What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-11-03 compared with 2021-08-04 · 243 added, 264 removed, 427 unchanged (54% of the section changed)

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Funeral Home Operations, which currently account for approximately 70% of our revenue, and Cemetery Operations, which currently account for approximately 30% of our revenue.

At June 30, 2021, we operated 171 funeral homes in 26 states and 32 cemeteries in 12 states.

At September 30, 2021, we operated 171 funeral homes in 26 states and 32 cemeteries in 12 states.

We compete with other publicly held and independent operators of funeral and cemetery companies.

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Recent Developments

Executive Team Appointment and Promotions

On June 1, 2021, C.

Benjamin Brink, Steven D.

Metzger and Carlos R.

Quezada were each promoted to Executive Vice President.

The Board also appointed Carlos R.

Quezada to serve as the Company’s Chief Operating Officer and Steven D.

Metzger to serve as the Company's Chief Administrative Officer.

Senior Notes and Credit Facility

On May 13, 2021, we completed the issuance of $400.0 million in aggregate principal amount 4.25% Senior Notes due 2029 (the “New Senior Notes”).

In connection with the issuance of the New Senior Notes, we entered into an amended and restated $150.0 million senior secured revolving credit facility (the “New Credit Facility”).

We used the proceeds of $395.5 million from the offering of the New Senior Notes, which are net of a 1.125% debt discount of $4.5 million, together with cash on hand and borrowings under the New Credit Facility, to redeem all of our existing $400.0 million in aggregate principal amount 6.625% senior notes due 2026 (the “Original Senior Notes”).

During the six months ended June 30, 2021, we divested three funeral homes for a total of $3.5 million, at a gain of $0.1 million.

Chinchilla v.

Carriage Services, Inc., et al.

, Superior Court of California, San Joaquin County, Case No.

STK-CV-UOE-2021-0004661.

On May 19, 2021, a putative class action against the Company and several of our subsidiaries was filed.

Plaintiff, a former employee, seeks monetary damages on behalf of himself and other similarly situated current and former non-exempt employees.

Plaintiff claims that the Company failed to, among other things, pay minimum wages, provide meal and rest breaks, pay overtime, provide accurately itemized wage statements, reimburse employees for business expenses, and provide wages when due.

At June 30, 2021, we are unable to reasonably estimate the possible loss or ranges of loss, if any.

During the nine months ended September 30, 2021, we sold three funeral homes for $3.5 million and real property for $0.7 million, for a total net loss of $0.2 million.

Business Impact under the Macroeconomic Environment of COVID-19

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Beginning in early March 2020, the Company’s senior leadership team took 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.

Our businesses remain 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.

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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, begun to normalize consistent with pre-COVID-19 levels as it relates to volumes and the services we provide.

During the third quarter of 2021, changes in the macroeconomic environment as a result of the pandemic have, to this point, led to an increase in funeral volumes and the services we provide.

Our businesses have remained focused on being innovative and resourceful, providing families immediate service as part of the grieving process.

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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.

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.

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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 CARES Act, which have provided a cash benefit in the form of tax payment refunds, 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.

We also applied certain measures of the CARES Act, which provided a cash benefit in the form of tax payment refunds, tax credits related to employee retention, cash deferral for the employer portion of the Social Security tax and minimal cash taxes for 2020.

While we have taken 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 Item 1, Financial Statements and Supplementary Data, Note 1 for additional information related to the CARES Act.

During the second quarter of 2021, as gathering restrictions were lifted by state and local officials, we saw a normalization of funeral volumes at broadly higher funeral contract revenue averages, with geographical funeral revenue and margin difference related to the COVID-19 pandemic death rates decreasing.

Although we expect these trends to continue, we will continue to assess these impacts, including the potential impacts of new variants of COVID-19, such as the delta variant, and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related gathering restrictions, if any, evolves.

During the third quarter of 2021, we experienced a high growth rate in funeral home revenue due to elevated funeral volumes from broad market share gains and higher COVID-19 related deaths combined with incremental growth in the average revenue per funeral contract.

We will continue to assess these impacts, including the potential impacts of new variants of COVID-19, such as the Delta variant, and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related gathering restrictions, if any, evolves.

Funeral Home Operations

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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.

We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic criteria to assess acquisition candidates.

As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses.

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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.

We began 2021 with $0.9 million in cash and ended the second quarter with $1.5 million in cash.

At June 30, 2021, we had borrowings of $60.5 million outstanding on our Credit Facility compared to $47.2 million at December 31, 2020.

We began 2021 with $0.9 million in cash and ended the third quarter with $1.1 million in cash.

At September 30, 2021, we had borrowings of $86.9 million outstanding on our Credit Facility compared to $47.2 million at December 31, 2020.

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

Six months ended June 30,

Nine months ended September 30,

Cash at beginning of year $ 716 $ 889

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Other financing costs (169) (461)

Net cash provided by (used in) financing activities 2,694 (32,893)

Net cash used in financing activities (37,281) (58,284)

Cash at end of the period $ 725 $ 1,088

Operating Activities

For the six months ended June 30, 2021, cash provided by operating activities was $41.4 million compared to $31.0 million for the six months ended June 30, 2020.

The increase of $10.4 million is a reflection of the resilient cash generating ability of our portfolio of high-quality funeral home and cemetery operations.

Our operating income (excluding the non-cash impact of the divestitures, disposals and impairment charges) increased $12.6 million, which was slightly offset by other unfavorable working capital changes.

For the nine months ended September 30, 2021, cash provided by operating activities was $69.7 million compared to $67.8 million for the nine months ended September 30, 2020.

The increase of $1.9 million is primarily due to the increase in

operating income (excluding the non-cash impact of the divestitures, disposals and impairment charges) of $15.3 million, which was offset by unfavorable working capital changes in accounts receivable, income tax receivables and accounts payable.

Investing Activities

Our investing activities, resulted in a net cash outflow of $7.9 million for the six months ended June 30, 2021 compared to $33.7 million for the six months ended June 30, 2020, a decrease of $25.8 million.

Our investing activities, resulted in a net cash outflow of $11.2 million for the nine months ended September 30, 2021 compared to $30.5 million for the nine months ended September 30, 2020, a decrease of $19.3 million.

Acquisition and Divestiture Activity

During the six months ended June 30, 2021, we sold three funeral homes for $3.5 million and purchased real estate for $2.9 million.

During the six months ended June 30, 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.

During the nine months ended September 30, 2021, we sold three funeral homes for $3.5 million, sold real property for $0.7 million and purchased real property for $3.3 million.

We also received proceeds of $2.8 million from our property insurance policy for the reimbursement of renovation costs for our funeral and cemetery businesses that were damaged by Hurricane Ida.

During the nine months ended September 30, 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.

We also sold six funeral homes for $7.3 million and we sold real property for $0.1 million.

Capital Expenditures

For the six months ended June 30, 2021, capital expenditures (comprising of growth and maintenance spend) totaled $8.8 million compared to $5.8 million for the six months ended June 30, 2020, an increase of $3.0 million.

For the nine months ended September 30, 2021, capital expenditures (comprising of growth and maintenance spend) totaled $15.3 million compared to $10.0 million for the nine months ended September 30, 2020, an increase of $5.3 million.

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

Six months ended June 30,

Nine months ended September 30,

Cemetery development $ 3,321 $ 4,120

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Total Growth $ 4,640 $ 6,292

Six months ended June 30,

Nine months ended September 30,

Facility repairs and improvements $ 1,610 $ 2,172

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Paving roads and parking lots 475 1,140

Other 213 376

Total Maintenance $ 5,394 $ 8,960

Financing Activities

Our financing activities resulted in a net cash outflow of $32.9 million for the six months ended June 30, 2021 compared to a net cash inflow of $2.7 million for the six months ended June 30, 2020, an increase of $35.6 million.

