UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 20172022
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to
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Commission File Number: | 1-11961 |
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
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DELAWAREDelaware | 76-0423828 |
(State or other jurisdiction of incorporation or organization)
| (I.R.S. Employer Identification No.)
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3040 Post Oak Boulevard, Suite 300 |
Houston, Texas, 77056 |
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3040 Post Oak Boulevard, Suite 300
Houston, Texas, 77056
(Address of principal executive offices)
(713) 332-8400
(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 |
Common Stock, par value $.01 per share | CSV | New 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. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or 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.
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Large accelerated filer | o☐ | Accelerated filer | x☒ |
Non-accelerated filer | o☐ (Do not check if a smaller reporting company)
| Smaller reporting company | o☐ |
| | Emerging growth company | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of October 20, 201728, 2022 was 16,085,750.14,714,808.
CARRIAGE SERVICES, INC.
INDEX
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3. Defaults Upon Senior Securities | |
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Item 4. Mine Safety Disclosures | |
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Item 5. Other Information | |
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PART I – FINANCIAL INFORMATION
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Item 1. | Financial Statements. |
Item 1.Financial Statements. CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETSSHEET
(unaudited and in thousands, except share data)
| | | | | (unaudited) | | | | | | | | | | |
| December 31, 2016 | | September 30, 2017 | | December 31, 2021 | | September 30, 2022 |
ASSETS | | | | ASSETS | | | |
Current assets: | | | | Current assets: | |
Cash and cash equivalents | $ | 3,286 |
| | $ | 759 |
| Cash and cash equivalents | $ | 1,148 | | | $ | 821 | |
Accounts receivable, net of allowance for bad debts of $746 in 2016 and $800 in 2017 | 18,860 |
| | 18,821 |
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Accounts receivable, net | | Accounts receivable, net | 25,314 | | | 23,352 | |
Inventories | 6,147 |
| | 6,346 |
| Inventories | 7,346 | | | 7,675 | |
Prepaid expenses | 2,640 |
| | 1,355 |
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Other current assets | 2,034 |
| | 764 |
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Prepaid and other current assets | | Prepaid and other current assets | 6,404 | | | 4,131 | |
Total current assets | 32,967 |
| | 28,045 |
| Total current assets | 40,212 | | | 35,979 | |
Preneed cemetery trust investments | 69,696 |
| | 71,728 |
| Preneed cemetery trust investments | 100,903 | | | 87,030 | |
Preneed funeral trust investments | 89,240 |
| | 89,444 |
| Preneed funeral trust investments | 113,658 | | | 98,638 | |
Preneed receivables, net of allowance for bad debts of $2,166 in 2016 and $2,230 in 2017 | 30,383 |
| | 31,279 |
| |
Receivables from preneed trusts | 14,218 |
| | 15,306 |
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Property, plant and equipment, net of accumulated depreciation of $110,509 in 2016 and $113,616 in 2017 | 235,113 |
| | 235,501 |
| |
Cemetery property, net of accumulated amortization of $34,194 in 2016 and $36,638 in 2017 | 76,119 |
| | 76,961 |
| |
Preneed cemetery receivables, net | | Preneed cemetery receivables, net | 23,150 | | | 25,873 | |
Receivables from preneed funeral trusts, net | | Receivables from preneed funeral trusts, net | 19,009 | | | 20,119 | |
Property, plant and equipment, net | | Property, plant and equipment, net | 269,367 | | | 275,977 | |
Cemetery property, net | | Cemetery property, net | 100,701 | | | 101,691 | |
Goodwill | 275,487 |
| | 275,487 |
| Goodwill | 391,972 | | | 393,765 | |
Intangible and other non-current assets | 14,957 |
| | 14,616 |
| |
Intangible and other non-current assets, net | | Intangible and other non-current assets, net | 29,378 | | | 30,451 | |
Operating lease right-of-use assets | | Operating lease right-of-use assets | 17,881 | | | 17,295 | |
Cemetery perpetual care trust investments | 46,889 |
| | 48,679 |
| Cemetery perpetual care trust investments | 72,400 | | | 60,569 | |
Total assets | $ | 885,069 |
| | $ | 887,046 |
| Total assets | $ | 1,178,631 | | | $ | 1,147,387 | |
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | | LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | | Current liabilities: | |
Current portion of long-term debt and capital lease obligations | $ | 13,267 |
| | $ | 16,323 |
| |
Current portion of debt and lease obligations | | Current portion of debt and lease obligations | $ | 2,809 | | | $ | 3,104 | |
Accounts payable | 10,198 |
| | 6,686 |
| Accounts payable | 14,205 | | | 9,325 | |
Other liabilities | 717 |
| | 1,811 |
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Accrued liabilities | 20,091 |
| | 15,294 |
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Accrued and other liabilities | | Accrued and other liabilities | 43,773 | | | 37,123 | |
| Total current liabilities | 44,273 |
| | 40,114 |
| Total current liabilities | 60,787 | | | 49,552 | |
Long-term debt, net of current portion | 137,862 |
| | 125,442 |
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Revolving credit facility | 66,542 |
| | 74,550 |
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Convertible subordinated notes due 2021 | 119,596 |
| | 123,182 |
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Obligations under capital leases, net of current portion | 2,630 |
| | 2,492 |
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Acquisition debt, net of current portion | | Acquisition debt, net of current portion | 3,979 | | | 3,846 | |
Credit facility | | Credit facility | 153,857 | | | 167,410 | |
| Senior notes | | Senior notes | 394,610 | | | 395,082 | |
Obligations under finance leases, net of current portion | | Obligations under finance leases, net of current portion | 5,157 | | | 4,842 | |
Obligations under operating leases, net of current portion | | Obligations under operating leases, net of current portion | 18,520 | | | 17,638 | |
Deferred preneed cemetery revenue | 54,631 |
| | 55,275 |
| Deferred preneed cemetery revenue | 50,202 | | | 52,173 | |
Deferred preneed funeral revenue | 33,198 |
| | 34,652 |
| Deferred preneed funeral revenue | 30,584 | | | 32,006 | |
Deferred tax liability | 42,810 |
| | 44,025 |
| Deferred tax liability | 45,784 | | | 47,483 | |
Other long-term liabilities | 2,567 |
| | 2,723 |
| Other long-term liabilities | 1,419 | | | 2,700 | |
Deferred preneed cemetery receipts held in trust | 69,696 |
| | 71,728 |
| Deferred preneed cemetery receipts held in trust | 100,903 | | | 87,030 | |
Deferred preneed funeral receipts held in trust | 89,240 |
| | 89,444 |
| Deferred preneed funeral receipts held in trust | 113,658 | | | 98,638 | |
Care trusts’ corpus | 46,290 |
| | 48,186 |
| Care trusts’ corpus | 71,156 | | | 60,067 | |
Total liabilities | 709,335 |
| | 711,813 |
| Total liabilities | 1,050,616 | | | 1,018,467 | |
Commitments and contingencies: |
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| Commitments and contingencies: | | | |
Stockholders’ equity: | | |
| Stockholders’ equity: | |
Common stock, $.01 par value; 80,000,000 shares authorized and 22,490,855 and 22,609,120 shares issued at December 31, 2016 and September 30, 2017, respectively | 225 |
| | 226 |
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Common stock, $0.01 par value; 80,000,000 shares authorized and 26,264,245 and 26,341,132 shares issued, respectively and 15,331,923 and 14,713,314 shares outstanding, respectively | | Common stock, $0.01 par value; 80,000,000 shares authorized and 26,264,245 and 26,341,132 shares issued, respectively and 15,331,923 and 14,713,314 shares outstanding, respectively | 263 | | | 263 | |
Additional paid-in capital | 215,064 |
| | 216,396 |
| Additional paid-in capital | 236,809 | | | 238,787 | |
Retained earnings | 20,711 |
| | 35,243 |
| Retained earnings | 135,462 | | | 168,623 | |
Treasury stock, at cost; 5,849,316 and 6,523,370 shares at December 31, 2016 and September 30, 2017, respectively | (60,266 | ) | | (76,632 | ) | |
Treasury stock, at cost; 10,932,322 and 11,627,818 shares, respectively | | Treasury stock, at cost; 10,932,322 and 11,627,818 shares, respectively | (244,519) | | | (278,753) | |
Total stockholders’ equity | 175,734 |
| | 175,233 |
| Total stockholders’ equity | 128,015 | | | 128,920 | |
Total liabilities and stockholders’ equity | $ | 885,069 |
| | $ | 887,046 |
| Total liabilities and stockholders’ equity | $ | 1,178,631 | | | $ | 1,147,387 | |
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
| | | | | | | | | | | | Three months ended September 30, | | Nine months ended September 30, |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | 2021 | | 2022 | | 2021 | | 2022 |
| 2016 | | 2017 | | 2016 | | 2017 | |
Revenues: | | | | | | | | |
Funeral | $ | 45,183 |
| | $ | 47,329 |
| | $ | 140,952 |
| | $ | 150,279 |
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Cemetery | 14,957 |
| | 13,725 |
| | 44,384 |
| | 42,784 |
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Revenue: | | Revenue: | | | | | | | |
Service revenue | | Service revenue | $ | 46,210 | | | $ | 42,992 | | | $ | 134,086 | | | $ | 135,279 | |
Property and merchandise revenue | | Property and merchandise revenue | 42,043 | | | 37,607 | | | 125,545 | | | 120,495 | |
Other revenue | | Other revenue | 6,788 | | | 6,898 | | | 20,324 | | | 20,484 | |
| 60,140 |
| | 61,054 |
| | 185,336 |
| | 193,063 |
| | 95,041 | | | 87,497 | | | 279,955 | | | 276,258 | |
Field costs and expenses: | | |
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| Field costs and expenses: | |
Funeral | 26,982 |
| | 29,267 |
| | 82,546 |
| | 89,118 |
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Cemetery | 8,695 |
| | 8,769 |
| | 25,546 |
| | 26,142 |
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Depreciation and amortization | 3,452 |
| | 3,601 |
| | 10,359 |
| | 10,719 |
| |
Cost of service | | Cost of service | 20,523 | | | 22,317 | | | 61,073 | | | 65,805 | |
Cost of merchandise | | Cost of merchandise | 28,632 | | | 28,668 | | | 84,672 | | | 87,304 | |
Cemetery property amortization | | Cemetery property amortization | 1,521 | | | 1,278 | | | 5,213 | | | 4,314 | |
Field depreciation expense | | Field depreciation expense | 3,154 | | | 3,281 | | | 9,432 | | | 9,831 | |
Regional and unallocated funeral and cemetery costs | 2,783 |
| | 3,937 |
| | 8,547 |
| | 9,845 |
| Regional and unallocated funeral and cemetery costs | 6,812 | | | 5,096 | | | 18,655 | | | 17,409 | |
Other expenses | | Other expenses | 1,235 | | | 1,259 | | | 3,758 | | | 3,807 | |
| 41,912 |
| | 45,574 |
| | 126,998 |
| | 135,824 |
| | 61,877 | | | 61,899 | | | 182,803 | | | 188,470 | |
Gross profit | 18,228 |
| | 15,480 |
| | 58,338 |
| | 57,239 |
| Gross profit | 33,164 | | | 25,598 | | | 97,152 | | | 87,788 | |
Corporate costs and expenses: | | |
| | | |
| Corporate costs and expenses: | |
General, administrative and other | 6,130 |
| | 6,134 |
| | 21,208 |
| | 19,549 |
| General, administrative and other | 9,041 | | | 10,383 | | | 25,340 | | | 28,123 | |
Home office depreciation and amortization | 355 |
| | 401 |
| | 1,139 |
| | 1,155 |
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| 6,485 |
| | 6,535 |
| | 22,347 |
| | 20,704 |
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Net (gain) loss on divestitures, disposals and impairments charges | | Net (gain) loss on divestitures, disposals and impairments charges | 858 | | | (7) | | | 1,377 | | | (433) | |
Operating income | 11,743 |
| | 8,945 |
| | 35,991 |
| | 36,535 |
| Operating income | 23,265 | | | 15,222 | | | 70,435 | | | 60,098 | |
| Interest expense | (2,903 | ) | | (3,282 | ) | | (8,722 | ) | | (9,517 | ) | Interest expense | (5,076) | | | (6,678) | | | (20,138) | | | (18,208) | |
Accretion of discount on convertible subordinated notes | (981 | ) | | (1,097 | ) | | (2,862 | ) | | (3,200 | ) | Accretion of discount on convertible subordinated notes | — | | | — | | | (20) | | | — | |
Loss on early extinguishment of debt | — |
| | — |
| | (567 | ) | | — |
| |
Loss on extinguishment of debt | | Loss on extinguishment of debt | — | | | — | | | (23,807) | | | — | |
Gain on insurance reimbursements | | Gain on insurance reimbursements | — | | | — | | | — | | | 3,275 | |
Other, net | (285 | ) | | (6 | ) | | 20 |
| | (3 | ) | Other, net | (21) | | | 95 | | | (87) | | | 78 | |
Income before income taxes | 7,574 |
| | 4,560 |
| | 23,860 |
| | 23,815 |
| Income before income taxes | 18,168 | | | 8,639 | | | 26,383 | | | 45,243 | |
Provision for income taxes | (3,030 | ) | | (1,824 | ) | | (9,545 | ) | | (9,526 | ) | |
Tax adjustment related to certain discrete items | 1,139 |
| | 302 |
| | 1,139 |
| | 243 |
| |
Total provision for income taxes | $ | (1,891 | ) | | $ | (1,522 | ) | | $ | (8,406 | ) | | $ | (9,283 | ) | |
Expense for income taxes | | Expense for income taxes | (5,125) | | | (2,640) | | | (7,466) | | | (12,578) | |
Tax adjustment related to discrete items | | Tax adjustment related to discrete items | 3 | | | (139) | | | 895 | | | 496 | |
Total expense for income taxes | | Total expense for income taxes | (5,122) | | | (2,779) | | | (6,571) | | | (12,082) | |
Net income | $ | 5,683 |
| | $ | 3,038 |
| | $ | 15,454 |
| | $ | 14,532 |
| Net income | $ | 13,046 | | | $ | 5,860 | | | $ | 19,812 | | | $ | 33,161 | |
| | | | | | | | | | | | | | | |
Basic earnings per common share: | $ | 0.34 |
| | $ | 0.18 |
| | $ | 0.93 |
| | $ | 0.87 |
| Basic earnings per common share: | $ | 0.74 | | | $ | 0.40 | | | $ | 1.11 | | | $ | 2.22 | |
Diluted earnings per common share: | $ | 0.33 |
| | $ | 0.17 |
| | $ | 0.91 |
| | $ | 0.81 |
| Diluted earnings per common share: | $ | 0.71 | | | $ | 0.38 | | | $ | 1.08 | | | $ | 2.09 | |
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Dividends declared per common share | $ | 0.050 |
| | $ | 0.050 |
| | $ | 0.100 |
| | $ | 0.150 |
| |
Dividends declared per common share: | | Dividends declared per common share: | $ | 0.1000 | | | $ | 0.1125 | | | $ | 0.3000 | | | $ | 0.3375 | |
| | | | | | | | | | | | | | | |
Weighted average number of common and common equivalent shares outstanding: | | | | | | | | Weighted average number of common and common equivalent shares outstanding: | |
Basic | 16,529 |
| | 16,476 |
| | 16,502 |
| | 16,575 |
| Basic | 17,499 | | | 14,689 | | | 17,809 | | | 14,908 | |
Diluted | 17,101 |
| | 17,598 |
| | 16,962 |
| | 17,887 |
| Diluted | 18,246 | | | 15,537 | | | 18,365 | | | 15,849 | |
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
| | | For the Nine Months Ended September 30, | | Nine months ended September 30, |
| 2016 | | 2017 | | 2021 | | 2022 |
Cash flows from operating activities: | | | | Cash flows from operating activities: | | | |
Net income | $ | 15,454 |
| | $ | 14,532 |
| Net income | $ | 19,812 | | | $ | 33,161 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | |
| Adjustments to reconcile net income to net cash provided by operating activities: | |
Depreciation and amortization | 11,498 |
| | 11,874 |
| Depreciation and amortization | 15,486 | | | 14,611 | |
Provision for losses on accounts receivable | 1,522 |
| | 1,737 |
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Provision for credit losses | | Provision for credit losses | 1,426 | | | 2,292 | |
Stock-based compensation expense | 2,645 |
| | 2,394 |
| Stock-based compensation expense | 3,832 | | | 4,577 | |
Deferred income tax expense | 3,618 |
| | 1,215 |
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Amortization of deferred financing costs | 622 |
| | 614 |
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Accretion of discount on convertible subordinated notes | 2,862 |
| | 3,200 |
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Loss on early extinguishment of debt | 567 |
| | — |
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Net loss on sale and disposal of other assets | 186 |
| | 341 |
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Impairment of intangible assets | 145 |
| | — |
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Deferred income tax expense (benefit) | | Deferred income tax expense (benefit) | (3,433) | | | 1,699 | |
Amortization of intangibles | | Amortization of intangibles | 968 | | | 957 | |
Amortization of debt issuance costs | | Amortization of debt issuance costs | 459 | | | 397 | |
Amortization and accretion of debt | | Amortization and accretion of debt | 319 | | | 368 | |
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Changes in operating assets and liabilities that provided (required) cash: | | |
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Loss on extinguishment of debt | | Loss on extinguishment of debt | 23,807 | | | — | |
Net (gain) loss on divestitures, disposals and impairment charges | | Net (gain) loss on divestitures, disposals and impairment charges | 1,558 | | | (433) | |
Gain on insurance reimbursements | | Gain on insurance reimbursements | — | | | (3,275) | |
Other | | Other | — | | | (153) | |
| Changes in operating assets and liabilities that provided (used) cash: | | Changes in operating assets and liabilities that provided (used) cash: | |
Accounts and preneed receivables | (3,945 | ) | | (2,594 | ) | Accounts and preneed receivables | (4,387) | | | (3,053) | |
Inventories and other current assets | 682 |
| | 2,356 |
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Inventories, prepaid and other current assets | | Inventories, prepaid and other current assets | (266) | | | 2,785 | |
Intangible and other non-current assets | 386 |
| | 340 |
| Intangible and other non-current assets | (887) | | | (1,381) | |
Preneed funeral and cemetery trust investments | (4,828 | ) | | (5,114 | ) | Preneed funeral and cemetery trust investments | (23,355) | | | (12,585) | |
Accounts payable | (2,149 | ) | | (3,510 | ) | Accounts payable | (845) | | | (2,451) | |
Accrued and other liabilities | 292 |
| | (2,790 | ) | Accrued and other liabilities | 9,643 | | | (3,080) | |
Deferred preneed funeral and cemetery revenue | 742 |
| | 2,098 |
| Deferred preneed funeral and cemetery revenue | 3,587 | | | 2,852 | |
Deferred preneed funeral and cemetery receipts held in trust | 4,541 |
| | 4,132 |
| Deferred preneed funeral and cemetery receipts held in trust | 21,975 | | | 12,758 | |
Net cash provided by operating activities | 34,840 |
| | 30,825 |
| Net cash provided by operating activities | 69,699 | | | 50,046 | |
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| |
Cash flows from investing activities: | | |
| Cash flows from investing activities: | |
Acquisitions and land for new construction | (15,056 | ) | | (723 | ) | |
Purchase of land and buildings previously leased | (6,258 | ) | | — |
| |
Net proceeds from the sale of other assets | 955 |
| | 405 |
| |
Acquisitions of businesses and real estate | | Acquisitions of businesses and real estate | (3,285) | | | (8,876) | |
| Proceeds from divestitures and sale of other assets | | Proceeds from divestitures and sale of other assets | 4,375 | | | 4,313 | |
Proceeds from insurance reimbursements | | Proceeds from insurance reimbursements | 2,946 | | | 2,209 | |
Capital expenditures | (12,039 | ) | | (13,129 | ) | Capital expenditures | (15,252) | | | (20,346) | |
Net cash used in investing activities | (32,398 | ) | | (13,447 | ) | Net cash used in investing activities | (11,216) | | | (22,700) | |
| | |
| |
Cash flows from financing activities: | | |
| Cash flows from financing activities: | |
Borrowings from the revolving credit facility | 45,500 |
| | 75,100 |
| |
Payments against the revolving credit facility | (74,800 | ) | | (67,300 | ) | |
Borrowings from the term loan | 39,063 |
| | — |
| |
Payments against the term loan | (8,438 | ) | | (8,438 | ) | |
Payments on other long-term debt and obligations under capital leases | (987 | ) | | (1,084 | ) | |
Borrowings from the credit facility | | Borrowings from the credit facility | 154,968 | | | 114,600 | |
Payments against the credit facility | | Payments against the credit facility | (115,268) | | | (101,000) | |
Payment to redeem the 6.625% senior notes due 2026 | | Payment to redeem the 6.625% senior notes due 2026 | (400,000) | | | — | |
Payment of call premium for the redemption of the 6.625% senior notes due 2026 | | Payment of call premium for the redemption of the 6.625% senior notes due 2026 | (19,876) | | | — | |
Proceeds from the issuance of the 4.25% senior notes due 2029 | | Proceeds from the issuance of the 4.25% senior notes due 2029 | 395,500 | | | — | |
Payment of debt issuance costs for the credit facility and the 4.25% senior notes due 2029 | | Payment of debt issuance costs for the credit facility and the 4.25% senior notes due 2029 | (2,054) | | | (339) | |
Conversions and maturity of the convertible notes | | Conversions and maturity of the convertible notes | (3,980) | | | — | |
| Payments on acquisition debt and obligations under finance leases | | Payments on acquisition debt and obligations under finance leases | (658) | | | (314) | |
Payments on contingent consideration recorded at acquisition date | — |
| | (101 | ) | Payments on contingent consideration recorded at acquisition date | (461) | | | — | |
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 686 |
| | 1,296 |
| Proceeds from the exercise of stock options and employee stock purchase plan contributions | 2,107 | | | 1,438 | |
Taxes paid on restricted stock vestings and exercise of non-qualified options | (560 | ) | | (509 | ) | |
Taxes paid on restricted stock vestings and exercises of stock options | | Taxes paid on restricted stock vestings and exercises of stock options | (1,433) | | | (287) | |
Dividends paid on common stock | (1,662 | ) | | (2,503 | ) | Dividends paid on common stock | (5,390) | | | (5,108) | |
Purchase of treasury stock | — |
| | (16,366 | ) | Purchase of treasury stock | (61,739) | | | (36,663) | |
Payment of loan origination costs related to the credit facility | (717 | ) | | — |
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Excess tax deficiency of equity compensation | (207 | ) | | — |
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| Net cash used in financing activities | (2,122 | ) | | (19,905 | ) | Net cash used in financing activities | (58,284) | | | (27,673) | |
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Net increase (decrease) in cash and cash equivalents | 320 |
| | (2,527 | ) | Net increase (decrease) in cash and cash equivalents | 199 | | | (327) | |
Cash and cash equivalents at beginning of period | 535 |
| | 3,286 |
| Cash and cash equivalents at beginning of period | 889 | | | 1,148 | |
Cash and cash equivalents at end of period | $ | 855 |
| | $ | 759 |
| Cash and cash equivalents at end of period | $ | 1,088 | | | $ | 821 | |
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The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
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| Three months ended September 30, 2021 |
| Shares Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Total |
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Balance – June 30, 2021 | 17,826 | | | $ | 262 | | | $ | 237,891 | | | $ | 109,069 | | | $ | (114,351) | | | $ | 232,871 | |
Net income | — | | | — | | | — | | | 13,046 | | | — | | | 13,046 | |
Issuance of common stock from employee stock purchase plan | 15 | | | — | | | 388 | | | — | | | — | | | 388 | |
Issuance of common stock to directors and board advisor | 3 | | | — | | | 147 | | | — | | | — | | | 147 | |
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Exercise of stock options | 12 | | | — | | | (82) | | | — | | | — | | | (82) | |
Cancellation and surrender of restricted common stock | (1) | | | — | | | (28) | | | — | | | — | | | (28) | |
Stock-based compensation expense | — | | | — | | | 1,148 | | | — | | | — | | | 1,148 | |
Dividends on common stock | — | | | — | | | (1,783) | | | — | | | — | | | (1,783) | |
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Treasury stock acquired | (1,203) | | | — | | | — | | | — | | | (53,239) | | | (53,239) | |
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Balance – September 30, 2021 | 16,652 | | | $ | 262 | | | $ | 237,681 | | | $ | 122,115 | | | $ | (167,590) | | | $ | 192,468 | |
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| Three months ended September 30, 2022 |
| Shares Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Total |
Balance – June 30, 2022 | 14,698 | | | $ | 263 | | | $ | 238,571 | | | $ | 162,763 | | | $ | (278,753) | | | $ | 122,844 | |
Net income | — | | | — | | | — | | | 5,860 | | | — | | | 5,860 | |
Issuance of common stock from employee stock purchase plan | 14 | | | — | | | 377 | | | — | | | — | | | 377 | |
Issuance of common stock to directors and board advisor | 2 | | | — | | | 76 | | | — | | | — | | | 76 | |
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Cancellation and surrender of restricted common stock | (1) | | | — | | | | | — | | | — | | | — | |
Stock-based compensation expense | — | | | — | | | 1,416 | | | — | | | — | | | 1,416 | |
Dividends on common stock | — | | | — | | | (1,653) | | | — | | | — | | | (1,653) | |
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Balance – September 30, 2022 | 14,713 | | | $ | 263 | | | $ | 238,787 | | | $ | 168,623 | | | $ | (278,753) | | | $ | 128,920 | |
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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
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| Nine months ended September 30, 2021 |
| Shares Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Total |
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Balance – December 31, 2020 | 17,995 | | | $ | 260 | | | $ | 239,989 | | | $ | 102,303 | | | $ | (102,050) | | | $ | 240,502 | |
Net income | — | | | — | | | — | | | 19,812 | | | — | | | 19,812 | |
Issuance of common stock from employee stock purchase plan | 47 | | | 1 | | | 1,227 | | | — | | | — | | | 1,228 | |
Issuance of common stock to directors and board advisor | 13 | | | — | | | 495 | | | — | | | — | | | 495 | |
Issuance of restricted common stock | 9 | | | — | | | — | | | — | | | — | | | — | |
Exercise of stock options | 127 | | | 1 | | | (178) | | | — | | | — | | | (177) | |
Cancellation and surrender of restricted common stock | (11) | | | — | | | (375) | | | — | | | — | | | (375) | |
Stock-based compensation expense | — | | | — | | | 3,337 | | | — | | | — | | | 3,337 | |
Dividends on common stock | — | | | — | | | (5,390) | | | — | | | — | | | (5,390) | |
Convertible notes conversions | �� | | | — | | | (1,424) | | | — | | | — | | | (1,424) | |
Treasury stock acquired | (1,528) | | | — | | | — | | | — | | | (65,540) | | | (65,540) | |
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Balance – September 30, 2021 | 16,652 | | | $ | 262 | | | $ | 237,681 | | | $ | 122,115 | | | $ | (167,590) | | | $ | 192,468 | |
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| Nine months ended September 30, 2022 |
| Shares Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Total |
Balance – December 31, 2021 | 15,332 | | | $ | 263 | | | $ | 236,809 | | | $ | 135,462 | | | $ | (244,519) | | | $ | 128,015 | |
Net income | — | | | — | | | — | | | 33,161 | | | — | | | 33,161 | |
Issuance of common stock from employee stock purchase plan | 39 | | | — | | | 1,378 | | | — | | | — | | | 1,378 | |
Issuance of common stock to directors and board advisor | 7 | | | — | | | 322 | | | — | | | — | | | 322 | |
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Exercise of stock options | 9 | | | — | | | (22) | | | — | | | — | | | (22) | |
Cancellation and surrender of restricted common stock | (6) | | | — | | | (205) | | | — | | | — | | | (205) | |
Stock-based compensation expense | — | | | — | | | 4,255 | | | — | | | — | | | 4,255 | |
Dividends on common stock | — | | | — | | | (5,108) | | | — | | | — | | | (5,108) | |
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Treasury stock acquired | (695) | | | — | | | — | | | — | | | (34,234) | | | (34,234) | |
Other | 27 | | | — | | | 1,358 | | | — | | | — | | | 1,358 | |
Balance – September 30, 2022 | 14,713 | | | $ | 263 | | | $ | 238,787 | | | $ | 168,623 | | | $ | (278,753) | | | $ | 128,920 | |
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The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of deathcarefuneral and cemetery services and merchandise in the United States. As of September 30, 2017, we operated 171 funeral homes in 28 states and 32 cemeteries in 11 states.
Our operations are reported in two business segments: Funeral Home Operations, which currently account for approximately 70% of our revenue and Cemetery Operations. Operations, which currently account for approximately 30% of our revenue. At September 30, 2022, we operated 169 funeral homes in 26 states and 31 cemeteries in 11 states.
Our funeral homes offer a complete rangehome operations are principally service businesses that generate revenue from sales of high value personalburial and cremation services to meet a family’s funeral needs, includingand related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrancememorial 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 cemeteries providecemetery operations generate revenue primarily through sales of cemetery interment rights (grave(primarily grave sites, lawn crypts, mausoleum spaces and mausoleum spaces) andniches), related cemetery merchandise such(such as memorial markers, and outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both on an at-needatneed and preneed basis.
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. 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, 20162021 unless otherwise disclosed herein, and should be read in conjunction therewith.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesrevenue and expenses. On an ongoing basis, we evaluate our critical estimates and judgments, includingwhich include those related to revenue recognition, realizationthe impairment of accounts receivable, goodwill intangible assets, property and equipment and deferred tax assets and liabilities. We basethe 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 on historical experience, third-party data and assumptions that we believe to be reasonable underabout complex and inherently uncertain matters and because the circumstances. Theuse of different judgments, assumptions or estimates could have a material impact on our financial condition or results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities.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 asbecause there can be no assurance that our resultsthe margins, operating income and net earnings, as a percentage of operationsrevenue, will be consistent from yearperiod to year.period.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Funeral and Cemetery OperationsReceivables
We record the revenue from sales ofOur funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Cemetery interment rightsreceivables are recorded as revenue in accordance with the accounting provisionsAccounts receivable, net and primarily consist of amounts due for real estate sales. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the interment right contract price. Interment right costs, which include real property and other costs related to cemetery development, are expensed using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery property of approximately $0.9 million for both the three months ended September 30, 2016 and 2017 and $3.1 million and $2.4 million for the nine months ended September 30, 2016 and 2017, respectively. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.
When preneed sales of funeral services already performed.
Atneed cemetery receivables and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subjectpreneed cemetery receivables with payments expected to refund, which is typicallybe received within one year afterfrom the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costsbalance sheet date are expensed when incurred.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of September 30, 2017, CSV RIA provided these services to two institutions, which have custody of 79% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as incomealso recorded in the period in which services are provided.
Accounts receivable, was comprised of the following at December 31, 2016 and September 30, 2017 (in thousands):
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| December 31, 2016 | | September 30, 2017 |
Funeral receivables, net of allowance for bad debt of $189 and $197, respectively | $ | 8,664 |
| | $ | 7,865 |
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Cemetery receivables, net of allowance for bad debt of $557 and $603, respectively | 9,862 |
| | 10,552 |
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Other receivables | 334 |
| | 404 |
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Accounts receivable, net | $ | 18,860 |
| | $ | 18,821 |
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Non-current preneednet. Preneed cemetery receivables representwith payments expected to be received beyond one year from the balance sheet date. date are recorded in Preneed cemetery receivables, were comprisednet. Our cemetery receivables generally consist of preneed sales of cemetery interment rights and related products and services, which are typically financed through interest-bearing installment sales contracts, generally with terms of up to five years, with such interest income reflected as Other revenue. In substantially all cases, we receive an initial down payment at the time the contract is signed.
For our funeral and atneed cemetery receivables, we have a collections policy where statements are sent to the customer at 30 days past due. Past due notification letters are sent at 45 days and continue until payment is received or the contract is placed with a third-party collections agency. For our preneed cemetery receivables, we have a collections policy where past due notification letters are sent to the customer beginning at 15 days past due and periodically thereafter until payment is received or the contract is cancelled.
Our allowance for credit losses reflects our best estimate of expected credit losses over the term of both our funeral and cemetery receivables. Our policy is to write off receivables when we have determined they will no longer be collectible. Write-offs are applied as a reduction to the allowance for credit losses and any recoveries of previous write-offs are netted against bad debt expense in the period recovered.
We determine our allowance for credit losses by using a loss-rate methodology, in which we assess our historical write-off of receivables against our total receivables over several years. From this historical loss-rate approach, we also consider the current and forecasted economic conditions expected to be in place over the life of our receivables. These estimates are impacted by a number of factors, including changes in the economy, demographics and competition in our local communities. We monitor our ongoing credit exposure through an active review of our customers’ receivables balance against contract terms and due dates. Our activities include timely performance of our accounts receivable reconciliations, assessment of our aging of receivables, dispute resolution and payment confirmation. We monitor any change in our historical write-off of receivables utilized in our loss-rate methodology and assess forecasted changes in market conditions within our credit reserve.
See Note 6 to the Consolidated Financial Statements herein for additional information related to our funeral and cemetery receivables.
Inventory
Inventory consists primarily of caskets, outer burial containers and cemetery monuments and markers and is recorded at the lower of its cost basis or net realizable value. Inventory is relieved using specific identification in fulfillment of performance obligations on our contracts.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the followingacquisition and fair value. We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at December 31, 2016the acquisition date, measured at the fair value as of that date. Acquisition related costs are recognized separately from the acquisition and September 30, 2017 (in thousands):are expensed as incurred. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition.
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| December 31, 2016 | | September 30, 2017 |
Funeral receivables, net of allowance for bad debt of $862 and $883, respectively | $ | 7,761 |
| | $ | 7,943 |
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Cemetery receivables, net of allowance for bad debt of $1,304 and $1,347, respectively | 22,622 |
| | 23,336 |
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Preneed receivable, net | $ | 30,383 |
| | $ | 31,279 |
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Bad debt expense totaled approximately $0.5 million and $0.6 million forDuring the three months ended September 30, 2016 and 2017, respectively, and $1.5 million and $1.7 million for the nine months ended September 30, 2016 and 2017, respectively.
Property, Plant and Equipment
Property, plant and equipment (including equipment under capital leases) are stated at cost. The costs2022, we acquired a business consisting of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method.
Property, plant and equipment was comprised of the following at December 31, 2016 and September 30, 2017 (in thousands):
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| December 31, 2016 | | September 30, 2017 |
Land | $ | 73,744 |
| | $ | 73,503 |
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Buildings and improvements | 195,214 |
| | 201,444 |
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Furniture, equipment and automobiles | 76,664 |
| | 74,170 |
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Property, plant and equipment, at cost | 345,622 |
| | 349,117 |
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Less: accumulated depreciation | (110,509 | ) | | (113,616 | ) |
Property, plant and equipment, net | $ | 235,113 |
| | $ | 235,501 |
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two funeral homes for $6.3 million. We recorded depreciation expense of approximately $2.9 million and $3.1 million fordid not acquire any businesses during the three months ended September 30, 2016 and 2017, respectively and $8.4 million and $9.4 million for the nine months ended September 30, 20162021.
See Notes 3 and 2017, respectively. During4 to the nine months ended September 30, 2017, we acquired real estateConsolidated Financial Statements herein for $0.7 million foradditional information related to our acquisitions.
Divested Operations
Prior to divesting a funeral home parking lot expansion projects. Duringor cemetery, we first determine whether the nine months ended September 30, 2016,sale of the net assets and activities (together referred to as a “set”) qualifies as a business. First, we acquired real estate for $2.7 million for various funeral home expansion projects and we purchased land and buildings at four funeral homesperform a screen test to determine if the set is not a business. The principle of the screen is that were previously leased for approximately $6.3 million.
Goodwill
Effective January 1, 2017, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”), Intangibles (Topic 350): Goodwill and Other. The guidance simplifies subsequent measurementif substantially all of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for
impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of itsthe gross assets and liabilities as if that reporting unit had been acquiredsold resides in a single asset or group of similar assets, the set is not a business. If the screen is not met, we perform an assessment to determine if the set is a business combination. Instead, impairmentby evaluating whether the set has both inputs and a substantive process that together significantly contribute to the ability to create outputs. When both inputs and a substantive process are present then the set is defined asdetermined to be a business and we consider the amount by whichaccounting treatment of goodwill for that set (see discussion of Goodwill below). Goodwill is only allocated to the carryingsale if the set is considered to be a business.
See Notes 4 and 5 to the Consolidated Financial Statements herein for additional information related to our divestitures.
Goodwill
The excess of the purchase price over the fair value of the reporting unit exceeds its fair value, upidentifiable net assets of funeral home businesses and cemeteries acquired is recorded as goodwill. Goodwill has an indefinite life and is not subject to the total amount of goodwill.
We performed our 2017amortization. As such, we test goodwill for impairment on an annual impairment test of goodwill using informationbasis as of August 31 2017.st each year. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. For
We performed our 2017 annual goodwill impairment test we performed a qualitative assessment and concluded that there was not an impairment to goodwill.
For our 2016 annual impairment test, we performed a quantitative impairment test.as of August 31, 2022. Our intent is to perform thea quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimatesperform a qualitative assessment during the remaining two years. We conducted qualitative assessments in 2020 and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements2021; however, we performed a quantitative assessment in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of the methodology used for the goodwill impairment quantitative test.
2022. In addition to our annual review,test, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant negative industry or economic trends and significant adverse changes in the business climate, which may be indicated by a decline in our market capitalization or decline in operating results. No such events
Our quantitative goodwill impairment test involves estimates and management judgment. In the quantitative analysis, we compare the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired. We determine fair value for each reporting unit using both an income approach, weighted 90%, and a market approach, weighted 10%. Our methodology for determining an income-based fair value is based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows discounted at our weighted average cost of capital based on market participant assumptions. Our methodology for determining a market approach fair value utilizes the guideline public company method, in which we rely on market multiples of comparable companies operating in the same industry as the individual reporting units. In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount an impairment charge is recorded in an amount equal to the difference.
Our 2022 quantitative assessment is not complete at the time of this filing, but we do not expect any impairment to goodwill as a result of our testing. For our 2020 and 2021 annual qualitative assessments, there was no impairment to goodwill as the fair value of our reporting units was greater than the carrying value.
When we divest a portion of a reporting unit that constitutes a business in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we allocate goodwill associated with that business to be included in the gain or changes occurred betweenloss on divestiture. The goodwill allocated is based on the relative fair value of the business being divested and the portion of the reporting unit that will be retained. Additionally, after each divestiture, we will test the goodwill remaining in the portion of the reporting unit to be retained for impairment using a qualitative assessment unless we deem a quantitative assessment to be appropriate to ensure the fair value of our testing date and reporting periodunits is greater than their carrying value.
See Note 4 to trigger a subsequent impairment review. No impairments were recordedthe Consolidated Financial Statements included herein for additional information related to our goodwill during the nine months ended September 30, 2016 and 2017.goodwill.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets, net on our Consolidated Balance Sheets.Sheet. Our tradenames are considered to have an indefinite life and are not subject to amortization.
We performed As such, we test our 2017 annual impairment test of intangible assets using informationfor impairment on an annual basis as of August 31 2017.st each year. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with thetradename is less than its carrying amount in accordance with the guidance. For our 2017 annual impairment test, we performedas a qualitative assessment and concluded that there was not an impairmentbasis for determining whether it is necessary to intangibles assets.
For our 2016 annual impairment test, we performedperform a quantitative impairment test.
We performed our annual intangible assets impairment test as of August 31, 2022. Our intent is to perform thea quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimatesperform a qualitative assessment during the remaining two years. We conducted qualitative assessments in 2020 and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements2021; however, we performed a quantitative assessment in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of the methodology used for the intangibles impairment quantitative test.
2022. In addition to our intangible assets annual review,test, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. During
Our quantitative intangible asset impairment test involves estimates and management judgment. Our quantitative analysis is performed using the third quarterrelief from royalty method, which measures the tradenames by determining the value of 2016,the royalties that we recordedare relieved from paying due to our ownership of the asset. We determine the fair value of the asset by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows and the determination and application of an appropriate royalty rate and discount rate. To estimate the royalty rates for the individual tradename, we mainly rely on the profit split method, but also consider the comparable third-party license agreements and the return on asset method. A scorecard is used to assess the relative strength of the individual tradename to further adjust the royalty rates selected under the profit-split method for qualitative factors. In accordance with the guidance, if the fair value of the tradename is less than its carrying amount, then an impairment charge is recorded in an amount equal to tradenamesthe difference.
