# Carriage Services Inc: Form 10-Q for the period ended Mar 31, 2016

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2016-04-26
- Accepted by EDGAR: Apr 25, 2016, 19:15 ET
- Period: 2016-03-31
- Accession: 0001016281-16-000199
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628116000199/csv-2016331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628116000199/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-01-01 to 2016-03-31 | $63.3m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-01-01 to 2016-03-31 | $42.0m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-01-01 to 2016-03-31 | $21.3m | us-gaap:GrossProfit |
| Operating income | 3 months, 2016-01-01 to 2016-03-31 | $11.7m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-01-01 to 2016-03-31 | $2.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-01-01 to 2016-03-31 | $3.0m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-01-01 to 2016-03-31 | $4.6m | us-gaap:NetIncomeLoss |
| Diluted shares (weighted) | 3 months, 2016-01-01 to 2016-03-31 | 16,650,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2016-01-01 to 2016-03-31 | $9.7m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2016-01-01 to 2016-03-31 | $3.6m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2016-01-01 to 2016-03-31 | $415.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2016-03-31 | $871.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-03-31 | $33.2m | us-gaap:AssetsCurrent |
| Total assets | at 2016-03-31 | $827.2m | us-gaap:Assets |
| Current liabilities | at 2016-03-31 | $35.9m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-03-31 | $664.5m | us-gaap:Liabilities |
| Long-term debt | at 2016-03-31 | $192.0m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-03-31 | $12.3m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-03-31 | $162.7m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 37,215 characters.

### OVERVIEW

#### General

We operate in two business segments: funeral home operations, which currently account for approximately 77% of our revenues, and cemetery operations, which account for approximately 23% 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. We mainly serve suburban and rural markets, where we primarily compete with smaller, independent operators and believe we are a market leader (first or second) in most of our markets. We provide funeral and cemetery services and products on both an “at-need” (time of death) and “preneed” (planned prior to death) basis. At March 31, 2016, we operated 167 funeral homes in 27 states and 32 cemeteries in 11 states within the United States.

Our business strategy is based on strong, local leadership and entrepreneurial principles that we believe drive market share, revenue growth, and profitability in our local markets. We believe Carriage has the most innovative and transparent operating and reporting processes in the deathcare industry, which we are able to achieve through a decentralized, high-performance cultural operating framework linked with incentive compensation programs that attract top-quality industry talent at all levels.

We are defined by our Mission Statement which states that “we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry” and our Guiding Principles which state our core values, which are comprised of:

- honesty, integrity and quality in all that we do;
- hard work, pride of accomplishment and shared success through employee ownership;
- belief in the power of people through individual initiative and teamwork;
- outstanding service and profitability go hand-in-hand; and
- growth of the Company is driven by decentralization and partnership.

Our five Guiding Principles collectively embody our “**Being The Best”** high-performance cultural, operating framework. Our general operations and business strategy are built upon the execution of the following three models:

- Standards Operating Model;
- 4E Leadership Model; and
- Strategic Acquisition Model.

For additional information regarding Carriage, our High Performance Culture and three models, please see Item 1, “Business–Business Strategy” in our Annual Report on Form 10-K for the year ended December 31, 2015.

### Standards Operating Model

Our Standards Operating Model eliminated the use of financial budgets which freed up enormous amounts of time to focus and work on growing each local business de-centrally and improving the quality and skills of the staff. Instead of the budget and control model, our Standards Operating Model and the underlying standards which we refer to as “**Being The Best,”** focus on market share, people, and operating and financial metrics that drive long-term, sustainable revenue growth and earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our local, personal service, high-value business. Standards Achievement is the measure by which we judge the success of each business. Our Standards Operating Model aligns our financial incentives for Managing Partners of each business with 4E Leadership skills and their teams who consistently achieve a high level of standards. Our Standards Operating Model is not designed to produce maximum short-term earnings because Carriage does not believe such performance is sustainable and will ultimately stress the business, which very often leads to declining market share, revenues and earnings.

