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, 2021 , we operated 171 funeral homes in 26 states and 32 cemeteries in 12 states. We compete with other publicly held and independent operators of funeral and cemetery companies. We believe we are a market leader in most of our markets. Funeral home and cemetery businesses provide products and services to families in three principal areas: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. Our funeral homes offer a complete range of services to meet a family's funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and memorial services and transportation services. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and services to take place at one location and thereby reduces transportation costs and inconvenience to the family. Our cemeteries provide interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). We provide funeral and cemetery services and products on both an "atneed" (time of death) and "preneed" (planned prior to death) basis. Recent Developments Executive Team Appointment and Promotions OnJune 1, 2021 ,C. Benjamin Brink ,Steven D. Metzger andCarlos R. Quezada were each promoted to Executive Vice President. The Board also appointedCarlos R. Quezada to serve as the Company's Chief Operating Officer andSteven D. Metzger to serve as the Company's Chief Administrative Officer. Senior Notes and Credit Facility OnMay 13, 2021 , we completed the issuance of$400.0 million in aggregate principal amount 4.25% Senior Notes due 2029 (the "New Senior Notes"). In connection with the issuance of the New Senior Notes, we entered into an amended and restated$150.0 million senior secured revolving credit facility (the "New Credit Facility"). We used the proceeds of$395.5 million from the offering of the New Senior Notes, which are net of a 1.125% debt discount of$4.5 million , together with cash on hand and borrowings under the New Credit Facility, to redeem all of our existing$400.0 million in aggregate principal amount 6.625% senior notes due 2026 (the "Original Senior Notes"). Divestitures During the six months endedJune 30, 2021 , we divested three funeral homes for a total of$3.5 million , at a gain of$0.1 million . Litigation Chinchilla v.Carriage Services, Inc. , et al.,Superior Court of California ,San Joaquin County , Case No. STK-CV-UOE-2021-0004661. OnMay 19, 2021 , a putative class action against the Company and several of our subsidiaries was filed. Plaintiff, a former employee, seeks monetary damages on behalf of himself and other similarly situated current and former non-exempt employees. Plaintiff claims that the Company failed to, among other things, pay minimum wages, provide meal and rest breaks, pay overtime, provide accurately itemized wage statements, reimburse employees for business expenses, and provide wages when due. AtJune 30, 2021 , we are unable to reasonably estimate the possible loss or ranges of loss, if any. - 42 - -------------------------------------------------------------------------------- Business Impact under the Macroeconomic Environment of COVID-19 OnMarch 11, 2020 , COVID-19 was deemed a global pandemic and since then, the Company has continued to proactively monitor and assess the pandemic's current and potential impact to the Company's operations. Beginning in earlyMarch 2020 , the Company's senior leadership team took certain steps to assist our businesses in appropriately adjusting and adapting to the conditions resulting from the COVID-19 pandemic. Our businesses 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. 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, begun to normalize consistent with pre-COVID-19 levels as it relates to volumes and the services we provide. Our businesses have remained focused on being innovative and resourceful, providing families immediate service as part of the grieving process. Within our financial reporting environment, we have considered various areas that could affect the results of our operations, though the scope, severity and duration of these impacts remain uncertain at this time because the ultimate impact of COVID-19 remains uncertain, including the potential impacts of new variants of COVID-19, such as the delta variant, and any resulting government responses to such variants. We do not believe we are vulnerable to certain concentrations, whether by geographic area, revenue for specific products or our relationships with our vendors. Our relationships with our vendors and suppliers have remained consistent and we continue to receive reliable service. Remote working arrangements, when utilized, have not materially affected our ability to maintain and support operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures. We believe our access to capital, the cost of our capital, or the sources and uses of our cash should be relatively consistent in the near term. While the expected duration of the pandemic is unknown, we have not currently experienced any material negative impacts to our liquidity position, access to capital, or cash flows as a result of COVID-19. See Liquidity within Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations, for additional information related to our liquidity position. We have also applied certain measures of the CARES Act, which have provided a cash benefit in the form of tax payment refunds, tax credits related to employee retention, cash deferral for the employer portion of theSocial Security tax and 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. During the second quarter of 2021, as gathering restrictions were lifted by state and local officials, we saw a normalization of funeral volumes at broadly higher funeral contract revenue averages, with geographical funeral revenue and margin difference related to the COVID-19 pandemic death rates decreasing. 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 variant, and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related gathering restrictions, if any, evolves. Funeral Home Operations Our funeral homes offer a complete range of high value personal services to meet a family's funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Factors affecting our funeral operating results include, but are not limited to: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage to increase average revenue per contract. - 43 - -------------------------------------------------------------------------------- Cemetery Operations Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an atneed and preneed basis. Factors affecting our cemetery operating results include, but are not limited to: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds. Business Strategy Our business strategy is based on strong, local leadership with entrepreneurial principles that is focused on sustainable long term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, high-performance culture operating framework linked with incentive compensation programs that attract top quality industry talent to our organization. We also believe that Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for independent owners who want their legacy family business to remain operationally prosperous in their local communities. Our Mission Statement states that "we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry" and our Guiding Principles state our core values, which are comprised of: •Honesty, integrity and quality in all that we do; •Hard work, pride of accomplishment, and shared success through employee ownership; •Belief in the power of people through individual initiative and teamwork; •Outstanding service and profitability to hand-in-hand; and •Growth of the company is driven by decentralization and partnership. Our five Guiding Principles collectively embody our Being The Best high-performance culture and operating framework. Our operations and business strategy are built upon the execution of the following three models: •Standards Operating Model; •4E Leadership Model; and •Strategic Acquisition Model. Standards Operating Model Our Standards Operating Model is focused on growing local market share, providing personalized high value services to our client families and guests, and operating financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenue and earnings. 4E Leadership Model Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established byJack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high performance culture: Energy to get the job done; the ability to Energize others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require localManaging Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams. Strategic Acquisition Model Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. We believe that both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic ranking criteria to assess acquisition candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses. - 44 - -------------------------------------------------------------------------------- We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization ("EBITDA") margins (a non-GAAP measure). We use criteria such as cultural alignment, volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry to evaluate the strategic position of potential acquisition candidates. Our financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital. Our belief in our Mission Statement and Guiding Principles and proper execution of the three models that define our strategy have given us a competitive advantage in every market where we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin. LIQUIDITY AND CAPITAL RESOURCES Overview Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our New Credit Facility. We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our New Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. For additional information regarding known material factors that could cause cash flow or access to and cost of finance sources to differ from our expectations, please read Part I, Item 1A "Risk Factors" in our Annual Report on Form 10-K for the year endedDecember 31, 2020 and Part II, Item 1A "Risk Factors" in this Quarterly Report on Form 10-Q. Our plan is to remain focused on integrating our newly acquired businesses and to use cash on hand and borrowings under our New Credit Facility primarily for general corporate purposes, payment of dividends and debt obligations, strategic acquisitions, internal growth capital expenditures, share repurchases, dividend increases and further debt repayments. We also expect continued divestiture activity for the next six months, which could yield approximately$3-5 million of cash from the proceeds of the sale. From time to time we may also use available cash resources (including borrowings under our New Credit Facility) to repurchase shares of our common stock, subject to satisfying certain financial covenants in our New Credit Facility and in the Indenture governing our New Senior Notes. We believe that our existing and anticipated cash resources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months. - 45 - -------------------------------------------------------------------------------- Cash Flows We began 2021 with$0.9 million in cash and ended the second quarter with$1.5 million in cash. AtJune 30, 2021 , we had borrowings of$60.5 million outstanding on our Credit Facility compared to$47.2 million atDecember 31, 2020 . The following table sets forth the elements of cash flow (in thousands): Six months ended June 30, 2020 2021 Cash at beginning of year$ 716 $ 889 Net cash provided by operating activities 31,001 41,441 Acquisitions of businesses and real estate (28,011) (2,935) Proceeds from divestitures and sale of other assets 78 3,622 Proceeds from insurance reimbursements - 120 Capital expenditures (5,786) (8,751) Net cash used in investing activities (33,719) (7,944)
Net borrowings on our Credit Facility, acquisition debt and finance lease obligations
5,221 12,848
Payment of call premium related to the Original Senior Notes - (19,876)
Payment of debt issuance and transaction costs (66) (6,430)
Conversions and maturity of the Convertibles Notes - (3,980)
Net proceeds related to employee equity plans 390 172
Dividends paid on common stock (2,682) (3,607)
Purchase of treasury stock - (11,559)
Other financing costs (169) (461)
Net cash provided by (used in) financing activities 2,694 (32,893)
Cash at end of the period $ 692 $ 1,493
Operating Activities
For the six months ended June 30, 2021 , cash provided by operating activities
was $41.4 million compared to $31.0 million for the six months ended June 30,
2020 . The increase of $10.4 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 impact of the
divestitures, disposals and impairment charges) increased $12.6 million , which
was slightly offset by other unfavorable working capital changes.
Investing Activities
Our investing activities, resulted in a net cash outflow of $7.9 million for the
six months ended June 30, 2021 compared to $33.7 million for the six months
ended June 30, 2020 , a decrease of $25.8 million .
Acquisition and Divestiture Activity
During the six months ended June 30, 2021 , we sold three funeral homes for $3.5
million and purchased real estate for $2.9 million .
During the six months ended June 30, 2020 , we acquired a funeral home and
cemetery combination business in Lafayette, California for $33.0 million in
cash, of which $5.0 million was deposited in escrow in 2019 and $28.0 million
was paid in 2020.
- 46 --------------------------------------------------------------------------------- Capital Expenditures For the six months endedJune 30, 2021 , capital expenditures (comprising of growth and maintenance spend) totaled$8.8 million compared to$5.8 million for the six months endedJune 30, 2020 , an increase of$3.0 million . The following tables present our growth and maintenance capital expenditures (in thousands): Six months ended June 30, 2020 2021 Growth Cemetery development$ 2,127 $ 2,665 Renovations at certain businesses 319 1,397 Live streaming equipment 388 87 Other 54 - Total Growth$ 2,888 $ 4,149 Six months ended June 30, 2020 2021
Maintenance
Facility repairs and improvements $ 694$ 870 Vehicles 634 795 General equipment and furniture 1,176 2,296 Paving roads and parking lots 181 265 Other 213 376 Total Maintenance$ 2,898 $ 4,602 Financing Activities Our financing activities resulted in a net cash outflow of$32.9 million for the six months endedJune 30, 2021 compared to a net cash inflow of$2.7 million for the six months endedJune 30, 2020 , an increase of$35.6 million . 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 New Senior Notes and New Credit Facility; iv)$4.0 million for the conversions and maturity of our Convertible Notes; and v)$3.6 million in dividends. During the six months endedJune 30, 2020 , we had net borrowings on our Credit Facility, acquisition debt and finance leases of$5.2 million and paid$2.7 million in dividends. Share Repurchase OnMay 18, 2021 , our Board approved an additional$25.0 million under our share repurchase program in accordance with Rule 10b-18 of the Exchange Act. During the three and six months endedJune 30, 2021 , we repurchased 324,700 shares of common stock (of which 24,700 settled inJuly 2021 ) for a total cost of$12.3 million (of which$742,000 settled inJuly 2021 ) at an average cost of$37.88 per share pursuant to our share repurchase program. 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, 2021 , we had approximately$38.3 million available for repurchase under our share repurchase program. - 47 - --------------------------------------------------------------------------------
Dividends
Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2020 Per Share Dollar Value March 1st$ 0.075 $ 1,339 June 1st 0.075 1,343 2021 Per Share Dollar Value March 1st$ 0.100 $ 1,799 June 1st 0.100 1,808
Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and
acquisition debt at
June 30, 2021
Credit Facility $ 60,500
Finance leases 5,696
Operating leases 21,438
Acquisition debt 5,215
Total $ 92,849
Credit Facility
On May 13, 2021 , in connection with the issuance of the New Senior Notes, we
entered into the New Credit Facility with the New Credit Facility Subsidiary
Guarantors (as defined below), the financial institutions party thereto, as
lenders, and Bank of America, N.A ., as administrative agent. We incurred $0.8
million in transactions costs related to the New Credit Facility, which were
capitalized and will be amortized over the remaining term of the related debt
using the straight-line method.
On May 13, 2021 , we used approximately $21.4 million of the availability under
the New Credit Facility to repay the outstanding balances under our prior $190.0
million senior secured revolving credit facility (the "Former Credit Facility")
and all commitments thereunder were terminated. In connection with the repayment
in full of all amounts due thereunder, the Former Credit Facility was retired
and $2.1 million of letters of credit previously issued under the Former Credit
Facility were deemed issued under (and remain outstanding under) the New Credit
Facility. In connection with the termination of the Former Credit Facility, for
the three and six months ended June 30, 2021 , we recognized a loss on the
write-off of $0.1 million in unamortized debt issuance costs, which was recorded
in Net loss on extinguishment of debt.
Immediately following the issuance of the New Senior Notes, we had outstanding
borrowings under the New Credit Facility of $58.8 million and $89.1 million
available for additional borrowings after giving effect to the $2.1 million of
outstanding letters of credit.
Our obligations under the New Credit Facility are unconditionally guaranteed on
a joint and several basis by the same subsidiaries which guarantee the New
Senior Notes and certain of our subsequently acquired or organized domestic
subsidiaries (collectively, the "Subsidiary Guarantors"). The New 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 final maturity of the New
Credit Facility will occur on May 13, 2026 .
