 45 days and continue until payment is received or the contract is placed with a third-party collections agency. For our preneed cemetery receivables, we have a collections policy where past due notification letters are sent to the customer beginning at 15 days past due and periodically thereafter until payment is received or the contract is cancelled.
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 our ongoing credit exposure through an active review of our customers’ receivables balance against contract terms and due dates. Our activities include timely performance of our accounts receivable reconciliations, assessment of our aging of receivables, dispute resolution and payment confirmation. 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. During 2020, we increased our allowance for credit losses on our funeral and cemetery receivables as a result of the economic impact of the COVID-19 pandemic (COVID-19).
See Notes 2 and 6 to the Consolidated Financial Statements herein for additional information related to funeral and cemetery receivables.
Inventory
Inventory consists primarily of caskets, outer burial containers and cemetery monuments and markers and is recorded at the lower of its cost basis or net realizable value. Inventory is relieved using specific identification in fulfillment of performance obligations on our contracts.
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.
On January 3, 2020, we acquired one funeral home and cemetery combination business in Lafayette, California.
During 2019, we acquired, in three separate transactions, two funeral home and cemetery combination businesses, seven funeral home businesses and three ancillary businesses. In October 2019, we acquired the following: (i) 4 funeral home businesses in Buffalo, New York; and (ii) 1 funeral home and cemetery combination business, 3 funeral home businesses and 3 ancillary businesses, which consist of a flower shop, a pet cremation business and an online cremation business in the Rockwall, Texas area. In December 2019, we acquired 1 funeral home and cemetery combination business in Fairfax, Virginia.
The pro forma impact of the acquisitions on prior periods is not presented as the impact is not material to our reported results. The results of the acquired businesses are included in our results of operations from the date of acquisition.
See Note 3 to the Consolidated Financial Statements herein for further information related to acquisitions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 if substantially all of the fair value of the gross assets sold resides in a single asset or group of similar assets, the set is not a business. If the screen is not met, we perform an assessment to determine if the set is a business by evaluating 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 only allocated to the sale if the set is considered to be a business.
During 2020, we sold 8 funeral homes for $8.4 million.During 2019, we divested 3 funeral homes whose building leases expired and sold a funeral home for $0.9 million. In addition, we merged a funeral home with a business in an existing market. During 2018, our management agreement with a Florida municipality expired and as a result, we divested three of our cemeteries. The operating results of these divested funeral homes and cemeteries are reflected on our Consolidated Statements of Operations through the divested date. We continually review our businesses to optimize the sustainable earning power and return on our invested capital.
See Notes 4, 5 and 11 to the Consolidated Financial Statements herein for additional information related to divestitures.
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. Factors that could trigger an interim impairment review include, but are not limited to, significant negative industry or economic trends and significant adverse changes in the business climate, which may be indicated by a decline in our market capitalization or decline in operating results.
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. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired. 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 projected future cash flows include assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows discounted at our weighted average cost of capital based on market participant assumptions. 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.
For our 2019 quantitative assessment, there was no impairment to goodwill as the fair value of our reporting units was greater than the carrying value, however, we recorded a goodwill impairment of $0.7 million during 2019 related to two funeral homes that we divested. We recorded a goodwill impairment of $0.8 million during 2018 related to a funeral home that we divested.
When we divest a portion of a reporting unit that constitutes a business in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we allocate goodwill associated with that business to be included in the gain or loss on divestiture. The goodwill allocated is based on the relative fair values of the business being divested and the portion of the
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
reporting unit that will be retained. Additionally, after each divestiture, we 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 to ensure the fair value of our reporting units is greater than their carrying value. For the year ended December 31, 2020, 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.
See Note 4 to the Consolidated Financial Statements included herein 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. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends.
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 flows that represent a savings in lieu of paying a royalty fee for use of the tradename. 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. To estimate the royalty rates for the individual tradename, we mainly rely on the profit split method, but also consider the comparable third-party license agreements and the return on asset method. A scorecard is used to assess the relative strength of the individual tradename to further adjust the royalty rates selected under the profit-split method for qualitative factors. 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.
For our 20172020 annual impairment test, we performed a qualitative assessment using information as of August 31, 2017. 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. Weand determined that there were no factors that would indicate the need to perform aan additional quantitative impairment test andtest. We concluded that it is more likely thanmore-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.
For our 2016 annual impairment test, we performed a2019 quantitative impairment test as of August 31, 2016 using the relief from royalty method for each location that had a tradename balance at August 31, 2016 and concluded that there was no impairment to our intangible assets.
In addition to our annual review, 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. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. During 2016,assessment, we recorded an impairment tofor tradenames of $145,000 related to a funeral home business held for sale$0.2 million during the year ended December 31, 2019 as the carrying valueamount of certain tradenames exceeded the fair value. No other impairments were recorded to our intangible assets during the yearsyear ended December 31, 2015, 2016 and 2017.2018.
See Note 1211 to the Consolidated Financial Statements included herein for additional information on ourrelated to intangible assets.
DivestedPreneed and Discontinued OperationsPerpetual Care Trust Funds
Effective January 1, 2015,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 adopted the FASB's guidance for reporting discontinued operations, which amended the definition of “discontinued operations” to include only disposals or held-for-sale classifications for components or groups of components of an entity that represent a strategic shift that either has or willdo not have a major effect on an entity's operations orright to access the corpus in the perpetual care trusts.
Our trust fund assets are reflected in our financial results. Examplesstatements as Preneed cemetery trust investments, Preneed funeral trust investments and Cemetery perpetual care trust investments. We have recognized financial interests of a strategic shift that has or will have a major effect on an entity's operationsthird parties in the trust funds in our financial statements as Deferred preneed funeral and financial results include a disposal of a major geographical area, line of business, equity method of investment or other parts of an entity. The new guidance also requires the disclosure of pre-tax income of disposals that do not qualify as discontinued operations.
We did not sell any of our funeral home or cemetery businessesreceipts held in 2015. During 2016, we sold a funeral home business in Tennessee for $1.35 million. During 2017, we sold a funeral home business in Kentucky for $0.6 million. The businesses sold during 2016trust and 2017 do not meet the definition of discontinued operations under the FASB guidance. As such, the operating results of these businesses, as well as the gain or loss on the sale are included within net income on our Consolidated Statements of Operations.
Care trusts’ corpus.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 trusts 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.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We continually review locationsare restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to optimizeperform an analysis to determine whether the sustainable earningenterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and return onthe obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our invested capital. These reviews could entail selling certain non-strategic businesses.position as the primary beneficiary in the majority of our funeral and cemetery trust funds.
See Note 5Notes 7 and 8 to the Consolidated Financial Statements herein for additional information concerning our divested businesses.related to preneed and perpetual care trust funds.
Fair Value Measurements
In August 2018, the FASB amended “Fair Value Measurements” to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in Level 3 measurements. It clarifies that the narrative disclosure of the effect of changes in Level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of the significant unobservable inputs used in Level 3 measurements. We adopted the new standard as of January 1, 2020 and it had no impact on our consolidated results of operations, consolidated financial position, and cash flows.
We measure the available-for-sale 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;
• 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 disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. The fair value disclosures of transfers in and out of Levels 1 and 2 and the gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy are also presented in Notes 6 and 10 to the Consolidated Financial Statements included herein. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
To determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased, the exit price is used as the fair value measurement. For the year ended December 31, 2017, we did not incur significant decreases in the volume or level of activity of any asset or liability. We consider an impairment of debt and equity securities other-than-temporary unless (a) we have the ability and intent to hold an investment and (b) evidence indicating the cost of the investment is recoverable before we are more likely than not required to sell the investment. If an impairment is indicated, then an adjustment is made to reduce the carrying amount to fair value which is recorded as a reduction to either Deferred preneed cemetery receipts held in trust, Deferred preneed funeral receipts held in trust or Care trusts’ corpus on our Consolidated Balance Sheets. For the years ended December 31, 2016, we recorded an impairment charge of $2.3 million for other-than-temporary declines in fair value related to unrealized losses on certain investments. We did not record any impairments during the year ended December 31, 2017.
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing risk management techniques when appropriate and when available for a reasonable price.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
See Notes 6,7 and 10 and 11 to the Consolidated Financial Statements herein for additional required disclosures concerning therelated to fair value measurement of our financial assets and liabilities.
PresentationCapitalized Commissions on Preneed Contracts
We capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of Debt Issuance Costsobtaining a contract with a customer. Our capitalized commissions on preneed contracts are amortized on a straight-line basis over the average maturity period of ten years for our preneed funeral trust contracts and eight years for our preneed cemetery merchandise and services contracts. Amortization expense totaled $0.6 million for each of the years ended December 31, 2018, 2019 and 2020.
EffectiveThe selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheet.
See Note 11 to the Consolidated Financial Statements herein for additional information related to capitalized commissions on preneed contracts.
Property, Plant and Equipment
Property, plant and equipment (including equipment under finance leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under finance leases) is computed based on the straight-line method over the following estimated useful lives of the assets:
| | | | | |
| Years |
| Buildings and improvements | 15 to 40 |
| Furniture and fixtures | 5 to 10 |
| Machinery and equipment | 3 to 15 |
| Automobiles | 5 to 70 |
Property, plant and equipment is comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Land | $ | 84,608 | | | $ | 82,615 | |
| Buildings and improvements | 242,641 | | | 240,567 | |
| Furniture, equipment and automobiles | 88,046 | | | 91,302 | |
| Property, plant and equipment, at cost | 415,295 | | | 414,484 | |
| Less: accumulated depreciation | (136,095) | | | (145,433) | |
| Property, plant and equipment, net | $ | 279,200 | | | $ | 269,051 | |
During 2020, we acquired $1.7 million of property, plant and equipment related to our acquisition that closed on January 1, 2016,3, 2020, described in Note 3 to the Consolidated Financial Statements included herein. In addition, we adopteddivested 8 funeral homes that had a carrying value of property, plant and equipment of $8.0 million, which was included in the FASB’s new guidancegain or loss on simplifying the presentationsale of debt issuance costs. Thedivestitures and recorded in Net loss on divestitures and impairment charges on our Consolidated Statements of Operations, described in Note 5 to the Consolidated Financial Statements included herein.
During 2019, we acquired $21.7 million of property, plant and equipment in connection with the funeral home and cemetery businesses we acquired during 2019. In addition, we ceased to operate three funeral homes whose building leases expired, sold a funeral home and merged a funeral home in an existing market that had a carrying value of property, plant and equipment of $0.6 million.
Our capital expenditures totaled $15.4 million and $15.2 million for the years ended December 31, 2019 and 2020, for property, plant, equipment and cemetery development. We recorded depreciation expense of $13.8 million, $13.8 million and $14.4 million for the years ended December 31, 2018, 2019 and 2020, respectively.
Long-lived assets, such as property, plant and equipment and right-of-use assets (see leases discussion below) 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 entitieslong-lived assets to be held and used are reported at the lower of their carrying amount or 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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
amortization (“EBITDA”) for four consecutive years and if there has been a decline in EBITDA in that have historically presented debt issuance costs as an asset, relatedsame period. Assets to a recognized debt liability, will be requireddisposed of and assets not expected to present those costs as a direct deduction fromprovide 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 related debt liability. This presentation resulted in debt issuance costs being presentedsale, 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 same way debt discounts have historically been addressed. Debt issuanceEastern 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, 0 impairment was identified on our long-lived assets at December 31, 2020.
For the year ended December 31, 2019, 0 impairment was identified on our long-lived assets. For the year ended December 31, 2018, we recorded an impairment of $0.2 million related to the real property of a funeral home that we divested, as the carrying value exceeded fair value.
Cemetery Property
When we acquire a cemetery, we utilize an internal and external approach to determine the fair value of the cemetery property. From an external perspective, we obtain an accredited appraisal to provide reasonable assurance for property existence, property availability (unrestricted) for development, property lines, available spaces to sell, identifiable obstacles or easements and general valuation inclusive of known variables in that market. From an internal perspective, we conduct a detailed analysis of the acquired cemetery property using other cemeteries in our portfolio as a benchmark. This provides the added benefit of relevant data that is not available to third party appraisers. Through this thorough internal process, the Company is able to identify viable costs of property based on historical experience, particular markets and demographics, reasonable margins, practical retail prices and park infrastructure and condition.
Cemetery property was $87.0 million and $101.1 million, net of accumulated amortization of $41.7 million and $46.6 million at December 31, 2019 and December 31, 2020, respectively. When cemetery property is sold, the value of the cemetery property (interment right costs) is expensed as amortization using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery interment rights of $3.6 million, $4.0 million and $2.7$5.0 million for the years ended December 31, 2018, 2019 and 2020, respectively.
Leases
We have been presented asoperating 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 years. We do not have lease agreements with residual value guarantees, sale-leaseback terms, material restrictive covenants or related parties. We do not have any material sublease arrangements.
We determine if an arrangement is a deductionlease at inception based on the facts and circumstances of the agreement. A right-of-use (“ROU”) asset represents our right to use the underlying asset for the lease term and the lease liability represents our obligation to make lease payments arising from the carrying value of the relatedlease. ROU assets and lease liabilities inare recognized on our Consolidated Balance SheetsSheet at the lease commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, while the expense for finance leases is recognized as depreciation expense and interest expense using the accelerated interest method of Decemberrecognition. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense. We have real estate lease agreements which require payments for lease and non-lease components and account for these as a single lease component. Leases with an initial term of 12 months or less, that do not include an option to renew the underlying asset, are not recorded on our Consolidated Balance Sheet and expense is recognized on a straight-line basis over the lease term.
Operating lease ROU assets are included in Operating lease right-of-use assets and operating lease liabilities are included in Current portion of operating lease obligations and Obligations under operating leases, net of current portion on our Consolidated Balance Sheet. Finance lease ROU assets are included in Property, plant and equipment, net and finance lease liabilities are included in Current portion of finance lease obligations and Obligations under finance leases, net of current portion on our Consolidated Balance Sheet.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In connection with the goodwill and intangible impairment tests performed at March 31, 20162020, we also evaluated the operating and 2017, respectively. The amounts relatedfinance leases of our funeral homes in the Eastern Reporting Unit and concluded that there was no impairment to our Credit Facility were $1.3 millionoperating and $1.0 million as of December 31, 2016 and 2017, respectively. The amounts relatedfinance lease assets. Subsequent to our Convertible Notes were $2.3 millionimpairment 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 operating and $1.7 million asfinance leases. See discussion of December 31, 2016our impairment policy for long-lived assets and 2017, respectively.right-of-use assets above.
See Notes 13 and 14Note 15 to the Consolidated Financial Statements included herein for additional information concerningrelated to leases.
Equity Plans and Stock-Based Compensation
We have equity-based employee and director compensation plans under which we have granted stock awards, stock options and performance awards. We also have an employee stock purchase plan (the “ESPP”). We recognize compensation expense in an amount equal to the presentationfair value of debt issuance costs.the stock-based awards expected to vest or to be purchased over the requisite service period. We recognize the effect of forfeitures in compensation cost when they occur and any previously recognized compensation cost for an award is reversed in the period that the award is forfeited.
Fair value is determined on the date of the grant. The fair value of stock awards is determined using the stock price on the grant date. The fair value of stock options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance conditions is determined using a Monte-Carlo simulation pricing model. The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
We recognize all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) as income tax benefit or expense in the income statement. We treat the tax effects of exercised or vested awards as discrete items in the reporting period in which they occur. For the years ended December 31, 2018, 2019 and 2020, the excess tax deficiency related to share-based payments was approximately $0.8 million, $0.4 million and $0.1 million, respectively, recorded within Tax adjustment related to discrete items on our Consolidated Statements of Operations. Excess tax benefits or deficiencies related to share-based payments are included in operating cash flows on the Consolidated Statements of Cash Flows.
See Note 18 to the Consolidated Financial Statements included herein for additional information related to equity plans and stock-based compensation.
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.
Memorial services frequently include performance obligations to direct the service, provide facilities and motor vehicles, catering, flowers, and stationary products. All other performance obligations on these contracts, including arrangement, removal, preparation, embalming, cremation, interment, and delivery of urns and caskets and related memorialization merchandise are fulfilled at the time of need. Personalized marker merchandise and marker installation services sold on atneed contracts are recognized when control is transferred to the customer, generally when the marker is delivered and installed in the cemetery.
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.
Ancillary funeral service revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses in Texas.
The earnings from our preneed trust investments, as well as trust management fees charged by our wholly-owned registered investment advisory firm (“CSV RIA”) are recorded in Other revenue. As of December 31, 2020, CSV RIA provided investment management and advisory services to approximately 80% of our trust assets, for a fee based on the market value of
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet of $8.9 million and $8.2 million at December 31, 2019 and December 31, 2020, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of ten years for preneed funeral contracts.
Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable, net and Preneed cemetery receivables, net on our Consolidated Balance Sheet. Balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance Sheet. The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled was $4.8 million and $7.9 million at December 31, 2019 and December 31, 2020, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of eight years for preneed cemetery contracts.
See Notes 21 to the Consolidated Financial Statements herein for additional information related to revenue.
Income Taxes
We and our subsidiaries file a consolidated U. S. federal income tax return, separate income tax returns in 1615 states in which we operate and combined or unitary income tax returns in 13 states in which we operate.14 states. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. Effective January 1, 2016, we adopted the FASB’s guidance requiring thatWe classify our deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.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 theour Consolidated Balance Sheets.Sheet.
On May 10, 2017,The recently passed Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) has certain provisions that are applicable to the Company as follows:
(i) allowing net operating losses (“NOLs”) arising in 2018, 2019 and 2020 to be carried back five years;
(ii) increasing the taxable income threshold on the interest deduction from 30% to 50% for tax years beginning in 2019 and 2020;
(iii) suspending payment requirements for the 6.2% employer portion of Social Security taxes from the date of enactment through the end of 2020, with half the balance due by the end of 2021, and the other half due by the end of 2022; and
(iv) our ability to receive employee retention credits up to $5,000 for paying wages to employees who are unable to work, while business operations are suspended.
In connection with the CARES Act, we filed amended federal returnsa claim for a refund on June 30, 2020, to carryback the NOLs generated in the tax year ended December 31, 2018. The refund claim from the 2018 tax year was received on August 7, 2020. An additional carryback claim for a refund was filed on November 3, 2020 for the tax years endingyear ended December 31, 2013, 20142019. The refund from this filing has not yet been received. On December 4, 2020, Carriage filed an amended federal return for the tax year ended December 31, 2018, in order to take full advantage of the CARES Act legislative changes. The changes reported in the amended return resulted in additional $2.3 million of loss. The additional losses generated from the amended filing will be administratively carried back and 2015, whichprocessed as part of the Joint Committee review of the 2018 carryback claim.
The majority of the NOLs generated significant refunds. As ain tax years 2018 and 2019 are the result on July 18, 2017, we received notification thatof 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 (“IRS”) selected ourapproval 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, 2013, 20142019 and 2015 for a limited scope examination to verify2020 was $0.7 million and $3.7 million, respectively. There was no reserve recorded at December 31, 2018.
Additional benefits stemming from the refunds due. The examinationsCARES Act are expected to conclude during 2018.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Cuts and Jobs Act (“the Tax Act”). The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including but not limited to bonus depreciation changes that will allow for full expensingdeferral of qualified property placed in service on or after September 27, 2017.
The Tax Act also establishes new tax laws that will affect 2018, including but not limited to (1) a reductionapproximately $3.5 million of the corporate tax rate from a top marginal rate6.2% employer portion of 35% to a flat rate of 21%; (2) a limitation of the tax deductionSocial Security taxes and approximately $0.4 million employer retention credits for interest expense to 30% of adjusted earnings (except for certain small businesses); (3) a limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks; (4) immediate deductions for certain new investments (instead of deductions for depreciation expense over time); (5) limitations of certain executive compensation deductions; and (6) limitations or repeals of many business deductions and credits.
The SEC staff issued Staff Accounting Bulletin (“SAB”) 118, which provides guidance on accounting for the effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements. If a company cannot determine a provision estimate in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Our analysis of the impact of the Tax Act is complete. The Tax Act reduces the corporate tax rate to 21% and as a result, we have recorded a decrease in our net deferred tax liability and a corresponding discrete tax benefit item of $17.2 million. In addition to the rate reduction, approximately $2.9 million of qualifying assets placed in service on or after September 27, 2017 have been fully expensed as of December 31, 2017.
We do not have any unrecognized tax benefits recorded as of December 31, 2017 and we do not anticipate a material change in our unrecognized tax benefits during the next twelve months.
See Note 16 to the Consolidated Financial Statements included herein for additional information concerning our income taxes.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we grant stock, restricted stock, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period.
Fair value is determined on the date of the grant. The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date. The fair value of the ESPP is determined based on the discount element offeredwages paid to employees and the embedded option element, which is determined using an option calculation model.unable to work due to governmental restrictions.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Effective January 1, 2017, we adopted the FASB’s ASU, Compensation: (Topic 718): Stock Compensation. The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The guidance requires that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. Entities are required to record a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the beginning of the annual period of adoption, with a cumulative-effect adjustment to retained earnings. At January 1, 2017, we performed an analysis for unrecognized excess tax benefits and deficiencies and determined that there were no adjustments to retained earnings, as there are no unrecognized excess tax benefits.
The guidance also requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement on a prospective basis. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. For the year ended December 31, 2017, the excess tax deficiency related to share-based payments was approximately $94,000, recorded within Tax adjustment related to certain discrete items on our Consolidated Statements of Operations. In addition, excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows.
The guidance also allows for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.
The guidance also requires that the presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and applied retrospectively. This resulted in $1.6 million, $0.6 million, and $0.5 million of employee taxes paid from withheld shares being presented as financing activities on our Consolidated Statement of Cash Flows for the years ended December 31, 2015, 2016 and 2017, respectively. Prior to January 1, 2017, these amounts were presented as operating activities on our Consolidated Statement of Cash Flows.
We adopted all of the provisions of this amendment in accordance with the transition requirements and it did not have a material effect on our Consolidated Financial Statements.
See Note 17 to the Consolidated Financial Statements included herein for additional information on our stock-based compensation plans.related to income taxes.
Computation of Earnings Per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and our Convertible Notes.Notes (as defined in Note 13).
Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstandingearnings allocated to unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation.
The fully diluted weighted average shares outstanding for the years ended December 31, 2015, 20162018, 2019 and 2017,2020, and the corresponding calculation of fully diluted earnings per share, included approximately 0.3 million, 0.5 million337,000, 10,000 and 0.9 million9,000 shares that would have been issued upon the conversion of our convertible subordinated notesConvertible Notes as a result of the application of the if-converted method prescribed by the FASB ASC 260.
See Note 1920 to the Consolidated Financial Statements included herein forrelated to the computation of per share earnings for the fiscal years ended December 31, 2015, 2016 and 2017.earnings.
Correction of Immaterial Error
During the year ended December 31, 2017,fourth quarter of 2020, we corrected an immaterial error related to 2013. Thethe net unrealized gains and losses associated with our trust investments. We previously recognized the net unrealized gains and losses associated with our trust investments in Accumulated other comprehensive income (“OCI”). In accordance with ASC 810, the fair value of our trust fund assets are accounted for as CFEs. We have determined the fair value of the financial assets of the trust is 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. As such, we have made the adjustment to reflect changes in unrealized gains and losses related to our trust securities in Other, net on our Consolidated Statements of Operations.
The net unrealized gains and losses in our Preneed cemetery trust investments, Preneed funeral trust investments and Cemetery perpetual care trust investments are equally offset by the correction of the deferred tax liability for the differencenet unrealized gains and losses in bookour Deferred preneed funeral and tax basis of certain assets. The error had thecemetery receipts held in trust and Care trusts’ corpus, which results in a net impact of understating the deferred tax liability and overstating net income in 2013. zero.
Management evaluated the effect of the adjustment on previously issued interim and annual consolidated financial statements in accordance with the SEC's SAB No. 99 and SAB 108Consolidated Financial Statements and concluded that it was immaterial to the interim and annual periods. As a result, in accordance with SAB No. 108, we corrected our Consolidated Balance Sheets as of January 1, 2015.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The effect of this adjustment on our Consolidated Balance Sheets as of December 31, 2016 and 2017 is as follows (dollars in thousands):
|
| | | | | | | | |
| | | December 31, 2016 | | December 31, 2017 |
| | | % Change |
| Increase in Deferred tax liability | $ | 2,255 |
| 5.6 | % | | 7.8 | % |
| Increase in Total liabilities | $ | 2,255 |
| 0.3 | % | | 0.3 | % |
| Decrease in Retained earnings | $ | 2,255 |
| 9.8 | % | | 3.7 | % |
| Decrease in Total stockholders' equity | $ | 2,255 |
| 1.3 | % | | 1.1 | % |
This adjustment had no impact on our Consolidated Balance Sheet, Consolidated Statements of Operations orand Consolidated StatementStatements of Cash Flows for any periods presented.
Related Party Transactions
Management evaluated reportable events and transactions that occurred between us and related persons during the yearyears ended December 31, 2017. See Note 15 to the Consolidated Financial Statements included herein for additional information on our related party transactions.2018 and 2019.
Subsequent Events
We have evaluated events and transactions during the period subsequent to December 31, 20172020 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
Revenue Recognition
In May 2014, the FASB issued ASU, Revenue from Contracts with Customers (Topic 606). FASB Accounting Standards Codification (“ASC”) Topic 606 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction priceSee Note 25 to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We will adopt the provisions of this ASUConsolidated Financial Statements included herein for our fiscal year beginning January 1, 2018 using the modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application.
Currently, our sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract priceadditional information related to the interment right. We have analyzed the impact on our contract portfolio by reviewing our revenue streams and our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard to our contracts and we do not expect the new accounting standard to significantly impact our current accounting for the cemetery interment rights. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.
We expect the adoption of this new accounting standard to affect our accounting for the selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts. Currently, these costs are charged to operations using the specific identification method in the period incurred. Under the new accounting standard, we will capitalize and amortize these costs over the average preneed maturity period for our preneed cemetery merchandise and services contracts and preneed funeral trust contracts.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts will continue to be charged to operations using the specific identification method in the period incurred.
subsequent events.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. RECENTLY ISSUED ACCOUNTING STANDARDS
Additionally,Fair Value Measurements
In August 2018, the FASB issued ASU, Fair Value Measurements (“Topic 820”) to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in level 3 measurements. It clarifies that, for investments measured at net asset value, disclosure of liquidation timing is only required if the investee has communicated the timing either to us or publicly. It also clarifies that the narrative disclosure of the effect of changes in level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of the significant unobservable inputs used in level 3 measurements. On January 1, 2020, we believeadopted the amounts due from customers for undelivered performance obligations on preneed contracts represent contract assets, which are required to be netted with Deferred preneed funeral revenuenew standard and Deferred preneed cemetery revenue, instead of Preneed receivables onthe impact was not material our Consolidated Balance Sheets.Financial Statements.
We are adopting this standardFinancial Instruments - Credit Losses
On January 1, 2020, we adopted Topic 326 using the modified retrospective method which recognizesand the cumulative effect of applying the standard at the date of initial application, with no restatement of the comparative periods presented. Based on our assessments, we doimpact was not expect the changematerial to have a material impact on our Consolidated Financial Statements. We have modified our financial systemsSee Notes 6 and 7 to provide accounting under the new guidance.Consolidated Financial Statements herein for additional disclosures required by Topic 326.
