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 75% of our revenue, and Cemetery Operations, which currently account for approximately 25% of our revenue. AtSeptember 30, 2020 , we operated 180 funeral homes in 27 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. Our funeral homes offer a complete range of high value personal services to meet a family's funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. We provide funeral and cemetery services and products on both an "atneed" (time of death) and "preneed" (planned prior to death) basis. Recent Developments Divestitures During the three months endedSeptember 30, 2020 , we divested six funeral homes for at total of$7.3 million , at a net loss on the sale of$4.9 million . Convertible Notes Repurchases OnSeptember 9, 2020 , we repurchased$3.76 million in aggregate principal amount 2.75% convertible subordinated notes due 2021 ("Convertible Notes") for$4.5 million in cash (plus accrued interest of$0.1 million totaling$4.6 million ). The privately-negotiated repurchases represented approximately 60% of the aggregate principal amount of Convertible Notes. Following the settlement of the repurchases, the aggregate principal amount of the Convertible Notes was reduced to approximately$2.6 million . In connection with the repurchases of our Convertible Notes, we obtained a limited consent from the lenders under our$190.0 million senior secured revolving credit facility ("Credit Facility") onAugust 7, 2020 to permit the repurchases of the Convertible Notes. 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. Since early March, the Company's senior leadership team has taken certain steps to assist our businesses in appropriately adjusting and adapting to the conditions resulting from the COVID-19 pandemic. Our businesses have been designated as essential services and, therefore, each one of the Company's business locations remains open and ready to provide service to their communities in this time of need. While our businesses provide an essential public function, along with a critical responsibility to the communities and families they serve, the health and safety of our employees and the families we serve remain our top priority. The Company has taken additional steps during this time to continually review and update our processes and procedures to comply with all regulatory mandates and procure additional supplies to ensure that each of our businesses have appropriate personal protective equipment to provide these essential services. Additionally, in many of our business locations, we have also updated staffing and service guidelines, such as reducing the number of team members present for a service, restricting the size and number of attendees and adjusting other operating procedures. The Company has also implemented additional safety and precautionary measures as it concerns our businesses' day-to-day interaction with the families and communities they serve. The overall impact of the macroeconomic environment to the deathcare industry from COVID-19 may provide varying results as compared to other industries. Our industry's revenues are impacted by various factors, including the number of funeral services performed, the average price for a service and the mix of traditional burial versus cremation contracts. Changes in the macroeconomic environment as a result of the pandemic have, to this point, led to an increase in volume and may create situations where people choose to spend less on funerals by purchasing less expensive caskets, minimize the scale of services and visitations, or elect not to make a preneed funeral or cemetery arrangement. During this time, our businesses have been focused on being innovative and resourceful, providing some type of immediate service as part of the grieving process. Gathering and travel restrictions across many areas of the country have limited our ability to provide large, in-person - 40 - -------------------------------------------------------------------------------- memorialization services and we have seen client families elect webcasting and livestreaming services, hold services with smaller attendance or rotating visitors, or in some cases, choose to delay services to a future date. Within our financial reporting environment, we have considered various areas that could affect the results of our operations, though the scope, severity and duration of these impacts remain uncertain at this time because the COVID-19 pandemic is continually evolving and the ultimate impact of COVID-19 remains uncertain. Certain estimates inherently involve assumptions about future events and annual results, making reliable estimates for those matters challenging in periods of economic instability. We do not believe we are vulnerable to certain concentrations, whether by geographic area, revenue for specific products or our relationships with our vendors. Our relationships with our vendors and suppliers have remained consistent and we continue to receive utmost service. Remote working arrangements have not adversely affected our ability to maintain and support operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. We believe our access to capital, the cost of our capital, or the sources and uses of our cash should be relatively consistent in the near term, but given the unprecedented nature of COVID-19, we also believe, it is prudent for us to take a broad-based approach to ensuring we maintain financial flexibility throughout the expected duration of the pandemic. We have, as part of a larger plan, taken steps to reduce overall expenses throughout 2020. For example, discretionary spending, such as growth capital expenditures (primarily cemetery inventory development) will be tightly managed and minimized during this time. Moreover, our executive officers and non-employee directors voluntarily agreed to temporary reductions in salary compensation fromApril 19, 2020 throughJune 28, 2020 . 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 have also applied certain measures of the CARES Act, which was enacted onMarch 27, 2020 , which has provided a cash benefit in the form of tax payment refunds (we received the 2018 tax year refund onAugust 7, 2020 and anticipate a further refund for tax year 2019), tax credits related to employee retention, cash deferral for the employer portion of theSocial Security tax and anticipated minimal cash taxes for 2020. Although we expect to take advantage of certain tax relief provisions of the CARES Act, we do not believe it will have a significant impact on our short-term or long-term liquidity position. See Item 1, Financial Statements and Supplementary Data, Note 1 for additional information related to the CARES Act. The COVID-19 pandemic, and related gathering restrictions issued by state and local officials, did impact aspects of our financial results in the third quarter and year to date, including revenue, volume, preneed cemetery sales, and average revenue per contract. We will continue to assess these impacts and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related gathering restrictions evolves. 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 and operating framework linked with incentive compensation programs that attract top-quality talent to our organization. - 41 - -------------------------------------------------------------------------------- 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 •Growth of the Company Is Driven by Decentralization and Partnership Our five Guiding Principles collectively embody our Being The Best high-performance culture, operating framework. Our operations and business strategy are built upon the execution of the following three models: •Standards Operating Model •4E Leadership Model •Strategic Acquisition Model Our belief in our Mission Statement and Guiding Principles that define us and proper execution of the following three models that define our strategy, have given us the competitive advantage in any market in which we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and 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 earnings before interest, taxes, depreciation and amortization ("EBITDA") margin (a non-GAAP measure). Standards Operating Model Our Standards Operating Model is focused on growing local market share, providing personalized high-value services to our client families and guests, and operating financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenue and earnings. 4E Leadership Model Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by the lateJack 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 ranking criteria to assess acquisition candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses. We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten-year performance in volumes (market share), revenue and sustainable field-level EBITDA margins. 