Carriage Services(CSV) - 2022 Q3 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements, including the balance sheet, statements of operations, cash flows, and changes in stockholders' equity, along with detailed condensed notes explaining significant accounting policies, recent accounting standards, and specific financial statement line items such as acquisitions, goodwill, trust investments, debt, leases, and segment reporting Unaudited Consolidated Balance Sheet This section provides a snapshot of the company's financial position, detailing assets, liabilities, and stockholders' equity at specific reporting dates Balance Sheet Metrics | Metric | | :----- | | ASSETS | | Total current assets | | Preneed cemetery trust investments | | Preneed funeral trust investments | | Preneed cemetery receivables, net | | Receivables from preneed funeral trusts, net | | Property, plant and equipment, net | | Cemetery property, net | | Goodwill | | Intangible and other non-current assets, net | | Operating lease right-of-use assets | | Cemetery perpetual care trust investments | | Total assets | | LIABILITIES AND STOCKHOLDERS' EQUITY | | Total current liabilities | | Acquisition debt, net of current portion | | Credit facility | | Senior notes | | Obligations under finance leases, net of current portion | | Obligations under operating leases, net of current portion | | Deferred preneed cemetery revenue | | Deferred preneed funeral revenue | | Deferred tax liability | | Other long-term liabilities | | Deferred preneed cemetery receipts held in trust | | Deferred preneed funeral receipts held in trust | | Care trusts' corpus | | Total liabilities | Key Balance Sheet Figures (in thousands) | Metric | December 31, 2021 (in thousands) | September 30, 2022 (in thousands) | | :--------------------------------------- | :------------------------------- | :-------------------------------- | | Total assets | $1,178,631 | $1,147,387 | | Total liabilities | $1,050,616 | $1,018,467 | Unaudited Consolidated Statements of Operations This section details the company's revenues, expenses, and net income over specific periods, reflecting its operational performance Consolidated Statements of Operations (in thousands) | Metric (in thousands) | Three months ended September 30, 2021 | Three months ended September 30, 2022 | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | | :------------------------------------------------- | :------------------------------------ | :------------------------------------ | :----------------------------------- | :----------------------------------- | | Revenue | $95,041 | $87,497 | $279,955 | $276,258 | | Gross profit | $33,164 | $25,598 | $97,152 | $87,788 | | Operating income | $23,265 | $15,222 | $70,435 | $60,098 | | Net income | $13,046 | $5,860 | $19,812 | $33,161 | | Basic earnings per common share | $0.74 | $0.40 | $1.11 | $2.22 | | Diluted earnings per common share | $0.71 | $0.38 | $1.08 | $2.09 | | Dividends declared per common share | $0.1000 | $0.1125 | $0.3000 | $0.3375 | Unaudited Consolidated Statements of Cash Flows This section outlines the cash inflows and outflows from operating, investing, and financing activities, providing insight into the company's liquidity Consolidated Statements of Cash Flows (in thousands) | Metric (in thousands) | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | | :------------------------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | $19,812 | $33,161 | | Net cash provided by operating activities | $69,699 | $50,046 | | Net cash used in investing activities | $(11,216) | $(22,700) | | Net cash used in financing activities | $(58,284) | $(27,673) | | Net increase (decrease) in cash and cash equivalents | $199 | $(327) | | Cash and cash equivalents at end of period | $1,088 | $821 | Unaudited Consolidated Statements of Changes in Stockholders' Equity This section details the changes in the company's equity over time, including net income, stock-based compensation, dividends, and share repurchases Stockholders' Equity Changes (Three Months) (in thousands) | Metric (in thousands) | Three months ended September 30, 2021 | Three months ended September 30, 2022 | | :------------------------------------------------- | :------------------------------------ | :------------------------------------ | | Net income | $13,046 | $5,860 | | Stock-based compensation expense | $1,148 | $1,416 | | Dividends on common stock | $(1,783) | $(1,653) | | Treasury stock acquired | $(53,239) | — | | Balance – September 30 | $192,468 | $128,920 | Stockholders' Equity Changes (Nine Months) (in thousands) | Metric (in thousands) | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | | :------------------------------------------------- | :----------------------------------- | :----------------------------------- | | Net income | $19,812 | $33,161 | | Stock-based compensation expense | $3,337 | $4,255 | | Dividends on common stock | $(5,390) | $(5,108) | | Treasury stock acquired | $(65,540) | $(34,234) | | Balance – September 30 | $192,468 | $128,920 | Condensed Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for the consolidated