Stock-Based CompensationIncome Taxes
In May 2017,December 2019, the FASB issued ASU, Compensation: (Topic 718): Stock Compensation - Scope of Modification Accounting. The amendments provide guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in Income Taxes (“Topic 718. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the award is modified. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. The amendments should be applied prospectively to an award modified on or after the adoption date. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Business Combinations
In January 2017, the FASB issued ASU, Business Combinations (Topic 805): Clarifying the Definition of a Business. This ASU applies to all entities that must determine whether they have acquired or sold a business.740”). The amendments in this ASU clarifysimplify the definitionaccounting for income taxes by removing certain exceptions such as (1) exception to the incremental approach for intraperiod tax allocation when there is a loss from continuing operations and income or a gain from other items (for example, discontinued operations or other comprehensive income) and (2) exception to the general methodology for calculating income taxes in an interim period when a year-to-date loss exceeds the anticipated loss for the year.
In addition, the ASU allows for the following (1) requiring that an entity recognize a franchise tax (or similar tax) that is partially based on income as an income-based tax and account for any incremental amount incurred as a non-income-based tax, (2) requiring that an entity evaluate when a step up in the tax basis of a business with the objective of adding guidance to assist entities with evaluating whether transactionsgoodwill should be considered part of the business combination in which the book goodwill was originally recognized and when it should be considered a separate transaction, (3) requiring that an entity reflect the effect of an enacted change in tax laws or rates in the annual effective tax rate computation in the interim period that includes the enactment date and (4) making minor codification improvements for income taxes related to employee stock ownership plans accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for fiscal years beginning after December 15, 2017, includingusing the interim periods within those periods, with earlier application permitted. Our adoption of this ASU for our fiscal year beginningequity method. On January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Cash Flows
In August 2016, the FASB issued ASU, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This ASU applies to all entities that are required to present a statement of cash flows under Topic 230. The amendments provide guidance on eight specific cash flow issues and includes clarification on how these items should be classified in the statement of cash flows and is designed to help eliminate diversity in practice as to where items are classified in the cash flow statement.
In November 2016, the FASB issued additional guidance on this topic that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Financial Instruments
In January 2016, the FASB issued ASU, Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and apply to all entities that hold financial assets or owe financial liabilities. The amendments in this ASU also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. That impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite-lived intangible assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with earlier application permitted for financial statements that have not been issued. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In June 2016, the FASB issued ASU, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This amendment replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt2020, we early adopted the provisions of this ASU for our fiscal year beginning January 1, 2020using the prospective method and are currently evaluating the impact the adoption of this new accounting standard will have onwas not material to our Consolidated Financial Statements.
LeasesAccounting Pronouncements Not Yet Adopted
Reference Rate Reform
In February 2016,March 2020, the FASB issued ASU, Leases (Topic 842). This ASU addressesReference Rate Reform (“Topic 848”) to provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions.criteria are met. The amendments inapply only to contracts and hedging relationships that reference London InterBank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company did not utilize the optional expedients and exceptions provided by this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities onduring the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning afteryear ended December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.31, 2020.
3. ACQUISITIONS
Our growth strategy depends on the execution of our Strategic Acquisition Model. We assess the strategic positioning of acquisition candidates based on certain criteria, which include volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry. The value of the acquisition candidates is based on the local market competitive dynamic which allows for appropriate and differentiating enterprise valuations and flexibility to customize the transactions.
On November 7, 2017,January 3, 2020, we acquired a1 funeral home and cemetery combination business in Longmont, ColoradoLafayette, California for $2.2$33.0 million in cash, of which $5.0 million was deposited in escrow in 2019 and we acquired a funeral home business$28.0 million was paid at closing in Loveland, Colorado for $2.3 million in cash. On December 5, 2017, we acquired five funeral home businesses on Long Island, New York for $23.0 million in cash.
For the acquisitions, we2020. We acquired substantially all of the assets and assumed certain operating liabilities including obligations associated with a capital lease and with certain financed automobiles. of these businesses.
The pro forma impact of these acquisitionsthis acquisition on prior periods is not presented, as the impact is not materialsignificant to our reported results. The results of the acquired businessesbusiness are included in the Company's resultsreflected on our Consolidated Statements of Operations from the date of acquisition.
Subsequent to our initial purchase price allocation for this acquisition made during the first quarter of 2020, we have adjusted our purchase price allocation based on additional information which became available prior to December 31, 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the breakdown of the purchase price allocation for the businesses described aboveour 2020 acquisition (in thousands): | | | | | | | | | | | | | | | | | |
| Initial Purchase Price Allocation | | Adjustments | | Adjusted Purchase Price Allocation |
| Current assets | $ | 2,662 | | | $ | 108 | | | $ | 2,770 | |
| Trust investments | 9,089 | | | — | | | 9,089 | |
| Property, plant & equipment | 1,720 | | | — | | | 1,720 | |
| Cemetery property | 14,753 | | | 82 | | | 14,835 | |
| Goodwill | 12,916 | | | 500 | | | 13,416 | |
| Intangible and other non-current assets | 2,506 | | | (628) | | | 1,878 | |
| Assumed liabilities | (489) | | | $ | — | | | $ | (489) | |
| Deferred tax liability | (527) | | | (5) | | | (532) | |
| Trust liabilities | (9,089) | | | — | | | (9,089) | |
| Deferred revenue | (541) | | | (57) | | | (598) | |
| Purchase price | $ | 33,000 | | | $ | — | | | $ | 33,000 | |
|
| | | |
| | Purchase Price Allocation |
| Current assets | $ | 180 |
|
| Property, plant & equipment | 12,195 |
|
| Goodwill | 12,469 |
|
| Intangible and other non-current assets | 3,309 |
|
| Assumed liabilities | (63 | ) |
| Obligations under capital leases | (590 | ) |
| Purchase price | $ | 27,500 |
|
The current assets primarily relate to preneed cemetery receivables. The intangible and other non-current assets primarily relate to the fair value of tradenamestradenames. The assumed liabilities primarily relate to the obligations associated with delivered preneed merchandise that were not paid for prior to acquisition. The goodwill recorded for our 2020 acquisition is expected to be deductible for tax purposes. As of December 31, 2020, our accounting for our 2020 acquisition is complete.
On October 9, 2019, we acquired four funeral home businesses in Buffalo, New York for $15.3 million in cash. On October 28, 2020, we acquired one funeral home and agreements not-to-compete.cemetery combination business, three funeral home businesses and three ancillary service businesses, which consist of a flower shop, a pet cremation business and an online cremation business, in the Rockwall, Texas area for $23.6 million in cash.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the outstanding equity interests of one funeral and cemetery combination business in Fairfax, Virginia were acquired for $102.0 million in cash.
The following table summarizes the fair value of the assets acquired for these businessesour 2020 acquisition (in millions)thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition Date | | Type of Business | | Market | | Assets
Acquired
(Excluding
Goodwill) | | Goodwill
Recorded | | Liabilities
and Debt
Assumed |
| January 3, 2020 | | One Funeral Home and Cemetery Combination | | Lafayette, CA | | $ | 30,292 | | | $ | 13,416 | | | $ | (10,708) | |
|
| | | | | | | | | | | | | | | | |
| Acquisition Date | | Type of Business | | Market | | Assets Acquired (Excluding Goodwill) | | Goodwill Recorded | | Liabilities and Debt Assumed |
| November 7, 2017 | | One Funeral Home | | Longmont, CO | | $ | 1.5 |
| | $ | 0.7 |
| | $ | — |
|
| November 7, 2017 | | One Funeral Home | | Loveland, CO | | $ | 1.7 |
| | $ | 0.7 |
| | $ | (0.1 | ) |
| December 5, 2017 | | Five Funeral Homes | | Long Island, NY | | $ | 12.5 |
| | $ | 11.1 |
| | $ | (0.6 | ) |
As of December 31, 2017, our accounting for our 2017 acquisitions is complete. See Note 12We recorded adjustments to the Consolidated Financial Statements included herein for additional information on our intangible and other non-current assets.
During 2016, we acquired six funeral home businesses. We acquired two funeral home businesses in Houston, Texas in May 2016, one funeral home business in Madera, California in September 2016, one funeral home business in Brookfield, Wisconsin in November 2016 and two funeral home businesses in Burlington, North Carolina and Graham, North Carolina in November 2016.
The following table summarizes the breakdown of the purchase price allocation for our 2019 acquisitions during the businesses acquired during 2016 (in thousands):
|
| | | |
| | Purchase Price |
| Cash paid | $ | 23,871 |
|
| Deferred payments | 8,884 |
|
| Purchase price | $ | 32,755 |
|
year ended December 31, 2020. The following table summarizes the breakdown of the purchase price allocation for these businesses and the businesses acquired during 2016subsequent adjustments made based on additional information which became available subsequent to the acquisitions (in thousands):
| | | | | | | | | | | | | | | | | |
| Initial Purchase Price Allocation | | Adjustments | | Adjusted Purchase Price Allocation |
| Current assets | $ | 1,482 | | | $ | 204 | | | $ | 1,686 | |
| Trust investments | 15,891 | | | — | | | 15,891 | |
| Property, plant & equipment | 21,680 | | | — | | | 21,680 | |
| Cemetery property | 11,994 | | | (45) | | | 11,949 | |
| Goodwill | 99,344 | | | 638 | | | 99,982 | |
| Intangible and other non-current assets | 8,269 | | | (1,480) | | | 6,789 | |
| Assumed liabilities | (657) | | | (145) | | | (802) | |
| Trust liabilities | (15,463) | | | — | | | (15,463) | |
| Deferred revenue | (1,633) | | | 992 | | | (641) | |
| Purchase price | $ | 140,907 | | | $ | 164 | | | $ | 141,071 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | |
| | Purchase Price Allocation |
| Current assets | $ | 530 |
|
| Property, plant & equipment | 15,972 |
|
| Goodwill | 11,832 |
|
| Intangible and other non-current assets | 4,588 |
|
| Assumed liabilities | (167 | ) |
| Purchase price | $ | 32,755 |
|
The intangible and other non-current assets relateDuring the year ended December 31, 2020, we paid an additional $164,000 for our acquisition of the cemetery business in Fairfax, Virginia to reimburse the sellers for certain incremental taxes resulting from the 338(h)(10) election under the Internal Revenue Code. We also received $153,000 in cash related to the fair valueclosing of tradenames and agreements not-to-compete, and the assumed liabilities relateall operating bank accounts in place prior to the obligations associated with certain financed automobiles we acquired.acquisition. The goodwill recorded for our 2019 acquisitions is expected to be deductible for tax purposes. As of December 31, 2020, our accounting for our 2019 acquisitions is complete.
The following table summarizes the fair value of the assets acquired for the businesses acquired during 2016our 2019 acquisitions based on our final purchase price allocation (in millions)thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Acquisition Date | | Type of Business | | Market | | Assets
Acquired
(Excluding
Goodwill) | | Goodwill
Recorded | | Liabilities
and Debt
Assumed |
| October 9, 2019 | | Four Funeral Homes | | Buffalo, NY | | $ | 7,942 | | | $ | 7,340 | | | $ | 0 | |
| October 28, 2019 | | One Funeral Home and Cemetery Combination, Three Funeral Homes and Three Ancillary Businesses | | Rockwall, TX | | $ | 15,878 | | | $ | 14,226 | | | $ | (6,479) | |
| December 31, 2019 | | One Funeral Home and Cemetery Combination | | Fairfax, VA | | $ | 34,175 | | | $ | 78,416 | | | $ | (10,427) | |
|
| | | | | | | | | | | | | | | | |
| Acquisition Date | | Type of Business | | Market | | Assets Acquired (Excluding Goodwill) | | Goodwill Recorded | | Liabilities and Debt Assumed |
| May 31, 2016 | | Two Funeral Homes | | Houston, TX | | $ | 7.0 |
| | $ | 3.3 |
| | $ | (0.1 | ) |
| September 20, 2016 | | One Funeral Home | | Madera, CA | | $ | 3.7 |
| | $ | 1.9 |
| | $ | — |
|
| November 8, 2016 | | One Funeral Home | | Brookfield, WI | | $ | 5.7 |
| | $ | 1.2 |
| | $ | (0.1 | ) |
| November 15, 2016 | | Two Funeral Homes | | Burlington/Graham, NC | | $ | 4.7 |
| | $ | 5.4 |
| | $ | — |
|
4. GOODWILL
Many of the former owners and staff of our acquired funeral homes and certain cemeteries have provided high quality service to families for generations. The resulting loyaltygenerations, which often represents a substantial portion of the value of a business. 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 primarily been recorded in connection with the acquisition of funeral home businesses.
Our goodwill has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis. Under current guidance,basis as of August 31st each year. In addition to our annual test, we are permitted to first assess qualitative factors to determine whether it is more-likely-than notthe impairment of goodwill whenever events or changes in circumstances indicate that the faircarrying value of a reporting unit is lessmay be greater than itsfair value. Factors that could trigger an interim impairment review include, but are not limited to, significant negative industry or economic trends and significant adverse changes in the business climate, which may be indicated by a decline in our market capitalization or decline in operating results.
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 recorded in Net loss on divestitures and impairment charges, as the carrying amount as a basis for determining whether it is necessary to performof our funeral homes in the Eastern Region Reporting Unit exceeded the fair value.
a quantitative goodwill impairment test. Our intent is to perform the quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform the qualitative assessment during the remaining two years. For our 20172020 annual impairment test, we performed a qualitative assessment. Weassessment and determined that there werewas no factors that would indicate the needadditional impairment to perform a quantitative goodwill impairment test and concluded that it is more likely than not thatas the fair value of our reporting units iswas greater than theirthe carrying valuevalue.
The following table presents changes in goodwill in the accompanying Consolidated Balance Sheet (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Goodwill at the beginning of year | $ | 303,887 | | | $ | 398,292 | |
| Net increase in goodwill related to acquisitions | 99,344 | | | 14,054 | |
| Decrease in goodwill related to divestitures | (4,197) | | | (5,736) | |
| Decrease in goodwill related to impairments | (742) | | | (13,632) | |
| Goodwill at the end of the year | $ | 398,292 | | | $ | 392,978 | |
During the year ended December 31, 2020, we recognized $14.1 million in goodwill related to our acquisitions; $10.4 million was allocated to our cemetery segment and thus there$3.7 million was noallocated to our funeral home segment.
In addition, we allocated $5.7 million of goodwill to the sale of five funeral homes for a loss recorded in Net loss on divestitures and impairment charges. Goodwill is only allocated to goodwill.the sale if the set is considered to be a business. 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.
During the year ended December 31, 2019, we recognized $99.3 million in goodwill related to our acquisitions; $36.9 million was allocated to our cemetery segment and $62.4 million was allocated to our funeral home segment.
In addition, we allocated $4.2 million of goodwill to the sale of a funeral home for a loss recorded in Net loss on divestitures and impairment charges. We also recorded a goodwill impairment of $0.7 million during 2019 related to two funeral homes that we divested which was recorded as a loss in Net loss on divestitures and impairment charges.
See NoteNotes 1, 3 and 5 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our annual goodwill impairment test.test and a discussion of our acquisitions and divestitures, respectively.
The following table presents changes in goodwill in the accompanying Consolidated Balance Sheets for the years ended December 31, 2016 and 2017 (in thousands):
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Goodwill at the beginning of year | $ | 264,416 |
| | $ | 275,487 |
|
| Increase in goodwill related to acquisitions | 11,832 |
| | 12,469 |
|
| Decrease in goodwill related to divestitures | (761 | ) | | — |
|
| Goodwill at the end of the year | $ | 275,487 |
| | $ | 287,956 |
|
5. DIVESTED AND DISCONTINUED OPERATIONS
We did not sell any of ourDuring 2020, we sold 8 funeral home or cemetery businesses in 2015. homes for $8.4 million.During 2016,2019, we divested 3 funeral homes whose building leases expired and sold a funeral home business in Tennessee for $1.35$0.9 million. During 2017,In addition, we soldmerged a funeral home with a business in Kentucky for $0.6 million. We continually review locations to optimize the sustainable earning poweran existing market. During 2018, our management agreement with a Florida municipality expired and return onas a result, we divested three of our invested capital. These reviews could entail selling certain non-strategic businesses.cemeteries.
The operating results of these divested businesses, as well as the gain or loss on the salefuneral homes and cemeteries are included within net incomereflected on our Consolidated Statements of Operations and are reflectedas shown in the table below (in thousands):
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2019 | | 2020 |
| Revenue | $ | 4,712 | | | $ | 805 | | | $ | 2,643 | |
| | | | | |
| Operating income (loss) | 1,130 | | | (569) | | | 159 | |
Net loss on divestitures(1) | (349) | | | (3,883) | | | (6,749) | |
| Income tax benefit (expense) | (246) | | | 1,288 | | | 2,135 | |
| Net income (loss) from divested operations, after tax | $ | 535 | | | $ | (3,164) | | | $ | (4,455) | |
| | | | | | | | |
| | |
| (1) | Net loss on divestitures is recorded in Net loss on divestitures and impairment charges on our Consolidated Statements of Operations. |
6.RECEIVABLES
Accounts Receivable
Accounts receivable is comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| Funeral | | Cemetery | | Corporate | | Total |
| Trade and financed receivables | $ | 11,448 | | | $ | 12,230 | | | $ | 0 | | | $ | 23,678 | |
| Other receivables | 367 | | | 2,144 | | | 201 | | | 2,712 | |
| Allowance for credit losses | (327) | | | (960) | | | 0 | | | (1,287) | |
| Accounts receivable, net | $ | 11,488 | | | $ | 13,414 | | | $ | 201 | | | $ | 25,103 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| Funeral | | Cemetery | | Corporate | | Total |
| Trade and financed receivables | $ | 10,046 | | | $ | 10,508 | | | $ | 0 | | | $ | 20,554 | |
| Other receivables | 935 | | | 157 | | | 681 | | | 1,773 | |
| Allowance for bad debt | (223) | | | (626) | | | 0 | | | (849) | |
| Accounts receivable, net | $ | 10,758 | | | $ | 10,039 | | | $ | 681 | | | $ | 21,478 | |
Other receivables include supplier rebates, commissions due from third party insurance companies and perpetual care income receivables. We do not provide an allowance for credit losses for these receivables as we have historically not had any collectability issues nor do we expect any in the foreseeable future.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Revenues | $ | — |
| | $ | 744 |
| | $ | 605 |
|
| | | | | | |
| Operating income | — |
| | 314 |
| | 277 |
|
| Net gain (loss) on disposal | — |
| | (29 | ) | | 191 |
|
| Income tax provision | — |
| | (112 | ) | | (187 | ) |
| Net income from divested operations | $ | — |
| | $ | 173 |
| | $ | 281 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2020 | | Provision for Credit Losses | | Allowance Recorded at Acquisition | | Write Offs | | Recoveries | | December 31, 2020 |
| Trade and financed receivables: | | | | | | | | | | | |
| Funeral | $ | (223) | | | $ | (1,142) | | | $ | 0 | | | $ | 2,115 | | | $ | (1,077) | | | $ | (327) | |
| Cemetery | (626) | | | (475) | | | (193) | | | 334 | | | 0 | | | (960) | |
| Total allowance for credit losses on Trade and financed receivables | $ | (849) | | | $ | (1,617) | | | $ | (193) | | | $ | 2,449 | | | $ | (1,077) | | | $ | (1,287) | |
6. PRENEEDAs noted in Note 3, we acquired preneed cemetery receivables in connection with the funeral home and cemetery combination business in Lafayette, California acquired on January 3, 2020. We recorded an allowance for credit losses of $0.4 million on these acquired receivables ($0.2 million current portion shown above in Accounts receivable, net and $0.2 million non-current portion shown below in Preneed cemetery receivables, net as noted in the respective allowance rollforward tables under Allowance Recorded at Acquisition). We accounted for the allowance for credit losses on these purchased financed assets using specific identification as these assets have a unique set of risk characteristics. For these specifically identified receivables, we determined the allowance to be 60% of the face value.
Bad debt expense for accounts receivable totaled $1.1 million for both the years ended December 31, 2018 and 2019.
Preneed Cemetery Receivables
Our preneed cemetery receivables are comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Cemetery interment rights | $ | 31,366 | | | $ | 36,696 | |
| Cemetery merchandise and services | 9,950 | | | 10,526 | |
Cemetery financed receivables
| $ | 41,316 | | | $ | 47,222 | |
The components of our preneed cemetery receivables are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Preneed cemetery receivables | $ | 41,316 | | | $ | 47,222 | |
| Less: unearned finance charges | (4,522) | | | (4,348) | |
| Preneed cemetery receivables, at amortized cost | $ | 36,794 | | | $ | 42,874 | |
| Less: allowance for bad debt and credit losses | (1,916) | | | (2,604) | |
| Less: balances due on undelivered cemetery preneed contracts | (4,823) | | | (7,919) | |
| Less: amounts in accounts receivable | (9,882) | | | (11,270) | |
| Preneed cemetery receivables, net | $ | 20,173 | | | $ | 21,081 | |
The following table summarizes the activity in our allowance for credit losses for Preneed cemetery receivables, net for the year ended December 31, 2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2020 | | Provision for Credit Losses | | Allowance Recorded at Acquisition | | Write Offs | | December 31, 2020 |
Total allowance for credit losses on Preneed cemetery receivables, net | $ | (1,290) | | | $ | (701) | | | $ | (171) | | | $ | 518 | | | $ | (1,644) | |
Bad debt expense for our preneed receivables totaled $0.7 million and $0.5 million for the years ended December 31, 2018 and 2019, respectively.
The amortized cost basis of our preneed cemetery receivables by year of origination as of December 31, 2020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2020 | | 2019 | | 2018 | | 2017 | | 2016 | | Prior | | Total |
| Total preneed cemetery receivables, at amortized cost | $ | 20,056 | | | $ | 10,593 | | | $ | 5,820 | | | $ | 3,387 | | | $ | 1,431 | | | $ | 1,587 | | | $ | 42,874 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The aging of past due preneed cemetery receivables as of December 31, 2020 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60
Past Due | | 61-90
Past Due | | 91-120
Past Due | | >120
Past Due | | Total Past
Due | | Current | | Total Financing
Receivables |
| Recognized revenue | $ | 759 | | | $ | 348 | | | $ | 174 | | | $ | 1,763 | | | $ | 3,044 | | | $ | 32,219 | | | $ | 35,263 | |
| Deferred revenue | 220 | | | 130 | | | 42 | | | 557 | | | 949 | | | 11,010 | | | 11,959 | |
| Total contracts | $ | 979 | | | $ | 478 | | | $ | 216 | | | $ | 2,320 | | | $ | 3,993 | | | $ | 43,229 | | | $ | 47,222 | |
The aging of past due preneed cemetery receivables as of December 31, 2019 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60
Past Due | | 61-90
Past Due | | 91-120
Past Due | | >120
Past Due | | Total Past
Due | | Current | | Total Financing
Receivables |
| Recognized revenue | $ | 745 | | | $ | 392 | | | $ | 148 | | | $ | 1,209 | | | $ | 2,494 | | | $ | 28,382 | | | $ | 30,876 | |
| Deferred revenue | 219 | | | 121 | | | 147 | | | 302 | | | 789 | | | 9,651 | | | 10,440 | |
| Total contracts | $ | 964 | | | $ | 513 | | | $ | 295 | | | $ | 1,511 | | | $ | 3,283 | | | $ | 38,033 | | | $ | 41,316 | |
7. TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are generally permitted to withdraw as the services and merchandise are provided to customers. Preneed funeral and cemetery contracts are secured by payments from customers, less amounts not required by law to be deposited into trust. Preneed cemetery trust investments are reduced by the trustThese earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed cemetery trust investments on our Consolidated Balance Sheets at December 31, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | |
| | December 31, 2016 |
| | December 31, 2017 |
|
| Preneed cemetery trust investments, at market value | $ | 71,834 |
| | $ | 75,992 |
|
| Less: allowance for contract cancellation | (2,138 | ) | | (2,139 | ) |
| Preneed cemetery trust investments, net | $ | 69,696 |
| | $ | 73,853 |
|
Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some instances, a portion of all of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At December 31, 2017, none of our preneed cemetery trust investments were underfunded.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Earnings from our preneed cemetery trust investments are recognized in Other revenue on the Consolidated Statements of Operations,when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included as revenue in the period in which they are earned. Our investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery.
Cemetery perpetual care trust investments represent a portion of the proceeds from the sale of cemetery property interment rights which we are required by various state laws to deposit into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized in Other revenue.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt, common stock and common stock.equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stock,stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the year ended December 31, 2017. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 1110 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.measurement.
The cost and fair market values associated with preneed cemetery trust investments at December 31, 2017 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 3,132 |
| | $ | — |
| | $ | — |
| | $ | 3,132 |
|
| Fixed income securities: | | | | | | | | | |
| Foreign debt | 2 | | 4,834 |
| | 292 |
| | (193 | ) | | 4,933 |
|
| Corporate debt | 2 | | 18,238 |
| | 1,184 |
| | (273 | ) | | 19,149 |
|
| Preferred stock | 2 | | 16,421 |
| | 510 |
| | (588 | ) | | 16,343 |
|
| Mortgage-backed securities | 2 | | 1,018 |
| | 249 |
| | (24 | ) | | 1,243 |
|
| Common stock | 1 | | 26,465 |
| | 5,250 |
| | (2,460 | ) | | 29,255 |
|
| Mutual funds: | | | | | | | | | |
| Fixed Income | 2 | | $ | 1,198 |
| | 50 |
| | (11 | ) | | $ | 1,237 |
|
| Trust securities | | | $ | 71,306 |
| | $ | 7,535 |
| | $ | (3,549 | ) | | $ | 75,292 |
|
| Accrued investment income | | | $ | 700 |
| | | | | | $ | 700 |
|
| Preneed cemetery trust investments | | | | | | | | | $ | 75,992 |
|
| Market value as a percentage of cost | | | | | | | | | 105.6 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
| Due in one year or less | $ | 303 |
|
| Due in one to five years | 2,183 |
|
| Due in five to ten years | 5,376 |
|
| Thereafter | 33,806 |
|
| Total fixed income securities | $ | 41,668 |
|
The cost and market values associated with preneed cemetery trust investments at December 31, 2016 are detailed below (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 10,852 |
| | $ | — |
| | $ | — |
| | $ | 10,852 |
|
| Fixed income securities: | | | | | | | | | |
| Municipal bonds | 2 | | 496 |
| | 18 |
| | (4 | ) | | $ | 510 |
|
| Foreign debt | 2 | | 7,574 |
| | 160 |
| | (656 | ) | | 7,078 |
|
| Corporate debt | 2 | | 20,621 |
| | 1,569 |
| | (1,123 | ) | | 21,067 |
|
| Preferred stock | 2 | | 16,287 |
| | 8 |
| | (947 | ) | | 15,348 |
|
| Mortgage-backed securities | 2 | | 949 |
| | 372 |
| | (4 | ) | | 1,317 |
|
| Common stock | 1 | | 13,250 |
| | 2,191 |
| | (1,838 | ) | | 13,603 |
|
| Mutual funds: | | | | | | | | | |
| Fixed Income | 2 | | 1,223 |
| | 107 |
| | — |
| | 1,330 |
|
| Trust Securities | | | $ | 71,252 |
| | $ | 4,425 |
| | $ | (4,572 | ) | | $ | 71,105 |
|
| Accrued investment income | | | $ | 729 |
| | | | | | $ | 729 |
|
| Preneed cemetery trust investments | | | | | | | | | $ | 71,834 |
|
| Market value as a percentage of cost | | | | | | | | | 99.8 | % |
We determine whether or not the assetsChanges in the preneedfair value of our trust fund assets (Preneed funeral, cemetery and perpetual care trust investments have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position,) are offset by changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basisfair value of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in our trust fund liabilities (Deferred preneed funeral and cemetery receipts held in truston our Consolidated Balance Sheets. For the year ended December 31, 2016, we recorded a $0.9 million impairment for other-than-temporary declines and Care trusts’ corpus) and reflected in the fair value related to unrealized losses on certain investments. We did not record any impairments in the year ended December 31, 2017.Other, net. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to the preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.regulations and the gain or loss is allocated to the contract.
At December 31, 2017,For fixed income securities in an unrealized loss position, we had certain investments withinfirst assess whether we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For fixed income securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If our preneed cemeteryassessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any unrealized loss that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
We rely on our trust investments to provide funding for the various contractual obligations that had tax lots in loss positions for more than one year. Based on our analysesarise upon maturity of these securities, the companies’ businessesunderlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions we determined that these investment losses were temporary in nature.
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the durationmay exist at any given time is not necessarily indicative of unrealized losses as of December 31, 2017 are shown in the following tables (in thousands):our ability to generate profit on our future performance obligations.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| Foreign debt | $ | 151 |
| | $ | (6 | ) | | $ | 1,637 |
| | $ | (187 | ) | | $ | 1,788 |
| | $ | (193 | ) |
| Corporate debt | 3,735 |
| | (72 | ) | | 846 |
| | (201 | ) | | 4,581 |
| | (273 | ) |
| Preferred stock | 48 |
| | — |
| | 8,109 |
| | (588 | ) | | 8,157 |
| | (588 | ) |
| Mortgage-backed securities | 127 |
| | (15 | ) | | 27 |
| | (9 | ) | | 154 |
| | (24 | ) |
| Common stock | 8,249 |
| | (1,512 | ) | | 1,742 |
| | (948 | ) | | 9,991 |
| | (2,460 | ) |
| Mutual funds: | | | | | | | | | | | |
| Fixed Income | 496 |
| | (11 | ) | | — |
| | — |
| | 496 |
| | (11 | ) |
| Total temporary impaired securities | $ | 12,806 |
| | $ | (1,616 | ) | | $ | 12,361 |
| | $ | (1,933 | ) | | $ | 25,167 |
| | $ | (3,549 | ) |
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following tables (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Preneed Cemetery Trust Investments
The components of Preneed cemetery trust investments on our Consolidated Balance Sheet are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Preneed cemetery trust investments, at market value | $ | 74,572 | | | $ | 89,081 | |
| Less: allowance for contract cancellation | (2,190) | | | (2,477) | |
| Preneed cemetery trust investments | $ | 72,382 | | | $ | 86,604 | |
The cost and fair market values associated with preneed cemetery trust investments at December 31, 2020 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 1,859 | | | $ | 0 | | | $ | 0 | | | $ | 1,859 |
| Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
| Foreign debt | 2 | | 15,953 | | | 2,083 | | | (702) | | | 17,334 |
| Corporate debt | 2 | | 14,856 | | | 1,820 | | | (358) | | | 16,318 |
| Preferred stock | 2 | | 11,886 | | | 980 | | | (336) | | | 12,530 |
| Mortgage-backed securities | 2 | | 272 | | | 0 | | | (159) | | | 113 |
| Common stock | 1 | | 30,253 | | | 7,642 | | | (6,601) | | | 31,294 |
| Mutual funds: | | | | | | | | | |
| Fixed Income | 2 | | 7,494 | | | 1,331 | | | (185) | | | 8,640 |
| Trust securities | | | $ | 82,573 | | | $ | 13,856 | | | $ | (8,341) | | | $ | 88,088 |
| Accrued investment income | | | $ | 993 | | | | | | | $ | 993 |
| Preneed cemetery trust investments | | | | | | | | | $ | 89,081 |
| Market value as a percentage of cost | | | | | | | | | 106.7% |
The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands):
| | | | | |
| Due in one year or less | $ | 0 | |
| Due in one to five years | 11,727 | |
| Due in five to ten years | 9,810 | |
| Thereafter | 24,758 | |
| Total fixed income securities | $ | 46,295 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| Municipal bonds | $ | 228 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 228 |
| | $ | (4 | ) |
| Foreign debt | 2,523 |
| | (180 | ) | | 2,868 |
| | (475 | ) | | 5,391 |
| | (655 | ) |
| Corporate debt | 6,939 |
| | (233 | ) | | 2,168 |
| | (890 | ) | | 9,107 |
| | (1,123 | ) |
| Preferred stock | 3,217 |
| | (121 | ) | | 11,635 |
| | (826 | ) | | 14,852 |
| | (947 | ) |
| Mortgage-backed securities | 51 |
| | (5 | ) | | — |
| | — |
| | 51 |
| | (5 | ) |
| Common stock | 2,608 |
| | (202 | ) | | 3,385 |
| | (1,636 | ) | | 5,993 |
| | (1,838 | ) |
| Total temporary impaired securities | $ | 15,566 |
| | $ | (745 | ) | | $ | 20,056 |
| | $ | (3,827 | ) | | $ | 35,622 |
| | $ | (4,572 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 5,729 | | | $ | 0 | | | $ | 0 | | | $ | 5,729 |
| Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
| Foreign debt | 2 | | 5,609 | | | 312 | | | (243) | | | 5,678 |
| Corporate debt | 2 | | 16,916 | | | 1,044 | | | (649) | | | 17,311 |
| Preferred stock | 2 | | 14,206 | | | 904 | | | (164) | | | 14,946 |
| Mortgage-backed securities | 2 | | 517 | | | 0 | | | (114) | | | 403 |
| Common stock | 1 | | 28,569 | | | 2,766 | | | (3,017) | | | 28,318 |
| Mutual funds: | | | | | | | | | |
| Fixed Income | 2 | | 1,463 | | | 72 | | | (85) | | | 1,450 |
| Trust Securities | | | $ | 73,009 | | | $ | 5,098 | | | $ | (4,272) | | | $ | 73,835 |
| Accrued investment income | | | $ | 737 | | | | | | | $ | 737 |
| Preneed cemetery trust investments | | | | | | | | | $ | 74,572 |
| Market value as a percentage of cost | | | | | | | | | 101.1% |
The following table summarized our fixed income securities (excluding mutual funds) within our preneed cemetery trust investments in an unrealized loss position at December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| Foreign debt | $ | 2,517 | | | $ | (57) | | | $ | 371 | | | $ | (645) | | | $ | 2,888 | | | $ | (702) | |
| Corporate debt | 784 | | | (99) | | | 542 | | | (259) | | | 1,326 | | | (358) | |
| Preferred stock | 709 | | | (118) | | | 4,049 | | | (218) | | | 4,758 | | | (336) | |
| Mortgage-backed securities | 0 | | | 0 | | | 112 | | | (159) | | | 112 | | | (159) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total fixed income securities with an unrealized loss | $ | 4,010 | | | $ | (274) | | | $ | 5,074 | | | $ | (1,281) | | | $ | 9,084 | | | $ | (1,555) | |
The following table summarized our fixed income securities within our preneed cemetery trust investments in an unrealized loss position at December 31, 2019, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign debt | $ | 268 | | | $ | (42) | | | $ | 758 | | | $ | (201) | | | $ | 1,026 | | | $ | (243) | |
| Corporate debt | 1,368 | | | (168) | | | 4,520 | | | (481) | | | 5,888 | | | (649) | |
| Preferred stock | 4,135 | | | (164) | | | 0 | | | 0 | | | 4,135 | | | (164) | |
| Mortgage-backed securities | 0 | | | 0 | | | 402 | | | (114) | | | 402 | | | (114) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total fixed income securities with an unrealized loss | $ | 5,771 | | | $ | (374) | | | $ | 5,680 | | | $ | (796) | | | $ | 11,451 | | | $ | (1,170) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the years ended December 31, 2015, 2016 and 2017 wereare as follows (in thousands):
| | | | Year ended December 31, | | Years ended December 31, |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Investment income | $ | 2,562 |
| | $ | 2,250 |
| | $ | 2,250 |
| Investment income | $ | 1,596 | | | $ | 1,743 | | | $ | 2,175 | |
| Realized gains | 2,952 |
| | 2,141 |
| | 2,218 |
| Realized gains | 4,546 | | | 6,353 | | | 8,922 | |
| Realized losses | (3,671 | ) | | (6,559 | ) | | (2,384 | ) | Realized losses | (5,817) | | | (4,677) | | | (5,090) | |
| Unrealized gains (losses), net | | Unrealized gains (losses), net | (6,610) | | | 826 | | | 5,515 | |
| Expenses and taxes | (1,790 | ) | | (1,266 | ) | | (1,308 | ) | Expenses and taxes | (907) | | | (1,313) | | | (1,354) | |
| Decrease (increase) in deferred preneed cemetery receipts held in trust | (53 | ) | | 3,434 |
| | (776 | ) | |
| Net change in deferred preneed cemetery receipts held in trust | | Net change in deferred preneed cemetery receipts held in trust | 7,192 | | | (2,932) | | | (10,168) | |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — | | | $ | — | | | $ | — | |
Purchases and sales of investments in the preneed cemetery trusts for the years ended December 31, 2015, 2016 and 2017 wereare as follows (in thousands):
| | | | Year ended December 31, | | Years ended December 31, |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Purchases | $ | (26,757 | ) | | $ | (25,643 | ) | | $ | (21,966 | ) | Purchases | $ | (27,006) | | | $ | (40,984) | | | $ | (48,824) | |
| Sales | 23,141 |
| | 25,846 |
| | 14,002 |
| Sales | 39,180 | | | 29,635 | | | 41,178 | |
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less retained amounts not required to be deposited into trust.
The components of Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed funeral trust investments on our Consolidated Balance Sheets at December 31, 2016 and 2017 wereSheet are as follows (in thousands):
|
| | | | | | | |
| | December 31, 2016 |
| | December 31, 2017 |
|
| Preneed funeral trust investments, at market value | $ | 91,980 |
| | $ | 93,341 |
|
| Less: allowance for contract cancellation | (2,740 | ) | | (2,659 | ) |
| Preneed funeral trust investments, net | $ | 89,240 |
| | $ | 90,682 |
|
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and in some instances, a portion of all earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At December 31, 2017, none of our preneed funeral trust investments were underfunded.
Earnings from our preneed funeral trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 for the year ended December 31, 2017. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 11 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy. | | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Preneed funeral trust investments, at market value | $ | 99,246 | | | $ | 104,166 | |
| Less: allowance for contract cancellation | (2,911) | | | (2,931) | |
| Preneed funeral trust investments | $ | 96,335 | | | $ | 101,235 | |
The cost and fair market values associated with preneed funeral trust investments at December 31, 20172020 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 18,478 | | | $ | 0 | | | $ | 0 | | | $ | 18,478 |
| Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
| U. S. treasury debt | 1 | | 819 | | | 6 | | | 0 | | | 825 |
| Foreign debt | 2 | | 15,144 | | | 2,018 | | | (634) | | | 16,528 |
| Corporate debt | 2 | | 13,292 | | | 1,638 | | | (310) | | | 14,620 |
| Preferred stock | 2 | | 10,944 | | | 900 | | | (298) | | | 11,546 |
| Mortgage-backed securities | 2 | | 293 | | | 1 | | | (155) | | | 139 |
| Common stock | 1 | | 28,327 | | | 7,364 | | | (6,052) | | | 29,639 |
| Mutual funds: | | | | | | | | | |
| | | | | | | | | |
| Fixed income | 2 | | 6,475 | | | 1,198 | | | (121) | | | 7,552 |
| Other investments | 2 | | 3,928 | | | 0 | | | 0 | | | 3,928 |
| Trust securities | | | $ | 97,700 | | | $ | 13,125 | | | $ | (7,570) | | | $ | 103,255 |
| Accrued investment income | | | $ | 911 | | | | | | | $ | 911 |
| Preneed funeral trust investments | | | | | | | | | $ | 104,166 |
| Market value as a percentage of cost | | | | | | | | | 105.7% |
|
| | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 14,349 |
| | $ | — |
| | $ | — |
| | $ | 14,349 |
|
| Fixed income securities: | | | | | | | | | |
| U.S. treasury debt | 1 | | 1,490 |
| | 10 |
| | (15 | ) | | 1,485 |
|
| Foreign debt | 2 | | 4,870 |
| | 298 |
| | (189 | ) | | 4,979 |
|
| Corporate debt | 2 | | 18,963 |
| | 1,197 |
| | (278 | ) | | 19,882 |
|
| Preferred stock | 2 | | 16,335 |
| | 501 |
| | (585 | ) | | 16,251 |
|
| Mortgage-backed securities | 2 | | 1,187 |
| | 263 |
| | (27 | ) | | 1,423 |
|
| Common stock | 1 | | 26,129 |
| | 5,253 |
| | (2,468 | ) | | 28,914 |
|
| Mutual funds: | | | | | | | | | |
| Fixed income | 2 | | 1,974 |
| | 52 |
| | (48 | ) | | 1,978 |
|
| Other investments | 2 | | 3,341 |
| | — |
| | — |
| | 3,341 |
|
| Trust securities | | | $ | 88,638 |
| | $ | 7,574 |
| | $ | (3,610 | ) | | $ | 92,602 |
|
| Accrued investment income | | | $ | 739 |
| | | | | | $ | 739 |
|
| Preneed funeral trust investments | | | | | | | | | $ | 93,341 |
|
| Market value as a percentage of cost | | | | | | | | | 104.5 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands):
|
| | | |
| Due in one year or less | $ | 320 |
|
| Due in one to five years | 3,744 |
|
| Due in five to ten years | 5,782 |
|
| Thereafter | 34,174 |
|
| Total fixed income securities | $ | 44,020 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | |
| Due in one year or less | $ | 825 | |
| Due in one to five years | 11,103 | |
| Due in five to ten years | 8,615 | |
| Thereafter | 23,115 | |
| Total fixed income securities | $ | 43,658 | |
The cost and market values associated with preneed funeral trust investments at December 31, 20162019 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 24,160 | | | $ | 0 | | | $ | 0 | | | $ | 24,160 |
| Fixed income securities: | | | | | | | | | |
| U.S. treasury debt | 1 | | 822 | | | 0 | | | 0 | | | 822 |
| | | | | | | | | |
| Foreign debt | 2 | | 5,587 | | | 309 | | | (232) | | | 5,664 |
| Corporate debt | 2 | | 16,109 | | | 992 | | | (646) | | | 16,455 |
| Preferred stock | 2 | | 14,094 | | | 874 | | | (198) | | | 14,770 |
| Mortgage-backed securities | 2 | | 585 | | | 0 | | | (117) | | | 468 |
| Common stock | 1 | | 27,652 | | | 2,773 | | | (2,869) | | | 27,556 |
| Mutual funds: | | | | | | | | | |
| Equity | 1 | | 772 | | | 617 | | | (4) | | | 1,385 |
| Fixed income | 2 | | 4,364 | | | 107 | | | (107) | | | 4,364 |
| Other investments | 2 | | 2,902 | | | 0 | | | 0 | | | 2,902 |
| Trust securities | | | $ | 97,047 | | | $ | 5,672 | | | $ | (4,173) | | | $ | 98,546 |
| Accrued investment income | | | $ | 700 | | | | | | | $ | 700 |
| Preneed funeral trust investments | | | | | | | | | $ | 99,246 |
| Market value as a percentage of cost | | | | | | | | | 101.5% |
|
| | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 22,787 |
| | $ | — |
| | $ | — |
| | $ | 22,787 |
|
| Fixed income securities: | | | | | | | | | |
| U.S. treasury debt | 1 | | 1,491 |
| | 21 |
| | (10 | ) | | 1,502 |
|
| Municipal bonds | 2 | | 447 |
| | 17 |
| | (4 | ) | | 460 |
|
| Foreign debt | 2 | | 7,692 |
| | 170 |
| | (677 | ) | | 7,185 |
|
| Corporate debt | 2 | | 21,454 |
| | 1,566 |
| | (1,134 | ) | | 21,886 |
|
| Preferred stock | 2 | | 17,037 |
| | 64 |
| | (970 | ) | | 16,131 |
|
| Mortgage-backed securities | 2 | | 1,165 |
| | 400 |
| | (5 | ) | | 1,560 |
|
| Common stock | 1 | | 13,675 |
| | 2,256 |
| | (1,850 | ) | | 14,081 |
|
| Mutual funds: | | | | | | | | | |
| Fixed income | 2 | | 2,124 |
| | 115 |
| | (66 | ) | | 2,173 |
|
| Other investments | 2 | | 3,463 |
| | — |
| | — |
| | 3,463 |
|
| Trust securities | | | $ | 91,335 |
| | $ | 4,609 |
| | $ | (4,716 | ) | | $ | 91,228 |
|
| Accrued investment income | | | $ | 752 |
| | | | | | $ | 752 |
|
| Preneed funeral trust investments | | | | | | | | | $ | 91,980 |
|
| Market value as a percentage of cost | | | | | | | | | 99.9 | % |
We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral receipts held in trust onThe following table summarized our Consolidated Balance Sheets. For the year ended December 31, 2016, we recorded a $0.9 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the year ended December 31, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered causing the contract to be withdrawn from the trust in accordance with state regulations.
At December 31, 2017, we had certain investmentsfixed income securities (excluding mutual funds) within our preneed funeral trust investments that had tax lotsinvestment in an unrealized loss positions for more than one year. Based on our analysesposition at December 31, 2020, aggregated by major security type and length of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporarytime in nature.a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign debt | $ | 2,225 | | | $ | (55) | | | $ | 337 | | | $ | (579) | | | $ | 2,562 | | | $ | (634) | |
| Corporate debt | 763 | | | (96) | | | 528 | | | (214) | | | 1,291 | | | (310) | |
| Preferred stock | 506 | | | (87) | | | 3,942 | | | (211) | | | 4,448 | | | (298) | |
| Mortgage-backed securities | 0 | | | 0 | | | 111 | | | (155) | | | 111 | | | (155) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total fixed income securities with an unrealized loss | $ | 3,494 | | | $ | (238) | | | $ | 4,918 | | | $ | (1,159) | | | $ | 8,412 | | | $ | (1,397) | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
OurThe following table summarized our fixed income securities within our preneed funeral trust investment in an unrealized losses, their associated fair market values, and the duration of unrealized losses as ofloss position at December 31, 2017 are shown the the following tables2019, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Foreign debt | $ | 274 | | | $ | (43) | | | $ | 723 | | | $ | (189) | | | $ | 997 | | | $ | (232) | |
| Corporate debt | 1,403 | | | (172) | | | 4,433 | | | (474) | | | 5,836 | | | (646) | |
| Preferred stock | 4,412 | | | (198) | | | 0 | | | 0 | | | 4,412 | | | (198) | |
| Mortgage-backed securities | 0 | | | 0 | | | 439 | | | (117) | | | 439 | | | (117) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total fixed income securities with an unrealized loss | $ | 6,089 | | | $ | (413) | | | $ | 5,595 | | | $ | (780) | | | $ | 11,684 | | | $ | (1,193) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| U.S. treasury debt | $ | 1,325 |
| | $ | (15 | ) | | $ | — |
| | $ | — |
| | $ | 1,325 |
| | $ | (15 | ) |
| Foreign debt | 159 |
| | (6 | ) | | 1,608 |
| | (183 | ) | | 1,767 |
| | (189 | ) |
| Corporate debt | 3,770 |
| | (74 | ) | | 842 |
| | (203 | ) | | 4,612 |
| | (277 | ) |
| Preferred stock | 50 |
| | — |
| | 8,184 |
| | (585 | ) | | 8,234 |
| | (585 | ) |
| Mortgage-backed securities | 221 |
| | (17 | ) | | 36 |
| | (10 | ) | | 257 |
| | (27 | ) |
| Common Stock | 8,001 |
| | (1,496 | ) | | 1,728 |
| | (972 | ) | | 9,729 |
| | (2,468 | ) |
| Mutual funds: | | | | | | | | | | | |
| Fixed income | 549 |
| | (12 | ) | | 615 |
| | (37 | ) | | 1,164 |
| | (49 | ) |
| Total temporary impaired securities | $ | 14,075 |
| | $ | (1,620 | ) | | $ | 13,013 |
| | $ | (1,990 | ) | | $ | 27,088 |
| | $ | (3,610 | ) |
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown the the following tables (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| U.S. treasury debt | $ | 834 |
| | $ | (10 | ) | | $ | — |
| | $ | — |
| | $ | 834 |
| | $ | (10 | ) |
| Municipal bonds | 244 |
| | (5 | ) | | — |
| | — |
| | 244 |
| | (5 | ) |
| Foreign debt | 2,654 |
| | (186 | ) | | 2,905 |
| | (490 | ) | | 5,559 |
| | (676 | ) |
| Corporate debt | 6,977 |
| | (215 | ) | | 2,234 |
| | (919 | ) | | 9,211 |
| | (1,134 | ) |
| Preferred stock | 3,420 |
| | (128 | ) | | 11,750 |
| | (842 | ) | | 15,170 |
| | (970 | ) |
| Mortgage-backed securities | 55 |
| | (5 | ) | | 11 |
| | (1 | ) | | 66 |
| | (6 | ) |
| Mutual funds: | | | | | | | | | | | |
| Equity | 2,795 |
| | (216 | ) | | 3,390 |
| | (1,634 | ) | | 6,185 |
| | (1,850 | ) |
| Fixed income | 97 |
| | (7 | ) | | 644 |
| | (58 | ) | | 741 |
| | (65 | ) |
| Total temporary impaired securities | $ | 17,076 |
| | $ | (772 | ) | | $ | 20,934 |
| | $ | (3,944 | ) | | $ | 38,010 |
| | $ | (4,716 | ) |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Preneed funeral trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the years ended December 31, 2015, 2016 and 2017 wereare as follows (in thousands):
| | | | Year ended December 31, | | Years ended December 31, |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Investment income | $ | 2,819 |
| | $ | 2,344 |
| | $ | 2,420 |
| Investment income | $ | 1,623 | | | $ | 1,753 | | | $ | 1,907 | |
| Realized gains | 3,931 |
| | 2,287 |
| | 2,386 |
| Realized gains | 6,662 | | | 6,214 | | | 9,441 | |
| Realized losses | (3,979 | ) | | (6,642 | ) | | (2,396 | ) | Realized losses | (5,882) | | | (4,612) | | | (4,677) | |
| Unrealized gains (losses), net | | Unrealized gains (losses), net | (6,727) | | | 1,499 | | | 5,555 | |
| Expenses and taxes | (988 | ) | | (1,174 | ) | | (1,290 | ) | Expenses and taxes | (885) | | | (1,129) | | | (878) | |
| Decrease (increase) in deferred preneed funeral receipts held in trust | (1,783 | ) | | 3,185 |
| | (1,120 | ) | |
| Net change in deferred preneed funeral receipts held in trust | | Net change in deferred preneed funeral receipts held in trust | 5,209 | | | (3,725) | | | (11,348) | |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — | | | $ | — | | | $ | — | |
Purchases and sales of investments in the preneed funeral trusts for the years ended December 31, 2015, 2016 and 2017 wereare as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Purchases | $ | (28,264) | | | $ | (38,984) | | | $ | (47,315) | |
| Sales | 39,955 | | | 29,983 | | | 43,270 | |
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Purchases | $ | (26,021 | ) | | $ | (26,457 | ) | | $ | (21,954 | ) |
| Sales | 42,582 |
| | 27,425 |
| | 14,463 |
|
7. PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years with such interest income reflected as Preneed cemetery finance charges. In substantially all cases, we receive an initial down payment at the time the contract is signed.
Total financed preneed cemetery receivables were comprised of the following at December 31, 2016 and December 31, 2017 (in thousands):
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Cemetery interment rights | $ | 28,687 |
| | $ | 29,625 |
|
| Cemetery merchandise and services | 10,299 |
| | 10,849 |
|
| Preneed cemetery receivables | $ | 38,986 |
| | $ | 40,474 |
|
These amounts are presentedCare trusts’ corpus on our Consolidated Balance Sheets at December 31, 2016 and December 31, 2017Sheet represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Cemetery perpetual care trust investments, at market value | $ | 64,047 | | | $ | 70,828 | |
| Obligations due from trust | (631) | | | (1,121) | |
| Care trusts’ corpus | $ | 63,416 | | | $ | 69,707 | |
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Accounts receivable, excluding unearned finance charges and allowance for contract cancellations of $2,622 and $2,779, respectively | $ | 11,380 |
| | $ | 11,843 |
|
Preneed receivables, excluding unearned finance charges and allowance for contract cancellations of $4,983 and $4,922, respectively | 27,606 |
| | 28,631 |
|
| Preneed cemetery receivables | $ | 38,986 |
| | $ | 40,474 |
|
The unearned finance charges associated with these receivables were $5.7 million at both December 31, 2016 and 2017.
We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately 4.9% of the total receivables on recognized sales at December 31, 2017. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ForThe following table reflects the years endingcost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2016 and 2017,2020 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 686 | | | $ | 0 | | | $ | 0 | | | $ | 686 |
| Fixed income securities: | | | | | | | | | |
| Foreign debt | 2 | | 12,539 | | | 1,641 | | | (582) | | | 13,598 |
| Corporate debt | 2 | | 11,684 | | | 1,506 | | | (240) | | | 12,950 |
| Preferred stock | 2 | | 10,444 | | | 819 | | | (355) | | | 10,908 |
| Mortgage-backed securities | 2 | | 206 | | | 0 | | | (121) | | | 85 |
| Common stock | 1 | | 23,662 | | | 6,108 | | | (5,255) | | | 24,515 |
| Mutual funds: | | | | | | | | | |
| | | | | | | | | |
| Fixed income | 2 | | 6,444 | | | 1,054 | | | (220) | | | 7,278 |
| Trust securities | | | $ | 65,665 | | | $ | 11,128 | | | $ | (6,773) | | | $ | 70,020 |
| Accrued investment income | | | $ | 808 | | | | | | | $ | 808 |
| Cemetery perpetual care investments | | | | | | | | | $ | 70,828 |
| Market value as a percentage of cost | | | | | | | | | 106.6% |
The estimated maturities of the change in the allowance for contract cancellations wasfixed income securities (excluding mutual funds) included above are as follows (in thousands):
| | | | | |
| Due in one year or less | $ | 0 | |
| Due in one to five years | 8,819 | |
| Due in five to ten years | 7,789 | |
| Thereafter | 20,933 | |
| Total fixed income securities | $ | 37,541 | |
|
| | | | | | | |
| | As of December 31, |
| | 2016 | | 2017 |
| Beginning balance | $ | 1,765 |
| | $ | 1,861 |
|
| Write-offs and cancellations | (1,332 | ) | | (1,298 | ) |
| Provision | 1,428 |
| | 1,456 |
|
| Ending balance | $ | 1,861 |
| | $ | 2,019 |
|
The aging of past due financing receivables as of following table reflects the cost and market values associated with the trust investments held in perpetual care trust funds at December 31, 2017 was2019 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized
Gains | | Unrealized
Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 4,624 | | | $ | 0 | | | $ | 0 | | | $ | 4,624 | |
| Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
| Foreign debt | 2 | | 4,200 | | | 238 | | | (175) | | | 4,263 | |
| Corporate debt | 2 | | 11,658 | | | 802 | | | (534) | | | 11,926 | |
| Preferred stock | 2 | | 10,782 | | | 666 | | | (106) | | | 11,342 | |
| Mortgage-backed securities | 2 | | 324 | | | 0 | | | (71) | | | 253 | |
| Common stock | 1 | | 21,594 | | | 3,399 | | | (1,911) | | | 23,082 | |
| Mutual funds: | | | | | | | | | |
| Equity | 1 | | 233 | | | 146 | | | (1) | | | 378 | |
| Fixed income | 2 | | 7,156 | | | 618 | | | (107) | | | 7,667 | |
| Trust securities | | | $ | 60,571 | | | $ | 5,869 | | | $ | (2,905) | | | $ | 63,535 | |
| Accrued investment income | | | $ | 512 | | | | | | | $ | 512 | |
| Cemetery perpetual care investments | | | | | | | | | $ | 64,047 | |
| Market value as a percentage of cost | | | | | | | | | 104.9 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarized our fixed income securities (excluding mutual funds) within our perpetual care trust investment in an unrealized loss position at December 31, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2020 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| Foreign debt | $ | 1,728 | | | $ | (43) | | | $ | 312 | | | $ | (539) | | | $ | 2,040 | | | $ | (582) | |
| Corporate debt | 592 | | | (74) | | | 410 | | | (166) | | | 1,002 | | | (240) | |
| Preferred stock | 1,142 | | | (191) | | | 3,060 | | | (164) | | | 4,202 | | | (355) | |
| Mortgage-backed securities | 0 | | | 0 | | | 85 | | | (121) | | | 85 | | | (121) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total fixed income securities with an unrealized loss | $ | 3,462 | | | $ | (308) | | | $ | 3,867 | | | $ | (990) | | | $ | 7,329 | | | $ | (1,298) | |
The following table summarized our fixed income securities within our perpetual care trust investment in an unrealized loss position at December 31, 2019, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| Foreign debt | $ | 168 | | | $ | (26) | | | $ | 549 | | | $ | (149) | | | $ | 717 | | | $ | (175) | |
| Corporate debt | 1,057 | | | (196) | | | 3,253 | | | (338) | | | 4,310 | | | (534) | |
| Preferred stock | 2,989 | | | (106) | | | 0 | | | 0 | | | 2,989 | | | (106) | |
| Mortgage-backed securities | 0 | | | 0 | | | 252 | | | (71) | | | 252 | | | (71) | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
| Total fixed income securities with an unrealized loss | $ | 4,214 | | | $ | (328) | | | $ | 4,054 | | | $ | (558) | | | $ | 8,268 | | | $ | (886) | |
Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Realized gains | $ | 1,364 | | | $ | 1,663 | | | $ | 2,602 | |
| Realized losses | (1,896) | | | (1,258) | | | (1,695) | |
| Unrealized gains (losses), net | (4,405) | | | 2,964 | | | 4,355 | |
| Net change in Care trusts’ corpus | 4,937 | | | (3,369) | | | (5,262) | |
| Total | $ | — | | | $ | — | | | $ | — | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total Financing Receivables |
| Recognized revenue | $ | 1,140 |
| | $ | 530 |
| | $ | 155 |
| | $ | 1,301 |
| | $ | 3,126 |
| | $ | 26,449 |
| | $ | 29,575 |
|
| Deferred revenue | 380 |
| | 171 |
| | 63 |
| | 392 |
| | 1,006 |
| | 9,893 |
| | 10,899 |
|
| Total contracts | $ | 1,520 |
| | $ | 701 |
| | $ | 218 |
| | $ | 1,693 |
| | $ | 4,132 |
| | $ | 36,342 |
| | $ | 40,474 |
|
The aging of past due financing receivables as of December 31, 2016 wasPerpetual care trust investment security transactions recorded in Other revenue are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Investment income | $ | 5,934 | | | $ | 4,500 | | | $ | 8,461 | |
| Realized losses | (1,355) | | | (377) | | | (387) | |
| Total | $ | 4,579 | | | $ | 4,123 | | | $ | 8,074 | |
Purchases and sales of investments in the perpetual care trusts are as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Purchases | $ | (17,313) | | | $ | (26,573) | | | $ | (38,168) | |
| Sales | 25,786 | | | 17,588 | | | 34,316 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total Financing Receivables |
| Recognized revenue | $ | 674 |
| | $ | 356 |
| | $ | 233 |
| | $ | 1,086 |
| | $ | 2,349 |
| | $ | 26,003 |
| | $ | 28,352 |
|
| Deferred revenue | 310 |
| | 112 |
| | 86 |
| | 316 |
| | 824 |
| | 9,810 |
| | 10,634 |
|
| Total contracts | $ | 984 |
| | $ | 468 |
| | $ | 319 |
| | $ | 1,402 |
| | $ | 3,173 |
| | $ | 35,813 |
| | $ | 38,986 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. RECEIVABLES FROM PRENEED TRUSTS
TheOur receivables from preneed trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest (less than 50%) in the trust assets. We account for these investments at cost. As of December 31, 2016 and 2017, receivablesReceivables from preneed trusts wereare as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Preneed trust funds, at cost | $ | 18,581 | | | $ | 17,365 | |
| Less: allowance for contract cancellation | (557) | | | (521) | |
| Receivables from preneed trusts, net | $ | 18,024 | | | $ | 16,844 | |
|
| | | | | | | |
| | December 31, 2016 |
| | December 31, 2017 |
|
| Preneed trust funds, at cost | $ | 14,658 |
| | $ | 15,759 |
|
| Less: allowance for contract cancellation | (440 | ) | | (472 | ) |
| Receivables from preneed trusts, net | $ | 14,218 |
| | $ | 15,287 |
|
The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at December 31, 20162019 and 2017.2020. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes unrealized gains and losses on trust assets.
The composition of the preneed trust funds at December 31, 2017 was2020 is as follows (in thousands):
| | | | | | | | | | | |
| Historical
Cost Basis | | Fair Value |
| As of December 31, 2020 | | | |
| Cash and cash equivalents | $ | 4,604 | | | $ | 4,604 | |
| Fixed income investments | 10,355 | | | 10,355 | |
| Mutual funds and common stocks | 2,402 | | | 2,569 | |
| Annuities | 4 | | | 4 | |
| Total | $ | 17,365 | | | $ | 17,532 | |
|
| | | | | | | |
| | Historical Cost Basis | | Fair Value |
| As of December 31, 2017 | | | |
| Cash and cash equivalents | $ | 3,903 |
| | $ | 3,903 |
|
| Fixed income investments | 9,306 |
| | 9,306 |
|
| Mutual funds and common stocks | 2,544 |
| | 2,567 |
|
| Annuities | 6 |
| | 6 |
|
| Total | $ | 15,759 |
| | $ | 15,782 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The composition of the preneed trust funds at December 31, 2016 was2019 is as follows (in thousands):
| | | | | | | | | | | |
| Historical
Cost Basis | | Fair Value |
| As of December 31, 2019 | | | |
| Cash and cash equivalents | $ | 4,533 | | | $ | 4,533 | |
| Fixed income investments | 11,603 | | | 11,603 | |
| Mutual funds and common stocks | 2,440 | | | 2,518 | |
| Annuities | 5 | | | 5 | |
| Total | $ | 18,581 | | | $ | 18,659 | |
|
| | | | | | | |
| | Historical Cost Basis | | Fair Value |
| As of December 31, 2016 | | | |
| Cash and cash equivalents | $ | 3,378 |
| | $ | 3,378 |
|
| Fixed income investments | 8,809 |
| | 8,809 |
|
| Mutual funds and common stocks | 2,455 |
| | 2,463 |
|
| Annuities | 16 |
| | 16 |
|
| Total | $ | 14,658 |
| | $ | 14,666 |
|
9. CONTRACTS FUNDED BY INSURANCE
CertainWhen preneed funeral contracts are funded by lifethrough third-party insurance contracts. policies, we earn a commission on the sale of the policies. Insurance commissions are subject to refund (charge-back) if the preneed policy is cancelled within a year or if there is an imminent death of beneficiary before the first year anniversary of the policy. We record these insurance commissions as Other revenue, as noted in our table of disaggregated revenue in Note 21 to the Consolidated Financial Statements included herein, when the commission is no longer subject to refund, which is typically one year after the policy is issued. All selling costs incurred pursuant to the sale of the insurance funded preneed contracts are expensed as incurred.
Generally, at the time of the sale of either the preneed insurance or preneed trust contract, the intent is that the beneficiary has made a commitment to assign the proceeds to us for the fulfillment of the life insurance policies have been assigned to usservice and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’smerchandise obligations underon the preneed contract for servicesat the time of need. However, this commitment is generally revocable and merchandise. the proceeds from the policy are portable, so the customer can choose to use an alternative provider at the time of need.
Preneed funeral contracts to be funded at maturity by third-party insurance policies totaled $357.4$408.8 million and $371.5$395.4 million at December 31, 20162019 and 2017,2020, respectively, and are not includedrecorded as assets or liabilities on our Consolidated Balance Sheets.Sheet.
10. CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | |
| | December 31, 2016 |
| | December 31, 2017 |
|
| Trust assets, at market value | $ | 46,889 |
| | $ | 50,229 |
|
| Obligations due from trust | (599 | ) | | (373 | ) |
| Care trusts’ corpus | $ | 46,290 |
| | $ | 49,856 |
|
We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in Revenues: Cemetery. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At December 31, 2017, none of our cemetery perpetual care trust investments were underfunded.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stock, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. There were no transfers between Levels 1 and 2 for the year ended December 31, 2017. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 11 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 1,906 |
| | $ | — |
| | $ | — |
| | $ | 1,906 |
|
| Fixed income securities: | | | | | | | | | |
| Foreign debt | 2 | | 3,580 |
| | 227 |
| | (134 | ) | | 3,673 |
|
| Corporate debt | 2 | | 12,557 |
| | 805 |
| | (187 | ) | | 13,175 |
|
| Preferred stock | 2 | | 11,545 |
| | 364 |
| | (411 | ) | | 11,498 |
|
| Mortgage-backed securities | 2 | | 621 |
| | 152 |
| | (15 | ) | | 758 |
|
| Common stock | 1 | | 16,326 |
| | 3,116 |
| | (1,595 | ) | | 17,847 |
|
| Mutual funds: | | | | | | | | | |
| Fixed income | 2 | | 913 |
| | 42 |
| | (10 | ) | | 945 |
|
| Trust securities | | | $ | 47,448 |
| | $ | 4,706 |
| | $ | (2,352 | ) | | $ | 49,802 |
|
| Accrued investment income | | | $ | 427 |
| | | | | | $ | 427 |
|
| Cemetery perpetual care investments | | | | | | | | | $ | 50,229 |
|
| Market value as a percentage of cost | | | | | | | | | 105.0 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
| Due in one year or less | $ | 184 |
|
| Due in one to five years | 1,441 |
|
| Due in five to ten years | 3,788 |
|
| Thereafter | 23,691 |
|
| Total fixed income securities | $ | 29,104 |
|
The following table reflects the cost and market values associated with the trust investments held in perpetual care trust funds at December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
| Cash and money market accounts | 1 | | $ | 6,522 |
| | $ | — |
| | $ | — |
| | $ | 6,522 |
|
| Fixed income securities: | | | | | | | | | |
| Municipal bonds | 2 | | 365 |
| | 13 |
| | (3 | ) | | 375 |
|
| Foreign debt | 2 | | 5,100 |
| | 99 |
| | (435 | ) | | 4,764 |
|
| Corporate debt | 2 | | 13,715 |
| | 966 |
| | (821 | ) | | 13,860 |
|
| Preferred stock | 2 | | 11,323 |
| | 5 |
| | (664 | ) | | 10,664 |
|
| Mortgage-backed securities | 2 | | 569 |
| | 223 |
| | (3 | ) | | 789 |
|
| Common stock | 1 | | 8,259 |
| | 1,382 |
| | (1,146 | ) | | 8,495 |
|
| Mutual funds: | | | | | | | | | |
| Fixed income | 2 | | 855 |
| | 76 |
| | — |
| | 931 |
|
| Trust securities | | | $ | 46,708 |
| | $ | 2,764 |
| | $ | (3,072 | ) | | $ | 46,400 |
|
| Accrued investment income | | | $ | 489 |
| | | | | | $ | 489 |
|
| Cemetery perpetual care investments | | | | | | | | | $ | 46,889 |
|
| Market value as a percentage of cost | | | | | | | | | 99.3 | % |
We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus. For the year ended December 31, 2016,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
we recorded a $0.4 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the year ended December 31, 2017.
At December 31, 2017, we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investments losses were temporary in nature.
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the year ended December 31, 2017 are shown in the following tables (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2017 |
| | In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| Foreign debt | $ | 92 |
| | $ | (3 | ) | | $ | 1,128 |
| | $ | (131 | ) | | $ | 1,220 |
| | $ | (134 | ) |
| Corporate debt | 2,621 |
| | (59 | ) | | 555 |
| | (128 | ) | | 3,176 |
| | (187 | ) |
| Preferred stock | 29 |
| | — |
| | 5,492 |
| | (411 | ) | | 5,521 |
| | (411 | ) |
| Mortgage-backed securities | 76 |
| | (10 | ) | | 16 |
| | (5 | ) | | 92 |
| | (15 | ) |
| Common stock | 5,119 |
| | (991 | ) | | 1,108 |
| | (604 | ) | | 6,227 |
| | (1,595 | ) |
| Mutual funds: | | | | | | | | | | | |
| Fixed income | 433 |
| | (10 | ) | | — |
| | — |
| | 433 |
| | (10 | ) |
| Total temporary impaired securities | $ | 8,370 |
| | $ | (1,073 | ) | | $ | 8,299 |
| | $ | (1,279 | ) | | $ | 16,669 |
| | $ | (2,352 | ) |
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the year ended December 31, 2016 are shown in the following tables (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| | December 31, 2016 |
| | In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
| Fixed income securities: | | | | | | | | | | | |
| Municipal bonds | $ | 137 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 137 |
| | $ | (3 | ) |
| Foreign debt | 1,619 |
| | (120 | ) | | 1,961 |
| | (315 | ) | | 3,580 |
| | (435 | ) |
| Corporate debt | 4,679 |
| | (152 | ) | | 1,439 |
| | (669 | ) | | 6,118 |
| | (821 | ) |
| Preferred stock | 2,038 |
| | (77 | ) | | 8,329 |
| | (587 | ) | | 10,367 |
| | (664 | ) |
| Mortgage-backed securities | 31 |
| | (3 | ) | | — |
| | — |
| | 31 |
| | (3 | ) |
| Common stock | 1,563 |
| | (121 | ) | | 2,004 |
| | (1,025 | ) | | 3,567 |
| | (1,146 | ) |
| Total temporary impaired securities | $ | 10,067 |
| | $ | (476 | ) | | $ | 13,733 |
| | $ | (2,596 | ) | | $ | 23,800 |
| | $ | (3,072 | ) |
Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the years ended December 31, 2015, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Realized gains | $ | 1,773 |
| | $ | 872 |
| | $ | 926 |
|
| Realized losses | (2,431 | ) | | (3,069 | ) | | (1,195 | ) |
| Decrease in Care trusts’ corpus | 658 |
| | 2,197 |
| | 269 |
|
| Total | $ | — |
| | $ | — |
| | $ | — |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Perpetual care trust investment security transactions recorded in Revenues: Cemetery for the years ended December 31, 2015, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Investment income | $ | 5,315 |
| | $ | 6,451 |
| | $ | 5,949 |
|
| Realized gains (losses), net | 436 |
| | (434 | ) | | (838 | ) |
| Total | $ | 5,751 |
| | $ | 6,017 |
| | $ | 5,111 |
|
Purchases and sales of investments in the perpetual care trusts for the years ended December 31, 2015, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | |
| | Year ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Purchases | $ | (16,694 | ) | | $ | (16,546 | ) | | $ | (13,923 | ) |
| Sales | 14,710 |
| | 16,534 |
| | 8,899 |
|
11.10. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date applicable for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date.
We evaluated our financial assets and liabilities for those financial assets and liabilities that met the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables,accounts receivable and trade payablesaccounts payable approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of our receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our long-termacquisition debt and Credit Facility (as defined in Note 12), Convertible Notes (as defined in Note 13) and Senior Notes (as defined in Note 14) are classified within Level 2 of the Fair Value Measurements hierarchy. The
At December 31, 2020, the carrying value and fair valuesvalue of our Credit Facility was $47.2 million. We believe that our Credit Facility bears interest at a rate that approximates prevailing market rates for instruments with similar characteristics and therefore, the carrying value of our Credit Facility approximates fair value. We estimate the fair value of our acquisition debt utilizing an income approach, which uses a present value calculation to discount payments based on current market rates as of the long-term debt and Credit Facility approximatereporting date. At December 31, 2020, the carrying valuesvalue of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves.our acquisition debt was $5.5 million, which approximated its fair value. The fair value of theour Convertible Notes issued in March 2014 was approximately $180.3$3.7 million at December 31, 20172020 based on the last traded or broker quoted price. The fair value of our Senior Notes was approximately $427.9 million at December 31, 2020 based on the last traded or broker quoted price.
We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investments categories on our Consolidated Balance SheetsSheet as having met the criteria for fair value measurement. Our receivables from preneed trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest (less than 50%) in the trust assets. We account for these investments at cost.
The following three-level valuation hierarchy based upon the transparency of inputs is utilized in the measurement and valuation of financial assets or liabilities as of the measurement date:
•Level 1—Fair value of securities based on unadjusted quoted prices for identical assets or liabilities in active markets. Our investments classified as Level 1 securities include cash, U.S. treasury debt, common stock and U.S. treasury debt;equity mutual funds;
•Level 2—Fair value of securities estimated based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation. These inputs include interest rates, yield curves, credit risk, prepayment speeds, rating and tax-exempt status. Our investments classified as Level 2 securities include municipal bonds,foreign debt, corporate debt, preferred stocks, foreign debt, mortgage-backed securities and fixed income mutual funds and other investments.
•Level 3—Unobservable inputs based upon the reporting entity’s internally developed assumptions, which market participants would use in pricing the asset or liability. As of December 31, 20162019 and 2017,2020, we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.
We account for our investments as available-for-sale and measure them at fair value under standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities. See Notes 67 and 108 to our Consolidated Financial Statements herein for additional information on the fair value hierarchy levels of our trust investments.investments and receivables from preneed trusts, respectively.
11. INTANGIBLE AND OTHER NON-CURRENT ASSETS
Intangible and other non-current assets are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Tradenames | $ | 25,233 | | | $ | 23,565 | |
| Prepaid agreements not-to-compete, net of accumulated amortization of $7,195 and $3,193, respectively | 3,915 | | | 2,785 | |
Capitalized commissions on preneed contracts, net of accumulated amortization of $1,127 and $1,594, respectively | 2,818 | | | 3,141 | |
| | | |
| Other | 150 | | | 51 | |
| Intangible and other non-current assets, net | $ | 32,116 | | | $ | 29,542 | |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Tradenames
12. INTANGIBLE AND OTHER NON-CURRENT ASSETS
IntangibleOur tradenames have indefinite lives and other non-current assets at December 31, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Prepaid agreements not-to-compete, net of accumulated amortization of $5,501 and $6,051, respectively | $ | 3,244 |
| | $ | 3,730 |
|
| Tradenames | 11,663 |
| | 14,372 |
|
| Other | 50 |
| | 15 |
|
| Intangible and other non-current assets | $ | 14,957 |
| | $ | 18,117 |
|
Prepaid agreements not-to-competetherefore are amortized over the term of the respective agreements, ranging generally from one to ten years. Amortization expense was approximately $300,000, $435,000 and $550,000 fornot amortized. During the years ended December 31, 2015, 20162019 and 2017, respectively. During the year ended December 31, 2017,2020, we increased prepaid agreements not-to-competetradenames by $0.9$7.8 million and $0.4 million, respectively, related to our 20172019 and 2020 acquisitions described in Note 3 to the Consolidated Financial Statements included herein.
OurAs a result of economic conditions caused by COVID-19, we performed a quantitative assessment of our tradenames have indefinite livesat March 31, 2020 and therefore are not amortized. we recorded an impairment to tradenames for certain of our funeral homes of $1.1 million during the quarter ended March 31, 2020 recorded in Net loss on divestitures and impairment charges, as the carrying amount of these tradenames exceeded the fair value.
During the year ended December 31, 2017,2020, we increaseddivested four funeral homes that had a carrying value of tradenames by approximately $2.7of $1.0 million, related towhich was included in the gain or loss on the sale of divestitures and recorded in Net loss on divestitures and impairment charges on our 2017 acquisitions described in Note 3 to the Consolidated Financial Statements included herein.of Operations. During the year ended December 31, 2016,2019, we recorded an impairment to tradenames of $145,000 related to$0.2 million as a funeral home business held for sale at September 30, 2016,result of our 2019 annual impairment test as the carrying valueamount of certain tradenames exceeded itsthe fair value. The impairment was recorded in Other, net on our Consolidated Statements of Operations. We did not record an impairment to tradenames in the year ended December 31, 2017. See NoteNotes 1, 3 and 5 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our annual indefinite-lived intangible asset impairment test.test and discussion of our acquisitions and divestitures, respectively.
13. LONG-TERM DEBT
Our long-term debt consistedPrepaid agreements not-to-compete are amortized over the term of the following atrespective agreements, ranging generally from one to ten years. Amortization expense was approximately $0.6 million, $0.7 million and $0.7 million for the years ended December 31, 20162018, 2019 and 2017 (in thousands):
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Revolving credit facility, secured, floating rate | $ | 67,700 |
| | $ | 92,000 |
|
| Term loan, secured, floating rate | 138,750 |
| | 127,500 |
|
| Acquisition debt | 12,245 |
| | 10,548 |
|
| Debt issuance costs, net of accumulated amortization of $4,138 and $4,442, respectively | (1,270 | ) | | (967 | ) |
| Less: current portion | (13,021 | ) | | (16,927 | ) |
| Total long-term debt | $ | 204,404 |
| | $ | 212,154 |
|
As of2020, respectively. During the year ended December 31, 2017,2020, we divested three funeral homes that had a $300carrying value of prepaid agreements not-to-compete of $0.5 million, secured bank credit facility with Bankwhich was included in the gain or loss on the sale of America, N.A. as Administrative Agent (the “Credit Agreement”), compriseddivestitures and recorded in Net loss on divestitures and impairment charges on our Consolidated Statements of a $150 million revolving credit facility and a $150 million term loan, (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility matures on February 9, 2021 and is collateralized by all personal property and funeral home real property in certain states.
On February 9, 2016, we entered into a seventh amendment (the “Seventh Amendment”) to our Credit Facility. The Seventh Amendment resulted in, among other things, (i) reducing our LIBOR based variable interest rate 37.5 basis points, (ii) extending the maturity so that the Credit Agreement will mature at the earlier of (a) any date that is 91 days prior to the maturity of any subordinated debt (including the $143.75 million in principal amount of the Convertible Notes, as defined inOperations. See Note 125 to the Consolidated Financial Statements included herein) or (b) February 9, 2021, (iii) increasing and fundingherein, for a discussion of our divestitures.
During the term loan so that $150 million was outstanding upon the effectiveness of the Seventh Amendment, (iv) reducing the size of the revolver to $150 million, (v) increasing the accordion to $75 million and (vi) updating the amortization payments for the term loan facility so that the borrowings under the term loan facility are subject to amortization payments of (a) $2.81 million at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2016 through the fiscal quarter endingyear ended December 31, 2017, (b) $3.752019, we increased prepaid agreements not-to-compete by $0.4 million atrelated to our 2019 acquisitions described in Note 3 to the endConsolidated Financial Statements included herein.
Capitalized Commissions
We capitalize our selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts. These costs are amortized on a straight-line basis over the average maturity period for our preneed cemetery merchandise and services contracts and preneed funeral trust contracts, of each fiscal quarter beginning witheight and ten years, respectively. Amortization expense totaled $0.6 million for both the fiscal quarter ending March 31, 2018 through the fiscal quarter ending March 31, 2020 and (c) $4.69 million at the end of each fiscal quarter beginning with the fiscal quarter ending June 30, 2020 through the fiscal quarter endingyears ended December 31, 2019 and 2020. In connection with the Seventh Amendment, we recognized a loss of $0.6 million to write-off the related unamortized debt issuance costs.
AsThe aggregate amortization expense for our non-compete agreements and capitalized commissions as of December 31, 2017,2020 is as follows (in thousands):
| | | | | | | | | | | |
| Non-Compete Agreements | | Capitalized Commissions |
| Years ending December 31, | | | |
| 2021 | $ | 618 | | | $ | 589 | |
| 2022 | 481 | | | 543 | |
| 2023 | 434 | | | 488 | |
| 2024 | 380 | | | 425 | |
| 2025 | 373 | | | 359 | |
| Thereafter | 499 | | | 737 | |
| Total amortization expense | $ | 2,785 | | | $ | 3,141 | |
12. CREDIT FACILITY AND ACQUISITION DEBT
On December 19, 2019, we had outstanding borrowings under theentered 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, and Bank of $92.0America, N.A., as administrative agent (in such capacity, the “Administrative Agent”) to increase our commitment to $190.0 million and $127.5incurred $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.
At December 31, 2020, our Credit Facility was outstanding on the term loan. We have one lettercomprised of: (i) a $190.0 million revolving credit facility, including a $15.0 million subfacility for letters of credit issued on November 30, 2017 and outstanding undera $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 for approximately $2.0 million, which bears interest at 2.125% and will expireoccur on November 27, 2018. Outstanding
May 31, 2023.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 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 (as defined below). 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. At December 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 ended March 31, 2020, June 30, 2020 and September 30, 2020 and (ii) 5.50 to 1.00 for the quarter ended December 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.
On May 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 ended March 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.
On August 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 Note 13). See Note 13 to the Consolidated Financial Statements included herein, 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 at December 31, 2020.
Our Credit Facility and Acquisition debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Credit Facility | $ | 83,800 | | | $ | 47,200 | |
| Debt issuance costs, net of accumulated amortization of $337 and $819, respectively | (1,618) | | | (1,136) | |
| Total Credit Facility | $ | 82,182 | | | $ | 46,064 | |
| | | |
| Acquisition debt | $ | 6,964 | | | $ | 5,509 | |
| Less: current portion | (1,306) | | | (1,027) | |
| Total acquisition debt, net of current portion | $ | 5,658 | | | $ | 4,482 | |
At December 31, 2020, we had outstanding borrowings under the Credit Facility of $47.2 million. We had 1 letter of credit for $2.0 million issued on November 30, 2019 and outstanding under the Credit Facility, which was increased to $2.1 million on September 29, 2020. The letter of credit bears interest at 3.125% and will expire on November 26, 2021. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. At December 31, 2020, we had $140.7 million of availability under the Credit Facility after giving affect to the $2.1 million of the outstanding letter of credit.
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. As ofAt December 31, 2017,2020, the prime rate margin was equivalent to 1.55%1.5% and the LIBOR rate margin was 2.125%2.5%. The weighted average interest rate on theour Credit Facility for the yearyears ended December 31, 20172019 and 2020 was 3.2%.2.9% and 3.8%, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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 Agreement.Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Agreement.Facility Guarantors.
We were in compliance with the covenants contained inThe interest expense and amortization of debt issuance costs related to our Credit AgreementFacility are as of December 31, 2016 and 2017. The Credit Agreement contains key ratios that we must comply with including a requirement to maintain a leverage ratio of no more than 3.50 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of December 31, 2017, the leverage ratio was 3.15 to 1.00 and the fixed charge coverage ratio was 2.14 to 1.00.follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2018 | | 2019 | | 2020 |
| Credit Facility interest expense | $ | 4,351 | | | $ | 1,601 | | | $ | 3,738 | |
| Credit Facility amortization of debt issuance costs | 234 | | | 229 | | | 482 | |
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 at 0% and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from five to twenty years.
Amortization of debt issuance costsThe imputed interest expense related to our Credit Facility was approximately $0.4 million and $0.3 million for the years ended December 31, 2016 and 2017, respectively. Unamortizedacquisition debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 2018 | | 2019 | | 2020 |
| Acquisition debt imputed interest expense | $ | 791 | | | $ | 622 | | | $ | 489 | |
The aggregate maturities of our long-termCredit Facility and acquisition debt for the next five years subsequent to December 31, 20172020 and thereafter, excluding debt issuance costs, are as follows (in thousands):
| | | | | | | | | | | |
| Credit Facility | | Acquisition Debt |
| Years ending December 31, | | | |
| 2021 | $ | 0 | | | $ | 1,386 | |
| 2022 | 0 | | | 825 | |
| 2023 | 47,200 | | | 825 | |
| 2024 | 0 | | | 772 | |
| 2025 | 0 | | | 772 | |
| Thereafter | 0 | | | 3,332 | |
| Total Credit Facility and acquisition debt | $ | 47,200 | | | $ | 7,912 | |
| Less: Interest | — | | | (2,403) | |
| Present value of Credit Facility and acquisition debt | $ | 47,200 | | | $ | 5,509 | |
|
| | | |
| Years ending December 31, | |
| 2018 | $ | 16,927 |
|
| 2019 | 16,949 |
|
| 2020 | 19,068 |
|
| 2021 | 172,699 |
|
| 2022 | 530 |
|
| 2023 and thereafter | 3,875 |
|
| | $ | 230,048 |
|
14.13. CONVERTIBLE SUBORDINATED NOTES
On March 19, 2014, we issued $143.75 million aggregate principal amount of our 2.75% convertible subordinated notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes have not been registered under the Securities Act of 1933, as amended (the “Securities Act”),are due on March 15, 2021 and were offered only to “qualified institutional buyers” in compliance with Rule 144A under the Securities Act. The Convertible Notes are governed by an indenture dated as of March 19, 2014 between Wilmington Trust, National Association, as Trustee, and us (the “Indenture”). The Convertible Notes bear interest at 2.75%. Interest on the Convertible Notes began to accrue on March 19, 2014 and per year, which is payable semi-annually in arrears on March 15 and September 15 of each year.
TheOn May 7, 2018, we completed our exchange of approximately $115.0 million in aggregate principal amount of Convertible Notes are general unsecured obligations and are subordinated in the righta privately-negotiated exchange agreement with a limited number of payment to allconvertible noteholders. On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes. On April 4, 2019, we completed a privately-negotiated repurchase of $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163.
On September 9, 2020, we completed privately-negotiated repurchases of $3.8 million in aggregate principal amount of our existingConvertible Notes for $4.6 million in cash (including accrued interest of $0.1 million) and future senior indebtedness and equal in right of payment with our other existing and future subordinated indebtedness. The initial conversion raterecorded $0.8 million for the reacquisition of the equity component. The September 2020 repurchases represented approximately 60% of the aggregate principal amount of Convertible Notes was 44.3169 sharesthen outstanding. Following the settlement of our common stock per $1,000the September 2020 repurchases, the aggregate principal amount of the Convertible Notes equivalentwas reduced to an initial conversion priceapproximately $2.6 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying values of common stock. The conversion rate is subject to adjustment upon the occurrence of certain events, as described in the Indenture. During the year ended December 31, 2017, an adjustment to the conversion rateliability and equity components of the Convertible Notes are reflected on our Consolidated Balance Sheet as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Long-term liabilities: | | | |
| Principal amount | $ | 6,319 | | | $ | 2,559 | |
| Unamortized discount of liability component | (319) | | | (20) | |
| Convertible Notes issuance costs, net of accumulated amortization of $130 and $63, respectively | (29) | | | (1) | |
| Carrying value of the liability component | $ | 5,971 | | | $ | 2,538 | |
| | | |
| Carrying value of the equity component | $ | 789 | | | $ | 319 | |
The carrying value of the liability component and the carrying value of the equity component are recorded in Convertible subordinated notes due 2021 and Additional paid-in capital, respectively, on our Consolidated Balance Sheet at December 31, 2019 and 2020.
The fair value of the Convertible Notes, which are Level 2 measurements, was triggered when our Board increased the dividends declared per common share from $0.05 per share to $0.075 per share. $3.7 million at December 31, 2020.
At December 31, 2017,2020, the adjusted conversion rate of the Convertible Notes is 44.626645.9712 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.41$21.75 per share of common stock.
The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes mature on March 15, 2021, unless earlier converted or purchased by us. The conversion option of the Convertible Notes is not an embedded derivative. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to December 15, 2020, if certain conditions are met. We may not redeem the Convertible Notes prior to maturity. However, in the event of a fundamental change (as defined in the Indenture), subject to certain conditions, a holder of the Convertible Notes will have the option to require us to purchase all or a portion of its Convertible Notes for cash. The fundamental change purchase price will equal 100% of the principal amount of the Convertible Notes to be purchased, plus any accrued and unpaid interest up to, but excluding, the fundamental change purchase date.as follows (in thousands):
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 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 38two 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, 20162019 and 20172020 was 6.75%3.2% and 2.75%3.1%, respectively.
Equity issuance costs are included in Additional paid-in capital (“APIC”) on our Consolidated Balance Sheets and are not amortized. Additionally, the recognition of the Convertible Notes as two separate components results in a basis difference associated with the liability component which represents a temporary tax difference. As a result, we recognized a deferred tax liability of $12.7 million related to this temporary difference which was recorded as a reduction to APIC and an increase to our deferred tax liability. The deferred tax liability is being amortized over the seven year term of the Convertible Notes. At December 31, 2017, the balance of our deferred tax liability related to our Convertible Notes was $4.1 million.
The carrying values of the liability and equity components of the Convertible Notes at December 31, 2016 and 2017 are reflected on our Consolidated Balance Sheets as follows (in thousands):
|
| | | | | | | |
| | December 31, 2016 | | December 31, 2017 |
| Long-term liabilities: | | | |
| Principal amount | $ | 143,750 |
| | $ | 143,750 |
|
| Unamortized discount of liability component | (21,887 | ) | | (17,559 | ) |
| Convertible Notes issuance costs, net of accumulated amortization of $1,359 and $1,877, respectively | (2,268 | ) | | (1,750 | ) |
| Carrying value of the liability component | $ | 119,596 |
| | $ | 124,441 |
|
| | | | |
| Carrying value of the equity component | $ | 17,973 |
| | $ | 17,973 |
|
The Carrying value of the liability component and the Carrying value of the equity component are recorded in Convertible subordinated notes due 2021 and Additional paid-in capital, respectively, on our Consolidated Balance Sheets at December 31, 2016 and 2017.
The fair value of the Convertible Notes, which are Level 2 measurements, was approximately $180.3 million at December 31, 2017.
Interest expense on the Convertible Notes included contractual coupon interest expense of $4.0 million for both the years ended December 31, 2016 and 2017. Accretion of the discount on the Convertible Notes was approximately $3.9 million and $4.3 million for the years ended December 31, 2016 and 2017, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $0.5 million for both the years ended December 31, 2016 and 2017.
The aggregate maturities of our Convertible Notes for the next five years subsequent to December 31, 20172020 and thereafter are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | Principal Maturity | | Discount Amortization | | Present
Value |
| Years ending December 31, | | | | | | |
| 2021 | | $ | 2,559 | | | $ | (20) | | | $ | 2,539 | |
| 2022 | | 0 | | | 0 | | | 0 | |
| 2023 | | 0 | | | 0 | | | 0 | |
| 2024 | | 0 | | | 0 | | | 0 | |
| 2025 | | 0 | | | 0 | | | 0 | |
| Thereafter | | 0 | | | 0 | | | 0 | |
| Total | | $ | 2,559 | | | $ | (20) | | | $ | 2,539 | |
14. SENIOR NOTES
|
| | | | | | | | | | | | |
| | | Principal Maturity | | Discount Amortization | | Present Value |
| Years ending December 31, | | | | | | |
| 2018 | | $ | — |
| | $ | (4,844 | ) | | $ | (4,844 | ) |
| 2019 | | — |
| | (5,422 | ) | | (5,422 | ) |
| 2020 | | — |
| | (6,068 | ) | | (6,068 | ) |
| 2021 | | 143,750 |
| | (1,225 | ) | | 142,525 |
|
| 2022 | | — |
| | — |
| | — |
|
| | | $ | 143,750 |
| | $ | (17,559 | ) | | $ | 126,191 |
|
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
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. COMMITMENTS AND CONTINGENCIES
LeasesSubsidiary 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 leasereceived proceeds of $76.9 million from the issuance of the 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 office facilities,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 funeral homesasset sales and equipment under operating leasesdo 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 original terms ranging from one to twelve years. Certainaffiliates. The Indenture also contains customary events of these leases provide for an annual rent adjustment and contain options for renewal. Rent expense totaled $6.5 million, $6.1 million and $6.1 million for the years ended December 31, 2015, 2016 and 2017, respectively. Assets acquired under capital leases are included in property, plant and equipment indefault.
The carrying value of our accompanyingSenior Notes is reflected on our Consolidated Balance Sheets in the amount of $2.7 million in 2016 and $6.6 million in 2017, net of accumulated depreciation. Capital lease obligations are included in current and long-term debt as indicated below. At December 31, 2017, future minimum lease payments under non-cancelable lease agreements wereSheet as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2019 | | December 31, 2020 |
| Long-term liabilities: | | | |
| Principal amount | $ | 400,000 | | | $ | 400,000 | |
| Debt premium, net of accumulated amortization of $0 and $221, respectively | 1,688 | | | 1,467 | |
| Debt discount, net of accumulated amortization of $492 and $1,020, respectively | (4,110) | | | (3,582) | |
| Debt issuance costs, net of accumulated amortization of $216 and $496, respectively | (2,131) | | | (1,917) | |
| Carrying value of the Senior Notes | $ | 395,447 | | | $ | 395,968 | |
The fair value of the Senior Notes, which are Level 2 measurements, was $427.9 million at December 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, which were issued in May 2018, for the year ended December 31, 2020 was 6.87% and 6.69%, respectively. The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the Additional Senior Notes, which were issued in December 2019, for year ended December 31, 2020 was 6.20% and 6.90%, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
|
| | | | | | | |
| | Future Minimum Lease Payments |
| | Operating Leases | | Capital Leases |
| Years ending December 31, | | | |
| 2018 | $ | 3,441 |
| | $ | 842 |
|
| 2019 | 3,056 |
| | 817 |
|
| 2020 | 2,521 |
| | 771 |
|
| 2021 | 2,155 |
| | 779 |
|
| 2022 | 303 |
| | 803 |
|
| Thereafter | 586 |
| | 7,818 |
|
| Total future minimum lease payments | $ | 12,062 |
| | $ | 11,830 |
|
| Less: amount representing interest (rates ranging from 7.0% to 11.5%) | | | (5,145 | ) |
| Less: current portion of obligations under capital leases | | | (324 | ) |
| Long-term obligations under capital leases | | | $ | 6,361 |
|
| | | | | | | | | | | | | | | | | |
| Years ended December 31, |
| 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 | 0 | | | 0 | | | 221 | |
| Senior Notes amortization of debt issuance costs | 77 | | | 139 | | | 280 | |
The aggregate maturities of our Senior Notes for the next five years subsequent to December 31, 2020 and thereafter are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Principal Maturity | | Discount Amortization | | Premium Amortization | | Present
Value |
| Years ending December 31, | | | | | | | | |
| 2021 | | $ | 0 | | | $ | (565) | | | $ | 235 | | | $ | (330) | |
| 2022 | | 0 | | | (605) | | | 250 | | | (355) | |
| 2023 | | 0 | | | (648) | | | 266 | | | (382) | |
| 2024 | | 0 | | | (694) | | | 283 | | | (411) | |
| 2025 | | 0 | | | (744) | | | 301 | | | (443) | |
| Thereafter | | 400,000 | | | (326) | | | 132 | | | 399,806 | |
| Total | | $ | 400,000 | | | $ | (3,582) | | | $ | 1,467 | | | $ | 397,885 | |
15. LEASES
On January 1, 2019, we adopted Topic 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 840. On January 1, 2019, we recorded operating lease right-of-use assets of $16.5 million and operating lease liabilities of $17.3 million, related to real estate and equipment leases, based on the present value of the future lease payments on the date of adoption.
Our lease obligations consist of operating and finance leases related to real estate and equipment. The components of lease cost are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | | | Years Ended December 31, |
| Income Statement Classification | | | | | 2019 | | 2020 |
| Operating lease cost | Facilities and grounds expense(1) | | | | | $ | 3,722 | | | $ | 3,795 | |
| Short-term lease cost | Facilities and grounds expense(1) | | | | | 277 | | | 224 | |
| | | | | | | | |
| Finance lease cost: | | | | | | | | |
| Depreciation of leased assets | Depreciation and amortization(2) | | | | | $ | 498 | | | $ | 439 | |
| Interest on lease liabilities | Interest expense | | | | | 520 | | | 496 | |
| Total finance lease cost | | | | | | 1,018 | | | 935 | |
| Total lease cost | | | | | | $ | 5,017 | | | $ | 4,954 | |
| | | | | | | | | | | | | | |
| | | | |
| (1) | Facilities and grounds expense is included within Cost of service and General, administrative and other on our Consolidated Statements of Operations.
|
| (2) | Depreciation and amortization expense is included within Field depreciation expense and Home office depreciation and amortization on our Consolidated Statements of Operations. |
Variable lease expense was immaterial for the years ended December 31, 2019 and 2020.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Supplemental cash flow information related to our leases is as follows (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2019 | | 2020 |
| Cash paid for operating leases included in operating activities | $ | 3,910 | | | $ | 3,383 | |
| Cash paid for finance leases included in financing activities | 872 | | | 828 | |
Right-of-use assets obtained in exchange for new leases are as follows (in thousands):
| | | | | | | | | | | |
| Years Ended December 31, |
| 2019 | | 2020 |
Right-of-use assets obtained in exchange for new operating lease liabilities(1) | $ | 8,175 | | | $ | 782 | |
| Right-of-use assets obtained in exchange for new finance lease liabilities | 0 | | | 0 | |
| | | | | | | | | | | | | | |
| | | | |
| (1) | During the year ended December 31, 2019, we modified an existing operating lease to extend the term through 2030. As a result of this modification, we increased our lease liabilities and right-of-use assets by $8.2 million. |
Supplemental balance sheet information related to leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Lease Type | | Balance Sheet Classification | | December 31, 2019 | | December 31, 2020 |
| Operating lease right-of-use assets | | Operating lease right-of-use assets | | $ | 22,304 | | | $ | 21,201 | |
| | | | | | |
| Finance lease right-of-use assets | | Property, plant and equipment, net | | 6,770 | | | 6,770 | |
| Accumulated depreciation | | Property, plant and equipment, net | | (1,566) | | | (2,005) | |
| Finance lease right-of-use assets, net | | | | $ | 5,204 | | | $ | 4,765 | |
| | | | | | |
| Operating lease current liabilities | | Current portion of operating lease obligations | | $ | 1,554 | | | $ | 2,082 | |
| Finance lease current liabilities | | Current portion of finance lease obligations | | 290 | | | 323 | |
| Total current lease liabilities | | | | $ | 1,844 | | | $ | 2,405 | |
| | | | | | |
| Operating lease non-current liabilities | | Obligations under operating leases, net of current portion | | $ | 21,533 | | | $ | 20,302 | |
| Finance lease non-current liabilities | | Obligations under finance leases, net of current portion | | 5,854 | | | 5,531 | |
| Total non-current lease liabilities | | | | $ | 27,387 | | | $ | 25,833 | |
| | | | | | |
| Total lease liabilities | | | | $ | 29,231 | | | $ | 28,238 | |
The average lease terms and discount rates as of December 31, 2020 are as follows:
| | | | | | | | | | | |
| Weighted-average remaining lease term (years) | | Weighted-average discount rate |
| Operating leases | 10.7 | | 8.1 | % |
| Finance leases | 5.9 | | 8.2 | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The aggregate future lease payments for operating and finance leases as of December 31, 2020 are as follows (in thousands):
| | | | | | | | | | | |
| Operating | | Finance |
| Lease payments due: | | | |
| 2021 | $ | 3,794 | | | $ | 836 | |
| 2022 | 3,422 | | | 860 | |
| 2023 | 3,301 | | | 860 | |
| 2024 | 3,292 | | | 791 | |
| 2025 | 3,156 | | | 736 | |
| Thereafter | 16,188 | | | 5,555 | |
| Total lease payments | $ | 33,153 | | | $ | 9,638 | |
| Less: Interest | (10,769) | | | (3,784) | |
| Present value of lease liabilities | $ | 22,384 | | | $ | 5,854 | |
As ofDecember 31, 2020, we had no additional significant operating or finance leases that had not yet commenced.
16. COMMITMENTS AND CONTINGENCIES
Non-Compete, Consulting and Employment Agreements
We have various non-compete agreements with former owners and employees. These agreements are generally for one to ten years and provide for periodic future 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 tenfive years and provide for bi-weekly or monthly payments.
We have employment agreements with certain of our executive officers and certain of our senior leadership. These agreements are generally for three or four to five years and provide for participation in various incentive compensation arrangements. These agreements generally renew automatically renew on an annual basis after their initial term has expired.
At December 31, 2017,2020, the maximum estimated future cash commitments under these agreements with remaining commitment terms, and with original terms of more than one year, are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| | Non-Compete | | Consulting | | Employment (a) | | Total |
| Years ending December 31, | | | | | | | |
| 2018 | $ | 1,745 |
| | $ | 907 |
| | $ | 2,020 |
| | $ | 4,672 |
|
| 2019 | 1,564 |
| | 592 |
| | 1,000 |
| | 3,156 |
|
| 2020 | 1,324 |
| | 421 |
| | 1,000 |
| | 2,745 |
|
| 2021 | 1,217 |
| | 328 |
| | 244 |
| | 1,789 |
|
| 2022 | 837 |
| | 118 |
| | — |
| | 955 |
|
| Thereafter | 1,360 |
| | — |
| | — |
| | 1,360 |
|
| | $ | 8,047 |
| | $ | 2,366 |
| | $ | 4,264 |
| | $ | 14,677 |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Non-Compete | | Consulting | | Employment(a) | | Total |
| Years ending December 31, | | | | | | | |
| 2021 | $ | 2,103 | | | $ | 879 | | | $ | 3,729 | | | $ | 6,711 | |
| 2022 | 1,569 | | | 537 | | | 3,456 | | | 5,562 | |
| 2023 | 1,063 | | | 266 | | | 1,181 | | | 2,510 | |
| 2024 | 691 | | | 114 | | | 900 | | | 1,705 | |
| 2025 | 431 | | | 51 | | | 900 | | | 1,382 | |
| Thereafter | 439 | | | 0 | | | 1,912 | | | 2,351 | |
| Total | $ | 6,296 | | | $ | 1,847 | | | $ | 12,078 | | | $ | 20,221 | |
| | | | | | | | |
| | |
| (a) | | |
(a) | Melvin C. Payne, our Chairman of the Board and Chief Executive Officer, has an employment agreement that renewsdoes not renew after the initial term. See Note 25 to the Consolidated Financial Statements included herein for one additional year on each anniversary of the effective date, such that at any given time between three and four years remain in the term of theinformation regarding Mr. Payne's employment agreement. |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
401(K)Defined Contribution Plan
We sponsor a defined contribution plan, (401K)a 401K plan, for the benefit of our employees. Matching contributions and plan administrative expenses totaled $1.7$2.1 million, $1.8$2.0 million and $1.9$2.3 million for 2015, 2016during the years ended December 31, 2018, 2019 and 2017,2020, respectively. We do not offer any post-retirement or post-employment benefits.
Other Commitments
Effective April 30, 2016, we terminated an agreement to outsource the processing of transactions for our cemetery business and certain accounting activities. At that time, all transaction processing returned in-house and we retained most of the personnel of the service provider that resided in our home office. We believe that the costs associated with performing these formerly outsourced activities internally should, for the foreseeable future, be less than the costs we incurred under the outsourcing arrangement. For the years ended December 31, 2015 and 2016, we incurred costs of approximately $1.9 million and $0.9 million, respectively, for services rendered under this agreement, of which we paid approximately $1.0 million and $0.6 million, respectively, with the remainder paid by the Preneed cemetery trust investments portfolio.
Litigation
We are a party to various litigation matters and proceedings. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. If we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters.
Faria, et al. v. Carriage Funeral Holdings, Inc., Superior Court of California, Contra Costa County, Case No. MSC18-00606. On March 26, 2018, six Plaintiffs filed a putative class action against Carriage Funeral Holdings, Inc., our subsidiary, their alleged employer, on behalf of themselves and all similarly situated current and former employees. Plaintiffs seek monetary damages and claim that Carriage Funeral Holdings, Inc. failed to pay minimum wages, provide meal and rest breaks, provide accurately itemized wage statements, reimburse employees for required expenses, and provide wages when due. Plaintiffs also claim that Carriage Funeral Holdings, Inc. violated California Business and Professions Code §17200 et seq. On June 5, 2018, Plaintiffs filed a First Amended Complaint to add a claim under the California Private Attorney General Act. On October 23, 2018, the parties mediated this matter and executed a Memorandum of Understanding for class settlement. In February 2019, a Class Action Settlement Agreement was fully executed and was approved by the Court in October 2019. We paid $0.7 million under the settlement agreement in November 2019. This case was formally closed on May 25, 2020. 16.
17. INCOME TAXES
The provision (benefit) for income taxes for the years ended December 31, 2015, 2016 and 2017 consisted of the following (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Current: | | | | | |
| U. S. federal provision (benefit) | $ | 1,489 | | | $ | (2,039) | | | $ | 1,778 | |
| State provision (benefit) | 1,309 | | | (195) | | | 2,177 | |
| Total current provision (benefit) | $ | 2,798 | | | $ | (2,234) | | | $ | 3,955 | |
| Deferred: | | | | | |
| U. S. federal provision | $ | 2,831 | | | $ | 8,056 | | | $ | 3,994 | |
| State provision | 992 | | | 2,061 | | | 603 | |
| Total deferred provision | $ | 3,823 | | | $ | 10,117 | | | $ | 4,597 | |
| Total income tax provision | $ | 6,621 | | | $ | 7,883 | | | $ | 8,552 | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Current: | | | | | |
| U. S. federal provision | $ | 9,840 |
| | $ | 6,609 |
| | $ | 6,425 |
|
| State provision | 862 |
| | 1,195 |
| | 815 |
|
| Total current provision | $ | 10,702 |
| | $ | 7,804 |
| | $ | 7,240 |
|
| Deferred: | | | | | |
| U. S. federal provision (benefit) | $ | 1,928 |
| | $ | 3,475 |
| | $ | (12,881 | ) |
| State provision | 1,107 |
| | 1,381 |
| | 1,230 |
|
| Total deferred provision (benefit) | $ | 3,035 |
| | $ | 4,856 |
| | $ | (11,651 | ) |
| Total income tax provision (benefit) | $ | 13,737 |
| | $ | 12,660 |
| | $ | (4,411 | ) |
A reconciliation of income taxes calculated at the U.S. federal statutory rate to those reflected in the Consolidated Statements of Operations for the years ended December 31, 2015, 2016 and 2017 is as follows (dollars in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, | |
| | 2018 | | 2019 | | 2020 | |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
| Federal statutory rate | $ | 3,834 | | | 21.0 | | % | $ | 4,707 | | | 21.0 | | % | $ | 5,175 | | | 21.0 | | % |
| Effect of state income taxes, net of federal benefit | 1,776 | | | 9.7 | | | 1,352 | | | 6.0 | | | 2,080 | | | 8.4 | | |
| Effect of non-deductible expenses and other, net | 1,451 | | | 7.9 | | | 947 | | | 4.2 | | | 460 | | | 1.9 | | |
| Effect of divestitures and impairment of businesses | 0 | | | 0 | | | 911 | | | 4.10 | | | 846 | | | 3.4 | | |
| Change in valuation allowance | 26 | | | 0.1 | | | (34) | | | (0.2) | | | (9) | | | 0 | | |
| Re-measurement of deferred taxes due to tax reform | (466) | | | (2.5) | | | 0 | | | 0 | | | 0 | | | 0 | | |
| Total | $ | 6,621 | | | 36.2 | | % | $ | 7,883 | | | 35.1 | | % | $ | 8,552 | | | 34.7 | | % |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, | |
| | 2015 | | 2016 | | 2017 | |
| | Amount | | Percent | | Amount | | Percent | | Amount | | Percent | |
| Federal statutory rate | $ | 12,105 |
| | 35.0 |
| % | $ | 11,300 |
| | 35.0 | % | $ | 11,474 |
| | 35.0 |
| % |
| Effect of state income taxes, net of federal benefit | 1,618 |
| | 4.7 |
| | 1,127 |
| | 3.5 | | 1,304 |
| | 4.0 |
| |
| Effect of non-deductible expenses and other, net | 155 |
| | 0.4 |
| | 213 |
| | 0.7 | | (36 | ) | | (0.1 | ) | |
| Change in valuation allowance | (141 | ) | | (0.4 | ) | | 20 |
| | 0.1 | | 23 |
| | 0.1 |
| |
| Re-measurement of deferred taxes due to tax reform | — |
| | — |
| | — |
| | — | | (17,176 | ) | | (52.4 | ) | |
| Total | $ | 13,737 |
| | 39.7 |
| % | $ | 12,660 |
| | 39.3 | % | $ | (4,411 | ) | | (13.5 | ) | % |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 15, 2016, we settled an open examination withDiscrete tax expense for the California Franchise Tax Board. As a result of paying the final assessment, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability of $0.2 million.
