What changed in this filing

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Item 1. Business

2021-03-02 compared with 2020-02-28 · 170 added, 201 removed, 97 unchanged (79% of the section changed)

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We believe we are a market leader in most of our markets.

Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services.

Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers.

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

CURRENT YEAR DEVELOPMENTS

Acquisitions.

On October 9, 2019 , we acquired four funeral home businesses in Buffalo, New York.

On October 28, 2019 , we acquired one funeral home and cemetery combination business, three funeral home businesses and three ancillary service businesses, which include a flower shop, a pet cremation business and an online cremation business, in the Dallas, Texas area.

On December 31, 2019 , we acquired a funeral home and cemetery combination business in Fairfax, Virginia.

The pro forma impact of these acquisitions on prior periods is not presented as the impact is not material to our reported results.

The results of the acquired businesses are included in our results of operations from the date of acquisition.

Executive Leadership Changes.

On December 2, 2019, William (Bill) Goetz joined our executive leadership team as President and Chief Operating Officer and was also elected to serve as a member of our Board of Directors.

Share Repurchase Program.

On July 31, 2019, our Board approved a share repurchase program authorizing us to purchase an additional $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”).

During the year ended December 31, 2019 , we repurchased 400,000 shares of common stock for a total cost of approximately $7.8 million at an average cost of $19.39 per share pursuant to this share repurchase program.

Based on all repurchases to the date of this Annual Report on Form 10-K and increases in authorization, we have approximately $25.6 million available for repurchase under our approved program.

During 2019, we paid $5.4 million in dividends.

Additional Senior Notes.

On December 19, 2019, we issued an additional $75.0 million in aggregate principal amount of 6.625% Senior Notes due 2026 (the “Additional Senior Notes”) and related guarantees by our subsidiary guarantors in a private offering under Rule 144A and Regulation S of the Securities Act of 1933, as amended (the “Securities Act”).

The Additional Senior Notes were issued as additional securities under the indenture by and among us, our subsidiary guarantors and Wilmington Trust, National Association, as trustee, pursuant to which $325.0 million in aggregate principal amount of 6.625% Senior Notes due 2026 (the “Initial Senior Notes” and, together with the Additional Senior Notes, the “Senior Notes”) issued by us in May 2018.

Divestitures.

During 2019 , we divested three funeral home businesses whose building leases expired and sold a funeral home business for $0.9 million .

In addition, we merged a funeral home business with a business in an existing market.

FUNERAL AND CEMETERY INDUSTRY

Funeral home and cemetery businesses provide products and services to families in three principal areas:

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and (iii) memorialization, generally through monuments, markers or inscriptions.

The funeral and cemetery industry in the United States is characterized by the following fundamental attributes (the industry statistics and information included in this Form 10-K are from reports compiled by Sundale Research based on information as of September 30, 2019 from the United States Department of Commerce).

Deaths and Death Trends

During 2019, the number of deaths in the United States increased by approximately 2.2% following a 1.3% and a 2.5% increase in 2018 and 2017, respectively.

The rapidly growing and aging population is expected to result in an increase in the number of deaths in the future.

The number of Americans age 55 to 64 totaled 42.8 million in 2018 and is expected to grow 2.0% to 47.2 million by 2023, making this the second fastest-growing age group, while the fastest-growing segment of the population is Americans aged 65 and older, with 52.3 million in 2018.

This age group is expected to increase to 60.0 million in 2023, reflecting an average annual growth rate of 2.8%.

Overall, from 2018 to 2023, the number of deaths in the United States is expected to increase by an average of 2.0% per year, reaching an estimated 3.15 million in 2023.

Burial and Cremation Trends

While the number of deaths is expected to increase over the next few years, the burial rate is expected to continue to decline.

In 2019, the number of burials in the United States decreased by an estimated 1.2%, following declines of 2.2% and 0.5% in 2018 and 2017 respectively.

The number of burials in the United States is estimated to fall by an average of 1.0% per year from 2018 through 2023.

In 2023, it is estimated that there will be approximately 1.26 million burials in the United States and a burial rate of 40.2%.

In 2019, the number of cremations in the United States increased by an estimated 5.2%, following increases of 4.5% and 5.6% in 2018 and 2017, respectively.

Slower growth is expected through 2023, due in part to the sheer size of the market for cremations;

however, shifting preferences will continue to lead to a considerable rise in cremations.

