CARRIAGE SERVICES, INC. OVERVIEW
General
Carriage Services, Inc. ("Carriage," the "Company," "we," "us," or "our") was incorporated in theState of Delaware inDecember 1993 and is a leadingU.S. provider of funeral and cemetery services and merchandise. We operate in two business segments: Funeral Home Operations, which currently account for approximately 70% of our revenue, and Cemetery Operations, which currently account for approximately 30% of our revenue. AtSeptember 30, 2021 , we operated 171 funeral homes in 26 states and 32 cemeteries in 12 states. We compete with other publicly held and independent operators of funeral and cemetery 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 "atneed" (time of death) and "preneed" (planned prior to death) basis. Recent Developments Divestitures During the nine months endedSeptember 30, 2021 , we sold three funeral homes for$3.5 million and real property for$0.7 million , for a total net loss of$0.2 million . Business Impact under the Macroeconomic Environment of COVID-19 OnMarch 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. Beginning in earlyMarch 2020 , the Company's senior leadership team took certain steps to assist our businesses in appropriately adjusting and adapting to the conditions resulting from the COVID-19 pandemic. Our businesses remain open and ready to provide service to their communities in this time of need. While our businesses provide an essential public function, along with a critical responsibility to the communities and families they serve, the health and safety of our employees and the families we serve remain our top priority. The Company has taken additional steps during this time to continually review and update our processes and procedures to comply with all regulatory mandates and procure additional supplies to ensure that each of our businesses have appropriate personal protective equipment to provide these essential services. The Company has also implemented additional safety and precautionary measures as it concerns our businesses' day-to-day interaction with the families and communities they serve. The overall impact of the macroeconomic environment to the deathcare industry from COVID-19 may provide varying results as compared to other industries. Our industry's revenues are impacted by various factors, including the number of funeral services performed, the average price for a service and the mix of traditional burial versus cremation contracts. During the third quarter of 2021, changes in the macroeconomic environment as a result of the pandemic have, to this point, led to an increase in funeral volumes and the services we provide. 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 various areas that could affect the results of our operations, though the scope, severity and duration of these impacts remain uncertain at this time because the ultimate impact of COVID-19 remains uncertain, including the potential impacts of new variants of COVID-19, such as the Delta variant, and any resulting government responses to such variants. We do not believe we are vulnerable to certain concentrations, whether by geographic area, revenue for specific products or our relationships with our vendors. Our relationships with our vendors and - 40 - -------------------------------------------------------------------------------- suppliers have remained consistent and we continue to receive reliable service. Remote working arrangements, when utilized, have not materially affected our ability to maintain and support operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. We believe our access to capital, the cost of our capital, or the sources and uses of our cash should be relatively consistent in the near term. While the expected duration of the pandemic is unknown, we have not currently experienced any material negative impacts to our liquidity position, access to capital, or cash flows as a result of COVID-19. See Liquidity within Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, for additional information related to our liquidity position. We also applied certain measures of the CARES Act, which provided a cash benefit in the form of tax payment refunds, tax credits related to employee retention, cash deferral for the employer portion of theSocial Security tax and minimal cash taxes for 2020. While we have taken advantage of certain tax relief provisions of the CARES Act, we do not believe it will have a significant impact on our short-term or long-term liquidity position. See Item 1, Financial Statements and Supplementary Data, Note 1 for additional information related to the CARES Act. During the third quarter of 2021, we experienced a high growth rate in funeral home revenue due to elevated funeral volumes from broad market share gains and higher COVID-19 related deaths combined with incremental growth in the average revenue per funeral contract. We will continue to assess these impacts, including the potential impacts of new variants of COVID-19, such as the Delta variant, and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related gathering restrictions, if any, evolves. Funeral Home Operations Our funeral homes offer a complete range of high value personal services to meet a family's funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Factors affecting our funeral operating results include, but are not limited to: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage to increase average revenue per contract. Cemetery Operations Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an atneed and preneed basis. Factors affecting our cemetery operating results include, but are not limited to: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds. Business Strategy Our business strategy is based on strong, local leadership with entrepreneurial principles that is focused on sustainable long term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, high-performance culture operating framework linked with incentive compensation programs that attract top quality industry talent to our organization. We also believe that Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for independent owners who want their legacy family business to remain operationally prosperous in their local communities. Our Mission Statement states that "we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry" and our Guiding Principles state our core values, which are comprised of: •Honesty, integrity and quality in all that we do; •Hard work, pride of accomplishment, and shared success through employee ownership; •Belief in the power of people through individual initiative and teamwork; •Outstanding service and profitability to hand-in-hand; and •Growth of the company is driven by decentralization and partnership. Our five Guiding Principles collectively embody our Being The Best high-performance culture and operating framework. Our operations and business strategy are built upon the execution of the following three models: •Standards Operating Model; - 41 - -------------------------------------------------------------------------------- •4E Leadership Model; and •Strategic Acquisition Model. Standards Operating Model Our Standards Operating Model is focused on growing local market share, providing personalized high value services to our client families and guests, and operating financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenue and earnings. 4E Leadership Model Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established byJack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high performance culture: Energy to get the job done; the ability to Energize others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require localManaging Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams. Strategic Acquisition Model Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. We believe that both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic criteria to assess acquisition candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses. We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization ("EBITDA") margins (a non-GAAP measure). We use criteria such as cultural alignment, volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry to evaluate the strategic position of potential acquisition candidates. Our financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital. Our belief in our Mission Statement and Guiding Principles and proper execution of the three models that define our strategy have given us a competitive advantage in every market where we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin. - 42 - -------------------------------------------------------------------------------- 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 New Credit Facility. We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our New Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. 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 endedDecember 31, 2020 and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. Our plan is to remain focused on integrating our newly acquired businesses and to use cash on hand and borrowings under our New Credit Facility primarily for general corporate purposes, payment of dividends and debt obligations, strategic acquisitions, internal growth capital expenditures, share repurchases, dividend increases and further debt repayments. We also expect continued divestiture activity for the next six months, which could yield approximately$3-4 million of cash from the proceeds of the sale. From time to time we may also use available cash resources (including borrowings under our New Credit Facility) to repurchase shares of our common stock, subject to satisfying certain financial covenants in our New Credit Facility and in the Indenture governing our New Senior Notes. We believe that our existing and anticipated cash resources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months. Cash Flows We began 2021 with$0.9 million in cash and ended the third quarter with$1.1 million in cash. AtSeptember 30, 2021 , we had borrowings of$86.9 million outstanding on our Credit Facility compared to$47.2 million atDecember 31, 2020 . The following table sets forth the elements of cash flow (in thousands): Nine months ended September 30, 2020 2021 Cash at beginning of year $ 716$ 889 Net cash provided by operating activities 67,822 69,699 Acquisitions of businesses and real estate (28,011) (3,285) Proceeds from divestitures and sale of other assets 7,416 4,375 Proceeds from insurance reimbursements 97 2,946 Capital expenditures (10,034) (15,252) Net cash used in investing activities (30,532) (11,216)
Net borrowings on our Credit Facility, acquisition debt and finance lease obligations
(28,860) 39,042
Payment of call premium related to the Original Senior Notes - (19,876)
Payment of debt issuance and transaction costs (78) (6,554)
Conversions and maturity of the Convertibles Notes (4,563) (3,980)
Net proceeds related to employee equity plans 640 674
Dividends paid on common stock (4,251) (5,390)
Purchase of treasury stock - (61,739)
Other financing costs (169) (461)
Net cash used in financing activities (37,281) (58,284)
Cash at end of the period $ 725 $ 1,088
Operating Activities
For the nine months ended September 30, 2021 , cash provided by operating
activities was $69.7 million compared to $67.8 million for the nine months ended
September 30, 2020 . The increase of $1.9 million is primarily due to the
increase in
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operating income (excluding the non-cash impact of the divestitures, disposals
and impairment charges) of $15.3 million , which was offset by unfavorable
working capital changes in accounts receivable, income tax receivables and
accounts payable.