financial statements, covering accounting policies, acquisitions, debt, and other key financial items 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the foundational principles and key accounting policies used in preparing the financial statements, including business segments and recent acquisitions - Carriage Services, Inc. operates in two business segments: Funeral Home Operations (approximately 70% of revenue) and Cemetery Operations (approximately 30% of revenue)[25] - As of September 30, 2022, the company operated 169 funeral homes in 26 states and 31 cemeteries in 11 states[25] - During the three and nine months ended September 30, 2022, the company acquired a business consisting of two funeral homes for $6.3 million[33] - The company performed its annual goodwill and intangible assets impairment tests as of August 31, 2022, and does not expect any impairment to goodwill or intangible assets[37][40] 2. RECENTLY ISSUED ACCOUNTING STANDARDS This section discusses the adoption of new accounting standards and their anticipated impact on the company's financial reporting - The company adopted Reference Rate Reform (Topic 848) in March 2020 and amended its Credit Facility in May 2022 to establish the Bloomberg Short-Term Bank Yield Index Rate (BSBY) as a benchmark rate, removing LIBOR[59][61] - The company plans to adopt ASU Topic 805 (Business Combinations) and Topic 326 (Credit Losses - Vintage Disclosures) for its fiscal year beginning January 1, 2023, with Topic 805 impact still being evaluated and Topic 326 expected to have no impact on consolidated financial statements[62][63] 3. ACQUISITIONS This section details recent business acquisitions, including the purchase price and the fair values of acquired assets - On August 8, 2022, Carriage Services acquired a business consisting of two funeral homes in Kissimmee, Florida, for $6.3 million in cash[64] Acquired Assets (in thousands) | Acquired Assets (in thousands) | Estimated Fair Values | | :----------------------------- | :-------------------- | | Current assets | $28 | | Property, plant & equipment | $2,986 | | Goodwill | $2,694 | | Intangible and other non-current assets | $542 | | Purchase price | $6,250 | 4. GOODWILL This section provides a breakdown of goodwill, including changes resulting from acquisitions and divestitures Goodwill Movement (in thousands) | Goodwill (in thousands) | December 31, 2021 | September 30, 2022 | | :---------------------- | :---------------- | :----------------- | | Goodwill at the beginning of the period | $392,978 | $391,972 | | Increase in goodwill related to acquisitions | — | $2,694 | | Decrease in goodwill related to divestitures | $(1,006) | $(901) | | Goodwill at the end of the period | $391,972 | $393,765 | 5. DIVESTED OPERATIONS This section reports on the financial results of operations that have been divested, including revenue, operating income, and net income - During the nine months ended September 30, 2022, the company merged one funeral home and sold two others for an aggregate of $0.9 million[67] Divested Operations Financials (in thousands) | Metric (in thousands) | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | | :------------------------------------ | :----------------------------------- | :----------------------------------- | | Revenue | $338 | $296 | | Operating income (loss) | $(54) | $25 | | Net income (loss) from divested operations, after tax | $35 | $(490) | 6. RECEIVABLES This section details the company's accounts receivable and preneed cemetery receivables, along with their respective allowances for credit losses Accounts and Preneed Cemetery Receivables (in thousands) | Accounts Receivable (in thousands) | December 31, 2021 | September 30, 2022 | | :--------------------------------- | :---------------- | :----------------- | | Accounts receivable, net | $25,314 | $23,352 | | Preneed cemetery receivables, net | $23,150 | $25,873 | Allowance for Credit Losses (in thousands) | Allowance for Credit Losses (in thousands) | January 1, 2022 | September 30, 2022 | | :----------------------------------------- | :-------------- | :----------------- | | Total allowance for credit losses on Trade and financed receivables | $(990) | $(909) | | Total allowance for credit losses on Preneed cemetery receivables, net | $(1,079) | $(1,178) | 7. TRUST INVESTMENTS This section describes the company's diversified trust investments for preneed cemetery, preneed funeral, and perpetual care, and their impact on financial statements - Trust investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk[74] - Changes in the fair value of trust fund assets are offset by changes in trust fund liabilities and reflected in Other, net, with no impact on earnings until services are performed or merchandise is delivered[74] Trust Investments Market Value (in thousands) | Trust Investments (in thousands) | December 31, 2021 (Market Value) | September 30, 2022 (Market Value) | | :------------------------------- | :------------------------------- | :-------------------------------- | | Preneed cemetery trust investments | $103,808 | $90,130 | | Preneed funeral trust investments | $116,973 | $102,028 | | Cemetery perpetual care trust investments | $72,400 | $60,569 | 8. RECEIVABLES FROM PRENEED FUNERAL TRUSTS This section details the net receivables from preneed funeral trusts, accounting for the allowance for contract cancellations Preneed Funeral Trust Receivables (in thousands) | Metric (in thousands) | December 31, 2021 | September 30, 2022 | | :------------------------------------- | :---------------- | :----------------- | | Preneed funeral trust funds, at cost | $19,597 | $20,741 | | Less: allowance for contract cancellation | $(588) | $(622) | | Receivables from preneed funeral trusts, net | $19,009 | $20,119 | 9. FAIR VALUE MEASUREMENTS This section explains the fair value hierarchy and measurements for financial instruments, including debt obligations - The carrying values of cash and cash equivalents, accounts receivable, and accounts payable approximate their fair values due to their short-term nature[94] Financial Instrument Fair Values (in millions) | Financial Instrument | Carrying Value (Sep 30, 2022, in millions) | Fair Value (Sep 30, 2022, in millions) | | :------------------- | :----------------------------------------- | :------------------------------------- | | Credit Facility | $169.0 | $169.0 | | Acquisition Debt | $4.5 | $4.5 | | Senior Notes | $395.1 | $317.2 | 10. INTANGIBLE AND OTHER NON-CURRENT ASSETS This section provides a breakdown of intangible and other non-current assets, including tradenames and capitalized commissions - Tradenames increased by $0.5 million related to the 2022 acquisition[97] Intangible and Other Non-Current Assets (in thousands) | Asset (in thousands) | December 31, 2021 | September 30, 2022 | | :--------------------------------------------------------------------------------- | :---------------- | :----------------- | | Tradenames | $23,565 | $24,108 | | Prepaid agreements not-to-compete, net of accumulated amortization | $2,247 | $1,884 | | Capitalized commissions on preneed contracts, net of accumulated amortization | $3,560 | $3,963 | | Other | $6 | $496 | | Intangible and other non-current assets, net | $29,378 | $30,451 | 11. CREDIT FACILITY AND ACQUISITION DEBT This section details the company's credit facility and acquisition debt, including amendments and interest rates - The Credit Facility was amended on May 27, 2022, increasing revolving credit commitments from $200.0 million to $250.0 million and establishing BSBY as a benchmark rate[100] - The weighted average interest rate on the Credit Facility increased from 2.0% for the three months ended September 30, 2021, to 4.3% for the same period in 2022[102] Credit Facility and Acquisition Debt (in thousands) | Debt (in thousands) | December 31, 2021 | September 30, 2022 | | :-------------------------------------------------------------------------------------------------------------------------- | :---------------- | :----------------- | | Credit Facility | $155,400 | $169,000 | | Acquisition debt | $4,500 | $4,460 | 12. SENIOR NOTES This section provides information on the company's senior notes, including principal amount, carrying value, fair value, and interest rate - The Senior Notes bear interest at 4.25% per year, payable semi-annually, and mature on May 15, 2029[106] Senior Notes Details (in thousands) | Senior Notes (in thousands) | December 31, 2021 | September 30, 2022 | | :------------------------------------------------------------------------------------------------------- | :---------------- | :----------------- | | Principal amount | $400,000 | $400,000 | | Carrying value of the Senior Notes | $394,610 | $395,082 | | Fair value of the Senior Notes (Sep 30, 2022) | N/A | $317,200 | 13. LEASES This section presents details on operating and finance lease costs, right-of-use assets, and total lease liabilities Lease Cost (in thousands) | Lease Cost (in thousands) | Three months ended September 30, 2021 | Three months ended September 30, 2022 | | :------------------------ | :------------------------------------ | :------------------------------------ | | Operating lease cost | $947 | $863 | | Finance lease cost | $228 | $221 | | Total lease cost | $1,257 | $1,203 | Lease Assets and Liabilities (in thousands) | Lease Assets/Liabilities (in thousands) | December 31, 2021 | September 30, 2022 | | :-------------------------------------- | :---------------- | :----------------- | | Operating lease right-of-use assets | $17,881 | $17,295 | | Finance lease right-of-use assets, net | $4,327 | $3,999 | | Total lease liabilities | $25,965 | $24,970 | | Weighted-average remaining lease term (Operating leases) | N/A | 9.1 years | | Weighted-average remaining lease term (Finance leases) | N/A | 11.8 years | 14. COMMITMENTS AND CONTINGENCIES This section outlines the company's legal and financial commitments, including details on a class action lawsuit settlement - A class action lawsuit (Chinchilla v. Carriage Services, Inc., et al.) was settled for $1.0 million, with the final settlement funded at $1.2 million on August 8, 2022[113] 15. STOCKHOLDERS' EQUITY This section provides details on stock-based compensation, share repurchase programs, and dividends declared - The Board authorized an increase in the share repurchase program by an additional $75.0 million on February 23, 2022, with $48.9 million remaining authorized for additional repurchases at September 30, 2022[127][129] Stock-Based Compensation Expense (in thousands) | Stock-Based Compensation Expense (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :---------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Restricted Stock | $89 | $36 | $308 | $133 | | Stock Options | $467 | $559 | $1,507 | $1,747 | | Performance Awards | $475 | $701 | $1,064 | $1,904 | | ESPP | $117 | $120 | $458 | $471 | Dividends Declared per Common Share | Dividends Declared per Common Share | 2021 (per share) | 2022 (per share) | | :---------------------------------- | :--------------- | :--------------- | | March 1st | $0.1000 | $0.1125 | | June 1st | $0.1000 | $0.1125 | | September 1st | $0.1000 | $0.1125 | 16. EARNINGS PER SHARE This section presents basic and diluted earnings per share, along with details on stock options excluded from dilution calculations - For the three and nine months ended September 30, 2022, 363,073 and 294,310 stock options, respectively, were excluded from the computation of diluted earnings per share due to their antidilutive effect[132] Earnings Per Share | EPS (per share) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :-------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Basic EPS | $0.74 | $0.40 | $1.11 | $2.22 | | Diluted EPS | $0.71 | $0.38 | $1.08 | $2.09 | 17. SEGMENT REPORTING This section provides a breakdown of revenue and operating income by the company's Funeral Home and Cemetery segments Segment Revenue (in thousands) | Revenue (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :--------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Funeral Home | $68,897 | $62,780 | $200,503 | $199,073 | | Cemetery | $26,144 | $24,717 | $79,452 | $77,185 | | Total | $95,041 | $87,497 | $279,955 | $276,258 | Segment Operating Income (in thousands) | Operating Income (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Funeral Home | $22,924 | $17,584 | $65,404 | $61,531 | | Cemetery | $9,471 | $8,023 | $30,462 | $26,662 | | Corporate | $(9,130) | $(10,385) | $(25,431) | $(28,095) | | Consolidated | $23,265 | $15,222 | $70,435 | $60,098 | 18. SUPPLEMENTARY DATA This section provides additional financial data, including details on balance sheet items and cash flow items Supplementary Balance Sheet Items (in thousands) | Balance Sheet Item (in thousands) | December 31, 2021 | September 30, 2022 | | :-------------------------------- | :---------------- | :----------------- | | Prepaid expenses | $2,215 | $3,348 | | Federal income taxes receivable | $4,064 | — | | State income taxes receivable | — | $617 | | Incentive compensation (current) | $19,121 | $8,801 | | Interest (accrued) | $2,250 | $6,473 | | Salaries and wages (accrued) | $2,193 | $3,909 | Supplementary Cash Flow Items (in thousands) | Cash Flow Item (in thousands) | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | | :---------------------------- | :----------------------------------- | :----------------------------------- | | Cash paid for interest | $14,817 | $12,900 | | Cash paid for taxes | $9,974 | $7,000 | | Unsettled share repurchases | $3,801 | — | | Fair value of donated real property | $635 | — | 19. SUBSEQUENT EVENTS This section discloses significant events that occurred after the reporting period, such as major acquisitions and their funding - On October 25, 2022, Carriage Services acquired a business consisting of three funeral homes, one cemetery, and one cremation-focused business in Charlotte, North Carolina, for $25 million in cash[139] - The acquisition was funded through a combination of cash on hand and borrowings under the Credit Facility, requiring a limited consent from lenders due to exceeding the allowed Total Leverage Ratio[139][141] Cautionary Statement on Forward–Looking Statements This section warns investors about the inherent risks and uncertainties associated with forward-looking statements, which could cause actual results to differ materially - This section warns investors that forward-looking statements are subject to significant risks and uncertainties that could cause actual results to differ materially from projections[142] - Key risk factors include the ability to find and retain skilled personnel, effects of competition, changes in death rates and consumer preferences, investment performance of trust funds, effects of inflation, and the ability to obtain debt or equity financing[142] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations, covering an overview of the business, recent developments, impacts of COVID-19 and inflation, business strategy, liquidity and capital resources, financial highlights, non-GAAP measures, and detailed segment results for both Funeral Home and Cemetery Operations OVERVIEW This section provides a general introduction to the company's business, recent developments, and the impacts of external factors like COVID-19 and inflation General This section provides a general overview