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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 meaning 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, 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 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. While we believe these assumptions 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 revenue 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:
•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, if at all;
•the potential adverse effects on the Company's business, financial and equity performance if management fails to meet the expectations of 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 and Strategic Acquisition Models;
•the effects of competition;
•changes in the number of deaths in our markets, which are not predictable from market to market or over the short term;
•changes in consumer preferences and our ability to adapt to or meet those changes;
•our ability to generate preneed 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, 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;
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•increased or unanticipated costs, such as merchandise, goods, insurance or 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 conclusion 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 funeral 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, 2023.
Investors 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.
OVERVIEW
General
We operate in two business segments: Funeral Home operations, which currently accounts for approximately 65% of our total revenue, and Cemetery operations, which currently accounts for approximately 35% of our total revenue. At September 30, 2024, we operated 162 funeral homes in 26 states and 31 cemeteries in 11 states. We compete with other publicly held, privately held and independent operators of funeral and cemetery companies.
Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and memorial 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 cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as memorial markers, outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis.
COMPANY DEVELOPMENTS
Credit Facility
On July 31, 2024, the Company entered into a fourth amendment, (the “Credit Facility Amendment”), to our senior secured revolving credit facility (as amended, the “Credit Facility”), with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Facility Amendment provided, among other things, for (i) the extension of the maturity date of the Credit Facility to July 31, 2029, provided that, if the Senior Notes (as defined in the Credit Facility) have a stated maturity date that is prior to July 31, 2029, then the maturity date shall instead be the date that is 91 days prior to the stated maturity date of the Senior Notes; (ii) the establishment of Term Secured Overnight Financing Rate (“SOFR”) as a benchmark rate and the removal of BSBY from the Credit Facility, including conforming revisions to certain defined terms under the Credit Facility; (iii) the conversion of each existing BSBY Rate Loan (as defined in the Credit Facility prior to giving effect to the Credit Facility Amendment) to a Term SOFR Loan (as defined in the Credit Facility); (iv) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (v) the removal of certain mandatory prepayments arising from the issuance of either Equity Interests or Debt (as both are defined by the Credit Facility); and (vi) modifications to the permitted investments covenant, relating to the Company’s ability to make certain acquisitions, subject to the satisfaction of certain conditions therein.
Inflationary and Macroeconomic Trends
During the third quarter of 2024, we continued to experience 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. Also, during the third quarter, after giving effect to the Credit Facility Amendment, we experienced lower variable interest rates under our Credit Facility, which resulted in lower borrowing costs during the quarter compared to the prior year. We expect this trend to continue as we remain focused on 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 third quarter of 2024, we continued to experience 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
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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 primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.
We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our Credit Facility, as needed, subject to its customary terms and conditions.
Our plan is to remain focused on executing our strategic objectives and growth strategy. This includes prioritizing our capital allocation for debt repayments, the payment of dividends and debt obligations, internal growth capital expenditures, and general corporate purposes, as allowed under our Credit Facility. We expect to fund these payments using cash on hand and borrowings under our Credit Facility. We believe that our existing and anticipated cash resources, including, as needed, additional borrowings or other financings that we may be able to obtain, will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months, as well as our long-term financial obligations.
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.
Cash Flows
We began 2023 with $1.5 million in cash and ended the third quarter with $1.3 million in cash. At September 30, 2024, we had borrowings of $140.0 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):
| Nine months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Cash at beginning of the year | $ | 1,523 | $ | 1,170 | |||||||
| Net cash provided by operating activities | 42,716 | 61,849 | |||||||||
| Acquisitions of businesses | — | (44,000) | |||||||||
| Proceeds from divestitures and sale of other assets | 12,015 | 2,296 | |||||||||
| Proceeds from insurance claims | 403 | 1,388 | |||||||||
| Capital expenditures | (11,710) | (13,069) | |||||||||
| Net cash provided by (used in) investing activities | 708 | (53,385) | |||||||||
| Net (payments) borrowings on our Credit Facility, acquisition debt and finance lease obligations | (39,564) | (3,891) | |||||||||
| Payment of debt issuance costs for the Credit Facility | (782) | — | |||||||||
| Net proceeds from employee equity plans | 1,757 | 955 | |||||||||
| Dividends paid on common stock | (5,098) | (5,023) | |||||||||
| Net cash used in financing activities | (43,687) | (7,959) | |||||||||
| Cash at end of the period | $ | 1,260 | $ | 1,675 | |||||||
Operating Activities
For the nine months ended September 30, 2024, cash provided by operating activities was $42.7 million compared to $61.8 million for the nine months ended September 30, 2023. The decrease of $19.1 million is primarily due to the following non-recurring events, which occurred during the first nine months of 2023: i) an $8.6 million withdrawal of realized capital
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gains and earnings from our preneed funeral and cemetery trust investments; and ii) the receipt of a $6.0 million incentive payment from a vendor for entering into a strategic partnership agreement to market and sell prearranged funeral services in the future.
