# Carriage Services Inc: Form 10-Q for the period ended Jun 30, 2016

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2016-07-26
- Accepted by EDGAR: Jul 26, 2016, 16:49 ET
- Period: 2016-06-30
- Accession: 0001016281-16-000226
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628116000226/csv-2016630x10qx10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628116000226/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2016-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2016-04-01 to 2016-06-30 | $61.9m | us-gaap:SalesRevenueNet |
| Revenue | 6 months, 2016-01-01 to 2016-06-30 | $125.2m | us-gaap:SalesRevenueNet |
| Cost of revenue | 3 months, 2016-04-01 to 2016-06-30 | $43.1m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2016-01-01 to 2016-06-30 | $85.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2016-04-01 to 2016-06-30 | $18.8m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2016-01-01 to 2016-06-30 | $40.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2016-04-01 to 2016-06-30 | $12.6m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2016-01-01 to 2016-06-30 | $24.2m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2016-04-01 to 2016-06-30 | $3.0m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2016-01-01 to 2016-06-30 | $5.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2016-04-01 to 2016-06-30 | $3.5m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2016-01-01 to 2016-06-30 | $6.5m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2016-04-01 to 2016-06-30 | $5.2m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Net income | 6 months, 2016-01-01 to 2016-06-30 | $9.8m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted shares (weighted) | 3 months, 2016-04-01 to 2016-06-30 | 17,075,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2016-01-01 to 2016-06-30 | 16,862,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2016-01-01 to 2016-06-30 | $24.5m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 6 months, 2016-01-01 to 2016-06-30 | $7.8m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2016-01-01 to 2016-06-30 | $831.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2016-01-01 to 2016-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2016-06-30 | $883.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2016-06-30 | $28.7m | us-gaap:AssetsCurrent |
| Total assets | at 2016-06-30 | $842.8m | us-gaap:Assets |
| Current liabilities | at 2016-06-30 | $38.0m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2016-06-30 | $674.2m | us-gaap:Liabilities |
| Long-term debt | at 2016-06-30 | $198.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2016-06-30 | $12.4m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2016-06-30 | $168.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 57,644 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 compete with other public deathcare companies and 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 June 30, 2016, we operated 169 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 strive to have the most innovative and transparent operating and reporting framework in the deathcare industry. We are able to achieve such an innovative and transparent framework through a decentralized, high-performance cultural operating framework with linked 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 that 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.

### Standards Operating Model

Our Standards Operating Model (our “Standards”) eliminated the use of financial budgets which freed up enormous amounts of time to focus and work on growing each local business and improving the quality and skills of the staff. Instead of the budget and control model, our 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 and incentivize the local managers. Our Standards are not designed to produce maximum short-term earnings because we do 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 within our Standards in a business year after year, we require “A 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. 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 and divestiture candidates. As we execute this strategy over time, we will acquire larger, higher margin strategic businesses and divest smaller businesses in non-strategic markets.

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. Our 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.

### CURRENT PERIOD DEVELOPMENTS

*Acquisitions.* On May 31, 2016, we acquired two funeral home businesses in Houston, Texas. The pro forma impact of the acquisition on prior periods is not presented, as the impact is not material to our reported results.

*Capital Expenditures.* During the second quarter of 2016, we purchased land and buildings at four funeral homes that were previously leased for approximately $6.3 million.

*Capital.* On May 19, 2016, the Board of Directors (our “Board”) approved an increase in our quarterly cash dividend on our common stock from $0.025 to $0.05 per share, effective with respect to dividends payable on September 1, 2016 and later.

*Commitments.* Effective April 30, 2016, we terminated an agreement to outsource the processing of transactions for our cemetery business and certain accounting activities. At that time, all transaction processing returned in-house and we retained most of the personnel that resided in our home office.

### REPORTING AND NON-GAAP FINANCIAL MEASURES

We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the quarter ending June 30, 2016 dated July 26, 2016 and discussed in the corresponding earnings conference call. 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. 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 United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.

Historically, the dynamic nature of the evolutionary process of building our culture, especially since launching the **Good To Great Journey** in the beginning of 2012, has led to a large number of charges such as severance, consulting and other balance sheet activities that we view as not core to our operations and as such have been added back to GAAP earnings as “Special Items”. The Special Items are important to add back because of the transformational nature of major changes over the last four years within our Operations and Strategic Growth Leadership Team, culminating during 2015 in a reduction from fifteen members to nine members. The number of these Special Items and other charges related to leadership and balance sheet component changes should be minimal during 2016 and thereafter.