Our 2022 quantitative assessment is not complete at the time of $145,000 relatedthis filing, but we do not expect any impairment to intangible assets as a funeral home business held for saleresult of our testing. For our 2020 and 2021 qualitative assessments, there was no impairment to intangibles assets as the fair value of our intangible assets was greater than the carrying value exceeded fair value. No other impairments were recorded
See Note 10 to the Consolidated Financial Statements included herein for additional information related to our intangible assets.
Preneed and Perpetual Care Trust Funds
Preneed sales generally require deposits to a trust or purchase of a third-party insurance product. We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state laws. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) cemetery perpetual care trusts.
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIEs”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts.
Our trust fund assets duringare reflected in our financial statements as Preneed cemetery trust investments, Preneed funeral trust investments and Cemetery perpetual care trust investments. We have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus.
The fair value of our trust fund assets are accounted for as Collateralized Financing Entities (“CFEs”) in ASC Topic 810. The accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities using the more observable of the fair value of the financial assets or fair value of the financial liabilities. Pursuant to this guidance, we have determined the fair value of the financial assets of the trusts are more observable and we first measure those financial assets at fair value. Our fair value of the financial liabilities mirror the fair value of the financial assets, in accordance with the ASC. Any changes in fair value are recognized in earnings.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
We also have preneed funeral trust fund assets in trusts that 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, reflected in our financial statements as Receivables from preneed funeral trusts, net.
Our preneed funeral and preneed cemetery merchandise and service trusts are reflected in our financial statements net of an allowance for contract cancellations. We determine this allowance based on our five-year historical experience of contract cancellations. On an ongoing basis, we monitor our historical trend and adjust our allowance accordingly.
See Notes 7 and 8 to the Consolidated Financial Statements herein for additional information related to preneed and perpetual care trust funds.
Fair Value Measurements
We measure the securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis in accordance with ASC Topic 820. This guidance defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value.
See Notes 7 and 9 to the Consolidated Financial Statements herein for additional required disclosures related to our fair value measurement of our financial assets and liabilities.
Capitalized Commissions on Preneed Contracts
We capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of 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 ten years for our preneed funeral trust contracts and eight years for our preneed cemetery merchandise and services contracts.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheet.
See Note 10 to the Consolidated Financial Statements herein for additional information related to our capitalized commissions on preneed contracts.
Property, Plant and Equipment
Property, plant and equipment (including equipment under finance leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under finance leases) is computed based on the straight-line method over the estimated useful lives of the assets.
Long-lived assets, such as property, plant and equipment and right-of-use assets (see discussion of Leases below), are reported at the lower of their carrying amount or fair value and are reviewed for impairment whenever events, such as significant negative industry or economic trends, or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
Property, plant and equipment is comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Land | $ | 82,095 | | | $ | 83,757 | |
Buildings and improvements | 240,387 | | | 250,890 | |
Furniture, equipment and automobiles | 73,377 | | | 68,919 | |
Property, plant and equipment, at cost | 395,859 | | | 403,566 | |
Less: accumulated depreciation | (126,492) | | | (127,589) | |
Property, plant and equipment, net | $ | 269,367 | | | $ | 275,977 | |
During the nine months ended September 30, 20162022, we acquired real property for $5.6 million. Additionally, we sold real property for $3.3 million, with a carrying value of $1.8 million, resulting in a gain on the sale of $1.4 million. We also divested two funeral homes that had a carrying value of property, plant and 2017.equipment of $0.7 million, which was included in the loss on the sale of divestitures and recorded in Net (gain) loss on divestitures, disposals and impairment charges on our Consolidated Statements of Operations, described in Note 5 to the Consolidated Financial Statements included herein.
StockDuring the nine months ended September 30, 2021, we acquired real property for $3.3 million. Additionally, we divested three funeral homes that had a carrying value of property, plant and equipment of $2.4 million, which was included in the gain/loss on the sale of divestitures and recorded in Net (gain) loss on divestitures, disposals and impairment charges.
Our growth and maintenance capital expenditures totaled $5.0 million and $5.3 million for the three months ended September 30, 2021 and 2022, respectively, and $11.1 million and $15.1 million for the nine months ended September 30, 2021 and 2022, respectively, for property, plant and equipment. In addition, we recorded depreciation expense of $3.4 million for both the three months ended September 30, 2021 and 2022 and $10.2 million and $10.1 million, for the nine months ended September 30, 2021 and 2022, respectively.
Cemetery Property
When we acquire a cemetery, we utilize an internal and external approach to determine the fair value of the cemetery property. From an external perspective, we obtain an accredited appraisal to provide reasonable assurance for property existence, property availability (unrestricted) for development, property lines, available spaces to sell, identifiable obstacles or easements and general valuation inclusive of known variables in that market. From an internal perspective, we conduct a detailed analysis of the acquired cemetery property using other cemeteries in our portfolio as a benchmark. This provides the added benefit of relevant data that is not available to third party appraisers. Through this thorough internal process, we are able to identify viable costs of property based on historical experience, particular markets and demographics, reasonable margins, practical retail prices and park infrastructure and condition.
Cemetery property was $100.7 million and $101.7 million, net of accumulated amortization of $53.1 million and $57.4 million at December 31, 2021 and September 30, 2022, 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 $1.5 million for both the three months ended September 30, 2021 and 2022 and $4.1 million and $5.2 million, for the nine months ended September 30, 2021 and 2022, respectively. We recorded amortization expense for cemetery interment rights of $1.5 million and $1.3 million for the three months ended September 30, 2021 and 2022, respectively, and $5.2 million and $4.3 million, for the nine months ended September 30, 2021 and 2022, respectively.
Leases
We have operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. We do not have lease agreements with residual value guarantees, sale-leaseback terms, material restrictive covenants or related parties. We do not have any material sublease arrangements.
We determine if an arrangement is a lease at inception based on the facts and circumstances of the agreement. A right-of-use (“ROU”) asset represents our right to use the underlying asset for the lease term and the lease liability represents our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized on our Consolidated Balance Sheet at the lease commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date to determine the present value of lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, while the expense for finance leases is recognized as depreciation expense and interest expense using the effective interest method of recognition. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense. We have real estate lease agreements which require payments for lease and non-lease components and we account for these as a single lease component. Leases with an initial term of 12 months or less, that do not include an option to renew the underlying asset, are not recorded on our Consolidated Balance Sheet and expense is recognized on a straight-line basis over the lease term.
Operating lease ROU assets are included in Operating lease right-of-use assets and operating lease liabilities are included in Current portion of operating lease obligations and Obligations under operating leases, net of current portion on our Consolidated Balance Sheet. Finance lease ROU assets are included in Property, plant and equipment, net and finance lease liabilities are included in Current portion of finance lease obligations and Obligations under finance leases, net of current portion on our Consolidated Balance Sheet.
See Notes 13 to the Consolidated Financial Statements included herein for additional information related to our leases.
Equity Plans and Stock-Based Compensation
We have stock-basedequity-based employee and director compensation plans under which we grant restrictedhave granted stock awards, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”(the “ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period. We recognize the effect of forfeitures in compensation cost when they occur and any previously recognized compensation cost for an award is reversed in the period that the award is forfeited.
Fair value is determined on the date of the grant.
The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value ofmodel or the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internalmarket performance metricsconditions is determined using the stock price on the grant date.Monte-Carlo simulation pricing model. The fair value of the ESPP is determined
based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
Effective January 1, 2017, we adopted the FASB’s ASU, Compensation: (Topic 718): Stock Compensation. The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The guidance requires that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. Entities are required to record a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the beginning of the annual period of adoption, with a cumulative-effect adjustment to retained earnings. At January 1, 2017, we performed an analysis for unrecognized excess tax benefits and deficiencies and determined that there were no adjustments to retained earnings, as there are no unrecognized excess tax benefits.
The guidance also requires thatWe recognize all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expensebenefit or benefitexpense in the income statement on a prospective basis. Thestatement. We treat the tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. For the three and nine months ended September 30, 2017, theThe excess tax deficiency related to share-based payments was approximately $70,000,benefit and tax deficiencies are recorded within Tax adjustment related to certain discrete itemson our Consolidated Statements of Operations. In addition,Operations and the excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows.
The guidance also allows for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.
The guidance also requires that the presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and applied retrospectively. This resulted in $0.6 million of employee taxes paid from withheld shares being presented as financing activities on our Consolidated Statement of Cash Flows for both the nine months ended September 30, 2016 and 2017. Prior to January 1, 2017, these amounts were presented as operating activities on our Consolidated StatementStatements of Cash Flows.
We adopted all of the provisions of this amendment in accordance with the transition requirements and it did not have a material effect on our Consolidated Financial Statements.
See Note 1115 to the Consolidated Financial Statements included herein for additional information related to our equity plans and stock-based compensation.
Revenue Recognition
Funeral and Cemetery Operations Revenue is recognized when control of the merchandise or services is transferred to the customer. Our performance obligations include the delivery of funeral and cemetery merchandise and services and cemetery property interment rights. Control transfers when merchandise is delivered or services are performed. For cemetery property interment rights, control transfers to the customer when the property is developed and the interment right has been sold and can no longer be marketed or sold to another customer. On our atneed contracts, we generally deliver the merchandise and perform the services at the time of need.
Memorial services frequently include performance obligations to direct the service, provide facilities and motor vehicles, catering, flowers, and stationary products. All other performance obligations on these contracts, including arrangement, removal, preparation, embalming, cremation, interment, and delivery of urns and caskets and related memorialization merchandise are fulfilled at the time of need. Personalized marker merchandise and marker installation services sold on atneed contracts are recognized when control is transferred to the customer, generally when the marker is delivered and installed in the cemetery.
Some of our contracts with customers include multiple performance obligations. For these contracts, we allocate the transaction price to each performance obligation based on its relative standalone selling price, which is based on prices charged to customers per our general price list. Package discounts are reflected net in Revenue. We recognize revenue when the merchandise is transferred or the service is performed, in satisfaction of the corresponding performance obligation. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Ancillary funeral service revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses.
The earnings from our preneed trust investments, as well as trust management fees charged by our wholly-owned registered investment advisory firm (“CSV RIA”) are recorded in Other revenue. As of September 30, 2022, CSV RIA provided investment management and advisory services to approximately 80% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenueon our stock-based compensation plans.Consolidated Balance Sheet of $8.0 million and $8.8 million at December 31, 2021 and September 30, 2022, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of ten years for preneed funeral contracts.
Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable, net and Preneed cemetery receivables, net on our Consolidated Balance Sheet. Balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance Sheet. The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled were $10.4 million and $10.5 million at December 31, 2021 and September 30, 2022, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of eight years for preneed cemetery contracts.
See Note 17 to the Consolidated Financial Statements herein for additional information related to revenue.
Income Taxes
We and our subsidiaries file a consolidated U.S.U. S. federal income tax return, separate income tax returns in 15 states in which we operate and combined or unitary income tax returns in 1314 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. We classify our deferred tax liabilities and assets as non-current on our Consolidated Balance Sheet.
We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in the financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets.Sheet.
On July 18, 2017,June 30, 2020, we filed carryback refund claims for the 2018 and 2019 tax years. The majority of the net operating losses generated in 2018 are the result of filing non-automatic accounting method changes relating to the recognition of revenue from our cemetery property and merchandise and services sales.
On October 11, 2021, we received notification thatan adverse ruling from the Internal Revenue Service (“IRS”) selectedrelated to our tax years endedaccounting method change for cemetery property revenue recognition filed in 2018 and subsequently filed an automatic accounting method change to adopt the IRS’s preferred method of revenue recognition for cemetery property effective for the year ending December 31, 2013, 20142021.
On March 2, 2022, we received approval from the IRS regarding our filed method change related to the revenue recognition of cemetery merchandise and 2015services sales. As a result, we recorded a $0.5 million reduction to the reserve for examination. The examination of ouruncertain tax positions, including interest, during the nine months ended September 30, 2022.
At December 31, 2021 and September 30, 2022, the reserve for uncertain tax positions was $3.8 million and $3.3 million, respectively, related to carrying back the net operating losses generated in the tax year ended December 31, 2013 had previously been completed during 2016, however, we2018, filed an amendmentunder the CARES Act on June 1, 2017. The examination related to 2013 should be limited in scope to the items revised in the amendment, which include research and development credits, state taxes and preneed cost of sales.30, 2020.
Income tax expense during interim periods is based on our estimatedforecasted annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, but are not limited to, such events as changes in estimates due to the finalization of income tax returns, tax audit settlements, tax effects of exercised or vested stock-based awards and increases or decreases in valuation allowances on deferred tax assets.
IncomeFor the three months ended September 30, 2021 and 2022, we had an income tax expense of $5.1 million and $2.8 million, respectively, and for the nine months ended September 30, 2021 and 2022, we had an income tax expense of $6.6 million and $12.1 million, respectively. Our operating tax rate before discrete items was $1.9 million28.2% and 30.6% for the three months ended September 30, 2016 compared to $1.5 million for the three months ended September 30, 2017. We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for both the three2021 and nine months ended September 30, 20162022, respectively, and 2017. Income tax expense was $8.4 million28.3% and 27.8% for the nine months ended September 30, 2016 compared2021 and 2022, respectively.
Computation of Earnings Per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and performance awards.
Share-based awards that contain non-forfeitable rights to $9.3 million fordividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the nine months ended September 30, 2017.computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation.
DuringOur performance awards are considered to be contingently issuable shares because their issuance is contingent upon the third quartersatisfaction of 2017,certain performance and service conditions. In accordance with ASC 260, we recognized a tax benefithave included in the computation of $0.2 million which reduced our effective tax rate to 39.0% fordiluted earnings per share the nine months ended September 30, 2017. Duringnumber of performance awards that would have been issuable as if the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016.
Correction of Immaterial Error
During the nine months ended September 30, 2017, we corrected an immaterial error related to 2013. The adjustment related to the correctionend of the deferred tax liability forreporting period was the difference in book and tax basis of certain assets. The error had the impact of understating the deferred tax liability and overstating net income in 2013. Management evaluated the effectend of the adjustment on previously issued interim and annual consolidated financial statements in accordance withcontingency period. These shares are considered to be outstanding at the SEC's Staff Accounting Bulletin (“SAB”) No. 99 and SAB 108 and concluded that it was immaterial tobeginning of the interim and annual periods. As a result, in accordance with SAB No. 108, we corrected our Consolidated Balance Sheets as of January 1, 2015.reporting period.
The effect of this adjustment on our Consolidated Balance Sheets as of December 31, 2016 is as follows (dollars in thousands): |
| | | | | |
| | % Change |
Increase in Deferred tax liability | $ | 2,255 |
| 5.6 | % |
Increase in Total liabilities | $ | 2,255 |
| 0.3 | % |
Decrease in Retained earnings | $ | 2,255 |
| 9.8 | % |
Decrease in Total stockholders' equity | $ | 2,255 |
| 1.3 | % |
This adjustment had no impact on our Consolidated Statements of Operations or Consolidated Statement of Cash Flows for any periods presented.
Related Party Transactions
Management evaluated reportable events and transactions that occurred between us and related persons during the nine months ended September 30, 2017. See Note 1516 to the Consolidated Financial Statements included herein for additional information on our related party transactions.to the computation of earnings per share.
Subsequent Events
ManagementWe have evaluated events and transactions during the period subsequent to September 30, 20172022 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
See Note 1619 to the Consolidated Financial Statements included herein for additional information onrelated to our subsequent
events.
2.RECENTLY ISSUED ACCOUNTING STANDARDS
Stock-Based CompensationAccounting Pronouncements Not Yet Adopted
Reference Rate Reform
In May 2017,March 2020, the FASB issued ASU, Compensation: (Topic 718): Stock Compensation - Scope of Modification Accounting.Reference Rate Reform (“Topic 848”) to provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments provideapply only to contracts and hedging relationships that reference London InterBank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered
into or evaluated on or before December 31, 2022. Contract modifications are required to be evaluated in determining whether the modifications result in the establishment of new contracts or the continuation of existing contracts. We adopted this amendment in March 2020.
On May 27, 2022, we amended our Credit Facility (defined in Note 11) to establish the Bloomberg Short-Term Bank Yield Index Rate (“BSBY”) as a benchmark rate and removed LIBOR from our Credit Facility, among other things. We did not apply the optional expedients provided by the guidance about which changesin Topic 848. See Note 11 to the termsConsolidated Financial Statements herein for additional information related to the amended Credit Facility.
Business Combinations - Accounting for Contract Assets and conditions ofContract Liabilities from Contracts with Customers
In October 2021, the FASB issued ASU, Business Combinations (“Topic 805”) to improve the accounting for acquired revenue contracts with customers in a share-based payment awardbusiness combination. The amendments in this update provide specific guidance on how to recognize and measure acquired contract assets and contract liabilities from revenue contracts in a business combination. These amendments require that an entity to apply modification accounting(acquirer) recognize and measure contract assets and contract liabilities acquired in a business combination in accordance with ASC 606 – Revenue from Contracts with Customers (“Topic 718. An entity606”). At the acquisition date, an acquirer should account for the effects of a modification unlessrelated revenue contracts in accordance with Topic 606 as if it had originated the fair value, vesting conditionscontracts. These amendments are effective for fiscal years beginning after December 15, 2022, including interim periods within those fiscal years and classificationshould be applied prospectively to business combinations occurring on or after the effective date of the modified awardamendments. We plan to adopt the provisions of Topic 805 for our fiscal year beginning January 1, 2023. We are still evaluating the same asimpact of adoption on our consolidated financial statements.
Credit Losses - Vintage Disclosures
In March 2022, the original award immediately beforeFASB issued ASU, Financial Instruments - Credit Losses (“Topic 326”) to make the award is modified.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 ASUamendment is effective for fiscal years beginning after December 15, 2017, and2022, including interim periods within those fiscal years with earlier application permitted for all entities. The amendmentsand should be applied prospectively to an award modifieddisclosures occurring on or after the adoption date. Our adoptioneffective date of this ASUthe amendment. We plan to adopt the provisions of Topic 326 for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Revenue Recognition
In May 2014, the FASB issued ASU, Revenue from Contracts with Customers (Topic 606). FASB Accounting Standards Codification (“ASC”) Topic 606 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 using the modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application.
Currently, our sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the interment right. We have analyzed the impact on our contract portfolio by reviewing our revenue streams and our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard to our contracts and we do not expect the new accounting standard to significantly impact our current accounting for the cemetery interment rights. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.
2023. We expect the adoption will have no impact on our consolidated financial statements.
3.ACQUISITIONS
On August 8, 2022, we acquired a business consisting of two funeral homes in Kissimmee, Florida for $6.3 million in cash. We acquired substantially all of the assets and assumed certain operating liabilities of this new accounting standardbusiness.
The pro forma impact of this acquisition on prior periods is not presented, as the impact is not significant to affect our accountingreported 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. Provisional estimates for inventory, furniture and equipment and intangible assets have been recorded for the selling costs relatedacquisition as independent valuations have not been finalized. We do not not expect any significant differences from estimated values upon completion of the valuations. 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 | $ | 28 | |
| |
Property, plant & equipment | 2,986 | |
| |
Goodwill | 2,694 | |
Intangible and other non-current assets | 542 | |
| |
| |
| |
| |
Purchase price | $ | 6,250 | |
The intangible and other non-current assets relate to preneed cemetery merchandise and services andthe fair value of tradenames. For the nine months ended September 30, 2021, we did not acquire any businesses. At September 30, 2022, we did not estimate a fair value for preneed funeral trust contracts. Currently, these costs are charged to operations usingassets and liabilities for this acquisition as this information was not yet available. However, the specific identification methodpreneed funeral trust assets and liabilities offset in our Consolidated Balance Sheet.
4.GOODWILL
The following table presents changes in goodwill in the period incurred. Underaccompanying Consolidated Balance Sheet (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Goodwill at the beginning of the period | $ | 392,978 | | | $ | 391,972 | |
Increase in goodwill related to acquisitions | — | | | 2,694 | |
Decrease in goodwill related to divestitures | (1,006) | | | (901) | |
| | | |
Goodwill at the end of the period | $ | 391,972 | | | $ | 393,765 | |
During the new accounting standard,three and nine months ended September 30, 2022, we will capitalizerecognized $2.7 million in goodwill related to our 2022 acquisition described in Note 3 to the Consolidated Financial Statements included herein. During the nine months ended September 30, 2021 and amortize2022, we allocated $1.0 million and $0.9 million of goodwill to the sale of one funeral home and two funeral homes, respectively, for a loss recorded in Net (gain) loss on divestitures, disposals and impairments charges.
See Note 1 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our goodwill impairment test.
5.DIVESTED OPERATIONS
During the three months ended September 30, 2021 and 2022, we did not sell any funeral homes or cemeteries. During the nine months ended September 30, 2022, we merged one funeral home with another business we own in an existing market and sold two funeral homes for an aggregate of $0.9 million. During the nine months ended September 30, 2021, we sold three funeral homes for an aggregate of $3.5 million.
The operating results of these costs overdivested funeral homes are reflected on our Consolidated Statements of Operations as shown in the typical financing termtable below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Revenue | $ | (10) | | | $ | — | | | $ | 338 | | | $ | 296 | |
| | | | | | | |
Operating income (loss) | (41) | | | — | | | (54) | | | 25 | |
Gain (loss) on divestitures(1) | — | | | — | | | 103 | | | (703) | |
Income tax benefit (expense) | 12 | | | — | | | (14) | | | 188 | |
Net income (loss) from divested operations, after tax | $ | (29) | | | $ | — | | | $ | 35 | | | $ | (490) | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Gain (loss) on divestitures is recorded in Net (gain) loss on divestitures, disposals and impairments charges on our Consolidated Statements of Operations. |
6.RECEIVABLES
Accounts Receivable
Accounts receivable is comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| Funeral | | Cemetery | | Corporate | | Total |
Trade and financed receivables | $ | 7,992 | | | $ | 14,524 | | | $ | — | | | $ | 22,516 | |
Other receivables | 509 | | | 1,047 | | | 189 | | | 1,745 | |
Allowance for credit losses | (255) | | | (654) | | | — | | | (909) | |
Accounts receivable, net | $ | 8,246 | | | $ | 14,917 | | | $ | 189 | | | $ | 23,352 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| Funeral | | Cemetery | | Corporate | | Total |
Trade and financed receivables | $ | 10,728 | | | $ | 13,629 | | | $ | — | | | $ | 24,357 | |
Other receivables | 329 | | | 1,433 | | | 185 | | | 1,947 | |
Allowance for credit losses | (365) | | | (625) | | | — | | | (990) | |
Accounts receivable, net | $ | 10,692 | | | $ | 14,437 | | | $ | 185 | | | $ | 25,314 | |
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.
The following table summarizes the activity in our allowance for credit losses by portfolio segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2022 | | Provision for Credit Losses | | | | Write Offs | | Recoveries | | September 30, 2022 |
Trade and financed receivables: | | | | | | | | | | | |
Funeral | $ | (365) | | | $ | (1,104) | | | | | $ | 2,150 | | | $ | (936) | | | $ | (255) | |
Cemetery | (625) | | | (452) | | | | | 423 | | | — | | | (654) | |
Total allowance for credit losses on Trade and financed receivables | $ | (990) | | | $ | (1,556) | | | | | $ | 2,573 | | | $ | (936) | | | $ | (909) | |
Preneed Cemetery Receivables
Our preneed cemetery receivables are comprised of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Interment rights | $ | 40,863 | | | $ | 43,888 | |
Merchandise and services | 7,348 | | | 8,233 | |
Unearned finance charges | 4,644 | | | 4,778 | |
Preneed cemetery receivables | $ | 52,855 | | | $ | 56,899 | |
The components of our preneed cemetery merchandise and services contracts and overreceivables are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Preneed cemetery receivables | $ | 52,855 | | | $ | 56,899 | |
Less: unearned finance charges | (4,644) | | | (4,778) | |
Preneed cemetery receivables, at amortized cost | $ | 48,211 | | | $ | 52,121 | |
Less: allowance for credit losses | (1,704) | | | (1,832) | |
Less: balances due on undelivered cemetery preneed contracts | (10,353) | | | (10,546) | |
Less: amounts in accounts receivable | (13,004) | | | (13,870) | |
Preneed cemetery receivables, net | $ | 23,150 | | | $ | 25,873 | |
The following table summarizes the average preneed maturity periodactivity in our allowance for credit losses for Preneed cemetery receivables, net (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2022 | | Provision for Credit Losses | | Write Offs | | September 30, 2022 |
Total allowance for credit losses on Preneed cemetery receivables, net | $ | (1,079) | | | $ | (736) | | | $ | 637 | | | $ | (1,178) | |
The amortized cost basis of our preneed funeral trust contracts. Based on our preliminary assessments, we do not expect the change to have a material impact on our Consolidated Financial Statements. cemetery receivables by year of origination at September 30, 2022 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2022 | | 2021 | | 2020 | | 2019 | | 2018 | | Prior | | Total |
Total preneed cemetery receivables, at amortized cost | $ | 21,973 | | | $ | 14,838 | | | $ | 7,854 | | | $ | 4,376 | | | $ | 1,585 | | | $ | 1,495 | | | $ | 52,121 | |
The selling costs related to the salesaging of past due preneed cemetery interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the cemetery interment rightreceivables at September 30, 2022 is recognized as revenue. The selling costs related to preneed funeral insurance contracts will continue to be charged to operations using the specific identification method in the period incurred.follows (in thousands):
We are continually evaluating the impact on our Consolidated Financial Statements and are currently modifying our financial systems to provide accounting under the new guidance. | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total |
Recognized revenue | $ | 634 | | | $ | 357 | | | $ | 148 | | | $ | 2,042 | | | $ | 3,181 | | | $ | 38,394 | | | $ | 41,575 | |
Deferred revenue | 185 | | | 147 | | | 441 | | | 518 | | | 1,291 | | | 14,033 | | | 15,324 | |
Total contracts | $ | 819 | | | $ | 504 | | | $ | 589 | | | $ | 2,560 | | | $ | 4,472 | | | $ | 52,427 | | | $ | 56,899 | |
In February 2016, the FASB issued ASU, Leases (Topic 842). This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3. PRENEED 7.TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are generally permitted to withdraw as the services and merchandise are provided to customers. Preneed funeral and cemetery contracts are secured by payments from customers, less retained amounts not required by law to be deposited into trust. Preneed cemetery trust investments can be reduced by the trustThese earnings we have been allowed to withdraware recognized in certain states prior to our performance.
The components of Preneed cemetery trust investmentsOther revenue on our Consolidated Balance Sheets at December 31, 2016 and September 30, 2017 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed cemetery trust investments, at market value | $ | 71,834 |
| | $ | 73,889 |
|
Less: allowance for contract cancellation | (2,138 | ) | | (2,161 | ) |
Preneed cemetery trust investments, net | $ | 69,696 |
| | $ | 71,728 |
|
Upon cancellationStatements of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some instances, a portion of all of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if
the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At September 30, 2017, none of our preneed cemetery trust investments were underfunded.
Earnings from our preneed cemetery trust investments are recognized as revenueOperations, when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included inas revenue in the period in which they are earned. Our investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery.
Cemetery perpetual care trust investments represent a portion of the proceeds from the sale of cemetery property interment rights 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.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt, common stock and common stock.equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds,U.S. agency obligations, foreign debt, corporate debt, preferred stocks, mortgage-backed securitiescertificates of deposit and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2017. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 79 to the Consolidated Financial Statements included herein for further information onof the fair value measurement and the three-level hierarchy.measurement.
The cost and fair market values associated with preneed cemetery trust investments at September 30, 2017 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 4,698 |
| | $ | — |
| | $ | — |
| | $ | 4,698 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 4,834 |
| | 275 |
| | (168 | ) | | 4,941 |
|
Corporate debt | 2 | | 19,335 |
| | 1,145 |
| | (553 | ) | | 19,927 |
|
Preferred stock | 2 | | 16,329 |
| | 383 |
| | (524 | ) | | 16,188 |
|
Mortgage-backed securities | 2 | | 1,089 |
| | 240 |
| | (23 | ) | | 1,306 |
|
Common stock | 1 | | 24,574 |
| | 3,376 |
| | (3,119 | ) | | 24,831 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 1,200 |
| | 81 |
| | — |
| | 1,281 |
|
Trust securities | | | $ | 72,059 |
| | $ | 5,501 |
| | $ | (4,387 | ) | | $ | 73,173 |
|
Accrued investment income | | | $ | 716 |
| | | | | | $ | 716 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 73,889 |
|
Market value as a percentage of cost | | | | | | | | | 101.5 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 15 |
|
Due in one to five years | 2,718 |
|
Due in five to ten years | 5,751 |
|
Thereafter | 33,879 |
|
Total | $ | 42,363 |
|
The cost and fair market values associated with preneed cemetery trust investments at December 31, 2016 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 10,852 |
| | $ | — |
| | $ | — |
| | $ | 10,852 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 496 |
| | 18 |
| | (4 | ) | | 510 |
|
Foreign debt | 2 | | 7,574 |
| | 160 |
| | (656 | ) | | 7,078 |
|
Corporate debt | 2 | | 20,621 |
| | 1,569 |
| | (1,123 | ) | | 21,067 |
|
Preferred stock | 2 | | 16,287 |
| | 8 |
| | (947 | ) | | 15,348 |
|
Mortgage-backed securities | 2 | | 949 |
| | 372 |
| | (4 | ) | | 1,317 |
|
Common stock | 1 | | 13,250 |
| | 2,191 |
| | (1,838 | ) | | 13,603 |
|
Mutual funds: | | | | | | | | | |
Fixed income | | | 1,223 |
| | 107 |
| | — |
| | 1,330 |
|
Trust securities | | | $ | 71,252 |
| | $ | 4,425 |
| | $ | (4,572 | ) | | $ | 71,105 |
|
Accrued investment income | | | $ | 729 |
| | | | | | $ | 729 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 71,834 |
|
Market value as a percentage of cost | | | | | | | | | 99.8 | % |
We determine whether or not the assetsChanges in the preneedfair value of our trust fund assets (Preneed funeral, cemetery and perpetual care trust investments have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position,) are offset by changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basisfair value of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in our trust fund liabilities (Deferred preneed funeral and cemetery receipts held in truston our Consolidated Balance Sheets. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines and Care trusts’ corpus) and reflected in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.8 million impairment and no impairments have been recorded in the nine months ended September 30, 2017.Other, net. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.regulations and the gain or loss is allocated to the contract.
AtWe 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
The components of Preneed cemetery trust investments on our Consolidated Balance Sheet are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Preneed cemetery trust investments, at market value | $ | 103,808 | | | $ | 90,130 | |
Less: allowance for contract cancellation | (2,905) | | | (3,100) | |
Preneed cemetery trust investments | $ | 100,903 | | | $ | 87,030 | |
The cost and market values associated with preneed cemetery trust investments at September 30, 2017, we had certain2022 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 6,852 | | | $ | — | | | $ | — | | | $ | 6,852 | |
Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
U.S. agency obligations | 2 | | 803 | | | — | | | (76) | | | 727 | |
Foreign debt | 2 | | 11,146 | | | 533 | | | (1,024) | | | 10,655 | |
Corporate debt | 2 | | 14,073 | | | 37 | | | (3,311) | | | 10,799 | |
Preferred stock | 2 | | 12,568 | | | 367 | | | (1,665) | | | 11,270 | |
Certificates of deposit | 2 | | 79 | | | — | | | (7) | | | 72 | |
Common stock | 1 | | 45,169 | | | 2,483 | | | (7,816) | | | 39,836 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 309 | | | — | | | (63) | | | 246 | |
Fixed income | 2 | | 12,324 | | | 8 | | | (3,603) | | | 8,729 | |
Trust securities | | | $ | 103,323 | | | $ | 3,428 | | | $ | (17,565) | | | $ | 89,186 | |
Accrued investment income | | | $ | 944 | | | | | | | $ | 944 | |
Preneed cemetery trust investments | | | | | | | | | $ | 90,130 | |
Market value as a percentage of cost | | | | | | | | | 86.3% |
The estimated maturities of the fixed income securities (excluding mutual funds) at September 30, 2022 included above are as follows (in thousands):
| | | | | |
Due in one year or less | $ | 1,515 | |
Due in one to five years | 6,815 | |
Due in five to ten years | 6,435 | |
Thereafter | 18,758 | |
Total fixed income securities | $ | 33,523 | |
The cost and market values associated with preneed cemetery trust investments at December 31, 2021 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 3,088 | | | $ | — | | | $ | — | | | $ | 3,088 | |
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 15,846 | | | 2,025 | | | (953) | | | 16,918 | |
Corporate debt | 2 | | 12,965 | | | 1,374 | | | (49) | | | 14,290 | |
Preferred stock | 2 | | 12,455 | | | 1,111 | | | (344) | | | 13,222 | |
| | | | | | | | | |
Common stock | 1 | | 40,992 | | | 6,906 | | | (4,079) | | | 43,819 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 28 | | | 8 | | | — | | | 36 | |
Fixed income | 2 | | 11,443 | | | 615 | | | (567) | | | 11,491 | |
Trust Securities | | | $ | 96,817 | | | $ | 12,039 | | | $ | (5,992) | | | $ | 102,864 | |
Accrued investment income | | | $ | 944 | | | | | | | $ | 944 | |
Preneed cemetery trust investments | | | | | | | | | $ | 103,808 | |
Market value as a percentage of cost | | | | | | | | | 106.2% |
The following table summarized our fixed income securities (excluding mutual funds) within our preneed cemetery trust investments that had tax lots in an unrealized loss positions for more than one year. Based onposition at September 30, 2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. agency obligations | $ | 728 | | | $ | (76) | | | $ | — | | | $ | — | | | $ | 728 | | | $ | (76) | |
Foreign debt | 6,829 | | | (528) | | | 583 | | | (496) | | | 7,412 | | | (1,024) | |
Corporate debt | 7,886 | | | (3,111) | | | 580 | | | (200) | | | 8,466 | | | (3,311) | |
Preferred stock | 6,438 | | | (1,088) | | | 3,356 | | | (577) | | | 9,794 | | | (1,665) | |
Certificates of deposit | 72 | | | (7) | | | — | | | — | | | 72 | | | (7) | |
Total fixed income securities with an unrealized loss | $ | 21,953 | | | $ | (4,810) | | | $ | 4,519 | | | $ | (1,273) | | | $ | 26,472 | | | $ | (6,083) | |
The following table summarized our analyses of thesefixed income securities the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our(excluding mutual funds) within our preneed cemetery trust investmentinvestments in an unrealized losses, their associated fair market values,loss position at December 31, 2021, aggregated by major security type and the durationlength of time in a continuous unrealized losses as of September 30, 2017 are shown in the following tableloss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 4,228 | | | $ | (517) | | | $ | 629 | | | $ | (436) | | | $ | 4,857 | | | $ | (953) | |
Corporate debt | 1,037 | | | (49) | | | — | | | — | | | 1,037 | | | (49) | |
Preferred stock | 1,301 | | | (63) | | | 2,913 | | | (281) | | | 4,214 | | | (344) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 6,566 | | | $ | (629) | | | $ | 3,542 | | | $ | (717) | | | $ | 10,108 | | | $ | (1,346) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 153 |
| | $ | (2 | ) | | $ | 1,657 |
| | $ | (166 | ) | | $ | 1,810 |
| | $ | (168 | ) |
Corporate debt | 2,158 |
| | (410 | ) | | 624 |
| | (143 | ) | | 2,782 |
| | (553 | ) |
Preferred stock | 273 |
| | (2 | ) | | 8,111 |
| | (522 | ) | | 8,384 |
| | (524 | ) |
Mortgage-backed securities | 200 |
| | (23 | ) | | — |
| | — |
| | 200 |
| | (23 | ) |
Common stock | 8,473 |
| | (2,247 | ) | | 1,936 |
| | (872 | ) | | 10,409 |
| | (3,119 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed Income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporary impaired securities | $ | 11,257 |
| | $ | (2,684 | ) | | $ | 12,328 |
| | $ | (1,703 | ) | | $ | 23,585 |
| | $ | (4,387 | ) |
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | $ | 228 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 228 |
| | $ | (4 | ) |
Foreign debt | 2,523 |
| | (180 | ) | | 2,868 |
| | (475 | ) | | 5,391 |
| | (655 | ) |
Corporate debt | 6,939 |
| | (233 | ) | | 2,168 |
| | (890 | ) | | 9,107 |
| | (1,123 | ) |
Preferred stock | 3,217 |
| | (121 | ) | | 11,635 |
| | (826 | ) | | 14,852 |
| | (947 | ) |
Mortgage-backed securities | 51 |
| | (5 | ) | | — |
| | — |
| | 51 |
| | (5 | ) |
Common stock | 2,608 |
| | (202 | ) | | 3,385 |
| | (1,636 | ) | | 5,993 |
| | (1,838 | ) |
Total temporary impaired securities | $ | 15,566 |
| | $ | (745 | ) | | $ | 20,056 |
| | $ | (3,827 | ) | | $ | 35,622 |
| | $ | (4,572 | ) |
Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 wereare as follows (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Three months ended September 30, | | Nine months ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 | | 2021 | | 2022 | | 2021 | | 2022 |
Investment income | $ | 578 |
| | $ | 474 |
| | $ | 1,546 |
| | $ | 1,755 |
| Investment income | $ | 441 | | | $ | 556 | | | $ | 1,570 | | | $ | 1,618 | |
Realized gains | 126 |
| | — |
| | 415 |
| | 2,215 |
| Realized gains | 2,207 | | | 392 | | | 16,315 | | | 9,285 | |
Realized losses | (673 | ) | | — |
| | (4,081 | ) | | (1,312 | ) | Realized losses | (214) | | | (105) | | | (6,563) | | | (2,488) | |
Unrealized gains (losses), net | | Unrealized gains (losses), net | (3,966) | | | (5,037) | | | 4,893 | | | (14,137) | |
Expenses and taxes | (139 | ) | | (336 | ) | | (832 | ) | | (1,213 | ) | Expenses and taxes | (546) | | | (482) | | | (1,308) | | | (1,353) | |
Decrease (increase) in deferred preneed cemetery receipts held in trust | 108 |
| | (138 | ) | | 2,952 |
| | (1,445 | ) | |
Net change in deferred preneed cemetery receipts held in trust | | Net change in deferred preneed cemetery receipts held in trust | 2,078 | | | 4,676 | | | (14,907) | | | 7,075 | |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Purchases and sales of investments in the preneed cemetery trusts for the three and nine months ended September 30, 2016 and 2017 wereare as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Purchases | $ | (7,532) | | | $ | (459) | | | $ | (34,740) | | | $ | (2,083) | |
Sales | 6,446 | | | — | | | 33,847 | | | 661 | |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (1,434 | ) | | $ | (915 | ) | | $ | (19,540 | ) | | $ | (19,355 | ) |
Sales | $ | 5,973 |
| | $ | — |
| | $ | 18,003 |
| | $ | 13,189 |
|
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less retained amounts not required to be deposited into trust.
The components of Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed funeral trust investments on our Consolidated Balance Sheets at December 31, 2016 and September 30, 2017 wereSheet are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Preneed funeral trust investments, at market value | $ | 116,973 | | | $ | 102,028 | |
Less: allowance for contract cancellation | (3,315) | | | (3,390) | |
Preneed funeral trust investments | $ | 113,658 | | | $ | 98,638 | |
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed funeral trust investments, at market value | $ | 91,980 |
| | $ | 92,151 |
|
Less: allowance for contract cancellation | (2,740 | ) | | (2,707 | ) |
Preneed funeral trust investments, net | $ | 89,240 |
| | $ | 89,444 |
|
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and in some instances, a portion of all earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized
losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At September 30, 2017, none of our preneed funeral trust investments were underfunded.