The number of cremations in the United States is expected to grow by an average of 4.4% per year from 2018 through 2023.

In 2023, it is estimated that there will be approximately 1.88 million cremations in the United States and a cremation rate of 59.8%.

Highly Fragmented Ownership

Our industry remains highly fragmented, and succession planning issues for privately-owned funeral and cemetery businesses have become more difficult and complex than ever.

We believe Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for owners who want their legacy family business to remain operationally prosperous in their local communities.

We also believe that our decentralized operating model will continue to attract the top entrepreneurial talent in our industry.

Our focus is on partnering with the best of the remaining independent funeral home and cemetery owners in major strategic markets around the country where the potential for future revenue growth is the highest.

The largest publicly held operators, in terms of revenue, of both funeral homes and cemeteries with operations in the United States are Service Corporation International (“SCI”), StoneMor Partners L.P.

(“StoneMor”), Park Lawn Corporation, traded on the Toronto Stock Exchange (“Park Lawn”) and Carriage.

We believe these four companies collectively represent approximately 20% of funeral and cemetery revenue in the United States.

Independent businesses, along with a few privately-owned consolidators, represent the remaining amount of industry revenue, accounting for an estimated 80% share of revenue.

Heritage and Tradition

Funeral home and cemetery businesses have traditionally been family-owned businesses that have built a local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals.

Given the sensitive nature of our business, we believe that relationships fostered at the local level build trust in the community and are a key driver of market share.

While new entrants may enter any given market, the time and resources required to develop local heritage and tradition serve as important barriers to entry.

Our funeral homes offer a complete range of services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and memorial services and transportation services.

Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and services to take place at one location and thereby reduces transportation costs and inconvenience to the family.

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

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

CURRENT YEAR DEVELOPMENTS

On January 3, 2020, we acquired one funeral home and cemetery combination business in Lafayette, California.

Performance Awards

On May 19, 2020, we cancelled all the performance awards previously awarded to all individuals in 2019 and February 2020 and the Compensation Committee of the Board of Directors (the “Board”) approved a new performance award agreement (the “New Agreement”) for certain eligible employees.

Pursuant to the New Agreement, the target share awards for each of the eligible employees will vest on December 31, 2024 if the Company’s common stock reaches one of five predetermined growth targets for a sustained period beginning on the grant date of May 19, 2020 and ending on December 31, 2024.

Convertible Notes Repurchases

On September 9, 2020, we repurchased $3.76 million in aggregate principal amount 2.75% convertible subordinated notes due 2021 (“Convertible Notes”) for $4.6 million in cash.

On May 19, 2020, the Board approved an increase of $0.05 per share to our annual dividend beginning with the dividend declaration in the third quarter.

On October 27, 2020, the Board approved an additional increase of $0.0125 per share for a total annual dividend of $0.40 per share beginning with the dividend declaration in the fourth quarter.

During 2020, we paid $6.0 million in dividends.

During 2020, we divested eight funeral homes for a total of $8.4 million, at a net loss of $6.7 million.

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 2020, 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.

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 have, to this point, led to an increase in volume and may 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, in some cases, 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, outdoor services, or in some cases, choose to delay services to a future date.

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 uncertain.

Certain estimates inherently involve assumptions about future events and annual results, making reliable estimates for those matters challenging in periods of 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 reliable service.

Remote working arrangements, when utilized, have not materially affected our ability to maintain and support operations, including financial reporting systems, internal controls over financial reporting and disclosure controls and procedures.

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, but given the unprecedented nature of COVID-19, we also believe, it is prudent for us to take a broad-based approach to ensuring we maintain financial flexibility throughout the expected duration of the pandemic.

As part of a larger plan, we took steps to reduce overall expenses.

For example, discretionary spending, such as growth capital expenditures (primarily cemetery inventory development) was tightly managed and minimized during this time.

While the expected duration of the pandemic is unknown, we have not currently experienced any material negative impacts to our liquidity position, access to capital, or cash flows as a result of COVID-19.

See Liquidity and Capital Resources within Part II, Item 7, 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 has provided a cash benefit in the form of tax payment refunds (we received the 2018 tax year refund on August 7, 2020 and anticipate a further refund for tax year 2019), tax credits related to employee retention, cash deferral for the employer portion of the Social Security tax and anticipated minimal cash taxes for 2020.