Investing Activities
Our investing activities, resulted in a net cash outflow of $11.2 million for
the nine months ended September 30, 2021 compared to $30.5 million for the nine
months ended September 30, 2020 , a decrease of $19.3 million .
Acquisition and Divestiture Activity
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.
During the nine months ended September 30, 2020 , we acquired a funeral home and
cemetery combination business in Lafayette, California for $33.0 million in
cash, of which $5.0 million was deposited in escrow in 2019 and $28.0 million
was paid in 2020. We also sold six funeral homes for $7.3 million and we sold
real property for $0.1 million .
Capital Expenditures
For the nine months ended September 30, 2021 , capital expenditures (comprising
of growth and maintenance spend) totaled $15.3 million compared to $10.0 million
for the nine months ended September 30, 2020 , an increase of $5.3 million .
The following tables present our growth and maintenance capital expenditures (in
thousands):
Nine months ended September 30,
2020 2021
Growth
Cemetery development $ 3,321 $ 4,120
Renovations at certain businesses 673 2,030
Live streaming equipment 560 142
Other 86 -
Total Growth $ 4,640 $ 6,292
Nine months ended September 30,
2020 2021
Maintenance
Facility repairs and improvements $ 1,610$ 2,172 Vehicles 1,201
1,481
General equipment and furniture 1,957 4,167 Paving roads and parking lots 475 1,140 Other 151 - Total Maintenance $ 5,394$ 8,960 Financing Activities Our financing activities resulted in a net cash outflow of$58.3 million for the nine months endedSeptember 30, 2021 compared to a net cash outflow of$37.3 million for the nine months endedSeptember 30, 2020 , an increase of$21.0 million . During the nine months endedSeptember 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 Original Senior Notes; ii)$61.7 million for the purchase of treasury stock; iii)$6.6 million for debt issuance and transactions costs related to our New Senior Notes and New Credit Facility; iv)$4.0 million for the conversions and maturity of our Convertible Notes; and v)$5.4 million in dividends. During the nine months endedSeptember 30, 2020 , we had net payments on our Credit Facility, acquisition debt and finance leases of$28.9 million , paid$4.3 million in dividends and paid$4.6 million for the repurchases of our Convertible Notes. - 44 - -------------------------------------------------------------------------------- Share Repurchase OnMay 18, 2021 andJuly 26, 2021 , our Board authorized increases of up to an additional$25.0 million , respectively, in our share repurchase program to permit us to purchase up to a total of$50.0 million under our share repurchase program, in addition to amounts previously authorized and outstanding, in accordance with the Exchange Act. Share repurchase activity is as follows (dollar value in thousands): Three months ended September 30,
Nine months ended
2021 2021
Number of Shares Repurchased(1) 1,203,493 1,528,197 Average Price Paid Per Share $ 44.24 $42.89 Dollar Value of Shares Repurchased(1) $ 53,239 $ 65,540
(1) During the three and nine months ended
Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares. AtSeptember 30, 2021 , we had approximately$10.1 million available for repurchase under our share repurchase program. Dividends Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2021 Per Share Dollar Value March 1st$ 0.1000 $ 1,799 June 1st$ 0.1000 $ 1,808 September 1st$ 0.1000 $ 1,783 2020 Per Share Dollar Value March 1st$ 0.0750 $ 1,339 June 1st$ 0.0750 $ 1,343 September 1st$ 0.0875 $ 1,569
Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and
acquisition debt at
September 30, 2021
Credit Facility $ 86,900
Finance leases 5,615
Operating leases 20,905
Acquisition debt 5,089
Total $ 118,509
Credit Facility
On May 13, 2021 , in connection with the issuance of the New Senior Notes, we
entered into the New Credit Facility with the New Credit Facility Subsidiary
Guarantors (as defined below), the financial institutions party thereto, as
lenders, and Bank of America, N.A ., as administrative agent. We incurred $0.8
million in transactions costs related to the New Credit Facility, which were
capitalized and will be amortized over the remaining term of the related debt
using the straight-line method.
On May 13, 2021 , we used approximately $21.4 million of the availability under
the New Credit Facility to repay the then outstanding balances under our Former
Credit Facility and all commitments thereunder were terminated. In connection
with the repayment in full of all amounts due thereunder, the Former Credit
Facility was retired and $2.1 million of letters of credit previously issued
under the Former Credit Facility were deemed issued under (and remain
outstanding under) the New Credit Facility. In connection with the termination
of the Former Credit Facility, for the nine months ended September 30, 2021 , we
recognized a loss on the write-off of $0.1 million in unamortized debt issuance
costs, which was recorded in Loss on extinguishment of debt.
Our obligations under the New Credit Facility are unconditionally guaranteed on
a joint and several basis by the same subsidiaries which guarantee the New
Senior Notes and certain of our Subsidiary Guarantors. The New Credit Facility
allows
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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 final maturity of the New Credit Facility will
occur on May 13, 2026 .
The New 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 New 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 New 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 New 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 New 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, 2021 , we were subject to the following
financial covenants under our New Credit Facility: (A) a Total Leverage Ratio
not to exceed 5.00 to 1.00 and (B) a Fixed Charge Coverage Ratio (as defined in
the New 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 New Credit
Facility as of September 30, 2021 .