The New Credit Facility is secured by a first-priority perfected security
interest in and lien on substantially all of the Company's personal property
assets and those of the Subsidiary Guarantors. In addition, the New Credit
Facility includes provisions which require the Company and the Subsidiary
Guarantors, upon the occurrence of an event of default or in the event the
Company's actual Total Leverage Ratio is not at least 0.25 less than the
required Total Leverage Ratio covenant level under the New Credit Facility, to
grant additional liens on real property assets accounting for no less than 50%
of the Company's and the Subsidiary Guarantors' funeral operations if requested
by the administrative agent.
The New Credit Facility contains customary affirmative covenants, including, but
not limited to, covenants with respect to the use of proceeds, payment of taxes
and other obligations, continuation of the Company's business and the
maintenance of existing rights and privileges, the maintenance of property and
insurance, amongst others.
In addition, the New Credit Facility also contains customary negative covenants,
including, but not limited to, covenants that restrict (subject to certain
exceptions) the ability of the Company and the Subsidiary Guarantors to incur
indebtedness, grant liens, make investments, engage in mergers and acquisitions,
and pay dividends and other restricted payments, and certain
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financial maintenance covenants. At June 30, 2021 , we were subject to the
following financial covenants under our New Credit Facility: (A) a Total
Leverage Ratio not to exceed 5.00 to 1.00 and (B) a Fixed Charge Coverage Ratio
(as defined in the New Credit Facility) of not less than 1.20 to 1.00 as of the
end of any period of four consecutive fiscal quarters. These financial
maintenance covenants are calculated for the Company and its subsidiaries on a
consolidated basis.
We were in compliance with all of the covenants contained in our New Credit
Facility as of June 30, 2021 .
At June 30, 2021 , we had outstanding borrowings under the New Credit Facility of
$60.5 million . We also had one letter of credit for $2.1 million outstanding
under the New Credit Facility, which will expire on November 25, 2021 . This
letter of credit is expected to automatically renew annually and secures our
obligations under our various self-insured policies. At June 30, 2021 , we had
$87.4 million of availability under the New Credit Facility.
Outstanding borrowings under our New Credit Facility bear interest at either a
prime rate or a LIBOR rate, plus an applicable margin based upon our leverage
ratio. At June 30, 2021 , the prime rate margin was equivalent to 0.75% and the
LIBOR rate margin was 1.75%. The weighted average interest rate on our New
Credit Facility was 2.5% and 2.8% and for the three and six months ended June
30, 2021 , respectively. The weighted average interest rate on our Former Credit
Facility was 3.6% and 3.9% for the three and six months ended June 30, 2020 ,
respectively.
The interest expense and amortization of debt issuance costs related to our
Credit Facility are as follows (in thousands):
Three months ended June 30, Six months ended June 30,
2020 2021 2020 2021
Credit Facility interest expense
$ 2,336$ 817 Credit Facility amortization of debt issuance costs 118 99 245 217 Lease Obligations Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to nineteen years. Many leases include one or more options to renew, some of which include options to extend the leases for up to 26 years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. The lease cost related to our operating leases and short-term leases and depreciation expense and interest expense related to our finance leases are as follows (in thousands): Three months ended June 30, Six months ended June 30, 2020 2021 2020 2021 Operating lease cost $ 954$ 964 $ 1,911 $ 1,924 Short-term lease cost 38 57 70 106 Variable lease cost 1 16 $ 26 57 Finance lease cost: Depreciation of lease right-of-use assets $ 109$ 109 $ 218$ 217 Interest on lease liabilities 125 119 251 239 Acquisition Debt Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from five to twenty years. The imputed interest expense related to our acquisition debt is as follows (in thousands): Three months ended June 30, Six months ended June 30, 2020 2021 2020 2021 Acquisition debt imputed interest expense $ 124$ 93
$ 251
Convertible Subordinated Notes due 2021 During the six months endedJune 30, 2021 , we converted approximately$2.4 million in aggregate principal amount of our Convertible Notes held by certain holders for approximately$3.8 million in cash. The Convertible Notes matured onMarch 15, 2021 , at which time all Convertible Notes outstanding, approximately$0.2 million in aggregate principal amount, were paid in full in cash at par value. Therefore, no Convertible Notes remain outstanding atJune 30, 2021 . - 49 - --------------------------------------------------------------------------------
The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes are as follows (in thousands):
Three months ended June 30, Six months ended June 30,
2020 2021 2020 2021
Convertible Notes interest expense $ 43 $ 18 $ 87 $ 18
Convertible Notes accretion of debt
discount 66 20 131 20
Convertible Notes amortization of debt
issuance costs 6 1 12 1
The effective interest rate on the unamortized debt discount for both the three
months ended June 30, 2020 and 2021 was 11.4%. The effective interest rate on
the debt issuance costs for the three months ended June 30, 2020 and 2021 was
3.2% and 3.1%, respectively.
Senior Notes
On May 13, 2021 , we completed the issuance of the New Senior Notes and related
guarantees by the Subsidiary Guarantors in a private offering under Rule 144A
and Regulation S of the Securities Act of 1933, as amended (the "Securities
Act").
We used the proceeds of $395.5 million from the offering of the New Senior
Notes, which are net of a 1.125% debt discount of $4.5 million , together with
cash on hand and borrowings under the New Credit Facility, to redeem all of the
Original Senior Notes. We paid a premium of $19.9 million to redeem the Original
Senior Notes on June 1, 2021 at a redemption price of 104.97% of the principal
amount thereof, plus accrued and unpaid interest of $13.25 million . We incurred
$1.3 million in transaction costs related to the New Senior Notes.
For the three and six months ended June 30, 2021 , we recognized a net loss of
$23.7 million related to the redemption of the Original Senior Notes, which was
recorded in Net loss on extinguishment of debt. The loss is composed of the
$19.9 million call premium, the write-off of $3.4 million in unamortized debt
discount, the write-off of $1.8 million in unamortized debt issuance costs,
offset by the write-off of $1.4 million in unamortized debt premium.
The New Senior Notes were issued under an indenture, dated as of May 13, 2021
(the "Indenture"), among the Company, the Subsidiary Guarantors and Wilmington
Trust, National Association , as trustee ("Collateral Trustee").
The New Senior Notes bear interest at 4.25% per year. Interest on the New Senior
Notes is payable semi-annually in arrears on May 15 and November 15 of each
year, beginning on November 15, 2021 . The New Senior Notes mature on May 15,
2029 , unless earlier redeemed or purchased. The New Senior Notes are unsecured,
senior obligations and are fully and unconditionally guaranteed on a senior
unsecured basis, jointly and severally by each of the Subsidiary Guarantors.
We may redeem the New Senior Notes, in whole or in part, at the redemption price
of 102.13% on or after May 15, 2024 , 101.06% on or after May 15, 2025 and 100%
on or after May 15, 2026 , plus accrued and unpaid interest, if any, to, but
excluding, the redemption date. At any time before May 15, 2024 , we may also
redeem all or part of the New Senior Notes at the redemption prices described in
the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the
date of redemption. In addition, before May 15, 2024 , we may redeem up to 40% of
the aggregate principal amount of the New Senior Notes outstanding using an
amount of cash equal to the net proceeds of certain equity offerings, at a price
of 104.25% of the principal amount of the New Senior Notes, plus accrued and
unpaid interest, if any, to (but excluding) the date of redemption; provided
that (1) at least 50% of the aggregate principal amount of the New Senior Notes
(including any additional New Senior Notes) outstanding under the Indenture
remain outstanding immediately after the occurrence of such redemption (unless
all New Senior Notes are redeemed concurrently), and (2) each such redemption
must occur within 180 days of the date of the consummation of any such equity
offering.
