Carriage Services(CSV) - 2021 Q1 - Quarterly Report

PART I – FINANCIAL INFORMATION Item 1. Financial Statements This section presents the unaudited consolidated financial statements of Carriage Services, Inc. for the quarter ended March 31, 2021, 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 line items Consolidated Balance Sheet This section provides a comparative overview of the company's financial position, detailing assets, liabilities, and stockholders' equity at the end of 2020 and Q1 2021 Consolidated Balance Sheet (in thousands): | Metric | Dec 31, 2020 (in thousands) | Mar 31, 2021 (in thousands) | |:---|:---|:---| | Total Assets | $1,145,825 | $1,157,726 | | Total Liabilities | $905,323 | $906,223 | | Total Stockholders' Equity | $240,502 | $251,503 | | Cash and Cash Equivalents | $889 | $406 | - Total assets increased by $11.9 million, and total stockholders' equity increased by $11.0 million from December 31, 2020, to March 31, 2021, while cash and cash equivalents decreased significantly[12] Consolidated Statements of Operations This section presents the company's financial performance for the three months ended March 31, 2020 and 2021, detailing revenue, gross profit, operating income, and net income Consolidated Statements of Operations (in thousands): | Metric | Three months ended Mar 31, 2020 (in thousands) | Three months ended Mar 31, 2021 (in thousands) | |:---|:---|:---| | Revenue | $77,490 | $96,637 | | Gross Profit | $23,171 | $35,061 | | Operating Income | $2,150 | $26,246 | | Net Income (Loss) | $(4,197) | $12,933 | | Basic EPS | $(0.23) | $0.72 | | Diluted EPS | $(0.23) | $0.71 | | Dividends Declared per Common Share | $0.075 | $0.1000 | - The company experienced a significant turnaround from a net loss of $4.2 million in Q1 2020 to a net income of $12.9 million in Q1 2021, driven by substantial revenue and gross profit growth, and a positive shift in operating income[16] Consolidated Statements of Cash Flows This section details the cash inflows and outflows from operating, investing, and financing activities for the three months ended March 31, 2020 and 2021 Consolidated Statements of Cash Flows (in thousands): | Metric | Three months ended Mar 31, 2020 (in thousands) | Three months ended Mar 31, 2021 (in thousands) | |:---|:---|:---| | Net Cash Provided by Operating Activities | $13,546 | $26,811 | | Net Cash Used in Investing Activities | $(30,660) | $(1,897) | | Net Cash Provided by (Used in) Financing Activities | $28,318 | $(25,397) | | Net Increase (Decrease) in Cash | $11,204 | $(483) | | Cash and Cash Equivalents at End of Period | $11,920 | $406 | - Operating cash flow significantly increased by $13.3 million, while investing activities shifted from a large outflow due to acquisitions in 2020 to a much smaller outflow in 2021. Financing activities saw a substantial shift from a net inflow to a net outflow, primarily due to net payments on credit facilities and convertible notes[20] Consolidated Statements of Changes in Stockholders' Equity This section outlines the changes in stockholders' equity, including net income, dividends, and stock-based compensation, for the three months ended March 31, 2020 and 2021 Consolidated Statements of Changes in Stockholders' Equity (in thousands): | Metric | Balance – Dec 31, 2020 (in thousands) | Balance – Mar 31, 2021 (in thousands) | |:---|:---|:---| | Total Stockholders' Equity | $240,502 | $251,503 | | Net Income - 2021 | — | $12,933 | | Dividends on Common Stock | $(1,339) (2020) | $(1,799) (2021) | | Stock-based Compensation Expense | $689 (2020) | $1,130 (2021) | | Convertible Notes Conversions | — | $(1,424) | - Stockholders' equity increased by $11.0 million, primarily driven by net income, partially offset by dividends paid and convertible notes conversions[24] Condensed Notes to Consolidated Financial Statements This section provides detailed explanations and disclosures for the consolidated financial statements, covering significant accounting policies, recent standards, and specific financial line items 1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This section outlines the company's business, principles of consolidation, use of estimates, and key accounting policies for various financial items including cash, receivables, inventory, business combinations, goodwill, intangible assets, trust funds, fair value measurements, capitalized commissions, property, plant and equipment, cemetery property, leases, equity plans, revenue recognition, and income taxes - Carriage Services, Inc. operates 173 funeral homes in 26 states and 32 cemeteries in 12 states, with Funeral Home Operations accounting for approximately 75% of revenue and Cemetery Operations for 25% of revenue[27] - The company provides both 'atneed' (time of death) and 'preneed' (planned prior to death) funeral and cemetery services and products[27] - Goodwill and tradenames are tested for impairment annually as of August 31, with a quantitative test performed at least once every three years and qualitative assessments in the interim[38][39] - Preneed and perpetual care trust funds are reported in accordance with VIE principles, with trust fund assets measured at fair value and corresponding liabilities mirroring these fair values[40][42] - Revenue is recognized when control of merchandise or services is transferred to the customer, with specific policies for atneed, preneed, and ancillary services[53] Property, Plant and Equipment, Net (in thousands): | Category | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Land | $82,615 | $81,981 | | Buildings and improvements | $240,567 | $240,988 | | Furniture, equipment and automobiles | $91,302 | $91,481 | | Property, plant and equipment, at cost | $414,484 | $414,450 | | Less: accumulated depreciation | $(145,433) | $(147,395) | | Property, plant and equipment, net | $269,051 | $267,055 | Capital Expenditures (in thousands): | Period | Growth & Maintenance Capital Expenditures | |:---|:---| | Three months ended Mar 31, 2020 | $2,700 | | Three months ended Mar 31, 2021 | $4,300 | 2. RECENTLY ISSUED ACCOUNTING STANDARDS The company reviewed the FASB's ASU on Reference Rate Reform (Topic 848) but did not utilize its optional expedients and exceptions during the