What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2023-05-05 compared with 2022-11-02 · 183 added, 426 removed, 231 unchanged (73% of the section changed)

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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.

(“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading provider of funeral and cemetery services and merchandise in the United States.

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 Operations, which currently accounts for approximately 70% of our total revenue, and Cemetery Operations, which currently accounts for approximately 30% of our total revenue.

At March 31, 2023, we operated 173 funeral homes in 26 states and 32 cemeteries in 11 states.

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

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

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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).

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

We provide 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.

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.

During the nine months ended September 30, 2022, we acquired a business consisting of two funeral homes for $6.3 million in cash.

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.

Board of Directors

On February 22, 2023, the Board of Directors (the “Board”) of the Company elected Carlos R.

Quezada, President and Chief Operating Officer, to serve as a Class II director, effective that same date, until the Company’s 2025 annual meeting of stockholders.

The Board also appointed Mr.

Quezada to serve as Vice Chairman of the Board.

Quezada will serve as a non-independent member of the Board, and the Board does not expect to appoint Mr.

Quezada to any of its standing committees.

Following the appointment of Mr.

Quezada, the Board is now comprised of six directors, including four independent directors.

Code of Business Conduct and Ethics

On February 22, 2023, our Board, on the recommendation of the Board’s Audit Committee, approved various amendments to the Company’s Code of Business Conduct and Ethics (the “Code”), which applies to all directors, officers and employees of the Company and its subsidiaries.

In addition to making certain technical and administrative updates, the amendments to the Code include, among other things, summarizing and clarifying the Company’s existing compliance requirements and also identifies and expands upon certain policies, including those related to bribery and kickbacks, antitrust, political activity and improper influence on auditors.

As disclosed in our Annual Report on Form 10-K for the year ended December 31, 2022, copies of the Code, as amended, are posted on our website under “Investors - Corporate Governance.”

Leadership Changes

Effective March 13, 2023, L.

Kian Granmayeh was appointed to serve as the Company’s Executive Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer).

On March 22, 2023, we acquired three funeral homes, two cemeteries and a cremation focused business in the Bakersfield, California area for $44.0 million.

During the three months ended March 31, 2023, we sold one funeral home and two cemeteries for $0.8 million for a loss of $0.1 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.

The overall macroeconomic impact from the pandemic to the funeral and cemetery 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

accelerated during the latter part of the third quarter.

During the three months ended March 31, 2023, deaths directly attributable from COVID-19 now have minimal direct impact on the overall death rate, although the overall death rate remains slightly higher than the pre-pandemic period, and we are unable to predict or forecast the duration or variation of this increased death rate with any certainty.

As a result, we experienced lower volumes, revenues, earnings and margins when compared to the first quarter of 2022, but overall financial performance remains at or above prior reporting periods during and prior to the pandemic.

Although we expect these death rate trends to continue, we will continue to assess these impacts, including the potential impacts of any emerging or new public health threats, and implement appropriate procedures, plans, strategies, and issue any disclosures that may be required, as the situation evolves.

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.

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 our inability to predict or forecast the duration or variation of the increased death rate with any certainty.

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.

We believe our access to capital, the cost of our capital, and 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.

For additional information related to our liquidity position, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.

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.

During the three months ended March 31, 2023, we continued 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.

For example, we experienced 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 throughout the current year, the ultimate scope and duration of these impacts are unknown at this time.

More broadly, the U.S.

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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.

Although we expect these trends to continue throughout the current 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

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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.

and our response to fluctuations in capital markets and interest

rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds.

Business Strategy

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

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

We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five-to-ten-year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins (a non-GAAP measure).

We use criteria such as cultural alignment, volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry to evaluate the strategic position of potential acquisition candidates.

Our financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital.

financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital.

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

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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.

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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, 2022.

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).

Our plan is to remain focused on integrating our recently acquired businesses and prioritizing our capital allocation for debt repayments, the payment of dividends and debt obligations and internal growth capital expenditures, which we expect to fund using cash on hand and borrowings under our Credit Facility, along with general corporate purposes, as allowed under our Credit Facility.

We believe that our existing and anticipated cash resources, including, as needed, additional borrowings or other financings that we may be able to obtain, will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months, as well as our long-term financial obligations.

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.

We began 2023 with $1.2 million in cash and ended the first quarter with $1.3 million in cash.

At March 31, 2023, we had borrowings of $213.6 million outstanding on our Credit Facility compared to $190.7 million at December 31, 2022.

