# Carriage Services Inc: Form 10-Q for the period ended Jun 30, 2023

- Company: [Carriage Services Inc](/companies/csv.md) (CIK 1016281)
- Form: 10-Q
- Filed: 2023-08-07
- Accepted by EDGAR: Aug 7, 2023, 16:47 ET
- Period: 2023-06-30
- Accession: 0001016281-23-000108
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1016281/000101628123000108/csv-20230630.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1016281/000101628123000108/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2023-06-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Revenue | 3 months, 2023-04-01 to 2023-06-30 | $97.7m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Revenue | 6 months, 2023-01-01 to 2023-06-30 | $193.2m | us-gaap:RevenueFromContractWithCustomerExcludingAssessedTax |
| Cost of revenue | 3 months, 2023-04-01 to 2023-06-30 | $66.5m | us-gaap:CostOfRevenue |
| Cost of revenue | 6 months, 2023-01-01 to 2023-06-30 | $130.9m | us-gaap:CostOfRevenue |
| Gross profit | 3 months, 2023-04-01 to 2023-06-30 | $31.2m | us-gaap:GrossProfit |
| Gross profit | 6 months, 2023-01-01 to 2023-06-30 | $62.3m | us-gaap:GrossProfit |
| Operating income | 3 months, 2023-04-01 to 2023-06-30 | $20.7m | us-gaap:OperatingIncomeLoss |
| Operating income | 6 months, 2023-01-01 to 2023-06-30 | $41.4m | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2023-04-01 to 2023-06-30 | $9.4m | us-gaap:InterestExpense |
| Interest expense | 6 months, 2023-01-01 to 2023-06-30 | $17.9m | us-gaap:InterestExpense |
| Income tax | 3 months, 2023-04-01 to 2023-06-30 | $3.3m | us-gaap:IncomeTaxExpenseBenefit |
| Income tax | 6 months, 2023-01-01 to 2023-06-30 | $6.8m | us-gaap:IncomeTaxExpenseBenefit |
| Diluted shares (weighted) | 3 months, 2023-04-01 to 2023-06-30 | 15,454,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Diluted shares (weighted) | 6 months, 2023-01-01 to 2023-06-30 | 15,461,000 shares | us-gaap:WeightedAverageNumberOfDilutedSharesOutstanding |
| Operating cash flow | 6 months, 2023-01-01 to 2023-06-30 | $39.2m | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Capital expenditure | 6 months, 2023-01-01 to 2023-06-30 | $9.0m | us-gaap:PaymentsToAcquirePropertyPlantAndEquipment |
| Dividends paid | 6 months, 2023-01-01 to 2023-06-30 | $3.3m | us-gaap:PaymentsOfDividendsCommonStock |
| Share repurchases | 6 months, 2023-01-01 to 2023-06-30 | $0 | us-gaap:PaymentsForRepurchaseOfCommonStock |
| Cash and equivalents | at 2023-06-30 | $970.0k | us-gaap:CashAndCashEquivalentsAtCarryingValue |
| Current assets | at 2023-06-30 | $37.7m | us-gaap:AssetsCurrent |
| Total assets | at 2023-06-30 | $1.24bn | us-gaap:Assets |
| Current liabilities | at 2023-06-30 | $42.5m | us-gaap:LiabilitiesCurrent |
| Total liabilities | at 2023-06-30 | $1.09bn | us-gaap:Liabilities |
| Long-term debt | at 2023-06-30 | $3.4m | us-gaap:LongTermDebtNoncurrent |
| Current portion of debt | at 2023-06-30 | $578.0k | us-gaap:LongTermDebtCurrent |
| Shareholders' equity | at 2023-06-30 | $156.2m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 56,277 characters.

### OVERVIEW

### General

Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading provider of funeral and cemetery services and merchandise in the United States. We operate in two business segments: Funeral Home operations, which currently accounts for approximately 70% of our total revenue, and Cemetery operations, which currently accounts for approximately 30% of our total revenue.

At June 30, 2023, we operated 172 funeral homes in 26 states and 32 cemeteries in 11 states. We compete with other publicly held, privately held and independent operators of funeral and cemetery companies.

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. 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 memorial 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.

Our cemeteries provide interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as memorial markers, outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise).

We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.

### Recent Developments

#### Board of Directors - Resignation; Election; and Review of Potential Strategic Alternatives

On June 15, 2023, Dr. Achille Messac, a member of our Board of Directors (the “Board”), provided notice of his resignation from the Board, effective on that date. Dr. Messac’s resignation was not a result of any disagreement with the Company on any matter related to its operations, policies or practices.

On June 21, 2023, the Board elected Chad Fargason to serve as a Class II Director until the Company’s 2025 annual meeting of shareholders. Mr. Fargason was appointed to serve on the Audit Committee, along with being appointed Chairman of the Corporate Governance Committee.

On June 29, 2023, the Board announced it had initiated a process to explore potential strategic alternatives, possibly including a sale, merger or other potential strategic or financial transaction, to maximize shareholder value.

#### Leadership Changes

On June 21, 2023, the Board appointed Carlos R. Quezada, to serve as Chief Executive Officer (“CEO”), effective on that date, as part of a planned succession of Melvin C. Payne, founder and former CEO. Concurrently with the appointment of Mr. Quezada as CEO, Mr. Payne stepped down as CEO and the Board approved his appointment as Executive Chairman of the Board, effective on that date.

On June 21, 2023, the Board appointed Steven D. Metzger, to serve as President, along with remaining in his role as Secretary, effective on that date.

#### Strategic Partnership Agreement

On May 16, 2023, we received a $6.0 million incentive payment from a vendor for entering into a strategic partnership agreement to market and sell prearranged funeral services in the future.

#### Inflationary and Macroeconomic Trends

During the second quarter of 2023, we continued to experience modest cost increases and surcharges from our vendors and suppliers on merchandise and goods due to increases in the cost of raw materials, as well as broader inflationary, and global supply chain impacts, along with rising interest rates. For example, we experienced higher costs related to full-time hourly base rates, utilities, funeral supplies, merchandise costs, insurance, and increased borrowing costs under our Credit Facility.

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Although we have taken steps to mitigate these cost increases and we expect these impacts to continue throughout the current year, the ultimate scope and duration of these impacts are unknown at this time. More broadly, the U.S. economy continues to experience higher rates of inflation, which has impacted a wide variety of industries and sectors, with consumers facing rising prices. Such inflation may negatively impact consumers or discretionary spending, including the amount that consumers are able to spend on our services, although we have not experienced such impacts to date and our industry has been largely resilient to similar adverse economic and market environments in the past. Although we expect these trends to continue throughout the current year, we will continue to assess these impacts and take the appropriate steps, if necessary, to mitigate these cost increases, if possible.

### Funeral Home Operations

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 memorial services and transportation services. Factors affecting our funeral operating results include, but are not limited to: 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 to increase average revenue per contract.

### Cemetery Operations

Our cemeteries provide interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches) and related cemetery merchandise (such as memorial markers, outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise) both on an atneed and preneed basis. Factors affecting our cemetery operating results include, but are not limited to: 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.

### 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 and operating framework linked with incentive compensation programs that attract top quality industry talent to our organization. We also believe that Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for independent funeral home owners who want their legacy family business to remain operationally prosperous in their local communities.

Our **Mission Statement** states that “we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry” and our **Guiding Principles** state our core values, which are comprised of:

- Honesty, integrity and quality in all that we do;
- Hard work, pride of accomplishment, and shared success through employee ownership;
- Belief in the power of people through individual initiative and teamwork;
- Outstanding service and profitability go hand-in-hand; and
- Growth of the Company is driven by decentralization and partnership.

Our five **Guiding Principles** collectively embody our **Being The Best** high-performance culture and 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.

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### 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.

### 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 Leadership qualities essential to succeed in a high performance culture: *Energy* to get the job done; the ability to *Energiz*e 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 our 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 in growing markets.

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** and proper execution of the three models that define our strategy have given us a competitive advantage in every market where 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.

### 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 (defined below).

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. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets or seek further borrowing capacity from our lenders to obtain additional funding and we may not be able to obtain such funding on terms and conditions that are acceptable to us. 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. For additional information regarding known material factors that could cause cash flow or access to and cost of finance sources to differ from our expectations, please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

Our plan is to remain focused on integrating our recently acquired businesses and prioritizing our capital allocation for debt repayments, the payment of dividends and debt obligations and internal growth capital expenditures, which we expect to fund using cash on hand and borrowings under our Credit Facility, along with general corporate purposes, as allowed under our

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Credit Facility. We believe that our existing and anticipated cash resources, including, as needed, additional borrowings or other financings that we may be able to obtain, will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months, as well as our long-term financial obligations.

#### Cash Flows

We began 2023 with $1.2 million in cash and ended the second quarter with $1.0 million in cash. At June 30, 2023, we had borrowings of $204.0 million outstanding on our Credit Facility compared to $190.7 million at December 31, 2022.

The following table sets forth the elements of cash flow (in thousands):

|  | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: |
| Cash at beginning of the year | $1,148 | $1,170 |
| Net cash provided by operating activities | 30,177 | 39,187 |
| Acquisitions of businesses and real property | (2,601) | (44,000) |
| Proceeds from divestitures and sale of other assets | 3,720 | 1,973 |
| Proceeds from insurance claims | 2,167 | 1,092 |
| Capital expenditures | (13,468) | (8,960) |
| Net cash used in investing activities | (10,182) | (49,895) |
| Net borrowings on our Credit Facility, acquisition debt and finance lease obligations | 19,598 | 13,044 |
| Payment of debt issuance for the Credit Facility and Senior Notes | (339) | — |
| Net proceeds from employee equity plans | 774 | 804 |
| Dividends paid on common stock | (3,455) | (3,340) |
| Purchase of treasury stock | (36,663) | — |
| Net cash provided by (used in) financing activities | (20,085) | 10,508 |
| Cash at end of the period | $1,058 | $970 |

#### Operating Activities

For the six months ended June 30, 2023, cash provided by operating activities was $39.2 million compared to $30.2 million for the six months ended June 30, 2022. The increase of $9.0 million is primarily due to an $8.6 million withdrawal of realized capital gains and earnings from our preneed funeral and cemetery trust investments and receiving a $6.0 million incentive payment from a vendor for entering into a strategic partnership agreement to market and sell prearranged funeral services in the future, offset by unfavorable working capital changes in accrued liabilities and accounts payable.

#### Investing Activities

Our investing activities, resulted in a net cash outflow of $49.9 million for the six months ended June 30, 2023 compared to $10.2 million for the six months ended June 30, 2022, an increase of $39.7 million.

#### Acquisition and Divestiture Activity

During the six months ended June 30, 2023, we acquired a business consisting of three funeral homes, two cemeteries and one cremation focused business for $44.0 million. In addition, we sold one funeral home and two cemeteries for $0.8 million and real property for $1.2 million.

