# Carriage Services Inc: Form 10-Q for the period ended Mar 31, 2014

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2014-05-07
- Accepted by EDGAR: May 7, 2014, 16:22 ET
- Period: 2014-03-31
- Accession: 0001016281-14-000091
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628114000091/csv-2014331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628114000091/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-01-01 to 2014-03-31 | $55.8m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-01-01 to 2014-03-31 | $37.8m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-01-01 to 2014-03-31 | $18.0m | us-gaap:GrossProfit |
| Operating income | 3 months, 2014-01-01 to 2014-03-31 | $8.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-01-01 to 2014-03-31 | $2.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-01-01 to 2014-03-31 | $1.1m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-01-01 to 2014-03-31 | $2.2m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.12 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-01-01 to 2014-03-31 | $0.12 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-01-01 to 2014-03-31 | 18,143,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2014-01-01 to 2014-03-31 | −$1.6m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2014-01-01 to 2014-03-31 | −$200.0k | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2014-01-01 to 2014-03-31 | $456.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2014-03-31 | $22.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-03-31 | $51.2m | us-gaap:AssetsCurrent |
| Total assets | at 2014-03-31 | $769.4m | us-gaap:Assets |
| Current liabilities | at 2014-03-31 | $41.2m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-03-31 | $603.7m | us-gaap:Liabilities |
| Long-term debt | at 2014-03-31 | $101.8m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2014-03-31 | $13.9m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2014-03-31 | $165.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 55,760 characters.

### 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 March 31, 2014, we operated 161 funeral homes in 26 states and 31 cemeteries in 10 states. Substantially all administrative activities are conducted in our home office in Houston, Texas.

We have implemented a long-term strategy in our operations designed to improve operating and financial results by growing market share and increasing profitability. We have a decentralized, entrepreneurial and local operating model that includes operating and financial standards developed from our best operations, along with an incentive compensation plan to reward Managing Partners for successfully meeting or exceeding the standards. The model essentially eliminated the use of line-item financial budgets at the location level in favor of the standards. The operating model and its 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 financial metrics. The model and standards are the measures by which we judge the success of each business. In 2012, we began a five year incentive plan, called “Good to Great,” which reward business managers, known as “Managing Partners,” with a bonus at the end of five years, equal to a ratio of 4 to 6 times their average annual bonus, if they are able to achieve an annual compound growth rate of 2% over a five year period. To date, the Standards Operating Model has driven significant changes in our organization, leadership and operating practices. Most importantly, the Standards Operating Model has allowed us to measure the sustainable revenue growth and earning power of our portfolio businesses. The Standards Operating Model led to the development of our Strategic Acquisition Model, described below under “Acquisitions,” which guides our acquisition and disposition strategy. We expect both models to drive long-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 of a successful operation organized around three primary areas - market share, people and operating financial metrics.
- *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 he or she earns a percentage of his or her respective business' earnings based upon the actual standards achieved 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. A Managing Partner’s performance is judged according to achievement of the standards for that business.

#### Funeral and Cemetery Operations

Factors affecting our funeral operating results include: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our at-need business to increase average revenue 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 from 23,010 in 2009 to 29,996 in 2013 (compounded annual increase of 6.9%). Our funeral operating revenue, excluding financial revenue, has increased from $120.6 million in 2009 to $154.7 million in 2013 (compounded annual increase of 6.4%). The increases are primarily a result of businesses we have acquired in the last five years and our ability to increase the average revenue per funeral through expanded service offerings and packages. Additional funeral revenue from preneed commissions and preneed funeral trust earnings has increased from $5.8 million in 2009 to $9.3

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million in 2013. We experienced a decrease of 3.4% in volumes and 2.7% in funeral operating revenues in the first three months of 2014 compared to the first three months of 2013, primarily due to a decrease in same store volumes and revenues.

The percentage of funeral services involving cremations has increased from 40.6% for the year ended 2009 to 46.8% for the year ended 2013, and was 46.4% for the first three months of 2014. On a same store basis, the cremation rate has risen to 46.6% for the first three months of 2014, up from 46.1% for the year ended December 31, 2013, and 45.8% for the comparable three month period in 2013. The cremation rate for our acquired funeral home businesses was 46.1% for the first three months of 2014 compared to 48.7% for the comparable three month period in 2013.

Cemetery operating results are affected by the size and success of our sales organization. Approximately 48.0% of our cemetery revenues for the year ended December 31, 2013 related to preneed sales of interment rights and related merchandise and services. For the three months ended March 31, 2014, those preneed sales were approximately 46.0% of total cemetery revenues. We believe that changes in the economy and consumer confidence affect the amount of preneed cemetery revenues. Cemetery revenues from investment earnings on trust funds were approximately $1.9 million, or 16.4% of total cemetery revenues, for the three months ended March 31, 2014, down from $2.5 million, or 20.4% of total cemetery revenues for the three months ended March 31, 2013. Changes in the capital markets and interest rates affect this component of our cemetery revenues.