of Carriage Services, Inc., including its operational scope and business segments - Carriage Services, Inc. is a leading U.S. provider of funeral and cemetery services, operating 169 funeral homes in 26 states and 31 cemeteries in 11 states as of September 30, 2022[149] - Funeral Home Operations account for approximately 70% of revenue, and Cemetery Operations account for approximately 30%[149] Recent Developments This section highlights key recent events, including executive changes and business acquisitions and divestitures - C. Benjamin Brink, Executive Vice President, Chief Financial Officer, and Treasurer, announced his resignation effective January 2, 2023[150] - During the nine months ended September 30, 2022, the company acquired two funeral homes for $6.3 million and sold real property and two funeral homes for a net gain of $0.7 million[151][152] Business Impacts of COVID-19 This section discusses the effects of the COVID-19 pandemic on the company's death rates, volumes, revenues, and supply chain - During the third quarter of 2022, the death rate normalized to pre-COVID-19 levels, resulting in lower volumes, revenues, earnings, and margins compared to the third quarter of 2021[153][154] - The company has not experienced any material supply chain impacts or disruptions, nor any material negative impacts to its liquidity position, access to capital, or cash flows as a result of COVID-19[154] Inflationary Trends This section addresses the impact of inflationary trends on the company's costs and its strategies to mitigate these effects - Beginning in the second quarter of 2022, the company experienced modest cost increases and surcharges from vendors due to inflation, impacting full-time hourly base rates, utilities, funeral supplies, merchandise costs, and insurance[155] - The company has taken steps to mitigate these cost increases and notes the industry's historical resilience to similar adverse economic and market environments[155] Funeral Home Operations This section describes the revenue sources and key factors influencing the operating results of the company's funeral home segment - Funeral homes generate revenue from sales of burial and cremation services and related merchandise[156] - Factors affecting operating results include demographic trends, market share, response to cremation trends, cost control, and pricing leverage[156] Cemetery Operations This section outlines the revenue generation and influencing factors for the company's cemetery operations - Cemetery operations generate revenue primarily through sales of interment rights, related merchandise, and services[157] - Factors affecting operating results include the size and success of the sales organization, local perceptions, economic conditions, and fluctuations in capital markets and interest rates[157] Business Strategy This section details the company's core business strategy, emphasizing local leadership, entrepreneurial principles, and growth models - The company's business strategy is based on strong, local leadership with entrepreneurial principles focused on sustainable long-term market share, revenue, and profitability growth[159] - The strategy is built upon three models: Standards Operating Model, 4E Leadership Model, and Strategic Acquisition Model[159] LIQUIDITY AND CAPITAL RESOURCES This section analyzes the company's ability to generate and manage cash, including sources of liquidity, cash flow activities, and debt obligations Overview This section provides a high-level summary of the company's primary sources of liquidity and capital, including internally generated cash and credit facility availability - The company's primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under its Credit Facility[165] - At September 30, 2022, the company had $78.7 million of availability under the Credit Facility[165] Cash Flows This section presents a summary of cash flows from operating, investing, and financing activities over specific periods Cash Flow Summary (in thousands) | Cash Flow (in thousands) | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | | :---------------------------------------------------------------------------------------------------------- | :----------------------------------- | :----------------------------------- | | Cash at beginning of the year | $889 | $1,148 | | Net cash provided by operating activities | $69,699 | $50,046 | | Net cash used in investing activities | $(11,216) | $(22,700) | | Net cash used in financing activities | $(58,284) | $(27,673) | | Cash at end of the period | $1,088 | $821 | Operating Activities This section analyzes the changes in net cash provided by operating activities, highlighting key contributing factors - Net cash provided by operating activities decreased by $19.7 million to $50.0 million for the nine months ended September 30, 2022[169] - The decrease was primarily due to unfavorable working capital changes in accrued liabilities, partially offset by favorable changes in income tax receivables[169] Investing Activities This section details the net cash used in investing activities, including acquisitions and capital