We also received proceeds of $1.1 million from our property insurance policy for the reimbursement of renovation costs for certain of our funeral businesses damaged by Hurricane Ian that occurred during the third quarter of 2022 and a fire that occurred during the first quarter of 2023.

During the six months ended June 30, 2022, we sold real property for $2.9 million and we sold two funeral homes for an aggregate of $0.9 million and purchased real property for $2.6 million.

#### Capital Expenditures

For the six months ended June 30, 2023, capital expenditures (comprised of growth and maintenance spend) totaled $9.0 million compared to $13.5 million for the six months ended June 30, 2022, a decrease of $4.5 million.

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

| Growth | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: |
| Cemetery development | $3,673 | $3,505 |
| Renovations at certain businesses(1) | 3,620 | 1,623 |
| Other | 193 | 109 |
| Total Growth | $7,486 | $5,237 |

(1) During the six months ended June 30, 2023, we spent $0.5 million for renovations on two businesses that were affected by Hurricane Ian, which occurred during the third quarter of 2022 and $0.3 million for renovations on one business that was damaged by a fire, which occurred during the first quarter of 2023, all of which was reimbursed by our property insurance. During the six months ended June 30, 2022, we spent $2.1 million for renovations on two businesses that were affected by Hurricane Ida, which occurred during the third quarter of 2021, all of which was reimbursed by our property insurance.

| Maintenance | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: |
| General equipment and furniture | $2,347 | $2,260 |
| Facility repairs and improvements | 1,599 | 249 |
| Vehicles | 1,129 | 443 |
| Paving roads and parking lots | 485 | 330 |
| Other | 422 | 441 |
| Total Maintenance | $5,982 | $3,723 |

#### Financing Activities

Our financing activities resulted in a net cash inflow of $10.5 million for the six months ended June 30, 2023 compared to a net cash outflow of $20.1 million for the six months ended June 30, 2022, an increase of $30.6 million.

During the six months ended June 30, 2023, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $13.0 million, offset by $3.3 million in dividends.

During the six months ended June 30, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $19.6 million, offset by $36.7 million for the purchase of treasury stock and $3.5 million in dividends.

#### Share Repurchase

Share repurchase activity is as follows (dollar value in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Number of Shares Repurchased | 205,496 | — | 695,496 | — |
| Average Price Paid Per Share | $40.02 | $— | $49.22 | $— |
| Dollar Value of Shares Repurchased | $8,224 | $— | $34,234 | $— |

Our shares were purchased in the open market 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 stock. At June 30, 2023, our share repurchase program had $48.9 million authorized for repurchases.

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#### Cash Dividend

Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):

| 2023 | Per Share | Dollar Value |
| --- | ---: | ---: |
| March 1st | $0.1125 | $1,661 |
| June 1st | $0.1125 | $1,679 |
| **2022** | **Per Share** | **Dollar Value** |
| March 1st | $0.1125 | $1,725 |
| June 1st | $0.1125 | $1,730 |

#### Credit Facility, Lease Obligations and Acquisition Debt

The outstanding principal of our Credit Facility, lease obligations and acquisition debt at June 30, 2023 is as follows (in thousands):

|  | June 30, 2023 |
| --- | ---: |
| Credit Facility | $204,000 |
| Finance leases | 4,946 |
| Operating leases | 19,441 |
| Acquisition debt | 3,948 |
| Total | $232,335 |

### Credit Facility

At June 30, 2023, our senior secured revolving credit facility (the “Credit Facility”) was comprised of: (i) a $250.0 million revolving credit facility, including 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 aggregate in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 13, 2026.

Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (as defined in Note 12) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”).

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 Subsidiary Guarantors to incur indebtedness, grant liens, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial maintenance covenants. At June 30, 2023, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 6.00 to 1.00 and (B) 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. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility as of June 30, 2023.

At June 30, 2023, we had outstanding borrowings under the Credit Facility of $204.0 million. We also had one letter of credit for $2.3 million under the Credit Facility. The letter of credit will expire on November 27, 2023 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At June 30, 2023, we had $43.7 million of availability under the Credit Facility.

Outstanding borrowings under our Credit Facility bear interest at a prime rate or the Bloomberg Short-Term Bank Yield Index (“BSBY”) rate, plus an applicable margin based on our leverage ratio. At June 30, 2023, the prime rate margin was equivalent to 2.625% and the BSBY rate margin was 3.625%. The weighted average interest rate on our Credit Facility was 2.9% and 8.6% for the three months ended June 30, 2022 and 2023, respectively and 2.5% and 8.3% for the six months ended June 30, 2022 and 2023, respectively.

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The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Credit Facility interest expense | $1,314 | $4,668 | $2,161 | $8,479 |
| Credit Facility amortization of debt issuance costs | 96 | 138 | 184 | 276 |

The interest payments on our remaining borrowings under the Credit Facility will be determined based on the average outstanding balance of our borrowings and the prevailing interest rate during that time.

### Lease Obligations

Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes, equipment and vehicles under operating leases with original terms ranging from one to twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. At June 30, 2023, operating and finance lease obligations were $35.3 million, with $5.0 million payable within 12 months.

The components of lease cost are as follows (in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Operating lease cost | $853 | $917 | $1,701 | $1,792 |
| Short-term lease cost | 76 | 92 | 178 | 186 |
| Variable lease cost | 16 | 56 | 23 | 114 |
| Finance lease cost: |  |  |  |  |
| Depreciation of leased assets | $109 | $109 | $217 | $217 |
| Interest on lease liabilities | 112 | 103 | 225 | 208 |
| Total finance lease cost | 221 | 212 | 442 | 425 |
| Total lease cost | $1,166 | $1,277 | $2,344 | $2,517 |

### 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 nine to twenty years. At June 30, 2023, acquisition debt obligations were $5.5 million, with $0.8 million payable within 12 months. Original maturities range from nine to twenty years.

