# Carriage Services Inc: Form 10-Q for the period ended Mar 31, 2018

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2018-04-27
- Accepted by EDGAR: Apr 27, 2018, 17:12 ET
- Period: 2018-03-31
- Accession: 0001016281-18-000058
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628118000058/csv-2018331x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628118000058/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-03-31.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-01-01 to 2018-03-31 | $68.9m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-01-01 to 2018-03-31 | $49.2m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-01-01 to 2018-03-31 | $24.2m | us-gaap:GrossProfit |
| Operating income | 3 months, 2018-01-01 to 2018-03-31 | $17.1m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-01-01 to 2018-03-31 | $3.7m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-01-01 to 2018-03-31 | $3.4m | us-gaap:IncomeTaxExpenseBenefit |
| Diluted shares (weighted) | 3 months, 2018-01-01 to 2018-03-31 | 17,700,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 3 months, 2018-01-01 to 2018-03-31 | $14.9m | us-gaap:NetCashProvidedByUsedInOperatingActivitiesContinuingOperations |
| Capital expenditure | 3 months, 2018-01-01 to 2018-03-31 | $2.1m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 3 months, 2018-01-01 to 2018-03-31 | $1.2m | us-gaap:PaymentsOfDividendsCommonStock |
| Cash and equivalents | at 2018-03-31 | $779.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-03-31 | $27.7m | us-gaap:AssetsCurrent |
| Total assets | at 2018-03-31 | $905.2m | us-gaap:Assets |
| Current liabilities | at 2018-03-31 | $40.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-03-31 | $695.0m | us-gaap:Liabilities |
| Long-term debt | at 2018-03-31 | $200.3m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-03-31 | $17.0m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-03-31 | $210.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 41,921 characters.

### OVERVIEW

### General

Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was founded in 1991 and incorporated in the State of Delaware in December 1993. We are 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 currently account for approximately 20% of our revenues.

At March 31, 2018, we operated 178 funeral homes in 29 states and 32 cemeteries in 11 states. We compete with other publicly held funeral and cemetery companies and smaller, independent operators. We believe we are a market leader in most of our markets.

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 atneed and preneed basis. We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) 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
- Growth of the Company Is Driven by Decentralization and Partnership

Our five **Guiding Principles** collectively embody our **Being The Best** high-performance culture, 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. We believe that 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 candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses.

Our belief in our **Mission Statement** and **Guiding Principles** that define us and proper execution of the three models that define our strategy have given us the competitive advantage in any market in which we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin.

### 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, 2018 dated April 24, 2018 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. The Trend Report is not a part of or incorporated by reference into this Quarterly Report on Form 10-Q.

Below is a reconciliation of Net income (a GAAP measure) to Adjusted net income (a non-GAAP measure) for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 (in thousands):

|  | Three Months Ended March 31, 2017 | 2018 |
| --- | ---: | ---: |
| Net income | $7,084 | $9,356 |
| Special items,(1) |  |  |
| Accretion of discount on convertible subordinated notes | 1,037 | 1,160 |
| Adjusted net income(2) | $8,121 | $10,516 |

(1) 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 typically taxed at the federal statutory rate, except for the Accretion of the discount on convertible subordinated notes, as this is a non-tax deductible item.

(2) Adjusted net income is defined as Net income plus adjustments for Special items and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations.

Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 (in thousands):

|  | Three Months Ended March 31, 2017 | 2018 |
| --- | ---: | ---: |
| Gross profit | $23,092 | $24,188 |
| Field depreciation and amortization | 3,471 | 3,773 |
| Regional and unallocated funeral and cemetery costs | 2,954 | 3,281 |
| Operating profit(1) | $29,517 | $31,242 |

(1) Operating profit is defined as Gross profit less Field depreciation and amortization and Regional and unallocated funeral and cemetery costs.

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Below is a breakdown of Operating profit (a non-GAAP measure) by segment for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 (in thousands):

|  | Three Months Ended March 31, 2017 | 2018 |
| --- | ---: | ---: |
| Funeral Home segment | $23,782 | $25,092 |
| Cemetery segment | 5,735 | 6,150 |
| Operating profit | $29,517 | $31,242 |
| Operating profit margin(1) | 43.3% | 42.6% |

(1) Operating profit margin, a non-GAAP measure, is Operating profit as a percentage of Total revenues.