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. - 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 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, cost reductions in 2020, and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. However, if our capital expenditures, acquisition or divestiture plans, or business impacts from the pandemic 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 (i) Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2019 . Our plan is to remain focused on integrating our newly acquired businesses and to use cash on hand and borrowings under our Credit Facility primarily for general corporate purposes and for payment of dividends and our debt obligations. Discretionary spending, such as internal growth projects and expenditures (primarily cemetery inventory development, along with funeral home expansion projects) will be tightly managed and minimized during the remainder of 2020. We also expect increased divestiture activity in the next 12 months, which will yield additional cash from the proceeds of the sale. From time to time we may also use available cash resources (including borrowings under our Credit Facility) to, subject to satisfying certain financial covenants in our Credit Facility, repurchase shares of our common stock and our remaining Convertible Notes in open market or privately negotiated transactions. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. As ofSeptember 30, 2020 , we have net unrealized losses of$7.3 million in our trusts. AtSeptember 30, 2020 , these net unrealized losses represented 3% of our original cost basis of$245.8 million . Our trusts have been and continue to be impacted by current market conditions in theU.S. and global financial markets. The decline in fair value is largely due to changes in interest rates and other market conditions. Our investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. In addition, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. Changes in unrealized gains and/or losses related to these securities are reflected in Other comprehensive income and offset by the Deferred preneed funeral and cemetery receipts held in trust and Care trusts' corpus interests in those unrealized gains and/or losses. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to the preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations. We rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations. In light of recent developments relating to COVID-19, 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. - 43 - -------------------------------------------------------------------------------- Cash Flows We began 2020 with$0.7 million in cash and other liquid investments and ended the third quarter with$0.7 million . As ofSeptember 30, 2020 , we had borrowings of$56.0 million outstanding on our Credit Facility compared to$83.8 million as ofDecember 31, 2019 . During the three months endedSeptember 30, 2020 , we reduced the outstanding borrowings on our Credit Facility by$33.7 million . The following table sets forth the elements of cash flow for the nine months endedSeptember 30, 2019 and 2020 (in thousands): Nine months ended September 30, 2019 2020 Cash at beginning of year$ 644 $ 716 Net cash provided by operating activities 36,061 67,822 Acquisitions - (28,011) Proceeds from insurance reimbursements 1,247 97 Proceeds from divestitures and sale of other assets 967 7,416 Capital expenditures (11,479) (10,034) Net cash used in investing activities (9,265) (30,532)
Net borrowings (payments) on our Credit Facility, acquisition debt and finance lease obligations
(10,470) (28,860)
Payment of debt issuance costs related to long-term debt (113) -
Repurchase of the Convertibles Notes (27) (4,563)
Payment of transaction costs related to the repurchase of the Convertibles Notes
- (12)
Payment of debt issuance costs related to the Senior Notes - (66)
Net proceeds from employee equity plans 961 640
Dividends paid on common stock (4,061) (4,251)
Purchase of treasury stock (7,756) -
Other financing costs (162) (169)
Net cash used in financing activities (21,628) (37,281)
Cash at end of the period $ 5,812 $ 725
Operating Activities
For the nine months ended September 30, 2020 , cash provided by operating
activities was $67.8 million compared to $36.1 million for the nine months ended
September 30, 2019 . The increase of $31.7 million is a reflection of the
resilient cash generating ability of our portfolio of high-quality funeral home
and cemetery operations. Our operating income (excluding the non-cash $19.6
million net loss on divestitures and impairment charges) increased $15.8 million
in addition to other favorable working capital changes.
Investing Activities
Our investing activities, resulted in a net cash outflow of $30.5 million for
the nine months ended September 30, 2020 compared to $9.3 million for the nine
months ended September 30, 2019 , an increase of $21.2 million .
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 at closing in 2020. We also paid an additional $0.2 million for our
acquisition of the cemetery business in Fairfax, Virginia to reimburse the
sellers for certain incremental taxes resulting from the 338(h)(10) election
under the Internal Revenue Code, which was offset by the receipt of $0.2 million
in cash related to the sellers closing all operating bank accounts in place
prior to the acquisition.
During the nine months ended September 30, 2020 , we sold six funeral homes for
$7.3 million and we sold real property for $0.1 million .
During the nine months ended September 30, 2020 , we received proceeds of $0.1
million from our property insurance policy for the reimbursement of renovation
costs for our cemetery businesses that were damaged by Hurricane Michael.
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For the nine months ended September 30, 2020 , capital expenditures totaled $10.0
million compared to $11.5 million for the nine months ended September 30, 2019 ,
a decrease of $1.5 million . The following tables present our growth and
maintenance capital expenditures (in thousands):
Nine months ended September 30,
2019 2020
Growth
Cemetery development $ 3,109 $ 3,321 Renovations at certain businesses 2,091
673
Live streaming equipment 42 560
Other 56 86
Total growth expenditures $ 5,298 $ 4,640
Maintenance
Facility repairs and improvements $ 1,565
Vehicles 1,641 1,201
General equipment and furniture 2,245 1,957
Paving roads and parking lots 651 475
Other 79 151
Total maintenance expenditures $ 6,181
Total capital expenditures $ 11,479 Financing Activities Our financing activities resulted in a net cash inflow of$37.3 million for the nine months endedSeptember 30, 2020 compared to a net cash outflow of$21.6 million for the nine months endedSeptember 30, 2019 , an increase of$15.7 million . 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. During the nine months endedSeptember 30, 2019 , we had net payments on our Credit Facility, acquisition debt and finance leases of$10.5 million , paid$4.1 million in dividends and repurchased treasury stock for$7.8 million . Dividends During the nine months endedSeptember 30, 2019 and 2020, our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2019 Per Share Dollar Value March 1st$ 0.0750 $ 1,360 June 1st$ 0.0750 $ 1,365 September 1st$ 0.0750 $ 1,336 2020 Per Share Dollar Value March 1st$ 0.0750 $ 1,339 June 1st$ 0.0750 $ 1,343 September 1st$ 0.0875 $ 1,569 Share Repurchases During the nine months endedSeptember 30, 2020 , we did not repurchase any shares of common stock pursuant to our share repurchase program. AtSeptember 30, 2020 , we had approximately$25.6 million available for repurchases under our share repurchase program. - 45 - --------------------------------------------------------------------------------
Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and
acquisition debt at
September 30, 2020
Credit Facility $ 56,000
Finance leases 5,929
Operating leases 22,016
Acquisition debt 6,119
Total $ 90,064
Credit Facility
At September 30, 2020 , our Credit Facility was comprised of: (i) a $190.0
million revolving credit facility, including a $15.0 million subfacility for
letters of credit and a $10.0 million swingline, and (ii) an accordion or
incremental option allowing for future increases in the facility size by an
additional amount of up to $75.0 million in the form of increased revolving
commitments or incremental term loans. The final maturity of the Credit Facility
will occur on May 31, 2023 .