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

Nine months ended September 30,

Three months ended March 31,

Cash at beginning of the year $ 1,148 $ 1,170

Net cash provided by operating activities 15,801 25,869

Acquisitions of businesses and real estate (3,285) (8,876)

Acquisitions of businesses and real property (2,575) (44,000)

Proceeds from divestitures and sale of other assets 1,026 1,275

Proceeds from insurance reimbursements 2,946 2,209

Proceeds from insurance claims 676 421

Capital expenditures (6,883) (4,982)

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Net borrowings on our Credit Facility, acquisition debt and finance lease obligations 18,700 22,773

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

Net proceeds from employee equity plans 374 428

Dividends paid on common stock (1,725) (1,661)

Purchase of treasury stock (25,655) —

Other financing costs (461) —

Net cash used in financing activities (58,284) (27,673)

Net cash provided by (used in) financing activities (8,306) 21,540

Cash at end of the period $ 887 $ 1,293

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.

For the three months ended March 31, 2023, cash provided by operating activities was $25.9 million compared to $15.8 million for the three months ended March 31, 2022.

The increase of $10.1 million is primarily due to a $7.0 million withdrawal of realized capital gains and earnings from our preneed cemetery trust investments, as well as favorable working capital changes in accrued liabilities.

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.

Our investing activities, resulted in a net cash outflow of $47.3 million for the three months ended March 31, 2023 compared to $7.8 million for the three months ended March 31, 2022, an increase of $39.5 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.

During the three months ended March 31, 2023, we acquired a business consisting of three funeral homes, two cemeteries and one cremation focused business for $44.0 million.

In addition, we sold one funeral home and two cemeteries for $0.8 million.

During the three months ended March 31, 2022, we sold two funeral homes for an aggregate of $0.9 million and purchased real property for $2.6 million.

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.

For the three months ended March 31, 2023, capital expenditures (comprised of growth and maintenance spend) totaled $5.0 million compared to $6.9 million for the three months ended March 31, 2022, a decrease of $1.9 million.

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

Nine months ended September 30,

Three months ended March 31,

Cemetery development $ 2,264 $ 2,118

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Total Growth $ 3,271 $ 3,140

(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,

(1) During the three months ended March 31, 2022, we spent $0.4 million for renovations on two businesses that were affected by Hurricane Ida, which occurred during the third quarter of 2021, all of which was reimbursed by our property insurance.

Three months ended March 31,

Facility repairs and improvements $ 1,067 $ 89

Vehicles 1,481 1,770

General equipment and furniture 1,339 909

Vehicles 795 233

Paving roads and parking lots 311 156

Information technology infrastructure improvements — 309

Other 100 146

Total Maintenance $ 3,612 $ 1,842

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.

Our financing activities resulted in a net cash inflow of $21.5 million for the three months ended March 31, 2023 compared to a net cash outflow of $8.3 million for the three months ended March 31, 2022, an increase of $29.8 million.

During the three months ended March 31, 2023, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $22.8 million, offset by $1.7 million in dividends.

During the three months ended March 31, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $18.7 million, offset by $25.7 million for the purchase of treasury stock and $1.7 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,

Three months ended March 31,

Number of Shares Repurchased (1)

1,528,197 695,496

Average Price Paid Per Share $ 53.08 $ —

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.

Cash Dividends

(1) During the three months ended March 31, 2022, 52,242 shares settled in April 2022, which had a cost of $2.8 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 stock.

At March 31, 2023, our share repurchase program had $48.9 million authorized for repurchases.

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

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$ 0.1125 $ 1,661

$ 0.1125 $ 1,730

September 1 st

$ 0.1125 $ 1,653

2022 Per Share Dollar Value

$ 0.1125 $ 1,725

$ 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

The outstanding principal of our Credit Facility, lease obligations and acquisition debt at March 31, 2023 is as follows (in thousands):

March 31, 2023

Credit Facility $ 213,600

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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.

At March 31, 2023, our senior secured revolving credit facility (the “Credit Facility”) was comprised of:

(i) a $250.0 million revolving credit facility, including a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the aggregate in the form of increased revolving commitments or incremental term loans.

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.

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:

At March 31, 2023, we were subject to the following financial covenants under our Credit Facility:

(A) a Total Leverage Ratio not to exceed 6.00 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 were in compliance with all of the covenants contained in our Credit Facility as of March 31, 2023.

At March 31, 2023, we had outstanding borrowings under the Credit Facility of $213.6 million.

We also had one letter of credit for $2.3 million under the Credit Facility.

The letter of credit will expire on November 27, 2023 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.

At March 31, 2023, we had $34.1 million of availability under the Credit Facility.

Outstanding borrowings under our Credit Facility bear interest at a prime rate or a Bloomberg Short-Term Bank Yield Index (“BSBY”) rate, plus an applicable margin based on our leverage ratio.

At March 31, 2023, the prime rate margin was equivalent to 2.375% and the BSBY rate margin was 3.375%.

The weighted average interest rate on our Credit Facility was 2.1% and 7.9% for the three months ended March 31, 2022 and 2023, 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

Three months ended March 31,

Credit Facility interest expense $ 847 $ 3,811

Credit Facility amortization of debt issuance costs 88 138

The interest payments on our remaining borrowings under the Credit Facility will be determined based on the average outstanding balance of our borrowings and the prevailing interest rate during that time.

Lease Obligations

Our lease obligations consist of operating and finance leases.

We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to twenty years.

We lease certain office facilities, certain funeral homes, equipment and vehicles 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

At March 31, 2023, operating and finance lease obligations were $36.3 million, with $5.0 million payable within 12 months.

The components of lease cost are as follows (in thousands):

Three months ended March 31,

Operating lease cost $ 848 $ 875

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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.

At March 31, 2023, acquisition debt obligations were $5.6 million, with $0.7 million payable within 12 months.

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

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

2021 2022 2021 2022

Three months ended March 31,

Acquisition debt imputed interest expense $ 80 $ 71

At September 30, 2022, the principal amount of our 4.25% senior notes due in May 2029 (the “Senior Notes”) was $400.0 million.

At March 31, 2023, 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.

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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.

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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 74 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

The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes for both the three months ended March 31, 2022 and 2023 was 4.42% and 4.30%, respectively.

At March 31, 2023, the fair value of the Senior Notes, which are Level 2 measurements, was $328.2 million.

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

Three months ended March 31,

Senior Notes interest expense $ 4,250 $ 4,250

Senior Notes amortization of debt discount 121 127

Senior Notes amortization of debt premium — — 85 —

Senior Notes amortization of debt issuance costs 34 36

At September 30, 2022, our future interest payments on our outstanding balance were $112.5 million, with $17.0 million payable within 12 months.

At March 31, 2023, our future interest payments on our outstanding balance were $108.3 million, with $17.0 million payable within 12 months.

FINANCIAL HIGHLIGHTS

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

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

2021 2022 2021 2022

Three months ended March 31,

Revenue $ 98,161 $ 95,514

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Net income $ 16,402 $ 8,844

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.”

Revenue for the three months ended March 31, 2023 decreased $2.6 million compared to the three months ended March 31, 2022, as we experienced an 8.1% decrease in funeral contract volume, which was partially offset by a 2.4% increase in the average revenue per funeral contract and a 5.3% increase in the number of preneed interment rights (property) sold, while the average price per interment right sold remained flat.

The contract volume decrease is primarily a result of the significant decline in COVID-19 related deaths in 2023 as compared to 2022, as these deaths now have a minimal impact on the overall death rate.

The increase in interment rights sold is due exclusively to our newly acquired cemetery businesses, not present in the comparative quarter of 2022.

Gross profit for the three months ended March 31, 2023 decreased $3.4 million compared to the three months ended March 31, 2022, due to the decrease in revenue from our funeral home segment, as well as increases in operating expenses in both our funeral home and cemetery segments.

Net income for the three months ended March 31, 2023 decreased $7.6 million compared to the three months ended March 31, 2022, primarily due to the following:

(1) the $3.4 million decrease in gross profit, (2) a $3.0 million increase in interest expense, (3) a $1.6 million increase in general and administrative expenses, (4) a $1.2 million impact from divestitures, disposals and insurance reimbursements, offset by (5) a $1.6 million decrease in income tax expense.

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

Further discussion of General, administrative and other expenses, Interest expense, Income taxes and other components of income and expenses are presented under “– Other Financial Statement Items.”

REPORTING AND NON-GAAP FINANCIAL MEASURES

We also present our financial performance in our “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.

We also present our financial performance in our “Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended March 31, 2023 issued on May 3, 2023, 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.