At September 30, 2021 , we had outstanding borrowings under the New Credit
Facility of $86.9 million . We also had one letter of credit for $2.1 million
under the New Credit Facility, which was increased to $2.3 million on September
1, 2021 . The letter of credit will expire on November 25, 2021 and is expected
to automatically renew annually and secures our obligations under our various
self-insured policies. At September 30, 2021 , we had $60.8 million of
availability under the New Credit Facility.
Outstanding borrowings under our New Credit Facility bear interest at either a
prime rate or a LIBOR rate, plus an applicable margin based upon our leverage
ratio. At September 30, 2021 , the prime rate margin was equivalent to 0.75% and
the LIBOR rate margin was 1.75%. The weighted average interest rate on our New
Credit Facility was 2.0% and 2.5% for the three and nine months ended September
30, 2021 , respectively. The weighted average interest rate on our Former Credit
Facility was 3.9% and 4.0% for the three and nine months ended September 30,
2020 , 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,
2020 2021 2020 2021
Credit Facility interest expense $ 828 $ 383 $ 3,164 $ 1,200
Credit Facility amortization of debt
issuance costs 118 80 363 297
Lease Obligations
Our lease obligations consist of operating and finance leases. We lease certain
office facilities, certain funeral homes and equipment under operating leases
with original terms ranging from one to nineteen years. Many leases include one
or more options to renew, some of which include options to extend the leases for
up to 26 years. We lease certain funeral homes under finance leases with
original terms ranging from ten to forty years.
The lease cost related to our operating leases and short-term leases and
depreciation expense and interest expense related to our finance leases are as
follows (in thousands):
Three months ended September 30, Nine months ended September 30,
2020 2021 2020 2021
Operating lease cost $ 927 $ 947 $ 2,838 $ 2,871
Short-term lease cost 35 39 107 145
Variable lease cost 17 43 41 100
Finance lease cost:
Depreciation of leased assets $ 111 $ 111 $ 329 $ 328
Interest on lease liabilities 123 117 374 356
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Acquisition Debt
Acquisition debt consists of deferred purchase price and promissory notes
payable to sellers. A majority of the deferred purchase price and notes bear no
interest and are discounted at imputed interest rates ranging from 7.3% to
10.0%. Original maturities range from five to twenty years.
The imputed interest expense related to our acquisition debt is as follows (in
thousands):
Three months ended September 30,
Nine months ended
2020 2021 2020 2021
Acquisition debt imputed interest
expense $ 122 $ 90 $ 373 $ 280
Convertible Subordinated Notes due 2021
During the nine months ended September 30, 2021 , we converted approximately $2.4
million in aggregate principal amount of our Convertible Notes held by certain
holders for approximately $3.8 million in cash. The Convertible Notes matured on
March 15, 2021 , at which time all Convertible Notes then outstanding,
approximately $0.2 million in aggregate principal amount, were paid in full in
cash at par value. No Convertible Notes remain outstanding at September 30,
2021 .
The interest expense and accretion of debt discount and debt issuance costs
related to our Convertible Notes are as follows (in thousands):
Three months ended September 30,
Nine months ended
2020 2021 2020 2021
Convertible Notes interest expense $ 43 $ 18 $ 130 $ 18
Convertible Notes accretion of debt
discount 69 20 200 20
Convertible Notes amortization of debt
issuance costs 9 1 21 1
The effective interest rate on the unamortized debt discount for both the three
months ended September 30, 2020 and 2021 was 11.4%. The effective interest rate
on the debt issuance costs for the three months ended September 30, 2020 and
2021 was 3.2% and 3.1%, respectively.
Senior Notes
On May 13, 2021 , we completed the issuance of the New Senior Notes and related
guarantees by the Subsidiary Guarantors in a private offering under Rule 144A
and Regulation S of the Securities Act. We used the proceeds of $395.5 million
from the offering of the New Senior Notes, which are net of a 1.125% debt
discount of $4.5 million , together with cash on hand and borrowings under the
New Credit Facility, to redeem all of the then outstanding Original Senior
Notes. We paid a premium of $19.9 million to redeem the Original Senior Notes on
June 1, 2021 at a redemption price of 104.97% of the principal amount thereof,
plus accrued and unpaid interest of $13.25 million . During the nine months ended
September 30, 2021 , we incurred $1.3 million in transaction costs related to the
New Senior Notes.
For the nine months ended September 30, 2021 , we recognized a net loss of $23.7
million related to the redemption of the Original Senior Notes, which was
recorded in Loss on extinguishment of debt. The loss is composed of the $19.9
million call premium, the write-off of $3.4 million in unamortized debt
discount, the write-off of $1.8 million in unamortized debt issuance costs,
offset by the write-off of $1.4 million in unamortized debt premium.
The New Senior Notes were issued under the Indenture, dated as of May 13, 2021 ,
among the Company, the Subsidiary Guarantors and Wilmington Trust, National
Association , as trustee.
The New Senior Notes bear interest at 4.25% per year. Interest on the New Senior
Notes is payable semi-annually in arrears on May 15 and November 15 of each
year, beginning on November 15, 2021 . The New Senior Notes mature on May 15,
2029 , unless earlier redeemed or purchased. The New Senior Notes are unsecured,
senior obligations and are fully and unconditionally guaranteed on a senior
unsecured basis, jointly and severally by each of the Subsidiary Guarantors.
We may redeem the New 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 New 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 New 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 New 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 New Senior Notes
(including any additional New Senior Notes) outstanding under the Indenture
remain outstanding immediately after the occurrence of such redemption (unless
all
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New 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 New Senior Notes will have the
option to require us to purchase for cash all or a portion of their New Senior
Notes at a price equal to 101% of the principal amount of the New 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 New Senior Notes at a price equal to 100% of the principal
amount of the New 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 92 months of
the New Senior Notes. The effective interest rate on the unamortized debt
discount and the unamortized debt issuance costs for the New Senior Notes for
both three and nine months ended September 30, 2021 was 4.42% and 4.30%,
respectively.
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
2020 2021 2020 2021
Senior Notes interest expense $ 6,625 $ 4,250 $ 19,875 $ 17,517
Senior Notes amortization of debt
discount 133 118 393 384
Senior Notes amortization of debt
premium 56 - 165 85
Senior Notes amortization of debt
issuance costs 72 34 208 161
At September 30, 2021 , the fair value of the New Senior Notes, which are Level 2
measurements, was $403.2 million .