During the six months ended June 30, 2021, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $12.8 million, offset by the following payments:

Our financing activities resulted in a net cash outflow of $58.3 million for the nine months ended September 30, 2021 compared to a net cash outflow of $37.3 million for the nine months ended September 30, 2020, an increase of $21.0 million.

During the nine months ended September 30, 2021, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $39.0 million, offset by the following payments:

i) $19.9 million for the call premium to redeem our Original Senior Notes;

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and v) $5.4 million in dividends.

During the six months ended June 30, 2020, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $5.2 million and paid $2.7 million in dividends.

During the nine months ended September 30, 2020, we had net payments on our Credit Facility, acquisition debt and finance leases of $28.9 million, paid $4.3 million in dividends and paid $4.6 million for the repurchases of our Convertible Notes.

Share Repurchase

On May 18, 2021, our Board approved an additional $25.0 million under our share repurchase program in accordance with Rule 10b-18 of the Exchange Act.

During the three and six months ended June 30, 2021, we repurchased 324,700 shares of common stock (of which 24,700 settled in July 2021) for a total cost of $12.3 million (of which $742,000 settled in July 2021) at an average cost of $37.88 per share pursuant to our share repurchase program.

On May 18, 2021 and July 26, 2021, our Board authorized increases of up to an additional $25.0 million, respectively, in our share repurchase program to permit us to purchase up to a total of $50.0 million under our share repurchase program, in addition to amounts previously authorized and outstanding, in accordance with the Exchange Act.

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

Three months ended September 30, 2021 Nine months ended September 30, 2021

Number of Shares Repurchased (1)

1,203,493 1,528,197

Average Price Paid Per Share $ 44.24 $ 42.89

Dollar Value of Shares Repurchased (1)

$ 53,239 $ 65,540

(1) During the three and nine months ended September 30, 2021, 84,000 shares settled in October 2021, which had a cost of $3.8 million.

Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations.

Shares purchased pursuant to the repurchase program are currently held as treasury shares.

At June 30, 2021, we had approximately $38.3 million available for repurchase under our share repurchase program.

At September 30, 2021, we had approximately $10.1 million available for repurchase under our share repurchase program.

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

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$ 0.1000 $ 1,799

$ 0.1000 $ 1,808

September 1 st

$ 0.1000 $ 1,783

2020 Per Share Dollar Value

$ 0.0750 $ 1,339

$ 0.0750 $ 1,343

September 1 st

$ 0.0875 $ 1,569

Credit Facility, Lease Obligations and Acquisition Debt

The outstanding principal of our Credit Facility, lease obligations and acquisition debt at June 30, 2021 is as follows (in thousands):

June 30, 2021

The outstanding principal of our Credit Facility, lease obligations and acquisition debt at September 30, 2021 is as follows (in thousands):

September 30, 2021

Credit Facility $ 86,900

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We incurred $0.8 million in transactions costs related to the New Credit Facility, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.

On May 13, 2021, we used approximately $21.4 million of the availability under the New Credit Facility to repay the outstanding balances under our prior $190.0 million senior secured revolving credit facility (the “Former Credit Facility”) and all commitments thereunder were terminated.

On May 13, 2021, we used approximately $21.4 million of the availability under the New Credit Facility to repay the then outstanding balances under our Former Credit Facility and all commitments thereunder were terminated.

In connection with the repayment in full of all amounts due thereunder, the Former Credit Facility was retired and $2.1 million of letters of credit previously issued under the Former Credit Facility were deemed issued under (and remain outstanding under) the New Credit Facility.

In connection with the termination of the Former Credit Facility, for the three and six months ended June 30, 2021, we recognized a loss on the write-off of $0.1 million in unamortized debt issuance costs, which was recorded in Net loss on extinguishment of debt .

Immediately following the issuance of the New Senior Notes, we had outstanding borrowings under the New Credit Facility of $58.8 million and $89.1 million available for additional borrowings after giving effect to the $2.1 million of outstanding letters of credit.

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

The New Credit Facility allows for future increases in the facility size in the form of increased revolving commitments or new incremental term loans by an additional amount of up to $75.0 million in the aggregate.

In connection with the termination of the Former Credit Facility, for the nine months ended September 30, 2021, we recognized a loss on the write-off of $0.1 million in unamortized debt issuance costs, which was recorded in Loss on extinguishment of debt .

The New Credit Facility allows

for future increases in the facility size in the form of increased revolving commitments or new incremental term loans by an additional amount of up to $75.0 million in the aggregate.

The final maturity of the New Credit Facility will occur on May 13, 2026.

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The New 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 New Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and the Subsidiary Guarantors to incur indebtedness, grant liens, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain

financial maintenance covenants.

At June 30, 2021, we were subject to the following financial covenants under our New Credit Facility:

At September 30, 2021, we were subject to the following financial covenants under our New Credit Facility:

(A) a Total Leverage Ratio not to exceed 5.00 to 1.00 and (B) a Fixed Charge Coverage Ratio (as defined in the New Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters.

These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis.

We were in compliance with all of the covenants contained in our New Credit Facility as of June 30, 2021.

At June 30, 2021, we had outstanding borrowings under the New Credit Facility of $60.5 million.

We also had one letter of credit for $2.1 million outstanding under the New Credit Facility, which will expire on November 25, 2021.

This letter of credit is expected to automatically renew annually and secures our obligations under our various self-insured policies.

At June 30, 2021, we had $87.4 million of availability under the New Credit Facility.

We were in compliance with all of the covenants contained in our New Credit Facility as of September 30, 2021.

At September 30, 2021, we had outstanding borrowings under the New Credit Facility of $86.9 million.

We also had one letter of credit for $2.1 million under the New Credit Facility, which was increased to $2.3 million on September 1, 2021.

The letter of credit will expire on November 25, 2021 and is expected to automatically renew annually and secures our obligations under our various self-insured policies.

At September 30, 2021, we had $60.8 million of availability under the New Credit Facility.

Outstanding borrowings under our New Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio.

At June 30, 2021, the prime rate margin was equivalent to 0.75% and the LIBOR rate margin was 1.75%.

The weighted average interest rate on our New Credit Facility was 2.5% and 2.8% and for the three and six months ended June 30, 2021, respectively.

The weighted average interest rate on our Former Credit Facility was 3.6% and 3.9% for the three and six months ended June 30, 2020, respectively.

At September 30, 2021, the prime rate margin was equivalent to 0.75% and the LIBOR rate margin was 1.75%.

The weighted average interest rate on our New Credit Facility was 2.0% and 2.5% for the three and nine months ended September 30, 2021, respectively.

The weighted average interest rate on our Former Credit Facility was 3.9% and 4.0% for the three and nine months ended September 30, 2020, respectively.

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

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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The lease cost related to our operating leases and short-term leases and depreciation expense and interest expense related to our finance leases are as follows (in thousands):

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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Finance lease cost:

Depreciation of lease right-of-use assets $ 109 $ 109 $ 218 $ 217

Depreciation of leased assets $ 111 $ 111 $ 329 $ 328

Interest on lease liabilities 123 117 374 356

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

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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Convertible Subordinated Notes due 2021

During the six months ended June 30, 2021, we converted approximately $2.4 million in aggregate principal amount of our Convertible Notes held by certain holders for approximately $3.8 million in cash.

The Convertible Notes matured on March 15, 2021, at which time all Convertible Notes outstanding, approximately $0.2 million in aggregate principal amount, were paid in full in cash at par value.

Therefore, no Convertible Notes remain outstanding at June 30, 2021.

During the nine months ended September 30, 2021, we converted approximately $2.4 million in aggregate principal amount of our Convertible Notes held by certain holders for approximately $3.8 million in cash.

The Convertible Notes matured on March 15, 2021, at which time all Convertible Notes then outstanding, approximately $0.2 million in aggregate principal amount, were paid in full in cash at par value.

