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(Exact name of registrant as specified in its charter)
iDelaware
i76-0423828
(State
or other jurisdiction of incorporation or organization)
(I.R.S. Employer Identification No.)
i3040 Post Oak Boulevard, iSuite 300
iHouston,
iTexas, i77056
(Address of principal executive offices)
(i713)
i332-8400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading
Symbol
Name of each exchange on which registered
iCommon Stock, par value $.01 per share
iCSV
iNew
York Stock Exchange
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. iYes☒ 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). iYes☒ No ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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.
Large accelerated filer
☐
iAccelerated
filer
☒
Non-accelerated filer
☐
Smaller reporting company
i☐
Emerging
growth company
i☐
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. ☐
Indicate by check mark whether the
registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes i☐ No ☒
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of May 1, 2023 was i14,934,211.
Obligations
under finance leases, net of current portion
i4,743
i4,641
Obligations
under operating leases, net of current portion
i17,315
i17,395
Deferred
preneed cemetery revenue
i51,746
i61,297
Deferred
preneed funeral revenue
i32,029
i32,248
Deferred
tax liability
i48,820
i48,642
Other
long-term liabilities
i3,065
i938
Deferred
preneed cemetery receipts held in trust
i95,065
i86,459
Deferred
preneed funeral receipts held in trust
i104,553
i101,366
Care
trusts’ corpus
i65,495
i64,352
Total
liabilities
i1,055,816
i1,077,822
Commitments
and contingencies:
i
i
Stockholders’ equity:
Common
stock, $ii0.01/ par value; ii80,000,000/
shares authorized and i26,359,876 and i26,562,368 shares issued, respectively and i14,732,058
and i14,934,550 shares outstanding, respectively
i264
i266
Additional
paid-in capital
i238,780
i239,962
Retained
earnings
i176,843
i185,687
Treasury
stock, at cost; ii11,627,818/ shares
(i278,753)
(i278,753)
Total
stockholders’ equity
i137,134
i147,162
Total
liabilities and stockholders’ equity
$
i1,192,950
$
i1,224,984
The
accompanying condensed notes are an integral part of these Consolidated Financial Statements.
- 3 -
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
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. Our operations are reported in itwo business segments: Funeral Home Operations, which currently accounts for
approximately i70% of our total revenue and Cemetery Operations, which currently accounts for approximately i30% of our total revenue. At March 31, 2023, we operated i173
funeral homes in i26 states and i32 cemeteries in i11
states.
Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the 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.
i
Principles of Consolidation and Interim Condensed Disclosures
Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments,
which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented.
There have been no material changes in our accounting policies previously disclosed in Part II, Item 8 “Financial Statements and Supplementary Data” in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 2022 unless otherwise disclosed herein, and should be read in conjunction therewith.
iUse
of Estimates
The preparation of our 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 our critical estimates and judgments, which include those related to the impairment of goodwill and the fair value measurements used in business combinations. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not
be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from period to period.
i
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
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.
- 7 -
Deferred Revenue
During the three months ended March 31, 2023, we withdrew $i7.0
million of realized capital gains and earnings from our preneed cemetery trust investments. In certain states, we are allowed to make these withdrawals prior to the delivery of preneed merchandise and service contracts. The realized capital gains and earnings withdrawn increase our cash flow from operations, but are not recognized as revenue in our Consolidated Statements of Operations, however, they reduce our Preneed cemetery trust investment and increase Deferred preneed cemetery revenue.
i
Property,
Plant and Equipment
i
Property, plant and equipment is comprised of the following (in thousands):
During
the three months ended March 31, 2023, we acquired $i12.6 million of property, plant and equipment related to our 2023 business combination, described in Note 3 to the Consolidated Financial Statements.
During the three months ended March 31, 2022, we acquired real property for $i2.6
million. We also divested itwo funeral homes that had a carrying value of property, plant and equipment of $i0.7 million, which was included in the loss on the
sale of divestitures and recorded in Net loss on divestitures, disposals and impairment charges.
Our growth and maintenance capital expenditures totaled $i4.6 million and $i2.9
million for the three months ended March 31, 2022 and 2023, respectively, for property, plant and equipment. In addition, we recorded depreciation expense of $i3.4 million and $i3.5
million for the three months ended March 31, 2022 and 2023, respectively.
Cemetery Property
Cemetery property was $i104.2 million and $i113.3
million, net of accumulated amortization of $i59.0 million and $i59.8 million at December 31,
2022 and March 31, 2023, 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. Our growth capital expenditures for cemetery property development totaled $i2.3 million and $i2.1
million for the three months ended March 31, 2022 and 2023, respectively. We recorded amortization expense for cemetery interment rights of $i1.3 million and $i1.2
million for the three months ended March 31, 2022 and 2023, respectively.
During the three months ended March 31, 2023, we acquired cemetery property for $i9.0 million related to our 2023 business combination, described in Note 3 to the Consolidated Financial Statements. We also divested itwo
cemeteries that had a carrying value of cemetery property of $i0.8 million, which was included in the loss on the sale of divestitures and recorded in Net loss on divestitures, disposals and impairment charges on our Consolidated Statements of Operations.
Income Taxes
Income tax expense was $i5.1
million and $i3.5 million for the three months ended March 31, 2022 and 2023, respectively. Our operating tax rate before discrete items was i26.5%
and i28.9% for the three months ended March 31, 2022 and 2023, respectively.
iSubsequent
Events
We have evaluated events and transactions during the period subsequent to March 31, 2023 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
- 8 -
2.iRECENTLY
ISSUED ACCOUNTING STANDARDS
i
Credit Losses - Vintage Disclosures
In March 2022, the FASB issued ASU, Financial Instruments - Credit Losses (“Topic 326”) to make the requirement to disclose gross write-offs by class of financing receivable and major security type consistent for all public business entities. The amendment in this update provides specific guidance on the disclosure for current period write-offs by year of origination for financing receivables.
This amendment is effective for fiscal years beginning after December 15, 2022, and therefore was effective for us beginning January 1, 2023. Our adoption of these amendments had no impact on our consolidated financial statements.
3. iBUSINESS COMBINATIONS
iTangible
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 measurement period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition.
On March 22, 2023, we acquired a business consisting of ithree
funeral homes, itwo cemeteries and ione cremation focused business in the Bakersfield, California area for $i44.0
million in cash. We acquired substantially all of the assets and assumed certain operating liabilities of this business.
The pro forma impact of this acquisition on prior periods is not presented, as the impact is not significant to our reported results. The results of the acquired business are reflected in our Consolidated Statements of Operations from the date of acquisition.
The measurement period to determine the fair values of acquired identifiable assets and assumed liabilities will end at the earlier of 12 months from the date of the acquisition or as soon as we receive the information we are seeking about facts and circumstances that existed as of the acquisition date. We recorded provisional estimates for the assets and liabilities acquired as our valuations have not been finalized at March 31, 2023.
i
Estimated
fair values of the assets acquired and liabilities assumed in this transaction as of the closing date are as follows (in thousands):
Estimated Fair Values
Current assets
$
i7,087
Property,
plant & equipment
i12,577
Cemetery property
i9,035
Goodwill
i13,612
Intangible
and other non-current assets
i3,763
Assumed liabilities
(i300)
Deferred
revenue
(i1,774)
Purchase price
$
i44,000
/
The
intangible and other non-current assets relate to the fair value of tradenames and right-of-use operating lease assets. The assumed liabilities relate to operating lease obligations. We did not estimate a fair value for cemetery perpetual care assets and liabilities for this acquisition as this information was not yet available. However, these trust assets and liabilities offset in our Consolidated Balance Sheet.
