# Carriage Services Inc: Form 10-Q for the period ended Mar 31, 2017

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2017-04-26
- Accepted by EDGAR: Apr 26, 2017, 16:39 ET
- Period: 2017-03-31
- Accession: 0001016281-17-000058
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628117000058/csv-2017331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628117000058/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2017-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2017-01-01 to 2017-03-31 | $45.1m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2017-01-01 to 2017-03-31 | $23.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2017-01-01 to 2017-03-31 | $15.9m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2017-01-01 to 2017-03-31 | $3.0m | us-gaap:InterestExpense |
| Income tax | 3 months, 2017-01-01 to 2017-03-31 | $4.7m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 3 months, 2017-01-01 to 2017-03-31 | $7.1m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted shares (weighted) | 3 months, 2017-01-01 to 2017-03-31 | 18,082,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2017-01-01 to 2017-03-31 | $8.2m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2017-01-01 to 2017-03-31 | $3.7m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2017-01-01 to 2017-03-31 | $833.0k | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2017-03-31 | $806.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2017-03-31 | $27.4m | us-gaap:AssetsCurrent |
| Total assets | at 2017-03-31 | $881.0m | us-gaap:Assets |
| Current liabilities | at 2017-03-31 | $36.4m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2017-03-31 | $695.4m | us-gaap:Liabilities |
| Long-term debt | at 2017-03-31 | $197.8m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2017-03-31 | $14.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2017-03-31 | $185.5m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 43,175 characters.

### OVERVIEW

#### General

Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading provider of funeral and cemetery services and merchandise in the United States. We operate in two business segments: funeral home operations, which currently account for approximately 80% of our revenues, and cemetery operations, which account for approximately 20% of our revenues.

At March 31, 2017, we operated 171 funeral homes in 28 states and 32 cemeteries in 11 states. We compete with other public funeral and cemetery companies and smaller, independent operators. We 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.

Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an at-need and preneed basis.

Our business strategy is based on having strong, local leadership with entrepreneurial principles that is focused on sustainable long term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, high performance culture operating framework linked with incentive compensation programs that attract top-quality industry talent to our organization

Our **Mission Statement** 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** 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 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 is focused on growing local market share, people development, and the key operating and financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable 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 local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams.

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### 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, 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 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.

### 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 March 31, 2017 dated April 26, 2017 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 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 and retirement, consulting and other activities, which are 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 several years within our Operations and Strategic Growth Leadership Team. The number of these Special Items were minimal in 2016 and should continue to be minimal thereafter.

Accordingly, after 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 Field EBITDA,” “Cemetery Field EBITDA,” “Funeral Financial EBITDA,” “Cemetery Financial EBITDA,” “Total Field EBITDA,” “Total Field EBITDA Margin,” “Operating Profit,” “Operating Profit 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 we use 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 35% for both the three months ended March 31, 2016 and 2017, except for the accretion of the discount on the Convertible Notes as this is a non-tax deductible item.
- 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 Special Items as deemed necessary, less cash for maintenance capital expenditures.
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- 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 costs 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 costs 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 costs.
- Total Field EBITDA Margin is defined as Total Field EBITDA as a percentage of revenue.
- Operating Profit is defined as Gross Profit, which is funeral and cemetery revenue minus funeral and cemetery field costs and expenses, less field depreciation and amortization and regional and unallocated funeral and cemetery costs.
- Operating Profit Margin is defined as Operating Profit 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.

We are providing below a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

*(in thousands)*

|  | For the Three Months Ended March 31, 2016 | 2017 |
| --- | ---: | ---: |
| Gross profit | $21,303 | $23,092 |
| Field depreciation and amortization | 3,336 | 3,471 |
| Regional and unallocated funeral and cemetery costs | 3,049 | 2,954 |
| Operating profit | $27,688 | $29,517 |

We are providing below a breakdown of Operating profit (a non-GAAP measure) by Segment for the three months ended March 31, 2017 compared to the three months ended March 31, 2016.

*(in thousands)*

|  | For the Three Months Ended March 31, 2016 | 2017 |
| --- | ---: | ---: |
| Funeral Home Segment | $21,521 | $23,782 |
| Cemetery Segment | 6,167 | 5,735 |
| Operating profit | $27,688 | $29,517 |

Further discussion of Operating profit for our Funeral Home and Cemetery Segments is presented herein under “Results of Operations.”

