UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☒QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2017March 31, 2024
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to
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Commission File Number: | 1-11961 |
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE | 76-0423828 |
(State or other jurisdiction of incorporation or organization)
| (I.R.S. Employer Identification No.)
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3040 Post Oak Boulevard, Suite 300 |
Houston, Texas, 77056 |
|
3040 Post Oak Boulevard, Suite 300
Houston, Texas, 77056
(Address of principal executive offices)
(713) 332-8400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: | | | | | | | | |
Title of each class | Trading Symbol | Name of each exchange on which registered |
Common Stock, par value $.01 per share | CSV | New York Stock Exchange |
| | |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x☒ No o☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x☒ No o☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
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Large accelerated filer | o☐ | | | | | | | Accelerated filer | x☒ |
Non-accelerated filer | o (Do not check if a smaller reporting company) ☐ | | | | | | | Smaller reporting company | o☐ |
| | | | | | | | Emerging growth company | o☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o☐ No x☒
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of October 20, 2017April 26, 2024 was 16,085,750.15,165,486.
CARRIAGE SERVICES, INC.
INDEX
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Item 2. Unregistered Sales of Equity Securities and Use of Proceeds | |
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Item 3. Defaults Upon Senior Securities | |
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Item 4. Mine Safety Disclosures | |
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Item 5. Other Information | |
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PART I – FINANCIAL INFORMATION
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Item 1. | Financial Statements. |
Item 1.Financial Statements. CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETSSHEET
(unaudited and in thousands, except share data)
| | | | | (unaudited) |
| December 31, 2016 | | September 30, 2017 |
| December 31, 2023 | | | December 31, 2023 | | March 31, 2024 |
ASSETS | | | |
Current assets: | | | |
Current assets: | |
Current assets: | |
Cash and cash equivalents | $ | 3,286 |
| | $ | 759 |
|
Accounts receivable, net of allowance for bad debts of $746 in 2016 and $800 in 2017 | 18,860 |
| | 18,821 |
|
Cash and cash equivalents | |
Cash and cash equivalents | |
Accounts receivable, net | |
Inventories | 6,147 |
| | 6,346 |
|
Prepaid expenses | 2,640 |
| | 1,355 |
|
Other current assets | 2,034 |
| | 764 |
|
Prepaid and other current assets | |
Total current assets | 32,967 |
| | 28,045 |
|
Preneed cemetery trust investments | 69,696 |
| | 71,728 |
|
Preneed funeral trust investments | 89,240 |
| | 89,444 |
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Preneed receivables, net of allowance for bad debts of $2,166 in 2016 and $2,230 in 2017 | 30,383 |
| | 31,279 |
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Receivables from preneed trusts | 14,218 |
| | 15,306 |
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Property, plant and equipment, net of accumulated depreciation of $110,509 in 2016 and $113,616 in 2017 | 235,113 |
| | 235,501 |
|
Cemetery property, net of accumulated amortization of $34,194 in 2016 and $36,638 in 2017 | 76,119 |
| | 76,961 |
|
Preneed cemetery receivables, net | |
Receivables from preneed funeral trusts, net | |
Property, plant and equipment, net | |
Cemetery property, net | |
Goodwill | 275,487 |
| | 275,487 |
|
Intangible and other non-current assets | 14,957 |
| | 14,616 |
|
Intangible and other non-current assets, net | |
Operating lease right-of-use assets | |
Cemetery perpetual care trust investments | 46,889 |
| | 48,679 |
|
Total assets | $ | 885,069 |
| | $ | 887,046 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt and capital lease obligations | $ | 13,267 |
| | $ | 16,323 |
|
Current liabilities: | |
Current liabilities: | |
Current portion of debt and lease obligations | |
Current portion of debt and lease obligations | |
Current portion of debt and lease obligations | |
Accounts payable | 10,198 |
| | 6,686 |
|
Other liabilities | 717 |
| | 1,811 |
|
Accrued liabilities | 20,091 |
| | 15,294 |
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Accrued and other liabilities | |
| Total current liabilities | 44,273 |
| | 40,114 |
|
Long-term debt, net of current portion | 137,862 |
| | 125,442 |
|
Revolving credit facility | 66,542 |
| | 74,550 |
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Convertible subordinated notes due 2021 | 119,596 |
| | 123,182 |
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Obligations under capital leases, net of current portion | 2,630 |
| | 2,492 |
|
Total current liabilities | |
Total current liabilities | |
Acquisition debt, net of current portion | |
Credit facility | |
| Senior notes | |
Senior notes | |
Senior notes | |
Obligations under finance leases, net of current portion | |
Obligations under operating leases, net of current portion | |
Deferred preneed cemetery revenue | 54,631 |
| | 55,275 |
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Deferred preneed funeral revenue | 33,198 |
| | 34,652 |
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Deferred tax liability | 42,810 |
| | 44,025 |
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Other long-term liabilities | 2,567 |
| | 2,723 |
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Deferred preneed cemetery receipts held in trust | 69,696 |
| | 71,728 |
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Deferred preneed funeral receipts held in trust | 89,240 |
| | 89,444 |
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Care trusts’ corpus | 46,290 |
| | 48,186 |
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Total liabilities | 709,335 |
| | 711,813 |
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Commitments and contingencies: |
| |
| Commitments and contingencies: | | | |
Stockholders’ equity: | | |
|
Common stock, $.01 par value; 80,000,000 shares authorized and 22,490,855 and 22,609,120 shares issued at December 31, 2016 and September 30, 2017, respectively | 225 |
| | 226 |
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Common stock, $0.01 par value; 80,000,000 shares authorized and 26,627,319 and 26,793,343 shares issued, respectively and 14,999,501 and 15,165,525 shares outstanding, respectively | |
Common stock, $0.01 par value; 80,000,000 shares authorized and 26,627,319 and 26,793,343 shares issued, respectively and 14,999,501 and 15,165,525 shares outstanding, respectively | |
Common stock, $0.01 par value; 80,000,000 shares authorized and 26,627,319 and 26,793,343 shares issued, respectively and 14,999,501 and 15,165,525 shares outstanding, respectively | |
Additional paid-in capital | 215,064 |
| | 216,396 |
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Retained earnings | 20,711 |
| | 35,243 |
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Treasury stock, at cost; 5,849,316 and 6,523,370 shares at December 31, 2016 and September 30, 2017, respectively | (60,266 | ) | | (76,632 | ) |
Treasury stock, at cost; 11,627,818 shares | |
Total stockholders’ equity | 175,734 |
| | 175,233 |
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Total liabilities and stockholders’ equity | $ | 885,069 |
| | $ | 887,046 |
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The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
| | Three months ended March 31, | |
| Three months ended March 31, | |
| Three months ended March 31, | |
| 2023 | |
| 2023 | |
| 2023 | |
Revenue: | |
Revenue: | |
Revenue: | |
Service revenue | |
Service revenue | |
Service revenue | |
Property and merchandise revenue | |
Property and merchandise revenue | |
Property and merchandise revenue | |
Other revenue | |
Other revenue | |
Other revenue | |
| 95,514 | |
| 95,514 | |
| 95,514 | |
Field costs and expenses: | |
Field costs and expenses: | |
Field costs and expenses: | |
Cost of service | |
Cost of service | |
Cost of service | |
Cost of merchandise | |
Cost of merchandise | |
Cost of merchandise | |
Cemetery property amortization | |
Cemetery property amortization | |
Cemetery property amortization | |
Field depreciation expense | |
Field depreciation expense | |
Field depreciation expense | |
Regional and unallocated funeral and cemetery costs | |
Regional and unallocated funeral and cemetery costs | |
Regional and unallocated funeral and cemetery costs | |
Other expenses | |
Other expenses | |
Other expenses | |
| 64,459 | |
| 64,459 | |
| 64,459 | |
Gross profit | |
Gross profit | |
Gross profit | |
Corporate costs and expenses: | |
Corporate costs and expenses: | |
Corporate costs and expenses: | |
General, administrative and other | |
General, administrative and other | |
General, administrative and other | |
| Net loss on divestitures, disposals and impairments charges | |
| Net loss on divestitures, disposals and impairments charges | |
| Net loss on divestitures, disposals and impairments charges | |
Operating income | |
Operating income | |
Operating income | |
| Interest expense | |
| Interest expense | |
| Interest expense | |
| | Loss on property damage, net of insurance claims | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Revenues: | | | | | | | |
Funeral | $ | 45,183 |
| | $ | 47,329 |
| | $ | 140,952 |
| | $ | 150,279 |
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Cemetery | 14,957 |
| | 13,725 |
| | 44,384 |
| | 42,784 |
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Loss on property damage, net of insurance claims | |
| 60,140 |
| | 61,054 |
| | 185,336 |
| | 193,063 |
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Field costs and expenses: | | |
| | | |
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Funeral | 26,982 |
| | 29,267 |
| | 82,546 |
| | 89,118 |
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Cemetery | 8,695 |
| | 8,769 |
| | 25,546 |
| | 26,142 |
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Depreciation and amortization | 3,452 |
| | 3,601 |
| | 10,359 |
| | 10,719 |
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Regional and unallocated funeral and cemetery costs | 2,783 |
| | 3,937 |
| | 8,547 |
| | 9,845 |
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| 41,912 |
| | 45,574 |
| | 126,998 |
| | 135,824 |
|
Gross profit | 18,228 |
| | 15,480 |
| | 58,338 |
| | 57,239 |
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Corporate costs and expenses: | | |
| | | |
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General, administrative and other | 6,130 |
| | 6,134 |
| | 21,208 |
| | 19,549 |
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Home office depreciation and amortization | 355 |
| | 401 |
| | 1,139 |
| | 1,155 |
|
| 6,485 |
| | 6,535 |
| | 22,347 |
| | 20,704 |
|
Operating income | 11,743 |
| | 8,945 |
| | 35,991 |
| | 36,535 |
|
Interest expense | (2,903 | ) | | (3,282 | ) | | (8,722 | ) | | (9,517 | ) |
Accretion of discount on convertible subordinated notes | (981 | ) | | (1,097 | ) | | (2,862 | ) | | (3,200 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | (567 | ) | | — |
|
Loss on property damage, net of insurance claims | |
Other, net | |
Other, net | |
Other, net | (285 | ) | | (6 | ) | | 20 |
| | (3 | ) |
Income before income taxes | 7,574 |
| | 4,560 |
| | 23,860 |
| | 23,815 |
|
Provision for income taxes | (3,030 | ) | | (1,824 | ) | | (9,545 | ) | | (9,526 | ) |
Tax adjustment related to certain discrete items | 1,139 |
| | 302 |
| | 1,139 |
| | 243 |
|
Total provision for income taxes | $ | (1,891 | ) | | $ | (1,522 | ) | | $ | (8,406 | ) | | $ | (9,283 | ) |
Income before income taxes | |
Income before income taxes | |
Expense for income taxes | |
Expense for income taxes | |
Expense for income taxes | |
(Benefit) expense related to discrete income tax items | |
(Benefit) expense related to discrete income tax items | |
(Benefit) expense related to discrete income tax items | |
Total expense for income taxes | |
Total expense for income taxes | |
Total expense for income taxes | |
Net income | |
Net income | |
Net income | $ | 5,683 |
| | $ | 3,038 |
| | $ | 15,454 |
| | $ | 14,532 |
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Basic earnings per common share: | $ | 0.34 |
| | $ | 0.18 |
| | $ | 0.93 |
| | $ | 0.87 |
|
| Basic earnings per common share: | |
| Basic earnings per common share: | |
Diluted earnings per common share: | |
Diluted earnings per common share: | |
Diluted earnings per common share: | $ | 0.33 |
| | $ | 0.17 |
| | $ | 0.91 |
| | $ | 0.81 |
|
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Dividends declared per common share | $ | 0.050 |
| | $ | 0.050 |
| | $ | 0.100 |
| | $ | 0.150 |
|
Dividends declared per common share: | |
| Dividends declared per common share: | |
| Dividends declared per common share: | |
| Weighted average number of common and common equivalent shares outstanding: | |
| Weighted average number of common and common equivalent shares outstanding: | |
| | | | | | | |
Weighted average number of common and common equivalent shares outstanding: | | | | | | | |
Basic | 16,529 |
| | 16,476 |
| | 16,502 |
| | 16,575 |
|
Basic | |
Basic | |
Diluted | 17,101 |
| | 17,598 |
| | 16,962 |
| | 17,887 |
|
Diluted | |
Diluted | |
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2016 | | 2017 |
Cash flows from operating activities: | | | |
Net income | $ | 15,454 |
| | $ | 14,532 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
|
Depreciation and amortization | 11,498 |
| | 11,874 |
|
Provision for losses on accounts receivable | 1,522 |
| | 1,737 |
|
Stock-based compensation expense | 2,645 |
| | 2,394 |
|
Deferred income tax expense | 3,618 |
| | 1,215 |
|
Amortization of deferred financing costs | 622 |
| | 614 |
|
Accretion of discount on convertible subordinated notes | 2,862 |
| | 3,200 |
|
Loss on early extinguishment of debt | 567 |
| | — |
|
Net loss on sale and disposal of other assets | 186 |
| | 341 |
|
Impairment of intangible assets | 145 |
| | — |
|
| | | |
Changes in operating assets and liabilities that provided (required) cash: | | |
|
Accounts and preneed receivables | (3,945 | ) | | (2,594 | ) |
Inventories and other current assets | 682 |
| | 2,356 |
|
Intangible and other non-current assets | 386 |
| | 340 |
|
Preneed funeral and cemetery trust investments | (4,828 | ) | | (5,114 | ) |
Accounts payable | (2,149 | ) | | (3,510 | ) |
Accrued and other liabilities | 292 |
| | (2,790 | ) |
Deferred preneed funeral and cemetery revenue | 742 |
| | 2,098 |
|
Deferred preneed funeral and cemetery receipts held in trust | 4,541 |
| | 4,132 |
|
Net cash provided by operating activities | 34,840 |
| | 30,825 |
|
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|
Cash flows from investing activities: | | |
|
Acquisitions and land for new construction | (15,056 | ) | | (723 | ) |
Purchase of land and buildings previously leased | (6,258 | ) | | — |
|
Net proceeds from the sale of other assets | 955 |
| | 405 |
|
Capital expenditures | (12,039 | ) | | (13,129 | ) |
Net cash used in investing activities | (32,398 | ) | | (13,447 | ) |
| | |
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Cash flows from financing activities: | | |
|
Borrowings from the revolving credit facility | 45,500 |
| | 75,100 |
|
Payments against the revolving credit facility | (74,800 | ) | | (67,300 | ) |
Borrowings from the term loan | 39,063 |
| | — |
|
Payments against the term loan | (8,438 | ) | | (8,438 | ) |
Payments on other long-term debt and obligations under capital leases | (987 | ) | | (1,084 | ) |
Payments on contingent consideration recorded at acquisition date | — |
| | (101 | ) |
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 686 |
| | 1,296 |
|
Taxes paid on restricted stock vestings and exercise of non-qualified options | (560 | ) | | (509 | ) |
Dividends paid on common stock | (1,662 | ) | | (2,503 | ) |
Purchase of treasury stock | — |
| | (16,366 | ) |
Payment of loan origination costs related to the credit facility | (717 | ) | | — |
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Excess tax deficiency of equity compensation | (207 | ) | | — |
|
Net cash used in financing activities | (2,122 | ) | | (19,905 | ) |
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Net increase (decrease) in cash and cash equivalents | 320 |
| | (2,527 | ) |
Cash and cash equivalents at beginning of period | 535 |
| | 3,286 |
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Cash and cash equivalents at end of period | $ | 855 |
| | $ | 759 |
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| Three months ended March 31, |
| 2023 | | 2024 |
Cash flows from operating activities: | | | |
Net income | $ | 8,844 | | | $ | 6,973 | |
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Depreciation and amortization | 4,769 | | | 5,460 | |
Provision for credit losses | 699 | | | 782 | |
Stock-based compensation expense | 2,141 | | | 489 | |
Deferred income tax benefit | (178) | | | (2,342) | |
Amortization of intangibles | 321 | | | 332 | |
Amortization of debt issuance costs | 174 | | | 176 | |
Amortization and accretion of debt | 127 | | | 132 | |
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Net loss on divestitures, disposals and impairment charges | 241 | | | 1,545 | |
Loss on property damage, net of insurance claims | 271 | | | — | |
Gain on sale of excess land | (530) | | | — | |
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Changes in operating assets and liabilities that provided (used) cash: | | | |
Accounts and preneed receivables | 120 | | | (1,800) | |
Inventories, prepaid and other current assets | 884 | | | 814 | |
Intangible and other non-current assets | (1,277) | | | (834) | |
Preneed funeral and cemetery trust investments | 5,356 | | | (15,255) | |
Accounts payable | (246) | | | 862 | |
Accrued and other liabilities | 1,924 | | | 4,831 | |
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Deferred preneed funeral and cemetery revenue | 8,132 | | | 2,267 | |
Deferred preneed funeral and cemetery receipts held in trust | (5,903) | | | 15,271 | |
Net cash provided by operating activities | 25,869 | | | 19,703 | |
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Cash flows from investing activities: | | | |
Acquisitions of businesses | (44,000) | | | — | |
| | | |
Proceeds from divestitures and sale of other assets | 1,275 | | | 10,877 | |
Proceeds from insurance claims | 421 | | | 46 | |
Capital expenditures | (4,982) | | | (3,551) | |
Net cash (used in) provided by investing activities | (47,286) | | | 7,372 | |
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Cash flows from financing activities: | | | |
Borrowings from the credit facility | 51,700 | | | 13,600 | |
Payments against the credit facility | (28,800) | | | (38,600) | |
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Payments on acquisition debt and obligations under finance leases | (127) | | | (152) | |
| | | |
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 526 | | | 347 | |
Taxes paid on restricted stock vestings and exercise of stock options | (98) | | | (418) | |
Dividends paid on common stock | (1,661) | | | (1,686) | |
| | | |
| | | |
Net cash provided by (used in) financing activities | 21,540 | | | (26,909) | |
| | | |
Net increase in cash and cash equivalents | 123 | | | 166 | |
Cash and cash equivalents at beginning of period | 1,170 | | | 1,523 | |
Cash and cash equivalents at end of period | $ | 1,293 | | | $ | 1,689 | |
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands) | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 |
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| Shares Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Total |
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Balance – December 31, 2022 | 14,732 | | | $ | 264 | | | $ | 238,780 | | | $ | 176,843 | | | $ | (278,753) | | | $ | 137,134 | |
Net income | — | | | — | | | — | | | 8,844 | | | — | | | 8,844 | |
Issuance of common stock from employee stock purchase plan | 22 | | | — | | | 526 | | | — | | | — | | | 526 | |
Issuance of common stock to directors and board advisor | 4 | | | — | | | 112 | | | — | | | — | | | 112 | |
Issuance of common stock to former executive | 30 | | | — | | | 826 | | | — | | | — | | | 826 | |
Issuance of restricted common stock | 142 | | | 2 | | | (2) | | | — | | | — | | | — | |
Exercise of stock options | 1 | | | — | | | (21) | | | — | | | — | | | (21) | |
Cancellation and surrender of restricted common stock | (4) | | | — | | | (77) | | | — | | | — | | | (77) | |
Stock-based compensation expense | — | | | — | | | 1,203 | | | — | | | — | | | 1,203 | |
Dividends on common stock | — | | | — | | | (1,661) | | | — | | | — | | | (1,661) | |
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Other | 8 | | | — | | | 276 | | | — | | | — | | | 276 | |
Balance – March 31, 2023 | 14,935 | | | $ | 266 | | | $ | 239,962 | | | $ | 185,687 | | | $ | (278,753) | | | $ | 147,162 | |
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| Shares Outstanding | | Common Stock | | Additional Paid-in Capital | | Retained Earnings | | Treasury Stock | | Total |
Balance – December 31, 2023 | 15,000 | | | $ | 266 | | | $ | 241,291 | | | $ | 210,256 | | | $ | (278,753) | | | $ | 173,060 | |
Net income | — | | | — | | | — | | | 6,973 | | | — | | | 6,973 | |
Issuance of common stock from employee stock purchase plan | 16 | | | — | | | 347 | | | — | | | — | | | 347 | |
Issuance of common stock to directors and board advisor | 4 | | | — | | | 113 | | | — | | | — | | | 113 | |
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Issuance of restricted common stock | 157 | | | 2 | | | (2) | | | — | | | — | | | — | |
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Cancellation and surrender of restricted common stock | (43) | | | — | | | (418) | | | — | | | — | | | (418) | |
Stock-based compensation expense | — | | | — | | | 376 | | | — | | | — | | | 376 | |
Dividends on common stock | — | | | — | | | (1,686) | | | — | | | — | | | (1,686) | |
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Other | 31 | | | — | | | 790 | | | — | | | — | | | 790 | |
Balance – March 31, 2024 | 15,165 | | | $ | 268 | | | $ | 240,811 | | | $ | 217,229 | | | $ | (278,753) | | | $ | 179,555 | |
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The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of deathcarefuneral and cemetery services and merchandise in the United States. As of September 30, 2017, we operated 171 funeral homes in 28 states and 32 cemeteries in 11 states.
Our operations are reported in two business segments: Funeral Home Operations, which currently accounts for approximately 70% of our total revenue, and Cemetery Operations. Operations, which currently accounts for approximately 30% of our total revenue. At March 31, 2024, we operated 165 funeral homes in 26 states and 31 cemeteries in 11 states.
Our funeral homes offer a complete rangehome operations are principally service businesses that generate revenue from sales of high value personalburial and cremation services to meet a family’s funeral needs, includingand related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrancememorial services and transportation services. We provide funeral services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
Our cemeteries providecemetery operations generate revenue primarily through sales of cemetery interment rights (grave(primarily grave sites, lawn crypts, mausoleum spaces and mausoleum spaces) andniches), related cemetery merchandise such(such as memorial markers, and outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both on an at-needatneed and preneed basis.
Principles of Consolidation and Interim Condensed Disclosures
Our unaudited consolidated financial statementsConsolidated Financial Statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statementsConsolidated Financial Statements are unaudited, but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our
There have been no material changes in our accounting policies previously disclosed 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, 2023. In addition, our unaudited consolidated financial statementsConsolidated Financial Statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 20162023 unless otherwise disclosed herein, and should be read in conjunction therewith.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesrevenue and expenses. On an ongoing basis, we evaluate our critical estimates and judgments, includingwhich include those related to revenue recognition, realizationthe impairment of accounts receivable, goodwill intangible assets, property and equipment and deferred tax assets and liabilities. We basethe fair value measurements used in business combinations. 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 on historical experience, third-party data and assumptions that we believe to be reasonable underabout complex and inherently uncertain matters and because the circumstances. Theuse of different judgments, assumptions or estimates could have a material impact on our financial condition or results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities.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 asbecause there can be no assurance that our resultsthe margins, operating income and net earnings, as a percentage of operationsrevenue, will be consistent from yearperiod to year.period.
FuneralCash and Cemetery OperationsCash Equivalents
We recordconsider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Inventory
Inventory consists primarily of caskets, outer burial containers and cemetery monuments and markers and is recorded at the revenuelower of its cost basis or net realizable value. Inventory is relieved using specific identification in fulfillment of performance obligations on our contracts.
Deferred Revenue
During the three months ended March 31, 2023, we withdrew $7.0 million of realized capital gains and earnings from sales ofour preneed funeral and cemetery trust investments. We did not withdraw any realized capital gains and earnings from our preneed trust investments during the three months ended March 31, 2024. In certain states, we are allowed to make these withdrawals prior to the delivery of preneed merchandise and services when the merchandise is delivered or the service is performed. Cemetery interment rightscontracts. The realized capital gains and earnings withdrawn increase our cash flow from operations, but are recordednot recognized as revenue in accordance withour Consolidated Statements of Operations, however, they reduce our Preneed funeral trust investments and Preneed cemetery trust investments and increase our Deferred preneed funeral revenue and Deferred preneed cemetery revenue.
Property, Plant and Equipment
Property, plant and equipment is comprised of the accounting provisions for real estate sales. This method providesfollowing (in thousands):
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| December 31, 2023 | | March 31, 2024 |
Land | $ | 87,635 | | | $ | 86,888 | |
Buildings and improvements | 263,522 | | | 260,864 | |
Furniture, equipment and vehicles | 74,372 | | | 72,880 | |
Property, plant and equipment, at cost | 425,529 | | | 420,632 | |
Less: accumulated depreciation | (138,045) | | | (138,667) | |
Property, plant and equipment, net | $ | 287,484 | | | $ | 281,965 | |
During the three months ended March 31, 2024, we sold six funeral homes and one cemetery that had a carrying value of property, plant and equipment of $3.1 million, which was included in the loss on sale and recorded in Net loss on divestitures, disposals and impairment charges on our Consolidated Statements of Operations.
During the three months ended March 31, 2023, we acquired $12.8 million of property, plant and equipment related to our acquisition of a business located in Bakersfield, CA, as more fully described in Note 3 to the Consolidated Financial Statements.
Our growth and maintenance capital expenditures totaled $2.9 million and $1.6 million for the recognitionthree months ended March 31, 2023 and 2024, respectively. In addition, we recorded depreciation expense of revenue in$3.5 million and $3.6 million for the period in whichthree months ended March 31, 2023 and 2024, respectively.