expenditures - Net cash used in investing activities increased by $11.5 million to $22.7 million for the nine months ended September 30, 2022[170] Investing Activity Details (in thousands) | Investing Activity (in thousands) | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | | :-------------------------------- | :----------------------------------- | :----------------------------------- | | Acquisitions of businesses and real estate | $(3,285) | $(8,876) | | Capital expenditures | $(15,252) | $(20,346) | Financing Activities This section examines the net cash used in financing activities, focusing on changes in treasury stock purchases and debt payments - Net cash used in financing activities decreased by $30.6 million to $27.7 million for the nine months ended September 30, 2022[175] - This decrease was primarily due to lower treasury stock purchases ($36.7 million in 2022 vs. $61.7 million in 2021) and the absence of significant debt redemption payments from the prior year[175] Share Repurchase This section provides details on the company's share repurchase program, including authorized amounts and actual repurchases - The Board authorized an additional $75.0 million for share repurchases on February 23, 2022[176] - No shares were repurchased during the three months ended September 30, 2022, with $48.9 million remaining authorized for additional repurchases at September 30, 2022[176] Share Repurchase Activity | Share Repurchase Activity | Nine months ended September 30, 2021 | Nine months ended September 30, 2022 | | :------------------------ | :----------------------------------- | :----------------------------------- | | Number of Shares Repurchased | 1,528,197 | 695,496 | | Dollar Value of Shares Repurchased (in thousands) | $65,540 | $34,234 | Cash Dividends This section reports on the cash dividends declared and paid per common share - Total dividends paid for the nine months ended September 30, 2022, were $5.1 million[175] Dividends Declared per Common Share | Dividends Declared per Common Share | 2021 (per share) | 2022 (per share) | | :---------------------------------- | :--------------- | :--------------- | | March 1st | $0.1000 | $0.1125 | | June 1st | $0.1000 | $0.1125 | | September 1st | $0.1000 | $0.1125 | Credit Facility, Lease Obligations and Acquisition Debt This section summarizes the company's total debt and lease obligations, providing an overview of its financial commitments Debt and Lease Obligations (in thousands) | Debt and Lease Obligations (in thousands) | September 30, 2022 | | :---------------------------------------- | :----------------- | | Credit Facility | $169,000 | | Finance leases | $5,258 | | Operating leases | $19,712 | | Acquisition debt | $4,460 | | Total | $198,430 | Credit Facility This section details the company's credit facility, including its size, leverage ratios, outstanding borrowings, and interest rates - The Credit Facility was amended on May 27, 2022, increasing the revolving credit facility to $250.0 million and raising the maximum Total Leverage Ratio to 5.25 to 1.00[180] - At September 30, 2022, outstanding borrowings were $169.0 million, with $78.7 million of availability[183] - The weighted average interest rate on the Credit Facility increased from 2.0% for the three months ended September 30, 2021, to 4.3% for the same period in 2022[183] Lease Obligations This section provides an overview of the company's total lease obligations and associated costs - Total lease obligations were $35.8 million at September 30, 2022, with $4.5 million payable within 12 months[185] Lease Cost (in thousands) | Lease Cost (in thousands) | Three months ended September 30, 2021 | Three months ended September 30, 2022 | | :------------------------ | :------------------------------------ | :------------------------------------ | | Operating lease cost | $947 | $863 | | Finance lease cost | $228 | $221 | | Total lease cost | $1,257 | $1,203 | Acquisition Debt This section details the company's acquisition debt obligations and related imputed interest expense - Acquisition debt obligations totaled $6.3 million at September 30, 2022, with $0.8 million payable within 12 months[186] Acquisition Debt Imputed Interest Expense (in thousands) | Imputed Interest Expense (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :-------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Acquisition debt imputed interest expense | $90 | $78 | $280 | $237 | Senior Notes This section describes the company's 4.25% Senior Notes, including their principal amount, fair value, and future interest payments - The 4.25% Senior Notes due May 2029 have a principal amount of $400.0 million[189] - At September 30, 2022, the fair value of the Senior Notes was $317.2 million, and future interest payments totaled $112.5 million, with $17.0 million payable within 12 months[189][190] Senior Notes Interest Expense (in thousands) | Senior Notes Interest Expense (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Senior Notes interest expense | $4,250 | $4,250 | $17,517 | $12,730 | FINANCIAL HIGHLIGHTS This section summarizes key financial performance indicators, including