### 4E Leadership Model

Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high-performance culture: *Energy* to get the job done; the ability to *Energize* others; the *Edge* necessary to make difficult decisions; and the ability to *Execute* and produce results. To achieve a high level of standards in a business year after year, we require “A

- 25 -

Players” in charge that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive teams locally that produce results.

### Strategic Acquisition Model

Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. Both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue and earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic ranking criteria to assess acquisition candidates. As we execute this strategy over time, we will acquire larger, higher margin strategic businesses.

Our belief in our Mission Statement and Guiding Principles that define us and proper execution of the three models that define our strategy have given us the competitive advantage in any market in which we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure or additional fixed regional and corporate overhead. This competitive advantage is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin. Carriage’s deep understanding of each market landscape and our historical, successful competition in individual local markets more than reasonably ensures that we are promoting the interests of the consumer and supporting unfettered markets which, in turn, results in better pricing and more choices for the consumer.

### OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenues, will be consistent from year to year.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). Our critical accounting policies are discussed in MD&A in our Annual Report on Form 10-K for the year ended December 31, 2015.

### THREE MONTHS ENDED MARCH 31, 2016 COMPARED TO MARCH 31, 2015

### Financial Highlights

Total revenue for the three months ended March 31, 2016 was $63.3 million compared to $63.2 million for the three months ended March 31, 2015, an increase of approximately $0.1 million, or 0.1%. Operating income decreased $2.9 million, or 19.7%, while our total field margins improved to 43.7% in the three months ended March 31, 2016 from 43.5% in the three months ended March 31, 2015. Further discussion of revenue and operating profit for our funeral home and cemetery segments is presented herein under “Results of Operations.” Net income for the three months ended March 31, 2016 decreased $1.8 million to $4.6 million, equal to $0.27 per diluted share, compared to net income of $6.4 million, equal to $0.34 per diluted share, for the three months ended March 31, 2015. Explanations of the financial highlights are discussed below.

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, 2016. 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 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” and “Total Field EBITDA”. These financial measurements are defined as 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 define Special Items as amounts included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations.

- 26 -

The following is a discussion of our results of operations for the three months ended March 31, 2016 compared to the same periods of 2015. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2012 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2011 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.

### Results of Operations

*Funeral Home Segment.* The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the three months ended March 31, 2015 compared to three months ended March 31, 2016 (dollars in thousands):

| Revenues: | Three Months Ended March 31, 2015 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $38,991 | $37,237 | $(1,754) | (4.5)% |
| Acquired operating revenue | $8,593 | $9,677 | 1,084 | 12.6% |
| Preneed funeral insurance commissions | 355 | 421 | 66 | 18.6% |
| Preneed funeral trust earnings | 2,198 | 1,967 | (231) | (10.5)% |
| Total | $50,137 | $49,302 | $(835) | (1.7)% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $15,898 | $15,152 | $(746) | (4.7)% |
| Acquired operating profit | $3,553 | $4,172 | 619 | 17.4% |
| Preneed funeral insurance commissions | 91 | 256 | 165 | 181.3% |
| Preneed funeral trust earnings | 2,180 | 1,941 | (239) | (11.0)% |
| Total | $21,722 | $21,521 | $(201) | (0.9)% |

Funeral home same store operating revenues for the three months ended March 31, 2016 decreased $1.8 million, or 4.5%, when compared to the three months ended March 31, 2015. The decrease was due primarily to a 5.4% decrease in same store contract volumes to 7,102, while the average revenue per contract increased slightly by $25 to $5,443. 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 $49 to $5,243 in the three months ended March 31, 2016. The average revenue per burial contract increased 2.4% to $8,807, while the number of burial contracts decreased 8.8% to 2,904. The average revenue per same store cremation contract remained flat at $3,237 primarily due to a decrease of 240 basis points in cremations with services which typically generate higher average revenue per contract than direct cremations.

The burial rate decreased 150 basis points to 40.9%, and the cremation rate increased 190 basis points to 51.8% for the three months ended March 31, 2016. 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 7.3% of the total number of contracts in the three months ended March 31, 2016, decreased 10.2% to $519.