Cemetery Property
Cemetery property was $114.6 million and $114.0 million, net of accumulated amortization of $64.6 million and $66.2 million at December 31, 2023 and March 31, 2024, respectively. When cemetery property is sold, the customer’s cumulative payments exceed 10%value of the intermentcemetery property (interment right contract price. Interment right costs, which include real property and other costs related to cemetery development, arecosts) is expensed as amortization using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Our growth capital expenditures for cemetery property development totaled $2.1 million and $2.0 million for the three months ended March 31, 2023 and 2024, respectively. We recorded amortization expense for cemetery propertyinterment rights of approximately $0.9 million for both the three months ended September 30, 2016 and 2017 and $3.1$1.2 million and $2.4 million for the nine months ended September 30, 2016 and 2017, respectively. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations 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.
When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costs are expensed when incurred.
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”). As of September 30, 2017, CSV RIA provided these services to two institutions, which have custody of 79% 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.
Accounts receivable was comprised of the following at December 31, 2016 and September 30, 2017 (in thousands):
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| December 31, 2016 | | September 30, 2017 |
Funeral receivables, net of allowance for bad debt of $189 and $197, respectively | $ | 8,664 |
| | $ | 7,865 |
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Cemetery receivables, net of allowance for bad debt of $557 and $603, respectively | 9,862 |
| | 10,552 |
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Other receivables | 334 |
| | 404 |
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Accounts receivable, net | $ | 18,860 |
| | $ | 18,821 |
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Non-current preneed receivables represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables were comprised of the following at December 31, 2016 and September 30, 2017 (in thousands):
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| December 31, 2016 | | September 30, 2017 |
Funeral receivables, net of allowance for bad debt of $862 and $883, respectively | $ | 7,761 |
| | $ | 7,943 |
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Cemetery receivables, net of allowance for bad debt of $1,304 and $1,347, respectively | 22,622 |
| | 23,336 |
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Preneed receivable, net | $ | 30,383 |
| | $ | 31,279 |
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Bad debt expense totaled approximately $0.5 million and $0.6$1.8 million for the three months ended September 30, 2016March 31, 2023 and 2017, respectively,2024, respectively.
During the three months ended March 31, 2024, we sold one cemetery that had a carrying value of cemetery property of $0.8 million, which was included in the loss on sale and $1.5recorded in Net loss on divestitures, disposals and impairment charges on our Consolidated Statements of Operations.
During the three months ended March 31, 2023, we acquired cemetery property for $9.0 million related to our acquisition of a business located in Bakersfield, CA, as more fully described in Note 3 to the Consolidated Financial Statements. We also sold two cemeteries that had a carrying value of cemetery property of $0.8 million, which was included in the loss on sale and recorded in Net loss on divestitures, disposals and impairment charges on our Consolidated Statements of Operations.
Income Taxes
Income tax expense was $3.5 million and $1.7 million for the nine months ended September 30, 2016 and 2017, respectively.
Property, Plant and Equipment
Property, plant and equipment (including equipment under capital leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method.
Property, plant and equipment was comprised of the following at December 31, 2016 and September 30, 2017 (in thousands):
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| December 31, 2016 | | September 30, 2017 |
Land | $ | 73,744 |
| | $ | 73,503 |
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Buildings and improvements | 195,214 |
| | 201,444 |
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Furniture, equipment and automobiles | 76,664 |
| | 74,170 |
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Property, plant and equipment, at cost | 345,622 |
| | 349,117 |
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Less: accumulated depreciation | (110,509 | ) | | (113,616 | ) |
Property, plant and equipment, net | $ | 235,113 |
| | $ | 235,501 |
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We recorded depreciation expense of approximately $2.9 million and $3.1$3.7 million for the three months ended September 30, 2016March 31, 2023 and 2017, respectively and $8.4 million and $9.4 million for the nine months ended September 30, 2016 and 2017,2024, respectively. During the nine months ended September 30, 2017, we acquired real estate for $0.7 million for funeral home parking lot expansion projects. During the nine months ended September 30, 2016, we acquired real estate for $2.7 million for various funeral home expansion projects and we purchased land and buildings at four funeral homes that were previously leased for approximately $6.3 million.
Goodwill
Effective January 1, 2017, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”), Intangibles (Topic 350): Goodwill and Other. The guidance simplifies subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for
impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill.
We performed our 2017 annual impairment test of goodwill using information as of August 31, 2017. 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. For our 2017 annual impairment test, we performed a qualitative assessment and concluded that there was not an impairment to goodwill.
For our 2016 annual impairment test, we performed a quantitative impairment test. Our intent is to perform the quantitative test at least once every three years unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of the methodology used for the goodwill impairment quantitative test.
In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results. No such events or changes occurred between our testing date and reporting period to trigger a subsequent impairment review. No impairments were recorded to our goodwill during the nine months ended September 30, 2016 and 2017.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets on our Consolidated Balance Sheets. Our tradenames are considered to have an indefinite life and are not subject to amortization.
We performed our 2017 annual impairment test of intangible assets using information as of August 31, 2017. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with the guidance. For our 2017 annual impairment test, we performed a qualitative assessment and concluded that there was not an impairment to intangibles assets.
For our 2016 annual impairment test, we performed a quantitative impairment test. Our intent is to perform the quantitative test at least once every three years unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of the methodology used for the intangibles impairment quantitative test.
In addition to our annual review, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. During the third quarter of 2016, we recorded an impairment to tradenames of $145,000 related to a funeral home business held for sale as the carrying value exceeded fair value. No other impairments were recorded to our intangible assets during the nine months ended September 30, 2016 and 2017.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we grant 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.
Effective January 1, 2017, we adopted the FASB’s ASU, Compensation: (Topic 718): Stock Compensation. The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The guidance requires that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. Entities are required to record a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the beginning of the annual period of adoption, with a cumulative-effect adjustment to retained earnings. At January 1, 2017, we performed an analysis for unrecognized excess tax benefits and deficiencies and determined that there were no adjustments to retained earnings, as there are no unrecognized excess tax benefits.
The guidance also requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement on a prospective basis. The tax effects of exercised or vested awards should be treated asrate before discrete items in the reporting period in which they occur. For the threewas 28.9% and nine months ended September 30, 2017, the excess tax deficiency related to share-based payments was approximately $70,000, recorded within Tax adjustment related to certain discrete items on our Consolidated Statements of Operations. In addition, excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows.
The guidance also allows for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.
The guidance also requires that the presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and applied retrospectively. This resulted in $0.6 million of employee taxes paid from withheld shares being presented as financing activities on our Consolidated Statement of Cash Flows for both the nine months ended September 30, 2016 and 2017. Prior to January 1, 2017, these amounts were presented as operating activities on our Consolidated Statement of Cash Flows.
We adopted all of the provisions of this amendment in accordance with the transition requirements and it did not have a material effect on our Consolidated Financial Statements.
See Note 11 to the Consolidated Financial Statements included herein for additional information on our stock-based compensation plans.
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 13 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 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 financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets.
On July 18, 2017, we received notification that the Internal Revenue Service (“IRS”) selected our tax years ended December 31, 2013, 2014 and 2015 for examination. The examination of our tax year ended December 31, 2013 had previously been completed during 2016, however, we filed an amendment on June 1, 2017. The examination related to 2013 should be limited in scope to the items revised in the amendment, which include research and development credits, state taxes and preneed cost of sales.
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, but are not limited to, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, and increases or decreases in valuation allowances on deferred tax assets.
Income tax expense was $1.9 million32.8% for the three months ended September 30, 2016 compared to $1.5 million for the three months ended September 30, 2017. We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for both the threeMarch 31, 2023 and nine months ended September 30, 2016 and 2017. Income tax expense was $8.4 million for the nine months ended September 30, 2016 compared to $9.3 million for the nine months ended September 30, 2017.
During the third quarter of 2017, we recognized a tax benefit of $0.2 million which reduced our effective tax rate to 39.0% for the nine months ended September 30, 2017. During the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016.
Correction of Immaterial Error
During the nine months ended September 30, 2017, we corrected an immaterial error related to 2013. The adjustment related to the correction of the deferred tax liability for the difference in book and tax basis of certain assets. The error had the impact of understating the deferred tax liability and overstating net income in 2013. Management evaluated the effect of the adjustment on previously issued interim and annual consolidated financial statements in accordance with the SEC's Staff Accounting Bulletin (“SAB”) No. 99 and SAB 108 and concluded that it was immaterial to the interim and annual periods. As a result, in accordance with SAB No. 108, we corrected our Consolidated Balance Sheets as of January 1, 2015.
The effect of this adjustment on our Consolidated Balance Sheets as of December 31, 2016 is as follows (dollars in thousands): |
| | | | | |
| | % Change |
Increase in Deferred tax liability | $ | 2,255 |
| 5.6 | % |
Increase in Total liabilities | $ | 2,255 |
| 0.3 | % |
Decrease in Retained earnings | $ | 2,255 |
| 9.8 | % |
Decrease in Total stockholders' equity | $ | 2,255 |
| 1.3 | % |
This adjustment had no impact on our Consolidated Statements of Operations or Consolidated Statement of Cash Flows for any periods presented.
Related Party Transactions
Management evaluated reportable events and transactions that occurred between us and related persons during the nine months ended September 30, 2017. See Note 15 to the Consolidated Financial Statements included herein for additional information on our related party transactions.2024, respectively.
Subsequent Events
ManagementWe have evaluated events and transactions during the period subsequent to September 30, 2017March 31, 2024 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
See Note 16 to the Consolidated Financial Statements included herein for additional information on our subsequent events.
2.RECENTLY ISSUED ACCOUNTING STANDARDS
Stock-Based CompensationSegment Reporting
In May 2017,November 2023, the FASB issued ASU, Compensation: (Topic 718): Stock CompensationSegment Reporting - Scope of Modification Accounting.Improvements to Reportable Segment Disclosures (“Topic 280”) to improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. The amendments provide guidance about which changesin this update require that a public entity disclose, on an annual and interim basis (1) significant segment expenses that are regularly provided to the termschief operating decision maker (“CODM”) and conditionsincluded within each reported measure of segment profit or loss; and (2) an amount for other segment items, as described in the amendments, by reportable segment and a share-based payment awarddescription of its composition. Additionally, the amendments require anthat a public entity to apply modification accounting in Topic 718. An entity should account fordisclose the effects of a modification unless the fair value, vesting conditionstitle and classificationposition of the modified awardCODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss in assessing segment performance and deciding how to allocate resources. The amendments are the same as the original award immediately before the award is modified. This ASU is effective for fiscal years beginning after December 15, 2017,2023, and interim periods within those fiscal years with earlier application permittedbeginning after December 15, 2024, and therefore were effective for all entities. The amendments should be applied prospectively to an award modified on or after the adoption date. Our adoption of this ASUus for our fiscal year beginning January 1, 2018 is not expected to2024 and for interim periods within our fiscal year beginning January 1, 2025. We expect the adoption will have a material effectno impact on our Consolidated Financial Statements.
Revenue RecognitionAccounting Pronouncements Not Yet Adopted
Income Taxes
In May 2014,December 2023, the FASB issued ASU, Revenue from Contracts with Customers (Topic 606). FASB Accounting Standards CodificationIncome Taxes - Improvements to Income Tax Disclosures (“ASC”Topic 740”) Topic 606 supersedesto enhance the revenue recognition requirements under Topic 605, Revenue Recognition,transparency about income tax information through improvements to income tax disclosures primarily related to rate reconciliation and most industry-specific guidance throughoutincome taxes paid information. The amendments in this update require that public business entities on an annual basis (1) disclose specific categories in the Industry Topicsrate reconciliation; and (2) provide additional information for reconciling items that meet a quantitative threshold (if the effect of those reconciling items is equal to or greater than five percent of the ASC.amount computed by multiplying pretax income (loss) by the applicable statutory income tax rate). The core principleamendments in this update also require that all entities disclose on an annual basis (1) the amount of net income taxes paid disaggregated by federal and state taxes; and (2) the guidanceamount of net income taxes paid disaggregated by individual jurisdictions in which net income taxes paid is that an entity should recognize revenueequal to depict the transferor greater than five percent of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchangetotal net income taxes paid. The amendments are effective for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period.2024. Early adoption is permitted. We plan to adopt the provisionsamendments of this ASUTopic 740 for our fiscal year beginning January 1, 2018 using2025. We expect the modified retrospective approach, which recognizesadoption will have no impact on our Consolidated Financial Statements.
3. BUSINESS COMBINATIONS
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the cumulative effectprice of initially applying the standardacquisition 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 an adjustmentof 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 retained earningsus at the closing date subsequently becomes available during the measurement period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition.
We did not acquire any businesses during the three months ended March 31, 2024. On March 22, 2023, we acquired a business consisting of three funeral homes, two cemeteries and one cremation focused business in the Bakersfield, CA area for $44.0 million in cash. We acquired substantially all of the assets and assumed certain operating liabilities of this business.
The pro forma impact of this acquisition on prior periods is not presented, as the impact is not significant to our reported results. The results of the acquired business are reflected in our Consolidated Statements of Operations from the date of initial application.acquisition.
The following table summarizes the breakdown of the purchase price allocation for our salesBakersfield, CA business acquisition (in thousands):
| | | | | | | | | | | | | | | | | |
| Initial Purchase Price Allocation | | Adjustments | | Adjusted Purchase Price Allocation |
Current assets | $ | 7,087 | | | $ | 131 | | | $ | 7,218 | |
Preneed trust assets | — | | | 11,428 | | | 11,428 | |
Property, plant & equipment | 12,577 | | | 245 | | | 12,822 | |
Cemetery property | 9,035 | | | — | | | 9,035 | |
Goodwill | 13,612 | | | (106) | | | 13,506 | |
Intangible and other non-current assets | 3,763 | | | — | | | 3,763 | |
Assumed liabilities | (300) | | | (66) | | | (366) | |
| | | | | |
Preneed trust liabilities | — | | | (11,428) | | | (11,428) | |
Deferred revenue | (1,774) | | | (204) | | | (1,978) | |
Purchase price | $ | 44,000 | | | $ | — | | | $ | 44,000 | |
The current assets relate to accounts receivable and inventory. The intangible and other non-current assets relate to the fair value of tradenames and right-of-use operating lease assets. The assumed liabilities relate to operating lease obligations and commissions payable. As of December 31, 2023, our accounting for this acquisition was complete.
The following table summarizes the fair value of the assets acquired and liabilities assumed for this business (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Acquisition Date | | Type of Business | | Market | | Assets Acquired (Excluding Goodwill) | | Goodwill Recorded | | Liabilities and Debt Assumed |
March 22, 2023 | | Three Funeral Homes, Two Cemeteries and One Cremation Focused Business | | Bakersfield, CA | | $ | 44,266 | | | $ | 13,506 | | | $ | (13,772) | |
4.GOODWILL
The following table presents changes in goodwill in the accompanying Consolidated Balance Sheet (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Goodwill at the beginning of the period | $ | 410,137 | | | $ | 423,643 | |
Increase in goodwill related to acquisitions | 13,506 | | | — | |
Decrease in goodwill related to divestitures | — | | | (8,748) | |
| | | |
Goodwill at the end of the period | $ | 423,643 | | | $ | 414,895 | |
During the three months ended March 31, 2024, we allocated $8.7 million of goodwill to the sale of six funeral homes and one cemetery interment rightsfor a loss recorded in Net loss on divestitures, disposals and impairments charges, of which $7.8 million was allocated to our funeral homes segment and $1.0 million was allocated to our cemetery segment.
During the three months ended March 31, 2023, we recognized $13.5 million in goodwill related to our acquisition of a business located in Bakersfield, CA, of which $4.5 million was allocated to our cemetery segment and $9.0 million was allocated to our funeral home segment.
5.DIVESTED OPERATIONS
During the three months ended March 31, 2024, we sold six funeral homes and one cemetery for an aggregate of $10.9 million. During the three months ended March 31, 2023, we sold one funeral home and two cemeteries for an aggregate of $0.8 million.
The operating results of these divested funeral homes and cemeteries are reflected on our Consolidated Statements of Operations as shown in the table below (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Revenue | $ | 66 | | | $ | 1,151 | | | | | |
| | | | | | | |
Operating income | 26 | | | 122 | | | | | |
Loss on divestitures(1) | (82) | | | (1,501) | | | | | |
Income tax benefit | 16 | | | 452 | | | | | |
Net loss from divested operations, after tax | $ | (40) | | | $ | (927) | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Loss on divestitures is recorded in Net loss on divestitures, disposals and impairments charges on our Consolidated Statements of Operations. |
6.RECEIVABLES
Accounts Receivable
Our funeral receivables are recorded in Accounts receivable, net and primarily consist of amounts due for funeral services already performed.
Atneed cemetery receivables and preneed cemetery receivables with payments expected to be received within one year from the balance sheet date are also recorded in Accounts receivable, net. Preneed cemetery receivables with payments expected to be received beyond one year from the balance sheet date are recorded in Preneed cemetery receivables, net.
Accounts receivable is comprised of the following (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| Funeral | | Cemetery | | Corporate | | Total |
Trade and financed receivables | $ | 8,412 | | | $ | 19,023 | | | $ | — | | | $ | 27,435 | |
Other receivables | 388 | | | 219 | | | 112 | | | 719 | |
Allowance for credit losses | (302) | | | (1,303) | | | — | | | (1,605) | |
Accounts receivable, net | $ | 8,498 | | | $ | 17,939 | | | $ | 112 | | | $ | 26,549 | |
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| Funeral | | Cemetery | | Corporate | | Total |
Trade and financed receivables | $ | 8,822 | | | $ | 18,459 | | | $ | — | | | $ | 27,281 | |
Other receivables | 404 | | | 595 | | | 286 | | | 1,285 | |
Allowance for credit losses | (266) | | | (1,240) | | | — | | | (1,506) | |
Accounts receivable, net | $ | 8,960 | | | $ | 17,814 | | | $ | 286 | | | $ | 27,060 | |
Other receivables include supplier rebates, commissions due from third party insurance companies and perpetual care income receivables. We do not provide an allowance for credit losses for these receivables as revenuewe have historically not had any collectability issues nor do we expect any in accordance with the retail land sales provisionsforeseeable future.
The following table summarizes the activity in our allowance for accounting for salescredit losses by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2024 | | Provision for Credit Losses | | | | Write Offs | | Recoveries | | March 31, 2024 |
Trade and financed receivables: | | | | | | | | | | | |
Funeral | $ | (266) | | | $ | (238) | | | | | $ | 459 | | | $ | (257) | | | $ | (302) | |
Cemetery | (1,240) | | | (208) | | | | | 145 | | | — | | | (1,303) | |
Total allowance for credit losses on trade and financed receivables | $ | (1,506) | | | $ | (446) | | | | | $ | 604 | | | $ | (257) | | | $ | (1,605) | |
Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet of real estate. This method provides for$10.7 million at both December 31, 2023 and March 31, 2024. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in thefuture periods. However, we estimate an average maturity period in which the customer’s cumulative payments exceed 10%of ten years for preneed funeral contracts.
Cemetery Receivables
Our cemetery receivables are comprised of the contract price related to the interment right. We have analyzed the impact on our contract portfolio by reviewing our revenue streams and our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard to our contracts and we do not expect the new accounting standard to significantly impact our current accounting for the cemetery interment rights. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.following (in thousands):
We expect the adoption of this new accounting standard to affect our accounting for the selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts. Currently, these costs are charged to operations using the specific identification method in the period incurred. Under the new accounting standard, we will capitalize and amortize these costs over the typical financing term for our preneed cemetery merchandise and services contracts and over the average preneed maturity period for our preneed funeral trust contracts. Based on our preliminary assessments, we do not expect the change to have a material impact on our Consolidated Financial Statements. The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts will continue to be charged to operations using the specific identification method in the period incurred. | | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Interment rights | $ | 60,863 | | | $ | 63,328 | |
Merchandise and services | 11,223 | | | 11,314 | |
Unearned finance charges | 5,669 | | | 5,884 | |
Cemetery receivables | $ | 77,755 | | | $ | 80,526 | |
We are continually evaluating the impact on our Consolidated Financial Statements and are currently modifying our financial systems to provide accounting under the new guidance.
Leases
In February 2016, the FASB issued ASU, Leases (Topic 842). This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3. PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed cemetery contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed cemetery trust investments can be reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of our cemetery receivables are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Cemetery receivables | $ | 77,755 | | | $ | 80,526 | |
Less: unearned finance charges | (5,669) | | | (5,884) | |
Cemetery receivables, at amortized cost | $ | 72,086 | | | $ | 74,642 | |
Less: allowance for credit losses | (3,495) | | | (3,602) | |
Less: balances due on undelivered cemetery preneed contracts | (15,797) | | | (16,466) | |
Less: amounts in accounts receivable | (17,219) | | | (17,720) | |
Preneed cemetery receivables, net | $ | 35,575 | | | $ | 36,854 | |
The following table summarizes the activity in our allowance for credit losses for Preneed cemetery trust investmentsreceivables, net (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| January 1, 2024 | | Provision for Credit Losses | | Write Offs | | March 31, 2024 |
Total allowance for credit losses on Preneed cemetery receivables, net | $ | (2,255) | | | $ | (336) | | | $ | 292 | | | $ | (2,299) | |
The amortized cost basis of our cemetery receivables by year of origination at March 31, 2024 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 2024 | | 2023 | | 2022 | | 2021 | | 2020 | | Prior | | Total |
Total preneed cemetery receivables, at amortized cost | $ | 12,395 | | | $ | 29,871 | | | $ | 17,435 | | | $ | 8,853 | | | $ | 3,818 | | | $ | 2,270 | | | $ | 74,642 | |
The aging of past due cemetery receivables at March 31, 2024 is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total |
Recognized revenue | $ | 2,418 | | | $ | 512 | | | $ | 333 | | | $ | 3,635 | | | $ | 6,898 | | | $ | 51,278 | | | $ | 58,176 | |
Deferred revenue | 444 | | | 128 | | | 141 | | | 1,234 | | | 1,947 | | | 20,403 | | | 22,350 | |
Total contracts | $ | 2,862 | | | $ | 640 | | | $ | 474 | | | $ | 4,869 | | | $ | 8,845 | | | $ | 71,681 | | | $ | 80,526 | |
Balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance SheetsSheet. The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled were $15.8 million and $16.5 million at December 31, 20162023 and September 30, 2017 were as follows (in thousands):March 31, 2024, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of eight years for preneed cemetery contracts.
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed cemetery trust investments, at market value | $ | 71,834 |
| | $ | 73,889 |
|
Less: allowance for contract cancellation | (2,138 | ) | | (2,161 | ) |
Preneed cemetery trust investments, net | $ | 69,696 |
| | $ | 71,728 |
|
7.FAIR VALUE MEASUREMENTSUpon cancellationWe evaluated our financial assets and liabilities for those that met the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of our receivables on preneed cemetery contracts are impracticable to estimate because of the lack of a preneed cemetery contract, a customer is generally entitled to receive a refundtrading market and the diverse number of individual contracts with varying terms. Our acquisition debt and Credit Facility (as defined in Note 11) and Senior Notes (as defined in Note 12) are classified within Level 2 of the corpus,Fair Value Measurements hierarchy.
At March 31, 2024, the carrying value and in some instances,fair value of our Credit Facility was $154.1 million. We believe that our Credit Facility bears interest at a portionrate that approximates prevailing market rates for instruments with similar characteristics and therefore, the carrying value of all our Credit Facility approximates fair value. We estimate the fair value of our acquisition debt utilizing an income approach, which uses a present value calculation to discount payments based on current market rates as
of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if
reporting date. At March 31, 2024, the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At September 30, 2017, nonecarrying value of our acquisition debt was $6.0 million, which approximated its fair value. The fair value of our Senior Notes was $355.2 million at March 31, 2024 based on the last traded or broker quoted price.
We identified investments in fixed income securities, common stock and mutual funds presented within the preneed cemeteryand perpetual care trust investments were underfunded.
Earnings fromcategories on our preneed cemetery trust investments are recognizedConsolidated Balance Sheet as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue inhaving met the period in which they are earned.
criteria for fair value measurement. Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt, common stock and common stock.equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds,U.S. agency obligations, foreign debt, corporate debt, preferred stocks, mortgage-backed securitiescertificates of deposit and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy.
In addition, we have an investment in a limited partnership fund, whose fair value has been estimated using the net asset value per share practical expedient described in ASC 820-10-35-59, Fair Value Measurement of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) and therefore, has not been classified in the fair value hierarchy. The investment strategy of this fund is to generate attractive, risk-adjusted returns over a multi-year performance period through the construction of a concentrated portfolio of investments possessing certain distinct business attributes that suggest the potential for long-term value creation. Beginning March 31, 2024, the agreement permits us to withdraw a percentage of the value of the investments in this fund through quarterly withdrawal dates with the intention to permit withdrawal of the entire investment over twelve successive withdrawal dates. Our unfunded commitment for this investment at March 31, 2024 was $10.0 million.
Our receivables from preneed funeral trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest (less than 50%) in the trust assets. We reviewaccount for these investments at cost. See Notes 8 and update9 to our Consolidated Financial Statements for the fair value hierarchy classifications quarterly. There were no transfers between Levels 1levels of our trust investments.
8.TRUST INVESTMENTS
Preneed trust investments represent trust fund assets that we are generally permitted to withdraw as the services and 2merchandise are provided to customers. Preneed funeral and cemetery contracts are secured by payments from customers, less amounts not required by law to be deposited into trust. These earnings are recognized in Other revenue on ourConsolidated Statements of Operations, when a service is performed or merchandise is delivered. Trust management fees charged by our wholly-owned registered investment advisory firm are included as revenue in the threeperiod in which they are earned. Our investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We do not intend to sell and nine months ended September 30, 2017. Thereit is likely that we will not be required to sell the securities prior to their anticipated recovery.