Investing Activities
Our investing activities resulted in a net cash inflow of $0.7 million for the nine months ended September 30, 2024, compared to a net cash outflow of $53.4 million for the nine months ended September 30, 2023. The increase of $54.1 million is due to the activity described below.
Acquisition and Divestiture Activity
During the nine months ended September 30, 2024, we sold six funeral homes and one cemetery for an aggregate of $10.9 million. Additionally, we sold real property for $1.1 million.
During the nine months ended September 30, 2023, we acquired a business consisting of three funeral homes, two cemeteries and one cremation focused business for $44.0 million. In addition, we sold two funeral homes and two cemeteries for $1.1 million and real property for $1.2 million.
Insurance Proceeds
During the nine months ended September 30, 2024, we received proceeds of $0.4 million from our property insurance policy for the reimbursement of renovation costs for certain of our funeral businesses damaged by Hurricane Ian that occurred during the third quarter of 2022.
During the nine months ended September 30, 2023, we received proceeds of $1.4 million from our property insurance policy for the reimbursement of renovation costs for certain of our funeral businesses damaged by Hurricane Ian that occurred during the third quarter of 2022 and a fire that occurred during the first quarter of 2023.
Capital Expenditures
For the nine months ended September 30, 2024, our capital expenditures (comprised of growth and maintenance spend) totaled $11.7 million compared to $13.1 million for the nine months ended September 30, 2023, a decrease of $1.4 million.
The following tables present our growth and maintenance capital expenditures (in thousands):
| Nine months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Growth | |||||||||||
| Cemetery development | $ | 5,288 | $ | 5,128 | |||||||
Renovations at certain businesses (1) | 1,371 | 1,905 | |||||||||
| Other | 38 | 110 | |||||||||
| Total Growth | $ | 6,697 | $ | 7,143 | |||||||
| (1) | During the nine months ended September 30, 2023, we spent $0.5 million for renovations on two businesses that were affected by Hurricane Ian, which occurred during the third quarter of 2022 and $0.4 million for renovations on one business that was damaged by a fire, which occurred during the first quarter of 2023, all of which was reimbursed by our property insurance. | |||||||||||||
| Nine months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Maintenance | |||||||||||
| General equipment and furniture | $ | 2,337 | $ | 3,584 | |||||||
| Facility repairs and improvements | 1,696 | 721 | |||||||||
| Vehicles | 162 | 568 | |||||||||
| Paving roads and parking lots | 472 | 394 | |||||||||
| Other | 346 | 659 | |||||||||
| Total Maintenance | $ | 5,013 | $ | 5,926 | |||||||
Financing Activities
Our financing activities resulted in a net cash outflow of $43.7 million for the nine months ended September 30, 2024 compared to a net cash outflow of $8.0 million for the nine months ended September 30, 2023, an increase of $35.7 million.
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During the nine months ended September 30, 2024, we had net payments on our Credit Facility, acquisition debt and finance leases of $39.6 million and we paid $5.1 million in dividends.
During the nine months ended September 30, 2023, we had net payments on our Credit Facility, acquisition debt and finance leases of $3.9 million and we paid $5.0 million in dividends.
Share Repurchase
We did not repurchase any shares during the nine months ended September 30, 2024 and 2023. At September 30, 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 | |||||||
June 1st | $ | 0.1125 | $ | 1,704 | |||||||
September 1st | $ | 0.1125 | $ | 1,708 | |||||||
| 2023 | Per Share | Dollar Value | |||||||||
March 1st | $ | 0.1125 | $ | 1,661 | |||||||
June 1st | $ | 0.1125 | $ | 1,679 | |||||||
September 1st | $ | 0.1125 | $ | 1,683 | |||||||
Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and acquisition debt at September 30, 2024 is as follows (in thousands):
| September 30, 2024 | |||||
| Credit Facility | $ | 140,000 | |||
| Operating leases | 17,491 | ||||
| Finance leases | 6,703 | ||||
| Acquisition debt | 5,938 | ||||
| Total | $ | 170,132 | |||
Credit Facility
At September 30, 2024, our 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.
On July 31, 2024, the Company entered into a Credit Facility Amendment, to our Credit Facility, with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Facility Amendment provided, among other things, for (i) the extension of the maturity date of the Credit Facility to July 31, 2029, provided that, if the Senior Notes (as defined in the Credit Facility) have a stated maturity date that is prior to July 31, 2029, then the maturity date shall instead be the date that is 91 days prior to the stated maturity date of the Senior Notes; (ii) the establishment of Term SOFR as a benchmark rate and the removal of BSBY from the Credit Facility, including conforming revisions to certain defined terms under the Credit Facility; (iii) the conversion of each existing BSBY Rate Loan (as defined in the Credit Facility prior to giving effect to the Credit Facility Amendment) to a Term SOFR Loan (as defined in the Credit Facility); (iv) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (v) the removal of certain mandatory prepayments arising from the issuance of either Equity Interests or Debt (as both are defined by the Credit Facility); and (vi) modifications to the permitted investments covenant, relating to the Company’s ability to make certain acquisitions, subject to the satisfaction of certain conditions therein.
We incurred $0.8 million in transactions costs related to the Credit Facility Amendment, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.