The effective interest rate on the unamortized debt discount and unamortized
debt issuance costs for the Original Senior Notes, issued in May 2018 , for both
the three and nine months ended September 30, 2020 was 6.87% and 6.69%,
respectively. The effective interest rate on the unamortized debt premium and
the unamortized debt issuance costs for the additional Original Senior Notes,
issued in December 2019 , for both the three and nine months ended September 30,
2020 was 6.20% and 6.90%, respectively.
FINANCIAL HIGHLIGHTS
Below are our financial highlights (in thousands except for volumes and
averages):
Three months ended September 30,
Nine months ended
2020 2021 2020 2021
Revenue $ 84,393 $ 95,041 $ 239,360 $ 279,955
Funeral contracts 11,512 12,566 34,742 36,704
Average revenue per funeral contract
$ 5,110 $ 5,336 Preneed interment rights (property) sold 2,655 2,841 6,861 8,775 Average price per preneed interment right sold$ 3,662 $ 4,763 $ 3,805 $ 4,635 Gross profit$ 27,874 $ 33,164 $ 76,205 $ 97,152 Net income$ 5,525 $ 13,046 $ 7,725 $ 19,812 Revenue for the three months endedSeptember 30, 2021 increased$10.6 million compared to the three months endedSeptember 30, 2020 , as we experienced a 7.0% increase in the number of preneed interment rights (property) sold, as well as a 30.1% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in the third quarter of 2020 due to COVID-19; (2) the full integration of the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020; and (3) the execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. - 48 - -------------------------------------------------------------------------------- We also experienced a 9.2% increase in total funeral contracts and a 3.2% increase in the average revenue per funeral contract for the three months endedSeptember 30, 2021 compared to the same period in 2020. Approximately 60% of the increase in funeral volumes is attributable to deaths from the Delta COVID-19 variant. The additional volume increase is primarily a consequence of our ability to adapt to the continued changing environment with our new and innovative ways to serve families. The increase in the average revenue per contract is a further reflection of our ability to creatively serve our families, as the number of contracts for which we provide memorial services are returning to pre-COVID-19 levels. Gross profit for the three months endedSeptember 30, 2021 increased$5.3 million compared to the three months endedSeptember 30, 2020 , primarily due to the increase in revenue from both our funeral home and cemetery segments, as well as decreases in funeral home operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel. Net income for the three months endedSeptember 30, 2021 increased$7.5 million compared to the three months endedSeptember 30, 2020 , primarily due to a$5.3 million increase in gross profit, a$2.9 million decrease in interest expense, and a$4.1 million decrease in net loss on divestitures, disposals and impairments charges, offset by a$2.6 million increase in general, administrative and other expenses, primarily due to increased incentive compensation, as well as a$2.3 million increase in tax expense. Revenue for the nine months endedSeptember 30, 2021 increased$40.6 million compared to the nine months endedSeptember 30, 2020 , as we experienced a 27.9% increase in the number of preneed interment rights (property) sold, as well as a 21.8% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19; (2) the full integration of the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020; and (3) the execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. We also experienced a 5.6% increase in total funeral contracts and a 4.4% increase in the average revenue per funeral contract for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The increase in volume is not only due to COVID-19 deaths during the first and third quarters of 2021, but is also a consequence of our ability to adapt to the continued changing environment with our new and innovative ways to serve families. The increase in the average revenue per contract is a further reflection of our ability to creatively serve our families, as the number of contracts for which we provide memorial services are returning to pre-COVID-19 levels in the second and third quarters of 2021. Gross profit for the nine months endedSeptember 30, 2021 increased$20.9 million compared to the nine months endedSeptember 30, 2020 , primarily due to the increase in revenue from both our funeral home and cemetery segments, as well as decreases in funeral home and cemetery operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel. Net income for the nine months endedSeptember 30, 2021 increased$12.1 million compared to the nine months endedSeptember 30, 2020 , primarily due to the increase in gross profit of$20.9 million , an$18.2 million decrease in net loss on divestitures, disposals and impairments charges, and a$4.6 million decrease in interest expense, offset by a$23.8 million loss on extinguishment of debt, a$5.9 million increase in general, administrative and other expenses, primarily due to increased incentive compensation, as well as a$2.4 million increase in tax 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, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under "- Other Financial Statement Items." REPORTING AND NON-GAAP FINANCIAL MEASURES We also present our financial performance in our "Operating and Financial Trend Report" ("Trend Report") as reported in our earnings release for the three months endedSeptember 30, 2021 issued onOctober 27, 2021 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 withUnited States generally accepted accounting principles ("GAAP"). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business. - 49 - --------------------------------------------------------------------------------
Below is a reconciliation of Net income, a GAAP measure, to Adjusted net income, a non-GAAP measure, (in thousands):
Three months ended September 30 ,
Nine months ended
2020 2021 2020 2021
Net income $ 5,525 $ 13,046 $ 7,725 $ 19,812
Special items(1)
Acquisition expenses - - 159 -
Severance and separation costs(2) - - 563 1,575
Performance awards cancellation and
exchange 108 - 180 -
Accretion of discount on Convertible
Notes(1) 69 - 200 20
Loss on extinguishment of debt(3) - - - 23,807
Net loss on divestitures and other
costs 4,917 282 4,917 179
Net impact of impairment of goodwill
and other - 500 14,769 500
Litigation reserve(4) - - 270 -
Disaster recovery and pandemic costs 340 1,002 1,312 2,041
Other special items(5) (60) 1,020 410 2,354
Sum of special items $ 5,374 $ 2,804 $ 22,780 $ 30,476
Tax effect on special items(1) 1,755 738 7,243 8,619
Adjusted net income(6) $ 9,144 $ 15,112 $ 23,262 $ 41,669 (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. In 2020, Special items are taxed at the
federal statutory rate of 21.0%, except the Net loss on divestitures and other costs
and the Net impact of impairment of goodwill and other, which are taxed at the
operating tax rate in the period. In 2021, Special items are taxed at the operating tax
rate in the period and include adjustments to reflect prior quarter Special items at
the operating tax rate on a year-to-date basis. The Accretion of discount on
Convertible Notes is not tax effected.
(2) The increase during the nine months ended
related to the resignation of two members of senior leadership in the first quarter of
2021.
(3) Loss on the redemption of our Original Senior Notes during the second quarter of 2021. (4) Relates to legal costs associated with a former corporate employee lawsuit. (5) During the nine months endedSeptember 30, 2020 , the Special item relates to the costs
associated with a state audit assessment. During the nine months ended
2021, the Special item relates to (1) the write-off of certain fixed assets; (2) a
one-time
interest paid on our Original Senior Notes for the two-week period during which our New
Senior Notes were issued prior to the redemption of our Original Senior Notes. (6) 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.
