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 U.S.
provider of funeral and cemetery services and merchandise. We operate in two
business segments: Funeral Home Operations, which currently account for
approximately 80% of our revenue, and Cemetery Operations, which currently
account for approximately 20% of our revenue.
At March 31, 2020, we operated 186 funeral homes in 29 states and 32 cemeteries
in 11 states. We compete with other publicly held and independent operators of
funeral and cemetery companies. We believe we are a market leader in most of our
markets.
Our funeral homes offer a complete range of high value personal services to meet
a family's funeral needs, including consultation, the removal and preparation of
remains, the sale of caskets and related funeral merchandise, the use of funeral
home facilities for visitation and remembrance services and transportation
services. Our cemeteries provide interment rights (grave sites and mausoleum
spaces) and related merchandise, such as markers and outer burial containers. We
provide funeral and cemetery services and products on both an "atneed" (time of
death) and "preneed" (planned prior to death) basis.
Recent Developments
Business Impact under the Macroeconomic Environment of COVID-19
On March 11, 2020, COVID-19 was deemed a global pandemic and since then, the
Company has continued to proactively monitor and assess the pandemic's current
and potential impact to the Company's operations. Since early March, the
Company's senior leadership team has taken certain steps to assist our
businesses in appropriately adjusting and adapting to the conditions resulting
from the COVID-19 pandemic. Our businesses have been designated as essential
services and, therefore, each one of the Company's business locations remains
open and ready to provide service to their communities in this time of need.
While our businesses provide an essential public function, along with a critical
responsibility to the communities and families they serve, the health and safety
of our employees and the families we serve remain our top priority. The Company
has taken additional steps during this time to continually review and update our
processes and procedures to comply with all regulatory mandates and procure
additional supplies to ensure that each of our businesses have appropriate
personal protective equipment to provide these essential services. Additionally,
in many of our business locations, we have also updated staffing and service
guidelines, such as reducing the number of team members present for a service,
restricting the size and number of attendees and adjusting other operating
procedures. The Company has also implemented additional safety and precautionary
measures as it concerns our businesses' day-to-day interaction with the families
and communities they serve.
The overall impact of the macroeconomic environment to the deathcare industry
from COVID-19 may provide varying results as compared to other industries,
because death occurs on a relatively consistent basis. Our industry's revenues
are impacted by various factors, including the number of funeral services
performed, the average price for a service and the mix of traditional burial
versus cremation contracts. Changes in the macroeconomic environment as a result
of the pandemic may not necessarily impact volume, but could create situations
where people choose to spend less on funerals by purchasing less expensive
caskets, minimize the scale of services and visitations, or elect not to make a
preneed funeral or cemetery arrangement. During this time, our businesses have
been focused on being innovative and resourceful, providing some type of
immediate service as part of the grieving process. Gathering and travel
restrictions across many areas of the country have limited our ability to
provide large, in-person memorialization services and we have seen client
families elect webcasting and livestreaming services, hold services with smaller
attendance or rotating visitors, or in some cases, choose to delay services to a
future date. We have also offered various incentives to our customers and sales
counselors to continue to foster sales in our cemeteries.
Within our financial reporting environment, we have considered various areas
that could affect the results of our operations, though the scope, severity and
duration of these impacts remain uncertain at this time because the COVID-19
pandemic is continually evolving and the ultimate impact of COVID-19 remains
highly uncertain. Certain estimates inherently involve assumptions about future
events and annual results, making reliable estimates for those matters
challenging in periods of extreme economic instability. We do not believe we are
vulnerable to certain concentrations, whether by geographic area, revenue for
specific products or our relationships with our vendors. Our relationships with
our vendors and suppliers have remained consistent and we continue to receive
utmost service. Remote working arrangements have not adversely affected our
ability to maintain and support operations, including financial reporting
systems, internal controls over financial reporting, and disclosure controls and
procedures. Our employees at the Houston Support Office, which account for
approximately 5% of our total employee population, were the primary group
affected by stay-at-home state and local orders.