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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 September 30, 2024, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 5.25 to 1.00 and (B) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility at September 30, 2024.
At September 30, 2024, we had outstanding borrowings under the Credit Facility of $140.0 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 automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2024, we had $107.4 million of availability under the Credit Facility.
The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Credit Facility interest expense | $ | 3,230 | $ | 4,508 | $ | 10,669 | $ | 12,987 | |||||||||||||||
| Credit Facility amortization of debt issuance costs | 105 | 138 | 381 | 414 | |||||||||||||||||||
At September 30, 2024, our outstanding borrowings under our Credit Facility bore interest at a prime rate or the SOFR rate, plus an applicable margin based on our leverage ratio. At September 30, 2024, the prime rate margin was equivalent to 1.50% and the SOFR term margin was 2.60%. The weighted average interest rate on our Credit Facility was 8.5% and 9.0% for the three months ended September 30, 2024 and 2023, respectively, and 8.7% and 8.5% for the nine months ended September 30, 2024 and 2023, 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 lease 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 September 30, 2024, operating and finance lease obligations were $35.9 million, with $5.5 million payable within 12 months.
The components of lease cost are as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Operating lease cost | $ | 1,007 | $ | 887 | $ | 2,984 | $ | 2,638 | |||||||||||||||
| Short-term lease cost | 63 | 75 | 157 | 261 | |||||||||||||||||||
| Variable lease cost | 86 | 69 | 278 | 183 | |||||||||||||||||||
| Finance lease cost: | |||||||||||||||||||||||
| Depreciation of leased assets | $ | 126 | $ | 190 | $ | 378 | $ | 407 | |||||||||||||||
| Interest on lease liabilities | 119 | 137 | 366 | 345 | |||||||||||||||||||
| Total finance lease cost | 245 | 327 | 744 | 752 | |||||||||||||||||||
| Total lease cost | $ | 1,401 | $ | 1,358 | $ | 4,163 | $ | 3,834 | |||||||||||||||
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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 range from nine to twenty years. At September 30, 2024, acquisition debt obligations were $8.9 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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Acquisition debt imputed interest expense | $ | 102 | $ | 70 | $ | 309 | $ | 212 | |||||||||||||||
Senior Notes
At September 30, 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 effective interest method over the remaining term of approximately 56 months of the Senior Notes. The effective interest rates on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes for both the three and nine months ended September 30, 2024 and 2023 were 4.42% and 4.30%, respectively.
At September 30, 2024, the fair value of the Senior Notes, which are Level 2 measurements, was $371.4 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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Senior Notes interest expense | $ | 4,250 | $ | 4,250 | $ | 12,750 | $ | 12,750 | |||||||||||||||
| Senior Notes amortization of debt discount | 136 | 129 | 402 | 384 | |||||||||||||||||||
| Senior Notes amortization of debt issuance costs | 38 | 37 | 114 | 110 | |||||||||||||||||||
At September 30, 2024, our future interest payments on our outstanding balance were $85.0 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 September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Revenue | $ | 100,687 | $ | 90,494 | $ | 306,498 | $ | 283,686 | |||||||||||||||
| Funeral contracts | 10,713 | 11,058 | 33,483 | 34,904 | |||||||||||||||||||
| Average revenue per funeral contract, excluding preneed funeral trust earnings | $ | 5,540 | $ | 5,373 | $ | 5,557 | $ | 5,357 | |||||||||||||||
| Preneed interment rights (property) sold | 3,511 | 2,785 | 11,127 | 8,680 | |||||||||||||||||||
| Average price per preneed interment right sold | $ | 5,360 | $ | 5,134 | $ | 5,408 | $ | 4,990 | |||||||||||||||
| Gross profit | $ | 35,490 | $ | 27,412 | $ | 109,745 | $ | 89,669 | |||||||||||||||
| Net income | $ | 9,866 | $ | 4,645 | $ | 23,098 | $ | 21,775 | |||||||||||||||
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Revenue for the three months ended September 30, 2024 increased $10.2 million compared to the three months ended September 30, 2023. We experienced a 26.1% increase in the number of preneed interment rights (property) sold and a 4.4% increase in the average price per interment right sold. Additionally, we experienced a 3.1% decrease in funeral contract volume, which was offset by a 3.1% increase in the average revenue per funeral contract. 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. Furthermore, despite the funeral contract volume decline impacted by the COVID-19 related pull forward effect, we continue to increase our average revenue per funeral contract through the successful execution of our enhanced pricing strategy.
Gross profit for the three months ended September 30, 2024 increased $8.1 million compared to the three months ended September 30, 2023, primarily due to the increase in revenue from our cemetery segment, as well as increases in gross profit margins from both segments, as we continue to successfully execute on our cost management initiatives.
Net income for the three months ended September 30, 2024 increased $5.2 million compared to the three months ended September 30, 2023. We experienced an $8.1 million increase in gross profit and a $1.2 million decrease in interest expense, which was partially offset by a $2.9 million increase in income tax expense and a $0.9 million increase in general, administrative and other expenses.