The Credit Facility is secured by a first-priority perfected security interest
in and lien on substantially all of the Company's personal property assets and
those of the Credit Facility Guarantors. In the event the Company's actual Total
Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio
covenant level, at the discretion of the Administrative Agent, the
Administrative Agent may unilaterally compel the Company and the Credit Facility
Guarantors to grant and perfect first-priority mortgage liens on fee-owned real
property assets which account for no less than 50% of funeral operations EBITDA.
As of September 30, 2020 , we were subject to the following financial covenants
under our Credit Facility: (A) a Total Leverage Ratio not to exceed, (i) 5.75 to
1.00 for the quarters ended March 31, 2020 , June 30, 2020 and September 30, 2020
and (ii) 5.50 to 1.00 for the quarter ended December 31, 2020 and each quarter
ended thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit
Facility) not to exceed 2.00 to 1.00 as of the end of any period of four
consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined
in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any
period of four consecutive fiscal quarters. These financial maintenance
covenants are calculated for the Company and its subsidiaries on a consolidated
basis.
On August 7, 2020 , we obtained a limited consent from the lenders under our
Credit Facility in connection with our privately-negotiated repurchases of our
Convertible Notes.
We were in compliance with the total leverage ratio, fixed charge coverage ratio
and senior secured leverage ratio covenants contained in our Credit Facility as
of September 30, 2020 .
We have one letter of credit outstanding under the Credit Facility issued on
November 30, 2019 for approximately $2.0 million , which was increased to $2.1
million on September 29, 2020 . The letter of credit bears interest at 3.125% and
will expire on November 25, 2020 . The letter of credit automatically renews
annually and secures our obligations under our various self-insured policies.
Outstanding borrowings under our Credit Facility bear interest at either a prime
rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio.
As of September 30, 2020 , the prime rate margin was equivalent to 2.00% and the
LIBOR rate margin was 3.00%. The weighted average interest rate on our Credit
Facility was 3.9% for both the three months ended September 30, 2019 and 2020
and 3.9% and 4.0% for the nine months ended September 30, 2019 and 2020,
respectively.
The interest expense and amortization of debt issuance costs related to our
Credit Facility during the three and nine months ended September 30, 2019 and
2020 is as follows (in thousands):
Three months ended September
30, Nine months ended
2019 2020 2019 2020
Credit Facility interest expense $ 350 $ 828 $ 1,090 $ 3,164
Credit Facility amortization of debt issuance
costs 59 118 167 363
- 46 --------------------------------------------------------------------------------- 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 during the three and nine months endedSeptember 30, 2019 and 2020 are as follows (in thousands): Three months ended September
30, Nine months ended
2019 2020 2019 2020
Operating lease cost $ 899 $ 927 $ 2,762 $ 2,838
Short-term lease cost 73 52 206 148
Finance lease cost:
Depreciation of lease right-of-use assets $ 131 $ 111 $ 395 $ 329
Interest on lease liabilities 129 123 392 374
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 during the three
and nine months ended September 30, 2019 and 2020 is as follows (in thousands):
Three months ended September
30, Nine months ended
2019 2020 2019 2020
Acquisition debt imputed interest expense
Convertible Subordinated Notes due 2021 OnSeptember 9, 2020 , we completed privately-negotiated repurchases (the "Repurchases") of$3.8 million in aggregate principal amount of Convertible Notes for$4.5 million in cash (plus accrued interest of$0.1 million totaling$4.6 million ) and recorded$0.8 million for the reacquisition of the equity component. The Repurchases represented approximately 60% of the aggregate principal amount of Convertible Notes then outstanding. Following the settlement of the Repurchases, the aggregate principal amount of the Convertible Notes was reduced to approximately$2.6 million . AtSeptember 30, 2020 , the principal amount of the liability component of our Convertible Notes was$2.6 million , the net carrying amount was$2.5 million and the carrying amount of the equity component was$0.3 million . The fair value of the Convertible Notes, which are Level 2 measurements, was$2.9 million atSeptember 30, 2020 . The Convertible Notes are due inMarch 2021 and bear interest at 2.75% per year, which is payable semi-annually in arrears onMarch 15 andSeptember 15 of each year. The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes during the three and nine months endedSeptember 30, 2019 and 2020 is as follows (in thousands): Three months ended
2019 2020 2019 2020
Convertible Notes interest expense $ 43 $ 43 $ 131 $ 130
Convertible Notes accretion of debt discount 61 69 178 200
Convertible Notes amortization of debt
issuance costs 6 9 19 21
The remaining unamortized debt discount and the remaining unamortized debt
issuance costs are being amortized using the effective interest method over the
remaining term of approximately five months of the Convertible Notes. The
effective interest rate on the unamortized debt discount for both the three and
nine months ended September 30, 2019 and 2020 was 11.4%. The effective interest
rate on the debt issuance costs for both the three months ended September 30,
2019 and 2020 was 3.2% and for the nine months ended September 30, 2019 and 2020
was 3.2% and 3.1%, respectively.
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Senior Notes due 2026
At September 30, 2020 , the principal amount of our Senior Notes was $400.0
million . The fair value of the Senior Notes, which are Level 2 measurements, was
$422.3 million at September 30, 2020 . The Senior Notes are due on June 1, 2026
and bear interest at 6.625% per year, which is payable semi-annually in arrears
on June 1 and December 1 of each year.