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### Financial Highlights

#### Three months ended March 31, 2017 compared to three months ended March 31, 2016

Total revenue for the three months ended March 31, 2017 and 2016 was $68.1 million and $63.3 million, respectively, which represents an increase of approximately $4.8 million, or 7.6%. For the quarter comparatives, we experienced an 8.7% increase in total funeral contracts and an increase in the average revenue per funeral contract of 1.7%. In addition, while we experienced a decrease of 18.0% in the number of preneed interment rights (property) sold, the average price per interment right sold increased 18.8%. Further discussion of revenue for our funeral home and cemetery segments as well as the contract mix is presented herein under “Results of Operations.”

Gross profit for the three months ended March 31, 2017 increased $1.8 million, or 8.4%, to $23.1 million, from $21.3 million for the three months ended March 31, 2016 due primarily to better cost management in our same store funeral home operations and increases in funeral acquisition revenues.

Further discussion of the components of Gross profit, excluding field depreciation and amortization and regional and unallocated funeral and cemetery costs is presented herein under “Results of Operations” within our funeral home and cemetery segments. Further discussion of field depreciation and amortization and regional and unallocated funeral and cemetery costs are presented herein under “Other Financial Statement Items.”

Net income for the three months ended March 31, 2017 increased $2.5 million to $7.1 million, equal to $0.39 per diluted share, compared to net income of $4.6 million, equal to $0.27 per diluted share, for the three months ended March 31, 2016. Further discussion of general, administrative and other expenses, home office depreciation and amortization expense, 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, 2016.

### RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three months ended March 31, 2017 compared to the same periods of 2016. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2013 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2012 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.

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*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, 2017 compared to three months ended March 31, 2016 (dollars in thousands):

| Revenues: | For the Three Months Ended March 31, 2016 | 2017 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $41,352 | $42,717 | $1,365 | 3.3% |
| Acquired operating revenue | 5,562 | 9,245 | 3,683 | 66.2% |
| Preneed funeral insurance commissions | 421 | 303 | (118) | (28.0)% |
| Preneed funeral trust earnings | 1,967 | 1,946 | (21) | (1.1)% |
| Total | $49,302 | $54,211 | $4,909 | 10.0% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $16,911 | $17,725 | $814 | 4.8% |
| Acquired operating profit | 2,413 | 4,014 | 1,601 | 66.3% |
| Preneed funeral insurance commissions | 256 | 130 | (126) | (49.2)% |
| Preneed funeral trust earnings | 1,941 | 1,913 | (28) | (1.4)% |
| Total | $21,521 | $23,782 | $2,261 | 10.5% |

Funeral home same store operating revenues for the three months ended March 31, 2017 increased $1.4 million, or 3.3%, when compared to the three months ended March 31, 2016. The increase was due primarily to a 0.8% increase in the average revenue per contract to $5,343 and a 2.5% increase in same store contract volumes to 7,994. 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 $40 to $5,535 in the three months ended March 31, 2017. The average revenue per burial contract increased 0.8% to $8,865 and the number of burial contracts increased 0.4% to 3,241. The number of cremation contracts also increased 4.5% to 4,184 and the average revenue per same store cremation contract increased 2.0% to $3,361.

The burial rate for our same store businesses decreased 90 basis points to 40.5%, while the cremation rate increased 100 basis points to 52.3% for the three months ended March 31, 2017 when compared to 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 7.1% of the total number of contracts in the three months ended March 31, 2017, increased 10.5% to $2,548.

Same store operating profit for the three months ended March 31, 2017 increased $0.8 million, or 4.8%, when compared to the three months ended March 31, 2016. This increase is a result of increased revenue, offset by a $0.6 million increase in expenses compared to the same period in 2016. As a result of better management of expenses, operating profit margin slightly increased by 0.6% to 41.5% for the three months ended March 31, 2017 compared to the same period in 2016.

Funeral home acquired operating revenues for the three months ended March 31, 2017 increased $3.7 million, or 66.2%, when compared to the three months ended March 31, 2016. The funeral home acquired portfolio for the three months ended March 31, 2017 includes six businesses acquired in the latter half of 2016 not present in the three months ended March 31, 2016 results. We experienced a 0.5% increase in the average revenue per contract to $6,506 and a 65.4% increase in the total number of contracts to 1,421. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in *Revenues* above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract decreased 0.4% to $6,703 in the three months ended March 31, 2017. The average revenue per contract for burial contracts decreased 3.8% to $9,450, while the number of burial contracts increased 73.6% to 698. The number of cremation contracts increased 56.6% to 617 and the average revenue per cremation contract increased 1.8% to $4,294.