No Convertible Notes remain outstanding at September 30, 2021.

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

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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Convertible Notes amortization of debt issuance costs 9 1 21 1

The effective interest rate on the unamortized debt discount for both the three months ended June 30, 2020 and 2021 was 11.4%.

The effective interest rate on the debt issuance costs for the three months ended June 30, 2020 and 2021 was 3.2% and 3.1%, respectively.

On May 13, 2021, we completed the issuance of the New Senior Notes and related guarantees by the Subsidiary Guarantors in a private offering under Rule 144A and Regulation S of the Securities Act of 1933, as amended (the “Securities Act”).

The effective interest rate on the unamortized debt discount for both the three months ended September 30, 2020 and 2021 was 11.4%.

The effective interest rate on the debt issuance costs for the three months ended September 30, 2020 and 2021 was 3.2% and 3.1%, respectively.

On May 13, 2021, we completed the issuance of the New Senior Notes and related guarantees by the Subsidiary Guarantors in a private offering under Rule 144A and Regulation S of the Securities Act.

We paid a premium of $19.9 million to redeem the Original Senior Notes on June 1, 2021 at a redemption price of 104.97% of the principal amount thereof, plus accrued and unpaid interest of $13.25 million.

We incurred $1.3 million in transaction costs related to the New Senior Notes.

For the three and six months ended June 30, 2021, we recognized a net loss of $23.7 million related to the redemption of the Original Senior Notes, which was recorded in Net loss on extinguishment of debt .

During the nine months ended September 30, 2021, we incurred $1.3 million in transaction costs related to the New Senior Notes.

For the nine months ended September 30, 2021, we recognized a net loss of $23.7 million related to the redemption of the Original Senior Notes, which was recorded in Loss on extinguishment of debt .

The loss is composed of the $19.9 million call premium, the write-off of $3.4 million in unamortized debt discount, the write-off of $1.8 million in unamortized debt issuance costs, offset by the write-off of $1.4 million in unamortized debt premium.

The New Senior Notes were issued under an indenture, dated as of May 13, 2021 (the “Indenture”), among the Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee (“Collateral Trustee”).

The New Senior Notes were issued under the Indenture, dated as of May 13, 2021, among the Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee.

The New Senior Notes bear interest at 4.25% per year.

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In addition, before May 15, 2024, we may redeem up to 40% of the aggregate principal amount of the New Senior Notes outstanding using an amount of cash equal to the net proceeds of certain equity offerings, at a price of 104.25% of the principal amount of the New Senior Notes, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption;

provided that (1) at least 50% of the aggregate principal amount of the New Senior Notes (including any additional New Senior Notes) outstanding under the Indenture remain outstanding immediately after the occurrence of such redemption (unless all New Senior Notes are redeemed concurrently), and (2) each such redemption must occur within 180 days of the date of the consummation of any such equity offering.

New Senior Notes are redeemed concurrently), and (2) each such redemption must occur within 180 days of the date of the consummation of any such equity offering.

If a “change of control” occurs, holders of the New Senior Notes will have the option to require us to purchase for cash all or a portion of their New Senior Notes at a price equal to 101% of the principal amount of the New Senior Notes, plus accrued and unpaid interest.

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The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 92 months of the New Senior Notes.

The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the New Senior Notes for both three and six months ended June 30, 2021 was 4.42% and 4.30%, respectively.

The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the New Senior Notes for both three and nine months ended September 30, 2021 was 4.42% and 4.30%, respectively.

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

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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Senior Notes amortization of debt issuance costs 72 34 208 161

At June 30, 2021, the fair value of the New Senior Notes, which are Level 2 measurements, was $399.5 million.

The effective interest rate on the unamortized debt issuance costs for the Original Senior Notes, issued in May 2018, for both three and six months ended June 30, 2021 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 Original Senior Notes, issued in December 2019, for both three and six months ended June 30, 2021 was 6.20% and 6.88%, respectively.

At September 30, 2021, the fair value of the New Senior Notes, which are Level 2 measurements, was $403.2 million.

The effective interest rate on the unamortized debt discount and unamortized debt issuance costs for the Original Senior Notes, issued in May 2018, for both the three and nine months ended September 30, 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 Original Senior Notes, issued in December 2019, for both the three and nine months ended September 30, 2020 was 6.20% and 6.90%, respectively.

FINANCIAL HIGHLIGHTS

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

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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Gross profit $ 27,874 $ 33,164 $ 76,205 $ 97,152

Net income (loss) $ 6,397 $ (6,167) $ 2,200 $ 6,766

Revenue for the three months ended June 30, 2021 increased $10.8 million compared to the three months ended June 30, 2020, as we experienced a 40.1% increase in the number of preneed interment rights (property) sold, as well as a 15.1% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in the second quarter of 2020 due to COVID-19;

Net income $ 5,525 $ 13,046 $ 7,725 $ 19,812

Revenue for the three months ended September 30, 2021 increased $10.6 million compared to the three months ended September 30, 2020, as we experienced a 7.0% increase in the number of preneed interment rights (property) sold, as well as a 30.1% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in the third quarter of 2020 due to COVID-19;

(2) the full integration of the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020;

and (3) the execution of the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

We also experienced a 9.7% increase in the average revenue per funeral contract for the three months ended June 30, 2021 compared to the same period in 2020, which reflects a normalization of contracts under which we provide memorial services returning to pre-COVID-19 levels.

Total funeral contracts decreased 7.6% for the same comparable period as the volume lift related to the COVID-19 death rate we experienced in the second quarter of 2020 tapered off.

Gross profit for the three months ended June 30, 2021 increased $3.8 million compared to the three months ended June 30, 2020, primarily due to the increase in revenue from our cemetery segment, as well as decreases in cemetery operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel.

These decreases were partially offset by increases in salaries and benefits expense in our funeral segment as a percent of operating revenue, which reflects the normalization of funeral personnel hours returning to pre-COVID-19 levels from being reduced during the second quarter of 2020 due to COVID-19.

Net income for the three months ended June 30, 2021 decreased $12.6 million compared to the three months ended June 30, 2020, primarily due to the $23.8 million loss on extinguishment of debt, offset by the $7.6 million decrease in tax expense and $3.8 million increase in gross profit.

Revenue for the six months ended June 30, 2021 increased $29.9 million compared to the six months ended June 30, 2020, as we experienced a 41.1% increase in the number of preneed interment rights (property) sold, as well as a 17.4% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19;

(2) the full integration of the cemetery acquisitions made in

the fourth quarter of 2019 and first quarter of 2020;

and (3) the execution of the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

We also experienced a 3.9% increase in total funeral contracts for the six months ended June 30, 2021 compared to the same period in 2020, primarily due to a peak spike in COVID-19 deaths during the first quarter of 2021, offset by volume decreases in the second quarter as death rates began to normalize to pre-COVID-19 levels.

Additionally, the average revenue per funeral contract increased 5.1% for the same comparable period in 2020 as contracts under which we provide memorial services began to normalize to pre-COVID-19 levels during the second quarter of 2021.

Gross profit for the six months ended June 30, 2021 increased $15.7 million compared to the six months ended June 30, 2020, primarily due to the increase in revenue from both our funeral home and cemetery segments, as well as decreases in funeral home and cemetery operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel primarily during the first quarter of 2021.

Net income for the six months ended June 30, 2021 increased $4.6 million compared to the six months ended June 30, 2020, primarily due to the increase in gross profit and the $14.7 million impairment charge we recorded in the first six months of 2020 that did not occur in first six months of 2021, offset by the $23.8 million loss on extinguishment of debt in the second quarter of 2021.

and (3) the execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

We also experienced a 9.2% increase in total funeral contracts and a 3.2% increase in the average revenue per funeral contract for the three months ended September 30, 2021 compared to the same period in 2020.