The interest expense and amortization of debt discount, debt premium and debt
issuance costs related to our Senior Notes during the three and nine months
ended September 30, 2019 and 2020 is as follows (in thousands):
Three months ended September Nine months ended September
30, 30,
2019 2020 2019 2020
Senior Notes interest expense $ 5,383 $ 6,625 $ 16,148 $ 19,875
Senior Notes amortization of debt discount 124 133 367 393
Senior Notes amortization of debt premium - 56 - 165
Senior Notes amortization of debt issuance
costs 35 72 103 208
The debt discount, the debt premium and the debt issuance costs are being
amortized using the effective interest method over the remaining term of
approximately 68 months of the Senior Notes. The effective interest rate on the
unamortized debt discount and the unamortized debt issuance costs for the
initial Senior Notes, which were issued in May 2018 , for 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 Senior Notes, which were 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 for the three months ended September 30, 2019
and 2020 (in thousands except for volumes and averages):
Three
months ended
2019 2020
Revenue $ 66,125 $ 84,393
Funeral contracts 9,238 11,512
Average revenue per funeral contract $ 5,516 $ 5,194
Preneed interment rights (property) sold 1,901 2,655
Average price per preneed interment right sold $ 3,622 $ 3,662
Gross profit $ 18,056 $ 27,874
Net income $ 577 $ 5,525
Revenue for the three months ended September 30, 2020 increased $18.3 million
compared to the three months ended September 30, 2019 , as we experienced a 24.6%
increase in total funeral contracts primarily due to the funeral home
acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as
well as increases from broad market share gains and death rate growth related to
the COVID-19 pandemic. Volume growth was offset by a decrease in the average
revenue per funeral contract of 5.8%. In addition, we experienced an increase of
39.7% in the number of preneed interment rights (property) sold primarily due to
the cemetery acquisitions made in the fourth quarter of 2019 and first quarter
of 2020, as well as an increase in the average price per interment right sold of
1.1%.
Gross profit for the three months ended September 30, 2020 increased $9.8
million compared to the three months ended September 30, 2019 , primarily due to
the increase in revenue from both our funeral home and cemetery segments due to
the acquisitions made in the fourth quarter of 2019 and first quarter of 2020,
as well as cost reduction measures implemented prior to and during the COVID-19
pandemic.
Net income for the three months ended September 30, 2020 increased $4.9 million
compared to the three months ended September 30, 2019 , primarily due to the
increase in gross profit, offset by the increase in interest expense related to
our Senior Notes and Credit Facility.
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Below are our financial highlights for the nine months ended
Nine
months ended
2019 2020
Revenue $ 202,958 $ 239,360
Funeral contracts 28,485 34,742
Average revenue per funeral contract $ 5,571 $ 5,110
Preneed interment rights (property) sold 5,419 6,861
Average price per preneed interment right sold $ 3,687 $ 3,805
Gross profit $ 58,907 $ 76,205
Net income $ 11,964 $ 7,725
Revenue for the nine months ended September 30, 2020 increased $36.4 million
compared to the nine months ended September 30, 2019 , as we experienced a 22.0%
increase in total funeral contracts primarily due to the funeral home
acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as
well as increases from broad market share gains and death rate growth related to
the COVID-19 pandemic. Volume growth was offset by a decrease in the average
revenue per funeral contract of 8.3%. In addition, we experienced an increase of
26.6% in the number of preneed interment rights (property) sold primarily due to
the cemetery acquisitions made in the fourth quarter of 2019 and first quarter
of 2020, as well as an increase of 3.2% in the average price per interment right
sold.
Gross profit for the nine months ended September 30, 2020 increased $17.3
million compared to the nine months ended September 30, 2019 , primarily due to
the increase in revenue from both our funeral home and cemetery segments due to
the acquisitions made in the fourth quarter of 2019 and first quarter of 2020,
as well as cost reduction measures implemented prior to and during the COVID-19
pandemic.
Net income for the nine months ended September 30, 2020 decreased $4.2 million
compared to the nine months ended September 30, 2019 , primarily due to the $19.6
million net loss on divestitures and impairment charges and $5.9 million
increase in interest expense related to our Senior Notes and Credit facility,
offset by the increase in gross profit.
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."
- 49 -
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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 and
nine months ended September 30, 2020 dated October 27, 2020 and discussed in the
corresponding earnings conference call. The Trend Report is used as a
supplemental financial statement by management and investors to compare our
current financial performance with our previous results and with the performance
of other companies. We do not intend for this information to be considered in
isolation or as a substitute for other measures of performance prepared in
accordance with United States generally accepted accounting principles ("GAAP").
The Trend Report is a non-GAAP statement that also provides insight into
underlying trends in our business.
Below is a reconciliation of Net income (a GAAP measure) to Adjusted net income
(a non-GAAP measure) for the three and nine months ended September 30, 2019 and
2020 (in thousands):
Three months ended September Nine months ended September
30, 30,
2019 2020 2019 2020
Net income $ 577 $ 5,525 $ 11,964 $ 7,725
Special items, net of tax(1)
Acquisition and divestiture expenses - - - 126
Severance and separation costs 235 - 889 445
Performance awards cancellation and exchange - 84 - 140
Accretion of discount on Convertible Notes(1) 61 69 178 200
Net loss on divestitures and other costs(2) 3,143 3,245 3,143 3,245
Net impact of impairment of goodwill and other
intangibles(2) 577 - 577 9,808
Litigation reserve 74 - 454 213
Natural disaster and pandemic costs - 268 - 1,036
Tax expense related to divested business(1) 860 - 860 -
Gain on insurance reimbursements (504) - (504) -
Other special items - (47) - 324
Adjusted net income(3) $ 5,023 $ 9,144 $ 17,561 $ 23,262 (1) Special items are defined as charges or credits included in our GAAP financial
statements that can vary from period to period and are not reflective of costs incurred
in the ordinary course of our operations. Special Items are taxed at the federal
statutory rate of 21.0% for the three and nine months ended
except for the Accretion of the discount on Convertible Notes, as this is a non-tax
deductible item and Tax expense related to divested business, the Net impact of
impairment of goodwill and other intangibles and the Net loss on divestitures and other
costs (described below). (2) The Net loss on divestitures and other costs and The Net impact of impairment of
goodwill and other intangibles special items are net of the federal statutory rate of
21.0% in 2019 and are net of the operating tax rate of approximately 34.0% in 2020. (3) Adjusted net income is defined as Net income plus adjustments for Special items and
other expenses or gains that we believe do not directly reflect our core operations and
may not be indicative of our normal business operations.
Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the three and nine months endedSeptember 30, 2019 and 2020 (in thousands): Three months endedSeptember 30 ,
Nine months ended
2019 2020 2019 2020
Gross profit $ 18,056 $ 27,874 $ 58,907 $ 76,205
Cemetery property amortization 972 1,471 2,990 3,445
Field depreciation expense 3,106 3,233 9,250 9,770
Regional and unallocated funeral and cemetery
costs 3,597 4,731 10,008 11,204
Operating profit(1) $ 25,731 $ 37,309 $ 81,155 $ 100,624 (1) Operating profit is defined as Gross profit less Cemetery property amortization, Field
depreciation expense and Regional and unallocated funeral and cemetery costs.
