What changed in this filing

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Item 2. Management’s Discussion and Analysis

2023-08-07 compared with 2023-05-05 · 209 added, 137 removed, 277 unchanged (56% of the section changed)

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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.

At June 30, 2023, we operated 172 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.

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

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

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

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

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Recent Developments

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.”

Board of Directors - Resignation;

and Review of Potential Strategic Alternatives

On June 15, 2023, Dr.

Achille Messac, a member of our Board of Directors (the “Board”), provided notice of his resignation from the Board, effective on that date.

Messac’s resignation was not a result of any disagreement with the Company on any matter related to its operations, policies or practices.

On June 21, 2023, the Board elected Chad Fargason to serve as a Class II Director until the Company’s 2025 annual meeting of shareholders.

Fargason was appointed to serve on the Audit Committee, along with being appointed Chairman of the Corporate Governance Committee.

On June 29, 2023, the Board announced it had initiated a process to explore potential strategic alternatives, possibly including a sale, merger or other potential strategic or financial transaction, to maximize shareholder value.

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

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 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 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, 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.

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

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.

On June 21, 2023, the Board appointed Carlos R.

Quezada, to serve as Chief Executive Officer (“CEO”), effective on that date, as part of a planned succession of Melvin C.

Payne, founder and former CEO.

Concurrently with the appointment of Mr.

Quezada as CEO, Mr.

Payne stepped down as CEO and the Board approved his appointment as Executive Chairman of the Board, effective on that date.

On June 21, 2023, the Board appointed Steven D.

Metzger, to serve as President, along with remaining in his role as Secretary, effective on that date.

Strategic Partnership Agreement

On May 16, 2023, we received a $6.0 million incentive payment from a vendor for entering into a strategic partnership agreement to market and sell prearranged funeral services in the future.

Inflationary and Macroeconomic Trends

During the second quarter of 2023, we continued to experience modest cost increases and surcharges from our vendors and suppliers on merchandise and goods due to increases in the cost of raw materials, as well as broader inflationary, and global supply chain impacts, along with rising interest rates.

For example, we experienced higher costs related to full-time hourly base rates, utilities, funeral supplies, merchandise costs, insurance, and increased borrowing costs under our Credit Facility.

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.

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Funeral Home Operations

Factors affecting our funeral operating results include, but are not limited to:

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Cemetery Operations

Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an atneed and preneed basis.

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

Factors affecting our cemetery operating results include, but are not limited to:

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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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Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins.

Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high performance culture:

Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E Leadership qualities essential to succeed in a high performance culture:

Energy to get the job done;

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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.

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 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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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 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.

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 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.

We began 2023 with $1.2 million in cash and ended the second quarter with $1.0 million in cash.

At June 30, 2023, we had borrowings of $204.0 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):

Three months ended March 31,

Six months ended June 30,

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

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Net borrowings on our Credit Facility, acquisition debt and finance lease obligations 19,598 13,044

Payment of debt issuance for the Credit Facility and Senior Notes (339) —

Net proceeds from employee equity plans 774 804

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Operating Activities

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.

For the six months ended June 30, 2023, cash provided by operating activities was $39.2 million compared to $30.2 million for the six months ended June 30, 2022.

The increase of $9.0 million is primarily due to an $8.6 million withdrawal of realized capital gains and earnings from our preneed funeral and cemetery trust investments and receiving a $6.0 million incentive payment from a vendor for entering into a strategic partnership agreement to market and sell prearranged funeral services in the future, offset by unfavorable working capital changes in accrued liabilities and accounts payable.

Investing Activities

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.

Our investing activities, resulted in a net cash outflow of $49.9 million for the six months ended June 30, 2023 compared to $10.2 million for the six months ended June 30, 2022, an increase of $39.7 million.

Acquisition and Divestiture Activity

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.

During the six months ended June 30, 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 and real property for $1.2 million.

We also received proceeds of $1.1 million from our property insurance policy for the reimbursement of renovation costs for certain of our funeral businesses damaged by Hurricane Ian that occurred during the third quarter of 2022 and a fire that occurred during the first quarter of 2023.

During the six months ended June 30, 2022, we sold real property for $2.9 million and we sold two funeral homes for an aggregate of $0.9 million and purchased real property for $2.6 million.

Capital Expenditures

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.

For the six months ended June 30, 2023, capital expenditures (comprised of growth and maintenance spend) totaled $9.0 million compared to $13.5 million for the six months ended June 30, 2022, a decrease of $4.5 million.

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

Three months ended March 31,

Six months ended June 30,

Cemetery development $ 3,673 $ 3,505

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Total Growth $ 7,486 $ 5,237

(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

(1) During the six months ended June 30, 2023, we spent $0.5 million for renovations on two businesses that were affected by Hurricane Ian, which occurred during the third quarter of 2022 and $0.3 million for renovations on one business that was damaged by a fire, which occurred during the first quarter of 2023, all of which was reimbursed by our property insurance.

During the six months ended June 30, 2022, we spent $2.1 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.

Six months ended June 30,

General equipment and furniture $ 2,347 $ 2,260

Facility repairs and improvements 1,599 249

Vehicles 1,129 443

Paving roads and parking lots 485 330

Information technology infrastructure improvements — 309

Other 422 441

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Financing Activities

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.

Our financing activities resulted in a net cash inflow of $10.5 million for the six months ended June 30, 2023 compared to a net cash outflow of $20.1 million for the six months ended June 30, 2022, an increase of $30.6 million.

During the six months ended June 30, 2023, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $13.0 million, offset by $3.3 million in dividends.

During the six months ended June 30, 2022, we had net borrowings on our Credit Facility, acquisition debt and finance leases of $19.6 million, offset by $36.7 million for the purchase of treasury stock and $3.5 million in dividends.

Share Repurchase

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

Three months ended March 31,

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

2022 2023 2022 2023

Number of Shares Repurchased 205,496 — 695,496 —

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Dollar Value of Shares Repurchased $ 8,224 $ — $ 34,234 $ —

(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.

At June 30, 2023, our share repurchase program had $48.9 million authorized for repurchases.

Cash Dividend

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 $ 1,679

2022 Per Share Dollar Value

$ 0.1125 $ 1,725

$ 0.1125 $ 1,730

Credit Facility, Lease Obligations and Acquisition Debt

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

March 31, 2023

The outstanding principal of our Credit Facility, lease obligations and acquisition debt at June 30, 2023 is as follows (in thousands):

June 30, 2023

Credit Facility $ 204,000

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Credit Facility

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

At June 30, 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”).

Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (as defined in Note 12) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”).

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

At June 30, 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 March 31, 2023.

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

We were in compliance with all of the covenants contained in our Credit Facility as of June 30, 2023.

At June 30, 2023, we had outstanding borrowings under the Credit Facility of $204.0 million.

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

The letter of credit will expire on November 27, 2023 and is expected to automatically renew annually and secures our obligations under our various self-insured policies.

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.

At June 30, 2023, we had $43.7 million of availability under the Credit Facility.

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

At June 30, 2023, the prime rate margin was equivalent to 2.625% and the BSBY rate margin was 3.625%.

The weighted average interest rate on our Credit Facility was 2.9% and 8.6% for the three months ended June 30, 2022 and 2023, respectively and 2.5% and 8.3% for the six months ended June 30, 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 March 31,

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

2022 2023 2022 2023

Credit Facility interest expense $ 1,314 $ 4,668 $ 2,161 $ 8,479

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We lease certain funeral homes under finance leases with original terms ranging from ten to forty years.

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

At June 30, 2023, operating and finance lease obligations were $35.3 million, with $5.0 million payable within 12 months.

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

Three months ended March 31,

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

2022 2023 2022 2023

Operating lease cost $ 853 $ 917 $ 1,701 $ 1,792

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Original maturities range from nine to twenty years.

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

At June 30, 2023, acquisition debt obligations were $5.5 million, with $0.8 million payable within 12 months.

Original maturities range from nine to twenty years.

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

Three months ended March 31,

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

2022 2023 2022 2023

Acquisition debt imputed interest expense $ 79 $ 71 $ 159 $ 142

At March 31, 2023, the principal amount of our 4.25% senior notes due in May 2029 (the “Senior Notes”) was $400.0 million.

At June 30, 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 debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 71 months of the Senior Notes.

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 effective interest rate on the unamortized debt discount and the

unamortized debt issuance costs for the Senior Notes for both the three and six months ended June 30, 2022 and 2023 was 4.42% and 4.30%, respectively.

At June 30, 2023, the fair value of the Senior Notes, which are Level 2 measurements, was $343.1 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,

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

2022 2023 2022 2023

Senior Notes interest expense $ 4,230 $ 4,250 $ 8,480 $ 8,500

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Senior Notes amortization of debt issuance costs 35 37 69 73

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

At June 30, 2023, our future interest payments on our outstanding balance were $99.9 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 March 31,

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

2022 2023 2022 2023

Revenue $ 90,600 $ 97,678 $ 188,761 $ 193,192

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Net income $ 10,899 $ 8,286 $ 27,301 $ 17,130

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.

Revenue for the three months ended June 30, 2023 increased $7.1 million compared to the three months ended June 30, 2022, as we experienced a 3.9% increase in funeral contract volume, while the average revenue per funeral contract remained flat, and a 20.8% increase in the average price per interment right sold, slightly offset by a 3.4% decrease in the number of preneed interment rights (property) sold.

Gross profit for the three months ended June 30, 2023 increased $3.5 million compared to the three months ended June 30, 2022, primarily due to the increase in revenue from both our funeral home and cemetery segments.

Net income for the three months ended June 30, 2023 decreased $2.6 million compared to the three months ended June 30, 2022, primarily due to the following:

(1) a $3.4 million increase in interest expense;

(2) a $2.6 million impact from divestitures, disposals and insurance reimbursements;

(3) a $1.0 million increase in general and administrative expenses, offset by (4) the $3.5 million increase in gross profit and (5) an $0.8 million decrease in income tax expense.

Revenue for the six months ended June 30, 2023 increased $4.4 million compared to the six months ended June 30, 2022, as we experienced a 1.3% increase in the average revenue per funeral contract, while funeral contract volume decreased 2.8%, and an 11.9% increase in the average price per interment right sold, while the number of preneed interment rights (property) sold remained flat.

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

Gross profit for the six months ended June 30, 2023 increased $0.1 million compared to the six months ended June 30, 2022, due to the increase in revenue from our cemetery segment, offset by increases in operating expenses in both our funeral home and cemetery segments.

Net income for the six months ended June 30, 2023 decreased $10.2 million compared to the six months ended June 30, 2022, primarily due to the following:

(1) a $6.4 million increase in interest expense;

(2) a $3.5 million impact from divestitures, disposals and insurance reimbursements;

(3) a $2.6 million increase in general and administrative expenses, offset by (4) a $2.4 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.”

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REPORTING AND NON-GAAP FINANCIAL MEASURES

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.

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 June 30, 2023 issued on August 2, 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.

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Below is a reconciliation of gross profit (a GAAP financial measure) to operating profit (a non-GAAP financial measure) (in thousands):

Three months ended March 31,

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

2022 2023 2022 2023

Gross profit $ 27,712 $ 31,202 $ 62,190 $ 62,257

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

Three months ended March 31,

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

2022 2023 2022 2023

Funeral Home $ 24,152 $ 23,947 $ 57,887 $ 52,913

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Operating profit margin (1)

42.6% 41.7% 44.5% 42.4%

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

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RESULTS OF OPERATIONS

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

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

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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.

The term “divested” when discussed in the Funeral Home segment, refers to one funeral home we sold in the six months ended June 30, 2023 and two funeral homes we sold in the six months ended June 30, 2022.

The term “divested” when discussed in the Cemetery segment, refers to two cemeteries we sold during the six months ended June 30, 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.

“Ancillary” in the Funeral Home segment represents our flower shop, our monument company, our pet cremation business and our online cremation businesses.

Cemetery property amortization, field depreciation expense and regional and unallocated funeral and cemetery costs, are not included in operating profit, a non-GAAP financial measure.

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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,

Three months ended June 30,

Operating $ 58,108 $ 60,800

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Cremation rate 57.4% 58.4%

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.

Funeral home operating revenue increased $2.7 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022.

The increase in operating revenue is primarily driven by a 4.5% increase in contract volume,

while the average revenue per contract excluding preneed interest remained flat.

The contract volume increase is primarily due to our newly acquired funeral home businesses, which were not present in the comparative quarter of 2022.

Funeral home operating profit for the three months ended June 30, 2023 decreased $0.1 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 190 basis points to 36.0%.

Operating expenses as a percentage of revenue increased 1.9% with the largest increases in salary and benefits expenses of 1.4% and general and administrative 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 and funeral supplies.

Ancillary revenue, which represents revenue from our flower shop, pet cremation and online cremation businesses increased $0.3 million and Ancillary operating profit decreased $0.1 million for the three months ended June 30, 2023 compared to the three months ended June 30, 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 June 30, 2023, compared to the three months ended June 30, 2022.

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

Six months ended June 30,

Operating $ 128,127 $ 127,044

Divested/planned divested 1,339 537

Ancillary 2,050 2,289

Other 4,777 4,720

Total $ 136,293 $ 134,590

Operating profit:

Operating $ 53,183 $ 48,416

Divested/planned divested 151 106

Ancillary 372 219

Other 4,181 4,172

Total $ 57,887 $ 52,913

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

Contract volume 24,271 23,746

Average revenue per contract, excluding preneed funeral trust earnings $ 5,279 $ 5,350

Average revenue per contract, including preneed funeral trust earnings $ 5,438 $ 5,510

Cremation rate 57.2% 58.7%

Funeral home operating revenue decreased $1.1 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The decrease in operating revenue is primarily driven by a 2.2% decrease in contract volume, which was partially offset by a 1.3% 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.

Funeral home operating profit for the six months ended June 30, 2023 decreased $4.8 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 340 basis points to 38.1%.

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%.

Operating expenses as a percentage of revenue increased 3.4% with the largest increases in salary and benefits expenses of 1.9%, facilities and grounds expenses of 0.7%, general and administrative expenses of 0.5% and other funeral costs 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 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.

Ancillary revenue, which represents revenue from our flower shop, pet cremation and online cremation businesses increased $0.2 million and Ancillary operating profit decreased $0.2 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

Other revenue and other operating profit, which consists of preneed funeral insurance commissions and preneed funeral trust and insurance, remained flat for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

Cemetery Segment

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

Three months ended March 31,

Three months ended June 30,

Operating $ 25,104 $ 29,142

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Total $ 28,662 $ 33,173

Operating profit:

Operating profit (loss):

Operating $ 11,136 $ 12,940

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Average price per interment right sold $ 4,341 $ 5,237

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 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.

Cemetery operating revenue increased $4.0 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, as we experienced a 20.6% increase in the average price per preneed interment right sold, slightly offset by a 3.3% decrease in preneed interment rights sold.

Cemetery atneed revenue, which represents 33.0% of our total operating revenue, increased $1.1 million for the three months ended June 30, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services from our newly acquired cemetery businesses, not present in the comparative quarter of 2022.

Cemetery operating profit increased $1.8 million for the three months ended June 30, 2023 compared to the three months ended June 30, 2022, due to the increase in revenue.

The comparable operating profit margin remained flat at 44.4%.

Operating expenses as a percent of operating revenue also remained flat.

Other revenue, which consists of preneed cemetery trust revenue and preneed cemetery finance charges, increased $0.5 million for the three months ended June 30, 2023, compared to the three months ended June 30, 2022.

The increase is primarily due to realized capital gains in the current year compared to the prior year and an increase in income in our perpetual care trust fund.

Other operating profit increased $0.5 million for the same comparative period, primarily due to the increase in revenue.

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

Six months ended June 30,

Operating $ 45,579 $ 50,747

Divested/planned divested 130 42

Other 6,759 7,813

Total $ 52,468 $ 58,602

Operating profit (loss):

Operating $ 19,731 $ 21,333

Divested/planned divested (14) 10

Other 6,485 7,574

Total $ 26,202 $ 28,917

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

Preneed revenue as a percentage of operating revenue 63.0% 63.0%

Preneed revenue (in thousands) $ 28,555 $ 31,833

Atneed revenue (in thousands) $ 17,024 $ 18,914

Number of preneed interment rights sold 5,871 5,890

Average price per interment right sold $ 4,409 $ 4,924

Cemetery operating revenue increased $5.2 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, as we experienced an 11.7% increase in the average price per preneed interment right sold, while the number of preneed interment rights sold remained flat.

Cemetery atneed revenue, which represents 37.0% of our total operating revenue increased $1.9 million for the six months ended June 30, 2023, compared to the same period of the prior year, primarily due to an increase in sales of merchandise and services from our newly acquired cemetery businesses, which were not present in the comparative period of 2022.

Cemetery operating profit increased $1.6 million for the six months ended June 30, 2023 compared to the six months ended June 30, 2022.

The comparable operating profit margin decreased 130 basis point to 42.0%.

Operating expenses as a percent of operating revenue increased 1.2% primarily due to an increase in salary and benefits expenses.

Other revenue, which consists of preneed cemetery trust revenue and preneed cemetery finance charges, increased $1.1 million for the six months ended June 30, 2023, compared to the six months ended June 30, 2022.

The increase is primarily due to an increase in income in our perpetual care trust fund and an increase in finance charges on preneed sales.

Other operating profit increased $1.1 million for the same comparative period, primarily due to the increase in revenue.

Cemetery property amortization.

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.

Cemetery property amortization totaled $1.9 million and $3.1 million for the three and six months ended June 30, 2023, respectively, an increase of $0.2 million and $0.1 million, respectively, compared to the same period in 2022, primarily due to the increase in property sold across our cemetery portfolio.

Field depreciation.

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.

Depreciation expense for our field businesses totaled $3.6 million and $6.9 million for the three and six months ended June 30, 2023, respectively, an increase of $0.3 million and $0.4 million, respectively, compared to the same period in 2022, primarily due to acquisitions made in latter half of 2022 and our March 2023 acquisition.

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 $5.4 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:

Regional and unallocated funeral and cemetery costs totaled $4.1 million for the three months ended June 30, 2023, a decrease of $1.8 million compared to the same period in 2022, primarily due to the following:

(1) a $0.7 million decrease in cash incentives and equity compensation;

(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.

(2) a $0.7 million decrease in incentive award trips and annual managing partner meetings and (3) a $0.4 million decrease in other expenses.

Regional and unallocated funeral and cemetery costs totaled $9.6 million for the six months ended June 30, 2023, a decrease of $2.7 million compared to the same period in 2022, primarily due to the following:

(1) a $1.3 million decrease in cash incentives and equity compensation;

(2) a $1.1 million decrease in incentive award trips and annual managing partner meetings and (3) a $0.3 million decrease in other expenses.

Other Financial Statement Items

General, administrative and other.

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

(1) $1.4 million increase in salary and benefits expense and cash and equity incentive compensation, as a result of having a complete senior leadership team, including current year executive promotions, offset by (2) a $0.4 million decrease in other expenses, including lower online marketing costs and travel costs.

General, administrative and other expenses totaled $20.4 million for the six months ended June 30, 2023, an increase of $2.6 million compared to the same period in 2022, primarily due to the following:

(1) a $3.2 million increase in salary and benefits expense and cash and equity incentive compensation, as a result of having a complete senior leadership team, including current year executive promotions, offset by (2) a $0.6 million decrease in other expenses, including lower online marketing costs and travel costs.

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 June 30, Six months ended June 30,

2022 2023 2022 2023

Net (gain) loss on divestitures $ (1,278) $ — $ (575) $ 82

Impairments related to assets held for sale — 243 — 243

Net loss on disposals of fixed assets 85 22 149 181

Total $ (1,193) $ 265 $ (426) $ 506

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.

During the six months ended June 30, 2023, we sold one funeral home and two cemeteries for a loss of $0.1 million.

We also recognized an impairment of $0.2 million related to property, plant and equipment for assets held for sale.

During the six months ended June 30, 2022, we sold real property and two funeral homes for a net gain of $0.6 million.

Interest expense .

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

Three months ended March 31,

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

2022 2023 2022 2023

Senior Notes $ 4,387 $ 4,414 $ 8,793 $ 8,827

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Acquisition debt 79 71 159 142

Other 1 2 9 2

Total $ 5,988 $ 9,396 $ 11,530 $ 17,935

(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.

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

During the three and six months ended June 30, 2023, we recorded a $0.2 million gain and $36,000 loss, respectively, net of insurance proceeds, primarily for property damaged by a fire that occurred during first quarter of 2023.

During the three and six months ended June 30, 2022, we recorded a $1.4 million gain and $3.3 million gain, net of insurance proceeds, for property damaged by Hurricane Ida that occurred during the third quarter of 2021.

During the three and six months ended June 30, 2023, we recorded a $0.1 million gain and $0.6 million gain, respectively, on the sale of other real property not used in business operations.

Income taxes.

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.

Income tax expense totaled $3.4 million for the three months ended June 30, 2023, a decrease of $0.8 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 28.0% for both the three months ended June 30, 2023 and 2022.

Income tax expense totaled $6.9 million for the six months ended June 30, 2023, a decrease of $2.4 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 28.5% and 27.2% for six months ended June 30, 2023 and 2022, respectively.

OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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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 and may be further affected by epidemics and pandemics, like COVID-19.

Our business can be affected by seasonal fluctuations in the death rate and may be further affected by epidemics and pandemics, like COVID-19, including any new or emerging public health threats.

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.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis