# Carriage Services Inc: Form 10-Q for the period ended Sep 30, 2018

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2018-11-01
- Accepted by EDGAR: Nov 1, 2018, 16:51 ET
- Period: 2018-09-30
- Accession: 0001016281-18-000115
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628118000115/csv-2018930x10q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628118000115/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2018-07-01 to 2018-09-30 | $60.0m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 9 months, 2018-01-01 to 2018-09-30 | $188.4m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $47.1m | us-gaap:CostOfRevenue |
| Cost of revenue | 9 months, 2018-01-01 to 2018-09-30 | $143.3m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2018-07-01 to 2018-09-30 | $17.1m | us-gaap:GrossProfit |
| Gross profit | 9 months, 2018-01-01 to 2018-09-30 | $58.1m | us-gaap:GrossProfit |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | $10.3m | us-gaap:OperatingIncomeLoss |
| Operating income | 9 months, 2018-01-01 to 2018-09-30 | $37.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $6.3m | us-gaap:InterestExpense |
| Interest expense | 9 months, 2018-01-01 to 2018-09-30 | $14.8m | us-gaap:InterestExpense |
| Income tax | 3 months, 2018-07-01 to 2018-09-30 | $1.0m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 9 months, 2018-01-01 to 2018-09-30 | $5.4m | us-gaap:IncomeTaxExpenseBenefit |
| Net income | 9 months, 2018-01-01 to 2018-09-30 | $14.3m | us-gaap:NetIncomeLossAvailableToCommonStockholdersBasic |
| Diluted shares (weighted) | 3 months, 2018-07-01 to 2018-09-30 | 19,161,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 9 months, 2018-01-01 to 2018-09-30 | 18,273,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Capital expenditure | 9 months, 2018-01-01 to 2018-09-30 | $9.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 9 months, 2018-01-01 to 2018-09-30 | $4.1m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 9 months, 2018-01-01 to 2018-09-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2018-09-30 | $9.5m | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2018-09-30 | $38.1m | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $948.7m | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $30.8m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2018-09-30 | $706.9m | us-gaap:Liabilities |
| Long-term debt | at 2018-09-30 | $7.6m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2018-09-30 | $2.1m | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2018-09-30 | $241.8m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 72,551 characters.

### OVERVIEW

### General

Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was founded in 1991 to strategically consolidate and operate funeral homes and cemeteries in the fragmented death care industry. We are a leading U.S. provider of funeral and cemetery services and merchandise. We operate in two business segments: funeral home operations, which currently account for approximately 78% of our revenues, and cemetery operations, which currently account for approximately 22% of our revenues.

At September 30, 2018, we operated 182 funeral homes in 29 states and 29 cemeteries in 11 states. We compete with other publicly held funeral and cemetery companies and smaller, privately-owned 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 the leadership and entrepreneurial empowerment of our local leadership at the individual business level, rather than a centralized model. We operate a decentralized, entrepreneurial business model that is focused on sustainable long-term market share, revenue, and margin growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which attracts top entrepreneurial 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 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 key operating and financial metrics that drive long-term, sustainable revenue growth and improved cash earning power of each local business by employing leadership and entrepreneurial principles that support 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 September 30, 2018 dated October 31, 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 and nine months ended September 30, 2017 and 2018 (in thousands):

|  | Three Months Ended September 30, 2017 | 2018 | Nine Months Ended September 30, 2017 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Net income | $3,038 | $2,200 | $14,532 | $14,303 |
| Special items,(1) |  |  |  |  |
| Accretion of discount on convertible subordinated notes | 1,097 | 246 | 3,200 | 1,961 |
| Net loss on early extinguishment of debt | — | — | — | 740 |
| Loss recorded for expired management contract | — | 277 | — | 277 |
| Natural disaster costs | 259 | — | 259 | — |
| Adjusted net income(2) | $4,394 | $2,723 | $17,991 | $17,281 |

(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.

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Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the three and nine months ended September 30, 2017 and 2018 (in thousands):

|  | Three Months Ended September 30, 2017 | 2018 | Nine Months Ended September 30, 2017 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | $15,480 | $17,114 | $57,239 | $58,127 |
| Field depreciation and amortization | 3,601 | 4,011 | 10,719 | 11,688 |
| Regional and unallocated funeral and cemetery costs | 3,937 | 2,114 | 9,845 | 8,662 |
| Operating profit(1) | $23,018 | $23,239 | $77,803 | $78,477 |

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

Below is a breakdown of Operating profit (a non-GAAP measure) by segment for the three and nine months ended September 30, 2017 and 2018 (in thousands):

|  | Three Months Ended September 30, 2017 | 2018 | Nine Months Ended September 30, 2017 | 2018 |
| --- | ---: | ---: | ---: | ---: |
| Funeral Home segment | $18,062 | $18,109 | $61,161 | $61,154 |
| Cemetery segment | 4,956 | 5,130 | 16,642 | 17,323 |
| Operating profit | $23,018 | $23,239 | $77,803 | $78,477 |
| Operating profit margin(1) | 37.7% | 36.2% | 40.3% | 39.0% |

(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 September 30, 2018 compared to three months ended September 30, 2017

Total revenue for the three months ended September 30, 2018 and 2017 was $64.2 million and $61.1 million, respectively, which represents an increase of approximately $3.1 million, or 5.1%. Funeral revenue increased $2.5 million to $49.8 million and cemetery revenue increased $0.6 million to $14.4 million in the three months ended September 30, 2018 compared to the same period in 2017. For the quarter comparatives, we experienced a 5.1% increase in total funeral contracts, while the average revenue per funeral contract remained flat. In addition, we experienced an increase of 13.1% in the number of preneed interment rights (property) sold and an increase of 3.8% in the average price per interment right sold as a result of sales of higher-valued gardens constructed in recent years at certain of our same store businesses. 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 September 30, 2018 increased $1.6 million, or 10.6%, to $17.1 million, from $15.5 million for the three months ended September 30, 2017, primarily due to the increase in acquisition funeral revenue and the decrease in field incentive compensation and natural disaster costs, offset by a decline in same store funeral 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 September 30, 2018 decreased $0.8 million to $2.2 million, equal to $0.11 per diluted share, compared to net income of $3.0 million, equal to $0.17 per diluted diluted share, for the three months ended September 30, 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.”