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)

Loss on extinguishment of debt (3)

Net (gain) loss on divestitures 282 — 179 (575)

Net impact of impairment of goodwill and other 500 — 500 —

Litigation reserve (4)

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)

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.

The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.

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

Three months ended March 31,

Gross profit $ 34,478 $ 31,055

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$ 45,454 $ 41,050

(1) Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs.

(1) Operating profit is defined as Gross profit plus Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs.

Our operations are reported in two business segments:

Funeral Home and Cemetery.

Below is a breakdown of 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

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

Three months ended March 31,

Funeral Home $ 33,735 $ 28,966

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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.”

Further discussion of Operating profit for our funeral home and cemetery segments is presented under “– Results of Operations.”

RESULTS OF OPERATIONS

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

The following is a discussion of our results of operations for the three months ended March 31, 2023 and 2022.

We previously classified our funeral homes and cemeteries as “same store” or “acquired” in our results of operations discussion in our quarterly and annual filings prior to December 31, 2022.

Same store generally referred to funeral homes and cemeteries acquired at least five years before the reporting period being presented, while acquired generally referred to funeral homes and cemeteries acquired within the preceding five years of the reporting period being presented, both of which excluded certain funeral homes and cemeteries that we intended to divest.

In an effort to simplify the discussion of our results of operations, provide meaningful metrics to investors to compare our results to previous periods and provide more insight into the underlying long-term performance trends in our business, we have combined both the same store and acquired categories and now refer to this combination as “operating”.

The term “operating” in the Funeral Home and Cemetery Segment simply refers to all our funeral homes and cemeteries owned and operated in the current reporting period, excluding certain funeral home and cemetery businesses that we have divested or intend to divest in the near future.

The term “divested” when discussed in the Funeral Home Segment, refers to one funeral home we sold in the three months ended March 31, 2023 and two funeral homes we sold in the three months ended March 31, 2022.

The term “divested” when discussed in the Cemetery Segment, refers to two cemeteries we sold during the three months ended March 31, 2023.

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

“Ancillary” in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business.

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Funeral Home Segment

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

Three months ended September 30,

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,

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%

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

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,

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

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

Three months ended March 31,

Operating $ 70,212 $ 66,463

Divested/planned divested 589 108

Ancillary 1,070 1,057

Other 2,484 2,457

Total $ 74,355 $ 70,085

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

Operating $ 31,273 $ 26,628

Divested/planned divested 48 (26)

Ancillary 221 146

Other 2,193 2,218

Total $ 33,735 $ 28,966

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

Nine months ended September 30,

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%

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

Contract volume 13,393 12,384

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Average revenue per contract, including preneed funeral trust earnings $ 5,398 $ 5,531

Burial rate 37.6% 36.2%

Cremation rate 57.1% 59.1%

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.

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.

Funeral home operating revenue decreased $3.7 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022.

The decrease in operating revenue is primarily driven by a 7.5% decrease in contract volume, which was partially offset by a 2.4% increase in the average revenue per contract excluding preneed interest.

volume decrease is primarily a result of the significant decline in COVID-19 related deaths in 2023 as compared to 2022, as these deaths now have a minimal impact on the overall death rate.

The increase in average revenue per contract is 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 operating profit for the three months ended March 31, 2023 decreased $4.6 million when compared to the same period in 2022, primarily due to an increase in operating expenses as a percentage of revenue.

The comparable operating profit margin decreased 440 basis points to 40.1%.

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.

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 expenses as a percentage of revenue increased 4.5% with the largest increase in salary and benefits expenses of 2.2%, facilities and grounds expenses of 1.0%, general and administrative expenses of 0.6%, and other funeral 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 and funeral supplies.

Ancillary 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 March 31, 2023 compared to the three months ended March 31, 2022.

Other revenue and other operating profit, which consists of preneed funeral insurance commissions and preneed funeral trust and insurance remained flat for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

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,

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,

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

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

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.

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,

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

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

Three months ended March 31,

Operating $ 20,475 $ 21,605

Divested/planned divested 73 42

Other 3,258 3,782

Total $ 23,806 $ 25,429

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

Operating $ 8,595 $ 8,393

Divested/planned divested 4 12

Other 3,120 $ 3,679

Total $ 11,719 $ 12,084

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

Nine months ended September 30,

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

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

Preneed revenue as a percentage of operating revenue 59.0% 58.0%

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Average price per interment right sold $ 4,510 $ 4,500

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.