On August 29, 2016, we received notification that the IRS completed its examination of our tax year ended December 31, 2013. As a result, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction2020 includes $0.1 million expense related to our liability of $0.6stock based compensation and $0.5 million which resulted in an increaseprimarily related to Deferred tax liability return to provision adjustments, state legislative changes and other discrete items.
We are subject to taxation in the amountUnited States and various states. As of $0.6 million.
December 31, 2020, tax years 2013 to 2019 are subject to examination by taxing authorities. On May 10, 2017, we filed amended federal returns for the tax years endingended December 31, 2013, 2014 and 2015, which generated significant refunds. Asrefunds of approximately $1.9 million. The amended returns are under audit and as a result, on July 18, 2017, we received notificationthe administrative processing of the carryback claims requires that the IRS selected ourstatute for tax years 2013 to 2015 remains open.
In connection with the 2019 stock acquisition of Calvary Memorial Park cemetery in Fairfax, Virginia, a 338(h)(10) election was filed April 24, 2020, which allowed the basis in the acquired assets to be stepped up to fair market value.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On June 30, 2020, Carriage filed a carryback claim for a refund for the tax year ended December 31, 2013, 2014 and 20152018, for $7.0 million. The requested refund was received on August 7, 2020. On November 3, 2020, Carriage filed a limited scope examination to verifycarryback claim for refund for the refunds due. The examinations are expected to conclude during 2018. The federal statute is still open for our 2015 and 2016 tax years.
We do not have any unrecognized tax benefits recorded as ofyear ended December 31, 20172019, for $1.2 million. The requested refund for tax year 2019 has not yet been received. On December 4, 2020, Carriage filed an amended federal return for the tax year ended December 31, 2018, in order to take full advantage of the CARES Act legislative changes. The changes reported in the amended return resulted in additional $2.3 million of loss. The additional losses generated from the amended filing will be administratively carried back and we do not anticipate a material change in our unrecognized tax benefits duringprocessed as part of the next twelve months.Joint Committee review of the 2018 carryback claim.
The tax effects of temporary differences from total operations that give rise to significant deferred tax assets and liabilities at December 31, 2016 and 2017 wereare as follows (in thousands):
| | | | Year Ended December 31, | | Years Ended December 31, |
| | 2016 | | 2017 | | 2019 | | 2020 |
| Deferred income tax assets: | | | | Deferred income tax assets: | | | |
| Net operating loss carryforwards | $ | 1,947 |
| | $ | 1,978 |
| Net operating loss carryforwards | $ | 3,602 | | | $ | 1,570 | |
| Interest expense limitation | | Interest expense limitation | 4,190 | | | 18 | |
| Tax credit carryforwards | 135 |
| | 133 |
| Tax credit carryforwards | 100 | | | 100 | |
| State bonus depreciation | 373 |
| | 494 |
| |
| Accrued liabilities and other | 11,163 |
| | 6,136 |
| |
| State depreciation | | State depreciation | 1,124 | | | 1,264 | |
| Accrued and other liabilities | | Accrued and other liabilities | 5,124 | | | 6,313 | |
| Amortization of non-compete agreements | 1,433 |
| | 873 |
| Amortization of non-compete agreements | 1,104 | | | 1,117 | |
| Preneed liabilities, net | 9,315 |
| | 5,239 |
| |
| Prepaid and other assets | | Prepaid and other assets | 0 | | | 741 | |
| | Total deferred income tax assets | 24,366 |
| | 14,853 |
| Total deferred income tax assets | 15,244 | | | 11,123 | |
| Less valuation allowance | (209 | ) | | (244 | ) | Less valuation allowance | (234) | | | (222) | |
| Total deferred income tax assets | $ | 24,157 |
| | $ | 14,609 |
| Total deferred income tax assets | $ | 15,010 | | | $ | 10,901 | |
| Deferred income tax liabilities: | | | | Deferred income tax liabilities: | |
| Depreciation and amortization | $ | (57,716 | ) | | $ | (41,447 | ) | Depreciation and amortization | $ | (49,568) | | | $ | (50,946) | |
Preneed liabilities
| | Preneed liabilities
| (6,446) | | | (6,427) | |
| Convertible subordinated notes due 2021 | (8,636 | ) | | (4,096 | ) | Convertible subordinated notes due 2021 | (75) | | | (5) | |
| Prepaids and other | (615 | ) | | (225 | ) | |
| Prepaid and other assets | | Prepaid and other assets | (289) | | | 0 | |
| Total deferred income tax liabilities | (66,967 | ) | | (45,768 | ) | Total deferred income tax liabilities | (56,378) | | | (57,378) | |
| Total net deferred tax liabilities | $ | (42,810 | ) | | $ | (31,159 | ) | Total net deferred tax liabilities | $ | (41,368) | | | $ | (46,477) | |
| Current deferred tax asset | $ | — |
| | $ | — |
| |
| Non-current deferred tax liabilities | (42,810 | ) | | (31,159 | ) | |
| Total net deferred tax liabilities | $ | (42,810 | ) | | $ | (31,159 | ) | |
Our deferred tax assets and liabilities, along with related valuation allowances, are classified as non-current on our Consolidated Balance SheetsSheet at December 31, 20162019 and 2017.
On December 22, 2017, the U.S. government enacted comprehensive tax legislation commonly referred to as the Tax Act. The Tax Act makes broad and complex changes to the U.S. tax code that will affect 2017, including but not limited to bonus depreciation changes that will allow for full expensing of qualified property placed in service on or after September 27, 2017.
The Tax Act also establishes new tax laws that will affect 2018, including but not limited to (1) a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; (2) a limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses); (3) a limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks; (4) immediate deductions for certain new investments (instead of deductions for depreciation expense over time); (5) limitations of certain executive compensation deductions; and (6) limitations or repeals of many business deductions and credits.
The SEC staff issued SAB 118, which provides guidance on accounting for the effects of the Tax Act. SAB 118 provides a measurement period that should not extend beyond one year from the Tax Act enactment date for companies to complete the accounting under ASC 740. In accordance with SAB 118, a company must reflect the income tax effects of those aspects of the Tax Act for which the accounting under ASC 740 is complete. To the extent that a company’s accounting for certain income tax effects is incomplete but it is able to determine a reasonable estimate, it must record a provisional estimate in the financial statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
If a company cannot determine a provision estimate in the financial statements, it should continue to apply ASC 740 on the basis of the provisions of the tax laws that were in effect immediately before the enactment of the Tax Act.
Our analysis of the impact of the Tax Act is complete. The Tax Act reduces the corporate tax rate to 21% and as a result we have recorded a decrease in our net deferred tax liability and a corresponding discrete tax benefit item of $17.2 million. In addition to the rate reduction, approximately $2.9 million of qualifying assets placed in service on or after September 27, 2017 have been fully expensed as of December 31, 2017.2020.
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 recognized an immaterial net increasedecrease in our valuation allowance during 2017 and 2016.2020.
For federal income tax reporting purposes, we have no net operating loss carryforwards. For state reporting purposes, we have approximately $36.4$32.7 million of net operating loss carryforwards that will expire between 20182021 and 2037,2039, if not utilized. Based on management’s assessment of the various state net operating losses, it was determined that it is more likely than not that we will be able to realize tax benefits on some portion of the amount of the state losses. The valuation allowance at December 31, 20172020 was attributable to the deferred tax asset related to a portion of the state operating losses.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on theour Consolidated Balance Sheets.
During 2017, the re-measurement ofSheet. The deferred tax liabilities due toassets recognized for those NOLs are presented net of these unrecognized tax reform resulted in no change to our uncertain tax positions. benefits.
At December 31, 2017, no2020, the Company’s unrecognized tax benefits reserve for uncertain tax positions were identifiedprimarily relates to losses generated from pending accounting method changes filed for the tax year ended December 31, 2018, being carried back 5 years, under the CARES Act. In 2018, we filed two Form 3115s, Application for Change in Accounting Method, to request consent to change the method of accounting for deferred revenue for our cemetery property and we do not anticipate a material change to ourcemetery merchandise and service operations beginning January 1, 2018. These method changes are still under review. Therefore, the unrecognized tax benefits duringbenefit reserve for the next twelve months.years ended December 31, 2019 and 2020 was $0.7 million and $3.7 million, respectively. There was no reserve recorded at December 31, 2018.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| 2018 | | 2019 | | 2020 |
| Unrecognized tax benefit at beginning of year | $ | 0 | | | $ | 0 | | | $ | 691 | |
| Gross increases - tax positions in prior period | 0 | | | 691 | | | 0 | |
| Gross decreases - tax positions in prior period | 0 | | | 0 | | | (691) | |
| Gross increases - tax positions in current period | 0 | | | 0 | | | 3,656 | |
| | | | | |
| Unrecognized tax benefit at end of year | $ | 0 | | | $ | 691 | | | $ | 3,656 | |
Included in balance of unrecognized tax benefit for the years ended December 31, 2019 and 2020 were $0.7 million and $3.7 million, respectively, of tax benefits that, if recognized, would affect the effective tax rate. At December 31, 2020, we expect that the $3.7 million of unrecognized tax benefit will be recognized in the next twelve months. We recognize interest accrued related to unrecognized tax benefit as income tax expense. As of December 31, 2020, we accrued an immaterial amount of interest related to the unrecognized tax benefit.
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Unrecognized tax benefit at beginning of year | $ | 515 |
| | $ | 814 |
| | $ | — |
|
| Reductions based on tax positions related to the prior year | — |
| | (17 | ) | | — |
|
| Reductions for tax year 2011 federal audit | — |
| | (568 | ) | | — |
|
| Additions (reductions) based on tax positions related to the current year | 299 |
| | (229 | ) | | — |
|
| Reductions as a result of a lapse of the applicable statute of limitations | — |
| | — |
| | — |
|
| Unrecognized tax benefit at end of year | $ | 814 |
| | $ | — |
| | $ | — |
|
17.18. STOCKHOLDERS’ EQUITY
Share Authorization
We are authorized to issue 80,000,000 shares of common stock, $0.01 per share par value. We had 22,490,85525,880,362 and 22,622,24226,020,494 shares issued and outstanding, net of 5,849,316 and 6,523,3708,025,339 shares held in treasury at par, at December 31, 20162019 and 2017,2020, respectively.
Stock Based Compensation Plans
During the year ended December 31, 2017,2020, we had two2 stock benefits plans in effect under which stock, restricted stock, stock options and performance awards have been granted or remain outstanding: the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”). The Amended and Restated 2006 Plan was terminated upon the approval of the 2017 Plan at the annual shareholders meeting on May 17, 2017. The 2017 Plan expires on May 17, 2027. All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”).
At December 31, 2020, we had 1,782,824 shares available to issue under our 2017 Plan. The termination of the Amended and Restated 2006 Plan does not affect the awards previously issued and outstanding.
All stock-based plans are administered byRestricted Stock
During the Compensation Committee appointed by our Board of Directors (the “Board”). The 2017 Plan provides for grants of options as non-qualified options or incentive stock options, restricted stock and performance awards. The 2017 Plan expires on May 17, 2027.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The status of each of the plans atyear ended December 31, 2017 is as follows (shares in thousands):
|
| | | | | | | | | | | |
| | Shares
Reserved | | Shares
Available to
Issue | | Options
Outstanding | | Performance Awards Outstanding(2) |
| Amended and Restated 2006 Plan | — |
| | — |
| | 1,918 |
| | 311 |
|
| 2017 Plan | 1,583 |
| (1) | 1,553 |
| | 16 |
| | 9 |
|
| Total | 1,583 |
| | 1,553 |
| | 1,934 |
| | 320 |
|
|
| | | | |
| | | | |
(1) | Amount includes approximately 28,000 shares granted from the Amended and Restated 2006 Plan that were returned to the Company due to cancellations and to pay the option price upon exercise. |
(2) | Performance Awards are reserved at 200% of shares granted which is equal to the maximum payout in shares. |
Restricted Stock
During 2017,2020, we issued restricted stock to certain employees totaling 27,25010,200 shares that vest over a three year period and had an aggregate grant date market value of approximately $0.8 million. The restricted$0.3 million at a weighted average stock issued will vest in either 25% or 33.33% increments over four or three year terms, respectively.price of $25.00. In 2016,2019, a total of 16,90025,550 shares of restricted stock were awarded with a grant date market value of approximately $0.3$0.5 million. In 2015,2018, a total of 37,90086,260 shares of restricted stock were awarded with a grant date market value of approximately $0.9$2.2 million.
A summary of the status of unvested restricted stock as of December 31, 2017,2020, and changes during 2017,2020, is presented below (shares in thousands):below:
| | | | | | | | | | | |
| Restricted stock awards | Shares | | Weighted Average
Grant Date
Fair Value |
| Unvested at January 1, 2020 | 69,745 | | | $ | 23.56 | |
| Granted | 10,200 | | | 25.00 | |
| Vested | (34,815) | | | 24.26 | |
| Cancelled | 0 | | | 0 | |
| Unvested at December 31, 2020 | 45,130 | | | $ | 23.34 | |
|
| | | | | | |
| Unvested stock awards | Shares | | Weighted Average Grant Date Fair Value |
| Unvested at January 1, 2017 | 63 |
| | $ | 21.07 |
|
| Awards | 27 |
| | 27.53 |
|
| Vestings | (30 | ) | | 20.10 |
|
| Cancellations | (6 | ) | | 22.70 |
|
| Unvested at December 31, 2017 | 54 |
| | $ | 24.09 |
|
We recorded stock-based compensation expense, which is included in Regional and unallocated funeral and cemetery costs and General, administrative and other expenses, for restricted stock awards of approximately $1.5$0.8 million, $0.7$0.8 million and $0.7 million in 2015, 2016 and 2017, respectively.
As ofthe years ended December 31, 2017,2018, 2019 and 2020, respectively.
At December 31, 2020, we had $1.3$1.1 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.40.9 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Options
During 2017,the year ended December 31, 2020, we granted 461,70020,000 options to our leadership team anda certain key employeesemployee at a weighted average exercise price of $26.56.$18.02. These options will vest in one-fifthone-third increments over a five-yearthree-year period and have a ten-yearten-year term. The fair value of these options was approximately $3.3$0.1 million. On June 26, 2020, we cancelled 100,000 options in connection with the resignation of our President and Chief Operating Officer.
In 2016,2019, a total of 235,500100,000 stock options were awarded, the fair value of which was $1.3$0.6 million. In 2015,2018, a total of 628,000212,940 stock options were awarded, the fair value of which was approximately $3.7$1.4 million.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
OptionsStock options are granted with an exercise price equal to the closing price of our common stock on the date of grant. All of the options granted and outstanding under this plan have either five, a seven or ten-year terms.ten-year term. We utilize the Black-Scholes option valuation model for estimating the fair value of our stock options. This model allows the use of a range of assumptions related to volatility, risk-free interest rate, expected holding period and dividend yield. The expected volatility utilized in the valuation model is based on the historical volatility of our stock price. The dividend yield and expected holding period are based on historical experience and management's estimate of future events. The risk-free interest rate is derived from the U.S. Treasury yield curve based on the expected life of the option in effect at the time of grant.
The fair values of our stock options were calculated using the following weighted average assumptions, based on the methods described above for the years ended December 31, 2015, 2016 and 2017:above:
| | | | | | | | | | | | | | | | | |
| Years Ended December 31, |
| 2018 | | 2019 | | 2020 |
| Dividend yield | 1.18 | % | | 1.23 | % | | 1.67 | % |
| Expected volatility | 27.08 | % | | 27.45 | % | | 38.54 | % |
| Risk-free interest rate | 2.65 | % | | 1.65 | % | | 0.25 | % |
| Expected holding period (years) | 5.0 | | 5.0 | | 3.7 |
| Black-Scholes value | $6.38 | | $5.70 | | $4.61 |
|
| | | | | | | | |
| | 2015 | | 2016 | | 2017 |
| Dividend yield | 0.44 | % | | 0.50 | % | | 0.75 | % |
| Expected volatility | 32.62 | % | | 31.21 | % | | 29.29 | % |
| Risk-free interest rate | 1.13 | % | | 1.23 | % | | 1.95 | % |
| Expected holding period (years) | 3.6 |
| | 5.0 |
| | 5.0 |
|
A summary of the stock options at December 31, 2015, 2016 and 2017 and changes during the three years ended December 31, 20172020 is presented in the table and narrative below (shares in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Shares | | Wtd. Avg.
Ex. Price | | Shares | | Wtd. Avg.
Ex. Price | | Shares | | Wtd. Avg.
Ex. Price |
| Outstanding at January 1, 2020 | 1,934 | | | $ | 20.85 | | | 1,523 | | | $ | 21.95 | | | 1,078 | | | $ | 23.22 | |
| Granted | 213 | | | $ | 25.43 | | | 100 | | | $ | 24.35 | | | 20 | | | $ | 18.02 | |
Exercised (1) | (459) | | | $ | 17.73 | | | (247) | | | $ | 17.37 | | | (40) | | | $ | 13.72 | |
| Cancelled or expired | (165) | | | $ | 25.34 | | | (298) | | | $ | 21.96 | | | (146) | | | $ | 23.97 | |
| Outstanding at December 31, 2020 | 1,523 | | | $ | 21.95 | | | 1,078 | | | $ | 23.22 | | | 912 | | | $ | 23.40 | |
| Exercisable at December 31, 2020 | 1,001 | | | $ | 20.29 | | | 643 | | | $ | 22.02 | | | 668 | | | $ | 22.90 | |
|
| | | | | | | | | | | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| | Shares | | Wtd. Avg. Ex. Price | | Shares | | Wtd. Avg. Ex. Price | | Shares | | Wtd. Avg. Ex. Price |
| Outstanding at beginning of period | 1,381 |
| | $ | 17.07 |
| | 1,695 |
| | $ | 18.95 |
| | 1,650 |
| | $ | 19.18 |
|
| Adjustment to beginning balance | — |
| | $ | — |
| | 18 |
| | $ | 18.94 |
| | — |
| | $ | — |
|
| Granted | 653 |
| | $ | 22.66 |
| | 236 |
| | $ | 20.06 |
| | 462 |
| | $ | 26.56 |
|
| Exercised | (110 | ) | | $ | 14.36 |
| | (112 | ) | | $ | 13.76 |
| | (159 | ) | | $ | 19.81 |
|
| Canceled or expired | (229 | ) | | $ | 20.39 |
| | (187 | ) | | $ | 21.30 |
| | (19 | ) | | $ | 23.17 |
|
| Outstanding at end of year | 1,695 |
| | $ | 18.95 |
| | 1,650 |
| | $ | 19.18 |
| | 1,934 |
| | $ | 20.85 |
|
| Exercisable at end of year | 583 |
| | $ | 15.00 |
| | 1,106 |
| | $ | 18.21 |
| | 1,225 |
| | $ | 18.68 |
|
| | | | | | | | | | | |
| | | |
| (1) | | For the year ended December 31, 2020, 20,000 options were surrendered by employees to pay the option price and taxes related to the option exercises. |
The aggregate intrinsic value of the outstanding and exercisable stock options was $7.2 million and $5.6 million at December 31, 2017 was $9.8 million and $8.6 million, respectively.2020. The total intrinsic value of options exercised during 2015, 2016the years ended December 31, 2018, 2019 and 20172020 totaled $1.1$3.9 million, $1.2 million and $1.0$0.5 million, respectively.
The total fair value of stock options vested during 2015, 20162018, 2019 and 20172020 totaled approximately $1.8$1.5 million, $2.8$0.9 million and $1.5$0.7 million, respectively. We recorded stock-based compensation expense, which is included in Regional and unallocated funeral and cemetery costs and General, administrative and other expenses, for stock options of approximately $2.4$1.0 million, $1.7$0.7 million and $1.5$0.7 million in 2015, 2016 and 2017, respectively.
As offor the years ended December 31, 2017,2018, 2019 and 2020, respectively.
At December 31, 2020, there was $3.0$0.8 million of unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted average period of approximately four1.53 years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table further describes our outstanding stock options at December 31, 2017:2020:
|
| | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| Actual Ranges of Exercise Prices | Number Outstanding at 12/31/17 | | Weighted-Average Remaining Contractual Life | | Weighted-Average Exercise Price | | Number Exercisable at 12/31/17 | | Weighted-Average Exercise Price |
| $4.78 - $5.94 | 105,603 |
| | 3.50 | | $ | 5.66 |
| | 105,603 |
| | $ | 5.66 |
|
| $16.73 - $20.49 | 942,153 |
| | 3.92 | | $ | 19.02 |
| | 797,673 |
| | $ | 18.83 |
|
| $22.58 - $26.93 | 885,900 |
| | 6.74 | | $ | 24.61 |
| | 322,001 |
| | $ | 22.58 |
|
| $4.78 - $26.93 | 1,933,656 |
| | 5.19 | | $ | 20.85 |
| | 1,225,277 |
| | $ | 18.68 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Options Outstanding | | Options Exercisable |
| Actual Ranges of Exercise Prices | Number Outstanding at 12/31/20 | | Weighted-Average
Remaining
Contractual Life | | Weighted-Average
Exercise Price | | Number Exercisable at 12/31/20 | | Weighted-Average
Remaining
Contractual Life | | Weighted-Average
Exercise Price |
| $5.94 - $5.94 | 22,674 | | | 1.18 | | $ | 5.94 | | | 22,674 | | | 1.18 | | $ | 5.94 | |
| $18.02 - $22.58 | 461,472 | | | 2.41 | | $ | 21.68 | | | 415,432 | | | 2.14 | | $ | 21.96 | |
| $25.43 - $26.54 | 427,590 | | | 6.50 | | $ | 26.19 | | | 229,776 | | | 6.43 | | $ | 26.28 | |
| $5.94 - $26.54 | 911,736 | | | 4.30 | | $ | 23.40 | | | 667,882 | | | 3.58 | | $ | 22.90 | |
Performance Awards
During 2017,On February 19, 2020, we granted 105,540237,500 performance awards to our leadership team and certain key employees, payable in shares. The fair value of these performance awards was $2.8 million and was determined by using the Monte-Carlo simulation pricing model. On May 19, 2020, we cancelled all performance award agreements previously awarded to all individuals during 2019 and the February 19, 2020 award.
Concurrently with the cancellation, the Compensation Committee of the Board approved a new performance award (“new performance award”) to be issued to certain employees. These awards will vest (if at all) on December 31, 2021 and June 30, 2022,2024 provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Earnings Before Interest Tax Depreciationthe Company’s common stock reaches one of five predetermined growth targets for a sustained period beginning on the grant date of May 19, 2020 and Amortization)ending on December 31, 2024. The new performance award was treated as a modification of the cancelled awards and Adjusted Consolidated EBITDA Marginresulted in an additional $1.7 million of incremental compensation costs. At December 31, 2020, there was $5.0 million of unrecognized compensation cost related to performance awards expected to be recognized over a weighted average period of 4.0 years.
A summary of the new performance award and changes during the year ended December 31, 2020 is achievedpresented in the table and below:
| | | | | | | | | | | |
| Performance Awards | Shares | | Weighted Average
Grant Date
Fair Value |
| At January 1, 2020 | 0 | | | 0 |
| Granted | 399,664 | | | $10.79 |
| Vested | 0 | | | 0 |
| Cancelled | (33,538) | | | $9.69 |
| At December 31, 2020 | 366,126 | | | $10.89 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table reflects the new performance awards granted during the year ended December 31, 2020, their respective fair values and the individual has remained continuously employedassumptions utilized in the Monte-Carlo simulation pricing model:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Grant date | | May 19, 2020 | | June 25, 2020 | | July 30, 2020 | | August 31, 2020 | | October 30, 2020 |
| Performance period | | May 19, 2020 - December 31, 2024 | | June 25, 2020 - December 31, 2024 | | July 30, 2020 - December 31, 2024 | | August 31, 2020 - December 31, 2024 | | October 30, 2020 - December 31, 2024 |
| Awards granted | | 368,921 | | 13,974 | | 2,795 | | 6,987 | | 6,987 |
Fair value (in millions) (1) | | $3.6 | | $0.2 | | $0.1 | | $0.2 | | $0.3 |
| Simulation period (years) | | 4.62 | | 4.52 | | 4.42 | | 4.33 | | 4.17 |
| Share price at grant date | | $15.79 | | $18.02 | | $23.10 | | $22.14 | | $25.81 |
| Expected volatility | | 34.54 | % | | 36.24 | % | | 37.43 | % | | 37.71 | % | | 38.72 | % |
| Risk-free interest rate | | 0.33 | % | | 0.29 | % | | 0.20 | % | | 0.24 | % | | 0.30 | % |
| | | | | | | | | | |
| | | | | | | | | | | |
| | | |
| (1) | | The total fair value of the new performance awards granted is $4.3 million. |
During 2019, we granted 306,623 performance awards to our leadership team and certain key employees, payable in shares. The fair value of these performance awards was $1.6 million and was determined by Carriage through such date. The Adjusted Consolidated EBITDAusing the Monte-Carlo simulation pricing model. These performance represents 50% of the awardawards were cancelled on May 19, 2020.
During 2018, we granted 113,320 performance awards to our leadership team and the Adjusted Consolidated EBITDA Margin performance represents 50% of the award.certain key employees, payable in shares. The fair value of these performance awards was approximately $2.8$2.9 million and was determined by using the weighted average stock price on the grant date of $26.56.
During 2016, we granted 73,700$25.43. These performance awards to our leadership team and certain key employees, payable in shares. These awards will vest (if at all)were cancelled on December 31, 2020 provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Consolidated Earnings Before Interest Tax Depreciation and Amortization) and Relative Shareholder Return performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents 25% of the award and the Relative Shareholder Return performance represents 75% of the award. The fair value of these performance awards was approximately $1.6 million and was determined by using a Monte-Carlo simulation pricing model. The assumptions used in the Monte-Carlo simulation pricing model are as follows:November 29, 2019.
|
| | |
| 2016 |
Performance period | January 1, 2016 - December 31, 2020 |
Simulation period (years) | 4.86 |
|
Share price at grant date | $20.06 |
Expected volatility | 31.2 | % |
Risk-free interest rate | 1.21 | % |
Forfeiture rate | 2.0 | % |
We recorded stock-based compensation expense, which is included in Regional and unallocated funeral and cemetery costs andGeneral, administrative and other expenses, for performance awards of approximately$4.4 million, $0.2 million and $0.7$0.9 million in 2016during the years ended December 31, 2018, 2019 and 2017,2020, respectively.
Employee Stock Purchase Plan
We provide all employees the opportunity to purchase common stock through payroll deductions in our ESPP. Purchases are made quarterly; the price being 85% of the lower of the price on the first day of the plan entry date (beginning of the fiscal year) or the actual date of purchase (end of quarter). In 2017,2020, employees purchased a total of 43,80871,908 shares at a weighted average price of $22.43$16.71 per share. In 2016,2019, employees purchased a total of 44,77473,731 shares at a weighted average price of $19.48$13.18 per share. In 2015,2018, employees purchased a total of 44,07449,938 shares at a weighted average price of $17.17$18.56 per share.