The imputed interest expense related to our acquisition debt is as follows (in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Acquisition debt imputed interest expense | $79 | $71 | $159 | $142 |

### Senior Notes

At June 30, 2023, the principal amount of our 4.25% senior notes due in May 2029 (the “Senior Notes”) was $400.0 million. The Senior Notes were issued under an indenture, dated as of May 13, 2021 (the “Indenture”), among the Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee. 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. The Senior Notes mature on May 15, 2029, unless earlier redeemed or purchased and bear interest at 4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021.

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.

The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 71 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the

\- 41 - unamortized debt issuance costs for the Senior Notes for both the three and six months ended June 30, 2022 and 2023 was 4.42% and 4.30%, respectively.

At June 30, 2023, the fair value of the Senior Notes, which are Level 2 measurements, was $343.1 million.

The interest expense and amortization of debt discount and debt issuance costs related to our Senior Notes are as follows (in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Senior Notes interest expense | $4,230 | $4,250 | $8,480 | $8,500 |
| Senior Notes amortization of debt discount | 122 | 128 | 243 | 255 |
| Senior Notes amortization of debt issuance costs | 35 | 37 | 69 | 73 |

At June 30, 2023, our future interest payments on our outstanding balance were $99.9 million, with $17.0 million payable within 12 months.

### FINANCIAL HIGHLIGHTS

Below are our financial highlights (in thousands except for volumes and averages):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Revenue | $90,600 | $97,678 | $188,761 | $193,192 |
| Funeral contracts | 11,006 | 11,431 | 24,521 | 23,846 |
| Average revenue per funeral contract | $5,493 | $5,492 | $5,439 | $5,510 |
| Preneed interment rights (property) sold | 3,511 | 3,391 | 5,889 | 5,895 |
| Average price per preneed interment right sold | $4,337 | $5,237 | $4,398 | $4,922 |
| Gross profit | $27,712 | $31,202 | $62,190 | $62,257 |
| Net income | $10,899 | $8,286 | $27,301 | $17,130 |

Revenue for the three months ended June 30, 2023 increased $7.1 million compared to the three months ended June 30, 2022, as we experienced a 3.9% increase in funeral contract volume, while the average revenue per funeral contract remained flat, and a 20.8% increase in the average price per interment right sold, slightly offset by a 3.4% decrease in the number of preneed interment rights (property) sold.

Gross profit for the three months ended June 30, 2023 increased $3.5 million compared to the three months ended June 30, 2022, primarily due to the increase in revenue from both our funeral home and cemetery segments.

Net income for the three months ended June 30, 2023 decreased $2.6 million compared to the three months ended June 30, 2022, primarily due to the following: (1) a $3.4 million increase in interest expense; (2) a $2.6 million impact from divestitures, disposals and insurance reimbursements; (3) a $1.0 million increase in general and administrative expenses, offset by (4) the $3.5 million increase in gross profit and (5) an $0.8 million decrease in income tax expense.

Revenue for the six months ended June 30, 2023 increased $4.4 million compared to the six months ended June 30, 2022, as we experienced a 1.3% increase in the average revenue per funeral contract, while funeral contract volume decreased 2.8%, and an 11.9% increase in the average price per interment right sold, while the number of preneed interment rights (property) sold remained flat. The contract volume decrease is primarily a result of the significant decline in COVID-19 related deaths in the first quarter of 2023 as compared to the same period in 2022, as these deaths now have a minimal impact on the overall death rate.

Gross profit for the six months ended June 30, 2023 increased $0.1 million compared to the six months ended June 30, 2022, due to the increase in revenue from our cemetery segment, offset by increases in operating expenses in both our funeral home and cemetery segments.

Net income for the six months ended June 30, 2023 decreased $10.2 million compared to the six months ended June 30, 2022, primarily due to the following: (1) a $6.4 million increase in interest expense; (2) a $3.5 million impact from divestitures, disposals and insurance reimbursements; (3) a $2.6 million increase in general and administrative expenses, offset by (4) a $2.4 million decrease in income tax expense.

Further discussion of revenue and the components of gross profit for our Funeral Home and Cemetery segments is presented under “– Results of Operations.”

\- 42 -

Further discussion of general, administrative and other expenses, interest expense, income taxes and other components of income and expenses are presented under “– Other Financial Statement Items.”

### REPORTING AND NON-GAAP FINANCIAL MEASURES

We also present our financial performance in our “Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended June 30, 2023 issued on August 2, 2023, and discussed in the corresponding earnings conference call. The 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 gross profit (a GAAP financial measure) to operating profit (a non-GAAP financial measure) (in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Gross profit | $27,712 | $31,202 | $62,190 | $62,257 |
| Cemetery property amortization | 1,704 | 1,892 | 3,036 | 3,093 |
| Field depreciation expense | 3,253 | 3,555 | 6,550 | 6,912 |
| Regional and unallocated funeral and cemetery costs | 5,966 | 4,131 | 12,313 | 9,568 |
| Operating profit(1) | $38,635 | $40,780 | $84,089 | $81,830 |

(1) Operating profit is defined as gross profit plus 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-financial GAAP measure) by segment (in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Funeral Home | $24,152 | $23,947 | $57,887 | $52,913 |
| Cemetery | 14,483 | 16,833 | 26,202 | 28,917 |
| Operating profit | $38,635 | $40,780 | $84,089 | $81,830 |
| Operating profit margin(1) | 42.6% | 41.7% | 44.5% | 42.4% |

(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 under “– Results of Operations.”

