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. AtJune 30, 2022 , we operated 167 funeral homes in 26 states and 31 cemeteries in 11 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
Executive Leadership Changes
On
Divestitures
During the six months ended
Credit Facility
OnMay 27 2022 , we entered into a second amendment and commitment increase to the Credit Facility with the financial institutions party thereto, as lenders, andBank of America, N.A ., as administrative agent. Pursuant to this amendment, the revolving credit commitment was increased from$200.0 million to$250.0 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. Throughout the pandemic, the Company's senior leadership team has taken steps to assist our businesses in appropriately adjusting and adapting to the conditions resulting from the COVID-19 pandemic. Our businesses are open and ready to provide service to the families and communities they serve. 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. We continue to 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 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 the pandemic 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 - 40 - -------------------------------------------------------------------------------- the second quarter of 2022, we continued to see the number of funeral contracts normalize to pre-COVID-19 levels. 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 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 and Omicron variants, and any resulting government responses to 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. Our relationships with our vendors and suppliers have remained consistent and we continue to receive reliable service. To date, we have not experienced any material supply chain impacts or disruptions from our vendors attributable to COVID-19. 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 Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources for additional information related to our liquidity position. During the second quarter of 2022, we continued to see a decrease in COVID-19-related deaths and the normalization of funeral contracts to pre-COVID-19 levels at broadly higher funeral contract revenue averages. During this same time, we have not seen an adverse impact to our overall financial performance. Although we expect these trends to continue, we will continue to assess these impacts, including the potential impacts of new variants of COVID-19, such as the Delta and Omicron 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. Although we have taken steps to mitigate these cost increases, we expect these impacts to continue through the end of the year. More broadly, theU.S. economy has recently experienced an increase in the rate 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, 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
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
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culture and operating framework linked with incentive compensation programs that
attract top quality industry talent to our organization. We also believe that
Carriage provides a unique consolidation and operating framework that offers a
highly attractive succession planning solution for independent funeral home
owners who want their legacy family business to remain operationally prosperous
in their local communities.
Our Mission Statement states that "we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry" and our Guiding Principles state our core values, which are comprised of:
•Honesty, integrity and quality in all that we do;
•Hard work, pride of accomplishment, and shared success through employee ownership;
•Belief in the power of people through individual initiative and teamwork;
•Outstanding service and profitability go hand-in-hand; and
•Growth of the Company is driven by decentralization and partnership.
Our five Guiding Principles collectively embody our Being The Best high-performance culture and operating framework. Our operations and business strategy are built upon the execution of the following three models:
•Standards Operating Model;
•4E Leadership Model; and
•Strategic Acquisition Model.
Standards Operating Model
Our Standards Operating Model is focused on growing local market share, providing personalized high-value services to our client families and guests, and operating financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenue and earnings. 4E Leadership Model Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established 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 our 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 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 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.
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--------------------------------------------------------------------------------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. AtJune 30, 2022 , we had$72.5 million of availability under the Credit Facility. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets 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 endedDecember 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, share repurchases, dividend increases 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 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 second quarter with$1.1 million in cash. AtJune 30, 2022 , we had borrowings of$175.2 million outstanding on our Credit Facility compared to$155.4 million atDecember 31, 2021 .
The following table sets forth the elements of cash flow (in thousands):
Six
months ended
2021 2022
Cash at beginning of the year $
889
Net cash provided by operating activities 41,441 30,177 Acquisitions of real estate (2,935) (2,601) Proceeds from divestitures and sale of other assets 3,622 3,720 Proceeds from insurance reimbursements 120 2,167 Capital expenditures (8,751) (13,468) Net cash used in investing activities (7,944) (10,182)
Net borrowings on our Credit Facility, acquisition debt and finance lease obligations
12,848 19,598
Payments to redeem the Original Senior Notes (400,000) -
Payment of call premium for the redemption of the Original Senior Notes
(19,876) -
Payment of debt issuance costs for the Credit Facility and Senior Notes
(1,930) (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 172 774
Dividends paid on common stock (3,607) (3,455)
Purchase of treasury stock (11,559) (36,663)
Other financing costs (461) -
Net cash used in financing activities (32,893) (20,085)
Cash at end of the period $ 1,493 $ 1,058
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Operating Activities
For the six months endedJune 30, 2022 , cash provided by operating activities was$30.2 million compared to$41.4 million for the six months endedJune 30, 2021 . The decrease of$11.2 million is primarily due to unfavorable working capital changes in accrued liabilities and income tax receivables.
