# Carriage Services Inc: Form 10-Q for the period ended Sep 30, 2010

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2010-11-05
- Accepted by EDGAR: Nov 5, 2010, 19:21 ET
- Period: 2010-09-30
- Accession: 0000950123-10-101632
- Inline XBRL: no
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000095012310101632/h77510e10vq.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000095012310101632/

## Management's discussion and analysis

As filed, 37,550 characters.

### Forward-Looking Statements

In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “project”, “forecast”, “plan”, “anticipate” and other similar words. Forward-looking statements are not guarantees of performance. Important factors that could cause actual results to differ materially from our expectations reflected in our forward-looking statements include those risks related to our business and our industry set forth in Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2009.

### Cautionary Statements

We caution readers that important factors, in some cases have affected, and in the future could affect, our actual consolidated results and could cause our actual consolidated results in the future to differ materially from the goals and expectations expressed herein and in any other forward-looking statements made by or on behalf of us. Risks associated with our business and the deathcare business are presented in Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2009.

### OVERVIEW

#### General

We operate two types of businesses: funeral homes, which account for approximately 75% of our revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. As of September 30, 2010, we operated 146 funeral homes in 25 states and 33 cemeteries in 12 states within the United States. Substantially all administrative activities are conducted in our home office in Houston, Texas.

We have implemented long-term initiatives in our operations designed to improve operating and financial results by growing market share and increasing profitability. We introduced a more decentralized, entrepreneurial and local operating model in 2004 that included operating and financial standards developed from our best operations, along with an incentive compensation plan to reward business managers for successfully meeting or exceeding the standards. The model essentially eliminated the use of line-item financial budgets in favor of the standards. The operating model and standards, which we refer to as the “Standards Operating Model” focus on the key drivers of a successful operation, organized around three primary areas — market share, people and operating and financial metrics. The model and standards are the measures by which we judge the success of each business. To date, the Standards Operating Model has driven significant changes in our organization, leadership and operating practices. Most importantly, the Standards Operating Model allowed us to measure the sustainable revenue growth and earning power of our portfolio of deathcare businesses, which then led to the development of a Strategic Acquisition Model, described below under “Acquisitions,” during 2006, that guides our acquisition and disposition strategies. Both models, when executed effectively, should drive longer term, sustainable increases in market share, revenue, earnings and cash flow. The standards are not designed to produce maximum short-term earnings because we do not believe such performance is sustainable without ultimately stressing the business, which often leads to declining market share, revenues and earnings. Important elements of the Standards Operating Model include:

- *Balanced Operating Model —* We believe a decentralized structure works best in the deathcare industry. Successful execution of the Standards Operating Model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial drive and corporate support aligned with the key drivers.
- *Incentives Aligned with Standards —* Empowering Managing Partners to do the right things in their operations and local communities, and providing appropriate support with operating and financial practices, will enable long-term growth and sustainable profitability. Each Managing Partner participates in a variable bonus plan whereby they earn a percentage of their business’ earnings based upon the actual standards achieved. Each Managing Partner has the opportunity to share in the earnings of the business as long as the performance exceeds our minimum standards.
- *The Right Local Leadership —* Successful execution of our operating model is highly dependent on strong local leadership as defined by our 4E Leadership Model, intelligent risk taking and entrepreneurial empowerment. Over time, a Managing Partner’s performance is judged according to achievement of the Standards for that business.

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#### Funeral and Cemetery Operations

Factors affecting our funeral operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by packaging complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our at-need business to increase average revenues per contract. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional burial and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. Thus, small changes in revenues, up or down, normally cause significant changes to our profitability.

Our funeral volumes have increased gradually from 21,665 in 2006 to 24,362 in 2009 (compound annual increase of 3.0%). Our funeral operating revenue has increased from $109.1 million in 2006 to $125.1 million in 2009 (compound annual increase of 3.5%). The increases are primarily because of businesses we acquired in 2007 and 2009 and our ability to increase the average revenue per funeral through expanded service offerings and packages. We experienced an increase of 4.3% in volumes in comparing the first nine months of 2010 to the first nine months of 2009, 0.2% of which resulted from organic growth and 4.1% through acquisitions. Funeral operating revenues for the nine months ended September 30, 2010 were up 3.0% compared to the nine months ended September 30, 2009.