\- 43 -

### RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three and six months ended June 30, 2023 and 2022.

We previously classified our funeral homes and cemeteries as “same store” or “acquired” in our results of operations discussion in our quarterly and annual filings prior to December 31, 2022. Same store generally referred to funeral homes and cemeteries acquired at least five years before the reporting period being presented, while acquired generally referred to funeral homes and cemeteries acquired within the preceding five years of the reporting period being presented, both of which excluded certain funeral homes and cemeteries that we intended to divest.

In an effort to simplify the discussion of our results of operations, provide meaningful metrics to investors to compare our results to previous periods and provide more insight into the underlying long-term performance trends in our business, we have combined both the same store and acquired categories and now refer to this combination as “operating”. The term “operating” in the Funeral Home and Cemetery segment simply refers to all our funeral homes and cemeteries owned and operated in the current reporting period, excluding certain funeral home and cemetery businesses that we have divested or intend to divest in the near future.

The term “divested” when discussed in the Funeral Home segment, refers to one funeral home we sold in the six months ended June 30, 2023 and two funeral homes we sold in the six months ended June 30, 2022. The term “divested” when discussed in the Cemetery segment, refers to two cemeteries we sold during the six months ended June 30, 2023.

“Planned divested” refers to the funeral home and cemetery businesses that we intend to divest.

“Ancillary” in the Funeral Home segment represents our flower shop, our monument company, our pet cremation business and our online cremation businesses.

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 for our funeral home operations (in thousands):

| Revenue: | Three months ended June 30, 2022 | 2023 |
| --- | ---: | ---: |
| Operating | $58,108 | $60,800 |
| Divested/planned divested | 557 | 210 |
| Ancillary | 980 | 1,232 |
| Other | 2,293 | 2,263 |
| Total | $61,938 | $64,505 |
| Operating profit: |  |  |
| Operating | $21,999 | $21,891 |
| Divested/planned divested | 14 | 29 |
| Ancillary | 151 | 73 |
| Other | 1,988 | 1,954 |
| Total | $24,152 | $23,947 |
| The following operating measures reflect the significant metrics over this comparative period: |  |  |
| Contract volume | 10,912 | 11,398 |
| Average revenue per contract, excluding preneed funeral trust earnings | $5,325 | $5,334 |
| Average revenue per contract, including preneed funeral trust earnings | $5,488 | $5,489 |
| Cremation rate | 57.4% | 58.4% |

Funeral home operating revenue increased $2.7 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The increase in operating revenue is primarily driven by a 4.5% increase in contract volume,

\- 44 - while the average revenue per contract excluding preneed interest remained flat. The contract volume increase is primarily due to our newly acquired funeral home businesses, which were not present in the comparative quarter of 2022.

Funeral home operating profit for the three months ended June 30, 2023 decreased $0.1 million when compared to the same period in 2022, primarily due to an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 190 basis points to 36.0%. Operating expenses as a percentage of revenue increased 1.9% with the largest increases in salary and benefits expenses of 1.4% and general and administrative expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities and funeral supplies.

Ancillary revenue, which represents revenue from our flower shop, pet cremation and online cremation businesses increased $0.3 million and Ancillary operating profit decreased $0.1 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

Other revenue and other operating profit, which consists of preneed funeral insurance commissions and preneed funeral trust and insurance remained flat for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

The following table sets forth certain information regarding our revenue and operating profit for our funeral home operations (in thousands):

| Revenue: | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: |
| Operating | $128,127 | $127,044 |
| Divested/planned divested | 1,339 | 537 |
| Ancillary | 2,050 | 2,289 |
| Other | 4,777 | 4,720 |
| Total | $136,293 | $134,590 |
| Operating profit: |  |  |
| Operating | $53,183 | $48,416 |
| Divested/planned divested | 151 | 106 |
| Ancillary | 372 | 219 |
| Other | 4,181 | 4,172 |
| Total | $57,887 | $52,913 |
| The following operating measures reflect the significant metrics over this comparative period: |  |  |
| Contract volume | 24,271 | 23,746 |
| Average revenue per contract, excluding preneed funeral trust earnings | $5,279 | $5,350 |
| Average revenue per contract, including preneed funeral trust earnings | $5,438 | $5,510 |
| Cremation rate | 57.2% | 58.7% |

Funeral home operating revenue decreased $1.1 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The decrease in operating revenue is primarily driven by a 2.2% decrease in contract volume, which was partially offset by a 1.3% increase in the average revenue per contract excluding preneed interest. The contract volume decrease is primarily a result of the significant decline in COVID-19 related deaths in the first quarter of 2023 as compared to the same period in 2022, as these deaths now have a minimal impact on the overall death rate. The increase in average revenue per contract is primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations.

Funeral home operating profit for the six months ended June 30, 2023 decreased $4.8 million when compared to the same period in 2022, primarily due to an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 340 basis points to 38.1%. Operating expenses as a percentage of revenue increased 3.4% with the largest increases in salary and benefits expenses of 1.9%, facilities and grounds expenses of 0.7%, general and administrative expenses of 0.5% and other funeral costs of 0.3%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities and funeral supplies.