Accordingly, beginning in the first quarter of 2016, these non-GAAP Special Items will be comprised of only those charges materially outside the normal course of business, which should result in major shrinkage of “the gap” between our GAAP and non-GAAP reported performance.

The non-GAAP financial measures in the Trend Report include such measures as “Special Items,” “Adjusted Net Income,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “Adjusted Consolidated EBITDA Margin,” “Adjusted Free Cash Flow,” “Funeral, Cemetery and Financial EBITDA,” “Total Field EBITDA,” “Total Field EBITDA Margin,” “Adjusted Basic Earnings Per Share” and “Adjusted Diluted Earnings Per Share”. 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.

The non-GAAP definitions used by the Company are as follows:

- Special Items are defined as charges or credits 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. Special Items are taxed at the federal statutory rate of 34 percent for the three and six months ended June 30, 2015 and 35 percent for the three and six months ended June 30, 2016, except for the accretion of the discount on the Convertible Notes as this is a non-tax deductible item and the tax adjustment from prior period.
- Adjusted Net Income is defined as net income plus adjustments for Special Items.
- Consolidated EBITDA is defined as net income before income taxes, interest expenses, non-cash stock compensation, depreciation and amortization, and interest income and other, net.
- Adjusted Consolidated EBITDA is defined as Consolidated EBITDA plus adjustments for Special Items.
- Adjusted Consolidated EBITDA Margin is defined as Adjusted Consolidated EBITDA as a percentage of revenue.
- Adjusted Free Cash Flow is defined as net cash provided by operations, adjusted by cash-related Special Items, less cash for maintenance capital expenditures.
- Funeral Field EBITDA is defined as Funeral Gross Profit, which is funeral revenue minus funeral field costs and expenses, less depreciation and amortization, regional and unallocated funeral overhead expenses and Funeral Financial EBITDA.
- Cemetery Field EBITDA is defined as Cemetery Gross Profit, which is cemetery revenue minus cemetery field costs and expenses, less depreciation and amortization, regional and unallocated cemetery overhead expenses and Cemetery Financial EBITDA.
- Funeral Financial EBITDA is defined as Funeral Financial Revenue less Funeral Financial Expenses.
- Cemetery Financial EBITDA is defined as Cemetery Financial Revenue less Cemetery Financial Expenses.
- Total Field EBITDA is defined as Gross Profit less depreciation and amortization, regional and unallocated overhead expenses.
- Total Field EBITDA Margin is defined as Total Field EBITDA as a percentage of revenue.
- Adjusted Basic Earnings Per Share is defined as GAAP Basic Earnings Per Share, adjusted for Special Items.
- Adjusted Diluted Earnings Per Share is defined as GAAP Diluted Earnings Per Share, adjusted for Special Items.

The non-GAAP Withdrawable Trust Income in our Trend Reports reflects the change in the available income we are able to withdraw from Preneed Cemetery Trusts in three states that allow cash income to be withdrawn prior to maturity of the contract. The intent of this presentation was to show the true cash earning power of our Company. However, the amount of reported Withdrawable Trust Income has been steadily declining over the past years while our Adjusted Consolidated EBITDA and Adjusted Consolidated EBITDA Margin have been materially increasing. As its financial impact is diminishing and the intrinsic value of reporting such non-GAAP affect is insignificant, we will no longer reflect Withdrawable Trust Income within the Special Items section of our Trend Reports.

We are providing below a reconciliation of Net Income (a GAAP measure) to Adjusted Net Income (a non-GAAP measure) for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015.

*(In millions)*

|  | For the Three Months Ended June 30, 2015 | 2016 | For the Six Months Ended June 30, 2015 | 2016 |
| --- | ---: | ---: | ---: | ---: |
| Net Income | $4.6 | $5.2 | $11.0 | $9.8 |
| Special items, net of tax except for \*\* |  |  |  |  |
| Withdrawable Trust Income | 0.2 | n/a | 0.2 | n/a |
| Acquisition and Divestiture Expenses | — | — | 0.4 | 0.3 |
| Severance Costs | 0.3 | — | 0.4 | 1.8 |
| Consulting Fees | 0.4 | 0.1 | 0.5 | 0.3 |
| Accretion of Discount on Convertible Subordinated Notes \*\* | 0.9 | 1.0 | 1.7 | 1.9 |
| Costs Related to the Credit Facility | — | — | — | 0.4 |
| Gain on Sale of Asset | — | — | — | (0.2) |
| Other Special Items | — | — | 0.1 | — |
| Tax Adjustment from Prior Period \*\* | — | — | 0.1 | — |
| Adjusted Net Income | $6.4 | $6.3 | $14.4 | $14.3 |

### Financial Highlights

#### Three months ended June 30, 2016 compared to three months ended June 30, 2015

Total revenue for the three months ended June 30, 2016 and 2015 was $61.9 million and $59.3 million, respectively, which represents an increase of approximately $2.6 million, or 4.4%. For the quarter comparatives, we experienced a 3.3% increase in total funeral contracts, while increasing the average revenue per funeral contract by 1.2%. In addition, we experienced a 0.7% increase in the number of preneed interment rights (property) sold, while increasing the average price per interment right sold by 10.6%. Further discussion of revenue for our funeral home and cemetery segments as well as the contract mix is presented herein under “Results of Operations.”