Although we expect to take advantage of certain tax relief provisions of the CARES Act, we do not believe it will have a significant impact on our short-term or long-term liquidity position.

See Part II, Item 8, 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, including revenue, volume, preneed cemetery sales, and average revenue per contract.

We will continue to assess these impacts and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related gathering restrictions evolves.

OUR OPERATIONS

See Part II, Item 8, Financial Statements and Supplementary Data, Note 21 for segment data related to our operations.

Funeral Home and Cemetery Operations

Our funeral home and cemetery operations are managed by a team of experienced industry and sales professionals with substantial leadership experience.

Given the high fixed-cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:

• our ability to establish and maintain market share positions supported by strong local heritage and relationships;

• our ability to effectively respond to the increasing trends towards cremation by bundling complimentary services and merchandise;

• our ability to control salary, merchandise and other controllable costs;

• our ability to exercise pricing leverage related to our atneed business to increase average revenue per contract;

• demographic trends in terms of population growth and average age, which impact death rates and number of deaths;

• our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds and our securities portfolio within the trust funds, which would offset lower pricing power as preneed contracts mature.

Our cemetery operations are subject to many of the same profitability factors as our funeral home business, as well as the following key factors:

• size and success of our sales organization;

• local perceptions and heritage of our cemeteries;

• our ability to adapt to changes in the economy and consumer confidence;

• 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.

Personalization and pre-planning continue to be two important trends in the funeral and cemetery industry, but the national trend toward more cremations may be the most significant.

While this trend is expected to continue, other factors are expected to lead to rising industry revenue, including an increase in spending on additional or unique funeral and cremation services.

Shifting preferences will likely continue to lead to a considerable rise in cremations;

as such, we are focused on educating and providing our cremation customers with additional services and products that are available.

All of our funeral homes offer cremation products and services.

While the average revenue for a cremation service is generally lower than that of an average traditional burial service, we have found that this revenue can be substantially enhanced by offering additional services and merchandise, including video tributes, flowers, burial garments and memorial items such as urns, keepsake jewelry and other items that hold a portion of the cremated remains.

We believe the following are our key strengths for our funeral home and cemetery operations:

Market Leader.

We compete with other publicly held funeral and cemetery companies and smaller, independent operators and believe we are a market leader in most of our markets.

We focus on markets that perform better than the industry average and are less subject to material economic and demographic changes.

High Performance, Decentralized, Partnership Culture.

Our funeral homes and cemeteries are managed by entrepreneurially focused Managing Partners with extensive funeral and cemetery industry experience, often within their local markets.

They are responsible for day-to-day operations and for growing the business by hiring, training and developing highly motivated and productive local teams.

Our businesses are supported by a broader team of High Performance leaders across multiple disciplines in our support center located in Houston, Texas.

This promotes more cooperation and synergy between our funeral and cemetery operations and supports the goal of market-share and volume growth in our most significant markets.

We believe our decentralized and partnership culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.

Flexible Capital Structure and Strong Cash Flows.

We believe our capital structure provides us with financial flexibility by allowing us to invest our cash in growth opportunities, such as business acquisitions and cemetery inventory projects.

While we reassess our capital allocation strategy annually, we currently believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our cash in growth opportunities that generate a return on invested capital in excess of our weighted average cost of

For additional information regarding our capital structure, please see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

Strong Field-Level Gross Profit Margins.

We believe that we have strong field-level gross profit margins and that this performance is a testament to the success of our business strategies.

Our strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure.

We will continue to seek ways to improve our financial performance, and we believe that our Standards Operating Model will continue to yield long-term improvement in our financial results.

Integrated Information Systems.

We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards.

Additionally, we have innovative technological and digital tools which enhance our ability to serve our client families in a remote environment.

All of our funeral homes and cemeteries are connected to our support center located in Houston, Texas, which allows us to monitor and assess critical operating and financial data and analyze the performance of individual locations on a timely basis.

Furthermore, our information system infrastructure provides senior management with a critical tool for monitoring and adhering to our established internal controls, which is critical given our decentralized model and the sensitive nature of our business operations.

Proven Leadership Team.

Our leadership team, headed by our founder, Chairman and Chief Executive Officer, Melvin C.

Payne, is characterized by a dynamic culture that focuses on addressing changing market conditions and emerging trends in the funeral services industry.

We believe our culture of emphasizing the 4E (Energy, Energize Others, Edge and Execution) leadership characteristics is critical and will provide an important advantage as the funeral and cemetery industry evolves.