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

### Financial Highlights

#### Three months ended March 31, 2018 compared to three months ended March 31, 2017

Total revenue for the three months ended March 31, 2018 and 2017 was $73.4 million and $68.2 million, respectively, which represents an increase of approximately $5.2 million, or 7.7%. Funeral revenue increased $4.4 million to $58.6 million and cemetery revenue increased $0.8 million to $14.8 million in the three months ended March 31, 2018 compared to the same period in 2017. For the quarter comparatives, we experienced a 7.4% increase in total funeral contracts and an increase in the average revenue per funeral contract of 0.8%. In addition, we experienced an increase of 14.2% in the number of preneed interment rights (property) sold and the average price per interment right sold increased 7.2%. Further discussion of revenue for our funeral home and cemetery segments on a same store and acquired basis is presented herein under “Results of Operations.”

Gross profit for the three months ended March 31, 2018 increased $1.1 million, or 4.7%, to $24.2 million, from $23.1 million for the three months ended March 31, 2017, primarily due to the increase in funeral revenue from the businesses we acquired in 2017, as these businesses were not represented in the three months ended March 31, 2017 and the increase in preneed cemetery revenue.

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, 2018 increased $2.3 million to $9.4 million, equal to $0.52 per diluted share, compared to net income of $7.1 million, equal to $0.39 per diluted share, for the three months ended March 31, 2017. 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, 2017.

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### RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three months ended March 31, 2018 compared to the same period of 2017. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2014 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2013 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. The term “divested” refers to one business sold during 2017. There were no discontinued operations in the periods presented. 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 March 31, 2018 compared to three months ended March 31, 2017 (dollars in thousands):

| Revenues: | Three Months Ended March 31, 2017 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $43,761 | $45,509 | $1,748 | 4.0% |
| Acquired operating revenue | 8,138 | 10,773 | 2,635 | 32.4% |
| Divested operating revenue | 63 | — | (63) | n/a |
| Preneed funeral insurance commissions | 303 | 260 | (43) | (14.2)% |
| Preneed funeral trust earnings | 1,946 | 2,052 | 106 | 5.4% |
| Total | $54,211 | $58,594 | $4,383 | 8.1% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $18,234 | $18,757 | $523 | 2.9% |
| Acquired operating profit | 3,504 | 4,291 | 787 | 22.5% |
| Divested operating profit | 1 | (3) | (4) | n/a |
| Preneed funeral insurance commissions | 130 | 38 | (92) | (70.8)% |
| Preneed funeral trust earnings | 1,913 | 2,009 | 96 | 5.0% |
| Total | $23,782 | $25,092 | $1,310 | 5.5% |

Funeral home same store operating revenue for the three months ended March 31, 2018 increased $1.7 million or 4.0%, when compared to the three months ended March 31, 2017. This was due primarily to a 3.4% increase in same store contract volumes to 8,430 and a 0.5% increase in the average revenue per contract to $5,398. 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 0.7% to $5,603 in the three months ended March 31, 2018. The average revenue per burial contract increased 0.5% to $8,913 and the number of burial contracts increased 2.5% to 3,419. The average revenue per cremation contract increased 2.8% to $3,462 and the number of cremation contracts increased 4.5% to 4,428.

The burial rate for our same store businesses decreased 30 basis points to 40.6% while the cremation rate increased 50 basis points to 52.5% for the three months ended March 31, 2018 when compared to the three months ended March 31, 2017. 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 6.9% of the total number of contracts in the three months ended March 31, 2018, decreased 4.4% to $2,446.