The following table summarizes the estimated fair value of the assets acquired and liabilities assumed for this business (in thousands):
Decrease
in goodwill related to assets held for sale
(i445)
i—
Goodwill
at the end of the period
$
i410,137
$
i423,749
/
During
the three months ended March 31, 2023, we recognized $i13.6 million in goodwill related to our 2023 business combination; $i5.7
million was allocated to our cemetery segment and $i7.9 million was allocated to our funeral home segment.
5.iDIVESTED
OPERATIONS
During the three months ended March 31, 2023, we sold ione funeral home and itwo
cemeteries for an aggregate of $i0.8 million. During the three months ended March 31, 2022, we sold itwo
funeral homes for an aggregate of $i0.9 million.
i
The operating results of these divested funeral homes and cemeteries
are reflected on our Consolidated Statements of Operations as shown in the table below (in thousands):
Loss
on divestitures is recorded in Net loss on divestitures, disposals and impairments charges on our Consolidated Statements of Operations.
/
6.iRECEIVABLES
Accounts
Receivable
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 also 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.
i
Accounts
receivable is comprised of the following (in thousands):
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.
i
The following table summarizes the activity
in our allowance for credit losses by segment (in thousands):
Total
allowance for credit losses on Trade and financed receivables
$
(i1,013)
$
(i447)
$
i700
$
(i314)
$
(i1,074)
/
Balances
due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet of $i8.9 million and $i10.4
million at December 31, 2022 and March 31, 2023, 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 iten years for preneed funeral contracts.
Preneed Cemetery Receivables
Our preneed cemetery receivables are comprised of the following
(in thousands):
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 were $i11.6 million and $i11.9
million at December 31, 2022 and March 31, 2023, 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 ieight years for preneed cemetery contracts.
7.iFAIR
VALUE MEASUREMENTS
We evaluated our financial assets and liabilities for those that met the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, accounts receivable and accounts 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 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 acquisition debt and Credit Facility (as defined in Note 11) and Senior Notes (as defined in Note 12) are classified within Level 2 of the Fair Value Measurements hierarchy.
At
March 31, 2023, the carrying value and fair value of our Credit Facility was $i213.6 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 reporting date. At March 31,
2023, the carrying value of our acquisition debt was $i4.0 million, which approximated its fair value. The fair value of our Senior Notes was $i328.2 million at March 31,
2023 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 Sheet as having met the criteria for fair value measurement. 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 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 inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including U.S. agency obligations, foreign debt, corporate debt,
preferred stocks, certificates of deposit and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy.
In addition, we have an investment in a limited partnership fund, whose fair value has been estimated using the net asset value per share practical expedient described in ASC 820-10-35-59, Fair Value Measurement of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) and therefore, has not been classified in the fair value hierarchy. The value of the investments in this fund cannot be redeemed because the investments include restrictions that do not allow for redemption within the first 12 months after acquisition. Our unfunded commitment for this investment at March 31, 2023 is $i10.0
million.
Our receivables from preneed funeral 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. See Notes 8 and 9 to our Consolidated Financial Statements for the fair value hierarchy levels of our trust investments.
8.iTRUST
INVESTMENTS
Preneed 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. These earnings are recognized in Other revenue on our 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.
- 12 -
Cemetery perpetual care trust investments represent a portion of the proceeds from the sale of cemetery property interment rights that 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.
Changes in the fair value of our trust fund assets (Preneed funeral, cemetery and perpetual care trust investments) are offset by changes in the fair value of our trust fund liabilities (Deferred
preneed funeral and cemetery receipts held in trust and Care trusts’ corpus) and reflected in Other, net. There is no impact on earnings until such time the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations and the gain or loss is allocated to the contract.
We rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying 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 that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations.
Preneed Cemetery Trust Investments
i
The components of Preneed cemetery trust investments on our Consolidated Balance Sheet are as follows (in thousands):
The
cost and market values associated with preneed cemetery trust investments at March 31, 2023 are detailed below (in thousands):
Fair Value Hierarchy Level
Cost
Unrealized Gains
Unrealized Losses
Fair Market Value
Cash
and money market accounts
1
$
i4,677
$
i—
$
i—
$
i4,677
Fixed
income securities:
U.S. agency obligations
2
i803
ii—/
(i55)
i748
Foreign
debt
2
i11,679
i728
(i703)
i11,704
Corporate
debt
2
i15,241
i168
(i5,260)
i10,149
Preferred
stock
2
i12,012
i438
(i1,701)
i10,749
Certificates
of deposit
2
i79
i—
(i8)
i71
Common
stock
1
i39,861
i4,811
(i7,491)
i37,181
Limited
partnership fund
i3,730
i10
i—
i3,740
Mutual
funds:
Equity
1
i572
i—
(i72)
i500
Fixed
income
2
i11,803
i11
(i3,029)
i8,785
Trust
securities
$
i100,457
$
i6,166
$
(i18,319)
$
i88,304
Accrued
investment income
$
i1,169
$
i1,169
Preneed
cemetery trust investments
$
i89,473
Market value as a percentage of cost
i87.9%
/i
The
estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands):
Due in one year or less
$
i1,291
Due
in one to five years
i9,682
Due in five to ten years
i4,285
Thereafter
i18,163
Total
fixed income securities
$
i33,421
/
- 13 -
The
cost and market values associated with preneed cemetery trust investments at December 31, 2022 are detailed below (in thousands):
Fair Value Hierarchy Level
Cost
Unrealized Gains
Unrealized Losses
Fair Market Value
Cash
and money market accounts
1
$
i10,434
$
i—
$
i—
$
i10,434
Fixed
income securities:
U.S. agency obligations
2
i803
ii—/
(i72)
i731
Foreign
debt
2
i12,241
i910
(i644)
i12,507
Corporate
debt
2
i15,066
i104
(i4,139)
i11,031
Preferred
stock
2
i12,560
i436
(i1,789)
i11,207
Certificate
of deposit
2
i79
i—
(i8)
i71
Common
stock
1
i42,929
i5,102
(i6,228)
i41,803
Mutual
funds:
Equity
1
i362
i—
(i33)
i329
Fixed
income
2
i12,324
i10
(i3,310)
i9,024
Trust
Securities
$
i106,798
$
i6,562
$
(i16,223)
$
i97,137
Accrued
investment income
$
i1,132
$
i1,132
Preneed
cemetery trust investments
$
i98,269
Market value as a percentage of cost
i91.0%
i
The
following table summarizes our fixed income securities (excluding mutual funds) within our preneed cemetery trust investments in an unrealized loss position at March 31, 2023, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
Total
fixed income securities with an unrealized loss
$
i12,391
$
(i1,849)
$
i10,346
$
(i5,878)
$
i22,737
$
(i7,727)
The
following table summarizes our fixed income securities (excluding mutual funds) within our preneed cemetery trust investments in an unrealized loss position at December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
Total
fixed income securities with an unrealized loss
$
i21,380
$
(i5,581)
$
i3,824
$
(i1,071)
$
i25,204
$
(i6,652)
/
-
14 -
i
Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations are as follows (in thousands):
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.