Earnings from our preneed funeral trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 for the three and nine months ended September 30, 2017. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed funeral trust investments at September 30, 20172022 are detailed below (in thousands):
| | | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value | | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 15,636 |
| | $ | — |
| | $ | — |
| | $ | 15,636 |
| Cash and money market accounts | 1 | | $ | 26,473 | | | $ | — | | | $ | — | | | $ | 26,473 | |
Fixed income securities: | | | | | | | | | Fixed income securities: | |
U.S treasury debt | 1 | | 1,490 |
| | 13 |
| | (4 | ) | | 1,499 |
| U.S treasury debt | 1 | | 551 | | | — | | | (51) | | | 500 | |
| Foreign debt | 2 | | 4,882 |
| | 282 |
| | (166 | ) | | 4,998 |
| Foreign debt | 2 | | 10,018 | | | 486 | | | (897) | | | 9,607 | |
Corporate debt | 2 | | 20,244 |
| | 1,165 |
| | (571 | ) | | 20,838 |
| Corporate debt | 2 | | 12,024 | | | 32 | | | (2,772) | | | 9,284 | |
Preferred stock | 2 | | 16,837 |
| | 457 |
| | (526 | ) | | 16,768 |
| Preferred stock | 2 | | 10,898 | | | 335 | | | (1,477) | | | 9,756 | |
Mortgage-backed securities | 2 | | 1,273 |
| | 255 |
| | (25 | ) | | 1,503 |
| |
| Common stock | 1 | | 24,488 |
| | 3,392 |
| | (3,133 | ) | | 24,747 |
| Common stock | 1 | | 39,081 | | | 2,234 | | | (6,655) | | | 34,660 | |
Mutual funds: | | | | | | | | | Mutual funds: | |
Equity | | Equity | 1 | | 282 | | — | | | (57) | | | 225 | |
Fixed income | 2 | | 1,998 |
| | 87 |
| | (38 | ) | | 2,047 |
| Fixed income | 2 | | 10,028 | | | 7 | | | (2,979) | | | 7,056 | |
Other investments | 2 | | 3,374 |
| | — |
| | — |
| | 3,374 |
| Other investments | 2 | | 3,635 | | | — | | | — | | | 3,635 | |
Trust securities | | $ | 90,222 |
| | $ | 5,651 |
| | $ | (4,463 | ) | | $ | 91,410 |
| Trust securities | | $ | 112,990 | | | $ | 3,094 | | | $ | (14,888) | | | $ | 101,196 | |
Accrued investment income | | $ | 741 |
| | | | | | $ | 741 |
| Accrued investment income | | $ | 832 | | | | | | | $ | 832 | |
Preneed funeral trust investments | | | | | | | | $ | 92,151 |
| Preneed funeral trust investments | | | | $ | 102,028 | |
Market value as a percentage of cost | | | | | | | | 101.3 | % | Market value as a percentage of cost | | 89.6% |
The estimated maturities of the fixed income securities (excluding mutual funds) at September 30, 2022 included above are as follows (in thousands):
| | | | | |
Due in one year or less | $ | 1,382 | |
Due in one to five years | 5,678 | |
Due in five to ten years | 5,623 | |
Thereafter | 16,464 | |
Total fixed income securities | $ | 29,147 | |
|
| | | |
Due in one year or less | $ | 78 |
|
Due in one to five years | 4,320 |
|
Due in five to ten years | 6,208 |
|
Thereafter | 35,000 |
|
Total | $ | 45,606 |
|
The cost and fair market values associated with preneed funeral trust investments at December 31, 20162021 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 23,438 | | | $ | — | | | $ | — | | | $ | 23,438 | |
Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
Foreign debt | 2 | | 14,936 | | | 1,874 | | | (887) | | | 15,923 | |
Corporate debt | 2 | | 11,231 | | | 1,223 | | | (46) | | | 12,408 | |
Preferred stock | 2 | | 11,001 | | | 986 | | | (319) | | | 11,668 | |
| | | | | | | | | |
Common stock | 1 | | 36,694 | | | 6,417 | | | (3,574) | | | 39,537 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 26 | | | 7 | | | — | | | 33 | |
Fixed income | 2 | | 9,396 | | | 454 | | | (470) | | | 9,380 | |
Other investments | 2 | | 3,754 | | | — | | | — | | | 3,754 | |
Trust securities | | | $ | 110,476 | | | $ | 10,961 | | | $ | (5,296) | | | $ | 116,141 | |
Accrued investment income | | | $ | 832 | | | | | | | $ | 832 | |
Preneed funeral trust investments | | | | | | | | | $ | 116,973 | |
Market value as a percentage of cost | | | | | | | | | 105.1% |
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 22,787 |
| | $ | — |
| | $ | — |
| | $ | 22,787 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 1,491 |
| | 21 |
| | (10 | ) | | 1,502 |
|
Municipal bonds | 2 | | 447 |
| | 17 |
| | (4 | ) | | 460 |
|
Foreign debt | 2 | | 7,692 |
| | 170 |
| | (677 | ) | | 7,185 |
|
Corporate debt | 2 | | 21,454 |
| | 1,566 |
| | (1,134 | ) | | 21,886 |
|
Preferred stock | 2 | | 17,037 |
| | 64 |
| | (970 | ) | | 16,131 |
|
Mortgage-backed securities | 2 | | 1,165 |
| | 400 |
| | (5 | ) | | 1,560 |
|
Common stock | 1 | | 13,675 |
| | 2,256 |
| | (1,850 | ) | | 14,081 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 2,124 |
| | 115 |
| | (66 | ) | | 2,173 |
|
Other investments | 2 | | 3,463 |
| | — |
| | — |
| | 3,463 |
|
Trust securities | | | $ | 91,335 |
| | $ | 4,609 |
| | $ | (4,716 | ) | | $ | 91,228 |
|
Accrued investment income | | | $ | 752 |
| | | | | | $ | 752 |
|
Preneed funeral trust investments | | | | | | | | | $ | 91,980 |
|
Market value as a percentage of cost | | | | | | | | | 99.9 | % |
We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral receipts held in trust onThe following table summarized our Consolidated Balance Sheets. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.9 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2017, we had certain investmentsfixed income securities (excluding mutual funds) within our preneed funeral trust investments that had tax lotsinvestment in an unrealized loss positions for more than one year. Based onposition at September 30, 2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | 500 | | | $ | (51) | | | $ | — | | | $ | — | | | $ | 500 | | | $ | (51) | |
Foreign debt | 6,151 | | | (475) | | | 498 | | | (422) | | | 6,649 | | | (897) | |
Corporate debt | 6,676 | | | (2,589) | | | 529 | | | (183) | | | 7,205 | | | (2,772) | |
Preferred stock | 5,436 | | | (953) | | | 2,973 | | | (524) | | | 8,409 | | | (1,477) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 18,763 | | | $ | (4,068) | | | $ | 4,000 | | | $ | (1,129) | | | $ | 22,763 | | | $ | (5,197) | |
The following table summarized our analyses of thesefixed income securities the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our(excluding mutual funds) within our preneed funeral trust investment in an unrealized losses, their associated fair market values,loss position at December 31, 2021, aggregated by major security type and the durationlength of time in a continuous unrealized losses as of September 30, 2017 are shown in the following tableloss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 4,251 | | | $ | (509) | | | $ | 548 | | | $ | (378) | | | $ | 4,799 | | | $ | (887) | |
Corporate debt | 965 | | | (46) | | | — | | | — | | | 965 | | | (46) | |
Preferred stock | 1,211 | | | (58) | | | 2,710 | | | (261) | | | 3,921 | | | (319) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 6,427 | | | $ | (613) | | | $ | 3,258 | | | $ | (639) | | | $ | 9,685 | | | $ | (1,252) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | 837 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 837 |
| | $ | (4 | ) |
Foreign debt | 170 |
| | (4 | ) | | 1,628 |
| | (163 | ) | | 1,798 |
| | (167 | ) |
Corporate debt | 2,273 |
| | (430 | ) | | 609 |
| | (141 | ) | | 2,882 |
| | (571 | ) |
Preferred stock | 191 |
| | (6 | ) | | 8,183 |
| | (520 | ) | | 8,374 |
| | (526 | ) |
Mortgage-backed securities | 234 |
| | (24 | ) | | 9 |
| | — |
| | 243 |
| | (24 | ) |
Common stock | 8,497 |
| | (2,241 | ) | | 1,934 |
| | (892 | ) | | 10,431 |
| | (3,133 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed income | 79 |
| | (1 | ) | | 608 |
| | (37 | ) | | 687 |
| | (38 | ) |
Total temporary impaired securities | $ | 12,281 |
| | $ | (2,710 | ) | | $ | 12,971 |
| | $ | (1,753 | ) | | $ | 25,252 |
| | $ | (4,463 | ) |
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | 834 |
| | $ | (10 | ) | | $ | — |
| | $ | — |
| | $ | 834 |
| | $ | (10 | ) |
Municipal bonds | 244 |
| | (5 | ) | | — |
| | — |
| | 244 |
| | (5 | ) |
Foreign debt | 2,654 |
| | (186 | ) | | 2,905 |
| | (490 | ) | | 5,559 |
| | (676 | ) |
Corporate debt | 6,977 |
| | (215 | ) | | 2,234 |
| | (919 | ) | | 9,211 |
| | (1,134 | ) |
Preferred stock | 3,420 |
| | (128 | ) | | 11,750 |
| | (842 | ) | | 15,170 |
| | (970 | ) |
Mortgage-backed securities | 55 |
| | (5 | ) | | 11 |
| | (1 | ) | | 66 |
| | (6 | ) |
Common stock | 2,795 |
| | (216 | ) | | 3,390 |
| | (1,634 | ) | | 6,185 |
| | (1,850 | ) |
Mutual funds: | | | | | | | | | | | |
Fixed income | 97 |
| | (7 | ) | | 644 |
| | (58 | ) | | 741 |
| | (65 | ) |
Total temporary impaired securities | $ | 17,076 |
| | $ | (772 | ) | | $ | 20,934 |
| | $ | (3,944 | ) | | $ | 38,010 |
| | $ | (4,716 | ) |
Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 wereare as follows (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, | | Three months ended September 30, | | Nine months ended September 30, | |
| 2016 | | 2017 | | 2016 | | 2017 | | 2021 | | 2022 | | 2021 | | 2022 | |
Investment income | $ | 596 |
| | $ | 524 |
| | $ | 1,639 |
| | $ | 1,801 |
| Investment income | $ | 357 | | | $ | 398 | | | $ | 1,261 | | | $ | 1,245 | | |
Realized gains | 131 |
| | — |
| | 525 |
| | 2,296 |
| Realized gains | 2,072 | | | 357 | | | 15,331 | | | 8,247 | | |
Realized losses | (716 | ) | | (2 | ) | | (4,090 | ) | | (1,314 | ) | Realized losses | (201) | | | (96) | | | (6,097) | | | (2,242) | | |
Unrealized gains (losses), net | | Unrealized gains (losses), net | (3,728) | | | (4,394) | | | 4,478 | | | (11,794) | | |
Expenses and taxes | (253 | ) | | (390 | ) | | (946 | ) | | (1,106 | ) | Expenses and taxes | (409) | | | (214) | | | (1,041) | | | (751) | | |
Decrease (increase) in deferred preneed funeral receipts held in trust | 242 |
| | (132 | ) | | 2,872 |
| | (1,677 | ) | |
Net change in deferred preneed funeral receipts held in trust | | Net change in deferred preneed funeral receipts held in trust | 1,909 | | | 3,949 | | | (13,932) | | | 5,295 | | |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
| | $ | — | | | $ | — | | | $ | — | | | $ | — | | |
Purchases and sales of investments in the preneed funeral trusts for the three and nine months ended September 30, 2016 and 2017 wereare as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2021 | | 2022 | | 2021 | | 2022 | | | | |
Purchases | $ | (6,729) | | | $ | — | | | $ | (32,219) | | | $ | (590) | | | | | |
Sales | 6,864 | | | 8 | | | 32,153 | | | 538 | | | | | |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (1,486 | ) | | $ | (966 | ) | | $ | (19,917 | ) | | $ | (19,548 | ) |
Sales | $ | 6,336 |
| | $ | 23 |
| | $ | 19,005 |
| | $ | 13,266 |
|
Cemetery Perpetual Care Trust Investments4. PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years, with such interest income reflected as Preneed cemetery finance charges. In substantially all cases, we receive an initial down payment at the time the contract is signed. At September 30, 2017, our total financed preneed receivables were $39.9 million, of which $29.3 million and $10.6 million were for cemetery interment rights and for merchandise and services, respectively. These amounts are presentedCare trusts’ corpus on our consolidated balance sheetConsolidated Balance Sheet represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus are as $11.7 million within Accounts receivablefollows (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Cemetery perpetual care trust investments, at market value | $ | 72,400 | | | $ | 60,569 | |
Obligations due from trust | (1,244) | | | (502) | |
Care trusts’ corpus | $ | 71,156 | | | $ | 60,067 | |
The following table reflects the cost and $28.2 million within Preneed receivables and exclude unearned finance charges and allowance for contract cancellations. The unearned finance chargesmarket values associated with these receivables were $5.7 million at both December 31, 2016 and September 30, 2017.
We determine an allowance for customer cancellations and refunds on contractsthe trust investments held in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately 4.8% of the total receivables on recognized salesperpetual care trust funds at September 30, 2017. An allowance is recorded2022 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 3,889 | | | $ | — | | | $ | — | | | $ | 3,889 | |
Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
Foreign debt | 2 | | 7,872 | | | 344 | | | (757) | | | 7,459 | |
Corporate debt | 2 | | 9,705 | | | 63 | | | (2,349) | | | 7,419 | |
Preferred stock | 2 | | 9,673 | | | 237 | | | (1,238) | | | 8,672 | |
| | | | | | | | | |
Common stock | 1 | | 29,510 | | | 1,651 | | | (5,289) | | | 25,872 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 199 | | | — | | | (40) | | | 159 | |
Fixed Income | 2 | | 8,895 | | | 5 | | | (2,473) | | | 6,427 | |
Trust securities | | | $ | 69,743 | | | $ | 2,300 | | | $ | (12,146) | | | $ | 59,897 | |
Accrued investment income | | | $ | 672 | | | | | | | $ | 672 | |
Cemetery perpetual care investments | | | | | | | | | $ | 60,569 | |
Market value as a percentage of cost | | | | | | | | | 85.9% |
The estimated maturities of the fixed income securities (excluding mutual funds) at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the nine months ended September 30, 2017, the change in the allowance for contract cancellations was2022 included above are as follows (in thousands):
| | | | | |
Due in one year or less | $ | 978 | |
Due in one to five years | 4,038 | |
Due in five to ten years | 4,400 | |
Thereafter | 14,134 | |
Total fixed income securities | $ | 23,550 | |
|
| | | |
| September 30, 2017 |
Beginning balance | $ | 1,861 |
|
Write-offs and cancellations | (1,004 | ) |
Provision | 1,093 |
|
Ending balance | $ | 1,950 |
|
The following table reflects the cost and market values associated with the trust investments held in cemetery perpetual care trust funds at December 31, 2021 (in thousands): | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 1,447 | | | $ | — | | | $ | — | | | $ | 1,447 | |
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 10,949 | | | 1,401 | | | (647) | | | 11,703 | |
Corporate debt | 2 | | 9,139 | | | 1,065 | | | (32) | | | 10,172 | |
Preferred stock | 2 | | 9,742 | | | 803 | | | (226) | | | 10,319 | |
| | | | | | | | | |
Common stock | 1 | | 27,853 | | | 4,990 | | | (3,008) | | | 29,835 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 19 | | | 5 | | | — | | | 24 | |
Fixed income | 2 | | 8,141 | | | 530 | | | (460) | | | 8,211 | |
Trust securities | | | $ | 67,290 | | | $ | 8,794 | | | $ | (4,373) | | | $ | 71,711 | |
Accrued investment income | | | $ | 689 | | | | | | | $ | 689 | |
Cemetery perpetual care investments | | | | | | | | | $ | 72,400 | |
Market value as a percentage of cost | | | | | | | | | 106.6% |
The aging of past due financing receivables as of following table summarized our fixed income securities (excluding mutual funds) within our cemetery perpetual care trust investment in an unrealized loss position at September 30, 2017 was2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2022 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 4,939 | | | $ | (393) | | | $ | 427 | | | $ | (364) | | | $ | 5,366 | | | $ | (757) | |
Corporate debt | 5,237 | | | (2,219) | | | 374 | | | (130) | | | 5,611 | | | (2,349) | |
Preferred stock | 4,937 | | | (814) | | | 2,782 | | | (424) | | | 7,719 | | | (1,238) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 15,113 | | | $ | (3,426) | | | $ | 3,583 | | | $ | (918) | | | $ | 18,696 | | | $ | (4,344) | |
The following table summarized our fixed income securities (excluding mutual funds) within our perpetual care trust investment in an unrealized loss position at December 31, 2021, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2021 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 2,649 | | | $ | (321) | | | $ | 468 | | | $ | (326) | | | $ | 3,117 | | | $ | (647) | |
Corporate debt | 846 | | | (32) | | | — | | | — | | | 846 | | | (32) | |
Preferred stock | 856 | | | (41) | | | 1,917 | | | (185) | | | 2,773 | | | (226) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 4,351 | | | $ | (394) | | | $ | 2,385 | | | $ | (511) | | | $ | 6,736 | | | $ | (905) | |
Cemetery perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Realized gains | $ | 275 | | | $ | 48 | | | $ | 2,224 | | | $ | 1,292 | |
Realized losses | (26) | | | (13) | | | (942) | | | (302) | |
Unrealized gains (losses), net | (3,070) | | | (3,730) | | | 3,747 | | | (9,846) | |
Net change in Care trusts’ corpus | 2,821 | | | 3,695 | | | (5,029) | | | 8,856 | |
Total | $ | — | | | $ | — | | | $ | — | | | $ | — | |
Cemetery perpetual care trust investment security transactions recorded in Other revenue are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Investment income | $ | 2,881 | | | $ | 3,075 | | | $ | 8,104 | | | $ | 8,613 | |
Realized losses, net | (278) | | | (739) | | | (557) | | | (1,343) | |
Total | $ | 2,603 | | | $ | 2,336 | | | $ | 7,547 | | | $ | 7,270 | |
Purchases and sales of investments in the cemetery perpetual care trusts are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Purchases | $ | (5,049) | | | $ | (233) | | | $ | (24,105) | | | $ | (644) | |
Sales | 4,431 | | | — | | | 23,695 | | | 441 | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total Financing Receivables |
Recognized revenue | $ | 866 |
| | $ | 393 |
| | $ | 190 |
| | $ | 1,205 |
| | $ | 2,654 |
| | $ | 26,517 |
| | $ | 29,171 |
|
Deferred revenue | 272 |
| | 145 |
| | 71 |
| | 387 |
| | 875 |
| | 9,900 |
| | 10,775 |
|
Total contracts | $ | 1,138 |
| | $ | 538 |
| | $ | 261 |
| | $ | 1,592 |
| | $ | 3,529 |
| | $ | 36,417 |
| | $ | 39,946 |
|
5. 8.RECEIVABLES FROM PRENEED FUNERAL TRUSTS
TheOur 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. As of December 31, 2016 and September 30, 2017, receivablesReceivables from preneed funeral trusts wereare as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed trust funds, at cost | $ | 14,658 |
| | $ | 15,780 |
|
Less: allowance for contract cancellation | (440 | ) | | (474 | ) |
Receivables from preneed trusts, net | $ | 14,218 |
| | $ | 15,306 |
|
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Preneed funeral trust funds, at cost | $ | 19,597 | | | $ | 20,741 | |
Less: allowance for contract cancellation | (588) | | | (622) | |
Receivables from preneed funeral trusts, net | $ | 19,009 | | | $ | 20,119 | |
The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at December 31, 2021 and September 30, 2017 and December 31, 2016.2022. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes the unrealized gains and losses on trust assets.
The composition of the preneed funeral trust funds at September 30, 2017 was2022 is as follows (in thousands):
| | | | | | | | | | | |
| Historical Cost Basis | | Fair Value |
Cash and cash equivalents | $ | 5,973 | | | $ | 5,973 | |
Fixed income investments | 12,078 | | | 12,078 | |
Mutual funds and common stocks | 2,687 | | | 2,363 | |
Annuities | 3 | | | 3 | |
Total | $ | 20,741 | | | $ | 20,417 | |
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
As of September 30, 2017 | | | |
Cash and cash equivalents | $ | 4,054 |
| | $ | 4,054 |
|
Fixed income investments | 9,218 |
| | 9,218 |
|
Mutual funds and common stocks | 2,492 |
| | 2,516 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 15,780 |
| | $ | 15,804 |
|
The composition of the preneed funeral trust funds at December 31, 2016 was2021 is as follows (in thousands):
| | | | | | | | | | | |
| Historical Cost Basis | | Fair Value |
Cash and cash equivalents | $ | 5,595 | | | $ | 5,595 | |
Fixed income investments | 11,386 | | | 11,386 | |
Mutual funds and common stocks | 2,611 | | | 2,682 | |
Annuities | 5 | | | 5 | |
Total | $ | 19,597 | | | $ | 19,668 | |
9.FAIR VALUE MEASUREMENTS
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
As of December 31, 2016 | | | |
Cash and cash equivalents | $ | 3,378 |
| | $ | 3,378 |
|
Fixed income investments | 8,809 |
| | 8,809 |
|
Mutual funds and common stocks | 2,455 |
| | 2,463 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 14,658 |
| | $ | 14,666 |
|
6.CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets representsFair value is defined as the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2016 and September 30, 2017 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Trust assets, at market value | $ | 46,889 |
| | $ | 48,679 |
|
Obligations due from trust | (599 | ) | | (493 | ) |
Care trusts’ corpus | $ | 46,290 |
| | $ | 48,186 |
|
We are required by various state laws to pay a portion of the proceedsprice that would be received from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expensesan asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date applicable for cemetery property and memorials. This trust fund income isitems that are recognized as earned, in Revenues: Cemetery. Trust management fees charged by CSV RIA are included in revenueor disclosed at fair value in the periodfinancial statements on a recurring basis. We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in which they are earned. At September 30, 2017, none of our cemetery perpetual care trust investments were underfunded.
Where quoted prices are available in an active market, investments held bycalculating valuation measurements, and the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stock, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2effect of the valuation hierarchy. We review and update our fair value hierarchy
classifications quarterly. There were no transfers between Levels 1 and 2measurement of significant unobservable inputs on earnings, or changes in the three and nine months ended September 30, 2017. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further informationnet assets, as of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at September 30, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 2,573 |
| | $ | — |
| | $ | — |
| | $ | 2,573 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 3,568 |
| | 211 |
| | (117 | ) | | 3,662 |
|
Corporate debt | 2 | | 13,194 |
| | 768 |
| | (368 | ) | | 13,594 |
|
Preferred stock | 2 | | 11,464 |
| | 260 |
| | (368 | ) | | 11,356 |
|
Mortgage-backed securities | 2 | | 661 |
| | 147 |
| | (14 | ) | | 794 |
|
Common stock | 1 | | 15,263 |
| | 1,985 |
| | (2,021 | ) | | 15,227 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 909 |
| | 64 |
| | — |
| | 973 |
|
Trust securities | | | $ | 47,632 |
| | $ | 3,435 |
| | $ | (2,888 | ) | | $ | 48,179 |
|
Accrued investment income | | | $ | 500 |
| | | | | | $ | 500 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 48,679 |
|
Market value as a percentage of cost | | | | | | | | | 101.1 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 9 |
|
Due in one to five years | 1,770 |
|
Due in five to ten years | 4,004 |
|
Thereafter | 23,622 |
|
| $ | 29,405 |
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 6,522 |
| | $ | — |
| | $ | — |
| | $ | 6,522 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 365 |
| | 13 |
| | (3 | ) | | 375 |
|
Foreign debt | 2 | | 5,100 |
| | 99 |
| | (435 | ) | | 4,764 |
|
Corporate debt | 2 | | 13,715 |
| | 966 |
| | (821 | ) | | 13,860 |
|
Preferred stock | 2 | | 11,323 |
| | 5 |
| | (664 | ) | | 10,664 |
|
Mortgage-backed securities | 2 | | 569 |
| | 223 |
| | (3 | ) | | 789 |
|
Common stock | 1 | | 8,259 |
| | 1,382 |
| | (1,146 | ) | | 8,495 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 855 |
| | 76 |
| | — |
| | 931 |
|
Trust securities | | | $ | 46,708 |
| | $ | 2,764 |
| | $ | (3,072 | ) | | $ | 46,400 |
|
Accrued investment income | | | $ | 489 |
| | | | | | $ | 489 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 46,889 |
|
Market value as a percentage of cost | | | | | | | | | 99.3 | % |
date.We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-
than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.5 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2017, we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended September 30, 2017 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 93 |
| | $ | (2 | ) | | $ | 1,138 |
| | $ | (115 | ) | | $ | 1,231 |
| | $ | (117 | ) |
Corporate debt | 1,435 |
| | (276 | ) | | 417 |
| | (92 | ) | | 1,852 |
| | (368 | ) |
Preferred stock | 681 |
| | (4 | ) | | 5,475 |
| | (364 | ) | | 6,156 |
| | (368 | ) |
Mortgage-backed securities | 121 |
| | (14 | ) | | — |
| | — |
| | 121 |
| | (14 | ) |
Common stock | 5,393 |
| | (1,466 | ) | | 1,221 |
| | (555 | ) | | 6,614 |
| | (2,021 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed Income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporary impaired securities | $ | 7,723 |
| | $ | (1,762 | ) | | $ | 8,251 |
| | $ | (1,126 | ) | | $ | 15,974 |
| | $ | (2,888 | ) |
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended December 31, 2016 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | $ | 137 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 137 |
| | $ | (3 | ) |
Foreign debt | 1,619 |
| | (120 | ) | | 1,961 |
| | (315 | ) | | 3,580 |
| | (435 | ) |
Corporate debt | 4,679 |
| | (152 | ) | | 1,439 |
| | (669 | ) | | 6,118 |
| | (821 | ) |
Preferred stock | 2,038 |
| | (77 | ) | | 8,329 |
| | (587 | ) | | 10,367 |
| | (664 | ) |
Mortgage-backed securities | 31 |
| | (3 | ) | | — |
| | — |
| | 31 |
| | (3 | ) |
Common stock | 1,563 |
| | (121 | ) | | 2,004 |
| | (1,025 | ) | | 3,567 |
| | (1,146 | ) |
Total temporary impaired securities | $ | 10,067 |
| | $ | (476 | ) | | $ | 13,733 |
| | $ | (2,596 | ) | | $ | 23,800 |
| | $ | (3,072 | ) |
Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Realized gains | $ | 44 |
| | $ | — |
| | $ | 156 |
| | $ | 925 |
|
Realized losses | (261 | ) | | — |
| | (1,943 | ) | | (630 | ) |
Decrease (increase) in care trusts’ corpus | 217 |
| | — |
| | 1,787 |
| | (295 | ) |
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Perpetual care trust investment security transactions recorded in Revenues: Cemetery for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Investment income | $ | 1,523 |
| | $ | 1,539 |
| | $ | 4,503 |
| | $ | 4,831 |
|
Realized gain, net | 14 |
| | (283 | ) | | (444 | ) | | (891 | ) |
Total | $ | 1,537 |
| | $ | 1,256 |
| | $ | 4,059 |
| | $ | 3,940 |
|
Purchases and sales of investments in the perpetual care trusts for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (936 | ) | | $ | (556 | ) | | $ | (12,888 | ) | | $ | (12,430 | ) |
Sales | $ | 3,832 |
| | $ | — |
| | $ | 11,702 |
| | $ | 8,390 |
|
7. FAIR VALUE MEASUREMENTS
We evaluateevaluated our financial assets and liabilities for those financial assets and liabilities that meetmet the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivablesaccounts receivable and trade payablesaccounts payable approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of our receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our long-termacquisition debt and Credit Facility (as defined in Note 9)11) and Senior Notes (as defined in Note 12) are classified within Level 2 of the Fair Value MeasurementMeasurements hierarchy. The fair values of our long-term debt and Credit Facility approximate
At September 30, 2022, the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. Thevalue and fair value of our Credit Facility was $169.0 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 convertible subordinated notes due 2021 was approximately $179.9 million atcarrying value of our Credit Facility approximates fair value. At September 30, 20172022, the carrying value of our acquisition debt was $4.5 million, which approximated its 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 September 30, 2022, the fair value of our Senior Notes was $317.2 million based on the last traded or broker quoted price. We identified investments in fixed income securities, common stock
At December 31, 2021 and mutual funds presented within the preneed and perpetual care trust investment categories on our Consolidated Balance Sheets as having met the criteria for fair value measurement. As of September 30, 2017,2022, we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.
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. 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 ourthese investments as available-for-sale and measure them at fair value under the standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities.cost. See Notes 37 and 68 to our Consolidated Financial Statements included herein for the fair value hierarchy levels of our trust investments.
8.
10.INTANGIBLE AND OTHER NON-CURRENT ASSETS
IntangiblesIntangible and other non-current assets at December 31, 2016 and September 30, 2017 wereare as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Tradenames | $ | 23,565 | | | $ | 24,108 | |
Prepaid agreements not-to-compete, net of accumulated amortization of $3,316 and $3,373, respectively | 2,247 | | | 1,884 | |
Capitalized commissions on preneed contracts, net of accumulated amortization of $2,278 and $2,803, respectively | 3,560 | | | 3,963 | |
| | | |
Other | 6 | | | 496 | |
Intangible and other non-current assets, net | $ | 29,378 | | | $ | 30,451 | |
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Prepaid agreements not-to-compete, net of accumulated amortization of $5,501 and $5,908, respectively | $ | 3,244 |
| | $ | 2,930 |
|
Tradenames | 11,663 |
| | 11,663 |
|
Other | 50 |
| | 23 |
|
Intangible and other non-current assets | $ | 14,957 |
| | $ | 14,616 |
|
Tradenames
Our tradenames have indefinite lives and therefore are not amortized. During the three and nine months ended September 30, 2022, we increased the value of our tradenames by $0.5 million related to our 2022 acquisition described in Note 3 to the Consolidated Financial Statements included herein.
See Note 1 to the Consolidated Financial Statements included herein for a discussion of the methodology used for our indefinite-lived intangible asset impairment test.
Prepaid Agreements
Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from one to ten years. Amortization expense was approximately $106,000$158,000 and $135,000$142,000 for the three months ended September 30, 20162021 and 2017,2022, respectively, and $308,000$495,000 and $407,000$432,000 for the nine months ended September 30, 20162021 and 2017,2022, respectively. Our tradenames have indefinite lives and therefore are not amortized.
9.LONG-TERM DEBT
Our long-term debt consisted of the following at December 31, 2016 and September 30, 2017 (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Revolving credit facility, secured, floating rate | $ | 67,700 |
| | $ | 75,500 |
|
Term loan, secured, floating rate | 138,750 |
| | 130,313 |
|
Acquisition debt | 12,245 |
| | 11,348 |
|
Debt issuance costs, net of accumulated amortization of $4,138 and $4,366, respectively | (1,270 | ) | | (1,043 | ) |
Less: current portion | (13,021 | ) | | (16,126 | ) |
Total long-term debt | $ | 204,404 |
| | $ | 199,992 |
|
As of September 30, 2017, we had a $300 million secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.
As of September 30, 2017, we had outstanding borrowings under the revolving credit facility of $75.5 million and approximately $130.3 million was outstanding on the term loan. We have one letter of credit issued on November 30, 2016 and outstanding under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% and will expire on November 27, 2017. The letter of credit automatically renews annually and securescapitalize our obligations under our various self-insured policies. Outstanding borrowings under the Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of September 30, 2017, the prime rate margin was equivalent to 1.125% and the LIBOR margin was 2.125%. The weighted average interest rate on the Credit Facility for the three and nine months ended September 30, 2017 was 3.4% and 3.1%, respectively.
We were in compliance with the covenants contained in the Credit Agreement as of September 30, 2017. The Credit Agreement contains key ratios that we must comply with, including a requirement to maintain a leverage ratio of no more than 3.50 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of September 30, 2017, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 1.89 to 1.00.
Amortization of debt issuanceselling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts. These costs are amortized on a straight-line basis over the average maturity period for our Credit Facilitypreneed cemetery merchandise and services contracts and preneed funeral trust contracts, of eight and ten years, respectively. Amortization expense was approximately $0.1 million$165,000 and $181,000 for both the three months ended September 30, 20162021 and 20172022, respectively, and $0.3 million$473,000 and $0.2 million$525,000 for the nine months ended September 30, 20162021 and 2017,2022, respectively.
The unamortized debt issuanceaggregate amortization expense for our non-compete agreements and capitalized commissions as of September 30, 2022 is as follows (in thousands):
| | | | | | | | | | | |
| Prepaid Agreements | | Capitalized Commissions |
Years ending December 31, | | | |
Remainder of 2022 | $ | 135 | | | $ | 186 | |
2023 | 496 | | | 710 | |
2024 | 381 | | | 650 | |
2025 | 372 | | | 585 | |
2026 | 257 | | | 518 | |
Thereafter | 243 | | | 1,314 | |
Total amortization expense | $ | 1,884 | | | $ | 3,963 | |
11.CREDIT FACILITY AND ACQUISITION DEBT
On May 27 2022, we entered into a second amendment and commitment increase (the “Credit Facility Amendment”) to the first amended and restated credit agreement dated May 13, 2021 (as amended, including by the Credit Facility Amendment, the “Credit Facility”) with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Facility Amendment provided, among other things, for (i) an increase to the Revolving Credit Commitments (as defined in the Credit Facility) under the Credit Facility from $200.0 million to $250.0 million in the aggregate; (ii) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (iii) the establishment of the BSBY as a benchmark rate and the removal of LIBOR from the Credit Facility; (iv) an increase in the maximum Total Leverage Ratio (as defined in the Credit Facility) to 5.25 to 1.00; and (v) modifications to the restricted payments covenant to allow us to make additional stock repurchases, subject to the
satisfaction of certain conditions therein. We incurred $0.3 million in transactions costs related to the Credit Facility are beingAmendment, which were capitalized and will be amortized over the remaining term of the related debt using the effectivestraight-line method.
At September 30, 2022, 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 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 allows for future increases in the facility size in the form of increased revolving commitments or new incremental term loans by an additional amount of up to $75.0 million in the aggregate.
The Credit Facility is secured by a first-priority perfected security interest method for our term loanin and lien on substantially all of the Company’s personal property assets and those of the Subsidiary Guarantors. In addition, the Credit Facility includes provisions which require the Company and the straight line methodSubsidiary Guarantors, upon the occurrence of an event of default or in the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level under the Credit Facility, to grant additional liens on real property assets accounting for no less than 50% of the Company’s and the Subsidiary Guarantors’ funeral operations if requested by the administrative agent.
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 September 30, 2022, we were subject to the following financial covenants under our revolvingCredit Facility: (A) a Total Leverage Ratio not to exceed 5.25 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 September 30, 2022.
Our Credit Facility and Acquisition debt consisted of the following (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Credit Facility | $ | 155,400 | | | $ | 169,000 | |
Debt issuance costs, net of accumulated amortization of $1,324 and $1,617, respectively | (1,543) | | | (1,590) | |
Total Credit Facility | $ | 153,857 | | | $ | 167,410 | |
| | | |
Acquisition debt | $ | 4,500 | | | $ | 4,460 | |
Less: current portion | (521) | | | (614) | |
Total acquisition debt, net of current portion | $ | 3,979 | | | $ | 3,846 | |
At September 30, 2022, we had outstanding borrowings under the Credit Facility of $169.0 million. We also had one letter of credit facility.for $2.3 million under the Credit Facility. The letter of credit will expire on November 25, 2022 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2022, we had $78.7 million of availability under the Credit Facility.
As of the effective date of the Credit Facility Amendment, outstanding borrowings under our Credit Facility bear interest at a prime rate or a BSBY rate, plus an applicable margin based on our leverage ratio. At September 30, 2022, the prime rate margin was equivalent to 1.125% and the BSBY rate margin was 2.125%. The weighted average interest rate on our Credit Facility was 2.0% and 4.3% for the three months ended September 30, 2021 and 2022, respectively, and 2.5% and 3.1% for the nine months ended September 30, 2021 and 2022, respectively.
The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Credit Facility interest expense | $ | 383 | | | $ | 1,971 | | | $ | 1,200 | | | $ | 4,132 | |
Credit Facility amortization of debt issuance costs | 80 | | | 109 | | | 297 | | | 293 | |
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers.
10.CONVERTIBLE SUBORDINATED NOTES
On March 19, 2014, we issued $143.75 million aggregate principal amount A majority of 2.75% convertible subordinatedthe deferred purchase price and notes due March 15, 2021 (the “Convertible Notes”)bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes beganOriginal maturities range from nine to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.twenty years.
The carrying values of the liability and equity components of the Convertible Notes at December 31, 2016 and September 30, 2017 are reflected inimputed interest expense related to our Consolidated Balance Sheetsacquisition debt is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Acquisition debt imputed interest expense | $ | 90 | | | $ | 78 | | | $ | 280 | | | $ | 237 | |
| | | | | | | |
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Long-term liabilities: | | | |
Principal amount | $ | 143,750 |
| | $ | 143,750 |
|
Unamortized discount of liability component | (21,887 | ) | | (18,687 | ) |
Convertible Notes issuance costs, net of accumulated amortization of $1,359 and $1,746, respectively | $ | (2,268 | ) | | $ | (1,881 | ) |
Carrying value of the liability component | $ | 119,596 |
| | $ | 123,182 |
|
| | | |
Equity component carrying value | $ | 17,973 |
| | $ | 17,973 |
|
12. SENIOR NOTESThe carrying value of our 4.25% senior notes due 2029 (the “Senior Notes”) is reflected on our Consolidated Balance Sheet as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Long-term liabilities: | | | |
Principal amount | $ | 400,000 | | | $ | 400,000 | |
| | | |
Debt discount, net of accumulated amortization of $301 and $669, respectively | (4,199) | | | (3,831) | |
Debt issuance costs, net of accumulated amortization of $86 and $190, respectively | (1,191) | | | (1,087) | |
Carrying value of the Senior Notes | $ | 394,610 | | | $ | 395,082 | |
At September 30, 2022, the fair value of the ConvertibleSenior Notes, which are Level 2 measurements, was approximately $179.9 million$317.2 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 September 30, 2017.4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021.
Interest expenseWe may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. In addition, before May 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Senior Notes outstanding using an amount of cash equal to the net proceeds of certain equity offerings, at a price of 104.25% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption; provided that (1) at least 50% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes) outstanding under the Indenture remain outstanding immediately after the occurrence of such redemption (unless all Senior Notes are redeemed concurrently), and (2) each such redemption must occur within 180 days of the date of the consummation of any such equity offering.
If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest.
The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the Convertible Notes included contractual couponability 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 approximately $1.0 million for both the three months ended September 30, 2016debt discount, debt premium and 2017 and $3.0 million for both the nine months ended September 30, 2016 and 2017. Accretion of the discount on the Convertible Notes was $1.0 million and $1.1 million for the three months ended September 30, 2016 and 2017, respectively, and $2.9 million and $3.2 million for the nine months ended September 30, 2016 and 2017, respectively. Amortization of debt issuance costs related to our ConvertibleSenior Notes was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 and $0.4 million for both the nine months ended September 30, 2016 and 2017.are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Senior Notes interest expense | $ | 4,250 | | | $ | 4,250 | | | $ | 17,517 | | | $ | 12,730 | |
Senior Notes amortization of debt discount | 118 | | | 125 | | | 384 | | | 368 | |
Senior Notes amortization of debt premium | — | | | — | | | 85 | | | — | |
Senior Notes amortization of debt issuance costs | 34 | | | 35 | | | 161 | | | 104 | |
The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at September 30, 2017, is 44.5392 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.45 per share of common stock.
The unamortizeddebt discount and the unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 80 months of the ConvertibleSenior Notes. The effective interest rate on the unamortized discount and the debt issuance costs forFor both the three and nine months ended September 30, 20162021 and 20172022, the effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes was 6.75%4.42% and 2.75%4.30%, respectively.