Cemetery perpetual care trust investments represent a portion of the proceeds from the sale of cemetery property interment rights that we are no Level 3 investmentsrequired by various state laws to deposit into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized in the preneed cemetery trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information onOther revenue.
Changes in the fair value measurementof our trust fund assets (Preneed funeral, cemetery and the three-level hierarchy.
The cost and fair market values associated with preneed cemeteryperpetual care trust investments at September 30, 2017) are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 4,698 |
| | $ | — |
| | $ | — |
| | $ | 4,698 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 4,834 |
| | 275 |
| | (168 | ) | | 4,941 |
|
Corporate debt | 2 | | 19,335 |
| | 1,145 |
| | (553 | ) | | 19,927 |
|
Preferred stock | 2 | | 16,329 |
| | 383 |
| | (524 | ) | | 16,188 |
|
Mortgage-backed securities | 2 | | 1,089 |
| | 240 |
| | (23 | ) | | 1,306 |
|
Common stock | 1 | | 24,574 |
| | 3,376 |
| | (3,119 | ) | | 24,831 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 1,200 |
| | 81 |
| | — |
| | 1,281 |
|
Trust securities | | | $ | 72,059 |
| | $ | 5,501 |
| | $ | (4,387 | ) | | $ | 73,173 |
|
Accrued investment income | | | $ | 716 |
| | | | | | $ | 716 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 73,889 |
|
Market value as a percentage of cost | | | | | | | | | 101.5 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 15 |
|
Due in one to five years | 2,718 |
|
Due in five to ten years | 5,751 |
|
Thereafter | 33,879 |
|
Total | $ | 42,363 |
|
The cost and fair market values associated with preneed cemetery trust investments at December 31, 2016 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 10,852 |
| | $ | — |
| | $ | — |
| | $ | 10,852 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 496 |
| | 18 |
| | (4 | ) | | 510 |
|
Foreign debt | 2 | | 7,574 |
| | 160 |
| | (656 | ) | | 7,078 |
|
Corporate debt | 2 | | 20,621 |
| | 1,569 |
| | (1,123 | ) | | 21,067 |
|
Preferred stock | 2 | | 16,287 |
| | 8 |
| | (947 | ) | | 15,348 |
|
Mortgage-backed securities | 2 | | 949 |
| | 372 |
| | (4 | ) | | 1,317 |
|
Common stock | 1 | | 13,250 |
| | 2,191 |
| | (1,838 | ) | | 13,603 |
|
Mutual funds: | | | | | | | | | |
Fixed income | | | 1,223 |
| | 107 |
| | — |
| | 1,330 |
|
Trust securities | | | $ | 71,252 |
| | $ | 4,425 |
| | $ | (4,572 | ) | | $ | 71,105 |
|
Accrued investment income | | | $ | 729 |
| | | | | | $ | 729 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 71,834 |
|
Market value as a percentage of cost | | | | | | | | | 99.8 | % |
We determine whether or not the assetsoffset by changes in the preneed cemeteryfair value of our trust investments 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. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in fund liabilities (Deferred preneed funeral and cemetery receipts held in truston our Consolidated Balance Sheets. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines and Care trusts’ corpus) and reflected in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.8 million impairment and no impairments have been recorded in the nine months ended September 30, 2017.Other, net. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.regulations and the gain or loss is allocated to the contract.
At September 30, 2017, we had certainWe rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations.
Preneed Cemetery Trust Investments
The components of Preneed cemetery trust investments on our Consolidated Balance Sheet are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Preneed cemetery trust investments, at market value | $ | 99,461 | | | $ | 101,990 | |
Less: allowance for contract cancellation | (3,087) | | | (3,233) | |
Preneed cemetery trust investments | $ | 96,374 | | | $ | 98,757 | |
The cost and market values associated with preneed cemetery trust investments at March 31, 2024 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 21,052 | | | $ | — | | | $ | — | | | $ | 21,052 | |
Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
U.S. agency obligations | 2 | | 664 | | | — | | | (56) | | | 608 | |
Foreign debt | 2 | | 7,849 | | | 1,454 | | | (14) | | | 9,289 | |
Corporate debt | 2 | | 15,489 | | | 257 | | | (2,508) | | | 13,238 | |
Preferred stock | 2 | | 11,296 | | | 492 | | | (1,790) | | | 9,998 | |
Certificates of deposit | 2 | | 79 | | | — | | | (7) | | | 72 | |
Common stock | 1 | | 34,679 | | | 2,459 | | | (5,314) | | | 31,824 | |
Limited partnership fund | | | 3,611 | | | 301 | | | — | | | 3,912 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 546 | | | 33 | | | (21) | | | 558 | |
Fixed income | 2 | | 12,490 | | | 34 | | | (2,279) | | | 10,245 | |
Trust securities | | | $ | 107,755 | | | $ | 5,030 | | | $ | (11,989) | | | $ | 100,796 | |
Accrued investment income | | | $ | 1,194 | | | | | | | $ | 1,194 | |
Preneed cemetery trust investments | | | | | | | | | $ | 101,990 | |
Market value as a percentage of cost | | | | | | | | | 93.5% |
The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands):
| | | | | |
Due in one year or less | $ | 136 | |
Due in one to five years | 12,662 | |
Due in five to ten years | 3,303 | |
Thereafter | 17,104 | |
Total fixed income securities | $ | 33,205 | |
The cost and market values associated with preneed cemetery trust investments at December 31, 2023 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 9,643 | | | $ | — | | | $ | — | | | $ | 9,643 | |
Fixed income securities: | | | | | | | | | |
U.S. agency obligations | 2 | | 803 | | | 1 | | | (51) | | | 753 | |
Foreign debt | 2 | | 7,764 | | | 1,371 | | | (17) | | | 9,118 | |
Corporate debt | 2 | | 15,071 | | | 342 | | | (3,657) | | | 11,756 | |
Preferred stock | 2 | | 10,965 | | | 473 | | | (1,572) | | | 9,866 | |
Certificate of deposit | 2 | | 79 | | | — | | | (7) | | | 72 | |
| | | | | | | | | |
Common stock | 1 | | 43,057 | | | 9,466 | | | (7,935) | | | 44,588 | |
Limited partnership fund | | | 3,575 | | | — | | | (3) | | | 3,572 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 553 | | | 10 | | | (30) | | | 533 | |
Fixed income | 2 | | 11,369 | | | 16 | | | (2,759) | | | 8,626 | |
Trust Securities | | | $ | 102,879 | | | $ | 11,679 | | | $ | (16,031) | | | $ | 98,527 | |
Accrued investment income | | | $ | 934 | | | | | | | $ | 934 | |
Preneed cemetery trust investments | | | | | | | | | $ | 99,461 | |
Market value as a percentage of cost | | | | | | | | | 95.8% |
The following table summarizes our fixed income securities (excluding mutual funds) within our preneed cemetery trust investments that had tax lots in an unrealized loss positions for more than one year. Based onposition at March 31, 2024, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. agency obligations | $ | — | | | $ | — | | | $ | 608 | | | $ | (56) | | | $ | 608 | | | $ | (56) | |
Foreign debt | — | | | — | | | 501 | | | (14) | | | 501 | | | (14) | |
Corporate debt | 685 | | | (16) | | | 5,046 | | | (2,492) | | | 5,731 | | | (2,508) | |
Preferred stock | 941 | | | (4) | | | 7,708 | | | (1,786) | | | 8,649 | | | (1,790) | |
Certificates of deposit | — | | | — | | | 73 | | | (7) | | | 73 | | | (7) | |
Total fixed income securities with an unrealized loss | $ | 1,626 | | | $ | (20) | | | $ | 13,936 | | | $ | (4,355) | | | $ | 15,562 | | | $ | (4,375) | |
The following table summarizes our analyses of thesefixed income securities the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our(excluding mutual funds) within our preneed cemetery trust investmentinvestments in an unrealized losses, their associated fair market values,loss position at December 31, 2023, aggregated by major security type and the durationlength of time in a continuous unrealized losses as of September 30, 2017 are shown in the following tableloss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. agency obligations | $ | — | | | $ | — | | | $ | 613 | | | $ | (51) | | | $ | 613 | | | $ | (51) | |
Foreign debt | 284 | | | (5) | | | 209 | | | (12) | | | 493 | | | (17) | |
Corporate debt | 666 | | | (62) | | | 4,239 | | | (3,595) | | | 4,905 | | | (3,657) | |
Preferred stock | 45 | | | — | | | 7,821 | | | (1,572) | | | 7,866 | | | (1,572) | |
Certificates of deposit | — | | | — | | | 72 | | | (7) | | | 72 | | | (7) | |
Total fixed income securities with an unrealized loss | $ | 995 | | | $ | (67) | | | $ | 12,954 | | | $ | (5,237) | | | $ | 13,949 | | | $ | (5,304) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 153 |
| | $ | (2 | ) | | $ | 1,657 |
| | $ | (166 | ) | | $ | 1,810 |
| | $ | (168 | ) |
Corporate debt | 2,158 |
| | (410 | ) | | 624 |
| | (143 | ) | | 2,782 |
| | (553 | ) |
Preferred stock | 273 |
| | (2 | ) | | 8,111 |
| | (522 | ) | | 8,384 |
| | (524 | ) |
Mortgage-backed securities | 200 |
| | (23 | ) | | — |
| | — |
| | 200 |
| | (23 | ) |
Common stock | 8,473 |
| | (2,247 | ) | | 1,936 |
| | (872 | ) | | 10,409 |
| | (3,119 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed Income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporary impaired securities | $ | 11,257 |
| | $ | (2,684 | ) | | $ | 12,328 |
| | $ | (1,703 | ) | | $ | 23,585 |
| | $ | (4,387 | ) |
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | $ | 228 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 228 |
| | $ | (4 | ) |
Foreign debt | 2,523 |
| | (180 | ) | | 2,868 |
| | (475 | ) | | 5,391 |
| | (655 | ) |
Corporate debt | 6,939 |
| | (233 | ) | | 2,168 |
| | (890 | ) | | 9,107 |
| | (1,123 | ) |
Preferred stock | 3,217 |
| | (121 | ) | | 11,635 |
| | (826 | ) | | 14,852 |
| | (947 | ) |
Mortgage-backed securities | 51 |
| | (5 | ) | | — |
| | — |
| | 51 |
| | (5 | ) |
Common stock | 2,608 |
| | (202 | ) | | 3,385 |
| | (1,636 | ) | | 5,993 |
| | (1,838 | ) |
Total temporary impaired securities | $ | 15,566 |
| | $ | (745 | ) | | $ | 20,056 |
| | $ | (3,827 | ) | | $ | 35,622 |
| | $ | (4,572 | ) |
Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 wereare as follows (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
| Three months ended March 31, | |
| Three months ended March 31, | |
| Three months ended March 31, | |
| 2023 | |
| 2023 | |
| 2023 | |
Investment income | |
Investment income | |
Investment income | $ | 578 |
| | $ | 474 |
| | $ | 1,546 |
| | $ | 1,755 |
|
Realized gains | 126 |
| | — |
| | 415 |
| | 2,215 |
|
Realized gains | |
Realized gains | |
Realized losses | (673 | ) | | — |
| | (4,081 | ) | | (1,312 | ) |
Realized losses | |
Realized losses | |
Unrealized losses, net | |
Unrealized losses, net | |
Unrealized losses, net | |
Expenses and taxes | (139 | ) | | (336 | ) | | (832 | ) | | (1,213 | ) |
Decrease (increase) in deferred preneed cemetery receipts held in trust | 108 |
| | (138 | ) | | 2,952 |
| | (1,445 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Expenses and taxes | |
Expenses and taxes | |
Net change in deferred preneed cemetery receipts held in trust | |
Net change in deferred preneed cemetery receipts held in trust | |
Net change in deferred preneed cemetery receipts held in trust | |
| $ | |
| $ | |
| $ | |
Purchases and sales of investments in the preneed cemetery trusts for the three and nine months ended September 30, 2016 and 2017 wereare as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Purchases | $ | (6,354) | | | $ | (4,326) | | | | | |
Sales | 3,045 | | | 16,560 | | | | | |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (1,434 | ) | | $ | (915 | ) | | $ | (19,540 | ) | | $ | (19,355 | ) |
Sales | $ | 5,973 |
| | $ | — |
| | $ | 18,003 |
| | $ | 13,189 |
|
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less retained amounts not required to be deposited into trust.
The components of Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed funeral trust investments on our Consolidated Balance Sheets at December 31, 2016 and September 30, 2017 wereSheet are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Preneed funeral trust investments, at market value | $ | 111,247 | | | $ | 113,377 | |
Less: allowance for contract cancellation | (3,405) | | | (3,544) | |
Preneed funeral trust investments | $ | 107,842 | | | $ | 109,833 | |
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed funeral trust investments, at market value | $ | 91,980 |
| | $ | 92,151 |
|
Less: allowance for contract cancellation | (2,740 | ) | | (2,707 | ) |
Preneed funeral trust investments, net | $ | 89,240 |
| | $ | 89,444 |
|
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and in some instances, a portion of all earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized
losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At September 30, 2017, none of our preneed funeral trust investments were underfunded.
Earnings from our preneed funeral trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 for the three and nine months ended September 30, 2017. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed funeral trust investments at September 30, 2017March 31, 2024 are detailed below (in thousands):
| | | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
| Fair Value Hierarchy Level | | | Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 15,636 |
| | $ | — |
| | $ | — |
| | $ | 15,636 |
|
Fixed income securities: | | | | | | | | |
U.S treasury debt | 1 | | 1,490 |
| | 13 |
| | (4 | ) | | 1,499 |
|
U.S treasury debt | |
U.S treasury debt | |
| Foreign debt | |
Foreign debt | |
Foreign debt | 2 | | 4,882 |
| | 282 |
| | (166 | ) | | 4,998 |
|
Corporate debt | 2 | | 20,244 |
| | 1,165 |
| | (571 | ) | | 20,838 |
|
Preferred stock | 2 | | 16,837 |
| | 457 |
| | (526 | ) | | 16,768 |
|
Mortgage-backed securities | 2 | | 1,273 |
| | 255 |
| | (25 | ) | | 1,503 |
|
| Common stock | 1 | | 24,488 |
| | 3,392 |
| | (3,133 | ) | | 24,747 |
|
Common stock | |
Common stock | |
Limited partnership fund | |
Mutual funds: | | | | | | | | |
Equity | |
Equity | |
Equity | |
Fixed income | 2 | | 1,998 |
| | 87 |
| | (38 | ) | | 2,047 |
|
Other investments | 2 | | 3,374 |
| | — |
| | — |
| | 3,374 |
|
Trust securities | | $ | 90,222 |
| | $ | 5,651 |
| | $ | (4,463 | ) | | $ | 91,410 |
|
Accrued investment income | | $ | 741 |
| | | | | | $ | 741 |
|
Preneed funeral trust investments | | | | | | | | $ | 92,151 |
|
Market value as a percentage of cost | | | | | | | | 101.3 | % | Market value as a percentage of cost | | | | | | | | | 95.1% |
The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands):
| | | | | |
Due in one year or less | $ | 80 | |
Due in one to five years | 11,310 | |
Due in five to ten years | 2,962 | |
Thereafter | 15,466 | |
Total fixed income securities | $ | 29,818 | |
|
| | | |
Due in one year or less | $ | 78 |
|
Due in one to five years | 4,320 |
|
Due in five to ten years | 6,208 |
|
Thereafter | 35,000 |
|
Total | $ | 45,606 |
|
The cost and fair market values associated with preneed funeral trust investments at December 31, 20162023 are detailed below (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 26,707 | | | $ | — | | | $ | — | | | $ | 26,707 | |
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 451 | | | — | | | (34) | | | 417 | |
Foreign debt | 2 | | 7,300 | | | 1,297 | | | (16) | | | 8,581 | |
Corporate debt | 2 | | 13,848 | | | 323 | | | (3,255) | | | 10,916 | |
Preferred stock | 2 | | 9,786 | | | 442 | | | (1,468) | | | 8,760 | |
| | | | | | | | | |
Common stock | 1 | | 38,600 | | | 8,858 | | | (6,855) | | | 40,603 | |
Limited partnership fund | | | 3,383 | | | — | | | (2) | | | 3,381 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 401 | | | 3 | | | (29) | | | 375 | |
Fixed income | 2 | | 9,513 | | | 15 | | | (2,383) | | | 7,145 | |
Other investments | 2 | | 3,510 | | | — | | | — | | | 3,510 | |
Trust securities | | | $ | 113,499 | | | $ | 10,938 | | | $ | (14,042) | | | $ | 110,395 | |
Accrued investment income | | | $ | 852 | | | | | | | $ | 852 | |
Preneed funeral trust investments | | | | | | | | | $ | 111,247 | |
Market value as a percentage of cost | | | | | | | | | 97.3% |
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 22,787 |
| | $ | — |
| | $ | — |
| | $ | 22,787 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 1,491 |
| | 21 |
| | (10 | ) | | 1,502 |
|
Municipal bonds | 2 | | 447 |
| | 17 |
| | (4 | ) | | 460 |
|
Foreign debt | 2 | | 7,692 |
| | 170 |
| | (677 | ) | | 7,185 |
|
Corporate debt | 2 | | 21,454 |
| | 1,566 |
| | (1,134 | ) | | 21,886 |
|
Preferred stock | 2 | | 17,037 |
| | 64 |
| | (970 | ) | | 16,131 |
|
Mortgage-backed securities | 2 | | 1,165 |
| | 400 |
| | (5 | ) | | 1,560 |
|
Common stock | 1 | | 13,675 |
| | 2,256 |
| | (1,850 | ) | | 14,081 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 2,124 |
| | 115 |
| | (66 | ) | | 2,173 |
|
Other investments | 2 | | 3,463 |
| | — |
| | — |
| | 3,463 |
|
Trust securities | | | $ | 91,335 |
| | $ | 4,609 |
| | $ | (4,716 | ) | | $ | 91,228 |
|
Accrued investment income | | | $ | 752 |
| | | | | | $ | 752 |
|
Preneed funeral trust investments | | | | | | | | | $ | 91,980 |
|
Market value as a percentage of cost | | | | | | | | | 99.9 | % |
We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments 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. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral receipts held in trust onThe following table summarizes our Consolidated Balance Sheets. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.9 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2017, we had certain investmentsfixed income securities (excluding mutual funds) within our preneed funeral trust investments that had tax lotsinvestment in an unrealized loss positions for more than one year. Based onposition at March 31, 2024, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | — | | | $ | — | | | $ | 368 | | | $ | (37) | | | $ | 368 | | | $ | (37) | |
Foreign debt | — | | | — | | | 464 | | | (13) | | | 464 | | | (13) | |
Corporate debt | 635 | | | (14) | | | 4,423 | | | (2,148) | | | 5,058 | | | (2,162) | |
Preferred stock | 830 | | | (4) | | | 6,817 | | | (1,641) | | | 7,647 | | | (1,645) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 1,465 | | | $ | (18) | | | $ | 12,072 | | | $ | (3,839) | | | $ | 13,537 | | | $ | (3,857) | |
The following table summarizes our analyses of thesefixed income securities the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our(excluding mutual funds) within our preneed funeral trust investment in an unrealized losses, their associated fair market values,loss position at December 31, 2023, aggregated by major security type and the durationlength of time in a continuous unrealized losses as of September 30, 2017 are shown in the following tableloss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | — | | | $ | — | | | $ | 371 | | | $ | (34) | | | $ | 371 | | | $ | (34) | |
Foreign debt | 269 | | | (5) | | | 198 | | | (11) | | | 467 | | | (16) | |
Corporate debt | 630 | | | (59) | | | 3,802 | | | (3,196) | | | 4,432 | | | (3,255) | |
Preferred stock | — | | | — | | | 7,078 | | | (1,468) | | | 7,078 | | | (1,468) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 899 | | | $ | (64) | | | $ | 11,449 | | | $ | (4,709) | | | $ | 12,348 | | | $ | (4,773) | |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | 837 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 837 |
| | $ | (4 | ) |
Foreign debt | 170 |
| | (4 | ) | | 1,628 |
| | (163 | ) | | 1,798 |
| | (167 | ) |
Corporate debt | 2,273 |
| | (430 | ) | | 609 |
| | (141 | ) | | 2,882 |
| | (571 | ) |
Preferred stock | 191 |
| | (6 | ) | | 8,183 |
| | (520 | ) | | 8,374 |
| | (526 | ) |
Mortgage-backed securities | 234 |
| | (24 | ) | | 9 |
| | — |
| | 243 |
| | (24 | ) |
Common stock | 8,497 |
| | (2,241 | ) | | 1,934 |
| | (892 | ) | | 10,431 |
| | (3,133 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed income | 79 |
| | (1 | ) | | 608 |
| | (37 | ) | | 687 |
| | (38 | ) |
Total temporary impaired securities | $ | 12,281 |
| | $ | (2,710 | ) | | $ | 12,971 |
| | $ | (1,753 | ) | | $ | 25,252 |
| | $ | (4,463 | ) |
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | 834 |
| | $ | (10 | ) | | $ | — |
| | $ | — |
| | $ | 834 |
| | $ | (10 | ) |
Municipal bonds | 244 |
| | (5 | ) | | — |
| | — |
| | 244 |
| | (5 | ) |
Foreign debt | 2,654 |
| | (186 | ) | | 2,905 |
| | (490 | ) | | 5,559 |
| | (676 | ) |
Corporate debt | 6,977 |
| | (215 | ) | | 2,234 |
| | (919 | ) | | 9,211 |
| | (1,134 | ) |
Preferred stock | 3,420 |
| | (128 | ) | | 11,750 |
| | (842 | ) | | 15,170 |
| | (970 | ) |
Mortgage-backed securities | 55 |
| | (5 | ) | | 11 |
| | (1 | ) | | 66 |
| | (6 | ) |
Common stock | 2,795 |
| | (216 | ) | | 3,390 |
| | (1,634 | ) | | 6,185 |
| | (1,850 | ) |
Mutual funds: | | | | | | | | | | | |
Fixed income | 97 |
| | (7 | ) | | 644 |
| | (58 | ) | | 741 |
| | (65 | ) |
Total temporary impaired securities | $ | 17,076 |
| | $ | (772 | ) | | $ | 20,934 |
| | $ | (3,944 | ) | | $ | 38,010 |
| | $ | (4,716 | ) |
Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 wereare as follows (in thousands):
| | | For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
| Three months ended March 31, | |
| Three months ended March 31, | |
| Three months ended March 31, | |
| 2023 | |
| 2023 | |
| 2023 | |
Investment income | |
Investment income | |
Investment income | $ | 596 |
| | $ | 524 |
| | $ | 1,639 |
| | $ | 1,801 |
|
Realized gains | 131 |
| | — |
| | 525 |
| | 2,296 |
|
Realized gains | |
Realized gains | |
Realized losses | (716 | ) | | (2 | ) | | (4,090 | ) | | (1,314 | ) |
Realized losses | |
Realized losses | |
Unrealized losses, net | |
Unrealized losses, net | |
Unrealized losses, net | |
Expenses and taxes | (253 | ) | | (390 | ) | | (946 | ) | | (1,106 | ) |
Decrease (increase) in deferred preneed funeral receipts held in trust | 242 |
| | (132 | ) | | 2,872 |
| | (1,677 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Expenses and taxes | |
Expenses and taxes | |
Net change in deferred preneed funeral receipts held in trust | |
Net change in deferred preneed funeral receipts held in trust | |
Net change in deferred preneed funeral receipts held in trust | |
| $ | |
| $ | |
| $ | |
Purchases and sales of investments in the preneed funeral trusts for the three and nine months ended September 30, 2016 and 2017 wereare as follows (in thousands):
| | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | | | |
| 2023 | | 2024 | | | | | | | | |
Purchases | $ | (6,063) | | | $ | (4,003) | | | | | | | | | |
Sales | 2,943 | | | 15,118 | | | | | | | | | |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (1,486 | ) | | $ | (966 | ) | | $ | (19,917 | ) | | $ | (19,548 | ) |
Sales | $ | 6,336 |
| | $ | 23 |
| | $ | 19,005 |
| | $ | 13,266 |
|
Cemetery Perpetual Care Trust Investments4. PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years, with such interest income reflected as Preneed cemetery finance charges. In substantially all cases, we receive an initial down payment at the time the contract is signed. At September 30, 2017, our total financed preneed receivables were $39.9 million, of which $29.3 million and $10.6 million were for cemetery interment rights and for merchandise and services, respectively. These amounts are presentedCare trusts’ corpus on our consolidated balance sheetConsolidated Balance Sheet represents the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus are as $11.7 million within Accounts receivablefollows (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Cemetery perpetual care trust investments, at market value | $ | 85,331 | | | $ | 87,802 | |
Obligations (due from) due to trust | (980) | | | 198 | |
Care trusts’ corpus | $ | 84,351 | | | $ | 88,000 | |
The following table reflects the cost and $28.2 million within Preneed receivables and exclude unearned finance charges and allowance for contract cancellations. The unearned finance chargesmarket values associated with these receivables were $5.7 millionthe trust investments held in cemetery perpetual care trust funds at both DecemberMarch 31, 2016 and September 30, 2017.2024 (in thousands):
We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. 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% | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 17,744 | | | $ | — | | | $ | — | | | $ | 17,744 | |
Fixed income securities: | | | | | | | | | |
| | | | | | | | | |
Foreign debt | 2 | | 7,116 | | | 1,239 | | | (15) | | | 8,340 | |
Corporate debt | 2 | | 13,736 | | | 258 | | | (2,315) | | | 11,679 | |
Preferred stock | 2 | | 10,239 | | | 415 | | | (1,609) | | | 9,045 | |
| | | | | | | | | |
Common stock | 1 | | 29,301 | | | 2,135 | | | (4,563) | | | 26,873 | |
Limited partnership fund | | | 3,047 | | | 254 | | | — | | | 3,301 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 458 | | | 24 | | | (18) | | | 464 | |
Fixed income | 2 | | 11,167 | | | 78 | | | (1,952) | | | 9,293 | |
| | | | | | | | | |
Trust securities | | | $ | 92,808 | | | $ | 4,403 | | | $ | (10,472) | | | $ | 86,739 | |
Accrued investment income | | | $ | 1,063 | | | | | | | $ | 1,063 | |
Cemetery perpetual care investments | | | | | | | | | $ | 87,802 | |
Market value as a percentage of cost | | | | | | | | | 93.5% |
The estimated maturities of the receivables on contracts in which the revenue has been recognized and paymentsfixed income securities (excluding mutual funds) included above are 90 days past due or more, which was approximately 4.8% of the total receivables on recognized sales at September 30, 2017. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the nine months ended September 30, 2017, the change in the allowance for contract cancellations was as follows (in thousands):
| | | | | |
Due in one year or less | $ | — | |
Due in one to five years | 10,687 | |
Due in five to ten years | 2,905 | |
Thereafter | 15,472 | |
Total fixed income securities | $ | 29,064 | |
The following table reflects the cost and market values associated with the trust investments held in cemetery perpetual care trust funds at December 31, 2023 (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 6,688 | | | $ | — | | | $ | — | | | $ | 6,688 | |
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 7,101 | | | 1,177 | | | (18) | | | 8,260 | |
Corporate debt | 2 | | 13,491 | | | 334 | | | (3,367) | | | 10,458 | |
Preferred stock | 2 | | 10,723 | | | 415 | | | (1,435) | | | 9,703 | |
| | | | | | | | | |
Common stock | 1 | | 36,413 | | | 8,098 | | | (6,580) | | | 37,931 | |
Limited partnership fund | | | 3,042 | | | — | | | (2) | | | 3,040 | |
Mutual funds: | | | | | | | | | |
Equity | 1 | | 467 | | | 5 | | | (26) | | | 446 | |
Fixed income | 2 | | 10,326 | | | 14 | | | (2,382) | | | 7,958 | |
Trust securities | | | $ | 88,251 | | | $ | 10,043 | | | $ | (13,810) | | | $ | 84,484 | |
Accrued investment income | | | $ | 847 | | | | | | | $ | 847 | |
Cemetery perpetual care investments | | | | | | | | | $ | 85,331 | |
Market value as a percentage of cost | | | | | | | | | 95.7% |
The following table summarizes our fixed income securities (excluding mutual funds) within our cemetery perpetual care trust investment in an unrealized loss position at March 31, 2024, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2024 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | — | | | $ | — | | | $ | 622 | | | $ | (15) | | | $ | 622 | | | $ | (15) | |
Corporate debt | 578 | | | (13) | | | 4,588 | | | (2,302) | | | 5,166 | | | (2,315) | |
Preferred stock | 757 | | | (4) | | | 7,151 | | | (1,605) | | | 7,908 | | | (1,609) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 1,335 | | | $ | (17) | | | $ | 12,361 | | | $ | (3,922) | | | $ | 13,696 | | | $ | (3,939) | |
|
| | | |
| September 30, 2017 |
Beginning balance | $ | 1,861 |
|
Write-offs and cancellations | (1,004 | ) |
Provision | 1,093 |
|
Ending balance | $ | 1,950 |
|
The following table summarizes our fixed income securities (excluding mutual funds) within our perpetual care trust investment in an unrealized loss position at December 31, 2023, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):The aging | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2023 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 440 | | | $ | (8) | | | $ | 178 | | | $ | (10) | | | $ | 618 | | | $ | (18) | |
Corporate debt | 567 | | | (53) | | | 3,879 | | | (3,314) | | | 4,446 | | | (3,367) | |
Preferred stock | — | | | — | | | 7,301 | | | (1,435) | | | 7,301 | | | (1,435) | |
| | | | | | | | | | | |
Total fixed income securities with an unrealized loss | $ | 1,007 | | | $ | (61) | | | $ | 11,358 | | | $ | (4,759) | | | $ | 12,365 | | | $ | (4,820) | |
Cemetery perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of past due financing receivables as of September 30, 2017 wasOperations are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Realized gains | $ | 160 | | | $ | 1,306 | | | | | |
Realized losses | (177) | | | (426) | | | | | |
Unrealized losses, net | (9,073) | | | (6,069) | | | | | |
Net change in care trusts’ corpus | 9,090 | | | 5,189 | | | | | |
Total | $ | — | | | $ | — | | | | | |
Cemetery perpetual care trust investment security transactions recorded in Other revenue are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Investment income | $ | 3,197 | | | $ | 3,129 | | | | | |
Realized losses, net | (456) | | | (374) | | | | | |
Total | $ | 2,741 | | | $ | 2,755 | | | | | |
Purchases and sales of investments in the cemetery perpetual care trusts are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Purchases | $ | (4,401) | | | $ | (3,649) | | | | | |
Sales | 2,210 | | | 14,661 | | | | | |
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total Financing Receivables |
Recognized revenue | $ | 866 |
| | $ | 393 |
| | $ | 190 |
| | $ | 1,205 |
| | $ | 2,654 |
| | $ | 26,517 |
| | $ | 29,171 |
|
Deferred revenue | 272 |
| | 145 |
| | 71 |
| | 387 |
| | 875 |
| | 9,900 |
| | 10,775 |
|
Total contracts | $ | 1,138 |
| | $ | 538 |
| | $ | 261 |
| | $ | 1,592 |
| | $ | 3,529 |
| | $ | 36,417 |
| | $ | 39,946 |
|
5. 9.RECEIVABLES FROM PRENEED FUNERAL TRUSTS
TheOur receivables from preneed funeral trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest (less than 50%) in the trust assets. We account for these investments at cost. As of December 31, 2016 and September 30, 2017, receivablesReceivables from preneed funeral trusts wereare as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed trust funds, at cost | $ | 14,658 |
| | $ | 15,780 |
|
Less: allowance for contract cancellation | (440 | ) | | (474 | ) |
Receivables from preneed trusts, net | $ | 14,218 |
| | $ | 15,306 |
|
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Preneed funeral trust funds, at cost | $ | 22,196 | | | $ | 22,301 | |
Less: allowance for contract cancellation | (666) | | | (669) | |
Receivables from preneed funeral trusts, net | $ | 21,530 | | | $ | 21,632 | |
The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the precedingunderlying preneed funeral contracts at September 30, 2017 and December 31, 2016.2023 and March 31, 2024. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes the unrealized gains and losses on trust assets.
The composition of the preneed funeral trust funds at September 30, 2017 wasMarch 31, 2024 is as follows (in thousands):
| | | | | | | | | | | |
| Historical Cost Basis | | Fair Value |
Cash and cash equivalents | $ | 6,568 | | | $ | 6,568 | |
Fixed income investments | 12,665 | | | 12,665 | |
Mutual funds and common stocks | 3,064 | | | 2,815 | |
Annuities | 4 | | | 4 | |
Total | $ | 22,301 | | | $ | 22,052 | |
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
As of September 30, 2017 | | | |
Cash and cash equivalents | $ | 4,054 |
| | $ | 4,054 |
|
Fixed income investments | 9,218 |
| | 9,218 |
|
Mutual funds and common stocks | 2,492 |
| | 2,516 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 15,780 |
| | $ | 15,804 |
|
The composition of the preneed funeral trust funds at December 31, 2016 was2023 is as follows (in thousands):
| | | | | | | | | | | |
| Historical Cost Basis | | Fair Value |
Cash and cash equivalents | $ | 6,547 | | | $ | 6,547 | |
Fixed income investments | 12,732 | | | 12,732 | |
Mutual funds and common stocks | 2,913 | | | 2,695 | |
Annuities | 4 | | | 4 | |
Total | $ | 22,196 | | | $ | 21,978 | |
10.INTANGIBLE AND OTHER NON-CURRENT ASSETS
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
As of December 31, 2016 | | | |
Cash and cash equivalents | $ | 3,378 |
| | $ | 3,378 |
|
Fixed income investments | 8,809 |
| | 8,809 |
|
Mutual funds and common stocks | 2,455 |
| | 2,463 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 14,658 |
| | $ | 14,666 |
|
6.CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets represents the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2016Intangible and September 30, 2017 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Trust assets, at market value | $ | 46,889 |
| | $ | 48,679 |
|
Obligations due from trust | (599 | ) | | (493 | ) |
Care trusts’ corpus | $ | 46,290 |
| | $ | 48,186 |
|
We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in Revenues: Cemetery. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At September 30, 2017, none of our cemetery perpetual care trust investments were underfunded.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stock, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy
classifications quarterly. There were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2017. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at September 30, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 2,573 |
| | $ | — |
| | $ | — |
| | $ | 2,573 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 3,568 |
| | 211 |
| | (117 | ) | | 3,662 |
|
Corporate debt | 2 | | 13,194 |
| | 768 |
| | (368 | ) | | 13,594 |
|
Preferred stock | 2 | | 11,464 |
| | 260 |
| | (368 | ) | | 11,356 |
|
Mortgage-backed securities | 2 | | 661 |
| | 147 |
| | (14 | ) | | 794 |
|
Common stock | 1 | | 15,263 |
| | 1,985 |
| | (2,021 | ) | | 15,227 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 909 |
| | 64 |
| | — |
| | 973 |
|
Trust securities | | | $ | 47,632 |
| | $ | 3,435 |
| | $ | (2,888 | ) | | $ | 48,179 |
|
Accrued investment income | | | $ | 500 |
| | | | | | $ | 500 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 48,679 |
|
Market value as a percentage of cost | | | | | | | | | 101.1 | % |
The estimated maturities of the fixed income securities included abovenon-current assets are as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Tradenames | $ | 28,862 | | | $ | 28,713 | |
Capitalized commissions on preneed contracts, net of accumulated amortization of $3,788 and $3,980, respectively | 4,678 | | | 4,715 | |
Prepaid agreements not-to-compete, net of accumulated amortization of $3,158 and $3,276, respectively | 1,335 | | | 1,269 | |
Internal-use software, net of accumulated amortization of $444 and $528, respectively | 2,422 | | | 2,835 | |
Other | 380 | | | 340 | |
Intangible and other non-current assets, net | $ | 37,677 | | | $ | 37,872 | |
|
| | | |
Due in one year or less | $ | 9 |
|
Due in one to five years | 1,770 |
|
Due in five to ten years | 4,004 |
|
Thereafter | 23,622 |
|
| $ | 29,405 |
|
TradenamesThe following table reflects the costOur tradenames have indefinite lives and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2016 (in thousands):therefore are not amortized.
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 6,522 |
| | $ | — |
| | $ | — |
| | $ | 6,522 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 365 |
| | 13 |
| | (3 | ) | | 375 |
|
Foreign debt | 2 | | 5,100 |
| | 99 |
| | (435 | ) | | 4,764 |
|
Corporate debt | 2 | | 13,715 |
| | 966 |
| | (821 | ) | | 13,860 |
|
Preferred stock | 2 | | 11,323 |
| | 5 |
| | (664 | ) | | 10,664 |
|
Mortgage-backed securities | 2 | | 569 |
| | 223 |
| | (3 | ) | | 789 |
|
Common stock | 1 | | 8,259 |
| | 1,382 |
| | (1,146 | ) | | 8,495 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 855 |
| | 76 |
| | — |
| | 931 |
|
Trust securities | | | $ | 46,708 |
| | $ | 2,764 |
| | $ | (3,072 | ) | | $ | 46,400 |
|
Accrued investment income | | | $ | 489 |
| | | | | | $ | 489 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 46,889 |
|
Market value as a percentage of cost | | | | | | | | | 99.3 | % |
We determine whether or not the assets in the cemetery perpetual care 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. If a loss is considered to be other-
than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus. InDuring the three months ended September 30, 2016,March 31, 2024, two of the funeral homes that we recordedsold had a $0.1carrying value of tradenames of $0.2 million, impairment for other-than-temporary declineswhich was included in the fair value related to unrealized lossesloss on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.5 million impairmentsale and no impairments have been recorded in the nine months ended September 30, 2017. There is no impactNet loss on earnings until such time that the loss is realized in the trusts, allocated to preneed contractsdivestitures, disposals and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2017, we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended September 30, 2017 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 93 |
| | $ | (2 | ) | | $ | 1,138 |
| | $ | (115 | ) | | $ | 1,231 |
| | $ | (117 | ) |
Corporate debt | 1,435 |
| | (276 | ) | | 417 |
| | (92 | ) | | 1,852 |
| | (368 | ) |
Preferred stock | 681 |
| | (4 | ) | | 5,475 |
| | (364 | ) | | 6,156 |
| | (368 | ) |
Mortgage-backed securities | 121 |
| | (14 | ) | | — |
| | — |
| | 121 |
| | (14 | ) |
Common stock | 5,393 |
| | (1,466 | ) | | 1,221 |
| | (555 | ) | | 6,614 |
| | (2,021 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed Income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporary impaired securities | $ | 7,723 |
| | $ | (1,762 | ) | | $ | 8,251 |
| | $ | (1,126 | ) | | $ | 15,974 |
| | $ | (2,888 | ) |
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended December 31, 2016 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | $ | 137 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 137 |
| | $ | (3 | ) |
Foreign debt | 1,619 |
| | (120 | ) | | 1,961 |
| | (315 | ) | | 3,580 |
| | (435 | ) |
Corporate debt | 4,679 |
| | (152 | ) | | 1,439 |
| | (669 | ) | | 6,118 |
| | (821 | ) |
Preferred stock | 2,038 |
| | (77 | ) | | 8,329 |
| | (587 | ) | | 10,367 |
| | (664 | ) |
Mortgage-backed securities | 31 |
| | (3 | ) | | — |
| | — |
| | 31 |
| | (3 | ) |
Common stock | 1,563 |
| | (121 | ) | | 2,004 |
| | (1,025 | ) | | 3,567 |
| | (1,146 | ) |
Total temporary impaired securities | $ | 10,067 |
| | $ | (476 | ) | | $ | 13,733 |
| | $ | (2,596 | ) | | $ | 23,800 |
| | $ | (3,072 | ) |
Perpetual care trust investment security transactions recorded in Other, net impairment charges on our Consolidated Statements of OperationsOperations.
Capitalized Commissions
We capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of obtaining a contract with a customer. Our capitalized commissions on preneed contracts are amortized on a straight-line basis over the average maturity period of ten years for our preneed funeral trust contracts and eight years for our preneed cemetery merchandise and services contracts.
Amortization expense was $0.2 million for both the three and nine months ended September 30, 2016March 31, 2023 and 2017 were as follows (in thousands):2024.
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Realized gains | $ | 44 |
| | $ | — |
| | $ | 156 |
| | $ | 925 |
|
Realized losses | (261 | ) | | — |
| | (1,943 | ) | | (630 | ) |
Decrease (increase) in care trusts’ corpus | 217 |
| | — |
| | 1,787 |
| | (295 | ) |
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Perpetual care trust investment security transactions recorded in Revenues: Cemetery for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Investment income | $ | 1,523 |
| | $ | 1,539 |
| | $ | 4,503 |
| | $ | 4,831 |
|
Realized gain, net | 14 |
| | (283 | ) | | (444 | ) | | (891 | ) |
Total | $ | 1,537 |
| | $ | 1,256 |
| | $ | 4,059 |
| | $ | 3,940 |
|
Purchases and sales of investments in the perpetual care trusts for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (936 | ) | | $ | (556 | ) | | $ | (12,888 | ) | | $ | (12,430 | ) |
Sales | $ | 3,832 |
| | $ | — |
| | $ | 11,702 |
| | $ | 8,390 |
|
7. FAIR VALUE MEASUREMENTS
We evaluate our financial assets and liabilities for those financial assets and liabilities that meet the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our long-term debt and Credit Facility (as defined in Note 9) are classified within Level 2 of the Fair Value Measurement hierarchy. The fair values of our long-term debt and Credit Facility approximate the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. The fair value of the convertible subordinated notes due 2021 was approximately $179.9 million at September 30, 2017 based on the last traded or broker quoted price. We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investment categories on our Consolidated Balance Sheets as having met the criteria for fair value measurement. As of September 30, 2017, we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.
We account for our investments as available-for-sale and measure them at fair value under the standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities. See Notes 3 and 6 to our Consolidated Financial Statements included herein for the fair value hierarchy levels of our trust investments.
8. INTANGIBLE AND OTHER NON-CURRENT ASSETS
Intangibles and other non-current assets at December 31, 2016 and September 30, 2017 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Prepaid agreements not-to-compete, net of accumulated amortization of $5,501 and $5,908, respectively | $ | 3,244 |
| | $ | 2,930 |
|
Tradenames | 11,663 |
| | 11,663 |
|
Other | 50 |
| | 23 |
|
Intangible and other non-current assets | $ | 14,957 |
| | $ | 14,616 |
|
Prepaid agreements not-to-compete are amortized over the term of the respective agreements, generally ranging generally from one to ten years. Amortization expense was approximately $106,000 and $135,000$0.1 million for both the three months ended September 30, 2016March 31, 2023 and 2017, respectively,2024.
Internal-use Software
Internal-use software is amortized on a straight-line basis typically over three to five years. Amortization expense was $0.1 million for both the three months ended March 31, 2023 and $308,0002024.
The aggregate amortization expense for our capitalized commissions, prepaid agreements and $407,000internal-use software as of March 31, 2024 is as follows (in thousands):
| | | | | | | | | | | | | | | | | |
| Capitalized Commissions | | Prepaid Agreements | | Internal-use Software |
Years ending December 31, | | | | | |
Remainder of 2024 | $ | 645 | | | $ | 345 | | | $ | 297 | |
2025 | 803 | | | 390 | | | 606 | |
2026 | 737 | | | 262 | | | 597 | |
2027 | 653 | | | 142 | | | 591 | |
2028 | 582 | | | 78 | | | 450 | |
Thereafter | 1,295 | | | 52 | | | 294 | |
Total amortization expense | $ | 4,715 | | | $ | 1,269 | | | $ | 2,835 | |
11.CREDIT FACILITY AND ACQUISITION DEBT
At March 31, 2024, 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, and the maintenance of property and insurance, among 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, pay dividends and make other restricted payments, and certain financial maintenance covenants. At March 31, 2024, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 5.50 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 nine months ended September 30, 2016Company and 2017, respectively. its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility at March 31, 2024.
Our tradenames have indefinite livesCredit Facility and therefore are not amortized.
9.LONG-TERM DEBT
Our long-termacquisition debt consisted of the following at December 31, 2016 and September 30, 2017(in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Credit Facility | $ | 179,100 | | | $ | 154,100 | |
Debt issuance costs, net of accumulated amortization of $2,478 and $2,616, respectively | (1,306) | | | (1,168) | |
Total Credit Facility | $ | 177,794 | | | $ | 152,932 | |
| | | |
Acquisition debt | $ | 5,998 | | | $ | 5,979 | |
Less: current portion | (537) | | | (599) | |
Total acquisition debt, net of current portion | $ | 5,461 | | | $ | 5,380 | |
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Revolving credit facility, secured, floating rate | $ | 67,700 |
| | $ | 75,500 |
|
Term loan, secured, floating rate | 138,750 |
| | 130,313 |
|
Acquisition debt | 12,245 |
| | 11,348 |
|
Debt issuance costs, net of accumulated amortization of $4,138 and $4,366, respectively | (1,270 | ) | | (1,043 | ) |
Less: current portion | (13,021 | ) | | (16,126 | ) |
Total long-term debt | $ | 204,404 |
| | $ | 199,992 |
|
As of September 30, 2017, we had a $300 million secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.
As of September 30, 2017,At March 31, 2024, we had outstanding borrowings under the revolving credit facilityCredit Facility of $75.5 million and approximately $130.3 million was outstanding on the term loan.$154.1 million. We havealso had one letter of credit issued on November 30, 2016 and outstandingfor $2.6 million under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% andFacility. The letter of credit will expire on November 27, 2017. The letter of credit25, 2024 and is expected to automatically renewsrenew annually and secures our obligations under our various self-insured policies. Outstanding borrowingsAt March 31, 2024, we had $93.3 million of availability under the Credit Facility bearFacility.
The interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of September 30, 2017, the prime rate margin was equivalent to 1.125%expense and the LIBOR margin was 2.125%. The weighted average interest rate on the Credit Facility for the three and nine months ended September 30, 2017 was 3.4% and 3.1%, respectively.
We were in compliance with the covenants contained in the Credit Agreement as of September 30, 2017. The Credit Agreement contains key ratios that we must comply with, including a requirement to maintain a leverage ratio of no more than 3.50 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of September 30, 2017, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 1.89 to 1.00.
Amortizationamortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Credit Facility interest expense | $ | 3,811 | | | $ | 3,916 | | | | | |
Credit Facility amortization of debt issuance costs | 138 | | | 138 | | | | | |
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 March 31, 2024, the prime rate margin was approximately $0.1 millionequivalent to 2.375% and the BSBY rate margin was 3.375%. The weighted average interest rate on our Credit Facility was 7.9% and 8.9% for both the three months ended September 30, 2016March 31, 2023 and 2017 and $0.3 million and $0.2 million for the nine months ended September 30, 2016 and 2017,2024, respectively. The unamortized debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers.
10.CONVERTIBLE SUBORDINATED NOTES
On March 19, 2014, we issued $143.75 million aggregate principal amount A majority of 2.75% convertible subordinatedthe deferred purchase price and notes due March 15, 2021 (the “Convertible Notes”)bear no interest and are discounted at imputed interest rates ranging from 6.5% to 7.3%. The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes beganOriginal maturities typically range from five to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.twenty years.
The carrying values of the liability and equity components of the Convertible Notes at December 31, 2016 and September 30, 2017 are reflected inimputed interest expense related to our Consolidated Balance Sheetsacquisition debt is as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Acquisition debt imputed interest expense | $ | 71 | | | $ | 104 | | | | | |
| | | | | | | |
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Long-term liabilities: | | | |
Principal amount | $ | 143,750 |
| | $ | 143,750 |
|
Unamortized discount of liability component | (21,887 | ) | | (18,687 | ) |
Convertible Notes issuance costs, net of accumulated amortization of $1,359 and $1,746, respectively | $ | (2,268 | ) | | $ | (1,881 | ) |
Carrying value of the liability component | $ | 119,596 |
| | $ | 123,182 |
|
| | | |
Equity component carrying value | $ | 17,973 |
| | $ | 17,973 |
|
12. SENIOR NOTESThe carrying value of our 4.25% senior notes due 2029 (the “Senior Notes”) is reflected on our Consolidated Balance Sheet as follows (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Long-term liabilities: | | | |
Principal amount | $ | 400,000 | | | $ | 400,000 | |
| | | |
Debt discount, net of accumulated amortization of $1,309 and $1,441, respectively | (3,191) | | | (3,059) | |
Debt issuance costs, net of accumulated amortization of $373 and $411, respectively | (904) | | | (866) | |
Carrying value of the Senior Notes | $ | 395,905 | | | $ | 396,075 | |
At March 31, 2024, the fair value of the ConvertibleSenior Notes, which are Level 2 measurements, was approximately $179.9 million$355.2 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 September 30, 2017.4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021.
Interest expenseThe Indenture contains restrictive covenants limiting our ability and the ability of 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 Convertible Notes included contractual couponability 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 interest expense and amortization of approximately $1.0 million for both the three months ended September 30, 2016debt discount and 2017 and $3.0 million for both the nine months ended September 30, 2016 and 2017. Accretion of the discount on the Convertible Notes was $1.0 million and $1.1 million for the three months ended September 30, 2016 and 2017, respectively, and $2.9 million and $3.2 million for the nine months ended September 30, 2016 and 2017, respectively. Amortization of debt issuance costs related to our ConvertibleSenior Notes was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 and $0.4 million for both the nine months ended September 30, 2016 and 2017.are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Senior Notes interest expense | $ | 4,250 | | | $ | 4,250 | | | | | |
Senior Notes amortization of debt discount | 127 | | | 132 | | | | | |
| | | | | | | |
Senior Notes amortization of debt issuance costs | 36 | | | 38 | | | | | |
The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at September 30, 2017, is 44.5392 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.45 per share of common stock.
The unamortizeddebt discount and the unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 62 months of the ConvertibleSenior Notes. The effective interest rate on the unamortized debt discount and the
unamortized debt issuance costs for both the three and nine months ended September 30, 2016 and 2017 was 6.75% and 2.75%, respectively.
11.STOCKHOLDERS’ EQUITY
Stock-Based Compensation Plans
During the nine months ended September 30, 2017, we had two stock benefits plans in effect under which restricted stock, stock options and performance awards have been granted or remain outstanding: the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”). The Amended and Restated 2006 Plan was terminated upon the approval of the 2017 Plan at the annual shareholders meeting on May 17, 2017. The termination of the Amended and Restated 2006 Plan does not affect the awards previously issued and outstanding.
All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). The 2017 Plan providesSenior Notes for grants of options as non-qualified options or incentive stock options, restricted stock and performance awards. The 2017 Plan expires on May 17, 2027.