i
The components of Preneed funeral trust investments on our Consolidated
Balance Sheet are as follows (in thousands):
The
cost and market values associated with preneed funeral trust investments at March 31, 2023 are detailed below (in thousands):
Fair Value Hierarchy Level
Cost
Unrealized Gains
Unrealized Losses
Fair Market Value
Cash
and money market accounts
1
$
i23,031
$
i—
$
i—
$
i23,031
Fixed
income securities:
U.S treasury debt
1
i484
i—
(i35)
i449
Foreign
debt
2
i11,219
i709
(i661)
i11,267
Corporate
debt
2
i13,980
i156
(i4,787)
i9,349
Preferred
stock
2
i11,084
i426
(i1,621)
i9,889
Common
stock
1
i36,620
i4,625
(i6,688)
i34,557
Limited
partnership fund
i3,633
i11
i—
i3,644
Mutual
funds:
Equity
1
i431
i—
(i64)
i367
Fixed
income
2
i10,247
i11
(i2,667)
i7,591
Other
investments
2
i3,556
i—
i—
i3,556
Trust
securities
$
i114,285
$
i5,938
$
(i16,523)
$
i103,700
Accrued
investment income
$
i1,095
$
i1,095
Preneed
funeral trust investments
$
i104,795
Market value as a percentage of cost
i90.7%
/
-
15 -
i
The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands):
Due in one year or less
$
i1,204
Due
in one to five years
i8,770
Due in five to ten years
i4,022
Thereafter
i16,958
Total
fixed income securities
$
i30,954
/
The cost and market values associated with preneed funeral trust investments at December 31,
2022 are detailed below (in thousands):
Fair Value Hierarchy Level
Cost
Unrealized Gains
Unrealized Losses
Fair Market Value
Cash
and money market accounts
1
$
i29,641
$
i—
$
i—
$
i29,641
Fixed
income securities:
U.S. treasury debt
1
i484
i—
(i45)
i439
Foreign
debt
2
i10,851
i818
(i555)
i11,114
Corporate
debt
2
i12,735
i89
(i3,443)
i9,381
Preferred
stock
2
i10,730
i391
(i1,564)
i9,557
Common
stock
1
i36,478
i4,485
(i5,187)
i35,776
Mutual
funds:
Equity
1
i326
i—
(i30)
i296
Fixed
income
2
i9,907
i9
(i2,691)
i7,225
Other
investments
2
i3,592
i—
i—
i3,592
Trust
securities
$
i114,744
$
i5,792
$
(i13,515)
$
i107,021
Accrued
investment income
$
i974
$
i974
Preneed
funeral trust investments
$
i107,995
Market value as a percentage of cost
i93.3%
i
The
following table summarizes our fixed income securities (excluding mutual funds) within our preneed funeral trust investment in an unrealized loss position at March 31, 2023, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
Total
fixed income securities with an unrealized loss
$
i11,541
$
(i1,751)
$
i9,062
$
(i5,353)
$
i20,603
$
(i7,104)
/
-
16 -
The following table summarizes our fixed income securities (excluding mutual funds) within our preneed funeral trust investment in an unrealized loss position at December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
Total
fixed income securities with an unrealized loss
$
i17,855
$
(i4,666)
$
i3,393
$
(i941)
$
i21,248
$
(i5,607)
i
Preneed
funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations are as follows (in thousands):
Care trusts’ corpus on our Consolidated Balance Sheet represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus are as follows (in thousands):
Cemetery perpetual care trust investments, at market value
$
i66,307
$
i65,322
Obligations
due from trust
(i812)
(i970)
Care
trusts’ corpus
$
i65,495
$
i64,352
/
-
17 -
The following table reflects the cost and market values associated with the trust investments held in cemetery perpetual care trust funds at March 31, 2023 (in thousands):
Fair Value
Hierarchy Level
Cost
Unrealized Gains
Unrealized Losses
Fair Market Value
Cash and money market accounts
1
$
i2,703
$
i—
$
i—
$
i2,703
Fixed
income securities:
Foreign debt
2
i8,926
i514
(i583)
i8,857
Corporate
debt
2
i11,344
i180
(i4,030)
i7,494
Preferred
stock
2
i10,004
i309
(i1,357)
i8,956
Common
stock
1
i28,291
i3,469
(i5,319)
i26,441
Limited
partnership fund
i2,637
i8
i—
i2,645
Mutual
funds:
Equity
1
i419
i—
(i54)
i365
Fixed
Income
2
i9,188
i30
(i2,240)
i6,978
Trust
securities
$
i73,512
$
i4,510
$
(i13,583)
$
i64,439
Accrued
investment income
$
i883
$
i883
Cemetery
perpetual care investments
$
i65,322
Market value as a percentage of cost
i87.7%
The
estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands):
Due in one year or less
$
i817
Due
in one to five years
i6,400
Due in five to ten years
i3,243
Thereafter
i14,847
Total
fixed income securities
$
i25,307
The following table reflects the cost and market values associated with the trust investments held in cemetery perpetual care trust funds at December 31, 2022 (in thousands):
Fair Value
Hierarchy Level
Cost
Unrealized Gains
Unrealized Losses
Fair Market Value
Cash and money market accounts
1
$
i5,326
$
i—
$
i—
$
i5,326
Fixed
income securities:
Foreign debt
2
i8,746
i600
(i470)
i8,876
Corporate
debt
2
i10,540
i118
(i2,961)
i7,697
Preferred
stock
2
i9,831
i287
(i1,374)
i8,744
Common
stock
1
i28,625
i3,443
(i4,297)
i27,771
Mutual
funds:
Equity
1
i345
i2
(i22)
i325
Fixed
income
2
i9,046
i26
(i2,310)
i6,762
Trust
securities
$
i72,459
$
i4,476
$
(i11,434)
$
i65,501
Accrued
investment income
$
i806
$
i806
Cemetery
perpetual care investments
$
i66,307
Market value as a percentage of cost
i90.4%
-
18 -
The following table summarizes our fixed income securities (excluding mutual funds) within our cemetery perpetual care trust investment in an unrealized loss position at March 31, 2023, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
Total
fixed income securities with an unrealized loss
$
i9,996
$
(i1,495)
$
i7,435
$
(i4,475)
$
i17,431
$
(i5,970)
The
following table summarizes our fixed income securities (excluding mutual funds) within our perpetual care trust investment in an unrealized loss position at December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
Total
fixed income securities with an unrealized loss
$
i15,602
$
(i4,068)
$
i2,584
$
(i737)
$
i18,186
$
(i4,805)
i
Cemetery
perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations are as follows (in thousands):
Our receivables from preneed funeral 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. Receivables from preneed funeral trusts are as follows (in thousands):
The
following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations related to the underlying preneed funeral contracts at December 31, 2022 and March 31, 2023. 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 funeral trust funds at March 31, 2023 is as follows (in thousands):
Historical Cost Basis
Fair Value
Cash
and cash equivalents
$
i6,191
$
i6,191
Fixed
income investments
i12,031
i12,031
Mutual
funds and common stocks
i2,750
i2,518
Annuities
i3
i3
Total
$
i20,975
$
i20,743
The
composition of the preneed funeral trust funds at December 31, 2022 is as follows (in thousands):
Historical Cost Basis
Fair Value
Cash and cash equivalents
$
i6,071
$
i6,071
Fixed
income investments
i11,795
i11,795
Mutual
funds and common stocks
i2,725
i2,440
Annuities
i3
i3
Total
$
i20,594
$
i20,309
/
10.iINTANGIBLE
AND OTHER NON-CURRENT ASSETS
i
Intangible and other non-current assets are as follows (in thousands):
Capitalized
commissions on preneed contracts, net of accumulated amortization of $i2,990 and $i3,179,
respectively
i4,048
i4,161
Prepaid
agreements not-to-compete, net of accumulated amortization of $i3,515 and $i3,646,
respectively
i1,877
i1,750
Internal-use
software, net of accumulated amortization of $i200 and $i262, respectively
i1,271
i1,966
Other
i124
i303
Intangible
and other non-current assets, net
$
i32,930
$
i37,254
/
Tradenames
During
the three months ended March 31, 2023, we increased the value of our tradenames by $i3.6 million related to our 2023 business combination, described in Note 3 to the Consolidated Financial Statements.
Capitalized Commissions
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 obtaining a contract with a customer. Our capitalized commissions on preneed contracts are amortized on a straight-line basis over the average maturity period of iten years for our preneed funeral trust contracts and ieight
years for our preneed cemetery merchandise and services contracts.