three months ended March 31, 2021, as it applies to contracts and hedging relationships referencing LIBOR or other discontinued rates - The FASB issued ASU, Reference Rate Reform (Topic 848), in March 2020 to provide optional guidance for accounting for reference rate reform[60] - The company did not utilize the optional expedients and exceptions provided by this ASU during the three months ended March 31, 2021[60] 3. GOODWILL Goodwill decreased by $1.0 million during the three months ended March 31, 2021, primarily due to the allocation of goodwill to the sale of one funeral home Changes in Goodwill (in thousands): | Metric | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Goodwill at beginning of period | $398,292 | $392,978 | | Decrease in goodwill related to divestitures | $(5,736) | $(1,006) | | Goodwill at the end of the period | $392,978 | $391,972 | - During Q1 2021, $1.0 million of goodwill was allocated to the sale of one funeral home, resulting in a loss recorded in Net loss (gain) on divestitures and impairment charges[61] 4. DIVESTED OPERATIONS In the first quarter of 2021, the company divested two funeral homes for $2.8 million, recognizing a net income of $0.254 million from these operations after tax, a significant change from no divestitures in the same period of 2020 - During the three months ended March 31, 2021, the company sold two funeral homes for $2.8 million[62] Operating Results of Divested Funeral Homes (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Revenue | $0 | $282 | | Operating income | $0 | $60 | | Gain on divestitures | $0 | $308 | | Income tax expense | $0 | $(114) | | Net income from divested operations, after tax | $0 | $254 | 5. RECEIVABLES Accounts receivable, net, increased slightly to $25.6 million by March 31, 2021, with a total allowance for credit losses of $1.283 million. Preneed cemetery receivables, net, also increased to $21.5 million, with a corresponding increase in the allowance for credit losses Accounts Receivable, Net (in thousands): | Category | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Trade and financed receivables | $23,678 | $22,278 | | Other receivables | $2,712 | $4,590 | | Allowance for credit losses | $(1,287) | $(1,283) | | Accounts receivable, net | $25,103 | $25,585 | Preneed Cemetery Receivables, Net (in thousands): | Category | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Preneed cemetery receivables, at amortized cost | $42,874 | $44,389 | | Less: allowance for credit losses | $(2,604) | $(2,864) | | Preneed cemetery receivables, net | $21,081 | $21,533 | - The total allowance for credit losses on trade and financed receivables remained stable at $1.283 million, with provisions for credit losses of $342 thousand and write-offs of $653 thousand during Q1 2021[65] 6. TRUST INVESTMENTS The company's preneed and perpetual care trust investments are diversified across various securities, with fair values generally exceeding cost. Both preneed cemetery and funeral trust investments saw increases in market value and realized gains in Q1 2021 compared to Q1 2020, while unrealized gains shifted from significant losses to gains - Preneed trust investments provide funding for contractual obligations and are diversified across multiple industry segments to minimize long-term risk[70] - Cemetery perpetual care trust investments are required by state laws and their income offsets maintenance expenses for cemetery property[70] Preneed Cemetery Trust Investments (in thousands): | Metric | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Preneed cemetery trust investments, at market value | $89,081 | $94,882 | | Less: allowance for contract cancellation | $(2,477) | $(2,519) | | Preneed cemetery trust investments | $86,604 | $92,363 | Preneed Funeral Trust Investments (in thousands): | Metric | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Preneed funeral trust investments, at market value | $104,166 | $108,131 | | Less: allowance for contract cancellation | $(2,931) | $(2,930) | | Preneed funeral trust investments | $101,235 | $105,201 | Cemetery Perpetual Care Trust Investments (in thousands): | Metric | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Cemetery perpetual care trust investments, at market value | $70,828 | $75,815 | | Obligations due from trust | $(1,121) | $(455) | | Care trusts' corpus | $69,707 | $75,360 | Net Change in Deferred Preneed Cemetery Receipts Held in Trust (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Investment income | $319 | $467 | | Realized gains | $1,916 | $4,092 | | Realized losses | $(1,372) | $(2,518) | | Unrealized gains (losses), net | $(16,305) | $9,708 | | Expenses and taxes | $(187) | $(327) | | Net change | $15,629 | $(11,422) | Net Change in Deferred Preneed Funeral Receipts Held in Trust (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Investment income | $258 | $369 | | Realized gains | $2,551 | $3,871 | | Realized losses | $(1,129) | $(2,368) | | Unrealized gains (losses), net | $(15,274) | $9,319 | | Expenses and taxes | $(97) | $(196) | | Net change | $13,691 | $(10,995) | Net Change in Care Trusts' Corpus (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Realized gains | $709 | $691 | | Realized losses | $(679) | $(420) | | Unrealized gains (losses), net | $(13,525) | $7,699 | | Net change | $13,495 | $(7,970) | 7. RECEIVABLES FROM PRENEED TRUSTS Receivables from preneed trusts, representing assets in third-party controlled trusts, increased slightly to $17.0 million at March 31, 2021, with the majority held in fixed income investments Receivables from Preneed Trusts (in thousands): | Metric | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Preneed trust funds, at cost | $17,365 | $17,502 | | Less: allowance for contract cancellation | $(521) | $(526) | | Receivables from preneed trusts, net | $16,844 | $16,976 | Composition of Preneed Trust Funds at March 31, 2021 (in thousands): | Category | Historical Cost Basis | Fair Value | |:---|:---|:---| | Cash and cash equivalents | $4,697 | $4,697 | | Fixed income investments | $10,473 | $10,473 | | Mutual funds and common stocks | $2,327 | $2,406 | | Annuities | $5 | $5 | | Total | $17,502 | $17,581 | 8. FAIR VALUE MEASUREMENTS The company measures securities