# Carriage Services Inc: Form 10-Q for the period ended Sep 30, 2014

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2014-10-29
- Accepted by EDGAR: Oct 29, 2014, 16:15 ET
- Period: 2014-09-30
- Accession: 0001016281-14-000149
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628114000149/csv-2014930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628114000149/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2014-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2014-07-01 to 2014-09-30 | $54.5m | us-gaap:SalesRevenueNet |
| Revenue | 9 months, 2014-01-01 to 2014-09-30 | $166.7m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2014-07-01 to 2014-09-30 | $39.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2014-01-01 to 2014-09-30 | $115.6m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2014-07-01 to 2014-09-30 | $15.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2014-01-01 to 2014-09-30 | $51.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2014-07-01 to 2014-09-30 | $8.2m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2014-01-01 to 2014-09-30 | $27.3m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2014-07-01 to 2014-09-30 | $2.2m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2014-01-01 to 2014-09-30 | $7.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2014-07-01 to 2014-09-30 | $2.4m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2014-01-01 to 2014-09-30 | $5.9m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2014-07-01 to 2014-09-30 | $5.0m | us-gaap:NetIncomeLoss |
| Net income | 9 months, 2014-01-01 to 2014-09-30 | $10.5m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.26 | us-gaap:EarningsPerShareDiluted |
| Diluted EPS | 9 months, 2014-01-01 to 2014-09-30 | $0.56 | us-gaap:EarningsPerShareDiluted |
| Basic EPS | 3 months, 2014-07-01 to 2014-09-30 | $0.27 | us-gaap:EarningsPerShareBasic |
| Basic EPS | 9 months, 2014-01-01 to 2014-09-30 | $0.57 | us-gaap:EarningsPerShareBasic |
| Diluted shares (weighted) | 3 months, 2014-07-01 to 2014-09-30 | 18,276,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2014-01-01 to 2014-09-30 | 18,223,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 9 months, 2014-01-01 to 2014-09-30 | $27.6m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 9 months, 2014-01-01 to 2014-09-30 | $18.2m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2014-01-01 to 2014-09-30 | $1.4m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2014-09-30 | $3.0m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2014-09-30 | $34.3m | us-gaap:AssetsCurrent |
| Total assets | at 2014-09-30 | $825.7m | us-gaap:Assets |
| Current liabilities | at 2014-09-30 | $34.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2014-09-30 | $651.2m | us-gaap:Liabilities |
| Long-term debt | at 2014-09-30 | $156.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2014-09-30 | $9.7m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2014-09-30 | $174.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 66,139 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 sales businesses that sell interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. As of September 30, 2014, we operated 164 funeral homes in 27 states and 32 cemeteries in 11 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 business managers, known as “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 successful execution of a handful of local market drivers of high and sustainable operating and sales performance over long periods of time, e.g. market share, preneed property sales, average revenue per funeral contract and interment, highly motivated and skilled service and sales staff, strong entrepreneurial leadership, profit margin management and other drivers. The model and standards are the measures by which we judge the success of each business. We also implemented short-term (one-year) **Being the Best** and long-term (five years) **Good to Great** Incentive Programs that recognize and reward those Managing Partners that can achieve and sustain a high level (over 70%) of “Standards Achievement.” The potential incentives over long periods of time are in the range of compensation that independent owners of these businesses would receive. 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 and Divestitures” 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 incentive 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 customized 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.

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Our funeral volumes have increased from 24,403 in 2010 to 29,854 in 2013 (compounded annual increase of 7.0%). Our funeral operating revenue, excluding financial revenue, has increased from $124.2 million in 2010 to $153.9 million in 2013 (compounded annual increase of 7.4%). 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 $8.1 million in 2010 to $9.2 million in 2013. We experienced an increase of 3.1% in volumes and 4.7% in funeral operating revenues in the nine months ended September 30, 2014 compared to the same period of 2013, primarily due to an increase in volumes and revenues from our acquired funeral home businesses. See “Results of Operations” below for the definition of acquired businesses.

The percentage of funeral services involving cremations has increased from 43.2% for the year ended 2010 to 46.9% for the year ended 2013, and was 47.3% for the nine months ended September 30, 2014. On a same store basis, the cremation rate has risen to 47.4% for the nine months ended September 30, 2014, up from 46.4% for the comparable nine month period in 2013. The cremation rate for our acquired funeral home businesses was 46.9% for the nine months ended September 30, 2014 compared to 49.2% for the comparable nine 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 nine months ended September 30, 2013 and 2014, preneed sales of interment rights and related merchandise were approximately 49.0% and 47.4%, respectively, 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 $6.1 million, or 19.2%, of total cemetery revenues for the nine months ended September 30, 2014, down from $6.2 million, or 20.2%, of total cemetery revenues for the nine months ended September 30, 2013. Changes in the capital markets and interest rates affect this component of our cemetery revenues.

Our cemetery financial performance from 2010 through 2013 was characterized by growth of operating revenues and field-level profit margins. Cemetery operating revenue increased from $37.8 million in 2010 to $40.5 million in 2013 (compounded annual increase of 2.3%). Cemetery field-level profit margins increased from $8.9 million in 2010 to $11.7 million in 2013 (compounded annual increase of 9.4%). 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.

#### 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 Funeral Commission Income* 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. If an interest-bearing installment contract is paid in full within one year, *Preneed Cemetery Finance Charges* are reduced by any accrued finance charges related to the contract.

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 September 30, 2014, CSV RIA provided these services to two institutions, which have custody of 77% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are

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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.

Applicable state laws generally require us to deposit a specified amount (which varies from state to state, generally 50% to 100% of the 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 and Divestitures

Our growth strategy includes the execution of our Strategic Acquisition Model. We assess the strategic positioning of acquisition candidates based on the size of the business, competitive standing in the market (market share), market size, market demographics, client family revenue profile (customer preferences), barriers to entry, institutional strength of the brand, and long term volume and price trends. Acquisition candidates are prequalified using our Standards Operating Model and 4E Leadership Model to determine alignment with our operating strategy. The value of the acquisition candidates is based on local market competitive dynamic which allows for appropriate and differentiating enterprise valuations and flexibility to customize the transactions.

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. In May 2014, we completed the acquisition of six businesses from certain subsidiaries of Service Corporation International (“SCI”). We acquired four businesses in New Orleans, Louisiana, consisting of four funeral homes, one of which was a combination funeral home and cemetery, and two funeral home businesses in Alexandria, Virginia (collectively, the “SCI Acquisition”) for $54.9 million. Additionally, during the nine months ended September 30, 2014, we purchased land for approximately $2.0 million to be used for funeral home expansions. During the nine months ended September 30, 2013, we purchased land for approximately $6.0 million to be used for similar projects.

During the first quarter of 2014, we sold a cemetery in Florida which was reported as held-for-sale at December 31, 2013 for approximately $0.2 million in cash and recognized a gain of $0.9 million. During the third quarter of 2014, we sold a funeral home in Ohio and a funeral home in Kentucky for approximately $0.6 million and $1.1 million, respectively, which were reported as held-for-sale at June 30, 2014. We recognized a net gain of approximately $0.7 million on these divestitures.

#### Financial Highlights

#### Three months ended September 30, 2013 compared to three months ended September 30, 2014

Total revenue for the three months ended September 30, 2014 and 2013 was $54.5 million and $49.5 million, respectively, an increase of 10.2%. Further discussion of revenue in our funeral home and cemetery segments is presented herein under “Results of Operations”. Net income from continuing operations for the three months ended September 30, 2014 totaled $4.6 million, equal to $0.24 per diluted share, compared to net income from continuing operations of $1.9 million, equal to $0.10 per diluted share, for the three months ended September 30, 2013. The increase in net income is attributable to better performance in our funeral home segment, better management of general and administrative expenses and a discrete tax benefit. On August 1, 2014, we received notification that the Internal Revenue Service (“IRS”) completed its examination of our tax year ended December 31, 2011. As a result, we recognized a tax benefit of $1.7 million related to uncertain tax positions which is included in our tax provision for the three month period ended September 30, 2014. Additionally, we recognized a credit to interest expense of $0.6 million related to the settled portion of these uncertain tax positions.

#### Nine months ended September 30, 2013 compared to nine months ended September 30, 2014

Total revenue for the nine months ended September 30, 2014 and 2013 was $166.7 million and $160.4 million, respectively, an increase of 3.9%. Further discussion of revenue in our funeral home and cemetery segments is presented herein under “Results of Operations”. Net income from continuing operations for the nine months ended September 30, 2014 totaled $10.1 million, equal to $0.54 per diluted share, compared to net income from continuing operations of $10.9 million, equal to $0.59 per diluted share for the nine months ended September 30, 2013. Net income from continuing operations for the nine months ended September 30, 2014 included a loss of approximately $1.0 million on the early extinguishment of debt related to the Fifth Amendment to our Credit Facility in May 2014, a loss of approximately $3.8 million on the redemption of our convertible junior subordinated debentures and $1.6 million related to the accretion of the discount on our convertible subordinated notes issued in March 2014. Additionally, we recognized a gain of $1.1 million in connection with the purchase of

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a funeral home building previously leased under a capital lease. As noted above, on August 1, 2014, we recognized a tax benefit of $1.7 million related to uncertain tax positions which is included in our tax provision for the nine month period ended September 30, 2014. Additionally, we recognized a credit to interest expense of $0.6 million related to the settled portion of these uncertain tax positions.

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 September 30, 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 such measures as “Adjusted Net Income,” “Adjusted Diluted Earnings Per Share,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “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 Withdrawable Trust Income, acquisition and divestiture 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 $0.3 million and $1.0 million for the three and nine months ended September 30, 2013, respectively, and $0.7 million and $1.5 million for the three and nine months ended September 30, 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 September 30, 2013 | 2014 | For the Nine Months Ended September 30, 2013 | 2014 |
| --- | ---: | ---: | ---: | ---: |
| Net income from continuing operations, as reported | $1.9 | $4.6 | $10.9 | $10.1 |
| Special items, net of tax at federal statutory rate of 34% |  |  |  |  |
| Withdrawable trust income | 0.2 | 0.5 | 0.7 | 1.0 |
| Acquisition and divestiture expenses | 0.1 | — | 0.2 | 0.7 |
| Severance costs | 0.4 | 0.1 | 0.9 | 0.6 |
| Consulting fees | 0.1 | 0.1 | 0.3 | 0.2 |
| Other incentive compensation | — | — | — | 0.7 |
| Securities transaction expenses | 0.2 | — | 0.2 | — |
| Accretion of discount on convertible subordinated notes | — | 0.5 | — | 1.1 |
| Costs related to credit facility | — | — | 0.2 | 0.6 |
| Loss on redemption of convertible junior subordinated debentures | — | — | — | 2.5 |
| Gain on asset purchase | — | — | — | (0.7) |
| Other special items | — | — | (0.5) | 0.5 |
| Tax adjustment from prior period | — |  | 0.6 | — |
| Adjusted (Non-GAAP) net income | $2.9 | $5.8 | $13.5 | $17.3 |

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### 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.

### RESULTS OF OPERATIONS

The following is a discussion of our results of continuing operations for the three and nine months ended September 30, 2013 and 2014. The term “same store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 2010 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2009 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.

*Funeral Home Segment.* The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the three and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2014.

#### Three months ended September 30, 2013 compared to three months ended September 30, 2014 (dollars in thousands):

| Revenues: | Three Months Ended September 30, 2013 | 2014 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $27,525 | $28,234 | $709 | 2.6% |
| Acquired operating revenue | 7,513 | 11,254 | 3,741 | 49.8% |
| Preneed funeral insurance commissions | 446 | 509 | 63 | 14.1% |
| Preneed funeral trust earnings | 1,648 | 1,773 | 125 | 7.6% |
| Total | $37,132 | $41,770 | $4,638 | 12.5% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $9,970 | $10,235 | $265 | 2.7% |
| Acquired operating profit | 2,098 | 3,603 | 1,505 | 71.7% |
| Preneed funeral insurance commissions | 183 | 249 | 66 | 36.1% |
| Preneed funeral trust earnings | 1,637 | 1,753 | 116 | 7.1% |
| Total | $13,888 | $15,840 | $1,952 | 14.1% |

Funeral home same store operating revenues for the three months ended September 30, 2014 increased $0.7 million, or 2.6%, when compared to the three months ended September 30, 2013. This increase was due to a 2.9% increase in the average revenue per contract to $5,455, offset by a 0.3% decrease in same store operating contracts to 5,427. 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 increased $147, or 2.9% to $5,203 in

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the three months ended September 30, 2014. The number of traditional burial contracts decreased 2.1% to 2,391, while the average revenue per burial contract increased 3.4% to $8,631. The cremation rate for same store businesses increased from 46.9% in the three months ended September 30, 2013 to 48.3% in the same period of 2014 and the number of cremation contracts increased 2.6% to 2,620. The average revenue per same store cremation contract increased 5.0% to $3,099, as cremations with services increased from 30.8% of total cremation contracts in the three months ended September 30, 2013 to 33.2% in the same period 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 7.7% of the total number of contracts in the third quarter of 2014, decreased from $2,088 in 2013 to $2,053 in 2014.

Same store operating profit for the three months ended September 30, 2014 increased $0.3 million, or 2.7%, from the comparable three months of 2013. The increase in operating profit is primarily due to the increase in revenue, offset by increases in merchandise expenses and salaries and benefits. Same store operating profit, as a percentage of funeral same store operating revenue, remained relatively flat at approximately 36.2% in both periods.

Funeral home acquired revenues for the three months ended September 30, 2014 increased $3.7 million, or 49.8%, when compared to the three months ended September 30, 2013, as we experienced a 42.5% increase in the number of contracts, and an increase of 5.1% in the average revenue per contract to $5,328 for those acquired operations. Excluding funeral trust earnings, the average revenue per contract increased 5.1% to $5,196 in 2014. The number of traditional burial contracts increased 39.9%, and the average revenue per burial contract increased 5.3% to $8,319. The cremation rate for the acquired businesses was 48.1% in the third quarter of 2013 and 2014. The average revenue per cremation contract increased 9.7% to $3,377 for the third quarter of 2014 and the number of cremation contracts increased from 731 in the three months ended September 30, 2013 to 1,041 in the same period of 2014, a 42.4% increase. Cremations with services decreased from 34.5% in the three months ended September 30, 2013 to 33.8% for the three months ended September 30, 2014. The increase in the average revenue per contract for acquired operations and the decline in the cremation rate is because the newly acquired businesses serve primarily traditional burial families.

Acquired operating profit for the three months ended September 30, 2014 increased $1.5 million, or 71.7%, when compared to the same period of 2013 and, as a percentage of revenue from acquired businesses, was 32.0% for the the three months ended September 30, 2014 compared to 27.9% for the same period 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.

The two categories of financial revenue (insurance commissions and trust earnings on matured preneed contracts) on a combined basis increased 9.0% in revenue and 10.0% in operating profit in the three months ended September 30, 2014 as compared to the three months ended September 30, 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.

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#### Nine months ended September 30, 2013 compared to nine months ended September 30, 2014 (dollars in thousands):

| Revenues: | Nine Months Ended September 30, 2013 | 2014 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $90,628 | $88,703 | $(1,925) | (2.1)% |
| Acquired operating revenue | 24,780 | 32,089 | 7,309 | 29.5% |
| Preneed funeral insurance commissions | 1,435 | 1,636 | 201 | 14.0% |
| Preneed funeral trust earnings | 5,584 | 5,498 | (86) | (1.5)% |
| Total | $122,427 | $127,926 | $5,499 | 4.5% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $34,969 | $32,706 | $(2,263) | (6.5)% |
| Acquired operating profit | 7,743 | 11,007 | 3,264 | 42.2% |
| Preneed funeral insurance commissions | 463 | 848 | 385 | 83.2% |
| Preneed funeral trust earnings | 5,545 | 5,459 | (86) | (1.6)% |
| Total | $48,720 | $50,020 | $1,300 | 2.7% |

Funeral home same store operating revenues for the nine months ended September 30, 2014 decreased $1.9 million, or 2.1%, when compared to the nine months ended September 30, 2013. Same store operating contracts decreased 2.7% to 17,003 in the nine months ended September 30, 2014, while the average revenue per contract increased 0.9% to $5,475 in the same period. 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 increased $29 to $5,217 for the nine months ended September 30, 2014. The number of traditional burial contracts decreased 5.6% to 7,646, while the average revenue per burial contract increased 3.0% to $8,571. The cremation rate for same store businesses increased from 46.4% in the nine months ended September 30, 2013 to 47.4% in the same period of 2014, while the number of cremation contracts decreased 0.5% to 8,063. The average revenue per same store cremation contract increased 1.5% to $3,074 as cremations with services increased slightly from 32.3% of total cremation contracts in the nine months ended September 30, 2013 to 32.6% in the same period 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 7.6% of the total number of contracts in 2014, decreased 5.6% to $2,150.

Same store operating profit for the nine months ended September 30, 2014 decreased $2.3 million, or 6.5%, from the comparable nine months of 2013 and, as a percentage of funeral same store operating revenue, decreased from 38.6% in 2013 to 36.9% in comparable period of 2014. The decrease in operating profit is primarily due to fixed operating expenses that did not decrease in proportion to the decrease in revenue in the nine months ended September 30, 2014. In addition, we had approximately $0.4 million non-recurring favorable adjustments to operating expenses in the nine months ended September 30, 2013 that did not occur in same period of 2014.

Funeral home acquired revenues for the nine months ended September 30, 2014 increased $7.3 million, or 29.5%, when compared to the nine months ended September 30, 2013, as we experienced a 23.1% increase in the number of contracts, and an increase in the average revenue per contract of 5.7%, to $5,332. Excluding funeral trust earnings, the average revenue per contract increased 5.2% to $5,208. The number of traditional burial contracts increased 28.0%, and the average revenue per burial contract increased 4.9% to $8,203. The cremation rate for the acquired businesses was 49.2% in the nine months ended September 30, 2013 compared to 46.9% for the nine months ended September 30, 2014. The average revenue per cremation contract increased 5.3% to $3,242 and the number of cremation contracts increased 17.5% to 2,890. The increase in the average revenue per contract for acquired operations and the decline in the cremation rate is because the newly acquired businesses serve primarily traditional burial families. Cremations with services decreased from 34.9% in the nine months ended September 30, 2013 to 34.3% for the nine months ended September 30, 2014.

Acquired operating profit for the nine months ended September 30, 2014 increased $3.3 million, or 42.2%, from the comparable nine months of 2013 and, as a percentage of revenue from acquired businesses, was 31.2% for the nine months ended September 30, 2013 compared to 34.3% in the same period of 2014. Salaries and benefits of acquired operations, as a percentage of revenue, are generally higher as a percentage of revenue than same store 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 1.6% in revenue in the nine months ended September 30, 2014 primarily due to higher preneed insurance commissions. Operating profit for the two categories of financial revenue, on a combined basis, increased 5.0% as a result of lower preneed commission costs and preneed promotional expenses. 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 and nine months ended September 30, 2013 compared to the three and nine months ended September 30, 2014.

#### Three months ended September 30, 2013 compared to three months ended September 30, 2014 (dollars in thousands):

| Revenues: | Three Months Ended September 30, 2013 | 2014 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $9,968 | $9,539 | $(429) | (4.3)% |
| Acquired operating revenue | 89 | 645 | 556 | 624.7% |
| Cemetery trust earnings | 1,940 | 2,212 | 272 | 14.0% |
| Preneed cemetery finance charges | 372 | 383 | 11 | 3.0% |
| Total | $12,369 | $12,779 | $410 | 3.3% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $2,724 | $2,148 | $(576) | (21.1)% |
| Acquired operating profit | 13 | 114 | 101 | 776.9% |
| Cemetery trust earnings | 1,903 | 2,146 | 243 | 12.8% |
| Preneed cemetery finance charges | 372 | 383 | 11 | 3.0% |
| Total | $5,012 | $4,791 | $(221) | (4.4)% |

Cemetery same store operating revenues for the three months ended September 30, 2014 decreased $0.4 million, or 4.3%, from $10.0 million for the three months ended September 30, 2013 to $9.5 million for the three months ended September 30, 2014. Preneed property sales decreased $0.5 million, or 9.7%, as we experienced a 4.0% decrease in the number of preened interment rights (property) sold. Additionally, the average price per interment decreased 5.8% to $2,775 in the third quarter of 2014. The percentage of those preneed 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 92.0% in the three months ended September 30, 2013 to 89.1% in the three months ended September 30, 2014. Revenue from deliveries of preneed merchandise and services decreased 10.5% to $0.9 million for the three months ended September 30, 2014. Same store at-need revenue increased $0.2 million, or 4.8%, and the number of at-need contracts increased 1.8% in the three months ended September 30, 2014.

Cemetery same store operating profit for the three months ended September 30, 2014 decreased $0.6 million, or 21.1%. The decrease in cemetery same store operating profit was a result of the decrease in revenue coupled with an increase in bad debt expense. As a percentage of revenues, cemetery same store operating profit decreased from 27.3% in the third quarter of 2013 to 22.5% in the third quarter of 2014.

Cemetery acquired revenue and acquired operating profit increased in 2014 primarily due to the cemetery acquired from SCI in May 2014.

The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Total trust earnings for the three months ended September 30, 2014 increased 14.0% when compared to the three months ended September 30, 2013. Earnings from perpetual care trust funds totaled approximately $1.4 million and $1.7 million for the three months ended September 30, 2013 and 2014, respectively. Trust earnings recognized upon the delivery of merchandise and service contracts remained flat at $0.3 million for the three months ended September 30, 2014 and 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 3.0%.

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#### Nine months ended September 30, 2013 compared to nine months ended September 30, 2014 (dollars in thousands):

| Revenues: | Nine Months Ended September 30, 2013 | 2014 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $30,486 | $30,633 | $147 | 0.5% |
| Acquired operating revenue | 232 | 1,034 | 802 | 345.7% |
| Cemetery trust earnings | 6,220 | 6,072 | (148) | (2.4)% |
| Preneed cemetery finance charges | 1,070 | 1,040 | (30) | (2.8)% |
| Total | $38,008 | $38,779 | $771 | 2.0% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $9,073 | $8,555 | $(518) | (5.7)% |
| Acquired operating (loss) profit | (33) | 239 | 272 | 824.2% |
| Cemetery trust earnings | 6,089 | 5,943 | (146) | (2.4)% |
| Preneed cemetery finance charges | 1,070 | 1,040 | (30) | (2.8)% |
| Total | $16,199 | $15,777 | $(422) | (2.6)% |

Cemetery same store operating revenues for the nine months ended September 30, 2014 increased $0.1 million, or 0.5%, when compared to the nine months ended September 30, 2013. Preneed property sales decreased $0.5 million, or 3.1% to $14.6 million for the nine months ended September 30, 2014 as we experienced a 0.3% decrease in the number of preened interment rights (property) sold. Additionally, the average price per interment decreased 1.2% to $2,788 in the nine months ended September 30, 2014. 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 92.9% in the nine months ended September 30, 2013 to 90.8% in the nine months ended September 30, 2014. Revenue from deliveries of preneed merchandise and services declined $0.2 million, or 7.6% in the nine months ended September 30, 2014. Same store at-need revenue increased $0.9 million, or 7.2%, and the number of at-need contracts increased 0.7% in the nine months ended September 30, 2014.