- 50 -
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Our operations are reported in two business segments: Funeral Home and Cemetery.
Below is a breakdown of Operating profit (a non-GAAP measure) by Segment for the
three and nine months ended September 30, 2019 and 2020 (in thousands):
Three months ended September 30, Nine months ended September 30,
2019 2020 2019 2020
Funeral Home $ 19,647 $ 25,636 $ 63,234 $ 75,462
Cemetery 6,084 11,673 17,921 25,162
Operating profit $ 25,731 $ 37,309 $ 81,155 $ 100,624
Operating profit margin(1) 38.9% 44.2% 40.0% 42.0%
(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, 2020 and 2019. The term "same store" refers to funeral homes and cemeteries acquired prior toJanuary 1, 2016 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, 2015 , 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 the six funeral homes we sold in 2020 and three funeral homes whose building leases expired, one funeral home we sold and a funeral home we merged with a funeral home in an existing market in 2019. "Planned divested" refers to the funeral home and cemetery businesses that we intend to divest in the near future. "Ancillary funeral services" in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business inTexas . 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 for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 (in thousands):
Three months ended
2019 2020
Revenue:
Same store operating revenue $ 40,824 $ 44,444
Acquired operating revenue 6,100 11,702
Divested/planned divested revenue 2,500 1,731
Ancillary funeral services revenue - 1,196
Preneed funeral insurance commissions 436 369
Preneed funeral trust and insurance 1,657 1,992
Total $ 51,517 $ 61,434
Operating profit:
Same store operating profit $ 15,124 $ 18,236
Acquired operating profit 2,297 4,699
Divested/planned divested operating profit 398 290
Ancillary funeral services operating profit - 292
Preneed funeral insurance commissions 213 159
Preneed funeral trust and insurance 1,615 1,960
Total $ 19,647 $ 25,636
The following measures reflect the significant metrics over this comparative
period:
Three months ended September 30,
2019 2020
Same store:
Contract volume 7,725 8,923Average revenue per contract, excluding preneed funeral trust earnings
$ 5,285 $ 4,981 Average revenue per contract, including preneed funeral trust earnings$ 5,472 $ 5,175 Burial rate 37.4 % 35.3 % Cremation rate 54.9 % 57.6 % Acquired: Contract volume 922 2,165
Average revenue per contract, excluding preneed funeral trust earnings
$ 6,616 $ 5,405 Average revenue per contract, including preneed funeral trust earnings$ 6,706 $ 5,489 Burial rate 48.5 % 40.5 % Cremation rate 44.4 % 54.0 % Funeral home same store operating revenue for the three months endedSeptember 30, 2020 increased$3.6 million compared to the three months endedSeptember 30, 2019 . The increase in operating revenue is primarily due to a 15.5% same store contract volume increase in the three months endedSeptember 30, 2020 compared to the same period in 2019. The increase in contract volume is due to market share gains in a majority of our markets, in addition to the increased deaths related to COVID-19. This increase was offset by a 5.8% decrease in the average revenue per contract, excluding preneed interest, for the same period, primarily due to a 210 basis point decrease in the burial rate. In addition, in the three months endedSeptember 30, 2020 compared to the same period in 2019, we experienced a decrease in services performed due to the restrictions placed on gatherings mandated by state and local governments due to COVID-19. Funeral home same store operating profit for the three months endedSeptember 30, 2020 increased$3.1 million when compared to the three months endedSeptember 30, 2019 , and the comparable operating profit margin increased 400 basis points to 41.0%. The increase in operating margin is primarily due to the increase in same store operating revenue and - 52 - -------------------------------------------------------------------------------- disciplined expense and cost management by local leaders at each business. Same store salaries and benefits increased$0.5 million due to an increase of$0.5 million in group health care costs related to higher claims and an increase of$0.3 million in the demand for pickup and embalming services due to increased contracts, offset by a decrease of$0.2 million in part-time funeral staff needed to assist with memorial services and a decrease of$0.1 million in full time salaries. While salaries and benefits increased, we experienced decreases in the majority of our other operating costs for the three months endedSeptember 30, 2020 compared to the same period in 2019. Funeral home acquired operating revenue for the three months endedSeptember 30, 2020 increased$5.6 million , as our funeral home acquired portfolio for the three months endedSeptember 30, 2020 included nine funeral home businesses added through three acquisitions in the fourth quarter of 2019 and one business acquired in the first quarter of 2020 not present in the three months endedSeptember 30, 2019 . Acquired operating profit for the three months endedSeptember 30, 2020 increased$2.4 million when compared to the three months endedSeptember 30, 2019 , and the comparable operating profit margin increased 250 basis points to 40.2%. The increase is primarily due to disciplined expense and cost management by local leaders at each business. The increase is slightly offset by lower margins for our businesses acquired in the fourth quarter of 2019 compared to our other acquired businesses, particularly with regard to higher salaries and benefits expenses. We expect the operating margins for these businesses to improve as we focus on integrating them into our high performance framework of the Standards Operating Model. Ancillary funeral services revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses inTexas , which were acquired in the fourth quarter of 2019. Operating profit from our ancillary funeral service businesses was$0.3 million for the three months endedSeptember 30, 2020 , with an operating profit margin of 24.4%. Preneed funeral insurance commissions and preneed funeral trust and insurance, also recorded in Other revenue, on a combined basis, increased$0.3 million or 12.8% for the three months endedSeptember 30, 2020 compared to the same period in 2019. The increase is primarily related to a 20.2% increase in preneed contracts maturing to at-need during the three months endedSeptember 30, 2020 compared to the same period in 2019, which triggers the recognition of trust earnings on the matured contracts. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased$0.3 million or 15.9% for the same comparative period, primarily due to the increase in funeral trust and insurance revenue. The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 (in thousands):
Nine months ended
2019 2020
Revenue:
Same store operating revenue $ 126,549 $ 130,755
Acquired operating revenue 19,133 34,561
Divested/planned divested revenue 8,155 6,781
Ancillary funeral services revenue - 3,464
Preneed funeral insurance commissions 1,124 1,061
Preneed funeral trust and insurance 5,226 5,676
Total $ 160,187 $ 182,298
Operating profit:
Same store operating profit $ 48,563 $ 53,233
Acquired operating profit 7,460 13,599
Divested/planned divested operating profit 1,632 1,663