in its preneed and perpetual care trusts at fair value, primarily classifying them as Level 1 or Level 2. As of March 31, 2021, the fair value of the Credit Facility approximated its carrying value, while Senior Notes had a fair value of $417.6 million compared to a carrying value of $396.1 million - Fair value measurements for trust investments are categorized into Level 1 (cash, U.S. treasury debt, common stock, equity mutual funds) and Level 2 (fixed income securities, foreign debt, corporate debt, preferred stocks, mortgage-backed securities, fixed income mutual funds, other investments)[70] - As of March 31, 2021, the Credit Facility's carrying value and fair value were $28.3 million, and acquisition debt's carrying value of $5.4 million approximated its fair value[93] - The fair value of Senior Notes was approximately $417.6 million at March 31, 2021, based on traded or broker-quoted prices, compared to a carrying value of $396.1 million[93][105] 9. INTANGIBLE AND OTHER NON-CURRENT ASSETS Intangible and other non-current assets totaled $29.5 million at March 31, 2021, primarily consisting of tradenames, prepaid non-compete agreements, and capitalized commissions on preneed contracts, with amortization expenses recorded for the latter two Intangible and Other Non-Current Assets (in thousands): | Category | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Tradenames | $23,565 | $23,565 | | Prepaid agreements not-to-compete, net | $2,785 | $2,676 | | Capitalized commissions on preneed contracts, net | $3,141 | $3,240 | | Other | $51 | $21 | | Intangible and other non-current assets, net | $29,542 | $29,502 | - Amortization expense for prepaid non-compete agreements was $168 thousand in Q1 2021 (down from $187 thousand in Q1 2020), and for capitalized commissions was $152 thousand in Q1 2021 (up from $141 thousand in Q1 2020)[97][98] 10. CREDIT FACILITY AND ACQUISITION DEBT The company's Credit Facility balance decreased to $28.3 million at March 31, 2021, with $159.6 million of availability. Acquisition debt remained stable at $5.4 million. The company was in compliance with all financial covenants under its Credit Facility Credit Facility and Acquisition Debt (in thousands): | Category | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Credit Facility | $47,200 | $28,300 | | Debt issuance costs, net | $(1,136) | $(1,018) | | Total Credit Facility | $46,064 | $27,282 | | Acquisition debt | $5,509 | $5,355 | | Less: current portion | $(1,027) | $(913) | | Total acquisition debt, net of current portion | $4,482 | $4,442 | - As of March 31, 2021, the company had $159.6 million of availability under its $190.0 million senior secured revolving credit facility[102] - The weighted average interest rate on the Credit Facility decreased from 4.3% in Q1 2020 to 3.3% in Q1 2021[102] Interest Expense (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Credit Facility interest expense | $1,230 | $445 | | Acquisition debt imputed interest expense | $127 | $97 | 11. CONVERTIBLE SUBORDINATED NOTES All Convertible Subordinated Notes due 2021 were fully converted or paid at maturity by March 31, 2021, with approximately $2.4 million converted for $3.8 million in cash and the remaining $0.2 million paid at par - Approximately $2.4 million in Convertible Notes were converted for $3.8 million in cash during Q1 2021, resulting in a $1.4 million reacquisition of the equity component[104] - The Convertible Notes matured on March 15, 2021, and all remaining outstanding notes (approximately $0.2 million) were paid in full, leaving no Convertible Notes outstanding[104] Convertible Notes Interest and Accretion (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Convertible Notes interest expense | $43 | $18 | | Convertible Notes accretion of debt discount | $65 | $20 | | Convertible Notes amortization of debt issuance costs | $6 | $1 | 12. SENIOR NOTES The company's $400.0 million Senior Notes due 2026 bear a fixed interest rate of 6.625%. Post-quarter, the company issued a conditional redemption notice for these notes, contingent on the issuance of new 4.25% Senior Notes due 2029 and an amended credit facility Senior Notes Carrying Value (in thousands): | Metric | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Principal amount | $400,000 | $400,000 | | Debt premium, net | $1,467 | $1,409 | | Debt discount, net | $(3,582) | $(3,444) | | Debt issuance costs, net | $(1,917) | $(1,843) | | Carrying value of the Senior Notes | $395,968 | $396,122 | - The Senior Notes are unsecured, senior obligations due June 1, 2026, bearing interest at 6.625% per year[106] - On April 30, 2021, the company delivered a conditional redemption notice for all outstanding Senior Notes, contingent on the completion of a new offering of $400 million in 4.25% Senior Notes due 2029 and an amended credit facility[108][179] Senior Notes Interest and Amortization (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Senior Notes interest expense | $6,625 | $6,625 | | Senior Notes amortization of debt discount | $129 | $138 | | Senior Notes amortization of debt premium | $54 | $58 | | Senior Notes amortization of debt issuance costs | $67 | $74 | 13. LEASES Total lease costs for operating and finance leases increased slightly to $1.278 million in Q1 2021. The company maintains both operating and finance lease liabilities on its balance sheet, with weighted-average remaining lease terms of 10.7 years for operating leases and 5.6 years for finance leases Total Lease Cost (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Operating lease cost | $957 | $960 | | Short-term lease cost | $32 | $49 | | Variable lease cost | $25 | $41 | | Finance lease cost (Depreciation) | $109 | $108 | | Finance lease cost (Interest) | $126 | $120 | | Total lease cost | $1,249 | $1,278 | Lease Liabilities (in thousands): | Category | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Operating lease right-of-use assets | $21,201 | $20,747 | | Finance lease right-of-use assets, net | $4,765 | $4,657 | | Total current lease liabilities | $2,405 | $2,388 | | Total non-current lease liabilities | $25,833 | $25,321 | | Total lease liabilities | $28,238 | $27,709 | Weighted-Average Lease Terms and Discount Rates: | Lease Type | Remaining Lease Term (years) | Discount Rate | |:---|:---|:---| | Operating leases | 10.7 | 8.1% | | Finance leases | 5.6 | 8.2% | 14. STOCKHOLDERS' EQUITY The company issued restricted stock and significant stock options in Q1 2021, leading to increased stock-based compensation expense. Dividends declared per common share increased to $0.1000, while no share repurchases occurred during the quarter - In Q1 2021, the company granted 701,400 stock options to key employees with a fair value of $7.1 million and an additional 150,000 performance-based options with a fair value of $1.7 million[116][117] Stock-Based Compensation Expense (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Restricted stock awards | $184 | $121 | | Stock options | $215 | $560 | | Performance awards | $121 | $237 | | Employee Stock Purchase Plan (ESPP) | $163 | $206 | | Non-Employee Director Compensation | $201 | $231 | Dividends Declared (in thousands, except per share amounts): | Date | Per Share | Dollar Value | |:---|:---|:---| | Mar 1, 2020 | $0.075 | $1,339 | | Mar 1, 2021 | $0.100 | $1,799 | - No shares of common stock were repurchased during Q1 2021, leaving approximately $25.6 million available under the share repurchase program[123][166] 15. EARNINGS PER SHARE Basic and diluted earnings per common share significantly improved from a loss in Q1 2020 to positive earnings in Q1 2021, reflecting the company's net income turnaround Earnings Per Common Share (in thousands, except per share data): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Net income (loss) | $(4,197) | $12,933 | | Income (loss) attributable to common stockholders | $(4,184) | $12,906 | | Basic EPS | $(0.23) | $0.72 | | Diluted EPS | $(0.23) | $0.71 | | Weighted average basic shares outstanding | 17,805 | 17,965 | | Weighted average diluted shares outstanding | 17,805 | 18,199 | - In Q1 2020, 1,034,084 stock options were excluded from diluted EPS computation due to their antidilutive effect, and 27,085 shares were excluded because of a net loss. In Q1 2021, no stock options were excluded[125] 16. SEGMENT REPORTING Both Funeral Home and Cemetery segments showed strong revenue and operating income growth in Q1 2021 compared to Q1 2020, with the Funeral Home segment continuing to be the larger contributor Revenue by Segment (in thousands): | Segment | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Funeral | $61,742 | $71,774 | | Cemetery | $15,748 | $24,863 | | Total | $77,490 | $96,637 | Operating Income (Loss) by Segment (in thousands): | Segment | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Funeral | $4,311 | $25,876 | | Cemetery | $4,167 | $9,493 | | Corporate | $(6,328) | $(9,123) | | Consolidated | $2,150 | $26,246 | - Total assets for the Funeral Home segment were $763.8 million and for the Cemetery segment were $378.9 million as of March 31, 2021[130] 17. SUPPLEMENTARY DATA Supplementary balance sheet data shows changes in current liabilities, including a significant increase in accrued interest and income tax payable, while other long-term liabilities decreased Accrued and Other Liabilities (in thousands): | Category | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Accrued salaries and wages | $1,392 | $3,307 | | Accrued incentive compensation | $11,139 | $5,964 | | Accrued interest | $2,291 | $8,888 | | Income tax payable | $798 | $4,392 | | Total accrued and other liabilities | $31,138 | $39,599 | Other Long-Term Liabilities (in thousands): | Category | Dec 31, 2020 | Mar 31, 2021 | |:---|:---|:---| | Incentive compensation | $2,975 | $351 | | Employer payroll tax deferral | $1,773 | $1,773 | | Accrued severance | $0 | $553 | | Total other long-term liabilities | $4,748 | $2,677 | Cash Paid for Interest and Taxes (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Cash paid for interest and financing costs | $1,337 | $1,337 | | Cash paid for taxes | $96 | $96 | 18. SUBSEQUENT EVENTS Subsequent to the quarter end, the company entered into an agreement to sell $400 million of 4.25% Senior Notes due 2029, with net proceeds intended to redeem existing Senior Notes and fund an amended credit facility - On April 29, 2021, the company agreed to sell $400 million in aggregate principal amount of 4.25% Senior Notes due 2029 in a private placement[134] - Net proceeds of approximately $394 million from the New Notes sale are intended to redeem all existing Senior Notes and facilitate an amended and restated credit facility[137] - A conditional redemption notice was delivered on April 30, 2021, for all outstanding Senior Notes, contingent on the completion of the New Notes offering and the new credit facility[138] Cautionary Statement on Forward–Looking Statements This section advises that the report contains forward-looking statements subject to various risks and uncertainties, and cautions investors against undue reliance on them - The report contains forward-looking statements regarding future earnings, revenue, cash flow, debt levels, acquisitions, divestitures, financing activities, economic conditions, and operational performance[140] - These statements are subject to significant risks and uncertainties, including the ability to retain skilled personnel, competition, changes in death rates, consumer preferences, investment performance of trust funds, interest rate fluctuations, and the impact of the COVID-19 pandemic[140] - Investors are cautioned not to place undue reliance on forward-looking statements, and the company undertakes no obligation to publicly update or revise them[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 for the three months ended March 31, 2021, highlighting significant revenue and profit growth, the impact of COVID-19, and strategic initiatives. It also details liquidity, capital resources, and segment-specific performance OVERVIEW This section provides a general overview of Carriage Services, Inc.'s business, recent developments, the impact of COVID-19, and its core business strategy across funeral home and cemetery operations - Carriage Services, Inc. is a leading U.S. provider of funeral and cemetery services, operating 173 funeral homes and 32 cemeteries[144] - The company's business strategy is based on strong local leadership, entrepreneurial principles, and