11.STOCKHOLDERS’ EQUITY13.LEASES
Stock-Based Compensation Plans
During the nine months ended September 30, 2017, we had two stock benefits plans in effect under which restricted stock, stock optionsOur lease obligations consist of operating and performance awards have been granted or remain outstanding: the Second Amendedfinance leases related to real estate and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”).equipment. The Amended and Restated 2006 Plan was terminated upon the approvalcomponents of the 2017 Plan at the annual shareholders meeting on May 17, 2017. The termination of the Amended and Restated 2006 Plan does not affect the awards previously issued and outstanding.
All stock-based planslease cost are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). The 2017 Plan provides for grants of options as non-qualified options or incentive stock options, restricted stock and performance awards. The 2017 Plan expires on May 17, 2027.
The status of each of the plans at September 30, 2017 is as follows (shares in(in thousands):
|
| | | | | | | | | | | |
| Shares Reserved | | Shares Available to Issue | | Options Outstanding | | Performance Awards Outstanding (2) |
Amended and Restated 2006 Plan | — |
| | — |
| | 1,929 |
| | 319 |
|
2017 Plan | 1,571 |
| (1) | 1,541 |
| | 16 |
| | 9 |
|
Total | 1,571 |
| | 1,541 |
| | 1,945 |
| | 328 |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| Income Statement Classification | | 2021 | | 2022 | | 2021 | | 2022 |
Operating lease cost | Facilities and grounds expense(1) | | $ | 947 | | | $ | 863 | | | $ | 2,871 | | | $ | 2,564 | |
Short-term lease cost | Facilities and grounds expense(1) | | 39 | | | 82 | | | 145 | | | 260 | |
Variable lease cost | Facilities and grounds expense(1) | | 43 | | | 37 | | | 100 | | | 60 | |
| | | | | | | | | |
Finance lease cost: | | | | | | | | | |
Depreciation of leased assets | Depreciation and amortization(2) | | $ | 111 | | | $ | 111 | | | $ | 328 | | | $ | 328 | |
Interest on lease liabilities | Interest expense | | 117 | | | 110 | | | 356 | | | 335 | |
Total finance lease cost | | | 228 | | | 221 | | | 684 | | | 663 | |
Total lease cost | | | $ | 1,257 | | | $ | 1,203 | | | $ | 3,800 | | | $ | 3,547 | |
| | | | | | | | | | | | | | |
| | | | |
(1) | | | | Facilities and grounds expense is included within Cost of service and General, administrative and other on our Consolidated Statements of Operations. |
(1)(2) | Amount includes approximately 17,500 shares granted from the AmendedDepreciation and Restated 2006 Plan that were returned to the Company due to cancellations. |
(2) | Performance Awards are reserved at 200%amortization expense is included within Field depreciation and General, administrative and other on our Consolidated Statements of shares granted which is equal to the maximum payout in shares.Operations. |
Supplemental cash flow information related to our leases is as follows (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Cash paid for operating leases included in operating activities | $ | 2,891 | | | $ | 2,698 | |
Cash paid for finance leases included in financing activities | 626 | | | 646 | |
Right-of-use assets obtained in exchange for new leases is as follows (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | (1,358) | | | $ | 764 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | — | | | — | |
During the three and nine months ended September 30, 2021, we received a leasehold improvement allowance of $1.4 million for the renovation of our home office space in Houston, Texas from our lessor. We recorded a leasehold improvement asset as property plant and equipment and reduced our right-of-use asset by $1.4 million. The leasehold improvement allowance will be recognized prospectively by ratably reducing the lease expense over the remaining lease term.
Supplemental balance sheet information related to leases is as follows (in thousands):
| | | | | | | | | | | | | | |
Lease Type | Balance Sheet Classification | December 31, 2021 | | September 30, 2022 |
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 17,881 | | | $ | 17,295 | |
| | | | |
Finance lease right-of-use assets | Property, plant and equipment, net | $ | 6,770 | | | $ | 6,770 | |
Accumulated depreciation | Property, plant and equipment, net | (2,443) | | | (2,771) | |
Finance lease right-of-use assets, net | | $ | 4,327 | | | $ | 3,999 | |
| | | | |
Operating lease current liabilities | Current portion of operating lease obligations | $ | 1,913 | | | $ | 2,074 | |
Finance lease current liabilities | Current portion of finance lease obligations | 375 | | | 416 | |
Total current lease liabilities | | $ | 2,288 | | | $ | 2,490 | |
| | | | |
Operating lease non-current liabilities | Obligations under operating leases, net of current portion | $ | 18,520 | | | $ | 17,638 | |
Finance lease non-current liabilities | Obligations under finance leases, net of current portion | 5,157 | | | 4,842 | |
Total non-current lease liabilities | | $ | 23,677 | | | $ | 22,480 | |
| | | | |
Total lease liabilities | | $ | 25,965 | | | $ | 24,970 | |
The average lease terms and discount rates at September 30, 2022 are as follows:
| | | | | | | | | | | |
| Weighted-average remaining lease term (years) | | Weighted-average discount rate |
Operating leases | 9.1 | | 8.0 | % |
Finance leases | 11.8 | | 8.2 | % |
The aggregate future lease payments for operating and finance leases at September 30, 2022 are as follows (in thousands):
| | | | | | | | | | | |
| Operating | | Finance |
Lease payments due: | | | |
Remainder of 2022 | $ | 899 | | | $ | 222 | |
2023 | 3,557 | | | 860 | |
2024 | 3,535 | | | 791 | |
2025 | 3,306 | | | 736 | |
2026 | 3,240 | | | 745 | |
Thereafter | 13,112 | | | 4,810 | |
Total lease payments | 27,649 | | | 8,164 | |
Less: Interest | (7,937) | | | (2,906) | |
Present value of lease liabilities | $ | 19,712 | | | $ | 5,258 | |
At September 30, 2022, we had no additional significant operating or finance leases that had not yet commenced.
14.COMMITMENTS AND CONTINGENCIES
Chinchilla v. Carriage Services, Inc., et al., Superior Court of California, San Joaquin County, Case No. STK-CV-UOE-2021-0004661. On May 19, 2021, a putative class action against the Company and several of our subsidiaries was filed. The plaintiff, a former employee, sought monetary damages on behalf of himself and other similarly situated current and former non-exempt employees. The plaintiff claimed that the Company failed to, among other things, pay minimum wages, provide meal and rest breaks, pay overtime, provide accurately itemized wage statements, reimburse employees for business expenses, and provide wages when due.
On January 5, 2022, the parties to the litigation engaged in and executed a Memorandum of Understanding for class settlement in the amount of $1.0 million. The parties subsequently executed a Class Settlement Agreement, and the court granted preliminary approval of the Class Settlement Agreement on March 29, 2022. The court granted Final Approval on July 26, 2022, and we funded the final settlement in the amount of $1.2 million on August 8, 2022.
15.STOCKHOLDERS’ EQUITY
Restricted Stock
Restricted stock activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2021 | | 2022 | | 2021 | | 2022 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | | | | | |
Granted(1) | — | | $ | — | | | — | | $ | — | | | 9,300 | | $ | 324 | | | — | | $ | — | | | | | | | |
Returned for payroll taxes | 711 | | $ | 28 | | | — | | $ | — | | | 10,399 | | $ | 375 | | | 4,136 | | $ | 205 | | | | | | | |
Cancelled | — | | $ | — | | | 500 | | $ | 16 | | | 966 | | $ | 27 | | | 1,950 | | $ | 63 | | | | | | | |
| | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Restricted stock granted during the nine months ended September 30, 2021 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 $34.79. |
We did not issue anyrecorded stock-based compensation expense, which is included in General, administrative and other expenses, for restricted stock duringawards of $89,000 and $36,000 for the three months ended September 30, 2017. During the second quarter of 2017, we issued 5,000 restricted stock grants to a new employee of the leadership team that vest over a five-year period with an aggregate grant date market value of approximately $0.1 million. During the first quarter of 2017, we issued a total of 22,250 restricted stock grants that vest over a three-year period with an aggregate grant date market value of approximately $0.6 million.
During the three months ended September 30, 20162021 and 2017, we recorded a benefit of $21,0002022, respectively, and $174,000 of pre-tax compensation expense, respectively, related to the vesting of restricted stock awards, which is included in general, administrative$308,000 and other expenses. The benefit was primarily related to the cancellation of 50,000 unvested restricted stock$133,000 for a former executive. During the nine months ended September 30, 20162021 and 2017, we recorded pre-tax compensation expense of approximately $0.5 million for both periods.2022, respectively.
As of September 30, 2017, we had approximately $1.3 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.7 years.
Stock Options
As of September 30, 2017, there were 1,945,656Stock option grants and cancellations are as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2021 | | 2022 | | 2021 | | 2022 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | | | | | |
Granted(1) | — | | $ | — | | | — | | $ | — | | | 701,400 | | $ | 7,115 | | | 58,500 | | $ | 959 | | | | | | | |
Granted(2) | — | | $ | — | | | — | | $ | — | | | — | | $ | — | | | 310,000 | | $ | 5,388 | | | | | | | |
Granted(3) | — | | $ | — | | | — | | $ | — | | | 150,000 | | $ | 1,684 | | | — | | $ | — | | | | | | | |
Granted(4) | — | | $ | — | | | 12,600 | | $ | 143 | | | — | | $ | — | | | 12,600 | | $ | 143 | | | | | | | |
Cancelled | 6,000 | | $ | 61 | | | 3,652 | | $ | 37 | | | 19,684 | | $ | 181 | | | 28,790 | | $ | 322 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Stock options granted during the nine months ended September 30, 2021 and 2022 had a weighted average price of $34.79 and $49.48, respectively. The fair value of these options was calculated using the Black-Scholes option pricing model. The options granted in 2021 and 2022 vest over a five-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 nine months ended September 30, 2022 had a weighted average price of $49.48. 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. |
(3) | We granted 150,000 options to a key employee at a weighted average price of $34.79. These options will vest when the price of our common stock closes at or above $53.39 (50,000 options) and $77.34 (100,000 options) for three consecutive days within the ten-year term and the employee has remained continuously employed by us through such date. The fair value of these options was $1.7 million. |
(4) | Stock options granted during the three and nine months ended September 30, 2022 had a weighted average price of $31.58. The fair value of these options was calculated using the Black-Scholes option pricing model and 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. |
Additional stock options outstanding and 708,379 stock options which remain unvested. option activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2021 | | 2022 | | 2021 | | 2022 | | | | |
| Shares | Cash | | Shares | Cash | | Shares | Cash | | Shares | Cash | | | | | | |
Exercised(1) | 32,665 | | (1) | | — | | — | | | 314,294 | | (1) | | 18,736 | | (1) | | | | | | |
Returned for option price(2) | 17,790 | | $ | — | | | — | | $ | — | | | 166,359 | | $ | 880 | | | 8,125 | | $ | 60 | | | | | | | |
Returned for payroll taxes(3) | 2,192 | | $ | 82 | | | — | | $ | — | | | 20,163 | | $ | 1,058 | | | 1,601 | | $ | 82 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Stock options exercised during the three months ended September 30, 2021 had a weighted average exercise price of $21.81, with an aggregate intrinsic value of $0.6 million. Stock options exercised during the nine months ended September 30, 2021 and 2022 had a weighted average exercise price of $21.78 and $25.88, respectively, with an aggregate intrinsic value of $5.0 million and $0.5 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. |
We did not grant any options during the three months ended September 30, 2017. During the second quarter of 2017, we granted 16,250 options to a new employee of the leadership team at an exercise price of $26.89. These options will vest in one-fifth increments over a five-year period and have a ten-year term. The fair value of the options granted during the second quarter of 2017 was approximately $0.1 million. During the first quarter of 2017, we granted 445,450 options to our leadership team and certain key employees at a weighted average exercise price of $26.54. These options will vest in one-fifth increments over a five-year period and have a ten-year term. The fair value of the total options granted during the first quarter of 2017 was approximately $3.2 million.
During the three months ended September 30, 2016 and 2017, we recorded approximately $0.2 million and $0.3 million, respectively, of pre-tax stock-based compensation expense, which is included in General, administrative and other expenses, for stock options. During the nine months ended September 30, 2016options of $467,000 and 2017, we recorded approximately $1.4 million and $1.2 million, respectively, of pre-tax compensation expense for stock options.
Performance Awards
We did not grant any performance awards during the three months ended September 30, 2017. During the second quarter of 2017, we granted 4,500 performance awards to a new employee of the leadership team, payable in shares. The fair value of these performance awards granted during the second quarter of 2017 was approximately $0.1 million. These awards will vest (if at all) on June 30, 2022, provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Earnings Before Interest Tax Depreciation and Amortization) and Adjusted Consolidated EBITDA Margin performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents 50% of the award and the Adjusted Consolidated EBITDA Margin performance represents 50% of the award. During the first quarter of 2017, we granted 101,040 performance awards to our leadership team and certain key employees, payable in shares. The fair value of these performance awards granted during the first quarter of 2017 was approximately $2.7 million. We recorded pre-tax compensation expense for performance awards totaling $46,000 and $208,000$559,000 for the three months ended September 30, 20162021 and 2017,2022, respectively, and $154,000$1,507,000 and $465,000$1,747,000 for the nine months ended September 30, 20162021 and 2017,2022, respectively.
Employee Stock Purchase PlanPerformance Awards
DuringPerformance award activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2021 | | 2022 | | 2021 | | 2022 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | | | | | |
Granted | 29,548 | | $ | 1,062 | | | — | | $ | — | | | 39,802 | | $ | 1,464 | | | 27,013 | | $ | 1,262 | | | | | | | |
Cancelled | 6,987 | | $ | 101 | | | — | | $ | — | | | 41,922 | | $ | 598 | | | 20,961 | | $ | 201 | | | | | | | |
On June 1, 2021, we amended the third quarterperformance award agreements granted on May 19, 2020 for three of 2017, employees purchasedour executives. The amendment increased the amount of performance awards payable in shares for the last three predetermined growth targets. It was treated as a totalmodification of 11,525 sharesthe original performance award agreement and resulted in an additional $2.6 million of common stock through our employee stock purchase plan (“ESPP”) at a weighted average priceincremental compensation expense, expected to be recognized over the remaining term of $21.76 per share. 36 months.
We recorded pre-tax stock-based compensation expense, which is included in General, administrative and other expenses, for the ESPP totaling approximately $53,000performance awards of $475,000 and $60,000$701,000 for the three months ended September 30, 20162021 and 2017,2022, respectively, and $197,000$1,064,000 and $204,000$1,904,000 for both the nine months ended September 30, 20162021 and 2017.2022, respectively.
Employee Stock Purchase Plan
ESPP activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2021 | | 2022 | | 2021 | | 2022 | | | | |
| Shares | Price | | Shares | Price | | Shares | Price | | Shares | Price | | | | | | |
ESPP | 14,734 | | $ | 26.32 | | | 13,795 | | $ | 27.34 | | | 46,622 | | $ | 26.32 | | | 38,884 | | $ | 35.42 | | | | | | | |
The fair value of the optionright (option) to purchase shares under the ESPP is estimated onat the date of grant (January 1 of each year) associatedpurchase with the four quarterly purchase dates using the following assumptions:
|
| | | | |
| 20172022 |
Dividend yield | 0.82 | %0.01% |
Expected volatility | 18.82 | %30.24% |
Risk-free interest rate | 0.53%0.08%, 0.65%0.22%, 0.77%0.31%, 0.89% | 0.40% |
Expected life (years) | 0.25, 0.50, 0.75, 1.00 |
|
Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of the purchase. The expected life of the ESPP grants represents the calendar quarters from the beginning of the year to the purchase date (end of each quarter).
Director Compensation
We recorded pre-taxstock-based compensation expense, related to director compensation, which is included in general,General, administrative and other expenses and Regional and unallocated funeral and cemetery costs, for the ESPP totaling $90,000$117,000 and $120,000 for both the three months ended September 30, 20162021 and 2017,2022, respectively, and $302,000$458,000 and $271,000$471,000 for the nine months ended September 30, 20162021 and 2017,2022, respectively.
Good To Great Incentive Program
Common stock issued to certain employees under this incentive program is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, | | Nine months ended September 30, | | |
2021 | | 2022 | | 2021 | | 2022 | | | | |
Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value (1) | | | | | | |
— | | $ | — | | | — | | $ | — | | | — | | $ | — | | | 27,448 | | $ | 1,358 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Common stock granted during the nine months ended September 30, 2022 had a grant date stock price of $49.48. |
Non-Employee Director and Board Advisor Compensation
Non-Employee Director and Board Advisor common stock activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, | | |
| 2021 | | 2022 | | 2021 | | 2022 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | Shares | Fair Value | | | | | | |
Board of Directors (1) | 3,192 | | $ | 142 | | | 2,214 | | $ | 71 | | | 12,565 | | $ | 480 | | | 7,255 | | $ | 307 | | | | | | | |
Advisor to the Board (1) | 112 | | $ | 5 | | | 155 | | $ | 5 | | | 389 | | $ | 15 | | | 374 | | $ | 15 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Common stock granted during the three months ended September 30, 2021 and 2022 had a weighted average price of $44.59 and $32.16, respectively, and $38.20 and $42.20 for the nine months ended September 30, 2021 and 2022. |
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 Directors (the “Board”), of $201,000 and $167,000 for the three months ended September 30, 2021 and 2022, respectively, and $656,000 and $552,000 for the nine months ended September 30, 2021 and 2022, respectively.
Share Repurchase
On February 25, 2016,23, 2022, our Board approved aauthorized an increase in our share repurchase program authorizingto permit us to purchase up to an aggregate of $25.0additional $75.0 million ofunder our common stockshare repurchase program, in addition to amounts previously authorized and outstanding in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange(“the Exchange Act”). During the three months ended September 30, 2017, we repurchased 574,054 shares of common stock for a total cost of $14.0 million at an average cost of $24.35 per share pursuant to this share
Share repurchase program. We did not repurchase any shares of common stockactivity is as follows (dollar value in the first or second quarter of 2017. thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 | | |
Number of Shares Repurchased(1) | 1,203,493 | | | — | | | 1,528,197 | | | 695,496 | | | |
Average Price Paid Per Share | $ | 44.24 | | | $ | — | | | $ | 42.89 | | | $ | 49.22 | | | |
Dollar Value of Shares Repurchased(1) | $ | 53,239 | | | $ | — | | | $ | 65,540 | | | $ | 34,234 | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | During the three and nine months ended September 30, 2021, 84,000 shares settled in October 2021, which had a cost of $3.8 million. |
Our shares wereare purchased in the open market. Purchases weremarket at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. See Note 15 to our Consolidated Financial Statements included herein for additional information on our related party transactions.
Cash Dividends
On July 26, 2017, our Board declared a dividend of $0.05 per share, totaling approximately $0.8 million, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. For During the three months ended September 30, 2016,2022, we paid a quarterly dividenddid not repurchase any shares of $0.050our common stock pursuant to our share repurchase program. At September 30, 2022, our share repurchase program had $48.9 million authorized for additional repurchases.
Cash Dividend
Our Board declared the following dividends payable on the dates below (in thousands, except per share totaling approximately $0.8 million. For the nine months ended September 30, 2016 and 2017, we paid total dividends of approximately $1.7 million and $2.5 million, respectively.amounts):
Accumulated other comprehensive income
Our components of accumulated other comprehensive income are as follows (in thousands): | | | | | | | | | | | |
2022 | Per Share | | Dollar Value |
March 1st | $ | 0.1125 | | | $ | 1,725 | |
June 1st | $ | 0.1125 | | | $ | 1,730 | |
September 1st | $ | 0.1125 | | | $ | 1,653 | |
| | | |
2021 | Per Share | | Dollar Value |
March 1st | $ | 0.1000 | | | $ | 1,799 | |
June 1st | $ | 0.1000 | | | $ | 1,808 | |
September 1st | $ | 0.1000 | | | $ | 1,783 | |
| | | |
| | | |
| | | |
|
| | | |
| Accumulated Other Comprehensive Income |
Balance at December 31, 2016 | $ | — |
|
Increase in net unrealized gains associated with available-for-sale securities of the trusts | 2,849 |
|
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus
| (2,849 | ) |
Balance at September 30, 2017 | $ | — |
|
12.16.EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings per share for(in thousands, except per share data): | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Numerator for basic and diluted earnings per share: | | | | | | | |
Net income | $ | 13,046 | | | $ | 5,860 | | | $ | 19,812 | | | $ | 33,361 | |
Less: Earnings allocated to unvested restricted stock | (18) | | | (3) | | | (33) | | | (21) | |
Income attributable to common stockholders | $ | 13,028 | | | $ | 5,857 | | | $ | 19,779 | | | $ | 33,340 | |
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per common share - weighted average shares outstanding | 17,499 | | | 14,689 | | | 17,809 | | | 14,908 | |
Effect of dilutive securities: | | | | | | | |
Stock options | 235 | | | 160 | | | 277 | | | 253 | |
| | | | | | | |
Performance awards | 512 | | | 688 | | | 279 | | | 688 | |
Denominator for diluted earnings per common share - weighted average shares outstanding | 18,246 | | | 15,537 | | | 18,365 | | | 15,849 | |
| | | | | | | |
Basic earnings per common share: | $ | 0.74 | | | $ | 0.40 | | | $ | 1.11 | | | $ | 2.22 | |
Diluted earnings per common share: | $ | 0.71 | | | $ | 0.38 | | | $ | 1.08 | | | $ | 2.09 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
For the three and nine months ended September 30, 20162022, there were 363,073 and 2017 (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Numerator for basic and diluted earnings per share: | | | | | | | |
Net income | $ | 5,683 |
| | $ | 3,038 |
| | $ | 15,454 |
| | $ | 14,532 |
|
Less: Earnings allocated to unvested restricted stock | (25 | ) | | (10 | ) | | (76 | ) | | (52 | ) |
Income attributable to common stockholders | $ | 5,658 |
| | $ | 3,028 |
| | $ | 15,378 |
| | $ | 14,480 |
|
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per common share - weighted average shares outstanding | 16,529 |
| | 16,476 |
| | 16,502 |
| | 16,575 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 273 |
| | 335 |
| | 260 |
| | 332 |
|
Convertible subordinated notes | 299 |
| | 787 |
| | 200 |
| | 980 |
|
Denominator for diluted earnings per common share - weighted average shares outstanding | 17,101 |
| | 17,598 |
| | 16,962 |
| | 17,887 |
|
| | | | | | | |
Basic earnings per common share: | $ | 0.34 |
| | $ | 0.18 |
| | $ | 0.93 |
| | $ | 0.87 |
|
Diluted earnings per common share: | $ | 0.33 |
| | $ | 0.17 |
| | $ | 0.91 |
| | $ | 0.81 |
|
The fully diluted weighted average shares outstanding for the three and nine months ended September 30, 2017 and the corresponding calculation of fully diluted earnings per share, include approximately 787,000 and 980,000 shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260, Earnings Per Share. There were 299,000 and 200,000 shares for the three and nine months ended September 30, 2016 that would have been issued upon conversion under the if-converted method.
For the both the three and nine months ended September 30, 2017 approximately 455,000 and 320,000294,310 stock options, wererespectively, excluded from the computation of diluted earnings per share because the inclusion of such stock optionsoption would result in an antidilutive effect. For the both the three and nine months ended September 30, 2016,2021, no stock options were excluded from the computation of diluted earnings per share.
13.MAJOR SEGMENTS OF BUSINESS
We conduct funeralOur performance awards are considered to be contingently issuable shares because their issuance is contingent upon the satisfaction of certain performance and cemetery operations onlyservice conditions. At September 30, 2022, 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 United States. computation of diluted earnings per share as of the beginning of the reporting period.
17.SEGMENT REPORTING
Revenue, disaggregated by major source for each of our reportable segments was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2022 | | | | | | |
| | Funeral | | Cemetery | | Total |
Services | | $ | 38,477 | | | $ | 4,515 | | | $ | 42,992 | |
Merchandise | | 20,777 | | | 3,651 | | | 24,428 | |
Cemetery property | | — | | | 13,179 | | | 13,179 | |
Other revenue | | 3,526 | | | 3,372 | | | 6,898 | |
Total | | $ | 62,780 | | | $ | 24,717 | | | $ | 87,497 | |
| | | | | | | | | | | | | | | | | | | | |
Three months ended September 30, 2021 | | | | | | |
| | Funeral | | Cemetery | | Total |
Services | | $ | 41,987 | | | $ | 4,223 | | | $ | 46,210 | |
Merchandise | | 23,532 | | | 3,305 | | | 26,837 | |
Cemetery property | | — | | | 15,206 | | | 15,206 | |
Other revenue | | 3,378 | | | 3,410 | | | 6,788 | |
Total | | $ | 68,897 | | | $ | 26,144 | | | $ | 95,041 | |
| | | | | | |
Nine months ended September 30, 2022 | | | | | | |
| | Funeral | | Cemetery | | Total |
Services | | $ | 122,133 | | | $ | 13,146 | | | $ | 135,279 | |
Merchandise | | 66,587 | | | 10,529 | | | 77,116 | |
Cemetery property | | — | | | 43,379 | | | 43,379 | |
Other revenue | | 10,353 | | | 10,131 | | | 20,484 | |
Total | | $ | 199,073 | | | $ | 77,185 | | | $ | 276,258 | |
| | | | | | |
Nine months ended September 30, 2021 | | | | | | |
| | Funeral | | Cemetery | | Total |
Services | | $ | 121,734 | | | $ | 12,352 | | | $ | 134,086 | |
Merchandise | | 68,363 | | | 10,387 | | | 78,750 | |
Cemetery property | | — | | | 46,795 | | | 46,795 | |
Other revenue | | 10,406 | | | 9,918 | | | 20,324 | |
Total | | $ | 200,503 | | | $ | 79,452 | | | $ | 279,955 | |
| | | | | | |
The following table presents revenues from operations,operating income (loss) from operations, income (loss) before income taxes and total assets by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Funeral | | Cemetery | | Corporate | | Consolidated |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Operating income (loss): | | | | | | | |
Three months ended September 30, 2022 | $ | 17,584 | | | $ | 8,023 | | | $ | (10,385) | | | $ | 15,222 | |
Three months ended September 30, 2021 | 22,924 | | | 9,471 | | | (9,130) | | | 23,265 | |
| | | | | | | |
Nine months ended September 30, 2022 | $ | 61,531 | | | $ | 26,662 | | | $ | (28,095) | | | $ | 60,098 | |
Nine months ended September 30, 2021 | 65,404 | | | 30,462 | | | (25,431) | | | 70,435 | |
| | | | | | | |
Income (loss) before income taxes: | | | | | | | |
Three months ended September 30, 2022 | $ | 17,605 | | | $ | 7,985 | | | $ | (16,951) | | | $ | 8,639 | |
Three months ended September 30, 2021 | 22,777 | | | 9,508 | | | (14,117) | | | 18,168 | |
| | | | | | | |
Nine months ended September 30, 2022 | $ | 64,577 | | | $ | 26,671 | | | $ | (46,005) | | | $ | 45,243 | |
Nine months ended September 30, 2021 | 64,951 | | | 30,537 | | | (69,105) | | | 26,383 | |
| | | | | | | |
Total assets: | | | | | | | |
September 30, 2022 | $ | 759,431 | | | $ | 371,441 | | | $ | 16,515 | | | $ | 1,147,387 | |
December 31, 2021 | 769,539 | | | 390,344 | | | 18,748 | | | 1,178,631 | |
|
| | | | | | | | | | | | | | | |
| Funeral | | Cemetery | | Corporate | | Consolidated |
Revenues from operations: | | | | | | | |
Three months ended September 30, 2017 | $ | 47,329 |
| | $ | 13,725 |
| | $ | — |
| | $ | 61,054 |
|
Three months ended September 30, 2016 | $ | 45,183 |
| | $ | 14,957 |
| | $ | — |
| | $ | 60,140 |
|
| | | | | | | |
Nine months ended September 30, 2017 | $ | 150,279 |
| | $ | 42,784 |
| | $ | — |
| | $ | 193,063 |
|
Nine months ended September 30, 2016 | $ | 140,952 |
| | $ | 44,384 |
| | $ | — |
| | $ | 185,336 |
|
| | | | | | | |
Income (loss) from operations before income taxes: | | | | | | | |
Three months ended September 30, 2017 | $ | 12,394 |
| | $ | 3,002 |
| | $ | (10,836 | ) | | $ | 4,560 |
|
Three months ended September 30, 2016 | $ | 13,478 |
| | $ | 4,327 |
| | $ | (10,231 | ) | | $ | 7,574 |
|
| | | | | | | |
Nine months ended September 30, 2017 | $ | 45,414 |
| | $ | 11,609 |
| | $ | (33,208 | ) | | $ | 23,815 |
|
Nine months ended September 30, 2016 | $ | 44,322 |
| | $ | 12,875 |
| | $ | (33,337 | ) | | $ | 23,860 |
|
| | | | | | | |
Total assets: | | | | | | | |
September 30, 2017 | $ | 637,075 |
| | $ | 245,674 |
| | $ | 4,297 |
| | $ | 887,046 |
|
December 31, 2016 | $ | 634,145 |
| | $ | 241,621 |
| | $ | 9,303 |
| | $ | 885,069 |
|
14.18.SUPPLEMENTARY DATA
Balance Sheet
The following table presents the detail of certain balance sheet accounts as of December 31, 2016 and September 30, 2017 (in thousands):
| | | | | | | | | | | |
| December 31, 2021 | | September 30, 2022 |
Prepaid and other current assets: | | | |
Prepaid expenses | $ | 2,215 | | | $ | 3,348 | |
| | | |
Federal income taxes receivable | 4,064 | | | — | |
State income taxes receivable | — | | | 617 | |
Other current assets | 125 | | | 166 | |
Total prepaid and other current assets | $ | 6,404 | | | $ | 4,131 | |
| | | |
Current portion of debt and lease obligations: | | | |
Acquisition debt | $ | 521 | | | $ | 614 | |
Finance lease obligations | 375 | | | 416 | |
Operating lease obligations | 1,913 | | | 2,074 | |
Total current portion of debt and lease obligations | $ | 2,809 | | | $ | 3,104 | |
| | | |
Accrued and other liabilities: | | | |
Incentive compensation | $ | 19,121 | | | $ | 8,801 | |
Insurance | 4,089 | | | 3,882 | |
Unrecognized tax benefit | 3,761 | | | 3,272 | |
Vacation | 3,334 | | | 3,339 | |
Natural disaster liability | 2,628 | | | 43 | |
Interest | 2,250 | | | 6,473 | |
Salaries and wages | 2,193 | | | 3,909 | |
Employer payroll tax deferral | 1,773 | | | 1,773 | |
Employee meetings and award trips | 1,462 | | | 868 | |
Commissions | 684 | | | 798 | |
Income tax payable | 485 | | | 864 | |
Ad valorem and franchise taxes | 450 | | | 2,196 | |
Perpetual care trust payable | 389 | | | 97 | |
Other accrued liabilities | 1,154 | | | 808 | |
Total accrued and other liabilities | $ | 43,773 | | | $ | 37,123 | |
| | | |
Other long-term liabilities: | | | |
Incentive compensation | $ | 1,291 | | | $ | 2,038 | |
| | | |
Other long-term liabilities | 128 | | | 662 | |
Total other long-term liabilities | $ | 1,419 | | | $ | 2,700 | |
Cash Flow
The following information is supplemental disclosure for the Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Cash paid for interest | $ | 14,817 | | | $ | 12,981 | |
Cash paid for taxes | 9,974 | | | 7,046 | |
Unsettled share repurchases | 3,801 | | | — | |
Fair value of donated real property | 635 | | | — | |
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Other current assets: | | | |
Income taxes receivable | $ | 1,932 |
| | $ | 671 |
|
Other current assets | 102 |
| | 93 |
|
Total other current assets | $ | 2,034 |
| | $ | 764 |
|
| | | |
Current portion of long-term debt and capital lease obligations: | | | |
Term note | $ | 11,250 |
| | $ | 14,063 |
|
Acquisition debt | 1,771 |
| | 2,063 |
|
Capital leases | 246 |
| | 197 |
|
Total current portion of long-term debt and capital lease obligations | $ | 13,267 |
| | $ | 16,323 |
|
| | | |
Other current liabilities: | | | |
Income taxes payable | $ | 509 |
| | $ | 1,579 |
|
Deferred rent | 208 |
| | 232 |
|
Total other current liabilities | $ | 717 |
| | $ | 1,811 |
|
| | | |
Accrued liabilities: | | | |
Accrued salaries and wages | $ | 4,005 |
| | $ | 1,365 |
|
Accrued incentive compensation | 8,237 |
| | 4,864 |
|
Accrued vacation | 2,305 |
| | 2,614 |
|
Accrued insurance | 1,726 |
| | 2,053 |
|
Accrued interest | 1,235 |
| | 257 |
|
Accrued ad valorem and franchise taxes | 981 |
| | 2,314 |
|
Accrued commissions | 543 |
| | 410 |
|
Other accrued liabilities | 1,059 |
| | 1,417 |
|
Total accrued liabilities | $ | 20,091 |
| | $ | 15,294 |
|
| | | |
Other long-term liabilities: | | | |
Deferred rent | $ | 1,207 |
| | $ | 1,029 |
|
Incentive compensation | 575 |
| | 924 |
|
Contingent consideration | 785 |
| | 770 |
|
Total other long-term liabilities | $ | 2,567 |
| | $ | 2,723 |
|
15.RELATED PARTY TRANSACTIONS
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. These shares had been held by Mr. Payne prior to such repurchase for over one year. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. These shares are currently held as treasury shares. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.
16.19. SUBSEQUENT EVENTS
On October 14, 2017, we completed construction of and began operating a new funeral home in Pennsylvania.
On October 25, 2017,2022, we acquired a business consisting of three funeral home businesses, one cemetery and one cremation focused business in the Charlotte, North Carolina area for $25 million in cash. The consideration for this acquisition was funded through a combination of cash on hand and borrowings under our Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075 per share, effective with respect to dividends payable on December 1, 2017 and later.Credit Facility.
On October 25, 2017,2022, in conjunction with our Board approvedacquisition described above, the Company obtained a $15.0 million increase in its authorization for repurchaseslimited consent under our Credit Facility from the financial institutions party thereto, as lenders, and Bank of ourcommon stock in addition America, N.A., as administrative agent,
to consummate the $25.0 million approved on February 25, 2016, bringingacquisition notwithstanding the total authorized repurchase amountCompany exceeding the allowed Total Leverage Ratio under the Credit Facility applicable to $40.0 million, in accordance with the Exchange Act.permitted acquisitions.
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 safe harbor provisionsmeaning of the Private Securities Litigation Reform Act of 1995. TheseAll statements, include statements regarding any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; anythan statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic 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.historical information, should be deemed to be forward-looking statements. The words “may”���may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements include, but are not limited to, statements regarding any projections of earnings, revenue, cash flow, debt levels, capital allocation, death rates, market share growth, overhead or other financial items; any statements of the plans, strategies and objectives of management for future operations; including, but not limited to, technology innovations, product development and organizational performance; any statements of the plans, timing and objectives of management for acquisition activities; any statements of the plans, timing, expectations and objectives of management for future financing activities, including, but not limited to, capital allocation and the ability to obtain credit or financing; any statements regarding future economic and market conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenuesrevenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
•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;
the effects of competition;
•the execution of our Standards Operating, 4E Leadership and StrategicStandard Acquisition Models;
•the effects of competition;
•changes in the number of deaths in our markets;
•changes in consumer preferences;preferences and our ability to adapt to or meet those changes;
•our ability to generate preneed sales;sales, including implementing our cemetery portfolio sales strategy, product development and optimization plans;
•the investment performance of our funeral and cemetery trust funds;
•fluctuations in interest rates;
•the effects of inflation to our business and financial condition and performance, including increased overall costs to 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 metrics to our rolling four quarter 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;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;
•effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;
•the potential impact of epidemics and pandemics, including the COVID-19 coronavirus, including new variants of COVID-19, such as the Delta and Omicron variants, on customer preferences and on our business;
•government, social, business and other actions that have been and will be taken in response to pandemics, including potential responses to new variants of COVID-19, its variants and any sub-variants;
•effects and expense of litigation;
•consolidation of the deathcarefuneral 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,
•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 deathcarefuneral 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, 2016.2021.
ReadersInvestors 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.
- 40 -
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
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 U.S. provider of funeral and cemetery services and merchandise in the United States.merchandise. We operate in two business segments: funeral home operations,Funeral Home Operations, which currently account for approximately 78%70% of our revenues,revenue, and cemetery operations,Cemetery Operations, which currently account for approximately 22%30% of our revenues.revenue.
At September 30, 2017,2022, we operated 171169 funeral homes in 2826 states and 3231 cemeteries in 11 states. We compete with other publicpublicly held and independent operators of funeral and cemetery companies and smaller, independent operators.companies. We believe we are a market leader in most of our markets.
Funeral home and cemetery businesses provide products and services to families in three principal areas: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. Our funeral homes offer a complete range of services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and memorial services and transportation services. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and services to take place at one location and thereby reduces transportation costs and inconvenience to the family.
Our cemeteries provide interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise).
We provide funeral and cemetery services and products on both an “at-need”“atneed” (time of death) and “preneed” (planned prior to death) basis.
Recent Developments
Executive Leadership Changes
On September 27, 2022, C. Benjamin Brink informed the Company of his plans to resign from his position as Executive Vice President, Chief Financial Officer and Treasurer effective January 2, 2023. Mr. Brink will remain in his role through January 2, 2023 and will serve as a consultant for the Company for six months thereafter. The planned resignation was not the result of any disagreement Mr. Brink had with the Company on any matter related to the Company's operations, policies, and practices, including any matters concerning the Company's controls or any financial or accounting-related matters or disclosures.
Acquisitions
During the nine months ended September 30, 2022, we acquired a business consisting of two funeral homes for $6.3 million in cash.
Divestitures
During the nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million for a net gain of $0.7 million.
Business Impacts of COVID-19
On March 11, 2020, COVID-19 was deemed a global pandemic and since then, the Company has continued to proactively monitor and assess the pandemic’s current and potential impact to the Company’s operations. Since that time, the Company’s senior leadership team has taken steps to assist our businesses throughout each phase of the COVID-19 pandemic, including updating our processes and procedures to comply with all regulatory mandates, along with keeping the health and safety of our employees and the families we serve our top priority. While we believe the country has begun to transition to a post-pandemic phase, we continue to monitor the situation and may make appropriate adjustments to our operations as necessary.
The overall macroeconomic impact from the pandemic to the deathcare 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 third quarter of 2022, we continued to see the death rate normalize to pre-COVID-19 levels, which
accelerated during the latter part of the third quarter. 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 the continued uncertainty surrounding the normalization of the death rate and the scope, severity and duration of the COVID-19 pandemic and its ultimate impact. This includes the potential impacts of new variants of COVID-19, its sub-variants and any other new variants, and any resulting impacts from such variants. 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, or 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. See “Liquidity and Capital Resources” below for additional information related to our liquidity position.
During the third quarter of 2022, we continued to see a decrease in COVID-19-related deaths and an accelerated normalization of the death rate to pre-COVID-19 levels. The normalization of the death rate to pre-COVID-19 levels during the third quarter of 2022 resulted in lower volumes, revenues, earnings and margins when compared to the third quarter of 2021, but overall financial performance remains at or above prior reporting periods during and prior to the COVID-19 pandemic. Although we expect these trends to continue, we will continue to assess these impacts, including the potential impacts of new variants of COVID-19, its sub-variants and any other new variants, and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related regulatory mandates and restrictions, if any, evolves.
Inflationary Trends
Beginning in the second quarter of 2022, we began to experience modest cost increases and surcharges from our vendors and suppliers on merchandise and goods due to broader inflationary, raw material cost increases, and global supply chain impacts. This trend in modest cost increases continued during the third quarter of 2022, with the Company experiencing, for example, higher costs related to full-time hourly base rates, utilities, funeral supplies, merchandise costs and insurance. Although we have taken steps to mitigate these cost increases and we expect these impacts to continue through the end of the 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 through the end of the 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 at-needatneed 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 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 having 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 performancehigh-performance culture and operating framework linked with incentive compensation programs that attract top-qualitytop quality industry talent to our organizationorganization. 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,•Honesty, integrity and quality in all that we do;
hard•Hard work, pride of accomplishment, and shared success through employee ownership;
belief•Belief in the power of people through individual initiative and teamwork;
outstanding•Outstanding service and profitability go hand-in-hand; and
growth•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, people development,providing personalized high-value services to our client families and the keyguests, and operating and financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenuesrevenue 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-performancehigh performance culture: Energy to get the job done; the ability to EnergizeEnergize 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. BothWe 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 willexpect to acquire larger, higher margin strategic businesses.