Approximately 60% of the increase in funeral volumes is attributable to deaths from the Delta COVID-19 variant.

The additional volume increase is primarily a consequence of our ability to adapt to the continued changing environment with our new and innovative ways to serve families.

The increase in the average revenue per contract is a further reflection of our ability to creatively serve our families, as the number of contracts for which we provide memorial services are returning to pre-COVID-19 levels.

Gross profit for the three months ended September 30, 2021 increased $5.3 million compared to the three months ended September 30, 2020, primarily due to the increase in revenue from both our funeral home and cemetery segments, as well as decreases in funeral home operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel.

Net income for the three months ended September 30, 2021 increased $7.5 million compared to the three months ended September 30, 2020, primarily due to a $5.3 million increase in gross profit, a $2.9 million decrease in interest expense, and a $4.1 million decrease in net loss on divestitures, disposals and impairments charges, offset by a $2.6 million increase in general, administrative and other expenses, primarily due to increased incentive compensation, as well as a $2.3 million increase in tax expense.

Revenue for the nine months ended September 30, 2021 increased $40.6 million compared to the nine months ended September 30, 2020, as we experienced a 27.9% increase in the number of preneed interment rights (property) sold, as well as a 21.8% increase in the average price per interment right sold, primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19;

(2) the full integration of the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020;

and (3) the execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

We also experienced a 5.6% increase in total funeral contracts and a 4.4% increase in the average revenue per funeral contract for the nine months ended September 30, 2021 compared to the same period in 2020.

The increase in volume is not only due to COVID-19 deaths during the first and third quarters of 2021, but is also a consequence of our ability to adapt to the continued changing environment with our new and innovative ways to serve families.

Gross profit for the nine months ended September 30, 2021 increased $20.9 million compared to the nine months ended September 30, 2020, primarily due to the increase in revenue from both our funeral home and cemetery segments, as well as decreases in funeral home and cemetery operating expenses as a percent of operating revenue primarily in salaries and benefits expense as we increased revenue without adding extra personnel.

Net income for the nine months ended September 30, 2021 increased $12.1 million compared to the nine months ended September 30, 2020, primarily due to the increase in gross profit of $20.9 million, an $18.2 million decrease in net loss on divestitures, disposals and impairments charges, and a $4.6 million decrease in interest expense, offset by a $23.8 million loss on extinguishment of debt, a $5.9 million increase in general, administrative and other expenses, primarily due to increased incentive compensation, as well as a $2.4 million increase in tax expense.

Further discussion of Revenue and the components of Gross profit for our funeral home and cemetery segments is presented herein under “– Results of Operations.”

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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 three months ended June 30, 2021 issued on July 27, 2021 and discussed in the corresponding earnings conference call.

We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended September 30, 2021 issued on October 27, 2021 and discussed in the corresponding earnings conference call.

The Trend Report is used as a supplemental financial statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies.

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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, (in thousands):

Three months ended June 30, Six months ended June 30,

Below is a reconciliation of Net income, a GAAP measure, to Adjusted net income, a non-GAAP measure, (in thousands):

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

Net income (loss) $ 6,397 $ (6,167) $ 2,200 $ 6,766

Special items, net of tax (1)

Net income $ 5,525 $ 13,046 $ 7,725 $ 19,812

Special items (1)

Acquisition expenses — — 159 —

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Accretion of discount on Convertible Notes (1)

Net loss on extinguishment of debt (3)

— 17,022 — 17,022

Net (gain) loss on divestitures and other costs — 139 — (74)

Net impact of impairment of goodwill and other intangibles 51 — 9,808 —

Loss on extinguishment of debt (3)

Net loss on divestitures and other costs 4,917 282 4,917 179

Net impact of impairment of goodwill and other — 500 14,769 500

Litigation reserve (4)

Natural disaster and pandemic costs 657 37 768 743

Disaster recovery and pandemic costs 340 1,002 1,312 2,041

Other special items (5)

(60) 1,020 410 2,354

Sum of special items $ 5,374 $ 2,804 $ 22,780 $ 30,476

Tax effect on special items (1)

1,755 738 7,243 8,619

Adjusted net income (6)

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(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.

In 2020, Special items are taxed at the federal statutory rate of 21.0%, except the Net (gain) loss on divestitures and other costs and the Net impact of impairment of goodwill and other intangibles, which are taxed at the operating tax rate of 33.3%.

In 2021, Special items are taxed at the operating tax rate of 28.5%.

In 2020, Special items are taxed at the federal statutory rate of 21.0%, except the Net loss on divestitures and other costs and the Net impact of impairment of goodwill and other, which are taxed at the operating tax rate in the period.

In 2021, Special items are taxed at the operating tax rate in the period and include adjustments to reflect prior quarter Special items at the operating tax rate on a year-to-date basis.

The Accretion of discount on Convertible Notes is not tax effected.

(2) The increase during the six months ended June 30, 2021 is due to separation costs related to the resignation of two members of senior leadership in the first quarter of 2021.

(2) The increase during the nine months ended September 30, 2021 is due to separation costs related to the resignation of two members of senior leadership in the first quarter of 2021.

(3) Loss on the redemption of our Original Senior Notes during the second quarter of 2021.

(4) Relates to legal costs associated with a former corporate employee lawsuit.

(5) In 2020, the Special item relates to the costs associated with a state audit assessment.

In 2021, the Special item relates to the write-off of certain fixed assets and interest paid on our Original Senior Notes for the two-week period during which our New Senior Notes were issued prior to the redemption of our Original Senior Notes.

(6) 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.

(5) During the nine months ended September 30, 2020, the Special item relates to the costs associated with a state audit assessment.

During the nine months ended September 30, 2021, the Special item relates to (1) the write-off of certain fixed assets;

(2) a one-time $1.0 million payment in September 2021 for residual insurance claims;

and (3) interest paid on our Original Senior Notes for the two-week period during which our New Senior Notes were issued prior to the redemption of our Original Senior Notes.

(6) Adjusted net income is defined as Net income 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) (in thousands):

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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Below is a breakdown of Operating profit (a non-GAAP measure) by Segment (in thousands):

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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RESULTS OF OPERATIONS

The following is a discussion of our results of operations for the three months ended June 30, 2021 and 2020.

The following is a discussion of our results of operations for the three and nine months ended September 30, 2021 and 2020.

The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2017 and owned and operated for the entirety of each period being presented, excluding certain funeral home and cemetery businesses that we intend to divest in the near future.

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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 homes we sold in the first six months of 2021.

The term “divested” when discussed in the Funeral Home Segment, refers to six funeral homes and three funeral homes we sold in the nine months ended September 30, 2020 and 2021, respectively.

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

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The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):

Three months ended June 30,

Three months ended September 30,

Same store operating revenue $ 47,865 $ 55,502

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

Three months ended June 30,

Three months ended September 30,

Contract volume 9,442 10,664

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Cremation rate 55.7% 54.1%

Funeral home same store operating revenue for the three months ended June 30, 2021 increased $3.0 million compared to the same period in 2020.

The increase in operating revenue is primarily driven by a 6.7% increase in the average revenue per contract excluding preneed interest, while same store contract volume remained flat.

The average revenue per contract in the second quarter of 2021 reflects a normalization of contracts under which we provide memorial services returning to pre-COVID-19 levels.

Funeral home same store operating profit for the three months ended June 30, 2021 decreased $0.1 million when compared to the same period in 2020.

The comparable operating profit margin decreased 280 basis points to 39.5%.

Operating expenses as a percent of operating revenue increased 2.8% for the three months ended June 30, 2021 compared to the same period in 2020.

The largest increase was in salaries and benefits expenses, which increased 1.3% as a percent of operating revenue, when funeral personnel hours were reduced during the second quarter of 2020 due to COVID-19.