\- 45 -

Ancillary revenue, which represents revenue from our flower shop, pet cremation and online cremation businesses increased $0.2 million and Ancillary operating profit decreased $0.2 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Other revenue and other operating profit, which consists of preneed funeral insurance commissions and preneed funeral trust and insurance, remained flat for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

### Cemetery Segment

The following table sets forth certain information regarding our revenue and operating profit for our cemetery operations (in thousands):

| Revenue: | Three months ended June 30, 2022 | 2023 |
| --- | ---: | ---: |
| Operating | $25,104 | $29,142 |
| Divested/planned divested | 57 | — |
| Other | 3,501 | 4,031 |
| Total | $28,662 | $33,173 |
| Operating profit (loss): |  |  |
| Operating | $11,136 | $12,940 |
| Divested/planned divested | (18) | (2) |
| Other | 3,365 | 3,895 |
| Total | $14,483 | $16,833 |
| The following operating measures reflect the significant metrics over this comparative period: |  |  |
| Preneed revenue as a percentage of operating revenue | 66.0% | 67.0% |
| Preneed revenue (in thousands) | $16,476 | $19,385 |
| Atneed revenue (in thousands) | $8,628 | $9,757 |
| Number of preneed interment rights sold | 3,506 | 3,391 |
| Average price per interment right sold | $4,341 | $5,237 |

Cemetery operating revenue increased $4.0 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, as we experienced a 20.6% increase in the average price per preneed interment right sold, slightly offset by a 3.3% decrease in preneed interment rights sold. Cemetery atneed revenue, which represents 33.0% of our total operating revenue, increased $1.1 million for the three months ended June 30, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services from our newly acquired cemetery businesses, not present in the comparative quarter of 2022.

Cemetery operating profit increased $1.8 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, due to the increase in revenue. The comparable operating profit margin remained flat at 44.4%. Operating expenses as a percent of operating revenue also remained flat.

Other revenue, which consists of preneed cemetery trust revenue and preneed cemetery finance charges, increased $0.5 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The increase is primarily due to realized capital gains in the current year compared to the prior year and an increase in income in our perpetual care trust fund. Other operating profit increased $0.5 million for the same comparative period, primarily due to the increase in revenue.

\- 46 -

The following table sets forth certain information regarding our revenue and operating profit for our cemetery operations (in thousands):

| Revenue: | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: |
| Operating | $45,579 | $50,747 |
| Divested/planned divested | 130 | 42 |
| Other | 6,759 | 7,813 |
| Total | $52,468 | $58,602 |
| Operating profit (loss): |  |  |
| Operating | $19,731 | $21,333 |
| Divested/planned divested | (14) | 10 |
| Other | 6,485 | 7,574 |
| Total | $26,202 | $28,917 |
| The following operating measures reflect the significant metrics over this comparative period: |  |  |
| Preneed revenue as a percentage of operating revenue | 63.0% | 63.0% |
| Preneed revenue (in thousands) | $28,555 | $31,833 |
| Atneed revenue (in thousands) | $17,024 | $18,914 |
| Number of preneed interment rights sold | 5,871 | 5,890 |
| Average price per interment right sold | $4,409 | $4,924 |

Cemetery operating revenue increased $5.2 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, as we experienced an 11.7% increase in the average price per preneed interment right sold, while the number of preneed interment rights sold remained flat. Cemetery atneed revenue, which represents 37.0% of our total operating revenue increased $1.9 million for the six months ended June 30, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services from our newly acquired cemetery businesses, which were not present in the comparative period of 2022.

Cemetery operating profit increased $1.6 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The comparable operating profit margin decreased 130 basis point to 42.0%. Operating expenses as a percent of operating revenue increased 1.2% primarily due to an increase in salary and benefits expenses.

Other revenue, which consists of preneed cemetery trust revenue and preneed cemetery finance charges, increased $1.1 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The increase is primarily due to an increase in income in our perpetual care trust fund and an increase in finance charges on preneed sales. Other operating profit increased $1.1 million for the same comparative period, primarily due to the increase in revenue.

*Cemetery property amortization.* Cemetery property amortization totaled $1.9 million and $3.1 million for the three and six months ended June 30, 2023, respectively, an increase of $0.2 million and $0.1 million, respectively, compared to the same period in 2022, primarily due to the increase in property sold across our cemetery portfolio.

*Field depreciation.* Depreciation expense for our field businesses totaled $3.6 million and $6.9 million for the three and six months ended June 30, 2023, respectively, an increase of $0.3 million and $0.4 million, respectively, compared to the same period in 2022, primarily due to acquisitions made in latter half of 2022 and our March 2023 acquisition.

*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 $4.1 million for the three months ended June 30, 2023, a decrease of $1.8 million compared to the same period in 2022, primarily due to the following: (1) a $0.7 million decrease in cash incentives and equity compensation; (2) a $0.7 million decrease in incentive award trips and annual managing partner meetings and (3) a $0.4 million decrease in other expenses.

Regional and unallocated funeral and cemetery costs totaled $9.6 million for the six months ended June 30, 2023, a decrease of $2.7 million compared to the same period in 2022, primarily due to the following: (1) a $1.3 million decrease in cash incentives and equity compensation; (2) a $1.1 million decrease in incentive award trips and annual managing partner meetings and (3) a $0.3 million decrease in other expenses.

\- 47 -

### Other Financial Statement Items

*General, administrative and other.* General, administrative and other expenses, which includes salaries and benefits, cash and equity incentive compensation for the Houston support office totaled $10.2 million for the three months ended June 30, 2023, an increase of $1.0 million compared to the same period in 2022, primarily due to the following: (1) $1.4 million increase in salary and benefits expense and cash and equity incentive compensation, as a result of having a complete senior leadership team, including current year executive promotions, offset by (2) a $0.4 million decrease in other expenses, including lower online marketing costs and travel costs.

General, administrative and other expenses totaled $20.4 million for the six months ended June 30, 2023, an increase of $2.6 million compared to the same period in 2022, primarily due to the following: (1) a $3.2 million increase in salary and benefits expense and cash and equity incentive compensation, as a result of having a complete senior leadership team, including current year executive promotions, offset by (2) a $0.6 million decrease in other expenses, including lower online marketing costs and travel costs.

*Net (gain) loss on divestitures, disposals and impairments charges.* The components of *Net (gain) loss on divestitures, disposals and impairment charges* are as follows (in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Net (gain) loss on divestitures | $(1,278) | $— | $(575) | $82 |
| Impairments related to assets held for sale | — | 243 | — | 243 |
| Net loss on disposals of fixed assets | 85 | 22 | 149 | 181 |
| Total | $(1,193) | $265 | $(426) | $506 |

During the six months ended June 30, 2023, we sold one funeral home and two cemeteries for a loss of $0.1 million. We also recognized an impairment of $0.2 million related to property, plant and equipment for assets held for sale.

During the six months ended June 30, 2022, we sold real property and two funeral homes for a net gain of $0.6 million.

*Interest expense*. Interest expense related to its respective debt arrangement is as follows (in thousands):

|  | Three months ended June 30, 2022 | 2023 | Six months ended June 30, 2022 | 2023 |
| --- | ---: | ---: | ---: | ---: |
| Senior Notes | $4,387 | $4,414 | $8,793 | $8,827 |
| Credit Facility | 1,409 | 4,806 | 2,344 | 8,755 |
| Finance leases | 112 | 103 | 225 | 209 |
| Acquisition debt | 79 | 71 | 159 | 142 |
| Other | 1 | 2 | 9 | 2 |
| Total | $5,988 | $9,396 | $11,530 | $17,935 |

*Net (gain) loss on property damage, net of insurance claims.* During the three and six months ended June 30, 2023, we recorded a $0.2 million gain and $36,000 loss, respectively, net of insurance proceeds, primarily for property damaged by a fire that occurred during first quarter of 2023.

During the three and six months ended June 30, 2022, we recorded a $1.4 million gain and $3.3 million gain, net of insurance proceeds, for property damaged by Hurricane Ida that occurred during the third quarter of 2021.

*Other, net.* During the three and six months ended June 30, 2023, we recorded a $0.1 million gain and $0.6 million gain, respectively, on the sale of other real property not used in business operations.

*Income taxes.* Income tax expense totaled $3.4 million for the three months ended June 30, 2023, a decrease of $0.8 million compared to the same period in 2022, primarily due to lower pre-tax income in the current period. Our operating tax rate before discrete items was 28.0% for both the three months ended June 30, 2023 and 2022.

Income tax expense totaled $6.9 million for the six months ended June 30, 2023, a decrease of $2.4 million compared to the same period in 2022, primarily due to lower pre-tax income in the current period. Our operating tax rate before discrete items was 28.5% and 27.2% for six months ended June 30, 2023 and 2022, respectively.

\- 48 -

### OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Understanding our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies is integral to understanding our Consolidated Financial Statements. Our critical accounting policies are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data” in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2022.

We have identified Business Combinations and Goodwill as those accounting policies that require significant judgments, assumptions and estimates and that have a significant impact on our financial condition and results of operations. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. 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 period to period. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.

### SEASONALITY

Our business can be affected by seasonal fluctuations in the death rate and may be further affected by epidemics and pandemics, like COVID-19, including any new or emerging public health threats. 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. For example, we experienced fluctuations in the death rate due to COVID-19, with a result of increased deaths during the duration of the pandemic. Although deaths directly attributable from COVID-19 now have minimal direct impact on the overall death rate, the overall death rate remains higher than the pre-COVID-19 pandemic period. As a result, we are unable to predict or forecast the duration or variation of this increased death rate with any certainty.

## Market risk

As filed, 4,608 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 other than those related to the impact of health and safety concerns from epidemics and pandemics and and inflation, which are described in more detail in Part 1, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022.

The following quantitative and qualitative information is provided about financial instruments to which we are a party at June 30, 2023 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 at June 30, 2023 are presented in Part 1, Item 1, Financial Statements, Note 8 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.19% 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. At June 30, 2023, we had outstanding borrowings under the Credit Facility of $204.0 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 the Credit Facility at either prime rate or the BSBY rate plus a margin. At June 30, 2023, the prime rate margin was equivalent to 2.625% and the BSBY rate margin was 3.625%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a

\- 49 - change in income before taxes of $2.0 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.

Our Senior Notes bear interest at the fixed annual rate of 4.25%. We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. At June 30, 2023, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $395.6 million and the fair value of the Senior Notes was $343.1 million based on the last traded or broker quoted price, reported by the Financial Industry Regulatory Authority, Inc. 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, 1,742 characters.

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

Our management, including our principal executive and principal financial officers, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Exchange Act as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial officers concluded that our disclosure controls and procedures are effective at June 30, 2023 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with US GAAP.

### Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting (defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

\- 50 -

## Risk factors

As filed, 8,440 characters.

#### Risk Factor Update

In light of our recent announcement regarding the Board’s review of potential strategic alternatives for the Company and recent developments affecting the financial services industry, we are also supplementing the risk factors set out under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 with the new risk factors set out below. The risk factors below should be carefully read in conjunction with the risk factors set out in our Annual Report on Form 10-K for the year ended December 31, 2022, which could materially affect our business, financial condition or future results. The risks described in this Quarterly Report on Form 10-Q, our Annual Report on Form 10-K for the year ended December 31, 2022, and our Quarterly Report on Form 10-Q for the quarter ending March 31, 2023 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.

### RISKS RELATED TO OUR BUSINESS

### Risks Related to Review of Strategic Alternatives Process and a Potential Strategic Transaction

**We are reviewing strategic alternatives and there can be no assurance that we will be successful in identifying or completing any strategic transaction, that any such strategic transaction will result in additional value for our stockholders or that the process will not have an adverse impact on our business.**

On June 29, 2023, we announced our Board had initiated a process to explore potential strategic alternatives, possibly including, but not limited to, a sale, merger or other potential strategic or financial transaction, aimed at increasing stockholder value. There can be no assurance that the review of strategic alternatives will result in the identification or consummation of any transaction. Our Board may also determine that our most effective strategy is to continue to execute on our current strategy.

The process of reviewing strategic alternatives may be costly, time consuming and disruptive to our business operations and, if we are unable to effectively manage the process, our business, financial condition and results of operations could be adversely affected. We have incurred, and may in the future incur, significant costs associated with identifying, evaluating and negotiating potential strategic alternatives, such as legal, financial advisor and accounting fees and expenses and other related charges. We may also incur additional unanticipated expenses in connection with this process. A considerable portion of these costs will be incurred regardless of whether any such course of action is implemented or transaction is completed, decreasing cash available for use in our business.

There can be no assurance that any potential transaction, or series of transactions, or other strategic alternative, if consummated, will provide greater value to our stockholders than that reflected in the current price of our common stock. Until the review process is concluded, perceived uncertainties related to our future may impact our business performance and volatility in the market price of our common stock and may make it more difficult for us to attract and retain qualified personnel and key employees. Our Board has not set a timetable for the conclusion of this review, nor has it made any definitive decisions related to taking any further actions or potential strategic options at this time or at all.

**Even if we are successful in completing a strategic alternative, we may be exposed to other operational and financial risks.**

Although there can be no assurance that a strategic alternative will result from the process we have undertaken to explore potential strategic alternatives, the negotiation and consummation of any such transaction, if completed, will require significant time on the part of our management, which could result in disruption to our business.

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The negotiation and consummation of any such transaction may also require more time or greater cash resources than we anticipate and expose us to other operational and financial risks, including, but not limited to:

- increased near-term and long-term expenditures;
- exposure to unknown liabilities;
- higher than expected acquisition or integration costs;
- incurrence of substantial debt or dilutive issuances of equity securities to fund future operations;
- write-downs of assets or goodwill or incurrence of non-recurring, impairment or other charges;
- increased amortization expenses;
- difficulty and cost in combining the operations and personnel of any acquiring or acquired business with our operations and personnel;
- impairment of relationships with key suppliers or customers of any acquired business due to changes in management and ownership;
- inability to retain key employees of our Company or any acquired or merged business; and
- possibility of future litigation.

Any of the foregoing risks could have a material adverse effect on our business, financial condition and prospects.

### GENERAL RISKS

### Economic Conditions and Natural Disasters

**Adverse developments affecting the financial services industry, including events or concerns involving liquidity, defaults, or non-performance by financial institutions, could adversely affect our business, financial condition, or results of operations.**

We currently maintain cash balances in accounts at U.S. financial institutions that we believe are high quality. These accounts, held by us and our affiliated companies, are in non-interest-bearing and interest-bearing operating accounts and may, from time to time, exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. If such banking institutions were to fail, we could lose all or a portion of those amounts held in excess of such insurance limitations. In addition, actual events involving limited liquidity, defaults, non-performance or other adverse developments that affect financial institutions, our third-party vendors and counterparties or other companies in the financial services industry or the financial services industry generally, or concerns or rumors about any events of these kinds or other similar risks, have in the past and may in the future lead to market-wide liquidity problems, which could adversely affect our business, financial condition, results of operations and liquidity.

Although we assess our banking relationships as we believe necessary or appropriate, our access to funding sources and other credit arrangements in amounts adequate to finance or capitalize our respective current and projected future business operations could be significantly impaired by factors that affect us, the financial institutions with which we have arrangements directly, or the financial services industry or economy in general. These factors could include, among others, events such as liquidity constraints or failures, the ability to perform obligations under various types of financial, credit or liquidity agreements or arrangements, disruptions or instability in the financial services industry or financial markets, or concerns or negative expectations about the prospects for companies in the financial services industry. These factors could involve financial institutions or financial services industry companies with which we, have financial or business relationships, but could also include factors involving financial markets or the financial services industry generally.

In addition, investor concerns regarding the U.S. or international financial systems could result in less favorable commercial financing terms, including higher interest rates or costs and tighter financial and operating covenants, or systemic limitations on access to credit and liquidity sources, thereby making it more difficult for us to acquire future financing or access to capital on acceptable terms or at all. As availability under our Credit Facility and/or the ability to access capital has historically been, and is expected to continue to be, one of our primary sources of liquidity, any adverse impacts on our ability to access such credit and liquidity sources as a result of adverse developments affecting the financial services industry could adversely affect our business, financial condition, results of operations.

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Filed Aug 7, 2023.
Source: SEC EDGAR, the filing index for accession 0001016281-23-000108. Last ingested by Listed: Nov 5, 2026, 19:16 ET. No prices; not investment advice.