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We believe our access to capital, the cost of our capital, or the sources and
uses of our cash should be relatively consistent in the near term. However, we
believe given the unprecedented nature of COVID-19, it is prudent for us to take
a broad-based approach to ensuring we maintain financial flexibility throughout
the expected duration of the pandemic. We have, as part of a larger plan, taken
steps to reduce overall expenses throughout the rest of 2020. For example,
discretionary spending, such as growth capital expenditures (primarily cemetery
inventory development) will be tightly managed and minimized during this time.
Moreover, our executive officers and non-employee directors voluntarily agreed
to temporary reductions in salary compensation effective as of April 19, 2020.
See Liquidity within Item 2, Management's Discussion and Analysis of Financial
Condition and Results of Operations, for additional information related to our
liquidity position.
We have also applied certain measures of the Coronavirus Aid, Relief, and
Economic Security Act (the "CARES Act"), which was enacted on March 27, 2020,
which we anticipate should provide a cash benefit in the form of a tax payment
refund, tax credits related to employee retention, cash deferral for the
employer portion of the Social Security tax and anticipated minimal cash taxes
for 2020. See Item 1, Financial Statements and Supplementary Data, Note 1 for
additional information related to the CARES Act.
The COVID-19 pandemic, and related gathering restrictions issued by state and
local officials, did impact aspects of our financial results in the first
quarter, including revenue, preneed cemetery sales, and average revenue per
contract. While it is difficult to gauge the exact extent of that impact over
the last few weeks of the first quarter, the Company will continue to implement
appropriate procedures, plans, strategy, and issue any disclosures that may be
required, as the situation surrounding the pandemic and related gathering
restrictions evolves.
Funeral Home Operations
Our funeral homes offer a complete range of high value personal services to meet
a family's funeral needs, including consultation, the removal and preparation of
remains, the sale of caskets and related funeral merchandise, the use of funeral
home facilities for visitation and remembrance services and transportation
services. Factors affecting our funeral operating results include, but are not
limited to: demographic trends relating to population growth and average age,
which impact death rates and number of deaths; establishing and maintaining
leading market share positions supported by strong local heritage and
relationships; effectively responding to increasing cremation trends by selling
complementary services and merchandise; controlling salary and merchandise
costs; and exercising pricing leverage to increase average revenue per contract.
Cemetery Operations
Our cemeteries provide interment rights (grave sites and mausoleum spaces) and
related merchandise, such as markers and outer burial containers both on an
atneed and preneed basis. Factors affecting our cemetery operating results
include, but are not limited to: the size and success of our sales organization;
local perceptions and heritage of our cemeteries; our ability to adapt to
changes in the economy and consumer confidence; and our response to fluctuations
in capital markets and interest rates, which affect investment earnings on trust
funds, finance charges on installment contracts and our securities portfolio
within the trust funds.
Business Strategy
Our business strategy is based on strong, local leadership with entrepreneurial
principles that is focused on sustainable long-term market share, revenue, and
profitability growth in each local business. We believe Carriage has the most
innovative operating model in the funeral and cemetery industry, which we are
able to achieve through a decentralized, high-performance culture and operating
framework linked with incentive compensation programs that attract top-quality
industry talent to our organization.
Our Mission Statement states that "we are committed to being the most
professional, ethical and highest quality funeral and cemetery service
organization in our industry" and our Guiding Principles state our core values,
which are comprised of:
• Honesty, Integrity and Quality in All That We Do


•           Hard work, Pride of Accomplishment, and Shared Success Through
            Employee Ownership

• Belief in the Power of People Through Individual Initiative and Teamwork

• Outstanding Service and Profitability Go Hand-in-Hand

• 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


• Strategic Acquisition Model





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Standards Operating Model
Our Standards Operating Model is focused on growing local market share,
providing personalized high-value services to our client families and guests,
and operating financial metrics that drive long-term, sustainable revenue growth
and improved earning power of our portfolio of businesses by employing
leadership and entrepreneurial principles that fit the nature of our high-value
personal service business. Standards Achievement is the measure by which we
judge the success of each business and incentivize our local managers and their
teams. Our Standards Operating Model is not designed to produce maximum
short-term earnings because we believe such performance is unsustainable and
will ultimately stress the business, which very often leads to declining market
share, revenue and earnings.
4E Leadership Model
Our 4E Leadership Model requires strong local leadership in each business to
grow an entrepreneurial, decentralized, high-value, personal service and sales
business at sustainable profit margins. Our 4E Leadership Model is based upon
principles established by the late Jack Welch during his tenure at General
Electric, and is based upon 4E qualities essential to succeed in a
high-performance culture: Energy to get the job done; the ability to Energize
others; the Edge necessary to make difficult decisions; and the ability to
Execute and produce results. To achieve a high level within our Standards in a
business year after year, we require local Managing Partners that have the 4E
Leadership skills to entrepreneurially grow the business by hiring, training and
developing highly motivated and productive local teams.
Strategic Acquisition Model
Our Standards Operating Model led to the development of our Strategic
Acquisition Model, which guides our acquisition strategy. We believe that both
models, when executed effectively, will drive long-term, sustainable increases
in market share, revenue, earnings and cash flow. We believe a primary driver of
higher revenue and profits in the future will be the execution of our Strategic
Acquisition Model using strategic ranking criteria to assess acquisition
candidates. As we execute this strategy over time, we expect to acquire larger,
higher margin strategic businesses.
We have learned that the long-term growth or decline of a local branded funeral
and cemetery business is reflected by several criteria that correlate strongly
with five to ten year performance in volumes (market share), revenue and
sustainable field-level earnings before interest, taxes, depreciation and
amortization ("EBITDA") margins (a non-GAAP measure). We use criteria such as
cultural alignment, volume and price trends, size of business, size of market,
competitive standing, demographics, strength of brand and barriers to entry to
evaluate the strategic position of potential acquisition candidates. Our
financial valuation of the acquisition candidate is then determined through the
application of an appropriate after-tax cash return on investment that exceeds
our cost of capital.
Our belief in our Mission Statement and Guiding Principles that define us and
proper execution of the three models that define our strategy have given us the
competitive advantage in any market in which we compete. We believe that we can
execute our three models without proportionate incremental investment in our
consolidation platform infrastructure and without additional fixed regional and
corporate overhead. This gives us a competitive advantage that is evidenced by
the sustained earning power of our portfolio as defined by our EBITDA margin.
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, steps
taken to reduce overall expenses throughout the rest of 2020, and anticipated
future cash flows, we do not anticipate any significant liquidity constraints in
the foreseeable future. However, if our capital expenditures, acquisition or
divestiture plans, or business impacts from the pandemic change, we may need to
access the capital markets to obtain additional funding. Further, to the extent
operating cash flow or access to and cost of financing sources are materially
different than expected, future liquidity may be adversely affected. 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 (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, 2019.
Our plan is to remain focused on integrating our newly acquired businesses and
to use cash on hand and borrowings under our Credit Facility primarily for
general corporate purposes and for payment of dividends and our debt
obligations. Discretionary spending, such as internal growth projects and
expenditures (primarily cemetery inventory development, along with funeral home

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expansion projects) will be tightly managed and minimized during the remainder
of 2020. From time to time we may also use available cash resources (including
borrowings under our Credit Facility) to, subject to satisfying certain
financial covenants in our Credit Facility, repurchase shares of our common
stock and our remaining 2.75% convertible subordinated notes due 2021
("Convertible Notes") in open market or privately negotiated transactions. We
have the ability to draw on our Credit Facility, subject to its customary terms
and conditions.
As of March 31, 2020, we have net unrealized losses of $45.1 million in our
trusts. At March 31, 2020, these net unrealized losses represented 18% of our
original cost basis of $245.2 million. The decline in fair value is largely due
to changes in interest rates and other market conditions. Our investments are
diversified across multiple industry segments using a balanced allocation
strategy to minimize long-term risk. In addition, we do not intend to sell and
it is likely that we will not be required to sell the securities prior to their
anticipated recovery. Changes in unrealized gains and/or losses related to these
securities are reflected in Other comprehensive income (loss) and offset by the
Deferred preneed funeral and cemetery receipts held in trust and Care trusts'
corpus interests in those unrealized gains and/or losses. There is no impact on
earnings until such time that the loss is realized in the trusts, allocated to
the 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.
We 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.
In light of recent developments relating to COVID-19, we believe that our
existing and anticipated cash resources will be sufficient to meet our
anticipated working capital requirements, capital expenditures, scheduled debt
payments, commitments and dividends for the next 12 months.
Cash Flows
We began 2020 with $0.7 million in cash and other liquid investments and ended
the first quarter with $11.9 million. As of March 31, 2020, we had borrowings of
$114.0 million outstanding on our Credit Facility compared to $83.8 million as
of December 31, 2019.
The following table sets forth the elements of cash flow for the three months
ended March 31, 2019 and 2020 (in thousands):
                                                              Three months ended March 31,
                                                                 2019                  2020
Cash at beginning of year                                 $       644       $           716

Net cash provided by operating activities                      10,994                13,546

Acquisitions                                                        -               (28,000 )
Net proceeds from the sale of other assets                        100                    78
Capital expenditures                                           (3,543 )              (2,738 )
Net cash used in investing activities                          (3,443 )             (30,660 )

Net borrowings (payments) on our Credit Facility,
acquisition debt and finance lease obligations                 (6,571 )              29,713

Payment of debt issuance costs related to the Senior Notes

                                                               -                   (14 )
Net proceeds from employee equity plans                           572                   127
Dividends paid on common stock                                 (1,360 )              (1,339 )
Other financing costs                                            (162 )                (169 )
Net cash provided by (used in) financing activities            (7,521 )              28,318

Cash at end of the period                                 $       674       $        11,920

Operating Activities For the three months ended March 31, 2020, cash provided by operating activities was $13.5 million compared to $11.0 million for the three months ended March 31, 2019. The increase of $2.5 million was due primarily to favorable working capital changes during the period.



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Investing Activities
Our investing activities, resulted in a net cash outflow of $30.7 million for
the three months ended March 31, 2020 compared to $3.4 million for the three
months ended March 31, 2019, an increase of $27.3 million.
During the three months ended March 31, 2020, we acquired a funeral home and
cemetery combination business in Lafayette, California for $33.0 million in
cash, of which $5.0 million was deposited in escrow in 2019 and $28.0 million
was paid in 2020.
For the three months ended March 31, 2020, capital expenditures totaled $2.7
million compared to $3.5 million for the three months ended March 31, 2019, a
decrease of $0.8 million. The following tables present our growth and
maintenance capital expenditures (in thousands):
                                         Three months ended March 31,
                                             2019                      2020

Growth


Cemetery development              $         1,067                   $   954
Renovations at certain businesses             744                       141
Other                                          39                        87
Total growth expenditures         $         1,850                   $ 1,182

Maintenance


Facility repairs and improvements $           217                   $   246
Vehicles                                      587                       428
General equipment and furniture               781                       649
Paving roads and parking lots                  61                       132
Other                                          47                       101
Total maintenance expenditures    $         1,693                   $ 1,556

Total capital expenditures        $         3,543                   $ 2,738


Financing Activities
Our financing activities resulted in a net cash inflow of $28.3 million for the
three months ended March 31, 2020 compared to a net cash outflow of $7.5 million
for the three months ended March 31, 2019, an increase of $35.8 million. During
the three months ended March 31, 2020, we had net borrowings on our Credit
Facility of $30.2 million and payments on our acquisition debt and finance
leases of $0.5 million and paid $1.3 million in dividends.
During the three months ended March 31, 2019, we had net payments on our Credit
Facility of $6.1 million and payments on our acquisition debt and finance leases
of $0.5 million and paid $1.4 million in dividends.
Dividends
During the three months ended March 31, 2019 and 2020, our Board of Directors
declared the following dividends payable on the dates below (in thousands,
except per share amounts):
     2019 Per Share      Dollar Value
March 1st $     0.075    $       1,360


     2020 Per Share      Dollar Value
March 1st $     0.075    $       1,339

Share Repurchases During the three months ended March 31, 2020, we did not repurchase any shares of common stock pursuant to our share repurchase program. At March 31, 2020, we had approximately $25.6 million available for repurchases under our share repurchase program.



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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, 2020 is as follows (in thousands):


                   March 31, 2020
Credit Facility  $        114,000
Finance leases              6,074
Operating leases           22,942
Acquisition debt            6,547
Total            $        149,563


Credit Facility
At March 31, 2020, our Credit Facility was comprised of: (i) a $190.0 million
revolving credit facility, which includes a $15.0 million subfacility for
letters of credit and a $10.0 million swingline, and (ii) an accordion or
incremental option allowing for future increases in the facility size by an
additional amount of up to $75.0 million in the form of increased revolving
commitments or incremental term loans. The final maturity of the Credit Facility
will occur on May 31, 2023.
The Credit Facility is secured by a first-priority perfected security interest
in and lien on substantially all of the Company's personal property assets and
those of the Credit Facility Guarantors. In the event the Company's actual Total
Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio
covenant level, at the discretion of the Administrative Agent, the
Administrative Agent may unilaterally compel the Company and the Credit Facility
Guarantors to grant and perfect first-priority mortgage liens on fee-owned real
property assets which account for no less than 50% of funeral operations EBITDA.
The Credit Facility contains customary affirmative covenants, including, but not
limited to, covenants with respect to the use of proceeds, payment of taxes and
other obligations, continuation of the Company's business and the maintenance of
existing rights and privileges, the maintenance of property and insurance,
amongst others.
In addition, the Credit Facility also contains customary negative covenants,
including, but not limited to, covenants that restrict (subject to certain
exceptions) the ability of the Company and its subsidiaries and party thereto as
guarantors (the "Credit Facility Guarantors") to incur additional indebtedness,
grant liens on assets, make investments, engage in mergers and acquisitions, and
pay dividends and other restricted payments, and certain financial covenants. As
of March 31, 2020, we were subject to the following financial covenant under our
Credit Facility: (A) a Total Leverage Ratio not to exceed, (i) 5.75 to 1.00 for
the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and (ii)
5.50 to 1.00 for the quarter ended December 31, 2020 and each quarter ended
thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit
Facility) not to exceed 2.00 to 1.00 as of the end of any period of four
consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined
in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any
period of four consecutive fiscal quarters. These financial maintenance
covenants are calculated for the Company and its subsidiaries on a consolidated
basis. As more fully described below, we were not in compliance with the Total
Leverage Ratio covenant for the quarter ended March 31, 2020.
As of March 31, 2020, the Company was not in compliance with the Total Leverage
Ratio covenant requirement as noted above. On May 18, 2020, we received a waiver
under our Credit Facility for the failure to comply with the Total Leverage
Ratio covenant for the fiscal quarter ended March 31, 2020. In connection with
the waiver, the Credit Facility was also amended to increase the interest rate
margin applicable to borrowings by up to 0.625% at each pricing level based on
the Total Leverage Ratio. Immediately following the effectiveness of the limited
waiver and fourth amendment, $74.0 million remained available for borrowing
under the Credit Facility.
We are in compliance with the fixed charge coverage ratio and senior secured
leverage ratio covenants contained in our Credit Facility as of March 31, 2020.
We expect to be in compliance with all of our covenant requirements for the next
twelve months.
We had one letter of credit issued on November 30, 2019 and outstanding under
the Credit Facility for approximately $2.0 million, which bears interest at
2.125% and will expire on November 25, 2020. The letter of credit automatically
renews annually and secures our obligations under our various self-insured
policies. Outstanding borrowings under our Credit Facility bear interest at
either a prime rate or a LIBOR rate, plus an applicable margin based upon our
leverage ratio. As of March 31, 2020, the prime rate margin was equivalent to
1.50% and the LIBOR rate margin was 2.50%. The weighted average interest rate on
our Credit Facility for the three months ended March 31, 2019 and 2020 was 4.1%
and 4.3%, respectively.

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The interest expense and amortization of debt issuance costs related to our Credit Facility during the three months ended March 31, 2019 and 2020 is as follows (in thousands):


                                                        Three months ended March 31,
                                                                2019              2020
Credit Facility interest expense                     $           379     $       1,230
Credit Facility amortization of debt issuance costs               54               126


Lease Obligations
Our lease obligations consist of operating and finance leases. We lease certain
office facilities, certain funeral homes and equipment under operating leases
with original terms ranging from one to nineteen years. Many leases include one
or more options to renew, some of which include options to extend the leases for
up to 26 years. We lease certain funeral homes under finance leases with
original terms ranging from ten to forty years.
The lease cost related to our operating leases and short-term leases and
depreciation expense and interest expense related to our finance leases during
the three months ended March 31, 2019 and 2020 are as follows (in thousands):
                                                  Three months ended March 31,
                                                     2019                        2020
Operating lease cost                      $           924                       $ 957
Short-term lease cost                                  75                          57

Finance lease cost:
Depreciation of lease right-of-use assets $           132                       $ 109
Interest on lease liabilities                         132                         126


Acquisition Debt Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from five to twenty years. The imputed interest expense related to our Credit acquisition debt during the three months ended March 31, 2019 and 2020 is as follows (in thousands):


                                                  Three months ended March 31,
                                                     2019                        2020
Acquisition debt imputed interest expense $           168                       $ 127



Convertible Subordinated Notes due 2021
At March 31, 2020, the principal amount of the liability component of our
Convertible Notes was $6.3 million, the net carrying amount was $6.0 million and
the carrying amount of the equity component was $0.8 million The fair value of
the Convertible Notes, which are Level 2 measurements, was $6.4 million at
March 31, 2020. The Convertible Notes are due in March 2021 and bear interest at
2.75% per year, which is payable semi-annually in arrears on March 15 and
September 15 of each year.
The interest expense and accretion of debt discount and debt issuance costs
related to our Convertible Notes during the three months ended March 31, 2019
and 2020 is as follows (in thousands):
                                                          Three months ended March 31,
                                                                  2019               2020
Convertible Notes interest expense                    $             44     $           43
Convertible Notes accretion of debt discount                        57                 65
Convertible Notes amortization of debt issuance costs                6                  6


The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 11 months of the Convertible Notes. The effective interest rate on the unamortized debt discount for both the three months ended March 31, 2019 and 2020 was 11.4%. The effective interest rate on the debt issuance costs for both the three months ended March 31, 2019 and 2020 was 3.2%.



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Senior Notes due 2026
At March 31, 2020, the principal amount of our Senior Notes was $400.0 million.
The fair value of the Senior Notes, which are Level 2 measurements, was $432.3
million at March 31, 2020. The Senior Notes are due on June 1, 2026 and bear
interest at 6.625% per year, which is payable semi-annually in arrears on June 1
and December 1 of each year.
The interest expense and amortization of debt discount, debt premium and debt
issuance costs related to our Senior Notes during the three months ended March
31, 2019 and 2020 is as follows (in thousands):
                                                        Three months ended March 31,
                                                               2019              2020
Senior Notes interest expense                        $        5,383     $       6,625
Senior Notes amortization of debt discount                      120               129
Senior Notes amortization of debt premium                         -               (54 )
Senior Notes amortization of debt issuance costs                 34                67


The debt discount, the debt premium and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 74 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the initial Senior Notes, which were issued in May 2018, for the three months ended March 31, 2020 was 6.87% and 6.69%, respectively. The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the additional Senior Notes, which were issued in December 2019, for the three months ended March 31, 2020 was 6.20% and 6.88%, respectively. Financial Highlights Below are our financial highlights for the three months ended March 31, 2019 and 2020 (in thousands except for volumes and averages):


                                                           Three Months Ended March 31,
                                                                    2019           2020
Revenue                                                   $       69,081     $   77,490
Funeral contracts                                                  9,881         11,493
Average revenue per funeral contract                      $        5,635     $    5,233
Preneed interment rights (property) sold                           1,462          1,868
Average price per preneed interment right sold            $        3,808     $    3,779
Gross profit                                              $       21,600     $   23,171
Net income (loss)                                         $        6,525     $   (4,197 )

Revenue for the three months ended March 31, 2020 increased $8.4 million compared to the three months ended March 31, 2019, as we experienced a 16.3% increase in total funeral contracts due to the funeral home acquisitions made in the fourth quarter of 2019 and first quarter of 2020, offset by a decrease in the average revenue per funeral contract of 7.1%. In addition, we experienced an increase of 27.8% in the number of preneed interment rights (property) sold due to the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020, while the average price per interment right sold decreased 0.8%. Gross profit for the three months ended March 31, 2020 increased $1.6 million compared to the three months ended March 31, 2019, primarily due to the increase in revenue from both our funeral home and cemetery segments due to the acquisitions made in the fourth quarter of 2019 and first quarter of 2020. Net income for the three months ended March 31, 2020 decreased $10.7 million compared to the three months ended March 31, 2019, primarily due to the impairment of goodwill and tradenames and increase in interest expense related to our Senior Notes, offset by the increase in gross profit. Further discussion of Revenue and the components of Gross profit for our funeral home and cemetery segments is presented herein under "- Results of Operations." Further discussion of General, administrative and other expenses, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under "- Other Financial Statement Items."



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REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our "Operating and Financial Trend
Report" ("Trend Report") as reported in our earnings release for the quarter
ended March 31, 2020 dated May 19, 2020 and discussed in the corresponding
earnings conference call. This Trend Report is used as a supplemental financial
statement by management and investors to compare our current financial
performance with our previous results and with the performance of other
companies. We do not intend for this information to be considered in isolation
or as a substitute for other measures of performance prepared in accordance with
United States generally accepted accounting principles ("GAAP"). The Trend
Report is a non-GAAP statement that also provides insight into underlying trends
in our business.
Below is a reconciliation of Net income (loss) (a GAAP measure) to Adjusted net
income (a non-GAAP measure) for the three months ended March 31, 2019 and 2020
(in thousands):
                                                               Three months ended March 31,
                                                              2019              2020
Net income (loss)                                             $       6,525     $    (4,197 )

Special items, net of tax except for items noted by **(1) Acquisition and divestiture expenses

                                      -              90
Severance and retirement costs                                          171             228
Accretion of discount on Convertible Notes**                             57              65
Net impact of impairment of goodwill and other intangibles(2)             -           9,757
Litigation reserve                                                       99              59
Natural disaster costs                                                    -             111
Adjusted net income(3)                                        $       6,852     $     6,113

(1) Special items are defined as charges or credits included in our GAAP financial


    statements that can vary from period to period and are not reflective of costs
    incurred in the ordinary course of our operations. Special Items are taxed at
    the federal statutory rate of 21 percent for the three months ended March 31,
    2019 and 2020, except for the Accretion of the discount on the Convertible
    Notes, as this is a non-tax deductible item and the Net impact of impairment of

goodwill and other intangibles (described below). (2) The Net impact of impairment of goodwill and other intangibles special item is


    net of the operating tax rate of 33.6%.
(3) Adjusted net income is defined as Net income (loss) plus adjustments for
    Special items and other expenses or gains that we believe do not directly
    reflect our core operations and may not be indicative of our normal business
    operations.


Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit
(a non-GAAP measure) for the three months ended March 31, 2019 and 2020 (in
thousands):
                                                           Three months ended March 31,
                                                         2019                2020
Gross profit                                             $        21,600     $    23,171

Cemetery property amortization                                       849             877
Field depreciation expense                                         3,085           3,290
Regional and unallocated funeral and cemetery costs                2,789           2,756
Operating profit(1)                                      $        28,323     $    30,094

(1) Operating profit is defined as Gross profit less Cemetery property


    amortization, Field depreciation expense and Regional and unallocated funeral
    and cemetery costs.



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Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP measure) by Segment for the three months ended March 31, 2019 and 2020 (in thousands):


                              Three months ended March 31,
                           2019                2020
Funeral Home               $      23,167       $      24,274
Cemetery                           5,156               5,820
Operating profit           $      28,323       $      30,094

Operating profit margin(1)          41.0 %              38.8 %



(1) Operating profit margin is defined as Operating profit as a percentage of Revenue.




Further discussion of Operating profit for our funeral home and cemetery
segments is presented herein under "- Results of Operations."
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three months
ended March 31, 2020 and 2019.
The term "same store" refers to funeral homes and cemeteries acquired prior to
January 1, 2016 and owned and operated for the entirety of each period being
presented, excluding certain funeral home businesses that we intend to divest in
the near future.
The term "acquired" refers to funeral homes and cemeteries purchased after
December 31, 2015, excluding any funeral home businesses that we intend to
divest in the near future. This classification of acquisitions has been
important to management and investors in monitoring the results of these
businesses and to gauge the leveraging performance contribution that a selective
acquisition program can have on total company performance.
The term "divested" when discussed in the Funeral Home Segment, refers to the
three funeral home businesses whose building leases expired, one funeral home
business we sold and a funeral home business we merged with a business in an
existing market in 2019.
"Planned divested" in the Funeral Home Segment refers to the funeral home
businesses that we intend to divest in the near future.
"Ancillary" in the Funeral Home Segment represents our flower shop, pet
cremation business and online cremation business in Texas.
Cemetery property amortization, Field depreciation expense and Regional and
unallocated funeral and cemetery costs, are not included in Operating profit, a
non-GAAP financial measure. Adding back these items will result in Gross profit,
a GAAP financial measure.

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Funeral Home Segment The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations for the three months ended March 31, 2020 compared to the three months ended March 31, 2019 (in thousands):


                                                  Three Months Ended March 31,
                                                       2019                     2020
Revenue:
Same store operating revenue                $        45,018                 $ 44,866
Acquired operating revenue                            6,953                   11,714
Divested/planned divested revenue                     2,027                    1,722
Ancillary funeral services revenue                        -                    1,151
Preneed funeral insurance commissions                   359                      366
Preneed funeral trust and insurance                   1,806                    1,923
Total                                       $        56,163                 $ 61,742

Operating profit:
Same store operating profit                 $        18,071                 $ 17,236
Acquired operating profit                             2,739                    4,245
Divested/planned divested operating profit              459                      466
Ancillary funeral services operating profit               -                      295
Preneed funeral insurance commissions                   133                      160
Preneed funeral trust and insurance                   1,765                    1,872
Total                                       $        23,167                 $ 24,274


The following measures reflect the significant metrics over this comparative
period:
                                                             Three Months Ended March 31,
                                                                   2019                2020
Same store:
Contract volume                                                   8,289               8,762

Average revenue per contract, excluding preneed funeral trust earnings

$       5,431       $       5,121
Average revenue per contract, including preneed funeral
trust earnings                                            $       5,618       $       5,314
Burial rate                                                        39.3 %              36.9 %
Cremation rate                                                     53.0 %              55.1 %

Acquired:
Contract volume                                                   1,050               2,208

Average revenue per contract, excluding preneed funeral trust earnings

$       6,623       $       5,305
Average revenue per contract, including preneed funeral
trust earnings                                            $       6,746       $       5,372
Burial rate                                                        50.1 %              41.8 %
Cremation rate                                                     43.0 %              53.4 %

Funeral home same store operating revenue for the three months ended March 31, 2020 decreased $0.2 million compared to the three months ended March 31, 2019. Although same store contract volume increased 5.7%, it was offset by a decrease in contract averages excluding preneed interest of 5.7%. The decrease in funeral contract averages for the three months ended March 31, 2020 compared to the same period in 2019 is primarily due to a 240 basis point decrease in the burial rate. In addition, over the last two weeks of March, we saw a decrease in services performed due to the rigorous restrictions placed on gatherings mandated by state, provincial, and local governments as COVID-19 became more prominent and individuals began to practice social distancing and comply with multiple state and provincial shelter in place orders. For both burial and cremation contracts for which memorial services were performed, we experienced a 230 and 390 basis point decrease in the number of these contracts, respectively, in the three months ended March 31, 2020. Funeral same store operating profit for the three months ended March 31, 2020 decreased $0.8 million when compared to the three months ended March 31, 2019, and the comparable operating profit margin decreased 170 basis points to 38.4%. The decrease in operating margin is due to the decrease in same store operating revenue, along with a 2.5% increase in operating costs.



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Same store salaries and benefits for the three months ending March 31, 2020 had
the largest increase of $0.4 million compared to the three months ended March
31, 2019. The increase in salaries and benefits was primarily due to the
increase in contract volume as we experienced an increase in the demand for
pickup and embalming services. The costs for funeral supplies for the three
months ending March 31, 2020 increased $0.1 million compared to the same period
in 2019 as our funeral homes ramped up their purchases of supplies in
preparation for COVID-19. The provision for credit losses increased $0.1 million
compared to the three months ending March 31, 2020 compared to the three months
ending March 31, 2019.
Funeral home acquired operating revenue for the three months ended March 31,
2020 increased $4.8 million, as our funeral home acquired portfolio for the
three months ended March 31, 2020 included nine funeral home businesses over
four acquisitions acquired in the fourth quarter of 2019 and one business
acquired in the first quarter of 2020 not present in the three months ended
March 31, 2019.
Acquired operating profit for the three months ended March 31, 2020 increased
$1.5 million when compared to the three months ended March 31, 2019. Operating
profit margin decreased 320 basis points to 36.2% for the three months ended
March 31, 2020 compared to the same period in 2019. The decrease is primarily
due to the recently acquired businesses (discussed above), as operating profit
margins for these businesses were lower compared to our other acquired
businesses, particularly with regard to higher salaries and benefits expenses.
We expect the operating margins for our recently acquired businesses to increase
as we focus on integrating these businesses into our high performance framework
of the Standards Operating Model.
Ancillary funeral services revenue, which is recorded in Other revenue,
represents revenue from our flower shop, pet cremation business and online
cremation business in Texas, which were acquired in the fourth quarter of 2019.
Operating profit from our ancillary funeral service businesses was $0.3 million
for the three months ended March 31, 2020, with an operating profit margin of
25.6%.
Preneed funeral insurance commissions and preneed funeral trust and insurance,
also recorded in Other revenue, on a combined basis, increased $0.1 million or
5.7% for the three months ended March 31, 2020 compared to the same period in
2019. The increase is primarily due to the increase in preneed trust and
insurance, while preneed funeral commissions remained fairly flat. Operating
profit for preneed funeral insurance commissions and preneed trust and
insurance, on a combined basis, increased 7.1% for the same comparative period
in 2019, primarily due to the increase in funeral trust and insurance revenue.
Cemetery Segment
The following table sets forth certain information regarding our Revenue and
Operating profit from our cemetery operations for the three months ended
March 31, 2020 compared to the three months ended March 31, 2019 (in thousands):
                                           Three Months Ended March 31,
                                                2019                     2020
Revenue:
Same store operating revenue         $        11,289                 $ 10,945
Acquired operating revenue                         -                    2,799
Preneed cemetery trust and insurance           1,251                    1,761
Preneed cemetery finance charges                 378                      243
Total                                $        12,918                 $ 15,748

Operating profit:
Same store operating profit          $         3,661                 $  3,151
Acquired operating profit                          -                      827
Preneed cemetery trust and insurance           1,117                    1,599
Preneed cemetery finance charges                 378                      243
Total                                $         5,156                 $  5,820



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The following measures reflect the significant metrics over this comparative period:


                                                             Three Months Ended March 31,
                                                                   2019                2020
Same store:
Preneed revenue as a percentage of operating revenue                 59 %                58 %
Preneed revenue (in thousands)                            $       6,661       $       6,311
Atneed revenue (in thousands)                             $       4,629       $       4,634
Number of preneed interment rights sold                           1,462               1,568
Average price per interment right sold                    $       3,808       $       3,604

Acquired:


Preneed revenue as a percentage of operating revenue                n/a                  62 %
Preneed revenue (in thousands)                                      n/a       $       1,736
Atneed revenue (in thousands)                                       n/a       $       1,063
Number of preneed interment rights sold                             n/a                 300
Average price per interment right sold                              n/a       $       4,696


Cemetery same store preneed revenue for the three months ended March 31, 2020
decreased $0.3 million due to the decrease in cemetery property revenue as we
experienced a 5.4% decrease in the average price of interments, offset by a 7.3%
increase in the number of preneed interment rights sold compared to the same
period in 2019. Cemetery same store atneed revenue, which represents
approximately 42% of our same store operating revenue remained flat as we
experienced a 0.7% increase in the average sale per contract, offset by a 0.6%
decrease in the number of atneed contracts sold.
Cemetery same store operating profit for the three months ended March 31, 2020
decreased $0.5 million from the same period in 2019. The comparable operating
profit margin decreased 360 basis points to 28.8% for the three months ended
March 31, 2020 from 32.4% in the same period in 2019. The decrease in operating
profit margin is a result of the decrease in operating revenue and a 2.2%
increase in operating costs, most notably a $0.2 million increase in promotional
expenses.
Our acquired cemetery portfolio includes two businesses acquired during the
fourth quarter of 2019 and one business acquired during the first quarter of
2020. These three businesses contributed $2.8 million in revenue and $0.8
million in operating profit for the three months ended March 31, 2020.
Preneed cemetery trust and insurance and preneed cemetery finance charges, which
are recorded in Other revenue, on a combined basis increased $0.4 million for
the three months ended March 31, 2020 compared to the same period in 2019.
Earnings in our perpetual care trust fund increased $0.5 million due to our
acquisitions. Operating profit for the two categories of Other revenue, on a
combined basis, also increased $0.3 million for the three months ended March 31,
2020 compared to the same period in 2019.
Cemetery property amortization. Cemetery property amortization remained flat at
$0.9 million for the three months ended March 31, 2020 compared to the three
months ended March 31, 2019.
Field depreciation. Depreciation expense for our field businesses increased $0.2
million for the three months ended March 31, 2020 compared to the three months
ended March 31, 2019. The increase was primarily attributable to additional
depreciation expense from the assets acquired through our 2019 and first quarter
2020 acquisitions.
Regional and unallocated funeral and cemetery costs. Regional and unallocated
funeral and cemetery costs consist of salaries and benefits for regional
management, field incentive compensation and other related costs for field
infrastructure. Regional and unallocated funeral and cemetery costs remained
flat at $2.8 million for the three months ended March 31, 2020, compared to the
three months ended March 31, 2019.
Other Financial Statement Items
General, administrative and other. General, administrative and other expenses
totaled $5.9 million for the three months ended March 31, 2020, an increase of
$0.3 million compared to the three months ended March 31, 2019. The increase was
primarily attributable to a $0.5 million increase in salaries and benefits and
severance costs, offset by a $0.2 million decrease in incentive and equity
compensation costs.

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Home office depreciation and amortization. Home office depreciation and
amortization expense remained flat at $0.4 million for the three months ended
March 31, 2020, compared to the three months ended March 31, 2019.
Impairment of goodwill and other intangibles. As a result of the economic
conditions caused by the response to COVID-19, we performed a quantitative
assessment of our goodwill and indefinite-lived intangible assets at March 31,
2020. We recorded a goodwill impairment of $13.6 million related to our funeral
homes in the Eastern Reporting Unit as the carrying value of goodwill exceeded
the fair value at March 31, 2020. We also recorded a $1.1 million impairment
charge to certain of our tradenames as the carrying amount of these tradenames
exceeded the fair value.
Interest expense. Interest expense totaled $8.4 million for the three months
ended March 31, 2020, an increase of $2.1 million compared to the three months
ended March 31, 2019. The increase was primarily due to increased borrowings on
our Credit Facility and the $75.0 million of additional Senior Notes we issued
on December 19, 2019.
Accretion of discount on convertible subordinated notes. We recognized accretion
of the discount on our Convertible Notes of $0.1 million for both the three
months ended March 31, 2020 and 2019.
Income taxes. We calculate our quarterly income tax expense (benefit) using a
forecasted annual effective tax rate and we adjust for any discrete items
arising during the quarter. Our income tax benefit was $2.2 million for the
three months ended March 31, 2020 compared to an income tax expense of $2.7
million for the three months ended March 31, 2019. Our operating tax rate before
discrete items was 33.6% and 28.0% for the three months ended March 31, 2020 and
2019, respectively. We recorded $0.7 million of additional tax expense in the
three months ended March 31, 2020 related to the impairment of goodwill and
other intangibles for businesses that were previously acquired as a stock
acquisition, which caused an increase of 3.6% in our operating tax rate.
In connection with the CARES Act, we expect to file a claim for a refund during
2020 to carryback the net operating losses generated in the tax years ending
December 31, 2018 and 2019 and have included the impact in our current
provision. In an effort to maximize the expected benefits afforded by the CARES
Act we plan to amend our 2018 tax return to include the additional first year
depreciation deduction for qualified improvement property. The majority of the
net operating losses generated in 2018 are the result of filing non-automatic
accounting method changes relating to the recognition of revenue from our
cemetery property and merchandise and services sales. Due to the uncertainty of
the timing of receiving Internal Revenue Service approval for non-automatic
accounting method changes, a reserve has been recorded against the benefit
derived from this carrying back that the net operating losses generated.
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 revenue and expenses,
the carrying value of assets and the recorded amounts of liabilities. Actual
results may differ from these estimates and such estimates may change if the
underlying conditions or assumptions change. Historical performance should not
be viewed as indicative of future performance because there can be no assurance
that our margins, operating income and net income, as a percentage of revenue,
will be consistent from year to year.
Management's discussion and analysis of financial condition and results of
operations ("MD&A") is based upon our Consolidated Financial Statements
presented herewith, which have been prepared in accordance with GAAP. Our
critical accounting policies are discussed in MD&A in our Annual Report on Form
10-K for the year ended December 31, 2019.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate.
Generally, the death rate is higher during the winter months because the
incidences of death from influenza and pneumonia are higher during this period
than other periods of the year.

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