Ancillary funeral services operating profit - 908
Preneed funeral insurance commissions 479 479
Preneed funeral trust and insurance 5,100 5,580
Total $ 63,234 $ 75,462
- 53 -
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The following measures reflect the significant metrics over this comparative
period:
Nine months ended September 30,
2019 2020
Same store:
Contract volume 23,690 26,263Average revenue per contract, excluding preneed funeral trust earnings
$ 5,342 $ 4,979 Average revenue per contract, including preneed funeral trust earnings$ 5,532 $ 5,167 Burial rate 38.3 % 36.0 % Cremation rate 53.9 % 56.8 % Acquired: Contract volume 2,888 6,681
Average revenue per contract, excluding preneed funeral trust earnings
$ 6,625 $ 5,173 Average revenue per contract, including preneed funeral trust earnings$ 6,741 $ 5,247 Burial rate 48.5 % 40.9 % Cremation rate 44.5 % 54.2 % Funeral home same store operating revenue for the nine months endedSeptember 30, 2020 increased$4.2 million compared to the nine months endedSeptember 30, 2019 . The increase in operating revenue is due to a 10.9% same store contract volume increase which is due to market share gains in a majority of our markets, in addition to the increased deaths related to COVID-19. This increase was offset by a 6.8% decrease in average revenue per contract, excluding preneed interest, primarily due to a 230 basis point decrease in the burial rate. Beginning in the latter half ofMarch 2020 , we saw a decrease in services performed due to the restrictions placed on gatherings mandated by state and local governments as the COVID-19 pandemic became more prominent and individuals began to practice social distancing to comply with applicable shelter in place and related orders. During the third quarter of 2020, we experienced an increase in memorial services compared to the second quarter of 2020, as social distancing restrictions were eased in certain jurisdictions. In addition, ourManaging Partners continued to show innovation by creating high value, uniquely customized personal services and sales in challenging local environments. Funeral home same store operating profit for the nine months endedSeptember 30, 2020 increased$4.7 million when compared to the nine months endedSeptember 30, 2019 , and the comparable operating profit margin increased 230 basis points to 40.7%. The increase in operating margin is primarily due to the increase in same store operating revenue and a$0.5 million or 0.6% decrease in operating costs of which the largest decreases were in part-time funeral staff needed to assist with memorial services, promotional costs, facilities and ground expenses and transportation costs. These decreases were as a result of disciplined expense and cost management by local leaders at each business. The decreases were partially offset by an increase in the demand for pickup and embalming services due to increased contracts and an increase in group health care costs related to higher claims in the nine months endedSeptember 30, 2020 . Funeral home acquired operating revenue for the nine months endedSeptember 30, 2020 increased$15.4 million , as our funeral home acquired portfolio for the nine months endedSeptember 30, 2020 included nine funeral home businesses added through three acquisitions in the fourth quarter of 2019 and one business acquired in the first quarter of 2020 not present in the nine months endedSeptember 30, 2019 . Acquired operating profit for the nine months endedSeptember 30, 2020 increased$6.1 million when compared to the nine months endedSeptember 30, 2019 . Operating profit margin increased slightly by 30 basis points to 39.3%. We experienced an increase in margin despite the lower operating profit margins of the recently acquired businesses (discussed above), as operating profit margin for these businesses were lower compared to our other acquired businesses, particularly with regard to higher salaries and benefits. We expect the operating margins for our recently acquired businesses to increase as we focus on integrating them into our high performance framework of the Standards Operating model. Ancillary funeral services revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses inTexas , which were acquired in the fourth quarter of 2019. Operating profit from our ancillary funeral service businesses was$0.9 million for the nine months endedSeptember 30, 2020 , with an operating profit margin of 26.2%. Preneed funeral insurance commissions and preneed funeral trust and insurance, also recorded in Other revenue, on a combined basis, increased$0.4 million or 6.1% for the nine months endedSeptember 30, 2020 compared to the same period in 2019. The increase is due to a 10.1% increase in preneed contracts maturing to at-need during the nine months endedSeptember 30, 2020 compared to the same period in 2019, which triggers the recognition of trust earnings on the matured contracts. - 54 - -------------------------------------------------------------------------------- Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased$0.5 million or 8.6% for the same comparative period in 2019, primarily due to the increase in revenue and reduction of preneed trust and insurance expenses. Cemetery Segment The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 (in thousands):
Three months ended
2019 2020
Revenue:
Same store operating revenue $ 12,768 $ 14,393
Acquired operating revenue - 5,220
Divested/planned divested revenue 65 116
Preneed cemetery trust and insurance 1,430 3,016
Preneed cemetery finance charges 345 214
Total $ 14,608 $ 22,959
Operating profit:
Same store operating profit $ 4,464 $ 6,175
Acquired operating profit - 2,335
Divested/planned divested operating profit (9) 40
Preneed cemetery trust and insurance 1,284 2,909
Preneed cemetery finance charges 345 214
Total $ 6,084 $ 11,673 The following measures reflect the significant metrics over this comparative period:
Three months ended
2019 2020
Same store:
Preneed revenue as a percentage of operating revenue 62 % 61 %
Preneed revenue (in thousands) $ 7,885 $ 8,768
Atneed revenue (in thousands) $ 4,883 $ 5,625
Number of preneed interment rights sold 1,901 1,893
Average price per interment right sold $ 3,622 $ 3,529 Acquired:
Preneed revenue as a percentage of operating revenue n/a 70 % Preneed revenue (in thousands) n/a$ 3,642 Atneed revenue (in thousands) n/a$ 1,578 Number of preneed interment rights sold n/a 748 Average price per interment right sold
n/a