a high-performance culture, executed through its Standards Operating Model, 4E Leadership Model, and Strategic Acquisition Model[152][154] General This subsection provides a general description of Carriage Services, Inc.'s business segments and service offerings - Carriage Services, Inc. operates in two segments: Funeral Home Operations (75% of revenue) and Cemetery Operations (25% of revenue)[144] - The company provides services and products on both an 'atneed' (time of death) and 'preneed' (planned prior to death) basis[144] Recent Developments This subsection highlights key corporate actions, including divestitures and the conversion of convertible notes, during the first quarter of 2021 - During Q1 2021, the company divested two funeral homes for $2.8 million, realizing a gain of $0.3 million[145] - All 2.75% convertible subordinated notes due 2021 were converted or paid at maturity by March 31, 2021, with no notes remaining outstanding[146] Business Impact under the Macroeconomic Environment of COVID-19 This subsection discusses how the COVID-19 pandemic impacted the company's operations, including increased deathcare volume, shifts in consumer preferences, and the utilization of CARES Act provisions - The company's businesses are designated as essential services and have remained open, adapting operations with updated safety procedures and staffing guidelines[147] - COVID-19 led to an increase in deathcare volume in Q1 2021, but also shifts in consumer preferences towards less expensive services or delayed memorialization[149] - The company utilized CARES Act provisions for tax payment refunds and credits, which are not expected to significantly impact short-term or long-term liquidity[149] Funeral Home Operations This subsection identifies the key factors influencing the operating results of the company's funeral home segment - Factors affecting funeral operating results include demographic trends, market share, response to cremation trends, cost control, and pricing leverage[150] Cemetery Operations This subsection outlines the primary factors that impact the operating results of the company's cemetery segment - Cemetery operating results are influenced by sales organization effectiveness, local perceptions, adaptation to economic changes, and capital market fluctuations affecting trust fund earnings[151] Business Strategy This subsection details the company's strategic framework, emphasizing its decentralized, high-performance culture and acquisition model - The company's strategy is built on a decentralized, high-performance culture, guided by its Standards Operating Model, 4E Leadership Model, and Strategic Acquisition Model[152][154] - The Strategic Acquisition Model focuses on acquiring larger, higher-margin businesses based on criteria like cultural alignment, volume/price trends, market size, and competitive standing[157] LIQUIDITY AND CAPITAL RESOURCES This section discusses the company's ability to generate and manage cash, its capital structure, and its capacity to meet financial obligations and fund strategic initiatives - Primary liquidity sources are internally generated cash flows from operations and availability under the Credit Facility[159] - The company expects to use cash and Credit Facility borrowings for general corporate purposes, dividends, and debt obligations, with potential for strategic acquisitions, capital expenditures, and share repurchases if Senior Notes are redeemed[159] - Continued divestiture activity is expected for the next 6-9 months, potentially yielding $3-5 million in cash proceeds[159] Overview This subsection provides a general statement on the company's expected cash resources and ability to meet its financial commitments for the upcoming year - The company anticipates sufficient cash resources to meet working capital, capital expenditures, debt payments, and dividends for the next 12 months[159] Cash Flows This subsection presents a summary of the company's cash flows from operating, investing, and financing activities for the three months ended March 31, 2020 and 2021 Cash Flow Summary (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Cash at beginning of year | $716 | $889 | | Net cash provided by operating activities | $13,546 | $26,811 | | Net cash used in investing activities | $(30,660) | $(1,897) | | Net cash provided by (used in) financing activities | $28,318 | $(25,397) | | Cash at end of the period | $11,920 | $406 | Operating Activities This subsection details the significant increase in cash generated from the company's core operating activities during Q1 2021 - Cash provided by operating activities increased by $13.3 million to $26.8 million in Q1 2021, reflecting strong cash generation and favorable working capital changes[162] Investing Activities This subsection highlights the substantial decrease in net cash outflow from investing activities in Q1 2021, primarily due to reduced acquisition spending - Net cash outflow from investing activities decreased by $28.8 million to $1.9 million in Q1 2021, primarily due to reduced acquisition spending compared to Q1 2020[163] Acquisition and Divestiture Activity This subsection summarizes the company's acquisition and divestiture transactions during the first quarters of 2020 and 2021 - In Q1 2021, the company sold two funeral homes for $2.8 million and purchased real estate for $0.4 million[164] - In Q1 2020, the company acquired a funeral home and cemetery business for $33.0 million in cash[164] Capital Expenditures This subsection details the increase in capital expenditures during Q1 2021, covering both growth and maintenance spending Capital Expenditures (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Total Growth | $1,182 | $2,207 | | Total Maintenance | $1,556 | $2,140 | | Total Capital Expenditures | $2,738 | $4,347 | - Capital expenditures increased by $1.6 million to $4.3 million in Q1 2021, with increases in both growth and maintenance spending[165] Financing Activities This subsection describes the significant shift in cash flows from financing activities, moving from a net inflow in Q1 2020 to a net outflow in Q1 2021 - Financing activities shifted from a net cash inflow of $28.3 million in Q1 2020 to a net cash outflow of $25.4 