The status of each of the plans at September 30, 2017 is as follows (shares in thousands):
|
| | | | | | | | | | | |
| Shares Reserved | | Shares Available to Issue | | Options Outstanding | | Performance Awards Outstanding (2) |
Amended and Restated 2006 Plan | — |
| | — |
| | 1,929 |
| | 319 |
|
2017 Plan | 1,571 |
| (1) | 1,541 |
| | 16 |
| | 9 |
|
Total | 1,571 |
| | 1,541 |
| | 1,945 |
| | 328 |
|
|
| | | | |
| | | | |
(1) | Amount includes approximately 17,500 shares granted from the Amended and Restated 2006 Plan that were returned to the Company due to cancellations. |
(2) | Performance Awards are reserved at 200% of shares granted which is equal to the maximum payout in shares. |
Restricted Stock
We did not issue any restricted stock duringboth the three months ended September 30, 2017. During the second quarterMarch 31, 2023 and 2024 was 4.42% and 4.30%, respectively.
13.LEASES
Our lease obligations consist of 2017,operating and finance leases related to real estate, vehicles and equipment. The components of lease cost are as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | | |
| | | Three months ended March 31, | | |
| Income Statement Classification | | 2023 | | 2024 | | | | |
Operating lease cost | Facilities and grounds expense(1) | | $ | 875 | | | $ | 978 | | | | | |
Short-term lease cost | Facilities and grounds expense(1) | | 94 | | | 18 | | | | | |
Variable lease cost | Facilities and grounds expense(1) | | 58 | | | 104 | | | | | |
| | | | | | | | | |
Finance lease cost: | | | | | | | | | |
Depreciation of leased assets | Depreciation and amortization(2) | | $ | 108 | | | $ | 126 | | | | | |
Interest on lease liabilities | Interest expense | | 105 | | | 125 | | | | | |
Total finance lease cost | | | 213 | | | 251 | | | | | |
Total lease cost | | | $ | 1,240 | | | $ | 1,351 | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Facilities and grounds expense is included within Cost of service and General, administrative and other on our Consolidated Statements of Operations. |
(2) | Depreciation and amortization expense is included within Field depreciation expense and General, administrative and other on our Consolidated Statements of Operations. |
Supplemental cash flow information related to our leases is as follows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2024 |
Cash paid for operating leases included in operating activities | $ | 951 | | | $ | 1,071 | |
Cash paid for finance leases included in financing activities | 223 | | | 277 | |
Right-of-use assets obtained in exchange for new leases is as follows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2024 |
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 908 | | | $ | 852 | |
Right-of-use assets obtained in exchange for new finance lease liabilities | — | | | — | |
Supplemental balance sheet information related to leases is as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Lease Type | | Balance Sheet Classification | | December 31, 2023 | | March 31, 2024 |
Operating lease right-of-use assets | | Operating lease right-of-use assets | | $ | 16,295 | | | $ | 16,512 | |
| | | | | | |
Finance lease right-of-use assets | | Property, plant and equipment, net | | $ | 8,249 | | | $ | 7,870 | |
Accumulated depreciation | | Property, plant and equipment, net | | (3,059) | | | (3,162) | |
Finance lease right-of-use assets, net | | | | $ | 5,190 | | | $ | 4,708 | |
| | | | | | |
Operating lease current liabilities | | Current portion of operating lease obligations | | $ | 2,713 | | | $ | 2,840 | |
Finance lease current liabilities | | Current portion of finance lease obligations | | 592 | | | 514 | |
Total current lease liabilities | | | | $ | 3,305 | | | $ | 3,354 | |
| | | | | | |
Operating lease non-current liabilities | | Obligations under operating leases, net of current portion | | $ | 15,797 | | | $ | 15,802 | |
Finance lease non-current liabilities | | Obligations under finance leases, net of current portion | | 5,831 | | | 5,434 | |
Total non-current lease liabilities | | | | $ | 21,628 | | | $ | 21,236 | |
| | | | | | |
Total lease liabilities | | | | $ | 24,933 | | | $ | 24,590 | |
The average lease terms and discount rates at March 31, 2024 are as follows:
| | | | | | | | | | | |
| Weighted-average remaining lease term (years) | | Weighted-average discount rate |
Operating leases | 7.6 | | 8.1 | % |
Finance leases | 10.4 | | 8.3 | % |
The aggregate future lease payments for non-cancelable operating and finance leases at March 31, 2024 are as follows (in thousands):
| | | | | | | | | | | |
| Operating | | Finance |
Lease payments due: | | | |
Remainder of 2024 | $ | 3,210 | | | $ | 774 | |
2025 | 3,960 | | | 964 | |
2026 | 3,824 | | | 974 | |
2027 | 3,583 | | | 974 | |
2028 | 3,314 | | | 723 | |
Thereafter | 6,854 | | | 4,512 | |
Total lease payments | 24,745 | | | 8,921 | |
Less: Interest | (6,103) | | | (2,973) | |
Present value of lease liabilities | $ | 18,642 | | | $ | 5,948 | |
At March 31, 2024, we issued 5,000had no significant operating or finance leases that had not yet commenced.
14.STOCKHOLDERS’ EQUITY
Restricted Stock
Restricted stock activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | | | | | |
Granted(1) | 142,020 | | $ | 4,634 | | | 156,630 | | $ | 3,834 | | | | | | | |
Returned for payroll taxes | 1,434 | | $ | 49 | | | 16,315 | | $ | 418 | | | | | | | |
Cancelled | 2,400 | | $ | 79 | | | 26,240 | | $ | 841 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Restricted stock granted during the three months ended March 31 2023 and 2024 vests over a three-year period, if the employee has remained continuously employed by us during the vesting period, at a weighted average stock price of $32.63 and $24.48, respectively. |
We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for restricted stock awards of $0.2 million and $0.5 million, for the three months ended March 31, 2023 and 2024, respectively.
Stock Options
Stock option grants to a new employee of the leadership team that vest over a five-year period with an aggregate grant date market value of approximately $0.1 million. During the first quarter of 2017, we issued a total of 22,250 restricted stock grants thatand cancellations are as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | | | | | |
Granted(1) | 214,191 | | $ | 2,506 | | | 370,590 | | $ | 3,830 | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | |
Cancelled | 92,440 | | $ | 1,231 | | | 294,728 | | $ | 3,757 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Stock options granted during the three months ended March 31, 2023 and 2024 had a weighted average price of $32.69 and $24.48, respectively. The fair value of these options was calculated using the Black-Scholes option pricing model. The options granted in 2023 and 2024 vest over a three-year period with an aggregate grant date market value of approximately $0.6 million.During the three months ended September 30, 2016 and 2017, we recorded a benefit of $21,000 and $174,000 of pre-tax compensation expense, respectively, related to the vesting of restricted stock awards, which is included in general, administrative and other expenses. The benefit was primarily related to the cancellation of 50,000 unvested restricted stock for a former executive. During the nine months ended September 30, 2016 and 2017, we recorded pre-tax compensation expense of approximately $0.5 million for both periods.
As of September 30, 2017, we had approximately $1.3 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.7 years.
Stock Options
As of September 30, 2017, there were 1,945,656 stock options outstanding and 708,379 stock options which remain unvested. We did not grant any options during the three months ended September 30, 2017. During the second quarter of 2017, we granted 16,250 options to a new employee of the leadership team at an exercise price of $26.89. These options will vest in one-fifth increments over a five-year period and have a ten-year term. These options will vest if the employee has remained continuously employed by us through the vesting period.
|
| |
| |
The fair value of the options granted during the second quarter of 2017 was approximately $0.1 million. During the first quarter of 2017, we granted 445,450 options to our leadership team and certain key employees at a weighted average exercise price of $26.54. These options will vest in one-fifth increments over a five-year period and have a ten-year term. The fair value of the total options granted during the first quarter of 2017 was approximately $3.2 million.
During the three months ended September 30, 2016 and 2017, weMarch 31, 2024 was estimated using the Black-Scholes option pricing model with the following assumptions:
| | | | | | | | | | |
Grant Date | | | | February 21, 2024 |
Expected holding period (years) | | | | 6.00 |
Awards granted | | | | 370,590 |
Dividend yield | | | | 1.79% |
Expected volatility | | | | 43.59% |
Risk-free interest rate | | | | 4.31% |
Black-Scholes value | | | | $10.34 |
Additional stock option activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
| Shares | Cash | | Shares | Cash | | | | | | |
Exercised(1) | 12,000 | | N/A | | — | | N/A | | | | | | |
Returned for option price(2) | 10,145 | | $ | — | | | — | | $ | — | | | | | | | |
Returned for payroll taxes(3) | 729 | | $ | 21 | | | — | | $ | — | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Stock options exercised during the three months ended March 31, 2023 had a weighted average exercise price of $25.43 with an aggregate intrinsic value of $0.1 million. |
(2) | Represents shares withheld/cash received for the payment of the option price. |
(3) | Represents shares withheld/cash paid for the payment of payroll taxes. |
We recorded approximately $0.2 million and $0.3 million, respectively, of pre-tax stock-based compensation expense, which is included in General, administrative and other expenses, for stock options. During the nine months ended September 30, 2016 and 2017, we recorded approximately $1.4options of $0.7 million and $1.2$0.2 million, respectively, of pre-tax compensation expense for stock options.
Performance Awards
We did not grant any performance awards during the three months ended September 30, 2017. During the second quarter of 2017, we granted 4,500 performance awards to a new employee of the leadership team, payable in shares. The fair value of these performance awards granted during the second quarter of 2017 was approximately $0.1 million. These awards will vest (if at all) on June 30, 2022, provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Earnings Before Interest Tax Depreciation and Amortization) and Adjusted Consolidated EBITDA Margin performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents 50% of the award and the Adjusted Consolidated EBITDA Margin performance represents 50% of the award. During the first quarter of 2017, we granted 101,040 performance awards to our leadership team and certain key employees, payable in shares. The fair value of these performance awards granted during the first quarter of 2017 was approximately $2.7 million. We recorded pre-tax compensation expense for performance awards totaling $46,000 and $208,000 for the three months ended September 30, 2016March 31, 2023 and 2017, respectively, and $154,000 and $465,000 for2024, respectively.
Performance Awards
Performance award activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | | | | | |
| | | | | | | | | | | |
Cancelled | 40,804 | | $ | 1,119 | | | 80,276 | | $ | 871 | | | | | | | |
For the ninethree months ended September 30, 2016March 31, 2023 and 2017, respectively.2024, we recorded stock-based compensation expense of $0.1 million and stock-based compensation benefit of $0.4 million, respectively, for performance awards, which is included in General, administrative and other expenses.
Employee Stock Purchase Plan
During the third quarter of 2017, employees purchased a total of 11,525 shares of common stock through our employee stock purchase plan (“ESPP”) at a weighted average price of $21.76 per share. We recorded pre-tax stock-based compensation expense for the ESPP totaling approximately $53,000 and $60,000 for the three months ended September 30, 2016 and 2017, respectively, and $197,000 and $204,000 for both the nine months ended September 30, 2016 and 2017.activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
| Shares | Price | | Shares | Price | | | | | | |
ESPP | 21,656 | | $ | 24.28 | | | 16,296 | | $ | 21.26 | | | | | | | |
The fair value of the optionright (option) to purchase shares under the ESPP is estimated onat the date of grant (January 1 of each year) associatedpurchase with the four quarterly purchase dates using the following assumptions:
| | | | | |
| 2024 |
Dividend yield | | 1.84% |
Expected volatility | 201741.15% |
Dividend yield | 0.82 | % |
Expected volatility | 18.82 | % |
Risk-free interest rate | 0.53%5.46%, 0.65%5.24%, 0.77%5.02%, 0.89% | 4.80% |
Expected life (years) | 0.25, 0.50, 0.75, 1.00 |
|
Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of the purchase. The expected life of the ESPP grants represents the calendar quarters from the beginning of the year to the purchase date (end of each quarter).
Director Compensation
We recorded pre-taxstock-based compensation expense, related to director compensation, which is included in general,General, administrative and other expenses and Regional and unallocated funeral and cemetery costs, for the ESPP totaling $90,000$0.3 million and $0.2 million for both the three months ended September 30, 2016March 31, 2023 and 2017, respectively,2024, respectively.
Common Stock
Former Employee
Common stock activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | | | | | |
Granted(1) | 30,000 | | $ | 826 | | | — | | $ | — | | | | | | | |
Returned for payroll taxes | 1,001 | | $ | 28 | | | — | | $ | — | | | | | | | |
| | | | | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | During the three months ended March 31, 2023, we issued 30,000 shares of common stock to a former executive at a stock price of $27.54, in accordance with his Separation and Release agreement pertaining to his resignation from his position as the Company’s Executive Vice President, Chief Financial Officer & Treasurer effective January 2, 2023. |
We recorded stock-based compensation expense, which is included in General, administrative and $302,000 and $271,000other expenses, for the nine months ended September 30, 2016 and 2017, respectively.
Share Repurchase
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18awards of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During$0.8 million, for the three months ended September 30, 2017, we repurchased 574,054 sharesMarch 31, 2023.
Good To Great Incentive Program
Common stock issued to certain employees under this incentive program is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | | | | | |
Granted(1) | 8,444 | | $ | 276 | | | 31,470 | | $ | 790 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Common stock granted during the three months ended March 31, 2023 and 2024 had a grant date stock price of $32.69 and $25.08, respectively. |
Non-Employee Director and Board Advisor Compensation
Non-Employee Director and Board Advisor common stock activity is as follows (in thousands, except shares):
| | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
| Shares | Fair Value | | Shares | Fair Value | | | | | | |
Board of Directors(1) | 3,518 | | $ | 107 | | | 3,999 | | $ | 108 | | | | | | | |
Advisor to the Board(1) | 163 | | $ | 5 | | | 184 | | $ | 5 | | | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Common stock granted during the three months ended March 31, 2023 and 2024 had a weighted average price of $30.52 and $27.04, respectively. |
We recorded compensation expense, which is included in General, administrative and other expenses, related to annual retainers, including the value of stock granted to non-employee Directors and an advisor to our Board, of $0.2 million and $0.5 million for a total cost of $14.0 million at an average cost of $24.35 per share pursuant to this share repurchase program. the three months ended March 31, 2023 and 2024, respectively.
Share Repurchase
We did not repurchase any shares of common stock in the first or second quarter of 2017. 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.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. See Note 15 to our Consolidated Financial Statements included herein for additional information on our related party transactions.
Cash Dividends
On July 26, 2017, our Board declared a dividend of $0.05 per share, totaling approximately $0.8 million, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. Forduring the three months ended September 30, 2016, we paid a quarterly dividend of $0.050March 31, 2023 and 2024. At March 31, 2024, our share repurchase program had $48.9 million authorized for repurchases.
Cash Dividends
Our Board declared the following dividends payable on the dates below (in thousands, except per share totaling approximately $0.8 million. For the nine months ended September 30, 2016 and 2017, we paid total dividends of approximately $1.7 million and $2.5 million, respectively.amounts):
Accumulated other comprehensive income
Our components of accumulated other comprehensive income are as follows (in thousands): | | | | | | | | | | | |
2024 | Per Share | | Dollar Value |
March 1st | $ | 0.1125 | | | $ | 1,686 | |
| | | |
| | | |
| | | |
2023 | Per Share | | Dollar Value |
March 1st | $ | 0.1125 | | | $ | 1,661 | |
| | | |
| | | |
| | | |
| | | |
| | | |
|
| | | |
| Accumulated Other Comprehensive Income |
Balance at December 31, 2016 | $ | — |
|
Increase in net unrealized gains associated with available-for-sale securities of the trusts | 2,849 |
|
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus
| (2,849 | ) |
Balance at September 30, 2017 | $ | — |
|
12.15.EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings per share for the three and nine months ended September 30, 2016 and 2017 (in thousands, except per share data):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Numerator for basic and diluted earnings per share: | | | | | | | |
Net income | $ | 8,844 | | | $ | 6,973 | | | | | |
Less: Earnings allocated to unvested restricted stock | (71) | | | (101) | | | | | |
Income attributable to common stockholders | $ | 8,773 | | | $ | 6,872 | | | | | |
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per common share – weighted average shares outstanding | 14,758 | | | 14,876 | | | | | |
Effect of dilutive securities: | | | | | | | |
Stock options | 99 | | | 17 | | | | | |
| | | | | | | |
Performance awards | 611 | | | 416 | | | | | |
Denominator for diluted earnings per common share – weighted average shares outstanding | 15,468 | | | 15,309 | | | | | |
| | | | | | | |
Basic earnings per common share: | $ | 0.59 | | | $ | 0.46 | | | | | |
Diluted earnings per common share: | $ | 0.57 | | | $ | 0.45 | | | | | |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Numerator for basic and diluted earnings per share: | | | | | | | |
Net income | $ | 5,683 |
| | $ | 3,038 |
| | $ | 15,454 |
| | $ | 14,532 |
|
Less: Earnings allocated to unvested restricted stock | (25 | ) | | (10 | ) | | (76 | ) | | (52 | ) |
Income attributable to common stockholders | $ | 5,658 |
| | $ | 3,028 |
| | $ | 15,378 |
| | $ | 14,480 |
|
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per common share - weighted average shares outstanding | 16,529 |
| | 16,476 |
| | 16,502 |
| | 16,575 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 273 |
| | 335 |
| | 260 |
| | 332 |
|
Convertible subordinated notes | 299 |
| | 787 |
| | 200 |
| | 980 |
|
Denominator for diluted earnings per common share - weighted average shares outstanding | 17,101 |
| | 17,598 |
| | 16,962 |
| | 17,887 |
|
| | | | | | | |
Basic earnings per common share: | $ | 0.34 |
| | $ | 0.18 |
| | $ | 0.93 |
| | $ | 0.87 |
|
Diluted earnings per common share: | $ | 0.33 |
| | $ | 0.17 |
| | $ | 0.91 |
| | $ | 0.81 |
|
The fully diluted weighted average shares outstanding for the three and nine months ended September 30, 2017 and the corresponding calculation of fully diluted earnings per share, include approximately 787,000 and 980,000 shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260, Earnings Per Share. There were 299,000 and 200,000 shares for the three and nine months ended September 30, 2016 that would have been issued upon conversion under the if-converted method.
For the both the three and nine months ended September 30, 2017 approximately 455,000 and 320,000 stockStock options were excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect. Foreffect are as follows:
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Antidilutive stock options | 1,129,210 | | | 1,564,656 | | | | | |
Our performance awards are considered to be contingently issuable shares because their issuance is contingent upon the bothsatisfaction of certain performance and service conditions. At March 31, 2024, we had satisfied certain performance criteria for the threefirst, second and nine months ended September 30, 2016, no stock options were excluded fromthird predetermined growth targets of our performance awards to be considered outstanding. Therefore, we included these awards in the computation of diluted earnings per share.share as of the beginning of the reporting period.
13.MAJOR SEGMENTS OF BUSINESS16.SEGMENT REPORTING
We conduct funeral and cemetery operations only in the United States. Revenue, disaggregated by major source for each of our reportable segments was as follows (in thousands):
| | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2024 | | | | | | |
| | Funeral | | Cemetery | | Total |
Services | | $ | 44,807 | | | $ | 4,892 | | | $ | 49,699 | |
Merchandise | | 22,659 | | | 4,140 | | | 26,799 | |
Cemetery property | | — | | | 18,703 | | | 18,703 | |
Other revenue | | 4,365 | | | 3,927 | | | 8,292 | |
Total | | $ | 71,831 | | | $ | 31,662 | | | $ | 103,493 | |
| | | | | | | | | | | | | | | | | | | | |
Three months ended March 31, 2023 | | | | | | |
| | Funeral | | Cemetery | | Total |
Services | | $ | 43,602 | | | $ | 4,605 | | | $ | 48,207 | |
Merchandise | | 22,969 | | | 3,934 | | | 26,903 | |
Cemetery property | | — | | | 13,108 | | | 13,108 | |
Other revenue | | 3,514 | | | 3,782 | | | 7,296 | |
Total | | $ | 70,085 | | | $ | 25,429 | | | $ | 95,514 | |
The following table presents revenues from operations,operating income (loss) from operations, income (loss) before income taxes and total assets by segment (in thousands):
| | | | | | | | | | | | | | | | | | | | | | | |
| Funeral | | Cemetery | | Corporate | | Consolidated |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Operating income (loss): | | | | | | | |
Three months ended March 31, 2024 | $ | 23,074 | | | $ | 12,642 | | | $ | (16,239) | | | $ | 19,477 | |
Three months ended March 31, 2023 | 22,192 | | | 8,613 | | | (10,171) | | | 20,634 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Income (loss) before income taxes: | | | | | | | |
Three months ended March 31, 2024 | $ | 22,869 | | | $ | 12,709 | | | $ | (24,856) | | | $ | 10,722 | |
Three months ended March 31, 2023 | 22,333 | | | 8,672 | | | (18,659) | | | 12,346 | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
| | | | | | | |
Total assets: | | | | | | | |
March 31, 2024 | $ | 790,358 | | | $ | 452,517 | | | $ | 17,644 | | | $ | 1,260,519 | |
December 31, 2023 | 802,368 | | | 448,018 | | | 17,666 | | | 1,268,052 | |
|
| | | | | | | | | | | | | | | |
| Funeral | | Cemetery | | Corporate | | Consolidated |
Revenues from operations: | | | | | | | |
Three months ended September 30, 2017 | $ | 47,329 |
| | $ | 13,725 |
| | $ | — |
| | $ | 61,054 |
|
Three months ended September 30, 2016 | $ | 45,183 |
| | $ | 14,957 |
| | $ | — |
| | $ | 60,140 |
|
| | | | | | | |
Nine months ended September 30, 2017 | $ | 150,279 |
| | $ | 42,784 |
| | $ | — |
| | $ | 193,063 |
|
Nine months ended September 30, 2016 | $ | 140,952 |
| | $ | 44,384 |
| | $ | — |
| | $ | 185,336 |
|
| | | | | | | |
Income (loss) from operations before income taxes: | | | | | | | |
Three months ended September 30, 2017 | $ | 12,394 |
| | $ | 3,002 |
| | $ | (10,836 | ) | | $ | 4,560 |
|
Three months ended September 30, 2016 | $ | 13,478 |
| | $ | 4,327 |
| | $ | (10,231 | ) | | $ | 7,574 |
|
| | | | | | | |
Nine months ended September 30, 2017 | $ | 45,414 |
| | $ | 11,609 |
| | $ | (33,208 | ) | | $ | 23,815 |
|
Nine months ended September 30, 2016 | $ | 44,322 |
| | $ | 12,875 |
| | $ | (33,337 | ) | | $ | 23,860 |
|
| | | | | | | |
Total assets: | | | | | | | |
September 30, 2017 | $ | 637,075 |
| | $ | 245,674 |
| | $ | 4,297 |
| | $ | 887,046 |
|
December 31, 2016 | $ | 634,145 |
| | $ | 241,621 |
| | $ | 9,303 |
| | $ | 885,069 |
|
14.17.SUPPLEMENTARY DATA
Balance Sheet
The following table presents the detail of certain balance sheet accounts as of December 31, 2016 and September 30, 2017 (in thousands):
| | | | | | | | | | | |
| December 31, 2023 | | March 31, 2024 |
Prepaid and other current assets: | | | |
Prepaid expenses | $ | 3,779 | | | $ | 3,767 | |
| | | |
Federal income tax receivable | 454 | | | — | |
State income tax receivable | 421 | | | — | |
Other current assets | 137 | | | 138 | |
Total prepaid and other current assets | $ | 4,791 | | | $ | 3,905 | |
| | | |
Current portion of debt and lease obligations: | | | |
Acquisition debt | $ | 537 | | | $ | 599 | |
Finance lease obligations | 592 | | | 514 | |
Operating lease obligations | 2,713 | | | 2,840 | |
Total current portion of debt and lease obligations | $ | 3,842 | | | $ | 3,953 | |
| | | |
Accrued and other liabilities: | | | |
Incentive compensation | $ | 13,156 | | | $ | 4,548 | |
Vacation | 3,647 | | | 3,758 | |
Unrecognized tax benefit | 3,382 | | | 3,405 | |
Insurance | 3,017 | | | 3,278 | |
| | | |
Interest | 2,409 | | | 6,626 | |
Ad valorem and franchise taxes | 2,395 | | | 1,493 | |
Salaries and wages | 2,285 | | | 7,061 | |
| | | |
Perpetual care trust payable | 1,358 | | | 1,529 | |
Employee meetings and award trips | 1,185 | | | 601 | |
Commissions | 1,144 | | | 1,258 | |
Income tax payable | — | | | 4,732 | |
Other accrued liabilities | 1,384 | | | 1,091 | |
Total accrued and other liabilities | $ | 35,362 | | | $ | 39,380 | |
| | | |
Other long-term liabilities: | | | |
Incentive compensation | $ | 1,855 | | | $ | 917 | |
| | | |
Other long-term liabilities | — | | | 1,025 | |
Total other long-term liabilities | $ | 1,855 | | | $ | 1,942 | |
Cash Flow
The following information is supplemental disclosure for the Consolidated Statements of Cash Flows (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2024 |
Cash paid for interest | $ | 3,782 | | | $ | 4,083 | |
Cash paid for taxes | 230 | | | 461 | |
| | | |
| | | |
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Other current assets: | | | |
Income taxes receivable | $ | 1,932 |
| | $ | 671 |
|
Other current assets | 102 |
| | 93 |
|
Total other current assets | $ | 2,034 |
| | $ | 764 |
|
| | | |
Current portion of long-term debt and capital lease obligations: | | | |
Term note | $ | 11,250 |
| | $ | 14,063 |
|
Acquisition debt | 1,771 |
| | 2,063 |
|
Capital leases | 246 |
| | 197 |
|
Total current portion of long-term debt and capital lease obligations | $ | 13,267 |
| | $ | 16,323 |
|
| | | |
Other current liabilities: | | | |
Income taxes payable | $ | 509 |
| | $ | 1,579 |
|
Deferred rent | 208 |
| | 232 |
|
Total other current liabilities | $ | 717 |
| | $ | 1,811 |
|
| | | |
Accrued liabilities: | | | |
Accrued salaries and wages | $ | 4,005 |
| | $ | 1,365 |
|
Accrued incentive compensation | 8,237 |
| | 4,864 |
|
Accrued vacation | 2,305 |
| | 2,614 |
|
Accrued insurance | 1,726 |
| | 2,053 |
|
Accrued interest | 1,235 |
| | 257 |
|
Accrued ad valorem and franchise taxes | 981 |
| | 2,314 |
|
Accrued commissions | 543 |
| | 410 |
|
Other accrued liabilities | 1,059 |
| | 1,417 |
|
Total accrued liabilities | $ | 20,091 |
| | $ | 15,294 |
|
| | | |
Other long-term liabilities: | | | |
Deferred rent | $ | 1,207 |
| | $ | 1,029 |
|
Incentive compensation | 575 |
| | 924 |
|
Contingent consideration | 785 |
| | 770 |
|
Total other long-term liabilities | $ | 2,567 |
| | $ | 2,723 |
|
15.RELATED PARTY TRANSACTIONS
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. These shares had been held by Mr. Payne prior to such repurchase for over one year. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. These shares are currently held as treasury shares. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.