revenue, funeral contracts, average revenue per contract, and net income - Revenue decreased by $7.5 million (7.9%) for the three months ended September 30, 2022, primarily due to an 11.6% decrease in funeral contract volume as the death rate normalized[191] - Net income for the nine months ended September 30, 2022, increased by $13.3 million (67.1%), driven by the absence of a $23.8 million loss on extinguishment of debt in 2021 and a $3.3 million gain on insurance reimbursements in 2022[191] Financial Highlights (in thousands) | Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Revenue | $95,041 | $87,497 | $279,955 | $276,258 | | Funeral contracts | 12,566 | 11,109 | 36,704 | 35,630 | | Average revenue per funeral contract | $5,358 | $5,516 | $5,336 | $5,463 | | Net income | $13,046 | $5,860 | $19,812 | $33,161 | REPORTING AND NON-GAAP FINANCIAL MEASURES This section explains the company's use of non-GAAP financial measures like Adjusted Net Income and Operating Profit to provide additional insights into business trends - The company uses non-GAAP financial measures such as Adjusted Net Income and Operating Profit to provide insight into underlying trends in its business[192][194][195] Non-GAAP Financial Measures (in thousands) | Non-GAAP Metric (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :----------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Adjusted Net Income | $15,112 | $6,935 | $41,669 | $31,147 | | Operating Profit | $44,651 | $35,253 | $130,452 | $119,342 | | Operating Profit Margin | 47.0% | 40.3% | 46.6% | 43.2% | RESULTS OF OPERATIONS This section provides a detailed analysis of the company's financial performance, broken down by its Funeral Home and Cemetery segments Funeral Home Segment This section analyzes the financial performance of the Funeral Home segment, including revenue, operating profit, and contract volume changes - Same store contract volume decreased by 12.8% for the three months and 2.6% for the nine months ended September 30, 2022, primarily due to the normalization of death rates to pre-COVID-19 levels[202][205] Funeral Home Revenue (in thousands) | Funeral Home Revenue (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :---------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Same store operating revenue | $57,321 | $51,258 | $165,481 | $163,776 | | Acquired operating revenue | $7,651 | $7,813 | $22,575 | $24,064 | | Total Funeral Home Revenue | $68,897 | $62,780 | $200,503 | $199,073 | Funeral Home Operating Profit (in thousands) | Funeral Home Operating Profit (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :------------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Same store operating profit | $25,644 | $18,717 | $71,520 | $65,313 | | Acquired operating profit | $3,371 | $3,036 | $9,784 | $9,845 | | Total Funeral Home Operating Profit | $31,355 | $24,173 | $88,445 | $82,060 | Cemetery Segment This section analyzes the financial performance of the Cemetery segment, including revenue, operating profit, and interment rights sales - Decreases in the number of interment rights sold for both same store and acquired businesses were primarily a result of the decline in COVID-19 related cases and the normalization of the death rate[209][212] Cemetery Revenue (in thousands) | Cemetery Revenue (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Same store operating revenue | $16,342 | $15,396 | $47,883 | $46,616 | | Acquired operating revenue | $6,362 | $5,947 | $21,517 | $20,437 | | Total Cemetery Revenue | $26,144 | $24,717 | $79,452 | $77,185 | Cemetery Operating Profit (in thousands) | Cemetery Operating Profit (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :------------------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Same store operating profit | $6,465 | $5,020 | $20,076 | $16,799 | | Acquired operating profit | $3,547 | $2,827 | $12,386 | $10,766 | | Total Cemetery Operating Profit | $13,296 | $11,080 | $42,007 | $37,282 | Other Financial Statement Items This section discusses changes in various financial statement items, including amortization, regional costs, general and administrative expenses, and interest expense - Cemetery property amortization decreased by $0.2 million (3 months) and $0.9 million (9 months) due to fewer property sales[215] - Regional and unallocated funeral and cemetery costs decreased by $1.7 million (3 months) and $1.2 million (9 months), primarily due to lower cash incentives, equity compensation, and COVID-19 related health and safety expenses[215] - General, administrative and other expenses increased by $1.3 million (3 months) and $2.8 million (9 months), driven by separation expenses, talent additions, and higher marketing costs, partially offset by lower insurance claims[216] Total Interest Expense (in thousands) | Interest Expense (in thousands) | 3 Months Ended Sep 30, 2021 | 3 Months Ended Sep 30, 2022 | 9 Months Ended Sep 30, 2021 | 9 Months Ended Sep 30, 2022 | | :------------------------------ | :-------------------------- | :-------------------------- | :-------------------------- | :-------------------------- | | Total Interest Expense | $5,076 | $6,678 | $20,137 | $18,208 | OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section identifies and explains the critical accounting policies and estimates that require significant judgment and can materially impact financial results - The company identifies Business Combinations and Goodwill as critical accounting policies that require significant judgments, assumptions, and estimates[219] - These policies are considered critical due to their potential to cause fluctuations in reported results and materially impact financial condition or results of operations[219] SEASONALITY This section discusses how seasonal fluctuations in the death rate, particularly during winter months, can affect the company's business operations - The company's business can be affected by seasonal fluctuations in the death rate, which is generally higher during the winter months due to increased incidences of influenza and pneumonia[220] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risks are related to interest rate fluctuations and changes in the values of securities held in preneed and perpetual care trusts. A hypothetical 0.25% change in interest rates would cause an approximate 1.19% change in the value of fixed income securities, and a 100 basis point change in the Credit Facility borrowing rate would result in a $1.7 million change in income before taxes - The company is primarily exposed to interest rate risk and changes in the values of securities associated with preneed and perpetual care trusts[222] - A 0.25% change in interest rates causes an approximate 1.19% change in the value of fixed income securities[222] - A change of 100 basis points in the Credit Facility borrowing rate would result in a change in income before taxes of $1.7 million[222] Item 4. Controls and Procedures Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022. There were no material changes in internal control over financial reporting during the fiscal quarter - Management concluded that the company's disclosure controls and procedures were effective as of September 30, 2022[224] - There was no change in the system of internal control over financial reporting during the fiscal quarter that has materially affected, or is reasonably likely to materially affect, internal control over financial reporting[225] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings that arise in the ordinary course of business, but does not expect these matters to have a material adverse effect on its financial statements. The company self-insures against certain risks and maintains insurance coverage for risks exceeding self-insurance amounts - The company is party to a number of legal proceedings but does not expect them to have a material adverse effect on its financial statements[228] - The company self-insures against certain risks and carries insurance with coverage for risk in excess of self-insurance amounts[228] Item 1A. Risk Factors This section supplements the risk factors from the Annual Report on Form 10-K, specifically highlighting the potential adverse effects of inflation on the company's liquidity, business, financial condition, and results of operations due to increased costs and reduced consumer discretionary spending - The company is supplementing its risk factors with a new risk factor on the adverse effects of inflation[229] - Inflation has the potential to adversely affect liquidity, business, financial condition, and results of operations by increasing costs or reducing consumer discretionary income[230] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased under the publicly announced share repurchase program during the quarter ended September 30, 2022. At the end of the quarter, $48.9 million remained authorized for repurchases - No shares were repurchased under the publicly announced share repurchase program during the quarter ended September 30, 2022[232] - At September 30, 2022, $48.9 million remained authorized for repurchases under the program[232] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period - Not applicable[233] Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period - Not applicable[234] Item 5. Other Information This item is not applicable to the company for the reporting period - Not applicable[235] Item 6. Exhibits This section lists the exhibits required to be filed with the Quarterly Report on Form 10-Q, which are incorporated by reference - The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the Exhibit Index and incorporated herein by reference[236] SIGNATURE This section confirms the official signing of the report by the company's Executive Vice President, Chief Financial Officer, and Treasurer - The report was signed by C. Benjamin Brink, Executive Vice President, Chief Financial Officer and Treasurer, on November 2, 2022[239] INDEX OF EXHIBITS This section provides a comprehensive list of all exhibits accompanying the report, including employment agreements and regulatory certifications - The index lists various exhibits, including employment agreements, Sarbanes-Oxley Act certifications (Sections 302 and 906), and XBRL documents[240][241]