If a "change of control" occurs, holders of the New Senior Notes will have the
option to require us to purchase for cash all or a portion of their New Senior
Notes at a price equal to 101% of the principal amount of the New Senior Notes,
plus accrued and unpaid interest. In addition, if we make certain asset sales
and do not reinvest the proceeds thereof or use such proceeds to repay certain
debt, we will be required to use the proceeds of such asset sales to make an
offer to purchase the New Senior Notes at a price equal to 100% of the principal
amount of the New Senior Notes, plus accrued and unpaid interest.
The Indenture contains restrictive covenants limiting our ability and our
Restricted Subsidiaries (as defined in the Indenture) to, among other things,
incur additional indebtedness or issue certain preferred shares, create liens on
certain assets to secure debt, pay dividends or make other equity distributions,
purchase or redeem capital stock, make certain investments, sell assets, agree
to certain restrictions on the ability of Restricted Subsidiaries to make
payments to us, consolidate, merge, sell or otherwise dispose of all or
substantially all assets, or engage in transactions with affiliates. The
Indenture also contains customary events of default.
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The debt discount and the debt issuance costs are being amortized using the
effective interest method over the remaining term of approximately 95 months of
the New Senior Notes. The effective interest rate on the unamortized debt
discount and the unamortized debt issuance costs for the New Senior Notes for
both three and six months ended June 30, 2021 was 4.42% and 4.30%, respectively.
The interest expense and amortization of debt discount, debt premium and debt
issuance costs related to our Senior Notes are as follows (in thousands):
Three months ended June 30, Six months ended June 30,
2020 2021 2020 2021
Senior Notes interest expense $ 6,625 $ 6,642 $ 13,250 $ 13,267
Senior Notes amortization of debt
discount 131 128 260 266
Senior Notes amortization of debt
premium 55 27 109 85
Senior Notes amortization of debt
issuance costs 69 53 136 127
At June 30, 2021 , the fair value of the New Senior Notes, which are Level 2
measurements, was $399.5 million .
The effective interest rate on the unamortized debt issuance costs for the
Original Senior Notes, issued in May 2018 , for both three and six months ended
June 30, 2021 was 6.87% and 6.69%, respectively. The effective interest rate on
the unamortized debt premium and the unamortized debt issuance costs for the
additional Original Senior Notes, issued in December 2019 , for both three and
six months ended June 30, 2021 was 6.20% and 6.88%, respectively.
FINANCIAL HIGHLIGHTS
Below are our financial highlights (in thousands except for volumes and
averages):
Three months ended June 30, Six months ended June 30,
2020 2021 2020 2021
Revenue $ 77,477 $ 88,277 $ 154,967 $ 184,914
Funeral contracts 11,737 10,842 23,230 24,138
Average revenue per funeral contract
$ 5,069 $ 5,325 Preneed interment rights (property) sold 2,338 3,276 4,206 5,934 Average price per preneed interment right sold$ 3,988 $ 4,592 $ 3,895 $ 4,573 Gross profit$ 25,160 $ 28,927 $ 48,331 $ 63,988 Net income (loss)$ 6,397 $ (6,167) $ 2,200 $ 6,766 Revenue for the three months endedJune 30, 2021 increased$10.8 million compared to the three months endedJune 30, 2020 , as we experienced a 40.1% increase in the number of preneed interment rights (property) sold, as well as a 15.1% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in the second quarter of 2020 due to COVID-19; (2) the full integration of the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020; and (3) the execution of the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. We also experienced a 9.7% increase in the average revenue per funeral contract for the three months endedJune 30, 2021 compared to the same period in 2020, which reflects a normalization of contracts under which we provide memorial services returning to pre-COVID-19 levels. Total funeral contracts decreased 7.6% for the same comparable period as the volume lift related to the COVID-19 death rate we experienced in the second quarter of 2020 tapered off. Gross profit for the three months endedJune 30, 2021 increased$3.8 million compared to the three months endedJune 30, 2020 , primarily due to the increase in revenue from our cemetery segment, as well as decreases in cemetery operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel. These decreases were partially offset by increases in salaries and benefits expense in our funeral segment as a percent of operating revenue, which reflects the normalization of funeral personnel hours returning to pre-COVID-19 levels from being reduced during the second quarter of 2020 due to COVID-19. Net income for the three months endedJune 30, 2021 decreased$12.6 million compared to the three months endedJune 30, 2020 , primarily due to the$23.8 million loss on extinguishment of debt, offset by the$7.6 million decrease in tax expense and$3.8 million increase in gross profit. Revenue for the six months endedJune 30, 2021 increased$29.9 million compared to the six months endedJune 30, 2020 , as we experienced a 41.1% increase in the number of preneed interment rights (property) sold, as well as a 17.4% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19; (2) the full integration of the cemetery acquisitions made in - 51 - -------------------------------------------------------------------------------- the fourth quarter of 2019 and first quarter of 2020; and (3) the execution of the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. We also experienced a 3.9% increase in total funeral contracts for the six months endedJune 30, 2021 compared to the same period in 2020, primarily due to a peak spike in COVID-19 deaths during the first quarter of 2021, offset by volume decreases in the second quarter as death rates began to normalize to pre-COVID-19 levels. Additionally, the average revenue per funeral contract increased 5.1% for the same comparable period in 2020 as contracts under which we provide memorial services began to normalize to pre-COVID-19 levels during the second quarter of 2021. Gross profit for the six months endedJune 30, 2021 increased$15.7 million compared to the six months endedJune 30, 2020 , primarily due to the increase in revenue from both our funeral home and cemetery segments, as well as decreases in funeral home and cemetery operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel primarily during the first quarter of 2021. Net income for the six months endedJune 30, 2021 increased$4.6 million compared to the six months endedJune 30, 2020 , primarily due to the increase in gross profit and the$14.7 million impairment charge we recorded in the first six months of 2020 that did not occur in first six months of 2021, offset by the$23.8 million loss on extinguishment of debt in the second quarter of 2021. Further discussion of Revenue and the components of Gross profit for our funeral home and cemetery segments is presented herein under "- Results of Operations." Further discussion of General, administrative and other expenses, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under "- Other Financial Statement Items." - 52 - -------------------------------------------------------------------------------- REPORTING AND NON-GAAP FINANCIAL MEASURES We also present our financial performance in our "Operating and Financial Trend Report" ("Trend Report") as reported in our earnings release for the three months endedJune 30, 2021 issued onJuly 27, 2021 and discussed in the corresponding earnings conference call. The Trend Report is used as a supplemental financial statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance withUnited States generally accepted accounting principles ("GAAP"). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business. Below is a reconciliation of Net income (loss), a GAAP measure, to Adjusted net income, a non-GAAP measure, (in thousands): Three months ended June 30, Six months ended June 30, 2020 2021 2020 2021 Net income (loss)$ 6,397 $ (6,167) $ 2,200 $ 6,766 Special items, net of tax(1) Acquisition expenses 36 - 126 - Severance and separation costs(2) 217 (118) 445 1,126 Performance awards cancellation and exchange 56 - 56 - Accretion of discount on Convertible Notes(1) 66 - 131 20 Net loss on extinguishment of debt(3) - 17,022 - 17,022 Net (gain) loss on divestitures and other costs - 139 - (74) Net impact of impairment of goodwill and other intangibles 51 - 9,808 - Litigation reserve(4) 154 - 213 - Natural disaster and pandemic costs 657 37 768 743 Other special items(5) 371 954 371 954 Adjusted net income(6)$ 8,005 $ 11,867 $ 14,118 $ 26,557
(1) Special items are defined as charges or credits included in our GAAP financial
statements that can vary from period to period and are not reflective of costs incurred
in the ordinary course of our operations. In 2020, Special items are taxed at the
federal statutory rate of 21.0%, except the Net (gain) loss on divestitures and other
costs and the Net impact of impairment of goodwill and other intangibles, which are
taxed at the operating tax rate of 33.3%. In 2021, Special items are taxed at the
operating tax rate of 28.5%. The Accretion of discount on Convertible Notes is not tax
effected.