We are committed to continue operating an efficient organization and strengthening our corporate and local business leadership.

Preneed Programs

Funeral and cemetery arrangements sold prior to death occurring are referred to as preneed contracts.We market funeral and cemetery services and products on a preneed basis at the local level.

We operate under a decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs.

Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services.

Preneed contracts permit families to eliminate the burden of making deathcare plans at the time of need and allow input from other family members before the death occurs.

We guarantee the price and performance of the preneed contracts to the customer.

Approximately 15% of our funeral services performed are funded through preneed contracts, which are usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need.

Insurance-funded contracts allow us to earn commission income to improve our near-term cash flow and offset a significant amount of the up-front costs associated with preneed sales.

Trust funded contracts typically provide cash that is invested in various securities with the expectation that returns will exceed the growth factor in the insurance contracts.

The cash flow and earnings from insurance contracts are more stable, but are generally lower than traditional trust fund investments.

In markets that depend on preneed sales for market share, we supplement the arrangements written by our local funeral directors with sales sourced by our own sales counselors and by third party sellers.

We sold 8,410 and 7,525 preneed funeral contracts, net of cancellations, during the years ended December 31, 2019 and 2020, respectively.

At December 31, 2020, we had a backlog of 97,294 preneed funeral contracts to be delivered in the future.

In addition to preneed funeral contracts, we also offer “pre-planned” funeral arrangements whereby a customer determines in advance substantially all of the details of a funeral service without any financial commitment or other obligation on the part of the client until the actual time of need.

Pre-planned funeral arrangements permit a family to avoid the burden of making deathcare plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an atneed sale.

Approximately 50% of our cemetery operating revenue is derived from preneed property sales.

Our preneed cemetery strategy is to build family heritage in our cemeteries by selling property and interment rights prior to death through full time, highly motivated and entrepreneurial local sales teams.

Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales.

Cemetery merchandise and services are often purchased in addition to cemetery property at the time of sale.

The performance of these preneed cemetery contracts is secured by placing the funds collected in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need.

General consumer confidence and discretionary income may have a significant impact on our preneed sales success rate.

Cemetery revenue that originated from preneed contracts represented approximately 66% and 67% of our total cemetery revenue for 2019 and 2020, respectively.

At December 31, 2020, we had a backlog of 64,820 preneed cemetery contracts to be delivered in the future.

Trust Funds and Insurance Contracts

We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state laws.

Such trusts include (i) preneed funeral trusts;

(ii) preneed cemetery merchandise and service trusts;

and (iii) cemetery perpetual care trusts.

These trusts are typically administered by independent financial institutions which we select.

Investment management and advisory services are provided either by our wholly-owned registered investment advisory firm (“CSV RIA”) or by independent financial advisors.

As of December 31, 2020, CSV RIA provided these services to approximately 80% of our trust assets, for a fee based on the market value of trust assets.

Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.

The investment advisors establish an investment policy that provides guidance on asset allocation, investment requirements, investment manager selection and performance monitoring.

The investment objectives are tailored to generate long-term investment returns without assuming undue risk, while ensuring the management of assets is in compliance with applicable laws.

Preneed sales generally require deposits to a trust or purchase of a third-party insurance product.

Trust fund income earned, along with the receipt and recognition of any insurance benefits, are not reflected in our revenue until the service is performed or the merchandise is delivered.

Trust fund holdings and deferred revenue are reflected on our Consolidated Balance Sheet, while our insurance funded contracts are not reflected on our Consolidated Balance Sheet.

In most states, we are not permitted to withdraw principal or investment income from such trusts until the service is performed.

Additionally, in most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust.

The income from these perpetual care trusts provides funds necessary to maintain cemetery property and memorials in perpetuity.

For additional information with respect to our trusts, see Part II, Item 8, Financial Statements and Supplementary Data, Note 7.

BUSINESS STRATEGY

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We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, high-performance culture operating framework linked with incentive compensation programs that attract top-quality industry talent to our organization.

We also believe that Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for owners who want their legacy family business to remain operationally prosperous in their local communities.

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:

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• Growth of the Company is driven by decentralization and partnership.

Our five Guiding Principles collectively embody our Being The Best high-performance cultural, operating framework.