million in Q1 2021, a $53.7 million change[165] - Key outflows in Q1 2021 included $19.1 million in net payments on credit facilities, acquisition debt, and finance leases, $1.8 million in dividends, and $4.0 million for convertible notes conversions and maturity[165] Share Repurchase This subsection reports that no common stock was repurchased in Q1 2021, with a substantial amount remaining available under the repurchase program - No shares of common stock were repurchased during Q1 2021, with approximately $25.6 million remaining available under the share repurchase program[166] Dividends This subsection provides a comparative overview of dividends declared per common share and their total dollar value for Q1 2020 and Q1 2021 Dividends Declared (in thousands, except per share amounts): | Date | Per Share | Dollar Value | |:---|:---|:---| | Mar 1, 2020 | $0.075 | $1,339 | | Mar 1, 2021 | $0.100 | $1,799 | Credit Facility, Lease Obligations and Acquisition Debt This subsection summarizes the company's key debt and lease obligations as of March 31, 2021 Debt and Lease Obligations (in thousands) at March 31, 2021: | Category | Amount | |:---|:---| | Credit Facility | $28,300 | | Finance leases | $5,776 | | Operating leases | $21,933 | | Acquisition debt | $5,355 | | Total | $61,364 | Credit Facility This subsection details the company's senior secured revolving credit facility, including its maturity, outstanding balance, availability, and compliance with financial covenants - The $190.0 million senior secured revolving credit facility matures on May 31, 2023, with $28.3 million outstanding and $159.6 million available at March 31, 2021[169] - The company was in compliance with all financial covenants (Total Leverage Ratio, Senior Secured Leverage Ratio, Fixed Charge Coverage Ratio) as of March 31, 2021[169] Credit Facility Interest Expense (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Credit Facility interest expense | $1,230 | $445 | | Credit Facility amortization of debt issuance costs | $126 | $118 | Lease Obligations This subsection provides a breakdown of the company's lease costs for operating and finance leases for the three months ended March 31, 2020 and 2021 Lease Costs (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Operating lease cost | $957 | $960 | | Short-term lease cost | $32 | $49 | | Variable lease cost | $25 | $41 | | Finance lease depreciation | $109 | $108 | | Finance lease interest | $126 | $120 | Acquisition Debt This subsection describes the nature of the company's acquisition debt, including its composition and imputed interest expense - Acquisition debt consists of deferred purchase price and promissory notes, mostly non-interest bearing and discounted at imputed rates of 7.3% to 10.0%[173] Acquisition Debt Imputed Interest Expense (in thousands): | Period | Amount | |:---|:---| | Three months ended Mar 31, 2020 | $127 | | Three months ended Mar 31, 2021 | $97 | Convertible Subordinated Notes due 2021 This subsection confirms the full conversion or payment of all Convertible Subordinated Notes by their maturity date in Q1 2021, resulting in no outstanding balance - All Convertible Notes were either converted for cash or paid at maturity by March 31, 2021, with no outstanding balance remaining[174] Convertible Notes Expense (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Interest expense | $43 | $18 | | Accretion of debt discount | $65 | $20 | | Amortization of debt issuance costs | $6 | $1 | Senior Notes due 2026 This subsection details the company's $400.0 million Senior Notes, their fixed interest rate, and the subsequent conditional redemption notice issued post-quarter - The $400.0 million Senior Notes bear a fixed interest rate of 6.625% and are due June 1, 2026[175][177] - The company has the right to redeem the Senior Notes at various prices depending on the redemption date and conditions[178] Senior Notes Expense (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Interest expense | $6,625 | $6,625 | | Amortization of debt discount | $129 | $138 | | Amortization of debt premium | $54 | $58 | | Amortization of debt issuance costs | $67 | $74 | FINANCIAL HIGHLIGHTS This section summarizes key financial performance metrics for Q1 2020 and Q1 2021, including revenue, funeral contracts, interment rights, gross profit, and net income Financial Highlights (in thousands, except per contract/right data): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Revenue | $77,490 | $96,637 | | Funeral contracts | 11,493 | 13,296 | | Average revenue per funeral contract | $5,233 | $5,276 | | Preneed interment rights (property) sold | 1,868 | 2,658 | | Average price per preneed interment right sold | $3,779 | $4,551 | | Gross profit | $23,171 | $35,061 | | Net income (loss) | $(4,197) | $12,933 | - Revenue increased by $19.1 million (24.6%) due to a 15.7% increase in funeral contracts (driven by COVID-19 related deaths) and a 42.3% increase in preneed interment rights sold, along with a 20.4% increase in average price per right[181] - Net income increased by $17.1 million, primarily due to higher gross profit and the absence of a $14.7 million impairment charge recorded in Q1 2020, partially offset by increased tax expense[181] REPORTING AND NON-GAAP FINANCIAL MEASURES This section provides reconciliations of GAAP net income and gross profit to adjusted non-GAAP measures, highlighting the impact of special items and segment operating performance Reconciliation of Net Income (Loss) to Adjusted Net Income (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Net income (loss) | $(4,197) | $12,933 | | Special items, net of tax | $10,310 | $1,757 | | Adjusted net income | $6,113 | $14,690 | Reconciliation of Gross Profit to Operating Profit (in thousands): | Metric | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Gross profit | $23,171 | $35,061 | | Cemetery property amortization | $877 | $1,517 | | Field depreciation expense | $3,290 | $3,136 | | Regional and unallocated funeral and cemetery costs | $2,756 | $6,073 | | Operating profit | $30,094 | $45,787 | Operating Profit by Segment (in thousands): | Segment | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Funeral Home | $24,274 | $32,906 | | Cemetery | $5,820 | $12,881 | | Operating profit | $30,094 | $45,787 | | Operating profit margin | 38.8% | 47.4% | - Adjusted net income increased from $6.1 million in Q1 2020 to $14.7 million in Q1 2021, primarily due to the absence of significant impairment charges and higher operating performance[183] RESULTS OF OPERATIONS This section provides a detailed analysis of the company's financial performance by segment, including revenue and operating profit trends, and discusses key factors influencing these results - The term 'same store' refers to businesses acquired prior to January 1, 2017, and 'acquired' refers to businesses purchased after December 31, 2016, excluding planned divestitures[187] Funeral Home Segment This subsection analyzes the revenue and operating profit performance of the Funeral Home segment, highlighting contributions from same-store, acquired, and divested operations Funeral Home Segment Revenue (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Same store operating revenue | $46,696 | $56,683 | | Acquired operating revenue | $8,885 | $10,139 | | Divested/planned divested revenue | $2,757 | $1,217 | | Ancillary revenue | $1,151 | $1,207 | | Preneed funeral insurance commissions | $366 | $330 | | Preneed funeral trust and insurance | $1,887 | $2,198 | | Total | $61,742 | $71,774 | Funeral Home Segment Operating Profit (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Same store operating profit | $18,062 | $25,812 | | Acquired operating profit | $3,247 | $4,467 | | Divested/planned divested operating profit | $673 | $134 | | Ancillary operating profit | $295 | $242 | | Preneed funeral insurance commissions | $156 | $91 | | Preneed funeral trust and insurance | $1,841 | $2,160 | | Total | $24,274 | $32,906 | - Same store operating revenue increased by $10.0 million (21.4%) due to a 21.7% increase in contract volume, primarily from a peak spike in COVID-19 deaths[190] - Acquired operating revenue increased by $1.3 million (14.7%) due to a 15.5% increase in acquired contract volume, also influenced by COVID-19[191] Cemetery Segment This subsection analyzes the revenue and operating profit performance of the Cemetery segment, detailing contributions from same-store, acquired, and preneed operations Cemetery Segment Revenue (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Same store operating revenue | $10,907 | $14,621 | | Acquired operating revenue | $2,799 | $6,980 | | Divested/planned divested revenue | $58 | $108 | | Preneed cemetery trust revenue | $1,742 | $2,889 | | Preneed cemetery finance charges | $242 | $265 | | Total | $15,748 | $24,863 | Cemetery Segment Operating Profit (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Same store operating profit | $3,167 | $5,711 | | Acquired operating profit | $827 | $4,102 | | Divested/planned divested operating profit | $3 | $38 | | Preneed cemetery trust operating profit | $1,581 | $2,765 | | Preneed cemetery finance charges | $242 | $265 | | Total | $5,820 | $12,881 | - Same store preneed revenue increased by $2.2 million (34.9%) due to a 20.9% increase in interment rights sold and a 7.3% increase in average price per right, driven by the cemetery sales strategy[194] - Acquired cemetery preneed revenue increased by $2.7 million and atneed revenue increased by $1.5 million, leading to a $3.3 million increase in acquired operating profit, with the operating profit margin rising to 58.8%[194] Cemetery property amortization This subsection reports an increase in cemetery property amortization during Q1 2021, reflecting higher property sales - Cemetery property amortization increased by $0.6 million to $1.5 million in Q1 2021, reflecting an increase in property sold[196] Field depreciation This subsection notes a decrease in field depreciation expense in Q1 2021, primarily due to older assets becoming fully depreciated - Field depreciation expense decreased by $0.2 million in Q1 2021, primarily due to older assets becoming fully depreciated[196] Regional and unallocated funeral and cemetery costs This subsection details the increase in regional and unallocated costs during Q1 2021, driven by higher incentives, equity compensation, and COVID-19 related expenses - Regional and unallocated costs increased by $3.3 million to $6.1 million in Q1 2021, driven by higher cash incentives, equity compensation, and COVID-19 related health and safety expenses[196] Other Financial Statement Items This section reviews changes in various other financial statement items, including general and administrative expenses, depreciation, divestiture gains/losses, interest expense, and income taxes General, administrative and other This subsection reports an increase in general, administrative, and other expenses in Q1 2021, mainly due to higher incentives, equity compensation, and leadership separation costs - General, administrative and other expenses increased by $2.9 million to $8.8 million in Q1 2021, mainly due to increased cash incentives, equity compensation, and separation expenses for senior leadership[197] Home office depreciation and amortization This subsection notes a decrease in home office depreciation and amortization in Q1 2021 as certain assets became fully depreciated - Home office depreciation and amortization decreased by $0.1 million in Q1 2021, as equipment and software became fully depreciated[197] Net loss (gain) on divestitures and impairments charges This subsection highlights a significant shift from a $14.7 million impairment charge in Q1 2020 to a $0.3 million gain from divestitures in Q1 2021 Net Loss (Gain) on Divestitures and Impairment Charges (in thousands): | Category | Three months ended Mar 31, 2020 | Three months ended Mar 31, 2021 | |:---|:---|:---| | Goodwill impairment | $13,632 | $0 | | Tradename impairment | $1,061 | $0 | | Gain on divestitures | $0 | $(308) | | Total | $14,693 | $(308) | - The company recorded a gain of $0.3 million from divestitures in Q1 2021, a significant improvement from a $14.7 million impairment charge in Q1 2020[197] Interest expense This subsection reports a decrease in interest expense during Q1 2021, primarily attributable to reduced borrowings on the Credit Facility - Interest expense decreased by $0.8 million to $7.6 million in Q1 2021, primarily due to decreased