Revenue for the nine months ended September 30, 2024 increased $22.8 million compared to the nine months ended September 30, 2023. We experienced a 28.2% increase in the number of preneed interment rights (property) sold and an 8.4% increase in the average price per interment right sold. Additionally, we experienced a 4.1% decrease in funeral contract volume, which was partially offset by a 3.7% increase in the average revenue per funeral contract. 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. Furthermore, despite the funeral contract volume decline impacted by the COVID-19 related pull forward effect, we continue to increase our average revenue per funeral contract through the successful execution of our enhanced pricing strategy.
Gross profit for the nine months ended September 30, 2024 increased $20.1 million compared to the nine months ended September 30, 2023, primarily due to the increase in revenue from our cemetery segment, as well as increases in gross profit margins from both segments, as we continue to successfully execute on our cost management initiatives.
Net income for the nine months ended September 30, 2024 increased $1.3 million compared to the nine months ended September 30, 2023. We experienced a $20.1 million increase in gross profit and a $2.1 million decrease in interest expense, which was partially offset by a $15.4 million increase in general, administrative and other expenses, primarily composed of one-time costs related to executive severance payments and our agreement to pay our financial advisor in connection with the Company's previously concluded review of strategic alternatives and a $3.9 million increase in income tax expense.
Further discussion of revenue and the components of gross profit for our funeral home and cemetery segments is presented under “Results of Operations.”
Further discussion of general, administrative and other expenses, interest expense, income taxes and other components of income and expenses are presented under “Other Financial Statement Items.”
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended September 30, 2024 issued on October 30, 2024, and discussed in the corresponding earnings conference call. The Trend Report is used as a supplemental financial statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
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Below is a reconciliation of gross profit (a GAAP financial measure) to adjusted operating profit (a non-GAAP financial measure) (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Gross profit | $ | 35,490 | $ | 27,412 | $ | 109,745 | $ | 89,669 | |||||||||||||||
| Cemetery property amortization | 1,957 | 1,318 | 6,273 | 4,411 | |||||||||||||||||||
| Field depreciation expense | 3,411 | 3,634 | 10,283 | 10,546 | |||||||||||||||||||
| Regional and unallocated funeral and cemetery costs | 4,085 | 3,771 | 12,172 | 13,339 | |||||||||||||||||||
Adjusted operating profit(1) | $ | 44,943 | $ | 36,135 | $ | 138,473 | $ | 117,965 | |||||||||||||||
| (1) | Adjusted operating profit is defined as gross profit plus cemetery property amortization, field depreciation expense and regional and unallocated funeral and cemetery costs. | |||||||||||||
Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of adjusted operating profit (a non-GAAP financial measure) by segment (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Funeral Home | $ | 25,097 | $ | 23,962 | $ | 81,966 | $ | 76,875 | |||||||||||||||
| Cemetery | 19,846 | 12,173 | 56,507 | 41,090 | |||||||||||||||||||
| Adjusted operating profit | $ | 44,943 | $ | 36,135 | $ | 138,473 | $ | 117,965 | |||||||||||||||
Adjusted operating profit margin(1) | 44.6% | 39.9% | 45.2% | 41.6% | |||||||||||||||||||
| (1) | Adjusted operating profit margin is defined as operating profit as a percentage of revenue. | |||||||||||||
Further discussion of adjusted operating profit for our funeral home and cemetery segments is presented under “Results of Operations.”
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three and nine months ended September 30, 2024 and 2023.
The term “operating” in the funeral home and cemetery segments refers to all funeral homes and cemeteries that we owned and operated in the current 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 and three funeral homes we merged with other businesses we own in existing markets during the nine months ended September 30, 2024, and two funeral homes we sold and one funeral home we merged with another business we own in an existing market during the nine months ended September 30, 2023.
The term “divested” when discussed in the cemetery segment refers to one cemetery we sold during the nine months ended September 30, 2024, and two cemeteries we sold during the nine months ended September 30, 2023.
The term “ancillary” in the funeral home segment represents our flower shop, monument business, pet cremation business and online cremation businesses.
Cemetery property amortization, field depreciation expense and regional and unallocated funeral and cemetery costs, are not included in adjusted operating profit, a non-GAAP financial measure. Adding back these items will result in gross profit, a GAAP financial measure.
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Funeral Home Segment
The following table sets forth certain information regarding our revenue and adjusted operating profit for our funeral home operations (in thousands):
| Three months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenue: | |||||||||||
| Operating | $ | 59,347 | $ | 58,533 | |||||||
| Divested | — | 882 | |||||||||
| Ancillary | 1,046 | 1,156 | |||||||||
| Other | 3,309 | 2,055 | |||||||||
| Total | $ | 63,702 | $ | 62,626 | |||||||
| Adjusted operating profit (loss): | |||||||||||
| Operating | $ | 22,384 | $ | 21,871 | |||||||
| Divested | (160) | 165 | |||||||||
| Ancillary | 156 | 147 | |||||||||
| Other | 2,717 | 1,779 | |||||||||
| Total | $ | 25,097 | $ | 23,962 | |||||||
| The following consolidated operating measures reflect the significant metrics over this comparative period: | |||||||||||
| Contract volume | 10,713 | 11,058 | |||||||||
| Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,540 | $ | 5,373 | |||||||
| Average revenue per contract, including preneed funeral trust earnings | $ | 5,689 | $ | 5,522 | |||||||
| Cremation rate | 60.7% | 59.5% | |||||||||
Funeral home operating revenue increased $0.8 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The increase in operating revenue is primarily driven by a 3.1% increase in the average revenue per contract excluding preneed interest, offset by a 3.1% decrease in contract volume. Despite the funeral contract volume decline impacted by the COVID-19 related pull forward effect, we continue to increase our average revenue per funeral contract through the successful execution of our enhanced pricing strategy.