- 20 -
Amortization expense was $i170,000 and $i189,000
for the three months ended March 31, 2022 and 2023, respectively.
Prepaid Agreements
Prepaid agreements not-to-compete are amortized over the term of the respective agreements, generally ranging from one to iten years. Amortization expense was $i148,000
and $i131,000 for the three months ended March 31, 2022 and 2023, respectively.
Internal-use Software
Internal-use software is amortized on a straight-line basis typically over three to ifive
years. Amortization expense was $i56,000 and $i62,000 for the three months ended March 31, 2022
and 2023, respectively.
i
The aggregate amortization expense for our capitalized commissions, prepaid agreements and internal-use software as of March 31, 2023 is as follows (in thousands):
Capitalized
Commissions
Prepaid Agreements
Internal-use Software
Years ending December 31,
Remainder of 2023
$
i729
$
i415
$
i194
2024
i715
i424
i297
2025
i650
i377
i386
2026
i584
i262
i374
2027
i518
i142
i373
Thereafter
i965
i130
i342
Total
amortization expense
$
i4,161
$
i1,750
$
i1,966
/
11.iCREDIT
FACILITY AND ACQUISITION DEBT
At March 31, 2023, our senior secured revolving credit facility (the “Credit Facility”) was comprised of: (i) a $i250.0 million revolving credit facility, including a $i15.0
million subfacility for letters of credit and a $i10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $i75.0
million in the aggregate in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 13, 2026.
Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (as defined in Note 12) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”).
The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations,
continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, amongst others.
In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and the Subsidiary Guarantors to incur indebtedness, grant liens, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial maintenance covenants. At March 31, 2023, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed i6.00
to 1.00 and (B) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than i1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility as of March 31,
2023.
- 21 -
i
Our Credit Facility and acquisition debt consisted of the following (in thousands):
Debt
issuance costs, net of accumulated amortization of $i1,926 and $i2,064, respectively
(i1,864)
(i1,720)
Total
Credit Facility
$
i188,836
$
i211,880
Acquisition
debt
$
i3,993
$
i3,971
Less:
current portion
(i555)
(i567)
Total acquisition
debt, net of current portion
$
i3,438
$
i3,404
/
At
March 31, 2023, we had outstanding borrowings under the Credit Facility of $i213.6 million. We also had one letter of credit for $i2.3
million under the Credit Facility. The letter of credit will expire on November 27, 2023 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At March 31, 2023, we had $i34.1 million of availability under the Credit Facility.
Outstanding borrowings under our Credit Facility bear interest at a prime rate or the Bloomberg Short-Term
Bank Yield Index (“BSBY”) rate, plus an applicable margin based on our leverage ratio. At March 31, 2023, the prime rate margin was equivalent to i2.375% and the BSBY rate margin was i3.375%.
The weighted average interest rate on our Credit Facility was i2.1% and i7.9% for the three months ended March 31, 2022 and 2023,
respectively.
i
The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
Credit
Facility amortization of debt issuance costs
i88
i138
/
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 i7.3% to i10.0%. Original maturities
range from nine to itwenty years.
The imputed interest expense related to our acquisition debt is as follows (in thousands):
Debt
discount, net of accumulated amortization of $i794 and $i921, respectively
(i3,706)
(i3,579)
Debt
issuance costs, net of accumulated amortization of $i226 and $i262, respectively
(i1,051)
(i1,015)
Carrying
value of the Senior Notes
$
i395,243
$
i395,406
/
At
March 31, 2023, the fair value of the Senior Notes, which are Level 2 measurements, was $i328.2 million.
The Senior Notes were issued under an indenture, dated as of May 13, 2021 (the “Indenture”), among the
Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally by each of the Subsidiary Guarantors. The Senior Notes mature on May 15, 2029, unless earlier redeemed or purchased and bear interest at i4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November
15, 2021.
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
- 22 -
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 and debt issuance costs related to our Senior Notes are as follows (in thousands):
The
debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately i74 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes for both the three months ended March 31, 2022 and 2023 was i4.42%
and i4.30%, respectively.
13.iiLEASES/
Our
lease obligations consist of operating and finance leases related to real estate, equipment and vehicles. iThe components of lease cost are as follows (in thousands):
Three
months ended March 31,
Income Statement Classification
2022
2023
Operating lease cost
Facilities and grounds expense(1)
$
i848
$
i875
Short-term
lease cost
Facilities and grounds expense(1)
i102
i94
Variable
lease cost
Facilities and grounds expense(1)
i7
i58
Finance
lease cost:
Depreciation of leased assets
Depreciation and amortization(2)
$
i108
$
i108
Interest
on lease liabilities
Interest expense
i113
i105
Total
finance lease cost
i221
i213
Total
lease cost
$
i1,178
$
i1,240
(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 General, administrative and other on our Consolidated Statements of Operations.
Supplemental cash flow information related to our leases is as follows (in thousands):
Restricted
stock granted during the three months ended March 31 2023 vests over a three-year period, if the employee has remained continuously employed by us during the vesting period, at a weighted average stock price of $i32.63.
/
-
24 -
We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for restricted stock awards of $i57,000 and $i178,000,
for the three months ended March 31, 2022 and 2023, respectively.
Common Stock
i
Common stock activity is as follows (in thousands, except shares):
During
the three months ended March 31, 2023, we issued i30,000 shares of common stock to C. Benjamin Brink (former executive) at a stock price of $i27.54,
in accordance with his Separation and Release agreement pertaining to his resignation from his position as the Company's Executive Vice President, Chief Financial Officer & Treasurer (Principal Financial Officer) effective January 2, 2023.
/
We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for common stock awards of $i826,000,
for the three months ended March 31, 2023.
Stock Options
i
Stock option grants and cancellations are as follows (in thousands, except shares):
Stock
options granted during the three months ended March 31, 2022 and 2023 had a weighted average price of $i49.48 and $i32.69,
respectively. The fair value of these options was calculated using the Black-Scholes option pricing model. The options granted in 2022 vest over a five-year period and have a ten-year term. The options granted in 2023 vest over a three-year period and have a ten-year term. These options will vest if the employee has remained continuously employed by us through the vesting period.
(2)
Stock options granted during the three months ended March 31, 2022 had a weighted average price of $i49.48.
The fair value of these options was calculated using the Black-Scholes option pricing model and vest over a seven-year period and have a ten-year term. These options will vest if the employee has remained continuously employed by us through the vesting period.
The fair value of the options granted during the three months ended March 31, 2023 was estimated using the Black-Scholes option pricing model with the following assumptions:
Stock
options exercised during the three months ended March 31, 2022 and 2023 had a weighted average exercise price of $i25.88 and $i25.43,
respectively, with an aggregate intrinsic value of $i0.5 million and $i0.1
million, respectively.
(2)
Represents shares withheld/cash received for the payment of the option price.
(3)
Represents shares withheld/cash paid for the payment of payroll taxes.
/
- 25 -
We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for
stock options of $i638,000 and $i710,000, for the three months ended March
31, 2022 and 2023, respectively.
Performance Awards
Performance award activity is as follows (in thousands, except shares):
We
recorded stock-based compensation expense, which is included in General, administrative and other expenses, for performance awards of $i566,000 and $i63,000
for the three months ended March 31, 2022 and 2023, respectively.
Employee Stock Purchase Plan
i
ESPP activity is as follows (in thousands, except shares):
The
fair value of the right (option) to purchase shares under the ESPP is estimated at the date of purchase with the four quarterly purchase dates using the following assumptions:
2023
Dividend yield
i1.30%
Expected
volatility
i53.51%
Risk-free interest rate
i4.53%,
i4.77%, i4.75%,
i4.72%
Expected life (years)
i0.25,
i0.50, i0.75,
i1.00
/
We recorded stock-based compensation expense, which is included in General, administrative and other expenses and Regional and unallocated funeral and cemetery costs, for the ESPP totaling
$i199,000 and $i252,000 for the three months ended March 31, 2022
and 2023, respectively.