The burial rate for our acquired businesses increased 230 basis points to 49.1%, while the cremation rate decreased 250 basis points to 43.4%. This is the result of an increase in the number of burial versus cremation contract sales at the locations that were acquired the latter half of 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 7.5% of the total number of contracts in the three months ended March 31, 2017, decreased 1.2% to $2,636.

Acquired operating profit for the three months ended March 31, 2017 increased $1.6 million, or 66.3%, from the three months ended March 31, 2016, primarily due to the six businesses acquired in the latter half of 2016 and reflected in the first

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quarter of 2017. Although revenues increased, operating profit margin remained flat for the three months ended March 31, 2017 compared to the same period in 2016 for our funeral home acquired businesses, as we incurred expenses for salaries and benefits for leadership investments at our acquired locations.

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 decreased $0.1 million for the three months ended March 31, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the three months ended March 31, 2017 is from the preened funeral insurance contracts sold in the three months ended March 31, 2016. Although the number of preneed insurance contracts sold in the three months ended March 31, 2016 increased 9.2% over the same period of the prior year, the amount of commissions earned on these sales decreased. The decrease is due primarily to the mix of insurance products sold that earned commissions. Trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and remained flat for the three months ended March 31, 2017 compared to the same period in the prior year.

Operating profit for our two categories of financial revenue, on a combined basis, decreased 7.0% in the three months ended March 31, 2017 due to the decrease in preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.

*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, 2017 compared to three months ended March 31, 2016 (dollars in thousands):

| Revenues: | For the Three Months Ended March 31, 2016 | 2017 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $11,132 | $10,839 | $(293) | (2.6)% |
| Acquired operating revenue | 709 | 909 | 200 | 28.2% |
| Cemetery trust earnings | 1,766 | 1,716 | (50) | (2.8)% |
| Preneed cemetery finance charges | 422 | 482 | 60 | 14.2% |
| Total | $14,029 | $13,946 | $(83) | (0.6)% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $3,843 | $3,295 | $(548) | (14.3)% |
| Acquired operating profit | 221 | 353 | 132 | 59.7% |
| Cemetery trust earnings | 1,681 | 1,605 | (76) | (4.5)% |
| Preneed cemetery finance charges | 422 | 482 | 60 | 14.2% |
| Total | $6,167 | $5,735 | $(432) | (7.0)% |

Cemetery same store operating revenues for the three months ended March 31, 2017 decreased $0.3 million, or 2.6%, when compared to the three months ended March 31, 2016. Approximately 55.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the three months ended March 31, 2017. Preneed revenue decreased $0.6 million, or 9.3%, as we experienced a 20.2% decrease in the number of preneed interment rights (property) sold to 1,545 in the three months ended March 31, 2017 from the same period in 2016. The decrease was primarily a result of attrition of key sales personnel at certain businesses during the period. The decrease was partially offset by a 20.3% increase in the average price per interment to $3,254. 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. Same store at-need revenue, which represents approximately 45.0% of our same store operating revenues, increased $0.3 million, or 6.9%, due primarily to a 7.6% increase in the average sale per contract to $1,351.

Cemetery same store operating profit for the three months ended March 31, 2017 decreased $0.5 million, or 14.3% from the same period in 2016. As a percentage of same store revenue, cemetery same store operating profit decreased to 30.4% in the three months ended March 31, 2017 compared to 34.5% in the same period in 2016. The decrease in operating profit was primarily a result of the decrease in revenue, combined with a $0.2 million, or 3.5%, increase in operating costs for the three months ended March 31, 2017 compared with the same period in 2016. Those expenses with significant increases include $0.2 million of salaries and benefits and $0.2 million of facilities and grounds expenses, offset by a decrease of $0.2 million in bad debt expense.

Cemetery acquired operating revenue and acquired operating profit increased for the three months ended March 31, 2017 primarily due to a $0.2 million increase in preneed revenue, as we have experienced a 46.4% increase in the number of preneed

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contracts sold to 101 compared with the same period in 2016 in our acquired portfolio. Cemetery acquired operating profit margin increased 760 basis points to 38.8% for the three months ended March 31, 2017 compared to the same period in 2016.