Same store operating profit for the three months ended March 31, 2016 decreased $0.7 million, or 4.7%, when compared to the three months ended March 31, 2015. This decrease is primarily a result of the decrease in revenue which was offset by a decrease of $0.8 million, or 5.3% in controllable expenses for the three months ended March 31, 2016 when compared to the same period in 2015. Those expenses with a significant decreases include $0.4 million of salaries and benefits, $0.3 million of facilities and ground expenses and $0.2 million of bad debt. These decreases were offset by an increase of approximately $0.1 million in general liability and other insurance expenses.

Funeral home acquired revenues for the three months ended March 31, 2016 increased $1.1 million, or 12.6%, when compared to the three months ended March 31, 2015 as we experienced an 8.6% increase in the total number of contracts to 1,559 and a 3.7% increase in the average revenue per contract to $6,410 for those acquired locations. 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 $223 to $6,207 in the three months ended March 31, 2016. The first quarter of 2016 includes the full effect of our acquisitions made in 2015. Our average revenue per contract for burial contracts increased 8.4% to $9,304. Our average revenue per cremation contract increased by 9.0% to $4,100 due to an

- 27 -

increase in cremations with services to 46.7% in the three months ended March 31, 2016 from 42.9% in the same period of 2015. The average revenue per cremation contract continues to increase as we expand our cremation memorialization product and service offerings.

Acquired operating profit for the three months ended March 31, 2016 increased $0.6 million, or 17.4%, from the three months ended March 31, 2015, and as a percentage of revenue from acquired businesses, increased to 43.1% in the three months ended March 31, 2016 compared to 41.3% in the same period of 2015. The increase in operating profit was primarily due to better performance from the acquisition of certain funeral homes from Service Corporation International in May 2014 (the “SCI Acquisition”), the full effect of our acquisition of two funeral home businesses in 2015 and better management of salaries and benefits (the largest controllable expense) as these acquired locations are integrated into our Standards Operating Model. The SCI Acquisition and our two funeral home acquisitions in 2015 (which comprises approximately one-quarter of our acquired portfolio), accounted for approximately half of our total acquired operating revenue and operating profit in the three months ended March 31, 2016.

The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings on matured preneed contracts. Preneed funeral commission revenue increased approximately $0.1 million, or 18.6% for the three months ended March 31, 2016 compared to the same period of 2015. Preneed funeral commission revenue is deferred for one year after the preneed funeral contracts are sold. In the first quarter of 2015, we sold 277 more preneed funeral contracts than in the same period of the previous year. Preneed funeral trust earnings decreased $0.2 million, or 10.5%, in the three months ended March 31, 2016 as compared to the same period of 2015. Trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Operating profit for our two categories of financial revenue, on a combined basis, decreased 3.3% in the three months ended March 31, 2016 due primarily to the decrease in preneed funeral trust revenue.

*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, 2015 compared to three months ended March 31, 2016 (dollars in thousands):

| Revenues: | Three Months Ended March 31, 2015 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $10,268 | $11,075 | $807 | 7.9% |
| Acquired operating revenue | 822 | 766 | (56) | (6.8)% |
| Cemetery trust earnings | 1,641 | 1,766 | 125 | 7.6% |
| Preneed cemetery finance charges | 385 | 422 | 37 | 9.6% |
| Total | $13,116 | $14,029 | $913 | 7.0% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $3,550 | $3,843 | $293 | 8.3% |
| Acquired operating profit | 300 | 221 | (79) | (26.3)% |
| Cemetery trust earnings | 1,579 | 1,681 | 102 | 6.5% |
| Preneed cemetery finance charges | 385 | 422 | 37 | 9.6% |
| Total | $5,814 | $6,167 | $353 | 6.1% |

Cemetery same store operating revenues for the three months ended March 31, 2016 increased $0.8 million, or 7.9%, when compared to the three months ended March 31, 2015. Approximately 59.0% of our same store operating revenues for the three months ended March 31, 2016 were related to preneed sales of interment rights and related merchandise and services. Preneed property revenue increased $0.4 million, or 8.2%, as we experienced a 5.0% increase in the average price per interment to $2,709, while the number of preneed interment rights (property) sold decreased 4.2% to 1,930 in the three months ended March 31, 2016 from the same period of 2015. The increase in the average price per interment was a result of sales of higher valued interments at newly constructed gardens at several of our same store locations. Additionally, preneed merchandise and services revenue increased approximately $0.1 million, or 13.0% for the first quarter of 2016 as compared to the first quarter of 2015. Same store at-need revenue, which represents approximately 41.0% of our same store operating revenues, increased 5.3% due primarily to a 6.3% increase in the number of contracts to 3,577.

Cemetery same store operating profit for the three months ended March 31, 2016 increased $0.3 million, or 8.3%, from the same period of 2015. As a percentage of revenue, cemetery same store operating profit was 34.7% in the three months ended

- 28 -

March 31, 2016 compared to 34.6% in the same period of 2015. The increase in operating profit was primarily a result of the increase in revenue, offset by a $0.5 million, or 8.6% increase in operating costs for the three months ended March 31, 2016 compared with the same period in 2015. Those expenses with a significant increases include $0.3 million of bad debt expense and $0.1 million of general and administrative costs.

Cemetery acquired revenue and acquired operating profit decreased in the first quarter of 2016 primarily due to a decrease in preneed merchandise and services revenue for the three months ended March 31, 2016 compared to the same period in 2015 for the cemetery acquired in the SCI Acquisition, which contributed approximately $0.7 million in revenue and $0.2 million in operating profit in the current period.

The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Total trust earnings increased 7.6%, primarily due to a $0.1 million increase in perpetual care trust income, while merchandise and service trust income remained flat in the three months ended March 31, 2016 compared to the same period of 2015. 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. Financial revenue earned from finance charges on the preneed contracts increased 9.6% in the three months ended March 31, 2016 compared to the same period of 2015, primarily as a result of our increased collection efforts.

### Other Financial Statement Items

*Regional and Unallocated Funeral and Cemetery Costs*. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs increased $0.5 million, or 20.8% for the three months ended March 31, 2016 compared to the same period of 2015, primarily due to a $0.5 million increase in field incentive compensation and a $0.2 million increase in severance expense, offset by a $0.2 million decrease in general and administrative expenses.

*General and Administrative.* General and administrative expenses totaled $9.2 million for the three months ended March 31, 2016, an increase of $2.1 million, or 29.0%, from the three months ended March 31, 2015. The increase was primarily attributable to a $2.5 million increase in severance expense, $2.2 million of which was related to the retirement of a former executive and $0.3 million was related to severance expenses to former employees. This increase was offset by a $0.3 million decrease in salaries and benefits and consulting costs due to decreased headcount and a $0.1 million decrease in non-cash stock compensation expense.

*Interest Expense.* Interest expense was $2.9 million for the three months ended March 31, 2016 compared to $2.6 million for the three months ended March 31, 2015, an increase of approximately $0.3 million. During the three months ended March 31, 2016, interest expense related to our term note and revolving credit facility increased by approximately $0.3 million compared to the same period of 2015 as a result of a higher principal balance during the current period.

*Accretion of Discount on Convertible Subordinated Notes.* For the three months ended March 31, 2016, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $0.9 million compared to $0.8 million for the three months ended March 31, 2015. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%.

*Loss on Early Extinguishment of Debt.* In February 2016, we entered into the Seventh Amendment to our Credit Facility. As a result, we recognized a loss of $0.6 million to write-off the related unamortized debt issuance costs.

*Other Income.* During the three months ended March 31, 2016, we recognized a gain of $0.3 million in connection with the sale of land.

*Income Taxes.* Income tax expense was $3.0 million for the three months ended March 31, 2016 compared to $4.6 million for the three months ended March 31, 2015. We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for the three months ended March 31, 2016 compared to 40.5% for the three months ended March 31, 2015. We have approximately $36.7 million of state net operating loss carry forwards that will expire between 2017 and 2037, 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 the deferred tax asset for the state operating losses is reviewed every quarter. At March 31, 2016, the valuation allowance totaled $0.2 million.

- 29 -

### 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. 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 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015.