We recorded stock-based compensation expense, which is included in Regional and unallocated funeral and cemetery costs and General, administrative and other expenses, for our ESPP of approximately $197,000, $234,000$0.2 million, $0.3 million and $244,000 in 2015, 2016$0.4 million during the years ended December 31, 2018, 2019 and 2017,2020, respectively.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The fair values of the right (option) to purchase shares under the ESPP are estimated at the date of purchase with the four quarterly purchase dates using the following assumptions:
| | | | | | | | | Years Ended December 31, |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Dividend yield | 0.4 | % | | 0.6 | % | | 0.9 | % | Dividend yield | 1.4 | % | | 1.4 | % | | 1.5 | % |
| Expected volatility | 24 | % | | 25 | % | | 19 | % | Expected volatility | 20.9 | % | | 36.1 | % | | 48.6 | % |
| Risk-free interest rate | 0.02%, 0.11%,0.18%, 0.25% |
| | 0.22%, 0.49%,0.55%, 0.61% |
| | 0.53%, 0.65%,0.77%0.89% |
| Risk-free interest rate | 1.44%, 1.61%, 1.72%, 1.83% | | 2.42%, 2.51%, 2.56%, 2.60% | | 1.54%, 1.57%, 1.57%, 1.56% |
| Expected life (years) | .25, .50, .75, 1.00 |
| | .25, .50, .75, 1.00 |
| | .25, .50, .75, 1.00
|
| Expected life (years) | 0.25, 0.50, 0.75, 1.00 | | 0.25, 0.50, .0.75, 1.00 | | 0.25, 0.50, 0.75, 1.00 |
Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of purchase. The expected life of the ESPP grants represents the calendar quarters from the beginning of the year to the purchase date (end of each quarter).
Good To Great Incentive Program
On February 19, 2020, we issued 17,991 shares of our common stock to certain employees, which were valued at approximately $0.4 million at a grant date stock price of $25.00.
During 2019, we issued 14,844 shares of our common stock to certain employees, which were valued at approximately $0.3 million at a grant date stock price of $19.92.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 2018, we issued 5,712 shares of our common stock to certain employees, which were valued at approximately $0.1 million at a grant date stock price of $25.43.
Director (Non-Employee) Compensation Plans
OurOn February 19, 2020, our Board revised the Director Compensation Policy provides for the following: (i)to provide that each independent director is entitled to an annuala quarterly retainer of $75,000,$35,000 payable in quarterly installmentscash and/or unrestricted shares of $18,750 eachour common stock at the end of the quarter; and (ii) theeach quarter. The Lead Director and chairman of our Audit Committee are entitled to an additional annual retainer of $10,000, payable in quarterly installments of $2,500 each at the end of each quarter, and the chairman of our Corporate Governance and Compensation Committees are entitled to an additional annual retainer of $5,000, payable in quarterly installments of $1,250 each at the end of each quarter. Any new independent director will receive upon admission to the Board a grant of $25,000 (in addition to the independent director annual retainer prorated at the time the new director is admitted to the Board) which can be taken in cash or restrictedunrestricted shares of our common stock. The number of shares of such common stock will be determined by dividing the cash amount by the closing price of our common stock on the date of grant, which will be the date of admission to the Board. Such common stock, will vest (based on continued service on the Board) 50% immediately and 25% on the first and second anniversaries of admission.
On August 9, 2016,April 23, 2020, as part of our broad-based effort to respond to COVID-19, the Board approved a temporary reduction of the quarterly retainer for our non-employee directors from $35,000 per quarter to $29,750 per quarter (or 15%) effective April 19, 2020. On June 26, 2020, the Board voted James R. Schenckto reinstate the quarterly retainer back to 100% effective as of June 28, 2020.
On July 30, 2020, the Board elected Dr. Achille Messac to serve as a Class 1II Director until the 20182022 annual meeting of shareholders. Mr. SchenckMessac was appointed to serve ason the chairman of theAudit, Compensation and Corporate Governance Committee and a member ofCommittees.
Pursuant to the Audit and Compensation Committees. Concurrently with the appointment, the Board granted Mr. Schenck 1,061 shares of the Company’s common stock under ourrevised Director Compensation Policy described above, for the year ended December 31, 2020, we granted 30,883 shares of our common stock to six Directors, which such grant waswere valued at approximately $25,000 based on$0.7 million at a weighted average stock price of $21.16. For the closingyear ended December 31, 2019, we granted 7,458 shares of our common stock to two Directors, which were valued at $0.2 million at a weighted average stock price onof $20.78. For the grant date.year ended December 31, 2018, we granted 7,403 shares of our common stock to three Directors, which were valued at $0.2 million at a weighted average stock price of $20.52.
We recorded compensation expense, which is included in General, administrative and other expenses, related to annual retainers, and restrictedincluding the value of stock awardsgranted to Directors above, of approximately $0.7$0.5 million, $0.4$0.5 million and $0.4$0.9 million in 2015, 2016during the years ended December 31, 2018, 2019 and 2017,2020, respectively.
Cash Dividends
On October 25, 2017, ourMay 19, 2020, the Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075of $0.05 per share effectiveto our annual dividend beginning with respect to dividends payable on December 1, 2017 and later.the dividend declaration in the third quarter. On October 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.
For the years ended December 31, 2016 and 2017, ourOur 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 | |
|
| | | | | | | |
| 2017 | Per Share | | Dollar Value |
| March 1st | $ | 0.050 |
| | $ | 833 |
|
| June 1st | $ | 0.050 |
| | $ | 835 |
|
| September 1st | $ | 0.050 |
| | $ | 835 |
|
| December 1st | $ | 0.075 |
| | $ | 1,206 |
|
| | | | |
| 2016 | Per Share | | Dollar Value |
| March 1st | $ | 0.025 |
| | $ | 415 |
|
| June 1st | $ | 0.025 |
| | $ | 415 |
|
| September 1st | $ | 0.050 |
| | $ | 831 |
|
| December 1st | $ | 0.050 |
| | $ | 830 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accumulated other comprehensive income
Our components of Accumulated other comprehensive income are as follows (in thousands):
|
| | | |
| Accumulated Other Comprehensive Income |
Balance at December 31, 2016 | $ | — |
|
Increase in net unrealized gains associated with available-for-sale securities of the trusts | 10,304 |
|
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus’
| (10,304 | ) |
Balance at December 31, 2017 | $ | — |
|
18.19. SHARE REPURCHASE PROGRAM
During the year ended December 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. On February 25, 2016,July 31, 2019, our Board approved aan additional $25.0 million under our share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases of our common stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act.
amended. During the year ended December 31, 2017,2019, we repurchased 574,054400,000 shares of common stock for a total cost of $14.0$7.8 million at an average cost of $24.35$19.39 per share pursuant to thisour share repurchase program. Our shares were purchased in the open market. Purchases weremarket 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 ended December 31, 2020, we did not repurchase any common shares. At December 31, 2017,2020, we had approximately $26.0$25.6 million available for repurchase under thisour share repurchase program.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price we paid for these shares was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. See Note 24 to our Consolidated Financial Statements included herein for additional information on our related party transactions.
We did not purchase any shares of our common stock during 2016. During 2015, we purchased 1,927,665 shares of our common stock for a total cost of $45.0 million, at an average cost of $23.34 per share under a previous share repurchase program.
19.20. EARNINGS PER SHARE
Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities and we have prepared our earnings per share calculations to exclude outstandingearnings allocated to unvested restricted stock awards, using the two-class method, in the basic and diluted weighted average shares outstanding calculation.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table sets forth the computation of the basic and diluted earnings per share for the years ended December 31, 2015, 2016 and 2017 (in thousands, except per share data):
| | | | Year Ended December 31, | | Years Ended December 31, |
| | 2015 | | 2016 | | 2017 | | 2018 | | 2019 | | 2020 |
| Numerator for basic and diluted earnings per share: | | | | | | Numerator for basic and diluted earnings per share: | | | | | |
| Net income | $ | 20,853 |
| | $ | 19,581 |
| | $ | 37,193 |
| Net income | $ | 11,645 | | | $ | 14,533 | | | $ | 16,090 | |
| Less: Earnings allocated to unvested restricted stock | (257 | ) | | (89 | ) | | (135 | ) | Less: Earnings allocated to unvested restricted stock | (57) | | | (62) | | | (46) | |
| Income attributable to common stockholders | $ | 20,596 |
| | $ | 19,492 |
| | $ | 37,058 |
| Income attributable to common stockholders | $ | 11,588 | | | $ | 14,471 | | | $ | 16,044 | |
| | | | | | | | | | | | |
| Denominator: | | | | | | Denominator: | |
| Denominator for basic earnings per common share - weighted average shares outstanding | 17,791 |
| | 16,515 |
| | 16,438 |
| Denominator for basic earnings per common share - weighted average shares outstanding | 17,971 | | | 17,877 | | | 17,872 | |
| Effect of dilutive securities: | | | | | | Effect of dilutive securities: | |
| Stock options | 246 |
| | 454 |
| | 336 |
| Stock options | 66 | | | 118 | | | 196 | |
| Convertible subordinated notes | 276 |
| | 491 |
| | 941 |
| |
| Convertible Notes | | Convertible Notes | 337 | | | 10 | | | 9 | |
| Denominator for diluted earnings per common share - weighted average shares outstanding | 18,313 |
| | 17,460 |
| | 17,715 |
| Denominator for diluted earnings per common share - weighted average shares outstanding | 18,374 | | | 18,005 | | | 18,077 | |
| | | | | | | | | | | | |
| Basic earnings per common share | $ | 1.16 |
| | $ | 1.18 |
| | $ | 2.25 |
| Basic earnings per common share | $ | 0.64 | | | $ | 0.81 | | | $ | 0.90 | |
| Diluted earnings per common share | $ | 1.12 |
| | $ | 1.12 |
| | $ | 2.09 |
| Diluted earnings per common share | $ | 0.63 | | | $ | 0.80 | | | $ | 0.89 | |
The fully diluted weighted average shares outstanding for the years ended December 31, 2015, 20162018, 2019 and 2017,2020, and the corresponding calculation of fully diluted earnings per share, included approximately 0.3 million, 0.5 million337,000, 10,000 and 0.9 million9,000 shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260.
ForDuring the year ended December 31, 2017, approximately 354,0002020, 0 stock options were excluded from the computation of diluted earnings per share. For the years ended December 31, 2018 and 2019, there were 1,660,919 and 338,440 stock options excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect. There were no options excluded in the computation of diluted earnings per share for the years ended December 31, 2015 and 2016.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. SEGMENT REPORTING
20. MAJOR SEGMENTS OF BUSINESS
We conduct funeral and cemetery operations only in the United States. Revenue, disaggregated by major source for each of our reportable segments was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
| Year Ended, December 31, 2020 | | | | | | |
| | Funeral | | Cemetery | | Total |
| Services | | $ | 150,283 | | | $ | 14,701 | | | $ | 164,984 | |
| Merchandise | | 84,787 | | | 10,778 | | | 95,565 | |
| Cemetery property | | 0 | | | 44,065 | | | 44,065 | |
| Other revenue | | 14,068 | | | 10,766 | | | 24,834 | |
| Total | | $ | 249,138 | | | $ | 80,310 | | | $ | 329,448 | |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended, December 31, 2019 | | | | | | |
| | Funeral | | Cemetery | | Total |
| Services | | $ | 131,636 | | | $ | 10,918 | | | $ | 142,554 | |
| Merchandise | | 75,682 | | | 7,665 | | | 83,347 | |
| Cemetery property | | 0 | | | 31,167 | | | 31,167 | |
| Other revenue | | 9,550 | | | 7,489 | | | 17,039 | |
| Total | | $ | 216,868 | | | $ | 57,239 | | | $ | 274,107 | |
| | | | | | | | | | | | | | | | | | | | |
| Year Ended, December 31, 2018 | | | | | | |
| | Funeral | | Cemetery | | Total |
| Services | | $ | 127,262 | | | $ | 11,342 | | | $ | 138,604 | |
| Merchandise | | 74,644 | | | 8,158 | | | 82,802 | |
| Cemetery property | | 0 | | | 29,451 | | | 29,451 | |
| Other revenue | | 8,819 | | | 8,316 | | | 17,135 | |
| Total | | $ | 210,725 | | | $ | 57,267 | | | $ | 267,992 | |
The following table presents revenues, gross profitoperating income (loss), income (loss) before income taxes, depreciation and amortization, interest expense, income tax expense (benefit), total assets, long-lived assets, capital expenditures and number of operating locations by segment (in thousands, except number of operating locations):
|
| | | | | | | | | | | | | | | |
| | Funeral | | Cemetery | | Corporate | | Consolidated |
| Revenues: | | | | | | | |
| 2017 | $ | 200,886 |
| | $ | 57,253 |
| | $ | — |
| | $ | 258,139 |
|
| 2016 | 189,401 |
| | 58,799 |
| | — |
| | 248,200 |
|
| 2015 | 185,818 |
| | 56,684 |
| | — |
| | 242,502 |
|
| Gross Profit (loss): | | | | | | | |
| 2017 | $ | 61,369 |
| | $ | 15,430 |
| | $ | (27,858 | ) | | $ | 48,941 |
|
| 2016 | 61,620 |
| | 18,030 |
| | (29,446 | ) | | 50,204 |
|
| 2015 | 59,434 |
| | 18,074 |
| | (28,860 | ) | | 48,648 |
|
| Income (loss) before income taxes: | | | | | | | |
| 2017 | $ | 60,634 |
| | $ | 15,852 |
| | $ | (43,704 | ) | | $ | 32,782 |
|
| 2016 | 61,163 |
| | 18,400 |
| | (47,322 | ) | | 32,241 |
|
| 2015 | 58,404 |
| | 17,492 |
| | (41,306 | ) | | 34,590 |
|
| Depreciation and amortization | | | | | | | |
| 2017 | $ | 9,785 |
| | $ | 4,589 |
| | $ | 1,605 |
| | $ | 15,979 |
|
| 2016 | 8,891 |
| | 5,028 |
| | 1,502 |
| | 15,421 |
|
| 2015 | 7,614 |
| | 4,420 |
| | 1,746 |
| | 13,780 |
|
| Interest expense: | | | | | | | |
| 2017 | $ | 1,170 |
| | $ | 2 |
| | $ | 11,776 |
| | $ | 12,948 |
|
| 2016 | 826 |
| | 3 |
| | 10,909 |
| | 11,738 |
|
| 2015 | 577 |
| | 8 |
| | 9,974 |
| | 10,559 |
|
| Income tax expense (benefit) | | | | | | | |
| 2017 | $ | (8,159 | ) | | $ | (2,133 | ) | | $ | 5,881 |
| | $ | (4,411 | ) |
| 2016 | 24,019 |
| | 7,226 |
| | (18,585 | ) | | 12,660 |
|
| 2015 | 23,195 |
| | 6,947 |
| | (16,405 | ) | | 13,737 |
|
| Total assets: | | | | | | | |
| 2017 | $ | 665,483 |
| | $ | 251,243 |
| | $ | 4,807 |
| | $ | 921,533 |
|
| 2016 | 634,145 |
| | 241,621 |
| | 9,303 |
| | 885,069 |
|
| 2015 | 591,389 |
| | 229,479 |
| | 12,271 |
| | 833,139 |
|
| Long-lived assets: | | | | | | | |
| 2017 | $ | 537,282 |
| | $ | 90,292 |
| | $ | 2,124 |
| | $ | 629,698 |
|
| 2016 | 509,361 |
| | 89,767 |
| | 2,548 |
| | 601,676 |
|
| 2015 | 472,419 |
| | 89,866 |
| | 3,370 |
| | 565,655 |
|
| Capital expenditures: | | | | | | | |
| 2017 | $ | 9,835 |
| | $ | 5,283 |
| | $ | 1,277 |
| | $ | 16,395 |
|
| 2016 | 17,411 |
| | 4,962 |
| | 731 |
| | 23,104 |
|
| 2015 | 27,654 |
| | 5,332 |
| | 2,838 |
| | 35,824 |
|
| Number of operating locations at year end: | | | | | | | |
| 2017 | 178 |
| | 32 |
| | — |
| | 210 |
|
| 2016 | 170 |
| | 32 |
| | — |
| | 202 |
|
| 2015 | 167 |
| | 32 |
| | — |
| | 199 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| | | | | | | | | | | | | | | | | | | | | | | |
| Funeral | | Cemetery | | Corporate | | Consolidated |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Operating income (loss): | | | | | | | |
| 2020 | $ | 57,622 | | | $ | 26,859 | | | $ | (27,254) | | | $ | 57,227 | |
| 2019 | 58,756 | | | 15,983 | | | (27,296) | | | 47,443 | |
| 2018 | 60,035 | | | 14,717 | | | (32,640) | | | 42,112 | |
| Income (loss) before income taxes: | | | | | | | |
| 2020 | $ | 56,875 | | | $ | 27,087 | | | $ | (59,320) | | | $ | 24,642 | |
| 2019 | 58,844 | | | 16,025 | | | (52,453) | | | 22,416 | |
| 2018 | 58,896 | | | 15,108 | | | (55,738) | | | 18,266 | |
| Depreciation and amortization: | | | | | | | |
| 2020 | $ | 11,586 | | | $ | 6,376 | | | $ | 1,427 | | | $ | 19,389 | |
| 2019 | 11,128 | | | 5,227 | | | 1,416 | | | 17,771 | |
| 2018 | 10,726 | | | 4,891 | | | 1,813 | | | 17,430 | |
| Interest expense: | | | | | | | |
| 2020 | $ | 1,004 | | | $ | 13 | | | $ | 31,498 | | | $ | 32,515 | |
| 2019 | 1,142 | | | 0 | | | 24,380 | | | 25,522 | |
| 2018 | 1,339 | | | 0 | | | 19,770 | | | 21,109 | |
| Income tax expense (benefit): | | | | | | | |
| 2020 | $ | 19,738 | | | $ | 9,401 | | | $ | (20,587) | | | $ | 8,552 | |
| 2019 | 20,694 | | | 5,635 | | | (18,446) | | | 7,883 | |
| 2018 | 21,349 | | | 5,476 | | | (20,204) | | | 6,621 | |
| Total assets: | | | | | | | |
| 2020 | $ | 764,535 | | | $ | 366,964 | | | $ | 14,326 | | | $ | 1,145,825 | |
| 2019 | 790,459 | | | 314,413 | | | 24,883 | | | 1,129,755 | |
| 2018 | 686,470 | | | 226,475 | | | 4,557 | | | 917,502 | |
| Long-lived assets: | | | | | | | |
| 2020 | $ | 619,588 | | | $ | 172,122 | | | $ | 995 | | | $ | 792,705 | |
| 2019 | 650,179 | | | 145,158 | | | 1,303 | | | 796,640 | |
| 2018 | 572,916 | | | 89,654 | | | 1,538 | | | 664,108 | |
| Capital expenditures: | | | | | | | |
| 2020 | $ | 6,997 | | | $ | 7,025 | | | $ | 1,176 | | | $ | 15,198 | |
| 2019 | 8,403 | | | 5,772 | | | 1,204 | | | 15,379 | |
| 2018 | 8,296 | | | 3,989 | | | 1,241 | | | 13,526 | |
| Number of operating locations at year end: | | | | | | | |
| 2020 | 178 | | 32 | | 0 | | | 210 |
| 2019 | 186 | | 31 | | 0 | | | 217 |
| 2018 | 182 | | 29 | | 0 | | | 211 |
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. SUPPLEMENTARY DATA
Balance Sheet
The detail of certain balance sheet accounts as of December 31, 2016 and 2017 is as follows (in thousands):
| | | | | | | | | | | |
| December 31, |
| 2019 | | 2020 |
| Prepaids and other current assets: | | | |
| Prepaid expenses | $ | 1,596 | | | $ | 1,919 | |
| Deposit on pending acquisition | 5,000 | | | 0 | |
| Federal income tax receivable | 2,973 | | | 0 | |
| State income tax receivable | 986 | | | 0 | |
| Other current assets | 112 | | | 157 | |
| Total other current assets | $ | 10,667 | | | $ | 2,076 | |
| | | |
| Current portion of debt and lease obligations: | | | |
| Current portion of acquisition debt | $ | 1,306 | | | $ | 1,027 | |
| Current portion of finance lease obligations | 290 | | | 323 | |
| Current portion of operating lease obligations | 1,554 | | | 2,082 | |
| Total current portion of debt and lease obligations | $ | 3,150 | | | $ | 3,432 | |
| | | |
| Accrued and other liabilities: | | | |
| Accrued salaries and wages | $ | 4,323 | | | $ | 1,392 | |
| Accrued incentive compensation | 9,199 | | | 11,139 | |
| Accrued vacation | 2,880 | | | 3,271 | |
| Accrued insurance | 2,329 | | | 3,016 | |
| Accrued interest | 2,299 | | | 2,291 | |
| Accrued ad valorem and franchise taxes | 678 | | | 435 | |
| Employer payroll tax deferral | 0 | | | 1,773 | |
| Accrued commissions | 560 | | | 634 | |
| Perpetual care trust taxes payable | 401 | | | 908 | |
| Income tax payable | 0 | | | 798 | |
| | | |
| Other accrued liabilities | 1,357 | | | 1,825 | |
| Unrecognized tax benefit | 0 | | | 3,656 | |
| Total accrued and other liabilities | $ | 24,026 | | | $ | 31,138 | |
| | | |
| Other long-term liabilities: | | | |
| | | |
| Incentive compensation | $ | 1,267 | | | $ | 2,975 | |
| Contingent consideration | 470 | | | 0 | |
| Employer payroll tax deferral | 0 | | | 1,773 | |
| Total other long-term liabilities | $ | 1,737 | | | $ | 4,748 | |
|
| | | | | | | |
| | December 31, |
| | 2016 | | 2017 |
| Other current assets: | | | |
| Income tax receivables | $ | 1,932 |
| | $ | 889 |
|
| Other current assets | 102 |
| | 97 |
|
| Total other current assets | $ | 2,034 |
| | $ | 986 |
|
| | | | |
| Current portion of long-term debt and capital lease obligations | | | |
| Term note | $ | 11,250 |
| | $ | 15,000 |
|
| Acquisition debt | 1,771 |
| | 1,927 |
|
| Capital leases | 246 |
| | 324 |
|
| Total current portion of long-term debt and capital lease obligations | $ | 13,267 |
| | $ | 17,251 |
|
| | | | |
| Other current liabilities: | | | |
| Income taxes payable | $ | 509 |
| | $ | 1,120 |
|
| Deferred rent | 208 |
| | 241 |
|
| Total other current liabilities | $ | 717 |
| | $ | 1,361 |
|
| | | | |
| Accrued liabilities: | | | |
| Accrued salaries and wages | $ | 4,005 |
| | $ | 2,643 |
|
| Accrued incentive compensation | 8,237 |
| | 6,412 |
|
| Accrued vacation | 2,305 |
| | 2,417 |
|
| Accrued insurance | 1,726 |
| | 1,832 |
|
| Accrued interest | 1,235 |
| | 1,271 |
|
| Accrued ad valorem and franchise taxes | 981 |
| | 1,003 |
|
| Accrued commissions | 543 |
| | 461 |
|
| Other accrued liabilities | 1,059 |
| | 1,520 |
|
| Total accrued liabilities | $ | 20,091 |
| | $ | 17,559 |
|
| | | | |
| Other long-term liabilities: | | | |
| Deferred rent | $ | 1,207 |
| | $ | 966 |
|
| Incentive compensation | 575 |
| | 1,287 |
|
| Contingent consideration | 785 |
| | 1,125 |
|
| Total other long-term liabilities | $ | 2,567 |
| | $ | 3,378 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenues and Field costs and expenses
The detail of certain income statement accounts for the years ended December 31, 2015, 2016 and 2017 is as follows (in thousands):
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Revenues: | | | | | |
| Goods | | | | | |
| Funeral | $ | 71,399 |
| | $ | 72,002 |
| | $ | 76,160 |
|
| Cemetery | 35,479 |
| | 37,678 |
| | 36,340 |
|
| Total goods | $ | 106,878 |
| | $ | 109,680 |
| | $ | 112,500 |
|
| Services | | | | | |
| Funeral | $ | 104,969 |
| | $ | 108,622 |
| | $ | 116,240 |
|
| Cemetery | 11,178 |
| | 11,269 |
| | 11,898 |
|
| Total services | $ | 116,147 |
| | $ | 119,891 |
| | $ | 128,138 |
|
| Financial revenue | | | | | |
| Preneed funeral commission income | $ | 1,484 |
| | $ | 1,429 |
| | $ | 1,254 |
|
| Preneed funeral trust earnings | 7,966 |
| | 7,348 |
| | 7,232 |
|
| Preneed cemetery trust earnings | 8,440 |
| | 8,004 |
| | 7,193 |
|
| Preneed cemetery finance charges | 1,587 |
| | 1,848 |
| | 1,822 |
|
| Total financial revenue | $ | 19,477 |
| | $ | 18,629 |
| | $ | 17,501 |
|
| Total revenues | $ | 242,502 |
| | $ | 248,200 |
| | $ | 258,139 |
|
| | | | | | |
| Field costs and expenses: | | | | | |
| Goods | | | | | |
| Funeral | $ | 56,819 |
| | $ | 56,787 |
| | $ | 60,797 |
|
| Cemetery | 24,600 |
| | 26,199 |
| | 26,630 |
|
| Total goods | $ | 81,419 |
| | $ | 82,986 |
| | $ | 87,427 |
|
| Services | | | | | |
| Funeral | $ | 51,236 |
| | $ | 52,595 |
| | $ | 57,174 |
|
| Cemetery | 6,924 |
| | 7,081 |
| | 7,705 |
|
| Total services | $ | 58,160 |
| | $ | 59,676 |
| | $ | 64,879 |
|
| Financial expenses | | | | | |
| Preneed funeral commissions | $ | 1,031 |
| | $ | 747 |
| | $ | 818 |
|
| Trust administration fees | 353 |
| | 378 |
| | 503 |
|
| Total financial expenses | $ | 1,384 |
| | $ | 1,125 |
| | $ | 1,321 |
|
| Total field costs and expenses | $ | 140,963 |
| | $ | 143,787 |
| | $ | 153,627 |
|
The Field costs and expenses, for purposes of this supplemental disclosure, include only costs and expenses that are directly allocable between the goods, services and financial categories in the funeral and cemetery segments. Depreciation and amortization and Regional and unallocated funeral and cemetery costs are not included in this disclosure.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22.23. QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below set forth consolidated operating results by fiscal quarter for the years ended December 31, 2016 and 2017 (in thousands, except earnings per share):
| | | | | | | | | | | | First
Quarter | | Second
Quarter | | Third
Quarter | | Fourth
Quarter |
| 2020 | | 2020 | | | | | | | |
| Revenue | | Revenue | $ | 77,490 | | | $ | 77,477 | | | $ | 84,393 | | | $ | 90,088 | |
| Gross profit | | Gross profit | 23,171 | | | 25,160 | | | 27,874 | | | 29,718 | |
| Net income (loss) | | Net income (loss) | $ | (4,197) | | | $ | 6,397 | | | $ | 5,525 | | | $ | 8,365 | |
| Basic earnings (loss) per common share: (a) | | Basic earnings (loss) per common share: (a) | $ | (0.23) | | | $ | 0.36 | | | $ | 0.31 | | | $ | 0.47 | |
| Diluted earnings (loss) per common share: (a) | | Diluted earnings (loss) per common share: (a) | $ | (0.23) | | | $ | 0.36 | | | $ | 0.31 | | | $ | 0.46 | |
| | First Quarter | | Second Quarter | | Third Quarter | | Fourth Quarter | |
| 2017 | | | | | | | | |
| Revenues | $ | 68,157 |
| | $ | 63,852 |
| | $ | 61,054 |
| | $ | 65,076 |
| |
| 2019 | | 2019 | |
| Revenue | | Revenue | $ | 69,081 | | | $ | 67,752 | | | $ | 66,125 | | | $ | 71,149 | |
| Gross profit | 23,092 |
| | 18,667 |
| | 15,480 |
| | 19,560 |
| Gross profit | 21,600 | | | 19,250 | | | 18,056 | | | 20,679 | |
| Net income | $ | 7,084 |
| | $ | 4,410 |
| | $ | 3,038 |
| | $ | 22,661 |
| Net income | $ | 6,525 | | | $ | 4,862 | | | $ | 577 | | | $ | 2,569 | |
| Basic earnings per common share: (a) | $ | 0.42 |
| | $ | 0.26 |
| | $ | 0.18 |
| | $ | 1.41 |
| Basic earnings per common share: (a) | $ | 0.36 | | | $ | 0.27 | | | $ | 0.03 | | | $ | 0.14 | |
| Diluted earnings per common share: (a) | $ | 0.39 |
| | $ | 0.24 |
| | $ | 0.17 |
| | $ | 1.31 |
| Diluted earnings per common share: (a) | $ | 0.36 | | | $ | 0.27 | | | $ | 0.03 | | | $ | 0.14 | |
| | | | | | | | | |
| 2016 | | | | | | | | |
| Revenues | $ | 63,331 |
| | $ | 61,865 |
| | $ | 60,140 |
| | $ | 62,864 |
| |
| Gross profit | 21,303 |
| | 18,807 |
| | 18,228 |
| | 21,312 |
| |
| Net income | $ | 4,571 |
| | $ | 5,200 |
| | $ | 5,683 |
| | $ | 4,127 |
| |
| Basic earnings per common share: (a) | $ | 0.27 |
| | $ | 0.31 |
| | $ | 0.34 |
| | $ | 0.25 |
| |
| Diluted earnings per common share: (a) | $ | 0.27 |
| | $ | 0.30 |
| | $ | 0.33 |
| | $ | 0.22 |
| |
| | | | | | | | |
| | |
| (a) | | |
(a) | Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts may not equal the total computed for 2016 and 2017 due to rounding. |
23.24. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information is supplemental disclosure for the Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | | | | | | | |
| | Years Ended December 31, |
| | 2018 | | 2019 | | 2020 |
| Cash paid for interest and financing costs | $ | 18,858 | | | $ | 23,870 | | | $ | 30,935 | |
| Cash paid for taxes | $ | 3,543 | | | $ | 378 | | | $ | 2,555 | |
| Cash refund received for taxes | $ | 0 | | | $ | 0 | | | $ | 7,012 | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
| | | | | |
|
| | | | | | | | | | | |
| | Year Ended December 31, |
| | 2015 | | 2016 | | 2017 |
| Cash paid for interest and financing costs | $ | 9,159 |
| | $ | 10,366 |
| | $ | 11,092 |
|
| Cash paid for taxes | 8,283 |
| | 10,874 |
| | 5,902 |
|
| Fair value of stock, stock options and performance awards issued to directors, officers, and certain other employees | 4,879 |
| | 3,275 |
| | 6,854 |
|
| Net withdrawals (deposits) from / into preneed funeral trusts | 12,054 |
| | (3,687 | ) | | (1,442 | ) |
| Net withdrawals (deposits) from / into preneed cemetery trusts | 8,681 |
| | (6,405 | ) | | (4,157 | ) |
| Net withdrawals (deposits) from / into perpetual care trusts | 5,543 |
| | (3,762 | ) | | (3,340 | ) |
| Net increase in preneed receivables | (1,714 | ) | | (2,385 | ) | | (1,261 | ) |
| Net deposits of receivables into preneed trusts | (735 | ) | | (674 | ) | | (1,069 | ) |
| Net change in preneed funeral receivables increasing deferred revenue | 483 |
| | 1,450 |
| | 1,387 |
|
| Net change in preneed cemetery receivables (decreasing) increasing deferred revenue | (154 | ) | | (2,090 | ) | | 59 |
|
| Net (withdrawals) deposits from / into preneed funeral trust accounts (decreasing) increasing deferred preneed funeral receipts held in trust | (12,054 | ) | | 3,687 |
| | 1,442 |
|
| Net (withdrawals) deposits from / into preneed cemetery trust accounts (decreasing) increasing deferred cemetery receipts held in trust | (8,681 | ) | | 6,405 |
| | 4,157 |
|
| Net (withdrawals) deposits from / into perpetual care trust accounts (decreasing) increasing care trusts’ corpus | (5,726 | ) | | 3,874 |
| | 3,566 |
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
24. RELATED PARTY TRANSACTIONS25. SUBSEQUENT EVENTS
On August 18, 2017,January 25, 2021, the Company detected that its information technology (“IT”) system was affected by a ransomware incident. Upon learning of the incident, the Company undertook immediate steps to address the incident, including engaging IT security and forensics experts and working diligently with these experts to assess the impact on the Company’s IT systems, implementing additional security measures to help prevent a similar incident in the future, and to restore any of its IT systems that were impacted by the incident. We have insurance coverage to protect against this type of ransomware attack and therefore the Company expects that recovery of the losses related to the incident is likely after a deductible. As of February 11, 2021, the restoration of any impacted systems was complete.