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During the nine months ended September 30, 2018, we entered into a series of transactions to recapitalize our Balance Sheet. Further discussion of this is presented herein under “Balance Sheet Recapitalization.”

#### Nine months ended September 30, 2018 compared to nine months ended September 30, 2017

Total revenue for the nine months ended September 30, 2018 and 2017 was $201.5 million and $193.1 million, respectively, which represents an increase of approximately $8.4 million, or 4.4%. Funeral revenue increased $6.7 million to $157.0 million and cemetery revenue increased $1.7 million to $44.5 million in the nine months ended September 30, 2018 compared to the same period in 2017. For the period comparatives, we experienced a 5.2% increase in total funeral contracts, offset by a decrease of 0.7% in the average revenue per funeral contract. In addition, we experienced an increase of 2.9% in the number of preneed interment rights (property) sold and an increase of 7.8% in the average price per interment right sold. 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 nine months ended September 30, 2018 increased $0.9 million, or 1.6%, to $58.1 million, from $57.2 million for the nine months ended September 30, 2017, primarily due to the increase in acquisition funeral revenue and the decrease in field incentive compensation, offset by a decline in same store funeral revenue and higher salaries and benefits costs (including higher health care costs) across all funeral home businesses.

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 nine months ended September 30, 2018 decreased $0.2 million to $14.3 million, equal to $0.78 per diluted share, compared to net income of $14.5 million, equal to $0.81 per diluted share, for the nine months ended September 30, 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.”

### Balance Sheet Recapitalization

On April 25, 2018, we entered into an eighth amendment and commitment increase (the “Eighth Amendment”) to our former secured credit facility, dated as of August 30, 2012 (as amended, the “Former Credit Agreement”), which amended the Former Credit Agreement to, among other things, increase the aggregate revolving credit commitment to $200 million.

On May 7, 2018, we used the remaining capacity from the Eighth Amendment to complete our exchange (the “Exchange”) of approximately $115.0 million of our 2.75% convertible subordinated notes due March 15, 2021 (the “Convertible Notes”), which represented approximately 80% of the aggregate principal amount of our Convertible Notes then outstanding.

On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of 6.625% senior notes due 2026 (the “Senior Notes”). We used approximately $291.4 million of the net proceeds from the sale of the Senior Notes to repay all amounts outstanding under our Former Credit Agreement and all commitments thereunder were terminated.

On May 31, 2018, we entered into a new $150 million senior secured revolving credit facility (the “New Credit Facility”) with our subsidiary guarantors, certain financial institutions, as lenders, and Bank of America, N.A., as administrative agent.

Further discussion of these transactions is presented herein under “Liquidity And Capital Resources.”

### 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 and nine months ended September 30, 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” when discussed in the Funeral Home Segment, refers to one business sold during 2017. The term “divested” when discussed in the Cemetery Segment, refers to three cemetery businesses that we ceased to operate on September 30, 2018, as a result of an expired management agreement. 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 September 30, 2018 compared to three months ended September 30, 2017 (in thousands, except percentages):

| Revenues: | Three Months Ended September 30, 2017 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $38,787 | $37,456 | $(1,331) | (3.4)% |
| Acquired operating revenue | 6,467 | 10,300 | 3,833 | 59.3% |
| Divested revenue | 144 | — | (144) | n/a |
| Preneed funeral insurance commissions | 315 | 360 | 45 | 14.3% |
| Preneed funeral trust earnings | 1,616 | 1,727 | 111 | 6.9% |
| Total | $47,329 | $49,843 | $2,514 | 5.3% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $14,196 | $12,735 | $(1,461) | (10.3)% |
| Acquired operating profit | 2,093 | 3,588 | 1,495 | 71.4% |
| Divested profit | 70 | — | (70) | n/a |
| Preneed funeral insurance commissions | 120 | 93 | (27) | (22.5)% |
| Preneed funeral trust earnings | 1,583 | 1,693 | 110 | 6.9% |
| Total | $18,062 | $18,109 | $47 | 0.3% |

Funeral home same store operating revenue for the three months ended September 30, 2018 decreased $1.3 million or 3.4%, when compared to the three months ended September 30, 2017. This was due primarily to a 3.5% decrease in same store contract volumes to 6,968, while the average revenue per contract remained flat at $5,375. 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 0.4% to $5,579 in the three months ended September 30, 2018. The average revenue per burial contract increased by 2.8% to $9,079, while the number of burial contracts decreased 6.3% to 2,782. The average revenue per cremation contract increased by 1.8% to $3,413, while the number of cremation contracts decreased 2.9% to 3,639.

The burial rate for our same store businesses decreased 120 basis points to 39.9%, while the cremation rate increased 30 basis points to 52.2% for the three months ended September 30, 2018 when compared to the three months ended September 30, 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 September 30, 2018, decreased 18.0% to $2,191.

Same store operating profit for the three months ended September 30, 2018 decreased $1.5 million, or 10.3%, when compared to the three months ended September 30, 2017 primarily due to the decrease in same store revenue. Our same store operating profit margin (same store operating profit as a percentage of same store operating revenue) decreased by 260 basis points to 34.0% for the three months ended September 30, 2018 compared to the same period in 2017. The decline in same store operating profit margin is primarily the result of an increase in salaries and benefits expenses, which increased $0.3 million, or 3.0% and other deterioration of expense management for the three months ended September 30, 2018 when compared to the three months ended

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September 30, 2017. The increase in these salaries and benefits costs was due to higher health care costs and continuous upgrading of personnel at our same store businesses.

Funeral home acquired operating revenue for the three months ended September 30, 2018 increased $3.8 million, or 59.3%, when compared to the three months ended September 30, 2017. The funeral home acquired portfolio for the three months ended September 30, 2018 includes seven businesses acquired in the fourth quarter of 2017 and four businesses acquired in the third quarter of 2018, not present in the three months ended September 30, 2017 results. While we experienced a decrease in the average revenue per contract of 5.1% to $6,045, the total number of contracts increased 67.9% to 1,704. 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 5.5% to $6,146 in the three months ended September 30, 2018. The average revenue per burial contract increased 1.7% to $9,666 and the number of burial contracts increased 61.1% to 712. The average revenue per cremation contract decreased 14.2% to $3,875, while the number of cremation contracts increased 73.4% to 841. The increase in the number of cremation contracts was primarily due to the businesses we acquired in Colorado in the fourth quarter of 2017, as these were not present in the prior period. The decrease in the average revenue per cremation contract was due to the higher number of cremation contracts for which we did not perform additional services at these businesses.

