CARRIAGE SERVICES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW General Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading provider of funeral and cemetery services and merchandise in the United States. We operate in two business segments: 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 September 30, 2023, we operated 171 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 Operations Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include 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. We provide funeral services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis. Our cemetery operations generate revenue primarily through sales of cemetery 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 cemetery services and products on both an atneed and preneed basis. Recent Developments Board of Directors - Resignation and Election On July 5, 2023, the Board of Directors (the “Board”) elected Somer Webb to serve as a Class I Director until the Company’s 2024 annual meeting of shareholders. Ms. Webb was appointed to serve as the Chair of the Compensation Committee and a member of the Audit and Corporate Governance Committees. On July 24, 2023, Barry Fingerhut, a member of the Board, provided notice of his resignation from the Board, effective on that date. Mr. Fingerhut’s resignation was not a result of any disagreement with the Company on any matter related to its operations, policies or practices. On July 25, 2023, our Board elected Julie Sanders to serve as a Class II Director until the Company’s 2025 annual meeting of shareholders. Ms. Sanders was appointed to serve on each of the Audit, Compensation and Corporate Governance Committees. Inflationary and Macroeconomic Trends During the third quarter of 2023, we continued to experience 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 inflationary impacts and 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 due to higher variable interest rates 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. More broadly, the U.S. economy continues to experience higher rates of inflation, which has impacted a wide variety of industries and sectors, with consumers facing rising prices. Such inflation may negatively impact consumer discretionary spending, including the amount that consumers are able to spend on our services, although we have not experienced any material 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 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. During the third quarter of 2023, we experienced lower volumes as compared to prior quarters due to fluctuations in the death rate, although overall financial performance remains at or above prior reporting periods. Although we expect fluctuations in the death rate to continue, we are unable to predict or forecast the duration or variation of the death rate with any certainty. Regardless of these fluctuations in the death rate, we continue to focus on expanding market share, cost management and executing on our strategic operational plans. - 35 - LIQUIDITY AND CAPITAL RESOURCES Overview Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility (defined below). We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets or seek further borrowing capacity from our lenders to obtain additional funding and we may not be able to obtain such funding on terms and conditions that are acceptable to us. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. For additional information regarding known material factors that could cause cash flow or access to and cost of finance sources to differ from our expectations, please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. Our plan remains 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. Cash Flows We began 2023 with $1.2 million in cash and ended the third quarter with $1.7 million in cash. At September 30, 2023, we had borrowings of $187.3 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, 2022 2023 Cash at beginning of the year $ 1,148 $ 1,170 Net cash provided by operating activities 50,046 61,849 Acquisitions of businesses and real property (8,876) (44,000) Proceeds from divestitures and sale of other assets 4,313 2,296 Proceeds from insurance claims 2,209 1,388 Capital expenditures (20,346) (13,069) Net cash used in investing activities (22,700) (53,385) Net borrowings (payments) on our Credit Facility, acquisition debt and finance lease obligations 13,286 (3,891) Payment of debt issuance costs for the Credit Facility and Senior Notes (339) — Net proceeds from employee equity plans 1,151 955 Dividends paid on common stock (5,108) (5,023) Purchase of treasury stock (36,663) — Net cash used in financing activities (27,673) (7,959) Cash at end of the period $ 821 $ 1,675 - 36 - Operating Activities For the nine months ended September 30, 2023, cash provided by operating activities was $61.8 million compared to $50.0 million for the nine months ended September 30, 2022. The increase of $11.8 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 related to a strategic partnership agreement to market and sell prearranged funeral services, partially offset by unfavorable working capital changes in income tax receivables. Investing Activities Our investing