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 2.8%, primarily due to a $0.1 million decrease in merchandise and services trust income in the three months ended March 31, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts increased 14.2% in the three months ended March 31, 2017 compared to the same period in 2016, primarily as a result of our increased collection efforts.

### Other Financial Statement Items

*Depreciation and Amortization*. Depreciation and amortization costs for the field and home office totaled $3.8 million for the three months ended March 31, 2017, an increase of $0.1 million, or 3.0%, from the three months ended March 31, 2016. This increase was primarily attributable to additional depreciation expense from assets acquired in our recent acquisitions.

*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 decreased $0.1 million, or 3.1%, for the three months ended March 31, 2017, compared to the same period in 2016, primarily due to a $0.4 million decrease in field incentive compensation and a $0.1 million decrease in severance expense, offset by a $0.2 million increase in salaries and benefits for investment in operation support and a $0.2 million increase in other administrative expenses.

*General, Administrative and Other.* General, administrative and other expenses totaled $6.8 million for the three months ended March 31, 2017, a decrease of $2.4 million, or 26.0%, from the three months ended March 31, 2016. The decrease was attributable to a $2.4 million decrease in severance and retirement expenses primarily related to the executive that retired in March 2016, a $0.5 million decrease in acquisition costs and a $0.2 million decrease in incentive compensation, offset by a $0.4 million increase in public company, regulatory and legal costs related to tax planning, shelf registration and designing a new long-term incentive plan, a $0.2 million increase in salaries and benefits for leadership investments in corporate development and information technology and a $0.1 million increase in other general costs.

*Interest Expense.* Interest expense was $3.0 million for the three months ended March 31, 2017 compared to $2.9 million for the three months ended March 31, 2016, an increase of approximately $0.1 million. During the three months ended March 31, 2017, interest expense related to our term note and revolving credit facility increased by approximately $0.1 million, primarily as a result of a 0.2% increase in the weighted average interest rate compared to the same period in 2016.

*Accretion of Discount on Convertible Subordinated Notes.* For the three months ended March 31, 2017, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $1.0 million, compared to $0.9 million for the three months ended March 31, 2016. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%.

*Income Taxes.* Income tax expense was $4.7 million for the three months ended March 31, 2017 compared to $3.0 million for the three months ended March 31, 2016. We recorded income taxes at the estimated effective rate of 40.0% for both the three months ended March 31, 2016 and 2017.

We have approximately $33.7 million of state net operating loss carry forwards that will expire between 2018 and 2038, 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, 2017, the valuation allowance totaled $0.2 million.

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### LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.

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 costs 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, 2016.

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 2017 with $3.3 million in cash and other liquid investments and ended the first quarter with $0.8 million in cash. As of March 31, 2017, we had borrowings of $65.1 million outstanding on our revolving credit facility compared to $67.7 million outstanding as of December 31, 2016.

The following table sets forth the elements of cash flow for the three months ended March 31, 2016 and March 31, 2017 (in millions):

|  | For the Three Months Ended March 31, 2016 | 2017 |
| --- | ---: | ---: |
| Cash at January 1st | $0.5 | $3.3 |
| Cash flow from operating activities | 10.2 | 8.2 |
| Acquisitions and land for new construction | (2.7) | — |
| Net proceeds from the sale of other assets | 0.6 | — |
| Growth capital expenditures | (2.0) | (1.9) |
| Maintenance capital expenditures | (1.6) | (1.8) |
| Net payments on our revolving credit facility, term loan and long-term debt obligations | (2.3) | (5.8) |
| Taxes paid on restricted stock vestings and exercise of non-qualified options | (0.5) | (0.5) |
| Dividends paid on common stock | (0.4) | (0.8) |
| Payment of loan origination costs related to the credit facility | (0.7) | — |
| Excess tax deficiency of equity compensation | (0.1) | — |
| Other financing costs | (0.1) | 0.1 |
| Cash at March 31st | $0.9 | $0.8 |

#### Operating Activities

For the three months ended March 31, 2017, cash provided by operating activities was $8.2 million compared to cash provided by operating activities of $10.2 million for the three months ended March 31, 2016, a decrease of $2.1 million, due primarily to unfavorable working capital changes, which include payments for accrued severance for the retirement of a former executive and our **Good To Great** incentive compensation plan during the first quarter of 2017.