We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins (a non-GAAP financial measure). We use criteria such as cultural alignment, volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry to evaluate the strategic position of potential acquisition candidates. Our financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital.
Our belief in our Mission Statement and Guiding Principles that define us and proper execution of the three models that define our strategy have given us thea competitive advantage in anyevery market in whichwhere 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. At September 30, 2022, we had $78.7 million of availability under the Credit Facility. 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, 2021.
Our plan is to use cash on hand and borrowings under our Credit Facility primarily for general corporate purposes, payment of dividends and debt obligations, strategic acquisitions, internal growth capital expenditures, and further debt repayments. From time to time we may also use available cash resources (including borrowings under our Credit Facility) to repurchase shares of our common stock, subject to satisfying certain financial covenants in our Credit Facility and in the Indenture (defined below) governing our Senior Notes (defined below). 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 2022 with $1.1 million in cash and ended the third quarter with $0.8 million in cash. At September 30, 2022, we had borrowings of $169.0 million outstanding on our Credit Facility compared to $155.4 million at December 31, 2021.
The following table sets forth the elements of cash flow (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Cash at beginning of the year | $ | 889 | | | $ | 1,148 | |
| | | |
Net cash provided by operating activities | 69,699 | | | 50,046 | |
| | | |
Acquisitions of businesses and real estate | (3,285) | | | (8,876) | |
| | | |
Proceeds from divestitures and sale of other assets | 4,375 | | | 4,313 | |
Proceeds from insurance reimbursements | 2,946 | | | 2,209 | |
Capital expenditures | (15,252) | | | (20,346) | |
Net cash used in investing activities | (11,216) | | | (22,700) | |
| | | |
Net borrowings on our Credit Facility, acquisition debt and finance lease obligations | 39,042 | | | 13,286 | |
Payment to redeem the 6.625% senior notes due 2026 | (400,000) | | | — | |
Payment of call premium for the redemption of the 6.625% senior notes due 2026 | (19,876) | | | — | |
Payment of debt issuance costs for the Credit Facility and the Senior Notes | (2,054) | | | (339) | |
Proceeds from the issuance of the Senior Notes | 395,500 | | | — | |
Conversions and maturity of the Convertibles Notes | (3,980) | | | — | |
Net proceeds related to employee equity plans | 674 | | | 1,151 | |
Dividends paid on common stock | (5,390) | | | (5,108) | |
Purchase of treasury stock | (61,739) | | | (36,663) | |
Other financing costs | (461) | | | — | |
Net cash used in financing activities | (58,284) | | | (27,673) | |
| | | |
Cash at end of the period | $ | 1,088 | | | $ | 821 | |
Operating Activities
For the nine months ended September 30, 2022, cash provided by operating activities was $50.0 million compared to $69.7 million for the nine months ended September 30, 2021. The decrease of $19.7 million is primarily due to unfavorable working capital changes in accrued liabilities, which were partially offset by favorable changes in income tax receivables.
Investing Activities
Our investing activities resulted in a net cash outflow of $22.7 million for the nine months ended September 30, 2022 compared to $11.2 million for the nine months ended September 30, 2021, a decrease of $11.5 million.
Acquisition and Divestiture Activity
During the nine months ended September 30, 2022, we acquired a business consisting of two funeral homes for $6.3 million in cash and we purchased real property for $2.6 million.
During the nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million.
During the nine months ended September 30, 2021, we sold three funeral homes for $3.5 million, sold real property for $0.7 million and purchased real property for $3.3 million. We also received proceeds of $2.8 million from our property insurance policy for the reimbursement of renovation costs for our funeral and cemetery businesses that were damaged by Hurricane Ida.
Capital Expenditures
For the nine months ended September 30, 2022, capital expenditures (comprised of growth and maintenance spend) totaled $20.3 million compared to $15.3 million for the nine months ended September 30, 2021, an increase of $5.0 million.
The following tables present our growth and maintenance capital expenditures (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Growth | | | |
Cemetery development | $ | 4,120 | | | $ | 5,215 | |
| | | |
Renovations at certain businesses(1) | 2,030 | | | 4,974 | |
| | | |
Other | 142 | | | 447 | |
Total Growth | $ | 6,292 | | | $ | 10,636 | |
| | | | | | | | | | | | | | |
| | | | |
(1) | During the nine months ended September 30, 2022, we spent $2.4 million for renovations on two businesses that were affected by Hurricane Ida, all of which was reimbursed by our property insurance. |
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Maintenance | | | |
Facility repairs and improvements | $ | 2,172 | | | $ | 3,131 | |
Vehicles | 1,481 | | | 1,770 | |
General equipment and furniture | 4,167 | | | 3,744 | |
Paving roads and parking lots | 1,140 | | | 1,065 | |
| | | |
Total Maintenance | $ | 8,960 | | | $ | 9,710 | |
Financing Activities
Our financing activities resulted in a net cash outflow of $27.7 million for the nine months ended September 30, 2022 compared to $58.3 million for the nine months ended September 30, 2021, a decrease of $30.6 million.
During the nine months ended September 30, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $13.3 million, offset by $36.7 million for the purchase of treasury stock and $5.1 million in dividends.
During the nine months ended September 30, 2021, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $39.0 million, offset by the following payments: i) $19.9 million for the call premium to redeem our 6.625% senior notes due 2026; ii) $61.7 million for the purchase of treasury stock; iii) $6.6 million for debt issuance and transactions costs related to our Senior Notes and Credit Facility; iv) $4.0 million for the conversions and maturity of our 2.75% convertible subordinated notes due 2021 (the “Convertible Notes”); and v) $5.4 million in dividends.
Share Repurchase
On February 23, 2022, our Board of Directors (the “Board”) authorized an increase in our share repurchase program to permit us to purchase up to an additional $75.0 million under our share repurchase program, in addition to amounts previously authorized and outstanding in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (“the Exchange Act”).
Share repurchase activity is as follows (dollar value in thousands):
| | | | | | | | | | | | | |
| Nine months ended September 30, | | |
| 2021 | | 2022 | | |
Number of Shares Repurchased(1) | 1,528,197 | | | 695,496 | | | |
Average Price Paid Per Share | $ | 42.89 | | | $ | 49.22 | | | |
Dollar Value of Shares Repurchased(1) | $ | 65,540 | | | $ | 34,234 | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | During the nine months ended September 30, 2021, 84,000 shares settled in October 2021, which had a cost of $3.8 million. |
Our shares are purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares. During the three months ended September 30, 2022, we did not repurchase any shares of our common stock pursuant to our share repurchase program. At September 30, 2022, our share repurchase program had $48.9 million authorized for additional repurchases.
Cash Dividends
Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):
| | | | | | | | | | | |
2022 | Per Share | | Dollar Value |
March 1st | $ | 0.1125 | | | $ | 1,725 | |
June 1st | $ | 0.1125 | | | $ | 1,730 | |
September 1st | $ | 0.1125 | | | $ | 1,653 | |
| | | |
2021 | Per Share | | Dollar Value |
March 1st | $ | 0.1000 | | | $ | 1,799 | |
June 1st | $ | 0.1000 | | | $ | 1,808 | |
September 1st | $ | 0.1000 | | | $ | 1,783 | |
| | | |
Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and acquisition debt at September 30, 2022 is as follows (in thousands):
| | | | | |
| September 30, 2022 |
Credit Facility | $ | 169,000 | |
Finance leases | 5,258 | |
Operating leases | 19,712 | |
Acquisition debt | 4,460 | |
Total | $ | 198,430 | |
Credit Facility
On May 27 2022, we entered into a second amendment and commitment increase (the “Credit Facility Amendment”) to the first amended and restated credit agreement dated May 13, 2021 (as amended, including the Credit Facility Amendment, the “Credit Facility”) with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Facility Amendment provided, among other things, for (i) an increase to the Revolving Credit Commitments (as defined in the Credit Facility) under the Credit Facility from $200.0 million to $250.0 million in the aggregate; (ii) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (iii) the establishment of the BSBY as a benchmark rate and the removal of LIBOR from the Credit Facility; (iv) an increase in the maximum Total Leverage Ratio (as defined in the Credit Facility) to 5.25 to 1.00; and (v) modifications to the restricted payments covenant to allow us to make additional stock repurchases, subject to the satisfaction of certain conditions therein. We incurred $0.3 million in transactions costs related to the Credit Facility Amendment, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.
At September 30, 2022, our Credit Facility was comprised of: (i) a $250.0 million revolving credit facility, including a $15.0 million million subfacility for letters of credit and a $10.0 million million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 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 allows for future increases in the facility size in the form of increased revolving commitments or new incremental term loans by an additional amount of up to $75.0 million in the aggregate.
The Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of the Company’s personal property assets and those of the Subsidiary Guarantors. In addition, the Credit Facility includes provisions which require the Company and the Subsidiary Guarantors, upon the occurrence of an event of default or in the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level under the Credit Facility, to grant additional liens on real property assets accounting for no less than 50% of the Company’s and the Subsidiary Guarantors’ funeral operations if requested by the administrative agent.
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 September 30, 2022, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 5.25 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 September 30, 2022.
At September 30, 2022, we had outstanding borrowings under the Credit Facility of $169.0 million. We also had one letter of credit for $2.3 million under the Credit Facility. The letter of credit will expire on November 25, 2022 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2022, we had $78.7 million of availability under the Credit Facility.
As of the effective date of the Credit Facility Amendment, outstanding borrowings under our Credit Facility bear interest at a prime rate or a BSBY rate, plus an applicable margin based on our leverage ratio. At September 30, 2022, the prime rate margin was equivalent to 1.125% and the BSBY rate margin was 2.125%. The weighted average interest rate on our Credit Facility was 2.0% and 4.3% for the three months ended September 30, 2021 and 2022, respectively, and 2.5% and 3.1% for the nine months ended September 30, 2021 and 2022, respectively.
The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Credit Facility interest expense | $ | 383 | | | $ | 1,971 | | | $ | 1,200 | | | $ | 4,132 | |
Credit Facility amortization of debt issuance costs | 80 | | | 109 | | | 297 | | | 293 | |
Lease Obligations
Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. At September 30, 2022, operating and finance lease obligations were $35.8 million, with $4.5 million payable within 12 months.
The lease cost related to our operating leases and short-term leases and depreciation expense and interest expense related to our finance leases are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Operating lease cost | $ | 947 | | | $ | 863 | | | $ | 2,871 | | | $ | 2,564 | |
Short-term lease cost | 39 | | | 82 | | | 145 | | | 260 | |
Variable lease cost | 43 | | | 37 | | | 100 | | | 60 | |
| | | | | | | |
Finance lease cost: | | | | | | | |
Depreciation of leased assets | $ | 111 | | | $ | 111 | | | $ | 328 | | | $ | 328 | |
Interest on lease liabilities | 117 | | | 110 | | | 356 | | | 335 | |
Total finance lease cost | 228 | | | 221 | | | 684 | | | 663 | |
Total lease cost | $ | 1,257 | | | $ | 1,203 | | | $ | 3,800 | | | $ | 3,547 | |
Acquisition Debt
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from nine to twenty years. At September 30, 2022, acquisition debt obligations were $6.3 million, with $0.8 million payable within 12 months.
The imputed interest expense related to our acquisition debt is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Acquisition debt imputed interest expense | $ | 90 | | | $ | 78 | | | $ | 280 | | | $ | 237 | |
| | | | | | | |
Senior Notes
At September 30, 2022, 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.
We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. In addition, before May 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Senior Notes outstanding using an amount of cash equal to the net proceeds of certain equity offerings, at a price of 104.25% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption; provided that (1) at least 50% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes) outstanding under the Indenture remain outstanding immediately after the occurrence of such redemption (unless all Senior Notes are redeemed concurrently), and (2) each such redemption must occur within 180 days of the date of the consummation of any such equity offering.
If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest.
The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default.
The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 80 months of the Senior Notes. For both the three and nine months ended September 30, 2021 and 2022, the effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes was 4.42% and 4.30%, respectively.
At September 30, 2022, the fair value of the Senior Notes, which are Level 2 measurements, was $317.2 million.
The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Senior Notes interest expense | $ | 4,250 | | | $ | 4,250 | | | $ | 17,517 | | | $ | 12,730 | |
Senior Notes amortization of debt discount | 118 | | | 125 | | | 384 | | | 368 | |
Senior Notes amortization of debt premium | — | | | — | | | 85 | | | — | |
Senior Notes amortization of debt issuance costs | 34 | | | 35 | | | 161 | | | 104 | |
At September 30, 2022, our future interest payments on our outstanding balance were $112.5 million, with $17.0 million payable within 12 months.
FINANCIAL HIGHLIGHTS
Below are our financial highlights (in thousands except for volumes and averages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Revenue | $ | 95,041 | | | $ | 87,497 | | | $ | 279,955 | | | $ | 276,258 | |
Funeral contracts | 12,566 | | | 11,109 | | | 36,704 | | | 35,630 | |
Average revenue per funeral contract | $ | 5,358 | | | $ | 5,516 | | | $ | 5,336 | | | $ | 5,463 | |
Preneed interment rights (property) sold | 2,841 | | | 2,455 | | | 8,775 | | | 8,344 | |
Average price per preneed interment right sold | $ | 4,763 | | | $ | 4,569 | | | $ | 4,635 | | | $ | 4,449 | |
Gross profit | $ | 33,164 | | | $ | 25,598 | | | $ | 97,152 | | | $ | 87,788 | |
Net income | $ | 13,046 | | | $ | 5,860 | | | $ | 19,812 | | | $ | 33,161 | |
Revenue for the three months ended September 30, 2022 decreased $7.5 million compared to the three months ended September 30, 2021, as we experienced an 11.6% decrease in funeral contract volume, which was slightly offset by a 2.9% increase in average revenue per funeral contract, as well as a 13.6% decrease in the number of preneed interment rights (property) sold and a 4.1% decrease in the average price per interment right sold. The decreases in funeral contract volume and the number of interment rights sold primarily correspond to the significant decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.
Gross profit for the three months ended September 30, 2022 decreased $7.6 million compared to the three months ended September 30, 2021, primarily due to the decrease in revenue.
Net income for the three months ended September 30, 2022 decreased $7.2 million compared to the three months ended September 30, 2021, primarily due to the $7.6 million decrease in gross profit, a $1.6 million increase in interest expense, a $1.3 million increase in general and administrative expense, offset by a $2.3 million decrease in income tax expense and a $0.9 million decrease in net gain on divestitures, disposals and impairments charges.
Revenue for the nine months ended September 30, 2022 decreased $3.7 million compared to the nine months ended September 30, 2021, as we experienced a 2.9% decrease in funeral contract volume, which was slightly offset by a 2.4% increase in average revenue per funeral contract, as well as a 4.9% decrease in the number of preneed interment rights (property) sold and a 4.0% decrease in the average price per interment right sold. The decreases in funeral contract volume and the number of interment rights sold primarily correspond to the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Gross profit for the nine months ended September 30, 2022 decreased $9.4 million compared to the nine months ended September 30, 2021, due to the decrease in revenue, as well as the increase in operating expenses in both our funeral and cemetery segments. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies, merchandise costs and insurance.
Net income for the nine months ended September 30, 2022 increased $13.3 million compared to the nine months ended September 30, 2021, due to a $23.8 million loss on extinguishment of debt in 2021, a $3.3 million gain on insurance reimbursements in 2022, a $1.9 million decrease in interest expense, and a $1.8 million decrease in net gain on divestitures, disposals and impairments charges, offset by a $9.4 million decrease in gross profit, a $5.5 million increase in income tax expense and a $2.8 million increase in general and administrative expense.
Further discussion of Revenue and the components of Gross profit for our funeral home and cemetery segments is presented herein 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 herein under “– Other Financial Statement Items.”
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the quarter endingthree months ended September 30, 2017 dated2022 issued on October 25, 201726, 2022 and discussed in the corresponding earnings conference call. ThisThe Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is acontains non-GAAP statementfinancial measures that alsowe believe provides insight into underlying trends in our business.
Historically, the dynamic nature
Below is a reconciliation of the evolutionary process of building our culture, especially since launching the Good To Great Journey in the beginning of 2012, has ledNet income, a GAAP financial measure, to Adjusted net income, a large number of charges such as severance and retirement, consulting and other activities, which are not core to our operations and as such, have been added back to GAAP earnings as “Special Items”. The Special Items are important to add back because of the transformational nature of major changes over the last several years within our Operations and Strategic Growth Leadership Team.
Accordingly, these non-GAAP Special Items will be comprised of only those charges materially outside the normal course of business. The number of these Special Items were minimal in 2016 and should continue to be minimal thereafter, which should result in major shrinkage of “the gap” between our GAAP and non-GAAP reported performance.
The non-GAAP financial measures in the Trend Report include such measures as “Special Items,” “Adjusted Net Income,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “Adjusted Consolidated EBITDA Margin,” “Adjusted Free Cash Flow,” “Funeral Field EBITDA,” “Cemetery Field EBITDA,” “Funeral Financial EBITDA,” “Cemetery Financial EBITDA,” “Total Field EBITDA,” “Total Field EBITDA Margin,” “Operating Profit,” “Operating Profit Margin,” “Adjusted Basic Earnings Per Share” and “Adjusted Diluted Earnings Per Share.” These financial measurements are defined as GAAP items adjusted for Special Items and are reconciled to GAAP in our earnings release and on the Trend Reports posted on our website (www.carriageservices.com). Our presentation of these measures may not be comparable to similarly titled measures in other companies’ reports.measure, (in thousands):
The non-GAAP definitions we use are as follows: | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Net income | $ | 13,046 | | | $ | 5,860 | | | $ | 19,812 | | | $ | 33,161 | |
Special items(1) | | | | | | | |
| | | | | | | |
Severance and separation costs(2) | — | | | 1,431 | | | 1,575 | | | 1,431 | |
Accretion of discount on Convertible Notes(1) | — | | | — | | | 20 | | | — | |
Loss on extinguishment of debt(3) | — | | | — | | | 23,807 | | | — | |
Net (gain) loss on divestitures | 282 | | | — | | | 179 | | | (575) | |
Net impact of impairment of goodwill and other | 500 | | | — | | | 500 | | | — | |
Litigation reserve(4) | — | | | — | | | — | | | 200 | |
Net gain on insurance reimbursements(5) | — | | | — | | | — | | | (3,275) | |
Disaster recovery and pandemic costs(6) | 1,002 | | | — | | | 2,041 | | | 168 | |
Change in uncertain tax reserves and other(1) | — | | | — | | | — | | | (533) | |
Other special items(7) | 1,020 | | | — | | | 2,354 | | | — | |
Sum of special items | $ | 2,804 | | | $ | 1,431 | | | $ | 30,476 | | | $ | (2,584) | |
Tax effect on special items(1) | 738 | | | 356 | | | 8,619 | | | (570) | |
Adjusted net income(8) | $ | 15,112 | | | $ | 6,935 | | | $ | 41,669 | | | $ | 31,147 | |
Special Items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special Items are taxed at the federal statutory rate of 35% for both the three and nine months ended September 30, 2016 and 2017, except for the accretion | | | | | | | | | | | | | | |
| | | | |
(1) | Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special items are taxed at the operating tax rate for the period except for the Accretion of the discount on the Convertible Notes, as this is a non-tax deductible item and the Change in uncertain tax reserves and other, as this item is a tax benefit. |
(2) | Costs related to the departure of certain key members of leadership in the first quarter of 2021 and in the third quarter of 2022. |
(3) | Loss on the redemption of our 6.625% senior notes due 2026 during the second quarter of 2021. |
(4) | Costs related to litigation matters. |
(5) | Net gain recognized on insurance reimbursements for property damage caused by Hurricane Ida that occurred during the third quarter of 2021. |
(6) | Relates to health and safety expenses, including personal protective equipment (“PPE”) due to COVID-19. We purchased more PPE during the three and nine months ended 2021 compared to the same periods in 2022. |
(7) | Relates to the write-off of certain fixed assets and interest paid on our 6.625% senior notes due 2026 for the two-week period during which our Senior Notes were issued prior to the redemption of our 6.625% senior notes due 2026. |
(8) | Adjusted net income is defined as Net income plus adjustments for Special items and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations. |
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Below is a non-tax deductible item.
Adjusted Net Income is defined as net income plus adjustments for Special Items.
Consolidated EBITDA is defined as net income before income taxes, interest expenses, non-cash stock compensation, depreciation and amortization, and interest income and other, net.
Adjusted Consolidated EBITDA is defined as Consolidated EBITDA plus adjustments for Special Items.
Adjusted Consolidated EBITDA Margin is defined as Adjusted Consolidated EBITDA as a percentage of revenue.
Adjusted Free Cash Flow is defined as net cash provided by operations, adjusted by Special Items as deemed necessary, less cash for maintenance capital expenditures.
Funeral Field EBITDA is defined as Funeral Gross Profit, which is funeral revenue minus funeral field costs and expenses, less depreciation and amortization, regional and unallocated funeral costs and Funeral Financial EBITDA.
Cemetery Field EBITDA is defined as Cemetery Gross Profit, which is cemetery revenue minus cemetery field costs and expenses, less depreciation and amortization, regional and unallocated cemetery costs and Cemetery Financial EBITDA.
Funeral Financial EBITDA is defined as Funeral Financial Revenue less Funeral Financial Expenses.
Cemetery Financial EBITDA is defined as Cemetery Financial Revenue less Cemetery Financial Expenses.
Total Field EBITDA is defined as Gross Profit less depreciation and amortization, regional and unallocated costs.
Total Field EBITDA Margin is defined as Total Field EBITDA as a percentage of revenue.
Operating Profit is defined as Gross Profit, which is funeral and cemetery revenue minus funeral and cemetery field costs and expenses, less field depreciation and amortization and regional and unallocated funeral and cemetery costs.
Operating Profit Margin is defined as Operating Profit as a percentage of revenue.
Adjusted Basic Earnings Per Share is defined as GAAP Basic Earnings Per Share, adjusted for Special Items.
Adjusted Diluted Earnings Per Share is defined as GAAP Diluted Earnings Per Share, adjusted for Special Items.
We are providing below a reconciliation of Gross profit (a GAAP financial measure) to Operating profit (a non-GAAP financial measure) (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Gross profit | $ | 33,164 | | | $ | 25,598 | | | $ | 97,152 | | | $ | 87,788 | |
| | | | | | | |
Cemetery property amortization | 1,521 | | | 1,278 | | | 5,213 | | | 4,314 | |
Field depreciation expense | 3,154 | | | 3,281 | | | 9,432 | | | 9,831 | |
Regional and unallocated funeral and cemetery costs | 6,812 | | | 5,096 | | | 18,655 | | | 17,409 | |
Operating profit(1) | $ | 44,651 | | | $ | 35,253 | | | $ | 130,452 | | | $ | 119,342 | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs. |
Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP financial measure) by Segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Funeral Home | $ | 31,355 | | | $ | 24,173 | | | $ | 88,445 | | | $ | 82,060 | |
Cemetery | 13,296 | | | 11,080 | | | 42,007 | | | 37,282 | |
Operating profit | $ | 44,651 | | | $ | 35,253 | | | $ | 130,452 | | | $ | 119,342 | |
| | | | | | | |
Operating profit margin(1) | 47.0% | | 40.3% | | 46.6% | | 43.2% |
| | | | | | | | | | | | | | |
| | | | |
(1) | Operating profit margin is defined as Operating profit as a percentage of Revenue. |
Further discussion of Operating profit for our funeral home and cemetery segments is presented herein under “– Results of Operations.”
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three and nine months ended September 30, 2022 and 2021.
The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2018 and owned and operated for the entirety of each period being presented, excluding certain funeral home and cemetery businesses that we intend to divest in the near future.
The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2017, excluding any funeral home and cemetery businesses that we intend to divest in the near future. This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance.
The term “divested” when discussed in the Funeral Home Segment, refers to two funeral homes we sold and one funeral home we merged with another business in an existing market in the first nine months of 2022 and three funeral homes we sold in the first nine months of 2021. The term “divested” when discussed in the Cemetery Segment, refers to one cemetery we sold during 2021.
“Planned divested” refers to the funeral home 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 from our funeral home operations (in thousands):
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 57,321 | | | $ | 51,258 | |
Acquired operating revenue | 7,651 | | | 7,813 | |
Divested/planned divested revenue | 564 | | | 186 | |
Ancillary revenue | 1,096 | | | 1,049 | |
Preneed funeral insurance commissions | 375 | | | 357 | |
Preneed funeral trust and insurance | 1,890 | | | 2,117 | |
Total | $ | 68,897 | | | $ | 62,780 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 25,644 | | | $ | 18,717 | |
Acquired operating profit | 3,371 | | | 3,036 | |
Divested/planned divested operating profit | 92 | | | 16 | |
Ancillary operating profit | 274 | | | 188 | |
Preneed funeral insurance commissions | 121 | | | 142 | |
Preneed funeral trust and insurance | 1,853 | | | 2,074 | |
Total | $ | 31,355 | | | $ | 24,173 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Contract volume | 10,889 | | | 9,499 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,264 | | | $ | 5,396 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 5,419 | | | $ | 5,594 | |
Burial rate | 34.1% | | 33.7% |
Cremation rate | 57.2% | | 58.2% |
| | | |
Acquired: | | | |
Contract volume | 1,555 | | | 1,570 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 4,920 | | | $ | 4,977 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 4,988 | | | $ | 5,066 | |
Burial rate | 35.9% | | 33.9% |
Cremation rate | 55.9% | | 58.2% |
Funeral home same store operating revenue decreased $6.1 million for the three months ended September 30, 2022 compared to the same period in 2021. The decrease in operating revenue is primarily due to a 12.8% decrease in same store contract volume, which was slightly offset by a 2.5% increase in the average revenue per contract excluding preneed interest. The same store contract volume decrease is primarily a result of the significant decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract in the third quarter of 2022 reflects a 1.4% increase in cremations with memorial services. This increase is primarily due to our continued focus to welcome and educate families on the many products and service options that are available with cremation.
Funeral home same store operating profit for the three months ended September 30, 2022 decreased $6.9 million when compared to the same period in 2021, primarily due to the decrease in operating revenue, with increased operating expenses as a percentage of revenue also contributing to the decline. The comparable operating profit margin decreased 820 basis points to 36.5%. Operating expenses as a percentage of operating revenue increased 8.2% with the largest increases in salaries and benefits expenses of 3.7%, facilities and grounds expenses of 0.8%, general and administrative expenses of 0.8%, general
liability insurance of 0.7% and transportation 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, funeral supplies and insurance.
Funeral home acquired operating revenue for the three months ended September 30, 2022 increased $0.2 million compared to the same period in 2021, due to the addition of two funeral home businesses added to our funeral home acquired portfolio during the third quarter of 2022, which contributed $0.4 million of operating revenue. Excluding these two businesses, acquired operating revenue decreased $0.2 million, due to a 6.0% decrease in acquired contract volume, offset by a 3.7% increase in average revenue per contract excluding preneed interest.
Funeral home acquired operating profit for the three months ended September 30, 2022 decreased $0.3 million when compared to the same period in 2021, primarily due to an increase in operating expenses as a percentage of revenue. The two funeral homes added to our acquired portfolio during the third quarter of 2022 contributed almost $0.2 million of operating profit. Excluding these two businesses, acquired operating profit decreased $0.5 million. The comparable operating profit margin decreased 520 basis points to 38.9%. Operating expenses as a percentage of operating revenue increased 5.2% with the largest increase in salaries and benefits expenses of 2.3%, facilities and grounds expenses of 0.7%, general liability insurance of 0.7%, other funeral costs of 0.6% and general and administrative expenses of 0.5%, offset by a decrease in promotional expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Ancillary revenue, recorded in Other 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 September 30, 2022 compared to the same period in 2021.
Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue), on a combined basis, increased $0.2 million for the three months ended September 30, 2022 compared to the same period in 2021. The increase is primarily due to a 14.3% increase in earnings on preneed contracts for the three months ended September 30, 2022 compared to the same period in 2021, as recognition is triggered at the time a preneed contract matures to atneed. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue.
The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 165,481 | | | $ | 163,776 | |
Acquired operating revenue | 22,575 | | | 24,064 | |
Divested/planned divested revenue | 2,120 | | | 907 | |
Ancillary revenue | 3,391 | | | 3,099 | |
Preneed funeral insurance commissions | 968 | | | 1,029 | |
Preneed funeral trust and insurance | 5,968 | | | 6,198 | |
Total | $ | 200,503 | | | $ | 199,073 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 71,520 | | | $ | 65,313 | |
Acquired operating profit | 9,784 | | | 9,845 | |
Divested/planned divested operating profit (loss) | 205 | | | (32) | |
Ancillary operating profit | 790 | | | 560 | |
Preneed funeral insurance commissions | 288 | | | 300 | |
Preneed funeral trust and insurance | 5,858 | | | 6,074 | |
Total | $ | 88,445 | | | $ | 82,060 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Contract volume | 31,503 | | | 30,686 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,253 | | | $ | 5,337 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 5,422 | | | $ | 5,516 | |
Burial rate | 35.6% | | 34.3% |
Cremation rate | 56.8% | | 57.5% |
| | | |
Acquired: | | | |
Contract volume | 4,749 | | | 4,765 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 4,754 | | | $ | 5,050 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 4,826 | | | $ | 5,140 | |
Burial rate | 37.6% | | 36.2% |
Cremation rate | 56.3% | | 57.6% |
Funeral home same store operating revenue decreased $1.7 million for the nine months ended September 30, 20162022 compared to the same period in 2021. The decrease in operating revenue is primarily due to a 2.6% decrease in same store contract volume, offset by a 1.6% increase in the average revenue per contract excluding preneed interest. The same store contract volume decrease is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract for the nine months ended September 30, 2022 reflects increases of 2.1% and 0.9% in cremations and burials with memorial services, respectively. These increases are primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.
Funeral home same store operating profit for the nine months ended September 30, 2022 decreased $6.2 million when compared to the same period in 2021, due to the decrease in operating revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 330 basis points to 39.9%. Operating expenses as a percentage of revenue increased 3.3% with the largest increase in salaries and benefits expenses of 1.0%, general and administrative expenses of 0.6%, transportation expenses of 0.3%, general liability insurance of 0.3% and facilities and grounds expenses of 0.3%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Funeral home acquired operating revenue for the nine months ended September 30, 2022 increased $1.5 million compared to the same period in 2021. The increase was due, in part, to the addition of two funeral home businesses added to our funeral home acquired portfolio during the third quarter of 2022, which contributed $0.4 million of operating revenue. Excluding these two businesses, acquired operating revenue increased $1.1 million due to a 7.1% increase in the average revenue per contract excluding preneed interest, slightly offset by a 2.0% decrease in acquired contract volume. The acquired contract volume decrease is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract for the nine months ended September 30, 2022 reflects increases of 2.4% and 0.7% in cremations and burials with memorial services, respectively. These increases are primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.
Funeral home acquired operating profit for the nine months ended September 30, 2022 increased $0.1 million when compared to the same period in 2021, primarily due to the two funeral homes added to our acquired portfolio during the third quarter of 2022, which contributed almost $0.2 million of operating profit. Excluding these two businesses, acquired operating profit decreased $0.1 million. The comparable operating profit margin decreased 240 basis points to 40.9%. Operating expenses as a percentage of operating revenue increased 2.4% with the largest increases in general and administrative expenses of 0.8%, salaries and benefits expenses of 0.6%, other funeral expenses of 0.6% and facilities and grounds expenses of 0.4%, offset by a decrease in promotional expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Ancillary revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses, decreased $0.3 million and Ancillary operating profit decreased $0.2 million for the nine months ended September 30, 2022 compared to the same period in 2021.
Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue), on a combined basis, increased $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase is due to an increase in the number of preneed contracts that matured to atneed, as well as an increase in the earnings on these preneed contracts, as recognition is triggered at the time a preneed contract matures to atneed. The number of contracts increased 2.2% and the average earnings per preneed contract increased 1.9% for the nine months ended September 30, 2022 compared to the same period in 2021. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue.
Cemetery Segment
The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 16,342 | | | $ | 15,396 | |
Acquired operating revenue | 6,362 | | | 5,947 | |
Divested revenue | 52 | | | — | |
Preneed cemetery trust revenue | 3,136 | | | 3,065 | |
Preneed cemetery finance charges | 252 | | | 309 | |
Total | $ | 26,144 | | | $ | 24,717 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 6,465 | | | $ | 5,020 | |
Acquired operating profit | 3,547 | | | 2,827 | |
Divested operating profit | 19 | | | — | |
Preneed cemetery trust operating profit | 3,013 | | | 2,924 | |
Preneed cemetery finance charges | 252 | | | 309 | |
Total | $ | 13,296 | | | $ | 11,080 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Preneed revenue as a percentage of operating revenue | 61% | | 60% |
Preneed revenue (in thousands) | $ | 9,909 | | | $ | 9,309 | |
Atneed revenue (in thousands) | $ | 6,433 | | | $ | 6,087 | |
Number of preneed interment rights sold | 2,223 | | | 1,917 | |
Average price per interment right sold | $ | 4,130 | | | $ | 4,181 | |
| | | |
| | | |
Acquired: | | | |
Preneed revenue as a percentage of operating revenue | 66% | | 61% |
Preneed revenue (in thousands) | $ | 4,194 | | | $ | 3,610 | |
Atneed revenue (in thousands) | $ | 2,168 | | | $ | 2,337 | |
Number of preneed interment rights sold | 606 | | | 538 | |
Average price per interment right sold | $ | 7,159 | | | $ | 5,951 | |
Cemetery same store preneed revenue decreased $0.6 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 13.8% decrease in the number of interment rights sold, slightly offset by a 1.2% increase in the average price per interment right sold. Cemetery same store atneed revenue, which represents 40% of our same store operating revenue decreased $0.3 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 13.2% decrease in the number of interment rights sold, which was offset by a 9.0% increase in the
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Gross profit | $ | 18,228 |
| | $ | 15,480 |
| | $ | 58,338 |
| | $ | 57,239 |
|
| | | | | | | |
Field depreciation and amortization | 3,452 |
| | 3,601 |
| | 10,359 |
| | 10,719 |
|
Regional and unallocated funeral and cemetery costs | 2,783 |
| | 3,937 |
| | 8,547 |
| | 9,845 |
|
Operating profit | $ | 24,463 |
| | $ | 23,018 |
| | $ | 77,244 |
| | $ | 77,803 |
|
average price per interment right sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.We are providing belowCemetery same store operating profit for the three months ended September 30, 2022 decreased $1.4 million from the same period in 2021, due to the decrease in operating revenue and an increase in operating expenses as a breakdownpercentage of revenue. The comparable operating profit margin decreased 700 basis points to 32.6%. Operating expenses as a percentage of operating revenue increased 7.0% with the largest increases in facilities and grounds expenses of 3.2%, salaries and benefits expenses of 1.1%, merchandise costs of 1.0%, general liability insurance of 0.7% and general and administrative expenses of 0.8%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Cemetery acquired preneed revenue decreased $0.6 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 16.9% decrease in the average price per interment right sold, as well as an 11.2% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 39% of our acquired operating revenue, increased $0.2 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 12.9% increase in the average price per interment right sold, offset by a 4.5% decrease in the number of interment rights sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery acquired operating profit decreased $0.7 million for the three months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 830 basis points to 47.5%. Operating expenses as a percentage of operating revenue increased 8.2% with the largest increases in salaries and benefits expenses of 2.1%, general liability insurance of 1.1%, facilities and grounds expenses of 0.9%, general and administrative expenses of 0.6%, merchandise costs of 0.6% and atneed commissions expense of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue), as well as their respective operating profit remained flat for the three months ended September 30, 2022 compared to the same period in 2021.
The following table sets forth certain information regarding our Revenue and Operating profit (a non-GAAP measure)from our cemetery operations (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 47,883 | | | $ | 46,616 | |
Acquired operating revenue | 21,517 | | | 20,437 | |
Divested revenue | 202 | | | — | |
Preneed cemetery trust revenue | 9,079 | | | 9,262 | |
Preneed cemetery finance charges | 771 | | | 870 | |
Total | $ | 79,452 | | | $ | 77,185 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 20,076 | | | $ | 16,799 | |
Acquired operating profit | 12,386 | | | 10,766 | |
Divested operating profit | 66 | | | — | |
Preneed cemetery trust operating profit | 8,708 | | | 8,847 | |
Preneed cemetery finance charges | 771 | | | 870 | |
Total | $ | 42,007 | | | $ | 37,282 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Preneed revenue as a percentage of operating revenue | 61% | | 61% |
Preneed revenue (in thousands) | $ | 29,044 | | $ | 28,509 |
Atneed revenue (in thousands) | $ | 18,839 | | $ | 18,107 |
Number of preneed interment rights sold | 6,375 | | 6,088 |
Average price per interment right sold | $ | 4,106 | | $ | 4,095 |
| | | |
| | | |
Acquired: | | | |
Preneed revenue as a percentage of operating revenue | 68% | | 64% |
Preneed revenue (in thousands) | $ | 14,692 | | $ | 12,996 |
Atneed revenue (in thousands) | $ | 6,825 | | $ | 7,441 |
Number of preneed interment rights sold | 2,369 | | 2,256 |
Average price per interment right sold | $ | 6,107 | | $ | 5,403 |
Cemetery same store preneed revenue decreased $0.5 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 4.5% decrease in the number of interment rights sold, while the average price per interment right sold remained flat. Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, decreased $0.7 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 6.9% decrease in the number of interment rights sold, offset by Segmenta 3.1% increase in the average price per interment right sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery same store operating profit decreased $3.3 million for the nine months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 590 basis points to 36.0%. Operating expenses as a percentage of operating revenue increased 5.9% with the largest increases in facilities and grounds expenses of 1.4%, promotional expenses of 1.0%, allowance for credit losses of 0.9%, due to a change in estimate in the second quarter of the prior year, which resulted in lower credit loss expense in the prior period, general liability insurance of 0.6% and general and administrative expenses of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Cemetery acquired preneed revenue decreased $1.7 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced an 11.5% decrease in the average price per interment right sold, as well as a 4.8% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 36% of our acquired operating revenue, increased $0.6 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 14.5% increase in the average price per interment right sold, while the number of interment rights sold decreased 4.8%. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery acquired operating profit decreased $1.6 million for the nine months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 490 basis points to 52.7%. Operating expenses as a percentage of operating revenue increased 4.9% with the largest increases in facilities and grounds expenses of 0.9%, salaries and benefits expenses increased 0.9%, general liability insurance of 0.8% and merchandise costs of 0.7%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase in trust revenue is primarily due to an increase in realized gains on delivered merchandise and services contracts. Operating profit for the two categories of Other Revenue, on a combined basis, increased $0.2 million for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to the increase in revenue.
Cemetery property amortization. Cemetery property amortization totaled $1.3 million and $4.3 million for the three and nine months ended September 30, 20172022, respectively, a decrease of $0.2 million and $0.9 million, respectively, compared to the same periods in 2021, primarily due to the decrease in property sold across our cemetery portfolio.
Field depreciation. Depreciation expense for our field businesses totaled $3.3 million and $9.8 million for the three and nine months ended September 30, 2016 (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Funeral Home Segment | $ | 18,201 |
| | $ | 18,062 |
| | $ | 58,406 |
| | $ | 61,161 |
|
Cemetery Segment | 6,262 |
| | 4,956 |
| | 18,838 |
| | 16,642 |
|
Operating profit | $ | 24,463 |
| | $ | 23,018 |
| | $ | 77,244 |
| | $ | 77,803 |
|
Further discussion of Operating profit for our Funeral Home and Cemetery Segments is presented herein under “Results of Operations.”