The percentage of funeral services involving cremations has increased from 34.3% for 2006 to 42.1% for 2009 and to 43.6% for the first nine months of 2010. A significant portion of that increase is the result of acquiring businesses in high cremation areas. On a same-store basis, the creation rate has risen to 40.5% for the nine months ended September 30, 2010.

The cemetery operating results are affected by the size and success of our sales organization. Approximately 52% of our cemetery revenues relate to preneed sales of interment rights and mausoleums and related merchandise and services. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend for discretionary items) also affect the amount of cemetery revenues. The current environment of high unemployment and low consumer confidence represents a formidable challenge to the cemetery sales staff. Approximately 13% of our cemetery revenues are attributable to investment earnings on trust funds and finance charges on installment contracts. Changes in the capital markets and interest rates affect this component of our cemetery revenues.

Our cemetery financial performance from 2006 through 2009 was characterized by increasing operating revenues and fluctuating field level profit margins. Cemetery revenue decreased by less than 1% as higher trust fund earnings and at-need revenues offset the decline in preneed revenues. Operating profit (Gross profit excluding depreciation and amortization and regional and unallocated costs) increased 11.1%, for the first nine months of 2010 compared to the same period of 2009, as a result of higher trust fund earnings and higher at-need gross profit. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries that can sustain consistent, modest growth in preneed property sales over time and to diversify and substantially increase our cemetery operating and financial results. Additionally, a portion of our capital expenditures in 2010 is designed to expand our cemetery product offerings.

#### Financial Revenue

We market funeral and cemetery services and products on a preneed basis. Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services. Preneed contracts permit families to eliminate issues of making deathcare plans at the time of need and allow input from other family members before the death occurs. We guarantee the price and performance of the preneed contracts to the customer.

Preneed funeral contracts are usually paid on an installment basis. The performance of preneed funeral contracts is usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. Additionally, we generally earn a commission from the insurance company from the sale of insurance-funded policies reflected as *Preneed Insurance Commission*. The commission income is recognized as revenue when the period of refund expires (generally one year), which helps us defray the costs we incur to originate the preneed contract (primarily commissions we pay to our sales counselors).

Preneed sales of cemetery interment rights are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years with such earnings reflected as *Preneed Cemetery Finance Charges*. In substantially all cases, we receive an initial down payment at the time the contract is signed. The interest rates generally range between 9.5% and 12% per annum. Occasionally, we have offered zero percent interest financing to promote sales for limited-time offers. In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust.

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We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state law. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) perpetual care trusts. These trusts are typically administered by independent financial institutions selected by the Company. Independent financial advisors are also used for investment management and advisory services.

Preneed funeral trust fund income earned and the receipt and recognition of any insurance benefits are deferred until the service is performed. Applicable state laws generally require us to deposit a specified amount (which varies from state to state, generally 50% to 100% of selling price) into a merchandise and service trust fund for preneed cemetery merchandise and service sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. The income from perpetual care trusts provides a portion of the funds necessary to maintain cemetery property and memorials in perpetuity. This trust fund income is recognized, as earned, in cemetery revenues.

#### Acquisitions

Our growth strategy includes the execution of the Strategic Acquisition Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We use six strategic ranking criteria to assess acquisition candidates and to differentiate the price we are willing to pay. Those criteria are:

- Size of business;
- Size of market;
- Competitive standing;
- Demographics;
- Strength of brand; and
- Barriers to entry.

In general terms, our price expectations range from four to five times pre-tax earnings before depreciation for “tuck-ins” to six to seven times pre-tax earnings before depreciation for businesses that rank very high in the ranking criteria. We derive the pre-tax earnings amounts based primarily on the size and product mix of the target business applied to our standards-based operating model. In 2009, we completed two acquisitions. We closed four acquisitions in the second quarter of 2010. The consideration paid for those acquired businesses in the second quarter of 2010 was $15.5 million in cash and the assumption of $0.6 million of liabilities and debt. During the third quarter of 2010, we completed one acquisition. The consideration paid for this business was $1.3 million in cash.