Operating income increased $1.6 million, or 14.6%, due primarily to better cost management in our same store funeral home operations, increases in funeral acquisition contract volumes and revenues as well as increases in sales and related revenue in our cemetery operations. Further discussion of operating income is presented herein under “Results of Operations” within our funeral home and cemetery segments.

Net income for the three months ended June 30, 2016 increased $0.6 million to $5.2 million, equal to $0.30 per diluted share, compared to net income of $4.6 million, equal to $0.24 per diluted share, for the three months ended June 30, 2015. Further discussion of depreciation and amortization expense, general and administrative costs, interest expense, income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”

#### Six months ended June 30, 2016 compared to six months ended June 30, 2015

Total revenue for the six months ended June 30, 2016 and 2015 was $125.2 million and $122.5 million, respectively, which represents an increase of $2.7 million, or 2.2%. Year to date, the number of families served remained flat, while our average revenue per contract increased by 1.3%. In addition, while we experienced a slight decrease of 1.4% in the number of preneed interment rights (property) sold, the average price per interment right sold increased 8.1%. Further discussion of revenue for our funeral home and cemetery segments as well as the contract mix is presented herein under “Results of Operations.”

Operating income decreased $1.3 million, or 4.9%, despite increasing revenues due primarily to increases in general and administrative expenses, incentive compensation, depreciation and amortization and cemetery operating expenses. Further discussion of operating income is presented herein under “Results of Operations” within our funeral home and cemetery segments.

Net income for the six months ended June 30, 2016 decreased $1.2 million to $9.8 million, equal to $0.57 per diluted share, compared to net income of $11.0 million, equal to $0.57 per diluted share, for the six months ended June 30, 2015. Further discussion depreciation and amortization expense, general and administrative costs, interest expense, income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”

### 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 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.

### RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three and six months ended June 30, 2016 compared to 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, within our field costs and expenses and regional and unallocated funeral and cemetery costs are not included in operating profit, a non-GAAP financial measure. Adding back these items will result in Gross Profit, a GAAP financial measure.

*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 June 30, 2016 compared to three months ended June 30, 2015 (dollars in thousands):

| Revenues: | For the Three Months Ended June 30, 2015 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $34,169 | $34,856 | $687 | 2.0% |
| Acquired operating revenue | 8,113 | 9,472 | 1,359 | 16.8% |
| Preneed funeral insurance commissions | 370 | 356 | (14) | (3.8)% |
| Preneed funeral trust earnings | 1,849 | 1,783 | (66) | (3.6)% |
| Total | $44,501 | $46,467 | $1,966 | 4.4% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $12,117 | $12,855 | $738 | 6.1% |
| Acquired operating profit | 3,196 | 3,908 | 712 | 22.3% |
| Preneed funeral insurance commissions | 98 | 155 | 57 | 58.2% |
| Preneed funeral trust earnings | 1,827 | 1,766 | (61) | (3.3)% |
| Total | $17,238 | $18,684 | $1,446 | 8.4% |

Funeral home same store operating revenues for the three months ended June 30, 2016 increased $0.7 million, or 2.0%, when compared to the three months ended June 30, 2015. The increase was due primarily to a 1.0% increase in the average revenue per contract to $5,272, as well as a 1.0% increase in same store contract volumes to 6,612. The average revenue per contract excludes the impact of the preneed funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased $45 to $5,472 in the three months ended June 30, 2016. The average revenue per burial contract increased 1.5% to $8,740, while the number of burial contracts decreased 2.5% to 2,721. The number of cremation contracts increased 3.1% to 3,388 and the average revenue per same store cremation contract increased 3.7% to $3,302.

The burial rate decreased 150 basis points to 41.2%, and the cremation rate increased 100 basis points to 51.2% for the three months ended June 30, 2016 when compared to the three months ended June 30, 2015. 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 the three months ended June 30, 2016, increased 10.7% to $2,405.