activities, resulted in a net cash outflow of $53.4 million for the nine months ended September 30, 2023 compared to $22.7 million for the nine months ended September 30, 2022, an increase of $30.7 million. Acquisition and Divestiture Activity During the nine months ended September 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 two funeral homes and two cemeteries for an aggregate of $1.1 million and real property for $1.2 million. We also received proceeds of $1.4 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 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. In addition, we sold two funeral homes for an aggregate of $0.9 million and real property for $3.3 million. Capital Expenditures For the nine months ended September 30, 2023, capital expenditures (comprised of growth and maintenance spend) totaled $13.1 million compared to $20.3 million for the nine months ended September 30, 2022, a decrease of $7.2 million. The following tables present our growth and maintenance capital expenditures (in thousands): Nine months ended September 30, 2022 2023 Growth Cemetery development $ 5,215 $ 5,128 Renovations at certain businesses (1) 4,974 1,905 Other 447 110 Total Growth $ 10,636 $ 7,143 (1) During the nine months ended September 30, 2023, we spent $0.8 million for renovations to two businesses that were affected by Hurricane Ian, which occurred during the third quarter of 2022 and $0.4 million for renovations to 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 nine months ended September 30, 2022, we spent $2.4 million for renovations to 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. Nine months ended September 30, 2022 2023 Maintenance General equipment and furniture $ 3,744 $ 3,584 Facility repairs and improvements 3,131 1,380 Vehicles 1,770 568 Paving roads and parking lots 1,065 394 Total Maintenance $ 9,710 $ 5,926 Financing Activities Our financing activities resulted in a net cash outflow of $8.0 million for the nine months ended September 30, 2023 compared to a net cash outflow of $27.7 million for the nine months ended September 30, 2022, a decrease of $19.7 million. During the nine months ended September 30, 2023, we had net payments on our Credit Facility, acquisition debt and finance leases of $3.9 million and we paid $5.0 million in dividends. - 37 - 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. Share Repurchase Share repurchase activity is as follows (dollar value in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Number of Shares Repurchased — — 695,496 — Average Price Paid Per Share $ — $ — $ 49.22 $ — Dollar Value of Shares Repurchased $ — $ — $ 34,234 $ — 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 September 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): 2023 Per Share Dollar Value March 1 st $ 0.1125 $ 1,661 June 1 st $ 0.1125 $ 1,679 September 1 st $ 0.1125 $ 1,683 2022 Per Share Dollar Value March 1 st $ 0.1125 $ 1,725 June 1 st $ 0.1125 $ 1,730 September 1 st $ 0.1125 $ 1,653 Credit Facility, Lease Obligations and Acquisition Debt The outstanding principal of our Credit Facility, lease obligations and acquisition debt at September 30, 2023 is as follows (in thousands): September 30, 2023 Credit Facility $ 187,300 Operating leases 18,244 Finance leases 7,438 Acquisition debt 3,924 Total $ 216,906 Credit Facility At September 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 (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, among 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 - 38 - liens, make investments, engage in mergers and acquisitions, pay dividends and make other restricted payments, and certain financial maintenance covenants. At September 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 September 30, 2023. At September 30, 2023, we had outstanding borrowings under the Credit Facility of $187.3 million. We also had one letter of credit for $2.3 million under the Credit Facility, which was increased to $2.6 million on July 7, 2023. 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, 2023, we had $60.1 million of availability under the Credit Facility. 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, 2022 2023 2022 2023 Credit Facility interest expense $ 1,971 $ 4,508 $ 4,132 $ 12,987 Credit Facility amortization of debt issuance costs 109 138 293 414 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 September 30, 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 4.3% and 9.0% for the three months ended September 30, 2022 and 2023, respectively and 3.1% and 8.5% for the nine months ended September 30, 2022 and 2023, respectively. 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. 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, equipment and vehicles under finance leases with original terms ranging from three to forty years. At September 30, 2023, operating and finance lease obligations were $37.0 million, with $5.4 million payable within 12 months. The components of lease cost are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Operating lease cost $ 863 $ 887 $ 2,564 $ 2,638 Short-term lease cost 82 75 260 261 Variable lease cost 37 69 60 183 Finance lease cost: Depreciation of leased assets $ 111 $ 190 $ 328 $ 407 Interest on lease liabilities 110 137 335 345 Total finance lease cost 221 327 663 752 Total lease cost $ 1,203 $ 1,358 $ 3,547 $ 3,834 Acquisition Debt Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from nine to twenty years. At September 30, 2023, acquisition debt obligations were $5.4 million, with $0.8 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, 2022 2023 2022 2023 Acquisition debt imputed interest expense $ 78 $ 70 $ 237 $ 212 - 39 - Senior Notes At September 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. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally by each of the Subsidiary Guarantors. The Senior Notes mature on May 15, 2029, unless earlier redeemed or purchased and bear interest at 4.25% per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021. The Indenture contains restrictive covenants limiting our ability and the ability of our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default. The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 68 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 and nine months ended September 30, 2022 and 2023 was 4.42% and 4.30%, respectively. At September 30, 2023, the fair value of the Senior Notes, which are Level 2 measurements, was $342.6 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 September 30, Nine months ended September 30, 2022 2023 2022 2023 Senior Notes interest expense $ 4,250 $ 4,250 $ 12,730 $ 12,750 Senior Notes amortization of debt discount 125 129 368 384 Senior Notes amortization of debt issuance costs 35 37 104 110 At September 30, 2023, our future interest payments on our outstanding balance were $102.0 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, 2022 2023 2022 2023 Revenue $ 87,497 $ 90,494 $ 276,258 $ 283,686 Funeral contracts 11,109 11,058 35,630 34,904 Average revenue per funeral contract $ 5,516 $ 5,522 $ 5,463 $ 5,514 Preneed interment rights (property) sold 2,455 2,785 8,344 8,680 Average price per preneed interment right sold $ 4,569 $ 5,134 $ 4,449 $ 4,990 Gross profit $ 25,598 $ 27,412 $ 87,788 $ 89,669 Net income $ 5,860 $ 4,645 $ 33,161 $ 21,775 Revenue for the three months ended September 30, 2023 increased $3.0 million compared to the three months ended September 30, 2022, as we experienced a 13.4% increase in the number of preneed interment rights (property) sold and a 12.4% increase in the average price per interment right sold, while the funeral contract volume and the average revenue per funeral contract remained flat. Gross profit for the three months ended September 30, 2023 increased $1.8 million compared to the three months ended September 30, 2022, primarily due to the increase in revenue from our cemetery segment, as well as improved cost management within our funeral segment. Net income for the three months ended September 30, 2023 decreased $1.2 million compared to the three months ended September 30, 2022, primarily due to a $2.6 million increase in interest expense and a $0.9 million increase in general and administrative expenses, offset by the $1.8 million increase in gross profit. - 40 - Revenue for the nine months ended September 30, 2023 increased $7.4 million compared to the nine months ended September 30, 2022, as we experienced a 12.2% increase in the average price per preneed interment right sold, a 4.0% increase in the number of preneed interment rights (property) sold and a 0.9% increase in the average revenue per funeral contract, offset by a 2.0% decrease in the funeral contract volume. The funeral contract volume decrease is primarily a result of the lower impact of COVID-19 related deaths in the first quarter of 2023 as compared to the same period in 2022. Gross profit for the nine months ended September 30, 2023 increased $1.9 million compared to the nine months ended September 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 nine months ended September 30, 2023 decreased $11.4 million compared to the nine months ended September 30, 2022, primarily due to a $9.0 million increase in interest expense and a $3.7 million impact from divestitures, disposals and insurance reimbursements. 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 “Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended September 30, 2023 issued on November 8, 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 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, 2022 2023 2022 2023 Gross profit $ 25,598 $ 27,412 $ 87,788 $ 89,669 Cemetery property amortization 1,278 1,318 4,314 4,411 Field depreciation expense 3,281 3,634 9,831 10,546 Regional and unallocated funeral and cemetery costs 5,096 3,771 17,409 13,339 Operating profit (1) $ 35,253 $ 36,135 $ 119,342 $ 117,965 (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-financial GAAP measure) by segment (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Funeral Home $ 24,173 $ 23,962 $ 82,060 $ 76,875 Cemetery 11,080 12,173 37,282 41,090 Operating profit $ 35,253 $ 36,135 $ 119,342 $ 117,965 Operating profit margin (1) 40.3% 39.9% 43.2% 41.6% (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 under “– Results of Operations.” - 41 - RESULTS OF OPERATIONS The following is a discussion of our results of operations for the three and nine months ended September 30, 2023 and 2022. The term “operating” in the Funeral Home and Cemetery segments refers to all funeral homes and cemeteries that we owned and operated in the current reporting period, excluding certain funeral home and cemetery businesses that we have divested in such period. The term “divested” when discussed in the Funeral Home segment, refers to two funeral home we sold in the nine months ended September 30, 2023 and two funeral homes we sold in the nine months ended September 30, 2022. The term “divested” when discussed in the Cemetery segment, refers to two cemeteries we sold during the nine months ended September 30, 2023. The term “ancillary” in the Funeral Home segment represents our flower shop, monument company, pet cremation business and 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. Adding back these items will result in gross profit, a GAAP financial measure. Funeral Home Segment The following table sets forth certain information regarding our revenue and operating profit for our funeral home operations (in thousands): Three months ended September 30, 2022 2023 Revenue: Operating $ 58,919 $ 59,397 Divested 335 18 Ancillary 1,049 1,156 Other 2,477 2,055 Total $ 62,780 $ 62,626 Operating profit: Operating $ 21,707 $ 22,025 Divested 59 11 Ancillary 188 147 Other 2,219 1,779 Total $ 24,173 $ 23,962 The following operating measures reflect the significant metrics over this comparative period: Contract volume 11,039 11,055 Average revenue per contract, excluding preneed funeral trust earnings $ 5,338 $ 5,373 Average revenue per contract, including preneed funeral trust earnings $ 5,517 $ 5,522 Cremation rate 58.3% 59.5% Funeral home operating revenue increased $0.5 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The increase in operating revenue is primarily driven by our newly acquired funeral home businesses, which were not present in the comparative quarter of 2022, as the funeral contract volume and the average revenue per contract excluding preneed interest remained flat. Funeral home operating profit for the three months ended September 30, 2023 increased $0.3 million when compared to the same period in 2022. The comparable operating profit margin increased 30 basis points to 37.1%. The increase in operating profit is primarily due to the increase in operating revenue, as well as improved cost management across our businesses. Operating expenses as a percentage of revenue remained flat for the comparable period. Ancillary revenue, which represents revenue from our flower shop, monument company, pet cremation business and online cremation businesses, increased $0.1 million, while ancillary operating profit remained flat for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. - 42 - Other revenue and other operating profit, which consists of preneed funeral insurance commissions and preneed funeral trust and insurance, both decreased $0.4 million, for the three months ended September 30, 2023, compared to the same period in 2022. The decreases are primarily due to a decline in realized earnings on preneed funeral trust and insurance contracts that matured to atneed during the period. The following table sets forth certain information regarding our revenue and operating profit for our funeral home operations (in thousands): Nine months ended September 30, 2022 2023 Revenue: Operating $ 187,433 $ 186,779 Divested 1,287 217 Ancillary 3,099 3,445 Other 7,254 6,775 Total $ 199,073 $ 197,216 Operating profit: Operating $ 75,078 $ 70,578 Divested 22 (20) Ancillary 560 366 Other 6,400 5,951 Total $ 82,060 $ 76,875 The following operating measures reflect the significant metrics over this comparative period: Contract volume 35,373 34,852 Average revenue per contract, excluding preneed funeral trust earnings $ 5,299 $ 5,359 Average revenue per contract, including preneed funeral trust earnings $ 5,464 $ 5,516 Cremation rate 57.6% 59.0% Funeral home operating revenue decreased $0.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The decrease in operating revenue is primarily driven by a 1.5% decrease in contract volume, which was not fully offset by a 1.1% increase in the average revenue per contract excluding preneed interest. 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. 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 nine months ended September 30, 2023 decreased $4.5 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 230 basis points to 37.8%. Operating expenses as a percentage of revenue increased 2.3%, with the largest increases in salary and benefits expenses of 1.3%, general and administrative expenses of 0.4%, other funeral costs of 0.3%, and facilities and grounds expenses of 0.2%. 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, monument company, pet cremation business and online cremation businesses, increased $0.3 million, while ancillary operating profit decreased $0.2 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in revenue is primarily due to our Bakersfield, CA business acquired during the first quarter of 2023, as it was not present in the comparative period of 2022. Similarly, the decrease in operating profit is primarily due to this same business, as its operating profit margins were lower compared to our other ancillary businesses, particularly with regard to higher salaries and benefits expenses. Other revenue, which consists of preneed funeral insurance commissions and preneed funeral trust decreased $0.5 million and other operating profit decreased $0.4 million, for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The decreases are primarily due to a decline in realized earnings on preneed funeral trust and insurance contracts that matured to atneed during the period. - 43 - Cemetery Segment The following table sets forth certain information regarding our revenue and operating profit for our cemetery operations (in thousands): Three months ended September 30, 2022 2023 Revenue: Operating $ 21,285 $ 24,577 Divested 60 3 Other 3,372 3,288 Total $ 24,717 $ 27,868 Operating profit (loss): Operating $ 7,869 $ 9,005 Divested (21) 2 Other 3,232 3,166 Total $ 11,080 $ 12,173 The following operating measures reflect the significant metrics over this comparative period: Preneed revenue as a percentage of operating revenue 61.0% 62.0% Preneed revenue (in thousands) $ 12,905 $ 15,166 Atneed revenue (in thousands) $ 8,380 $ 9,411 Number of preneed interment rights sold 2,444 2,785 Average price per interment right sold $ 4,585 $ 5,134 Cemetery operating revenue increased $3.3 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022, as we experienced a 12.0% increase in the average price per preneed interment right sold, and a 14.0% increase in preneed interment rights sold. Cemetery atneed revenue, which represents 38.0% of our total operating revenue, increased $1.0 million for the three months ended September 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 $1.1 million for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The comparable operating profit margin decreased 40 basis points to 36.6%. The increase in operating profit is primarily due to the increase in operating revenue, as well as improved cost management across our businesses. Operating expenses as a percentage of revenue remained flat for the comparable period. Other revenue and other operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, both decreased $0.1 million for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The decreases are primarily due to realized capital gains in the current year compared to the prior year in our merchandise and service fund. - 44 - The following table sets forth certain information regarding our revenue and operating profit for our cemetery operations (in thousands): Nine months ended September 30, 2022 2023 Revenue: Operating $ 66,864 $ 75,324 Divested 190 45 Other 10,131 11,101 Total $ 77,185 $ 86,470 Operating profit (loss): Operating $ 27,600 $ 30,338 Divested (35) 12 Other 9,717 10,740 Total $ 37,282 $ 41,090 The following operating measures reflect the significant metrics over this comparative period: Preneed revenue as a percentage of operating revenue 62.0% 62.0% Preneed revenue (in thousands) $ 41,461 $ 46,999 Atneed revenue (in thousands) $ 25,403 $ 28,325 Number of preneed interment rights sold 8,315 8,675 Average price per interment right sold $ 4,461 $ 4,992 Cemetery operating revenue increased $8.5 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, as we experienced an 11.9% increase in the average price per preneed interment right sold, as well as a 4.3% increase in the number of preneed interment rights sold. Cemetery atneed revenue, which represents 38.0% of our total operating revenue, increased $2.9 million for the nine months ended September 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 $2.7 million for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The increase in operating profit is primarily due to the increase in operating revenue, offset by an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 100 basis point to 40.3%. Operating expenses as a percent of operating revenue increased 1.0% primarily due to an increase in salary and benefits expenses. Other revenue and other operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, both increased $1.0 million for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The increases are primarily due to an increase in income in our perpetual care trust fund and an increase in finance charges on preneed sales. Cemetery property amortization. Cemetery property amortization totaled $1.3 million for both the three months ended September 30, 2023 and 2022. Cemetery property amortization totaled $4.4 million for the nine months ended September 30, 2023, an increase of $0.1 million, 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 $3.6 million and $10.5 million for the three and nine months ended September 30, 2023, respectively, an increase of $0.4 million and $0.7 million, respectively, compared to the same period in 2022, primarily due to the business acquisitions made in the latter half of 2022 and the first quarter of 2023. 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 $3.8 million for the three months ended September 30, 2023, a decrease of $1.3 million compared to the same period in 2022, primarily due to the following: (1) a $1.0 million decrease in cash incentives and equity compensation; (2) a $0.2 million decrease in incentive award trips and annual managing partner meetings and (3) a $0.1 million decrease in other expenses. - 45 - Regional and unallocated funeral and cemetery costs totaled $13.3 million for the nine months ended September 30, 2023, a decrease of $4.1 million compared to the same period in 2022, primarily due to the following: (1) a $2.2 million decrease in cash incentives and equity compensation; (2) a $1.2 million decrease in incentive award trips and annual managing partner meetings; (3) $0.4 million decrease in travel expense 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 $11.3 million for the three months ended September 30, 2023, an increase of $0.9 million compared to the same period in 2022, which is primarily due to a $0.9 million increase in consulting fees related to our review of strategic alternatives. General, administrative and other expenses totaled $31.7 million for the nine months ended September 30, 2023, an increase of $3.6 million compared to the same period in 2022, primarily due to the following: (1) a $3.1 million increase in salary and benefits expense and cash and equity incentive compensation, as a result of changes to our senior leadership team, including current year executive promotions and (2) a $1.0 million increase in consulting fees related to our review of strategic alternatives, offset by (3) a $0.5 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 September 30, Nine months ended September 30, 2022 2023 2022 2023 Impairment of goodwill, intangibles and PPE $ — $ 211 $ — $ 454 Net (gain) loss on divestitures — 24 (575) 106 Net (gain) loss on disposals of fixed assets (7) 188 142 369 Total $ (7) $ 423 $ (433) $ 929 During the nine months ended September 30, 2023, we sold two funeral homes and two cemeteries for a loss of $0.1 million. We also recognized an impairment of $0.2 million as a result of our 2023 qualitative assessment of tradenames and an impairment of $0.2 million related to property, plant and equipment for assets held for sale. During the nine months ended September 30, 2022, we sold real property and two funeral homes for a net gain of $0.7 million, of which $0.1 million was recorded in Other, net related to the sale of assets not used in operating activities. Interest expense . Interest expense related to its respective debt arrangement is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Senior Notes $ 4,410 $ 4,416 $ 13,203 $ 13,244 Credit Facility 2,081 4,647 4,425 13,402 Finance leases 110 137 335 345 Acquisition debt 78 70 237 212 Other (1) 8 8 10 Total $ 6,678 $ 9,278 $ 18,208 $ 27,213 Net gain on property damage, net of insurance claims. The components of Net gain on property damage, net of insurance claims are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 (Gain) on property damaged by Hurricane Ida $ — $ — $ (3,275) $ (28) (Gain) on property damaged by Hurricane Ian — (379) — (379) Loss on property damaged by a fire in Q1 2023 — — — 64 Total $ — $ (379) $ (3,275) $ (343) Other, net. During the nine months ended September 30, 2023, we recorded a $0.6 million gain on the sale of other real property not used in business operations. We did not record any gain or loss activity during the three months ended September 30, 2023. Income taxes. Income tax expense totaled $2.1 million for the three months ended September 30, 2023, a decrease of $0.6 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 30.4% and 30.6% for the three months ended September 30, 2023 and 2022, respectively. - 46 - Income tax expense totaled $9.0 million for the nine months ended September 30, 2023, a decrease of $3.0 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 27.8% for nine months ended September 30, 2023 and 2022, respectively. OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES The preparation of our Consolidated Financial Statements requires us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses. Understanding our accounting policies and the extent to which our management uses judgment, assumptions and estimates in applying these policies is integral to understanding our Consolidated Financial Statements. Our critical accounting policies are more fully described in Part 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. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from period to period. We evaluate our critical accounting estimates and judgments required by our policies on an ongoing basis and update them as appropriate based on changing conditions. SEASONALITY Our business can be affected by seasonal fluctuations in the death rate, with number of deaths generally higher during the winter months due to the higher incidences of death from influenza and pneumonia as compared to other periods of the year. Seasonal fluctuations in the death rate may be further affected by epidemics and pandemics, like COVID-19, including any new or emerging public health threats. These unexpected fluctuations may not only increase death rates during the affected period, but also may subsequently decrease death rates following the affected period as a result of an acceleration of death rates. As a result, we are unable to predict or forecast the duration or variation of the current death rate with any certainty.