#### Financial Highlights

Net income for the three months ended September 30, 2010 totaled $0.9 million, equal to $0.05 per diluted share, the same as reported for the three months ended September 30, 2009. Despite a 7.9% increase in total revenue, the third quarter of 2010 net income was negatively affected by acquisition transaction costs and increases in field incentive compensation and self insurance costs. Net income for the nine months ended September 30, 2010 totaled $5.9 million, equal to $0.33 per diluted share, compared to $5.2 million, equal to $0.29 per diluted share, for the nine months ended September 30, 2009. The variance between the two periods is primarily attributable to higher trust fund earnings. The business acquired in the third quarter of 2010 did not have a material impact on our current results.

### CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, inventories, goodwill, other intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, because there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be consistent from year to year.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements. Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2009 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2009 Form 10-K.

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### RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three and nine month periods ended September 30, 2009 and 2010. The term “same-store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 2006 and owned and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after January 1, 2006 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on the total company performance. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in operating profit.

*Funeral Home Segment.* The following table sets forth certain information regarding the revenues and operating profit from the funeral home operations for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2010.

#### Three months ended September 30, 2009 compared to three months ended September 30, 2010 (dollars in thousands):

| Revenues: | Three Months Ended September 30, 2009 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same-store operating revenue | $25,442 | $25,317 | $(125) | (0.5)% |
| Acquired operating revenue | 3,785 | 5,790 | 2,005 | 53.0% |
| Preneed funeral insurance commissions | 483 | 632 | 149 | \* |
| Preneed funeral trust earnings | 870 | 1,553 | 683 | 78.5% |
| Total | $30,580 | $33,292 | $2,712 | 8.9% |
| Operating profit: |  |  |  |  |
| Same-store operating profit | $8,570 | $7,806 | $(764) | (8.9)% |
| Acquired operating profit | 948 | 848 | (100) | (10.5)% |
| Preneed funeral insurance commissions | 1 | 219 | 218 | \* |
| Preneed funeral trust earnings | 870 | 1,553 | 683 | 78.5% |
| Total | $10,389 | $10,426 | $37 | 0.4% |

\* not meaningful

Funeral same-store operating revenues for the three months ended September 30, 2010 decreased $0.1 million, or 0.5%, when compared to the three months ended September 30, 2009. We experienced a 1.6% increase in the number of contracts and the average revenue per contract increased 0.2% for those existing operations at $5,553. The average revenue per contract includes the impact of the funeral trust fund earnings recognized at the time that we provide the needed services for preneed families. The number of traditional burial contracts remained flat while the average revenue per burial contract increased 1.6% to $8,083. The cremation rate for the same-store businesses rose from 40.1% to 41.5%. The average revenue per same-store cremation contract increased 1.5% to $3,100 and the number of cremation contracts increased 5.1%. Cremations with services declined from 47.1% of total cremation contracts in the third quarter of 2009 to 42.2% in the third quarter of 2010. The average revenue for “other” contracts, which make up approximately 7.6% of the number of contracts, declined from $2,127 to $1,989. Other contracts consist of charges for merchandise or services for which we do not perform a funeral service for the deceased during the period.

Same-store operating profit for the three months ended September 30, 2010 decreased $0.8 million, or 8.9%, from the comparable three months of 2009, and as a percentage of funeral same-store operating revenue, decreased from 33.7% to 30.8%. A combined increase of $0.6 million is self-insured costs, along with the decline in revenues were the primary reason for the decline in operating profit. Those costs were primarily medical and workers compensation claims.

Funeral acquired revenues for the three months ended September 30, 2010 increased $2.0 million, or 53.0%, when compared to the three months ended September 30, 2009 as we experienced a 57.3% increase in the number of contracts, due to the acquisitions completed in the second and third quarters of 2010, yet a decrease of 2.2%, to $3,799, in the average revenue per contract for those acquired operations. The 2010 period includes the results of operation attributable to the two acquisitions that closed in the fourth quarter of 2009, the three funeral businesses acquired in the second quarter and, to a lesser extent, the one funeral business that closed late in the third quarter. The cremation rate for the acquired businesses was 60.2% for the third quarter of 2010, up from 54.4% in the prior year period, as these businesses are located in higher cremation areas compared to

\- 23 - our existing locations. The average revenue per cremation contract increased 12.5% to $2,387 for the third quarter of 2010 and the number of cremation contracts increased 73.9% compared to the same period of 2009.

