# Carriage Services Inc: Form 10-K for the period ended Dec 31, 2019 - Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281) - Form: 10-K - Filed: 2020-02-28 - Accepted by EDGAR: Feb 28, 2020, 15:17 ET - Period: 2019-12-31 - Accession: 0001016281-20-000035 - Inline XBRL: yes - Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628120000035/csv-20191231x10k.htm - All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628120000035/ ## Figures reported in this filing Standardized XBRL line items for the period ended 2019-12-31. | Line item | Period | Value | XBRL concept | | --- | --- | ---: | --- | | Revenue | 3 months, 2019-10-01 to 2019-12-31 | $71.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Revenue | 12 months, 2019-01-01 to 2019-12-31 | $274.1m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax | | Cost of revenue | 12 months, 2019-01-01 to 2019-12-31 | $194.5m | us-gaap:CostOfRevenue | | Gross profit | 3 months, 2019-10-01 to 2019-12-31 | $20.7m | us-gaap:GrossProfit | | Gross profit | 12 months, 2019-01-01 to 2019-12-31 | $79.6m | us-gaap:GrossProfit | | Operating income | 12 months, 2019-01-01 to 2019-12-31 | $52.3m | us-gaap:OperatingIncomeLoss | | Interest expense | 12 months, 2019-01-01 to 2019-12-31 | $25.5m | us-gaap:InterestExpense | | Income tax | 12 months, 2019-01-01 to 2019-12-31 | $7.4m | us-gaap:IncomeTaxExpenseBenefit | | Net income | 12 months, 2019-01-01 to 2019-12-31 | $14.5m | us-gaap:NetIncomeLoss | | Diluted EPS | 3 months, 2019-10-01 to 2019-12-31 | $0.14 | us-gaap:EarningsPerShareDiluted | | Diluted EPS | 12 months, 2019-01-01 to 2019-12-31 | $0.80 | us-gaap:EarningsPerShareDiluted | | Basic EPS | 3 months, 2019-10-01 to 2019-12-31 | $0.14 | us-gaap:EarningsPerShareBasic | | Basic EPS | 12 months, 2019-01-01 to 2019-12-31 | $0.81 | us-gaap:EarningsPerShareBasic | | Diluted shares (weighted) | 12 months, 2019-01-01 to 2019-12-31 | 18,005,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding | | Operating cash flow | 12 months, 2019-01-01 to 2019-12-31 | $43.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities | | Capital expenditure | 12 months, 2019-01-01 to 2019-12-31 | $15.4m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment | | Dividends paid | 12 months, 2019-01-01 to 2019-12-31 | $5.4m | us-gaap:PaymentsOfDividendsCommonStock | | Share repurchases | 12 months, 2019-01-01 to 2019-12-31 | $9.2m | us-gaap:PaymentsForRepurchaseOfCommonStock | | Cash and equivalents | at 2019-12-31 | $716.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue | | Current assets | at 2019-12-31 | $39.9m | us-gaap:AssetsCurrent | | Total assets | at 2019-12-31 | $1.13bn | us-gaap:Assets | | Current liabilities | at 2019-12-31 | $35.6m | us-gaap:LiabilitiesCurrent | | Total liabilities | at 2019-12-31 | $903.2m | us-gaap:Liabilities | | Long-term debt | at 2019-12-31 | $87.8m | us-gaap:LongTermDebtNoncurrent | | Current portion of debt | at 2019-12-31 | $1.3m | us-gaap:LongTermDebtCurrent | | Shareholders' equity | at 2019-12-31 | $226.6m | us-gaap:StockholdersEquity | ## Business As filed, 44,083 characters. ### GENERAL Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading provider of funeral and cemetery services and merchandise in the United States. We operate in two business segments: funeral home operations, which currently accounts for approximately 80% of our total revenue, and cemetery operations, which currently accounts for approximately 20% of our total revenue. At December 31, 2019, we operated 186 funeral homes in 29 states and 31 cemeteries in 11 states. We compete with other publicly held and independent operators of funeral and cemetery companies. 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. We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis. ### CURRENT YEAR DEVELOPMENTS *Acquisitions.* On October 9, 2019, we acquired four funeral home businesses in Buffalo, New York. On October 28, 2019, we acquired one funeral home and cemetery combination business, three funeral home businesses and three ancillary service businesses, which include a flower shop, a pet cremation business and an online cremation business, in the Dallas, Texas area. On December 31, 2019, we acquired a funeral home and cemetery combination business in Fairfax, Virginia. The pro forma impact of these acquisitions on prior periods is not presented as the impact is not material to our reported results. The results of the acquired businesses are included in our results of operations from the date of acquisition. *Executive Leadership Changes.* On December 2, 2019, William (Bill) Goetz joined our executive leadership team as President and Chief Operating Officer and was also elected to serve as a member of our Board of Directors. *Share Repurchase Program.* On July 31, 2019, our Board approved a share repurchase program authorizing us to purchase an additional $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the year ended December 31, 2019, we repurchased 400,000 shares of common stock for a total cost of approximately $7.8 million at an average cost of $19.39 per share pursuant to this share repurchase program. Based on all repurchases to the date of this Annual Report on Form 10-K and increases in authorization, we have approximately $25.6 million available for repurchase under our approved program. *Dividends.* During 2019, we paid $5.4 million in dividends. *Additional Senior Notes.* On December 19, 2019, we issued an additional $75.0 million in aggregate principal amount of 6.625% Senior Notes due 2026 (the “Additional Senior Notes”) and related guarantees by our subsidiary guarantors in a private offering under Rule 144A and Regulation S of the Securities Act of 1933, as amended (the “Securities Act”). The Additional Senior Notes were issued as additional securities under the indenture by and among us, our subsidiary guarantors and Wilmington Trust, National Association, as trustee, pursuant to which $325.0 million in aggregate principal amount of 6.625% Senior Notes due 2026 (the “Initial Senior Notes” and, together with the Additional Senior Notes, the “Senior Notes”) issued by us in May 2018. *Divestitures.* During 2019, we divested three funeral home businesses whose building leases expired and sold a funeral home business for $0.9 million. In addition, we merged a funeral home business with a business in an existing market. ### FUNERAL AND CEMETERY INDUSTRY Funeral home and cemetery businesses provide products and services to families in three principal areas: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. The funeral and cemetery industry in the United States is characterized by the following fundamental attributes (the industry statistics and information included in this Form 10-K are from reports compiled by Sundale Research based on information as of September 30, 2019 from the United States Department of Commerce). ### Deaths and Death Trends During 2019, the number of deaths in the United States increased by approximately 2.2% following a 1.3% and a 2.5% increase in 2018 and 2017, respectively. The rapidly growing and aging population is expected to result in an increase in the number of deaths in the future. The number of Americans age 55 to 64 totaled 42.8 million in 2018 and is expected to grow 2.0% to 47.2 million by 2023, making this the second fastest-growing age group, while the fastest-growing segment of the population is Americans aged 65 and older, with 52.3 million in 2018. This age group is expected to increase to 60.0 million in 2023, reflecting an average annual growth rate of 2.8%. Overall, from 2018 to 2023, the number of deaths in the United States is expected to increase by an average of 2.0% per year, reaching an estimated 3.15 million in 2023. ### Burial and Cremation Trends While the number of deaths is expected to increase over the next few years, the burial rate is expected to continue to decline. In 2019, the number of burials in the United States decreased by an estimated 1.2%, following declines of 2.2% and 0.5% in 2018 and 2017 respectively. The number of burials in the United States is estimated to fall by an average of 1.0% per year from 2018 through 2023. In 2023, it is estimated that there will be approximately 1.26 million burials in the United States and a burial rate of 40.2%. In 2019, the number of cremations in the United States increased by an estimated 5.2%, following increases of 4.5% and 5.6% in 2018 and 2017, respectively. Slower growth is expected through 2023, due in part to the sheer size of the market for cremations; however, shifting preferences will continue to lead to a considerable rise in cremations. The number of cremations in the United States is expected to grow by an average of 4.4% per year from 2018 through 2023. In 2023, it is estimated that there will be approximately 1.88 million cremations in the United States and a cremation rate of 59.8%. ### Highly Fragmented Ownership Our industry remains highly fragmented, and succession planning issues for privately-owned funeral and cemetery businesses have become more difficult and complex than ever. We believe Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for owners who want their legacy family business to remain operationally prosperous in their local communities. We also believe that our decentralized operating model will continue to attract the top entrepreneurial talent in our industry. Our focus is on partnering with the best of the remaining independent funeral home and cemetery owners in major strategic markets around the country where the potential for future revenue growth is the highest. The largest publicly held operators, in terms of revenue, of both funeral homes and cemeteries with operations in the United States are Service Corporation International (“SCI”), StoneMor Partners L.P. (“StoneMor”), Park Lawn Corporation, traded on the Toronto Stock Exchange (“Park Lawn”) and Carriage. We believe these four companies collectively represent approximately 20% of funeral and cemetery revenue in the United States. Independent businesses, along with a few privately-owned consolidators, represent the remaining amount of industry revenue, accounting for an estimated 80% share of revenue. ### Heritage and Tradition Funeral home and cemetery businesses have traditionally been family-owned businesses that have built a local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals. Given the sensitive nature of our business, we believe that relationships fostered at the local level build trust in the community and are a key driver of market share. While new entrants may enter any given market, the time and resources required to develop local heritage and tradition serve as important barriers to entry. ### BUSINESS STRATEGY Our business strategy is based on strong, local leadership with entrepreneurial principles that is focused on sustainable long term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, high-performance culture operating framework linked with incentive compensation programs that attract top-quality industry talent to our organization. Our **Mission Statement** states that “we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry” and our **Guiding Principles** state our core values, which are comprised of: - Honesty, integrity and quality in all that we do; - Hard work, pride of accomplishment and shared success through employee ownership; - Belief in the power of people through individual initiative and teamwork; - Outstanding service and profitability go hand-in-hand; and - Growth of the Company is driven by decentralization and partnership. Our five **Guiding Principles** collectively embody our **Being The Best** high-performance cultural, operating framework. Our operations and business strategy are built upon the execution of the following three models: - Standards Operating Model; - 4E Leadership Model; and - Strategic Acquisition Model. ### Standards Operating Model Our Standards Operating Model is focused on growing local market share, providing personalized high-value services to our client families and guests, and operating 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, revenue and earnings. Important elements of our Standards Operating Model include: - *Balanced Operating Model –* We believe a decentralized structure works best in the funeral and cemetery industry. Successful execution of our Standards Operating Model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial drive and corporate support aligned with the key drivers of a successful operation organized around three primary areas - market share, high-value services and operating financial metrics. - *Incentives Aligned with Standards –* Empowering local managers, who we call Managing Partners, to do the right things in their operations and local communities, and providing appropriate support with operating and financial practices, will enable long-term growth and sustainable profitability. Each Managing Partner participates in a variable bonus plan whereby he or she earns a percentage of his or her respective business’ earnings based upon the actual standards achieved as long as the performance exceeds our minimum standards. Our five year incentive award, called the “**Good To Great Award,”** which began in 2012, rewards Managing Partners with a bonus at the end of five years, equal to a ratio of four to six times their average annual bonus, if they are able to achieve an annual compound growth rate of 2% over a five year period. The growth rate was changed to 1% beginning with the 2019 payout year, which impacts all five-year performance periods ending on or after December 31, 2019. After each five year incentive plan is achieved and paid out, a new five year plan period begins. To date, we have had four performance periods in which we have paid $5.1 million to the Managing Partners who have earned a bonus under this program. - *The Right Local Leadership –* Successful execution of our operating model is highly dependent on strong local leadership as defined by our 4E Leadership Model, intelligent risk taking and entrepreneurial empowerment. A Managing Partner’s performance is judged according to achievement of the standards for that business. ### 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. ### 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. We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins (a non-GAAP measure). We use criteria such as cultural alignment, volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry to evaluate the strategic position of potential acquisition candidates. Our financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital. 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. Other elements of our overall business strategy include the following: *Enhancement of Burial and Cremation Services.* Personalization and pre-planning continue to be two of the most important trends in the funeral and cemetery industry, but the national trend toward more cremations may be the most significant. While this trend is expected to continue, other factors are expected to lead to rising industry revenue, including an increase in spending on additional or unique funeral and cremation services. The percentage of funeral services performed by our funeral homes for which cremation was chosen as the method of disposition was 51.4% for the year ended December 31, 2017, 52.2% for the year ended December 31, 2018 and 53.7% for the year ended December 31, 2019. Shifting preferences will likely continue to lead to a considerable rise in cremations; as such, we are focused on educating and providing our cremation customers additional services and products that are available. All of our funeral homes offer cremation products and services. While the average revenue for a cremation service is generally lower than that of an average traditional burial service, we have found that this revenue can be substantially enhanced by offering additional services and merchandise, including video tributes, flowers, burial garments and memorial items such as urns, keepsake jewelry and other items that hold a portion of the cremated remains. *Preneed Funeral Sales Program.* We operate under a local, decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs. Approximately 20% of our funeral services performed are funded through preneed contracts, which are usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. Insurance-funded contracts allow us to earn commission income to improve our near-term cash flow and offset a significant amount of the up-front costs associated with preneed sales. Trust funded contracts typically provide cash that is invested in various securities with the expectation that returns will exceed the growth factor in the insurance contracts. The cash flow and earnings from insurance contracts are more stable, but are generally lower than traditional trust fund investments. In markets that depend on preneed sales for market share, we supplement the arrangements written by our local funeral directors with sales sourced by our own sales counselors and by third party sellers. *Preneed Cemetery Sales Program.* Our preneed cemetery strategy is to build family heritage in our cemeteries by selling property and interment rights prior to death through full time, highly motivated and entrepreneurial local sales teams. Approximately 50% of our cemetery operating revenue is derived from preneed property sales. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales. Cemetery merchandise and services are often purchased in addition to cemetery property at the time of sale. The performance of these preneed cemetery contracts is secured by placing the funds collected in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. General consumer confidence and discretionary income may have a significant impact on our preneed sales success rate. ### OUR STRENGTHS *Market Leader.* We compete with other publicly held funeral and cemetery companies and smaller, independent operators and believe we are a market leader in most of our markets. We focus on markets that perform better than the industry average and are less subject to material economic and demographic changes. *High Performance, Decentralized, Partnership Culture.