Cemetery same store preneed revenue for the three months endedSeptember 30, 2020 increased$0.9 million compared to the same period in 2019. Although the number of preneed interments sold remained flat and we experienced a 2.6% decrease in the average sale per preneed contract, preneed property revenue increased$0.4 million or 6.6% primarily due to additional revenue recognized from several memorial gardens under construction that progressed towards completion during the three months endedSeptember 30, 2020 . Preneed merchandise and service revenue increased$0.5 million as we experienced a 45.6% increase in the deliveries of merchandise and service contracts during the three months endedSeptember 30, 2020 . Cemetery same store atneed revenue, which represents 39.0% of our same store operating revenue increased$0.7 million , as we experienced 21.2% increase in the number of contracts, offset by a 4.9% decrease in the average sale per contract. - 55 - -------------------------------------------------------------------------------- Cemetery same store operating profit for the three months endedSeptember 30, 2020 increased$1.7 million from the same period in 2019. The comparable operating profit margin increased 790 basis points to 42.9% primarily as a result of the increase in operating revenue and a 1% decrease in operating expenses with the most significant decrease of$0.2 million in the allowance for credit losses, as we received an increase in payments on financed receivables in the third quarter of 2020. Our acquired cemetery portfolio includes two businesses acquired during the fourth quarter of 2019 and one business acquired during the first quarter of 2020. These three businesses contributed$5.2 million in operating revenue and$2.3 million in operating profit for the three months endedSeptember 30, 2020 . Preneed cemetery trust and preneed cemetery finance charges, which are recorded in Other revenue, on a combined basis increased$1.5 million for the three months endedSeptember 30, 2020 compared to the same period in 2019. The increase is primarily due to a$0.7 million increase in perpetual care trust income from our acquired cemetery businesses and a$0.3 million increase in realized capital gains during the quarter. Operating profit for the two categories of Other revenue, on a combined basis, increased$1.5 million for the three months endedSeptember 30, 2020 compared to the same period in 2019, primarily due to the increase in perpetual care trust fund revenue. The increase in our trust fund income is primarily due to our execution of a major repositioning strategy during and after the COVID-19 market crash inMarch 2020 , substantially increasing our preneed cemetery trust revenue and operating profit. The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 (in thousands):
Nine months ended
2019 2020
Revenue:
Same store operating revenue $ 37,157 $ 36,910
Acquired operating revenue - 12,074
Divested/planned divested revenue 230 283
Preneed cemetery trust and insurance 4,266 7,099
Preneed cemetery finance charges 1,118 696
Total $ 42,771 $ 57,062
Operating profit:
Same store operating profit $ 12,961 $ 12,998
Acquired operating profit - 4,596
Divested/planned divested operating profit 2 87
Preneed cemetery trust and insurance 3,840 6,785
Preneed cemetery finance charges 1,118 696
Total $ 17,921 $ 25,162
- 56 ---------------------------------------------------------------------------------
The following measures reflect the significant metrics over this comparative period:
Nine months ended
2019 2020
Same store:
Preneed revenue as a percentage of operating revenue 62 % 60 %
Preneed revenue (in thousands) $ 22,979 $ 22,132
Atneed revenue (in thousands) $ 14,178 $ 14,778
Number of preneed interment rights sold 5,412 5,217
Average price per interment right sold $ 3,690 $ 3,693 Acquired:
Preneed revenue as a percentage of operating revenue n/a 65 % Preneed revenue (in thousands) n/a$ 7,899 Atneed revenue (in thousands) n/a$ 4,175 Number of preneed interment rights sold n/a 1,600 Average price per interment right sold
n/a
Cemetery same store preneed revenue decreased$0.8 million for the nine months endedSeptember 30, 2020 compared to the same period in 2019. We experienced a$1.2 million or 6.2% decrease in preneed property revenue due to a 3.6% decrease in the number of preneed interments rights sold, while the average price per interment right sold remained flat. The decrease in the number of preneed interment rights sold is primarily due to the COVID-19 pandemic as individuals practiced social distancing to comply with applicable shelter in place and related orders, which resulted in our preneed sales personnel being unable to meet with families at our businesses, in certain areas of the country. This was most evident in the second quarter of 2020 as these restrictions affected our ability to host certain annual events such as the Ching Ming festival during April andMemorial Day festivities during May. The decrease in preneed property revenue was partially offset by a$0.4 million increase in preneed merchandise and service revenue as we experienced a 16.7% increase in the deliveries of merchandise and service contracts during the nine months endedSeptember 30, 2020 . Cemetery same store atneed revenue, which represents 40% of our same store operating revenue, increased$0.6 million as we experienced a 6.5% increase in the number of atneed contracts, while the average sales per contract decreased 2.1%. Cemetery same store operating profit for the nine months endedSeptember 30, 2020 remained flat compared to the same period in 2019. The comparable operating profit margin increased 30 basis points to 35.2% as a result of better management of operating expenses throughout the year. Operating expense as a percent of operating revenue increased in two categories in the nine months endedSeptember 30, 2020 compared to the same period in 2019. Our allowance for credit losses expense and salaries and wages both increased 0.4% as a percentage of revenue. The increase in the allowance for credit losses is due to slower payments on financed receivables mostly in the second quarter of 2020, particularly in the states most affected by COVID-19. Salaries and benefits increased due to the addition of field personnel in the fourth quarter of 2019. Our acquired cemetery portfolio includes two businesses that were acquired during the fourth quarter of 2019 and one business that was acquired during the first quarter of 2020. These three businesses contributed$12.1 million in operating revenue and$4.6 million in operating profit for the nine months endedSeptember 30, 2020 . Preneed cemetery trust and preneed cemetery finance charges, which are recorded in Other revenue, on a combined basis increased$2.4 million for the nine months endedSeptember 30, 2020 compared to the same period in 2019. The increase was primarily due to a$3.0 million increase in perpetual care trust fund earnings of which$1.7 million was from acquisitions and a$0.4 million increase in realized gains. These increases were partially offset by a$0.4 million decrease in finance charge revenue. The decrease in finance charge revenue is primarily due to our enhanced preneed cemetery property sales strategy of reducing interest rates on preneed contracts. Operating profit for the two categories of Other revenue, on a combined basis, increased$2.5 million for the nine months endedSeptember 30, 2020 compared to the same period in 2019 due to the increase in revenue. The increase in our trust fund income is primarily due to our execution of a major repositioning strategy during and after the COVID-19 market crash inMarch 2020 , substantially increasing our preneed cemetery trust revenue and operating profit. - 57 - -------------------------------------------------------------------------------- Cemetery property amortization. Cemetery property amortization totaled$1.5 million for the three months endedSeptember 30, 2020 , an increase of$0.5 million compared to the three months endedSeptember 30, 2019 . The increase in amortization in the third quarter of 2020 is primarily due to the increase in property sales at the newly acquired cemetery businesses. Cemetery property amortization totaled$3.4 million for the nine months endedSeptember 30, 2020 , an increase of$0.5 million compared to the nine months endedSeptember 30, 2019 . The increase in property sold at our acquired cemeteries resulted in a$0.7 million increase in amortization expense for the nine months endedSeptember 30, 2020 , while the amortization expense for our same store businesses decreased$0.2 million due to a decrease in property sales in the period. Field depreciation. Depreciation expense for our field businesses increased$0.1 million for the three months endedSeptember 30, 2020 compared to the three months endedSeptember 30, 2019 . Depreciation expense for our field businesses increased$0.5 million for the nine months endedSeptember 30, 2020 compared to the nine months endedSeptember 30, 2019 . The increase was primarily due to additional depreciation expense from assets added as a result of our acquisitions during the fourth quarter of 2019 and first quarter of 2020. Regional and unallocated funeral and cemetery costs. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled$4.7 million for the three months endedSeptember 30, 2020 , an increase of$1.1 million primarily due to a$1.2 million increase in incentive and equity compensation, a$0.3 million increase in health and safety expenses related to the COVID-19 pandemic and a$0.3 million increase in salaries and benefits, offset by a$0.5 million decrease in severance expense and a$0.2 million decrease in other general administrative costs. Regional and unallocated funeral and cemetery costs totaled$11.2 million for the nine months endedSeptember 30, 2020 , an increase of$1.2 million primarily due to a$1.0 million increase in incentive and equity compensation, a$0.9 million increase in health and safety expenses due to the COVID-19 pandemic, a$0.6 million increase in salaries and benefits and a$0.3 million increase related to a state audit assessment, offset by a$1.1 million decrease in severance expense, a$0.3 million decrease in other general administrative costs and a$0.2 million employee retention credit in connection with the CARES Act. Other Financial Statement Items General, administrative and other. General, administrative and other expenses totaled$6.1 million for the three months endedSeptember 30, 2020 , an increase of$0.4 million compared to the three months endedSeptember 30, 2019 . The increase was primarily attributable to an$0.8 million increase in incentive and equity compensation, offset by a$0.4 million decrease in other general administrative costs. General, administrative and other expenses totaled$18.6 million for the nine months endedSeptember 30, 2020 , an increase of$1.6 million compared to the nine months endedSeptember 30, 2019 . The increase was primarily attributable to a$1.2 million increase in incentive and equity compensation, a$0.5 million increase in salaries, benefits and severance costs, a$0.4 million increase in public company and acquisition costs and a$0.2 million increase in litigation reserve, offset by a$0.7 million decrease in other general administrative costs. Home office depreciation and amortization. Home office depreciation and amortization expense remained flat at$0.3 million and$1.1 million for the three and nine months endedSeptember 30, 2020 , compared to the three and nine months endedSeptember 30, 2019 primarily due to machinery and equipment at the home office becoming fully depreciated in the latter half of 2019, offset by additional software assets purchased during the fourth quarter of 2019. Net loss on divestitures and impairments charges. The components of Net loss on divestitures and impairment charges for the three and nine months endedSeptember 30, 2020 and 2019 are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2019 2020 2019 2020 Goodwill impairment$ (509) $ -$ (509) (13,632) Tradename impairment (221) - (221) (1,061) Net loss on divestitures (3,863) (4,917) (3,874) (4,917) Total$ (4,593) $ (4,917) $ (4,604) $ (19,610) Interest expense. Interest expense totaled$8.0 million for the three months endedSeptember 30, 2020 , an increase of$1.7 million compared to the three months endedSeptember 30, 2019 . Interest expense totaled$24.8 million for the nine months endedSeptember 30, 2020 , an increase of$5.9 million compared to the nine months endedSeptember 30, 2019 . The increase was primarily due to increased borrowings on our Credit Facility and the$75.0 million of additional Senior Notes we issued onDecember 19, 2019 . - 58 - -------------------------------------------------------------------------------- Accretion of discount on convertible subordinated notes. We recognized accretion of the discount on our Convertible Notes of$0.1 million for both the three months endedSeptember 30, 2020 and 2019 and$0.2 million for both the nine months endedSeptember 30, 2020 and 2019. Other, net. The components of Other, net for the three and nine months endedSeptember 30, 2020 and 2019 are as follows (in thousands): Three months ended
2019 2020 2019 2020
Gain on insurance reimbursements related to $ 638 $ - $ 638 $ 55
Hurricane Michael
Other income (expense) (121) (1) 52 (63)
Other gain (loss) - (27) - (26)
Total $ 517 $ (28) $ 690 $ (34)
Income taxes. Our income tax expense was $2.9 million and $0.9 million for the
three months ended September 30, 2020 and 2019, respectively and $4.2 million
and $5.8 million for the nine months ended September 30, 2020 and 2019,
respectively. Our operating tax rate before discrete items was 34.0% and 61.0%
for the three months ended September 30, 2020 and 2019, respectively and 33.8%
and 31.3% for the nine months ended September 30, 2020 and 2019, respectively.
The increase in our overall effective tax rate for the nine months ended
September 30, 2019 is due to the unfavorable tax impact of impairment of
goodwill and other intangibles recorded in the first quarter of 2020 for
businesses that were previously acquired through stock acquisitions.
In connection with the CARES Act, we filed a claim for a refund on June 30,
2020 , to carryback the net operating losses generated in the tax year ending
December 31, 2018 . The refund claim from the 2018 tax year was received on
August 7, 2020 , and we have included the impact in our current provision. In an
effort to maximize the expected benefits afforded by the CARES Act, we plan to
amend our 2018 tax return to include the additional first year depreciation
deduction for qualified improvement property. 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. Due to the uncertainty of the timing of
receiving IRS approval for non-automatic accounting method changes, a reserve
has been recorded against the benefit derived from this carrying back that the
net operating losses generated; therefore, for the nine months ended September
30, 2020 , the reserve for uncertain tax positions was $2.9 million .
Additionally, we plan to file a claim for a refund for the net operating losses
generated in the tax year ending December 31, 2019 , in the fourth quarter of
2020. Although we expect to take advantage of certain tax relief provisions of
the CARES Act, we do not believe it will have a significant impact on our
short-term or long-term liquidity position.
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, 2019 .
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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