Same store operating profit for the three months ended March 31, 2018 increased $0.5 million, or 2.9%, when compared to the three months ended March 31, 2017. Although same store revenue increased, same store operating profit margin (same store operating profit as a percentage of same store operating revenue) decreased by 50 basis points to 41.2% for the three months ended March 31, 2018 compared to the same period in 2017. The decline in same store operating profit margin is primarily the result of our focus on hiring additional managing partners to increase market share and grow revenue in our same store businesses. In the latter part of 2017, we began a process of de-clustering businesses in certain markets by adding managing partners to a business that may have been grouped with two or more businesses led by a single managing partner. While this results in shorter-term higher salaries and benefits, we believe that having the right managing partners in these businesses will increase market share and

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grow same store revenue. Same store salaries and benefits for the three months ended March 31, 2018 increased $0.7 million, or 5.7%, when compared to the three months ended March 31, 2017.

Funeral home acquired operating revenue for the three months ended March 31, 2018 increased $2.6 million, or 32.4%, when compared to the three months ended March 31, 2017. The funeral home acquired portfolio for the three months ended March 31, 2018 includes seven businesses acquired in the fourth quarter of 2017, not present in the three months ended March 31, 2017 results. We experienced a slight decrease in the average revenue per contract of 0.8% to $6,405 and a 33.5% increase in the total number of contracts to 1,682. 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 1.8% to $6,519 in the three months ended March 31, 2018. The average revenue per burial contract increased 5.1% to $9,961, while the number of burial contracts increased 25.6% to 751. The average revenue per cremation contract decreased 7.7% to $4,005 and the number of cremation contracts increased 42.2% to 799.

The burial rate for our acquired businesses decreased 290 basis points to 44.6% while the cremation rate increased 290 basis points to 47.5% for the three months ended March 31, 2018 when compared to the three months ended March 31, 2017. 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 7.9% of the total number of contracts in the three months ended March 31, 2018, decreased 16.4% to $2,157.

Acquired operating profit for the three months ended March 31, 2018 increased $0.8 million, or 22.5%, when compared to the three months ended March 31, 2017. Although acquired operating revenue increased, acquired operating profit margin decreased 330 basis points to 39.8% for the three months ended March 31, 2018 compared to the same period in 2017. The decrease is primarily due to the seven businesses we acquired in the fourth quarter of 2017, as operating profit margins for newly acquired businesses are generally lower than same store businesses, particularly in regards to higher salary and benefit costs. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.

Funeral home divested operating revenues and operating profit are from one business divested in December 2017. Expenses for the three months ended March 31, 2018 are residual expenses incurred for the divested business.

The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased by 14.2% for the three months ended March 31, 2018 compared to the same period in 2017. 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, 2018 is from the preneed funeral insurance contracts sold in the three months ended March 31, 2017. The number of preneed insurance contracts sold in the three months ended March 31, 2017 decreased 13.9% and the face value of the insurance products that earned commissions decreased 0.7% compared to the contracts sold during the same period of the prior year. 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 and earnings from the maturity of preneed funeral contracts. Trust earnings increased $0.1 million, or 5.4%, for the three months ended March 31, 2018. The increase is primarily due to an increase in earnings from the maturity of preneed contracts, while the earnings from trust management fees remained relatively flat.

Operating profit for our two categories of financial revenue, on a combined basis, remained relatively flat in the three months ended March 31, 2018.

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### Cemetery Segment

The following tables set forth certain information regarding the revenues and operating profit from our cemetery operations for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 (dollars in thousands):

| Revenues: | Three Months Ended March 31, 2017 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $10,839 | $11,717 | $878 | 8.1% |
| Acquired operating revenue | 909 | 870 | (39) | (4.3)% |
| Cemetery trust earnings | 1,716 | 1,759 | 43 | 2.5% |
| Preneed cemetery finance charges | 482 | 447 | (35) | (7.3)% |
| Total | $13,946 | $14,793 | $847 | 6.1% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $3,295 | $3,760 | $465 | 14.1% |
| Acquired operating profit | 353 | 325 | (28) | (7.9)% |
| Cemetery trust earnings | 1,605 | 1,618 | 13 | 0.8% |
| Preneed cemetery finance charges | 482 | 447 | (35) | (7.3)% |
| Total | $5,735 | $6,150 | $415 | 7.2% |