Good To Great Incentive Program
During the three months ended March 31, 2023, we issued i8,444 shares of our common stock to certain employees, which were valued at $i0.3
million at a grant date stock price of $i32.69. During the three months ended March 31, 2022, we issued i27,448
shares of our common stock to certain employees, which were valued at $i1.4 million at a grant date stock price of $i49.48.
Non-Employee
Director and Board Advisor Compensation
i
Non-Employee Director and Board Advisor common stock activity is as follows (in thousands, except shares):
Common
stock granted during the three months ended March 31, 2022 and 2023 had a weighted average price of $i53.33 and $i30.52,
respectively.
/
We recorded compensation expense, which is included in General, administrative and other expenses, related to annual retainers, including the value of stock granted to non-employee Directors and an advisor to our Board, of $i201,000 and $i166,000
for the three months ended March 31, 2022 and 2023, respectively.
- 26 -
Share Repurchase
i
Share repurchase activity is as follows (dollar value in thousands):
Three
months ended March 31
2022
2023
Number of Shares Repurchased(1)
i490,000
i—
Average
Price Paid Per Share
$
i53.08
$
i—
Dollar
Value of Shares Repurchased(1)
$
i26,010
$
i—
(1)
During
the three months ended March 31, 2022, ii52,242/
shares settled in April 2022, which had a cost of $ii2.8/ million.
/
Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury stock. At March 31, 2023, our share repurchase program had $i48.9 million
authorized for repurchases.
Cash Dividend
i
Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):
2023
Per Share
Dollar
Value
March 1st
$
i0.1125
$
i1,661
2022
Per
Share
Dollar Value
March 1st
$
i0.1125
$
i1,725
/
15.iEARNINGS
PER SHARE
iThe following table sets forth the computation of the basic and diluted earnings per share (in thousands, except per share data):
Numerator for basic and diluted earnings per share:
Net income
$
i16,402
$
i8,844
Less:
Earnings allocated to unvested restricted stock
(i15)
(i71)
Income
attributable to common stockholders
$
i16,387
$
i8,773
Denominator:
Denominator
for basic earnings per common share - weighted average shares outstanding
i15,244
i14,758
Effect
of dilutive securities:
Stock options
i409
i99
Performance
awards
i716
i611
Denominator
for diluted earnings per common share - weighted average shares outstanding
i16,369
i15,468
Basic
earnings per common share:
$
i1.07
$
i0.59
Diluted
earnings per common share:
$
i1.00
$
i0.57
/
For
the three months ended March 31, 2023, i1,129,210 stock options were excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect. For the three months ended March 31, 2022, ino
stock options were excluded from the computation of diluted earnings per share.
Our performance awards are considered to be contingently issuable shares because their issuance is contingent upon the satisfaction of certain performance and service conditions. At March 31, 2023, we had satisfied certain performance criteria for the first, second and third predetermined growth targets of our performance awards to be considered outstanding. Therefore, we included these awards in the computation of diluted earnings per share as of the beginning of the reporting period.
- 27 -
16.iSEGMENT
REPORTING
i
Revenue, disaggregated by major source for each of our reportable segments was as follows (in thousands):
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains certain statements and information that 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. Words such as “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar
words or expressions may be used to identify forward-looking statements; however, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements include, but are not limited to, statements regarding any projections of earnings, revenue, cash flow, investment returns, capital allocation, debt levels, equity performance, death rates, market share growth, overhead, including talent recruitment, field and corporate incentive compensation, or other financial items; any statements of the plans, strategies and objectives of management for future operations or financing activities, including, but not limited to, capital allocation, the ability to obtain credit or financing, organizational performance, anticipated integration, performance and other benefits of recently completed and anticipated acquisitions, and cost and debt reductions; any statements of the plans, timing and objectives of management for acquisition and
divestiture 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 we believe these assumptions concerning future events 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 revenue 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:
•our ability to find and retain skilled personnel;
•the effects of our talent recruitment efforts, 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;
•our ability to execute and meet the objectives of our High Performance and Credit Profile Restoration Plan, if at all;
•the
execution of our Standards Operating, 4E Leadership and Strategic Acquisition Models;
•the effects of competition;
•changes in the number of deaths in our markets;
•changes in consumer preferences and our ability to adapt to or meet those changes;
•our ability to generate preneed sales, including implementing our cemetery portfolio sales strategy, product development and optimization plans;
•the investment performance of our funeral and cemetery trust funds;
•fluctuations in interest rates;
•the
effects of inflation on our operational and financial performance, including the increased overall costs for our goods and services, the impact on customer preferences as a result of changes in discretionary income, and our ability, if at all, to mitigate such effects;
•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 expectations related to our capital allocation framework, including our forecasted rates of return, planned uses of free cash flow and future capital allocation, including share repurchases, potential strategic acquisitions, internal growth projects, dividend increases, or debt repayment plans;
•our
ability to meet the projected financial and equity performance goals to our updated full year outlook, 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 merchandise, goods, insurance or taxes, and our ability to mitigate or minimize such costs, if at all;
•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;
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•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, such as the COVID-19 coronavirus, including any new or emerging public health threats, on customer preferences and on our business;
•government,
social, business and other actions that have been and will be taken in response to pandemics and epidemics, such as the COVID-19 coronavirus, including potential responses to any new or emerging public health threats;
•effects and expense of litigation;
•consolidation of the funeral and cemetery industry;
•our ability to identify and consummate strategic acquisitions, if at all, and successfully 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,
•adverse developments affecting the financial services industry;
•acts of war or terrorists acts and the governmental or military response to such acts;
•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 (i) Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report
on Form 10-K for the year ended December 31, 2022.
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.
- 31 -
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations.
OVERVIEW
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 accounts for approximately 70% of our total revenue, and Cemetery Operations, which currently accounts for approximately 30% of our total revenue.
At March 31, 2023, we operated 173 funeral homes in 26 states and 32 cemeteries in 11 states. We compete with other publicly held, privately held and independent operators of funeral and cemetery companies.
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 memorial markers, outer burial containers and monuments) 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.
Recent Developments
Board of Directors
On February 22, 2023, the Board of Directors (the “Board”) of the Company elected Carlos R. Quezada, President and Chief Operating Officer, to serve as a Class II director, effective that same date, until the Company’s 2025 annual meeting of stockholders. The Board also appointed Mr. Quezada to serve as Vice Chairman of the
Board. Mr. Quezada will serve as a non-independent member of the Board, and the Board does not expect to appoint Mr. Quezada to any of its standing committees. Following the appointment of Mr. Quezada, the Board is now comprised of six directors, including four independent directors.
Code of Business Conduct and Ethics
On February 22, 2023, our Board, on the recommendation of the Board’s Audit Committee, approved various amendments to the Company’s Code of Business Conduct and Ethics (the “Code”), which applies to all directors, officers and employees of the Company and its subsidiaries.
In addition to making certain technical and administrative updates, the amendments to the Code include, among other things, summarizing and clarifying the Company’s existing compliance requirements and also identifies and expands upon certain policies, including those related to bribery and kickbacks, antitrust, political activity and improper influence on auditors. As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, copies of the Code, as amended, are posted on our website under “Investors - Corporate Governance.”
Leadership Changes
Effective March
13, 2023, L. Kian Granmayeh was appointed to serve as the Company’s Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer).
Acquisitions
On March 22, 2023, we acquired three funeral homes, two cemeteries and a cremation focused business in the Bakersfield, California area for $44.0 million.
Divestitures
During the three months ended March 31, 2023, we sold one funeral home and two cemeteries for $0.8 million for a loss of $0.1 million.