Investing Activities
Our investing activities, resulted in a net cash outflow of$10.2 million for the six months endedJune 30, 2022 compared to$7.9 million for the six months endedJune 30, 2021 , a decrease of$2.3 million .
Acquisition and Divestiture Activity
During the six months ended
During the six months ended
Capital Expenditures
For the six months ended
The following tables present our growth and maintenance capital expenditures (in
thousands):
Six months ended June 30,
2021 2022
Growth
Cemetery development $ 2,665 $ 3,673 Renovations at certain businesses(1) 1,397
3,620
Other 87 193
Total Growth $ 4,149 $ 7,486 (1) During the six months ended
businesses that were affected by Hurricane Ida, all of which was reimbursed by our
property insurance.
Six months ended June 30,
2021 2022
Maintenance
Facility repairs and improvements $ 870 $ 1,599
Vehicles 795 1,129
General equipment and furniture 2,296 2,347
Paving roads and parking lots 265 485
Other 376 422
Total Maintenance $ 4,602 $ 5,982
Financing Activities
Our financing activities resulted in a net cash outflow of
During the six months endedJune 30, 2022 , we had net borrowings on our Credit Facility, acquisition debt and finance leases of$19.6 million , offset by$36.7 million for the purchase of treasury stock and$3.5 million in dividends. During the six months endedJune 30, 2021 , we had net borrowings on our Credit Facility, acquisition debt and finance leases of$12.8 million , offset by the following payments: i)$19.9 million for the call premium to redeem our Original Senior Notes; ii)$11.6 million for the purchase of treasury stock; iii)$6.4 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 Convertible Notes; and v)$3.6 million in dividends. - 44 - --------------------------------------------------------------------------------
Share Repurchase
OnFebruary 23, 2022 , our Board authorized an increase in our share repurchase program to permit us to purchase up to an additional$75.0 million under our share repurchase program, in addition to amounts previously authorized and outstanding in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended ("the Exchange Act").
Share repurchase activity is as follows (dollar value in thousands):
Six months ended June 30,
2021 2022
Number of Shares Repurchased(1) 324,700 695,496
Average Price Paid Per Share$ 37.88 $
49.22
Dollar Value of Shares Repurchased(1)$ 12,301 $
34,233
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. AtJune 30, 2022 , our share repurchase program had$48.9 million authorized for repurchases.
Cash Dividends
Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2022 Per Share Dollar Value March 1st$ 0.1125 $ 1,725 June 1st$ 0.1125 $ 1,730 2021 Per Share Dollar Value March 1st$ 0.1000 $ 1,799 June 1st$ 0.1000 $ 1,808
Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and
acquisition debt at
June 30, 2022
Credit Facility $ 175,200
Finance leases 5,356
Operating leases 20,034
Acquisition debt 4,474
Total $ 205,064
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, 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 the Company to make additional stock repurchases, subject to the
satisfaction of certain conditions therein. We incurred $0.3 million in
transactions costs related to this amendment, which were capitalized and will be
amortized over the remaining term of the related debt using the straight-line
method.
At June 30, 2022 , our senior secured revolving 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 .
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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 June 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
AtJune 30, 2022 , we had outstanding borrowings under the Credit Facility of$175.2 million . We also had one letter of credit for$2.3 million under the Credit Facility. The letter of credit will expire onNovember 25, 2022 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. AtJune 30, 2022 , we had$72.5 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 our leverage ratio. AtJune 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 2.5% and 2.9% for the three months endedJune 30, 2021 and 2022, respectively and 2.8% and 2.5% for the six months endedJune 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 June 30 ,
Six months ended
2021 2022 2021 2022
Credit Facility interest expense
$ 817 $ 2,161 Credit Facility amortization of debt issuance costs 99 96 217 184 - 46 -
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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. AtJune 30, 2022 , operating and finance lease obligations were$36.7 million , with$4.4 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 June 30, Six months ended June 30,
2020 2021 2021 2022
Operating lease cost $ 964 $ 853 $ 1,924 $ 1,701
Short-term lease cost 57 76 106 178
Variable lease cost 16 16 57 23
Finance lease cost:
Depreciation of leased assets $ 109 $ 109 $ 217 $ 217
Interest on lease liabilities 119 112 239 225
Total finance lease cost 228 221 456 442
Total lease cost $ 1,265 $ 1,166 $ 2,543 $ 2,344
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 June 30, 2022 ,
acquisition debt obligations were $6.4 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 June 30, Six months ended June 30,
2021 2022 2021 2022
Acquisition debt imputed interest
expense $ 93 $ 79 $ 190 $ 159
Senior Notes
At June 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.