Cemetery same store operating profit decreased $0.5 million, or 5.7%, from $9.1 million for the nine months ended September 30, 2013 to $8.6 million for the nine months ended September 30, 2014. The decrease in cemetery same store operating profit was due primarily to an increase in bad debt expense. As a percentage of revenues, cemetery same store operating profit was 29.8% and 27.9% for the nine months ended September 30, 2013 and 2014, respectively.

Cemetery acquired revenue and acquired operating profit increased in 2014 primarily due to the cemetery acquired from SCI in May 2014.

The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Total trust earnings for the nine months ended September 30, 2014 decreased 2.4% when compared to the nine months ended September 30, 2013. Earnings from perpetual care trust funds totaled $4.5 million for the nine months ended September 30, 2013 compared to $4.4 million for the nine months ended September 30, 2014, a decrease of $0.1 million, or 3.1%. Trust earnings recognized upon the delivery of merchandise and service contracts remained flat at $1.0 million for the nine months ended September 30, 2014 and 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 decreased 2.8%.

*Regional and Unallocated Funeral and Cemetery Costs*. Regional and unallocated funeral and cemetery costs for the three months ended September 30, 2014 increased $0.2 million, or 6.6%, compared to the three months ended September 30, 2013 primarily due to a $0.4 million increase in incentive compensation for field management and their employees offset by a $0.2 million decrease in regional management salaries and benefits. Regional and unallocated funeral and cemetery costs for the nine months ended September 30, 2014 decreased $0.8 million, or 10.5%, compared to the nine months ended September 30, 2013 primarily due to a $0.5 million decrease in incentive compensation for field management and their employees, a $0.4 million decrease in regional management salaries and benefits, a $0.2 million decrease in non-recurring items such as severance costs and natural disaster costs offset by a $0.3 million increase in expenses associated with regional training.

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*General and Administrative.* General and administrative expenses totaled $6.6 million for the three months ended September 30, 2014, a decrease of $0.3 million, or 4.5%, compared to the three months ended September 30, 2013 primarily due to a $0.6 million decrease in salaries and benefits, a $0.5 million decrease in severance costs, a $0.2 million decrease in securities transaction expenses and a $0.1 million decrease in divestiture and acquisition expenses offset by a $0.9 million increase in incentive compensation and a $0.2 million increase in stock-based compensation. General and administrative expenses totaled $22.7 million for the nine months ended September 30, 2014, an increase of $2.5 million, or 12.4%, compared to the nine months ended September 30, 2013 primarily due to an increase of $1.5 million in incentive compensation, a $1.4 million increase in stock-based compensation, a $0.7 million increase in acquisition and divestiture expenses and a $0.2 million increase in public company costs offset by a $0.8 million decrease in salaries and benefits, a $0.3 million decrease in severance costs and a $0.2 million decrease in securities transaction expenses.

*Interest Expense.* Interest expense, net was $2.2 million for the three months ended September 30, 2014, a decrease of approximately $1.0 million, or 32.3%, compared to the three months ended September 30, 2013. Interest expense decreased $0.5 million as a result of our new convertible subordinated notes issued in May 2014 which have a fixed interest rate of 2.75% compared to our junior convertible subordinated notes which had an interest rate of 7%. In addition, we recognized a $0.6 million credit in the third quarter of 2014 related to the settled portion of uncertain tax positions as a result of the finalization of the IRS audit for our 2011 tax year. These decreases were offset by a $0.2 million increase in interest expense related to our Credit Facility due to higher revolving balances in the three months ended September 30, 2014 compared to the three months ended September 30, 2013.

Interest expense, net was $7.7 million for the nine months ended September 30, 2014, a decrease of $1.8 million, or 18.7%, compared to the nine months ended September 30, 2013. Interest expense decreased $0.3 million as a result of our new convertible subordinated notes issued in May 2014. Interest expense related to our Credit Facility decreased $0.4 million as a result of the Third Amendment to the Credit Facility, completed in the second quarter of 2013, which lowered our interest rate by 50 basis points. Additionally, we wrote-off $0.4 million of unamortized debt issuance costs related to the Third Amendment which is reflected in interest expense in the nine months ended September 30, 2013. Interest expense related to uncertain tax positions decreased $0.7 million due primarily to the $0.6 million credit recognized in the third quarter of 2014 related to the settled portion of uncertain tax positions as a result of the finalization of the IRS audit for our 2011 tax year.

*Accretion of Discount on Convertible Subordinated Notes.* For the three and nine months ended September 30, 2014, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $0.8 million and $1.6 million, respectively. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%.

*Loss on Early Extinguishment of Debt.* In April 2014, we entered into the Fifth Amendment to our Credit Facility. As a result, we recognized a loss of $1.0 million to write-off the related unamortized deferred loan costs.

*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 date. As of April 16, 2014, all of the TIDES had been redeemed. For the nine months ended September 30, 2014, we recognized a total loss of $3.8 million 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 nine months ended September 30, 2014, we recognized a gain of $1.1 million in connection with the purchase of a funeral home building previously leased under a capital lease.

*Income Taxes.* We recorded income taxes at the estimated effective rate of 41.5% for the nine months ended September 30, 2014. We have approximately $44.2 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 September 30, 2014, the valuation allowance totaled $0.3 million. During the third quarter of 2014, we received notification that the IRS examination of our tax year ended December 31, 2011 was completed. As such, we reduced previously recorded liabilities related to uncertain tax positions and recognized a benefit of $1.7 million. Additionally, we recognized a credit to interest expense of $0.6 million related to the settled portion of the uncertain tax positions.

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### LIQUIDITY AND CAPITAL RESOURCES

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 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.

We intend to use cash on hand and borrowings 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 borrowings 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.

#### Cash Flows

We began 2014 with $1.4 million in cash and other liquid investments and ended the third quarter with $3.0 million in cash. As of September 30, 2014, we had borrowings of $42.3 million outstanding on our revolving credit facility.

The following table sets forth the elements of cash flow for the nine months ended September 30, 2013 and September 30, 2014 (in millions):

|  | For the Nine Months Ended September 30, 2013 | 2014 |
| --- | ---: | ---: |
| Cash at January 1st | $1.7 | $1.4 |
| Cash flow from operating activities | 31.2 | 27.6 |
| Acquisitions and land for new construction | (6.0) | (56.9) |
| Net proceeds from the sale of businesses and other assets | 8.3 | 1.9 |
| Growth capital expenditures | (2.8) | (12.9) |
| Maintenance capital expenditures | (4.6) | (5.3) |
| Net (payments) borrowings on our revolving credit facility, term loan and long-term debt obligations | (26.6) | 10.4 |
| Proceeds from issuance of convertible subordinated notes | — | 143.7 |
| Payment of debt issuance costs related the convertible subordinated notes | — | (4.7) |
| Redemption of convertible junior subordinated debentures | — | (89.7) |
| Payments for performance-based stock awards | — | (16.2) |
| Dividends on common stock | (1.4) | (1.4) |
| Excess tax benefit of equity compensation | 1.0 | 4.6 |
| Payment of loan origination costs related to the credit facility | (0.6) | (0.8) |
| Other financing costs | 0.7 | 1.3 |
| Cash at September 30th | $0.9 | $3.0 |

For the nine months ended September 30, 2014, cash provided by operating activities was $27.6 million compared to cash provided by operating activities of $31.2 million for the nine months ended September 30, 2013. The decrease was primarily due to a $4.8 million decrease in net income. The decrease due to working capital changes included a $2.7 million increase in preneed receivables, offset by $1.0 million increase in accounts payable and accrued liabilities. Refer to Part I, Item 2. *Management's Discussion and Analysis of Financial Condition and Results of Operations - Overview - Financial Highlights* for a discussion of our operations.

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Our investing activities resulted in a net cash outflow of $73.1 million for the nine months ended September 30, 2014 compared to $5.2 million for the nine months ended September 30, 2013. The increase was due to the SCI Acquisition completed in May 2014 for $54.9 million. Additionally we acquired land for approximately $2.0 million in the nine months ended September 30, 2014 for funeral home expansion projects. We acquired land for approximately $6.0 million in the nine months ended September 30, 2013 for similar projects. For the nine months ended September 30, 2014, we sold businesses for approximately $1.9 million compared to net proceeds of $8.3 million for businesses sold in the nine months ended September 30, 2013.

For the nine months ended September 30, 2014, capital expenditures totaled $18.2 million compared to $7.4 million for the nine months ended September 30, 2013. Maintenance capital expenditures were $5.3 million in the nine months ended September 30, 2014 compared to $4.6 million in the nine months ended September 30, 2013. Growth capital expenditures were $12.9 million in the nine months ended September 30, 2014 compared to $2.8 million in the nine months ended September 30, 2013. The increase in growth capital expenditures was due primarily to the purchase of three buildings for approximately $7.6 million which we had previously leased. Additionally, we incurred construction costs of approximately $2.8 million related to three new funeral homes.

Our financing activities resulted in a net cash inflow of $47.0 million for the nine months ended September 30, 2014 compared to a net cash outflow of $26.9 million for the nine months ended September 30, 2013. During the nine months ended September 30, 2014, we had gross proceeds of $143.75 million from the issuance of our convertible subordinated notes in March 2014. We paid transaction costs of approximately $4.7 million related to the issuance of these notes. In connection with the issuance of the notes, we paid $89.7 million in principal to redeem our outstanding convertible junior subordinated debentures. During the nine months ended September 30, 2014, we had net borrowings on our revolving line of credit of $5.4 million compared to net payments of $18.7 million in the nine months ended September 30, 2013. In connection with the Fifth Amendment to our Credit Facility completed in the second quarter of 2014, our term loan increased $11.0 million, offset by payments of $5.3 million during the nine months ended September 30, 2014. We paid approximately $0.8 million in loan origination costs related to the Fifth Amendment to the Credit Facility. Additionally, during the nine months ended September 30, 2014, we paid approximately $16.2 million related to performance-based stock awards and recognized $4.6 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 September 2, 2014 to record holders of our common stock as of August 15, 2014. For the nine months ended September 30, 2014, we paid approximately $1.4 million in dividends. 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 September 30, 2014, we had a $325 million credit facility with Bank of America, N.A. as the Administrative Agent comprised of a $200 million revolving credit facility and a $125 million term loan. The Credit Facility also contains an accordion provision to borrow up to an additional $50 million in revolving loans, subject to certain conditions. The Credit Facility is set to mature on March 31, 2019 and is collateralized by all personal property and funeral home real property in certain states. As of September 30, 2014, we had $42.3 million drawn under the revolving credit facility and $122.7 million was outstanding under the term loan. No letters of credit were issued and outstanding under the Credit Facility at September 30, 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 September 30, 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 and nine months ended September 30, 2014 was 2.9% and 2.8%, respectively.

The outstanding principal of our long-term debt and capital lease obligations at September 30, 2014 totaled $127.3 million and consisted of $122.7 million under our term loan and $4.7 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.

On April 14, 2014, we entered into a fifth amendment to our Credit Facility (the “Fifth Amendment”), which provided for an increase in our revolving credit facility from $125 million to $200 million and new funding under our term loan whereby $125 million became outstanding upon effectiveness of the Fifth Amendment. The Fifth Amendment became effective upon the closing of the SCI Acquisition on May 15, 2014. Borrowings under the term loan facility are subject to installment payments of

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7.5% of the principal amount in the first two years following the effective date, 10.0% for the third and fourth years following the effective date and 12.5% per year thereafter with the balance payable upon maturity on March 31, 2019. Installment payments are made quarterly beginning September 30, 2014. The Fifth Amendment also modified our 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. In connection with the Fifth Amendment, we recognized a loss of $1.0 million to write-off the related unamortized deferred loan costs.

We were in compliance with the covenants contained in the Credit Facility as of September 30, 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 March 30, 2015 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 September 30, 2014, the leverage ratio was 2.83 to 1.00 and the fixed charge coverage ratio was 2.60 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.

#### 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 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 Notes bear interest at 2.75% per year. 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 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.

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.

We received gross proceeds of $143.75 million and paid transactions costs of approximately $4.7 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.

At September 30, 2014, the carrying amount of the equity component was approximately $18.0 million. At September 30, 2014, the principal amount of the liability component was $143.75 million and the net carrying amount was $113.7 million. The unamortized discount of $30.0 million as of September 30, 2014 is being amortized over the remaining seven year term of the notes.

We recognized contractual coupon interest expense of $1.0 million and $2.1 million, respectively, and interest expense of $0.8 million and $1.6 million, respectively, related to the accretion of the debt discount for the three and nine months ended September 30, 2014. The effective interest rate on the liability component for the three and nine months ended September 30, 2014 was 6.75% per year. Additionally, we recognized amortization expense related to the debt issuance costs of $0.1 million and $0.3 million, respectively, for the three and nine months ended September 30, 2014.

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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 debenture 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. In the first quarter of 2014, we used a portion of the net proceeds from the issuance of the Notes to redeem the convertible junior subordinated debentures for approximately $61.9 million in principal amount of our existing convertible junior subordinated debentures and approximately $0.9 million associated with the call premium. In April 2014, the remaining TIDES principal balance of $27.9 million had been redeemed.

### 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, 3,845 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 September 30, 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 September 30, 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 1.54% 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 September 30, 2014, we had outstanding borrowings of $42.3 million under our $200 million revolving credit facility and $122.7 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 September 30, 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 $1.6 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.

Our convertible subordinated notes bear interest at a fixed rate of 2.75% per year. The notes do not contain a call feature. The fair value of these notes is approximately $151.0 million based on the last traded or broker quoted price. 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. Increases in market interest rates may cause the fair value of these debt instruments to decrease but such changes will not affect our interest costs.

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## Controls and procedures

As filed, 1,506 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 September 30, 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 and nine months ended September 30, 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 Oct 29, 2014.
Source: SEC EDGAR, the filing index for accession 0001016281-14-000149. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.