borrowings on the Credit Facility[198] Income taxes This subsection details the shift from an income tax benefit in Q1 2020 to an expense in Q1 2021, along with changes in the operating tax rate and a reserve for uncertain tax positions - The company shifted from an income tax benefit of $2.2 million in Q1 2020 to an expense of $5.6 million in Q1 2021[198] - The operating tax rate before discrete items was 31.0% in Q1 2021, down from 33.6% in Q1 2020[198] - A $3.7 million reserve for uncertain tax positions was maintained at March 31, 2021, related to carryback refund claims under the CARES Act[198] OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES This section emphasizes that financial statement preparation involves significant estimates and judgments, which are based on historical data and assumptions, but actual results may vary - The preparation of financial statements requires significant estimates and judgments, including those related to receivables, goodwill, intangible assets, deferred taxes, and property depreciation[200] - Estimates are based on historical experience, third-party data, and reasonable assumptions, but actual results may differ[200] SEASONALITY This section notes that the company's business can be affected by seasonal fluctuations in the death rate, typically higher during winter months - The business can be affected by seasonal fluctuations in the death rate, which is generally higher during winter months due to increased incidences of influenza and pneumonia[201] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company is primarily exposed to interest rate risk and changes in the value of securities within its preneed and perpetual care trusts. Management actively monitors these risks, but does not use derivative instruments for speculation - The company's primary market risks are related to interest rate fluctuations and changes in the values of securities in preneed and perpetual care trusts[202] - A 0.25% change in interest rates causes an approximate 1.38% change in the value of fixed income securities held in trusts[202] - A 100 basis point change in the Credit Facility's borrowing rate would result in a $0.3 million change in income before taxes, assuming the outstanding balance remains unchanged[202] - The Senior Notes bear a fixed interest rate of 6.625%, so increases in market interest rates would decrease their fair value but not affect the company's interest costs[202][204] Item 4. Controls and Procedures Management, including the principal executive and financial officers, concluded that the company's disclosure controls and procedures were effective as of March 31, 2021, ensuring accurate and timely financial reporting. No material changes to internal control over financial reporting occurred during the quarter - Disclosure controls and procedures were evaluated and deemed effective as of March 31, 2021, ensuring timely and accurate financial reporting[205] - No material changes in internal control over financial reporting occurred during the fiscal quarter[206] PART II – OTHER INFORMATION Item 1. Legal Proceedings The company is involved in various legal proceedings in the ordinary course of business, but does not expect them to have a material adverse effect on its financial statements. It self-insures against certain risks and maintains insurance coverage - The company is party to legal proceedings arising in the ordinary course of business, but does not expect a material adverse effect on its financial statements[209] - The company self-insures against certain risks and carries insurance for coverage in excess of self-insurance amounts, believing reserves and insurance provide reasonable coverage[209] Item 1A. Risk Factors This section supplements previously disclosed risk factors, specifically highlighting the potential for significant future payments and share issuances under the company's 'Good To Great' incentive programs, which could lead to less cash availability or shareholder dilution - The 'Good To Great' incentive program rewards Managing Partners for achieving a minimum net revenue compounded annual growth rate over a five-year period, payable in cash and common stock[210] - The 'Good To Great II' incentive program for non-Managing Partners could result in significant shareholder dilution, with a potential award of 971,820 shares if the highest performance tier (Common Stock Price Average of $77.34 per share) is achieved[210] - Future bonus payments under these programs are uncertain but could be substantial, potentially reducing cash available for operations[210] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds During Q1 2021, the company repurchased 9,688 shares of common stock, representing shares surrendered by employees for tax withholding upon restricted stock vesting. Approximately $25.6 million remained available under the share repurchase program Common Stock Repurchases (Q1 2021): | Period | Total Number of Shares Purchased | Average Price Paid Per Share | Dollar Value of Shares That May Yet Be Purchased Under the Program | |:---|:---|:---|:---| | Jan 1 - Jan 31, 2021 | — | — | $25,601,446 | | Feb 1 - Feb 28, 2021 | 9,688 | $35.81 | $25,601,446 | | Mar 1 - Mar 31, 2021 | — | — | $25,601,446 | | Total for quarter ended Mar 31, 2021 | 9,688 | | | - The repurchased shares represent those surrendered by employees to cover taxes withheld on restricted stock vestings[212] Item 3. Defaults Upon Senior Securities This item is not applicable to the company for the reporting period Item 4. Mine Safety Disclosures This item is not applicable to the company for the reporting period Item 5. Other Information No other information is reported under this item Item 6. Exhibits This section lists the exhibits filed with the Quarterly Report on Form 10-Q, which are incorporated by reference - The exhibits required by Item 601 of Regulation S-K are set forth in the Exhibit Index and incorporated by reference[216] SIGNATURE - The report was signed on May 5, 2021, by C. Benjamin Brink, Senior Vice President, Chief Financial Officer and Treasurer[219] INDEX OF EXHIBITS - The index provides a list of exhibits filed with the Form 10-Q, including employment agreements, certifications, and XBRL documents[221]