Acquired operating profit for the three months ended September 30, 2010 declined $0.1, or 10.5%, from the comparable three months of 2009 and, as a percentage of revenue from acquired businesses, was 25.0% for the third quarter of 2009 compared to 14.6% for the third quarter of 2010 as those recently acquired businesses have not fully transitioned into Carriage’s Standard Operating Model.

The two categories of financial revenue, insurance commissions and trust earnings on matured preneed contracts, had a meaningful impact on funeral revenues and profit. On a combined basis, these categories experienced an increase of $0.8 million and $0.9 million in revenue and operating profit, respectively, compared to the third quarter of 2009 primarily due to higher realization of interest income, dividends and capital gains that have been allocated to individual maturing contracts and lower preneed expenses.

#### Nine months ended September 30, 2009 compared to nine months ended September 30, 2010 (dollars in thousands):

| Revenues: | Nine Months Ended September 30, 2009 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same-store operating revenue | $80,519 | $79,984 | $(535) | 0.7% |
| Acquired operating revenue | 12,184 | 15,474 | 3,290 | 27.0% |
| Preneed funeral insurance commissions | 1,573 | 1,817 | 244 | \* |
| Preneed funeral trust earnings | 2,940 | 4,542 | 1,602 | 54.5% |
| Total | $97,216 | $101,817 | $4,601 | 4.7% |
| Operating profit: |  |  |  |  |
| Same-store operating profit | $28,702 | $26,975 | $(1,727) | (6.0)% |
| Acquired operating profit | 3,501 | 3,599 | 98 | 2.8% |
| Preneed funeral insurance commissions | 129 | 746 | 617 | \* |
| Preneed funeral trust earnings | 2,940 | 4,542 | 1,602 | 54.5% |
| Total | $35,272 | $35,862 | $590 | 1.7% |

\* not meaningful

Funeral same-store operating revenues for the nine months ended September 30, 2010 decreased $0.5 million, or 0.7%, when compared to the nine months ended September 30, 2009. We experienced a 0.2% increase in the number of contracts and an increase of 0.8%, to $5,605, in the average revenue per contract for those existing operations. The average revenue per contract includes the impact of the funeral trust fund earnings on matured contracts. The number of traditional burial contracts decreased 2.6%, while the average revenue per burial contract increased 2.4% to $8,088. The cremation rate for the same-store businesses rose from 39.5% to 40.5%. The average revenue per cremation contract increased 4.1% to $3,096 and the number of cremation contracts increased 2.7%. Cremations with services declined from 45.9% of total cremation contracts in the third quarter of 2009 to 44.9% in the third quarter of 2010.

Same-store operating profit for the nine months ended September 30, 2010 decreased $1.7 million, or 6.0%, from the comparable nine months of 2009 and, as a percentage of funeral same-store operating revenue, decreased from 35.6% to 33.7%. Self-insured healthcare costs rose $0.6 million year over year and along with the decline in operating revenues represents the majority of decline in operating profit.

Acquired funeral homes generated $15.5 million in revenue, equal to 15.2% of our funeral home revenue and $3.6 million in operating profit, equal to 10.0% of our funeral home operating profit. The average revenue per contract for the acquired businesses was $4,100 and the cremation rate was 55.4% for the nine months ended September 30, 2010. For the nine months ended September 30, 2009, the average revenue per contract was $3,977, and the cremation rate was 53.2%.

Financial revenue and profit for the nine months ended September 30, 2010 increased $1.8 million and $2.2 million, respectively, compared to the nine months ended September 30, 2009, primarily because of higher realization of interest income, dividends and capital gains that have been allocated to individual maturing contracts and lower preneed expenses.

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*Cemetery Segment*. The following table sets forth certain information regarding our revenues and operating profit from the cemetery operations for the three and nine months ended September 30, 2009 compared to the three and nine months ended September 30, 2010.

#### Three months ended September 30, 2009 compared to three months ended September 30, 2010 (dollars in thousands):

| Revenues: | Three Months Ended September 30, 2009 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same-store operating revenue | $8,881 | $9,030 | $149 | 1.7% |
| Acquired operating revenue | 1,532 | 1,670 | 138 | 9.0% |
| Cemetery trust earnings | 802 | 1,121 | 319 | 39.8% |
| Preneed cemetery finance charges | 372 | 372 | — | 0.0% |
| Total | $11,587 | $12,193 | $606 | 5.2% |
| Operating profit: |  |  |  |  |
| Same-store operating profit | $1,825 | $1,885 | $60 | 3.3% |
| Acquired operating profit | 202 | 486 | 284 | 140.6% |
| Cemetery trust earnings | 802 | 1,121 | 319 | 39.8% |
| Preneed cemetery finance charges | 372 | 372 | — | 0.0% |
| Total | $3,201 | $3,864 | $663 | 20.7% |

Cemetery same-store operating revenues for the three months ended September 30, 2010 increased $0.1 million, or 1.7%, compared to the three months ended September 30, 2009. Same-store revenue from preneed property sales increased $0.2 million, revenue from deliveries of preneed merchandise and services deliveries decreased $0.4 million, or 25.7%, and at-need revenues increased $0.3 million, or 8.7%.

Cemetery same-store operating profit for the three months ended September 30, 2010 decreased $0.1 million, or 3.3%. As a percentage of revenues, cemetery same-store operating profit increased slightly from 20.5% to 20.9%. Promotional expenses (primarily preneed sales commissions) remained flat and bad debts increased $0.1 million, or 14.5%, offset by higher at-need gross profit.

Cemetery acquired revenues for the three months ended September 30, 2010 increased $0.1 million, or 9.0%, compared to the three months ended September 30, 2009. Acquired revenue from preneed property sales increased $0.1 million and preneed revenue from merchandise and services deliveries decreased slightly while at-need revenues increased $0.1 million, or 17.0%. Cemetery acquired operating profit increased $0.3 million due to the increase in revenue.

The two categories of financial revenue which consist of trust earnings and finance charges on preneed receivables had a meaningful impact on cemetery revenues and operating profit. Total trust earnings increased $0.3 million, or 39.8%, when compared to the three months ended September 30, 2009. Earnings from perpetual care trust funds totaled $1.0 million for the three months ended September 30, 2010 compared to $0.6 million for the three months ended September 30, 2009. Trust earnings recognized upon the delivery of merchandise and service contracts decreased $0.1 million, or 36.5%, compared to the same period in 2009. Finance charges on the preneed contracts were relatively flat.

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#### Nine months ended September 30, 2009 compared to nine months ended September 30, 2010 (dollars in thousands):

| Revenues: | Nine Months Ended September 30, 2009 | 2010 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same-store operating revenue | $27,219 | $25,702 | $(1,517) | (5.6)% |
| Acquired operating revenue | 4,800 | 4,758 | (42) | (0.9)% |
| Cemetery trust earnings | 2,149 | 3,369 | 1,220 | 56.8% |
| Preneed cemetery finance charges | 1,136 | 1,203 | 67 | 5.9% |
| Total | $35,304 | $35,032 | $(272) | (0.8)% |
| Operating profit: |  |  |  |  |
| Same-store operating profit | $6,014 | $5,629 | $(385) | (6.4)% |
| Acquired operating profit | 1,112 | 1,369 | 257 | 23.1% |
| Cemetery trust earnings | 2,149 | 3,369 | 1,220 | 56.8% |
| Preneed cemetery finance charges | 1,136 | 1,203 | 67 | 5.9% |
| Total | $10,411 | $11,570 | $1,159 | 11.1% |

Cemetery same-store operating revenues for the nine months ended September 30, 2010, decreased $1.5 million, or 5.6%, compared to the nine months ended September 30, 2009. Same-store revenue from preneed property sales decreased $1.6 million, or 12%, which was primarily a reflection of a 14.7% decrease in the number of interment rights (property) sold and a 9.6% increase in the average price per interment. The percentage of those we were able to recognize as revenue, because we received at least 10% of the sales price from the customer, decreased from 87.5% to 82.2%. Revenue from deliveries of preneed merchandise and services deliveries decreased $0.5 million, or 11.7% and same-store at-need revenues increased $0.6 million, or 6.2%.

Cemetery same-store operating profit for the nine months ended September 30, 2010 decreased $0.4 million, or 6.4% primarily due to the decline in revenues. As a percentage of revenues, cemetery same-store operating profit decreased slightly from 22.1% to 21.9%. Promotional expenses (primarily preneed sales commissions) decreased $0.6 million and bad debts decreased $0.3 million in correlation with the lower preneed sales volumes.

Cemetery acquired revenues for the nine months ended September 30, 2010 decreased slightly, compared to the nine months ended September 30, 2009. Revenue from preneed property sales decreased slightly and preneed revenue from merchandise and services deliveries decreased $0.1 million. At-need revenues increased $0.1 million compared to the same period in 2009. As a percentage of revenues, cemetery acquired operating profit increased from 23.2% to 28.9% as we experienced a reduction of controllable expenses.

Total trust earnings increased $1.2 million, or 56.8%, when compared to the nine months ended September 30, 2009. Earnings from perpetual care trust funds totaled $3.0 million for the nine months ended September 30, 2010 compared to $1.8 million for the nine months ended September 30, 2009, due in large part to capital gains realized in the improving financial markets. Trust earnings recognized upon the delivery of merchandise and service contracts were flat compared to the same period in 2009.

*Other*. General and administrative expenses totaled $4.1 million for the three months ended September 30, 2010, an increase of $0.2 million compared to the three months ended September 30, 2009, due primarily to increases in acquisition transaction costs.

*Income Taxes.* The Company recorded income taxes at the estimated effective rate of 40.5% for 2009 and for the first nine months of 2010. For federal income tax reporting purposes, Carriage has net operating loss carryforwards totaling approximately $15.1 million available at September 30, 2010 to offset future Federal taxable income, which will expire between 2022 and 2028, if not utilized. Carriage also has approximately $62.2 million of state net operating loss carryforwards that will expire between 2010 and 2028, if not utilized. Based on management’s assessment of the various state net operating losses, it has been determined that it is more likely than not that the Company will not be able to realize tax benefits on a substantial amount of the state losses. Accordingly, a valuation allowance was established and is reviewed every quarter related to the deferred tax asset related to the state operating losses.

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### LIQUIDITY AND CAPITAL RESOURCES

While the impact has not been dramatic yet, the adverse economic conditions in the U.S., particularly the high level of unemployment, will continue to affect our business. Carriage began 2010 with $3.6 million in cash and other liquid investments and ended the third quarter with $1.3 million in cash and $5.0 million drawn on the bank credit facility. The elements of cash flow for the nine months ended September 30, 2010 consisted of the following (in millions):

|  |  |
| --- | ---: |
| Cash and liquid investments at beginning of year | $3.6 |
| Cash flow from operations | 16.5 |
| Business acquisitions | (16.8) |
| Cash drawn on the bank credit facility | 5.0 |
| Maintenance capital expenditures | (5.0) |
| Growth capital expenditures — funeral homes | (0.2) |
| Growth capital expenditures — cemeteries | (1.6) |
| Other investing and financing activities, net | (0.2) |
| Cash at September 30, 2010 | $1.3 |

For the nine months ended September 30, 2010, cash provided by operating activities was $16.5 million as compared to $7.9 million for the nine months ended September 30, 2009. The 2009 period included the payment of a $3.3 million litigation settlement. Capital expenditures totaled $6.9 million for the nine months ended September 30, 2010 compared to $6.1 million for the nine months ended September 30, 2009. Capital expenditures for the first nine months of 2010 included $1.6 million for cemetery inventory development projects.

The outstanding principal of senior debt at September 30, 2010 totaled $141.8 million and consisted of $130.0 million in 7⅞% Senior Notes maturing in 2015, $5.0 million drawn on the credit facility and $6.8 million in acquisition indebtedness and capital lease obligations. Additionally, $0.1 million in letters of credit were issued and outstanding under the credit facility at September 30, 2010.

The Company has a $40.0 million senior secured revolving credit facility that matures in November 2012 and is collateralized by all personal property and funeral home real property in certain states. The credit facility also contains an accordion provision to borrow up to an additional $20.0 million. Borrowings under the credit facility bear interest at either prime or LIBOR options. At September 30, 2010, the prime rate option was equivalent to 5.75% and the LIBOR option was set at the 30 day LIBOR rate plus 350 basis points.

A total of $92.9 million was outstanding at September 30, 2010 on the convertible junior subordinated debenture. Amounts outstanding under the debenture are payable to our affiliate trust, Carriage Services Capital Trust, bear interest at 7.0% and mature in 2029. Substantially all the assets of the Trust consist of the convertible junior subordinated debentures. In 1999, the Trust issued 1.875 million shares of term income deferrable equity securities (“TIDES”). The rights of the debentures are functionally equivalent to those of the TIDES. In June 2010, the Company repurchased 17,850 shares of these TIDES for approximately $0.6 million and recorded a gain of $0.3 million. In September 2010, the Company converted these preferred shares at the current conversion rate of 2.4465 into shares of common stock equal to 43,670 shares. Immediately upon the exchange, these common shares were cancelled and held in Treasury.

The convertible junior subordinated debenture payable to the affiliated Trust, and the TIDES, each contain a provision for the deferral of interest payments and distributions for up to 20 consecutive quarters. During any period in which distribution payments are deferred, distributions will continue to accumulate at the 7% annual rate. Also, the deferred distributions themselves accumulate distributions at the annual rate of 7%. During any deferral period, Carriage is prohibited from paying dividends on the Common Stock or repurchasing Common Stock, subject to limited exceptions. The Company currently expects to continue paying the distributions as due.

The Company intends to use its cash and credit facility primarily to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development. The Company has the ability to draw on our revolving credit facility, subject to customary terms and conditions of the credit agreement.

We believe our cash on hand, cash flow from operations, and the available capacity under our credit facility described above will be adequate to meet our working capital needs and other financial obligations over the next twelve months.

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### SEASONALITY

Our business can be affected by seasonal fluctuations in the death rate. Generally, the rate is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.

## Market risk

As filed, 1,346 characters.

In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. For information regarding the Company’s exposure to certain market risks, see Item 7A, “Quantitative and Qualitative Disclosures About Market Risk”, in the Company’s Annual Report filed on Form 10-K for the year ended December 31, 2009. There have been no significant changes in the Company’s market risk from that disclosed in the Form 10-K for the year ended December 31, 2009.

The 7⅞% Senior Notes were issued to the public at par and are carried at a cost of $130 million. At September 30, 2010, these securities were typically trading at a price of approximately $99.25, indicating a fair market value of approximately $129 million.

The convertible junior subordinated debentures, payable to Carriage Services Capital Trust, pay interest at the fixed rate of 7% and are carried on our Consolidated Balance Sheets at a cost of approximately $92.9 million. The fair value of these securities is estimated to be approximately $56 million at September 30, 2010 based on available broker quotes of the corresponding preferred securities issued by the Trust.

## Controls and procedures

As filed, 1,483 characters.

In accordance with the Securities Exchange Act of 1934, as amended (the “Exchange Act”) Rules 13a-15 and 15d-15, we carried out an evaluation under the supervision and with the participation of management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2010 to provide reasonable assurance that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Our disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in reports filed or submitted under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

There has been no change in our internal control over financial reporting that occurred during the nine months ended September 30, 2010 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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## Risk factors

As filed, 159 characters.

There have been no material changes in our risk factors from those disclosed in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2009.

Filed Nov 5, 2010.
Source: SEC EDGAR, the filing index for accession 0000950123-10-101632. Last ingested by Listed: Nov 4, 2026, 17:54 ET. No prices; not investment advice.