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

Our operations and business strategy are built upon the execution of the following three models:

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Each Managing Partner participates in a variable bonus plan whereby he or she earns a percentage of his or her respective business’ earnings based upon the actual standards achieved as long as the performance exceeds our minimum standards.

Our five year incentive award, called the “ Good To Great Award ,” which began in 2012, rewards Managing Partners with a bonus at the end of five years, equal to a ratio of four to six times their average annual bonus, if they are able to achieve an annual compound growth rate of 2% over a five year period.

The growth rate was changed to 1% beginning with the 2019 payout year, which impacts all five-year performance periods ending on or after December 31, 2019.

After each five year incentive plan is achieved and paid out, a new five year plan period begins.

To date, we have had four performance periods in which we have paid $5.1 million to the Managing Partners who have earned a bonus under this program.

• The Right Local Leadership – Successful execution of our operating model is highly dependent on strong local leadership as defined by our 4E Leadership Model, intelligent risk taking and entrepreneurial empowerment.

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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.

Our belief in our Mission Statement and Guiding Principles and proper execution of the three models that define our strategy have given us a competitive advantage in every market where we compete.

We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead.

This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin.

Other elements of our overall business strategy include the following:

Enhancement of Burial and Cremation Services.

Personalization and pre-planning continue to be two of the most important trends in the funeral and cemetery industry, but the national trend toward more cremations may be the most significant.

While this trend is expected to continue, other factors are expected to lead to rising industry revenue, including an increase in spending on additional or unique funeral and cremation services.

The percentage of funeral services performed by our funeral homes for which cremation was chosen as the method of disposition was 51.4% for the year ended December 31, 2017 , 52.2% for the year ended December 31, 2018 and 53.7% for the year ended December 31, 2019 .

Shifting preferences will likely continue to lead to a considerable rise in cremations;

as such, we are focused on educating and providing our cremation customers additional services and products that are available.

All of our funeral homes offer cremation products and services.

Preneed Funeral Sales Program.

We operate under a local, decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs.

Approximately 20% of our funeral services performed are funded through preneed contracts, which are usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need.

Insurance-funded contracts allow us to earn commission income to improve our near-term cash flow and offset a significant amount of the up-front costs associated with preneed sales.

Trust funded contracts typically provide cash that is invested in various securities with the expectation that returns will exceed the growth factor in the insurance contracts.

The cash flow and earnings from insurance contracts are more stable, but are generally lower than traditional trust fund investments.

Preneed Cemetery Sales Program.

Approximately 50% of our cemetery operating revenue is derived from preneed property sales.

Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales.

Cemetery merchandise and services are often purchased in addition to cemetery property at the time of sale.

General consumer confidence and discretionary income may have a significant impact on our preneed sales success rate.

OUR STRENGTHS

Market Leader.

We compete with other publicly held funeral and cemetery companies and smaller, independent operators and believe we are a market leader in most of our markets.

We focus on markets that perform better than the industry average and are less subject to material economic and demographic changes.

High Performance, Decentralized, Partnership Culture.

Our funeral homes and cemeteries are managed by Managing Partners with extensive funeral and cemetery industry experience, often within their local markets.

Our Managing Partners have responsibility for day-to-day operations, but are required to follow operating and financial standards based on our Standards Operating Model that are custom designed for distinct business groupings based on the size (number of funerals) and average revenue per funeral.

This strategy allows each local business to maintain its unique identity within its local market and to capitalize on its reputation and heritage while a range of support services is provided from our home office in Houston, Texas.

We believe our culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.

Flexible Capital Structure.

We believe that our capital structure provides us with financial flexibility by allowing us to invest our cash flow in growth opportunities, such as business acquisitions and cemetery inventory projects.

Stable Cash Flow.

We have demonstrated the ability to generate strong and stable cash flow.

Cash flow from operations for 2019 totaled $43.2 million , which was used primarily for the acquisition of funeral home and cemetery businesses, capital expenditures and our working capital needs, including payment of dividends and our debt obligations.

During 2020, we intend to focus on integrating our newly acquired businesses and to use our cash flow to fund internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends and our debt obligations.

From time to time, we may also use available cash flow to repurchase shares of our common stock and remaining 2.75% convertible subordinated notes due 2021.

While we reassess our capital allocation strategy annually, we currently believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our net cash flow in growth opportunities that generate a return on invested capital in excess of our weighted average cost of capital.

Strong Field-Level Gross Profit Margins.