-
32 -
Business Impacts of COVID-19
The overall macroeconomic impact from the pandemic to the funeral and cemetery industry may provide varying results as compared to other industries. Our industry’s revenues are impacted by various factors, including for example, fluctuations in the death rate, the number of funeral services performed, the average price for a service and the mix of traditional burial versus cremation contracts. During the three months ended March 31, 2023, deaths directly attributable from COVID-19 now have minimal direct impact on the overall death rate, although the overall death rate remains slightly higher than the pre-pandemic period, and we
are unable to predict or forecast the duration or variation of this increased death rate with any certainty. As a result, we experienced lower volumes, revenues, earnings and margins when compared to the first quarter of 2022, but overall financial performance remains at or above prior reporting periods during and prior to the pandemic. Although we expect these death rate trends to continue, we will continue to assess these impacts, including the potential impacts of any emerging or new public health threats, and implement appropriate procedures, plans, strategies, and issue any disclosures that may be required, as the situation evolves. Regardless of these recent trends, our businesses have remained focused on being innovative and resourceful, providing families immediate service as part of the grieving process.
Within our financial reporting environment, we have considered the impact of COVID-19 on the assumptions and estimates
used in preparing our consolidated financial statements. In the opinion of management, all material adjustments necessary for a fair presentation of the Company’s financial results for the quarter have been made, but are complicated by our inability to predict or forecast the duration or variation of the increased death rate with any certainty. We do not believe we are particularly vulnerable to concentrations, with respect to geographic area, revenue for specific products or our relationships with our vendors. To date, we have not experienced any material supply chain impacts or disruptions from our vendors attributable to COVID-19 and we continue to receive reliable service.
We believe our access to capital, the cost of our capital, and the sources and uses of our cash should be relatively consistent in the near term. While the expected
duration and potential future impacts of the pandemic are 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. For additional information related to our liquidity position, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.
Inflationary Trends
During the three months ended March 31, 2023, we continued to experience modest cost increases and surcharges from our vendors and suppliers on merchandise and goods due to broader inflationary, raw material cost increases, and global supply chain impacts. For example, we experienced higher costs related to full-time hourly base rates, utilities, funeral supplies, merchandise
costs and insurance. Although we have taken steps to mitigate these cost increases and we expect these impacts to continue throughout the current year, the ultimate scope and duration of these impacts are unknown at this time. More broadly, the U.S. economy continues to experience higher rates of inflation, which has impacted a wide variety of industries and sectors, with consumers facing rising prices. Such inflation may negatively impact consumers or discretionary spending, including the amount that consumers are able to spend on our services, although we have not experienced such impacts to date and our industry has been largely resilient to similar adverse economic and market environments in the past. Although we expect these trends to continue throughout the current year, we will continue to assess these impacts and take the appropriate steps, if necessary, to mitigate these cost increases, if possible.
Funeral Home Operations
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. Factors affecting our funeral operating results include, but are not limited to: 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 to increase average revenue per contract.
Cemetery
Operations
Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an atneed and preneed basis. Factors affecting our cemetery operating results include, but are not limited to: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest
- 33 -
rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within
the trust funds.
Business Strategy
Our business strategy 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 funeral and cemetery industry, which we are able to achieve through a decentralized, high-performance culture and 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 independent funeral home 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 most 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 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 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.
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 our 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 in growing markets.
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
- 34 -
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.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility (defined below).
We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current
cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets or seek further borrowing capacity from our lenders to obtain additional funding and we may not be able to obtain such funding on terms and conditions that are acceptable to us. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. For additional information regarding known material factors that could cause cash flow or access to and cost of finance sources to differ from our expectations, please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31,
2022.
Our plan is to remain focused on integrating our recently acquired businesses and prioritizing our capital allocation for debt repayments, the payment of dividends and debt obligations and internal growth capital expenditures, which we expect to fund using cash on hand and borrowings under our Credit Facility, along with general corporate purposes, as allowed under our Credit Facility. We believe that our existing and anticipated cash resources, including, as needed, additional borrowings or other financings that we may be able to obtain, will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months, as well as our long-term financial obligations.
Cash Flows
We began 2023 with $1.2 million in cash and ended the first quarter
with $1.3 million in cash. At March 31, 2023, we had borrowings of $213.6 million outstanding on our Credit Facility compared to $190.7 million at December 31, 2022.
The following table sets forth the elements of cash flow (in thousands):
Proceeds
from divestitures and sale of other assets
1,026
1,275
Proceeds from insurance claims
676
421
Capital expenditures
(6,883)
(4,982)
Net cash used in investing activities
(7,756)
(47,286)
Net
borrowings on our Credit Facility, acquisition debt and finance lease obligations
18,700
22,773
Net proceeds from employee equity plans
374
428
Dividends
paid on common stock
(1,725)
(1,661)
Purchase of treasury stock
(25,655)
—
Net cash provided by (used in) financing activities
(8,306)
21,540
Cash
at end of the period
$
887
$
1,293
- 35 -
Operating Activities
For the three months ended March 31, 2023, cash provided by operating activities was $25.9 million compared to $15.8 million for the three months ended March 31, 2022. The increase of $10.1 million is primarily due to a $7.0 million withdrawal of realized capital gains and
earnings from our preneed cemetery trust investments, as well as favorable working capital changes in accrued liabilities.
Investing Activities
Our investing activities, resulted in a net cash outflow of $47.3 million for the three months ended March 31, 2023 compared to $7.8 million for the three months ended March 31, 2022, an increase of $39.5 million.
Acquisition and Divestiture Activity
During the three months ended March 31, 2023, we acquired a business consisting of three funeral homes, two cemeteries and one cremation focused business for $44.0 million. In addition, we sold one funeral home and two cemeteries for $0.8 million.
During
the three months ended March 31, 2022, we sold two funeral homes for an aggregate of $0.9 million and purchased real property for $2.6 million.
Capital Expenditures
For the three months ended March 31, 2023, capital expenditures (comprised of growth and maintenance spend) totaled $5.0 million compared to $6.9 million for the three months ended March 31, 2022, a decrease of $1.9 million.
The following tables present our growth and maintenance capital expenditures (in thousands):
During the three months ended March 31, 2022,
we spent $0.4 million for renovations on two businesses that were affected by Hurricane Ida, which occurred during the third quarter of 2021, all of which was reimbursed by our property insurance.
Information
technology infrastructure improvements
—
309
Other
100
146
Total Maintenance
$
3,612
$
1,842
Financing Activities
Our financing activities resulted
in a net cash inflow of $21.5 million for the three months ended March 31, 2023 compared to a net cash outflow of $8.3 million for the three months ended March 31, 2022, an increase of $29.8 million.
During the three months ended March 31, 2023, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $22.8 million, offset by $1.7 million in dividends.
During the three months ended March 31, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $18.7 million, offset by $25.7 million for the purchase of treasury stock and $1.7 million in dividends.
-
36 -
Share Repurchase
Share repurchase activity is as follows (dollar value in thousands):
During
the three months ended March 31, 2022, 52,242 shares settled in April 2022, which had a cost of $2.8 million.
Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury stock. At March 31, 2023, our share repurchase program had $48.9 million authorized for repurchases.
Dividends
Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):
2023
Per
Share
Dollar Value
March 1st
$
0.1125
$
1,661
2022
Per
Share
Dollar Value
March 1st
$
0.1125
$
1,725
Credit
Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and acquisition debt at March 31, 2023 is as follows (in thousands):
At March 31, 2023, our senior secured revolving credit facility (the “Credit Facility”) was comprised of: (i) a $250.0 million revolving credit facility, including a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of
up to $75.0 million in the aggregate in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 13, 2026.
Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (defined below) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”).
The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations,
continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, amongst others.