(2) The increase during the six months ended
related to the resignation of two members of senior leadership in the first quarter of
2021.
(3) Loss on the redemption of our Original Senior Notes during the second quarter of 2021. (4) Relates to legal costs associated with a former corporate employee lawsuit. (5) In 2020, the Special item relates to the costs associated with a state audit
assessment. In 2021, the Special item 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
New Senior Notes were issued prior to the redemption of our Original Senior Notes. (6) Adjusted net income is defined as Net income (loss) 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) (in thousands):
Three months ended June 30, Six months ended June 30,
2020 2021 2020 2021
Gross profit $ 25,160 $ 28,927 $ 48,331 $ 63,988
Cemetery property amortization 1,097 2,175 1,974 3,692
Field depreciation expense 3,247 3,142 6,537 6,278
Regional and unallocated funeral and
cemetery costs 3,717 5,770 6,473 11,843
Operating profit(1) $ 33,221 $ 40,014 $ 63,315 $ 85,801 (1) Operating profit is defined as Gross profit less Cemetery property amortization, Field
depreciation expense and Regional and unallocated funeral and cemetery costs.
- 53 -
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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 (in
thousands):
Three months ended June 30, Six months ended June 30,
2020 2021 2020 2021
Funeral Home $ 25,552 $ 24,184 $ 49,826 $ 57,090
Cemetery 7,669 15,830 13,489 28,711
Operating profit $ 33,221 $ 40,014 $ 63,315 $ 85,801
Operating profit margin(1) 42.9% 45.3% 40.9% 46.4%
(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 months endedJune 30, 2021 and 2020. The term "same store" refers to funeral homes and cemeteries acquired prior toJanuary 1, 2017 and owned and operated for the entirety of each period being presented, excluding certain funeral home and cemetery businesses that we intend to divest in the near future. The term "acquired" refers to funeral homes and cemeteries purchased afterDecember 31, 2016 , excluding any funeral home and cemetery businesses that we intend to divest in the near future. This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. The term "divested" when discussed in the Funeral Home Segment, refers to the three funeral homes we sold in the first six months of 2021. "Planned divested" refers to the funeral home and cemetery businesses that we intend to divest. "Ancillary" in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business. Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure. - 54 - -------------------------------------------------------------------------------- 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, 2020 2021 Revenue: Same store operating revenue$ 44,296 $ 47,284 Acquired operating revenue 9,023 8,557 Divested/planned divested revenue 2,584
809
Ancillary revenue 1,117
1,088
Preneed funeral insurance commissions 326
263
Preneed funeral trust and insurance 1,775 1,831 Total$ 59,121 $ 59,832 Operating profit: Same store operating profit$ 18,725 $ 18,659 Acquired operating profit 3,755 3,261 Divested/planned divested operating profit 830
119
Ancillary operating profit 321
274
Preneed funeral insurance commissions 160
78
Preneed funeral trust and insurance 1,761 1,793 Total$ 25,552 $ 24,184
The following measures reflect the significant metrics over this comparative period:
Three months ended
2020 2021
Same store:
Contract volume 9,056 9,061Average revenue per contract, excluding preneed funeral trust earnings
$ 4,891 $ 5,218 Average revenue per contract, including preneed funeral trust earnings$ 5,066 $ 5,399 Burial rate 36.1% 35.2% Cremation rate 57.4% 56.9% Acquired: Contract volume 1,941 1,625
Average revenue per contract, excluding preneed funeral trust earnings
$
4,649
$ 4,710 $ 5,324 Burial rate 41.4% 40.4% Cremation rate 55.0% 54.9% Funeral home same store operating revenue for the three months endedJune 30, 2021 increased$3.0 million compared to the same period in 2020. The increase in operating revenue is primarily driven by a 6.7% increase in the average revenue per contract excluding preneed interest, while same store contract volume remained flat. The average revenue per contract in the second quarter of 2021 reflects a normalization of contracts under which we provide memorial services returning to pre-COVID-19 levels. Funeral home same store operating profit for the three months endedJune 30, 2021 decreased$0.1 million when compared to the same period in 2020. The comparable operating profit margin decreased 280 basis points to 39.5%. Operating expenses as a percent of operating revenue increased 2.8% for the three months endedJune 30, 2021 compared to the same period in 2020. The largest increase was in salaries and benefits expenses, which increased 1.3% as a percent of operating revenue, when funeral personnel hours were reduced during the second quarter of 2020 due to COVID-19. This increase reflects normalization of salaries and benefits expenses returning to pre-COVID-19 levels. We also experienced increases as a - 55 - -------------------------------------------------------------------------------- percentage of revenue in the following areas: (1) general liability insurance costs increased 0.5%; (2) general and administrative expenses increased 0.3%; and (3) merchandise costs increased 0.2%. Funeral home acquired operating revenue for the three months endedJune 30, 2021 decreased$0.5 million compared to the same period in 2020. The decrease in operating revenue is primarily due to a 16.3% decrease in acquired contract volume, which was partially offset by a 13.3% increase in the average revenue per contract. The average revenue per contract in the second quarter of 2021 reflects a normalization of contracts under which we provide memorial services returning to pre-COVID-19 levels and the volume lift related to the COVID-19 death rate we experienced in the second quarter of 2020 tapering off. Acquired operating profit for the three months endedJune 30, 2021 decreased by$0.5 million when compared to the same period in 2020. The comparable operating profit margin decreased 350 basis points to 38.1%. The decrease in operating profit is primarily due to the decrease in acquired operating revenue. Operating expenses as a percent of operating revenue increased 3.5% for the three months endedJune 30, 2021 compared to the same period in 2020, as we experienced increases as a percentage of revenue in the following areas: (1) other funeral costs increased 1.5%; (2) general liability insurance costs increased 0.6%; and (3) salaries and benefits expenses increased 0.2%. Ancillary revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses, remained flat, while Ancillary operating profit decreased 14.6% for three months endedJune 30, 2021 compared to the same period in 2020. Operating expenses as a percent of operating revenue increased 1.8% for the same comparative period, as we experienced slight increases in rent expense and other funeral costs, slightly offset by a decrease in salaries and benefits expenses. Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue) and the respective operating profit, on a combined basis, remained flat for the three months endedJune 30, 2021 compared to the same period in 2020. The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands): Six months ended June 30, 2020 2021 Revenue: Same store operating revenue$ 90,992 $ 103,967 Acquired operating revenue 17,908 18,696 Divested/planned divested revenue 5,341
2,026
Ancillary revenue 2,268
2,295
Preneed funeral insurance commissions 692
593
Preneed funeral trust and insurance 3,662 4,029 Total$ 120,863 $ 131,606 Operating profit: Same store operating profit$ 36,787 $ 44,471 Acquired operating profit 7,002 7,728 Divested/planned divested operating profit 1,503
253
Ancillary operating profit 616
516