We believe that we have strong field-level gross profit margins and that this performance is a testament to the success of our business strategies.

Our strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure.

We will continue to seek ways to improve our financial performance, and we believe that our Standards Operating Model will continue to yield long-term improvement in our financial results.

Integrated Information Systems.

We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards.

All of our funeral homes and cemeteries are connected to our home office in Houston, which allows us to monitor and assess critical operating and financial data and analyze the performance of individual locations on a timely basis.

Proven Leadership Team.

Our leadership team, headed by our founder, Chairman and Chief Executive Officer, Melvin C.

Payne, is characterized by a dynamic culture that focuses on addressing changing market conditions and emerging trends in the funeral services industry.

We are committed to continue operating an efficient organization and strengthening our corporate and local business leadership.

Our businesses are supported by a broader team of High Performance leaders across multiple disciplines located in our home office in Houston.

This promotes more cooperation and synergy between our funeral and cemetery operations and supports the goal of market-share and volume growth in our most significant markets.

OUR OPERATIONS

We conduct our funeral and cemetery operations only in the United States.

Our operations are reported in two segments:

funeral home operations and cemetery operations.

Information for each of our segments is presented below and in our financial statements set forth herein.

Funeral Home Operations

At December 31, 2019 , we operated 186 funeral homes in 29 states.

Funeral home revenue currently accounts for approximately 80% of our total revenue.

The funeral home operations are managed by a team of experienced industry professionals and regional leadership with substantial management experience in our industry.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 23 for segment data related to our funeral home operations.

Given the high fixed-cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:

our ability to establish and maintain market share positions supported by strong local heritage and relationships;

our ability to effectively respond to the increasing trends towards cremation by packaging complimentary services and merchandise;

our ability to control salary, merchandise and other controllable costs;

our ability to exercise pricing leverage related to our atneed business to increase average revenue per contract;

demographic trends in terms of population growth and average age, which impact death rates and number of deaths;

our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds and our securities portfolio within the trust funds, which would offset lower pricing power as preneed contracts mature.

Cemetery Operations

At December 31, 2019 , we operated 31 cemeteries in 11 states.

Cemetery revenue currently accounts for approximately 20% of our total revenue.

The cemetery operations are led by a team of experienced industry and sales professionals and regional leadership with substantial management experience in our industry.

See Part II, Item 8, Financial Statements and Supplementary Data, Note 23 for segment data related to our cemetery operations.

Our cemetery operations are subject to many of the profitability factors as our funeral home business, as well as the following key factors:

size and success of our sales organization;

local perceptions and heritage of our cemeteries;

our ability to adapt to changes in the economy and consumer confidence;

our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds.

Preneed Programs

Funeral and cemetery arrangements sold prior to death occurring are referred to as preneed contracts.We market funeral and cemetery services and products on a preneed basis at the local level.

Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services.

Preneed contracts permit families to eliminate issues of making deathcare plans at the time of need and allow input from other family members before the death occurs.

We guarantee the price and performance of the preneed contracts to the customer.

Pre-planned funeral arrangements permit a family to avoid issues of making deathcare plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an atneed sale.

We sold 8,303 and 8,410 preneed funeral contracts, net of cancellations, during the years ended December 31, 2018 and 2019 , respectively.

At December 31, 2019 , we had a backlog of 98,493 preneed funeral contracts and 58,256 preneed cemetery contracts to be delivered in the future.

Approximately 20% of our funeral contract volumes during the years ended December 31, 2018 and 2019 originated through preneed contracts.

Cemetery revenue that originated from preneed contracts represented approximately 65% and 66% of our total cemetery revenue for 2018 and 2019 , respectively.

At December 31, 2019 , we employed a staff of 126 advance-planning and family service representatives for the sale of preneed products and services.

Our advance-planning and family service representatives primarily assist families in making atneed and preneed funeral, memorialization and cemetery arrangements through the selection and purchase of cemetery property, merchandise and services and ensuring that the expectations of our client families and their guests are exceeded.

Trust Funds and Insurance Contracts

We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state laws.

Such trusts include (i) preneed funeral trusts;

(ii) preneed cemetery merchandise and service trusts;

and (iii) cemetery perpetual care trusts.

These trusts are typically administered by independent financial institutions selected by us.

Investment management and advisory services are provided either by our wholly-owned registered investment advisory firm, CSV RIA, or by independent financial advisors.