The burial rate for our acquired businesses decreased 170 basis points to 41.8%, while the cremation rate increased 160 basis points to 49.4% for the three months ended September 30, 2018 when compared to the three months ended September 30, 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 8.9% of the total number of contracts in the three months ended September 30, 2018, decreased 8.4% to $2,202.

Acquired operating profit for the three months ended September 30, 2018 increased $1.5 million, or 71.4%, when compared to the three months ended September 30, 2017. Acquired operating profit margin increased 240 basis points to 34.8% for the three months ended September 30, 2018 compared to the same period in 2017. The increase is primarily due to the two Virginia businesses we acquired in July 2018, which are not present in the three months ended September 30, 2017 results. These businesses have high contract volume with a higher operating profit margin compared to our other acquired businesses.

Funeral home divested operating revenues and operating profit are from one business divested in December 2017.

The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue increased by 14.3% for the three months ended September 30, 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, thus, the preneed commission revenue recognized for the three months ended September 30, 2018 is from the preneed funeral insurance contracts sold in the three months ended September 30, 2017. The number of preneed insurance contracts sold in the three months ended September 30, 2017 decreased 5.9%, while the face value of the insurance products that earned commissions increased 2.0% compared to the contracts sold during the same period of 2016. 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 6.9%, for the three months ended September 30, 2018. The increase is due to an increase in earnings from the maturity of preneed contracts.

Operating profit for our two categories of financial revenue, on a combined basis, increased $0.1 million, or 4.9%, in the three months ended September 30, 2018, compared to the three months ended September 30, 2017.

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The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the nine months ended September 30, 2018 compared to nine months ended September 30, 2017 (in thousands, except percentages):

| Revenues: | Nine Months Ended September 30, 2017 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $121,914 | $120,449 | $(1,465) | (1.2)% |
| Acquired operating revenue | 21,687 | 29,908 | 8,221 | 37.9% |
| Divested revenue | 441 | — | (441) | n/a |
| Preneed funeral insurance commissions | 951 | 974 | 23 | 2.4% |
| Preneed funeral trust earnings | 5,286 | 5,638 | 352 | 6.7% |
| Total | $150,279 | $156,969 | $6,690 | 4.5% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $47,172 | $44,462 | $(2,710) | (5.7)% |
| Acquired operating profit | 8,242 | 10,884 | 2,642 | 32.1% |
| Divested profit | 216 | (3) | (219) | n/a |
| Preneed funeral insurance commissions | 329 | 285 | (44) | (13.4)% |
| Preneed funeral trust earnings | 5,202 | 5,526 | 324 | 6.2% |
| Total | $61,161 | $61,154 | $(7) | —% |

Funeral home same store operating revenue for the nine months ended September 30, 2018 decreased $1.5 million, or 1.2%, when compared to the nine months ended September 30, 2017. This was due primarily to a 0.6% decrease in the average revenue per contract to $5,334, and a 0.6% decrease in same store contract volumes to 22,580. 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 decreased 0.3% to $5,542 in the nine months ended September 30, 2018. The average revenue per burial contract increased 1.0% to $8,965, while the number of burial contracts decreased 3.2% to 8,978. The average revenue per cremation contract increased 1.5% to $3,419 and the number of cremation contracts increased 0.9% to 11,923.

The burial rate for our same store businesses decreased 100 basis points to 39.8%, while the cremation rate increased 80 basis points to 52.8% for the nine months ended September 30, 2018, when compared to the nine months ended September 30, 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 7.4% of the total number of contracts in the nine months ended September 30, 2018, decreased 9.8% to $2,321.

Same store operating profit for the nine months ended September 30, 2018 decreased $2.7 million, or 5.7%, when compared to the nine months ended September 30, 2017. In addition to the decrease in same store revenue, same store operating profit margin (same store operating profit as a percentage of same store operating revenue) decreased by 180 basis points to 36.9% for the nine months ended September 30, 2018 compared to the same period in 2017. The decline in same store operating profit margin is primarily the result of an increase in salaries and benefits expenses, which increased $1.5 million, or 4.4% and other deterioration of expense management for the nine months ended September 30, 2018, when compared to the nine months ended September 30, 2017. The increase in these salaries and benefits costs was due to higher health care costs and continuous upgrading of personnel at our same store businesses.

Funeral home acquired operating revenue for the nine months ended September 30, 2018 increased $8.2 million, or 37.9%, when compared to the nine months ended September 30, 2017. The funeral home acquired portfolio for the nine months ended September 30, 2018 includes seven businesses acquired in the fourth quarter of 2017 and four businesses acquired in the third quarter of 2018, not present in the nine months ended September 30, 2017 results. We experienced a 45.5% increase in the total number of contracts to 4,857, while the average revenue per contract decreased 5.2% to $6,158. 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 5.7% to $6,268 in the nine months ended September 30, 2018. The average revenue per burial contract increased 2.0% to $9,731 and the number of burial contracts increased 33.8% to 2,064. The average revenue per cremation contract decreased 11.3% to $3,961, while the number of cremation contracts increased 58.6% to 2,392. The increase in the number of cremation contracts was primarily due to the businesses we acquired in Colorado in the fourth quarter of 2017, as these were not present in the prior

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period. The decrease in the average revenue per cremation contract was due to the higher number of cremation contracts for which we did not perform additional services at these businesses.

The burial rate for our acquired businesses decreased 370 basis points to 42.5%, while the cremation rate increased 400 basis points to 49.2% for the nine months ended September 30, 2018, when compared to the nine months ended September 30, 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 8.3% of the total number of contracts in the nine months ended September 30, 2018, decreased 13.8% to $2,205.