In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and the Subsidiary Guarantors to incur indebtedness, grant liens, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial maintenance covenants. At March 31, 2023, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 6.00 to 1.00 and
(B) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility as of March 31, 2023.
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At March 31, 2023, we had outstanding borrowings under the Credit Facility of $213.6 million. We also had one letter
of credit for $2.3 million under the Credit Facility. The letter of credit will expire on November 27, 2023 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At March 31, 2023, we had $34.1 million of availability under the Credit Facility.
Outstanding borrowings under our Credit Facility bear interest at a prime rate or a Bloomberg Short-Term Bank Yield Index (“BSBY”) rate, plus an applicable margin based on our leverage ratio. At March 31, 2023, the prime rate margin was equivalent to 2.375% and the BSBY rate margin was 3.375%. The weighted average interest rate on our Credit Facility was 2.1% and 7.9% for the three months ended March 31, 2022 and 2023,
respectively.
The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
Credit Facility amortization of debt issuance costs
88
138
The interest payments on our remaining borrowings under the Credit Facility will be determined based on
the average outstanding balance of our borrowings and the prevailing interest rate during that time.
Lease Obligations
Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes, equipment and vehicles under operating leases with original terms ranging from one to twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. At March 31, 2023, operating and finance lease obligations were $36.3 million, with $5.0 million payable within 12 months.
The components of lease cost are as follows (in thousands):
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 nine to twenty years. At March 31, 2023, acquisition debt obligations were $5.6 million, with $0.7 million payable within 12 months.
The imputed interest expense related to our acquisition debt is as follows (in thousands):
At March 31, 2023, the principal amount of our 4.25% senior notes due in May 2029 (the “Senior Notes”) was $400.0 million. The Senior Notes were issued under an indenture, dated as of May 13, 2021 (the “Indenture”), among the Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally by each of the Subsidiary Guarantors. The Senior Notes mature on May
15, 2029, unless earlier redeemed or purchased and bear interest at 4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021.
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The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to
secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default.
The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 74 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes for both the three months ended March
31, 2022 and 2023 was 4.42% and 4.30%, respectively.
At March 31, 2023, the fair value of the Senior Notes, which are Level 2 measurements, was $328.2 million.
The interest expense and amortization of debt discount and debt issuance costs related to our Senior Notes are as follows (in thousands):
Revenue for the three months ended March 31, 2023 decreased $2.6 million compared to the three months ended March 31, 2022, as we experienced an 8.1% decrease in funeral contract volume, which was partially offset by a 2.4% increase in the average revenue per funeral contract
and a 5.3% increase in the number of preneed interment rights (property) sold, while the average price per interment right sold remained flat. The contract volume decrease is primarily a result of the significant decline in COVID-19 related deaths in 2023 as compared to 2022, as these deaths now have a minimal impact on the overall death rate. The increase in interment rights sold is due exclusively to our newly acquired cemetery businesses, not present in the comparative quarter of 2022.
Gross profit for the three months ended March 31, 2023 decreased $3.4 million compared to the three months ended March 31, 2022, due to the decrease in revenue from our funeral home segment, as well as increases in operating expenses in both our funeral
home and cemetery segments.
Net income for the three months ended March 31, 2023 decreased $7.6 million compared to the three months ended March 31, 2022, primarily due to the following: (1) the $3.4 million decrease in gross profit, (2) a $3.0 million increase in interest expense, (3) a $1.6 million increase in general and administrative expenses, (4) a $1.2 million impact from divestitures, disposals and insurance reimbursements, offset by (5) a $1.6 million decrease in income tax expense.
Further discussion of Revenue and the components of Gross profit for our funeral home and cemetery segments is presented under “– Results of Operations.”
Further discussion of General, administrative and other expenses, Interest expense, Income
taxes and other components of income and expenses are presented under “– Other Financial Statement Items.”
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REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended March 31, 2023 issued on May 3, 2023, and discussed in the corresponding earnings conference call. The 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 Gross profit (a GAAP financial measure) to Operating profit (a non-GAAP financial measure) (in thousands):
Regional and unallocated funeral and cemetery costs
6,347
5,437
Operating
profit(1)
$
45,454
$
41,050
(1)
Operating
profit is defined as Gross profit plus Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs.
Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-financial GAAP measure) by Segment (in thousands):
Operating profit margin is defined as Operating
profit as a percentage of Revenue.
Further discussion of Operating profit for our funeral home and cemetery segments is presented under “– Results of Operations.”
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RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three months ended March 31, 2023 and 2022.
We previously classified our funeral homes and cemeteries as “same store” or “acquired”
in our results of operations discussion in our quarterly and annual filings prior to December 31, 2022. Same store generally referred to funeral homes and cemeteries acquired at least five years before the reporting period being presented, while acquired generally referred to funeral homes and cemeteries acquired within the preceding five years of the reporting period being presented, both of which excluded certain funeral homes and cemeteries that we intended to divest.
In an effort to simplify the discussion of our results of operations, provide meaningful metrics to investors to compare our results to previous periods and provide more insight into the underlying long-term performance trends in our business, we have combined both the same store and acquired categories and now refer to this combination as “operating”. The term “operating” in the Funeral Home
and Cemetery Segment simply refers to all our funeral homes and cemeteries owned and operated in the current reporting period, excluding certain funeral home and cemetery businesses that we have divested or intend to divest in the near future.
The term “divested” when discussed in the Funeral Home Segment, refers to one funeral home we sold in the three months ended March 31, 2023 and two funeral homes we sold in the three months ended March 31, 2022. The term “divested” when discussed in the Cemetery Segment, refers to two cemeteries we sold during the three months ended March 31, 2023.
“Planned divested” refers to the funeral home and cemetery businesses that we intend to divest.
“Ancillary”
in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business.
Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure.
Funeral Home Segment
The following table sets forth certain information regarding our Revenue and Operating profit for our funeral home operations (in thousands):
Average revenue per contract, excluding preneed funeral trust earnings
$
5,242
$
5,367
Average
revenue per contract, including preneed funeral trust earnings
$
5,398
$
5,531
Cremation rate
57.1%
59.1%
Funeral home operating revenue decreased $3.7 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The decrease in operating revenue
is primarily driven by a 7.5% decrease in contract volume, which was partially offset by a 2.4% increase in the average revenue per contract excluding preneed interest. The contract
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volume decrease is primarily a result of the significant decline in COVID-19 related deaths in 2023 as compared to 2022, as these deaths now have a minimal impact on the overall death rate. The increase in average revenue per contract
is primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.
Funeral home operating profit for the three months ended March 31, 2023 decreased $4.6 million when compared to the same period in 2022, primarily due to an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 440 basis points to 40.1%. Operating expenses as a percentage of revenue increased 4.5% with the largest increase in salary and benefits expenses of 2.2%, facilities and grounds expenses of 1.0%, general and administrative expenses of 0.6%, and other funeral costs of 0.4%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities and funeral
supplies.
Ancillary revenue, which represents revenue from our flower shop, pet cremation and online cremation businesses remained flat and Ancillary operating profit decreased $0.1 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.
Other revenue and other operating profit, which consists of preneed funeral insurance commissions and preneed funeral trust and insurance remained flat for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.
Cemetery Segment
The following table sets forth
certain information regarding our Revenue and Operating profit for our cemetery operations (in thousands):
The
following operating measures reflect the significant metrics over this comparative period:
Preneed revenue as a percentage of operating revenue
59.0%
58.0%
Preneed revenue (in thousands)
$
12,078
$
12,447
Atneed
revenue (in thousands)
$
8,396
$
9,157
Number of preneed interment rights sold
2,365
2,499
Average price per interment right sold
$
4,510
$
4,500
Cemetery operating revenue
increased $1.1 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, as we experienced a 5.7% increase in the number of preneed interment rights sold, while the average price per preneed interment right sold remained flat. The increase in interment rights sold is due exclusively to our newly acquired cemetery businesses, not present in the comparative quarter of 2022. Cemetery atneed revenue, which represents 42.0% of our total operating revenue, increased $0.8 million for the three months ended March 31, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services.