Cemetery operating revenue increased $1.1 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, as we experienced a 5.7% increase in the number of preneed interment rights sold, while the average price per preneed interment right sold remained flat.

The increase in interment rights sold is due exclusively to our newly acquired cemetery businesses, not present in the comparative quarter of 2022.

Cemetery atneed revenue, which represents 42.0% of our total operating revenue, increased $0.8 million for the three months ended March 31, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services.

Cemetery operating profit decreased $0.2 million for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, primarily due to an increase in operating expenses as a percentage of revenue.

The comparable operating profit margin decreased 320 basis points to 38.8%.

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.

Operating expenses as a percent of operating revenue increased 3.1% with the largest increase in merchandise costs of 0.9%, salary and benefits expenses of 0.9% and facilities and grounds expenses of 0.6%.

The increase in operating expenses is partially due to higher costs from inflationary impacts concentrated in our utilities and merchandise costs.

Other revenue, which consists of preneed cemetery trust revenue and preneed cemetery finance charges, increased $0.5 million for the three months ended March 31, 2023, compared to the three months ended March 31, 2022.

The increase is primarily due to an increase in dividends and interest income in our perpetual care trust fund.

Other operating profit increased $0.6 million for the same comparative period, primarily due to the increase in revenue.

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.

Cemetery property amortization totaled $1.2 million for the three months ended March 31, 2023, a decrease of $0.1 million compared to the same period in 2022.

The decrease is due to fewer sales of private mausoleums in the first quarter of 2023, which generally have a higher cost of construction.

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.

Depreciation expense for our field businesses totaled $3.4 million for the three months ended March 31, 2023, an increase of $0.1 million compared to the same period in 2022, primarily due to acquisitions made in latter half 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:

Regional and unallocated funeral and cemetery costs totaled $5.4 million for the three months ended March 31, 2023, a decrease of $0.9 million compared to the same period in 2022, primarily due to the following:

(1) a $0.5 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.

(2) a $0.3 million decrease in incentive award trips and annual managing partner meetings;

and (3) a $0.1 million decrease in other general expenses.

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

General, administrative and other expenses, which includes salaries and benefits, cash and equity incentive compensation for the Houston support office totaled $10.2 million for the three months ended March 31, 2023, an increase of $1.6 million compared to the same period in 2022, primarily due to an increase in salary and benefits expense, along with increased cash and equity incentive compensation, as a result of having a complete senior leadership team at the end of the current period.

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 March 31,

Net loss on divestitures $ 703 $ 82

Net loss on disposals of fixed assets 64 159

Total $ 767 $ 241

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.

During the three months ended March 31, 2023 and 2022, we divested one funeral home and two cemeteries for an aggregate loss of $0.1 million and we divested two funeral homes for a loss of $0.7 million, respectively.

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

Interest expense related to its respective debt arrangement is as follows (in thousands):

Three months ended March 31,

Senior Notes $ 4,406 $ 4,413

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Acquisition debt 80 71

Convertible Notes — — 20 —

Other 2 (1) 7 8

Total $ 5,542 $ 8,539

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.

(Gain) loss on property damage, net of insurance claims.

During the three months ended March 31, 2023, we recorded a $0.3 million loss, net of insurance proceeds, for property damaged by a fire that occurred during first quarter of 2023.

During the three months ended March 31, 2022, we recorded a $1.9 million gain, net of insurance proceeds, for property damaged by Hurricane Ida that occurred during the third quarter of 2021.

During the three months ended March 31, 2023, we recorded a $0.5 million gain on the sale of other real property not used in business operations.

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.

Income tax expense totaled $3.5 million for the three months ended March 31, 2023, a decrease of $1.6 million compared to the same period in 2022, primarily due to lower pre-tax income in the current period.

Our operating tax rate before discrete items was 28.9% and 26.5% for the three months ended March 31, 2023 and 2022, respectively.

OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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.

Our critical accounting policies are more fully described in Part II, Item 8 “Financial Statements and Supplementary Data” in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2022.

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.

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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.

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.

Our business can be affected by seasonal fluctuations in the death rate and may be further affected by epidemics and pandemics, like COVID-19.

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

For example, we experienced fluctuations in the death rate due to COVID-19, with a result of increased deaths during the duration of the pandemic.

Although deaths directly attributable from COVID-19 now have minimal direct impact on the overall death rate, the overall death rate remains higher than the pre-COVID-19 pandemic period.

As a result, we are unable to predict or forecast the duration or variation of this increased death rate with any certainty.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis