CARRIAGE SERVICES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW General Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading U.S. provider of funeral and cemetery services and merchandise. We operate in two business segments: 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 September 30, 2022, we operated 169 funeral homes in 26 states and 31 cemeteries in 11 states. We compete with other publicly held and independent operators of funeral and cemetery companies. We believe we are a market leader in most of our markets. Funeral home and cemetery businesses provide products and services to families in three principal areas: (i) ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of remains, either through burial or cremation; and (iii) memorialization, generally through monuments, markers or inscriptions. Our funeral homes offer a complete range of services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and memorial services and transportation services. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and services to take place at one location and thereby reduces transportation costs and inconvenience to the family. Our cemeteries provide interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis. Recent Developments Executive Leadership Changes On September 27, 2022, C. Benjamin Brink informed the Company of his plans to resign from his position as Executive Vice President, Chief Financial Officer and Treasurer effective January 2, 2023. Mr. Brink will remain in his role through January 2, 2023 and will serve as a consultant for the Company for six months thereafter. The planned resignation was not the result of any disagreement Mr. Brink had with the Company on any matter related to the Company's operations, policies, and practices, including any matters concerning the Company's controls or any financial or accounting-related matters or disclosures. Acquisitions During the nine months ended September 30, 2022, we acquired a business consisting of two funeral homes for $6.3 million in cash. Divestitures During the nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million for a net gain of $0.7 million. Business Impacts of COVID-19 On March 11, 2020, COVID-19 was deemed a global pandemic and since then, the Company has continued to proactively monitor and assess the pandemic’s current and potential impact to the Company’s operations. Since that time, the Company’s senior leadership team has taken steps to assist our businesses throughout each phase of the COVID-19 pandemic, including updating our processes and procedures to comply with all regulatory mandates, along with keeping the health and safety of our employees and the families we serve our top priority. While we believe the country has begun to transition to a post-pandemic phase, we continue to monitor the situation and may make appropriate adjustments to our operations as necessary. The overall macroeconomic impact from the pandemic to the deathcare industry may provide varying results as compared to other industries. Our industry’s revenues are impacted by various factors, including for example, fluctuations in the death rate, the number of funeral services performed, the average price for a service and the mix of traditional burial versus cremation contracts. During the third quarter of 2022, we continued to see the death rate normalize to pre-COVID-19 levels, which - 41 - accelerated during the latter part of the third quarter. Regardless of these recent trends, our businesses have remained focused on being innovative and resourceful, providing families immediate service as part of the grieving process. Within our financial reporting environment, we have considered the impact of COVID-19 on the assumptions and estimates used in preparing our consolidated financial statements. In the opinion of management, all material adjustments necessary for a fair presentation of the Company’s financial results for the quarter have been made but are complicated by the continued uncertainty surrounding the normalization of the death rate and the scope, severity and duration of the COVID-19 pandemic and its ultimate impact. This includes the potential impacts of new variants of COVID-19, its sub-variants and any other new variants, and any resulting impacts from such variants. We do not believe we are particularly vulnerable to concentrations, with respect to geographic area, revenue for specific products or our relationships with our vendors. To date, we have not experienced any material supply chain impacts or disruptions from our vendors attributable to COVID-19 and we continue to receive reliable service. We believe our access to capital, the cost of our capital, or the sources and uses of our cash should be relatively consistent in the near term. While the expected duration and potential future impacts of the pandemic are unknown, we have not currently experienced any material negative impacts to our liquidity position, access to capital, or cash flows as a result of COVID-19. See “Liquidity and Capital Resources” below for additional information related to our liquidity position. During the third quarter of 2022, we continued to see a decrease in COVID-19-related deaths and an accelerated normalization of the death rate to pre-COVID-19 levels. The normalization of the death rate to pre-COVID-19 levels during the third quarter of 2022 resulted in lower volumes, revenues, earnings and margins when compared to the third quarter of 2021, but overall financial performance remains at or above prior reporting periods during and prior to the COVID-19 pandemic. Although we expect these trends to continue, we will continue to assess these impacts, including the potential impacts of new variants of COVID-19, its sub-variants and any other new variants, and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related regulatory mandates and restrictions, if any, evolves. Inflationary Trends Beginning in the second quarter of 2022, we began to experience modest cost increases and surcharges from our vendors and suppliers on merchandise and goods due to broader inflationary, raw material cost increases, and global supply chain impacts. This trend in modest cost increases continued during the third quarter of 2022, with the Company experiencing, for example, higher costs related to full-time hourly base rates, utilities, funeral supplies, merchandise costs and insurance. Although we have taken steps to mitigate these cost increases and we expect these impacts to continue through the end of the year, the ultimate scope and duration of these impacts are unknown at this time. More broadly, the U.S. economy continues to experience higher rates of inflation, which has impacted a wide variety of industries and sectors, with consumers facing rising prices. Such inflation may negatively impact consumers or discretionary spending, including the amount that consumers are able to spend on our services, although we have not experienced such impacts to date and our industry has been largely resilient to similar adverse economic and market environments in the past. Although we expect these trends to continue through the end of the year, we will continue to assess these impacts and take the appropriate steps, if necessary, to mitigate these cost increases, if possible. Funeral Home Operations Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Factors affecting our funeral operating results include, but are not limited to: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage to increase average