As of December 31, 2019 , CSV RIA provided these services to approximately 71% of our trust assets, for a fee based on the market value of trust assets.

The investment advisors establish an investment policy that gives guidance on asset allocation, investment requirements, investment manager selection and performance monitoring.

The investment objectives are tailored to generate long-term investment returns without assuming undue risk, while ensuring the management of assets is in compliance with applicable laws.

Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product.

Trust fund income earned, along with the receipt and recognition of any insurance benefits, are not reflected in our revenue until the service is performed or the merchandise is delivered.

Trust fund holdings and deferred revenue are reflected on our Consolidated Balance Sheet, while the insurance contracts are not on our Consolidated Balance Sheet.

In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed.

Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses.

The aggregate balance of our preneed funeral contracts held in trust, insurance contracts and receivables from preneed trusts was $523.1 million as of December 31, 2019 .

We are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of the selling price) into a merchandise and service trust fund for preneed cemetery merchandise and services sales.

The related trust fund income earned is recognized when the related merchandise and services are delivered.

We are generally permitted to withdraw the trust principal and accrued income when the merchandise is actually delivered, when the service is provided or when the contract is canceled.

However, certain states allow the withdrawal of income prior to delivery when the regulations identify excess earnings in the trusts.

We did not withdraw any trust income in 2018 and 2019 .

Cemetery merchandise and service trust fund balances totaled $72.4 million as of December 31, 2019 .

In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust.

The income from these perpetual care trusts provides funds necessary to maintain cemetery property and memorials in perpetuity.

This trust fund income is recognized, as earned and is reflected in our Consolidated Financial Statements as Other revenue .

While we are entitled to withdraw the income from perpetual care trusts to provide for maintenance of cemetery property and memorials, we are restricted from withdrawing any of the principal balances of the trust fund.

Perpetual care trust balances totaled $64.0 million at December 31, 2019 .

For additional information with respect to our trusts, see Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 9 and 11.

Our business can be affected by seasonal fluctuations in the death rate.

Generally, the number of deaths is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.

The operating environment in the funeral and cemetery industry has been highly competitive.

Publicly held companies with operations in the United States include SCI, StoneMor, Park Lawn and Carriage.

In addition, a number of smaller private consolidators have been active in acquiring and operating funeral homes and cemeteries.

The largest publicly held operators, in terms of revenue, of both funeral homes and cemeteries with operations in the United States are Service Corporation International (“SCI”), StoneMor, Inc.

(“StoneMor”), Park Lawn Corporation (“Park Lawn”) and Carriage.

We believe these four companies collectively represent approximately 20% of funeral and cemetery revenue in the United States.

Independent businesses, along with a few privately-owned consolidators, represent the remaining amount of industry revenue, accounting for an estimated 80% share of revenue.

Our funeral home and cemetery operations face competition in the markets that they serve.

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Market share for funeral homes and cemeteries is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important.

Because of the importance of reputation and heritage, market share increases are usually gained over a long period of time.

Because of the importance of reputation and heritage, market share increases

are usually gained over a long period of time.

The sale of preneed funeral services and cemetery property has increasingly been used by many companies as a marketing tool to build market share.

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These competitors have been successful in capturing a portion of the low-end market and product sales.

Our business can be affected by seasonal fluctuations in the death rate.

Generally, the number of deaths is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.

Our operations are subject to regulations, supervision and licensing under numerous federal, state and local laws, ordinances and regulations, including extensive regulations concerning trust funds, preneed sales of funeral and cemetery products and services and various other aspects of our business.

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We cannot predict what changes, if any, may be made to the Funeral Rule or the impact of any such changes on our business.

State Trust Laws.

We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state laws.

Such trusts include (i) preneed funeral trusts;

(ii) preneed cemetery merchandise and service trusts;

and (iii) cemetery perpetual care trusts.

These trusts are typically administered by independent financial institutions which we select.

Under state trust laws, our wholly owned registered investment advisor is allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.

Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product.

In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed.

Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses.

Additionally, we are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of the selling price) into a merchandise and service trust fund for preneed cemetery merchandise and services sales.

Environmental.

Our operations are also subject to stringent federal, regional, state and local laws and regulations relating to environmental protection, including legal requirements governing air emissions, waste management and disposal and wastewater discharges.

Our operations are also subject to certain federal, regional, state and local laws and regulations relating to environmental protection, including legal requirements governing air emissions, waste management and disposal and wastewater discharges.

For instance, the federal Clean Air Act and analogous state laws, which restrict the emission of pollutants from many sources, including crematories, may require us to apply for and obtain air emissions permits, install costly emissions control equipment, and conduct monitoring and reporting tasks.

Also, in the course of our operations, we store and use chemicals and other regulated substances as well as generate wastes that may subject us to strict liability under the federal Resource Conservation and Recovery Act and comparable state laws, which govern the treatment, storage, and disposal of nonhazardous and hazardous wastes, and the federal Comprehensive Environmental Response, Compensation and Liability Act, a remedial statute that imposes cleanup obligations on current and past owners or operators of facilities where hazardous substance releases occurred and anyone who transported or disposed or arranged for the transportation or disposal of hazardous substances released into the environment from such sites.

In addition, the Federal Water Pollution Control Act, also known as the federal Clean Water Act, and analogous state laws regulate discharges of pollutants to state and federal waters.

Underground and aboveground storage tanks that store chemicals and fuels for vehicle maintenance or general operations are located at certain of our facilities and any spills or releases from those facilities may cause us to incur remedial liabilities under the Clean Water Act or analogous state laws as well as potential liabilities for damages to properties or persons.

In addition, the Federal Water Pollution Control Act, also known as

the federal Clean Water Act, and analogous state laws regulate discharges of pollutants to state and federal waters.

Underground and above ground storage tanks that store chemicals and fuels for vehicle maintenance or general operations are located at certain of our facilities and any spills or releases from those facilities may cause us to incur remedial liabilities under the Clean Water Act or analogous state laws as well as potential liabilities for damages to properties or persons.

Failure to comply with environmental laws and regulations could result in the assessment of sanctions, including administrative, civil, and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, delays in permitting or performance of projects and the issuance of injunctions restricting or prohibiting some or all of our activities in affected areas.

Moreover, accidental releases or spills may occur in the course of our

operations, and we cannot assure that we will not incur significant costs and liabilities as a result of such releases or spills, including any third party claims for damages to property, natural resources or persons.

Moreover, accidental releases or spills may occur in the course of our operations, and we cannot assure that we will not incur significant costs and liabilities as a result of such releases or spills, including any third party claims for damages to property, natural resources or persons.

Also, it is possible that implementation of stricter environmental laws and regulations or more stringent enforcement of existing environmental requirements could result in additional, currently unidentifiable costs or liabilities to us, such as requirements to purchase pollution control equipment or implement operational changes or improvements.

While we believe we are in substantial compliance with existing environmental laws and regulations, we cannot assure that we will not incur substantial costs in the future.

While we believe we are in compliance with existing environmental laws and regulations, we cannot assure that we will not incur substantial costs in the future.

Worker Health and Safety .

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In addition, the OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and implementing regulations and similar state statutes and regulations require that we organize and/or disclose information about hazardous materials used or produced in our operations and that this information be provided to employees, state and local governmental authorities and citizens.

We believe that we are in substantial compliance with all applicable laws and regulations relating to worker health and safety.

We believe that we are in compliance with all applicable laws and regulations relating to worker health and safety.

HUMAN CAPITAL

Our funeral homes and cemeteries are managed by entrepreneurially focused Managing Partners with extensive funeral and cemetery industry experience.

They have responsibility for day-to-day operations and follow operating and financial metrics called “Standards” within our Standards Operating Model.

Standards Achievement is the measure by which we judge the Managing Partner's performance and how we incentivize our Managing Partners and their teams.

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.

See Part I, Item 1, Business Strategy for additional details about our Standards Operating Model and 4E Leadership Model.

As of December 31, 2020, we and our subsidiaries employed 2,718 employees, of whom 1,126 were full-time and 1,592 were part-time.

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Our website address is www.carriageservices.com .

Available on our website under “Investors – SEC Filings,” free of charge, are Carriage’s annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, insider reports on Forms 3, 4 and 5 filed on behalf of directors and officers and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.

Available on our website under “Investors – SEC Filings,” free of charge, are Carriage’s annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, current reports on Form 8-K, insider reports on Forms 3, 4 and 5 filed on behalf of directors and officers and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the SEC.

Also posted on our website, and available in print upon request, are charters for our Audit Committee, Compensation Committee and Corporate Governance Committee.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1. Business