Cemetery operating profit decreased $0.2 million for the three months ended March
31, 2023 compared to the three months ended March 31, 2022, primarily due to an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 320 basis points to 38.8%. Operating expenses as a percent of operating revenue increased 3.1% with the largest increase in merchandise costs of 0.9%, salary and benefits expenses of 0.9% and facilities and grounds expenses of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our utilities and merchandise costs.
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Other revenue, which consists of preneed cemetery trust revenue and preneed cemetery finance charges, increased $0.5 million for the three months ended
March 31, 2023, compared to the three months ended March 31, 2022. The increase is primarily due to an increase in dividends and interest income in our perpetual care trust fund. Other operating profit increased $0.6 million for the same comparative period, primarily due to the increase in revenue.
Cemetery property amortization. Cemetery property amortization totaled $1.2 million for the three months ended March 31, 2023, a decrease of $0.1 million compared to the same period in 2022. The decrease is due to fewer sales of private mausoleums in the first quarter of 2023, which generally have a higher cost of construction.
Field depreciation. Depreciation expense for our field businesses
totaled $3.4 million for the three months ended March 31, 2023, an increase of $0.1 million compared to the same period in 2022, primarily due to acquisitions made in latter half of 2022.
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 $5.4 million for the three months ended March 31, 2023, a decrease of $0.9 million compared to the same period in 2022, primarily due to the following: (1) a $0.5 million decrease in cash incentives and equity compensation; (2) a $0.3 million decrease in incentive award trips and annual managing partner meetings; and (3)
a $0.1 million decrease in other general expenses.
Other Financial Statement Items
General, administrative and other. General, administrative and other expenses, which includes salaries and benefits, cash and equity incentive compensation for the Houston support office totaled $10.2 million for the three months ended March 31, 2023, an increase of $1.6 million compared to the same period in 2022, primarily due to an increase in salary and benefits expense, along with increased cash and equity incentive compensation, as a result of having a complete senior leadership team at the end of the current period.
Net loss on divestitures, disposals and impairments charges. The components of Net loss on divestitures, disposals
and impairment charges are as follows (in thousands):
During the three months ended March 31, 2023 and 2022, we divested one funeral home and two cemeteries for an aggregate loss of $0.1 million and we divested two funeral homes for a loss of $0.7 million, respectively.
Interest expense. Interest expense related to its respective debt arrangement is as follows (in thousands):
(Gain)
loss on property damage, net of insurance claims. During the three months ended March 31, 2023, we recorded a $0.3 million loss, net of insurance proceeds, for property damaged by a fire that occurred during first quarter of 2023. During the three months ended March 31, 2022, we recorded a $1.9 million gain, net of insurance proceeds, for property damaged by Hurricane Ida that occurred during the third quarter of 2021.
Other, net. During the three months ended March 31, 2023, we recorded a $0.5 million gain on the sale of other real property not used in business operations.
Income taxes. Income tax expense totaled $3.5 million for the three months ended March
31, 2023, a decrease of $1.6 million compared to the same period in 2022, primarily due to lower pre-tax income in the current period. Our operating tax rate before discrete items was 28.9% and 26.5% for the three months ended March 31, 2023 and 2022, respectively.
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OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Understanding
our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies is integral to understanding our Consolidated Financial Statements. Our critical accounting policies are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data” in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2022.
We have identified Business Combinations and Goodwill as those accounting policies that require significant judgments, assumptions and estimates and that have a significant impact on our financial condition and results of operations. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because
the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from period to period. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate and may be further affected
by epidemics and pandemics, like COVID-19. 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. For example, we experienced fluctuations in the death rate due to COVID-19, with a result of increased deaths during the duration of the pandemic. Although deaths directly attributable from COVID-19 now have minimal direct impact on the overall death rate, the overall death rate remains higher than the pre-COVID-19 pandemic period. As a result, we are unable to predict or forecast the duration or variation of this increased death rate with any certainty.
Item 3.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 other than those related to COVID-19 and inflation which are described in more detail in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.
The following quantitative and qualitative information is provided about financial instruments to which we are a party at March 31, 2023 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 at March 31, 2023 are presented in Part 1, Item 1, Financial Statements, Note 8 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.21% 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. At March 31, 2023, we had outstanding borrowings under the Credit Facility of $213.6 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 the Credit Facility at either prime rate or the BSBY rate plus a margin. At March 31, 2023, the prime rate margin was equivalent to 2.375% and the BSBY rate margin was 3.375%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result
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in a change in income before taxes of $2.1 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
Senior Notes bear interest at the fixed annual rate of 4.25%. We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. At March 31, 2023, the carrying value of the Senior Notes on our Consolidated Balance Sheet was
$395.4 million and the fair value of the Senior Notes was $328.2 million based on the last traded or broker quoted price, reported by the Financial Industry Regulatory Authority, Inc. 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 4.Controls and Procedures.
Management’s Evaluation
of Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officers, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. 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 rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial
officers concluded that our disclosure controls and procedures are effective at March 31, 2023 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with US GAAP.
Changes in Internal Control over Financial Reporting
There was no change in our system of internal control over financial reporting (defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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-
PART II – OTHER INFORMATION
Item 1.Legal Proceedings.
We and our subsidiaries are parties to a number of 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.
We
self-insure against certain risks and carry insurance with coverage and coverage limits for risk 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 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 provides 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 1A.Risk Factors.
Risk Factor Update
In
light of recent developments affecting the financial services industry, we are also supplementing the risk factors set out under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 with the new risk factor set out below. The risk factor below should be carefully read in conjunction with the risk factors set out in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q and our Annual Report on Form 10-K for the year ended December 31, 2022 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our
business, financial condition or future results.
GENERAL RISKS
Economic Conditions and Natural Disasters
Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults, or non-performance by financial institutions, could adversely affect our business, financial condition, or results of operations.
We currently maintain cash balances in accounts at U.S. financial institutions that we believe are high quality. These accounts, held by us and our affiliated companies, are in non-interest-bearing and interest-bearing operating accounts and may, from time to time, exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If such banking institutions were to fail, we could lose all or a portion of those amounts held
in excess of such insurance limitations. In addition, actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, our third-party vendors and counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems, which could adversely affect our business, financial condition, results of operations and liquidity.
Although we assess our banking relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our respective current and projected future business operations could be significantly impaired by factors that affect us, the financial institutions with
which we have arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions or financial services industry companies with which we, have financial or business relationships, but could also include factors involving financial markets or the financial services industry generally.
In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and
tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire future financing or access to capital on acceptable terms or at all. As availability under our Credit Facility and/or the ability to access capital has historically been, and is expected to continue to be, one of our primary sources of liquidity, any adverse impacts on our ability to access such credit and liquidity sources as a result of adverse developments affecting the financial services industry could adversely affect our business, financial condition, results of operations.
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Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds.
The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended March 31, 2023:
Period
Total
Number of Shares Purchased(1)
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(2)
Represents
shares surrendered by employees to pay taxes withheld upon the vesting of restricted stock awards.
(2)
See Part I, Item 1, Financial Statements, Note 14 for additional information on our publicly announced share repurchase program.
Item 3.Defaults Upon Senior Securities.
Not applicable.
Item 4.Mine Safety Disclosures.
Not applicable.
Item
5.Other Information.
Not applicable.
Item 6.Exhibits.
The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the Exhibit Index accompanying this Quarterly Report on Form 10-Q and are incorporated herein by reference.
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SIGNATURE
Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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