Funeral home adjusted operating profit for the three months ended September 30, 2024 increased $0.5 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 30 basis points to 37.7%. Operating expenses as a percentage of revenue decreased 0.4%, with the largest decrease in salaries and benefits expenses, while other operating expenses remained relatively flat. This 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, decreased $0.1 million, while ancillary adjusted operating profit remained flat for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The decrease in ancillary revenue is primarily due to a decision to cease the operations of a cremation focused business at our Bakersfield, CA business, which did not contribute materially to adjusted operating profit.
Other revenue and other adjusted operating profit, which consists of preneed funeral insurance commissions and earnings from delivered preneed funeral trust and insurance contracts, increased $1.3 million and $0.9 million, respectively, for the three months ended September 30, 2024, compared to the same period in 2023. These increases are primarily due to an increase of $1.3 million in our general agency commission income earned on the sale of preneed insurance policies in the third quarter of 2024. compared to the same period in 2023. This is 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.
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The following table sets forth certain information regarding our revenue and adjusted operating profit for our funeral home operations (in thousands):
| Nine months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenue: | |||||||||||
| Operating | $ | 185,150 | $ | 183,673 | |||||||
| Divested | 916 | 3,323 | |||||||||
| Ancillary | 3,375 | 3,445 | |||||||||
| Other | 9,687 | 6,775 | |||||||||
| Total | $ | 199,128 | $ | 197,216 | |||||||
| Adjusted operating profit (loss): | |||||||||||
| Operating | $ | 73,277 | $ | 69,749 | |||||||
| Divested | (125) | 809 | |||||||||
| Ancillary | 522 | 366 | |||||||||
| Other | 8,292 | 5,951 | |||||||||
| Total | $ | 81,966 | $ | 76,875 | |||||||
| The following consolidated operating measures reflect the significant metrics over this comparative period: | |||||||||||
| Contract volume | 33,483 | 34,904 | |||||||||
| Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,557 | $ | 5,357 | |||||||
| Average revenue per contract, including preneed funeral trust earnings | $ | 5,720 | $ | 5,514 | |||||||
| Cremation rate | 59.8% | 59.0% | |||||||||
Funeral home operating revenue increased $1.5 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase in operating revenue is primarily driven by a 3.7% increase in the average revenue per contract excluding preneed interest, which was partially offset by a 4.1% decrease in contract volume. Despite the funeral contract volume decline impacted by the COVID-19 related pull forward effect, we continue to increase 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 year.
Funeral home adjusted operating profit for the nine months ended September 30, 2024, increased $3.5 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 160 basis points to 39.6%. Operating expenses as a percentage of revenue decreased 1.6%, with the largest decreases in salaries and benefits expenses of 0.9%, other funeral costs of 0.2% and promotional expenses of 0.2%, which reflects the continued progress we have made successfully executing on our cost management initiatives this year.
Ancillary revenue, which represents revenue from our flower shop, monument business, pet cremation business and online cremation businesses decreased $0.1 million, while ancillary adjusted operating profit increased $0.2 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The lack of growth in ancillary revenue is primarily due to a decision to cease the operations of a cremation focused business at our Bakersfield, CA business, which did not contribute materially to adjusted operating profit.
Other revenue and other adjusted operating profit, which consists of preneed funeral insurance commissions and earnings from delivered preneed funeral trust and insurance contracts, increased $2.9 million and $2.3 million, respectively, for the nine months ended September 30, 2024, compared to the same period in 2023. These increases are primarily due to an increase of $2.9 million in our general agency commission income earned on the sale of preneed insurance policies through the third quarter of 2024, compared to the same period in 2023. This is 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.