This increase reflects normalization of salaries and benefits expenses returning to pre-COVID-19 levels.

We also experienced increases as a

percentage of revenue in the following areas:

(1) general liability insurance costs increased 0.5%;

(2) general and administrative expenses increased 0.3%;

and (3) merchandise costs increased 0.2%.

Funeral home acquired operating revenue for the three months ended June 30, 2021 decreased $0.5 million compared to the same period in 2020.

The decrease in operating revenue is primarily due to a 16.3% decrease in acquired contract volume, which was partially offset by a 13.3% increase in the average revenue per contract.

The average revenue per contract in the second quarter of 2021 reflects a normalization of contracts under which we provide memorial services returning to pre-COVID-19 levels and the volume lift related to the COVID-19 death rate we experienced in the second quarter of 2020 tapering off.

Acquired operating profit for the three months ended June 30, 2021 decreased by $0.5 million when compared to the same period in 2020.

The comparable operating profit margin decreased 350 basis points to 38.1%.

The decrease in operating profit is primarily due to the decrease in acquired operating revenue.

Operating expenses as a percent of operating revenue increased 3.5% for the three months ended June 30, 2021 compared to the same period in 2020, as we experienced increases as a percentage of revenue in the following areas:

(1) other funeral costs increased 1.5%;

(2) general liability insurance costs increased 0.6%;

and (3) salaries and benefits expenses increased 0.2%.

Ancillary revenue, which is recorded in Other revenue , represents revenue from our flower shop, pet cremation and online cremation businesses, remained flat, while Ancillary operating profit decreased 14.6% for three months ended June 30, 2021 compared to the same period in 2020.

Operating expenses as a percent of operating revenue increased 1.8% for the same comparative period, as we experienced slight increases in rent expense and other funeral costs, slightly offset by a decrease in salaries and benefits expenses.

Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue) and the respective operating profit, on a combined basis, remained flat for the three months ended June 30, 2021 compared to the same period in 2020.

Funeral home same store operating revenue for the three months ended September 30, 2021 increased $7.6 million compared to the same period in 2020.

The increase in operating revenue is primarily due to a 12.9% increase in same store contract volume, as well as a 2.7% increase in the average revenue per contract excluding preneed interest.

Approximately 60% of the increase in funeral volumes is attributable to deaths from the Delta COVID-19 variant.

The additional volume increase is primarily a consequence of our ability to adapt to the continued changing environment with our new and innovative ways to serve families.

Funeral home same store operating profit for the three months ended September 30, 2021 increased $5.1 million when compared to the same period in 2020.

The comparable operating profit margin increased 340 basis points to 45.0%.

The increase in operating profit is primarily due to the increase in same store operating revenue along with disciplined expense and cost management by leaders at each business.

Overall same store operating expenses as a percent of operating revenue

decreased 3.4% with the largest decrease in salaries and benefits expense of 2.1% as a percent of operating revenue, as we focused on optimizing the inherent operating leverage in each business by increasing revenue without adding extra personnel.

Funeral home acquired operating revenue for the three months ended September 30, 2021 increased $1.1 million compared to the same period in 2020.

The increase in operating revenue is primarily due to a 7.4% increase in acquired contract volume, as well as a 6.1% increase in the average revenue per contract excluding preneed interest.

The average revenue per contract in the third quarter of 2021 reflects an increase in cremation contracts with services in the third quarter of 2021 compared to the third quarter of 2020, primarily due to our continued determination and focus to welcome and educate families on the many products and service options that are available with cremation.

Funeral home acquired operating profit for the three months ended September 30, 2021 increased $1.0 million when compared to the same period in 2020.

The comparable operating profit margin increased 660 basis points to 42.5%.

The increase in operating profit is primarily due to the increase in acquired operating revenue along with disciplined expense and costs management by leader at each business.

Overall acquired operating expenses as a percent of operating revenue decreased 6.6% with the largest decrease in salaries and benefits expense of 5.9% as a percentage of operating revenue, as we focused on optimizing the inherent operating leverage in each business by increasing revenue without adding extra personnel.

Ancillary revenue, which is recorded in Other revenue , represents revenue from our flower shop, pet cremation and online cremation businesses, decreased $0.1 million, while Ancillary operating profit remained flat for the three months ended September 30, 2021 compared to the same period in 2020.

Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue) on a combined basis, decreased $0.1 million for the three months ended September 30, 2021 compared to the same period in 2020.

The decrease is primarily related to a 6.2% decrease in preneed contracts maturing to atneed which triggers the recognition of trust earnings on matured contracts.

Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, decreased $0.2 million for the same comparative period, primarily due to the decrease in preneed funeral trust and insurance revenue.

The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands):

Six months ended June 30,

Nine months ended September 30,

Same store operating revenue $ 139,126 $ 159,728

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

Six months ended June 30,

Nine months ended September 30,

Contract volume 27,603 30,793

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Cremation rate 55.1% 54.3%

Funeral home same store operating revenue for the six months ended June 30, 2021 increased $13.0 million compared to the same period in 2020.

The increase in operating revenue is primarily driven by a 10.9% increase in same store contract volume, as well as a 3.0% increase in the average revenue per contract excluding preneed interest.

The increase in volume is primarily due to a peak spike in COVID-19 deaths during the first quarter of 2021, offset by volume decreases in the second quarter as death rates began to normalize to pre-COVID-19 levels.

Additionally, the average revenue per contract increased as contracts under which we provide memorial services began to normalize to pre-COVID-19 levels in the second quarter of 2021.

Funeral home same store operating profit for the six months ended June 30, 2021 increased $7.7 million when compared to the same period in 2020.

Funeral home same store operating revenue for the nine months ended September 30, 2021 increased $20.6 million compared to the same period in 2020.

The increase in operating revenue is primarily driven by an 11.6% increase in same store contract volume, as well as a 2.9% increase in the average revenue per contract excluding preneed interest.

Funeral home same store operating profit for the nine months ended September 30, 2021 increased $12.8 million when compared to the same period in 2020.

The comparable operating profit margin increased 280 basis points to 43.5%.

The increase in operating profit is primarily due to the increase in same store operating revenue along with disciplined expense and cost management by leaders at each business.

Operating expenses as a percent of operating revenue decreased 2.3% for the six months ended June 30, 2021 compared to the same period in 2020.

The largest decrease was in salaries and benefits expense, which decreased 1.4% as a percent of operating revenue as we increased revenue during the first quarter of 2021 without adding extra personnel.

We also experienced decreases as a percentage of revenue in the following areas:

(1) allowance for credit losses decreased 0.3%;

(2) promotional expenses decreased 0.3%;

and (3) general and administrative expenses decreased 0.2%;

offset slightly by a 0.2% increase in general liability insurance costs.

Funeral home acquired operating revenue for the six months ended June 30, 2021 increased $0.8 million compared to the same period in 2020.

The increase in operating revenue is primarily driven by a 5.8% increase in the average revenue per contract excluding preneed interest, while acquired contract volume decreased by 1.3%.

The increase in the average revenue per contract reflects a normalization of contracts under which we provide memorial services returning to pre-COVID-19 levels in the second quarter of 2021, as the volume lift related to the COVID-19 death rate we experienced in the first quarter of 2021 tapered off.

Acquired operating profit for the six months ended June 30, 2021 increased $0.7 million when compared to the same period in 2020.

Overall same store operating expenses as a percent of operating revenue decreased 2.7% with the largest decrease in salaries and benefits expense of 1.6% as a percent of operating revenue, as we focused on optimizing the inherent operating leverage in each business by increasing revenue without adding extra personnel.

Funeral home acquired operating revenue for the nine months ended September 30, 2021 increased $1.9 million compared to the same period in 2020.