Preneed funeral insurance commissions 318
167
Preneed funeral trust and insurance 3,600 3,955 Total$ 49,826 $ 57,090 - 56 -
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The following measures reflect the significant metrics over this comparative
period:
Six months ended June 30,
2020 2021
Same store:
Contract volume 18,114 20,089Average revenue per contract, excluding preneed funeral trust earnings
$ 5,023 $ 5,175 Average revenue per contract, including preneed funeral trust earnings$ 5,205 $ 5,354 Burial rate 36.5% 36.0% Cremation rate 56.2% 57.0% Acquired: Contract volume 3,674 3,627
Average revenue per contract, excluding preneed funeral trust earnings
$ 4,874 $ 5,155 Average revenue per contract, including preneed funeral trust earnings$ 4,933 $ 5,220 Burial rate 41.6% 40.7% Cremation rate 54.8% 54.5% Funeral home same store operating revenue for the six months endedJune 30, 2021 increased$13.0 million compared to the same period in 2020. The increase in operating revenue is primarily driven by a 10.9% increase in same store contract volume, as well as a 3.0% increase in the average revenue per contract excluding preneed interest. The increase in volume is primarily due to a peak spike in COVID-19 deaths during the first quarter of 2021, offset by volume decreases in the second quarter as death rates began to normalize to pre-COVID-19 levels. Additionally, the average revenue per contract increased as contracts under which we provide memorial services began to normalize to pre-COVID-19 levels in the second quarter of 2021. Funeral home same store operating profit for the six months endedJune 30, 2021 increased$7.7 million when compared to the same period in 2020. The comparable operating profit margin increased 240 basis points to 42.8%. The increase in operating profit is primarily due to the increase in same store operating revenue along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 2.3% for the six months endedJune 30, 2021 compared to the same period in 2020. The largest decrease was in salaries and benefits expense, which decreased 1.4% as a percent of operating revenue as we increased revenue during the first quarter of 2021 without adding extra personnel. We also experienced decreases as a percentage of revenue in the following areas: (1) allowance for credit losses decreased 0.3%; (2) promotional expenses decreased 0.3%; and (3) general and administrative expenses decreased 0.2%; offset slightly by a 0.2% increase in general liability insurance costs. Funeral home acquired operating revenue for the six months endedJune 30, 2021 increased$0.8 million compared to the same period in 2020. The increase in operating revenue is primarily driven by a 5.8% increase in the average revenue per contract excluding preneed interest, while acquired contract volume decreased by 1.3%. The increase in the average revenue per contract reflects a normalization of contracts under which we provide memorial services returning to pre-COVID-19 levels in the second quarter of 2021, as the volume lift related to the COVID-19 death rate we experienced in the first quarter of 2021 tapered off. Acquired operating profit for the six months endedJune 30, 2021 increased$0.7 million when compared to the same period in 2020. The comparable operating profit margin increased 220 basis points to 41.3%. The increase in operating profit is primarily due to the increase in acquired operating revenue along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 2.2% for the six months endedJune 30, 2021 compared to the same period in 2020. The largest decrease was in salaries and benefits expense, which decreased 3.0% as a percent of operating revenue as we increased revenue without adding extra personnel during the first quarter of 2021. We also experienced decreases as a percentage of revenue in the following areas: (1) allowance for credit losses decreased 0.4%; and (2) promotional expenses decreased 0.3%; offset slightly by a 0.8% increase in other funeral costs. Ancillary revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses, remained flat, while Ancillary operating profit decreased 16.2% for the six months endedJune 30, 2021 compared to the same period in 2020. Operating expenses as a percent of operating revenue increased 3.4% for the same comparative period, as we experienced increases in the following areas: (1) other funeral costs increased 3.1%; (2) rent expense increased 1.7%; and (3) general and administrative expenses increased 1.6%. Preneed funeral insurance commissions and preneed funeral trust and insurance (recorded in Other revenue) on a combined basis, increased$0.3 million or 6.2% for the six months endedJune 30, 2021 compared to the same period in 2020. The increase is primarily related to a 1.0% increase in preneed contracts maturing to atneed which triggers the recognition of - 57 - -------------------------------------------------------------------------------- trust earnings on matured contracts. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased$0.2 million or 5.2% for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue. Cemetery Segment The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands): Three months ended June 30, 2020 2021 Revenue: Same store operating revenue$ 11,565 $ 16,516 Acquired operating revenue 4,056 8,175 Divested/planned divested revenue 162
508
Preneed cemetery trust revenue 2,333
2,992
Preneed cemetery finance charges 240 254 Total$ 18,356 $ 28,445 Operating profit: Same store operating profit$ 3,666 $ 7,579 Acquired operating profit 1,435 4,737 Divested/planned divested operating profit 41
392
Preneed cemetery trust operating profit 2,287
2,868
Preneed cemetery finance charges 240 254 Total$ 7,669 $ 15,830 The following measures reflect the significant metrics over this comparative period: Three months ended June 30, 2020 2021 Same store: Preneed revenue as a percentage of operating revenue 61% 63% Preneed revenue (in thousands)$ 7,041 $ 10,338 Atneed revenue (in thousands)$ 4,524 $ 6,178 Number of preneed interment rights sold 1,749 2,251 Average price per interment right sold $
3,964
Acquired:
Preneed revenue as a percentage of operating revenue 62% 74% Preneed revenue (in thousands)$ 2,523 $ 6,055 Atneed revenue (in thousands)$ 1,533 $ 2,120 Number of preneed interment rights sold 552 1,013 Average price per interment right sold $
4,273
Cemetery same store preneed revenue increased$3.3 million for the three months endedJune 30, 2021 compared to the same period in 2020, as we experienced a 28.7% increase in the number of interments rights sold, as well as a 3.7% increase in the average price per interment right sold. The increase is primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in the second quarter of 2020 due to COVID-19; and (2) the execution of the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. Cemetery same store atneed revenue, which represents 37% of our same store operating revenue, increased$1.7 million as we experienced a 17.2% increase in same store atneed contracts and a 16.5% increase in the average sale per contract for the three months endedJune 30, 2021 compared to the same period in 2020. This increase is primarily due to the increased number of deaths in 2021 related to COVID-19. - 58 - -------------------------------------------------------------------------------- Cemetery same store operating profit for the three months endedJune 30, 2021 increased$3.9 million from the same period in 2020. The comparable operating profit margin increased 1,420 basis points to 45.9% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 14.2% in the three months endedJune 30, 2021 compared to the same period in 2020. The largest decrease was in salaries and benefits expense, which decreased 3.4% as a percent of operating revenue as we increased revenue without adding extra personnel. We also experienced