- 50 -
--------------------------------------------------------------------------------Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) (in thousands):
Three months ended September 30 ,
Nine months ended
2020 2021 2020 2021
Gross profit $ 27,874 $ 33,164 $ 76,205 $ 97,152
Cemetery property amortization 1,471 1,521 3,445 5,213
Field depreciation expense 3,233 3,154 9,770 9,432
Regional and unallocated funeral and
cemetery costs 4,731 6,812 11,204 18,655
Operating profit(1) $ 37,309 $ 44,651 $ 100,624 $ 130,452 (1) Operating profit is defined as Gross profit less Cemetery property amortization, Field
depreciation expense and Regional and unallocated funeral and cemetery costs.
Our operations are reported in two business segments: Funeral Home and Cemetery.
Below is a breakdown of Operating profit (a non-GAAP measure) by Segment (in
thousands):
Three months ended September 30 ,
Nine months ended
2020 2021 2020 2021
Funeral Home $ 25,636 $ 31,355 $ 75,462 $ 88,445
Cemetery 11,673 13,296 25,162 42,007
Operating profit $ 37,309 $ 44,651 $ 100,624 $ 130,452
Operating profit margin(1) 44.2% 47.0% 42.0% 46.6%
(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 endedSeptember 30, 2021 and 2020. The term "same store" refers to funeral homes and cemeteries acquired prior toJanuary 1, 2017 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 afterDecember 31, 2016 , 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 six funeral homes and three funeral homes we sold in the nine months endedSeptember 30, 2020 and 2021, respectively. "Planned divested" refers to the funeral home and cemetery businesses that we intend to divest. "Ancillary" in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business. Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure. - 51 - -------------------------------------------------------------------------------- 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
2020 2021
Revenue:
Same store operating revenue $ 47,865 $ 55,502
Acquired operating revenue 8,205 9,354
Divested/planned divested revenue 1,796 694
Ancillary revenue 1,196 1,096
Preneed funeral insurance commissions 369 375
Preneed funeral trust and insurance 2,003 1,876
Total $ 61,434 $ 68,897
Operating profit:
Same store operating profit $ 19,903 $ 24,960
Acquired operating profit 2,942 3,974
Divested/planned divested operating profit 369 187
Ancillary operating profit 292 274
Preneed funeral insurance commissions 159 121
Preneed funeral trust and insurance 1,971 1,839
Total $ 25,636 $ 31,355 The following measures reflect the significant metrics over this comparative period:
Three months ended
2020 2021
Same store:
Contract volume 9,442 10,664Average revenue per contract, excluding preneed funeral trust earnings
$ 5,069 $ 5,205
Average revenue per contract, including preneed funeral trust
earnings $ 5,260 $ 5,361
Burial rate 35.8% 33.7%
Cremation rate 57.1% 57.5%
Acquired:
Contract volume 1,619 1,739Average revenue per contract, excluding preneed funeral trust earnings
$ 5,068 $ 5,379
Average revenue per contract, including preneed funeral trust
earnings $ 5,142 $ 5,440
Burial rate 39.5% 38.4%
Cremation rate 55.7% 54.1%
Funeral home same store operating revenue for the three months ended September
30, 2021 increased $7.6 million compared to the same period in 2020. The
increase in operating revenue is primarily due to a 12.9% increase in same store
contract volume, as well as a 2.7% increase in the average revenue per contract
excluding preneed interest. Approximately 60% of the increase in funeral volumes
is attributable to deaths from the Delta COVID-19 variant. The additional volume
increase is primarily a consequence of our ability to adapt to the continued
changing environment with our new and innovative ways to serve families. The
increase in the average revenue per contract is a further reflection of our
ability to creatively serve our families, as the number of contracts for which
we provide memorial services are returning to pre-COVID-19 levels.
Funeral home same store operating profit for the three months ended September
30, 2021 increased $5.1 million when compared to the same period in 2020. The
comparable operating profit margin increased 340 basis points to 45.0%. The
increase in operating profit is primarily due to the increase in same store
operating revenue along with disciplined expense and cost management by leaders
at each business. Overall same store operating expenses as a percent of
operating revenue
- 52 -
--------------------------------------------------------------------------------
decreased 3.4% with the largest decrease in salaries and benefits expense of
2.1% as a percent of operating revenue, as we focused on optimizing the inherent
operating leverage in each business by increasing revenue without adding extra
personnel.
Funeral home acquired operating revenue for the three months ended September 30,
2021 increased $1.1 million compared to the same period in 2020. The increase in
operating revenue is primarily due to a 7.4% increase in acquired contract
volume, as well as a 6.1% increase in the average revenue per contract excluding
preneed interest. The average revenue per contract in the third quarter of 2021
reflects an increase in cremation contracts with services in the third quarter
of 2021 compared to the third quarter of 2020, primarily due to our continued
determination and focus to welcome and educate families on the many products and
service options that are available with cremation.
Funeral home acquired operating profit for the three months ended September 30,
2021 increased $1.0 million when compared to the same period in 2020. The
comparable operating profit margin increased 660 basis points to 42.5%. The
increase in operating profit is primarily due to the increase in acquired
operating revenue along with disciplined expense and costs management by leader
at each business. Overall acquired operating expenses as a percent of operating
revenue decreased 6.6% with the largest decrease in salaries and benefits
expense of 5.9% as a percentage of operating revenue, as we focused on
optimizing the inherent operating leverage in each business by increasing
revenue without adding extra personnel.
Ancillary revenue, which is recorded in Other revenue, represents revenue from
our flower shop, pet cremation and online cremation businesses, decreased $0.1
million , while Ancillary operating profit remained flat for the three months
ended September 30, 2021 compared to the same period in 2020.