The increase in operating revenue is primarily driven by a 6.0% increase in the average revenue per contract excluding preneed interest, as well as a 1.4% increase in acquired contract volume.

Acquired operating profit for the nine months ended September 30, 2021 increased $1.8 million when compared to the same period in 2020.

The comparable operating profit margin increased 360 basis points to 41.7%.

The increase in operating profit is primarily due to the increase in acquired operating revenue along with disciplined expense and cost management by leaders at each business.

Operating expenses as a percent of operating revenue decreased 2.2% for the six months ended June 30, 2021 compared to the same period in 2020.

The largest decrease was in salaries and benefits expense, which decreased 3.0% as a percent of operating revenue as we increased revenue without adding extra personnel during the first quarter of 2021.

We also experienced decreases as a percentage of revenue in the following areas:

(1) allowance for credit losses decreased 0.4%;

and (2) promotional expenses decreased 0.3%;

offset slightly by a 0.8% increase in other funeral costs.

Ancillary revenue, which is recorded in Other revenue , represents revenue from our flower shop, pet cremation and online cremation businesses, remained flat, while Ancillary operating profit decreased 16.2% for the six months ended June 30, 2021 compared to the same period in 2020.

Operating expenses as a percent of operating revenue increased 3.4% for the same comparative period, as we experienced increases in the following areas:

(1) other funeral costs increased 3.1%;

(2) rent expense increased 1.7%;

and (3) general and administrative expenses increased 1.6%.

Preneed funeral insurance commissions and preneed funeral trust and insurance (recorded in Other revenue) on a combined basis, increased $0.3 million or 6.2% for the six months ended June 30, 2021 compared to the same period in 2020.

The increase is primarily related to a 1.0% increase in preneed contracts maturing to atneed which triggers the recognition of

trust earnings on matured contracts.

Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million or 5.2% for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue.

Overall acquired operating expenses as a percent of operating revenue decreased 3.6% with the largest decrease in salaries and benefits expense of 3.9% as a percent of operating revenue, as we focused on optimizing the inherent operating leverage in each business by increasing revenue without adding extra personnel.

Ancillary revenue, which is recorded in Other revenue , represents revenue from our flower shop, pet cremation and online cremation businesses and Ancillary operating profit both decreased $0.1 million for the nine months ended September 30, 2021 compared to the same period in 2020.

Preneed funeral insurance commissions and preneed funeral trust and insurance (recorded in Other revenue) on a combined basis, increased $0.1 million for the nine months ended September 30, 2021 compared to the same period in 2020.

The increase is primarily from trust and insurance earnings on preneed contracts.

Recognition of trust earnings is triggered at the time a preneed contract matures to at need.

For the nine months ended September 30, 2021, the average trust earnings per matured preened contract increased slightly compared to the prior period.

Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, remained relatively flat for the same comparative period.

Cemetery Segment

The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):

Three months ended June 30,

Three months ended September 30,

Same store operating revenue $ 14,391 $ 16,342

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

Three months ended June 30,

Three months ended September 30,

Preneed revenue as a percentage of operating revenue 61% 61%

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Average price per interment right sold $ 4,051 $ 7,159

Cemetery same store preneed revenue increased $3.3 million for the three months ended June 30, 2021 compared to the same period in 2020, as we experienced a 28.7% increase in the number of interments rights sold, as well as a 3.7% increase in the average price per interment right sold.

The increase is primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in the second quarter of 2020 due to COVID-19;

and (2) the execution of the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

Cemetery same store atneed revenue, which represents 37% of our same store operating revenue, increased $1.7 million as we experienced a 17.2% increase in same store atneed contracts and a 16.5% increase in the average sale per contract for the three months ended June 30, 2021 compared to the same period in 2020.

This increase is primarily due to the increased number of deaths in 2021 related to COVID-19.

Cemetery same store operating profit for the three months ended June 30, 2021 increased $3.9 million from the same period in 2020.

The comparable operating profit margin increased 1,420 basis points to 45.9% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business.

Operating expenses as a percent of operating revenue decreased 14.2% in the three months ended June 30, 2021 compared to the same period in 2020.

The largest decrease was in salaries and benefits expense, which decreased 3.4% as a percent of operating revenue as we increased revenue without adding extra personnel.

We also experienced decreases as a percentage of revenue in the following areas:

(1) allowance for credit losses decreased 3.1%;

(2) general liability insurance costs decreased 1.4%;

and (3) promotional expenses decreased 1.3%.

Cemetery same store preneed revenue increased $1.1 million for the three months ended September 30, 2021 compared to the same period in 2020, as we experienced a 17.2% increase in the number of interments rights sold, as well as a 17.2% increase in the average price per interment right sold.

The increase is primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in the third quarter of 2020 due to COVID-19;

and (2) the continuous execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, increased $0.8 million as we experienced a 9.1% increase in same store atneed contracts and a 5.0% increase in the average sale per contract for the three months ended September 30, 2021 compared to the same period in 2020.

These increases are primarily due to the increased number of deaths in 2021 related to COVID-19.

Cemetery same store operating profit for the three months ended September 30, 2021 increased $0.3 million from the same period in 2020, primarily due to the increase in operating revenue.

The comparable operating profit margin decreased 320 basis points to 39.6%.

Operating expenses as a percent of operating revenue increased 3.0% with the largest increases in the following areas:

(1) promotional expenses increased 2.5% due to our recent deployment of a performance-based compensation

plan with escalating commissions for higher sales target achievement;

and (2) allowance for credit losses increased 1.1% primarily due to one business who experienced unusually low credit loss expense in the prior year.

There are three businesses in our acquired cemetery portfolio, two of which were acquired in the fourth quarter of 2019 and one acquired in the first quarter of 2020.

In the first quarter of 2020, we hired new sales leadership at two of the newly acquired cemeteries and continue to build their respective sales teams as we execute the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

As a result, our acquired cemetery portfolio experienced a $3.5 million increase in preneed revenue and a $0.6 million increase in atneed revenue for the three months ended June 30, 2021 compared to the same period in 2020.

Cemetery acquired operating profit increased $3.3 million for three months ended June 30, 2021 from the same period in 2020.

In the first quarter of 2020, we hired new sales leadership at two of the newly acquired cemeteries and continue to build their respective sales teams as we execute our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

As a result, our acquired cemetery portfolio experienced a $0.6 million increase in preneed revenue and a $0.6 million increase in atneed revenue for the three months ended September 30, 2021 compared to the same period in 2020.

Cemetery acquired operating profit increased $1.2 million for the three months ended September 30, 2021 from the same period in 2020.

The comparable operating profit margin increased 1,110 basis points to 55.8% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business.

Operating expenses as a percent of operating revenue decreased 22.6% in the three months ended June 30, 2021 compared to the same period in 2020.

The largest decrease was in salaries and benefits expense, which decreased 10.7% as a percent of operating revenue as we increased revenue without adding extra personnel.

We also experienced decreases as a percentage of revenue in the following areas:

(1) promotional expenses decreased 5.6%;

(2) merchandise and services costs decreased 3.1%;

and (3) general liability insurance costs decreased 1.2%.

Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased $0.7 million for the three months ended June 30, 2021 compared to the same period in 2020.

The increase in our trust fund income is primarily due to our execution of a major repositioning strategy beginning at the height of the COVID-19 market crisis in March 2020, substantially increasing our preneed cemetery trust revenue and operating profit.

We experienced a $0.6 million increase in income and a $0.1 million increase in realized capital gains primarily within our perpetual care trusts in the three months ended June 30, 2021 compared to the same period of 2020.

Operating profit for the two categories of Other revenue , on a combined basis, increased $0.6 million for three months ended June 30, 2021 compared to the same period in 2020 primarily due to the increase in our perpetual care trust revenue.

Operating expenses as a percent of operating revenue decreased 11.0% with the largest decreases in the following areas:

(1) promotional expenses and salaries and benefits both decreased 3.8% as a percent of operating revenue as we benefited from an increase in revenue without incurring additional expenses;

and (2) merchandise and services costs decreased 2.1%.

Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenu e) on a combined basis increased $0.1 million for the three months ended September 30, 2021 compared to the same period in 2020.

The increase in trust revenue is due to a decrease in realized losses on delivered merchandise and services contracts and an increase in finance charge revenue.

Operating profit for the two categories of Other revenue , on a combined basis, increased $0.1 million for the three months ended September 30, 2021 compared to the same period in 2020 primarily due to the increase in revenue.

The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands):

Six months ended June 30,

Nine months ended September 30,

Same store operating revenue $ 36,952 $ 47,883

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

Six months ended June 30,

Nine months ended September 30,

Preneed revenue as a percentage of operating revenue 60% 61%

8 unchanged sentences

Average price per interment right sold $ 4,248 $ 6,107

Cemetery same store preneed revenue increased $5.4 million for the six months ended June 30, 2021 compared to the same period in 2020, as we experienced a 24.9% increase in the number of interments rights sold, as well as a 5.5% increase in the average price per interment right sold.

Cemetery same store preneed revenue increased $6.9 million for the nine months ended September 30, 2021 compared to the same period in 2020, as we experienced a 21.8% increase in the number of interments rights sold, as well as an 11.4% increase in the average price per interment right sold.

The increase is primarily due to (1) our sales personnel being less impacted by social distancing restrictions that were in place in 2020 due to COVID-19;

and (2) the execution of the initial stages of our two year cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

Cemetery same store atneed revenue, which represents 40% of our same store operating revenue, increased $3.2 million for the six months ended June 30, 2021 compared to the same period in 2020.

and (2) the continuous execution of our innovative cemetery sales strategy of building high performance sales teams and standardized sales systems across our portfolio of cemeteries.

Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, increased $4.0 million for the nine months ended September 30, 2021 compared to the same period in 2020.

The increase was a result of a 16.2% increase in same store atneed contracts and a 9.4% increase in the average sale per contract, primarily due to the increased deaths in 2021 related to COVID-19.

Cemetery same store operating profit increased $6.4 million for the six months ended June 30, 2021 compared to the same period in 2020.

Cemetery same store operating profit increased $7.1 million for the nine months ended September 30, 2021 compared to the same period in 2020.

The comparable operating profit margin increased 670 basis points to 41.9% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business.

Operating expenses as a percent of operating revenue decreased 12.2% in the six months ended June 30, 2021 compared to the same period in 2020.

The largest decrease was in salaries and benefits expense, which decreased 4.0% as a percent of operating revenue as we increased revenue without adding extra personnel.

We also experienced decreases as a percentage of revenue in the following areas:

(1) allowance for credit losses decreased 1.7%;

(2) promotional expenses decreased 1.5%;

and (3) general liability insurance costs decreased 1.4%.

Operating expenses as a percent of operating revenue decreased 6.7% with the largest decreases in the following areas:

(1) salaries and benefits expense decreased 2.9%, as we increased revenue without adding extra personnel;

(2) facilities and grounds expenses decreased 1.3%;

and (3) allowance for credit losses decreased 0.6%.

There are three businesses in our acquired cemetery portfolio, two of which were acquired in the fourth quarter of 2019 and one acquired in the first quarter of 2020.

As a result, our acquired cemetery portfolio experienced a $6.2 million increase in preneed revenue and a $2.1 million increase in atneed revenue for the six months ended June 30, 2021 compared to the same period in 2020.

Cemetery acquired operating profit increased $6.6 million for six months ended June 30, 2021 compared to the same period in 2020.

As a result, our acquired cemetery portfolio experienced a $6.8 million increase in preneed revenue and a $2.7 million increase in atneed revenue for the nine months ended September 30, 2021 compared to the same period in 2020.

Cemetery acquired operating profit increased $7.8 million for the nine months ended September 30, 2021 compared to the same period in 2020.

The comparable operating profit margin increased 1,950 basis points to 57.6% primarily as a result of the increase in operating revenue, along with disciplined expense and cost management by leaders at each business.

Operating expenses as a percent of operating revenue decreased 25.3% in the six months ended June 30, 2021 compared to the same period in 2020.

The largest decrease was in salaries and benefits expense, which decreased 13.1% as a percent of operating revenue as we increased revenue without adding extra personnel.

We also experienced decreases as a percentage of revenue in the following areas:

Operating expenses as a percent of operating revenue decreased 19.5% with the largest decreases in the following areas:

(1) salaries and benefits expense decreased 9.3%, as we increased revenue without adding extra personnel;

(2) promotional expenses decreased 4.3%;

(3) merchandise and services costs decreased 2.5%;

and (3) general liability insurance costs decreased 2.1%.

Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue) on a combined basis increased $1.8 million for the six months ended June 30, 2021 compared to the same period in 2020.

and (4) facilities and grounds expenses decreased 1.5%.

Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue ) on a combined basis increased $2.0 million for the nine months ended September 30, 2021 compared to the same period in 2020.

We experienced a $1.3 million increase in income and a $0.5 million increase in realized capital gains primarily within our perpetual care trusts

for the six months ended June 30, 2021 compared to the same period of 2020.

Operating profit for the two categories of Other revenue , on a combined basis, increased $1.8 million for six months ended June 30, 2021 compared to the same period in 2020 primarily due to the increase in preneed cemetery trust revenue.

We experienced a $1.4 million increase in income and a $0.3 million increase in realized capital gains within our perpetual care trusts for the nine months ended September 30, 2021 compared to the same period of 2020.

Additionally, income from delivered merchandise and service contracts increased $0.2 million.

Operating profit for the two categories of Other revenue , on a combined basis, increased $1.9 million for the nine months ended September 30, 2021 compared to the same period in 2020 primarily due to the increase in revenue.

Cemetery property amortization .

Cemetery property amortization totaled $2.2 million and $3.7 million for the three and six months ended June 30, 2021, respectively, increases of $1.1 million and $1.7 million, respectively, compared to the same periods in prior year primarily due to the increase in property sold across our cemetery portfolio.

Cemetery property amortization totaled $1.5 million and $5.2 million for the three and nine months ended September 30, 2021, respectively, increases of $0.1 million and $1.8 million, respectively, compared to the same periods in prior year primarily due to the increase in property sold across our cemetery portfolio.

Field depreciation.

Depreciation expense for our field businesses totaled $3.1 million and $6.3 million for the three and six months ended June 30, 2021, respectively, decreases of $0.1 million and $0.3 million, respectively, compared to the same periods in prior year primarily due to building structures and older vehicles becoming fully depreciated without any newly acquired building structures and vehicles to offset the decrease.

Depreciation expense for our field businesses totaled $3.2 million and $9.4 million for the three and nine months ended September 30, 2021, respectively, decreases of $0.1 million and $0.3 million, respectively, compared to the same periods in prior year primarily due to building structures and older vehicles becoming fully depreciated without any newly acquired building structures and vehicles to offset the decreases.

Regional and unallocated funeral and cemetery costs.

Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure.

Regional and unallocated funeral and cemetery costs totaled $5.8 million for the three months ended June 30, 2021, an increase of $2.1 million primarily due to the following:

Regional and unallocated funeral and cemetery costs totaled $6.8 million for the three months ended September 30, 2021, an increase of $2.1 million compared to the same period in the prior year primarily due to the following:

(1) a $0.9 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation;

(2) a $0.5 million increase in salary and benefits expenses, which includes our Chief Operating Officer hired in June 2020 and three cemetery directors of sales support hired in the second half of 2020;

(3) a $0.3 million increase in other general administrative costs, which includes higher travel and advertising costs;

(2) a $0.4 million increase in other general administrative costs, which includes higher travel costs;

(3) a $0.4 million increase in natural disaster costs due to Hurricane Ida impacting several Louisiana businesses;

(4) a $0.3 million increase in salary and benefits expenses, which includes additional cemetery sales employees;

and (5) a $0.1 million increase in separation expenses.

offset by (5) a $0.4 million decrease in state audit assessments and (6) a $0.1 million decrease in health and safety expenses related to the COVID-19 pandemic.

Regional and unallocated funeral and cemetery costs totaled $11.8 million for the six months ended June 30, 2021, an increase of $5.4 million primarily due to the following:

Regional and unallocated funeral and cemetery costs totaled $18.7 million for the nine months ended September 30, 2021, an increase of $7.5 million compared to the same period in the prior year primarily due to the following:

(1) a $5.1 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation;

(2) $0.7 million increase in salary and benefits expenses, which includes our Chief Operating Officer hired in June 2020 and three cemetery directors of sales support hired in the second half of 2020;

(2) $1.0 million increase in salary and benefits expenses, which includes our Chief Operating Officer hired in June 2020 and six additional cemetery sales employees;

(3) a $0.7 million increase in other general administrative costs, which includes higher travel and advertising costs;

(4) a $0.5 million increase in health and safety expenses related to the COVID-19 pandemic;

and (4) a $0.3 million increase in other general administrative costs, which includes higher travel and advertising costs;

and (5) a $0.5 million increase in natural disaster costs due to Hurricane Ida impacting several Louisiana businesses;

offset by (6) a $0.3 million decrease in state audit assessments.

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General, administrative and other.

General, administrative and other expenses totaled $6.9 million for the three months ended June 30, 2021, an increase of $0.4 million compared to the three months ended June 30, 2020.

The increase was primarily attributable to the following:

General, administrative and other expenses totaled $8.8 million for the three months ended September 30, 2021, an increase of $2.6 million compared to the same period in the prior year primarily due to the following:

(1) a $1.2 million increase in insurance claims expense, which includes a one-time $1.0 million payment for residual insurance claims;

(2) a $0.7 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation;

and (2) a $0.2 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology;

offset by (3) a $0.2 million decrease in litigation reserve.

General, administrative and other expenses totaled $15.7 million for the six months ended June 30, 2021, an increase of $3.2 million compared to the six months ended June 30, 2020.

The increase was primarily attributable to the following:

(3) a $0.4 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology;

and (4) a $0.3 million increase in salary and benefits expenses.

General, administrative and other expenses totaled $24.5 million for the nine months ended September 30, 2021, an increase of $5.9 million compared to the same period in the prior year primarily due to the following:

(1) a $2.5 million increase in cash incentives and equity compensation, as a result of our improved performance, which reinforces our strategy of aligning incentives with long-term value creation;

(2) a $1.2 million increase in separation expenses related to the resignation of two members of senior leadership;

and (3) a $0.5 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology, offset by (4) a $0.3 million decrease in litigation reserve.

(3) a $1.2 million increase in insurance claims expense, which includes a one-time $1.0 million payment for residual insurance claims;

(4) a $1.0 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology;

and (5) a $0.3 million increase in salary and benefits expenses;

offset by (6) a $0.3 million decrease in litigation reserve.

Home office depreciation and amortization.

Home office depreciation and amortization expense totaled $0.3 million and $0.6 million for the three and six months ended June 30, 2021, respectively, decreases of $0.1 million and $0.2 million, respectively, compared to the same periods in prior year primarily due to equipment and software at the home office becoming fully depreciated in the latter half of 2020 without any newly acquired assets to offset the decrease.

Home office depreciation and amortization expense totaled $0.3 million and $0.8 million for the three and nine months ended September 30, 2021, respectively, decreases of $0.1 million and $0.3 million, respectively, compared to the same periods in prior year primarily due to equipment and software at the home office becoming fully depreciated in the latter half of the prior year without any newly acquired assets to offset the decreases.

Net loss on divestitures, disposals and impairments charges.

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

Three months ended June 30, Six months ended June 30,

Three months ended September 30, Nine months ended September 30,

2020 2021 2020 2021

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Tradename impairment — — 1,061 —

Net (gain) loss on divestitures — 205 — (103)

Assets held for sale impairment — 500 — 500

Net loss on divestitures and real property 4,917 282 4,917 179

Net loss on disposals of fixed assets — 76 — 698

Total $ 4,917 $ 858 $ 19,610 $ 1,377

During the six months ended June 30, 2021, we divested three funeral homes for a net gain of $0.1 million and disposed of fixed assets for a net loss of $0.6 million.

During the six months ended June 30, 2020, we recorded an impairment for goodwill of $13.6 million as the carrying amount of our funeral homes in the Eastern Region Reporting Unit exceeded the fair value and we recorded an impairment for certain of our tradenames of $1.1 million as the carrying amount of these tradenames exceeded the fair value.

During the nine months ended September 30, 2021, we divested three funeral homes and sold real property for a total net loss of $0.2 million and disposed of fixed assets for a net loss of $0.7 million.

In addition, we recognized an impairment loss of $0.5 million for property, plant and equipment assets held for sale at September 30, 2021.

During the nine months ended September 30, 2020, we recorded an impairment for goodwill of $13.6 million as the carrying amount of our funeral homes in the Eastern Region Reporting Unit exceeded the fair value and we recorded an impairment for certain of our tradenames of $1.1 million as the carrying amount of these tradenames exceeded the fair value.

We also recognized a net loss of $4.9 million on the sale of six funeral homes.

Interest expense .

Interest expense totaled $7.5 million and $15.1 million for the three and six months ended June 30, 2021, respectively, decreases of $0.9 million and $1.7 million, respectively, compared to the same periods in prior year, primarily due to decreased borrowings and lower interest rates on our Credit Facility, as well as lower interest on our New Senior Notes.

Interest expense totaled $5.1 million and $20.1 million for the three and nine months ended September 30, 2021, respectively, decreases of $2.9 million and $4.6 million, respectively, compared to the same periods in prior year, primarily due to decreased borrowings and lower interest rates on our Credit Facility, as well as lower interest on our New Senior Notes.

Income taxes.

We had an income tax benefit of $4.2 million and an income tax expense of $3.4 million for the three months ended June 30, 2021 and 2020, respectively and an income tax expense of $1.4 million and $1.3 million for the six months ended June 30, 2021 and 2020, respectively.

Our operating tax rate before discrete items was 33.0% and 33.5% for the three months ended June 30, 2021 and 2020, respectively and 28.5% and 33.3% for the six months ended June 30, 2021 and 2020, respectively.

Income tax expense totaled $5.1 million and $6.6 million for the three and nine months ended September 30, 2021 respectively, increases of $2.3 million and $2.4 million, respectively.

Our operating tax rate before discrete items was 28.2% and 34.0% for the three months ended September 30, 2021 and 2020, respectively and 28.3% and 33.8% for the nine months ended September 30, 2021 and 2020, respectively.

We filed carryback refund claims for the 2018 and 2019 tax years as allowed by the legislative changes included in the CARES Act.

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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 receiving Internal Revenue Service approval regarding our non-automatic accounting method changes, a reserve has been recorded against the benefit derived from this carrying back that the net operating losses generated.

At June 30, 2021, the reserve for uncertain tax positions was $3.7 million.

As of September 30, 2021, we received an adverse ruling related to the change to our method of recognition of revenue from our constructed cemetery property, however, we are currently in further discussions with the IRS regarding this ruling.

Due to the uncertainty that exists, a reserve has been recorded against the benefit derived from this carrying back that the net operating losses generated.

At September 30, 2021, the reserve for uncertain tax positions was $3.7 million.

OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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What changed 10-Q

Item 2. Management’s Discussion and Analysis