Our cemetery financial performance from 2009 through 2013 was characterized by varying levels of operating revenues yet increasing field-level profit margins. Cemetery operating revenue increased from $39.3 million in 2009 to $40.5 million in 2013. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on the growth of our preneed property sales. Additionally, a portion of our capital expenditures in 2014 is designated 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. Insurance policies, intended to fund preneed funeral contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases. Revenue from preneed funeral contracts, along with accumulated earnings, is not recognized until the time the funeral service is performed. The accumulated earnings from the trust investments and insurance policies are intended to offset the inflation in funeral prices. Additionally, we generally earn a commission from the insurance company from the sale of insurance-funded policies reflected as *Preneed Insurance Commission* within *Funeral Revenue*. 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* within *Cemetery Revenue*. In substantially all cases, we receive an initial down payment at the time the contract is signed. 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.

We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state laws. 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 us. Investment management and advisory services are provided either by our wholly-owned registered investment advisor (CSV RIA) or independent financial advisors. As of March 31, 2014, CSV RIA provided these services to two institutions, which have custody of 76% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income as the advisory services are provided. The investment advisors establish an investment policy that gives guidance on asset allocation, investment requirements, investment manager selection and performance monitoring. The investment objectives are tailored to generate long-term investment returns without assuming undue risk, while ensuring the management of the assets is in compliance with applicable laws.

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Preneed funeral trust fund income earned, along with 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. 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. The income from perpetual care trusts provides a portion of the funds necessary to maintain cemetery property and memorials in perpetuity. Perpetual care trust fund income is recognized, as earned, in our cemetery revenues.

#### Acquisitions

Our growth strategy includes the execution of our Strategic Acquisition Model. We use six strategic ranking criteria to assess acquisition candidates and to differentiate the price we are willing to pay under a discounted cash flow methodology. Those criteria are:

- size of business;
- size of market;
- competitive standing;
- local market demographics;
- strength of brand; and
- barriers to entry.

In general terms, should a target business be acceptable per the criteria above, we will then determine the value of the target using a discounted cash flow methodology. During 2013, we acquired two funeral homes, one in Tennessee and one in Georgia. The consideration paid for the 2013 acquisitions was $13.7 million. Additionally, we purchased land for approximately $6.0 million in 2013 to be used for future funeral expansions. We have not acquired any businesses to date in 2014.

#### Financial Highlights

Net income from continuing operations for the three months ended March 31, 2014 totaled $1.7 million, equal to $0.09 per diluted share, compared to net income from continuing operations for the three months ended March 31, 2013, which totaled $5.4 million, equal to $0.26 per diluted share. Net income from continuing operations for the three months ended March 31, 2014 included a loss of approximately $3.8 million on the redemption of our convertible junior subordinated debentures. Total revenue for the three months ended March 31, 2014 was $55.8 million, a decrease of 2.6% for the comparable period in 2013. Our funeral segment experienced a decrease in revenue and gross profit during the three months ended March 31, 2014 primarily as a result of a decrease in same store contracts compared to the same period of 2013. The cemetery segment experienced decreases in revenue during the three months ended March 31, 2014 due to lower preneed property sales and lower trust earnings offset, in part, by increased at-need revenue and margin. Gross profit for these segments decreased as a result of lower revenues in the three months ended March 31, 2014 as compared to the same period in 2013. We experienced increases in general and administrative expenses due to increases in severance costs, incentive and stock-based compensation, acquisition and divestiture expenses and consulting costs.

We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release and discussed on our earnings call for the quarter ending March 31, 2014. This Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other deathcare companies. The Trend Report is a Non-GAAP statement from continuing operations that also provides insight into underlying trends in our business. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP.

The Non-GAAP financial measures in the Trend Report include “Adjusted Net Income,” “Adjusted Basic Earnings Per Share,” “Adjusted Diluted Earnings Per Share,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “Free Cash Flow,” “Funeral, Cemetery and Financial EBITDA,” “Total Field EBITDA” and “Special Items.” These financial measurements are defined as similar GAAP items adjusted for Special Items and are reconciled to GAAP in our earnings release and on the Trend Reports posted on our website (www.carriageservices.com). In addition, our presentation of these measures may not be comparable to similarly titled measures in other companies’ reports. We are providing below a reconciliation after tax of net income from continuing operations (a GAAP measure) to Non-GAAP net income (a non-GAAP measure). Non-GAAP net income is defined as net income from continuing operations adjusted for Special Items, including

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Withdrawable trust income, acquisition expenses, severance costs and other items in the table below. The adjustment of Special Items in Non-GAAP income allows management to focus on the evaluation of operating performance as it primarily relates to our operating expenses.

In certain states, we are allowed to withdraw realized trust earnings prior to delivery from cemetery merchandise and services trusts, which management describes as “Withdrawable trust income.” The Withdrawable trust income, pre-tax, totaled $0.5 million and $0.2 million for the three months ended March 31, 2013 and 2014, respectively. While the Withdrawable trust income is not recognized as revenue in our Consolidated Statements of Operations, it increases cash flow from operations. The Withdrawable trust income is treated as a special item in our Non-GAAP net income calculation.

*(In millions)*

|  | For the Three Months Ended March 31, 2013 | 2014 |
| --- | ---: | ---: |
| Net income from continuing operations, as reported | $5.4 | $1.7 |
| After-tax special items: |  |  |
| Withdrawable trust income | 0.3 | 0.1 |
| Acquisition and divestiture expenses | — | 0.5 |
| Severance costs | 0.1 | 0.2 |
| Other incentive compensation | — | 0.6 |
| Consulting fees | — | 0.1 |
| Loss on redemption of convertible junior subordinated debentures | — | 2.3 |
| Accretion of discount on convertible subordinated notes | — | 0.1 |
| Other | 0.2 | (0.2) |
| Non-GAAP net income | $6.0 | $5.4 |

### OVERVIEW OF 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 ongoing 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 and liabilities. 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 that our results of operations 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 included in this Form 10-Q. 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 Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the year ended December 31, 2013.

### RECENT DEVELOPMENTS

On January 3, 2014, we cancelled all the outstanding Performance-Based Stock Awards (the “PBS Awards”). All holders of the PBS Awards surrendered their outstanding shares in exchange for a cash payout of approximately $16.1 million. See Item 1, Notes to the Consolidated Financial Statements, Note 17 for additional information.

On January 16, 2014, we sold a cemetery business in Florida that was held for sale at December 31, 2013 for approximately $0.2 million in cash. See Item 1, Notes to the Consolidated Financial Statements, Note 4 for additional information.

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On February 27, 2014, we entered into a fourth amendment to our Credit Facility which (a) allows us to issue senior unsecured debt in an amount not to exceed $150 million when aggregated with any subordinated debt or convertible subordinated debt issued by us and (b) allows us to refinance our existing convertible junior subordinated debentures with the proceeds of certain of senior unsecured debt, subordinated debt or convertible subordinated debt.

On March 3, 2014, certain of our subsidiaries entered into an Asset Sale Agreement with SCI to acquire four funeral businesses and one cemetery business in the New Orleans, Louisiana region and two funeral businesses in the Northern Virginia region for an aggregate purchase price of $54.9 million. Under the Asset Sale Agreement, we will acquire the properties, leasehold interests, assets and rights and assume certain liabilities of the businesses being acquired. The closing of the SCI Acquisition is subject to certain closing conditions, including, but not limited to, approval by the Federal Trade Commission. We currently anticipate that the SCI Acquisition will close in the second quarter of 2014.

On March 3, 2014, David J. DeCarlo joined our executive leadership team as President and Vice Chairman of the Board. Mr. DeCarlo will lead our Strategic and Corporate Development, Supply and Project Development and Operations Support including Information Technology and Human Resources. Bill Heiligbrodt is now our Executive Vice President and Secretary and has resigned from the Board. Mr. Heiligbrodt will lead our Treasury and Finance, Accounting and Reporting, Legal and Investor Relations.

On March 19, 2014 , we issued $143.75 million aggregate principal amount of 2.75% Convertible Subordinated Notes due 2021 (the “Notes”). The Notes have not been registered under the Securities Act of 1933, as amended, and were offered only to “qualified institutional buyers” in compliance with Rule 144A under the Securities Act. The Notes bear interest at 2.75%. We used a portion of the proceeds to repay our outstanding balance on our revolving credit facility and to redeem our existing convertible junior subordinated debentures. See Item 1, Notes to the Consolidated Financial Statements, Notes 14 and 15 and Item 2, Management's Discussion and Analysis of Financial Condition and Results of Operations - Liquidity and Capital Resources for additional information.

On April 14, 2014, we entered into a fifth amendment to our Credit Facility (the “Fifth Amendment”), which provides for an increase in our revolving credit facility from $125 million to $200 million and new funding under our term loan so that $125 million will be outstanding upon effectiveness of the Fifth Amendment. The Fifth Amendment becomes effective upon the consummation of the SCI Acquisition. We currently anticipate that the SCI Acquisition will close in the second quarter of 2014. Borrowings under the term loan facility are subject to amortization payments of 7.5% of the principal amount in the first two years following the Fifth Amendment effective date, 10.0% for the third and fourth years following the effective date and 12.5% per year thereafter. Obligations under the Fifth Amendment mature on March 31, 2019. The Fifth Amendment also modifies the financial covenants so that we must maintain a leverage ratio of 3.75 to 1.00 through March 30, 2015 and 3.50 to 1.00 thereafter.

### RESULTS OF OPERATIONS

The following is a discussion of our results of continuing operations for the three months ended March 31, 2013 and 2014. The term “same store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 2009 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2008 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 total company performance. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in operating profit.

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*Funeral Home Segment.* The following tables set forth certain information regarding the revenues and operating profit from the funeral home operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2014.

#### Three months ended March 31, 2013 compared to three months ended March 31, 2014 (dollars in thousands):

| Revenues: | Three Months Ended March 31, 2013 | 2014 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $33,671 | $31,482 | $(2,189) | (6.5)% |
| Acquired operating revenue | 9,146 | 10,178 | 1,032 | 11.3% |
| Preneed funeral insurance commissions | 508 | 564 | 56 | 11.0% |
| Preneed funeral trust earnings | 1,726 | 1,935 | 209 | 12.1% |
| Total | $45,051 | $44,159 | $(892) | (2.0)% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $13,664 | $12,103 | $(1,561) | (11.4)% |
| Acquired operating profit | 3,213 | 3,772 | 559 | 17.4% |
| Preneed funeral insurance commissions | 110 | 317 | 207 | 188.2% |
| Preneed funeral trust earnings | 1,712 | 1,928 | 216 | 12.6% |
| Total | $18,699 | $18,120 | $(579) | (3.1)% |

Funeral home same store operating revenues for the three months ended March 31, 2014 decreased $2.2 million, or 6.5%, when compared to the three months ended March 31, 2013. Same store operating contracts decreased from 6,435 in the first quarter of 2013 to 6,049 in the first quarter of 2014, while the average revenue per contract remained flat at $5,469 for the three months ended March 31, 2014. The average revenue per contract includes the impact of the funeral trust fund earnings recognized at the time that we provide the services pursuant to the preneed contract. Excluding funeral trust earnings, the average revenue per contract decreased $29 from $5,233 for the three months ended March 31, 2013 to $5,204 for the three months ended March 31, 2014. The number of traditional burial contracts decreased 8.7%, while the average revenue per burial contract increased 2.6% from $8,280 in 2013 to $8,496 in 2014. The cremation rate for same store businesses increased from 45.8% in 2013 to 46.6% in 2014, while the number of cremation contracts decreased 4.5%. The average revenue per same store cremation contract decreased 2.6% to $3,010. Cremations with services declined from 33.5% of total cremation contracts in the first quarter of 2013 to 31.3% in the first quarter of 2014. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 7.5% of the total number of contracts in the first quarter of 2014, decreased slightly to $2,174.

Same store operating profit for the three months ended March 31, 2014 decreased $1.6 million, or 11.4%, from the comparable three months of 2013, and as a percentage of funeral same store operating revenue, decreased to 38.4% from 40.5%. The decrease in operating profit is primarily the result of the decrease in revenue, offset in part, by better management of costs including salaries and benefits and field insurance expenses.

Funeral home acquired revenues for the three months ended March 31, 2014 increased $1.0 million, or 11.3%, when compared to the three months ended March 31, 2013, as we experienced a 5.7% increase in the number of contracts, and an increase of 6.1%, to $5,299, in the average revenue per contract for those acquired operations. Excluding funeral trust earnings, the average revenue per contract increased 5.3% to $5,185. The number of traditional burial contracts increased 11.0%, and the average revenue per burial contract increased 6.5% to $8,113. The cremation rate for the acquired businesses was 46.1% for the first quarter of 2014 compared to 48.7% in the first quarter of 2013. The average revenue per cremation contract increased 1.8% to $3,102 for the first quarter of 2014, while the number of cremation contracts remained flat at 904 for the three months ended March 31, 2014. Cremations with services decreased from 35.1% in the three months ended March 31, 2013 to 33.3% for the three months ended March 31, 2014. The increase in the average revenue per contract for acquired operations and the decline in the cremation rate is because the acquired businesses serve primarily traditional burial families.

Acquired operating profit for the three months ended March 31, 2014 increased $0.6 million, or 17.4%, from the comparable three months of 2013 and, as a percentage of revenue from acquired businesses, was 37.1% for the first quarter of 2014 compared to 35.1% for the first quarter of 2013. Salaries and benefits of acquired operations, as a percentage of revenue, are generally higher as a percentage of revenue than existing locations. As these acquired businesses transition into our Standards Operating Model, we expect to see operating profit margins rise toward those on a same store basis.

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The two categories of financial revenue (insurance commissions and trust earnings on matured preneed contracts) on a combined basis increased 11.9% in revenue and 23.2% in operating profit in the three months ended March 31, 2014 as compared to the three months ended March 31, 2013 as a result of higher earnings on trust contracts. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets.

*Cemetery Segment.* The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the three months ended March 31, 2013 compared to the three months ended March 31, 2014.

#### Three months ended March 31, 2013 compared to three months ended March 31, 2014 (dollars in thousands):

| Revenues: | Three Months Ended March 31, 2013 | 2014 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $9,691 | $9,712 | $21 | 0.2% |
| Acquired operating revenue | 69 | 55 | (14) | n/a |
| Cemetery trust earnings | 2,194 | 1,584 | (610) | (27.8)% |
| Preneed cemetery finance charges | 310 | 337 | 27 | 8.7% |
| Total | $12,264 | $11,688 | $(576) | (4.7)% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $3,020 | $2,839 | $(181) | (6.0)% |
| Acquired operating loss | (27) | (9) | 18 | n/a |
| Cemetery trust earnings | 2,146 | 1,561 | (585) | (27.3)% |
| Preneed cemetery finance charges | 310 | 337 | 27 | 8.7% |
| Total | $5,449 | $4,728 | $(721) | (13.2)% |

Cemetery same store operating revenues for the three months ended March 31, 2014 increased slightly to $9,712, or 0.2%, from $9,691 for the three months ended March 31, 2013. Preneed property sales decreased $0.3 million, or 5.7%. We experienced a 6.0% decrease in the number of preened interment rights (property) sold, while the average price per interment remained flat. The percentage of those interment rights sold that we were able to recognize as revenue, because we received at least 10% of the sales price from the customer, decreased from 92.1% in the three months ended March 31, 2013 to 91.0% in the three months ended March 31, 2014. Same store at-need revenue increased $0.4 million, or 9.4%, while the number of at-need contracts decreased 2.9%. Revenue from deliveries of preneed merchandise and services declined $0.2 million, or 13.5%.

Cemetery same store operating profit for the three months ended March 31, 2014 decreased $0.2 million, or 6.0%. As a percentage of revenues, cemetery same store operating profit decreased from 31.2% to 29.2%. The decrease in cemetery same store operating profit is primarily a result of an increase in bad debt expense, offset by a decrease in insurance costs.

We acquired one cemetery in the second quarter of 2012 which primarily operates as an at-need business. This is the only cemetery business in this category.

The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Total trust earnings for the three months ended March 31, 2014 decreased 27.8% when compared to the three months ended March 31, 2013. Earnings from perpetual care trust funds totaled $1.0 million for the three months ended March 31, 2014 compared to $1.6 million for the three months ended March 31, 2013, a decrease of $0.6 million, or 34.4%. Trust earnings recognized upon the delivery of merchandise and service contracts decreased 13.4% from the same period in 2013. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Finance charges on the preneed contracts increased 8.7%.

*Regional and Unallocated Funeral and Cemetery Costs*. Regional and unallocated funeral and cemetery costs for the three months ended March 31, 2014 decreased $0.4 million, or 13.8%, compared to the three months ended March 31, 2013 primarily due to a $0.2 million decrease in regional management salaries and benefits and a $0.2 million decrease in termination expenses.

*General and Administrative.* General and administrative expenses totaled $9.3 million for the three months ended March 31, 2014, an increase of $3.1 million, or 48.6%, compared to the three months ended March 31, 2013 primarily due to a $0.7 million increase in incentive compensation, $0.8 million increase in stock-based compensation, $0.7 million increase in

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acquisition and divestiture expenses, $0.6 million increase in termination and consulting expenses, $0.2 million increase in 401(k) matching and $0.1 million increase in public company costs.

*Interest Expense.* Interest expense, net was $2.6 million and $2.8 million for the three months ended March 31, 2013 and 2014, respectively. Interest expense increased year over year as 2014 includes approximately $0.2 million of additional cash interest paid and debt issuance cost amortization on the Notes which did not occur in 2013.

*Loss on redemption of convertible subordinated debentures.* On March 17, 2014, we called for the redemption of all our outstanding convertible junior subordinated debentures due 2029 held by Carriage Services Capital Trust and the corresponding TIDES at a price $50 per $50 principal amount of the convertible junior subordinated debentures being redeemed, plus accrued and unpaid interest to the redemption dated. Redemption period for the TIDES ended April 16, 2014. During the first quarter of 2014, approximately $61.9 million in principal amount of the convertible junior subordinated debentures were redeemed. We recognized a total loss of $3.8 million in the three months ended March 31, 2014 as a result of the write-off of the related unamortized debt issuance costs of $2.9 million and $0.9 million for the premium paid on the convertible junior subordinated debentures redeemed.

*Other Income.* For the three months ended March 31, 2014, we recognized a gain of $1.1 million in connection with the purchase of funeral home building previously under a capital lease.

*Income Taxes.* We recorded income taxes at the estimated effective rate of 37.9% for the year ended December 31, 2013 and 39.0% for the three months ended March 31, 2014. We have approximately $47.3 million of state net operating loss carry forwards that will expire between 2015 and 2035, 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 we will not be able to realize the tax benefits of certain portions of the state losses. Accordingly, a valuation allowance has been established and is reviewed every quarter related to the deferred tax asset for the state operating losses. At March 31, 2014 the valuation allowance totaled $0.3 million.

### LIQUIDITY AND CAPITAL RESOURCES

#### Overview

Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility (as defined below under *Debt Obligations*). We generate cash in our operations primarily from at-need sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. We believe that existing cash balances, future cash flows from operations and borrowings under our Credit Facility will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividend payments and acquisitions for the foreseeable future. Based on our recent operating results, current cash position, anticipated future cash flows and sources of financing that we expect to have available, we do not anticipate any significant liquidity constraints in the foreseeable future. However, if our capital expenditures or acquisition plans for 2014 change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item IA “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013.

#### Cash Flows

We began 2014 with $1.4 million in cash and other liquid investments and ended the first quarter with $22.0 million in cash. As of March 31, 2014, we had no outstanding borrowings on our revolving credit facility.

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The following table sets forth the elements of cash flow for the three months ended March 31, 2013 and March 31, 2014 (in millions):

|  | For the Three Months Ended March 31, 2013 | 2014 |
| --- | ---: | ---: |
| Cash at January 1st | $1.7 | $1.4 |
| Cash flow from operating activities | 9.9 | (1.6) |
| Acquisitions and new construction | (6.0) | — |
| Proceeds from the sale of businesses and other assets | 2.0 | 0.2 |
| Net payments on our revolving credit facility, term loan and long-term debt obligations | (4.4) | (40.1) |
| Proceeds from issuance of convertible subordinated notes | — | 143.7 |
| Payment of issuance costs related the convertible subordinated notes | — | (4.4) |
| Redemption of convertible junior subordinated debentures | — | (61.9) |
| Payments for performance awards | — | (16.2) |
| Maintenance capital expenditures | (1.8) | (0.9) |
| Growth capital expenditures | (0.8) | (4.1) |
| Dividends on common stock | (0.4) | (0.4) |
| Excess tax benefit of equity compensation | 0.9 | 5.6 |
| Other financing costs | 0.2 | 0.6 |
| Cash at March 31st | $1.3 | $21.9 |

For the three months ended March 31, 2014 cash used in operating activities was $1.6 million compared to cash provided by operating activities of $9.9 million for the three months ended March 31, 2013. The decrease in cash was primarily due to non-cash adjustments to operating activities of $3.0 million decrease in net income, a $4.9 million deferred tax benefit related to the cash out payments of the performance-based stock awards and a $2.0 million gain recognized on the sale of a cemetery and the purchase of a building previously held as a capital lease offset, in part, by a $2.9 million write-off of unamortized deferred loan costs related to the redemption of the convertible junior subordinated debentures and a $0.8 million increase in stock-based compensation expense as a result of the write-off of unamortized stock-based compensation expense related to the cancellation of our performance-based stock awards. The decrease in cash due to working capital changes was due to a $4.9 million decrease in accounts payable and accrued liabilities as a result of reduction in accruals related to income and property taxes and interest related to the convertible junior subordinated debentures.

Our investing activities resulted in a net cash outflow of $4.8 million for the three months ended March 31, 2014 compared to $6.6 million for the three months ended March 31, 2013. The decrease was due to lower new construction expenditures and lower proceeds from the sale of businesses and other assets, offset by an increase in capital expenditures. We acquired land for approximately $6.0 million in the three months ended March 31, 2013 for funeral home expansion projects. For the three months ended March 31, 2014, we sold a business for approximately $0.2 million compared to net proceeds of $2.0 million for businesses sold in the three months ended March 31, 2013.

For the three months ended March 31, 2014, capital expenditures totaled $5.0 million compared to $2.6 million for the three months ended March 31, 2013. For the three months ended March 31, 2014, we purchased two buildings which we previously leased for approximately $3.1 million. Maintenance capital expenditures were $0.9 million in the three months ended March 31, 2014 compared to $1.8 million in the three months ended March 31, 2013. The decrease in maintenance capital expenditures of $0.9 million was primarily due to decreases in expenditures for information technology and infrastructure improvements of $0.4 million and other funeral and cemetery major repair projects of $0.4 million. Additionally, we had a decrease of $0.1 million in vehicles purchased in 2014 as compared to 2013.

Our financing activities resulted in a net cash inflow of $27.0 million for the three months ended March 31, 2014 compared to a net cash outflow of $3.7 million for the three months ended March 31, 2013. During the three months ended March 31, 2014, we received proceeds of approximately $143.75 million from the issuance of convertible subordinated notes in March 2014. We paid transaction costs of approximately $4.3 million related to the issuance of these notes. In connection of with issuance of the notes, we paid $61.9 million in principal to redeem our outstanding convertible junior subordinated debentures and paid down our revolving credit facility. During the three months ended March 31, 2014, we repaid $3.0 million on our term loan. During the three months ended March 31, 2013, we had net payments of $1.7 million on our Credit Facility and repaid $2.5 million on our term loan. Additionally, during the three months ended March 31, 2014, we paid approximately

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$16.1 million related to performance-based stock awards. During the three months ended March 31, 2014, we recognized $5.6 million related to the excess tax benefit of equity compensation.

#### Dividends

Our Board declared a quarterly dividend of $0.025 per share, totaling approximately $0.5 million, which was paid on March 3, 2014 to record holders of our common stock as of February 13, 2014. We have a dividend reinvestment program so that stockholders may elect to reinvest their dividends into additional shares of our common stock.

#### Debt Obligations

As of March 31, 2014, we had a $255 million credit facility with Bank of America, N.A. as the Administrative Agent comprised of a $125 million revolving credit facility and a $130 million term loan. The Credit Facility also contains an accordion provision to borrow up to an additional $40 million in revolving loans, subject to certain conditions. The Credit Facility is set to mature on September 30, 2017 and is collateralized by all personal property and funeral home real property in certain states. As of March 31, 2014, we had nothing drawn under the revolving credit facility and $114.0 million was outstanding under the term loan. No letters of credit were issued and outstanding under the Credit Facility at March 31, 2014. Under the Credit Facility, outstanding borrowings bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon the Company's leverage ratio. At March 31, 2014, the prime rate margin was equivalent to 1.50% and the LIBOR margin was 2.50%. The weighted average interest rate on the Credit Facility for the three months ended March 31, 2014 was 2.7% .

The outstanding principal of long-term debt and capital lease obligations at March 31, 2014 totaled $117.2 million and consisted of $114.0 million under our term loan and $3.2 million in acquisition indebtedness and capital lease obligations.

On February 27, 2014, we entered into a fourth amendment to our Credit Facility which (a) allows us to issue senior unsecured debt in an amount not to exceed $150 million when aggregated with any subordinated debt or convertible subordinated debt issued by us and (b) allows us to refinance our existing convertible junior subordinated debentures with the proceeds of certain of senior unsecured debt, subordinated debt or convertible subordinated debt.

We were in compliance with the covenants contained in the Credit Facility as of March 31, 2014. Key ratios that we must comply with include a Total Debt to EBITDA ratio that as of the last day of each quarter must not be greater than 3.75 to 1.00 through September 30, 2014 and no more than 3.50 to 1.00 thereafter and a fixed charge coverage ratio that must not be less than 1.20 to 1.00. As of March 31, 2014, the leverage ratio was 2.18 to 1.00 and the fixed charge coverage ratio was 1.83 to 1.00. The leverage ratio decline to below 3.00 to 1.00 at June 30, 2013 automatically triggered a 50 basis point rate decline on all our term loan and revolving credit facility during the third quarter of 2013.

On April 14, 2014, we entered into a Fifth Amendment which provides, among other things, for an increase in our revolving credit facility from $125 million to $200 million and new funding under our term loan so that $125 million will be outstanding upon effectiveness of the Fifth Amendment. The Fifth Amendment becomes effective upon the consummation of the SCI Acquisition. We currently anticipate that the SCI Acquisition will close in the second quarter of 2014. Borrowings under the term loan facility are subject to amortization payments of 7.5% of the principal amount in the first two years following the Fifth Amendment effective date, 10.0% for the third and fourth years following the effective date and 12.5% per year thereafter. Obligations under the Fifth Amendment mature on March 31, 2019. The Fifth Amendment also modifies the financial covenants so that we must maintain a leverage ratio of 3.75 to 1.00 through March 30, 2015 and 3.50 to 1.00 thereafter.

#### Convertible Subordinated Notes due 2021

On March 19, 2014 , we issued $143.75 million aggregate principal amount of Notes. The Notes have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were offered only to “qualified institutional buyers” in compliance with Rule 144A under the Securities Act. The Notes are governed by an indenture dated as of March 19, 2014 between Wilmington Trust, National Association, as Trustee, and us (the “Indenture”). The Notes bear interest at 2.75%. Interest on the Notes accrues from March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year, beginning September 15, 2014.

The Notes are general unsecured obligations and will be subordinated in the right of payment to all of our existing and future senior indebtedness and equal in right of payment with our other existing and future subordinated indebtedness. The initial conversion rate of the Notes is 44.3169 shares of our common stock per $1,000 principal amount of the Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain events as described in the Indenture.

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The Notes mature on March 15, 2021, unless earlier converted or purchased by us. Holders of the Notes may convert their Notes at their option at any time prior to December 15, 2020, if one or more of the following conditions has been satisfied: (1) during any fiscal quarter (and only during such fiscal quarter) commencing after March 31, 2014, if, for a least 20 trading days, (whether or not consecutive) during the 30 consecutive trading day period ending on the last trading day of the immediately preceding fiscal quarter, the last reported sales price of our common stock for such trading day is greater than or equal to 130% of the applicable conversion price on such trading day; (2) during the five consecutive business day period immediately following any five consecutive trading day period (the “Measurement Period”), in which, for each trading day of the Measurement Period, the trading price (as defined in the Indenture) per $1,000 principal amount of the Notes for such trading day was less than 98% of the product of last reported sale price of our common stock for such trading day and the applicable conversion rate on such trading day; or (3) upon the occurrence of specified corporate transactions described in the Indenture. Holders may also convert their Notes at their option at any time beginning on December 15, 2020, and ending on the close of business on the business day immediately preceding the maturity date.

We may not redeem the Notes prior to maturity. However, in the event of a fundamental change (as defined in the Indenture), subject to certain conditions, a holder of the Notes will have the option to require us to purchase all or a portion of its Notes for cash. The fundamental change purchase price will equal 100% of the principal amount of the Notes to be purchased, plus any accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.

The conversion option of the Notes is not an embedded derivative. In order to be a derivative, the conversion feature would need to be able to be settled in cash, or an instrument readily convertible to cash. We do not intend to issue a registration statement for the resale of the common stock issuable upon conversion. Thus, the shares that the holder will receive upon conversion are not readily convertible to cash.

We have recorded the issuance of the Notes per the guidance provided under ASC 470, Topic 20, *Debt with Conversion and Other Options,* which requires that we separate the Notes into a liability component and an equity component. The carrying amount of the liability is calculated by measuring the fair value of a similar liability (including any embedded features other than the conversion option) that does not have an associated equity component. The carrying amount of the liability component was determined based on a bond discount rate of 6.75%. The carrying amount of the equity component representing the embedded conversion option was determined by deducting the fair value of the liability component from the initial proceeds of the Notes and is recorded in Additional Paid in Capital (“APIC”) on our Consolidated Balance Sheet. The excess of the principal amount of the liability over its carrying amount is amortized to interest expense using the effective interest method. The expected life of the liability component will not be reassessed in subsequent periods unless the terms are modified.

We received proceeds of approximately $143.75 million and paid transactions costs of approximately $4.3 million. We used a portion of the proceeds to repay our outstanding balance on our revolving credit facility and to redeem our existing convertible junior subordinated debentures.

Subsequent to the issuance of the Notes, we accrued additional transaction costs of $0.8 million. Total transaction costs of $5.1 million were allocated to the liability and equity components in proportion to the allocation of the initial proceeds and accounted for as debt issuance costs and equity issuance costs, respectively. Debt issuance costs are included in Deferred charges and other non-current assets on our Consolidated Balance Sheet and are being amortized using the effective interest method over the seven year term of the Notes. Equity issuance costs are included in Additional Paid in Capital (“APIC”) on our Consolidated Balance Sheet and are not amortized. Additionally, the recognition of the Notes as two separate components results in a basis difference associated with liability component which represents a temporary difference. As a result, we recognized a deferred tax liability of $12.7 million related to this temporary difference which was recorded as a reduction to APIC and an increase to our deferred tax liability.

At March 31, 2014, the carrying amount of the equity component was $31.7 million. At March 31, 2014, the principal amount of the liability component was $143.75 million and the net carrying amount was $112.3 million. The unamortized discount of $31.5 million as of March 31, 2014 will be amortized over the remaining term of seven years.

For the three months ended March 31, 2014, we recognized contractual coupon interest expense of $0.1 million and interest expense of $0.2 million related to the accretion of the debt discount. The effective interest rate on the liability component for the three months ended March 31, 2014 was 6.75%. Additionally, we recognized amortization expense of $44,000 related to the debt issuance costs.

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*Convertible Junior Subordinated Debentures Payable To Affiliate And Company Obligated Mandatorily Redeemable Convertible Preferred Securities of Carriage Services Capital Trust*

On March 17, 2014, we called for the redemption of all our outstanding convertible junior subordinated debentures due 2029 held by Carriage Services Capital Trust for redemption on April 16, 2014 at a price $50 per $50 principal amount of the convertible junior subordinated debentures being redeemed, plus accrued and unpaid interest to the redemption dated. In March 2014, we used a portion of the net proceeds from the issuance of the Notes to repurchase approximately $61.9 million in principal amount of the convertible junior subordinated debentures and $0.9 million associated with the call premium. At December 31, 2013 and March 31, 2014, amounts outstanding under the convertible junior subordinated debentures totaled $89.8 million and $27.9 million, respectively.

We intend to use cash on hand and borrowing under our Credit Facility primarily to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development and funeral home expansion projects. We have the ability to draw on our revolving credit facility, subject to customary terms and conditions of the credit agreement. We believe that existing cash balances, future cash flows from operations and the borrowing under our Credit Facility described above will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividends and acquisitions for the foreseeable future.

### SEASONALITY

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

## Market risk

As filed, 4,243 characters.

In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks.

The following quantitative and qualitative information is provided about financial instruments to which we are a party at March 31, 2014 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.

Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.

The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”

In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as of March 31, 2014 are presented in Item I, Notes to the Consolidated Financial Statements, Notes 6, 8 and 10 to our Consolidated Financial Statements in this Form 10-Q. See also Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Form 10-Q. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.5% change in the value of the fixed income securities.

We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of March 31, 2014, we had no outstanding borrowings under our $125 million revolving credit facility and $114.0 million outstanding on our term loan. Any further borrowings or voluntary prepayments against the revolving credit facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under the Credit Facility at either prime rate or LIBOR rate plus a margin. At March 31, 2014, the prime rate margin was equivalent to 1.50% and the LIBOR margin was 2.50%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of $1.1 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.

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The remaining unredeemed convertible junior subordinated debentures, payable to the Trust, pay interest at the fixed rate of 7% and are carried on our Consolidated Balance Sheet at a cost of approximately $27.9 million. The estimated fair value of these securities is estimated to be approximately $28.0 million at March 31, 2014, based on available broker quotes of the corresponding preferred securities issued by the Trust.

The fair value of the Notes due 2021 issued in March 2014 is approximately $151.7 million based on the last traded or broker quoted price.

Increases in market interest rates may cause the value of these debt instruments to decrease but such changes will not affect our interest costs. The remainder of our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease.

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## Controls and procedures

As filed, 1,489 characters.

### Management’s Evaluation of Disclosure Controls and Procedures

Our management, including our principal executive and financial officers, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act) as of the end of the period covered by this Form 10-Q. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that our disclosure controls and procedures were effective as of March 31, 2014 (the end of the period covered by this Form 10-Q) at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

During the three months ended March 31, 2014, there was no change in our system of internal control over financial reporting (defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) 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, 748 characters.

There have been no material changes in our risk factors as previously disclosed in “Part I, Item 1A. Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2013. Readers should carefully consider the factors discussed in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2013, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 2013 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

Filed May 7, 2014.
Source: SEC EDGAR, the filing index for accession 0001016281-14-000091. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.