16.SUBSEQUENT EVENTS
On October 14, 2017, we completed construction of and began operating a new funeral home in Pennsylvania.
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.
On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases of ourcommon stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains certain statements and information that may constitute forward-looking statements within the safe harbor provisionsmeaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical information, should be deemed to be forward-looking statements. Words such as “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions may be used to identify forward-looking statements; however, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements include, but are not limited to, statements regarding any projections of earnings, revenues, asset sales,revenue, cash flow, investment returns, capital allocation, debt levels, equity performance, death rates, market share growth, cost inflation, overhead, including talent recruitment, field and corporate incentive compensation, preneed sales or other financial items; any statements of the plans, strategies, objectives and timing of management for future operations or financing activities, including, but not limited to, technology improvements, product development, capital allocation, organizational performance, execution of our strategic objectives and growth plan, planned divestitures, the ability to obtain credit or financing, anticipated integration, performance and other benefits of recently completed and anticipated acquisitions, and cost management and debt reductions; any statements of the plans, timing and objectives of management for future operations;acquisition and divestiture activities; any statements regarding future economic and market conditions or performance; any projections or expectations related to the conclusion of the Board's strategic review; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. The words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions are intended to identify forward-looking statements, which are generally not historical in nature. While management believes thatwe believe these forward-looking statementsassumptions concerning future events are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenuesrevenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:to:
•our ability to find and retain skilled personnel;
•the effects of our talent recruitment efforts, incentive and compensation plans and programs, including such effects on our Standards Operating Model and the Company’s operational and financial performance;
•our ability to execute our strategic objectives and growth strategy;strategy, if at all;
•the potential adverse effects on the Company's business, financial and equity performance if management fails to meet the expectations of competition;its strategic objectives and growth plan;
•our ability to execute and meet the objectives of our High Performance and Credit Profile Restoration Plan, if at all;
•the execution of our Standards Operating 4E Leadership and Strategic Acquisition Models;
•the effects of competition;
•changes in the number of deaths in our markets;markets, which are not predictable from market to market or over the short term;
•changes in consumer preferences;preferences and our ability to adapt to or meet those changes;
•our ability to generate preneed sales;sales, including implementing our cemetery portfolio sales strategy, product development and optimization plans;
•the investment performance of our funeral and cemetery trust funds;
•fluctuations in interest rates;rates, including, but not limited to, the effects of increased borrowing costs under our Credit Facility and our ability to minimize such costs, if at all;
•the effects of inflation on our operational and financial performance, including the increased overall costs for our goods and services, the impact on customer preferences as a result of changes in discretionary income, and our ability, if at all, to mitigate such effects;
•our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
•our ability to meet the timing, objectives and expectations related to our capital allocation framework, including our forecasted rates of return, planned uses of free cash flow and future capital allocation, including share repurchases, potential strategic acquisitions, internal growth projects, dividend increases, or debt repayment plans;
•our ability to meet the projected financial and equity performance goals of our full year outlook, if at all;
•the timely and full payment of death benefits related to preneed funeral contracts funded through life insurance contracts;
•the financial condition of third-party insurance companies that fund our preneed funeral contracts;
•increased or unanticipated costs, such as merchandise, goods, insurance or taxes;taxes, and our ability to mitigate or minimize such costs, if at all;
•our level of indebtedness and the cash required to service our indebtedness;
•changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service;
•effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;
•the potential impact of epidemics and pandemics, such as the COVID-19 coronavirus, including any new or emerging public health threats, on customer preferences and on our business;
•government, social, business and other actions that have been and will be taken in response to pandemics and epidemics, such as those that were taken with the COVID-19 coronavirus, including potential responses to any new or emerging public health threats;
•effects and expense of litigation;
•consolidation in the funeral and cemetery industry;
•our ability to identify and consummate strategic acquisitions, if at all, and successfully integrate acquired businesses with our existing businesses, including expected performance and financial improvements related thereto;
•potential adverse impacts resulting from shareholder or market perceptions of our recent announcement regarding the deathcareconclusion of our Board’s review of potential strategic alternatives;
•economic, financial and stock market fluctuations;
•interruptions or security lapses of our information technology, including any cybersecurity or ransomware incidents;
•adverse developments affecting the financial services industry;
•acts of war or terrorists acts and the governmental or military response to such acts;
•our failure to maintain effective control over financial reporting; and
•other factors and uncertainties inherent in the deathcarefuneral and cemetery industry.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (i) Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2023.
ReadersInvestors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations. 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 homeFuneral Home operations, which currently accountaccounts for approximately 78%70% of our revenues,total revenue, and cemeteryCemetery operations, which accountcurrently accounts for approximately 22%30% of our revenues.
total revenue. At September 30, 2017,March 31, 2024, we operated 171165 funeral homes in 2826 states and 3231 cemeteries in 11 states. We compete with other publicpublicly held, privately held and independent operators of funeral and cemetery companies and smaller, independent operators. We believe we are a market leader in most of our markets. We provide funeral and cemetery services and products on both an “at-need” (time of death) and “preneed” (planned prior to death) basis.companies.
Our funeral homes offer a complete rangehome operations are principally service businesses that generate revenue from sales of high value personalburial and cremation services to meet a family’s funeral needs, includingand related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrancememorial services and transportation services. We provide funeral services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
Our cemeteries providecemetery operations generate revenue primarily through sales of cemetery interment rights (grave(primarily grave sites, lawn crypts, mausoleum spaces and mausoleum spaces) andniches), related cemetery merchandise such(such as memorial markers, and outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both on an at-needatneed and preneed basis.
COMPANY DEVELOPMENTS
Board of Directors and Leadership Changes
On February 22, 2024, the Board of Directors (the “Board”) of the Company announced the conclusion of the Company’s review of strategic alternatives, first announced on June 29, 2023, which was overseen by the Board with assistance from experienced financial advisors and legal counsel. On February 21, 2024, the Board voted to bring the strategic review process to a close. The Board unanimously determined that continuing to execute on the Company’s strategic plan as an independent, public company is in the best interests of the Company and its stockholders at this time.
On February 22, 2024 (the “Transition Date”), the Company announced that Melvin C. Payne, the Company’s founder and former Chief Executive Officer, would cease to serve as Executive Chairman of the Board, but will remain on the Board until the Company’s 2024 annual meeting of stockholders, when the term for Class I directors is scheduled to expire. Beginning on the Transition Date, Mr. Payne began serving as a special advisor to the Board and senior management in a consulting role.
In connection with Mr. Payne’s termination of employment, the employment-related provisions of his Employment Agreement, dated as of November 5, 2019, with the Company (as amended prior to the Transition Date, the “Employment Agreement”) terminated on the Transition Date.
On February 21, 2024, the Company and Mr. Payne entered into a Transition Agreement (the “Transition Agreement”), setting forth the terms of his severance benefits and his consulting arrangement. Under the Transition Agreement, Mr. Payne is entitled to receive certain benefits, subject to the timely execution and non-revocation by Mr. Payne and his spouse of waiver and release agreements in connection with the Transition Date and the end of the 12-month consulting term set forth in the Transition Agreement (the “Releases”).
These payments and benefits include the following:
• Salary continuation for 24 months of $2.0 million;
• 2023 annual bonus of $1.25 million;
• Prorated 2024 bonus of $181,500;
• Prorated settlement of performance awards of $3.0 million payable in cash;
• Consulting payments of $1.0 million;
• Payments for maintaining health benefits for Mr. Payne and his spouse for up to 36 months; and
• Reimbursement of legal expenses up to $35,000.
All of the payments and benefits provided under the Transition Agreement are subject to Mr. Payne’s continued compliance with certain confidentiality, non-competition, non-solicitation and non-disparagement provisions of the Employment Agreement, as well as compliance by Mr. Payne and his spouse with their respective Releases. The Transition Agreement may be terminated by the Company upon the material breach of the Transition Agreement, the Employment Agreement or either of the Releases. Upon Mr. Payne’s death, any consulting fee payments would be paid to his estate.
On March 7, 2024, upon the recommendation of the Corporate Governance Committee of the Company, the Board realigned the Company’s classes of directors to provide for equal apportionment among the three classes as a result of the previous announcement of Mr. Payne, a current Class I director, remaining on the Board until the Company’s 2024 annual meeting of stockholders, at which time his term will expire. To facilitate the class realignment, on March 7, 2024, Julie Sanders resigned from the Board as a Class II director (term expiring in 2025), and, effective as of March 7, 2024, was re-elected by the Board to serve as a Class I director until the Company’s 2024 annual meeting of shareholders. Ms. Sanders will continue to serve on the Audit, Compensation and Corporate Governance Committees of the Board.
On March 7, 2024, upon the recommendation of the Corporate Governance Committee of the Company, the Board elected Chad Fargason to serve as the Company’s first Non-Executive Chairman of the Board, effective on that date. The election of Mr. Fargason as the Board’s Non-Executive Chairman was as a result of the previous announcement of Mr. Payne ceasing to serve as Executive Chairman of the Board of the Company, effective February 22, 2024.
Effective March 25, 2024, Kathryn Shanley was appointed to serve as the Company’s Chief Accounting Officer (Principal Accounting Officer). In connection with the appointment of Ms. Shanley as the Company’s Chief Accounting Officer (Principal Accounting Officer), effective March 25, 2024, L. Kian Granmayeh ceased serving as the Company’s Principal Accounting Officer. Mr. Granmayeh continues to serve as the Company’s Executive Vice President, Chief Financial Officer, and Treasurer (Principal Financial Officer).
Divestitures
During the three months ended March 31, 2024, we sold six funeral homes and one cemetery for an aggregate of $10.9 million for a net loss of $1.5 million.
Inflationary and Macroeconomic Trends
During the first quarter of 2024, we experienced a stabilization of inflationary costs from our vendors and suppliers for merchandise and goods, particularly as it relates to utilities, funeral supplies and merchandise costs, with costs remaining flat when compared to the same period during 2023. Although we continue to experience higher variable interest rates under our Credit Facility, we anticipate lower borrowing costs as we continue prioritizing paying down our outstanding debt throughout the year. While we are encouraged by the stabilization of inflationary costs that we have experienced thus far in 2024, we are unable to forecast with any certainty whether inflationary costs will continue to moderate in future periods, as the ultimate scope and duration of these impacts remain unknown at this time. More broadly, the U.S. economy continues to experience the impact of several years of higher rates of inflation, which has impacted a wide variety of industries and sectors, with consumers facing rising prices. Such inflation may negatively impact consumer discretionary spending, including the amount that consumers are able to spend on our services, although we have not experienced any material 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 year, we will assess these impacts and take the appropriate steps, if necessary, to mitigate any changes in consumer preferences or additional cost increases, if possible.
During the first quarter of 2024, we experienced lower volumes as compared to prior years due to fluctuations in the death rate, although overall financial performance remains at or above prior reporting periods. Although we expect fluctuations in the death rate to continue, we are unable to predict or forecast the duration or variation of the death rate with any certainty. Regardless of these fluctuations in the death rate, we continue to focus on expanding market share, cost management and executing on our strategic operational plans.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our business strategyprimary 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 allocations and 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, 2023.
Our plan is based on having strong, local leadership with entrepreneurial principles that isto remain focused on sustainable long term market share, revenue,integrating our recently acquired business and profitabilityprioritizing our capital allocation for debt repayments, the payment of dividends and debt obligations and internal growth in each local business.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 Credit Facility. We believe Carriage hasthat 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 most innovativenext 12 months, as well as our long-term financial obligations.
Cash Flows
We began 2024 with $1.5 million in cash and ended the first quarter with $1.7 million in cash. At March 31, 2024, we had borrowings of $154.1 million outstanding on our Credit Facility compared to $179.1 million at December 31, 2023.
The following table sets forth the elements of cash flow (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2024 |
Cash at beginning of the year | $ | 1,170 | | | $ | 1,523 | |
| | | |
Net cash provided by operating activities | 25,869 | | | 19,703 | |
| | | |
Acquisitions of businesses | (44,000) | | | — | |
| | | |
Proceeds from divestitures and sale of other assets | 1,275 | | | 10,877 | |
Proceeds from insurance claims | 421 | | | 46 | |
Capital expenditures | (4,982) | | | (3,551) | |
Net (cash used) provided by investing activities | (47,286) | | | 7,372 | |
| | | |
Net borrowings (payments) on our Credit Facility, acquisition debt and finance lease obligations | 22,773 | | | (25,152) | |
| | | |
| | | |
| | | |
| | | |
Net proceeds from (payments for) employee equity plans | 428 | | | (71) | |
Dividends paid on common stock | (1,661) | | | (1,686) | |
| | | |
| | | |
Net cash provided by (used in) financing activities | 21,540 | | | (26,909) | |
| | | |
Cash at end of the period | $ | 1,293 | | | $ | 1,689 | |
Operating Activities
For the three months ended March 31, 2024, cash provided by operating model inactivities was $19.7 million compared to $25.9 million for the three months ended March 31, 2023, a decrease of $6.2 million primarily due to a $7.0 million withdrawal of realized capital gains and earnings from our preneed funeral and cemetery industry,trust investments received in the first quarter of 2023.
Investing Activities
Our investing activities, resulted in a net cash inflow of $7.4 million for the three months ended March 31, 2024 compared to a net cash outflow of $47.3 million for the three months ended March 31, 2023, an increase of $54.7 million.
Acquisition and Divestiture Activity
During the three months ended March 31, 2024, we sold six funeral homes and one cemetery for an aggregate of $10.9 million.
During the three months ended March 31, 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.
Capital Expenditures
For the three months ended March 31, 2024, our capital expenditures (comprised of growth and maintenance spend) totaled $3.6 million compared to $5.0 million for the three months ended March 31, 2023, a decrease of $1.4 million.
The following tables present our growth and maintenance capital expenditures (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2024 |
Growth | | | |
Cemetery development | $ | 2,118 | | | $ | 2,000 | |
| | | |
Renovations at certain businesses | 906 | | | 362 | |
| | | |
Other | 116 | | | 27 | |
Total Growth | $ | 3,140 | | | $ | 2,389 | |
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2024 |
Maintenance | | | |
General equipment and furniture | $ | 1,218 | | | $ | 623 | |
Facility repairs and improvements | 89 | | | 302 | |
Vehicles | 233 | | | 14 | |
Paving roads and parking lots | 156 | | | 60 | |
Other | 146 | | | 163 | |
Total Maintenance | $ | 1,842 | | | $ | 1,162 | |
Financing Activities
Our financing activities resulted in a net cash outflow of $26.9 million for the three months ended March 31, 2024 compared to a net cash inflow of $21.5 million for the three months ended March 31, 2023, a decrease of $48.4 million.
During the three months ended March 31, 2024, we had net payments on our Credit Facility, acquisition debt and finance leases of $25.2 million and paid dividends of $1.7 million.
During the three months ended March 31, 2023, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $22.8 million, offset by $1.7 million of dividends paid.
Share Repurchase
We did not repurchase any shares during the three months ended March 31, 2023 and 2024. At March 31, 2024, our share repurchase program had $48.9 million authorized for repurchases.
Cash Dividends
Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):
| | | | | | | | | | | |
2024 | Per Share | | Dollar Value |
March 1st | $ | 0.1125 | | | $ | 1,686 | |
| | | |
| | | |
| | | |
2023 | Per Share | | Dollar Value |
March 1st | $ | 0.1125 | | | $ | 1,661 | |
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Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and acquisition debt at March 31, 2024 is as follows (in thousands):
| | | | | |
| March 31, 2024 |
Credit Facility | $ | 154,100 | |
Operating leases | 18,642 | |
Finance leases | 5,948 | |
Acquisition debt | 5,979 | |
Total | $ | 184,669 | |
Credit Facility
At March 31, 2024, 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, and the maintenance of property and insurance, among 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, pay dividends and make other restricted payments, and certain financial maintenance covenants. At March 31, 2024, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 5.50 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 ablecalculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility at March 31, 2024.
At March 31, 2024, we had outstanding borrowings under the Credit Facility of $154.1 million. We also had one letter of credit for $2.6 million under the Credit Facility. The letter of credit will expire on November 25, 2024 and is expected to achieve through a decentralized, high performance culture operating framework linked with incentive compensation programs that attract top-quality industry talentautomatically renew annually and secures our obligations under our various self-insured policies. At March 31, 2024, we had $93.3 million of availability under the Credit Facility.
The interest expense and amortization of debt issuance costs related to our organizationCredit Facility are as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Credit Facility interest expense | $ | 3,811 | | | $ | 3,916 | | | | | |
Credit Facility amortization of debt issuance costs | 138 | | | 138 | | | | | |
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 March 31, 2024, the prime rate margin was equivalent to 2.375% and the BSBY rate margin was 3.375%. The weighted average interest rate on our Credit Facility was 7.9% and 8.9% for the three months ended March 31, 2023 and 2024, respectively.
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 Mission Statement states that “welease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes, vehicles and equipment 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. In addition, we lease certain other funeral homes, vehicles and equipment under finance leases with original terms ranging from three and a half to forty years. At March 31, 2024, operating and finance lease obligations were $35.5 million, with $5.5 million payable within 12 months.
The components of lease cost are committedas follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Operating lease cost | $ | 875 | | | $ | 978 | | | | | |
Short-term lease cost | 94 | | | 18 | | | | | |
Variable lease cost | 58 | | | 104 | | | | | |
| | | | | | | |
Finance lease cost: | | | | | | | |
Depreciation of leased assets | $ | 108 | | | $ | 126 | | | | | |
Interest on lease liabilities | 105 | | | 125 | | | | | |
Total finance lease cost | 213 | | | 251 | | | | | |
Total lease cost | $ | 1,240 | | | $ | 1,351 | | | | | |
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 6.5% to 7.3%. Original maturities typically range from five to twenty years. At March 31, 2024, acquisition debt obligations were $9.2 million, with $0.9 million payable within 12 months.
The imputed interest expense related to our acquisition debt is as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Acquisition debt imputed interest expense | $ | 71 | | | $ | 104 | | | | | |
| | | | | | | |
Senior Notes
At March 31, 2024, 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 the ability of 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 most professional, ethicaleffective interest method over the remaining term of approximately 62 months of the Senior Notes. The effective interest rate on the unamortized debt discount and highest qualitythe unamortized debt issuance costs for the Senior Notes for both the three months ended March 31, 2023 and 2024 was 4.42% and 4.30%, respectively.
At March 31, 2024, the fair value of the Senior Notes, which are Level 2 measurements, was $355.2 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 March 31, | | |
| 2023 | | 2024 | | | | |
Senior Notes interest expense | $ | 4,250 | | | $ | 4,250 | | | | | |
Senior Notes amortization of debt discount | 127 | | | 132 | | | | | |
| | | | | | | |
Senior Notes amortization of debt issuance costs | 36 | | | 38 | | | | | |
At March 31, 2024, our future interest payments on our outstanding balance were $93.5 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 March 31, | | |
| 2023 | | 2024 | | | | |
Revenue | $ | 95,514 | | | $ | 103,493 | | | | | |
Funeral contracts | 12,415 | | | 12,091 | | | | | |
Average revenue per funeral contract | $ | 5,527 | | | $ | 5,756 | | | | | |
Preneed interment rights (property) sold | 2,504 | | 3,437 | | | | |
Average price per preneed interment right sold | $ | 4,496 | | | $ | 4,849 | | | | | |
Gross profit | $ | 31,055 | | | $ | 37,262 | | | | | |
Net income | $ | 8,844 | | | $ | 6,973 | | | | | |
Revenue for the three months ended March 31, 2024 increased $8.0 million compared to the three months ended March 31, 2023, as we experienced a 37.3% increase in the number of preneed interment rights (property) sold, a 7.9% increase in the average price per interment right sold and a 4.1% increase in the average revenue per funeral contract, offset by a 2.6% decrease in funeral contract volume. The increase in cemetery revenue highlights the effectiveness of our preneed cemetery sales growth plan, as we continue to focus on executing our strategic goals. Additionally, despite the funeral contract volume decline due to the COVID-19 related pull forward effect, we increased our average revenue per funeral contract through the successful execution of our enhanced pricing strategy, which was the primary driver in funeral revenue growth this quarter.
Gross profit for the three months ended March 31, 2024 increased $6.2 million compared to the three months ended March 31, 2023, primarily due to the increase in revenue from both our funeral and cemetery service organizationsegments, as well as the continued progress we have made successfully executing on our cost management initiatives this quarter.
Net income for the three months ended March 31, 2024 decreased $1.9 million compared to the three months ended March 31, 2023, as the $6.2 million increase in profit contribution from our industry”businesses was offset by a $6.1 million increase in general, administrative and our Guiding Principles state our core values, which are comprised of: other expenses and a $1.3 million increase in loss on divestitures.
honesty, integrity and quality in all that we do;
hard work, prideFurther discussion of accomplishment and shared success through employee ownership;
belief in the power of people through individual initiative and teamwork;
outstanding service and profitability go hand-in-hand; and
growth of the Company is driven by decentralization and partnership.
Our five Guiding Principles collectively embody our Being The Best high-performance culture, operating framework. Our operations and business strategy are built upon the execution of the following three models:
Standards Operating Model;
4E Leadership Model; and
Strategic Acquisition Model.
Standards Operating Model
Our Standards Operating Model is focused on growing local market share, people development,revenue and the key operatingcomponents of gross profit for our funeral home and financial metrics that drive long-term, sustainable revenue growthcemetery segments is presented under “– Results of Operations.”
Further discussion of general, administrative and improved earning powerother expenses, interest expense, income taxes and other components of our portfolio of businesses by employing leadershipincome and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenues and earnings.expenses are presented under “– Other Financial Statement Items.”
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. 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 will acquire larger, higher margin strategic businesses.
Our belief in our Mission Statement and Guiding Principles that define us and proper execution of the three models that define our strategy have given us the competitive advantage in any market in which we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin.
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Operating“Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the quarter ending September 30, 2017 dated October 25, 2017three months ended March 31, 2024 issued on May 1, 2024, and discussed in the corresponding earnings conference call. ThisThe Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
Historically, the dynamic nature of the evolutionary process of building our culture, especially since launching the Good To Great Journey in the beginning of 2012, has led to a large number of charges such as severance and retirement, consulting and other activities, which are not core to our operations and as such, have been added back to GAAP earnings as “Special Items”. The Special Items are important to add back because of the transformational nature of major changes over the last several years within our Operations and Strategic Growth Leadership Team.
Accordingly, these non-GAAP Special Items will be comprised of only those charges materially outside the normal course of business. The number of these Special Items were minimal in 2016 and should continue to be minimal thereafter, which should result in major shrinkage of “the gap” between our GAAP and non-GAAP reported performance.
The non-GAAP financial measures in the Trend Report include such measures as “Special Items,” “Adjusted Net Income,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “Adjusted Consolidated EBITDA Margin,” “Adjusted Free Cash Flow,” “Funeral Field EBITDA,” “Cemetery Field EBITDA,” “Funeral Financial EBITDA,” “Cemetery Financial EBITDA,” “Total Field EBITDA,” “Total Field EBITDA Margin,” “Operating Profit,” “Operating Profit Margin,” “Adjusted Basic Earnings Per Share” and “Adjusted Diluted Earnings Per Share.” These financial measurements are defined as GAAP items adjusted for Special Items and are reconciled to GAAP in our earnings release and on the Trend Reports posted on our website (www.carriageservices.com). Our presentation of these measures may not be comparable to similarly titled measures in other companies’ reports.
The non-GAAP definitions we use are as follows:
Special Items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special Items are taxed at the federal statutory rate of 35% for both the three and nine months ended September 30, 2016 and 2017, except for the accretion of the discount on the Convertible Notes as thisBelow is a non-tax deductible item.
Adjusted Net Income is defined as net income plus adjustments for Special Items.
Consolidated EBITDA is defined as net income before income taxes, interest expenses, non-cash stock compensation, depreciation and amortization, and interest income and other, net.
Adjusted Consolidated EBITDA is defined as Consolidated EBITDA plus adjustments for Special Items.
Adjusted Consolidated EBITDA Margin is defined as Adjusted Consolidated EBITDA as a percentage of revenue.
Adjusted Free Cash Flow is defined as net cash provided by operations, adjusted by Special Items as deemed necessary, less cash for maintenance capital expenditures.
Funeral Field EBITDA is defined as Funeral Gross Profit, which is funeral revenue minus funeral field costs and expenses, less depreciation and amortization, regional and unallocated funeral costs and Funeral Financial EBITDA.
Cemetery Field EBITDA is defined as Cemetery Gross Profit, which is cemetery revenue minus cemetery field costs and expenses, less depreciation and amortization, regional and unallocated cemetery costs and Cemetery Financial EBITDA.
Funeral Financial EBITDA is defined as Funeral Financial Revenue less Funeral Financial Expenses.
Cemetery Financial EBITDA is defined as Cemetery Financial Revenue less Cemetery Financial Expenses.
Total Field EBITDA is defined as Gross Profit less depreciation and amortization, regional and unallocated costs.
Total Field EBITDA Margin is defined as Total Field EBITDA as a percentage of revenue.
Operating Profit is defined as Gross Profit, which is funeral and cemetery revenue minus funeral and cemetery field costs and expenses, less field depreciation and amortization and regional and unallocated funeral and cemetery costs.
Operating Profit Margin is defined as Operating Profit as a percentage of revenue.
Adjusted Basic Earnings Per Share is defined as GAAP Basic Earnings Per Share, adjusted for Special Items.
Adjusted Diluted Earnings Per Share is defined as GAAP Diluted Earnings Per Share, adjusted for Special Items.
We are providing below a reconciliation of Grossgross profit (a GAAP financial measure) to Operatingoperating profit (a non-GAAP financial measure) for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016 (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Gross profit | $ | 31,055 | | | $ | 37,262 | | | | | |
| | | | | | | |
Cemetery property amortization | 1,201 | | | 1,756 | | | | | |
Field depreciation expense | 3,357 | | | 3,467 | | | | | |
Regional and unallocated funeral and cemetery costs | 5,437 | | | 3,842 | | | | | |
Operating profit(1) | $ | 41,050 | | | $ | 46,327 | | | | | |
| | | | | | | | | | | | | | |
| | | | |
(1) | Operating profit is defined as gross profit plus cemetery property amortization, field depreciation expense and regional and unallocated funeral and cemetery costs. |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Gross profit | $ | 18,228 |
| | $ | 15,480 |
| | $ | 58,338 |
| | $ | 57,239 |
|
| | | | | | | |
Field depreciation and amortization | 3,452 |
| | 3,601 |
| | 10,359 |
| | 10,719 |
|
Regional and unallocated funeral and cemetery costs | 2,783 |
| | 3,937 |
| | 8,547 |
| | 9,845 |
|
Operating profit | $ | 24,463 |
| | $ | 23,018 |
| | $ | 77,244 |
| | $ | 77,803 |
|
WeOur operations are providing belowreported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operatingoperating profit (a non-GAAP financial measure) by Segment for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016segment (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Funeral Home | $ | 28,966 | | | $ | 30,602 | | | | | |
Cemetery | 12,084 | | | 15,725 | | | | | |
Operating profit | $ | 41,050 | | | $ | 46,327 | | | | | |
| | | | | | | |
Operating profit margin(1) | 43.0% | | 44.8% | | | | |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Funeral Home Segment | $ | 18,201 |
| | $ | 18,062 |
| | $ | 58,406 |
| | $ | 61,161 |
|
Cemetery Segment | 6,262 |
| | 4,956 |
| | 18,838 |
| | 16,642 |
|
Operating profit | $ | 24,463 |
| | $ | 23,018 |
| | $ | 77,244 |
| | $ | 77,803 |
|
| | | | | | | | | | | | | | |
| | | | |
(1) | Operating profit margin is defined as operating profit as a percentage of revenue. |
Further discussion of Operatingoperating profit for our Funeral Home and Cemetery Segments is presented herein under “Results of Operations.”
Financial Highlights
Three months ended September 30, 2017 compared to three months ended September 30, 2016
Total revenue for the three months ended September 30, 2017 and 2016 was $61.1 million and $60.1 million, respectively, which represents an increase of approximately $0.9 million, or 1.5%. Funeral revenue increased $2.1 million to $47.3 million, while cemetery revenue decreased $1.2 million to $13.7 million in the three months ended September 30, 2017 compared to the same period in 2016. For the quarter comparatives, we experienced a 3.3% increase in total funeral contracts and an increase in the average revenue per funeral contract of 1.8%. In addition, while we experienced a decrease of 6.3% in the number of preneed interment rights (property) sold, the average price per interment right sold increased 1.2%. Further discussion of revenue for our funeral home and cemetery segments on a same store and acquired basis is presented herein under “Results“– Results of Operations.”
Gross profit for the three months ended September 30, 2017 decreased $2.7 million, or 15.1%, to $15.5 million, from $18.2 million for the three months ended September 30, 2016 primarily due to a decline in preneed cemetery revenue and higher costs as a percentage of revenue in the six businesses we acquired in 2016. As these acquired businesses transition into our Standards Operating Model, we expect to see their gross profit margins rise towards those on a same store basis.
Further discussion of the components of Gross profit, excluding field depreciation and amortization and regional and unallocated funeral and cemetery costs is presented herein under “Results of Operations” within our funeral home and cemetery segments. Further discussion of field depreciation and amortization and regional and unallocated funeral and cemetery costs are presented herein under “Other Financial Statement Items.”
Net income for the three months ended September 30, 2017 decreased $2.6 million to $3.0 million, equal to $0.17 per diluted share, compared to net income of $5.7 million, equal to $0.33 per diluted share, for the three months ended September 30, 2016. Further discussion of general, administrative and other expenses, home office depreciation and amortization expense, interest expense, income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”
Nine months ended September 30, 2017 compared to Nine months ended September 30, 2016
Total revenue for the nine months ended September 30, 2017 and 2016 was $193.1 million and $185.3 million, respectively, which represents an increase of approximately $7.7 million, or 4.2%. Funeral revenue increased $9.3 million to $150.3 million, while cemetery revenue decreased $1.6 million to $42.8 million in the nine months ended September 30, 2017 compared to the same period in 2016. For the period comparatives, we experienced a 5.2% increase in total funeral contracts and an increase in the average revenue per funeral contract of 1.7%. In addition, while we experienced a decrease of 10.4% in the number of preneed interment rights (property) sold, the average price per interment right sold increased 4.6%. Further discussion of revenue for our funeral home and cemetery segments on a same store and acquired basis is presented herein under “Results of Operations.”
Gross profit for the nine months ended September 30, 2017 decreased $1.1 million, or 1.9%, to $57.2 million, from $58.3 million for the nine months ended September 30, 2016 primarily due to a decline in preneed cemetery revenue and higher costs as a percentage of revenue in the six businesses we acquired in 2016. As these acquired businesses transition into our Standards Operating Model, we expect to see their gross profit margins rise towards those on a same store basis.
Further discussion of the components of Gross profit, excluding field depreciation and amortization and regional and unallocated funeral and cemetery costs is presented herein under “Results of Operations” within our funeral home and cemetery segments. Further discussion of field depreciation and amortization and regional and unallocated funeral and cemetery costs are presented herein under “Other Financial Statement Items.”
Net income for the nine months ended September 30, 2017 decreased $0.9 million to $14.5 million, equal to $0.81 per diluted share, compared to net income of $15.4 million, equal to $0.91 per diluted share, for the nine months ended September 30, 2016. Further discussion of general, administrative and other expenses, home office depreciation and amortization expense, interest expense, income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there
can be no assurance the margins, operating income and net earnings, as a percentage of revenues, will be consistent from year to year.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with GAAP. Our critical accounting policies are discussed in MD&A in our Annual Report on Form 10-K for the year ended December 31, 2016.
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three and nine months ended September 30, 2017 compared to the same periods of 2016. March 31, 2024 and 2023.
The term “same store”“operating” in the funeral home and cemetery segments refers to all funeral homes and cemeteries acquired prior to January 1, 2013that we owned and operated forin the entiretycurrent reporting period, excluding certain funeral home and cemetery businesses that we have divested in such period.
The term “divested” when discussed in the funeral home segment, refers to six funeral homes we sold in the three months ended March 31, 2024 and one funeral home we sold in the three months ended March 31, 2023. The term “divested” when discussed in the cemetery segment, refers to the sale of one cemetery in each period being presented. Funeral homesof the three months ended March 31, 2024 and cemeteries purchased after December 31, 2012 are referred to as “acquired.” This classification of acquisitions has been important to management2023.
The term “ancillary” in the funeral home segment represents our flower shop, monument business, pet cremation business and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. Depreciation andonline cremation businesses.
Cemetery property amortization, within our field costs and expensesdepreciation 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,gross profit, a GAAP financial measure.
Funeral Home Segment.Segment
The following tables settable sets forth certain information regarding the revenuesour revenue and operating profit fromfor our funeral home operations (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2024 |
Revenue: | | | |
Operating | $ | 65,407 | | | $ | 66,578 | |
Divested | 1,164 | | | 888 | |
Ancillary | 1,057 | | | 1,247 | |
Other | 2,457 | | | 3,118 | |
Total | $ | 70,085 | | | $ | 71,831 | |
| | | |
Operating profit: | | | |
Operating | $ | 26,327 | | | $ | 27,527 | |
Divested | 275 | | | 99 | |
Ancillary | 146 | | | 173 | |
Other | 2,218 | | | 2,803 | |
Total | $ | 28,966 | | | $ | 30,602 | |
| | | |
The following operating measures reflect the significant metrics over this comparative period: | | | |
| | | |
Contract volume | 12,415 | | | 12,091 | |
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,362 | | | $ | 5,580 | |
Average revenue per contract, including preneed funeral trust earnings | $ | 5,527 | | | $ | 5,756 | |
Cremation rate | 59.1% | | 59.0% |
Funeral home operating revenue increased $1.2 million for the three months ended September 30, 2017 compared to three months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 37,094 |
| | $ | 38,032 |
| | $ | 938 |
| | 2.5 | % |
Acquired operating revenue | 5,996 |
| | 7,363 |
| | 1,367 |
| | 22.8 | % |
Preneed funeral insurance commissions | 361 |
| | 315 |
| | (46 | ) | | (12.7 | )% |
Preneed funeral trust earnings | 1,732 |
| | 1,618 |
| | (114 | ) | | (6.6 | )% |
Total | $ | 45,183 |
| | $ | 47,328 |
| | $ | 2,145 |
| | 4.7 | % |
| | | | | | | |
Operating profit: |
| |
| | | | |
Same store operating profit | $ | 13,894 |
| | $ | 13,938 |
| | $ | 44 |
| | 0.3 | % |
Acquired operating profit | 2,431 |
| | 2,419 |
| | (12 | ) | | (0.5 | )% |
Preneed funeral insurance commissions | 166 |
| | 120 |
| | (46 | ) | | (27.7 | )% |
Preneed funeral trust earnings | 1,710 |
| | 1,585 |
| | (125 | ) | | (7.3 | )% |
Total | $ | 18,201 |
| | $ | 18,062 |
| | $ | (139 | ) | | (0.8 | )% |
Funeral home same store operating revenues for the three months ended September 30, 2017 increased $0.9 million or 2.5%, whenMarch 31, 2024, compared to the three months ended September 30, 2016. This was due primarily to a 0.7%March 31, 2023. The increase in same store contract volumes to 7,093 andoperating revenue is primarily driven by a 1.8%4.1% increase in the average revenue per contract excluding preneed interest, which was partially offset by a 2.6% decrease in contract volume. Despite the funeral contract volume decline due to $5,362. Thethe COVID-19 related pull forward effect, we increased our average revenue per funeral contract excludesthrough the impactsuccessful execution of our enhanced pricing strategy, which was the preneedprimary driver in funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 1.6% to $5,543 in the three months ended September 30, 2017. The average revenue per burial contract increased 0.2% to $8,832 and the number of burial contracts increased 1.9% to 2,898. The average revenue per cremation contract increased 1.1% to $3,352 and the number of cremation contracts increased 1.7% to 3,702.growth this quarter.
The burial rate for our same store businesses increased 50 basis points to 40.9% and the cremation rate also increased 50 basis points to 52.2% for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 6.9% of the total number of contracts in the three months ended September 30, 2017, increased 16.6% to $2,669.
Same storeFuneral home operating profit for the three months ended September 30, 2017March 31, 2024 increased $1.2 million when compared to the same period in 2023, primarily due to the increase in operating revenue, as well as a decrease in operating expenses as a percentage of revenue. The comparable operating profit margin increased 100 basis points to 41.3%. Operating expenses as a percentage of revenue decreased 1.1%, with the largest decreases in salaries and benefits expenses of 0.6% and promotional expenses of 0.2%, which reflects the continued progress we have made successfully executing on our cost management initiatives this quarter.
Ancillary revenue, which represents revenue from our flower shop, monument business, pet cremation business and online cremation businesses, increased $0.2 million, while ancillary operating profit remained flat whenfor the three months ended March 31, 2024, compared to the three months ended September 30, 2016. AlthoughMarch 31, 2023. The increase in ancillary revenue increased,is primarily due to our Bakersfield, CA business, which was acquired during the last week of March 2023 and therefore was not fully present in the comparative period.
Other revenue and other operating profit, margin decreased by 90 basis points to 36.6%which consists of preneed funeral insurance commissions and earnings from delivered preneed funeral trust and insurance contracts, increased $0.7 million and $0.6 million, respectively, for the three months ended September 30, 2017March 31, 2024, compared to the same period in 2016. 2023. These increases are primarily due to our continued focus on growth of our preneed funeral sales through our strategic partnership with a national insurance provider that began during the second quarter of 2023. As a result, we have experienced a 25.7% increase in preneed insurance contracts sold during the first quarter of 2024, compared to the same period in 2023.
Cemetery Segment
The decline infollowing table sets forth certain information regarding our revenue and operating profit margin largely relates to significant increases in certain expenses including $0.4for our cemetery operations (in thousands):
| | | | | | | | | | | |
| Three months ended March 31, |
| 2023 | | 2024 |
Revenue: | | | |
Operating | $ | 21,317 | | | $ | 27,581 | |
Divested | 330 | | | 154 | |
Other | 3,782 | | | 3,927 | |
Total | $ | 25,429 | | | $ | 31,662 | |
| | | |
Operating profit (loss): | | | |
Operating | $ | 8,312 | | | $ | 11,952 | |
Divested | 93 | | | (35) | |
Other | 3,679 | | | 3,808 | |
Total | $ | 12,084 | | | $ | 15,725 | |
| | | |
The following operating measures reflect the significant metrics over this comparative period: | | | |
| | | |
Preneed revenue as a percentage of operating revenue | 58.0% | | 65.0% |
Preneed revenue (in thousands) | $ | 12,324 | | | $ | 17,932 | |
Atneed revenue (in thousands) | $ | 8,993 | | | $ | 9,649 | |
Number of preneed interment rights sold | 2,504 | | | 3,437 | |
Average price per interment right sold | $ | 4,496 | | | $ | 4,849 | |
Cemetery operating revenue increased $6.3 million of general liability and other insurance related expenses, $0.2 million of salaries and benefits and $0.1 million of bad debt expense.
Funeral home acquired operating revenues for the three months ended September 30, 2017 increased $1.4 million, or 22.8%, whenMarch 31, 2024, compared to the three months ended September 30, 2016. The funeral home acquired portfolio for the three months ended September 30, 2017 includes four businesses acquired in the latter half of 2016, not fully present in the three months ended September 30, 2016 results. We experienced a slight increase in the average revenue per contract of 0.2% to $6,370 and a 22.6% increase in the total number of contracts to 1,156. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract slightly decreased 0.4% to $6,538 in the three months ended September 30, 2017. The average revenue per burial contract decreased 1.7% to $9,458, while the number of burial contracts increased 22.4% to 525. The average revenue per cremation contract increased 6.1% to $4,421 and the number of cremation contracts increased 18.3% to 531.
The burial rate for our acquired businesses slightly decreased 10 basis points to 45.4% and the cremation rate also decreased 170 basis points to 45.9% for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 8.7% of the total number of contracts in the three months ended September 30, 2017, decreased 17.6% to $2,446.
Acquired operating profit for the three months ended September 30, 2017 remained flat when compared to the three months ended September 30, 2016. Although revenue increased, operating profit margin decreased 760 basis points to 32.9% for the three months ended September 30, 2017 compared to the same period in 2016. The decrease is primarily due to the businesses we acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased by 12.7% for the three months ended September 30, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the three months ended September 30, 2017 is from the preneed funeral insurance contracts sold in the three months ended September 30, 2016. The number of preneed insurance contracts sold in the three months ended September 30, 2016 decreased 4.9% and the face value of the insurance products that earned commissions decreased 2.3% compared to the contracts sold during the same period of the prior year. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and earnings from the maturity of preneed funeral contracts. Trust earnings decreased $0.1 million or 6.6% for the three months ended September 30, 2017, which is comprised of a 7.8% decrease in earnings from the maturity of preneed contracts, offset by an 8.9% increase in earnings from trust management fees.
Operating profit for our two categories of financial revenue, on a combined basis, decreased 9.1% in the three months ended September 30, 2017 due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.
The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 117,029 |
| | $ | 119,310 |
| | $ | 2,281 |
| | 1.9 | % |
Acquired operating revenue | 17,303 |
| | 24,727 |
| | 7,424 |
| | 42.9 | % |
Preneed funeral insurance commissions | 1,138 |
| | 951 |
| | (187 | ) | | (16.4 | )% |
Preneed funeral trust earnings | 5,482 |
| | 5,290 |
| | (192 | ) | | (3.5 | )% |
Total | $ | 140,952 |
| | $ | 150,278 |
| | $ | 9,326 |
| | 6.6 | % |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 45,119 |
| | $ | 46,111 |
| | $ | 992 |
| | 2.2 | % |
Acquired operating profit | 7,293 |
| | 9,515 |
| | 2,222 |
| | 30.5 | % |
Preneed funeral insurance commissions | 577 |
| | 329 |
| | (248 | ) | | (43.0 | )% |
Preneed funeral trust earnings | 5,417 |
| | 5,206 |
| | (211 | ) | | (3.9 | )% |
Total | $ | 58,406 |
| | $ | 61,161 |
| | $ | 2,755 |
| | 4.7 | % |
Funeral home same store operating revenues for the nine months ended September 30, 2017 increased $2.3 million, or 1.9%, when compared to the nine months ended September 30, 2016. The increase was due primarily to a 0.9% increase in same store contract volumes to 22,296 and a 1.0% increase in the average revenue per contract to $5,351. The average revenue per contract excludes the impact of the preneed funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 0.9% to $5,540 in the nine months ended September 30, 2017. The average revenue per burial contract increased 1.1% to $8,877, while the number of burial contracts decreased 0.6% to 9,037. The average revenue per cremation contract increased 1.3% to $3,363 and the number of cremation contracts increased 3.0% to 11,664.
The burial rate for our same store businesses decreased 70 basis points to 40.5%, while the cremation rate increased 100 basis points to 52.3% for the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 7.2% of the total number of contracts in the nine months ended September 30, 2017, increased 10.8% to $2,561.
Same store operating profit for the nine months ended September 30, 2017 increased $1.0 million, or 2.2%, when compared to the nine months ended September 30, 2016. This increase is a result of increased revenue and better management of expenses as operating profit margin remained stable at 38.6% for the nine months ended September 30, 2017 compared to the same period in 2016.
Funeral home acquired operating revenues for the nine months ended September 30, 2017 increased $7.4 million, or 42.9%, when compared to the nine months ended September 30, 2016. The funeral home acquired portfolio for the nine months ended September 30, 2017 includes six businesses acquired during 2016, not fully present in the nine months ended September 30, 2016 results. We experienced an increase in the average revenue per contract of 1.7% to $6,524 and a 40.5% increase in the total number of contracts to 3,790. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract increased 1.2% to $6,699 in the nine months ended September 30, 2017. The average revenue per burial contract decreased 1.3% to $9,505, while the number of burial contracts increased 43.4% to 1,817. The average revenue per cremation contract increased 5.9% to $4,396 and the number of cremation contracts increased 35.8% to 1,661.
The burial rate for our acquired businesses increased 90 basis points to 47.9%, while the cremation rate decreased 150 basis points to 43.8%. This is the result of an increase in the number of burial versus cremation contract sales at the businesses that were acquired the latter half of 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 8.3% of the total number of contracts in the nine months ended September 30, 2017, decreased 5.1% to $2,625.
Acquired operating profit for the nine months ended September 30, 2017 increased $2.2 million, or 30.5%, from the nine months ended September 30, 2016, primarily due to the six businesses acquired during 2016 and not fully present in the nine months ended September 30, 2016 results. Although revenues increased, operating profit margin decreased 360 basis points to 38.5% for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease is primarily due to the
businesses we acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased $0.2 million or 16.4% for the nine months ended September 30, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the nine months ended September 30, 2017 is from the preneed funeral insurance contracts sold in the nine months ended September 30, 2016. The number of preneed insurance contracts sold in the nine months ended September 30, 2016 decreased 1.1% and the face value of the insurance products that earned commissions decreased 7.1% over the same period of the prior year. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and earnings from the maturity of preneed funeral contracts. Trust earnings decreased $0.2 million or 3.5% for the nine months ended September 30, 2017, which is comprised of a 4.6% decrease in earnings from the maturity of preneed contracts, offset by a 12.3% increase in earnings from trust management fees.
Operating profit for our two categories of financial revenue, on a combined basis, decreased 7.7% in the nine months ended September 30, 2017 due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.
Cemetery Segment. The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the three months ended September 30, 2017 compared to three months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 11,467 |
| | $ | 10,748 |
| | $ | (719 | ) | | (6.3 | )% |
Acquired operating revenue | 978 |
| | 761 |
| | (217 | ) | | (22.2 | )% |
Cemetery trust earnings | 2,025 |
| | 1,768 |
| | (257 | ) | | (12.7 | )% |
Preneed cemetery finance charges | 487 |
| | 449 |
| | (38 | ) | | (7.8 | )% |
Total | $ | 14,957 |
| | $ | 13,726 |
| | $ | (1,231 | ) | | (8.2 | )% |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 3,342 |
| | $ | 2,649 |
| | $ | (693 | ) | | (20.7 | )% |
Acquired operating profit | 479 |
| | 200 |
| | (279 | ) | | (58.2 | )% |
Cemetery trust earnings | 1,954 |
| | 1,658 |
| | (296 | ) | | (15.1 | )% |
Preneed cemetery finance charges | 487 |
| | 449 |
| | (38 | ) | | (7.8 | )% |
Total | $ | 6,262 |
| | $ | 4,956 |
| | $ | (1,306 | ) | | (20.9 | )% |
Cemetery same store operating revenues for the three months ended September 30, 2017 decreased $0.7 million, or 6.3%, when compared to the three months ended September 30, 2016. Approximately 55.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the three months ended September 30, 2017. Preneed revenue decreased $0.9 million, or 13.6%,March 31, 2023, as we experienced a 5.7% decrease37.3% increase in the number of preneed interment rights (property) sold to 1,542 and a 5.9% decrease in average price per interment to $3,278 for the three months ended September 30, 2017 compared to the same period in 2016. The decrease in preneed revenue was due to the attrition of key sales personnel at certain businesses, the absence of approximately $0.4 million of large private estate sales we had in the third quarter of last year, as well as the impact of the Texas and Florida hurricanes which caused business closures and displaced workers in these States during the period. Same store at-need revenue, which represents approximately 45.0% of our same store operating revenues, increased $0.2 million, or 4.4%, due primarily to a 7.9% increase in the average sale per contract to $1,562.
Cemetery same store operating profit for the three months ended September 30, 2017 decreased $0.7 million, or 20.7% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 24.6% in the three months ended September 30, 2017 compared to 29.1% in the same period in 2016. The decline in operating profit margin largely relates to significant increases in certain expenses including $0.2 million of general liability and other insurance related expenses, $0.1 million of salaries and benefits and $0.1 million of facilities and grounds expenses, offset by a $0.4 million decrease in promotional expenses.
Cemetery acquired operating revenue and acquired operating profit decreased for the three months ended September 30, 2017 primarily due to a $0.2 million decrease in preneed revenue. The decrease in preneed revenue was primarily due to the absence of approximately $0.2 million of large private estate sales we had in the third quarter of last year. In addition, we experienced a 14% decrease in the number of preneed interment rights sold compared with the same period in 2016 and increases in facilities and grounds expenses and bad debt expense for the three months ended September 30, 2017 compared to the same period in 2016.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Total trust earnings decreased $0.3 million or 12.7%, primarily due to a $0.3 million decrease in capital gains from our perpetual care trust in the three months ended September 30, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts remained flat in the three months ended September 30, 2017 compared to the same period in 2016.
Cemetery Segment. The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the nine months ended September 30, 2017 compared to nine months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 35,093 |
| | $ | 33,522 |
| | $ | (1,571 | ) | | (4.5 | )% |
Acquired operating revenue | 2,312 |
| | 2,370 |
| | 58 |
| | 2.5 | % |
Cemetery trust earnings | 5,622 |
| | 5,512 |
| | (110 | ) | | (2.0 | )% |
Preneed cemetery finance charges | 1,357 |
| | 1,381 |
| | 24 |
| | 1.8 | % |
Total | $ | 44,384 |
| | $ | 42,785 |
| | $ | (1,599 | ) | | (3.6 | )% |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 11,283 |
| | $ | 9,287 |
| | $ | (1,996 | ) | | (17.7 | )% |
Acquired operating profit | 791 |
| | 743 |
| | (48 | ) | | (6.1 | )% |
Cemetery trust earnings | 5,407 |
| | 5,231 |
| | (176 | ) | | (3.3 | )% |
Preneed cemetery finance charges | 1,357 |
| | 1,381 |
| | 24 |
| | 1.8 | % |
Total | $ | 18,838 |
| | $ | 16,642 |
| | $ | (2,196 | ) | | (11.7 | )% |
Cemetery same store operating revenues for the nine months ended September 30, 2017 decreased $1.6 million, or 4.5%, when compared to the nine months ended September 30, 2016. Approximately 56.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the nine months ended September 30, 2017. Preneed revenue decreased $2.4 million, or 11.2%, as we experienced a 11.4% decrease in the number of preneed interment rights sold to 4,942 in the nine months ended September 30, 2017 compared to the same period in 2016. The decrease was primarily a result of attrition of key sales personnel at certain businesses during the period. In addition, preneed sales were negatively impacted in our Texas and Florida businesses due to the hurricanes affecting those areas in the third quarter of 2017, as well as the absence of approximately $0.4 million of large private estate sales we had in the third quarter of last year. The decrease was slightly offset by a 4.0% increase in the average price per interment to $3,256. Same store at-needright sold. Cemetery atneed revenue, which represents approximately 44.0%35.0% of our same storetotal operating revenues,revenue, increased $0.8$0.6 million or 5.7%, due primarily to a 9.0% increase in the average sale per contract to $1,459.
Cemetery same store operating profit for the ninethree months ended September 30, 2017 decreased $2.0 million, or 17.7% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 27.7% in the nine months ended September 30, 2017 compared to 32.2% in the same period in 2016. The decrease in operating profit was primarily a result of the decrease in revenue, combined with a $0.4 million, or 1.8%, increase in operating costs for the nine months ended September 30, 2017 compared with the same period in 2016. Those expenses with significant increases include $0.2 million of salaries and benefits and $0.2 million of facilities and grounds expenses.
Cemetery acquired operating revenue and acquired operating profit remained flat for the nine months ended September 30, 2017. Cemetery acquired operating profit margin decreased from 34.2% to 31.4% for the nine months ended September 30, 2017March 31, 2024, compared to the same period in 20162023, primarily due to an increase in delivered merchandise and services across our cemetery portfolio. The increase in cemetery revenue highlights the effectiveness of our preneed cemetery sales growth plan, as we experienced increasescontinue to focus on executing our strategic goals.
Cemetery operating profit increased $3.6 million for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to the increase in operating revenue, as well as a decrease in operating expenses as a percentage of revenue. The comparable operating profit margin increased 430 basis points to 43.3%. Operating expenses as a percentage of revenue decreased 4.3%, with the largest decreases in salaries and benefits expenses of 2.9%, merchandise costs of 1.2%, and bad debt expense.facilities and grounds expenses of 0.6%, which reflects the continued progress we have made successfully executing on our cost management initiatives this quarter.
The two categories of financialOther revenue and other operating profit, which consist of preneed cemetery trust earningsrevenue and preneed cemetery finance charges, on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of
the trust assets. Total trust earnings decreasedboth increased $0.1 million or 2.0%,for the three months ended March 31, 2024, compared to the three months ended March 31, 2023, primarily due to decreased capital gains from our perpetual care trustan increase in finance charge revenue related to the nine months ended September 30, 2017increase in cemetery sales during the first quarter of 2024, compared to the same period in 2016. Financial revenue earned from finance charges on2023.
Cemetery property amortization. Cemetery property amortization totaled $1.8 million for the preneed contracts remained flat at $1.4 million in the ninethree months ended September 30, 2017March 31, 2024, an increase of $0.6 million compared to the same period in 2016.2023, primarily due to the increase in property sold across our cemetery portfolio.
Other Financial Statement Items
Field depreciation.Depreciation and Amortization. Depreciation and amortization costsexpense for theour field and home officebusinesses totaled $4.0$3.5 million for the three months ended September 30, 2017,March 31, 2024, an increase of $0.2$0.1 million or 5.1%, fromcompared to the three months ended September 30, 2016 and $11.9 million for the nine months ended September 30, 2017, an increase of $0.4 million or 3.3%, from the nine months ended September 30, 2016. These increases were primarily attributable to additional depreciation expense from assets acquiredsame period in our 2016 acquisitions.2023.
Regional and Unallocated Funeralunallocated funeral and Cemetery Costs.cemetery costs. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled $3.9$3.8 million for the three months ended September 30, 2017, an increaseMarch 31, 2024, a decrease of $1.2$1.6 million or 41.5%, compared to the same period in 2016,2023, primarily due to a $0.5an $0.8 million increasedecrease in fieldcash incentives and equity compensation costs and an $0.8 million decrease in incentive award trip costs.
Other Financial Statement Items
General, administrative and other. General, administrative and other expenses, which includes salaries and benefits and cash and equity incentive compensation a $0.4 million increase in natural disaster related costs and a $0.3 million increase in other general administrative costs.
Regional and unallocated funeral and cemetery costsfor the Houston support office, totaled $9.8$16.2 million for the ninethree months ended September 30, 2017,March 31, 2024, an increase of $1.3$6.1 million or 15.2%, compared to the same period in 2016,2023, which is primarily due to the following: (1) a $4.2 million increase in salary and benefits expenses and cash and equity incentive compensation costs, primarily driven by the termination expense recorded during the first quarter of 2024 for our former Executive Chairman of the Board pursuant to his Transition Agreement effective February 22, 2024; (2) a $1.5 million increase in professional fees related to the Board’s review of strategic alternatives; and (3) a $0.4 million increase in field incentive compensation, a $0.4 million increase in natural disaster related costs, a $0.4 million increase inall other general administrative costsexpenses.
Net loss on divestitures, disposals and $0.1 million increase in salariesimpairments charges. The components of Net loss on divestitures, disposals and benefits.impairment charges are as follows (in thousands):
On Friday, August 25, 2017 and Sunday, September 10, 2017, hurricanes Harvey and Irma struck Texas and Florida, respectively. Thirteen of our funeral homes and six of our cemeteries were impacted by either or both property damage and business interruption. Based on our preliminary review of our property, flood and business interruption insurance policies, we believe that much of the loss we have experienced will be covered by insurance. As of September 30, 2017, we have spent approximately $0.5 million for employee assistance and property repair costs. We have recognized approximately $0.4 million in expenses and recorded a receivable for insurance reimbursement of approximately $0.1 million. | | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Net loss on divestitures | $ | 82 | | | $ | 1,501 | | | | | |
Net loss on disposals of fixed assets | 159 | | | 44 | | | | | |
Total | $ | 241 | | | $ | 1,545 | | | | | |
General, Administrative and Other. General, administrative and other expenses remained flat at $6.1 million for bothDuring the three months ended September 30, 2016March 31, 2024, we sold six funeral homes and 2017. Those expenses with significant increases include $0.4 millionone cemetery for an aggregate loss of equity compensation, $0.2 million$1.5 million. During the three months ended March 31, 2023, we sold one funeral home and two cemeteries for an aggregate loss of salaries and benefits for leadership investments in our Houston support office, $0.2 million of other general administrative costs, $0.2 million of incentive compensation and $0.2 million of public company and regulatory costs$0.1 million.
Interest expense. Interest expense related to tax planning, offset by a $1.2 million decrease in severance and retirement expenses primarily related toits respective debt arrangement is as follows (in thousands):
| | | | | | | | | | | | | | | |
| Three months ended March 31, | | |
| 2023 | | 2024 | | | | |
Senior Notes | $ | 4,413 | | | $ | 4,420 | | | | | |
Credit Facility | 3,949 | | | 4,054 | | | | | |
Finance leases | 105 | | | 125 | | | | | |
Acquisition debt | 71 | | | 104 | | | | | |
Other | 1 | | | 9 | | | | | |
Total | $ | 8,539 | | | $ | 8,712 | | | | | |
Net loss on property damage, net of insurance claims. During the retirement of a former executive.
General, administrative and other expenses totaled $19.5 million for the ninethree months ended September 30, 2017, a decrease of $1.7 million, or 7.8%, from the nine months ended September 30, 2016. The decrease was attributable to a $3.5 million decrease in retirement expenses primarily related to the retirement of two former executives during 2016, a $0.7 million decrease in acquisition costs, offset by a $0.9 million increase in salaries and benefits for leadership investments in our Houston support office, a $0.7 million increase in public company, regulatory and legal costs related to tax planning, filing our current shelf registration statement and adopting a new long-term incentive plan, a $0.6 million increase in other general administrative costs andMarch 31, 2023, we recorded a $0.3 million increaseloss, net of insurance proceeds, for property damaged by a fire that occurred during first quarter of 2023. We did not record any gain or loss activity during the three months ended March 31, 2024.
Other, net. During the three months ended March 31, 2023, we recorded a $0.5 million gain on the sale of other real estate not used in incentive and equity compensation.business operations. We did not record any gain or loss activity during the three months ended March 31, 2024.
Interest Expense. InterestIncome taxes. Income tax expense was $3.3totaled $3.7 million for the three months ended September 30, 2017 compared to $2.9 million for the three months ended September 30, 2016,March 31, 2024, an increase of approximately $0.4 million. During the three months ended September 30, 2017, interest expense increased by approximately $0.3$0.2 million related to our term note and revolving credit facility and by approximately $0.1 million related to our deferred purchase obligations for our 2016 acquisitions. During the three months ended September 30, 2017, the weighted average interest rate increased 0.6% compared to the same period in 2016.
Interest expense was $9.5 million for the nine months ended September 30, 2017 compared2023, primarily due to $8.7 million for the nine months ended September 30, 2016, an increase of approximately $0.8 million. During the nine months ended September 30, 2017, interest expense increased by approximately $0.4 million related to our term note and revolving credit facility and by approximately $0.4 million related to our deferred purchase obligations for our 2016 acquisitions. During the nine months ended September 30, 2017, the weighted average interest rate increased 0.3% compared to the same period in 2016.
Accretion of Discount on Convertible Subordinated Notes. For the three and nine months ended September 30, 2017, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $1.1 million and $3.2 million respectively,
compared to $1.0 million and $2.9 million for the three and nine months ended September 30, 2016, respectively. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%.
Income Taxes. Income tax expense on discrete items. Our operating tax rate before discrete items was $1.5 million32.8% and 28.9% for the three months ended September 30, 2017 comparedMarch 31, 2024 and 2023, respectively.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our Consolidated Financial Statements requires us to $1.9 million formake estimates and assumptions that affect the three months ended September 30, 2016. We recorded income taxes at the estimated effective rate, before discrete items,reported amounts of 40.0% for both the threeassets, liabilities, revenue and nine months ended September 30, 2017 and 2016. Income tax expense was $9.3 million for the nine months ended September 30, 2017 compared to $8.4 million for the nine months ended September 30, 2016.
During the third quarter of 2017, we recognized a tax benefit of $0.2 million which reducedexpenses. Understanding our effective tax rate to 39% for the nine months ended September 30, 2017. During the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016.
We have approximately $36.8 million of state net operating loss carry forwards that will expire between 2018 and 2038, if not utilized. Based on management’s assessment of the various state net operating losses, it has been determined that it is more likely than not that we will not be able to realize the tax benefits of certain portions of the state losses. Accordingly, a valuation allowance has been establishedaccounting policies and the deferred tax asset for the state operating lossesextent to which our management uses judgment, assumptions and estimates in applying these policies is reviewed every quarter. At September 30, 2017, the valuation allowance totaled $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
integral to understanding our Consolidated Financial Statements. Our primary sources of liquiditycritical accounting policies are more fully described in Part II, Item 8 “Financial Statements and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.
We generate cashSupplementary Data” in our operations primarily from at-need sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and costs of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item 1A “Risk Factors”Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2016.2023.
We intend to use cash on handhave identified Business Combinations and borrowings under our Credit Facility primarily to acquire funeral homeGoodwill as those accounting policies that require significant judgments, assumptions and cemetery businessesestimates and for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends. From time to time we may also use available cash to repurchase shares of our common stock in open market or privately negotiated transactions. Wethat have the ability to drawa significant impact on our revolving credit facility, subjectfinancial condition and results of operations. These policies are considered critical because they may result in fluctuations in our reported results from period to customary termsperiod 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 Credit Agreement. We believe that our existing cash balance, future cash flows from operationsmargins, operating income and borrowings under our Credit Facility described belownet earnings, as a percentage of revenue, will be sufficientconsistent from period to meetperiod. We evaluate our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividendscritical accounting estimates and acquisitions for the foreseeable future.
Cash Flows
We began 2017 with $3.3 million in cashjudgments required by our policies on an ongoing basis and other liquid investments and ended the third quarter with $0.8 million in cash. As of September 30, 2017, we had borrowings of $75.5 million outstanding on our revolving credit facility compared to $67.7 million outstandingupdate them as of December 31, 2016.
The following table sets forth the elements of cash flow for the nine months ended September 30, 2016 and 2017 (in millions):
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2016 | | 2017 |
Cash at January 1st | $ | 0.5 |
| | $ | 3.3 |
|
Cash flow from operating activities | 34.8 |
| | 30.8 |
|
Acquisitions and land for new construction | (15.1 | ) | | (0.7 | ) |
Purchase of land and buildings previously leased | (6.3 | ) | | — |
|
Net proceeds from the sale of other assets | 1.0 |
| | 0.4 |
|
Growth capital expenditures | (6.8 | ) | | (6.8 | ) |
Maintenance capital expenditures | (5.2 | ) | | (6.3 | ) |
Net (payments) borrowings on our revolving credit facility, term loan and long-term debt obligations | 0.3 |
| | (1.7 | ) |
Taxes paid on restricted stock vestings and exercise of non-qualified options | (0.6 | ) | | (0.5 | ) |
Dividends paid on common stock | (1.7 | ) | | (2.5 | ) |
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 0.7 |
| | 1.2 |
|
Purchase of treasury stock | — |
| | (16.4 | ) |
Payment of loan origination costs related to the credit facility | (0.7 | ) | | — |
|
Other financing costs | (0.1 | ) | | — |
|
Cash at September 30th | $ | 0.8 |
| | $ | 0.8 |
|
Operating Activities
For the nine months ended September 30, 2017, cash provided by operating activities was $30.8 million compared to cash provided by operating activities of $34.8 million for the nine months ended September 30, 2016, a decrease of $4.0 million, due primarily to the decline in preneed cemetery revenue and acquired funeral home operating profit margin in the second and third quarters of 2017 and unfavorable working capital changes, which include, the timing of payments for income taxes, payments for accrued severance for the retirement of a former executive and our Good To Great incentive compensation plan during the first quarter of 2017.
Investing Activities
Our investing activities resulted in a net cash outflow of $13.4 million for the nine months ended September 30, 2017 compared to $32.4 million for the nine months ended September 30, 2016, a decrease of $19.0 million. During the nine months ended September 30, 2017, we purchased real estate for funeral home parking lot expansion projects for approximately $0.7 million. Capital expenditures totaled $13.1 million, of which $6.8 million and $6.3 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily related to cemetery development costs of $3.0 million, construction costs related to two new funeral home facilities of approximately $2.5 million and renovations at certain businesses of $1.3 million. Maintenance capital expenditures in the nine months ended September 30, 2017 were primarily related to maintenance projects for facility repairs and improvements of $1.8 million, vehicle purchases of $1.7 million, IT infrastructure improvements, general equipment, and furniture purchases of $1.8 million, and paving roads, parking lots and landscaping projects of $1.0 million.
During the nine months ended September 30, 2016, we acquired three funeral home businesses for approximately $15.8 million. We purchased land for funeral home expansion projects for approximately $2.7 million. Additionally, we purchased land and buildings at four funeral home locations that were previously leased for approximately $6.3 million. Capital expenditures totaled $12.0 million, of which $6.8 million and $5.2 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily construction costs related to funeral home facilities of approximately $2.3 million, renovations at certain business locations of $1.3 million and cemetery development costs of $3.2 million. Maintenance capital expenditures in the nine months ended September 30, 2016 were primarily related to vehicle purchases of $1.2 million, general
equipment and furniture purchases of $1.6 million and maintenance projects such as paving roads, parking lots, facility repairs and general improvements of $2.4 million.
Financing Activities
Our financing activities resulted in a net cash outflow of $19.9 million for the nine months ended September 30, 2017 compared to $2.1 million for the nine months ended September 30, 2016, an increase of $17.8 million. During the nine months ended September 30, 2017, we had net payments on our revolving credit facility and term loan of $0.6 million. We also purchased treasury stock for $16.4 million and paid $2.5 million in dividends.
During the nine months ended September 30, 2016, we had net borrowings on our revolving credit facility and term loan of $1.3 million. We also paid transaction costs of approximately $0.7 million related to the Seventh Amendment of our Credit Facility and paid $1.7 million in dividends.
Dividends
On July 26, 2017 our Board declared a dividend of $0.05 per share, totaling approximately $0.8 million, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. For the three months ended September 30, 2016, we paid a quarterly dividend of $0.050 per share, totaling approximately $0.8 million. For the nine months ended September 30, 2016 and 2017, we paid total dividends of approximately $1.7 million and $2.5 million, respectively.
Share Repurchase
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the three months ended September 30, 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 this share repurchase program. We did not purchase any shares of common stock in the first or second quarter of 2017. 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.changing conditions.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.
Debt Obligations
The outstanding principal of our total long-term debt and capital lease obligations at September 30, 2017 totaled $218.8 million and consisted of $130.3 million under our term loan, $75.5 million outstanding under our revolving credit facility and $14.0 million in acquisition indebtedness and capital lease obligations.
As of September 30, 2017, we had a $300 million secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.
We have one letter of credit issued on November 30, 2016 and outstanding under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% and will expire on November 27, 2017. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Under the Credit Facility, outstanding borrowings bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. At September 30, 2017, the prime rate margin was equivalent to 1.125% and the LIBOR margin was 2.125%. The weighted average interest rate on the Credit Facility for the three and nine months ended September 30, 2017 was 3.4% and 3.1%, respectively.
We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by our subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Facility.
We were in compliance with the covenants contained in the Credit Agreement as of September 30, 2017. The Credit Agreement contains key ratios with which we must comply, including a requirement to maintain a leverage ratio of no more than 3.5 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of September 30, 2017, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 1.89 to 1.00.
Amortization of debt issuance costs related to our Credit Facility was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 and $0.3 million and $0.2 million for the nine months ended September 30, 2016 and 2017, respectively. The unamortized debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.
Convertible Subordinated Notes due 2021
On March 19, 2014, we issued $143.75 million aggregate principal amount of 2.75% convertible subordinated notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.
At September 30, 2017, the carrying amount of the equity component was approximately $18.0 million. At September 30, 2017, the principal amount of the liability component was $143.75 million and the net carrying amount was $123.2 million. The unamortized discount of $18.7 million and the unamortized debt issuance costs of $1.9 million as of September 30, 2017 are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized discount and the debt issuance costs for the three and nine months ended September 30, 2016 and 2017 was 6.75% and 2.75%, respectively.
Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $1.0 million for both the three months ended September 30, 2016 and 2017 and $3.0 million for both the nine months ended September 30, 2016 and 2017. Accretion of the discount on the Convertible Notes was $1.0 million and $1.1 million for the three months ended September 30, 2016 and 2017, respectively, and $2.9 million and $3.2 million for the nine months ended September 30, 2016 and 2017, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 and $0.4 million for both the nine months ended September 30, 2016 and 2017.
The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at September 30, 2017, is 44.5392 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.45 per share of common stock.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate. Generally, the death rate, iswith number of deaths generally higher during the winter months becausedue to the higher incidences of death from influenza and pneumonia are higher during this period thanas compared to other periods of the year. Seasonal fluctuations in the death rate may be further affected by epidemics and pandemics, like COVID-19, including any new or emerging public health threats. These unexpected fluctuations may not only increase death rates during the affected period, but also may subsequently decrease death rates following the affected period as a result of an acceleration of death rates (also referred to as a “pull forward effect”). As a result, we are unable to predict or forecast the duration or variation of the current death rate with any certainty.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
Item 3.Quantitative and Qualitative Disclosures About Market Risk.
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.risks other than those related to the impact of health and safety concerns from epidemics and pandemics 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, 2023.
The following quantitative and qualitative information is provided about financial instruments to which we are a party at September 30, 2017March 31, 2024 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.
Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as of September 30, 2017at March 31, 2024 are presented in Part 1, Item 1, “Condensed Notes to Consolidated Financial Statements,” Notes 3 and 6 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 1.51%0.87% 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 September 30, 2017,At March 31, 2024, we had outstanding borrowings under the Credit Facility of $75.5 million under our $150.0
million revolving credit facility and approximately $130.3 million outstanding on our term loan.$154.1 million. Any further borrowings or voluntary prepayments against the revolving credit facilityCredit 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 LIBORthe BSBY rate plus a margin.an applicable margin based on our leverage ratio. At September 30, 2017,March 31, 2024, the prime rate margin was equivalent to 1.125%2.375% and the LIBORBSBY rate margin was 2.125%3.375%. Assuming the outstanding balance remains unchanged, a change of 100 basis
points in our borrowing rate would result in a change in income before taxes of $2.1$1.5 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 ConvertibleSenior Notes bear interest at athe fixed annual rate of 2.75% per year. The Convertible4.25%. We may redeem the Senior Notes, do not contain a call feature.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 September 30, 2017,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 March 31, 2024, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $396.1 million and the fair value of these notesthe Senior Notes was approximately $179.9$355.2 million based on the last traded or broker quoted price.price, reported by Financial Industry Regulatory Authority. Increases in market interest rates may cause the value of the ConvertibleSenior Notes to decrease, but such changes will not affect our interest costs.
The remainder of our long-term debt and leases consistsconsist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates could causecauses the fair value of those liabilities to decrease, but such changes will not affect our interest costs.
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Item 4. | Controls and Procedures. |
Item 4.Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officer,officers, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionSEC's rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial officer,officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial officerofficers have concluded that our disclosure controls and procedures are effective as of September 30, 2017at March 31, 2024 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 reportQuarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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Item 1. | Legal Proceedings. |
Item 1.Legal Proceedings.
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.
We self-insure against certain risks and carry insurance with coverage and coverage limits for risk 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 provides 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.
Item 1A.Risk Factors.
There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A “Risk Factors” ofin our Annual Report on Form 10-K for the year ended December 31, 2016.2023. Readers should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016,2023, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, 20162023 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.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds.Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended September 30, 2017:March 31, 2024:
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Dollar Value of Shares That May Yet Be Purchased Under the Program |
| | | | | | | | |
July 1, 2017 - July 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
August 1, 2017 - August 31, 2017 | | 285,353 |
| | $ | 24.30 |
| | 185,353 |
| | $ | 20,450,852 |
|
September 1, 2017 - September 30, 2017 | | 388,701 |
| | $ | 24.26 |
| | 388,701 |
| | $ | 11,019,052 |
|
Total for quarter ended September 30, 2017 | | 674,054 |
| | | | 574,054 |
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Period | | Total Number of Shares Purchased(1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Dollar Value of Shares That May Yet Be Purchased Under the Program(2) |
| | | | | | | | |
January 1, 2024 - January 31, 2024 | | — | | | $ | — | | | — | | | $ | 48,898,769 | |
February 1, 2024 - February 29, 2024 | | 14,597 | | | $ | 25.58 | | | — | | | $ | 48,898,769 | |
March 1, 2024 - March 31, 2024 | | 1,718 | | | $ | 26.14 | | | — | | | $ | 48,898,769 | |
Total for quarter ended March 31, 2024 | | 16,315 | | | | | — | | | |
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(1) | Represents shares surrendered by employees to pay taxes withheld upon the vesting of restricted stock awards. |
(2) | | | |
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(See Part I, Item 1, | ) | On August 18, 2017, we purchased 100,000 shares of Financial Statements, Note 14 for additional information on our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million.The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of thepublicly announced share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. program. |
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Item 3. | Defaults Upon Senior Securities.Item 3.Defaults Upon Senior Securities. |
Not applicable.
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Item 4. | Mine Safety Disclosures. |
Item 4.Mine Safety Disclosures.
Not applicable.
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Item 5. | Other Information. |
None.Item 5.Other Information.
Item 6.Exhibits.
The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the Exhibit Index accompanying this Quarterly Report on Form 10-Q and are incorporated herein by reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | CARRIAGE SERVICES, INC. |
Date: | October 25, 2017May 3, 2024 | /s/ Viki K. BlindermanL. Kian Granmayeh |
| | Viki K. BlindermanL. Kian Granmayeh |
| | SeniorExecutive Vice President, PrincipalChief Financial Officer and SecretaryTreasurer |
| | (Principal Financial Officer) |
CARRIAGE SERVICES, INC.
INDEX OF EXHIBITS
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Exhibit No. | | Description |
3.1 | | |
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3.2 | | | | Description10.2 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 1997, filed on November 14, 1997. |
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3.3 | | |
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3.4 | | |
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10.1 | | |
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10.2 | | |
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*10.3 | | |
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*10.4 | | |
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*10.5 | | |
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*10.6 | | |
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*10.7 | | |
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10.8 | | |
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*31.1 | | |
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*31.2 | | |
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**32 | | |
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*101.INS | | XBRL Instance Document - the instance document does not appear in the Interactive Data File because XBRL tags are embedded within the Inline XBRL document. |
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*101101.SCH | | Inline XBRL Taxonomy Extension Schema Documents. |
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*101.CAL | | Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
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*101.LAB | | Inline XBRL Taxonomy Extension Label Linkbase Document. |
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*101.PRE | | Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
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*101.DEF | | Inline XBRL Taxonomy Extension Definition Linkbase Document. |
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*104 | | Cover Page Interactive Data Files.File (formatted as Inline XBRL and contained in Exhibit 101). |
__________________
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(*) | Filed herewith. |
(**) | Furnished herewith. |
(*(†) | Filed herewith. |
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(†) | Management contract or compensatory plan or arrangement. |