Preneed funeral insurance commissions and preneed funeral trust and insurance
revenue (recorded in Other revenue) on a combined basis, decreased $0.1 million
for the three months ended September 30, 2021 compared to the same period in
2020. The decrease is primarily related to a 6.2% decrease in preneed contracts
maturing to atneed which triggers the recognition of trust earnings on matured
contracts. Operating profit for preneed funeral insurance commissions and
preneed trust and insurance, on a combined basis, decreased $0.2 million for the
same comparative period, primarily due to the decrease 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
2020 2021
Revenue:
Same store operating revenue $ 139,126 $ 159,728
Acquired operating revenue 26,113 28,050
Divested/planned divested revenue 6,822 2,434
Ancillary revenue 3,464 3,391
Preneed funeral insurance commissions 1,061 968
Preneed funeral trust and insurance 5,711 5,932
Total $ 182,297 $ 200,503
Operating profit:
Same store operating profit $ 56,687 $ 69,454
Acquired operating profit 9,944 11,702
Divested/planned divested operating profit 1,829 390
Ancillary operating profit 908 790
Preneed funeral insurance commissions 477 288
Preneed funeral trust and insurance 5,617 5,821
Total $ 75,462 $ 88,445
- 53 -
--------------------------------------------------------------------------------
The following measures reflect the significant metrics over this comparative
period:
Nine months ended September 30,
2020 2021
Same store:
Contract volume 27,603 30,793Average revenue per contract, excluding preneed funeral trust earnings
$ 5,040 $ 5,187
Average revenue per contract, including preneed funeral trust
earnings $ 5,226 $ 5,359
Burial rate 36.3% 35.2%
Cremation rate 56.5% 57.1%
Acquired:
Contract volume 5,293 5,366Average revenue per contract, excluding preneed funeral trust earnings
$ 4,933 $ 5,227
Average revenue per contract, including preneed funeral trust
earnings $ 4,997 $ 5,291
Burial rate 41.0% 40.0%
Cremation rate 55.1% 54.3%
Funeral home same store operating revenue for the nine months ended September
30, 2021 increased $20.6 million compared to the same period in 2020. The
increase in operating revenue is primarily driven by an 11.6% increase in same
store contract volume, as well as a 2.9% increase in the average revenue per
contract excluding preneed interest. The increase in volume is not only due to
COVID-19 deaths during the first and third quarters of 2021, but is also a
consequence of our ability to adapt to the continued changing environment with
our new and innovative ways to serve families. The increase in the average
revenue per contract is a further reflection of our ability to creatively serve
our families, as the number of contracts for which we provide memorial services
are returning to pre-COVID-19 levels in the second and third quarters of 2021.
Funeral home same store operating profit for the nine months ended September 30,
2021 increased $12.8 million when compared to the same period in 2020. The
comparable operating profit margin increased 280 basis points to 43.5%. The
increase in operating profit is primarily due to the increase in same store
operating revenue along with disciplined expense and cost management by leaders
at each business. Overall same store operating expenses as a percent of
operating revenue decreased 2.7% with the largest decrease in salaries and
benefits expense of 1.6% as a percent of operating revenue, as we focused on
optimizing the inherent operating leverage in each business by increasing
revenue without adding extra personnel.
Funeral home acquired operating revenue for the nine months ended September 30,
2021 increased $1.9 million compared to the same period in 2020. The increase in
operating revenue is primarily driven by a 6.0% increase in the average revenue
per contract excluding preneed interest, as well as a 1.4% increase in acquired
contract volume. The increase in the average revenue per contract is a further
reflection of our ability to creatively serve our families, as the number of
contracts for which we provide memorial services are returning to pre-COVID-19
levels in the second and third quarters of 2021.
Acquired operating profit for the nine months ended September 30, 2021 increased
$1.8 million when compared to the same period in 2020. The comparable operating
profit margin increased 360 basis points to 41.7%. The increase in operating
profit is primarily due to the increase in acquired operating revenue along with
disciplined expense and cost management by leaders at each business. Overall
acquired operating expenses as a percent of operating revenue decreased 3.6%
with the largest decrease in salaries and benefits expense of 3.9% as a percent
of operating revenue, as we focused on optimizing the inherent operating
leverage in each business by increasing revenue without adding extra personnel.
Ancillary revenue, which is recorded in Other revenue, represents revenue from
our flower shop, pet cremation and online cremation businesses and Ancillary
operating profit both decreased $0.1 million for the nine months ended September
30, 2021 compared to the same period in 2020.
Preneed funeral insurance commissions and preneed funeral trust and insurance
(recorded in Other revenue) on a combined basis, increased $0.1 million for the
nine months ended September 30, 2021 compared to the same period in 2020. The
increase is primarily from trust and insurance earnings on preneed contracts.
Recognition of trust earnings is triggered at the time a preneed contract
matures to at need. For the nine months ended September 30, 2021 , the average
trust earnings per matured preened contract increased slightly compared to the
prior period. Operating profit for preneed funeral insurance commissions and
preneed trust and insurance, on a combined basis, remained relatively flat for
the same comparative period.
- 54 -
--------------------------------------------------------------------------------
Cemetery Segment
The following table sets forth certain information regarding our Revenue and
Operating profit from our cemetery operations (in thousands):
Three months ended
2020 2021
Revenue:
Same store operating revenue $ 14,391 $ 16,342
Acquired operating revenue 5,220 6,362
Divested/planned divested revenue 89 52
Preneed cemetery trust revenue 3,045 3,136
Preneed cemetery finance charges 214 252
Total $ 22,959 $ 26,144
Operating profit:
Same store operating profit $ 6,161 $ 6,465
Acquired operating profit 2,335 3,547
Divested/planned divested operating profit 25 19
Preneed cemetery trust operating profit 2,938 3,013
Preneed cemetery finance charges 214 252
Total $ 11,673 $ 13,296 The following measures reflect the significant metrics over this comparative period:
Three months ended
2020 2021
Same store:
Preneed revenue as a percentage of operating revenue 61% 61%
Preneed revenue (in thousands) $ 8,771 $ 9,909
Atneed revenue (in thousands) $ 5,619 $ 6,432
Number of preneed interment rights sold 1,897 2,223
Average price per interment right sold $
3,523
Acquired:
Preneed revenue as a percentage of operating revenue 70% 66% Preneed revenue (in thousands) $ 3,642$ 4,195 Atneed revenue (in thousands) $ 1,578$ 2,168 Number of preneed interment rights sold 748 606 Average price per interment right sold $
4,051
Cemetery same store preneed revenue increased$1.1 million for the three months endedSeptember 30, 2021 compared to the same period in 2020, as we experienced a 17.2% increase in the number of interments rights sold, as well as a 17.2% increase in the average price per interment right sold. The increase is primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in the third quarter of 2020 due to COVID-19; and (2) the continuous execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, increased$0.8 million as we experienced a 9.1% increase in same store atneed contracts and a 5.0% increase in the average sale per contract for the three months endedSeptember 30, 2021 compared to the same period in 2020. These increases are primarily due to the increased number of deaths in 2021 related to COVID-19. Cemetery same store operating profit for the three months endedSeptember 30, 2021 increased$0.3 million from the same period in 2020, primarily due to the increase in operating revenue. The comparable operating profit margin decreased 320 basis points to 39.6%. Operating expenses as a percent of operating revenue increased 3.0% with the largest increases in the following areas: (1) promotional expenses increased 2.5% due to our recent deployment of a performance-based compensation - 55 - -------------------------------------------------------------------------------- plan with escalating commissions for higher sales target achievement; and (2) allowance for credit losses increased 1.1% primarily due to one business who experienced unusually low credit loss expense in the prior year. There are three businesses in our acquired cemetery portfolio, two of which were acquired in the fourth quarter of 2019 and one acquired in the first quarter of 2020. In the first quarter of 2020, we hired new sales leadership at two of the newly acquired cemeteries and continue to build their respective sales teams as we execute our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. As a result, our acquired cemetery portfolio experienced a$0.6 million increase in preneed revenue and a$0.6 million increase in atneed revenue for the three months endedSeptember 30, 2021 compared to the same period in 2020. Cemetery acquired operating profit increased$1.2 million for the three months endedSeptember 30, 2021 from the same period in 2020. The comparable operating profit margin increased 1,110 basis points to 55.8% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 11.0% with the largest decreases in the following areas: (1) promotional expenses and salaries and benefits both decreased 3.8% as a percent of operating revenue as we benefited from an increase in revenue without incurring additional expenses; and (2) merchandise and services costs decreased 2.1%. Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased$0.1 million for the three months endedSeptember 30, 2021 compared to the same period in 2020. The increase in trust revenue is due to a decrease in realized losses on delivered merchandise and services contracts and an increase in finance charge revenue. Operating profit for the two categories of Other revenue, on a combined basis, increased$0.1 million for the three months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to the increase in revenue. The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):
Nine months ended
2020 2021
Revenue:
Same store operating revenue $ 36,952 $ 47,883
Acquired operating revenue 12,075 21,517
Divested/planned divested revenue 182 202
Preneed cemetery trust revenue 7,158 9,079
Preneed cemetery finance charges 696 771
Total $ 57,063 $ 79,452
Operating profit:
Same store operating profit $ 13,002 $ 20,076
Acquired operating profit 4,597 12,386
Divested/planned divested operating profit 23 66
Preneed cemetery trust operating profit 6,844 8,708
Preneed cemetery finance charges 696 771
Total $ 25,162 $ 42,007
- 56 ---------------------------------------------------------------------------------
The following measures reflect the significant metrics over this comparative period:
Nine months ended
2020 2021
Same store:
Preneed revenue as a percentage of operating revenue 60% 61%
Preneed revenue (in thousands) $ 22,144 $ 29,046
Atneed revenue (in thousands) $ 14,810 $ 18,840
Number of preneed interment rights sold 5,233 6,375
Average price per interment right sold $
3,686
Acquired:
Preneed revenue as a percentage of operating revenue 65% 68% Preneed revenue (in thousands) $ 7,899$ 14,692 Atneed revenue (in thousands) $ 4,175$ 6,825 Number of preneed interment rights sold 1,600 2,369 Average price per interment right sold $
4,248
Cemetery same store preneed revenue increased$6.9 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020, as we experienced a 21.8% increase in the number of interments rights sold, as well as an 11.4% increase in the average price per interment right sold. The increase is primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19; and (2) the continuous execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, increased$4.0 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The increase was a result of a 16.2% increase in same store atneed contracts and a 9.4% increase in the average sale per contract, primarily due to the increased deaths in 2021 related to COVID-19. Cemetery same store operating profit increased$7.1 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The comparable operating profit margin increased 670 basis points to 41.9% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 6.7% with the largest decreases in the following areas: (1) salaries and benefits expense decreased 2.9%, as we increased revenue without adding extra personnel; (2) facilities and grounds expenses decreased 1.3%; and (3) allowance for credit losses decreased 0.6%. There are three businesses in our acquired cemetery portfolio, two of which were acquired in the fourth quarter of 2019 and one acquired in the first quarter of 2020. In the first quarter of 2020, we hired new sales leadership at two of the newly acquired cemeteries and continue to build their respective sales teams as we execute our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. As a result, our acquired cemetery portfolio experienced a$6.8 million increase in preneed revenue and a$2.7 million increase in atneed revenue for the nine months endedSeptember 30, 2021 compared to the same period in 2020. Cemetery acquired operating profit increased$7.8 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The comparable operating profit margin increased 1,950 basis points to 57.6% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 19.5% with the largest decreases in the following areas: (1) salaries and benefits expense decreased 9.3%, as we increased revenue without adding extra personnel; (2) promotional expenses decreased 4.3%; (3) merchandise and services costs decreased 2.5%; and (4) facilities and grounds expenses decreased 1.5%. Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased$2.0 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020. The increase in our trust fund income is primarily due to our execution of a major repositioning strategy beginning at the height of the COVID-19 market crisis inMarch 2020 , substantially increasing our preneed cemetery trust revenue and operating profit. We experienced a$1.4 million increase in income and a$0.3 million increase in realized capital gains within our perpetual care trusts for the nine months endedSeptember 30, 2021 compared to the same period of 2020. Additionally, income from delivered merchandise and service contracts increased$0.2 million . Operating profit for the two categories of Other revenue, on a combined basis, increased$1.9 million for the nine months endedSeptember 30, 2021 compared to the same period in 2020 primarily due to the increase in revenue. - 57 - -------------------------------------------------------------------------------- Cemetery property amortization. Cemetery property amortization totaled$1.5 million and$5.2 million for the three and nine months endedSeptember 30, 2021 , respectively, increases of$0.1 million and$1.8 million , respectively, compared to the same periods in prior year primarily due to the increase in property sold across our cemetery portfolio. Field depreciation. Depreciation expense for our field businesses totaled$3.2 million and$9.4 million for the three and nine months endedSeptember 30, 2021 , respectively, decreases of$0.1 million and$0.3 million , respectively, compared to the same periods in prior year primarily due to building structures and older vehicles becoming fully depreciated without any newly acquired building structures and vehicles to offset the decreases. 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$6.8 million for the three months endedSeptember 30, 2021 , an increase of$2.1 million compared to the same period in the prior year primarily due to the following: (1) a$0.9 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (2) a$0.4 million increase in other general administrative costs, which includes higher travel costs; (3) a$0.4 million increase in natural disaster costs due to Hurricane Ida impacting severalLouisiana businesses; (4) a$0.3 million increase in salary and benefits expenses, which includes additional cemetery sales employees; and (5) a$0.1 million increase in separation expenses. Regional and unallocated funeral and cemetery costs totaled$18.7 million for the nine months endedSeptember 30, 2021 , an increase of$7.5 million compared to the same period in the prior year primarily due to the following: (1) a$5.1 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (2)$1.0 million increase in salary and benefits expenses, which includes our Chief Operating Officer hired inJune 2020 and six additional cemetery sales employees; (3) a$0.7 million increase in other general administrative costs, which includes higher travel and advertising costs; (4) a$0.5 million increase in health and safety expenses related to the COVID-19 pandemic; and (5) a$0.5 million increase in natural disaster costs due to Hurricane Ida impacting severalLouisiana businesses; offset by (6) a$0.3 million decrease in state audit assessments. Other Financial Statement Items General, administrative and other. General, administrative and other expenses totaled$8.8 million for the three months endedSeptember 30, 2021 , an increase of$2.6 million compared to the same period in the prior year primarily due to the following: (1) a$1.2 million increase in insurance claims expense, which includes a one-time$1.0 million payment for residual insurance claims; (2) a$0.7 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (3) a$0.4 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; and (4) a$0.3 million increase in salary and benefits expenses. General, administrative and other expenses totaled$24.5 million for the nine months endedSeptember 30, 2021 , an increase of$5.9 million compared to the same period in the prior year primarily due to the following: (1) a$2.5 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (2) a$1.2 million increase in separation expenses related to the resignation of two members of senior leadership; (3) a$1.2 million increase in insurance claims expense, which includes a one-time$1.0 million payment for residual insurance claims; (4) a$1.0 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; and (5) a$0.3 million increase in salary and benefits expenses; offset by (6) a$0.3 million decrease in litigation reserve. Home office depreciation and amortization. Home office depreciation and amortization expense totaled$0.3 million and$0.8 million for the three and nine months endedSeptember 30, 2021 , respectively, decreases of$0.1 million and$0.3 million , respectively, compared to the same periods in prior year primarily due to equipment and software at the home office becoming fully depreciated in the latter half of the prior year without any newly acquired assets to offset the decreases. - 58 - -------------------------------------------------------------------------------- Net loss on divestitures, disposals and impairments charges. The components of Net loss on divestitures, disposals and impairment charges are as follows (in thousands): Three months endedSeptember 30 ,
Nine months ended
2020 2021 2020 2021
Goodwill impairment $ - $ - $ 13,632 $ -
Tradename impairment - - 1,061 -
Assets held for sale impairment - 500 - 500
Net loss on divestitures and real
property 4,917 282 4,917 179
Net loss on disposals of fixed assets - 76 - 698
Total $ 4,917 $ 858 $ 19,610 $ 1,377
During the nine months ended September 30, 2021 , we divested three funeral homes
and sold real property for a total 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 .
During the nine months ended September 30, 2020 , we recorded an impairment for
goodwill of $13.6 million as the carrying amount of our funeral homes in the
Eastern Region Reporting Unit exceeded the fair value and we recorded an
impairment for certain of our tradenames of $1.1 million as the carrying amount
of these tradenames exceeded the fair value. We also recognized a net loss of
$4.9 million on the sale of six funeral homes.
Interest expense. Interest expense totaled $5.1 million and $20.1 million for
the three and nine months ended September 30, 2021 , respectively, decreases of
$2.9 million and $4.6 million , respectively, compared to the same periods in
prior year, primarily due to decreased borrowings and lower interest rates on
our Credit Facility, as well as lower interest on our New Senior Notes.
Income taxes. Income tax expense totaled $5.1 million and $6.6 million for the
three and nine months ended September 30, 2021 respectively, increases of $2.3
million and $2.4 million , respectively. Our operating tax rate before discrete
items was 28.2% and 34.0% for the three months ended September 30, 2021 and
2020, respectively and 28.3% and 33.8% for the nine months ended September 30,
2021 and 2020, respectively.
We filed carryback refund claims for the 2018 and 2019 tax years as allowed by
the legislative changes included in the CARES Act. As a result of requesting a
tax refund in excess of $5 million , we must receive Joint Committee approval and
undergo an audit for the tax year ending December 31, 2018 . This audit is
currently in progress. In 2020, the 2018 tax return was amended to take full
advantage of the CARES Act legislative benefits resulting in additional losses
that increase the amount of our carryback refund claim. 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. As of September 30, 2021 ,
we received an adverse ruling related to the change to our method of recognition
of revenue from our constructed cemetery property, however, we are currently in
further discussions with the IRS regarding this ruling. Due to the uncertainty
that exists, a reserve has been recorded against the benefit derived from this
carrying back that the net operating losses generated. At September 30, 2021 ,
the reserve for uncertain tax positions was $3.7 million .
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Consolidated Financial Statements requires us to make
estimates and judgments that affect the amounts reported in the unaudited
consolidated financial statements 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 revenue and expenses,
the carrying value of assets and the recorded amounts of liabilities. Actual
results may differ from these estimates and such estimates may change if the
underlying conditions or assumptions change. Historical performance should not
be viewed as indicative of future performance because there can be no assurance
that our margins, operating income and net income, as a percentage of revenue,
will be consistent from year to year.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is based upon our Consolidated Financial Statements
presented herewith, which have been prepared in accordance with GAAP. Our
critical accounting policies are discussed in MD&A in our Annual Report on Form
10-K for the year ended December 31, 2020 .
- 59 -
--------------------------------------------------------------------------------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. Item 3.Quantitative and Qualitative Disclosures About Market Risk. In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks other than those related to COVID-19 which are described in more detail in Part 1, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 . The following quantitative and qualitative information is provided about financial instruments to which we are a party atSeptember 30, 2021 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 atSeptember 30, 2021 are presented in Item 1, "Condensed Notes to Consolidated Financial Statements," Note 6 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 1.26% 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. AtSeptember 30, 2021 , we had outstanding borrowings under the New Credit Facility of$86.9 million . Any further borrowings or voluntary prepayments against the New Credit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under the New Credit Facility at either prime rate or the LIBOR rate plus a margin. AtSeptember 30, 2021 , the prime rate margin was equivalent to 0.75% and the LIBOR rate margin was 1.75%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of$0.9 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 New Senior Notes bear interest at the fixed annual rate of 4.25%. We may redeem the New Senior Notes, in whole or in part, at the redemption price of 102.13% on or afterMay 15, 2024 , 101.06% on or afterMay 15, 2025 and 100% on or afterMay 15, 2026 , plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time beforeMay 15, 2024 , we may also redeem all or part of the New Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. AtSeptember 30, 2021 , the carrying value of the New Senior Notes on our Consolidated Balance Sheet was$394.5 million and the fair value of the New Senior Notes was$403.2 million based on the last traded or broker quoted price, reported by theFinancial Industry Regulatory Authority, Inc. Increases in market interest rates may cause the value of the New Senior Notes to decrease, but such changes will not affect our interest costs. The remainder of our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease, but such changes will not affect our interest costs. - 60 -
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