* Our funeral homes and cemeteries are managed by Managing Partners with extensive funeral and cemetery industry experience, often within their local markets. Our Managing Partners have responsibility for day-to-day operations, but are required to follow operating and financial standards based on our Standards Operating Model that are custom designed for distinct business groupings based on the size (number of funerals) and average revenue per funeral. This strategy allows each local business to maintain its unique identity within its local market and to capitalize on its reputation and heritage while a range of support services is provided from our home office in Houston, Texas. We believe our culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates. *Flexible Capital Structure.* We believe that our capital structure provides us with financial flexibility by allowing us to invest our cash flow in growth opportunities, such as business acquisitions and cemetery inventory projects. For additional information regarding our capital structure, please see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources. *Stable Cash Flow.* We have demonstrated the ability to generate strong and stable cash flow. Cash flow from operations for 2019 totaled $43.2 million, which was used primarily for the acquisition of funeral home and cemetery businesses, capital expenditures and our working capital needs, including payment of dividends and our debt obligations. During 2020, we intend to focus on integrating our newly acquired businesses and to use our cash flow to fund internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends and our debt obligations. From time to time, we may also use available cash flow to repurchase shares of our common stock and remaining 2.75% convertible subordinated notes due 2021. While we reassess our capital allocation strategy annually, we currently believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our net cash flow in growth opportunities that generate a return on invested capital in excess of our weighted average cost of capital. *Strong Field-Level Gross Profit Margins.* We believe that we have strong field-level gross profit margins and that this performance is a testament to the success of our business strategies. Our strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure. We will continue to seek ways to improve our financial performance, and we believe that our Standards Operating Model will continue to yield long-term improvement in our financial results. *Integrated Information Systems.* We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards. All of our funeral homes and cemeteries are connected to our home office in Houston, which allows us to monitor and assess critical operating and financial data and analyze the performance of individual locations on a timely basis. Furthermore, our information system infrastructure provides senior management with a critical tool for monitoring and adhering to our established internal controls, which is critical given our decentralized model and the sensitive nature of our business operations. *Proven Leadership Team.* Our leadership team, headed by our founder, Chairman and Chief Executive Officer, Melvin C. Payne, is characterized by a dynamic culture that focuses on addressing changing market conditions and emerging trends in the funeral services industry. We believe our culture of emphasizing the 4E (Energy, Energize Others, Edge and Execution) leadership characteristics is critical and will provide an important advantage as the funeral and cemetery industry evolves. We are committed to continue operating an efficient organization and strengthening our corporate and local business leadership. Our businesses are supported by a broader team of High Performance leaders across multiple disciplines located in our home office in Houston. This promotes more cooperation and synergy between our funeral and cemetery operations and supports the goal of market-share and volume growth in our most significant markets. ### OUR OPERATIONS We conduct our funeral and cemetery operations only in the United States. Our operations are reported in two segments: funeral home operations and cemetery operations. Information for each of our segments is presented below and in our financial statements set forth herein. ### Funeral Home Operations At December 31, 2019, we operated 186 funeral homes in 29 states. Funeral home revenue currently accounts for approximately 80% of our total revenue. The funeral home operations are managed by a team of experienced industry professionals and regional leadership with substantial management experience in our industry. See Part II, Item 8, Financial Statements and Supplementary Data, Note 23 for segment data related to our funeral home operations. Our funeral homes offer a complete range of 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. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and services to take place at one location and thereby reduces transportation costs and inconvenience to the family. Given the high fixed-cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability: - our ability to establish and maintain market share positions supported by strong local heritage and relationships; - our ability to effectively respond to the increasing trends towards cremation by packaging complimentary services and merchandise; - our ability to control salary, merchandise and other controllable costs; - our ability to exercise pricing leverage related to our atneed business to increase average revenue per contract; - demographic trends in terms of population growth and average age, which impact death rates and number of deaths; and - our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds and our securities portfolio within the trust funds, which would offset lower pricing power as preneed contracts mature. ### Cemetery Operations At December 31, 2019, we operated 31 cemeteries in 11 states. Cemetery revenue currently accounts for approximately 20% of our total revenue. The cemetery operations are led by a team of experienced industry and sales professionals and regional leadership with substantial management experience in our industry. See Part II, Item 8, Financial Statements and Supplementary Data, Note 23 for segment data related to our cemetery operations. Our cemeteries provide interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). Our cemetery operations are subject to many of the profitability factors as our funeral home business, as well as the following key factors: - size and success of our sales organization; - local perceptions and heritage of our cemeteries; - our ability to adapt to changes in the economy and consumer confidence; and - our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds. ### Preneed Programs Funeral and cemetery arrangements sold prior to death occurring are referred to as preneed contracts.We market funeral and cemetery services and products on a preneed basis at the local level. Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services. Preneed contracts permit families to eliminate issues of making deathcare plans at the time of need and allow input from other family members before the death occurs. We guarantee the price and performance of the preneed contracts to the customer. In addition to preneed funeral contracts, we also offer “pre-planned” funeral arrangements whereby a customer determines in advance substantially all of the details of a funeral service without any financial commitment or other obligation on the part of the client until the actual time of need. Pre-planned funeral arrangements permit a family to avoid issues of making deathcare plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an atneed sale. We sold 8,303 and 8,410 preneed funeral contracts, net of cancellations, during the years ended December 31, 2018 and 2019, respectively. At December 31, 2019, we had a backlog of 98,493 preneed funeral contracts and 58,256 preneed cemetery contracts to be delivered in the future. Approximately 20% of our funeral contract volumes during the years ended December 31, 2018 and 2019 originated through preneed contracts. Cemetery revenue that originated from preneed contracts represented approximately 65% and 66% of our total cemetery revenue for 2018 and 2019, respectively. At December 31, 2019, we employed a staff of 126 advance-planning and family service representatives for the sale of preneed products and services. Our advance-planning and family service representatives primarily assist families in making atneed and preneed funeral, memorialization and cemetery arrangements through the selection and purchase of cemetery property, merchandise and services and ensuring that the expectations of our client families and their guests are exceeded. ### Trust Funds and Insurance Contracts We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state laws. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) cemetery perpetual care trusts. These trusts are typically administered by independent financial institutions selected by us. Investment management and advisory services are provided either by our wholly-owned registered investment advisory firm, CSV RIA, or by independent financial advisors. As of December 31, 2019, CSV RIA provided these services to approximately 71% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided. The investment advisors establish an investment policy that gives guidance on asset allocation, investment requirements, investment manager selection and performance monitoring. The investment objectives are tailored to generate long-term investment returns without assuming undue risk, while ensuring the management of assets is in compliance with applicable laws. Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. Trust fund income earned, along with the receipt and recognition of any insurance benefits, are not reflected in our revenue until the service is performed or the merchandise is delivered. Trust fund holdings and deferred revenue are reflected on our Consolidated Balance Sheet, while the insurance contracts are not on our Consolidated Balance Sheet. In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed. Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses. The aggregate balance of our preneed funeral contracts held in trust, insurance contracts and receivables from preneed trusts was $523.1 million as of December 31, 2019. We are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of the selling price) into a merchandise and service trust fund for preneed cemetery merchandise and services sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. We are generally permitted to withdraw the trust principal and accrued income when the merchandise is actually delivered, when the service is provided or when the contract is canceled. However, certain states allow the withdrawal of income prior to delivery when the regulations identify excess earnings in the trusts. We did not withdraw any trust income in 2018 and 2019. Cemetery merchandise and service trust fund balances totaled $72.4 million as of December 31, 2019. In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust. The income from these perpetual care trusts provides funds necessary to maintain cemetery property and memorials in perpetuity. This trust fund income is recognized, as earned and is reflected in our Consolidated Financial Statements as *Other revenue*. While we are entitled to withdraw the income from perpetual care trusts to provide for maintenance of cemetery property and memorials, we are restricted from withdrawing any of the principal balances of the trust fund. Perpetual care trust balances totaled $64.0 million at December 31, 2019. For additional information with respect to our trusts, see Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 9 and 11. ### SEASONALITY Our business can be affected by seasonal fluctuations in the death rate. Generally, the number of deaths 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. ### COMPETITION The operating environment in the funeral and cemetery industry has been highly competitive. Publicly held companies with operations in the United States include SCI, StoneMor, Park Lawn and Carriage. In addition, a number of smaller private consolidators have been active in acquiring and operating funeral homes and cemeteries. Our funeral home and cemetery operations face competition in the markets that they serve. Our primary competition in most of our markets is from local independent operators. We have observed new start-up competition in certain areas of the country, which may impact our profitability in certain markets. Market share for funeral homes and cemeteries is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important. Because of the importance of reputation and heritage, market share increases are usually gained over a long period of time. The sale of preneed funeral services and cemetery property has increasingly been used by many companies as a marketing tool to build market share. There has been increasing competition from providers specializing in specific services, such as cremations, who offer minimal service and low-end pricing. We also face competition from companies that market products and related merchandise over the internet and non-traditional casket stores in certain markets. These competitors have been successful in capturing a portion of the low-end market and product sales. ### REGULATION *General.* Our operations are subject to regulations, supervision and licensing under numerous federal, state and local laws, ordinances and regulations, including extensive regulations concerning trust funds, preneed sales of funeral and cemetery products and services and various other aspects of our business. We believe that we comply in all material respects with the provisions of these laws, ordinances and regulations. Legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which could have a material impact on our business. We cannot predict the impact of any future laws and regulations or changes to existing laws and regulations. *Federal Trade Commission.* Our funeral home operations are comprehensively regulated by the Federal Trade Commission (“FTC”) under Section 5 of the Federal Trade Commission Act and a trade regulation rule for the funeral industry promulgated thereunder referred to as the “Funeral Rule.” The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized pricing information and various other disclosures about funeral goods and services and prohibit a funeral provider from: (i) misrepresenting legal, crematory and cemetery requirements; (ii) embalming for a fee without permission; (iii) requiring the purchase of a casket for direct cremation; (iv) requiring consumers to buy certain funeral goods or services as condition for furnishing other funeral goods or services; (v) misrepresenting state and local requirements for an outer burial container; and (vi) representing that funeral goods and services have preservative and protective value. Additionally, the Funeral Rule requires the disclosure of mark-ups, commissions, additional charges and rebates related to cash advance items. The FTC has announced that it is reviewing the Funeral Rule, which may result in changes to the Funeral Rule. Among the subjects under review by the FTC is whether the scope of the Funeral Rule should be expanded to cover cemetery sales and merchandise and mandated disclosure of online pricing. We cannot predict what changes, if any, may be made to the Funeral Rule or the impact of any such changes on our business. *Environmental.