Acquired operating profit for the nine months ended September 30, 2018 increased $2.6 million, or 32.1%, when compared to the nine months ended September 30, 2017. Although acquired operating revenue increased, acquired operating profit margin decreased 160 basis points to 36.4% for the nine months ended September 30, 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 these acquired businesses were lower compared to our other acquired businesses, particularly with regard to higher salaries and benefits expenses.

Funeral home divested operating revenues and operating profit are from one business divested in December 2017. Expenses for the nine months ended September 30, 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 increased by 2.4% for the nine months ended September 30, 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, thus, the preneed commission revenue recognized for the nine months ended September 30, 2018 is from the preneed funeral insurance contracts sold in the nine months ended September 30, 2017. The number of preneed insurance contracts sold in the nine months ended September 30, 2017 decreased 5.7%, while the face value of the insurance products that earned commissions increased 8.5% compared to the contracts sold during the same period of 2016. 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 $0.4 million, or 6.7%, for the nine months ended September 30, 2018. The increase is due to an increase in earnings from the maturity of preneed contracts.

Operating profit for our two categories of financial revenue, on a combined basis, increased $0.3 million, or 5.1%, in the nine months ended September 30, 2018, compared to the nine months ended September 30, 2017.

### Cemetery Segment

The following tables set forth certain information regarding the revenues and operating profit from our cemetery operations for the three months ended September 30, 2018 compared to the three months ended September 30, 2017 (in thousands, except percentages):

| Revenues: | Three Months Ended September 30, 2017 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $9,688 | $10,439 | $751 | 7.8% |
| Acquired operating revenue | 761 | 652 | (109) | (14.3)% |
| Divested revenue | 1,338 | 1,479 | $141 | 10.5% |
| Cemetery trust earnings | 1,556 | 1,392 | (164) | (10.5)% |
| Preneed cemetery finance charges | 382 | 436 | 54 | 14.1% |
| Total | $13,725 | $14,398 | $673 | 4.9% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $2,669 | $2,891 | $222 | 8.3% |
| Acquired operating profit | 200 | 116 | (84) | (42.0)% |
| Divested profit | 259 | 407 | $148 | 57.1% |
| Cemetery trust earnings | 1,446 | 1,280 | (166) | (11.5)% |
| Preneed cemetery finance charges | 382 | 436 | 54 | 14.1% |
| Total | $4,956 | $5,130 | $174 | 3.5% |

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Cemetery same store operating revenue for the three months ended September 30, 2018 increased $0.8 million, or 7.8%, when compared to the three months ended September 30, 2017. Approximately 60.0% 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 September 30, 2018. Preneed revenue increased $0.8 million, or 15.5% as we experienced a 16.4% increase in the number of preneed interment rights sold to 1,602 and a 3.7% increase in average price per interment right to $3,524 for the three months ended September 30, 2018 compared to the same period in 2017. The increase in the average price per interment was a result of sales in higher-valued gardens constructed in recent years at certain of our same store businesses. Same store atneed revenue, which represents approximately 40.0% of our same store cemetery operating revenues, decreased $0.1 million, or 1.9%, due primarily to a 3.8% decrease in the number of contracts to 2,651, offset by an increase of 2.0% in the average sale per contract to $1,593.

Cemetery same store operating profit for the three months ended September 30, 2018 increased $0.2 million, or 8.3%, 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 27.7% in the three months ended September 30, 2018 compared to 27.5% in the same period in 2017. The increase in cemetery same store operating profit margin is primarily due to the increase in revenue.

Cemetery acquired operating revenue decreased $0.1 million, or 14.3%, and cemetery acquired operating profit also decreased $0.1 million, or 42.0%, for the three months ended September 30, 2018 compared to the same period in 2017. Our acquired cemetery portfolio consists of only one cemetery business that experienced both a decrease in the number of preneed interment rights sold and a decrease in average price per interment right for the three months ended September 30, 2018 compared to the same period in 2017.

Cemetery divested operating revenues and operating profit are from three cemetery businesses that we ceased to operate on September 30, 2018, as a result of an expired management agreement.

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 decreased $0.1 million in the three months ended September 30, 2018 compared to the same period in 2017. The decrease is primarily due to a decrease in interest income earned in the investment portfolio due to a lower allocation to fixed income securities in our perpetual care trust in the three months ended September 30, 2018 compared to the same period in 2017.

The following tables set forth certain information regarding the revenues and operating profit from our cemetery operations for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 (in thousands, except percentages):

| Revenues: | Nine Months Ended September 30, 2017 | 2018 | Change Amount% |  |
| --- | ---: | ---: | ---: | ---: |
| Same store operating revenue | $29,820 | $31,698 | $1,878 | 6.3% |
| Acquired operating revenue | 2,370 | 2,530 | 160 | 6.8% |
| Divested revenue | 4,612 | 4,712 | $100 | 2.2% |
| Cemetery trust earnings | 4,815 | 4,327 | (488) | (10.1)% |
| Preneed cemetery finance charges | 1,167 | 1,239 | 72 | 6.2% |
| Total | $42,784 | $44,506 | $1,722 | 4.0% |
| Operating profit: |  |  |  |  |
| Same store operating profit | $8,991 | $9,901 | $910 | 10.1% |
| Acquired operating profit | 743 | 852 | 109 | 14.7% |
| Divested profit | 1,208 | 1,376 | $168 | 13.9% |
| Cemetery trust earnings | 4,533 | 3,955 | (578) | (12.8)% |
| Preneed cemetery finance charges | 1,167 | 1,239 | 72 | 6.2% |
| Total | $16,642 | $17,323 | $681 | 4.1% |

Cemetery same store operating revenue for the nine months ended September 30, 2018 increased $1.9 million, or 6.3%, when compared to the nine months ended September 30, 2017. Approximately 60.0% of our cemetery same store operating revenue related to preneed sales of interment rights (property) and related merchandise and services for the nine months ended September 30, 2018. Preneed revenue increased $1.6 million, or 9.5%, as we experienced a 6.6% increase in average price per interment right to $3,561 and a 4.5% increase in the number of preneed interment rights sold to 4,558 for the nine months ended September 30,

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2018 compared to the same period in 2017. The increase in the average price per interment was a result of sales in higher-valued gardens constructed in recent years at certain of our same store businesses. During the first and second quarters of 2018, we recognized revenue from a completed large garden at a certain cemetery business. Same store atneed revenue, which represents approximately 40.0% of our same store cemetery operating revenues, increased $0.3 million, or 2.0%, due primarily to a 5.7% increase in the average sale per contract to $1,550, offset by a decrease of 3.5% in the number of contracts to 8,484.