Financial Highlights
Three months ended September 30, 2017 compared to three months ended September 30, 2016
Total revenue for the three months ended September 30, 2017 and 2016 was $61.1 million and $60.1 million,2022, respectively, which represents an increase of approximately $0.9$0.1 million or 1.5%. Funeral revenue increased $2.1and $0.4 million, to $47.3 million, while cemetery revenue decreased $1.2 million to $13.7 million in the three months ended September 30, 2017respectively, compared to the same periodperiods in 2016. For the quarter comparatives, we experienced a 3.3% increase in total funeral contracts2021, primarily due to depreciation from computer and an increasehardware equipment added in the average revenue perlast twelve months, as well as from assets added as a result of our acquisition during the third quarter of 2022.
Regional and unallocated funeral contract of 1.8%. In addition, while we experienced a decrease of 6.3% in the number of preneed interment rights (property) sold, the average price per interment right sold increased 1.2%. Further discussion of revenue for our funeral home and cemetery segments on a same storecosts. Regional and acquired basis is presented herein under “Resultsunallocated funeral and cemetery costs consist of Operations.”
Gross profitsalaries and benefits for the three months ended September 30, 2017 decreased $2.7 million, or 15.1%, to $15.5 million, from $18.2regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled $5.1 million for the three months ended September 30, 20162022, a decrease of $1.7 million compared to the same period in 2021, primarily due to the following: (1) a decline$1.1 million decrease in preneed cemetery revenuecash incentives and higher costs asequity compensation; (2) a percentage of revenue$0.5 million decrease in health and safety expenses related to COVID-19; (3) a $0.2 million decrease in salary and benefits expenses; (4) a $0.1 million decrease in other general administrative costs; offset by (5) a $0.2 million increase in incentive award trips and annual managing partner meetings, which were postponed in the six businesses we acquired in 2016. As these acquired businesses transition into our Standards Operating Model, we expectprior year due to see their gross profit margins rise towards those on a same store basis.COVID-19.
Further discussion of the components of Gross profit, excluding field depreciation and amortization and regionalRegional and unallocated funeral and cemetery costs is presented herein under “Results of Operations” within our funeral home and cemetery segments. Further discussion of field depreciation and amortization and regional and unallocated funeral and cemetery costs are presented herein under “Other Financial Statement Items.”
Net income for the three months ended September 30, 2017 decreased $2.6 million to $3.0 million, equal to $0.17 per diluted share, compared to net income of $5.7 million, equal to $0.33 per diluted share, for the three months ended September 30, 2016. Further discussion of general, administrative and other expenses, home office depreciation and amortization expense, interest expense, income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”
Nine months ended September 30, 2017 compared to Nine months ended September 30, 2016
Total revenue for the nine months ended September 30, 2017 and 2016 was $193.1 million and $185.3 million, respectively, which represents an increase of approximately $7.7 million, or 4.2%. Funeral revenue increased $9.3 million to $150.3 million, while cemetery revenue decreased $1.6 million to $42.8 million in the nine months ended September 30, 2017 compared to the same period in 2016. For the period comparatives, we experienced a 5.2% increase in total funeral contracts and an increase in the average revenue per funeral contract of 1.7%. In addition, while we experienced a decrease of 10.4% in the number of preneed interment rights (property) sold, the average price per interment right sold increased 4.6%. Further discussion of revenue for our funeral home and cemetery segments on a same store and acquired basis is presented herein under “Results of Operations.”
Gross profit for the nine months ended September 30, 2017 decreased $1.1 million, or 1.9%, to $57.2 million, from $58.3totaled $17.4 million for the nine months ended September 30, 20162022, a decrease of $1.2 million compared to the same period in 2021, primarily due to the following: (1) a decline$1.7 million decrease in preneed cemetery revenuecash incentives and higher costsequity compensation; (2) a $1.3 million decrease in health and safety expenses related to COVID-19; (3) a $0.3 million decrease in salary and benefits expenses; offset by (4) a $1.3 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19; and (5) a $0.2 million increase in other general administrative costs.
Other Financial Statement Items
General, administrative and other. General, administrative and other expenses totaled $10.4 million for the three months ended September 30, 2022, an increase of $1.3 million compared to the same period in 2021, primarily due to the following: (1) a $1.4 million increase in separation expenses related to the departure of a key member of leadership; (2) a $0.8 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a percentage of revenueChief Information Officer; (3) a $0.5 million increase in the six businesses we acquiredother general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; offset by (4) a $1.0 million decrease in 2016. As these acquired businesses transition into our Standards Operating Model, we expect to see their gross profit margins rise towards those oninsurance claims expense, which included a same store basis.one-time $1.0 million payment for residual insurance claims in 2021; and (3) a $0.3 million decrease in cash incentives and equity compensation.
Further discussion of the components of Gross profit, excluding field depreciationGeneral, administrative and amortization and regional and unallocated funeral and cemetery costs is presented herein under “Results of Operations” within our funeral home and cemetery segments. Further discussion of field depreciation and amortization and regional and unallocated funeral and cemetery costs are presented herein under “Other Financial Statement Items.”
Net incomeother expenses totaled $28.1 million for the nine months ended September 30, 2017 decreased2022, an increase of $2.8 million compared to the same period in 2021, primarily due to the following: (1) a $2.4 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a Chief Information Officer; (2) a $1.8 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; (3) a $0.1 million increase in cash incentives and equity compensation; offset by (4) a $1.3 million decrease in insurance claims expense, which included a one-time $1.0 million payment for residual insurance claims in 2021; (5) a $0.1 million decrease in separation expense related to the departure of certain key members of leadership, and (6) a $0.1 million decrease in divestiture expenses.
Net (gain) loss on divestitures, disposals and impairments charges. The components of Net (gain) loss on divestitures, disposals and impairment charges are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| | | | | | | |
| | | | | | | |
Assets held for sale impairment | $ | 500 | | | $ | — | | | $ | 500 | | | $ | — | |
Net (gain) loss on divestitures and real property | 282 | | | — | | | 179 | | | (575) | |
Net (gain) loss on disposals of fixed assets | 76 | | | (7) | | | 698 | | | 142 | |
Total | $ | 858 | | | $ | (7) | | | $ | 1,377 | | | $ | (433) | |
During the nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million for a net gain of $0.7 million, of which $0.1 million is recorded in Other, net related to $14.5the sale of assets not used in operating activities. During the nine months ended September 30, 2021, we sold three funeral homes and real property for $4.2 million equalfor a net loss of $0.2 million and disposed of fixed assets for a net loss of $0.7 million. In addition, we recognized an impairment loss of $0.5 million for property, plant and equipment assets held for sale at September 30, 2021.
Interest expense. Interest expense related to $0.81 per diluted share, compared to netour various debt arrangement is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | | | 2021 | | 2022 | | 2021 | | 2022 |
Senior Notes | | | | | $ | 4,403 | | | $ | 4,410 | | | $ | 17,977 | | | $ | 13,203 | |
Credit Facility | | | | | 464 | | | 2,081 | | | 1,497 | | | 4,425 | |
Finance leases | | | | | 117 | | | 110 | | | 356 | | | 335 | |
Acquisition debt | | | | | 90 | | | 78 | | | 280 | | | 237 | |
Convertible Notes | | | | | — | | | — | | | 20 | | | — | |
Other | | | | | 2 | | | (1) | | | 7 | | | 8 | |
Total | | | | | $ | 5,076 | | | $ | 6,678 | | | $ | 20,137 | | | $ | 18,208 | |
Gain on insurance reimbursements. During the nine months ended September 30, 2022, we recorded a gain on the reimbursements received from insurance for property damaged by Hurricane Ida that occurred during the third quarter of 2021.
Income taxes. We had an income tax expense of $15.4$2.8 million equal to $0.91 per diluted share,and $5.1 million for the three months ended September 30, 2022 and 2021, respectively, and income tax expense of $12.1 million and $6.6 million for the nine months ended September 30, 2016. Further discussion2022 and 2021, respectively. Our operating tax rate before discrete items was 30.6% and 28.2% for the three months ended September 30, 2022 and 2021, respectively, and 27.8% and 28.3% for the nine months ended September 30, 2022 and 2021, respectively.
On June 30, 2020, we filed carryback refund claims for the 2018 and 2019 tax years. The majority of general, administrativethe net operating losses generated in 2018 are the result of filing non-automatic accounting method changes relating to the recognition of revenue from our cemetery property and other expenses, home office depreciationmerchandise and amortization expense,services sales.
On October 11, 2021, we received an adverse ruling from the IRS related to our accounting method change for cemetery property revenue recognition filed in 2018 and subsequently filed an automatic accounting method change to adopt the IRS’s preferred method of revenue recognition for cemetery property effective for the year ending December 31, 2021.
On March 2, 2022, we received approval from the IRS regarding our method change filed related to the revenue recognition of cemetery merchandise and services sales. As a result, we recorded a $0.5 million reduction to the reserve for uncertain tax positions, including interest, expense, income taxesduring the nine months ended September 30, 2022.
At December 31, 2021 and other components of incomeSeptember 30, 2022, the reserve for uncertain tax positions was $3.8 million and expenses are presented herein$3.3 million, respectively, related to carrying back the net operating losses generated in the tax year ended December 31, 2018 filed under “Other Financial Statement Items.”the CARES Act on June 30, 2020.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATESOther Financial Statement Items
The preparation of the Consolidated Financial Statements requires us to make estimatesGeneral, administrative and judgments that affect the amounts reported in the unaudited consolidated financial statementsother. General, administrative and accompanying notes. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues andother expenses the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there
can be no assurance the margins, operating income and net earnings, as a percentage of revenues, will be consistent from year to year.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with GAAP. Our critical accounting policies are discussed in MD&A in our Annual Report on Form 10-K for the year ended December 31, 2016.
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three and nine months ended September 30, 2017 compared to the same periods of 2016. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2013 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2012 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. Depreciation and amortization, within our field costs and expenses 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 tables set forth certain information regarding the revenues and operating profit from our funeral home operationstotaled $10.4 million for the three months ended September 30, 20172022, an increase of $1.3 million compared to threethe same period in 2021, primarily due to the following: (1) a $1.4 million increase in separation expenses related to the departure of a key member of leadership; (2) a $0.8 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a Chief Information Officer; (3) a $0.5 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; offset by (4) a $1.0 million decrease in insurance claims expense, which included a one-time $1.0 million payment for residual insurance claims in 2021; and (3) a $0.3 million decrease in cash incentives and equity compensation.
General, administrative and other expenses totaled $28.1 million for the nine months ended September 30, 2016 (dollars2022, an increase of $2.8 million compared to the same period in 2021, primarily due to the following: (1) a $2.4 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a Chief Information Officer; (2) a $1.8 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; (3) a $0.1 million increase in cash incentives and equity compensation; offset by (4) a $1.3 million decrease in insurance claims expense, which included a one-time $1.0 million payment for residual insurance claims in 2021; (5) a $0.1 million decrease in separation expense related to the departure of certain key members of leadership, and (6) a $0.1 million decrease in divestiture expenses.
Net (gain) loss on divestitures, disposals and impairments charges. The components of Net (gain) loss on divestitures, disposals and impairment charges are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| | | | | | | |
| | | | | | | |
Assets held for sale impairment | $ | 500 | | | $ | — | | | $ | 500 | | | $ | — | |
Net (gain) loss on divestitures and real property | 282 | | | — | | | 179 | | | (575) | |
Net (gain) loss on disposals of fixed assets | 76 | | | (7) | | | 698 | | | 142 | |
Total | $ | 858 | | | $ | (7) | | | $ | 1,377 | | | $ | (433) | |
During the nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million for a net gain of $0.7 million, of which $0.1 million is recorded in Other, net related to the sale of assets not used in operating activities. During the nine months ended September 30, 2021, we sold three funeral homes and real property for $4.2 million for a net loss of $0.2 million and disposed of fixed assets for a net loss of $0.7 million. In addition, we recognized an impairment loss of $0.5 million for property, plant and equipment assets held for sale at September 30, 2021.
|
| | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 37,094 |
| | $ | 38,032 |
| | $ | 938 |
| | 2.5 | % |
Acquired operating revenue | 5,996 |
| | 7,363 |
| | 1,367 |
| | 22.8 | % |
Preneed funeral insurance commissions | 361 |
| | 315 |
| | (46 | ) | | (12.7 | )% |
Preneed funeral trust earnings | 1,732 |
| | 1,618 |
| | (114 | ) | | (6.6 | )% |
Total | $ | 45,183 |
| | $ | 47,328 |
| | $ | 2,145 |
| | 4.7 | % |
| | | | | | | |
Operating profit: |
| |
| | | | |
Same store operating profit | $ | 13,894 |
| | $ | 13,938 |
| | $ | 44 |
| | 0.3 | % |
Acquired operating profit | 2,431 |
| | 2,419 |
| | (12 | ) | | (0.5 | )% |
Preneed funeral insurance commissions | 166 |
| | 120 |
| | (46 | ) | | (27.7 | )% |
Preneed funeral trust earnings | 1,710 |
| | 1,585 |
| | (125 | ) | | (7.3 | )% |
Total | $ | 18,201 |
| | $ | 18,062 |
| | $ | (139 | ) | | (0.8 | )% |
Interest expense. Interest expense related to our various debt arrangement is as follows (in thousands):Funeral home same store operating revenues | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | | | 2021 | | 2022 | | 2021 | | 2022 |
Senior Notes | | | | | $ | 4,403 | | | $ | 4,410 | | | $ | 17,977 | | | $ | 13,203 | |
Credit Facility | | | | | 464 | | | 2,081 | | | 1,497 | | | 4,425 | |
Finance leases | | | | | 117 | | | 110 | | | 356 | | | 335 | |
Acquisition debt | | | | | 90 | | | 78 | | | 280 | | | 237 | |
Convertible Notes | | | | | — | | | — | | | 20 | | | — | |
Other | | | | | 2 | | | (1) | | | 7 | | | 8 | |
Total | | | | | $ | 5,076 | | | $ | 6,678 | | | $ | 20,137 | | | $ | 18,208 | |
Gain on insurance reimbursements. During the nine months ended September 30, 2022, we recorded a gain on the reimbursements received from insurance for property damaged by Hurricane Ida that occurred during the third quarter of 2021.
Income taxes. We had an income tax expense of $2.8 million and $5.1 million for the three months ended September 30, 2017 increased $0.92022 and 2021, respectively, and income tax expense of $12.1 million or 2.5%, when compared toand $6.6 million for the threenine months ended September 30, 2016. This2022 and 2021, respectively. Our operating tax rate before discrete items was due primarily to a 0.7% increase in same store contract volumes to 7,09330.6% and a 1.8% increase in the average revenue per contract to $5,362. The average revenue per contract excludes the impact of the preneed funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 1.6% to $5,543 in the three months ended September 30, 2017. The average revenue per burial contract increased 0.2% to $8,832 and the number of burial contracts increased 1.9% to 2,898. The average revenue per cremation contract increased 1.1% to $3,352 and the number of cremation contracts increased 1.7% to 3,702.
The burial rate for our same store businesses increased 50 basis points to 40.9% and the cremation rate also increased 50 basis points to 52.2%28.2% for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service2022 and which made up approximately 6.9% of the total number of contracts in the three months ended September 30, 2017, increased 16.6% to $2,669.
Same store operating profit for the three months ended September 30, 2017 remained flat, when compared to the three months ended September 30, 2016. Although revenue increased, operating profit margin decreased by 90 basis points to 36.6% for the three months ended September 30, 2017 compared to the same period in 2016. The decline in operating profit margin largely relates to significant increases in certain expenses including $0.4 million of general liability2021, respectively, and other insurance related expenses, $0.2 million of salaries27.8% and benefits and $0.1 million of bad debt expense.
Funeral home acquired operating revenues for the three months ended September 30, 2017 increased $1.4 million, or 22.8%, when compared to the three months ended September 30, 2016. The funeral home acquired portfolio for the three months ended September 30, 2017 includes four businesses acquired in the latter half of 2016, not fully present in the three months ended September 30, 2016 results. We experienced a slight increase in the average revenue per contract of 0.2% to $6,370 and a 22.6% increase in the total number of contracts to 1,156. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract slightly decreased 0.4% to $6,538 in the three months ended September 30, 2017. The average revenue per burial contract decreased 1.7% to $9,458, while the number of burial contracts increased 22.4% to 525. The average revenue per cremation contract increased 6.1% to $4,421 and the number of cremation contracts increased 18.3% to 531.
The burial rate for our acquired businesses slightly decreased 10 basis points to 45.4% and the cremation rate also decreased 170 basis points to 45.9% for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 8.7% of the total number of contracts in the three months ended September 30, 2017, decreased 17.6% to $2,446.
Acquired operating profit for the three months ended September 30, 2017 remained flat when compared to the three months ended September 30, 2016. Although revenue increased, operating profit margin decreased 760 basis points to 32.9% for the three months ended September 30, 2017 compared to the same period in 2016. The decrease is primarily due to the businesses we acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased by 12.7% for the three months ended September 30, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the three months ended September 30, 2017 is from the preneed funeral insurance contracts sold in the three months ended September 30, 2016. The number of preneed insurance contracts sold in the three months ended September 30, 2016 decreased 4.9% and the face value of the insurance products that earned commissions decreased 2.3% compared to the contracts sold during the same period of the prior year. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and earnings from the maturity of preneed funeral contracts. Trust earnings decreased $0.1 million or 6.6% for the three months ended September 30, 2017, which is comprised of a 7.8% decrease in earnings from the maturity of preneed contracts, offset by an 8.9% increase in earnings from trust management fees.
Operating profit for our two categories of financial revenue, on a combined basis, decreased 9.1% in the three months ended September 30, 2017 due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.
The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations28.3% for the nine months ended September 30, 2017 compared2022 and 2021, respectively.
On June 30, 2020, we filed carryback refund claims for the 2018 and 2019 tax years. The majority of the net operating losses generated in 2018 are the result of filing non-automatic accounting method changes relating to the recognition of revenue from our cemetery property and merchandise and services sales.
On October 11, 2021, we received an adverse ruling from the IRS related to our accounting method change for cemetery property revenue recognition filed in 2018 and subsequently filed an automatic accounting method change to adopt the IRS’s preferred method of revenue recognition for cemetery property effective for the year ending December 31, 2021.
On March 2, 2022, we received approval from the IRS regarding our method change filed related to the revenue recognition of cemetery merchandise and services sales. As a result, we recorded a $0.5 million reduction to the reserve for uncertain tax positions, including interest, during the nine months ended September 30, 2016 (dollars in thousands):2022.
|
| | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 117,029 |
| | $ | 119,310 |
| | $ | 2,281 |
| | 1.9 | % |
Acquired operating revenue | 17,303 |
| | 24,727 |
| | 7,424 |
| | 42.9 | % |
Preneed funeral insurance commissions | 1,138 |
| | 951 |
| | (187 | ) | | (16.4 | )% |
Preneed funeral trust earnings | 5,482 |
| | 5,290 |
| | (192 | ) | | (3.5 | )% |
Total | $ | 140,952 |
| | $ | 150,278 |
| | $ | 9,326 |
| | 6.6 | % |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 45,119 |
| | $ | 46,111 |
| | $ | 992 |
| | 2.2 | % |
Acquired operating profit | 7,293 |
| | 9,515 |
| | 2,222 |
| | 30.5 | % |
Preneed funeral insurance commissions | 577 |
| | 329 |
| | (248 | ) | | (43.0 | )% |
Preneed funeral trust earnings | 5,417 |
| | 5,206 |
| | (211 | ) | | (3.9 | )% |
Total | $ | 58,406 |
| | $ | 61,161 |
| | $ | 2,755 |
| | 4.7 | % |
Funeral home same store operating revenues for the nine months endedAt December 31, 2021 and September 30, 2017 increased $2.32022, the reserve for uncertain tax positions was $3.8 million or 1.9%, when comparedand $3.3 million, respectively, related to carrying back the nine months ended September 30, 2016. The increase was due primarily to a 0.9% increase in same store contract volumes to 22,296 and a 1.0% increasenet operating losses generated in the average revenue per contract to $5,351. The average revenue per contract excludestax year ended December 31, 2018 filed under the impact of the preneed funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 0.9% to $5,540 in the nine months ended SeptemberCARES Act on June 30, 2017. The average revenue per burial contract increased 1.1% to $8,877, while the number of burial contracts decreased 0.6% to 9,037. The average revenue per cremation contract increased 1.3% to $3,363 and the number of cremation contracts increased 3.0% to 11,664.2020.
The burial rate for our same store businesses decreased 70 basis points to 40.5%, while the cremation rate increased 100 basis points to 52.3% for the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 7.2% of the total number of contracts in the nine months ended September 30, 2017, increased 10.8% to $2,561.
Same store operating profit for the nine months ended September 30, 2017 increased $1.0 million, or 2.2%, when compared to the nine months ended September 30, 2016. This increase is a result of increased revenue and better management of expenses as operating profit margin remained stable at 38.6% for the nine months ended September 30, 2017 compared to the same period in 2016.
Funeral home acquired operating revenues for the nine months ended September 30, 2017 increased $7.4 million, or 42.9%, when compared to the nine months ended September 30, 2016. The funeral home acquired portfolio for the nine months ended September 30, 2017 includes six businesses acquired during 2016, not fully present in the nine months ended September 30, 2016 results. We experienced an increase in the average revenue per contract of 1.7% to $6,524 and a 40.5% increase in the total number of contracts to 3,790. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract increased 1.2% to $6,699 in the nine months ended September 30, 2017. The average revenue per burial contract decreased 1.3% to $9,505, while the number of burial contracts increased 43.4% to 1,817. The average revenue per cremation contract increased 5.9% to $4,396 and the number of cremation contracts increased 35.8% to 1,661.
The burial rate for our acquired businesses increased 90 basis points to 47.9%, while the cremation rate decreased 150 basis points to 43.8%. This is the result of an increase in the number of burial versus cremation contract sales at the businesses that were acquired the latter half of 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 8.3% of the total number of contracts in the nine months ended September 30, 2017, decreased 5.1% to $2,625.
Acquired operating profit for the nine months ended September 30, 2017 increased $2.2 million, or 30.5%, from the nine months ended September 30, 2016, primarily due to the six businesses acquired during 2016 and not fully present in the nine months ended September 30, 2016 results. Although revenues increased, operating profit margin decreased 360 basis points to 38.5% for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease is primarily due to the
businesses we acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased $0.2 million or 16.4% for the nine months ended September 30, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the nine months ended September 30, 2017 is from the preneed funeral insurance contracts sold in the nine months ended September 30, 2016. The number of preneed insurance contracts sold in the nine months ended September 30, 2016 decreased 1.1% and the face value of the insurance products that earned commissions decreased 7.1% over the same period of the prior year. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and earnings from the maturity of preneed funeral contracts. Trust earnings decreased $0.2 million or 3.5% for the nine months ended September 30, 2017, which is comprised of a 4.6% decrease in earnings from the maturity of preneed contracts, offset by a 12.3% increase in earnings from trust management fees.
Operating profit for our two categories of financial revenue, on a combined basis, decreased 7.7% in the nine months ended September 30, 2017 due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.
Cemetery Segment. The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the three months ended September 30, 2017 compared to three months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 11,467 |
| | $ | 10,748 |
| | $ | (719 | ) | | (6.3 | )% |
Acquired operating revenue | 978 |
| | 761 |
| | (217 | ) | | (22.2 | )% |
Cemetery trust earnings | 2,025 |
| | 1,768 |
| | (257 | ) | | (12.7 | )% |
Preneed cemetery finance charges | 487 |
| | 449 |
| | (38 | ) | | (7.8 | )% |
Total | $ | 14,957 |
| | $ | 13,726 |
| | $ | (1,231 | ) | | (8.2 | )% |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 3,342 |
| | $ | 2,649 |
| | $ | (693 | ) | | (20.7 | )% |
Acquired operating profit | 479 |
| | 200 |
| | (279 | ) | | (58.2 | )% |
Cemetery trust earnings | 1,954 |
| | 1,658 |
| | (296 | ) | | (15.1 | )% |
Preneed cemetery finance charges | 487 |
| | 449 |
| | (38 | ) | | (7.8 | )% |
Total | $ | 6,262 |
| | $ | 4,956 |
| | $ | (1,306 | ) | | (20.9 | )% |
Cemetery same store operating revenues for the three months ended September 30, 2017 decreased $0.7 million, or 6.3%, when compared to the three months ended September 30, 2016. Approximately 55.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the three months ended September 30, 2017. Preneed revenue decreased $0.9 million, or 13.6%, as we experienced a 5.7% decrease in the number of preneed interment rights sold to 1,542 and a 5.9% decrease in average price per interment to $3,278 for the three months ended September 30, 2017 compared to the same period in 2016. The decrease in preneed revenue was due to the attrition of key sales personnel at certain businesses, the absence of approximately $0.4 million of large private estate sales we had in the third quarter of last year, as well as the impact of the Texas and Florida hurricanes which caused business closures and displaced workers in these States during the period. Same store at-need revenue, which represents approximately 45.0% of our same store operating revenues, increased $0.2 million, or 4.4%, due primarily to a 7.9% increase in the average sale per contract to $1,562.
Cemetery same store operating profit for the three months ended September 30, 2017 decreased $0.7 million, or 20.7% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 24.6% in the three months ended September 30, 2017 compared to 29.1% in the same period in 2016. The decline in operating profit margin largely relates to significant increases in certain expenses including $0.2 million of general liability and other insurance related expenses, $0.1 million of salaries and benefits and $0.1 million of facilities and grounds expenses, offset by a $0.4 million decrease in promotional expenses.
Cemetery acquired operating revenue and acquired operating profit decreased for the three months ended September 30, 2017 primarily due to a $0.2 million decrease in preneed revenue. The decrease in preneed revenue was primarily due to the absence of approximately $0.2 million of large private estate sales we had in the third quarter of last year. In addition, we experienced a 14% decrease in the number of preneed interment rights sold compared with the same period in 2016 and increases in facilities and grounds expenses and bad debt expense for the three months ended September 30, 2017 compared to the same period in 2016.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Total trust earnings decreased $0.3 million or 12.7%, primarily due to a $0.3 million decrease in capital gains from our perpetual care trust in the three months ended September 30, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts remained flat in the three months ended September 30, 2017 compared to the same period in 2016.
Cemetery Segment. The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the nine months ended September 30, 2017 compared to nine months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 35,093 |
| | $ | 33,522 |
| | $ | (1,571 | ) | | (4.5 | )% |
Acquired operating revenue | 2,312 |
| | 2,370 |
| | 58 |
| | 2.5 | % |
Cemetery trust earnings | 5,622 |
| | 5,512 |
| | (110 | ) | | (2.0 | )% |
Preneed cemetery finance charges | 1,357 |
| | 1,381 |
| | 24 |
| | 1.8 | % |
Total | $ | 44,384 |
| | $ | 42,785 |
| | $ | (1,599 | ) | | (3.6 | )% |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 11,283 |
| | $ | 9,287 |
| | $ | (1,996 | ) | | (17.7 | )% |
Acquired operating profit | 791 |
| | 743 |
| | (48 | ) | | (6.1 | )% |
Cemetery trust earnings | 5,407 |
| | 5,231 |
| | (176 | ) | | (3.3 | )% |
Preneed cemetery finance charges | 1,357 |
| | 1,381 |
| | 24 |
| | 1.8 | % |
Total | $ | 18,838 |
| | $ | 16,642 |
| | $ | (2,196 | ) | | (11.7 | )% |
Cemetery same store operating revenues for the nine months ended September 30, 2017 decreased $1.6 million, or 4.5%, when compared to the nine months ended September 30, 2016. Approximately 56.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the nine months ended September 30, 2017. Preneed revenue decreased $2.4 million, or 11.2%, as we experienced a 11.4% decrease in the number of preneed interment rights sold to 4,942 in the nine months ended September 30, 2017 compared to the same period in 2016. The decrease was primarily a result of attrition of key sales personnel at certain businesses during the period. In addition, preneed sales were negatively impacted in our Texas and Florida businesses due to the hurricanes affecting those areas in the third quarter of 2017, as well as the absence of approximately $0.4 million of large private estate sales we had in the third quarter of last year. The decrease was slightly offset by a 4.0% increase in the average price per interment to $3,256. Same store at-need revenue, which represents approximately 44.0% of our same store operating revenues, increased $0.8 million, or 5.7%, due primarily to a 9.0% increase in the average sale per contract to $1,459.
Cemetery same store operating profit for the nine months ended September 30, 2017 decreased $2.0 million, or 17.7% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 27.7% in the nine months ended September 30, 2017 compared to 32.2% in the same period in 2016. The decrease in operating profit was primarily a result of the decrease in revenue, combined with a $0.4 million, or 1.8%, increase in operating costs for the nine months ended September 30, 2017 compared with the same period in 2016. Those expenses with significant increases include $0.2 million of salaries and benefits and $0.2 million of facilities and grounds expenses.
Cemetery acquired operating revenue and acquired operating profit remained flat for the nine months ended September 30, 2017. Cemetery acquired operating profit margin decreased from 34.2% to 31.4% for the nine months ended September 30, 2017 compared to the same period in 2016 as we experienced increases in salaries and benefits and bad debt expense.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of
the trust assets. Total trust earnings decreased $0.1 million or 2.0%, primarily due to decreased capital gains from our perpetual care trust in the nine months ended September 30, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts remained flat at $1.4 million in the nine months ended September 30, 2017 compared to the same period in 2016.
Investing Activities
Our investing activities resulted in a net cash outflow of $22.7 million for the nine months ended September 30, 2022 compared to $11.2 million for the nine months ended September 30, 2021, a decrease of $11.5 million.
Acquisition and Divestiture Activity
During the nine months ended September 30, 2022, we acquired a business consisting of two funeral homes for $6.3 million in cash and we purchased real property for $2.6 million.
During the nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million.
During the nine months ended September 30, 2021, we sold three funeral homes for $3.5 million, sold real property for $0.7 million and purchased real property for $3.3 million. We also received proceeds of $2.8 million from our property insurance policy for the reimbursement of renovation costs for our funeral and cemetery businesses that were damaged by Hurricane Ida.
Capital Expenditures
For the nine months ended September 30, 2022, capital expenditures (comprised of growth and maintenance spend) totaled $20.3 million compared to $15.3 million for the nine months ended September 30, 2021, an increase of $5.0 million.
The following tables present our growth and maintenance capital expenditures (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Growth | | | |
Cemetery development | $ | 4,120 | | | $ | 5,215 | |
| | | |
Renovations at certain businesses(1) | 2,030 | | | 4,974 | |
| | | |
Other | 142 | | | 447 | |
Total Growth | $ | 6,292 | | | $ | 10,636 | |
| | | | | | | | | | | | | | |
| | | | |
(1) | During the nine months ended September 30, 2022, we spent $2.4 million for renovations on two businesses that were affected by Hurricane Ida, all of which was reimbursed by our property insurance. |
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Maintenance | | | |
Facility repairs and improvements | $ | 2,172 | | | $ | 3,131 | |
Vehicles | 1,481 | | | 1,770 | |
General equipment and furniture | 4,167 | | | 3,744 | |
Paving roads and parking lots | 1,140 | | | 1,065 | |
| | | |
Total Maintenance | $ | 8,960 | | | $ | 9,710 | |
Financing Activities
Our financing activities resulted in a net cash outflow of $27.7 million for the nine months ended September 30, 2022 compared to $58.3 million for the nine months ended September 30, 2021, a decrease of $30.6 million.
During the nine months ended September 30, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $13.3 million, offset by $36.7 million for the purchase of treasury stock and $5.1 million in dividends.
During the nine months ended September 30, 2021, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $39.0 million, offset by the following payments: i) $19.9 million for the call premium to redeem our 6.625% senior notes due 2026; ii) $61.7 million for the purchase of treasury stock; iii) $6.6 million for debt issuance and transactions costs related to our Senior Notes and Credit Facility; iv) $4.0 million for the conversions and maturity of our 2.75% convertible subordinated notes due 2021 (the “Convertible Notes”); and v) $5.4 million in dividends.
Share Repurchase
On February 23, 2022, our Board of Directors (the “Board”) authorized an increase in our share repurchase program to permit us to purchase up to an additional $75.0 million under our share repurchase program, in addition to amounts previously authorized and outstanding in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (“the Exchange Act”).
Share repurchase activity is as follows (dollar value in thousands):
| | | | | | | | | | | | | |
| Nine months ended September 30, | | |
| 2021 | | 2022 | | |
Number of Shares Repurchased(1) | 1,528,197 | | | 695,496 | | | |
Average Price Paid Per Share | $ | 42.89 | | | $ | 49.22 | | | |
Dollar Value of Shares Repurchased(1) | $ | 65,540 | | | $ | 34,234 | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | During the nine months ended September 30, 2021, 84,000 shares settled in October 2021, which had a cost of $3.8 million. |
Our shares are purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares. During the three months ended September 30, 2022, we did not repurchase any shares of our common stock pursuant to our share repurchase program. At September 30, 2022, our share repurchase program had $48.9 million authorized for additional repurchases.
Cash Dividends
Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):
| | | | | | | | | | | |
2022 | Per Share | | Dollar Value |
March 1st | $ | 0.1125 | | | $ | 1,725 | |
June 1st | $ | 0.1125 | | | $ | 1,730 | |
September 1st | $ | 0.1125 | | | $ | 1,653 | |
| | | |
2021 | Per Share | | Dollar Value |
March 1st | $ | 0.1000 | | | $ | 1,799 | |
June 1st | $ | 0.1000 | | | $ | 1,808 | |
September 1st | $ | 0.1000 | | | $ | 1,783 | |
| | | |
Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and acquisition debt at September 30, 2022 is as follows (in thousands):
| | | | | |
| September 30, 2022 |
Credit Facility | $ | 169,000 | |
Finance leases | 5,258 | |
Operating leases | 19,712 | |
Acquisition debt | 4,460 | |
Total | $ | 198,430 | |
Credit Facility
On May 27 2022, we entered into a second amendment and commitment increase (the “Credit Facility Amendment”) to the first amended and restated credit agreement dated May 13, 2021 (as amended, including the Credit Facility Amendment, the “Credit Facility”) with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Facility Amendment provided, among other things, for (i) an increase to the Revolving Credit Commitments (as defined in the Credit Facility) under the Credit Facility from $200.0 million to $250.0 million in the aggregate; (ii) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (iii) the establishment of the BSBY as a benchmark rate and the removal of LIBOR from the Credit Facility; (iv) an increase in the maximum Total Leverage Ratio (as defined in the Credit Facility) to 5.25 to 1.00; and (v) modifications to the restricted payments covenant to allow us to make additional stock repurchases, subject to the satisfaction of certain conditions therein. We incurred $0.3 million in transactions costs related to the Credit Facility Amendment, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.
At September 30, 2022, our Credit Facility was comprised of: (i) a $250.0 million revolving credit facility, including a $15.0 million million subfacility for letters of credit and a $10.0 million million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 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 allows for future increases in the facility size in the form of increased revolving commitments or new incremental term loans by an additional amount of up to $75.0 million in the aggregate.
The Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of the Company’s personal property assets and those of the Subsidiary Guarantors. In addition, the Credit Facility includes provisions which require the Company and the Subsidiary Guarantors, upon the occurrence of an event of default or in the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level under the Credit Facility, to grant additional liens on real property assets accounting for no less than 50% of the Company’s and the Subsidiary Guarantors’ funeral operations if requested by the administrative agent.
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 September 30, 2022, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 5.25 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 September 30, 2022.
At September 30, 2022, we had outstanding borrowings under the Credit Facility of $169.0 million. We also had one letter of credit for $2.3 million under the Credit Facility. The letter of credit will expire on November 25, 2022 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2022, we had $78.7 million of availability under the Credit Facility.
As of the effective date of the Credit Facility Amendment, outstanding borrowings under our Credit Facility bear interest at a prime rate or a BSBY rate, plus an applicable margin based on our leverage ratio. At September 30, 2022, the prime rate margin was equivalent to 1.125% and the BSBY rate margin was 2.125%. The weighted average interest rate on our Credit Facility was 2.0% and 4.3% for the three months ended September 30, 2021 and 2022, respectively, and 2.5% and 3.1% for the nine months ended September 30, 2021 and 2022, respectively.
The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Credit Facility interest expense | $ | 383 | | | $ | 1,971 | | | $ | 1,200 | | | $ | 4,132 | |
Credit Facility amortization of debt issuance costs | 80 | | | 109 | | | 297 | | | 293 | |
Lease Obligations
Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. At September 30, 2022, operating and finance lease obligations were $35.8 million, with $4.5 million payable within 12 months.
The lease cost related to our operating leases and short-term leases and depreciation expense and interest expense related to our finance leases are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Operating lease cost | $ | 947 | | | $ | 863 | | | $ | 2,871 | | | $ | 2,564 | |
Short-term lease cost | 39 | | | 82 | | | 145 | | | 260 | |
Variable lease cost | 43 | | | 37 | | | 100 | | | 60 | |
| | | | | | | |
Finance lease cost: | | | | | | | |
Depreciation of leased assets | $ | 111 | | | $ | 111 | | | $ | 328 | | | $ | 328 | |
Interest on lease liabilities | 117 | | | 110 | | | 356 | | | 335 | |
Total finance lease cost | 228 | | | 221 | | | 684 | | | 663 | |
Total lease cost | $ | 1,257 | | | $ | 1,203 | | | $ | 3,800 | | | $ | 3,547 | |
Acquisition Debt
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from nine to twenty years. At September 30, 2022, acquisition debt obligations were $6.3 million, with $0.8 million payable within 12 months.
The imputed interest expense related to our acquisition debt is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Acquisition debt imputed interest expense | $ | 90 | | | $ | 78 | | | $ | 280 | | | $ | 237 | |
| | | | | | | |
Senior Notes
At September 30, 2022, 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.
We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. In addition, before May 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Senior Notes outstanding using an amount of cash equal to the net proceeds of certain equity offerings, at a price of 104.25% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption; provided that (1) at least 50% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes) outstanding under the Indenture remain outstanding immediately after the occurrence of such redemption (unless all Senior Notes are redeemed concurrently), and (2) each such redemption must occur within 180 days of the date of the consummation of any such equity offering.
If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest.
The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default.
The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 80 months of the Senior Notes. For both the three and nine months ended September 30, 2021 and 2022, the effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes was 4.42% and 4.30%, respectively.
At September 30, 2022, the fair value of the Senior Notes, which are Level 2 measurements, was $317.2 million.
The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Senior Notes interest expense | $ | 4,250 | | | $ | 4,250 | | | $ | 17,517 | | | $ | 12,730 | |
Senior Notes amortization of debt discount | 118 | | | 125 | | | 384 | | | 368 | |
Senior Notes amortization of debt premium | — | | | — | | | 85 | | | — | |
Senior Notes amortization of debt issuance costs | 34 | | | 35 | | | 161 | | | 104 | |
At September 30, 2022, our future interest payments on our outstanding balance were $112.5 million, with $17.0 million payable within 12 months.
FINANCIAL HIGHLIGHTS
Below are our financial highlights (in thousands except for volumes and averages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Revenue | $ | 95,041 | | | $ | 87,497 | | | $ | 279,955 | | | $ | 276,258 | |
Funeral contracts | 12,566 | | | 11,109 | | | 36,704 | | | 35,630 | |
Average revenue per funeral contract | $ | 5,358 | | | $ | 5,516 | | | $ | 5,336 | | | $ | 5,463 | |
Preneed interment rights (property) sold | 2,841 | | | 2,455 | | | 8,775 | | | 8,344 | |
Average price per preneed interment right sold | $ | 4,763 | | | $ | 4,569 | | | $ | 4,635 | | | $ | 4,449 | |
Gross profit | $ | 33,164 | | | $ | 25,598 | | | $ | 97,152 | | | $ | 87,788 | |
Net income | $ | 13,046 | | | $ | 5,860 | | | $ | 19,812 | | | $ | 33,161 | |
Revenue for the three months ended September 30, 2022 decreased $7.5 million compared to the three months ended September 30, 2021, as we experienced an 11.6% decrease in funeral contract volume, which was slightly offset by a 2.9% increase in average revenue per funeral contract, as well as a 13.6% decrease in the number of preneed interment rights (property) sold and a 4.1% decrease in the average price per interment right sold. The decreases in funeral contract volume and the number of interment rights sold primarily correspond to the significant decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.
Gross profit for the three months ended September 30, 2022 decreased $7.6 million compared to the three months ended September 30, 2021, primarily due to the decrease in revenue.
Net income for the three months ended September 30, 2022 decreased $7.2 million compared to the three months ended September 30, 2021, primarily due to the $7.6 million decrease in gross profit, a $1.6 million increase in interest expense, a $1.3 million increase in general and administrative expense, offset by a $2.3 million decrease in income tax expense and a $0.9 million decrease in net gain on divestitures, disposals and impairments charges.
Revenue for the nine months ended September 30, 2022 decreased $3.7 million compared to the nine months ended September 30, 2021, as we experienced a 2.9% decrease in funeral contract volume, which was slightly offset by a 2.4% increase in average revenue per funeral contract, as well as a 4.9% decrease in the number of preneed interment rights (property) sold and a 4.0% decrease in the average price per interment right sold. The decreases in funeral contract volume and the number of interment rights sold primarily correspond to the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Gross profit for the nine months ended September 30, 2022 decreased $9.4 million compared to the nine months ended September 30, 2021, due to the decrease in revenue, as well as the increase in operating expenses in both our funeral and cemetery segments. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies, merchandise costs and insurance.
Net income for the nine months ended September 30, 2022 increased $13.3 million compared to the nine months ended September 30, 2021, due to a $23.8 million loss on extinguishment of debt in 2021, a $3.3 million gain on insurance reimbursements in 2022, a $1.9 million decrease in interest expense, and a $1.8 million decrease in net gain on divestitures, disposals and impairments charges, offset by a $9.4 million decrease in gross profit, a $5.5 million increase in income tax expense and a $2.8 million increase in general and administrative expense.
Further discussion of Revenue and the components of Gross profit for our funeral home and cemetery segments is presented herein 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 herein under “– Other Financial Statement ItemsItems.”
Depreciation
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Operating and Amortization. Depreciation and amortization costsFinancial Trend Report” (“Trend Report”) as reported in our earnings release for the fieldthree months ended September 30, 2022 issued on October 26, 2022 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 contains non-GAAP financial measures that we believe provides insight into underlying trends in our business.
Below is a reconciliation of Net income, a GAAP financial measure, to Adjusted net income, a non-GAAP financial measure, (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Net income | $ | 13,046 | | | $ | 5,860 | | | $ | 19,812 | | | $ | 33,161 | |
Special items(1) | | | | | | | |
| | | | | | | |
Severance and separation costs(2) | — | | | 1,431 | | | 1,575 | | | 1,431 | |
Accretion of discount on Convertible Notes(1) | — | | | — | | | 20 | | | — | |
Loss on extinguishment of debt(3) | — | | | — | | | 23,807 | | | — | |
Net (gain) loss on divestitures | 282 | | | — | | | 179 | | | (575) | |
Net impact of impairment of goodwill and other | 500 | | | — | | | 500 | | | — | |
Litigation reserve(4) | — | | | — | | | — | | | 200 | |
Net gain on insurance reimbursements(5) | — | | | — | | | — | | | (3,275) | |
Disaster recovery and pandemic costs(6) | 1,002 | | | — | | | 2,041 | | | 168 | |
Change in uncertain tax reserves and other(1) | — | | | — | | | — | | | (533) | |
Other special items(7) | 1,020 | | | — | | | 2,354 | | | — | |
Sum of special items | $ | 2,804 | | | $ | 1,431 | | | $ | 30,476 | | | $ | (2,584) | |
Tax effect on special items(1) | 738 | | | 356 | | | 8,619 | | | (570) | |
Adjusted net income(8) | $ | 15,112 | | | $ | 6,935 | | | $ | 41,669 | | | $ | 31,147 | |
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(1) | Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special items are taxed at the operating tax rate for the period except for the Accretion of the discount on Convertible Notes, as this is a non-tax deductible item and the Change in uncertain tax reserves and other, as this item is a tax benefit. |
(2) | Costs related to the departure of certain key members of leadership in the first quarter of 2021 and in the third quarter of 2022. |
(3) | Loss on the redemption of our 6.625% senior notes due 2026 during the second quarter of 2021. |
(4) | Costs related to litigation matters. |
(5) | Net gain recognized on insurance reimbursements for property damage caused by Hurricane Ida that occurred during the third quarter of 2021. |
(6) | Relates to health and safety expenses, including personal protective equipment (“PPE”) due to COVID-19. We purchased more PPE during the three and nine months ended 2021 compared to the same periods in 2022. |
(7) | Relates to the write-off of certain fixed assets and interest paid on our 6.625% senior notes due 2026 for the two-week period during which our Senior Notes were issued prior to the redemption of our 6.625% senior notes due 2026. |
(8) | Adjusted net income is defined as Net income plus adjustments for Special items and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations. |
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Below is a reconciliation of Gross profit (a GAAP financial measure) to Operating profit (a non-GAAP financial measure) (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Gross profit | $ | 33,164 | | | $ | 25,598 | | | $ | 97,152 | | | $ | 87,788 | |
| | | | | | | |
Cemetery property amortization | 1,521 | | | 1,278 | | | 5,213 | | | 4,314 | |
Field depreciation expense | 3,154 | | | 3,281 | | | 9,432 | | | 9,831 | |
Regional and unallocated funeral and cemetery costs | 6,812 | | | 5,096 | | | 18,655 | | | 17,409 | |
Operating profit(1) | $ | 44,651 | | | $ | 35,253 | | | $ | 130,452 | | | $ | 119,342 | |
| | | | | | | | | | | | | | |
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(1) | Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs. |
Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP financial measure) by Segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Funeral Home | $ | 31,355 | | | $ | 24,173 | | | $ | 88,445 | | | $ | 82,060 | |
Cemetery | 13,296 | | | 11,080 | | | 42,007 | | | 37,282 | |
Operating profit | $ | 44,651 | | | $ | 35,253 | | | $ | 130,452 | | | $ | 119,342 | |
| | | | | | | |
Operating profit margin(1) | 47.0% | | 40.3% | | 46.6% | | 43.2% |
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(1) | Operating profit margin is defined as Operating profit as a percentage of Revenue. |
Further discussion of Operating profit for our funeral home office totaled $4.0and cemetery segments is presented herein under “– Results of Operations.”
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three and nine months ended September 30, 2022 and 2021.
The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2018 and owned and operated for the entirety of each period being presented, excluding certain funeral home and cemetery businesses that we intend to divest in the near future.
The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2017, excluding any funeral home and cemetery businesses that we intend to divest in the near future. This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance.
The term “divested” when discussed in the Funeral Home Segment, refers to two funeral homes we sold and one funeral home we merged with another business in an existing market in the first nine months of 2022 and three funeral homes we sold in the first nine months of 2021. The term “divested” when discussed in the Cemetery Segment, refers to one cemetery we sold during 2021.
“Planned divested” refers to the funeral home 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 from our funeral home operations (in thousands):
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 57,321 | | | $ | 51,258 | |
Acquired operating revenue | 7,651 | | | 7,813 | |
Divested/planned divested revenue | 564 | | | 186 | |
Ancillary revenue | 1,096 | | | 1,049 | |
Preneed funeral insurance commissions | 375 | | | 357 | |
Preneed funeral trust and insurance | 1,890 | | | 2,117 | |
Total | $ | 68,897 | | | $ | 62,780 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 25,644 | | | $ | 18,717 | |
Acquired operating profit | 3,371 | | | 3,036 | |
Divested/planned divested operating profit | 92 | | | 16 | |
Ancillary operating profit | 274 | | | 188 | |
Preneed funeral insurance commissions | 121 | | | 142 | |
Preneed funeral trust and insurance | 1,853 | | | 2,074 | |
Total | $ | 31,355 | | | $ | 24,173 | |
The following measures reflect the significant metrics over this comparative period:
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| Three months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Contract volume | 10,889 | | | 9,499 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,264 | | | $ | 5,396 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 5,419 | | | $ | 5,594 | |
Burial rate | 34.1% | | 33.7% |
Cremation rate | 57.2% | | 58.2% |
| | | |
Acquired: | | | |
Contract volume | 1,555 | | | 1,570 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 4,920 | | | $ | 4,977 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 4,988 | | | $ | 5,066 | |
Burial rate | 35.9% | | 33.9% |
Cremation rate | 55.9% | | 58.2% |
Funeral home same store operating revenue decreased $6.1 million for the three months ended September 30, 2017, an2022 compared to the same period in 2021. The decrease in operating revenue is primarily due to a 12.8% decrease in same store contract volume, which was slightly offset by a 2.5% increase in the average revenue per contract excluding preneed interest. The same store contract volume decrease is primarily a result of $0.2 million, or 5.1%, fromthe significant decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract in the third quarter of 2022 reflects a 1.4% increase in cremations with memorial services. This increase is primarily due to our continued focus to welcome and educate families on the many products and service options that are available with cremation.
Funeral home same store operating profit for the three months ended September 30, 20162022 decreased $6.9 million when compared to the same period in 2021, primarily due to the decrease in operating revenue, with increased operating expenses as a percentage of revenue also contributing to the decline. The comparable operating profit margin decreased 820 basis points to 36.5%. Operating expenses as a percentage of operating revenue increased 8.2% with the largest increases in salaries and $11.9benefits expenses of 3.7%, facilities and grounds expenses of 0.8%, general and administrative expenses of 0.8%, general
liability insurance of 0.7% and transportation 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, funeral supplies and insurance.
Funeral home acquired operating revenue for the three months ended September 30, 2022 increased $0.2 million compared to the same period in 2021, due to the addition of two funeral home businesses added to our funeral home acquired portfolio during the third quarter of 2022, which contributed $0.4 million of operating revenue. Excluding these two businesses, acquired operating revenue decreased $0.2 million, due to a 6.0% decrease in acquired contract volume, offset by a 3.7% increase in average revenue per contract excluding preneed interest.
Funeral home acquired operating profit for the three months ended September 30, 2022 decreased $0.3 million when compared to the same period in 2021, primarily due to an increase in operating expenses as a percentage of revenue. The two funeral homes added to our acquired portfolio during the third quarter of 2022 contributed almost $0.2 million of operating profit. Excluding these two businesses, acquired operating profit decreased $0.5 million. The comparable operating profit margin decreased 520 basis points to 38.9%. Operating expenses as a percentage of operating revenue increased 5.2% with the largest increase in salaries and benefits expenses of 2.3%, facilities and grounds expenses of 0.7%, general liability insurance of 0.7%, other funeral costs of 0.6% and general and administrative expenses of 0.5%, offset by a decrease in promotional expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Ancillary revenue, recorded in Other 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 September 30, 2022 compared to the same period in 2021.
Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue), on a combined basis, increased $0.2 million for the three months ended September 30, 2022 compared to the same period in 2021. The increase is primarily due to a 14.3% increase in earnings on preneed contracts for the three months ended September 30, 2022 compared to the same period in 2021, as recognition is triggered at the time a preneed contract matures to atneed. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue.
The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 165,481 | | | $ | 163,776 | |
Acquired operating revenue | 22,575 | | | 24,064 | |
Divested/planned divested revenue | 2,120 | | | 907 | |
Ancillary revenue | 3,391 | | | 3,099 | |
Preneed funeral insurance commissions | 968 | | | 1,029 | |
Preneed funeral trust and insurance | 5,968 | | | 6,198 | |
Total | $ | 200,503 | | | $ | 199,073 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 71,520 | | | $ | 65,313 | |
Acquired operating profit | 9,784 | | | 9,845 | |
Divested/planned divested operating profit (loss) | 205 | | | (32) | |
Ancillary operating profit | 790 | | | 560 | |
Preneed funeral insurance commissions | 288 | | | 300 | |
Preneed funeral trust and insurance | 5,858 | | | 6,074 | |
Total | $ | 88,445 | | | $ | 82,060 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Contract volume | 31,503 | | | 30,686 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,253 | | | $ | 5,337 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 5,422 | | | $ | 5,516 | |
Burial rate | 35.6% | | 34.3% |
Cremation rate | 56.8% | | 57.5% |
| | | |
Acquired: | | | |
Contract volume | 4,749 | | | 4,765 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 4,754 | | | $ | 5,050 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 4,826 | | | $ | 5,140 | |
Burial rate | 37.6% | | 36.2% |
Cremation rate | 56.3% | | 57.6% |
Funeral home same store operating revenue decreased $1.7 million for the nine months ended September 30, 2017, an2022 compared to the same period in 2021. The decrease in operating revenue is primarily due to a 2.6% decrease in same store contract volume, offset by a 1.6% increase in the average revenue per contract excluding preneed interest. The same store contract volume decrease is primarily a result of $0.4 million or 3.3%, fromthe decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract for the nine months ended September 30, 2016.2022 reflects increases of 2.1% and 0.9% in cremations and burials with memorial services, respectively. These increases wereare primarily attributabledue to additionala 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 same store operating profit for the nine months ended September 30, 2022 decreased $6.2 million when compared to the same period in 2021, due to the decrease in operating revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 330 basis points to 39.9%. Operating expenses as a percentage of revenue increased 3.3% with the largest increase in salaries and benefits expenses of 1.0%, general and administrative expenses of 0.6%, transportation expenses of 0.3%, general liability insurance of 0.3% and facilities and grounds expenses of 0.3%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Funeral home acquired operating revenue for the nine months ended September 30, 2022 increased $1.5 million compared to the same period in 2021. The increase was due, in part, to the addition of two funeral home businesses added to our funeral home acquired portfolio during the third quarter of 2022, which contributed $0.4 million of operating revenue. Excluding these two businesses, acquired operating revenue increased $1.1 million due to a 7.1% increase in the average revenue per contract excluding preneed interest, slightly offset by a 2.0% decrease in acquired contract volume. The acquired contract volume decrease is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract for the nine months ended September 30, 2022 reflects increases of 2.4% and 0.7% in cremations and burials with memorial services, respectively. These increases are primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.
Funeral home acquired operating profit for the nine months ended September 30, 2022 increased $0.1 million when compared to the same period in 2021, primarily due to the two funeral homes added to our acquired portfolio during the third quarter of 2022, which contributed almost $0.2 million of operating profit. Excluding these two businesses, acquired operating profit decreased $0.1 million. The comparable operating profit margin decreased 240 basis points to 40.9%. Operating expenses as a percentage of operating revenue increased 2.4% with the largest increases in general and administrative expenses of 0.8%, salaries and benefits expenses of 0.6%, other funeral expenses of 0.6% and facilities and grounds expenses of 0.4%, offset by a decrease in promotional expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Ancillary revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses, decreased $0.3 million and Ancillary operating profit decreased $0.2 million for the nine months ended September 30, 2022 compared to the same period in 2021.
Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue), on a combined basis, increased $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase is due to an increase in the number of preneed contracts that matured to atneed, as well as an increase in the earnings on these preneed contracts, as recognition is triggered at the time a preneed contract matures to atneed. The number of contracts increased 2.2% and the average earnings per preneed contract increased 1.9% for the nine months ended September 30, 2022 compared to the same period in 2021. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue.
Cemetery Segment
The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 16,342 | | | $ | 15,396 | |
Acquired operating revenue | 6,362 | | | 5,947 | |
Divested revenue | 52 | | | — | |
Preneed cemetery trust revenue | 3,136 | | | 3,065 | |
Preneed cemetery finance charges | 252 | | | 309 | |
Total | $ | 26,144 | | | $ | 24,717 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 6,465 | | | $ | 5,020 | |
Acquired operating profit | 3,547 | | | 2,827 | |
Divested operating profit | 19 | | | — | |
Preneed cemetery trust operating profit | 3,013 | | | 2,924 | |
Preneed cemetery finance charges | 252 | | | 309 | |
Total | $ | 13,296 | | | $ | 11,080 | |
The following measures reflect the significant metrics over this comparative period:
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| Three months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Preneed revenue as a percentage of operating revenue | 61% | | 60% |
Preneed revenue (in thousands) | $ | 9,909 | | | $ | 9,309 | |
Atneed revenue (in thousands) | $ | 6,433 | | | $ | 6,087 | |
Number of preneed interment rights sold | 2,223 | | | 1,917 | |
Average price per interment right sold | $ | 4,130 | | | $ | 4,181 | |
| | | |
| | | |
Acquired: | | | |
Preneed revenue as a percentage of operating revenue | 66% | | 61% |
Preneed revenue (in thousands) | $ | 4,194 | | | $ | 3,610 | |
Atneed revenue (in thousands) | $ | 2,168 | | | $ | 2,337 | |
Number of preneed interment rights sold | 606 | | | 538 | |
Average price per interment right sold | $ | 7,159 | | | $ | 5,951 | |
Cemetery same store preneed revenue decreased $0.6 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 13.8% decrease in the number of interment rights sold, slightly offset by a 1.2% increase in the average price per interment right sold. Cemetery same store atneed revenue, which represents 40% of our same store operating revenue decreased $0.3 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 13.2% decrease in the number of interment rights sold, which was offset by a 9.0% increase in the
average price per interment right sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery same store operating profit for the three months ended September 30, 2022 decreased $1.4 million from the same period in 2021, due to the decrease in operating revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 700 basis points to 32.6%. Operating expenses as a percentage of operating revenue increased 7.0% with the largest increases in facilities and grounds expenses of 3.2%, salaries and benefits expenses of 1.1%, merchandise costs of 1.0%, general liability insurance of 0.7% and general and administrative expenses of 0.8%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Cemetery acquired preneed revenue decreased $0.6 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 16.9% decrease in the average price per interment right sold, as well as an 11.2% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 39% of our acquired operating revenue, increased $0.2 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 12.9% increase in the average price per interment right sold, offset by a 4.5% decrease in the number of interment rights sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery acquired operating profit decreased $0.7 million for the three months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 830 basis points to 47.5%. Operating expenses as a percentage of operating revenue increased 8.2% with the largest increases in salaries and benefits expenses of 2.1%, general liability insurance of 1.1%, facilities and grounds expenses of 0.9%, general and administrative expenses of 0.6%, merchandise costs of 0.6% and atneed commissions expense of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue), as well as their respective operating profit remained flat for the three months ended September 30, 2022 compared to the same period in 2021.
The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 47,883 | | | $ | 46,616 | |
Acquired operating revenue | 21,517 | | | 20,437 | |
Divested revenue | 202 | | | — | |
Preneed cemetery trust revenue | 9,079 | | | 9,262 | |
Preneed cemetery finance charges | 771 | | | 870 | |
Total | $ | 79,452 | | | $ | 77,185 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 20,076 | | | $ | 16,799 | |
Acquired operating profit | 12,386 | | | 10,766 | |
Divested operating profit | 66 | | | — | |
Preneed cemetery trust operating profit | 8,708 | | | 8,847 | |
Preneed cemetery finance charges | 771 | | | 870 | |
Total | $ | 42,007 | | | $ | 37,282 | |
The following measures reflect the significant metrics over this comparative period:
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| Nine months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Preneed revenue as a percentage of operating revenue | 61% | | 61% |
Preneed revenue (in thousands) | $ | 29,044 | | $ | 28,509 |
Atneed revenue (in thousands) | $ | 18,839 | | $ | 18,107 |
Number of preneed interment rights sold | 6,375 | | 6,088 |
Average price per interment right sold | $ | 4,106 | | $ | 4,095 |
| | | |
| | | |
Acquired: | | | |
Preneed revenue as a percentage of operating revenue | 68% | | 64% |
Preneed revenue (in thousands) | $ | 14,692 | | $ | 12,996 |
Atneed revenue (in thousands) | $ | 6,825 | | $ | 7,441 |
Number of preneed interment rights sold | 2,369 | | 2,256 |
Average price per interment right sold | $ | 6,107 | | $ | 5,403 |
Cemetery same store preneed revenue decreased $0.5 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 4.5% decrease in the number of interment rights sold, while the average price per interment right sold remained flat. Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, decreased $0.7 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 6.9% decrease in the number of interment rights sold, offset by a 3.1% increase in the average price per interment right sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery same store operating profit decreased $3.3 million for the nine months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 590 basis points to 36.0%. Operating expenses as a percentage of operating revenue increased 5.9% with the largest increases in facilities and grounds expenses of 1.4%, promotional expenses of 1.0%, allowance for credit losses of 0.9%, due to a change in estimate in the second quarter of the prior year, which resulted in lower credit loss expense in the prior period, general liability insurance of 0.6% and general and administrative expenses of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Cemetery acquired preneed revenue decreased $1.7 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced an 11.5% decrease in the average price per interment right sold, as well as a 4.8% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 36% of our acquired operating revenue, increased $0.6 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 14.5% increase in the average price per interment right sold, while the number of interment rights sold decreased 4.8%. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery acquired operating profit decreased $1.6 million for the nine months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 490 basis points to 52.7%. Operating expenses as a percentage of operating revenue increased 4.9% with the largest increases in facilities and grounds expenses of 0.9%, salaries and benefits expenses increased 0.9%, general liability insurance of 0.8% and merchandise costs of 0.7%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase in trust revenue is primarily due to an increase in realized gains on delivered merchandise and services contracts. Operating profit for the two categories of Other Revenue, on a combined basis, increased $0.2 million for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to the increase in revenue.
Cemetery property amortization. Cemetery property amortization totaled $1.3 million and $4.3 million for the three and nine months ended September 30, 2022, respectively, a decrease of $0.2 million and $0.9 million, respectively, compared to the same periods in 2021, primarily due to the decrease in property sold across our cemetery portfolio.
Field depreciation. Depreciation expense for our field businesses totaled $3.3 million and $9.8 million for the three and nine months ended September 30, 2022, respectively, an increase of $0.1 million and $0.4 million, respectively, compared to the same periods in 2021, primarily due to depreciation expensefrom computer and hardware equipment added in the last twelve months, as well as from assets acquired inadded as a result of our 2016 acquisitions.acquisition during the third quarter of 2022.
Regional and Unallocated Funeralunallocated funeral and Cemetery Costs.cemetery costs. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled $3.9$5.1 million for the three months ended September 30, 2017, an increase2022, a decrease of $1.2$1.7 million or 41.5%, compared to the same period in 2016,2021, primarily due to the following: (1) a $1.1 million decrease in cash incentives and equity compensation; (2) a $0.5 million increasedecrease in field incentive compensation,health and safety expenses related to COVID-19; (3) a $0.4$0.2 million increasedecrease in natural disaster related costssalary and benefits expenses; (4) a $0.3$0.1 million increasedecrease in other general administrative costs.costs; offset by (5) a $0.2 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19.
Regional and unallocated funeral and cemetery costs totaled $9.8$17.4 million for the nine months ended September 30, 2017, an increase2022, a decrease of $1.3$1.2 million or 15.2%, compared to the same period in 2016,2021, primarily due to the following: (1) a $0.4$1.7 million decrease in cash incentives and equity compensation; (2) a $1.3 million decrease in health and safety expenses related to COVID-19; (3) a $0.3 million decrease in salary and benefits expenses; offset by (4) a $1.3 million increase in field incentive compensation,award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19; and (5) a $0.4 million increase in natural disaster related costs, a $0.4$0.2 million increase in other general administrative costs and $0.1 million increase in salaries and benefits.costs.
On Friday, August 25, 2017 and Sunday, September 10, 2017, hurricanes Harvey and Irma struck Texas and Florida, respectively. Thirteen of our funeral homes and six of our cemeteries were impacted by either or both property damage and business interruption. Based on our preliminary review of our property, flood and business interruption insurance policies, we believe that much of the loss we have experienced will be covered by insurance. As of September 30, 2017, we have spent approximately $0.5 million for employee assistance and property repair costs. We have recognized approximately $0.4 million in expenses and recorded a receivable for insurance reimbursement of approximately $0.1 million.
General, Administrative and Other. General, administrative and other expenses remained flat at $6.1 million for both the three months ended September 30, 2016 and 2017. Those expenses with significant increases include $0.4 million of equity compensation, $0.2 million of salaries and benefits for leadership investments in our Houston support office, $0.2 million of other general administrative costs, $0.2 million of incentive compensation and $0.2 million of public company and regulatory costs related to tax planning, offset by a $1.2 million decrease in severance and retirement expenses primarily related to the retirement of a former executive.
General, administrative and other expenses totaled $19.5 million for the nine months ended September 30, 2017, a decrease of $1.7 million, or 7.8%, from the nine months ended September 30, 2016. The decrease was attributable to a $3.5 million decrease in retirement expenses primarily related to the retirement of two former executives during 2016, a $0.7 million decrease in acquisition costs, offset by a $0.9 million increase in salaries and benefits for leadership investments in our Houston support office, a $0.7 million increase in public company, regulatory and legal costs related to tax planning, filing our current shelf registration statement and adopting a new long-term incentive plan, a $0.6 million increase in other general administrative costs and a $0.3 million increase in incentive and equity compensation.
Interest Expense. Interest expense was $3.3 million for the three months ended September 30, 2017 compared to $2.9 million for the three months ended September 30, 2016, an increase of approximately $0.4 million. During the three months ended September 30, 2017, interest expense increased by approximately $0.3 million related to our term note and revolving credit facility and by approximately $0.1 million related to our deferred purchase obligations for our 2016 acquisitions. During the three months ended September 30, 2017, the weighted average interest rate increased 0.6% compared to the same period in 2016.
Interest expense was $9.5 million for the nine months ended September 30, 2017 compared to $8.7 million for the nine months ended September 30, 2016, an increase of approximately $0.8 million. During the nine months ended September 30, 2017, interest expense increased by approximately $0.4 million related to our term note and revolving credit facility and by approximately $0.4 million related to our deferred purchase obligations for our 2016 acquisitions. During the nine months ended September 30, 2017, the weighted average interest rate increased 0.3% compared to the same period in 2016.
Accretion of Discount on Convertible Subordinated Notes. For the three and nine months ended September 30, 2017, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $1.1 million and $3.2 million respectively,
compared to $1.0 million and $2.9 million for the three and nine months ended September 30, 2016, respectively. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%.
Income Taxes. Income tax expense was $1.5 million for the three months ended September 30, 2017 compared to $1.9 million for the three months ended September 30, 2016. We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for both the three and nine months ended September 30, 2017 and 2016. Income tax expense was $9.3 million for the nine months ended September 30, 2017 compared to $8.4 million for the nine months ended September 30, 2016.
During the third quarter of 2017, we recognized a tax benefit of $0.2 million which reduced our effective tax rate to 39% for the nine months ended September 30, 2017. During the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016.
We have approximately $36.8 million of state net operating loss carry forwards that will expire between 2018 and 2038, if not utilized. Based on management’s assessment of the various state net operating losses, it has been determined that it is more likely than not that we will not be able to realize the tax benefits of certain portions of the state losses. Accordingly, a valuation allowance has been established and the deferred tax asset for the state operating losses is reviewed every quarter. At September 30, 2017, the valuation allowance totaled $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.
We generate cash in our operations primarily from at-need 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. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and costs of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
We intend to use cash on hand and borrowings under our Credit Facility primarily to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends. From time to time we may also use available cash to repurchase shares of our common stock in open market or privately negotiated transactions. We have the ability to draw on our revolving credit facility, subject to customary terms and conditions of the Credit Agreement. We believe that our existing cash balance, future cash flows from operations and borrowings under our Credit Facility described below will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividends and acquisitions for the foreseeable future.
Cash Flows
We began 2017 with $3.3 million in cash and other liquid investments and ended the third quarter with $0.8 million in cash. As of September 30, 2017, we had borrowings of $75.5 million outstanding on our revolving credit facility compared to $67.7 million outstanding as of December 31, 2016.
The following table sets forth the elements of cash flow for the nine months ended September 30, 2016 and 2017 (in millions):
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2016 | | 2017 |
Cash at January 1st | $ | 0.5 |
| | $ | 3.3 |
|
Cash flow from operating activities | 34.8 |
| | 30.8 |
|
Acquisitions and land for new construction | (15.1 | ) | | (0.7 | ) |
Purchase of land and buildings previously leased | (6.3 | ) | | — |
|
Net proceeds from the sale of other assets | 1.0 |
| | 0.4 |
|
Growth capital expenditures | (6.8 | ) | | (6.8 | ) |
Maintenance capital expenditures | (5.2 | ) | | (6.3 | ) |
Net (payments) borrowings on our revolving credit facility, term loan and long-term debt obligations | 0.3 |
| | (1.7 | ) |
Taxes paid on restricted stock vestings and exercise of non-qualified options | (0.6 | ) | | (0.5 | ) |
Dividends paid on common stock | (1.7 | ) | | (2.5 | ) |
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 0.7 |
| | 1.2 |
|
Purchase of treasury stock | — |
| | (16.4 | ) |
Payment of loan origination costs related to the credit facility | (0.7 | ) | | — |
|
Other financing costs | (0.1 | ) | | — |
|
Cash at September 30th | $ | 0.8 |
| | $ | 0.8 |
|
Operating Activities
For the nine months ended September 30, 2017, cash provided by operating activities was $30.8 million compared to cash provided by operating activities of $34.8 million for the nine months ended September 30, 2016, a decrease of $4.0 million, due primarily to the decline in preneed cemetery revenue and acquired funeral home operating profit margin in the second and third quarters of 2017 and unfavorable working capital changes, which include, the timing of payments for income taxes, payments for accrued severance for the retirement of a former executive and our Good To Great incentive compensation plan during the first quarter of 2017.
Investing Activities
Our investing activities resulted in a net cash outflow of $13.4$22.7 million for the nine months ended September 30, 20172022 compared to $32.4$11.2 million for the nine months ended September 30, 2016,2021, a decrease of $19.0$11.5 million.
Acquisition and Divestiture Activity
During the nine months ended September 30, 2017,2022, we acquired a business consisting of two funeral homes for $6.3 million in cash and we purchased real estateproperty for funeral home parking lot expansion projects for approximately $0.7 million. Capital expenditures totaled $13.1 million, of which $6.8 million and $6.3 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily related to cemetery development costs of $3.0 million, construction costs related to two new funeral home facilities of approximately $2.5 million and renovations at certain businesses of $1.3 million. Maintenance capital expenditures in the nine months ended September 30, 2017 were primarily related to maintenance projects for facility repairs and improvements of $1.8 million, vehicle purchases of $1.7 million, IT infrastructure improvements, general equipment, and furniture purchases of $1.8 million, and paving roads, parking lots and landscaping projects of $1.0$2.6 million.
During the nine months ended September 30, 2016,2022, we acquired three funeral home businessessold real property for approximately $15.8 million. We purchased land for funeral home expansion projects for approximately $2.7 million. Additionally, we purchased land and buildings at four funeral home locations that were previously leased for approximately $6.3 million. Capital expenditures totaled $12.0 million, of which $6.8$3.3 million and $5.2 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily construction costs related totwo funeral home facilities of approximately $2.3 million, renovations at certain business locations of $1.3 million and cemetery development costs of $3.2homes for $0.9 million. Maintenance capital expenditures in
During the nine months ended September 30, 2016 were primarily related to vehicle purchases of $1.22021, we sold three funeral homes for $3.5 million, general
equipment and furniture purchases of $1.6sold real property for $0.7 million and purchased real property for $3.3 million. We also received proceeds of $2.8 million from our property insurance policy for the reimbursement of renovation costs for our funeral and cemetery businesses that were damaged by Hurricane Ida.
Capital Expenditures
For the nine months ended September 30, 2022, capital expenditures (comprised of growth and maintenance projects such as paving roads, parking lots, facility repairsspend) totaled $20.3 million compared to $15.3 million for the nine months ended September 30, 2021, an increase of $5.0 million.
The following tables present our growth and general improvements of $2.4 million.maintenance capital expenditures (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Growth | | | |
Cemetery development | $ | 4,120 | | | $ | 5,215 | |
| | | |
Renovations at certain businesses(1) | 2,030 | | | 4,974 | |
| | | |
Other | 142 | | | 447 | |
Total Growth | $ | 6,292 | | | $ | 10,636 | |
| | | | | | | | | | | | | | |
| | | | |
(1) | During the nine months ended September 30, 2022, we spent $2.4 million for renovations on two businesses that were affected by Hurricane Ida, all of which was reimbursed by our property insurance. |
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Maintenance | | | |
Facility repairs and improvements | $ | 2,172 | | | $ | 3,131 | |
Vehicles | 1,481 | | | 1,770 | |
General equipment and furniture | 4,167 | | | 3,744 | |
Paving roads and parking lots | 1,140 | | | 1,065 | |
| | | |
Total Maintenance | $ | 8,960 | | | $ | 9,710 | |
Financing Activities
Our financing activities resulted in a net cash outflow of $19.9$27.7 million for the nine months ended September 30, 20172022 compared to $2.1$58.3 million for the nine months ended September 30, 2016, an increase2021, a decrease of $17.8$30.6 million. During the nine months ended September 30, 2017, we had net payments on our revolving credit facility and term loan of $0.6 million. We also purchased treasury stock for $16.4 million and paid $2.5 million in dividends.
During the nine months ended September 30, 2016,2022, we had net borrowings on our revolving credit facility and term loan of $1.3 million. We also paid transaction costs of approximately $0.7 million related to the Seventh Amendment of our Credit Facility, acquisition debt and paid $1.7finance leases of $13.3 million, offset by $36.7 million for the purchase of treasury stock and $5.1 million in dividends.
Dividends
On July 26, 2017 our Board declared a dividend of $0.05 per share, totaling approximately $0.8 million, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. For the three months ended September 30, 2016, we paid a quarterly dividend of $0.050 per share, totaling approximately $0.8 million. ForDuring the nine months ended September 30, 20162021, we had net borrowings on our Credit Facility, acquisition debt and 2017, we paid total dividendsfinance leases of approximately $1.7$39.0 million, offset by the following payments: i) $19.9 million for the call premium to redeem our 6.625% senior notes due 2026; ii) $61.7 million for the purchase of treasury stock; iii) $6.6 million for debt issuance and $2.5transactions costs related to our Senior Notes and Credit Facility; iv) $4.0 million respectively.for the conversions and maturity of our 2.75% convertible subordinated notes due 2021 (the “Convertible Notes”); and v) $5.4 million in dividends.
Share Repurchase
On February 25, 2016,23, 2022, our Board approved aof Directors (the “Board”) authorized an increase in our share repurchase program authorizingto permit us to purchase up to an aggregate of $25.0additional $75.0 million ofunder our common stockshare repurchase program, in addition to amounts previously authorized and outstanding in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange(“the Exchange Act”). During the three months ended September 30, 2017, we repurchased 574,054 shares of common stock for a total cost of $14.0 million at an average cost of $24.35 per share pursuant to this share
Share repurchase program. We did not purchase any shares of common stockactivity is as follows (dollar value in the first or second quarter of 2017. thousands):
| | | | | | | | | | | | | |
| Nine months ended September 30, | | |
| 2021 | | 2022 | | |
Number of Shares Repurchased(1) | 1,528,197 | | | 695,496 | | | |
Average Price Paid Per Share | $ | 42.89 | | | $ | 49.22 | | | |
Dollar Value of Shares Repurchased(1) | $ | 65,540 | | | $ | 34,234 | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | During the nine months ended September 30, 2021, 84,000 shares settled in October 2021, which had a cost of $3.8 million. |
Our shares wereare purchased in the open market. Purchases weremarket at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares.
On August 18, 2017, During the three months ended September 30, 2022, we purchased 100,000did not repurchase any shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 perour share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of therepurchase program. At September 30, 2022, our share repurchase program approved byhad $48.9 million authorized for additional repurchases.
Cash Dividends
Our Board declared the Boardfollowing dividends payable on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.dates below (in thousands, except per share amounts):
| | | | | | | | | | | |
2022 | Per Share | | Dollar Value |
March 1st | $ | 0.1125 | | | $ | 1,725 | |
June 1st | $ | 0.1125 | | | $ | 1,730 | |
September 1st | $ | 0.1125 | | | $ | 1,653 | |
| | | |
2021 | Per Share | | Dollar Value |
March 1st | $ | 0.1000 | | | $ | 1,799 | |
June 1st | $ | 0.1000 | | | $ | 1,808 | |
September 1st | $ | 0.1000 | | | $ | 1,783 | |
| | | |
Credit Facility, Lease Obligations and Acquisition Debt Obligations
The outstanding principal of our total long-term debt and capitalCredit Facility, lease obligations and acquisition debt at September 30, 2017 totaled $218.8 million2022 is as follows (in thousands):
| | | | | |
| September 30, 2022 |
Credit Facility | $ | 169,000 | |
Finance leases | 5,258 | |
Operating leases | 19,712 | |
Acquisition debt | 4,460 | |
Total | $ | 198,430 | |
Credit Facility
On May 27 2022, we entered into a second amendment and consisted of $130.3 million under our term loan, $75.5 million outstanding under our revolvingcommitment increase (the “Credit Facility Amendment”) to the first amended and restated credit facilityagreement dated May 13, 2021 (as amended, including the Credit Facility Amendment, the “Credit Facility”) with the financial institutions party thereto, as lenders, and $14.0 million in acquisition indebtedness and capital lease obligations.
As of September 30, 2017, we had a $300 million secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”).administrative agent. The Credit Facility also containsAmendment provided, among other things, for (i) an accordion provisionincrease to borrow up to an additional $75 millionthe Revolving Credit Commitments (as defined in revolving loans, subject to certain conditions. Thethe Credit Facility is collateralized by all personal property and funeral home real property in certain states.
We have one letter of credit issued on November 30, 2016 and outstandingFacility) under the Credit Facility for approximately $2.0from $200.0 million which bears interest at 2.125%to $250.0 million in the aggregate; (ii) modifications to the definitions of “Applicable Rate” and will expire on November 27, 2017. The letter“Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (iii) the establishment of credit automatically renews annuallythe BSBY as a benchmark rate and secures our obligations under our various self-insured policies. Underthe removal of LIBOR from the Credit Facility, outstanding borrowings bear interest at either a prime rate or a LIBOR rate, plusFacility; (iv) an applicable margin based upon our leverage ratio. At September 30, 2017,increase in the prime rate margin was equivalent to 1.125% and the LIBOR margin was 2.125%. The weighted average interest rate on the Credit Facility for the three and nine months ended September 30, 2017 was 3.4% and 3.1%, respectively.
We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by our subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Facility.
We were in compliance with the covenants containedmaximum Total Leverage Ratio (as defined in the Credit Agreement as of September 30, 2017. The Credit Agreement contains key ratios with which we must comply, including a requirementFacility) to maintain a leverage ratio of no more than 3.55.25 to 1.001.00; and a(v) modifications to the restricted payments covenant to maintain a fixed charge coverage ratioallow us to make additional stock repurchases, subject to the satisfaction of no less than 1.20 to 1.00. As of September 30, 2017, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 1.89 to 1.00.
Amortization of debt issuance costs related to our Credit Facility was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 andcertain conditions therein. We incurred $0.3 million and $0.2 million for the nine months ended September 30, 2016 and 2017, respectively. The unamortized debt issuancein transactions costs related to the Credit Facility are beingAmendment, which were capitalized and will be amortized over the remaining term of the related debt using the effectivestraight-line method.
At September 30, 2022, our Credit Facility was comprised of: (i) a $250.0 million revolving credit facility, including a $15.0 million million subfacility for letters of credit and a $10.0 million million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 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 allows for future increases in the facility size in the form of increased revolving commitments or new incremental term loans by an additional amount of up to $75.0 million in the aggregate.
The Credit Facility is secured by a first-priority perfected security interest method for our term loanin and lien on substantially all of the Company’s personal property assets and those of the Subsidiary Guarantors. In addition, the Credit Facility includes provisions which require the Company and the straight line methodSubsidiary Guarantors, upon the occurrence of an event of default or in the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level under the Credit Facility, to grant additional liens on real property assets accounting for no less than 50% of the Company’s and the Subsidiary Guarantors’ funeral operations if requested by the administrative agent.
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 September 30, 2022, we were subject to the following financial covenants under our revolvingCredit Facility: (A) a Total Leverage Ratio not to exceed 5.25 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 September 30, 2022.
At September 30, 2022, we had outstanding borrowings under the Credit Facility of $169.0 million. We also had one letter of credit facility.for $2.3 million under the Credit Facility. The letter of credit will expire on November 25, 2022 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2022, we had $78.7 million of availability under the Credit Facility.
Convertible SubordinatedAs of the effective date of the Credit Facility Amendment, outstanding borrowings under our Credit Facility bear interest at a prime rate or a BSBY rate, plus an applicable margin based on our leverage ratio. At September 30, 2022, the prime rate margin was equivalent to 1.125% and the BSBY rate margin was 2.125%. The weighted average interest rate on our Credit Facility was 2.0% and 4.3% for the three months ended September 30, 2021 and 2022, respectively, and 2.5% and 3.1% for the nine months ended September 30, 2021 and 2022, respectively.
The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Credit Facility interest expense | $ | 383 | | | $ | 1,971 | | | $ | 1,200 | | | $ | 4,132 | |
Credit Facility amortization of debt issuance costs | 80 | | | 109 | | | 297 | | | 293 | |
Lease Obligations
Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. At September 30, 2022, operating and finance lease obligations were $35.8 million, with $4.5 million payable within 12 months.
The lease cost related to our operating leases and short-term leases and depreciation expense and interest expense related to our finance leases are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Operating lease cost | $ | 947 | | | $ | 863 | | | $ | 2,871 | | | $ | 2,564 | |
Short-term lease cost | 39 | | | 82 | | | 145 | | | 260 | |
Variable lease cost | 43 | | | 37 | | | 100 | | | 60 | |
| | | | | | | |
Finance lease cost: | | | | | | | |
Depreciation of leased assets | $ | 111 | | | $ | 111 | | | $ | 328 | | | $ | 328 | |
Interest on lease liabilities | 117 | | | 110 | | | 356 | | | 335 | |
Total finance lease cost | 228 | | | 221 | | | 684 | | | 663 | |
Total lease cost | $ | 1,257 | | | $ | 1,203 | | | $ | 3,800 | | | $ | 3,547 | |
Acquisition Debt
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from nine to twenty years. At September 30, 2022, acquisition debt obligations were $6.3 million, with $0.8 million payable within 12 months.
The imputed interest expense related to our acquisition debt is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Acquisition debt imputed interest expense | $ | 90 | | | $ | 78 | | | $ | 280 | | | $ | 237 | |
| | | | | | | |
Senior Notes due 2021
On March 19, 2014, we issued $143.75 million aggregateAt September 30, 2022, the principal amount of 2.75% convertible subordinatedour 4.25% senior notes due March 15,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 “Convertible Notes”“Indenture”)., among the Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee. The ConvertibleSenior 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 2.75%4.25% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 andyear, which is payable semi-annually in arrears on MarchMay 15 and SeptemberNovember 15 of each year.year, beginning on November 15, 2021.
We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At September 30, 2017,any time before May 15, 2024, we may also redeem all or part of the carryingSenior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. In addition, before May 15, 2024, we may redeem up to 40% of the aggregate principal amount of the Senior Notes outstanding using an amount of cash equal to the net proceeds of certain equity component was approximately $18.0 million. At September 30, 2017,offerings, at a price of 104.25% of the principal amount of the liability component was $143.75 millionSenior Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption; provided that (1) at least 50% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes) outstanding under the Indenture remain outstanding immediately after the occurrence of such redemption (unless all Senior Notes are redeemed concurrently), and (2) each such redemption must occur within 180 days of the date of the consummation of any such equity offering.
If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest.
The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default.
The debt discount and the net carrying amount was $123.2 million. The unamortized discount of $18.7 million and the unamortized debt issuance costs of $1.9 million as of September 30, 2017 are being amortized using the effective interest method over the remaining term of approximately 80 months of the ConvertibleSenior Notes. TheFor both the three and nine months ended September 30, 2021 and 2022, the effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes was 4.42% and 4.30%, respectively.
At September 30, 2022, the fair value of the Senior Notes, which are Level 2 measurements, was $317.2 million.
The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Senior Notes interest expense | $ | 4,250 | | | $ | 4,250 | | | $ | 17,517 | | | $ | 12,730 | |
Senior Notes amortization of debt discount | 118 | | | 125 | | | 384 | | | 368 | |
Senior Notes amortization of debt premium | — | | | — | | | 85 | | | — | |
Senior Notes amortization of debt issuance costs | 34 | | | 35 | | | 161 | | | 104 | |
At September 30, 2022, our future interest payments on our outstanding balance were $112.5 million, with $17.0 million payable within 12 months.
FINANCIAL HIGHLIGHTS
Below are our financial highlights (in thousands except for volumes and averages):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Revenue | $ | 95,041 | | | $ | 87,497 | | | $ | 279,955 | | | $ | 276,258 | |
Funeral contracts | 12,566 | | | 11,109 | | | 36,704 | | | 35,630 | |
Average revenue per funeral contract | $ | 5,358 | | | $ | 5,516 | | | $ | 5,336 | | | $ | 5,463 | |
Preneed interment rights (property) sold | 2,841 | | | 2,455 | | | 8,775 | | | 8,344 | |
Average price per preneed interment right sold | $ | 4,763 | | | $ | 4,569 | | | $ | 4,635 | | | $ | 4,449 | |
Gross profit | $ | 33,164 | | | $ | 25,598 | | | $ | 97,152 | | | $ | 87,788 | |
Net income | $ | 13,046 | | | $ | 5,860 | | | $ | 19,812 | | | $ | 33,161 | |
Revenue for the three months ended September 30, 2022 decreased $7.5 million compared to the three months ended September 30, 2021, as we experienced an 11.6% decrease in funeral contract volume, which was slightly offset by a 2.9% increase in average revenue per funeral contract, as well as a 13.6% decrease in the number of preneed interment rights (property) sold and a 4.1% decrease in the average price per interment right sold. The decreases in funeral contract volume and the number of interment rights sold primarily correspond to the significant decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.
Gross profit for the three months ended September 30, 2022 decreased $7.6 million compared to the three months ended September 30, 2021, primarily due to the decrease in revenue.
Net income for the three months ended September 30, 2022 decreased $7.2 million compared to the three months ended September 30, 2021, primarily due to the $7.6 million decrease in gross profit, a $1.6 million increase in interest expense, a $1.3 million increase in general and administrative expense, offset by a $2.3 million decrease in income tax expense and a $0.9 million decrease in net gain on divestitures, disposals and impairments charges.
Revenue for the nine months ended September 30, 2022 decreased $3.7 million compared to the nine months ended September 30, 2021, as we experienced a 2.9% decrease in funeral contract volume, which was slightly offset by a 2.4% increase in average revenue per funeral contract, as well as a 4.9% decrease in the number of preneed interment rights (property) sold and a 4.0% decrease in the average price per interment right sold. The decreases in funeral contract volume and the number of interment rights sold primarily correspond to the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Gross profit for the nine months ended September 30, 2022 decreased $9.4 million compared to the nine months ended September 30, 2021, due to the decrease in revenue, as well as the increase in operating expenses in both our funeral and cemetery segments. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies, merchandise costs and insurance.
Net income for the nine months ended September 30, 2022 increased $13.3 million compared to the nine months ended September 30, 2021, due to a $23.8 million loss on extinguishment of debt in 2021, a $3.3 million gain on insurance reimbursements in 2022, a $1.9 million decrease in interest expense, and a $1.8 million decrease in net gain on divestitures, disposals and impairments charges, offset by a $9.4 million decrease in gross profit, a $5.5 million increase in income tax expense and a $2.8 million increase in general and administrative expense.
Further discussion of Revenue and the components of Gross profit for our funeral home and cemetery segments is presented herein 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 herein under “– Other Financial Statement Items.”
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended September 30, 2022 issued on October 26, 2022 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 contains non-GAAP financial measures that we believe provides insight into underlying trends in our business.
Below is a reconciliation of Net income, a GAAP financial measure, to Adjusted net income, a non-GAAP financial measure, (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Net income | $ | 13,046 | | | $ | 5,860 | | | $ | 19,812 | | | $ | 33,161 | |
Special items(1) | | | | | | | |
| | | | | | | |
Severance and separation costs(2) | — | | | 1,431 | | | 1,575 | | | 1,431 | |
Accretion of discount on Convertible Notes(1) | — | | | — | | | 20 | | | — | |
Loss on extinguishment of debt(3) | — | | | — | | | 23,807 | | | — | |
Net (gain) loss on divestitures | 282 | | | — | | | 179 | | | (575) | |
Net impact of impairment of goodwill and other | 500 | | | — | | | 500 | | | — | |
Litigation reserve(4) | — | | | — | | | — | | | 200 | |
Net gain on insurance reimbursements(5) | — | | | — | | | — | | | (3,275) | |
Disaster recovery and pandemic costs(6) | 1,002 | | | — | | | 2,041 | | | 168 | |
Change in uncertain tax reserves and other(1) | — | | | — | | | — | | | (533) | |
Other special items(7) | 1,020 | | | — | | | 2,354 | | | — | |
Sum of special items | $ | 2,804 | | | $ | 1,431 | | | $ | 30,476 | | | $ | (2,584) | |
Tax effect on special items(1) | 738 | | | 356 | | | 8,619 | | | (570) | |
Adjusted net income(8) | $ | 15,112 | | | $ | 6,935 | | | $ | 41,669 | | | $ | 31,147 | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special items are taxed at the operating tax rate for the period except for the Accretion of the discount on Convertible Notes, as this is a non-tax deductible item and the Change in uncertain tax reserves and other, as this item is a tax benefit. |
(2) | Costs related to the departure of certain key members of leadership in the first quarter of 2021 and in the third quarter of 2022. |
(3) | Loss on the redemption of our 6.625% senior notes due 2026 during the second quarter of 2021. |
(4) | Costs related to litigation matters. |
(5) | Net gain recognized on insurance reimbursements for property damage caused by Hurricane Ida that occurred during the third quarter of 2021. |
(6) | Relates to health and safety expenses, including personal protective equipment (“PPE”) due to COVID-19. We purchased more PPE during the three and nine months ended 2021 compared to the same periods in 2022. |
(7) | Relates to the write-off of certain fixed assets and interest paid on our 6.625% senior notes due 2026 for the two-week period during which our Senior Notes were issued prior to the redemption of our 6.625% senior notes due 2026. |
(8) | Adjusted net income is defined as Net income plus adjustments for Special items and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations. |
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| |
| |
Below is a reconciliation of Gross profit (a GAAP financial measure) to Operating profit (a non-GAAP financial measure) (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Gross profit | $ | 33,164 | | | $ | 25,598 | | | $ | 97,152 | | | $ | 87,788 | |
| | | | | | | |
Cemetery property amortization | 1,521 | | | 1,278 | | | 5,213 | | | 4,314 | |
Field depreciation expense | 3,154 | | | 3,281 | | | 9,432 | | | 9,831 | |
Regional and unallocated funeral and cemetery costs | 6,812 | | | 5,096 | | | 18,655 | | | 17,409 | |
Operating profit(1) | $ | 44,651 | | | $ | 35,253 | | | $ | 130,452 | | | $ | 119,342 | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs. |
Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP financial measure) by Segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
Funeral Home | $ | 31,355 | | | $ | 24,173 | | | $ | 88,445 | | | $ | 82,060 | |
Cemetery | 13,296 | | | 11,080 | | | 42,007 | | | 37,282 | |
Operating profit | $ | 44,651 | | | $ | 35,253 | | | $ | 130,452 | | | $ | 119,342 | |
| | | | | | | |
Operating profit margin(1) | 47.0% | | 40.3% | | 46.6% | | 43.2% |
| | | | | | | | | | | | | | |
| | | | |
(1) | Operating profit margin is defined as Operating profit as a percentage of Revenue. |
Further discussion of Operating profit for our funeral home and cemetery segments is presented herein under “– Results of Operations.”
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three and nine months ended September 30, 20162022 and 2021.
The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2018 and owned and operated for the entirety of each period being presented, excluding certain funeral home and cemetery businesses that we intend to divest in the near future.
The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2017, was 6.75%excluding any funeral home and 2.75%, respectively.cemetery businesses that we intend to divest in the near future. This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance.
Interest expense onThe term “divested” when discussed in the Convertible Notes included contractual coupon interest expense of approximately $1.0 million for bothFuneral Home Segment, refers to two funeral homes we sold and one funeral home we merged with another business in an existing market in the three months ended September 30, 2016 and 2017 and $3.0 million for both thefirst nine months ended September 30, 2016of 2022 and 2017. Accretionthree funeral homes we sold in the first nine months of 2021. The term “divested” when discussed in the discount onCemetery Segment, refers to one cemetery we sold during 2021.
“Planned divested” refers to the Convertible Notes was $1.0 millionfuneral home businesses that we intend to divest.
“Ancillary” in the Funeral Home Segment represents our flower shop, pet cremation business and $1.1online cremation business.
Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure.
Funeral Home Segment
The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 57,321 | | | $ | 51,258 | |
Acquired operating revenue | 7,651 | | | 7,813 | |
Divested/planned divested revenue | 564 | | | 186 | |
Ancillary revenue | 1,096 | | | 1,049 | |
Preneed funeral insurance commissions | 375 | | | 357 | |
Preneed funeral trust and insurance | 1,890 | | | 2,117 | |
Total | $ | 68,897 | | | $ | 62,780 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 25,644 | | | $ | 18,717 | |
Acquired operating profit | 3,371 | | | 3,036 | |
Divested/planned divested operating profit | 92 | | | 16 | |
Ancillary operating profit | 274 | | | 188 | |
Preneed funeral insurance commissions | 121 | | | 142 | |
Preneed funeral trust and insurance | 1,853 | | | 2,074 | |
Total | $ | 31,355 | | | $ | 24,173 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Contract volume | 10,889 | | | 9,499 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,264 | | | $ | 5,396 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 5,419 | | | $ | 5,594 | |
Burial rate | 34.1% | | 33.7% |
Cremation rate | 57.2% | | 58.2% |
| | | |
Acquired: | | | |
Contract volume | 1,555 | | | 1,570 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 4,920 | | | $ | 4,977 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 4,988 | | | $ | 5,066 | |
Burial rate | 35.9% | | 33.9% |
Cremation rate | 55.9% | | 58.2% |
Funeral home same store operating revenue decreased $6.1 million for the three months ended September 30, 20162022 compared to the same period in 2021. The decrease in operating revenue is primarily due to a 12.8% decrease in same store contract volume, which was slightly offset by a 2.5% increase in the average revenue per contract excluding preneed interest. The same store contract volume decrease is primarily a result of the significant decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract in the third quarter of 2022 reflects a 1.4% increase in cremations with memorial services. This increase is primarily due to our continued focus to welcome and 2017, respectively,educate families on the many products and $2.9service options that are available with cremation.
Funeral home same store operating profit for the three months ended September 30, 2022 decreased $6.9 million when compared to the same period in 2021, primarily due to the decrease in operating revenue, with increased operating expenses as a percentage of revenue also contributing to the decline. The comparable operating profit margin decreased 820 basis points to 36.5%. Operating expenses as a percentage of operating revenue increased 8.2% with the largest increases in salaries and $3.2benefits expenses of 3.7%, facilities and grounds expenses of 0.8%, general and administrative expenses of 0.8%, general
liability insurance of 0.7% and transportation 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, funeral supplies and insurance.
Funeral home acquired operating revenue for the three months ended September 30, 2022 increased $0.2 million compared to the same period in 2021, due to the addition of two funeral home businesses added to our funeral home acquired portfolio during the third quarter of 2022, which contributed $0.4 million of operating revenue. Excluding these two businesses, acquired operating revenue decreased $0.2 million, due to a 6.0% decrease in acquired contract volume, offset by a 3.7% increase in average revenue per contract excluding preneed interest.
Funeral home acquired operating profit for the three months ended September 30, 2022 decreased $0.3 million when compared to the same period in 2021, primarily due to an increase in operating expenses as a percentage of revenue. The two funeral homes added to our acquired portfolio during the third quarter of 2022 contributed almost $0.2 million of operating profit. Excluding these two businesses, acquired operating profit decreased $0.5 million. The comparable operating profit margin decreased 520 basis points to 38.9%. Operating expenses as a percentage of operating revenue increased 5.2% with the largest increase in salaries and benefits expenses of 2.3%, facilities and grounds expenses of 0.7%, general liability insurance of 0.7%, other funeral costs of 0.6% and general and administrative expenses of 0.5%, offset by a decrease in promotional expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Ancillary revenue, recorded in Other 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 September 30, 2022 compared to the same period in 2021.
Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue), on a combined basis, increased $0.2 million for the three months ended September 30, 2022 compared to the same period in 2021. The increase is primarily due to a 14.3% increase in earnings on preneed contracts for the three months ended September 30, 2022 compared to the same period in 2021, as recognition is triggered at the time a preneed contract matures to atneed. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue.
The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 165,481 | | | $ | 163,776 | |
Acquired operating revenue | 22,575 | | | 24,064 | |
Divested/planned divested revenue | 2,120 | | | 907 | |
Ancillary revenue | 3,391 | | | 3,099 | |
Preneed funeral insurance commissions | 968 | | | 1,029 | |
Preneed funeral trust and insurance | 5,968 | | | 6,198 | |
Total | $ | 200,503 | | | $ | 199,073 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 71,520 | | | $ | 65,313 | |
Acquired operating profit | 9,784 | | | 9,845 | |
Divested/planned divested operating profit (loss) | 205 | | | (32) | |
Ancillary operating profit | 790 | | | 560 | |
Preneed funeral insurance commissions | 288 | | | 300 | |
Preneed funeral trust and insurance | 5,858 | | | 6,074 | |
Total | $ | 88,445 | | | $ | 82,060 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Contract volume | 31,503 | | | 30,686 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,253 | | | $ | 5,337 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 5,422 | | | $ | 5,516 | |
Burial rate | 35.6% | | 34.3% |
Cremation rate | 56.8% | | 57.5% |
| | | |
Acquired: | | | |
Contract volume | 4,749 | | | 4,765 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 4,754 | | | $ | 5,050 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 4,826 | | | $ | 5,140 | |
Burial rate | 37.6% | | 36.2% |
Cremation rate | 56.3% | | 57.6% |
Funeral home same store operating revenue decreased $1.7 million for the nine months ended September 30, 20162022 compared to the same period in 2021. The decrease in operating revenue is primarily due to a 2.6% decrease in same store contract volume, offset by a 1.6% increase in the average revenue per contract excluding preneed interest. The same store contract volume decrease is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract for the nine months ended September 30, 2022 reflects increases of 2.1% and 2017,0.9% in cremations and burials with memorial services, respectively. AmortizationThese increases are primarily due to a combination of debt issuanceprice increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.
Funeral home same store operating profit for the nine months ended September 30, 2022 decreased $6.2 million when compared to the same period in 2021, due to the decrease in operating revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 330 basis points to 39.9%. Operating expenses as a percentage of revenue increased 3.3% with the largest increase in salaries and benefits expenses of 1.0%, general and administrative expenses of 0.6%, transportation expenses of 0.3%, general liability insurance of 0.3% and facilities and grounds expenses of 0.3%. The increase in operating expenses is partially due to higher costs relatedfrom inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Funeral home acquired operating revenue for the nine months ended September 30, 2022 increased $1.5 million compared to the same period in 2021. The increase was due, in part, to the addition of two funeral home businesses added to our Convertible Notes was approximatelyfuneral home acquired portfolio during the third quarter of 2022, which contributed $0.4 million of operating revenue. Excluding these two businesses, acquired operating revenue increased $1.1 million due to a 7.1% increase in the average revenue per contract excluding preneed interest, slightly offset by a 2.0% decrease in acquired contract volume. The acquired contract volume decrease is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract for the nine months ended September 30, 2022 reflects increases of 2.4% and 0.7% in cremations and burials with memorial services, respectively. These increases are primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.
Funeral home acquired operating profit for the nine months ended September 30, 2022 increased $0.1 million when compared to the same period in 2021, primarily due to the two funeral homes added to our acquired portfolio during the third quarter of 2022, which contributed almost $0.2 million of operating profit. Excluding these two businesses, acquired operating profit decreased $0.1 million. The comparable operating profit margin decreased 240 basis points to 40.9%. Operating expenses as a percentage of operating revenue increased 2.4% with the largest increases in general and administrative expenses of 0.8%, salaries and benefits expenses of 0.6%, other funeral expenses of 0.6% and facilities and grounds expenses of 0.4%, offset by a decrease in promotional expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance.
Ancillary revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses, decreased $0.3 million and Ancillary operating profit decreased $0.2 million for boththe nine months ended September 30, 2022 compared to the same period in 2021.
Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue), on a combined basis, increased $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase is due to an increase in the number of preneed contracts that matured to atneed, as well as an increase in the earnings on these preneed contracts, as recognition is triggered at the time a preneed contract matures to atneed. The number of contracts increased 2.2% and the average earnings per preneed contract increased 1.9% for the nine months ended September 30, 2022 compared to the same period in 2021. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue.
Cemetery Segment
The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 16,342 | | | $ | 15,396 | |
Acquired operating revenue | 6,362 | | | 5,947 | |
Divested revenue | 52 | | | — | |
Preneed cemetery trust revenue | 3,136 | | | 3,065 | |
Preneed cemetery finance charges | 252 | | | 309 | |
Total | $ | 26,144 | | | $ | 24,717 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 6,465 | | | $ | 5,020 | |
Acquired operating profit | 3,547 | | | 2,827 | |
Divested operating profit | 19 | | | — | |
Preneed cemetery trust operating profit | 3,013 | | | 2,924 | |
Preneed cemetery finance charges | 252 | | | 309 | |
Total | $ | 13,296 | | | $ | 11,080 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Three months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Preneed revenue as a percentage of operating revenue | 61% | | 60% |
Preneed revenue (in thousands) | $ | 9,909 | | | $ | 9,309 | |
Atneed revenue (in thousands) | $ | 6,433 | | | $ | 6,087 | |
Number of preneed interment rights sold | 2,223 | | | 1,917 | |
Average price per interment right sold | $ | 4,130 | | | $ | 4,181 | |
| | | |
| | | |
Acquired: | | | |
Preneed revenue as a percentage of operating revenue | 66% | | 61% |
Preneed revenue (in thousands) | $ | 4,194 | | | $ | 3,610 | |
Atneed revenue (in thousands) | $ | 2,168 | | | $ | 2,337 | |
Number of preneed interment rights sold | 606 | | | 538 | |
Average price per interment right sold | $ | 7,159 | | | $ | 5,951 | |
Cemetery same store preneed revenue decreased $0.6 million for the three months ended September 30, 2016 and 2017 and $0.42022 compared to the same period in 2021, as we experienced a 13.8% decrease in the number of interment rights sold, slightly offset by a 1.2% increase in the average price per interment right sold. Cemetery same store atneed revenue, which represents 40% of our same store operating revenue decreased $0.3 million for boththe three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 13.2% decrease in the number of interment rights sold, which was offset by a 9.0% increase in the
average price per interment right sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery same store operating profit for the three months ended September 30, 2022 decreased $1.4 million from the same period in 2021, due to the decrease in operating revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 700 basis points to 32.6%. Operating expenses as a percentage of operating revenue increased 7.0% with the largest increases in facilities and grounds expenses of 3.2%, salaries and benefits expenses of 1.1%, merchandise costs of 1.0%, general liability insurance of 0.7% and general and administrative expenses of 0.8%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Cemetery acquired preneed revenue decreased $0.6 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 16.9% decrease in the average price per interment right sold, as well as an 11.2% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 39% of our acquired operating revenue, increased $0.2 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 12.9% increase in the average price per interment right sold, offset by a 4.5% decrease in the number of interment rights sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery acquired operating profit decreased $0.7 million for the three months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 830 basis points to 47.5%. Operating expenses as a percentage of operating revenue increased 8.2% with the largest increases in salaries and benefits expenses of 2.1%, general liability insurance of 1.1%, facilities and grounds expenses of 0.9%, general and administrative expenses of 0.6%, merchandise costs of 0.6% and atneed commissions expense of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue), as well as their respective operating profit remained flat for the three months ended September 30, 2022 compared to the same period in 2021.
The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Revenue: | | | |
Same store operating revenue | $ | 47,883 | | | $ | 46,616 | |
Acquired operating revenue | 21,517 | | | 20,437 | |
Divested revenue | 202 | | | — | |
Preneed cemetery trust revenue | 9,079 | | | 9,262 | |
Preneed cemetery finance charges | 771 | | | 870 | |
Total | $ | 79,452 | | | $ | 77,185 | |
| | | |
Operating profit: | | | |
Same store operating profit | $ | 20,076 | | | $ | 16,799 | |
Acquired operating profit | 12,386 | | | 10,766 | |
Divested operating profit | 66 | | | — | |
Preneed cemetery trust operating profit | 8,708 | | | 8,847 | |
Preneed cemetery finance charges | 771 | | | 870 | |
Total | $ | 42,007 | | | $ | 37,282 | |
The following measures reflect the significant metrics over this comparative period:
| | | | | | | | | | | |
| Nine months ended September 30, |
| 2021 | | 2022 |
Same store: | | | |
Preneed revenue as a percentage of operating revenue | 61% | | 61% |
Preneed revenue (in thousands) | $ | 29,044 | | $ | 28,509 |
Atneed revenue (in thousands) | $ | 18,839 | | $ | 18,107 |
Number of preneed interment rights sold | 6,375 | | 6,088 |
Average price per interment right sold | $ | 4,106 | | $ | 4,095 |
| | | |
| | | |
Acquired: | | | |
Preneed revenue as a percentage of operating revenue | 68% | | 64% |
Preneed revenue (in thousands) | $ | 14,692 | | $ | 12,996 |
Atneed revenue (in thousands) | $ | 6,825 | | $ | 7,441 |
Number of preneed interment rights sold | 2,369 | | 2,256 |
Average price per interment right sold | $ | 6,107 | | $ | 5,403 |
Cemetery same store preneed revenue decreased $0.5 million for the nine months ended September 30, 2016 and 2017.
2022 compared to the same period in 2021, as we experienced a 4.5% decrease in the number of interment rights sold, while the average price per interment right sold remained flat. Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, decreased $0.7 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 6.9% decrease in the number of interment rights sold, offset by a 3.1% increase in the average price per interment right sold. The initial conversion ratedecrease in the number of interment rights sold is primarily a result of the Convertible Notes,decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery same store operating profit decreased $3.3 million for the nine months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of March 19, 2014, was 44.3169 sharesrevenue. The comparable operating profit margin decreased 590 basis points to 36.0%. Operating expenses as a percentage of operating revenue increased 5.9% with the largest increases in facilities and grounds expenses of 1.4%, promotional expenses of 1.0%, allowance for credit losses of 0.9%, due to a change in estimate in the second quarter of the prior year, which resulted in lower credit loss expense in the prior period, general liability insurance of 0.6% and general and administrative expenses of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Cemetery acquired preneed revenue decreased $1.7 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced an 11.5% decrease in the average price per interment right sold, as well as a 4.8% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 36% of our common stockacquired operating revenue, increased $0.6 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 14.5% increase in the average price per $1,000 principal amountinterment right sold, while the number of Convertible Notes, equivalentinterment rights sold decreased 4.8%. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels.
Cemetery acquired operating profit decreased $1.6 million for the nine months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 490 basis points to 52.7%. Operating expenses as a percentage of operating revenue increased 4.9% with the largest increases in facilities and grounds expenses of 0.9%, salaries and benefits expenses increased 0.9%, general liability insurance of 0.8% and merchandise costs of 0.7%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance.
Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase in trust revenue is primarily due to an initial conversion priceincrease in realized gains on delivered merchandise and services contracts. Operating profit for the two categories of approximately $22.56 per shareOther Revenue, on a combined basis, increased $0.2 million for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to the increase in revenue.
Cemetery property amortization. Cemetery property amortization totaled $1.3 million and $4.3 million for the three and nine months ended September 30, 2022, respectively, a decrease of common stock. $0.2 million and $0.9 million, respectively, compared to the same periods in 2021, primarily due to the decrease in property sold across our cemetery portfolio.
Field depreciation. Depreciation expense for our field businesses totaled $3.3 million and $9.8 million for the three and nine months ended September 30, 2022, respectively, an increase of $0.1 million and $0.4 million, respectively, compared to the same periods in 2021, primarily due to depreciation from computer and hardware equipment added in the last twelve months, as well as from assets added as a result of our acquisition during the third quarter 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 $5.1 million for the three months ended September 30, 2022, a decrease of $1.7 million compared to the same period in 2021, primarily due to the following: (1) a $1.1 million decrease in cash incentives and equity compensation; (2) a $0.5 million decrease in health and safety expenses related to COVID-19; (3) a $0.2 million decrease in salary and benefits expenses; (4) a $0.1 million decrease in other general administrative costs; offset by (5) a $0.2 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19.
Regional and unallocated funeral and cemetery costs totaled $17.4 million for the nine months ended September 30, 2022, a decrease of $1.2 million compared to the same period in 2021, primarily due to the following: (1) a $1.7 million decrease in cash incentives and equity compensation; (2) a $1.3 million decrease in health and safety expenses related to COVID-19; (3) a $0.3 million decrease in salary and benefits expenses; offset by (4) a $1.3 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19; and (5) a $0.2 million increase in other general administrative costs.
Other Financial Statement Items
General, administrative and other. General, administrative and other expenses totaled $10.4 million for the three months ended September 30, 2022, an increase of $1.3 million compared to the same period in 2021, primarily due to the following: (1) a $1.4 million increase in separation expenses related to the departure of a key member of leadership; (2) a $0.8 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a Chief Information Officer; (3) a $0.5 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; offset by (4) a $1.0 million decrease in insurance claims expense, which included a one-time $1.0 million payment for residual insurance claims in 2021; and (3) a $0.3 million decrease in cash incentives and equity compensation.
General, administrative and other expenses totaled $28.1 million for the nine months ended September 30, 2022, an increase of $2.8 million compared to the same period in 2021, primarily due to the following: (1) a $2.4 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a Chief Information Officer; (2) a $1.8 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; (3) a $0.1 million increase in cash incentives and equity compensation; offset by (4) a $1.3 million decrease in insurance claims expense, which included a one-time $1.0 million payment for residual insurance claims in 2021; (5) a $0.1 million decrease in separation expense related to the departure of certain key members of leadership, and (6) a $0.1 million decrease in divestiture expenses.
Net (gain) loss on divestitures, disposals and impairments charges. The adjusted conversion ratecomponents of Net (gain) loss on divestitures, disposals and impairment charges are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended September 30, | | Nine months ended September 30, |
| 2021 | | 2022 | | 2021 | | 2022 |
| | | | | | | |
| | | | | | | |
Assets held for sale impairment | $ | 500 | | | $ | — | | | $ | 500 | | | $ | — | |
Net (gain) loss on divestitures and real property | 282 | | | — | | | 179 | | | (575) | |
Net (gain) loss on disposals of fixed assets | 76 | | | (7) | | | 698 | | | 142 | |
Total | $ | 858 | | | $ | (7) | | | $ | 1,377 | | | $ | (433) | |
During the Convertible Notes,nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million for a net gain of $0.7 million, of which $0.1 million is recorded in effectOther, net related to the sale of assets not used in operating activities. During the nine months ended September 30, 2021, we sold three funeral homes and real property for $4.2 million for a net loss of $0.2 million and disposed of fixed assets for a net loss of $0.7 million. In addition, we recognized an impairment loss of $0.5 million for property, plant and equipment assets held for sale at September 30, 2017,2021.
Interest expense. Interest expense related to our various debt arrangement is 44.5392 sharesas follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended September 30, | | Nine months ended September 30, |
| | | | | 2021 | | 2022 | | 2021 | | 2022 |
Senior Notes | | | | | $ | 4,403 | | | $ | 4,410 | | | $ | 17,977 | | | $ | 13,203 | |
Credit Facility | | | | | 464 | | | 2,081 | | | 1,497 | | | 4,425 | |
Finance leases | | | | | 117 | | | 110 | | | 356 | | | 335 | |
Acquisition debt | | | | | 90 | | | 78 | | | 280 | | | 237 | |
Convertible Notes | | | | | — | | | — | | | 20 | | | — | |
Other | | | | | 2 | | | (1) | | | 7 | | | 8 | |
Total | | | | | $ | 5,076 | | | $ | 6,678 | | | $ | 20,137 | | | $ | 18,208 | |
Gain on insurance reimbursements. During the nine months ended September 30, 2022, we recorded a gain on the reimbursements received from insurance for property damaged by Hurricane Ida that occurred during the third quarter of 2021.
Income taxes. We had an income tax expense of $2.8 million and $5.1 million for the three months ended September 30, 2022 and 2021, respectively, and income tax expense of $12.1 million and $6.6 million for the nine months ended September 30, 2022 and 2021, respectively. Our operating tax rate before discrete items was 30.6% and 28.2% for the three months ended September 30, 2022 and 2021, respectively, and 27.8% and 28.3% for the nine months ended September 30, 2022 and 2021, respectively.
On June 30, 2020, we filed carryback refund claims for the 2018 and 2019 tax years. The majority of the net operating losses generated in 2018 are the result of filing non-automatic accounting method changes relating to the recognition of revenue from our cemetery property and merchandise and services sales.
On October 11, 2021, we received an adverse ruling from the IRS related to our accounting method change for cemetery property revenue recognition filed in 2018 and subsequently filed an automatic accounting method change to adopt the IRS’s preferred method of revenue recognition for cemetery property effective for the year ending December 31, 2021.
On March 2, 2022, we received approval from the IRS regarding our method change filed related to the revenue recognition of cemetery merchandise and services sales. As a result, we recorded a $0.5 million reduction to the reserve for uncertain tax positions, including interest, during the nine months ended September 30, 2022.
At December 31, 2021 and September 30, 2022, the reserve for uncertain tax positions was $3.8 million and $3.3 million, respectively, related to carrying back the net operating losses generated in the tax year ended December 31, 2018 filed under the CARES Act on June 30, 2020.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our common stock per $1,000 principal amountConsolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of Convertible Notes, equivalentassets, 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 I, Item 1, Financial Statements, Note 1.
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 adjusted conversion price of approximately $22.45 per share of common stock.ongoing basis and update them as appropriate based on changing conditions.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate. Generally, the death rate 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.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
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.risks other than those related to COVID-19 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, 2021.
The following quantitative and qualitative information is provided about financial instruments to which we are a party at September 30, 20172022 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.
Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as ofat September 30, 20172022 are presented in Part 1, Item 1, “Condensed Notes to Consolidated Financial Statements,” Notes 3 and 6 Note 7 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 1.51%1.19% change in the value of the fixed income securities.
We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As ofAt September 30, 2017,2022, we had outstanding borrowings under the Credit Facility of $75.5 million under our $150.0
million revolving credit facility and approximately $130.3 million outstanding on our term loan.$169.0 million. Any further borrowings or voluntary prepayments against the revolving credit facilityCredit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under the Credit Facility at either prime rate or LIBORa BSBY rate, plus a margin.an applicable margin based our leverage ratio. At September 30, 2017,2022, the prime rate margin was equivalent to 1.125% and the LIBORBSBY rate margin was 2.125%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of $2.1$1.7 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 ConvertibleSenior Notes bear interest at athe fixed annual rate of 2.75% per year. The Convertible4.25%. We may redeem the Senior Notes, do not contain a call feature.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 September 30, 2017,2022, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $395.1 million and the fair value of these notesthe Senior Notes was approximately $179.9$317.2 million based on the last traded or broker quoted price.price, reported by the Financial Industry Regulatory Authority, Inc. Increases in market interest rates may cause the value of the ConvertibleSenior Notes to decrease, but such changes will not affect our interest costs.
The remainder of our long-term debt and leases consistsconsist 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 could causecauses the fair value of those liabilities to decrease, but such changes will not affect our interest costs.
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Item 4. | Controls and Procedures. |
Item 4.Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officer, hasofficers, 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 Securities Exchange Act of 1934, as amended (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 Securities and Exchange CommissionSEC rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial officer,officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial officerofficers concluded that our disclosure controls and procedures are effective as ofat September 30, 20172022 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 reportQuarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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Item 1. | Legal Proceedings. |
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.
There have been no material changes in our risk factors as previously disclosed inFor more information regarding legal proceedings see Part I, Item 1A, “Risk Factors”1, Financial Statements, Note 14.
Item 1A.Risk Factors.
Risk Factor Update
In light of our Annual Report on Form 10-K forincreased inflationary trends in the year ended December 31, 2016. Readers should carefully considerU.S. and global marketplace, we are also supplementing the risk factors discussed in set out under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016, which could materially affect2021 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 business, financial condition or future results.Annual Report on Form 10-K for the year ended December 31, 2021. 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, 20162021 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.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.Economic Conditions and Natural Disasters We may be adversely affected by the effects of inflation. Inflation has the potential to adversely affect our liquidity, business, financial condition and results of operations by increasing our overall cost structure or by reducing the amount of discretionary income consumers have available to spend on our services. The existence of inflation in the economy has resulted in, and may continue to result in, higher interest rates and capital costs, supply shortages, increased costs of labor, components, manufacturing and shipping, as well as weakening exchange rates and other similar effects. As a result of inflation, we have already experienced modest cost increases and surcharges from our vendors and suppliers on merchandise and goods and may continue to experience additional cost increases in the future, which could be of greater magnitude than those experienced to date. In addition, the impacts of inflation are also felt by consumers who face rising prices for a variety of goods and services, which could reduce the amount of discretionary spending that would otherwise be available to our client families and potential client families to spend on our services. Although we may take measures to mitigate the effects of inflation, if these measures are not effective, our business, financial condition, results of operations and liquidity could be materially adversely affected. Even if such measures are effective, there could be a difference between the timing of when these beneficial actions impact our results of operations and when the cost of inflation is incurred.
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 September 30, 2017:
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| | | | | | | | | | | | | | |
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 |
| | | | | | | | |
July 1, 2017 - July 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
August 1, 2017 - August 31, 2017 | | 285,353 |
| | $ | 24.30 |
| | 185,353 |
| | $ | 20,450,852 |
|
September 1, 2017 - September 30, 2017 | | 388,701 |
| | $ | 24.26 |
| | 388,701 |
| | $ | 11,019,052 |
|
Total for quarter ended September 30, 2017 | | 674,054 |
| | | | 574,054 |
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| | | | | | | | | | | | | | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Dollar Value of Shares That May Yet Be Purchased Under the Program(1)) |
| | | | | | | | |
July 1, 2022 - July 31, 2022 | | — | | | $ | — | | | — | | | $ | 48,898,769 | |
August 1, 2022 - August 31, 2022 | | — | | | $ | — | | | — | | | $ | 48,898,769 | |
September 1, 2022 - September 30, 2022 | | — | | | $ | — | | | — | | | $ | 48,898,769 | |
Total for quarter ended September 30, 2022 | | — | | | | | — | | | |
| | | | | | | | | | | | | | |
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(1(1) | ) | On August 18, 2017, we purchased 100,000 shares ofSee Part I, Item 1, Financial Statements, Note 15 for additional information on our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million.The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of thepublicly announced share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. program. |
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Item 3. | Defaults Upon Senior Securities.
|
Item 3.Defaults Upon Senior Securities.
Not applicable.
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Item 4. | Mine Safety Disclosures. |
Item 4.Mine Safety Disclosures.
Not applicable.
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Item 5. | Other Information. |
None.
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.
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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| | |
| | CARRIAGE SERVICES, INC. |
Date: | October 25, 2017November 2, 2022 | /s/ Viki K. BlindermanC. Benjamin Brink |
| | Viki K. BlindermanC. Benjamin Brink |
| | SeniorExecutive Vice President, PrincipalChief Financial Officer and SecretaryTreasurer |
| | (Principal Financial Officer) |
CARRIAGE SERVICES, INC.
INDEX OF EXHIBITS
| | | | | | | | |
Exhibit No. | | Description |
*10.1 | | |
| | |
Exhibit No.*10.2 | | Description |
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*31.110.3 | | |
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*10.4 | | |
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*31.1 | | |
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*31.2 | | |
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**32 | | |
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*101 | | Interactive Data Files. |
__________________
|
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(*)*101.INS | Filed herewith. |
XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
| | |
(**)101.SCH | Furnished herewith. |
Inline XBRL Taxonomy Extension Schema Documents. |
| | |
*101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
| | |
*101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
| | |
*101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
| | |
*101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
| | |
*104 | | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). |
__________________
| | | | | |
(*) | Filed herewith. |
(**) | Furnished herewith. |
(†) | Management contract or compensatory plan or arrangement. |