revenue per contract. Cemetery Operations Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an atneed and preneed basis. Factors affecting our cemetery operating results include, but are not limited to: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds. - 42 - Business Strategy Our business strategy is based on strong, local leadership with entrepreneurial principles that is focused on sustainable long term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, high-performance culture and operating framework linked with incentive compensation programs that attract top quality industry talent to our organization. We also believe that Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for independent funeral home owners who want their legacy family business to remain operationally prosperous in their local communities. Our Mission Statement states that “we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry” and our Guiding Principles state our core values, which are comprised of: • Honesty, integrity and quality in all that we do; • Hard work, pride of accomplishment, and shared success through employee ownership; • Belief in the power of people through individual initiative and teamwork; • Outstanding service and profitability go hand-in-hand; and • Growth of the Company is driven by decentralization and partnership. Our five Guiding Principles collectively embody our Being The Best high-performance culture and operating framework. Our operations and business strategy are built upon the execution of the following three models: • Standards Operating Model; • 4E Leadership Model; and • Strategic Acquisition Model. Standards Operating Model Our Standards Operating Model is focused on growing local market share, providing personalized high-value services to our client families and guests, and operating financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenue and earnings. 4E Leadership Model Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high performance culture: Energy to get the job done; the ability to Energiz e others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require our local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams. Strategic Acquisition Model Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. We believe that both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic criteria to assess acquisition candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses. We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins (a non-GAAP financial measure). We use criteria such as cultural alignment, volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry to evaluate the strategic position of potential acquisition candidates. Our financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital. - 43 - Our belief in our Mission Statement and Guiding Principles and proper execution of the three models that define our strategy have given us a competitive advantage in every market where we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin. LIQUIDITY AND CAPITAL RESOURCES Overview Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility (defined below). We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. At September 30, 2022, we had $78.7 million of availability under the Credit Facility. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets or seek further borrowing capacity from our lenders to obtain additional funding and we may not be able to obtain such funding on terms and conditions that are acceptable to us. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. For additional information regarding known material factors that could cause cash flow or access to and cost of finance sources to differ from our expectations, please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021. Our plan is to use cash on hand and borrowings under our Credit Facility primarily for general corporate purposes, payment of dividends and debt obligations, strategic acquisitions, internal growth capital expenditures, and further debt repayments. From time to time we may also use available cash resources (including borrowings under our Credit Facility) to repurchase shares of our common stock, subject to satisfying certain financial covenants in our Credit Facility and in the Indenture (defined below) governing our Senior Notes (defined below). We believe that our existing and anticipated cash resources, including, as needed, additional borrowings or other financings that we may be able to obtain, will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months, as well as our long-term financial obligations. Cash Flows We began 2022 with $1.1 million in cash and ended the third quarter with $0.8 million in cash. At September 30, 2022, we had borrowings of $169.0 million outstanding on our Credit Facility compared to $155.4 million at December 31, 2021. - 44 - The following table sets forth the elements of cash flow (in thousands): Nine months ended September 30, 2021 2022 Cash at beginning of the year $ 889 $ 1,148 Net cash provided by operating activities 69,699 50,046 Acquisitions of businesses and real estate (3,285) (8,876) Proceeds from divestitures and sale of other assets 4,375 4,313 Proceeds from insurance reimbursements 2,946 2,209 Capital expenditures (15,252) (20,346) Net cash used in investing activities (11,216) (22,700) Net borrowings on our Credit Facility, acquisition debt and finance lease obligations 39,042 13,286 Payment to redeem the 6.625% senior notes due 2026 (400,000) — Payment of call premium for the redemption of the 6.625% senior notes due 2026 (19,876) — Payment of debt issuance costs for the Credit Facility and the Senior Notes (2,054) (339) Proceeds from the issuance of the Senior Notes 395,500 — Conversions and maturity of the Convertibles Notes (3,980) — Net proceeds related to employee equity plans 674 1,151 Dividends paid on common stock (5,390) (5,108) Purchase of treasury stock (61,739) (36,663) Other financing costs (461) — Net cash used in financing activities (58,284) (27,673) Cash at end of the period $ 1,088 $ 821 Operating Activities For the nine months ended September 30, 2022, cash provided by operating activities was $50.0 million compared to $69.7 million for the nine months ended September 30, 2021. The decrease of $19.7 million is primarily due to unfavorable working capital changes in accrued liabilities, which were partially offset by favorable changes in income tax receivables. Investing Activities Our investing activities resulted in a net cash outflow of $22.7 million for the nine months ended September 30, 2022 compared to $11.2 million for the nine months ended September 30, 2021, a decrease of $11.5 million. Acquisition and Divestiture Activity During the nine months ended September 30, 2022, we acquired a business consisting of two funeral homes for $6.3 million in cash and we purchased real property for $2.6 million. During the nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million. 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. Capital Expenditures For the nine months ended September 30, 2022, capital expenditures (comprised of growth and maintenance spend) totaled $20.3 million compared to $15.3 million for the nine months ended September 30, 2021, an increase of $5.0 million. - 45 - The following tables present our growth and maintenance capital expenditures (in thousands): Nine months ended September 30, 2021 2022 Growth Cemetery development $ 4,120 $ 5,215 Renovations at certain businesses (1) 2,030 4,974 Other 142 447 Total Growth $ 6,292 $ 10,636 (1) During the nine months ended September 30, 2022, we spent $2.4 million for renovations on two businesses that were affected by Hurricane Ida, all of which was reimbursed by our property insurance. Nine months ended September 30, 2021 2022 Maintenance Facility repairs and improvements $ 2,172 $ 3,131 Vehicles 1,481 1,770 General equipment and furniture 4,167 3,744 Paving roads and parking lots 1,140 1,065 Total Maintenance $ 8,960 $ 9,710 Financing Activities Our financing activities resulted in a net cash outflow of $27.7 million for the nine months ended September 30, 2022 compared to $58.3 million for the nine months ended September 30, 2021, a decrease of $30.6 million. During the nine months ended September 30, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $13.3 million, offset by $36.7 million for the purchase of treasury stock and $5.1 million in dividends. 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 6.625% senior notes due 2026; ii) $61.7 million for the purchase of treasury stock; iii) $6.6 million for debt issuance and transactions costs related to our Senior Notes and Credit Facility; iv) $4.0 million for the conversions and maturity of our 2.75% convertible subordinated notes due 2021 (the “ Convertible Notes ”) ; and v) $5.4 million in dividends. Share Repurchase On February 23, 2022, our Board of Directors (the “Board”) authorized an increase in our share repurchase program to permit us to purchase up to an additional $75.0 million under our share repurchase program, in addition to amounts previously authorized and outstanding in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (“the Exchange Act”). Share repurchase activity is as follows (dollar value in thousands): Nine months ended September 30, 2021 2022 Number of Shares Repurchased (1) 1,528,197 695,496 Average Price Paid Per Share $ 42.89 $ 49.22 Dollar Value of Shares Repurchased (1) $ 65,540 $ 34,234 (1) During the nine months ended September 30, 2021, 84,000 shares settled in October 2021, which had a cost of $3.8 million. Our shares are 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. During the three months ended September 30, 2022, we did not repurchase any shares of our common stock pursuant to our share repurchase program. At September 30, 2022, our share repurchase program had $48.9 million authorized for additional repurchases. - 46 - Cash Dividends Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2022 Per Share Dollar Value March 1 st $ 0.1125 $ 1,725 June 1 st $ 0.1125 $ 1,730 September 1 st $ 0.1125 $ 1,653 2021 Per Share Dollar Value March 1 st $ 0.1000 $ 1,799 June 1 st $ 0.1000 $ 1,808 September 1 st $ 0.1000 $ 1,783 Credit Facility, Lease Obligations and Acquisition Debt The outstanding principal of our Credit Facility, lease obligations and acquisition debt at September 30, 2022 is as follows (in thousands): September 30, 2022 Credit Facility $ 169,000 Finance leases 5,258 Operating leases 19,712 Acquisition debt 4,460 Total $ 198,430 Credit Facility On May 27 2022, we entered into a second amendment and commitment increase (the “Credit Facility Amendment”) to the first amended and restated credit agreement dated May 13, 2021 (as amended, including the Credit Facility Amendment, the “Credit Facility”) with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Facility Amendment provided, among other things, for (i) an increase to the Revolving Credit Commitments (as defined in the Credit Facility) under the Credit Facility from $200.0 million to $250.0 million in the aggregate; (ii) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (iii) the establishment of the BSBY as a benchmark rate and the removal of LIBOR from the Credit Facility; (iv) an increase in the maximum Total Leverage Ratio (as defined in the Credit Facility) to 5.25 to 1.00; and (v) modifications to the restricted payments covenant to allow us to make additional stock repurchases, subject to the satisfaction of certain conditions therein. We incurred $0.3 million in transactions costs related to the Credit Facility Amendment, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method. At September 30, 2022, our Credit Facility was comprised of: (i) a $250.0 million revolving credit facility, including a $15.0 million million subfacility for letters of credit and a $10.0 million million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 13, 2026. Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (defined below) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”). The 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 Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of the Company’s personal property assets and those of the Subsidiary Guarantors. In addition, the Credit Facility includes provisions which require the Company and the Subsidiary Guarantors, upon the occurrence of an event of default or in the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level under the Credit Facility, to grant additional liens on real property assets accounting for no less than 50% of the Company’s and the Subsidiary Guarantors’ funeral operations if requested by the administrative agent. - 47 - The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations, continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, amongst others. In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and 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 September 30, 2022, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 5.25 to 1.00 and (B) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility as of September 30, 2022. At September 30, 2022, we had outstanding borrowings under the Credit Facility of $169.0 million. We also had one letter of credit for $2.3 million under the Credit Facility. The letter of credit will expire on November 25, 2022 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2022, we had $78.7 million of availability under the Credit Facility. As of the effective date of the Credit Facility Amendment, outstanding borrowings under our Credit Facility bear interest at a prime rate or a BSBY rate, plus an applicable margin based on our leverage ratio. At September 30, 2022, the prime rate margin was equivalent to 1.125% and the BSBY rate margin was 2.125%. The weighted average interest rate on our Credit Facility was 2.0% and 4.3% for the three months ended September 30, 2021 and 2022, respectively, and 2.5% and 3.1% for the nine months ended September 30, 2021 and 2022, respectively. The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2021 2022 2021 2022 Credit Facility interest expense $ 383 $ 1,971 $ 1,200 $ 4,132 Credit Facility amortization of debt issuance costs 80 109 297 293 Lease Obligations Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. At September 30, 2022, operating and finance lease obligations were $35.8 million, with $4.5 million payable within 12 months. 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 September 30, Nine months ended September 30, 2021 2022 2021 2022 Operating lease cost $ 947 $ 863 $ 2,871 $ 2,564 Short-term lease cost 39 82 145 260 Variable lease cost 43 37 100 60 Finance lease cost: Depreciation of leased assets $ 111 $ 111 $ 328 $ 328 Interest on lease liabilities 117 110 356 335 Total finance lease cost 228 221 684 663 Total lease cost $ 1,257 $ 1,203 $ 3,800 $ 3,547 Acquisition Debt Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from nine to twenty years. At September 30, 2022, acquisition debt obligations were $6.3 million, with $0.8 million payable within 12 months. - 48 - The imputed interest expense related to our acquisition debt is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2021 2022 2021 2022 Acquisition debt imputed interest expense $ 90 $ 78 $ 280 $ 237 Senior Notes At September 30, 2022, the principal amount of our 4.25% senior notes due in May 2029 (the “Senior Notes”) was $400.0 million. The Senior Notes were issued under an indenture, dated as of May 13, 2021 (the “Indenture”), among the Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally by each of the Subsidiary Guarantors. The Senior Notes mature on May 15, 2029, unless earlier redeemed or purchased and bear interest at 4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021. We may redeem the Senior Notes, in whole or in part, at the redemption price of 102.13% on or after May 15, 2024, 101.06% on or after May 15, 2025 and 100% on or after May 15, 2026, plus accrued and unpaid interest, if any, to, but excluding, the redemption date. At any time before May 15, 2024, we may also redeem all or part of the Senior Notes at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to (but excluding) the date of redemption. In addition, before May 15, 2024, we may redeem up to 40% of the aggregate principal amount of the 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 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 Senior Notes (including any additional Senior Notes) outstanding under the Indenture remain outstanding immediately after the occurrence of such redemption (unless all 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 Senior Notes will have the option to require us to purchase for cash all or a portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest. The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default. The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 80 months of the Senior Notes. For both the three and nine months ended September 30, 2021 and 2022, the effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes was 4.42% and 4.30%, respectively. At September 30, 2022, the fair value of the Senior Notes, which are Level 2 measurements, was $317.2 million. 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 September 30, Nine months ended September 30, 2021 2022 2021 2022 Senior Notes interest expense $ 4,250 $ 4,250 $ 17,517 $ 12,730 Senior Notes amortization of debt discount 118 125 384 368 Senior Notes amortization of debt premium — — 85 — Senior Notes amortization of debt issuance costs 34 35 161 104 At September 30, 2022, our future interest payments on our outstanding balance were $112.5 million, with $17.0 million payable within 12 months. - 49 - FINANCIAL HIGHLIGHTS Below are our financial highlights (in thousands except for volumes and averages): Three months ended September 30, Nine months ended September 30, 2021 2022 2021 2022 Revenue $ 95,041 $ 87,497 $ 279,955 $ 276,258 Funeral contracts 12,566 11,109 36,704 35,630 Average revenue per funeral contract $ 5,358 $ 5,516 $ 5,336 $ 5,463 Preneed interment rights (property) sold 2,841 2,455 8,775 8,344 Average price per preneed interment right sold $ 4,763 $ 4,569 $ 4,635 $ 4,449 Gross profit $ 33,164 $ 25,598 $ 97,152 $ 87,788 Net income $ 13,046 $ 5,860 $ 19,812 $ 33,161 Revenue for the three months ended September 30, 2022 decreased $7.5 million compared to the three months ended September 30, 2021, as we experienced an 11.6% decrease in funeral contract volume, which was slightly offset by a 2.9% increase in average revenue per funeral contract, as well as a 13.6% decrease in the number of preneed interment rights (property) sold and a 4.1% decrease in the average price per interment right sold. The decreases in funeral contract volume and the number of interment rights sold primarily correspond to the significant decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels. Gross profit for the three months ended September 30, 2022 decreased $7.6 million compared to the three months ended September 30, 2021, primarily due to the decrease in revenue. Net income for the three months ended September 30, 2022 decreased $7.2 million compared to the three months ended September 30, 2021, primarily due to the $7.6 million decrease in gross profit, a $1.6 million increase in interest expense, a $1.3 million increase in general and administrative expense, offset by a $2.3 million decrease in income tax expense and a $0.9 million decrease in net gain on divestitures, disposals and impairments charges. Revenue for the nine months ended September 30, 2022 decreased $3.7 million compared to the nine months ended September 30, 2021, as we experienced a 2.9% decrease in funeral contract volume, which was slightly offset by a 2.4% increase in average revenue per funeral contract, as well as a 4.9% decrease in the number of preneed interment rights (property) sold and a 4.0% decrease in the average price per interment right sold. The decreases in funeral contract volume and the number of interment rights sold primarily correspond to the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. Gross profit for the nine months ended September 30, 2022 decreased $9.4 million compared to the nine months ended September 30, 2021, due to the decrease in revenue, as well as the increase in operating expenses in both our funeral and cemetery segments. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies, merchandise costs and insurance. Net income for the nine months ended September 30, 2022 increased $13.3 million compared to the nine months ended September 30, 2021, due to a $23.8 million loss on extinguishment of debt in 2021, a $3.3 million gain on insurance reimbursements in 2022, a $1.9 million decrease in interest expense, and a $1.8 million decrease in net gain on divestitures, disposals and impairments charges, offset by a $9.4 million decrease in gross profit, a $5.5 million increase in income tax expense and a $2.8 million increase in general and administrative 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.” Further discussion of General, administrative and other expenses, Interest expense, Income taxes and other components of income and expenses are presented herein under “– Other Financial Statement Items.” 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 September 30, 2022 issued on October 26, 2022 and discussed in the corresponding earnings conference call. The Trend Report is used as a supplemental financial statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report contains non-GAAP financial measures that we believe provides insight into underlying trends in our business. - 50 - Below is a reconciliation of Net income, a GAAP financial measure, to Adjusted net income, a non-GAAP financial measure, (in thousands): Three months ended September 30, Nine months ended September 30, 2021 2022 2021 2022 Net income $ 13,046 $ 5,860 $ 19,812 $ 33,161 Special items (1) Severance and separation costs (2) — 1,431 1,575 1,431 Accretion of discount on Convertible Notes (1) — — 20 — Loss on extinguishment of debt (3) — — 23,807 — Net (gain) loss on divestitures 282 — 179 (575) Net impact of impairment of goodwill and other 500 — 500 — Litigation reserve (4) — — — 200 Net gain on insurance reimbursements (5) — — — (3,275) Disaster recovery and pandemic costs (6) 1,002 — 2,041 168 Change in uncertain tax reserves and other (1) — — — (533) Other special items (7) 1,020 — 2,354 — Sum of special items $ 2,804 $ 1,431 $ 30,476 $ (2,584) Tax effect on special items (1) 738 356 8,619 (570) Adjusted net income (8) $ 15,112 $ 6,935 $ 41,669 $ 31,147 (1) Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special items are taxed at the operating tax rate for the period except for the Accretion of the discount on Convertible Notes, as this is a non-tax deductible item and the Change in uncertain tax reserves and other, as this item is a tax benefit. (2) Costs related to the departure of certain key members of leadership in the first quarter of 2021 and in the third quarter of 2022. (3) Loss on the redemption of our 6.625% senior notes due 2026 during the second quarter of 2021. (4) Costs related to litigation matters. (5) Net gain recognized on insurance reimbursements for property damage caused by Hurricane Ida that occurred during the third quarter of 2021. (6) Relates to health and safety expenses, including personal protective equipment (“PPE”) due to COVID-19. We purchased more PPE during the three and nine months ended 2021 compared to the same periods in 2022. (7) Relates to the write-off of certain fixed assets and interest paid on our 6.625% senior notes due 2026 for the two-week period during which our Senior Notes were issued prior to the redemption of our 6.625% senior notes due 2026. (8) 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 financial measure) to Operating profit (a non-GAAP financial measure) (in thousands): Three months ended September 30, Nine months ended September 30, 2021 2022 2021 2022 Gross profit $ 33,164 $ 25,598 $ 97,152 $ 87,788 Cemetery property amortization 1,521 1,278 5,213 4,314 Field depreciation expense 3,154 3,281 9,432 9,831 Regional and unallocated funeral and cemetery costs 6,812 5,096 18,655 17,409 Operating profit (1) $ 44,651 $ 35,253 $ 130,452 $ 119,342 (1) Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs. - 51 - Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP financial measure) by Segment (in thousands): Three months ended September 30, Nine months ended September 30, 2021 2022 2021 2022 Funeral Home $ 31,355 $ 24,173 $ 88,445 $ 82,060 Cemetery 13,296 11,080 42,007 37,282 Operating profit $ 44,651 $ 35,253 $ 130,452 $ 119,342 Operating profit margin (1) 47.0% 40.3% 46.6% 43.2% (1) Operating profit margin is defined as Operating profit as a percentage of Revenue. Further discussion of Operating profit for our funeral home and cemetery segments is presented herein under “– Results of Operations.” RESULTS OF OPERATIONS The following is a discussion of our results of operations for the three and nine months ended September 30, 2022 and 2021. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2018 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. The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2017, excluding any funeral home and cemetery businesses that we intend to divest in the near future. This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. The term “divested” when discussed in the Funeral Home Segment, refers to two funeral homes we sold and one funeral home we merged with another business in an existing market in the first nine months of 2022 and three funeral homes we sold in the first nine months of 2021. The term “divested” when discussed in the Cemetery Segment, refers to one cemetery we sold during 2021. “Planned divested” refers to the funeral home businesses that we intend to divest. “Ancillary” in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business. Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure. - 52 - Funeral Home Segment The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations (in thousands): Three months ended September 30, 2021 2022 Revenue: Same store operating revenue $ 57,321 $ 51,258 Acquired operating revenue 7,651 7,813 Divested/planned divested revenue 564 186 Ancillary revenue 1,096 1,049 Preneed funeral insurance commissions 375 357 Preneed funeral trust and insurance 1,890 2,117 Total $ 68,897 $ 62,780 Operating profit: Same store operating profit $ 25,644 $ 18,717 Acquired operating profit 3,371 3,036 Divested/planned divested operating profit 92 16 Ancillary operating profit 274 188 Preneed funeral insurance commissions 121 142 Preneed funeral trust and insurance 1,853 2,074 Total $ 31,355 $ 24,173 The following measures reflect the significant metrics over this comparative period: Three months ended September 30, 2021 2022 Same store: Contract volume 10,889 9,499 Average revenue per contract, excluding preneed funeral trust earnings $ 5,264 $ 5,396 Average revenue per contract, including preneed funeral trust earnings $ 5,419 $ 5,594 Burial rate 34.1% 33.7% Cremation rate 57.2% 58.2% Acquired: Contract volume 1,555 1,570 Average revenue per contract, excluding preneed funeral trust earnings $ 4,920 $ 4,977 Average revenue per contract, including preneed funeral trust earnings $ 4,988 $ 5,066 Burial rate 35.9% 33.9% Cremation rate 55.9% 58.2% Funeral home same store operating revenue decreased $6.1 million for the three months ended September 30, 2022 compared to the same period in 2021. The decrease in operating revenue is primarily due to a 12.8% decrease in same store contract volume, which was slightly offset by a 2.5% increase in the average revenue per contract excluding preneed interest. The same store contract volume decrease is primarily a result of the significant decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract in the third quarter of 2022 reflects a 1.4% increase in cremations with memorial services. This increase is primarily due to our continued focus to welcome and educate families on the many products and service options that are available with cremation. Funeral home same store operating profit for the three months ended September 30, 2022 decreased $6.9 million when compared to the same period in 2021, primarily due to the decrease in operating revenue, with increased operating expenses as a percentage of revenue also contributing to the decline. The comparable operating profit margin decreased 820 basis points to 36.5%. Operating expenses as a percentage of operating revenue increased 8.2% with the largest increases in salaries and benefits expenses of 3.7%, facilities and grounds expenses of 0.8%, general and administrative expenses of 0.8%, general - 53 - liability insurance of 0.7% and transportation costs of 0.4%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance. Funeral home acquired operating revenue for the three months ended September 30, 2022 increased $0.2 million compared to the same period in 2021, due to the addition of two funeral home businesses added to our funeral home acquired portfolio during the third quarter of 2022, which contributed $0.4 million of operating revenue. Excluding these two businesses, acquired operating revenue decreased $0.2 million, due to a 6.0% decrease in acquired contract volume, offset by a 3.7% increase in average revenue per contract excluding preneed interest. Funeral home acquired operating profit for the three months ended September 30, 2022 decreased $0.3 million when compared to the same period in 2021, primarily due to an increase in operating expenses as a percentage of revenue. The two funeral homes added to our acquired portfolio during the third quarter of 2022 contributed almost $0.2 million of operating profit. Excluding these two businesses, acquired operating profit decreased $0.5 million. The comparable operating profit margin decreased 520 basis points to 38.9%. Operating expenses as a percentage of operating revenue increased 5.2% with the largest increase in salaries and benefits expenses of 2.3%, facilities and grounds expenses of 0.7%, general liability insurance of 0.7%, other funeral costs of 0.6% and general and administrative expenses of 0.5%, offset by a decrease in promotional expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance. Ancillary revenue, recorded in Other revenue , which represents revenue from our flower shop, pet cremation and online cremation businesses, remained flat and Ancillary operating profit decreased $0.1 million for the three months ended September 30, 2022 compared to the same period in 2021. Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue ), on a combined basis, increased $0.2 million for the three months ended September 30, 2022 compared to the same period in 2021. The increase is primarily due to a 14.3% increase in earnings on preneed contracts for the three months ended September 30, 2022 compared to the same period in 2021, as recognition is triggered at the time a preneed contract matures to atneed. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million for the same comparative period, primarily due to the increase 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): Nine months ended September 30, 2021 2022 Revenue: Same store operating revenue $ 165,481 $ 163,776 Acquired operating revenue 22,575 24,064 Divested/planned divested revenue 2,120 907 Ancillary revenue 3,391 3,099 Preneed funeral insurance commissions 968 1,029 Preneed funeral trust and insurance 5,968 6,198 Total $ 200,503 $ 199,073 Operating profit: Same store operating profit $ 71,520 $ 65,313 Acquired operating profit 9,784 9,845 Divested/planned divested operating profit (loss) 205 (32) Ancillary operating profit 790 560 Preneed funeral insurance commissions 288 300 Preneed funeral trust and insurance 5,858 6,074 Total $ 88,445 $ 82,060 - 54 - The following measures reflect the significant metrics over this comparative period: Nine months ended September 30, 2021 2022 Same store: Contract volume 31,503 30,686 Average revenue per contract, excluding preneed funeral trust earnings $ 5,253 $ 5,337 Average revenue per contract, including preneed funeral trust earnings $ 5,422 $ 5,516 Burial rate 35.6% 34.3% Cremation rate 56.8% 57.5% Acquired: Contract volume 4,749 4,765 Average revenue per contract, excluding preneed funeral trust earnings $ 4,754 $ 5,050 Average revenue per contract, including preneed funeral trust earnings $ 4,826 $ 5,140 Burial rate 37.6% 36.2% Cremation rate 56.3% 57.6% Funeral home same store operating revenue decreased $1.7 million for the nine months ended September 30, 2022 compared to the same period in 2021. The decrease in operating revenue is primarily due to a 2.6% decrease in same store contract volume, offset by a 1.6% increase in the average revenue per contract excluding preneed interest. The same store contract volume decrease is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract for the nine months ended September 30, 2022 reflects increases of 2.1% and 0.9% in cremations and burials with memorial services, respectively. These increases are primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations. Funeral home same store operating profit for the nine months ended September 30, 2022 decreased $6.2 million when compared to the same period in 2021, due to the decrease in operating revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 330 basis points to 39.9%. Operating expenses as a percentage of revenue increased 3.3% with the largest increase in salaries and benefits expenses of 1.0%, general and administrative expenses of 0.6%, transportation expenses of 0.3%, general liability insurance of 0.3% and facilities and grounds expenses of 0.3%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance. Funeral home acquired operating revenue for the nine months ended September 30, 2022 increased $1.5 million compared to the same period in 2021. The increase was due, in part, to the addition of two funeral home businesses added to our funeral home acquired portfolio during the third quarter of 2022, which contributed $0.4 million of operating revenue. Excluding these two businesses, acquired operating revenue increased $1.1 million due to a 7.1% increase in the average revenue per contract excluding preneed interest, slightly offset by a 2.0% decrease in acquired contract volume. The acquired contract volume decrease is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. The increase in average revenue per contract for the nine months ended September 30, 2022 reflects increases of 2.4% and 0.7% in cremations and burials with memorial services, respectively. These increases are primarily due to a combination of price increases and our continued focus on educating families on the many products and service options that are available with burials and cremations. Funeral home acquired operating profit for the nine months ended September 30, 2022 increased $0.1 million when compared to the same period in 2021, primarily due to the two funeral homes added to our acquired portfolio during the third quarter of 2022, which contributed almost $0.2 million of operating profit. Excluding these two businesses, acquired operating profit decreased $0.1 million. The comparable operating profit margin decreased 240 basis points to 40.9%. Operating expenses as a percentage of operating revenue increased 2.4% with the largest increases in general and administrative expenses of 0.8%, salaries and benefits expenses of 0.6%, other funeral expenses of 0.6% and facilities and grounds expenses of 0.4%, offset by a decrease in promotional expenses of 0.5%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, funeral supplies and insurance. Ancillary revenue, which is recorded in Other revenue , represents revenue from our flower shop, pet cremation and online cremation businesses, decreased $0.3 million and Ancillary operating profit decreased $0.2 million for the nine months ended September 30, 2022 compared to the same period in 2021. - 55 - Preneed funeral insurance commissions and preneed funeral trust and insurance revenue (recorded in Other revenue ), on a combined basis, increased $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase is due to an increase in the number of preneed contracts that matured to atneed, as well as an increase in the earnings on these preneed contracts, as recognition is triggered at the time a preneed contract matures to atneed. The number of contracts increased 2.2% and the average earnings per preneed contract increased 1.9% for the nine months ended September 30, 2022 compared to the same period in 2021. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million for the same comparative period, primarily due to the increase in preneed funeral trust and insurance revenue. Cemetery Segment The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands): Three months ended September 30, 2021 2022 Revenue: Same store operating revenue $ 16,342 $ 15,396 Acquired operating revenue 6,362 5,947 Divested revenue 52 — Preneed cemetery trust revenue 3,136 3,065 Preneed cemetery finance charges 252 309 Total $ 26,144 $ 24,717 Operating profit: Same store operating profit $ 6,465 $ 5,020 Acquired operating profit 3,547 2,827 Divested operating profit 19 — Preneed cemetery trust operating profit 3,013 2,924 Preneed cemetery finance charges 252 309 Total $ 13,296 $ 11,080 The following measures reflect the significant metrics over this comparative period: Three months ended September 30, 2021 2022 Same store: Preneed revenue as a percentage of operating revenue 61% 60% Preneed revenue (in thousands) $ 9,909 $ 9,309 Atneed revenue (in thousands) $ 6,433 $ 6,087 Number of preneed interment rights sold 2,223 1,917 Average price per interment right sold $ 4,130 $ 4,181 Acquired: Preneed revenue as a percentage of operating revenue 66% 61% Preneed revenue (in thousands) $ 4,194 $ 3,610 Atneed revenue (in thousands) $ 2,168 $ 2,337 Number of preneed interment rights sold 606 538 Average price per interment right sold $ 7,159 $ 5,951 Cemetery same store preneed revenue decreased $0.6 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 13.8% decrease in the number of interment rights sold, slightly offset by a 1.2% increase in the average price per interment right sold. Cemetery same store atneed revenue, which represents 40% of our same store operating revenue decreased $0.3 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 13.2% decrease in the number of interment rights sold, which was offset by a 9.0% increase in the - 56 - average price per interment right sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels. Cemetery same store operating profit for the three months ended September 30, 2022 decreased $1.4 million from the same period in 2021, due to the decrease in operating revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 700 basis points to 32.6%. Operating expenses as a percentage of operating revenue increased 7.0% with the largest increases in facilities and grounds expenses of 3.2%, salaries and benefits expenses of 1.1%, merchandise costs of 1.0%, general liability insurance of 0.7% and general and administrative expenses of 0.8%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance. Cemetery acquired preneed revenue decreased $0.6 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 16.9% decrease in the average price per interment right sold, as well as an 11.2% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 39% of our acquired operating revenue, increased $0.2 million for the three months ended September 30, 2022 compared to the same period in 2021, as we experienced a 12.9% increase in the average price per interment right sold, offset by a 4.5% decrease in the number of interment rights sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases as compared to the third quarter of 2021, as the death rate normalized to pre-COVID-19 levels. Cemetery acquired operating profit decreased $0.7 million for the three months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 830 basis points to 47.5%. Operating expenses as a percentage of operating revenue increased 8.2% with the largest increases in salaries and benefits expenses of 2.1%, general liability insurance of 1.1%, facilities and grounds expenses of 0.9%, general and administrative expenses of 0.6%, merchandise costs of 0.6% and atneed commissions expense of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance. Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue ), as well as their respective operating profit remained flat for the three months ended September 30, 2022 compared to the same period in 2021. The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations (in thousands): Nine months ended September 30, 2021 2022 Revenue: Same store operating revenue $ 47,883 $ 46,616 Acquired operating revenue 21,517 20,437 Divested revenue 202 — Preneed cemetery trust revenue 9,079 9,262 Preneed cemetery finance charges 771 870 Total $ 79,452 $ 77,185 Operating profit: Same store operating profit $ 20,076 $ 16,799 Acquired operating profit 12,386 10,766 Divested operating profit 66 — Preneed cemetery trust operating profit 8,708 8,847 Preneed cemetery finance charges 771 870 Total $ 42,007 $ 37,282 - 57 - The following measures reflect the significant metrics over this comparative period: Nine months ended September 30, 2021 2022 Same store: Preneed revenue as a percentage of operating revenue 61% 61% Preneed revenue (in thousands) $ 29,044 $ 28,509 Atneed revenue (in thousands) $ 18,839 $ 18,107 Number of preneed interment rights sold 6,375 6,088 Average price per interment right sold $ 4,106 $ 4,095 Acquired: Preneed revenue as a percentage of operating revenue 68% 64% Preneed revenue (in thousands) $ 14,692 $ 12,996 Atneed revenue (in thousands) $ 6,825 $ 7,441 Number of preneed interment rights sold 2,369 2,256 Average price per interment right sold $ 6,107 $ 5,403 Cemetery same store preneed revenue decreased $0.5 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 4.5% decrease in the number of interment rights sold, while the average price per interment right sold remained flat. Cemetery same store atneed revenue, which represents 39% of our same store operating revenue, decreased $0.7 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 6.9% decrease in the number of interment rights sold, offset by a 3.1% increase in the average price per interment right sold. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. Cemetery same store operating profit decreased $3.3 million for the nine months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 590 basis points to 36.0%. Operating expenses as a percentage of operating revenue increased 5.9% with the largest increases in facilities and grounds expenses of 1.4%, promotional expenses of 1.0%, allowance for credit losses of 0.9%, due to a change in estimate in the second quarter of the prior year, which resulted in lower credit loss expense in the prior period, general liability insurance of 0.6% and general and administrative expenses of 0.6%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance. Cemetery acquired preneed revenue decreased $1.7 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced an 11.5% decrease in the average price per interment right sold, as well as a 4.8% decrease in the number of interment rights sold. Cemetery acquired atneed revenue, which represents 36% of our acquired operating revenue, increased $0.6 million for the nine months ended September 30, 2022 compared to the same period in 2021, as we experienced a 14.5% increase in the average price per interment right sold, while the number of interment rights sold decreased 4.8%. The decrease in the number of interment rights sold is primarily a result of the decline in COVID-19 related cases in 2022 compared to 2021, as the death rate normalized to pre-COVID-19 levels. Cemetery acquired operating profit decreased $1.6 million for the nine months ended September 30, 2022 from the same period in 2021, due to the decrease in revenue and an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 490 basis points to 52.7%. Operating expenses as a percentage of operating revenue increased 4.9% with the largest increases in facilities and grounds expenses of 0.9%, salaries and benefits expenses increased 0.9%, general liability insurance of 0.8% and merchandise costs of 0.7%. The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our full-time hourly base rates, utilities, merchandise costs and insurance. Preneed cemetery trust revenue and preneed cemetery finance charges (recorded in Other revenue ) on a combined basis increased $0.3 million for the nine months ended September 30, 2022 compared to the same period in 2021. The increase in trust revenue is primarily due to an increase in realized gains on delivered merchandise and services contracts. Operating profit for the two categories of Other Revenue , on a combined basis, increased $0.2 million for the nine months ended September 30, 2022 compared to the same period in 2021, primarily due to the increase in revenue. - 58 - Cemetery property amortization . Cemetery property amortization totaled $1.3 million and $4.3 million for the three and nine months ended September 30, 2022, respectively, a decrease of $0.2 million and $0.9 million, respectively, compared to the same periods in 2021, primarily due to the decrease in property sold across our cemetery portfolio. Field depreciation. Depreciation expense for our field businesses totaled $3.3 million and $9.8 million for the three and nine months ended September 30, 2022, respectively, an increase of $0.1 million and $0.4 million, respectively, compared to the same periods in 2021, primarily due to depreciation from computer and hardware equipment added in the last twelve months, as well as from assets added as a result of our acquisition during the third quarter of 2022. 