While we purchased 100,000 sharesare taking all appropriate measures to safeguard the integrity of our common stockIT infrastructure, data, and employee, customer and vendor information and prevent such an event from reoccurring, we cannot provide reasonable assurance that similar incidents may occur in the future. Refer to Part I, Item 1A. Risk Factors for risks related to our business.
On January 28, 2021, we received a conversion notice from a holder of our Convertible Notes exercising their right to convert. Following receipt of the conversion notice, in accordance with the terms of the Indenture, we provided notice to settle such conversion in cash, which will settle on the third business day immediately following the applicable 25-day period observation period, as more fully described in the Indenture.
On February 17, 2021, the Company entered into an amendment to the employment agreement of Melvin C. Payne, ourthe Company’s Chief Executive Officer and Chairman of the Board (the “Amendment”), to extend the term of his employment to February 17, 2028. The Amendment also increases the minimum amount for Mr. Payne’s base salary to $900,000 and Chief Executive Officer. These shares had been heldincludes consideration paid by the Company to Mr. Payne prior to such repurchase for over one year. The purchasein the form of these shares was made pursuant to a privately negotiated transaction at aCompany stock options that only vest if the price of $23.85 per share for a total purchasethe Company's stock reaches predetermined price targets.
On December 13, 2017, we purchased real estate totaling $0.3 million for funeral home expansion projects from an employee at fair market value.
25. SUBSEQUENT EVENTS
None.
CARRIAGE SERVICES, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
| | | | | | | | | | | | | | | | | | | | | | | |
| Description | Balance at
beginning
of year | | Charged to
costs and
expenses | | Deduction | | Balance at
end
of year |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| Year ended December 31, 2018: | | | | | | | |
| Allowance for bad debts, current portion | $ | 835 | | | $ | 1,111 | | | $ | 1,177 | | | $ | 769 | |
| Allowance for bad debts of preneed cemetery receivables, non-current portion | $ | 2,278 | | | $ | 730 | | | $ | 1,781 | | | $ | 1,227 | |
| Employee severance accruals | $ | 0 | | | $ | 1,649 | | | $ | 508 | | | $ | 1,141 | |
| Valuation allowance of the deferred tax asset | $ | 244 | | | $ | 32 | | | $ | 0 | | | $ | 276 | |
| | | | | | | |
| Year ended December 31, 2019: | | | | | | | |
| Allowance for bad debts, current portion | $ | 769 | | | $ | 1,088 | | | $ | 1,008 | | | $ | 849 | |
| Allowance for bad debts of preneed cemetery receivables, non-current portion | $ | 1,227 | | | $ | 532 | | | $ | 469 | | | $ | 1,290 | |
| Employee severance accruals | $ | 1,141 | | | $ | 1,265 | | | $ | 1,569 | | | $ | 837 | |
| Valuation allowance of the deferred tax asset | $ | 276 | | | $ | 0 | | | $ | 43 | | | $ | 233 | |
| | | | | | | |
| Year ended December 31, 2020: | | | | | | | |
| Allowance for credit losses, current portion | $ | 849 | | | $ | 1,617 | | | $ | 1,179 | | | $ | 1,287 | |
| Allowance for credit losses of preneed cemetery receivables, non-current portion | $ | 1,290 | | | $ | 701 | | | $ | 347 | | | $ | 1,644 | |
| Employee severance accruals | $ | 837 | | | $ | 596 | | | $ | 1,271 | | | $ | 162 | |
| Valuation allowance of the deferred tax asset | $ | 233 | | | $ | 0 | | | $ | 11 | | | $ | 222 | |
|
| | | | | | | | | | | | | | | |
| Description | Balance at beginning of year | | Charged to costs and expenses | | Deduction | | Balance at end of year |
| Year ended December 31, 2015: | | | | | | | |
| Allowance for bad debts, current portion | $ | 802 |
| | $ | 966 |
| | $ | 1,039 |
| | $ | 729 |
|
| Allowance for receivables from preneed funeral and cemetery trusts and contract cancellations, non-current portion | $ | 2,339 |
| | $ | 712 |
| | $ | 1,009 |
| | $ | 2,042 |
|
| Employee severance accruals | $ | 216 |
| | $ | 698 |
| | $ | 634 |
| | $ | 280 |
|
| Litigation reserves | $ | 3 |
| | $ | — |
| | $ | 3 |
| | $ | — |
|
| Valuation allowance of the deferred tax asset | $ | 330 |
| | $ | — |
| | $ | 141 |
| | $ | 189 |
|
| | | | | | | | |
| Year ended December 31, 2016: | | | | | | | |
| Allowance for bad debts, current portion | $ | 729 |
| | $ | 1,155 |
| | $ | 1,138 |
| | $ | 746 |
|
| Allowance for receivables from preneed funeral and cemetery trusts and contract cancellations, non-current portion | $ | 2,042 |
| | $ | 943 |
| | $ | 819 |
| | $ | 2,166 |
|
| Employee severance accruals | $ | 280 |
| | $ | 3,641 |
| | $ | 2,404 |
| | $ | 1,517 |
|
| Valuation allowance of the deferred tax asset | $ | 189 |
| | $ | 20 |
| | $ | — |
| | $ | 209 |
|
| | | | | | | | |
| Year ended December 31, 2017: | | | | | | | |
| Allowance for bad debts, current portion | $ | 746 |
| | $ | 1,248 |
| | $ | 1,159 |
| | $ | 835 |
|
| Allowance for receivables from preneed funeral and cemetery trusts and contract cancellations, non-current portion | $ | 2,166 |
| | $ | 950 |
| | $ | 838 |
| | $ | 2,278 |
|
| Employee severance accruals | $ | 1,517 |
| | $ | 571 |
| | $ | 2,088 |
| | $ | — |
|
| Valuation allowance of the deferred tax asset | $ | 209 |
| | $ | 35 |
| | $ | — |
| | $ | 244 |
|
| |
ITEM 9. | CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. |
None.
| |
ITEM 9A. |
ITEM 9A. CONTROLS AND PROCEDURES. |
Management’s Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive and financial officers, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-K. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that our disclosure controls and procedures were effective as of December 31, 20172020 (the end of the period covered by this Annual Report on Form 10-K).
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management’s report on our internal control over financial reporting is presented on the following page of this Form 10-K. Grant Thornton LLP, the independent registered public accounting firm that audited the financial statements included in this Form 10-K, has issued an attestation report on our internal control over financial reporting.
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined under Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended.
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s Consolidated Financial Statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that:
(i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our Consolidated Financial Statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the Company’s internal control over financial reporting as of December 31, 20172020 using the framework specified in Internal Control — Integrated Framework (2013), published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2017.2020.
The Company’s internal control over financial reporting as of December 31, 20172020 has been audited by Grant Thornton LLP, an independent registered public accounting firm, which also audited the financial statements of the Company for the year ended December 31, 2017,2020, as stated in their report which is presented in this Annual Report.
| | |
|
| /s/ Melvin C. Payne |
| Melvin C. Payne |
| Chief Executive Officer and Chairman of the Board |
| (Principal Executive Officer) |
| | |
|
| /s/ Viki K. Blinderman |
| Viki K. Blinderman |
Senior Vice President and Chief Accounting Officer |
(Principal Financial Officer and Secretary
Officer) |
February 21, 2018March 2, 2021
Changes in Internal Control Over Financial Reporting
During the three months ended December 31, 2017,2020, there was no change in our system of internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
| |
ITEM 9B. | OTHER INFORMATION. |
ITEM 9B. OTHER INFORMATION.
None.
PART III
| |
ITEM 10. | DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. |
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.
Code of Ethics
We have adopted a Business Ethics and Code of Business Conduct and Ethics (the “Code”), which is applicable to each of our Directors, Officers, and employees, including our principal executive officer and other senior financial officers, who include our principal financial officer, principal accounting officer or controller, and persons performing similar functions. The Code is available on our internet website at www.carriageservices.com. To the extent required by SEC rules, we intend to disclose any amendments to this code and any waiver of a provision of the Code for the benefit of our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, on our website within four business days following any such amendment of waiver, or within any other period that may be required under SEC rules from time to time.
The information required by Item 10 is incorporated in this Annual Report on Form 10-K by reference to the registrant’sour definitive proxy statement relatingor an amendment to its 2018 annual meeting of stockholders, which proxy statement willthis Annual Report on Form 10-K to be filed pursuant to Regulation 14A ofwith the Exchange Act withinSEC not later than 120 days after the end of the last fiscal year.year ended December 31, 2020.
| |
ITEM 11. | EXECUTIVE COMPENSATION. |
ITEM 11. EXECUTIVE COMPENSATION.
The information required by Item 11 is incorporated in this Annual Report on Form 10-K by reference to the registrant’sour definitive proxy statement relatingor an amendment to its 2018 annual meeting of stockholders, which proxy statement willthis Annual Report on Form 10-K to be filed pursuant to Regulation 14A ofwith the Exchange Act withinSEC not later than 120 days after the end of the last fiscal year.year ended December 31, 2020.
| |
ITEM 12. | SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS. |
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS.
The information required by Item 12 is incorporated in this Annual Report on Form 10-K by reference to the registrant’sour definitive proxy statement relatingor an amendment to its 2018 annual meeting of stockholders, which proxy statement willthis Annual Report on Form 10-K to be filed pursuant to Regulation 14A ofwith the Exchange Act withinSEC not later than 120 days after the end of the last fiscal year.year ended December 31, 2020.
The following table, required by Item 201(d) of Regulation S-K, summarizes information regarding the number of shares of our common stock that are available for issuance under all of our existing equity compensation plans as of December 31, 2017.2020.
| | | | | | | | | | | | | | | | | |
| Plan Category | Number of securities to
be issued upon exercise
of outstanding options,
warrants and rights
(a) | | Weighted-average
exercise price of
outstanding options,
warrants and rights
(b) | | Number of securities
remaining available for
future issuance under
equity compensation
plans (excluding
securities reflected in
column (a))
(c) |
| Equity compensation plans approved by security holders | 911,736 | | | $ | 23.40 | | | 1,782,824 | |
| Equity compensation plans not approved by security holders | — | | | — | | | — | |
| Total | 911,736 | | | $ | 23.40 | | | 1,782,824 | |
|
| | | | | | | | | |
| Plan Category | Number of securities to be issued upon exercise of outstanding options, warrants and rights (a) | | Weighted-average exercise price of outstanding options, warrants and rights (b) | | Number of securities remaining available for future issuance under equity compensation plans (excluding securities reflected in column (a)) (c) |
| Equity compensation plans approved by security holders | 1,933,656 |
| | $ | 20.85 |
| | 1,552,677 |
|
| Equity compensation plans not approved by security holders | — |
| | — |
| | — |
|
| Total | 1,933,656 |
| | $ | 20.85 |
| | 1,552,677 |
|
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. | |
ITEM 13. | CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE. |
The information required by Item 13 is incorporated in this Annual Report on Form 10-K by reference to the registrant’sour definitive proxy statement relatingor an amendment to its 2018 annual meeting of stockholders, which proxy statement willthis Annual Report on Form 10-K to be filed pursuant to Regulation 14A ofwith the Exchange Act withinSEC not later than 120 days after the end of the last fiscal year.year ended December 31, 2020.
| |
ITEM 14. | PRINCIPAL ACCOUNTANT FEES AND SERVICES. |
ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES.
The information required by Item 14 is incorporated in this Annual Report on Form 10-K by reference to the registrant’sour definitive proxy statement relatingor an amendment to its 2018 annual meeting of stockholders, which proxy statement willthis Annual Report on Form 10-K to be filed pursuant to Regulation 14A ofwith the Exchange Act withinSEC not later than 120 days after the end of the last fiscal year.year ended December 31, 2020.
PART IV
| |
ITEM 15. | EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. |
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(1) FINANCIAL STATEMENTS
The following financial statements and the Report of Independent Registered Public Accounting Firm are filed as a part of this Form 10-K on the pages indicated: (2) FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule is included in this Form 10-K on the page indicated: All other schedules are omitted as the required information is inapplicable or the information is presented in the Consolidated Financial Statements or related notes.
(3) EXHIBITS
A copy of this Form 10-K, excluding exhibits, will be furnished at no charge to each person to whom a proxy statement for our 20182021 annual meeting of stockholders is delivered upon the request of such person. Exhibits to this Form 10-K are available upon payment of a reasonable fee, which is limited to our expenses in furnishing the requested exhibit. Requests for copies should be directed to our Corporate Secretary, by mail at 3040 Post Oak Boulevard, Suite 300, Houston, Texas 77056 or by phone at 1-866-332-8400 or 713-332-8400.
|
| | | | | | | |
| Exhibit No. | | Description |
| |
| 3.1 | | |
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| 3.2 | | |
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| 3.3 | | |
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|
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| 3.6 | | |
| | |
4.13.7 | | |
| | |
| 4.1 | | |
| | |
10.14.2 | | |
| | |
| 4.3 | | |
| | |
| 4.4 | | |
| | |
| 4.5 | | |
| | |
| 4.6 | | |
| | |
| 4.7 | | |
| | |
| 4.8 | | |
| | |
| 4.9 | | |
| | |
| 4.10 | | |
| | |
| 10.1 | | |
| |
| 10.2 | | |
| |
| | | | | | | | |
| 10.3 | | |
| |
| 10.4 | | |
| | |
| 10.5 | | |
| | |
| 10.6 | | |
| | |
| 10.7 | | |
| | |
| 10.8 | | |
| | |
| 10.9 | | Second AmendedEighth Amendment and Restated EmploymentCommitment Increase to Credit Agreement, dated March 14, 2012 between Carriage Services, Inc.April 25. 2018, by and Melvin C. Payne.among the Company, Bank of America, N.A., as Administrative Agent, and the other lenders party thereto. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 20, 2012.on April 27, 2018. † |
| | |
| 10.10 | | First Amendment to Second AmendedCredit Agreement, dated May 31, 2018, among the Company, the financial institutions party thereto, as lenders and Restated Employment Agreement by and between Carriage Services, Inc. and Melvin C. Payne dated March 3, 2014.Bank of America, N.A., as Administrative Agent. Incorporated by reference to Exhibit 10.410.1 to the Company's QuarterlyCompany’s Current Report on Form 10-Q for its quarter ended March8-K filed on May 31, 2014.2018. † |
| | |
| 10.11 | | |
| | |
| 10.12 | | |
| | |
| 10.13 | | |
| | |
| 10.14 | | |
| | |
10.1210.15 | | |
| | |
10.1310.16 | | |
| | |
10.14 | | |
| | |
|
| | |
10.1510.17 | | |
| | |
10.16 | | |
| | |
10.17 | | |
| | |
10.18 | | |
| | |
10.19 | | |
| | |
10.20 | | |
| | |
10.21 | | |
| |
10.22 | | |
| | |
| | | | | | | | |
10.2310.18 | | |
| | |
10.2410.19 | | |
| | |
10.2510.20 | | |
| | |
10.2610.21 | | |
| | |
10.27 | | |
| | |
10.28 | | |
| | |
10.29 | | |
| | |
10.30 | | |
| | |
10.31 | | |
| | |
10.3210.22 | | |
| | |
|
| | |
10.3310.23 | | |
| | |
*1210.24 | | |
| | |
*21.110.25 | | |
| | |
| 10.26 | | |
| | |
| 10.27 | | |
| | |
| | |
| 10.28 | | |
| | |
| 10.29 | | |
| | |
| 10.30 | | |
| | |
| 10.31 | | |
| | |
| 10.32 | | |
| | |
| | | | | | | | |
| 10.33 | | |
| | |
| 10.34 | | Transaction Agreement dated as of November 25, 2019 by and among Carriage Funeral Holdings, Inc., Carriage Holdings Virginia, Inc., Carriage Services of Virginia LLC, Calvary Memorial Park, Inc., Fairfax Memorial Funeral Home, L.L.C., Holder Representative and Carriage Services, Inc.Incorporated by reference to Exhibit 10.38to the Company's Annual Report on Form 10-K filed on February 28, 2020. ++ |
| | |
| 10.35 | | Amendment to the Transaction Agreement dated as of December 30, 2019 by and among Carriage Funeral Holdings, Inc., Carriage Holdings Virginia, Inc., Carriage Services of Virginia LLC, Calvary Memorial Park, Inc., Fairfax Memorial Funeral Home, L.L.C., Holder Representative and Carriage Services, Inc.Incorporated by reference to Exhibit 10.39to the Company's Annual Report on Form 10-K filed on February 28, 2020. |
| | |
| 10.36 | | Limited Waiver and Fourth Amendment to Credit Agreement, dated as of May 18, 2020, by and among Carriage Services, Inc., the financial institutions party thereto, as lenders, and Bank of America, as administrative agent, swing line lender and L/C issuer. Incorporated by reference to Exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 22, 2020. |
| | |
| 10.37 | | |
| | |
| 10.38 | | Limited Consent to Credit Agreement, dated as of August 7, 2020, by and among Carriage Services, Inc., the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent, swing line lender and L/C issuer.Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the Quarterly Period Ending September 30, 2020. |
| | |
| 10.39 | | |
| | |
| *10.40 | | |
| | |
| *21.1 | | |
| |
| *23.1 | | |
| | |
| *31.1 | | |
| |
| *31.2 | | |
| |
| **32 | | |
| |
| *101 | | Interactive Data Files. |
__________________
|
| | | | |
| (†) | Management contract or compensatory plan or arrangement. |
| | | | | | | | | | | | | | |
ITEM 16.(++) | FORM 10-K SUMMARY.Portions of this exhibit have been redacted in accordance with Item 601(b)(10) of Regulation S-K. |
ITEM 16. FORM 10-K SUMMARY.
None.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on February 21, 2018.March 2, 2021.
|
| | | | | | | |
| CARRIAGE SERVICES, INC. |
| |
| By: | | /s/ Melvin C. Payne |
| | Melvin C. Payne
Chief Executive Officer and Chairman of the Board
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
| | | | | | | | | | | | | | |
| Signature | | Title | | Date |
| | |
| /s/ Melvin C. Payne | | Chief Executive Officer and Chairman of the Board | | |
| Melvin C. Payne | | (Principal Executive Officer) | | March 2, 2021 |
| | |
| /s/ Viki K. Blinderman | | Senior Vice President and Chief Accounting Officer | | March 2, 2021 |
| Viki K. Blinderman | | (Principal Financial Officer) | | |
| | | | |
Signature | | Title | | Date |
| | |
/s/ Melvin C. Payne | | Chief Executive Officer and Chairman of the Board | | |
Melvin C. Payne | | (Principal Executive Officer) | | February 21, 2018 |
| | |
/s/ Viki K. Blinderman | | Senior Vice President, Principal Financial Officer and Secretary | | February 21, 2018 |
Viki K. Blinderman | | (Principal Financial Officer) | | |
| | | | |
| /s/ Adeola Olaniyan | | Corporate Controller and Principal Accounting Officer | | February 21, 2018March 2, 2021 |
| Adeola Olaniyan | | | | |
| | | | |
| /s/ Donald D. Patteson Jr. | | Director | | February 21, 2018March 2, 2021 |
| Donald D. Patteson Jr. | | | | |
| | |
/s/ James R. Schenck | | Director | | February 21, 2018 |
James R. Schenck | | | | |
| | |
/s/ Barry K. Fingerhut | | Director | | February 21, 2018 |
Barry K. Fingerhut | | | | |
| | | | |
/s/ Bryan D. Leibman | | Director | | February 21, 2018 |
Bryan D. Leibman | | | | |
EXHIBIT INDEX
|
| | |
Exhibit No./s/ James R. Schenck | | DescriptionDirector | | March 2, 2021 |
| James R. Schenck | |
3.1 | | |
| |
3.2 | | |
| |
3.3 | | |
| | |
3.4 | | |
| |
3.5 | | |
| |
3.6 | | |
| | |
4.1 | | |
| | |
10.1 | | |
| |
10.2 | | |
| |
10.3 | | |
| |
10.4 | | |
| | |
10.5 | | |
| | |
10.6 | | |
| | |
10.7 | | |
| | |
10.8 | | |
| | |
|
| | |
10.9/s/ Barry K. Fingerhut | | | | March 14, 2012 between Carriage Services, Inc. and Melvin C. Payne. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 20, 2012. †2, 2021 |
| Barry K. Fingerhut | | |
10.10 | | |
| | |
10.11 | | |
| | |
10.12 | | |
| | |
10.13 | | |
| | |
10.14 | | |
| | |
10.15 | | |
| | |
10.16 | | |
| | |
10.17 | | |
| | |
10.18 | | |
| | |
10.19 | | |
| | |
10.20 | | |
| | |
10.21 | | |
| |
10.22 | | |
| | |
10.23 | | |
| | |
10.24 | | |
| | |
10.25 | | |
| | |
10.26 | | |
|
| | |
| | |
10.27/s/ Bryan D. Leibman | | | | March 21, 2017. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed March 23, 2017. †2, 2021 |
| Bryan D. Leibman | | |
10.28 | | |
| | |
10.29 | | |
| | |
10.30 | | |
| | |
10.31 | | |
| | |
10.32 | | |
| | |
10.33 | | |
| | |
*12 | | |
| |
*21.1 | | |
| |
*23.1 | | |
| | |
*31.1 | | |
| |
*31.2 | | |
| |
**32 | | |
| |
*101 | | Interactive Data Files. |
__________________
|
| | | | |
(*)/s/ Douglas Meehan | Filed herewith. | Director | | March 2, 2021 |
| Douglas Meehan | | | | |
| |
(**) | Furnished herewith. |
|
| |
(†)/s/ Achille Messac | Management contract or compensatory plan or arrangement. | Director | | March 2, 2021 |
| Achille Messac | | | | |