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#### Investing Activities

Our investing activities resulted in a net cash outflow of $3.7 million for the three months ended March 31, 2017 compared to $5.7 million for the three months ended March 31, 2016, a decrease of $2.0 million. During the three months ended March 31, 2017, our capital expenditures totaled $3.7 million, of which $1.9 million and $1.8 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily related to cemetery development costs of $0.9 million, construction costs related to new funeral home facilities of approximately $0.8 million and renovations at certain business locations of $0.2 million. Maintenance capital expenditures in the three months ended March 31, 2017 were primarily related to vehicle purchases of $0.6 million, maintenance projects, such as paving roads, parking lots, facility repairs and improvements of $0.6 million, general equipment and furniture purchases of $0.4 million, and information technology infrastructure improvements of $0.2 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, during the three months ended March 31, 2016. Our growth capital expenditures were primarily related to construction costs related to new 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 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.

#### Financing Activities

Our financing activities resulted in a net cash outflow of $6.9 million for the three months ended March 31, 2017 compared to $4.2 million for the three months ended March 31, 2016, an increase of $2.7 million. During the three months ended March 31, 2017, we had net payments on our revolving credit facility and term loan of $5.4 million and paid $0.8 million in dividends.

During the three months ended March 31, 2016, we had net payments on our revolving credit facility and term loan of $2.3 million. We also paid transaction costs of approximately $0.7 million related to the Seventh Amendment of our Credit Facility and $0.4 million in dividends.

#### Dividends

On January 26, 2017, our Board declared a dividend of $0.050 per share, totaling approximately $0.8 million, which was paid on March 1, 2017 to record holders of our common stock as of February 13, 2017. During the first quarter of 2016, we paid a quarterly dividend of $0.025 per share, totaling approximately $0.4 million.

#### 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”). During the three months ended March 31, 2017, we did not repurchase any shares of common stock pursuant to this share repurchase program.

#### Debt Obligations

The outstanding principal of our total long-term debt and capital lease obligations at March 31, 2017 totaled $214.6 million and consisted of $135.9 million under our term loan, $65.1 million outstanding under our revolving credit facility and $14.8 million in acquisition indebtedness and capital lease obligations.

As of March 31, 2017, 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.

We have one letter of credit issued on November 30, 2016 and outstanding under the Credit Facility for approximately $2.0 million, bears interest at 2.125% and will expire on November 27, 2017. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. 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, 2017, 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, 2017 was 2.9%.

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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, 2017. 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 March 31, 2017, the leverage ratio was 2.75 to 1.00 and the fixed charge coverage ratio was 2.29 to 1.00.

Debt issuance costs, net of accumulated amortization, related to the Credit Facility of $1.2 million for the three months ended March 31, 2017 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. Amortization of debt issuance costs related to our Credit Facility was approximately $0.1 million for both the three months ended March 31, 2016 and 2017.

#### 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, 2017, the carrying amount of the equity component was approximately $18.0 million. At March 31, 2017, the principal amount of the liability component was $143.75 million and the net carrying amount was $120.8 million. The unamortized discount of $20.8 million and the unamortized debt issuance costs of $2.1 million as of March 31, 2017 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, 2016 and 2017 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, 2016 and 2017. Amortization of debt issuance costs related to our Convertible Notes was approximately $0.1 million for both the three months ended March 31, 2016 and 2017. Accretion of the discount on the Convertible Notes was $0.9 million and $1.0 million for the three months ended March 31, 2016 and 2017, respectively.

The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, effective at March 31, 2017, is 44.4530 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.50 per share of common stock.

### 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, 3,893 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, 2017 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, 2017 are presented in Item 1, “Condensed Notes to Consolidated

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Financial Statements,” Notes 3 and 6 to our Consolidated Financial Statements 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 1.55% change in the value of the fixed income securities.

We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of March 31, 2017, we had outstanding borrowings of $65.1 million under our $150.0 million revolving credit facility and approximately $135.9 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, 2017, 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. The Convertible Notes do not contain a call feature. At March 31, 2017, the fair value of these notes was approximately $187.4 million based on the last traded or broker quoted price. Increases in market interest rates may cause the value of the Convertible Notes to decrease, but such changes will not affect our interest costs.

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

## Controls and procedures

As filed, 1,595 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 Securities Exchange Act of 1934, as amended (“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 Securities and Exchange Commission 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, 2017 (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.

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## Risk factors

As filed, 748 characters.

There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016. 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, 2016, 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, 2016 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, 2017.
Source: SEC EDGAR, the filing index for accession 0001016281-17-000058. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.