Cemetery same store operating profit for the nine months ended September 30, 2018 increased $0.9 million, or 10.1%, 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 31.2% in the nine months ended September 30, 2018 compared to 30.2% in the same period in 2017. The increase in cemetery same store operating profit margin is due to the increase in revenue, offset by a $0.7 million increase in expenses. The categories with significant increases include $0.4 million of facilities and grounds expenses and $0.4 million of promotional expenses, offset by a $0.1 million decrease in bad debt expense.

Cemetery acquired operating revenue increased $0.2 million, or 6.8%, and acquired operating profit increased $0.1 million, or 14.7%, from the same period in 2017. Cemetery acquired operating profit as a percentage of cemetery acquired operating revenue (cemetery operating profit margin) increased to 33.7% in the nine months ended September 30, 2018 compared to 31.4% in the same period in 2017. Our acquired cemetery portfolio consists of only one cemetery business that experienced both increased revenue and better management of expenses in the nine months ended September 30, 2018 compared to the same period 2017.

Cemetery divested operating revenues and operating profit are from three cemetery businesses that we ceased to operate on September 30, 2018, as a result of an expired management agreement.

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 decreased $0.4 million, or 7.0%, in the nine months ended September 30, 2018 compared to the same period in 2017. The decrease is primarily due to gains realized in the perpetual care trust during the nine months ended September 30, 2017 that were not present in the same period in 2018.

Operating profit for trust earnings and financial revenue earned from finance charges decreased $0.5 million or 8.9% in the nine months ended September 30, 2018 compared to the same period in 2017. The decrease is due to decreased perpetual care trust revenue and higher general and administrative costs in our registered investment advisor firm.

### Other Financial Statement Items

#### Depreciation and Amortization

Depreciation and amortization related to our field and home office totaled $4.5 million for the three months ended September 30, 2018, an increase of $0.5 million, or 12.8%, from the three months ended September 30, 2017. Depreciation and amortization related to our field and home office totaled $13.1 million for the nine months ended September 30, 2018, an increase of $1.2 million, or 10.3%, from the nine months ended September 30, 2017. These increases were primarily attributable to additional depreciation expense from assets acquired in our 2017 and 2018 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 totaled $2.1 million for the three months ended September 30, 2018, a decrease of $1.8 million, or 46.3%, compared to the same period in 2017, primarily due to a $1.1 million decrease in field incentive compensation in line with Standards Achievement at certain businesses, a $0.5 million decrease in other general administrative costs and a $0.3 million decrease in natural disaster costs, offset by a $0.1 million increase in severance expenses.

Regional and unallocated funeral and cemetery costs totaled $8.7 million for the nine months ended September 30, 2018, a decrease of $1.2 million, or 12.0%, compared to the same period in 2017, primarily due to a $0.6 million decrease in other general administrative costs, a $0.5 million decrease in field incentive compensation in line with Standards Achievement at certain businesses and a $0.3 million decrease in natural disaster costs, offset by a $0.2 million increase in salaries and benefits expenses.

#### General, Administrative and Other

General, administrative and other expenses totaled $6.3 million for the three months ended September 30, 2018, an increase of $0.2 million, or 3.4%, compared to the same period in 2017. The increase was attributable to a $0.2 million increase in acquisition expenses and a $0.1 million increase in equity compensation, offset by a $0.1 million decrease in incentive compensation.

General, administrative and other expenses totaled $19.3 million for the nine months ended September 30, 2018, a decrease of $0.2 million, or 1.1%, compared to the same period in 2017. The decrease was attributable to a $0.5 million decrease in public company and regulatory costs, a $0.4 million decrease in salaries and benefits expenses, a $0.3 million decrease in severance

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expenses and a $0.1 million decrease in other general administrative costs, offset by a $0.5 million increase in equity compensation, a $0.3 million increase in health care costs, a $0.3 million increase in acquisition expenses.

#### Interest Expense

Interest expense was $6.3 million for the three months ended September 30, 2018 compared to $3.3 million for the three months ended September 30, 2017, an increase of approximately $3.0 million due to the following: (i) an increase of $5.5 million related to our Senior Notes; and (ii) an increase of $0.1 million related to capital leases, offset by; (iii) a decrease of $1.7 million related to our Former Credit Agreement; and (iv) a decrease of $0.9 million related to the Exchange of our Convertible Notes.

Interest expense was $14.8 million for the nine months ended September 30, 2018 compared to $9.5 million for the nine months ended September 30, 2017, an increase of approximately $5.3 million due to the following: (i) an increase of $7.4 million related to our Senior Notes; and (ii) an increase of $0.2 million related to capital leases, offset by; (iii) a decrease of $1.4 million related to the Exchange of our Convertible Notes; and (iv) a decrease of $0.9 million related to our Former Credit Agreement.

#### Accretion of Discount on Convertible Notes

For the three months ended September 30, 2018, we recognized accretion of the discount on our Convertible Notes of $0.2 million compared to $1.1 million for the three months ended September 30, 2017, a decrease of approximately $0.9 million, which was attributable to the Exchange of our Convertible Notes.

For the nine months ended September 30, 2018, we recognized accretion of the discount on our Convertible Notes of $2.0 million compared to $3.2 million for the nine months ended September 30, 2017, a decrease of approximately $1.2 million, which was attributable to the Exchange of our Convertible Notes.

#### Net Loss on Early Extinguishment of Debt

For the nine months ended September 30, 2018, we recognized a net loss of approximately $0.9 million on the early extinguishment of debt for the following transactions:

(i) a loss of approximately $1.6 million related to the termination of our Former Credit Agreement, which consisted of a write-off of approximately $0.7 million of transaction costs related to the Eighth Amendment and a write-off of approximately $0.9 million of unamortized debt issuance costs related to the Former Credit Agreement;

(ii) a net gain of approximately $1.2 million related to the redemption of our Convertible Notes, which consisted of a gain of approximately $2.5 million on the difference between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding the Exchange and a loss of approximately $1.3 million related to the write-off of unamortized debt issuance costs due to the Exchange of our Convertible Notes; and

(iii) a loss of approximately $0.5 million related to transaction costs incurred for the redemption of our Convertible Notes.

#### Other, net

For the nine months ended September 30, 2018, we recognized a loss of approximately $0.3 million on an expired management agreement with a Florida municipality and as a result, we ceased to operate three of our cemetery businesses on September 30, 2018.

#### Income Taxes

Income tax expense was $1.2 million for the three months ended September 30, 2018 compared to $1.5 million for the three months ended September 30, 2017. Income tax expense was $5.1 million for the nine months ended September 30, 2018 compared to $9.3 million for the nine months ended September 30, 2017. We recorded income taxes at the estimated effective rate, before discrete items, of 30.3% and 28.0% for the three and nine months ended September 30, 2018 and 40.0% for both the three and nine months ended September 30, 2017. The decrease in the effective tax rate in 2018 compared to 2017 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”). The discrete items include income tax benefit related to stock compensation and refunds received from the completion of state income tax audits, income tax expense related to state tax rate changes and other non-material discrete state items.

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 $33.4 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 September 30, 2018, 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 New 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 future borrowings under our New 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 New Credit Facility) to repurchase shares of our common stock and our Convertible Notes in open market or privately negotiated transactions. We have the ability to draw on our senior secured revolving credit facility, subject to customary terms and conditions of the New Credit Facility. 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 third quarter with $9.5 million in cash. As of September 30, 2018, we had no borrowings outstanding on our New Credit Facility compared to $92.0 million outstanding under our Former Credit Agreement as of December 31, 2017.

The following table sets forth the elements of cash flow for the nine months ended September 30, 2017 and 2018 (in millions):

|  | Nine Months Ended September 30, 2017 | 2018 |
| --- | ---: | ---: |
| Cash at January 1st | $3.3 | $1.0 |
| Cash flow from operating activities | 30.8 | 38.7 |
| Acquisitions and land for new construction | (0.7) | (38.0) |
| Net proceeds from the sale of other assets | 0.4 | — |
| Growth capital expenditures | (6.8) | (2.8) |
| Maintenance capital expenditures | (6.3) | (6.2) |
| Net payments on long-term debt obligations | (1.7) | (220.5) |
| Payment of debt issuance costs related to long-term debt | — | (1.6) |
| Redemption of the Convertible Notes | — | (75.2) |
| Payment of transaction costs related to the redemption of the Convertible Notes | — | (0.8) |
| Proceeds from the issuance of the Senior Notes | — | 320.1 |
| Payment of debt issuance costs related to the Senior Notes | — | (1.4) |
| Taxes paid on restricted stock vestings and exercise of non-qualified options | (0.5) | (0.7) |
| Dividends paid on common stock | (2.5) | (4.1) |
| Purchase of treasury stock | (16.4) | — |
| Other financing costs | 1.2 | 0.9 |
| Cash at September 30th | $0.8 | $9.5 |

#### Operating Activities

For the nine months ended September 30, 2018 cash flow provided by operating activities was $38.7 million compared to cash flow provided by operating activities of $30.8 million for the nine months ended September 30, 2017. The increase of $7.9 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 participant year), compared to three Managing Partners in 2018 under our **Good To Great** incentive compensation plan.

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Finally, we have accrued interest expense for our Senior Notes that will be paid in December 2018, that were not accrued in the prior year.

#### Investing Activities

Our investing activities, resulted in a net cash outflow of $47.0 million for the nine months ended September 30, 2018 compared to $13.4 million for the nine months ended September 30, 2017, a decrease of $33.6 million. During the nine months ended September 30, 2018, we purchased four funeral home businesses for approximately $38.0 million. During the nine months ended September 30, 2017, we purchased land for a funeral home parking lot expansion project for approximately $0.7 million.

For the nine months ended September 30, 2018, capital expenditures totaled $9.0 million compared to $13.1 million, a decrease of $4.1 million. The following tables present our growth and maintenance capital expenditures (in millions):

| Growth | Nine Months Ended September 30, 2017 | 2018 |
| --- | ---: | ---: |
| Cemetery development | $3.0 | $1.6 |
| Construction for new funeral facilities | 2.5 | — |
| Renovations at certain businesses | 1.3 | 1.2 |
| Total | $6.8 | $2.8 |

| Maintenance | Nine Months Ended September 30, 2017 | 2018 |
| --- | ---: | ---: |
| Facility repairs and improvements | $1.8 | $1.5 |
| Vehicles | 1.7 | 2.0 |
| General equipment and furniture | 1.6 | 1.7 |
| Paving roads and parking lots | 1.0 | 0.5 |
| Information technology infrastructure improvements | 0.2 | 0.5 |
| Total | $6.3 | $6.2 |

#### Financing Activities

Our financing activities resulted in a net cash inflow of $16.8 million for the nine months ended September 30, 2018 compared to a net cash outflow of $19.9 million for the nine months ended September 30, 2017, an increase of $36.7 million. During the nine months ended September 30, 2018, we had net borrowings on our Senior Notes of $318.8 million, offset by net payments on our long-term debt obligations of $222.1 million and a payment of $76.1 million to exchange our Convertible Notes. We also paid $4.1 million in dividends.

During the nine months ended September 30, 2017, we had net payments on our long-term debt obligations of $1.7 million. We purchased treasury stock for $16.4 million and paid $2.5 million in dividends.

#### Dividends

For the three and nine months ended September 30, 2017 and 2018, our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):

| 2017 | Per Share | Dollar Value |
| --- | ---: | ---: |
| March 1st | $0.050 | $833 |
| June 1st | $0.050 | $835 |
| September 1st | $0.050 | $835 |
| **2018** | **Per Share** | **Dollar Value** |
| March 1st | $0.075 | $1,207 |
| June 1st | $0.075 | $1,433 |
| September 4th | $0.075 | $1,436 |

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#### Share Repurchase

At September 30, 2018, we had approximately $26.0 million available for repurchases under our share repurchase program. During the three and nine months ended September 30, 2018, we did not purchase any shares of common stock pursuant to our share repurchase program.

#### Long-term Debt

On April 25, 2018, we entered into an Eighth Amendment, which amended the Former Credit Agreement as follows:

(i) increase the aggregate revolving credit commitment to $200 million;

(ii) permit the Company to use the proceeds of revolving loans; (a) to repay certain indebtedness; (b) for working capital and acquisitions; (c) to make certain capital expenditures; (d) to pay interest on certain subordinated indebtedness and refinancing indebtedness (subject to the satisfaction of certain terms and conditions); (e) to prepay, repay, purchase or redeem certain subordinated indebtedness; and (f) for general corporate purposes;

(iii) modify the maximum senior secured leverage ratio covenant; and

(iv) release the mortgage liens of the Administrative Agent on certain real property collateral located in a flood plain, among other things.

Following the effectiveness of the Eighth Amendment, the Former Credit Agreement was comprised of a $200 million revolving credit facility and a $150 million term loan. Under the Former Credit Agreement, as amended by the Eighth Amendment, we were required to comply with a covenant to maintain a maximum senior secured leverage ratio. We incurred approximately $0.7 million in transaction costs related to the Eighth Amendment of our Former Credit Agreement, which were recorded in *Net loss on early extinguishment of debt.*

On May 7, 2018, we used the remaining capacity from the Eighth Amendment to redeem approximately 80% of the then outstanding aggregate principal amount of our Convertible Notes. We recognized (i) a net gain of approximately $1.2 million related to the redemption of our Convertible Notes; and (ii) a loss of approximately $0.5 million related to transaction costs incurred for the redemption of our Convertible Notes, all of which were recorded in *Net loss on early extinguishment of debt.*

On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our Senior Notes.

On May 31, 2018, we used approximately $291.4 million of the net proceeds from the sale of the Senior Notes to repay all amounts outstanding under our Former Credit Agreement and all commitments thereunder were terminated. In connection with the repayment in full of all amounts due thereunder, the Former Credit Agreement was retired and $2.0 million of letters of credit previously issued under the Former Credit Agreement were deemed issued under (and remain outstanding under) the New Credit Facility. We did not incur any material early termination penalties in connection with the repayment of the Former Credit Agreement. In connection with the termination of the Former Credit Agreement, we recognized (i) a loss of approximately $0.7 million related to the Eighth Amendment transaction costs; and (ii) a loss of approximately $0.9 million of unamortized debt issuance costs related to the Former Credit Agreement, all of which were recorded in *Net loss on early extinguishment of debt.*

On May 31, 2018, in connection with the issuance of the Senior Notes, we entered into a $150 million New Credit Facility with Credit Facility Guarantors (as defined below), the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. Our obligations under the New Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Credit Facility Guarantors”).

At closing, we had no outstanding borrowings under the New Credit Facility and $148.0 million of availability after giving effect to the $2.0 million of letters of credit previously issued under the Former Credit Agreement that were deemed issued under (and remain outstanding under) the New Credit Facility. The New Credit Facility includes an accordion feature allowing for future increases in the facility size by an additional amount of up to $75.0 million. The New Credit Facility matures on May 31, 2023. Interest will accrue on amounts outstanding under the New Credit Facility at either a prime rate or a LIBOR rate, plus an applicable margin based upon our total leverage ratio.

We incurred approximately $0.9 million in transactions costs related to our New Credit Facility, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method and are recorded in *Intangible and other non-current assets.*

The New Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of our personal property assets and those of the Credit Facility Guarantors, and will include provisions which require us and such subsidiaries, upon the occurrence of an event of default under the New Credit Facility, to grant additional liens on real property assets accounting for no less than 50% of our and the Credit Facility Guarantors' funeral operations.

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The New Credit Facility contains customary negative covenants, including, but not limited to, covenants that, among other things, restrict (subject to certain exceptions) our ability and the Credit Facility Guarantor's ability to incur indebtedness, grant liens, make investments, engage in acquisitions, mergers or consolidations, and pay dividends and other restricted payments, and the following financial covenants: a total leverage ratio not to exceed 5.50 to 1.00, and a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. We will calculate the financial covenants on a consolidated basis.

As of September 30, 2018, we had no outstanding borrowings under the New Credit Facility and $16.3 million in acquisition indebtedness and capital lease obligations. We had one letter of credit issued on November 30, 2017 and outstanding under the New 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. Outstanding borrowings under our New Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of September 30, 2018, the prime rate margin was equivalent to 1.00% and the LIBOR margin was 2.00%. As we had no outstanding borrowings under the New Credit Facility during the three months ended September 30, 2018, the weighted average interest rate on our New Credit Facility was zero. For the six months ended June 30, 2018, the weighted average interest rate on our Former Credit Agreement was 4.0%.

As of September 30, 2018, we were in compliance with the covenants contained in the New Credit Facility, with a leverage ratio of 4.86 to 1.00 and a fixed charge coverage ratio of 1.95 to 1.00.

Amortization of debt issuance costs related to our New Credit Facility was approximately $41,000 and $54,000 for the three and nine months ended September 30, 2018, respectively.

Acquisition debt consisted of deferred purchase price and promissory notes payable to sellers. Imputed interest expense related to our acquisition debt was $0.3 million and $0.2 million for both the three months ended September 30, 2017 and 2018, respectively and $0.7 million and $0.6 million for both the nine months ended September 30, 2017 and 2018, respectively.

#### Convertible Notes

On March 19, 2014, we issued $143.75 million aggregate principal amount of our 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.

On May 7, 2018, we completed our Exchange of approximately $115.0 million in aggregate principal amount of Convertible Notes in privately negotiated exchange agreements with a limited number of convertible noteholders, for approximately $74.8 million in cash (plus accrued interest of $0.4 million totaling $75.2 million) and 2,822,859 newly issued shares of our common stock, par value $.01 per share, pursuant to a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The cash portion of the exchange consideration was funded from our Former Credit Agreement. Following the settlement of the Exchange, the aggregate principal amount of our Convertible Notes outstanding was reduced to approximately $28.8 million.

We recognized a net gain of approximately $1.2 million, which was recorded in *Net loss on early extinguishment of debt,* related to the Exchange of our Convertible Notes. The gain is composed of a difference of approximately $2.5 million between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding the Exchange, partially offset by a write-off of approximately $1.3 million in unamortized debt issuance costs related to the Exchange of our Convertible Notes. The gain does not include the impact of any transaction costs we incurred to exchange the Convertible Notes.

We incurred approximately $0.8 million in transactions costs related to the Exchange of our Convertible Notes, of which approximately $0.5 million was expensed and recorded in *Net loss on early extinguishment of debt* and approximately $0.3 million was allocated to the equity component and recorded in *Additional paid-in capital.*

At September 30, 2018, the carrying amount of the equity component was approximately $3.6 million, the principal amount of the liability component was approximately $28.8 million and the net carrying amount was approximately $25.7 million. The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized debt discount for both the three and nine months ended September 30, 2017 and 2018 was 11.4%. The effective interest rate on the unamortized debt issuance costs for both the three and nine months ended September 30, 2017 and 2018 was 3.2%.

Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $1.0 million and $0.2 million for the three months ended September 30, 2017 and 2018, respectively and approximately $3.0 million and $1.7 million for the nine months ended September 30, 2017 and 2018, respectively. Accretion of the discount on the Convertible Notes was approximately $1.1 million and $0.2 million for the three months ended September 30, 2017 and 2018, respectively and approximately $3.2 million and $2.0 million for the nine months ended September 30, 2017 and 2018, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $130,000 and $27,000 for the three months ended

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September 30, 2017 and 2018, respectively and approximately $0.4 million and $0.2 million for the nine months ended September 30, 2017 and 2018, 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, in effect at September 30, 2018, is 44.8913 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.28 per share of common stock.

#### Senior Notes

On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our Senior Notes and related guarantees in a private offering under Rule 144A and Regulation S of the Securities Act.

We received proceeds of $320.1 million, net of a 1.5% debt discount of $4.9 million, of which we used $291.4 million to repay our existing indebtedness under our Former Credit Agreement and intend to use the remaining net proceeds for general corporate purposes, including acquisitions. We incurred approximately $1.4 million in transaction costs related to the Senior Notes.

The Senior Notes bear interest at 6.625% per year. Interest on the Senior Notes began to accrue on May 31, 2018 and is payable semi-annually in arrears on September 1 and December 1 of each year, beginning on December 1, 2018 to holders of record on each May 15 and November 15 preceding an interest payment date. The Senior Notes mature on September 1, 2026, unless earlier redeemed or purchased, as such redemption or purchase may be allowed pursuant to the indenture governing the Senior Notes. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by certain of our existing subsidiaries.

The debt discount of $4.9 million and the debt issuance costs of $1.4 million are being amortized using the effective interest method over the remaining term of approximately 92 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for both the three and nine months ended September 30, 2018 was 6.87% and 6.69%, respectively.

Interest expense on the Senior Notes included contractual coupon interest expense of approximately $5.4 million and $7.2 million for the three and nine months ended September 30, 2018, respectively. Amortization of the debt discount on the Senior Notes was $116,000 and $154,000 for the three and nine months ended September 30, 2018, respectively and amortization of debt issuance costs on the Senior Notes was $33,000 and $44,000 for the three and nine months ended September 30, 2018, respectively.

### SEASONALITY

Our business can be affected by seasonal fluctuations in the death rate. Generally, the death rate is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.

## Market risk

As filed, 4,057 characters.

In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks.

The following quantitative and qualitative information is provided about financial instruments to which we are a party at September 30, 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 September 30, 2018 are presented in Item 1, “Condensed Notes to Consolidated Financial Statements,” Notes 7 and 10 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates could change the value of the fixed income securities by approximately 1.83%.

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We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of September 30, 2018, we had no outstanding borrowings under the New Credit Facility. Any future borrowings or voluntary prepayments against the New 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 New Credit Facility at either prime rate or LIBOR rate plus a margin. At September 30, 2018, the prime rate margin was equivalent to 1.00% and the LIBOR margin was 2.00%. 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 September 30, 2018, the fair value of these notes was approximately $31.9 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.

Our Senior Notes bear interest at a fixed rate of 6.625% per year. The Senior Notes do not contain a call feature. At September 30, 2018, the fair value of these notes was approximately $331.9 million based on the last traded or broker quoted price. Increases in market interest rates may cause the value of the Senior 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, 1,798 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 September 30, 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, 4,935 characters.

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. Except as set forth below, there have been no material changes to the risk factors described in our Annual Report on Form 10-K for the year ended December 31, 2017.

***Our level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the notes.***

Our indebtedness requires significant interest and principal payments. As of September 30, 2018, we had approximately $360.3 million of total debt (excluding debt issuance costs, debt discounts and capital lease obligations), consisting of $9.8 million of acquisition debt (consisting of deferred purchase price and promissory notes payable to sellers of businesses we purchased), $25.7 million of carrying value of the liability of our Convertible Notes, and $325.0 million of our Senior Notes, and we had no borrowings and $148.0 million of availability under the New Credit Facility after giving effect to $2.0 million of outstanding letters of credit.

Our and our subsidiaries’ level of indebtedness could have important consequences to holders of the notes, including:

- continuing to require us and certain of our subsidiaries to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, thereby reducing the funds available for operations and any future business opportunities;
- limiting flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;
- placing us at a competitive disadvantage compared to our competitors that have less indebtedness;
- increasing our vulnerability to adverse general economic or industry conditions;
- making us and our subsidiaries more vulnerable to increases in interest rates, as borrowings under our New Credit Facility are at variable rates; and
- limiting our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing.

Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take certain actions, including reducing spending on day-to-day operations, reducing future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt, including the notes.

Additionally, our leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the economy in general.

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***Despite our current levels of indebtedness, we may still incur additional indebtedness. This could further exacerbate the risks associated with our indebtedness.***

We may incur additional indebtedness in the future. The terms of the New Credit Facility and the indenture governing our Senior Notes will limit, but not prohibit, us from incurring additional indebtedness. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us or our subsidiaries from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt agreements. To the extent new debt is added to our current debt levels, the leverage risks associated with our indebtedness would increase.

Filed Nov 1, 2018.
Source: SEC EDGAR, the filing index for accession 0001016281-18-000115. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.