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 $5.1 million for the three months ended September 30, 2022, a decrease of $1.7 million compared to the same period in 2021, primarily due to the following: (1) a $1.1 million decrease in cash incentives and equity compensation; (2) a $0.5 million decrease in health and safety expenses related to COVID-19; (3) a $0.2 million decrease in salary and benefits expenses; (4) a $0.1 million decrease in other general administrative costs; offset by (5) a $0.2 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19. Regional and unallocated funeral and cemetery costs totaled $17.4 million for the nine months ended September 30, 2022, a decrease of $1.2 million compared to the same period in 2021, primarily due to the following: (1) a $1.7 million decrease in cash incentives and equity compensation; (2) a $1.3 million decrease in health and safety expenses related to COVID-19; (3) a $0.3 million decrease in salary and benefits expenses; offset by (4) a $1.3 million increase in incentive award trips and annual managing partner meetings, which were postponed in the prior year due to COVID-19; and (5) a $0.2 million increase in other general administrative costs. Other Financial Statement Items General, administrative and other. General, administrative and other expenses totaled $10.4 million for the three months ended September 30, 2022, an increase of $1.3 million compared to the same period in 2021, primarily due to the following: (1) a $1.4 million increase in separation expenses related to the departure of a key member of leadership; (2) a $0.8 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a Chief Information Officer; (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 $1.0 million decrease in insurance claims expense, which included a one-time $1.0 million payment for residual insurance claims in 2021; and (3) a $0.3 million decrease in cash incentives and equity compensation. General, administrative and other expenses totaled $28.1 million for the nine months ended September 30, 2022, an increase of $2.8 million compared to the same period in 2021, primarily due to the following: (1) a $2.4 million increase in salary and benefits expenses, which includes talent additions to our recently developed marketing department, as well as a Chief Information Officer; (2) a $1.8 million increase in other general administrative costs, which includes higher online marketing and advertising costs and software license fees for new technology; (3) a $0.1 million increase in cash incentives and equity compensation; offset by (4) a $1.3 million decrease in insurance claims expense, which included a one-time $1.0 million payment for residual insurance claims in 2021; (5) a $0.1 million decrease in separation expense related to the departure of certain key members of leadership, and (6) a $0.1 million decrease in divestiture expenses. Net (gain) loss on divestitures, disposals and impairments charges. The components of Net (gain) loss on divestitures, disposals and impairment charges are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2021 2022 2021 2022 Assets held for sale impairment $ 500 $ — $ 500 $ — Net (gain) loss on divestitures and real property 282 — 179 (575) Net (gain) loss on disposals of fixed assets 76 (7) 698 142 Total $ 858 $ (7) $ 1,377 $ (433) During the nine months ended September 30, 2022, we sold real property for $3.3 million and two funeral homes for $0.9 million for a net gain of $0.7 million, of which $0.1 million is recorded in Other, net related to the sale of assets not used in operating activities. During the nine months ended September 30, 2021, we sold three funeral homes and real property for $4.2 million for a 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. - 59 - Interest expense . Interest expense related to our various debt arrangement is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2021 2022 2021 2022 Senior Notes $ 4,403 $ 4,410 $ 17,977 $ 13,203 Credit Facility 464 2,081 1,497 4,425 Finance leases 117 110 356 335 Acquisition debt 90 78 280 237 Convertible Notes — — 20 — Other 2 (1) 7 8 Total $ 5,076 $ 6,678 $ 20,137 $ 18,208 Gain on insurance reimbursements. During the nine months ended September 30, 2022, we recorded a gain on the reimbursements received from insurance for property damaged by Hurricane Ida that occurred during the third quarter of 2021. Income taxes. We had an income tax expense of $2.8 million and $5.1 million for the three months ended September 30, 2022 and 2021, respectively, and income tax expense of $12.1 million and $6.6 million for the nine months ended September 30, 2022 and 2021, respectively. Our operating tax rate before discrete items was 30.6% and 28.2% for the three months ended September 30, 2022 and 2021, respectively, and 27.8% and 28.3% for the nine months ended September 30, 2022 and 2021, respectively. On June 30, 2020, we filed carryback refund claims for the 2018 and 2019 tax years. 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. On October 11, 2021, we received an adverse ruling from the IRS related to our accounting method change for cemetery property revenue recognition filed in 2018 and subsequently filed an automatic accounting method change to adopt the IRS’s preferred method of revenue recognition for cemetery property effective for the year ending December 31, 2021. On March 2, 2022, we received approval from the IRS regarding our method change filed related to the revenue recognition of cemetery merchandise and services sales. As a result, we recorded a $0.5 million reduction to the reserve for uncertain tax positions, including interest, during the nine months ended September 30, 2022. At December 31, 2021 and September 30, 2022, the reserve for uncertain tax positions was $3.8 million and $3.3 million, respectively, related to carrying back the net operating losses generated in the tax year ended December 31, 2018 filed under the CARES Act on June 30, 2020. OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Understanding our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies is integral to understanding our Consolidated Financial Statements. Our critical accounting policies are more fully described in Part I, Item 1, Financial Statements, Note 1. We have identified Business Combinations and Goodwill as those accounting policies that require significant judgments, assumptions and estimates and that have a significant impact on our financial condition and results of operations. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from period to period. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions. SEASONALITY Our business can be affected by seasonal fluctuations in the death rate. Generally, the death rate is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year. - 60 -