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Cemetery Segment
The following table sets forth certain information regarding our revenue and adjusted operating profit for our cemetery operations (in thousands):
| Three months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenue: | |||||||||||
| Operating | $ | 32,988 | $ | 24,315 | |||||||
| Divested | — | 265 | |||||||||
| Other | 3,997 | 3,288 | |||||||||
| Total | $ | 36,985 | $ | 27,868 | |||||||
| Adjusted operating profit (loss): | |||||||||||
| Operating | $ | 15,883 | $ | 8,980 | |||||||
| Divested | (3) | 27 | |||||||||
| Other | 3,966 | 3,166 | |||||||||
| Total | $ | 19,846 | $ | 12,173 | |||||||
| The following consolidated operating measures reflect the significant metrics over this comparative period: | |||||||||||
| Preneed revenue as a percentage of operating revenue | 70.0% | 62.0% | |||||||||
| Preneed revenue (in thousands) | $ | 23,207 | $ | 15,168 | |||||||
| Atneed revenue (in thousands) | $ | 9,781 | $ | 9,412 | |||||||
| Number of preneed interment rights sold | 3,511 | 2,785 | |||||||||
| Average price per interment right sold | $ | 5,360 | $ | 5,134 | |||||||
Cemetery operating revenue increased $8.7 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, as we experienced a 26.1% increase in the number of preneed interment rights (property) sold and a 4.4% increase in the average price per interment right sold. Cemetery atneed revenue, which represents approximately 30.0% of our total operating revenue, increased $0.4 million for the three months ended September 30, 2024, compared to the same period in 2023, 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 continue to focus on executing our strategic objectives.
Cemetery adjusted operating profit increased $6.9 million for the three months ended September 30, 2024, compared to the three months ended September 30, 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 1,120 basis points to 48.1%. Operating expenses as a percentage of revenue decreased 11.5%, with the largest decreases in salaries and benefits expenses of 4.7%, promotional expense of 2.9%, merchandise costs of 1.4%, allowance for credit losses of 1.2% and general and administrative costs of 0.9%, which reflects the continued progress we have made successfully executing on our cost management initiatives this quarter.
Other revenue and other adjusted operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, increased $0.7 million and $0.8 million, respectively, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to market performance in our perpetual care trust fund and an increase in realized gains on preneed merchandise and services that were delivered in the third quarter of 2024 compared to the same period of 2023.
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The following table sets forth certain information regarding our revenue and adjusted operating profit for our cemetery operations (in thousands):
| Nine months ended September 30, | |||||||||||
| 2024 | 2023 | ||||||||||
| Revenue: | |||||||||||
| Operating | $ | 95,339 | $ | 74,465 | |||||||
| Divested | 154 | 904 | |||||||||
| Other | 11,877 | 11,101 | |||||||||
| Total | $ | 107,370 | $ | 86,470 | |||||||
| Adjusted operating profit (loss): | |||||||||||
| Operating | $ | 44,900 | $ | 30,163 | |||||||
| Divested | (35) | 187 | |||||||||
| Other | 11,642 | 10,740 | |||||||||
| Total | $ | 56,507 | $ | 41,090 | |||||||
| The following consolidated operating measures reflect the significant metrics over this comparative period: | |||||||||||
| Preneed revenue as a percentage of operating revenue | 69.0% | 63.0% | |||||||||
| Preneed revenue (in thousands) | $ | 66,150 | $ | 47,016 | |||||||
| Atneed revenue (in thousands) | $ | 29,343 | $ | 28,353 | |||||||
| Number of preneed interment rights sold | 11,127 | 8,680 | |||||||||
| Average price per interment right sold | $ | 5,408 | $ | 4,990 | |||||||
Cemetery operating revenue increased $20.9 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, as we experienced a 28.2% increase in the number of preneed interment rights (property) sold and an 8.4% increase in the average price per interment right sold. Cemetery atneed revenue, which represents approximately 31.0% of our total operating revenue, increased $1.0 million for the nine months ended September 30, 2024, compared to the same period in 2023, 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 continue to focus on executing our strategic objectives.
Cemetery adjusted operating profit increased $14.7 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 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 660 basis points to 47.1%. Operating expenses as a percentage of revenue decreased 6.7%, with the largest decreases in salaries and benefits expenses of 3.8%, merchandise costs of 0.8%, allowance for credit losses of 0.5% and promotional expense of 0.4%, which reflects the continued progress we have made successfully executing on our cost management initiatives this quarter.
Other revenue and other adjusted operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, increased $0.8 million and $0.9 million, respectively, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. These increases are primarily due to an increase in market performance in our perpetual care trust fund, an increase in realized gains on preneed merchandise and services that were delivered in the third quarter of 2024, and an increase finance charge revenue related to the increase in cemetery sales during the current year.
Cemetery property amortization. Cemetery property amortization totaled $2.0 million and $6.3 million for the three and nine months ended September 30, 2024, respectively, an increase of $0.6 million and $1.9 million compared to the same periods in 2023, primarily driven by the increase in property sold across our cemetery portfolio.
Field depreciation. Depreciation expense for our field businesses totaled $3.4 million and $10.3 million for the three and nine months ended September 30, 2024, respectively, a decrease of $0.2 million and $0.3 million compared to the same periods in 2023, primarily driven by our business decision in 2023 to lease vehicles rather than purchase them.
Regional and unallocated funeral and cemetery costs. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure.
Regional and unallocated funeral and cemetery costs totaled $4.1 million for the three months ended September 30, 2024, an increase of $0.3 million compared to the same period in 2023, primarily driven by an increase in leadership and development
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expenses as we focus on the continued education of our teams to ensure the successful implementation of our various initiatives.
Regional and unallocated funeral and cemetery costs totaled $12.2 million for the nine months ended September 30, 2024, a decrease of $1.2 million compared to the same period in 2023, primarily driven by a decrease in incentive compensation costs.
Other Financial Statement Items
General, administrative and other. General, administrative and other expenses, which include salaries and benefits and cash and equity incentive compensation for our Houston support office, totaled $12.2 million for the three months ended September 30, 2024, an increase of $0.9 million compared to the same period in 2023, primarily driven by the following: i) a $1.1 million expected increase in other professional fees primarily related to the development of our digital transformation project; ii) a $0.3 million increase primarily related to consulting fees paid to our former Executive Chairman of the Board pursuant to his Transition Agreement and to our former Chief Financial Officer pursuant to his Separation and Release Agreement, and iii) a $0.4 million net increase in all other expenses. These increases were offset by a $0.9 million decrease in consulting fees related to the Company's previously concluded review of strategic alternatives.
General, administrative and other expenses totaled $47.0 million for the nine months ended September 30, 2024, an increase of $15.4 million compared to the same period in 2023, primarily driven by the following: i) a $6.2 million increase in salary and benefits expenses and cash and equity incentive compensation costs, primarily driven by the termination expense of our former Executive Chairman of the Board pursuant to his Transition Agreement and termination expense for our former Chief Financial Officer pursuant to his Separation and Release Agreement; ii) a $5.2 million increase primarily related to our agreement to pay our financial advisor in connection with the Company's previously concluded review of strategic alternatives; iii) a $3.1 million expected increase in other professional fees primarily related to the development of our digital transformation project; iv) a $0.6 million increase related to consulting fees paid to our former Executive Chairman of the Board pursuant to his Transition Agreement and our former Chief Financial Officer pursuant to his Separation and Release Agreement; and v) a $0.3 million net increase in all other expenses.
Net loss on divestitures, disposals and impairments charges. The components of Net loss on divestitures, disposals and impairment charges are as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Net (gain) loss on divestitures | $ | (295) | $ | 24 | $ | 1,214 | $ | 106 | |||||||||||||||
| Impairment of intangibles and PPE | 637 | 211 | 637 | 454 | |||||||||||||||||||
| Net loss on disposals of fixed assets | 45 | 188 | 104 | 369 | |||||||||||||||||||
| Total | $ | 387 | $ | 423 | $ | 1,955 | $ | 929 | |||||||||||||||
During the nine months ended September 30, 2024, we sold six funeral homes and one cemetery for an aggregate loss of $1.2 million. We also recognized an impairment of $0.6 million as a result of our 2024 qualitative assessment of tradenames and an impairment of $40 thousand related to property, plant and equipment for assets held for sale.
During the nine months ended September 30, 2023, we sold two funeral homes and two cemeteries for an aggregate loss of $0.1 million. We also recognized an impairment of $0.2 million as a result of our 2023 qualitative assessment of tradenames and an impairment of $0.2 million related to property, plant and equipment for assets held for sale.
Interest expense. Interest expense related to its respective debt arrangement is as follows (in thousands):
| Three months ended September 30, | Nine months ended September 30, | ||||||||||||||||||||||
| 2024 | 2023 | 2024 | 2023 | ||||||||||||||||||||
| Senior Notes | $ | 4,424 | $ | 4,416 | $ | 13,266 | $ | 13,244 | |||||||||||||||
| Credit Facility | 3,335 | 4,647 | 11,050 | 13,402 | |||||||||||||||||||
| Finance leases | 119 | 137 | 366 | 345 | |||||||||||||||||||
| Acquisition debt | 102 | 70 | 309 | 212 | |||||||||||||||||||
| Other | 55 | 8 | 80 | 10 | |||||||||||||||||||
| Total | $ | 8,035 | $ | 9,278 | $ | 25,071 | $ | 27,213 | |||||||||||||||
Net gain on property damage, net of insurance claims. During the nine months ended September 30, 2024, we recorded a $0.4 million gain, net of insurance proceeds, for damages from Hurricane Ian, which occurred during the third quarter of 2022. We did not record any gain or loss activity during the three months ended September 30, 2024.
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During the three and nine months ended September 30, 2023, we recorded a $0.4 million and $0.3 million gain, respectively, net of insurance proceeds, for damages from Hurricane Ian, which occurred during the third quarter of 2022.
Other, net. During the nine months ended September 30, 2023, we recorded a $0.6 million gain on the sale of other real property not used in business operations. We did not record any gain or loss activity during the three months ended September 30, 2023.
Income taxes. Income tax expense totaled $5.0 million for the three months ended September 30, 2024, an increase of $2.9 million compared to the same period in 2023, primarily driven by an increase in tax expense on discrete items related to equity. Our operating tax rate before discrete items was 33.2% and 30.4% for the three months ended September 30, 2024 and 2023, respectively.
Income tax expense totaled $12.9 million for the nine months ended September 30, 2024, an increase of $3.9 million compared to the same period in 2023, primarily driven by an increase in tax expense on discrete items related to equity. Our operating tax rate before discrete items was 33.2% and 28.9% for the nine months ended September 30, 2024 and 2023, respectively.
CRITICAL ACCOUNTING ESTIMATES
The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Understanding our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies is integral to understanding our Consolidated Financial Statements. Our critical accounting policies are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data” in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2023.
We have identified Business Combinations and Goodwill as those accounting policies that require significant judgments, assumptions and estimates and that have a significant impact on our financial condition and results of operations. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from period to period. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate, with number of deaths generally higher during the winter months due to the higher incidences of death from influenza and pneumonia as 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.
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 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, 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
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consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments at September 30, 2024 are presented in Part 1, Item 1, Financial Statements, Note 8 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 0.86% change in the value of the fixed income securities.
We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. At September 30, 2024, we had outstanding borrowings under the Credit Facility of $140.0 million. Any further borrowings or voluntary prepayments against the Credit Facility or any change in the floating rate would cause a change in interest expense. Pursuant to our Credit Facility, as amended, we have the option to pay interest under the Credit Facility at either prime rate or the Term SOFR rate plus an applicable margin based on our leverage ratio. At September 30, 2024, the prime rate margin was equivalent to 1.50% and the SOFR term margin was 2.60%. 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 $1.4 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.
Our Senior Notes bear interest at the fixed annual rate of 4.25%. We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. At September 30, 2024, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $396.4 million and the fair value of the Senior Notes was $371.4 million based on the last traded or broker quoted price, reported by Financial Industry Regulatory Authority. Increases in market interest rates may cause the value of the Senior Notes to decrease, but such changes will not affect our interest costs.
The remainder of our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease, but such changes will not affect our interest costs.
Item 4.Controls and Procedures.
Management’s Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive and principal financial 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 Exchange Act) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial officers have concluded that our disclosure controls and procedures are effective at September 30, 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 Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II – OTHER INFORMATION
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.
Denning v. Carriage Services, Inc., et al., Superior Court of California, Ventura County, Case No. 2024 CU OE 028098. On July 29, 2024, a wage and hour class action was filed against the Company and several of its subsidiaries. Plaintiff, a former employee, seeks monetary damages on behalf of herself and other similarly situated current and former non-exempt employees as the putative class for the alleged failure to pay legally mandated compensation and reimbursement expenses. As of September 30, 2024, we are unable to reasonably estimate the possible loss or ranges of loss, if any. The prospective class has not been certified by a court of competent jurisdiction and the Company intends to vigorously defend itself in all respects.
Item 1A.Risk Factors.
There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 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, 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, 2023 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.
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, 2024:
| Period | Total Number of Shares Purchased | 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(1) | ||||||||||||||||||||||
| July 1, 2024 - July 31, 2024 | — | $ | — | — | $ | 48,898,769 | ||||||||||||||||||||
| August 1, 2024 - August 31, 2024 | — | $ | — | — | $ | 48,898,769 | ||||||||||||||||||||
| September 1, 2024 - September 30, 2024 | — | $ | — | — | $ | 48,898,769 | ||||||||||||||||||||
| Total for quarter ended September 30, 2024 | — | — | ||||||||||||||||||||||||
| (1) | See Part I, Item 1, Financial Statements, Note 14 for additional information on our publicly announced share repurchase program. | |||||||||||||
Item 3.Defaults Upon Senior Securities.
Not applicable.
Item 4.Mine Safety Disclosures.
Not applicable.
Item 5.Other Information.
Rule 10b5-1 and Non-Rule 10b5-1 Trading Arrangements
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During the fiscal quarter ended September 30, 2024, no director or officer (as determined in Rule 16a-1(f) of the Securities Exchange Act of 1934, as amended) of the Company adopted terminated
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.
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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.
| CARRIAGE SERVICES, INC. | ||||||||
| Date: | November 1, 2024 | /s/ Kathryn Shanley | ||||||
| Kathryn Shanley | ||||||||
| Chief Accounting Officer | ||||||||
| (Principal Accounting Officer & Interim Principal Financial Officer) | ||||||||
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CARRIAGE SERVICES, INC.
INDEX OF EXHIBITS
| Exhibit No. | Description | |||||||
| 3.1 | ||||||||
| 3.2 | ||||||||
| 3.3 | ||||||||
| 3.4 | ||||||||
| 10.1 | ||||||||
| *31.1 | ||||||||
| *31.2 | ||||||||
| **32 | ||||||||
| *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. | |||||||
| *101.SCH | Inline XBRL Taxonomy Extension Schema Documents. | |||||||
| *101.CAL | Inline XBRL Taxonomy Extension Calculation Linkbase Document. | |||||||
| *101.LAB | Inline XBRL Taxonomy Extension Label Linkbase Document. | |||||||
| *101.PRE | Inline XBRL Taxonomy Extension Presentation Linkbase Document. | |||||||
| *101.DEF | Inline XBRL Taxonomy Extension Definition Linkbase Document. | |||||||
| *104 | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | |||||||
| (*) | Filed herewith. | |||||||
| (**) | Furnished herewith. | |||||||
| (†) | Management contract or compensatory plan or arrangement. | |||||||
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