Same store operating profit for the three months ended June 30, 2016 increased $0.7 million, or 6.1%, when compared to the three months ended June 30, 2015. This increase is a result of an increase in revenue, as well as better management of expenses, as controllable expenses remained flat compared to the same period in 2015. The most significant changes were in salaries and benefits, which decreased by $0.1 million and facilities and grounds expenses, which also decreased by approximately $0.1 million, offset by a $0.1 million increase in bad debt expense and a $0.1 million increase in general liability and other insurance expenses.

Funeral home acquired operating revenues for the three months ended June 30, 2016 increased $1.4 million, or 16.8%, when compared to the three months ended June 30, 2015 as we experienced a 14.3% increase in the total number of contracts to 1,530 and a 1.5% increase in the average revenue per contract to $6,343. 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 $132 to $6,191 in the three months ended June 30, 2016. The average revenue per contract for burial contracts increased 2.3% to $9,130 and the number of burial contracts increased 11.3% to 736. The number of cremation contracts increased 14.9% to 672 and the average revenue per cremation contract increased by 6.3% to $4,026.

Acquired operating profit for the three months ended June 30, 2016 increased $0.7 million, or 22.3%, from the three months ended June 30, 2015. This increase is a result of an increase in revenue, as well as better management of controllable expenses. The most significant change was in salaries and benefits (the largest controllable expense), which decreased 2.0% as a percentage of revenue compared to the same period in 2015.

The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings on matured preneed contracts. Preneed funeral insurance commission revenue remained flat at $0.4 million for the three months ended June 30, 2016 compared to the same period in 2015. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. In the second quarter of 2015, we sold 229 more preneed funeral contracts than in the same period of the previous year. Preneed funeral trust earnings decreased $0.1 million, or 3.6%, in the three months ended June 30, 2016 as compared to the same period in 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 0.2% in the three months ended June 30, 2016 due primarily to the decrease in preneed funeral trust revenue.

The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the six months ended June 30, 2016 compared to the six months ended June 30, 2015 (dollars in thousands):

| Revenues: | For the Six Months Ended June 30, 2015 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $73,160 | $72,093 | $(1,067) | (1.5)% |
| Acquired operating revenue | 16,706 | 19,149 | 2,443 | 14.6% |
| Preneed funeral insurance commissions | 725 | 777 | 52 | 7.2% |
| Preneed funeral trust earnings | 4,047 | 3,750 | (297) | (7.3)% |
| Total | $94,638 | $95,769 | $1,131 | 1.2% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $28,015 | $28,007 | $(8) | —% |
| Acquired operating profit | 6,749 | 8,080 | 1,331 | 19.7% |
| Preneed funeral insurance commissions | 189 | 411 | 222 | 117.5% |
| Preneed funeral trust earnings | 4,007 | 3,707 | (300) | (7.5)% |
| Total | $38,960 | $40,205 | $1,245 | 3.2% |

Funeral home same store operating revenues for the six months ended June 30, 2016 decreased $1.1 million, or 1.5%, when compared to the six months ended June 30, 2015. The decrease was due primarily to a decrease of 2.4% in same store contract volumes to 13,714, while the average revenue per contract increased slightly by 1.0% to $5,257. The average revenue per contract excludes the impact of the preneed funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased $35 to $5,457 in the six months ended June 30, 2016. The average revenue per burial contract increased 2.0% to $8,774, while the number of burial contracts decreased 5.9% to 5,625. The number of cremation contracts increased slightly by 0.5% to 7,067, and the average revenue per same store cremation contract increased 2.1% to $3,268.

The burial rate decreased 150 basis points to 41.0%, and the cremation rate increased 150 basis points to 51.5% for the six months ended June 30, 2016 when compared to the six months ended June 30, 2015. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 7.5% of the total number of contracts in the six months ended June 30, 2016, increased 8.6% to $2,342.

Same store operating profit for the six months ended June 30, 2016 remained flat compared to the six months ended June 30, 2015, despite the decrease in operating revenues. This is primarily the result of better management of controllable expenses which decreased $0.8 million or 2.3% when compared to the same period in 2015. Those expenses with significant decreases include $0.5 million of salaries and benefits and $0.5 million of facilities and grounds expenses, offset by an increase of $0.2 million in general liability and other insurance expenses.

Funeral home acquired operating revenues for the six months ended June 30, 2016 increased $2.4 million, or 14.6%, when compared to the six months ended June 30, 2015 as we experienced an 11.3% increase in the number of total contracts to 3,089 and a 2.6% increase in the average revenue per contract to $6,377. 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 $179 to $6,199 in the six months ended June 30, 2016. The average revenue per burial contract increased 5.4% to $9,217 and the number of burial contracts increased 4.7% to 1,461. The number of cremation contracts increased 18.0% to 1,391 and the average revenue per cremation contract increased 7.6% to $4,064.

Acquired operating profit for the six months ended June 30, 2016 increased $1.3 million, or 19.7%, from the six months ended June 30, 2015. This increase is a result of an increase in revenue, as well as better management of controllable expenses. The most significant change was in salaries and benefits (the largest controllable expense), which decreased 1.3% as a percentage of revenue compared to the same period in 2015.

The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings on matured preneed contracts. Preneed funeral insurance commissions revenue increased by approximately $0.1 million, or 7.2% for the six months ended June 30, 2016 compared to the same period in 2015. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. In the first six months of 2015, we sold 506 more preneed funeral contracts than in the same period of the previous year. Preneed funeral trust earnings decreased by approximately $0.3 million, or 7.3%, for the six months ended June 30, 2016 compared to the same period in 2015. Preneed funeral 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 the two categories of financial revenue, on a combined basis, decreased 1.9% in the six months ended June 30, 2016 compared to the same period in 2015, 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 June 30, 2016 compared to three months ended June 30, 2015 (dollars in thousands):

| Revenues: | For the Three Months Ended June 30, 2015 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $11,266 | $12,345 | $1,079 | 9.6% |
| Acquired operating revenue | 930 | 774 | (156) | (16.8)% |
| Cemetery trust earnings | 2,176 | 1,831 | (345) | (15.9)% |
| Preneed cemetery finance charges | 388 | 448 | 60 | 15.5% |
| Total | $14,760 | $15,398 | $638 | 4.3% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $3,537 | $4,049 | $512 | 14.5% |
| Acquired operating profit | 288 | 140 | (148) | (51.4)% |
| Cemetery trust earnings | 2,101 | 1,772 | (329) | (15.7)% |
| Preneed cemetery finance charges | 388 | 448 | 60 | 15.5% |
| Total | $6,314 | $6,409 | $95 | 1.5% |

Cemetery same store operating revenues for the three months ended June 30, 2016 increased $1.1 million, or 9.6%, when compared to the three months ended June 30, 2015. Approximately 62.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the three months ended June 30, 2016. Preneed property revenue increased $1.0 million, or 17.3%, as we experienced a 1.1% increase in the number of preneed interment rights (property) sold to 1,992 combined with a 10.8% increase in the average price per interment to $3,256 in the three months ended June 30, 2016 from the same period in 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. Preneed merchandise and services revenue decreased slightly by approximately $0.1 million, or 6.5% for the second quarter of 2016 as compared to the second quarter of 2015. Same store at-need revenue, which represents approximately 38.0% of our same store operating revenues, increased 5.3% due primarily to a 6.0% increase in the number of contracts to 3,507.

Cemetery same store operating profit for the three months ended June 30, 2016 increased $0.5 million, or 14.5% from the same period in 2015. As a percentage of revenue, cemetery same store operating profit was 32.8% in the three months ended June 30, 2016 compared to 31.4% in the same period in 2015. The increase in operating profit was primarily a result of the increase in revenue, offset by a $0.6 million, or 8.5%, increase in operating costs for the three months ended June 30, 2016 compared with the same period in 2015. Those expenses with significant increases include $0.4 million of promotional expenses and $0.1 million of salaries and benefits.

Cemetery acquired revenue and acquired operating profit decreased in the second quarter of 2016 primarily due to a decrease in preneed property revenue for the three months ended June 30, 2016 compared with the same period in 2015. Approximately 80% of the revenue and 65% of the operating profit for this portfolio is from the cemetery acquired in 2014.

The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. 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. Total trust earnings decreased 15.9%, primarily due to a $0.3 million decrease in perpetual care trust income in the three months ended June 30, 2016 compared to the same period in 2015. Financial revenue earned from finance charges on the preneed contracts increased 15.5% in the three months ended June 30, 2016 compared to the same period in 2015, primarily as a result of our increased collection efforts.

The following tables set forth certain information regarding the revenues and operating profit from our cemetery operations for the six months ended June 30, 2016 compared to six months ended June 30, 2015 (dollars in thousands):

| Revenues: | For the Six Months Ended June 30, 2015 | 2016 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $21,534 | $23,420 | $1,886 | 8.8% |
| Acquired operating revenue | 1,752 | 1,540 | (212) | (12.1)% |
| Cemetery trust earnings | 3,817 | 3,597 | (220) | (5.8)% |
| Preneed cemetery finance charges | 773 | 870 | 97 | 12.5% |
| Total | $27,876 | $29,427 | $1,551 | 5.6% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $7,087 | $7,892 | $805 | 11.4% |
| Acquired operating profit | 588 | 361 | (227) | (38.6)% |
| Cemetery trust earnings | 3,680 | 3,453 | (227) | (6.2)% |
| Preneed cemetery finance charges | 773 | 870 | 97 | 12.5% |
| Total | $12,128 | $12,576 | $448 | 3.7% |

Cemetery same store operating revenues for the six months ended June 30, 2016 increased $1.9 million, or 8.8%, when compared to the six months ended June 30, 2015. Approximately 60.0% of our same store operating revenues were related to preneed sales of interment rights (property) and related merchandise and services for the six months ended June 30, 2016. Preneed property revenue increased $1.4 million, or 13.0%, as we experienced a 8.3% increase in the average price per interment to $2,987, while the number of preneed interment rights sold decreased 1.6% to 3,922 in the six months ended June 30, 2016 from the same period in 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 2.1% for our same store locations. Same store at-need revenue, which represents approximately 40.0% of our same store operating revenues, increased 5.3% due primarily to a 6.2% increase in the number of contracts to 7,084.

Cemetery same store operating profit for the six months ended June 30, 2016 increased $0.8 million, or 11.4%. As a percentage of same store revenue, cemetery same store operating profit increased to 33.7% in the six months ended June 30, 2016 from 32.9% in the same period in 2015. The increase in operating profit was primarily a result of the increase in revenue, offset by $1.0 million or 8.6% increase in operating costs for the six months ended June 30, 2016 compared with the same period in 2015. Those expenses with significant increases include $0.4 million of promotional expenses, $0.2 million of bad debt expense, $0.1 million of general and administrative expenses and $0.1 million of salaries and benefits.

Cemetery acquired revenue and operating profit decreased in the six months ended June 30, 2016 primarily due to a decrease in preneed property revenue compared with the same period in 2015. Approximately 85% of the revenue and operating profit for this portfolio is from the cemetery acquired in 2014.

The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. 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. Total trust earnings decreased by 5.8%, primarily due to a $0.1 million decrease in perpetual care trust income and a $0.1 million decrease in trust management fees in the six months ended June 30, 2016 compared to the same period in 2015. Financial revenue earned from finance charges on the preneed contracts increased 12.5% in the six months ended June 30, 2016 compared to the same period in 2015, primarily as a result of our increased collection efforts.

### Other Financial Statement Items

*Depreciation and Amortization Costs*. Depreciation and Amortization costs totaled $4.0 million for the three months ended June 30, 2016, an increase of $0.6 million, or 17.6%, from the three months ended June 30, 2015 and $7.7 million for the six months ended June 30, 2016, an increase of $1.0 million, or 15.0%, from the six months ended June 30, 2015. These increases were primarily attributable to additional depreciation expense from assets acquired in our recent acquisitions, as well as from our newly constructed funeral homes which began operating in the latter half of 2015.

*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 $0.4 million, or 17.5%, for the three months ended June 30, 2016 compared to the same period in 2015, primarily due to a $0.4 million increase in field incentive compensation. Regional and unallocated funeral and cemetery costs for the six months ended June 30, 2016 increased by $0.9 million, or 19.2%, from the same period in 2015 primarily due to a $0.9 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. In 2015, a proportionate amount of the incentive compensation charges were recorded in the latter half of the year.

*General and Administrative Costs and Expenses.* General and administrative expenses totaled $5.8 million for the three months ended June 30, 2016, a decrease of $1.1 million, or 15.3%, from the three months ended June 30, 2015. The decrease was primarily attributable to a $0.5 million decrease in severance expense, a $0.4 million decrease in salaries and benefits, a $0.3 million decrease in non-cash stock compensation expense, and a $0.3 million decrease in other general and administrative expenses. These decreases were offset by an increase of $0.2 million in incentive compensation and $0.2 million in acquisition costs.

General and administrative expenses totaled $15.1 million for the six months ended June 30, 2016, an increase of $1.0 million, or 7.3%, from the six months ended June 30, 2015. The increase was primarily attributable to a $2.0 million increase in severance expense related to the retirement of a former executive, $0.3 million increase in incentive compensation, $0.2 million increase in acquisition costs, offset by a decrease of $0.9 million in salaries and benefits, $0.4 million in non-cash stock compensation expense and $0.2 million in other general and administrative expenses.

*Interest Expense.* Interest expense was $3.0 million for the three months ended June 30, 2016 compared to $2.5 million for the three months ended June 30, 2015, an increase of approximately $0.5 million. During the three months ended June 30, 2016, interest expense related to our term note and revolving credit facility increased by approximately $0.5 million compared to the same period in 2015, as a result of a higher principal balance and a higher interest rate during the current period. We currently pay interest at a prime rate or a LIBOR rate plus an applicable margin based upon our leverage ratio as determined by our Credit Agreement. In the current period, the weighted average interest rate increased 0.5% compared to the same period in 2015, as a result of an increase in our leverage ratio.

Interest expense was $5.8 million for the six months ended June 30, 2016 compared to $5.1 million for the six months ended June 30, 2015, an increase of approximately $0.7 million. During the six months ended June 30, 2016, interest expense related to our term note and revolving credit facility increased by approximately $0.7 million compared to the same period of 2015, as a result of a higher principal balance and higher interest rate during the current period. In the current period, the weighted average interest rate increased 0.3% compared to the same period in 2015, as a result of an increase in our leverage ratio.

*Accretion of Discount on Convertible Subordinated Notes.* For the three and six months ended June 30, 2016, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $1.0 million and $1.9 million, respectively, compared to $0.9 million and $1.7 million for the three and six months ended June 30, 2015, 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 February 2016, we entered into the Seventh Amendment (as defined below under *Debt Obligations*) to our Credit Facility. As a result, we recognized a loss of $0.6 million to write-off the related unamortized debt issuance costs during the six months ended June 30, 2016.

*Other Income.* During the six months ended June 30, 2016, we recognized a gain of $0.3 million in connection with the sale of land.

*Income Taxes.* Income tax expense was $3.5 million for the three months ended June 30, 2016 compared to $3.1 million for the three months ended June 30, 2015 and $6.5 million for the six months ended June 30, 2016 compared to $7.7 million for the six months ended June 30, 2015. We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for the six months ended June 30, 2016 compared to 40.5% for the six months ended June 30, 2015. We have approximately $38.6 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 June 30, 2016, the valuation allowance totaled $0.2 million.

### 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.

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 and anticipated future cash flows, 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 our existing cash balance, future cash flows from operations and borrowings under our Credit Facility described below 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 second quarter with $0.9 million in cash. As of June 30, 2016, we had borrowings of $60.0 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 six months ended June 30, 2015 and June 30, 2016 (in millions):

|  | For the Six Months Ended June 30, 2015 | 2016 |
| --- | ---: | ---: |
| Cash at January 1st | $0.4 | $0.5 |
| Cash flow provided by operating activities | 28.3 | 24.5 |
| Acquisitions and land for new construction | (4.2) | (9.4) |
| Purchase of land and buildings previously leased | (6.1) | (6.3) |
| Net proceeds from the sale of businesses and other assets | — | 0.6 |
| Growth capital expenditures | (10.5) | (4.4) |
| Maintenance capital expenditures | (4.8) | (3.4) |
| Net borrowings on our revolving credit facility, term loan and long-term debt obligations | 0.8 | 0.1 |
| Dividends on common stock | (0.9) | (0.8) |
| Excess tax benefit (deficiency) of equity compensation | 0.2 | (0.2) |
| Purchases of treasury stock | (3.1) | — |
| Payment of loan origination costs related to the credit facility | — | (0.7) |
| Other financing proceeds | 0.5 | 0.4 |
| Cash at June 30th | $0.6 | $0.9 |

For the six months ended June 30, 2016, cash provided by operating activities was $24.5 million compared to cash provided by operating activities of $28.3 million for the six months ended June 30, 2015, a decrease of $3.9 million, due primarily to the decrease in net income and unfavorable working capital changes, which included an increase in preneed financed receivables, slower collections on accounts receivable and an increase in tax payments due to becoming a tax payer in the latter half of 2015, offset by favorable changes in accrued severance for the retirement of a former executive that has not been fully paid.

Our investing activities resulted in a net cash outflow of $22.9 million for the six months ended June 30, 2016 compared to $25.6 million for the six months ended June 30, 2015, a decrease of $2.7 million. During the six months ended June 30, 2016, we acquired two funeral home businesses for approximately $10.2 million. The purchase price consisted of $6.7 million paid in cash at closing and $3.5 million of deferred purchase price payments. The net present value of such future deferred purchase price payments for these two funeral home businesses was $6.5 million. We purchased land for funeral home expansion projects for approximately $2.7 million. Additionally, we purchased land and buildings at four funeral home locations that were previously leased for approximately $6.3 million. In addition, capital expenditures totaled $7.8 million, of which $4.4 million and $3.4 million were growth and maintenance capital expenditures, respectively, for the six months ended June 30, 2016. Our growth capital expenditures were primarily related to construction costs related to funeral home facilities of approximately $1.3 million, renovations at certain business locations of $0.9 million and cemetery development costs of $2.2 million. Maintenance capital expenditures in the six months ended June 30, 2016 were primarily related to vehicle purchases of $1.0 million, general equipment and furniture purchases of $1.0 million and maintenance projects such as paving roads, parking lots, facility repairs and improvements of $1.4 million.

During the six months ended June 30, 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, the net present value of future deferred payments totaling $5.5 million. We also purchased land and buildings at three funeral home businesses that were previously leased under operating leases for approximately $6.1 million. Capital expenditures totaled $15.3 million, of which $10.4 million and $4.8 million were growth and maintenance capital expenditures, respectively, for the six months ended June 30, 2015.

Our financing activities resulted in a net cash outflow of $1.2 million for the six months ended June 30, 2016 compared to $2.6 million for the six months ended June 30, 2015, a decrease of $1.4 million. During the six months ended June 30, 2016, we had net borrowings on our revolving credit facility and term loan of $0.8 million. We also paid transaction costs of approximately $0.7 million related to the Seventh Amendment of our Credit Facility. During the six months ended June 30, 2015, we had net borrowings on our revolving credit facility and term loan of $1.2 million. We also purchased treasury stock for approximately $3.1 million.

#### Dividends

During the three months ended June 30, 2016, our Board declared a quarterly dividend of $0.025 per share, totaling approximately $0.4 million, which was paid on June 1, 2016 to record holders of our common stock as of May 13, 2016. For the six months ended June 30, 2015 and 2016, we paid total dividends of approximately $0.9 million and $0.8 million, respectively. We have a dividend reinvestment program so that stockholders may elect to reinvest their dividends into additional shares of our common stock.

On May 19, 2016, our Board approved an increase in our quarterly cash dividend on our common stock from $0.025 to $0.05 per share, effective with respect to dividends payable on September 1, 2016 and later.

#### 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 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 six months ended June 30, 2016, we did not repurchase any shares of common stock.

#### Debt Obligations

The outstanding principal of our total long-term debt and capital lease obligations at June 30, 2016 totaled $215.2 million and consisted of $144.4 million under our term loan, $60.0 million outstanding under our revolving credit facility and $10.8 million in acquisition indebtedness and capital lease obligations.

As of June 30, 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 June 30, 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 June 30, 2016, the prime rate margin was equivalent to 1.63% and the LIBOR margin was 2.63%. The weighted average interest rate on the Credit Facility for the three and six months ended June 30, 2016 was 2.9% and 2.8%, respectively.

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 June 30, 2016. The Credit Agreement contains key ratios with which we must comply, including a requirement to maintain a leverage ratio of no more than 3.5 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of June 30, 2016, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 2.46 to 1.00.

Debt issuance costs, net of accumulated amortization, of $1.4 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 June 30, 2016, the carrying amount of the equity component was approximately $18.0 million. At June 30, 2016, the principal amount of the liability component was $143.75 million and the net carrying amount was $117.4 million. The unamortized discount of $23.9 million and the unamortized debt issuance costs of $2.5 million as of June 30, 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 and six months ended June 30, 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 June 30, 2015 and 2016 and $2.0 million for both the six months ended June 30, 2015 and 2016, respectively. Amortization of debt issuance costs was approximately $0.1 million for both the three months ended June 30, 2015 and 2016 and $0.2 million for both the six months ended June 30, 2015 and 2016, respectively. Accretion of the discount on the Convertible Notes was $0.9 million and $1.0 million for the three months ended June 30, 2015 and 2016, respectively, and $1.7 million and $1.9 million for the six months ended June 30, 2015 and 2016, respectively.

### 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, 3,856 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 June 30, 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 June 30, 2016 are presented in Item 1, “Condensed Notes to Consolidated

Financial Statements,” Notes 5 and 8 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 1.46% 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 June 30, 2016, we had outstanding borrowings of $60.0 million under our $150.0 million revolving credit facility and approximately $144.4 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 June 30, 2016, the prime rate margin was equivalent to 1.63% and the LIBOR margin was 2.63%. 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. The Convertible Notes do not contain a call feature. At June 30, 2016, the fair value of these notes was approximately $160.2 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, 1,506 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 June 30, 2016 (the end of the period covered by this Form 10-Q) at the reasonable assurance level.

### Changes in Internal Control over Financial Reporting

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) during the fiscal quarter covered by this quarterly report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

## 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 Jul 26, 2016.
Source: SEC EDGAR, the filing index for accession 0001016281-16-000226. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.