* Our operations are also subject to stringent federal, regional, state and local laws and regulations relating to environmental protection, including legal requirements governing air emissions, waste management and disposal and wastewater discharges. For instance, the federal Clean Air Act and analogous state laws, which restrict the emission of pollutants from many sources, including crematories, may require us to apply for and obtain air emissions permits, install costly emissions control equipment, and conduct monitoring and reporting tasks. Also, in the course of our operations, we store and use chemicals and other regulated substances as well as generate wastes that may subject us to strict liability under the federal Resource Conservation and Recovery Act and comparable state laws, which govern the treatment, storage, and disposal of nonhazardous and hazardous wastes, and the federal Comprehensive Environmental Response, Compensation and Liability Act, a remedial statute that imposes cleanup obligations on current and past owners or operators of facilities where hazardous substance releases occurred and anyone who transported or disposed or arranged for the transportation or disposal of hazardous substances released into the environment from such sites. In addition, the Federal Water Pollution Control Act, also known as the federal Clean Water Act, and analogous state laws regulate discharges of pollutants to state and federal waters. Underground and aboveground storage tanks that store chemicals and fuels for vehicle maintenance or general operations are located at certain of our facilities and any spills or releases from those facilities may cause us to incur remedial liabilities under the Clean Water Act or analogous state laws as well as potential liabilities for damages to properties or persons. Failure to comply with environmental laws and regulations could result in the assessment of sanctions, including administrative, civil, and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, delays in permitting or performance of projects and the issuance of injunctions restricting or prohibiting some or all of our activities in affected areas. Moreover, accidental releases or spills may occur in the course of our operations, and we cannot assure that we will not incur significant costs and liabilities as a result of such releases or spills, including any third party claims for damages to property, natural resources or persons. Also, it is possible that implementation of stricter environmental laws and regulations or more stringent enforcement of existing environmental requirements could result in additional, currently unidentifiable costs or liabilities to us, such as requirements to purchase pollution control equipment or implement operational changes or improvements. While we believe we are in substantial compliance with existing environmental laws and regulations, we cannot assure that we will not incur substantial costs in the future. *Worker Health and Safety*. We are subject to the requirements of the federal Occupational Safety and Health Act, as amended (“OSHA”), and comparable state statutes whose purpose is to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and implementing regulations and similar state statutes and regulations require that we organize and/or disclose information about hazardous materials used or produced in our operations and that this information be provided to employees, state and local governmental authorities and citizens. We believe that we are in substantial compliance with all applicable laws and regulations relating to worker health and safety. ### EMPLOYEES As of December 31, 2019, we and our subsidiaries employed 2,797 employees, of whom 1,137 were full-time and 1,660 were part-time. All of our funeral directors and embalmers possess licenses required by applicable regulatory agencies. None of our employees are represented by unions. ### AVAILABLE INFORMATION We file annual, quarterly and other reports, and any amendments to those reports, and information with the United States Securities and Exchange Commission (“SEC”). The SEC maintains a website at ***www.sec.gov*** that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us. Our website address is ***www.carriageservices.com***. Available on our website under “Investors – SEC Filings,” free of charge, are Carriage’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, insider reports on Forms 3, 4 and 5 filed on behalf of directors and officers and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC. Also posted on our website, and available in print upon request, are charters for our Audit Committee, Compensation Committee and Corporate Governance Committee. Copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines are also posted on our website under “Investors – Corporate Governance.” Within the time period required by the SEC and the New York Stock Exchange, we will post on our website any modifications to the charters and any waivers applicable to senior officers as defined in the applicable charters, as required by the Sarbanes-Oxley Act of 2002. Information contained on our website is not part of this Annual Report on Form 10-K. ## Risk factors As filed, 35,665 characters. ### RISKS RELATED TO OUR BUSINESS **The success of our businesses is typically dependent upon one or a few key employees for success because of the localized and personal nature of our business.** Funeral home and cemetery businesses have built local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals. We believe these relationships build trust in the community and are a key driver to market share. Our businesses, which tend to serve small local markets, usually have one or a few key employees that drive our relationships. Our ability to attract and retain Managing Partners, sales force and other personnel is an important factor in achieving future success. We can give no assurance that we can retain these employees or that these relationships will drive market share. Our inability to attract and maintain qualified and productive Managing Partners and sales force could have a material adverse effect on our financial condition, results of operations and cash flows. **Our ability to execute our growth strategy is highly dependent upon our ability to successfully identify suitable acquisition candidates and negotiate transactions on favorable terms.** There is no assurance that we will be able to continue to identify acquisition candidates that meet our criteria or that we will be able to reach terms with identified candidates for transactions that are acceptable to us, and even if we do, we may not be able to successfully complete the transaction or integrate the new business into our existing business. We intend to apply standards established under our Strategic Acquisition Model to evaluate acquisition candidates, and there is no assurance that we will continue to be successful in doing so or that we will find attractive candidates that satisfy these standards. Due in part to the presence of competitors who have been in certain markets longer than we have, such acquisitions or investments may be more difficult or expensive than we anticipate. **Improved performance in our funeral and cemetery segments is dependent upon successful execution of our Standards Operating Model.** We have implemented our Standards Operating Model to improve and better measure performance in our funeral and cemetery operations. We developed standards according to criteria, each with a different weighting, designed around market share, high-value services and operational and financial metrics. We also incentivize our location Managing Partners by giving them the opportunity to earn a fixed percentage of the field-level earnings before interest, taxes, depreciation and amortization based upon the number and weighting of the standards achieved. Our expectation is that, over time, the Standards Operating Model will result in improving field-level margins, market share, customer satisfaction and overall financial performance, but there is no assurance that these goals will be met. Failure to successfully implement our Standards Operating Model in our funeral and cemetery operations could have a material adverse effect on our financial condition, results of operations and cash flows. **Marketing and sales activities by existing and new competitors could cause us to lose market share and lead to lower revenue and margins.** We face competition in all of our markets. Most of our competitors are independently owned, and some are relatively recent market entrants. Some of the recent entrants are individuals who were formerly employed by us or by our competitors and have relationships and name recognition within our markets. As a group, independent competitors tend to be aggressive in distinguishing themselves by their independent ownership, and they promote their independence through television, radio and print advertising, direct mailings and personal contact. Increasing pressures from new market entrants and continued advertising and marketing by competitors in local markets could cause us to lose market share and revenue. The types of services and the prices offered on such services by our competitors may attract customers, causing us to lose market share and revenue as well as to incur costs in response to competition to vary the types or mix of products or services offered by us. Also, increased use of the internet by customers to research and/or purchase products and services could cause us to lose potential revenue. **Our “Good To Great” incentive program could result in significant future payments to our Managing Partners.** In January, 2012, in order to continue to align our Managing Partners’ incentives with long-term value creation, we implemented our “**Good To Great”** incentive program, which rewards our Managing Partners for achieving an average net revenue compounded annual growth rate equal to at least 1% (the “Minimum Growth Rate”) over a five year performance period (the “Performance Period”) with respect to our funeral homes that they operate. The Minimum Growth Rate was changed from 2% to 1% beginning with the 2019 payout year, which impacts all five-year performance periods ending on or after December 31, 2019. Each Managing Partner that achieves the Minimum Growth Rate during the applicable Performance Period and remains continuously employed as a Managing Partner of the same business throughout the Performance Period will receive a one-time bonus, payable in a combination of cash and shares of our common stock, determined at our discretion. We believe this incentive program will result in improved field-level margins, market share and overall financial performance. **Price competition could also reduce our market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenue and margins.** We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products. New market entrants tend to attempt to build market share by offering lower cost alternatives. In the past, this price competition has resulted in our losing market share in some markets. In other markets, we have had to reduce prices or offer discounts thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could further reduce revenue, profits and our preneed backlog. **Our ability to generate preneed sales depends on a number of factors, including sales incentives and local and general economic conditions.** Significant declines in preneed sales would reduce our backlog and revenue and could reduce our future market share. On the other hand, a significant increase in preneed sales can have a negative impact on cash flow as a result of commissions and other costs incurred initially without corresponding revenue. As we have localized our preneed sales strategies, we are continuing to refine the mix of service and product offerings in both our funeral and cemetery segments, including changes in our sales commission and incentive structure. These changes could cause us to experience declines in preneed sales in the short-run. In addition, economic conditions at the local or national level could cause declines in preneed sales either as a result of less discretionary income or lower consumer confidence. Declines in preneed cemetery property sales reduces current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share. ### Increased preneed sales could have a negative impact on our cash flows. Preneed sales of funeral and cemetery products and services generally have an initial negative impact on our cash flows, as we are required to deposit a portion of the sales proceeds into trusts or escrow accounts and often incur other expenses at the time of sale. Furthermore, many preneed purchases are paid for in installments over a period of several years, further reducing our cash flows at the time of sale. Because preneed sales generally provide positive cash flows over the long term, we market the sale of such contracts at the local level. If our efforts to increase such sales are successful, however, our current cash flows could be materially and adversely affected. **Our funeral and cemetery trust funds own investments in equity securities, fixed income securities, and mutual funds, which are affected by market conditions that are beyond our control.** In connection with our backlog of preneed funeral and preneed cemetery merchandise and service contracts, funeral and cemetery trust funds own investments in equity securities, fixed income securities and mutual funds. Our returns on these investments are affected by financial market conditions that are beyond our control. The following table summarizes our investment returns (realized and unrealized), excluding certain fees, on our trust funds for the years ended December 31, 2017, 2018 and 2019: | | 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Preneed funeral trust funds | 11.5% | (6.5)% | 21.2% | | Preneed cemetery trust funds | 13.1% | (8.4)% | 26.0% | | Perpetual care trust funds | 12.8% | (8.0)% | 25.2% | Generally, earnings or gains and losses on our preneed funeral and cemetery trust investments are recognized, and we withdraw cash, when the underlying service is performed, merchandise is delivered, or upon contract cancellation. Our cemetery perpetual care trusts recognize earnings, and in certain states, capital gains and losses, and we withdraw cash when we incur qualifying cemetery maintenance costs. If the investments in our trust funds experience significant, recurring and sustained declines in subsequent years, there could be insufficient funds in the trusts to cover the costs of delivering services and merchandise or maintaining cemeteries in the future. We may be required to cover any such shortfall with cash flows from operations or other sources of cash, which could have a material adverse effect on our financial condition, results of operations or cash flows. For more information related to our trust investments, see Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 9 and 11. If the fair market value of these trusts, plus any other amount due to us upon delivery of the associated contracts, were to decline below the estimated costs to deliver the underlying products and services, we would record a charge to earnings for the expected losses on the delivery of the associated contracts. For additional information, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies and Estimates. **Earnings from and principal of trust funds could be reduced by changes in financial markets and the mix of securities owned.** Earnings and investment gains and losses on trust funds are affected by financial market conditions and the specific fixed-income and equity securities that we choose to maintain in the funds. We may not choose the optimal mix for any particular market condition. Declines in earnings from perpetual care trust funds would cause a decline in current revenue, while declines in earnings from other trust funds could cause a decline in future cash flows and revenue. **We may be required to replenish our funeral and cemetery trust funds in order to meet minimum funding requirements, which would have a negative effect on our earnings and cash flow.** In certain states, we have withdrawn allowable distributable earnings including gains prior to the maturity or cancellation of the related contract. Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions on withdrawals of future earnings when trust fund values drop below certain prescribed amounts. In the event of realized losses or market declines, we may be required to deposit portions or all of these amounts into the respective trusts in some future period. **Increasing death benefits related to preneed funeral contracts funded through life insurance contracts may not cover future increases in the cost of providing a price-guaranteed funeral service.** We sell price-guaranteed preneed funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. For preneed funeral contracts funded through life insurance contracts, we receive in cash a general agency commission from the third-party insurance company. Additionally, there is an increasing death benefit associated with the contract that may vary over the contract life. There is no guarantee that the increasing death benefit will cover future increases in the cost of providing a price-guaranteed funeral service, and any such excess cost could be materially adverse to our future cash flows, revenue, and operating margins. **The financial condition of third-party insurance companies that fund our preneed funeral contracts may impact our future revenue.** Where permitted by state law, our customers may arrange their preneed funeral contract by purchasing a life insurance policy from third-party insurance companies. The customer/policy holder assigns the policy benefits to our funeral home to pay for the preneed funeral contract at the time of need. If the financial condition of the third-party insurance companies were to deteriorate materially because of market conditions or otherwise, there could be an adverse effect on our ability to collect all or part of the proceeds of the life insurance policy, including the annual increase in the death benefit, when we fulfill the preneed contract at the time of need. Failure to collect such proceeds could have a material adverse effect on our financial condition, results of operations, or cash flows. **Increased or unanticipated costs, such as insurance or other taxes, may have a negative impact on our earnings and cash flow.** We may experience material increases in certain costs, such as insurance or other taxes. Future cost increases are difficult to quantify and could materially and adversely affect our results of operations and cash flows. **Changes in taxation as well as the inherent difficulty in quantifying potential tax effects of business decisions could have a material adverse effect on the results of our operations, financial condition, or cash flows.** We make judgments regarding the utilization of existing income tax credits and the potential tax effects of various financial transactions and results of operations to estimate our obligations to taxing authorities. Tax obligations include income, franchise, real estate, sales and use, and employment-related taxes. These judgments include reserves for potential adverse outcomes regarding our tax positions. Changes in federal, state, or local tax laws, adverse tax audit results, or adverse tax rulings on positions taken could have a material adverse effect on the results of our operations, financial condition, or cash flows. **Covenant restrictions under our debt instruments may limit our flexibility in operating and growing our business.** The terms of our Credit Facility and the indenture governing our Senior Notes limit our ability and the ability of our subsidiaries to, among other things: incur additional debt (including guarantees thereof); pay dividends or make distributions or redeem or repurchase stock; make investments; grant liens; make capital expenditures; enter into transactions with affiliates; enter into sale-leaseback transactions; sell assets; and acquire the assets of, or merge or consolidate with, other companies. Our Credit Facility also requires us to maintain certain financial ratios. Complying with these restrictive covenants and financial ratios, as well as those that may be contained in any future debt agreements, may limit our ability to finance our future operations or capital needs or to take advantage of other favorable business opportunities. Our ability to comply with these restrictive covenants and financial ratios will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with any of these covenants or restrictions when they apply could result in a default under any future debt instrument, which could result in acceleration of the debt under that instrument and, in some cases, the acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. In the case of an event of default, or in the event of a cross-default or cross-acceleration, we may not have sufficient funds available to make the required payments under our debt instruments. If we are unable to repay amounts owed under the terms of our Credit Facility, the lenders thereunder may be entitled to sell certain of our funeral assets to satisfy our obligations under the agreement. **Our level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.** Our indebtedness requires significant interest and principal payments. As of December 31, 2019, we had $497.1 million of total debt (excluding debt issuance costs, debt discounts, debt premium and lease obligations), consisting of $7.0 million of acquisition debt (consisting of deferred purchase price and promissory notes payable to sellers of businesses we purchased), $6.3 million of our Convertible Notes, $400.0 million of our Senior Notes and $83.8 million of outstanding borrowings under our Credit Facility, with $104.2 million of availability under our 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 us, 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 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. **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 our 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. **Economic, financial and stock market fluctuations could affect future potential earnings and cash flows and could result in future goodwill, intangible assets and long-lived asset impairments.** In addition to an annual review, we assess the impairment of goodwill, intangible assets and other long-lived assets whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, a significant decline in the market value of our stock or debt values, significant under-performance relative to historical or projected future operating results, and significant negative industry or economic trends. If these factors occur, we may have a triggering event, which could result in an impairment of our goodwill. Based on the results of our annual goodwill and intangible assets impairment test we performed as of August 31, 2019 and our annual review of long-lived assets as of December 31, 2019, we recorded an impairment for tradenames of $0.2 million and concluded that there was no impairments of our goodwill or other long-lived assets. However, we recorded an impairment of $0.5 million during 2019, related to a funeral home business that we divested in the fourth quarter of 2019 and $0.2 million related to a funeral home business we intend to sell in 2020, as the carrying value exceeded fair value. Additionally, if current economic conditions weaken causing deterioration in our operating revenue, operating margins and cash flows, we may have a triggering event that could result in a material impairment of our goodwill, intangible assets and/or long-lived assets. **We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.** In the ordinary course of our business, we receive certain personal information, in both physical and electronic formats, about our customers, their loved ones, our employees, and our vendors. We maintain substantial security measures and data backup systems to protect, store, and prevent unauthorized access to such information. Nevertheless, it is possible that computer hackers and others (through cyberattacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means) might defeat our security measures in the future and obtain the personal information of customers, their loved ones, our employees, and our vendors that we hold. If we fail to protect our own information, we could experience significant costs and expenses as well as damage to our reputation. Additionally, legislation relating to cyber security threats could impose additional requirements on our operations. Our ability to manage and maintain our internal reports effectively and integration of new business acquisitions depends significantly on our enterprise resource planning system and other information systems. Some of our information technology systems may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. The failure of our systems to operate effectively or to integrate with other systems, or a breach in security or other unauthorized access of these systems, may also result in reduced efficiency of our operations and could require significant capital investments to remediate any such failure, problem or breach and to comply with applicable regulations, all of which could adversely affect our business, financial condition and results of operations. ### The funeral and cemetery industry is competitive. The funeral and cemetery industry is characterized by a large number of locally-owned, independent operations in the United States. To compete successfully, our funeral service locations and cemeteries must maintain good reputations and high professional standards, as well as offer attractive products and services at competitive prices. In addition, we must market ourselves in such a manner as to distinguish us from our competitors. We have historically experienced price competition from independent and publicly held funeral service and cemetery operators, monument dealers, casket retailers, low-cost funeral providers, and other nontraditional providers of merchandise and services. If we are unable to successfully compete, our financial condition, results of operations, and cash flows could be materially adversely affected. **Declines in the number of deaths in our markets can cause a decrease in revenue. Changes in the number of deaths are not predictable from market to market or over the short term.** Declines in the number of deaths could cause atneed sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenue. Although the United States Bureau of the Census estimates that the number of deaths in the United States will increase in the future, longer life spans could reduce the rate of deaths. In addition, changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. These variations may cause our revenue to fluctuate and our results of operations to lack predictability. **The increasing number of cremations in the United States could cause revenue to decline because we could lose market share to firms specializing in cremations.** Our traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has increased every year and this trend is expected to continue into the future. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenue to firms specializing in cremations. **If we are not able to respond effectively to changing consumer preferences, our market share, revenue and profitability could decrease.** Future market share, revenue and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. In past years, we have implemented new product and service strategies based on results of customer surveys that we conduct on a continuous basis. However, we may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective. **Because the funeral and cemetery businesses are high fixed-cost businesses, changes in revenue can have a disproportionately large effect on cash flow and profits.** Companies in the funeral home and cemetery business incur the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause margins, profits and cash flow to decline at a greater rate than the decline in revenue. **Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.** The funeral and cemetery industry is subject to extensive and evolving regulation and licensing requirements under federal, state and local laws. For example, the funeral home industry is regulated by the FTC, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales. As such, we are subject to state trust fund and preneed sales practice audits, which could result in audit adjustments as a result of non-compliance. In addition, we may assume the liability for any audit adjustments for our acquired businesses for periods under audit that were prior to our ownership of the business depending upon the obligations outlined in the agreement. These audit adjustments could have a material adverse impact on our financial condition, results of operations and cash flows. Embalming and cremation facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome, and we are always at risk of not complying with the regulations or facing costly and burdensome investigations from regulatory authorities. In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. Several states and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, increase trust requirements and/or prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on us, our financial condition, our results of operations and our future prospects. For additional information regarding the regulation of the funeral and cemetery industry, see Part I, Item 1, Business, Regulation. **We are subject to environmental and worker health and safety laws and regulations that may expose us to significant costs and liabilities.** Our cemetery and funeral home operations are subject to stringent federal, regional, state and local laws and regulations governing worker health and safety aspects of the operations, the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations may restrict or impact our business in many ways, including requiring the acquisition of a permit before conducting regulated activities, restricting the types, quantities and concentration of substances that can be released into the environment, applying specific health and safety criteria addressing worker protection, and imposing substantial liabilities for any pollution resulting from our operations. We may be required to make significant capital and operating expenditures to comply with these laws and regulations and any failure to comply may result in the assessment of sanctions, including administrative, civil and criminal penalties, imposition of investigatory, remedial or corrective action obligations, delays in permitting or performance of projects and the issuance of injunctions restricting or prohibiting our activities. Failure to appropriately transport and dispose of generated wastes, used chemicals or other regulated substances, or any spills or other unauthorized releases of regulated substances in the course of our operations could expose us to material losses, expenditures and liabilities under applicable environmental laws and regulations, and result in neighboring landowners and other third parties filing claims for personal injury, property damage and natural resource damage allegedly caused by such non-compliant activities or spills or releases. Certain of these laws may impose strict, joint and several liabilities upon us for the remediation of contaminated property resulting from our or a predecessor owner's or operator's operations. We may not be able to recover some or any of these costs from insurance or contractual indemnifications. Moreover, changes in environmental laws, regulations and enforcement policies occur frequently, and any changes that result in more stringent or costly emissions control or waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our results of operations, competitive position or financial condition. **Unfavorable results of litigation could have a material adverse impact on our financial statements.** We are subject to a variety of claims and lawsuits in the ordinary course of our business. Adverse outcomes in potential litigation related to our business may result in significant monetary damages or injunctive relief against us, as litigation and other claims are subject to inherent uncertainties. Any such adverse outcomes that may arise in the future, could have a material adverse impact on our financial position, results of operations, and cash flows. **Burial practice claims could have a material adverse impact on our financial results.** From time to time, we are party to various claims and legal proceedings, including improper burial practices. When disputes occur, we may be subjected to litigation and liability for improper burial practices. We may be subject to litigation and liability based upon actions or events that occurred before we acquired or managed the cemeteries. Claims or litigation based upon our burial practices could have a material adverse impact on our financial condition, results of operations and cash flows. **Failure to maintain effective internal control over financial reporting could adversely affect our results of operations, investor confidence, and our stock price.** The accuracy of our financial reporting depends on the effectiveness of our internal control over financial reporting. Internal control over financial reporting can provide only reasonable assurance with respect to the preparation and fair presentation of financial statements and may not prevent or detect misstatements because of its inherent limitations. If we do not maintain effective internal control over financial reporting or implement controls sufficient to provide reasonable assurance with respect to the preparation and fair presentation of our financial statements, we could be unable to file accurate financial reports on a timely basis, and our results of operations, investor confidence, and stock price could be materially adversely affected. ## Properties As filed, 3,179 characters. At December 31, 2019, we operated 186 funeral homes in 29 states and 31 cemeteries in 11 states. We own the real estate and buildings for 165 of our funeral homes and lease 21 facilities. We own 30 cemeteries and operate one cemetery under a long-term contract with a municipality, which we refer to as a managed property. We operate 18 funeral homes in combination with cemeteries as these locations are physically located on the same property or in very close proximity and are under the same leadership. The 31 cemeteries that we operate have developed cemetery property of approximately 129,000 and 152,000 units available-for-sale at December 31, 2018 and 2019, respectively. In addition, we own approximately 500 acres that are available for future development or sale. We anticipate having a sufficient inventory of lots to maintain our property sales for the foreseeable future. The following table sets forth certain information as of December 31, 2019, regarding our properties used by the funeral home segment and by the cemetery segment identified by state: | State | Number of Funeral Homes Owned | Leased(1) | Number of Cemeteries Owned | Managed | | --- | ---: | ---: | ---: | ---: | | California | 23 | 5 | 4 | — | | Colorado | 2 | — | — | — | | Connecticut | 8 | 2 | — | — | | Florida | 11 | 5 | 5 | — | | Georgia | 3 | — | — | — | | Idaho | 5 | 1 | 3 | — | | Illinois | 2 | — | 1 | — | | Kansas | 2 | — | — | — | | Kentucky | 7 | 1 | 1 | — | | Louisiana | 3 | 1 | 1 | — | | Maryland | 1 | — | — | — | | Massachusetts | 12 | — | — | — | | Michigan | 2 | — | — | — | | Montana | 2 | 1 | 1 | — | | Nevada | 2 | — | 2 | 1 | | New Jersey | 4 | 1 | — | — | | New Mexico | 1 | — | — | — | | New York | 10 | 1 | — | — | | North Carolina | 7 | 1 | 1 | — | | Ohio | 5 | — | — | — | | Oklahoma | 6 | — | 2 | — | | Pennsylvania | 2 | — | — | — | | Rhode Island | 4 | — | — | — | | Tennessee | 5 | — | — | — | | Texas | 24 | 1 | 8 | — | | Virginia | 8 | 1 | 1 | — | | Washington | 2 | — | — | — | | West Virginia | 1 | — | — | — | | Wisconsin | 1 | — | — | — | | Total | 165 | 21 | 30 | 1 | (1) The leases, with respect to these funeral homes, generally have remaining terms ranging from one to fifteen years, and generally, we have the right to renew past the initial terms and have a right of first refusal on any proposed sale of the property where these funeral homes are located. Our home office occupies approximately 48,000 square feet of leased office space in Houston, Texas. At December 31, 2019, we owned and operated 806 vehicles. The following table sets forth the number of funeral homes and cemeteries owned and operated by us for the periods presented: | | Years Ended December 31, 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Funeral homes at beginning of period | 170 | 178 | 182 | | Acquisitions | 7 | 4 | 9 | | Constructed funeral homes | 2 | — | — | | Divestitures | (1) | — | (4) | | Mergers of funeral homes | — | — | (1) | | Funeral homes at end of period | 178 | 182 | 186 | | Cemeteries at beginning of period | 32 | 32 | 29 | | Acquisitions | — | — | 2 | | Divestitures | — | (3) | — | | Cemeteries at end of period | 32 | 29 | 31 | ## Legal proceedings As filed, 2,306 characters. We and our subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of our business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial statements. Information regarding litigation is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 18. *Faria, et al. v. Carriage Funeral Holdings, Inc.,* Superior Court of California, Contra Costa County, Case No. MSC18-00606. On March 26, 2018, six Plaintiffs filed a putative class action against Carriage Funeral Holdings, Inc., our subsidiary, their alleged employer, on behalf of themselves and all similarly situated current and former employees. Plaintiffs seek monetary damages and claim that Carriage Funeral Holdings, Inc. failed to pay minimum wages, provide meal and rest breaks, provide accurately itemized wage statements, reimburse employees for required expenses, and provide wages when due. Plaintiffs also claim that Carriage Funeral Holdings, Inc. violated California Business and Professions Code §17200 et seq. On June 5, 2018, Plaintiffs filed a First Amended Complaint to add a claim under the California Private Attorney General Act. On October 23, 2018, the parties mediated this matter and executed a Memorandum of Understanding for class settlement. In February 2019, a Class Action Settlement Agreement was fully executed and was approved by the Court in October 2019. We paid $0.7 million under the settlement agreement in November 2019. We self-insure against certain risks and carry insurance with coverage and coverage limits for risks in excess of the coverage amounts consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there can be no assurance that self-insurance reserves and insurance will be sufficient to mitigate all damages, claims or contingencies, we believe that the reserves and our insurance provide reasonable coverage for known asserted and unasserted claims. In the event we sustain a loss from a claim and the insurance carrier disputes coverage or coverage limits, we may record a charge in a different period than the recovery, if any, from the insurance carrier. ## Management's discussion and analysis As filed, 87,543 characters. ### OVERVIEW #### General We operate in two business segments: funeral home operations, which accounts for approximately 80% of our revenue, and cemetery operations, which accounts for approximately 20% of our revenue. 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. We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis. At December 31, 2019, we operated 186 funeral homes in 29 states and 31 cemeteries in 11 states within the United States. For additional discussion about our overall business strategy, see Part I, Item 1, Business – Business Strategy. #### Funeral Home Operations Factors affecting our funeral operating results include: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our atneed business to increase average revenue per contract. In simple terms, volume and price are the two variables that affect funeral revenue. The average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. #### Cemetery Operations Factors affecting our cemetery operating results include: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds. ### LIQUIDITY AND CAPITAL RESOURCES #### Overview 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, 2019. During 2020, we intend to focus on integrating our newly acquired businesses and to use cash on hand and borrowings under our Credit Facility primarily for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends and our debt obligations. From time to time we may also use available cash resources (including borrowings under our Credit Facility) to repurchase shares of our common stock and our remaining 2.75% convertible subordinated notes due 2021 (“Convertible Notes”) in open market or privately-negotiated transactions. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. 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 2019 with $0.6 million in cash and other liquid investments and ended the year with $0.7 million in cash. At December 31, 2019, we had borrowings of $83.8 million outstanding on our Credit Facility compared to $27.1 million as of December 31, 2018 and $92.0 million as of December 31, 2017. The following table sets forth the elements of cash flow for the years ended December 31, 2017, 2018 and 2019 (in thousands): | | 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Cash at beginning of year | $3,286 | $952 | $644 | | Cash flow from operating activities | 45,230 | 48,994 | 43,216 | | Acquisitions and land for new construction | (28,799) | (37,970) | (140,907) | | Deposit on pending acquisition | — | — | (5,000) | | Proceeds from insurance reimbursements | — | — | 1,433 | | Net proceeds from the sale of businesses and other assets | 5,731 | — | 967 | | Growth capital expenditures | (7,973) | (4,260) | (6,584) | | Maintenance capital expenditures | (8,422) | (9,266) | (8,795) | | Cash flow from investing activities | (39,463) | (51,496) | (158,886) | | Net borrowings (payments) on long-term debt obligations | 11,088 | (194,340) | 54,413 | | Payment of debt issuance costs related to long-term debt | — | (1,751) | (891) | | Acquisition of Convertible Notes | — | (98,266) | (27) | | Transaction costs related to the acquisition of Convertible Notes | — | (885) | — | | Proceeds from the issuance of the Senior Notes | — | 320,125 | 76,688 | | Payment of debt issuance costs related to the Senior Notes | — | (1,367) | (980) | | Dividends paid on common stock | (3,709) | (5,513) | (5,398) | | Net proceeds from employee equity plans | 987 | 595 | 1,251 | | Purchase of treasury stock | (16,366) | (16,266) | (9,152) | | Other financing costs | (101) | (138) | (162) | | Cash flow from financing activities | (8,101) | 2,194 | 115,742 | | Cash at end of year | $952 | $644 | $716 | #### Operating Activities For the year ended December 31, 2019, cash provided by operating activities was $43.2 million compared to $49.0 million for the year ended December 31, 2018 and $45.2 million for the year ended December 31, 2017. The decrease of $5.8 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 was due primarily to approximately $5.0 million in more cash interest paid in 2019 compared to 2018, as well as additional unfavorable working capital changes. The increase of $3.8 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was primarily due to the favorable impact of working capital changes. #### Investing Activities Our investing activities resulted in a net cash outflow of $158.9 million for the year ended December 31, 2019 compared to $51.5 million for the year ended December 31, 2018 and $39.5 million for the year ended December 31, 2017, an increase of $107.4 million and $12.0 million, respectively. During the year ended December 31, 2019, we acquired, in three separate transactions, two funeral home and cemetery combination businesses, seven funeral home businesses and three ancillary service businesses for an aggregate purchase price of $140.9 million. In October 2019, we acquired the following: (i) four funeral home businesses in Buffalo, New York; and (ii) one funeral home and cemetery combination business, three funeral home businesses and three ancillary service businesses, which consist of a flower shop, a pet cremation business and an online cremation business in the Dallas, Texas area. In December 2019, we acquired one funeral home and cemetery combination business in Fairfax, Virginia. During the year ended December 31, 2019, we paid a $5.0 million deposit for a funeral home and cemetery combination business that we acquired in January 2020. During the year ended December 31, 2019, we received proceeds of $1.4 million from our property insurance policy for the reimbursement of renovation costs for our funeral and cemetery businesses that were damaged by Hurricane Michael. During the year ended December 31, 2019, we sold a funeral home business for $0.9 million and we sold real property for $0.1 million related to a funeral home we merged with another business in an existing market. During the year ended December 31, 2018, we acquired four funeral home businesses, two in Virginia, one in Tennessee, and one in North Carolina, for an aggregate purchase price of $38.0 million. During the year ended December 31, 2017, we acquired seven funeral home businesses, two in Colorado and five in New York, for the aggregate purchase price of $27.5 million. We also purchased real estate for a funeral home parking lot expansion projects for $1.3 million. Additionally, we sold a funeral home business for $0.6 million and land for $5.1 million. For the year ended December 31, 2019, capital expenditures totaled $15.4 million compared to $13.5 million for the year ended December 31, 2018, and $16.4 million for the year ended December 31, 2017, an increase of $1.9 million and a decrease of $2.9 million, respectively. The following tables present our growth and maintenance capital expenditures (in thousands): | Growth | 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Cemetery development | $3,688 | $3,149 | $4,348 | | Construction for new funeral facilities | 3,117 | 11 | — | | Renovations at certain businesses(1) | 1,168 | 1,100 | 2,236 | | Total Growth | $7,973 | $4,260 | $6,584 | (1) During the year ended December 31, 2019, we spent $1.6 million for renovations on four businesses that were affected by Hurricane Michael, of which $1.4 million was reimbursed by our property insurance policy. | Maintenance | 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Facility repairs and improvements | $2,239 | $2,591 | $1,820 | | General equipment and furniture | 2,010 | 2,247 | 3,032 | | Vehicles | 1,928 | 2,556 | 1,950 | | Paving roads and parking lots | 1,287 | 674 | 795 | | Information technology infrastructure improvements | 915 | 1,172 | 977 | | Other | 43 | 26 | 221 | | Total Maintenance | $8,422 | $9,266 | $8,795 | #### Financing Activities Our financing activities resulted in a net cash inflow of $115.7 million for the year ended December 31, 2019 compared to $2.2 million for the year ended December 31, 2018 and net cash outflow of $8.1 million for the year ended December 31, 2017, an increase of $113.5 million and $10.3 million, respectively. For the year ended December 31, 2019, we had net proceeds related to the issuance of our Additional Senior Notes of $75.7 million and net borrowing on our long-term debt obligations of $53.5 million. We purchased treasury stock for $9.2 million and paid $5.4 million in dividends on our common stock. For the year ended December 31, 2018, we had net proceeds related to the issuance of our Initial Senior Notes of $318.8 million, offset by net payments on our long-term debt obligations of $196.1 million and payments of $99.2 million to acquire our Convertible Notes. We purchased treasury stock for $16.3 million and paid $5.5 million in dividends on our common stock. For the year ended December 31, 2017, we had net borrowings on our long-term debt obligations of $11.1 million. We purchased treasury stock for $16.4 million and paid $3.7 million in dividends on our common stock. #### Dividends On October 25, 2017, our Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075 per share, effective with respect to dividends payable on December 1, 2017 and later. For the years ended December 31, 2019, 2018 and 2017, our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): | 2019 | Per Share | Dollar Value | | --- | ---: | ---: | | March 1st | $0.075 | $1,360 | | June 1st | $0.075 | $1,365 | | September 1st | $0.075 | $1,336 | | December 1st | $0.075 | $1,337 | | **2018** | **Per Share** | **Dollar Value** | | March 1st | $0.075 | $1,207 | | June 1st | $0.075 | $1,433 | | September 1st | $0.075 | $1,436 | | December 1st | $0.075 | $1,430 | | **2017** | **Per Share** | **Dollar Value** | | March 1st | $0.050 | $833 | | June 1st | $0.050 | $835 | | September 1st | $0.050 | $835 | | December 1st | $0.075 | $1,206 | #### Share Repurchases On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Exchange Act. On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases bringing the total authorized repurchase amount to $40.0 million. On July 31, 2019, our Board approved an additional $25.0 million for repurchases of our common stock in accordance with the Exchange Act. During the year ended December 31, 2019, we repurchased 400,000 shares of common stock for a total cost of $7.8 million at an average cost of $19.39 per share pursuant to our share repurchase program. During the year ended December 31, 2018, we repurchased 1,101,969 shares of common stock for a total cost of approximately $17.7 million at an average cost of $16.03 per share pursuant to our share repurchase program. During the year ended December 31, 2017, we repurchased 574,054 shares of common stock for a total cost of $14.0 million at an average cost of $24.35 per share pursuant to our share repurchase program. Our shares were purchased in the open market. Purchases were at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares. At December 31, 2019, we had approximately $25.6 million available for repurchase under our share repurchase program. #### Long-term Debt and Lease Obligations The outstanding principal of our long-term debt and lease obligations at December 31, 2018 and 2019 is as follows (in thousands): | | December 31, 2018 | December 31, 2019 | | --- | ---: | ---: | | Credit Facility | $27,100 | $83,800 | | Finance leases | 6,143 | 5,854 | | Operating leases | — | 21,533 | | Acquisition debt | 6,925 | 5,658 | | Total long-term debt and lease obligations | $40,168 | $116,845 | 26 ### Credit Facility On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our Initial Senior Notes. We used $291.4 million of the net proceeds from the sale of the Initial Senior Notes to repay all amounts outstanding under our former credit agreement. 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 senior secured revolving credit facility (as defined below). On May 31, 2018, we entered into a $150.0 million senior secured revolving credit facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent, which we subsequently amend in November 2018 and July 2019. For the year ended December 31, 2018, we recognized a loss of $1.6 million, recorded in *Net loss on early extinguishment of debt,* related to the termination of our former credit agreement, which consisted of a write-off of $0.7 million of transaction costs and a write-off of $0.9 million of unamortized debt issuance costs. Additionally, we incurred $1.1 million in transaction costs related to our senior secured revolving credit facility, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method. On December 19, 2019, we entered into a third amendment and commitment increase (“Credit Facility”) to our $150.0 million senior secured revolving credit facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent (in such capacity, the “Administrative Agent”) to increase our commitment to $190.0 million. The Credit Facility is comprised of: (i) a $190.0 million revolving credit facility, which includes a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 31, 2023. For the year ended December 31, 2019, we incurred $0.9 million in transactions costs related to our Credit Facility, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method. The Company’s obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes and certain of the Company’s Credit Facility Guarantors. The Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of the Company’s personal property assets and those of the Credit Facility Guarantors. In the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level, at the discretion of the Administrative Agent, the Administrative Agent may unilaterally compel the Company and the Credit Facility Guarantors to grant and perfect first-priority mortgage liens on fee-owned real property assets which account for no less than 50% of funeral operations EBITDA. The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations, continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, amongst others. In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and the Credit Facility Guarantors to incur indebtedness, grant liens, make investments, engage in acquisitions, mergers or consolidations, and pay dividends and other restricted payments, and the following financial maintenance covenants: (A) a Total Leverage Ratio not to exceed (i) 6.00 to 1.00 for the quarter ended December 31, 2019, (ii) 5.75 to 1.00 for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and (iii) 5.50 to 1.00 for the quarter ended December 31, 2020 and each quarter ended thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit Facility) not to exceed 2.00 to 1.00 as of the end of any period of four consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. Effective with the Credit Facility, an applicable rate premium shall be set forth in reference to the Total Leverage Ratio and increases by 0.500% whenever the most recent compliance certificate delivered indicates that the Total Leverage Ratio is greater than 5.00 to 1.00. The financial maintenance covenants will be calculated for the Company and its subsidiaries on a consolidated basis. As of December 31, 2019, we had outstanding borrowings under our Credit Facility of $83.8 million. We had one letter of credit issued on November 25, 2019 and outstanding under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% and will expire on November 25, 2020. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under our Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of December 31, 2019, the prime rate margin was equivalent to 1.500% and the LIBOR rate margin was 2.500%. The weighted average interest rate on our Credit Facility for the years ended December 31, 2018 and 2019 was 4.0% and 2.9%, respectively. We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by 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 Credit Facility Guarantors. We are in compliance with the covenants contained in our Credit Facility as of December 31, 2019, with a leverage ratio of 5.66 to 1.00, a fixed charge coverage ratio of 2.70 to 1.00 and a senior secured leverage ratio of 0.94 to 1.00. Interest expense related to our Credit Facility was $6.9 million, $4.3 million and $1.6 million for the years ended December 31, 2017, 2018 and 2019, respectively. Amortization of debt issuance costs related to our Credit Facility was $0.3 million, $0.2 million and $0.2 million for the years ended December 31, 2017, 2018 and 2019, respectively. ### Lease Obligations On January 1, 2019, we adopted Topic 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. As a result, we recorded operating lease right-of-use (“ROU”) assets of $16.5 million and operating lease liabilities of $17.3 million related to real estate and equipment leases, based on the present value of the future lease payments on the date of adoption. Lease expense related to our operating leases and short-term leases was $3.7 million and $0.3 million, respectively for the year ended December 31, 2019. Depreciation expense related to our finance leases was $0.5 million for the year ended December 31, 2019. Interest expense related to our finance leases was $0.5 million for the year ended December 31, 2019. During the year ended December 31, 2019, we modified an existing operating lease to extend the term through 2030. As a result of this modification, we increased our lease liabilities and right-of-use assets by $8.2 million. ### Acquisition Debt Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from five to twenty years. Imputed interest expense related to our acquisition debt was $0.9 million, $0.8 million and $0.6 million for the years ended December 31, 2017, 2018 and 2019, 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 (the “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 $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”). On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes for $22.9 million in cash (plus accrued interest of approximately $0.2 million totaling $23.0 million). Following the Exchange and the December 2018 repurchases, the aggregate principal amount of our Convertible Notes outstanding was reduced to $6.3 million. For the year ended December 31, 2018, we recognized a net gain of $1.7 million, recorded in *Net loss on early extinguishment of debt,* related to the Exchange and December 2018 repurchases of our Convertible Notes, which consisted of a gain of $3.1 million on the difference between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding each exchange and repurchase, and a loss of $1.4 million related to the write-off of unamortized debt issuance costs due to the exchange and repurchase of our Convertible Notes. We incurred $0.9 million in transactions costs related to the Exchange and December 2018 repurchases of our Convertible Notes, of which $0.6 million was expensed and recorded in *Net loss on early extinguishment of debt* and $0.3 million was allocated to the equity component and recorded in *Additional paid-in capital.* On April 4, 2019, we completed a privately-negotiated repurchase of an additional $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163. The Convertible Notes are general unsecured obligations and are subordinated in the right of payment to all of our existing and future senior indebtedness and equal in right of payment with our other existing and future subordinated indebtedness. 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 $22.56 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain events, as described in the indenture governing the Convertible Notes. During 2018, an adjustment to the conversion rate of the Convertible Notes was triggered when our Board increased the dividends declared per common share from $0.05 per share to $0.075 per share. At December 31, 2019, the adjusted conversion rate of the Convertible Notes is 45.4615 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of $22.00 per share of common stock. At December 31, 2019, the carrying amount of the equity component was $0.8 million, the principal amount of the liability component was $6.3 million and the net carrying amount was $6.0 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 approximately 14 months of the Convertible Notes. The effective interest rate on the unamortized debt discount for the years ended December 31, 2018 and 2019 was 11.3% and 11.4%, respectively. The effective interest rate on the debt issuance costs for both years ended December 31, 2018 and 2019 was 3.2%. Interest expense on the Convertible Notes included contractual coupon interest expense of $4.0 million, $1.9 million and $0.2 million for the years ended December 31, 2017, 2018 and 2019, respectively. Accretion of the discount on the Convertible Notes was $4.3 million, $2.2 million and $0.2 million for the years ended December 31, 2017, 2018 and 2019, respectively. Amortization of debt issuance costs related to our Convertible Notes was $517,000, $245,000 and $24,000 for the years ended December 31, 2017, 2018 and 2019, respectively. ### Senior Notes On May 31, 2018, we issued $325.0 million in aggregate principal amount of our Initial Senior Notes and related guarantees in a private offering under Rule 144A and Regulation S under 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. We incurred $1.4 million in debt issuance costs related to the Initial Senior Notes. The Initial Senior Notes were issued under an indenture, dated as of May 31, 2018 (the “Indenture”), among us, certain of our existing subsidiaries (collectively, the “Subsidiary Guarantors”), as guarantors, and Wilmington Trust, National Association., as trustee. On December 19, 2019, we issued an additional $75.0 million in aggregate principal amount of our Initial Senior Notes (the “Additional Senior Notes” and, together with the Initial Senior Notes, the “Senior Notes”) and related guarantees by the Subsidiary Guarantors in a private offering under Rule 144A and Regulation S of the Securities Act. The Additional Senior Notes were issued as additional securities under the Indenture. We received proceeds of $76.9 million, net of a debt premium of $1.7 million (plus accrued interest of $0.2 million). We incurred $1.0 million in debt issuance costs related to the Additional Senior Notes. The additional issuance brings the total principal amount of Senior Notes outstanding to $400.0 million. The Senior Notes are treated as a single class of securities under the Indenture, and the Additional Senior Notes have identical terms to the Initial Senior Notes, except with respect to the date of issuance, the issue price, the initial interest accrual date and the initial interest payment date. 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 June 1 and December 1 of each year, beginning on December 1, 2018 with respect to the Initial Senior Notes and June 1, 2020 with respect to the Additional Senior Notes to holders of record on each May 15 and November 15 preceding an interest payment date. The Senior Notes mature on June 1, 2026, unless earlier redeemed or repurchased. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by each of the Subsidiary Guarantors. We may redeem all or part of the Senior Notes at any time prior to June 1, 2021 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed, plus a “make whole” premium, and accrued and unpaid interest, if any, to the date of redemption. We have the right to redeem the Senior Notes at any time on or after June 1, 2021 at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption. Additionally, at any time before June 1, 2021, we may redeem up to 40% of the aggregate principal amount of the Senior Notes issued with an amount equal to the net proceeds of certain equity offerings, at a price equal to 106.625% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption; provided that (1) at least 60% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes ) originally issued under the Indenture remain outstanding immediately after the occurrence of such redemption (excluding Senior Notes held by us); and (2) each such redemption must occur within 180 days of the date of the closing of each such equity offering. If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest. The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default. At December 31, 2019, the debt discount of $4.1 million, the debt premium of $1.7 million and the debt issuance costs of $2.1 million are being amortized using the effective interest method over the remaining term of approximately 77 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Initial Senior Notes for the year ended December 31, 2019 was 6.87% and 6.69%, respectively. The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the Additional Senior Notes for the year ended December 31, 2019 was 6.20% and 6.88%, respectively. Interest expense on the Senior Notes included contractual coupon interest expense of $12.6 million and $21.7 million for the years ended December 31, 2018 and 2019, respectively. Amortization of the debt discount on the Senior Notes was $0.3 million and $0.5 million for the years ended December 31, 2018 and 2019, respectively and amortization of debt issuance costs on the Senior Notes was $0.1 million for both the years ended December 31, 2018 and 2019. ### CONTRACTUAL OBLIGATIONS The following table summarizes the known future payments required for the debt on our Consolidated Balance Sheet as of December 31, 2019. Where appropriate we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements where additional information is available. | | Financial Note Reference | Payments Due By Period (in thousands) Total | 2020 | 2021 | 2022 | 2023 | 2024 | After 5 Years | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Long-term debt obligations | 14 | $90,764 | $1,289 | $1,023 | $523 | $84,363 | $550 | $3,016 | | Interest obligation on long-term debt (a) | 14 | 15,511 | 4,138 | 4,074 | 4,014 | 1,826 | 252 | 1,207 | | Finance lease obligations, including interest | 17 | 10,466 | 828 | 836 | 860 | 860 | 791 | 6,291 | | Senior Notes (b) | 16 | 400,000 | — | — | — | — | — | 400,000 | | Convertible Notes (c) | 15 | 6,319 | — | 6,319 | — | — | — | — | | Interest on Senior Notes | 16 | 170,042 | 26,500 | 26,500 | 26,500 | 26,500 | 26,500 | 37,542 | | Interest on Convertible Notes | 15 | 210 | 174 | 36 | — | — | — | — | | Operating lease obligations, including interest | 17 | 34,703 | 3,358 | 3,705 | 3,345 | 3,249 | 3,248 | 17,798 | | Total contractual obligations | | $728,015 | $36,287 | $42,493 | $35,242 | $116,798 | $31,341 | $465,854 | (a) Based on interest rates in effect at December 31, 2019. (b) Matures June 1, 2026. (c) Matures March 15, 2021. 30 ### OFF-BALANCE SHEET ARRANGEMENTS The following table summarizes our off-balance sheet arrangements as of December 31, 2019. Where appropriate, we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements where additional information is available. We have various non-compete agreements with former owners and employees of businesses we have acquired. These agreements are generally for one to ten years and provide for periodic payments over the term of the agreements. We have various consulting agreements with former owners of businesses we have acquired. Payments for such agreements are generally not made in advance. These agreements are generally for one to five years and provide for bi-weekly or monthly payments. We have employment agreements with our executive officers and certain senior leadership. These agreements are generally for three to five years and provide for participation in various incentive compensation arrangements. These agreements generally renew automatically on an annual basis after their initial term has expired. | | Financial Note Reference | Payments Due By Period (in thousands) Total | 2020 | 2021 | 2022 | 2023 | 2024 | After 5 Years | | --- | ---: | ---: | ---: | ---: | ---: | ---: | ---: | ---: | | Non-compete agreements | 18 | $8,090 | $2,135 | $1,905 | $1,465 | $993 | $665 | $927 | | Consulting agreements | 18 | 2,118 | 869 | 663 | 404 | 162 | 20 | — | | Employment agreements (a) | 18 | 11,466 | 3,482 | 3,482 | 3,077 | 777 | 648 | — | | Total contractual cash obligations | | $21,674 | $6,486 | $6,050 | $4,946 | $1,932 | $1,333 | $927 | (a) Melvin C. Payne, our Chairman of the Board and Chief Executive Officer, has an employment agreement that does not renew after the initial term of five years. The obligations related to our off-balance sheet arrangements are significant to our future liquidity; however, although we can provide no assurances, we anticipate that these obligations will be funded from cash provided from our operating activities. If we are not able to meet these obligations with cash provided by our operating activities, we may be required to access the capital markets or draw down on our Credit Facility, both of which may be more difficult to access. ### FINANCIAL HIGHLIGHTS Below are our financial highlights for the years ended December 31, 2017, 2018 and 2019 (in thousands except for volumes and averages): | | Years Ended December 31, 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Revenue | $258,139 | $267,992 | $274,107 | | Funeral contracts | 34,894 | 36,816 | 38,940 | | Average revenue per contract | $5,705 | $5,674 | $5,499 | | Preneed interment rights (property) sold | 6,959 | 7,063 | 7,205 | | Average price per interment right sold | $3,294 | $3,472 | $3,653 | | Gross profit | $76,799 | $75,947 | $79,585 | | Net income | $37,193 | $11,645 | $14,533 | Revenue in 2019 increased $6.1 million compared to 2018, as we experienced a 5.8% increase in total funeral contracts, offset by a decrease in the average revenue per funeral contract of 3.1%. In addition, the average price per interment right (property) sold increased 5.2% and we experienced an increase of 2.0% in the number of preneed interment rights sold. Revenue in 2018 increased $9.9 million compared to 2017, as we experienced a 5.5% increase in total funeral contracts, offset by a slight decrease in the average revenue per funeral contract of 0.5%. In addition, the average price per interment right (property) sold increased 5.4% and we experienced an increase of 1.5% in the number of preneed interment rights sold. Further discussion of Revenue for our funeral home and cemetery segments is presented herein under “– Results of Operations.” Gross profit in 2019 increased $3.6 million compared to 2018, primarily due to an increase in revenue from our funeral home segment due to the acquisitions made in the fourth quarter of 2019 and the second half of 2018. Gross profit in 2018 decreased $0.9 million compared to 2017, primarily due to a decline in revenue from our funeral home segment and higher salaries and benefits costs, including higher health care costs, across all businesses. Further discussion of the components of Gross profit for our funeral home and cemetery segments, is presented herein under “– Results of Operations.” Net income in 2019 increased $2.9 million compared to 2018 primarily due to the increase in gross profit, as well as a $5.0 million decrease in general and administrative expenses, offset by a $2.5 million increase in interest expense primarily related to our Senior Notes and a $2.9 million increase in the loss on divested businesses. Net income in 2018 decreased $25.5 million compared to 2017 primarily due to a $17.5 million discrete tax benefit recorded due to the re-measurement of our deferred tax assets and liabilities to reflect the impact of the recent tax law change. Additionally, we experienced an increase of $8.2 million in interest expense related to our Senior Notes. 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.” ### 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 year ending December 31, 2019 dated February 19, 2020 and discussed in the corresponding earnings conference call. This Trend Report is used as a supplemental financial 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. Below is a reconciliation of Net Income (a GAAP measure) to Adjusted Net Income (a non-GAAP measure) for the years ended December 31, 2017, 2018, and 2019 (in thousands): | | 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Net income | $37,193 | $11,645 | $14,533 | | Special items, net of tax except for items noted by\*\*(1) | | | | | Acquisition and divestiture expenses | — | — | 1,646 | | Severance and retirement costs | — | 1,134 | 951 | | Performance awards cancellation write-off | — | 2,594 | — | | Accretion of discount on Convertible Notes\*\* | 4,329 | 2,192 | 241 | | Net loss on early extinguishment of debt | — | 397 | — | | Loss on sale of business and other costs | — | 439 | 3,331 | | Goodwill and other impairments | — | 805 | 761 | | Litigation reserve | — | 790 | 592 | | Natural disaster costs | 403 | 345 | — | | Tax expense related to divested business\*\* | — | — | 911 | | Gain on insurance proceeds | — | — | (699) | | Other special items | — | — | 265 | | Tax adjustment related to certain discrete items\*\* | (17,176) | 1,225 | — | | Adjusted net income(2) | $24,749 | $21,566 | $22,532 | (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 taxed at the federal statutory rate of 35 percent for the year ended December 31, 2017 and 21 percent for the years ended December 31, 2018 and 2019, except for the Accretion of the discount on the Convertible Notes, the Tax expense related to divested business and the Tax adjustment related to certain discrete items, as these are non-tax deductible items. (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. 32 Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the years ended December 31, 2017, 2018, and 2019 (in thousands): | | 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Gross profit | $76,799 | $75,947 | $79,585 | | Cemetery property amortization | 3,350 | 3,602 | 3,985 | | Field depreciation expense | 11,024 | 12,015 | 12,370 | | Regional and unallocated funeral and cemetery costs | 13,339 | 12,749 | 13,827 | | Operating profit(1) | $104,512 | $104,313 | $109,767 | (1) Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs. Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP measure) by Segment for the years ended December 31, 2017, 2018, and 2019 (in thousands): | | 2017 | 2018 | 2019 | | --- | ---: | ---: | ---: | | Funeral Home | $81,981 | $82,154 | $85,737 | | Cemetery | 22,531 | 22,159 | 24,030 | | Operating profit | $104,512 | $104,313 | $109,767 | | Operating profit margin(1) | 40.5% | 38.9% | 40.0% | (1) Operating profit margin is defined as Operating profit as a percentage of Revenue. Further discussion of Operating profit for our funeral home and cemetery segments is presented herein under “– Results of Operations.” ### YEAR ENDED DECEMBER 31, 2019 COMPARED TO YEAR ENDED DECEMBER 31, 2018 ### Results of Operations The following is a discussion of our results of operations for the years ended December 31, 2019 and 2018. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2015 and owned and operated for the entirety of each period being presented, excluding certain funeral home businesses that we intend to divest in the near future. The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2014, excluding any funeral home businesses that the we intend to divest in the near future. 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 the three funeral home businesses whose building leases expired, one funeral home business we sold and a funeral home business we merged with a business in an existing market in 2019. The term “divested” when discussed in the Cemetery Segment, refers to three cemetery businesses that we divested as a result of a management agreement that expired on September 30, 2018. “Planned divested” in the Funeral Home Segment refers to the funeral home businesses that we intend to divest in the near future. “Ancillary” in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business. Cemetery property amortization, Field depreciation expense 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 table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations for the year ended December 31, 2019 compared to the year ended December 31, 2018 (in thousands): | Revenue: | Years Ended December 31, 2018 | 2019 | | --- | ---: | ---: | | Same store operating revenue | $166,934 | $167,246 | | Acquired operating revenue | 26,835 | 33,146 | | Divested/planned divested revenue | 8,399 | 7,195 | | Ancillary funeral services revenue | — | 748 | | Preneed funeral insurance commissions | 1,294 | 1,475 | | Preneed funeral trust and insurance | 7,263 | 7,058 | | Total | $210,725 | $216,868 | | Operating profit: | | | | Same store operating profit | $63,119 | $63,938 | | Acquired operating profit | 9,732 | 12,547 | | Divested/planned divested operating profit | 1,779 | 1,437 | | Ancillary funeral services operating profit | — | 298 | | Preneed funeral insurance commissions | 414 | 633 | | Preneed funeral trust and insurance | 7,110 | 6,884 | | Total | $82,154 | $85,737 | The following measures reflect the significant metrics over this comparative period: | Same store: | Years Ended December 31, 2018 | 2019 | | --- | ---: | ---: | | Contract volume | 30,838 | 31,544 | | Average revenue per contract, excluding preneed funeral trust earnings | $5,413 | $5,302 | | Average revenue per contract, including preneed funeral trust earnings | $5,620 | $5,493 | | Burial rate | 39.5% | 38.2% | | Cremation rate | 52.8% | 54.1% | | Acquired: | | | | Contract volume | 3,854 | 5,482 | | Average revenue per contract, excluding preneed funeral trust earnings | $6,963 | $6,046 | | Average revenue per contract, including preneed funeral trust earnings | $7,057 | $6,144 | | Burial rate | 49.3% | 44.7% | | Cremation rate | 42.6% | 48.1% | Funeral home same store operating revenue for the year ended December 31, 2019 increased $0.3 million, primarily due to the increase in same store contract volume, offset by the decrease in the average revenue per contract compared to year ended December 31, 2018. In spite of the high contract volume we had in the first quarter of 2018 due to a severe flu season, we experienced a 2.3% increase in contract volume in the twelve months ended December 31, 2019 compared to the same period in 2018, primarily due to the revision of our funeral home standards operating model to emphasize our focus on growing operating revenue and serving more families. Same store operating profit for the year ended December 31, 2019 increased $0.8 million when compared to the year ended December 31, 2018 and the comparable operating profit margin increased 40 basis points to 38.2%. Operating expenses decreased $0.5 million primarily due to a decrease in salaries and benefits of $0.8 million, or 0.5% as a percentage of operating revenue, offset by a $0.2 million increase in promotional costs, or 0.1% as a percentage of operating revenue. This is a result of changes implemented in the fourth quarter in 2018, which included assessing leadership and support teams at each business to ensure an optimal personnel mix, improving social media presence and reviewing pricing on merchandise and services to maximize operational efficiencies. Funeral home acquired operating revenue for the year ended December 31, 2019 increased $6.3 million, as our funeral home acquired portfolio for the year ended December 31, 2019 included four businesses acquired in the third quarter of 2018, and nine businesses in the fourth quarter of 2019 not fully present in the year ended December 31, 2018. Although we experienced an increase in acquired contract volumes, we experienced decreases in acquired average revenue per burial and cremation contracts due to increased discounts. Acquired operating profit for the year ended December 31, 2019 increased $2.8 million when compared to the year ended December 31, 2018. Operating profit margin increased by 160 basis points to 37.9% for the year ended December 31, 2019 compared to the same period in 2018. The increase is primarily due to the increase in acquired revenue and better management of expenses as operating expenses increased $3.5 million for the comparable period. We experienced significant savings in salaries and benefits which decreased 2.2% as a percentage of operating revenue, as a result of changes implemented in the fourth quarter of 2018 described above. Ancillary funeral services revenue, which is recorded in *Other revenue*, represents revenue from our flower shop, pet cremation business and online cremation business, which was acquired in the fourth quarter of 2019. Preneed funeral insurance and preneed funeral trust earnings, also recorded in *Other revenue*, on a combined basis, remained flat for the year ended December 31, 2019 compared to the same period in 2018. Operating profit from our ancillary funeral service businesses was $0.3 million for the year ended December 31, 2019, with an operating profit margin of 39.8%. Operating profit for preneed funeral insurance commission and preneed trust earnings, on a combined basis, also remained flat for the same comparative period primarily due to the increase in funeral commission revenue, offset by the decrease in preneed trust earnings. ### Cemetery Segment The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations for the year ended December 31, 2018 compared to the year ended December 31, 2019 (in thousands): | Revenue: | Years Ended December 31, 2018 | 2019 | | --- | ---: | ---: | | Same store operating revenue | $45,135 | $49,455 | | Acquired operating revenue | — | 295 | | Divested revenue | 4,712 | — | | Preneed cemetery trust and insurance | 5,761 | 6,035 | | Preneed cemetery finance charges | 1,659 | 1,454 | | Total | $57,267 | $57,239 | | Operating profit: | | | | Same store operating profit | $13,880 | $17,055 | | Acquired operating profit | — | 73 | | Divested operating profit | 1,376 | — | | Preneed cemetery trust and insurance | 5,244 | 5,448 | | Preneed cemetery finance charges | 1,659 | 1,454 | | Total | $22,159 | $24,030 | 35 The following measures reflect the significant metrics over this comparative period: | Same store: | Years Ended December 31, 2018 | 2019 | | --- | ---: | ---: | | Preneed revenue as a percentage of operating revenue | 58% | 61% | | Preneed revenue (in thousands) | $26,407 | $30,204 | | Number of preneed interment rights sold | 6,475 | 7,145 | | Atneed revenue (in thousands) | $18,727 | $19,251 | | Acquired: | | | | Preneed revenue as a percentage of operating revenue | —% | 65% | | Preneed revenue (in thousands) | $— | $192 | | Number of preneed interment rights sold | — | 60 | | Atneed revenue (in thousands) | $— | $103 | Cemetery same store operating revenue for the year ended December 31, 2019 increased $4.3 million, as we experienced a 10.3% increase in the number of preneed interment rights sold and a 2.9% increase in the average price of interments sold for the year ended December 31, 2019 compared to the same period in 2018. Same store atneed revenue, which represents approximately 39% of our same store operating revenue increased $0.5 million, as we experienced a 4.0% increase in the average sale per contract, offset by a 1.2% decrease in the number of atneed contracts sold. Cemetery same store operating profit for the year ended December 31, 2019 increased $3.2 million from the same period in 2018. The comparable operating profit margin increased 370 basis points to 34.5% for the year ended December 31, 2019 from 30.8% in the same period in 2018. The improvement in operating profit margin is a result of changes implemented in the fourth quarter of 2018 and continuing in the first half of 2019, which included a larger focus on the growth of revenue and market share, the hiring of talented sales managers for our larger cemeteries, and the investment in new product inventory for sale. As a result, we gained significant operational efficiencies throughout 2019, as same store cemetery operating costs only increased 4.0% compared to the 9.6% increase in operating revenue. Our acquired cemetery portfolio includes two businesses acquired during the fourth quarter of 2019. These two businesses contributed $0.3 million in revenue and $0.1 million in operating profit for the year ended December 31, 2019. Preneed cemetery trust earnings and preneed cemetery finance charges, which are recorded in *Other revenue*, on a combined basis, increased $0.1 million for the year ended December 31, 2019 compared to the same period in 2018. The increase is due to a $0.3 million increase in realized capital gains in our perpetual care trust funds in 2019 compared to 2018, partially offset by a $0.2 million decrease in finance charge revenue for the same comparable period. The decrease in finance charge revenue is due to our enhanced preneed cemetery property sales strategy of reducing interest rates on preneed contracts which has led to the increase in our cemetery same store operating revenue in 2019. Operating profit for the two categories of *Other revenue*, on a combined basis, remained flat for the same comparative period. *Cemetery property amortization.* Cemetery property amortization totaled $4.0 million for the year ended December 31, 2019, an increase of $0.4 million compared to the year ended December 31, 2018. The increase was primarily attributable to additional sales of cemetery property in 2019 compared to 2018. *Field depreciation.* Depreciation expense for our field businesses totaled $12.4 million for the year ended December 31, 2019, an increase of $0.4 million compared to the year ended December 31, 2018. The increase was primarily attributable to additional depreciation expense from the assets acquired through our 2018 and 2019 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 $13.8 million for the year ended December 31, 2019, an increase of $1.1 million primarily due to an increase of $0.9 million in severance expense from the separation of certain operational leadership, $0.3 million increase in benefits provided to employees and a $0.5 million increase in incentive compensation, offset by a decrease of $0.5 million in natural disaster costs and a decrease of $0.1 million in other general administrative costs. ### Other Financial Statement Items *General, administrative and other.* General, administrative and other expenses totaled $25.9 million for the year ended December 31, 2019, a decrease of $4.9 million compared to the year ended December 31, 2018. The decrease was attributable to the following: (1) a $4.4 million decrease in incentive and equity compensation primarily related to the cancellation of performance awards in 2018; (2) a $1.1 million decrease in severance costs and a $1.1 million decrease in salaries and benefits related to the separation of executive operating leadership in 2018; (3) an $0.8 million decrease in litigation reserves related to the payment of a class action settlement agreement in the fourth quarter of 2019; and (4) a $0.4 million decrease in group health insurance, offset by (5) a $2.1 million increase in acquisition costs; and (6) an $0.8 million increase in other general administrative costs. *Home office depreciation and amortization.* Home office depreciation and amortization expense totaled $1.4 million for the year ended December 31, 2019, a decrease of $0.4 million compared to the year ended December 31, 2018. The decrease was primarily attributable to machinery and equipment at the home office becoming fully depreciated in the first quarter of 2019. *Interest expense*. Interest expense related to its respective debt arrangement for the years ended December 31, 2018 and 2019 is as follows (in thousands): | | Years Ended December 31, 2018 | 2019 | | --- | ---: | ---: | | Senior Notes | $12,969 | $22,343 | | Credit Facility | 4,585 | 1,830 | | Convertible Notes | 2,123 | 198 | | Finance leases | 530 | 520 | | Acquisition debt | 791 | 622 | | Miscellaneous | 111 | 9 | | Total | $21,109 | $25,522 | *Accretion of discount on convertible subordinated notes*. For the year ended December 31, 2019, we recognized accretion of the discount on our Convertible Notes of $0.2 million compared to $2.2 million for the same period in 2018, a decrease of $2.0 million, which was attributable to the Exchange and December 2018 repurchases of our Convertible Notes. *Loss on early extinguishment of debt, net.* For the year ended December 31, 2018, we recognized a net loss of $0.5 million on the early extinguishment of debt for the following transactions: (i) a loss of $1.6 million related to the termination of our Former Credit Agreement, which consisted of a write-off of $0.7 million of transaction costs related to the Eighth Amendment and a write-off of $0.9 million of unamortized debt issuance costs related to the Former Credit Agreement; (ii) a net gain of $1.7 million related to the May exchanges and the December repurchases of our Convertible Notes, which consisted of a gain of $3.1 million on the difference between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding each exchange and repurchase, and a loss of $1.4 million related to the write-off of unamortized debt issuance costs due to the exchange and repurchase of our Convertible Notes; and (iii) a loss of $0.6 million related to transaction costs incurred for the exchange and repurchase of our Convertible Notes. *Other, net.* The components of *Other, net* for the years ended December 31, 2018 and 2019 are as follows (in thousands): | | Years Ended December 31, 2018 | 2019 | | --- | ---: | ---: | | Loss on sale of business and other assets | $(377) | $(4,028) | | Goodwill impairment | (846) | (742) | | Tradenames impairment | — | (221) | | Gain on insurance reimbursements | — | 885 | | Other loss | (15) | (4) | | Total | $(1,238) | $(4,110) | *Income taxes.* Our income tax provision was $7.9 million for the year ended December 31, 2019 compared to $6.6 million for the year ended December 31, 2018. Our operating tax rate before discrete items was 33.0% and 31.5% for the years ended December 31, 2019 and 2018, respectively. During the year ended December 31, 2019, we recorded additional tax expense of $0.9 million related to a divested business previously acquired as a stock acquisition. We also recorded discrete tax expense of $0.5 million and $0.9 million for the years ended December 31, 2019 and 2018, respectively, related primarily to share-based compensation. See Part II, Item 8, Financial Statements and Supplementary Data, Note 19 for additional information regarding income taxes. ### OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, inventories, goodwill, other intangible assets, property and equipment and deferred tax assets and liabilities. 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 revenue 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 revenue, will be consistent from year to year. “Management's Discussion and Analysis of Financial Condition and Results of Operations” (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with United States GAAP. Our critical accounting policies are more fully described in Part II, Item 8, Financial Statements and Supplementary Data, Note 1. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements. #### Revenue Recognition - Funeral Home Operations Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and remembrance services and transportation services. We provide funeral services and products on both an atneed and preneed basis. Funeral arrangements sold at the time of death are referred to as atneed funeral contracts. The performance obligation on these atneed contracts for both merchandise and services are bundled as a single performance obligation, as the performance of these obligations occur within a short time frame (usually within a few days) from the time of death to the funeral service. Although our performance activities are transferred in sequence such as, embalming the body, delivering the casket, obtaining service related items like flowers and performing the service, these are all essential to satisfy our contractual obligation to the customer, thus, bundled into a single performance obligation. Revenue is recognized on the date of funeral service, as all performance obligations have been satisfied. Payment is due at or before time of transfer. Outstanding balances due from customers, if any, on atneed funeral contracts are included in *Accounts receivable* on our Consolidated Balance Sheet. Funeral arrangements sold prior to death occurring are referred to as preneed funeral contracts. In many instances, the customer pays for the preneed contract over a period of time. For preneed funeral merchandise and service contracts, the performance obligation occurs at the time of need (when death occurs) and revenue is recognized on the date of delivery of merchandise or performance of service. We do not deliver merchandise on preneed contracts or provide service prior to the time of death. The performance obligation for preneed funeral contracts is similar to the elements of the performance obligation of atneed funeral contracts. For preneed funeral services, all preneed funeral contracts are re-written upon the date of death as an atneed contract. The performance obligation is satisfied at the date of the service. Revenue from preneed funeral contracts, along with accumulated earnings, is deferred until the time the merchandise is delivered or the service is performed. The principal and accumulated earnings of the trusts are withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in insurance benefits on the insurance products are recognized when the service is performed. The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheet. Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce *Deferred preneed funeral revenue* on our Consolidated Balance Sheet. Our funeral receivables recorded in *Accounts Receivable, net* primarily consist of amounts due for funeral services already performed. We estimate an allowance for doubtful accounts on these receivables based on our historical experience and we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed funeral contracts are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are subject to refund (charge-back) if the preneed policy is cancelled within a year or if there is an imminent death of beneficiary before the first year anniversary of the policy. We record these insurance commissions as *Other revenue* when the commission is no longer subject to refund, which is typically one year after the policy is issued. All selling costs incurred pursuant to the sale of the insurance funded preneed contracts are expensed as incurred. Preneed funeral contracts to be funded at maturity by third-party insurance policies are not recorded as assets or liabilities on our Consolidated Balance Sheet. See Part II, Item 8, Financial Statements and Supplementary Data, Note 6 for additional information related to revenue. #### Revenue Recognition - Cemetery Operations Our cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis. Cemetery arrangements sold at the time of death are referred to as atneed cemetery contracts. The performance obligation on these atneed contracts for cemetery property, merchandise and services are distinct. The performance obligations from the time of death to the disposition of the remains, include delivering cemetery property, unearthing the ground, interring remains and installing merchandise on the cemetery grounds. Each item on the contract is recognized as a distinct good or service. The performance obligation is satisfied and revenue is recognized on the purchase date of the interment right, on the date of the cemetery service, and on the date of delivery of the merchandise (set on cemetery grounds). Payment is due at or before time of transfer. Outstanding balances due from customers, if any, on completed atneed contracts are included in *Accounts receivable* on our Consolidated Balance Sheet. Cemetery arrangements sold prior to death occurring are referred to as preneed cemetery contracts. For preneed cemetery interment rights, the performance obligation is the sale of the interment right and revenue is recognized at the time the contract is signed. Control of cemetery interment rights is transferred to the customer upon execution of the contract as customers select a specific location and space for their interment right, thus, restricting us from other use or transfer of the contracted cemetery property. The interment right is deeded to the customer when the contract is paid in full. For preneed cemetery merchandise and service, the performance obligation occurs at the time of need (when death occurs) and revenue is recognized on the date of delivery of merchandise or performance of service. We do not deliver merchandise on preneed contracts or provide service prior to the time of death. The performance obligation for preneed cemetery merchandise and service is similar to the elements of the performance obligation of atneed cemetery merchandise and service. Preneed cemetery contracts are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. In substantially all cases, we receive an initial down payment at the time the contract is signed. Earnings on these installment contracts are not recognized until the time the merchandise is transferred or the service is performed and are recorded as *Other revenue.* The performance of the preneed cemetery contracts is secured by placing the funds collected, less amounts that we may retain under state regulations, in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. This method is intended to fund preneed contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases. The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheet. Balances due from customers on delivered preneed cemetery contracts are included in *Accounts receivable* and *Preneed receivables* on our Consolidated Balance Sheet. Balances due on undelivered preneed cemetery contracts have been reclassified to reduce *Deferred preneed cemetery revenue* on our Consolidated Balance Sheet. Allowances for bad debts and customer cancellations on cemetery financed receivables are provided at the date that the sale is recognized as revenue and are based on our historical experience. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more. See Part II, Item 8, Financial Statements and Supplementary Data, Note 6 for additional information related to revenue. #### Preneed Funeral and Cemetery Trust Funds Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. The investments of such trust funds are classified as available-for-sale and are reported at fair market value. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds. Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”) and are recorded as *Other revenue*. As of December 31, 2019, CSV RIA provided these services to approximately 71% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided. We determine whether or not the assets in the preneed trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. There will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis. See Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 9 and 11 for additional related disclosures related to preneed funeral and cemetery trust funds. #### Long-Lived Assets Long-lived assets, such as property, plant and equipment subject to depreciation and amortization, are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the Property, Plant and Equipment topic of the Accounting Standards Codification (“ASC”) 360. This guidance requires that long-lived assets to be held and used are reported at the lower of their carrying amount or fair value. We assess long-lived assets for impairment whenever events or circumstances indicate that the carrying value may be greater than the fair value. We evaluate our long-lived assets for impairment when a funeral home or cemetery business has negative earnings before interest, taxes, depreciation and amortization (“EBITDA”) for four consecutive years and if there has been a decline in EBITDA in that same period. We review our long-lived assets deemed held-for-sale to the point of recoverability. Assets to be disposed of and assets not expected to provide any future service potential are recorded at the lower of their carrying amount or fair value less estimated cost to sell. If we determine that the carrying value is not recoverable from the proceeds of the sale, we record an impairment at that time. See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 for additional information related to long-lived assets. #### Business Combinations Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition. See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 for additional information related to business combinations. #### Goodwill The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses and cemeteries acquired is recorded as goodwill. Goodwill has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years. We perform our annual goodwill impairment test as of August 31st each year. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. We conducted qualitative assessments in 2017 and 2018; however, we performed a quantitative assessment in 2019. Our quantitative goodwill impairment test involves estimates and management judgment. In the quantitative analysis, we compare the fair value of each reporting unit to its carrying value, including goodwill.We determine fair value for each reporting unit using both an income approach, weighted 90%, and a market approach, weighted 10%. Our methodology for determining an income-based fair value is based on discounting projected future cash flows. Our methodology for determining a market approach fair value utilizes the guideline public company method, in which we rely on market multiples of comparable companies operating in the same industry as the individual reporting units. In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount an impairment charge is recorded in an amount equal to the difference. See Part II, Item 8, Financial Statements and Supplementary Data, Note 4 for additional information related to goodwill. #### Intangible Assets Our intangible assets include tradenames resulting from acquisitions and are included in *Intangible and other non-current assets, net* on our Consolidated Balance Sheet. Our tradenames are considered to have an indefinite life and are not subject to amortization. As such, we test our intangible assets for impairment on an annual basis. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years. We perform our annual intangible assets impairment test as of August 31st each year. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of the tradename is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. Our quantitative intangible asset impairment test involves estimates and management judgment. Our quantitative analysis is performed using the relief from royalty method, which measures the tradenames by determining the value of the royalties that we are relieved from paying due to our ownership of the asset. We determine the fair value of the asset by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename. In accordance with the guidance, if the fair value of the tradename is less than its carrying amount, then an impairment charge is recorded in an amount equal to the difference. See Part II, Item 8, Financial Statements and Supplementary Data, Note 13 for additional information related to intangible assets. #### Fair Value Measurements We measure the available-for-sale securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis in accordance with the Fair Value Measurements Topic of the ASC. This guidance defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows: - Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets; - Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and - Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement. We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value. See Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 11 and 12 for additional information related to fair value measurements. #### Income Taxes We and our subsidiaries file a consolidated U. S. federal income tax return, separate income tax returns in 15 states in which we operate and combined or unitary income tax returns in 14 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. We classify our deferred tax liabilities and assets as non-current on our Consolidated Balance Sheet. We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized. We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in the financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheet. See Part II, Item 8, Financial Statements and Supplementary Data, Note 19 for additional information related to income taxes. #### Stock Plans and Stock-Based Compensation We have stock-based employee and director compensation plans under which we grant stock, restricted stock, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period. Fair value is determined on the date of the grant. The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date. The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model. See Part II, Item 8, Financial Statements and Supplementary Data, Note 20 for additional information related to stock-based compensation plans. #### Computation of Earnings per Common Share Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and our Convertible Notes (as defined in Note 15). Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation. See Part II, Item 8, Financial Statements and Supplementary Data, Note 22 for additional information related to computation of earnings per share. ### RECENT ACCOUNTING PRONOUNCEMENTS, ACCOUNTING CHANGES AND OTHER REGULATIONS For discussion of recent accounting pronouncements and accounting changes, see Note 2 in Part II, Item 8. Financial Statements and Supplementary Data. ### SEASONALITY Our business can be affected by seasonal fluctuations in the death rate. Generally, the number of deaths 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. ### INFLATION Inflation has not had a material impact on our results of operations over the last three fiscal years. ## Market risk As filed, 4,845 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 December 31, 2019 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 December 31, 2019 are presented in Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 9 and 11. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.67% 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 December 31, 2019,we had outstanding borrowings under the Credit Facility of $83.8 million. Any further borrowings or voluntary prepayments against the Credit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under our Credit Facility at either the prime rate or the LIBOR rate plus a margin. At December 31, 2019, the prime rate margin was equivalent to 1.5% and the LIBOR rate margin was 2.5%. 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 $0.1 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 the fixed annual rate of 2.75%. The Convertible Notes do not contain a call feature. At December 31, 2019, the carrying value of the Convertible Notes on our Consolidated Balance Sheet was $6.0 million and the fair value of the Convertible Notes was $7.8 million based on the last traded or broker quoted price, as reported by the Financial Industry Regulatory Authority, Inc. (“FINRA).” 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 the fixed annual rate of 6.625%. We may redeem all or part of the Senior Notes at any time prior to June 1, 2021 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed, plus a “make whole” premium, and accrued and unpaid interest, if any, to the date of redemption. We have the right to redeem the Senior Notes at any time on or after June 1, 2021 at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption. At December 31, 2019, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $395.4 million and the fair value of the Senior Notes notes was $426.4 million based on the last traded or broker quoted price as reported by FINRA. 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 consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease, but such changes will not affect our interest costs. ## Controls and procedures As filed, 4,796 characters. ### Management’s Evaluation of Disclosure Controls and Procedures Our management, including our principal executive and financial officers, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Exchange Act) as of the end of the period covered by this Form 10-K. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and financial officers have concluded that our disclosure controls and procedures were effective as of December 31, 2019 (the end of the period covered by this Annual Report on Form 10-K). ### Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management’s report on our internal control over financial reporting is presented on the following page of this Form 10-K. Grant Thornton LLP, the independent registered public accounting firm that audited the financial statements included in this Form 10-K, has issued an attestation report on our internal control over financial reporting. ### MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING Management of the Company is responsible for establishing and maintaining adequate internal control over financial reporting as such term is defined under Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s Consolidated Financial Statements for external purposes in accordance with generally accepted accounting principles, and includes those policies and procedures that: (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the U.S., and that our receipts and expenditures are being made only in accordance with authorizations of management and our directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on our Consolidated Financial Statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Management conducted an assessment of the Company’s internal control over financial reporting as of December 31, 2019 using the framework specified in *Internal Control — Integrated Framework (2013)*, published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such assessment, management has concluded that the Company’s internal control over financial reporting was effective as of December 31, 2019. The Company’s internal control over financial reporting as of December 31, 2019 has been audited by Grant Thornton LLP, an independent registered public accounting firm, which also audited the financial statements of the Company for the year ended December 31, 2019, as stated in their report which is presented in this Annual Report. /s/ Melvin C. Payne Melvin C. Payne Chief Executive Officer and Chairman of the Board /s/ Viki K. Blinderman Viki K. Blinderman Senior Vice President, Chief Accounting Officer and Secretary (Principal Financial Officer) February 28, 2020 ### Changes in Internal Control Over Financial Reporting During the three months ended December 31, 2019, there was no change in our system of internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Filed Feb 28, 2020. Source: SEC EDGAR, the filing index for accession 0001016281-20-000035. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.