decreases as a percentage of revenue in the following areas: (1) allowance for credit losses decreased 3.1%; (2) general liability insurance costs decreased 1.4%; and (3) promotional expenses decreased 1.3%. There are three businesses in our acquired cemetery portfolio, two of which were acquired in the fourth quarter of 2019 and one acquired in the first quarter of 2020. In the first quarter of 2020, we hired new sales leadership at two of the newly acquired cemeteries and continue to build their respective sales teams as we execute the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. As a result, our acquired cemetery portfolio experienced a$3.5 million increase in preneed revenue and a$0.6 million increase in atneed revenue for the three months endedJune 30, 2021 compared to the same period in 2020. Cemetery acquired operating profit increased$3.3 million for three months endedJune 30, 2021 from the same period in 2020. The comparable operating profit margin increased 2,250 basis points to 57.9% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 22.6% in the three months endedJune 30, 2021 compared to the same period in 2020. The largest decrease was in salaries and benefits expense, which decreased 10.7% as a percent of operating revenue as we increased revenue without adding extra personnel. We also experienced decreases as a percentage of revenue in the following areas: (1) promotional expenses decreased 5.6%; (2) merchandise and services costs decreased 3.1%; and (3) general liability insurance costs decreased 1.2%. Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased$0.7 million for the three months endedJune 30, 2021 compared to the same period in 2020. The increase in our trust fund income is primarily due to our execution of a major repositioning strategy beginning at the height of the COVID-19 market crisis inMarch 2020 , substantially increasing our preneed cemetery trust revenue and operating profit. We experienced a$0.6 million increase in income and a$0.1 million increase in realized capital gains primarily within our perpetual care trusts in the three months endedJune 30, 2021 compared to the same period of 2020. Operating profit for the two categories of Other revenue, on a combined basis, increased$0.6 million for three months endedJune 30, 2021 compared to the same period in 2020 primarily due to the increase in our perpetual care trust revenue. The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands): Six months ended June 30, 2020 2021 Revenue: Same store operating revenue$ 22,439 $ 31,083 Acquired operating revenue 6,855 15,155 Divested/planned divested revenue 261
696
Preneed cemetery trust revenue 4,067
5,856
Preneed cemetery finance charges 482 518 Total$ 34,104 $ 53,308 Operating profit: Same store operating profit$ 6,838 $ 13,284 Acquired operating profit 2,262 8,839 Divested/planned divested operating profit 47
462
Preneed cemetery trust operating profit 3,860
5,608
Preneed cemetery finance charges 482 518 Total$ 13,489 $ 28,711 - 59 -
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The following measures reflect the significant metrics over this comparative
period:
Six months ended June 30,
2020 2021
Same store:
Preneed revenue as a percentage of operating revenue 59% 60%
Preneed revenue (in thousands) $ 13,335 $ 18,778
Atneed revenue (in thousands) $ 9,104 $ 12,305
Number of preneed interment rights sold 3,306 4,129
Average price per interment right sold $
3,803
Acquired:
Preneed revenue as a percentage of operating revenue 62% 69% Preneed revenue (in thousands)$ 4,258 $ 10,498 Atneed revenue (in thousands)$ 2,597 $ 4,657 Number of preneed interment rights sold 852 1,763 Average price per interment right sold $
4,422
Cemetery same store preneed revenue increased$5.4 million for the six months endedJune 30, 2021 compared to the same period in 2020, as we experienced a 24.9% increase in the number of interments rights sold, as well as a 5.5% increase in the average price per interment right sold. The increase is primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19; and (2) the execution of the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. Cemetery same store atneed revenue, which represents 40% of our same store operating revenue, increased$3.2 million for the six months endedJune 30, 2021 compared to the same period in 2020. The increase was a result of a 20.4% increase in same store atneed contracts and a 12.2% increase in the average sale per contract, primarily due to the increased deaths in 2021 related to COVID-19. Cemetery same store operating profit increased$6.4 million for the six months endedJune 30, 2021 compared to the same period in 2020. The comparable operating profit margin increased 1,220 basis points to 42.7% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 12.2% in the six months endedJune 30, 2021 compared to the same period in 2020. The largest decrease was in salaries and benefits expense, which decreased 4.0% as a percent of operating revenue as we increased revenue without adding extra personnel. We also experienced decreases as a percentage of revenue in the following areas: (1) allowance for credit losses decreased 1.7%; (2) promotional expenses decreased 1.5%; and (3) general liability insurance costs decreased 1.4%. There are three businesses in our acquired cemetery portfolio, two of which were acquired in the fourth quarter of 2019 and one acquired in the first quarter of 2020. In the first quarter of 2020, we hired new sales leadership at two of the newly acquired cemeteries and continue to build their respective sales teams as we execute the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries. As a result, our acquired cemetery portfolio experienced a$6.2 million increase in preneed revenue and a$2.1 million increase in atneed revenue for the six months endedJune 30, 2021 compared to the same period in 2020. Cemetery acquired operating profit increased$6.6 million for six months endedJune 30, 2021 compared to the same period in 2020. The comparable operating profit margin increased 2,530 basis points to 58.3% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business. Operating expenses as a percent of operating revenue decreased 25.3% in the six months endedJune 30, 2021 compared to the same period in 2020. The largest decrease was in salaries and benefits expense, which decreased 13.1% as a percent of operating revenue as we increased revenue without adding extra personnel. We also experienced decreases as a percentage of revenue in the following areas: (1) promotional expenses decreased 4.8%; (2) merchandise and services costs decreased 2.2%; and (3) general liability insurance costs decreased 2.1%. Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased$1.8 million for the six months endedJune 30, 2021 compared to the same period in 2020. The increase in our trust fund income is primarily due to our execution of a major repositioning strategy beginning at the height of the COVID-19 market crisis inMarch 2020 , substantially increasing our preneed cemetery trust revenue and operating profit. We experienced a$1.3 million increase in income and a$0.5 million increase in realized capital gains primarily within our perpetual care trusts - 60 - -------------------------------------------------------------------------------- for the six months endedJune 30, 2021 compared to the same period of 2020. Operating profit for the two categories of Other revenue, on a combined basis, increased$1.8 million for six months endedJune 30, 2021 compared to the same period in 2020 primarily due to the increase in preneed cemetery trust revenue. Cemetery property amortization. Cemetery property amortization totaled$2.2 million and$3.7 million for the three and six months endedJune 30, 2021 , respectively, increases of$1.1 million and$1.7 million , respectively, compared to the same periods in prior year primarily due to the increase in property sold across our cemetery portfolio. Field depreciation. Depreciation expense for our field businesses totaled$3.1 million and$6.3 million for the three and six months endedJune 30, 2021 , respectively, decreases of$0.1 million and$0.3 million , respectively, compared to the same periods in prior year primarily due to building structures and older vehicles becoming fully depreciated without any newly acquired building structures and vehicles to offset the decrease. Regional and unallocated funeral and cemetery costs. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled$5.8 million for the three months endedJune 30, 2021 , an increase of$2.1 million primarily due to the following: (1) a$1.7 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (2) a$0.5 million increase in salary and benefits expenses, which includes our Chief Operating Officer hired inJune 2020 and three cemetery directors of sales support hired in the second half of 2020; (3) a$0.3 million increase in other general administrative costs, which includes higher travel and advertising costs; and (4) a$0.1 million increase in separation expenses; offset by (5) a$0.4 million decrease in state audit assessments and (6) a$0.1 million decrease in health and safety expenses related to the COVID-19 pandemic. Regional and unallocated funeral and cemetery costs totaled$11.8 million for the six months endedJune 30, 2021 , an increase of$5.4 million primarily due to the following: (1) a$4.2 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (2)$0.7 million increase in salary and benefits expenses, which includes our Chief Operating Officer hired inJune 2020 and three cemetery directors of sales support hired in the second half of 2020; (3) a$0.6 million increase in health and safety expenses related to the COVID-19 pandemic; and (4) a$0.3 million increase in other general administrative costs, which includes higher travel and advertising costs; offset by (5) a$0.4 million decrease in state audit assessments. Other Financial Statement Items General, administrative and other. General, administrative and other expenses totaled$6.9 million for the three months endedJune 30, 2021 , an increase of$0.4 million compared to the three months endedJune 30, 2020 . The increase was primarily attributable to the following: (1) a$0.4 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; and (2) a$0.2 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; offset by (3) a$0.2 million decrease in litigation reserve. General, administrative and other expenses totaled$15.7 million for the six months endedJune 30, 2021 , an increase of$3.2 million compared to the six months endedJune 30, 2020 . The increase was primarily attributable to the following: (1) a$1.8 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation; (2) a$1.2 million increase in separation expenses related to the resignation of two members of senior leadership; and (3) a$0.5 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology, offset by (4) a$0.3 million decrease in litigation reserve. Home office depreciation and amortization. Home office depreciation and amortization expense totaled$0.3 million and$0.6 million for the three and six months endedJune 30, 2021 , respectively, decreases of$0.1 million and$0.2 million , respectively, compared to the same periods in prior year primarily due to equipment and software at the home office becoming fully depreciated in the latter half of 2020 without any newly acquired assets to offset the decrease. - 61 - -------------------------------------------------------------------------------- Net loss on divestitures, disposals and impairments charges. The components of Net loss on divestitures, disposals and impairment charges are as follows (in thousands): Three months endedJune 30 ,
Six months ended
2020 2021 2020 2021
Goodwill impairment $ - $ - $ 13,632 $ -
Tradename impairment - - 1,061 -
Net (gain) loss on divestitures - 205 - (103)
Net loss on disposals of fixed assets - 622 - 622
Total $ - $ 827 $ 14,693 $ 519
During the six months ended June 30, 2021 , we divested three funeral homes for a
net gain of $0.1 million and disposed of fixed assets for a net loss of $0.6
million .
During the six months ended June 30, 2020 , we recorded an impairment for
goodwill of $13.6 million as the carrying amount of our funeral homes in the
Eastern Region Reporting Unit exceeded the fair value and we recorded an
impairment for certain of our tradenames of $1.1 million as the carrying amount
of these tradenames exceeded the fair value.
Interest expense. Interest expense totaled $7.5 million and $15.1 million for
the three and six months ended June 30, 2021 , respectively, decreases of $0.9
million and $1.7 million , respectively, compared to the same periods in prior
year, primarily due to decreased borrowings and lower interest rates on our
Credit Facility, as well as lower interest on our New Senior Notes.
Income taxes. We had an income tax benefit of $4.2 million and an income tax
expense of $3.4 million for the three months ended June 30, 2021 and 2020,
respectively and an income tax expense of $1.4 million and $1.3 million for the
six months ended June 30, 2021 and 2020, respectively. Our operating tax rate
before discrete items was 33.0% and 33.5% for the three months ended June 30,
2021 and 2020, respectively and 28.5% and 33.3% for the six months ended June
30, 2021 and 2020, respectively.
We filed carryback refund claims for the 2018 and 2019 tax years as allowed by
the legislative changes included in the CARES Act. As a result of requesting a
tax refund in excess of $5 million , we must receive Joint Committee approval and
undergo an audit for the tax year ending December 31, 2018 . This audit is
currently in progress. In 2020, the 2018 tax return was amended to take full
advantage of the CARES Act legislative benefits resulting in additional losses
that increase the amount of our carryback refund claim. The majority of the net
operating losses generated in 2018 are the result of filing non-automatic
accounting method changes relating to the recognition of revenue from our
cemetery property and merchandise and services sales. Due to the uncertainty of
receiving Internal Revenue Service approval regarding our non-automatic
accounting method changes, a reserve has been recorded against the benefit
derived from this carrying back that the net operating losses generated. At
June 30, 2021 , the reserve for uncertain tax positions was $3.7 million .
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Consolidated Financial Statements requires us to make
estimates and judgments that affect the amounts reported in the unaudited
consolidated financial statements and accompanying notes. We base our estimates
on historical experience, third-party data and assumptions that we believe to be
reasonable under the circumstances. The results of these considerations form the
basis for making judgments about the amount and timing of revenue and expenses,
the carrying value of assets and the recorded amounts of liabilities. Actual
results may differ from these estimates and such estimates may change if the
underlying conditions or assumptions change. Historical performance should not
be viewed as indicative of future performance because there can be no assurance
that our margins, operating income and net income, as a percentage of revenue,
will be consistent from year to year.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is based upon our Consolidated Financial Statements
presented herewith, which have been prepared in accordance with GAAP. Our
critical accounting policies are discussed in MD&A in our Annual Report on Form
10-K for the year ended December 31, 2020 .
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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