Cemetery same store operating revenue for the three months ended March 31, 2018 increased $0.9 million, or 8.1%, when compared to the three months ended March 31, 2017. Approximately 57.0% of our cemetery same store operating revenue related to preneed sales of interment rights (property) and related merchandise and services for the three months ended March 31, 2018. Preneed revenue increased $0.8 million, or 12.8%, as we experienced a 16.6% increase in the number of preneed interment rights sold to 1,802, while we experienced a 4.5% decrease in average price per interment to $3,124 for the three months ended March 31, 2018 compared to the same period in 2017. During the first quarter of 2018, we invested in additional sales leadership personnel at certain businesses, which contributed to the increase in revenue. In addition, we recognized revenue from a recently completed large garden at a certain cemetery business. Same store atneed revenue, which represents approximately 43.0% of our same store cemetery operating revenues, increased $0.1 million, or 2.4%, due primarily to a 5.5% increase in the average sale per contract to $1,425.

Cemetery same store operating profit for the three months ended March 31, 2018 increased $0.5 million, or 14.1%, from the same period in 2017. Cemetery same store operating profit as a percentage of cemetery same store operating revenue (cemetery operating profit margin) increased to 32.1% in the three months ended March 31, 2018 compared to 30.4% in the same period in 2017. The increase in cemetery same store operating profit margin is primarily due to the increase in preneed revenue, offset by a $0.2 million increase in salaries and benefits.

Cemetery acquired operating revenue and acquired operating profit remained relatively flat for the three months ended March 31, 2018 compared to the same period for 2017. Our acquired cemetery portfolio consists of only one cemetery business.

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 and financial revenue earned from finance charges remained flat in the three months ended March 31, 2018 compared to the same period in 2017.

### Other Financial Statement Items

#### Depreciation and Amortization

Depreciation and amortization related to our field and home office totaled $4.2 million for the three months ended March 31, 2018, an increase of $0.4 million, or 9.6%, from the three months ended March 31, 2017. These increases were primarily attributable to additional depreciation expense from assets acquired in our 2017 acquisitions, as well as the completion of two constructed funeral homes in the latter half of 2017.

#### 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 totaled $3.3 million for the three months ended March 31, 2018, an increase of $0.3 million, or 11.1%, compared to the same period in 2017,

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primarily due to a $0.4 million increase in field incentive compensation in line with increasing EBITDA and Standards Achievement, offset by a $0.1 million decrease in other general administrative costs.

#### General, Administrative and Other

General, administrative and other expenses totaled $6.6 million for the three months ended March 31, 2018, a decrease of $0.2 million, or 3.3%, compared to the same period in 2017. The decrease was attributable to a $0.3 million decrease in public company and regulatory costs, a $0.2 million decrease in severance expenses, a $0.1 million decrease in salaries and benefits and a $0.1 million decrease in other general administrative costs, offset by a $0.3 million increase in equity compensation and a $0.2 million increase in incentive compensation.

#### Interest Expense

Interest expense was $3.7 million for the three months ended March 31, 2018 compared to $3.0 million for the three months ended March 31, 2017, an increase of approximately $0.7 million. During the three months ended March 31, 2018, interest expense increased by approximately $0.6 million related to our Credit Facility, due to an increase in our weighted average interest rate and additional borrowings, and by approximately $0.1 million related to the addition of three capital leases in the latter half of 2017. During the three months ended March 31, 2018, the weighted average interest rate increased 1.0% compared to the same period in 2017, primarily as a result of an increase in the LIBOR rate.

#### Accretion of Discount on Convertible Subordinated Notes

For the three months ended March 31, 2018, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $1.2 million compared to $1.0 million for the three months ended March 31, 2017. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%.

#### Income Taxes

Income tax expense was $2.9 million for the three months ended March 31, 2018 compared to $4.7 million for the three months ended March 31, 2017. We recorded income taxes at the estimated effective rate, before discrete items, of 27.5% for the three months ended March 31, 2018 and 40.0% for the three months ended March 31, 2017. The discrete items include income tax benefit related to stock compensation and refunds received from the completion of state income tax audits, and income tax expense related to state tax rate changes and other non-material discrete state items. The decrease in the effective tax rate is primarily attributable to the reduction of the U.S. federal statutory income tax rate to 21% from 35% resulting from enactment of the Tax Cuts and Jobs Act of 2017 (the “TCJA”).