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 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 2016 with $0.5 million in cash and other liquid investments and ended the first quarter with $0.9 million in cash. As of March 31, 2016, we had borrowings of $54.0 million outstanding on our revolving credit facility compared to $92.6 million outstanding as of December 31, 2015.

The following table sets forth the elements of cash flow for the three months ended March 31, 2015 and March 31, 2016 (in millions):

|  | For the Three Months Ended March 31, 2015 | 2016 |
| --- | ---: | ---: |
| Cash at January 1st | $0.4 | $0.5 |
| Cash flow provided by operating activities | 12.6 | 9.7 |
| Acquisitions and land for new construction | (4.3) | (2.7) |
| Purchase of land and buildings previously leased | (0.6) | — |
| Net proceeds from the sale of businesses and other assets | — | 0.6 |
| Growth capital expenditures | (4.0) | (2.0) |
| Maintenance capital expenditures | (1.8) | (1.6) |
| Net borrowings (payments) on our revolving credit facility, term loan and long-term debt obligations | (2.2) | (2.3) |
| Dividends on common stock | (0.5) | (0.4) |
| Excess tax benefit (deficiency) of equity compensation | 0.4 | (0.1) |
| Payment of loan origination costs related to the credit facility | — | (0.7) |
| Other financing costs | 0.3 | (0.1) |
| Cash at March 31st | $0.3 | $0.9 |

For the three months ended March 31, 2016, cash provided by operating activities was $9.7 million compared to cash provided by operating activities of $12.6 million for the three months ended March 31, 2015, due primarily to a $1.8 million decrease in net income and other working capital changes.

Our investing activities resulted in a net cash outflow of $5.7 million for the three months ended March 31, 2016 compared to $10.6 million for the three months ended March 31, 2015, a decrease of $4.9 million. During the three months ended March 31, 2016, we purchased land for funeral home expansion projects for approximately $2.7 million. In addition, capital expenditures totaled $3.6 million, of which $2.0 million and $1.6 million were growth and maintenance capital expenditures, respectively, for the three months ended March 31, 2016. Our growth capital expenditures were primarily related to construction costs related to funeral home facilities of approximately $0.7 million, renovations at certain business locations of $0.4 million and cemetery development costs of $0.8 million. Maintenance capital expenditures in the three months ended March 31, 2016 were primarily

- 30 -

related to vehicle purchases of $0.6 million, general equipment and furniture purchases of $0.6 million and maintenance projects such as paving roads, parking lots, facility repairs and improvements of $0.4 million. Additionally, we received net proceeds of approximately $0.6 million from the sale of land in the three months ended March 31, 2016.

During the three months ended March 31, 2015, we acquired a funeral home business for approximately $8.8 million. The purchase price consisted of $4.25 million paid in cash at closing and $4.5 million which was the net present value of future deferred payments totaling $5.5 million. We also purchased a previously leased funeral home property for $0.6 million. Capital expenditures totaled $5.8 million, of which $4.0 million and $1.8 million were growth and maintenance capital expenditures, respectively, for the three months ended March 31, 2015.

Our financing activities resulted in a net cash outflow of $3.7 million for the three months ended March 31, 2016 compared to $2.1 million for the three months ended March 31, 2015, an increase of $1.6 million, primarily due to activity with our Credit Facility. During the three months ended March 31, 2016, we had net borrowings on our revolving credit facility and term loan of $2.3 million. We also paid transaction costs of approximately $0.7 million related to our Credit Facility. During the three months ended March 31, 2015, we had net borrowings on our revolving credit facility and term loan of approximately $1.8 million.

#### Dividends

During the three months ended March 31, 2016, our Board declared a quarterly dividend of $0.025 per share, totaling approximately $0.4 million, which was paid on March 1, 2016 to record holders of our common stock as of February 12, 2016. For the three months ended March 31, 2015, we paid total dividends of approximately $0.5 million. We have a dividend reinvestment program so that stockholders may elect to reinvest their dividends into additional shares of our common stock.

#### Share Repurchase Program

On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The shares may be purchased from time to time in the open market or in privately negotiated transactions. Purchases will be at times and in amounts as management deems appropriate based on factors such as market conditions, legal requirements and other business considerations. During the three months ended March 31, 2016, we did not repurchase any shares of our common stock.

#### Debt Obligations

The outstanding principal of our total long-term debt and capital lease obligations at March 31, 2016 totaled $208.9 million and consisted of $147.2 million under our term loan, $54.0 million outstanding under our revolving credit facility and $7.7 million in acquisition indebtedness and capital lease obligations.

As of March 31, 2016, we had a $300 million secured bank credit facility with Bank of America, N.A. as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.

On February 9, 2016, we entered into a seventh amendment (the “Seventh Amendment”) to our Credit Facility. The Seventh Amendment resulted in, among other things, (i) reducing our LIBOR based variable interest rate 37.5 basis points, (ii) extending the maturity so that the Credit Agreement will mature at the earlier of (a) any date that is 91 days prior to the maturity of any subordinated debt (including the $143.75 million in principal amount of the Convertible Notes) or (b) February 9, 2021, (iii) increasing and funding the term loan so that $150 million was outstanding upon the effectiveness of the Seventh Amendment, (iv) reducing the size of the revolver to $150 million, (v) increasing the accordion to $75 million and (vi) updating the amortization payments for the term loan facility so that the borrowings under the term loan facility are subject to amortization payments of $2.81 million at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2016 through the fiscal quarter ending December 31, 2017, $3.75 million at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2018 through the fiscal quarter ending March 31, 2020 and $4.69 million at the end of each fiscal quarter beginning with the fiscal quarter ending June 30, 2020 through the fiscal quarter ending December 31, 2020.

No letters of credit were issued and outstanding under the Credit Facility at March 31, 2016. Under the Credit Facility, outstanding borrowings bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. At March 31, 2016, the prime rate margin was equivalent to 1.125% and the LIBOR margin was 2.125%. The weighted average interest rate on the Credit Facility for the three months ended March 31, 2016 was 2.7%.

- 31 -

We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by our subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Facility.

We were in compliance with the covenants contained in the Credit Agreement as of March 31, 2016. The Credit Agreement contains key ratios that we must comply with including a requirement to maintain a leverage ratio of no more than 3.50 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of March 31, 2016, the leverage ratio was 3.05 to 1.00 and the fixed charge coverage ratio was 2.54 to 1.00.

Debt issuance costs, net of accumulated amortization, of $1.5 million related to the Credit Facility are being amortized over the term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.

#### Convertible Subordinated Notes due 2021

On March 19, 2014, we issued $143.75 million aggregate principal amount of 2.75% Convertible Subordinated Notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.

At March 31, 2016, the carrying amount of the equity component was approximately $18.0 million. At March 31, 2016, the principal amount of the liability component was $143.75 million and the net carrying amount was $116.3 million. The unamortized discount of $24.8 million and the unamortized debt issuance costs of $2.6 million as of March 31, 2016 are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized discount and the debt issuance costs for the three months ended March 31, 2015 and 2016 was 6.75% and 2.75%, respectively.

Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $1.0 million for both the three months ended March 31, 2015 and 2016. Amortization of debt issuance costs was approximately $0.1 million for both the three months ended March 31, 2015 and 2016. Accretion of the discount on the convertible subordinated notes was $0.8 million and $0.9 million for the three months ended March 31, 2015 and 2016.

### 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, 3,819 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, 2016 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, 2016 are presented in Item 1, “Condensed Notes to Consolidated Financial Statements,” Notes 3 and 6 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 1.48% change in the value of the fixed income securities.

- 32 -

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, 2016, we had outstanding borrowings of $54.0 million under our $150.0 million revolving credit facility and approximately $147.2 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, 2016, the prime rate margin was equivalent to 1.125% and the LIBOR margin was 2.125%. 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 $2.0 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 Notes bear interest at a fixed rate of 2.75% per year. At March 31, 2016, the fair value of these notes was approximately $157.9 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.

## 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, 2016 (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, 2016, 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.

- 33 -

## 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, 2015. Readers should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2015, 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, 2015 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 Apr 26, 2016.
Source: SEC EDGAR, the filing index for accession 0001016281-16-000199. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.