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The Indenture contains restrictive covenants limiting our ability and our
Restricted Subsidiaries (as defined in the Indenture) to, among other things,
incur additional indebtedness or issue certain preferred shares, create liens on
certain assets to secure debt, pay dividends or make other equity distributions,
purchase or redeem capital stock, make certain investments, sell assets, agree
to certain restrictions on the ability of Restricted Subsidiaries to make
payments to us, consolidate, merge, sell or otherwise dispose of all or
substantially all assets, or engage in transactions with affiliates. The
Indenture also contains customary events of default.
The debt discount and the debt issuance costs are being amortized using the
effective interest method over the remaining term of approximately 83 months of
the Senior Notes. For both the three and six months ended June 30, 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.
For the three and six months ended June 30, 2021 , the effective interest rate on
the unamortized debt discount and unamortized debt issuance costs for our $400
million in aggregate principal amount of 6.625% senior notes due 2026 (the
"Original Senior Notes") was 6.87% and 6.69%, respectively. For the six months
ended June 30, 2021 , 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 was 6.20% and 6.88%, respectively. All of our
Original Senior Notes were redeemed on June 1, 2021 .
At
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 June 30, Six months ended June 30,
2021 2022 2021 2022
Senior Notes interest expense $ 6,642 $ 4,230 $ 13,267 $ 8,480
Senior Notes amortization of debt
discount 128 122 266 243
Senior Notes amortization of debt
premium 27 - 85 -
Senior Notes amortization of debt
issuance costs 53 35 127 69
At
FINANCIAL HIGHLIGHTS
Below are our financial highlights (in thousands except for volumes and averages):
Three months ended June 30, Six months ended June 30,
2021 2022 2021 2022
Revenue $ 88,277 $ 90,600 $ 184,914 $ 188,761
Funeral contracts 10,842 11,006 24,138 24,521
Average revenue per funeral contract
$ 5,325 $ 5,439 Preneed interment rights (property) sold 3,276 3,511 5,934 5,889 Average price per preneed interment right sold$ 4,592 $ 4,337 $ 4,573 $ 4,398 Gross profit$ 28,927 $ 27,712 $ 63,988 $ 62,190 Net income (loss)$ (6,167) $ 10,899 $ 6,766 $ 27,301 Revenue for the three months endedJune 30, 2022 increased$2.3 million compared to the three months endedJune 30, 2021 , as we experienced a 1.5% increase in funeral contract volume, as well as a 2.0% increase in average revenue per funeral contract primarily due to market share gains and higher normalized death rates, offset by a 7.2% decrease in the number of preneed interment rights (property) sold, as well as a 5.6% decrease in the average price per interment right sold. Gross profit for the three months endedJune 30, 2022 decreased$1.2 million compared to the three months endedJune 30, 2021 , primarily due to the increase in operating expenses in our cemetery segment. Net income for the three months endedJune 30, 2022 increased$17.1 million compared to the three months endedJune 30, 2021 , primarily due to a$23.8 million loss on extinguishment of debt in 2021, a$2.0 million increase in net gain on divestitures, disposals and impairments charges, a$1.5 million decrease in interest expense, and a$1.4 million gain on insurance reimbursements, offset by a$8.4 million increase in income tax expense.
Revenue for the six months ended
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contract primarily due to market share gains and higher normalized death rates,
offset by a 0.8% decrease in the number of preneed interment rights (property)
sold, as well as a 3.8% decrease in the average price per interment right sold.
Gross profit for the six months ended
Net income for the six months endedJune 30, 2022 increased$20.5 million compared to the six months endedJune 30, 2021 , primarily due primarily due to a$23.8 million loss on extinguishment of debt in 2021, a$3.5 million decrease in interest expense, a$3.3 million gain on insurance reimbursements and a$0.9 million increase in net gain on divestitures, disposals and impairments charges, offset by a$7.9 million increase in income 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, 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 June 30, 2022 issued on July 27, 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.
- 49 -
--------------------------------------------------------------------------------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 June 30, Six months ended June 30,
2021 2022 2021 2022
Net income (loss) $ (6,167) $ 10,899 $ 6,766 $ 27,301
Special items(1)
Severance and separation costs(2) - - 1,575 -
Accretion of discount on Convertible
Notes(1) - - 20 -
Loss on extinguishment of debt(3) 23,807 - 23,807 -
Net (gain) loss on divestitures and other
costs 205 (1,284) (103) (581)
Litigation reserve(4) - 200 - 200
Net gain on insurance reimbursements(5) - (1,376) - (3,275)
Disaster recovery and pandemic costs(6) 145 - 1,039 168
Change in uncertain tax reserves and
other(1) - - - (533)
Other special items(7) 1,334 - 1,334 -
Sum of special items $ 25,491 $ (2,460) $ 27,672 $ (4,021)
Tax effect on special items(1) 7,457 (653) 7,881 (926)
Adjusted net income(8) $ 11,867 $ 9,092 $ 26,557 $ 24,206 (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 termination or resignation of certain key members of leadership in
the first quarter of 2021.
(3) Loss on the redemption of our Original Senior Notes 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 six 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 Original Senior
Notes for the two-week period during which our Senior Notes were issued prior to the
redemption of our Original Senior Notes. (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.
Below is a reconciliation of Gross profit (a GAAP financial measure) to Operating profit (a non-GAAP financial measure) (in thousands):
Three months ended June 30, Six months ended June 30,
2021 2022 2021 2022
Gross profit $ 28,927 $ 27,712 $ 63,988 $ 62,190
Cemetery property amortization 2,175 1,704 3,692 3,036
Field depreciation expense 3,142 3,253 6,278 6,550
Regional and unallocated funeral and
cemetery costs 5,770 5,966 11,843 12,313
Operating profit(1) $ 40,014 $ 38,635 $ 85,801 $ 84,089 (1) Operating profit is defined as Gross profit less Cemetery property amortization, Field
depreciation expense and Regional and unallocated funeral and cemetery costs.
- 50 -
--------------------------------------------------------------------------------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 June 30, Six months ended June 30,
2021 2022 2021 2022
Funeral Home $ 24,184 $ 24,152 $ 57,090 $ 57,887
Cemetery 15,830 14,483 28,711 26,202
Operating profit $ 40,014 $ 38,635 $ 85,801 $ 84,089
Operating profit margin(1) 45.3% 42.6% 46.4% 44.5%
(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 six
months ended
The term "same store" refers to funeral homes and cemeteries acquired prior toJanuary 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 afterDecember 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 six months of 2022 and three funeral homes we sold in the first six 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.
- 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 June 30,
2021 2022
Revenue:
Same store operating revenue $ 48,922 $ 50,631
Acquired operating revenue 6,939 7,641
Divested/planned divested revenue 783 428
Ancillary revenue 1,088
980
Preneed funeral insurance commissions 263
409
Preneed funeral trust and insurance 1,837 1,849 Total$ 59,832 $ 61,938 Operating profit: Same store operating profit$ 19,144 $ 19,042 Acquired operating profit 2,769 3,059 Divested/planned divested operating profit 119
(54)
Ancillary operating profit 274
151
Preneed funeral insurance commissions 79
145
Preneed funeral trust and insurance 1,799 1,809 Total$ 24,184 $ 24,152
The following measures reflect the significant metrics over this comparative period:
Three months ended
2021 2022
Same store:
Contract volume 9,241 9,415Average revenue per contract, excluding preneed funeral trust earnings
$ 5,294 $ 5,378 Average revenue per contract, including preneed funeral trust earnings$ 5,472 $ 5,547 Burial rate 35.7% 34.3% Cremation rate 56.5% 57.3% Acquired: Contract volume 1,446 1,489
Average revenue per contract, excluding preneed funeral trust earnings
$
4,799
$ 4,864 $ 5,238 Burial rate 38.4% 37.7% Cremation rate 56.7% 57.2% Funeral home same store operating revenue increased$1.7 million for the three months endedJune 30, 2022 compared to the same period in 2021. The increase in operating revenue is primarily related to a 1.9% increase in same store contract volume, as well as a 1.6% increase in the average revenue per contract excluding preneed interest. The same store contract volume increased in spite of a 45.4% decrease in same store COVID-19 related contracts during the second quarter of 2022 compared to the second quarter of 2021. This additional volume increase is primarily due to market share gains and higher normalized death rates. The increase in average revenue per contract in the second quarter of 2022 reflects increases of 1.8% in cremations with memorial services and 1.5% in burials with memorial services compared to the second quarter of 2021. These increases are primarily due to the normalization of customer preferences for memorial services and 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 endedJune 30, 2022 decreased$0.1 million when compared to the same period in 2021, due to the increase in operating expenses. The comparable operating profit margin decreased 150 basis points to 37.6%. Operating expenses as a percentage of operating revenue increased 1.5% with the largest - 52 - --------------------------------------------------------------------------------
increases in property and general liability insurance of 0.5%, transportation costs of 0.3%, and general and administrative expenses of 0.3%, which were partially offset by a decrease in salaries and benefits expenses of 0.4%, primarily due to lower health insurance expenses.
Funeral home acquired operating revenue for the three months endedJune 30, 2022 increased$0.7 million compared to the same period in 2021. The increase in operating revenue is primarily due to a 6.9% increase in the average revenue per contract excluding preneed interest, as well as a 3.0% increase in acquired contract volume. The acquired contract volume increased in spite of a 74.1% decrease in acquired COVID-19 related contracts for the second quarter of 2022 compared to the second quarter of 2021. This additional volume increase is primarily due to market share gains and higher normalized death rates. The increase in average revenue per contract in the second quarter of 2022 reflects increases of 6.1% in burials with memorial services and 1.8% in cremations with memorial services compared to the second quarter of 2021. These increases are primarily due to the normalization of customer preferences for memorial services and our continued 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 endedJune 30, 2022 increased$0.3 million when compared to the same period in 2021, due to the increase in acquired operating revenue and a decrease in operating expenses. The comparable operating profit margin increased 10 basis points to 40.0%. Operating expenses as a percentage of operating revenue decreased 0.1% with the largest decrease in salaries and benefits expenses of 0.9%, primarily due to lower health insurance expenses, offset by an increase in allowance for credit losses of 0.8%, due to the aging of higher accounts receivable related to the high volume of sales due to the COVID-19 spike during the latter half of 2021. Ancillary revenue, recorded in Other revenue, which represents revenue from our flower shop, pet cremation and online cremation businesses, as well as Ancillary operating profit each decreased$0.1 million for the three months endedJune 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 endedJune 30, 2022 compared to the same period in 2021. The increase is primarily related to the increase in funeral insurance commissions, resulting from an increase in preneed insurance sales. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased$0.1 million for the same comparative period, primarily due to the increase in preneed funeral insurance commission revenue.
The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):
Six months ended June 30,
2021 2022
Revenue:
Same store operating revenue $ 107,777 $ 112,157
Acquired operating revenue 14,924 16,251
Divested/planned divested revenue 1,984 1,146
Ancillary revenue 2,295
2,050
Preneed funeral insurance commissions 593
672
Preneed funeral trust and insurance 4,033 4,017 Total$ 131,606 $ 136,293 Operating profit: Same store operating profit$ 45,770 $ 46,541 Acquired operating profit 6,413 6,809 Divested/planned divested operating profit 264
71
Ancillary operating profit 516
372
Preneed funeral insurance commissions 168
158
Preneed funeral trust and insurance 3,959 3,936 Total$ 57,090 $ 57,887 - 53 -
--------------------------------------------------------------------------------
The following measures reflect the significant metrics over this comparative
period:
Six months ended June 30,
2021 2022
Same store:
Contract volume 20,516 21,068Average revenue per contract, excluding preneed funeral trust earnings
$ 5,253 $ 5,324 Average revenue per contract, including preneed funeral trust earnings$ 5,429 $ 5,491 Burial rate 36.5% 34.7% Cremation rate 56.5% 57.1% Acquired: Contract volume 3,194 3,195
Average revenue per contract, excluding preneed funeral trust earnings
$ 4,673 $ 5,086 Average revenue per contract, including preneed funeral trust earnings$ 4,747 $ 5,177 Burial rate 38.4% 37.3% Cremation rate 56.5% 57.4% Funeral home same store operating revenue increased$4.4 million for the six months endedJune 30, 2022 compared to the same period in 2021. The increase in operating revenue is primarily related to a 2.7% increase in same store contract volume, as well as a 1.4% increase in the average revenue per contract excluding preneed interest. The same store contract volume increased in spite of a 48.4% decrease in COVID-19 related contracts for the six months endedJune 30, 2022 compared to the same period in 2021. This additional volume increase is primarily due to market share gains and higher normalized death rates. The increase in average revenue per contract for the six months endedJune 30, 2022 reflects increases of 4.2% in burials with memorial services and 2.3% in cremations with memorial services compared to the same period of 2021. These increases are primarily due to the normalization of customer preferences for memorial services and 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 six months endedJune 30, 2022 increased$0.8 million when compared to the same period in 2021, due to the increase in operating revenue, offset by the increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 100 basis points to 41.5%. Operating expenses as a percentage of revenue increased 1.0% with the largest increases in allowance for credit losses of 0.3%, transportation costs of 0.2%, and general and administrative expenses of 0.2%, which were partially offset by a decrease in salaries and benefits expenses of 0.4%, primarily due to lower health insurance expenses. Funeral home acquired operating revenue for the six months endedJune 30, 2022 increased$1.3 million compared to the same period in 2021. The increase in operating revenue is primarily due to an 8.8% increase in the average revenue per contract excluding preneed interest, while the acquired contract volume was flat in spite of a 65.6% decrease in COVID-19 related contracts for the six months endedJune 30, 2022 compared to the same period in 2021. The increase in average revenue per contract in the six months endingJune 30, 2022 reflects increases of 6.9% in burials with memorial services and 5.2% in cremations with memorial services compared to the same period of 2021. These increases are primarily due to the normalization of customer preferences for memorial services and our continued 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 six months endedJune 30, 2022 increased$0.4 million when compared to the same period in 2021, due to the increase in operating revenue, offset by the increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 110 basis points to 41.9%. Operating expenses as a percentage of revenue increased 1.1% with the largest increases in allowance for credit losses of 0.9% and funeral costs of 0.5%, which were partially offset by a decrease in salaries and benefits expenses of 0.2%, primarily due to lower health insurance expenses. Ancillary revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses, decreased$0.2 million and Ancillary operating profit decreased$0.1 million for the six months endedJune 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$0.1 million for the six months endedJune 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, remained 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 June 30,
2021 2022
Revenue:
Same store operating revenue $ 16,906 $ 16,969
Acquired operating revenue 8,175 8,193
Divested revenue 70 -
Preneed cemetery trust revenue 3,040 3,183
Preneed cemetery finance charges 254 317 Total$ 28,445 $ 28,662 Operating profit: Same store operating profit$ 7,907 $ 6,479 Acquired operating profit 4,737 4,640 Divested operating profit 16 - Preneed cemetery trust operating profit 2,916
3,047
Preneed cemetery finance charges 254 317 Total$ 15,830 $ 14,483 The following measures reflect the significant metrics over this comparative period: Three months ended June 30, 2021 2022 Same store: Preneed revenue as a percentage of operating revenue 63% 65% Preneed revenue (in thousands)$ 10,676 $ 11,097 Atneed revenue (in thousands)$ 6,230 $ 5,872 Number of preneed interment rights sold 2,253 2,390 Average price per interment right sold $
4,108
Acquired:
Preneed revenue as a percentage of operating revenue 74% 66% Preneed revenue (in thousands)$ 6,055 $ 5,397 Atneed revenue (in thousands)$ 2,120 $ 2,796 Number of preneed interment rights sold 1,013 1,121 Average price per interment right sold $
5,704
Cemetery same store preneed revenue increased$0.4 million for the three months endedJune 30, 2022 compared to the same period in 2021, as we experienced a 6.1% increase in the number of interment rights sold, while the average price per interment right sold remained flat. Cemetery same store atneed revenue, which represents 35% of our same store operating revenue decreased$0.4 million for the three months endedJune 30, 2022 compared to the same period in 2021, as we experienced a 3.7% decrease in the number of interment rights sold, as well as a 2.2% decrease in the average price per interment right sold. Cemetery same store operating profit for the three months endedJune 30, 2022 decreased$1.4 million from the same period in 2021, due to the increase in operating expenses. The comparable operating profit margin decreased 860 basis points to 38.2%. Operating expenses as a percent of operating revenue increased 8.6% with the largest increases in the following areas: (1) allowance for credit losses of 4.9%, due to a change in estimate in the prior period, which resulted in lower credit loss expense in the prior period; (2) promotional expenses of 2.4% due to an increase in commissions paid on preneed sales; and (3) facilities and grounds expenses of 1.8%, primarily due to an increase in property and general liability insurance. - 55 - -------------------------------------------------------------------------------- Cemetery acquired preneed revenue decreased$0.7 million for the three months endedJune 30, 2022 compared to the same period in 2021, as we experienced a 15.2% decrease in the average price per interment right sold, while the number of interment rights sold increased 10.7%. Cemetery acquired atneed revenue, which represents 34% of our acquired operating revenue, increased$0.7 million for the three months endedJune 30, 2022 compared to the same period in 2021, as we experienced a 42.8% increase in the average price per interment right sold, while the number of interment rights sold decreased 16.3%. Cemetery acquired operating profit decreased$0.1 million for the three months endedJune 30, 2022 from the same period in 2021. The comparable operating profit margin decreased 130 basis points to 56.6% primarily as a result a 1.3% increase in operating expenses as a percent of operating revenue. Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased$0.2 million for the three months endedJune 30, 2022 compared to the same period in 2021. The increase in trust revenue is 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 three months endedJune 30, 2022 compared to the same period in 2021 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):
Six months ended June 30,
2021 2022
Revenue:
Same store operating revenue $ 31,541 $ 31,220
Acquired operating revenue 15,155 14,490
Divested revenue 150 -
Preneed cemetery trust revenue 5,943 6,197
Preneed cemetery finance charges 519 561 Total$ 53,308 $ 52,468 Operating profit: Same store operating profit$ 13,611 $ 11,779 Acquired operating profit 8,839 7,939 Divested operating profit 47 - Preneed cemetery trust operating profit 5,695
5,923
Preneed cemetery finance charges 519 561 Total$ 28,711 $ 26,202 - 56 -
--------------------------------------------------------------------------------
The following measures reflect the significant metrics over this comparative
period:
Six months ended June 30,
2021 2022
Same store:
Preneed revenue as a percentage of operating revenue 61% 62%
Preneed revenue (in thousands) $ 19,134 $ 19,201
Atneed revenue (in thousands) 12,407 12,019
Number of preneed interment rights sold 4,152 4,171
Average price per interment right sold $ 4,093 $ 4,056
Acquired:
Preneed revenue as a percentage of operating revenue 69% 65% Preneed revenue (in thousands) 10,498 9,386 Atneed revenue (in thousands) 4,657 5,104 Number of preneed interment rights sold 1,763 1,718 Average price per interment right sold $ 5,745 $ 5,231 Cemetery same store preneed revenue increased$0.1 million for the six months endedJune 30, 2022 compared to the same period in 2021, as we experienced a 0.5% increase in the number of interment rights sold, while the average price per interment right sold decreased 0.9%. Cemetery same store atneed revenue, which represents 38% of our same store operating revenue, decreased$0.4 million for the six months endedJune 30, 2022 compared to the same period in 2021, as we experienced a 3.6% decrease in the number of interment rights sold, while the average price per interment right sold increased 0.5%. Cemetery same store operating profit for the six months endedJune 30, 2022 decreased$1.8 million from the same period in 2021, due to the decrease in operating revenue and increase in operating costs. The comparable operating profit margin decreased 550 basis points to 37.7%. Operating expenses as a percent of operating revenue increased 5.4% with the largest increases in the following areas: (1) allowance for credit losses of 2.6%, 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; (2) promotional expenses of 1.4% due to an increase in commissions paid on preneed sales; and (3) facilities and grounds expenses of 1.2%, primarily due to an increase in property and general liability insurance. Cemetery acquired preneed revenue decreased$1.1 million for the six months endedJune 30, 2022 compared to the same period in 2021, as we experienced an 8.9% decrease in the average price per interment right sold, as well as a 2.6% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 35% of our acquired operating revenue, increased$0.4 million for the six months endedJune 30, 2022 compared to the same period in 2021, as we experienced a 15.3% increase in the average price per interment right sold, while the number of interment rights sold decreased 12.7%. Cemetery acquired operating profit decreased$0.9 million for the six months endedJune 30, 2022 from the same period in 2021, due to the decrease in operating revenue and increase in operating costs. The comparable operating profit margin decreased 350 basis points to 54.8%. Operating expenses as a percent of operating revenue increased 3.5% with the largest increases in the following areas: (1) facilities and grounds expenses of 1.5%, primarily due to an increase in property and general liability insurance; (2) promotional expenses of 0.9% due to an increase in commissions paid on preneed and atneed sales; and (3) general and administrative expenses increased 0.7%. Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased$0.3 million for the six months endedJune 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$0.3 million for the six months endedJune 30, 2022 compared to the same period in 2021 primarily due to the increase in revenue.
Cemetery property amortization. Cemetery property amortization totaled
- 57 -
--------------------------------------------------------------------------------
Field depreciation. Depreciation expense for our field businesses totaled
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$6.0 million for the three months endedJune 30, 2022 , an increase of$0.2 million compared to the same period in 2021, primarily due to the following: (1) a$0.6 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19; (2) a$0.2 million increase in salary and benefits expenses, which includes additional cemetery sales employees; offset by (3) a$0.5 million decrease in cash incentives and equity compensation; and (4) a$0.1 million decrease in health and safety expenses related to COVID-19. Regional and unallocated funeral and cemetery costs totaled$12.3 million for the six months endedJune 30, 2022 , an increase of$0.5 million compared to the same period in 2021, primarily due to the following: (1) a$1.0 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19; (2) a$0.5 million increase in salary and benefits expenses, which includes additional cemetery sales employees; (3) a$0.3 million increase in other general administrative costs, which includes higher travel costs; and (4) a$0.1 million increase in separation expenses; offset by (4) a$0.7 million decrease in cash incentives and equity compensation; and (5) a$0.7 million decrease in health and safety expenses related to COVID-19.
Other Financial Statement Items
General, administrative and other. General, administrative and other expenses totaled$9.2 million for the three months endedJune 30, 2022 , an increase of$2.0 million compared to the same period in 2021, primarily due to the following: (1) 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; (2) a$0.8 million increase in salary and benefits expenses, which includes talent investment in our recently developed marketing department, as well as a Chief Information Officer; and (3) a$0.2 million increase in cash incentives and equity compensation. General, administrative and other expenses totaled$17.7 million for the six months endedJune 30, 2022 , an increase of$1.4 million compared to the same period in 2021, primarily due to the following: (1) a$1.3 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; (2) a$1.1 million increase in salary and benefits expenses, which includes talent investment in our recently developed marketing department, as well as a Chief Information Officer; (3) a$0.7 million increase in cash incentives and equity compensation; offset by (4) a$1.6 million decrease in separation expense related to the resignation of two members of senior leadership in the first quarter of 2021, and (5) 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 June 30, Six months ended June 30,
2021 2022 2021 2022
Net (gain) loss on divestitures and
real property $ 205 $ (1,278) (103) (575)
Net loss on disposals of fixed assets 622 85 622 149
Total $ 827 $ (1,193) $ 519 $ (426)
During the six months ended June 30, 2022 , we sold real property for $2.7
million and two funeral homes for $0.9 million for a net gain of $0.6 million .
During the six months ended June 30, 2021 , we sold three funeral homes for $3.5
million for a net gain of $0.1 million and disposed of fixed assets for a net
loss of $0.6 million .
Interest expense. Interest expense related to our various debt arrangement is as
follows (in thousands):
Three months ended
June 30, Six months ended June 30,
2021 2022 2021 2022
Senior Notes $ 6,795 $ 4,387 $ 13,574 $ 8,793
Credit Facility 470 1,409 1,033 2,344
Finance leases 119 112 239 225
Acquisition debt 93 79 190 159
Convertible Notes - - 19 -
Other 1 1 7 9
Total $ 7,478 $ 5,988 $ 15,062 $ 11,530
- 58 ---------------------------------------------------------------------------------
Gain on insurance reimbursements. During the three and six months ended
Income taxes. We had an income tax expense of$4.2 million and an income tax benefit of$4.2 million for the three months endedJune 30, 2022 and 2021, respectively and income tax expense of$9.3 million and$1.4 million for the six month endedJune 30, 2022 and 2021, respectively. Our operating tax rate before discrete items was 28.0% and 33.0% for the three months endedJune 30, 2022 and 2021, respectively and 27.15% and 28.5% for the six month endedJune 30, 2022 and 2021, respectively. OnJune 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. OnOctober 11, 2021 , we received an adverse ruling from theIRS related to our accounting method change for cemetery property revenue recognition filed in 2018 and subsequently filed an automatic accounting method change to adopt theIRS' preferred method of revenue recognition for cemetery property effective for the year endingDecember 31, 2021 . OnMarch 2, 2022 , we received approval from theIRS regarding our method change filed related to the revenue recognition of cemetery merchandise and services sales. As a result, we recorded a$0.6 million reduction to the reserve for uncertain tax positions, including interest, during the six months endedJune 30, 2022 . AtDecember 31, 2021 andJune 30, 2022 , the reserve for uncertain tax positions was$3.8 million and$3.2 million , respectively, related to carrying back the net operating losses generated in the tax year endedDecember 31, 2018 , filed under the CARES Act onJune 30, 2020 .
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Understanding our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies is integral to understanding our Consolidated Financial Statements. Our critical accounting policies are more fully described in Part I, Item 1, Financial Statements, Note 1. We have identified Business Combinations andGoodwill as those accounting policies that require significant judgments, assumptions and estimates and that have a significant impact on our financial condition and results of operations. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from period to period. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate. 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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