Regulatory changes from the TCJA negatively impacted the effective tax rate for the first quarter of 2018 by 0.2% due to the repeal of the domestic production activities deduction and 0.3% due to the exclusion of performance based compensation from the overall executive compensation deduction limitation. Additionally, regulatory changes to the deductibility of meals and entertainment along with the state conformity to the federal bonus depreciation rules both had a non-material negative rate impact on the effective tax rate. We adopted the provisions of Topic 606 using the modified retrospective approach, effective January 1, 2018. The adoption of this topic did not have a material impact on the effective tax rate for the reporting period.

We have approximately $34.0 million of state net operating loss carry forwards that will expire between 2019 and 2039, if not utilized. Based on management’s assessment of the various state net operating losses, it has been determined that it is more likely than not that we will not be able to realize the tax benefits of certain portions of the state losses. Accordingly, a valuation allowance has been established and is reviewed quarterly. At March 31, 2018, 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 atneed 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, 2017.

We intend to use cash on hand and borrowings under our Credit Facility to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends. From time to time we may also use our cash resources (including borrowings under our Credit Facility) to repurchase shares of our common stock and our Convertible Notes in open market or privately negotiated transactions. We have the ability

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to draw on our revolving credit facility, subject to customary terms and conditions of the Credit Agreement. We believe that our existing and anticipated cash resources 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 2018 with $1.0 million in cash and other liquid investments and ended the first quarter with $0.8 million in cash. As of March 31, 2018, we had borrowings of $84.2 million outstanding on our revolving credit facility compared to $92.0 million outstanding as of December 31, 2017.

The following table sets forth the elements of cash flow for the three months ended March 31, 2017 and 2018 (in millions):

|  | Three Months Ended March 31, 2017 | 2018 |
| --- | ---: | ---: |
| Cash at January 1st | $3.3 | $1.0 |
| Cash flow from operating activities | 8.2 | 14.9 |
| Growth capital expenditures | (1.9) | (0.6) |
| Maintenance capital expenditures | (1.8) | (1.5) |
| Net payments on our revolving credit facility, term loan and long-term debt obligations | (5.8) | (12.0) |
| Taxes paid on restricted stock vestings and exercise of non-qualified options | (0.5) | (0.3) |
| Dividends paid on common stock | (0.8) | (1.2) |
| Proceeds from the exercise of stock options and employee stock purchase plan contributions | 0.3 | 0.6 |
| Other financing costs | (0.2) | (0.1) |
| Cash at March 31st | $0.8 | $0.8 |

#### Operating Activities

For the three months ended March 31, 2018, cash flow provided by operating activities was $14.9 million compared to cash flow provided by operating activities of $8.2 million for the three months ended March 31, 2017. The increase of $6.7 million is due primarily to favorable working capital changes, which include a payment made in 2017 for accrued severance for the retirement of a former executive, which did not occur in 2018. In addition, we paid twelve Managing Partners in 2017 (largest plan year), compared to three Managing Partners in 2018 under our **Good To Great** incentive compensation plan.

#### Investing Activities

Our investing activities, which consist of capital expenditures, resulted in a net cash outflow of $2.1 million for the three months ended March 31, 2018 compared to $3.7 million for the three months ended March 31, 2017, a decrease of $1.6 million.

The following tables present our growth and maintenance capital expenditures (in millions):

| Growth | Three Months Ended March 31, 2017 | 2018 |
| --- | ---: | ---: |
| Cemetery development | $0.9 | $0.5 |
| Construction for new funeral facilities | 0.8 | — |
| Renovations at certain businesses | 0.2 | 0.1 |
| Total Growth | $1.9 | $0.6 |

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| Maintenance | Three Months Ended March 31, 2017 | 2018 |
| --- | ---: | ---: |
| Facility repairs and improvements | $0.6 | $0.3 |
| General equipment and furniture | 0.4 | 0.5 |
| Vehicles | 0.6 | 0.6 |
| Paving roads and parking lots | 0.1 | — |
| Information technology infrastructure improvements | 0.1 | 0.1 |
| Total Maintenance | $1.8 | $1.5 |

#### Financing Activities

Our financing activities resulted in a net cash outflow of $13.0 million for the three months ended March 31, 2018 compared to $6.9 million for the three months ended March 31, 2017, an increase of $6.1 million. During the three months ended March 31, 2018, we had net payments on our revolving credit facility, term loan and long-term debt obligations of $12.0 million. We also paid $1.2 million in dividends.

During the three months ended March 31, 2017, we had net payments on our revolving credit facility, term loan and long-term debt obligations of $5.8 million. We paid $0.8 million in dividends.

#### Dividends

On January 25, 2018, our Board declared a dividend of $0.075 per share, totaling approximately $1.2 million, which was paid on March 1, 2018 to record holders of our common stock as of February 12, 2018. For the three months ended March 31, 2017, we paid a quarterly dividend of $0.050 per share, totaling approximately $0.8 million.

#### Share Repurchase

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”). On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases of our common stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act. At March 31, 2018, we had approximately $26.0 million available for repurchases under this share repurchase program. During the three months ended March 31, 2018, we did not purchase 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, 2018 totaled $224.9 million and consisted of $123.8 million under our term loan, $84.2 million outstanding under our revolving credit facility and $16.9 million in acquisition indebtedness and capital lease obligations.

As of March 31, 2018, we had a $300 million secured 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, 2017 and outstanding under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% and will expire on November 26, 2018. 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, 2018, the prime rate margin was equivalent to 1.625% and the LIBOR margin was 2.625%. The weighted average interest rate on the Credit Facility for the three months ended March 31, 2018 was 3.9%.

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, 2018. 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

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and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of March 31, 2018, the leverage ratio was 2.96 to 1.00 and the fixed charge coverage ratio was 2.04 to 1.00.

Amortization of debt issuance costs related to our Credit Facility was approximately $0.1 million for both the three months ended March 31, 2017 and 2018. The unamortized debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight-line method for our revolving credit facility.

#### Convertible Subordinated Notes due 2021

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

At March 31, 2018, the carrying amount of the equity component was approximately $18.0 million. At March 31, 2018, the principal amount of the liability component was $143.75 million and the net carrying amount was $127.4 million. The unamortized discount of $16.4 million and the unamortized debt issuance costs of $1.6 million as of March 31, 2018 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, 2017 and 2018 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, 2017 and 2018. Accretion of the discount on the Convertible Notes was $1.0 million and $1.2 million for the three months ended March 31, 2017 and 2018, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $0.1 million for both the three months ended March 31, 2017 and 2018.

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, in effect at March 31, 2018, is 44.7115 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.37 per share of common stock.

We may from time to time seek to retire or purchase our Convertible Notes through cash purchases and/or exchanges for equity securities, in open market purchases, privately negotiated transactions or otherwise. Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors. The amounts involved may be material. During the three months ended March 31, 2018, we did not repurchase any Convertible Notes.

### 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, 3,918 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, 2018 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, 2018 are presented in Item 1, “Condensed Notes to Consolidated Financial Statements,” Notes 4 and 7 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The

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sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.53% 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, 2018, we had outstanding borrowings of $84.2 million under our $150.0 million revolving credit facility and approximately $123.8 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, 2018, the prime rate margin was equivalent to 1.625% and the LIBOR margin was 2.625%. 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 $2.1 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.

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, 2018, the fair value of these notes was approximately $188.6 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 could cause the fair value of those liabilities to decrease, but such changes will not affect our interest costs.

## Controls and procedures

As filed, 1,794 characters.

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

Our management, including our principal executive and financial officer, 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 Quarterly Report on 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 officer, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officer concluded that our disclosure controls and procedures are effective as of March 31, 2018 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with US GAAP.

### 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, 2017. 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, 2017, 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, 2017 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 27, 2018.
Source: SEC EDGAR, the filing index for accession 0001016281-18-000058. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.