CARRIAGE SERVICES INC 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. OVERVIEW General We operate in two business segments: Funeral Home operations, which currently accounts for approximately 65% of our total revenue, and Cemetery operations, which currently accounts for approximately 35% of our total revenue. At September 30, 2024, we operated 162 funeral homes in 26 states and 31 cemeteries in 11 states. We compete with other publicly held, privately held and independent operators of funeral and cemetery companies. 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. COMPANY DEVELOPMENTS Credit Facility On July 31, 2024, the Company entered into a fourth amendment, (the “Credit Facility Amendment”), to our senior secured revolving credit facility (as amended, the “Credit Facility”), with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Facility Amendment provided, among other things, for (i) the extension of the maturity date of the Credit Facility to July 31, 2029, provided that, if the Senior Notes (as defined in the Credit Facility) have a stated maturity date that is prior to July 31, 2029, then the maturity date shall instead be the date that is 91 days prior to the stated maturity date of the Senior Notes; (ii) the establishment of Term Secured Overnight Financing Rate (“SOFR”) as a benchmark rate and the removal of BSBY from the Credit Facility, including conforming revisions to certain defined terms under the Credit Facility; (iii) the conversion of each existing BSBY Rate Loan (as defined in the Credit Facility prior to giving effect to the Credit Facility Amendment) to a Term SOFR Loan (as defined in the Credit Facility); (iv) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (v) the removal of certain mandatory prepayments arising from the issuance of either Equity Interests or Debt (as both are defined by the Credit Facility); and (vi) modifications to the permitted investments covenant, relating to the Company’s ability to make certain acquisitions, subject to the satisfaction of certain conditions therein. Inflationary and Macroeconomic Trends During the third quarter of 2024, we continued to experience a stabilization of inflationary costs from our vendors and suppliers for merchandise and goods, particularly as it relates to utilities, funeral supplies and merchandise costs, with costs remaining flat when compared to the same period during 2023. Also, during the third quarter, after giving effect to the Credit Facility Amendment, we experienced lower variable interest rates under our Credit Facility, which resulted in lower borrowing costs during the quarter compared to the prior year. We expect this trend to continue as we remain focused on paying down our outstanding debt throughout the year. While we are encouraged by the stabilization of inflationary costs that we have experienced thus far in 2024, we are unable to forecast with any certainty whether inflationary costs will continue to moderate in future periods, as the ultimate scope and duration of these impacts remain unknown at this time. More broadly, the U.S. economy continues to experience the impact of several years of 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 year, we will assess these impacts and take the appropriate steps, if necessary, to mitigate any changes in consumer preferences or additional cost increases, if possible. During the third quarter of 2024, we continued to experience lower volumes as compared to prior years 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 - 38 - 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. 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. 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, as needed, subject to its customary terms and conditions. Our plan is to remain focused on executing our strategic objectives and growth strategy. This includes prioritizing our capital allocation for debt repayments, the payment of dividends and debt obligations, internal growth capital expenditures, and general corporate purposes, as allowed under our Credit Facility. We expect to fund these payments using cash on hand and borrowings 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. However, if our capital allocations and 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, 2023. Cash Flows We began 2023 with $1.5 million in cash and ended the third quarter with $1.3 million in cash. At September 30, 2024, we had borrowings of $140.0 million outstanding on our Credit Facility compared to $179.1 million at December 31, 2023. The following table sets forth the elements of cash flow (in thousands): Nine months ended September 30, 2024 2023 Cash at beginning of the year $ 1,523 $ 1,170 Net cash provided by operating activities 42,716 61,849 Acquisitions of businesses — (44,000) Proceeds from divestitures and sale of other assets 12,015 2,296 Proceeds from insurance claims 403 1,388 Capital expenditures (11,710) (13,069) Net cash provided by (used in) investing activities 708 (53,385) Net (payments) borrowings on our Credit Facility, acquisition debt and finance lease obligations (39,564) (3,891) Payment of debt issuance costs for the Credit Facility (782) — Net proceeds from employee equity plans 1,757 955 Dividends paid on common stock (5,098) (5,023) Net cash used in financing activities (43,687) (7,959) Cash at end of the period $ 1,260 $ 1,675 Operating Activities For the nine months ended September 30, 2024, cash provided by operating activities was $42.7 million compared to $61.8 million for the nine months ended September 30, 2023. The decrease of $19.1 million is primarily due to the following non-recurring events, which occurred during the first nine months of 2023: i) an $8.6 million withdrawal of realized capital - 39 - gains and earnings from our preneed funeral and cemetery trust investments; and ii) the receipt of 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. Investing Activities Our investing activities resulted in a net cash inflow of $0.7 million for the nine months ended September 30, 2024, compared to a net cash outflow of $53.4 million for the nine months ended September 30, 2023. The increase of $54.1 million is due to the activity described below. Acquisition and Divestiture Activity During the nine months ended September 30, 2024, we sold six funeral homes and one cemetery for an aggregate of $10.9 million. Additionally, we sold real property for $1.1 million. 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 $1.1 million and real property for $1.2 million. Insurance Proceeds During the nine months ended September 30, 2024, we received proceeds of $0.4 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. During the nine months ended September 30, 2023, we 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. Capital Expenditures For the nine months ended September 30, 2024, our capital expenditures (comprised of growth and maintenance spend) totaled $11.7 million compared to $13.1 million for the nine months ended September 30, 2023, a decrease of $1.4 million. The following tables present our growth and maintenance capital expenditures (in thousands): Nine months ended September 30, 2024 2023 Growth Cemetery development $ 5,288 $ 5,128 Renovations at certain businesses (1) 1,371 1,905 Other 38 110 Total Growth $ 6,697 $ 7,143 (1) During the nine months ended September 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 $0.4 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. Nine months ended September 30, 2024 2023 Maintenance General equipment and furniture $ 2,337 $ 3,584 Facility repairs and improvements 1,696 721 Vehicles 162 568 Paving roads and parking lots 472 394 Other 346 659 Total Maintenance $ 5,013 $ 5,926 Financing Activities Our financing activities resulted in a net cash outflow of $43.7 million for the nine months ended September 30, 2024 compared to a net cash outflow of $8.0 million for the nine months ended September 30, 2023, an increase of $35.7 million. - 40 - During the nine months ended September 30, 2024, we had net payments on our Credit Facility, acquisition debt and finance leases of $39.6 million and we paid $5.1 million in dividends. 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. Share Repurchase We did not repurchase any shares during the nine months ended September 30, 2024 and 2023. At September 30, 2024, our share repurchase program had $48.9 million authorized for repurchases. Cash Dividends Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2024 Per Share Dollar Value March 1 st $ 0.1125 $ 1,686 June 1 st $ 0.1125 $ 1,704 September 1 st $ 0.1125 $ 1,708 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 Credit Facility, Lease Obligations and Acquisition Debt The outstanding principal of our Credit Facility, lease obligations and acquisition debt at September 30, 2024 is as follows (in thousands): September 30, 2024 Credit Facility $ 140,000 Operating leases 17,491 Finance leases 6,703 Acquisition debt 5,938 Total $ 170,132 Credit Facility At September 30, 2024, our 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. On July 31, 2024, the Company entered into a Credit Facility Amendment, to our Credit Facility, with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. The Credit Facility Amendment provided, among other things, for (i) the extension of the maturity date of the Credit Facility to July 31, 2029, provided that, if the Senior Notes (as defined in the Credit Facility) have a stated maturity date that is prior to July 31, 2029, then the maturity date shall instead be the date that is 91 days prior to the stated maturity date of the Senior Notes; (ii) the establishment of Term SOFR as a benchmark rate and the removal of BSBY from the Credit Facility, including conforming revisions to certain defined terms under the Credit Facility; (iii) the conversion of each existing BSBY Rate Loan (as defined in the Credit Facility prior to giving effect to the Credit Facility Amendment) to a Term SOFR Loan (as defined in the Credit Facility); (iv) modifications to the definitions of “Applicable Rate” and “Applicable Fee Rate” to change the applicable rates and pricing levels set forth in each pricing grid; (v) the removal of certain mandatory prepayments arising from the issuance of either Equity Interests or Debt (as both are defined by the Credit Facility); and (vi) modifications to the permitted investments covenant, relating to the Company’s ability to make certain acquisitions, subject to the satisfaction of certain conditions therein. We incurred $0.8 million in transactions costs related to the Credit Facility Amendment, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method. - 41 - 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, and 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 liens, make investments, engage in mergers and acquisitions, pay dividends and make other restricted payments, and certain financial maintenance covenants. At September 30, 2024, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 5.25 to 1.00 and (B) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility at September 30, 2024. At September 30, 2024, we had outstanding borrowings under the Credit Facility of $140.0 million. We also had one letter of credit for $2.6 million under the Credit Facility. The letter of credit will expire on November 25, 2024 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2024, we had $107.4 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, 2024 2023 2024 2023 Credit Facility interest expense $ 3,230 $ 4,508 $ 10,669 $ 12,987 Credit Facility amortization of debt issuance costs 105 138 381 414 At September 30, 2024, our outstanding borrowings under our Credit Facility bore interest at a prime rate or the SOFR rate, plus an applicable margin based on our leverage ratio. At September 30, 2024, the prime rate margin was equivalent to 1.50% and the SOFR term margin was 2.60%. The weighted average interest rate on our Credit Facility was 8.5% and 9.0% for the three months ended September 30, 2024 and 2023, respectively, and 8.7% and 8.5% for the nine months ended September 30, 2024 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, vehicles 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. In addition, we lease certain other funeral homes, vehicles and equipment under finance leases with original terms ranging from three and a half to forty years. At September 30, 2024, operating and finance lease obligations were $35.9 million, with $5.5 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, 2024 2023 2024 2023 Operating lease cost $ 1,007 $ 887 $ 2,984 $ 2,638 Short-term lease cost 63 75 157 261 Variable lease cost 86 69 278 183 Finance lease cost: Depreciation of leased assets $ 126 $ 190 $ 378 $ 407 Interest on lease liabilities 119 137 366 345 Total finance lease cost 245 327 744 752 Total lease cost $ 1,401 $ 1,358 $ 4,163 $ 3,834 - 42 - 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 6.5% to 7.3%. Original maturities range from nine to twenty years. At September 30, 2024, acquisition debt obligations were $8.9 million, with $0.9 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, 2024 2023 2024 2023 Acquisition debt imputed interest expense $ 102 $ 70 $ 309 $ 212 Senior Notes At September 30, 2024, 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 56 months of the Senior Notes. The effective interest rates 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, 2024 and 2023 were 4.42% and 4.30%, respectively. At September 30, 2024, the fair value of the Senior Notes, which are Level 2 measurements, was $371.4 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, 2024 2023 2024 2023 Senior Notes interest expense $ 4,250 $ 4,250 $ 12,750 $ 12,750 Senior Notes amortization of debt discount 136 129 402 384 Senior Notes amortization of debt issuance costs 38 37 114 110 At September 30, 2024, our future interest payments on our outstanding balance were $85.0 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, 2024 2023 2024 2023 Revenue $ 100,687 $ 90,494 $ 306,498 $ 283,686 Funeral contracts 10,713 11,058 33,483 34,904 Average revenue per funeral contract, excluding preneed funeral trust earnings $ 5,540 $ 5,373 $ 5,557 $ 5,357 Preneed interment rights (property) sold 3,511 2,785 11,127 8,680 Average price per preneed interment right sold $ 5,360 $ 5,134 $ 5,408 $ 4,990 Gross profit $ 35,490 $ 27,412 $ 109,745 $ 89,669 Net income $ 9,866 $ 4,645 $ 23,098 $ 21,775 - 43 - Revenue for the three months ended September 30, 2024 increased $10.2 million compared to the three months ended September 30, 2023. We experienced a 26.1% increase in the number of preneed interment rights (property) sold and a 4.4% increase in the average price per interment right sold. Additionally, we experienced a 3.1% decrease in funeral contract volume, which was offset by a 3.1% increase in the average revenue per funeral contract. The increase in cemetery revenue highlights the effectiveness of our preneed cemetery sales growth plan, as we continue to focus on executing our strategic goals. Furthermore, despite the funeral contract volume decline impacted by the COVID-19 related pull forward effect, we continue to increase our average revenue per funeral contract through the successful execution of our enhanced pricing strategy. Gross profit for the three months ended September 30, 2024 increased $8.1 million compared to the three months ended September 30, 2023, primarily due to the increase in revenue from our cemetery segment, as well as increases in gross profit margins from both segments, as we continue to successfully execute on our cost management initiatives. Net income for the three months ended September 30, 2024 increased $5.2 million compared to the three months ended September 30, 2023. We experienced an $8.1 million increase in gross profit and a $1.2 million decrease in interest expense, which was partially offset by a $2.9 million increase in income tax expense and a $0.9 million increase in general, administrative and other expenses. Revenue for the nine months ended September 30, 2024 increased $22.8 million compared to the nine months ended September 30, 2023. We experienced a 28.2% increase in the number of preneed interment rights (property) sold and an 8.4% increase in the average price per interment right sold. Additionally, we experienced a 4.1% decrease in funeral contract volume, which was partially offset by a 3.7% increase in the average revenue per funeral contract. The increase in cemetery revenue highlights the effectiveness of our preneed cemetery sales growth plan, as we continue to focus on executing our strategic goals. Furthermore, despite the funeral contract volume decline impacted by the COVID-19 related pull forward effect, we continue to increase our average revenue per funeral contract through the successful execution of our enhanced pricing strategy. Gross profit for the nine months ended September 30, 2024 increased $20.1 million compared to the nine months ended September 30, 2023, primarily due to the increase in revenue from our cemetery segment, as well as increases in gross profit margins from both segments, as we continue to successfully execute on our cost management initiatives. Net income for the nine months ended September 30, 2024 increased $1.3 million compared to the nine months ended September 30, 2023. We experienced a $20.1 million increase in gross profit and a $2.1 million decrease in interest expense, which was partially offset by a $15.4 million increase in general, administrative and other expenses, primarily composed of one-time costs related to executive severance payments and our agreement to pay our financial advisor in connection with the Company's previously concluded review of strategic alternatives and a $3.9 million increase in income tax expense. Further discussion of revenue and the components of gross profit for our funeral home and cemetery segments is presented under “Results of Operations.” Further discussion of general, administrative and other expenses, interest expense, income taxes and other components of income and expenses are presented under “Other Financial Statement Items.” REPORTING AND NON-GAAP FINANCIAL MEASURES We also present our financial performance in our “Condensed Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the three months ended September 30, 2024 issued on October 30, 2024, 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. - 44 - Below is a reconciliation of gross profit (a GAAP financial measure) to adjusted operating profit (a non-GAAP financial measure) (in thousands): Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Gross profit $ 35,490 $ 27,412 $ 109,745 $ 89,669 Cemetery property amortization 1,957 1,318 6,273 4,411 Field depreciation expense 3,411 3,634 10,283 10,546 Regional and unallocated funeral and cemetery costs 4,085 3,771 12,172 13,339 Adjusted operating profit (1) $ 44,943 $ 36,135 $ 138,473 $ 117,965 (1) Adjusted 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 adjusted operating profit (a non-GAAP financial measure) by segment (in thousands): Three months ended September 30, Nine months ended September 30, 2024 2023 2024 2023 Funeral Home $ 25,097 $ 23,962 $ 81,966 $ 76,875 Cemetery 19,846 12,173 56,507 41,090 Adjusted operating profit $ 44,943 $ 36,135 $ 138,473 $ 117,965 Adjusted operating profit margin (1) 44.6% 39.9% 45.2% 41.6% (1) Adjusted operating profit margin is defined as operating profit as a percentage of revenue. Further discussion of adjusted operating profit for our funeral home and cemetery segments is presented under “Results of Operations.” RESULTS OF OPERATIONS The following is a discussion of our results of operations for the three and nine months ended September 30, 2024 and 2023. 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 six funeral homes we sold and three funeral homes we merged with other businesses we own in existing markets during the nine months ended September 30, 2024, and two funeral homes we sold and one funeral home we merged with another business we own in an existing market during the nine months ended September 30, 2023. The term “divested” when discussed in the cemetery segment refers to one cemetery we sold during the nine months ended September 30, 2024, and 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 business, 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 adjusted operating profit, a non-GAAP financial measure. Adding back these items will result in gross profit, a GAAP financial measure. - 45 - Funeral Home Segment The following table sets forth certain information regarding our revenue and adjusted operating profit for our funeral home operations (in thousands): Three months ended September 30, 2024 2023 Revenue: Operating $ 59,347 $ 58,533 Divested — 882 Ancillary 1,046 1,156 Other 3,309 2,055 Total $ 63,702 $ 62,626 Adjusted operating profit (loss): Operating $ 22,384 $ 21,871 Divested (160) 165 Ancillary 156 147 Other 2,717 1,779 Total $ 25,097 $ 23,962 The following consolidated operating measures reflect the significant metrics over this comparative period: Contract volume 10,713 11,058 Average revenue per contract, excluding preneed funeral trust earnings $ 5,540 $ 5,373 Average revenue per contract, including preneed funeral trust earnings $ 5,689 $ 5,522 Cremation rate 60.7% 59.5% Funeral home operating revenue increased $0.8 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The increase in operating revenue is primarily driven by a 3.1% increase in the average revenue per contract excluding preneed interest, offset by a 3.1% decrease in contract volume. Despite the funeral contract volume decline impacted by the COVID-19 related pull forward effect, we continue to increase our average revenue per funeral contract through the successful execution of our enhanced pricing strategy. Funeral home adjusted operating profit for the three months ended September 30, 2024 increased $0.5 million when compared to the same period in 2023, primarily due to the increase in operating revenue, as well as a decrease in operating expenses as a percentage of revenue. The comparable operating profit margin increased 30 basis points to 37.7%. Operating expenses as a percentage of revenue decreased 0.4%, with the largest decrease in salaries and benefits expenses, while other operating expenses remained relatively flat. This reflects the continued progress we have made successfully executing on our cost management initiatives this quarter. Ancillary revenue, which represents revenue from our flower shop, monument business, pet cremation business and online cremation businesses, decreased $0.1 million, while ancillary adjusted operating profit remained flat for the three months ended September 30, 2024, compared to the three months ended September 30, 2023. The decrease in ancillary revenue is primarily due to a decision to cease the operations of a cremation focused business at our Bakersfield, CA business, which did not contribute materially to adjusted operating profit. Other revenue and other adjusted operating profit, which consists of preneed funeral insurance commissions and earnings from delivered preneed funeral trust and insurance contracts, increased $1.3 million and $0.9 million, respectively, for the three months ended September 30, 2024, compared to the same period in 2023. These increases are primarily due to an increase of $1.3 million in our general agency commission income earned on the sale of preneed insurance policies in the third quarter of 2024. compared to the same period in 2023. This is primarily due to our continued focus on growth of our preneed funeral sales through our strategic partnership with a national insurance provider that began during the second quarter of 2023. - 46 - The following table sets forth certain information regarding our revenue and adjusted operating profit for our funeral home operations (in thousands): Nine months ended September 30, 2024 2023 Revenue: Operating $ 185,150 $ 183,673 Divested 916 3,323 Ancillary 3,375 3,445 Other 9,687 6,775 Total $ 199,128 $ 197,216 Adjusted operating profit (loss): Operating $ 73,277 $ 69,749 Divested (125) 809 Ancillary 522 366 Other 8,292 5,951 Total $ 81,966 $ 76,875 The following consolidated operating measures reflect the significant metrics over this comparative period: Contract volume 33,483 34,904 Average revenue per contract, excluding preneed funeral trust earnings $ 5,557 $ 5,357 Average revenue per contract, including preneed funeral trust earnings $ 5,720 $ 5,514 Cremation rate 59.8% 59.0% Funeral home operating revenue increased $1.5 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The increase in operating revenue is primarily driven by a 3.7% increase in the average revenue per contract excluding preneed interest, which was partially offset by a 4.1% decrease in contract volume. Despite the funeral contract volume decline impacted by the COVID-19 related pull forward effect, we continue to increase our average revenue per funeral contract through the successful execution of our enhanced pricing strategy, which was the primary driver in funeral revenue growth this year. Funeral home adjusted operating profit for the nine months ended September 30, 2024, increased $3.5 million when compared to the same period in 2023, primarily due to the increase in operating revenue, as well as a decrease in operating expenses as a percentage of revenue. The comparable operating profit margin increased 160 basis points to 39.6%. Operating expenses as a percentage of revenue decreased 1.6%, with the largest decreases in salaries and benefits expenses of 0.9%, other funeral costs of 0.2% and promotional expenses of 0.2%, which reflects the continued progress we have made successfully executing on our cost management initiatives this year. Ancillary revenue, which represents revenue from our flower shop, monument business, pet cremation business and online cremation businesses decreased $0.1 million, while ancillary adjusted operating profit increased $0.2 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. The lack of growth in ancillary revenue is primarily due to a decision to cease the operations of a cremation focused business at our Bakersfield, CA business, which did not contribute materially to adjusted operating profit. Other revenue and other adjusted operating profit, which consists of preneed funeral insurance commissions and earnings from delivered preneed funeral trust and insurance contracts, increased $2.9 million and $2.3 million, respectively, for the nine months ended September 30, 2024, compared to the same period in 2023. These increases are primarily due to an increase of $2.9 million in our general agency commission income earned on the sale of preneed insurance policies through the third quarter of 2024, compared to the same period in 2023. This is primarily due to our continued focus on growth of our preneed funeral sales through our strategic partnership with a national insurance provider that began during the second quarter of 2023. - 47 - Cemetery Segment The following table sets forth certain information regarding our revenue and adjusted operating profit for our cemetery operations (in thousands): Three months ended September 30, 2024 2023 Revenue: Operating $ 32,988 $ 24,315 Divested — 265 Other 3,997 3,288 Total $ 36,985 $ 27,868 Adjusted operating profit (loss): Operating $ 15,883 $ 8,980 Divested (3) 27 Other 3,966 3,166 Total $ 19,846 $ 12,173 The following consolidated operating measures reflect the significant metrics over this comparative period: Preneed revenue as a percentage of operating revenue 70.0% 62.0% Preneed revenue (in thousands) $ 23,207 $ 15,168 Atneed revenue (in thousands) $ 9,781 $ 9,412 Number of preneed interment rights sold 3,511 2,785 Average price per interment right sold $ 5,360 $ 5,134 Cemetery operating revenue increased $8.7 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, as we experienced a 26.1% increase in the number of preneed interment rights (property) sold and a 4.4% increase in the average price per interment right sold. Cemetery atneed revenue, which represents approximately 30.0% of our total operating revenue, increased $0.4 million for the three months ended September 30, 2024, compared to the same period in 2023, primarily due to an increase in delivered merchandise and services across our cemetery portfolio. The increase in cemetery revenue highlights the effectiveness of our preneed cemetery sales growth plan, as we continue to focus on executing our strategic objectives. Cemetery adjusted operating profit increased $6.9 million for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to the increase in operating revenue, as well as a decrease in operating expenses as a percentage of revenue. The comparable operating profit margin increased 1,120 basis points to 48.1%. Operating expenses as a percentage of revenue decreased 11.5%, with the largest decreases in salaries and benefits expenses of 4.7%, promotional expense of 2.9%, merchandise costs of 1.4%, allowance for credit losses of 1.2% and general and administrative costs of 0.9%, which reflects the continued progress we have made successfully executing on our cost management initiatives this quarter. Other revenue and other adjusted operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, increased $0.7 million and $0.8 million, respectively, for the three months ended September 30, 2024, compared to the three months ended September 30, 2023, primarily due to market performance in our perpetual care trust fund and an increase in realized gains on preneed merchandise and services that were delivered in the third quarter of 2024 compared to the same period of 2023. - 48 - The following table sets forth certain information regarding our revenue and adjusted operating profit for our cemetery operations (in thousands): Nine months ended September 30, 2024 2023 Revenue: Operating $ 95,339 $ 74,465 Divested 154 904 Other 11,877 11,101 Total $ 107,370 $ 86,470 Adjusted operating profit (loss): Operating $ 44,900 $ 30,163 Divested (35) 187 Other 11,642 10,740 Total $ 56,507 $ 41,090 The following consolidated operating measures reflect the significant metrics over this comparative period: Preneed revenue as a percentage of operating revenue 69.0% 63.0% Preneed revenue (in thousands) $ 66,150 $ 47,016 Atneed revenue (in thousands) $ 29,343 $ 28,353 Number of preneed interment rights sold 11,127 8,680 Average price per interment right sold $ 5,408 $ 4,990 Cemetery operating revenue increased $20.9 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, as we experienced a 28.2% increase in the number of preneed interment rights (property) sold and an 8.4% increase in the average price per interment right sold. Cemetery atneed revenue, which represents approximately 31.0% of our total operating revenue, increased $1.0 million for the nine months ended September 30, 2024, compared to the same period in 2023, primarily due to an increase in delivered merchandise and services across our cemetery portfolio. The increase in cemetery revenue highlights the effectiveness of our preneed cemetery sales growth plan, as we continue to focus on executing our strategic objectives. Cemetery adjusted operating profit increased $14.7 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, primarily due to the increase in operating revenue, as well as a decrease in operating expenses as a percentage of revenue. The comparable operating profit margin increased 660 basis points to 47.1%. Operating expenses as a percentage of revenue decreased 6.7%, with the largest decreases in salaries and benefits expenses of 3.8%, merchandise costs of 0.8%, allowance for credit losses of 0.5% and promotional expense of 0.4%, which reflects the continued progress we have made successfully executing on our cost management initiatives this quarter. Other revenue and other adjusted operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, increased $0.8 million and $0.9 million, respectively, for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023. These increases are primarily due to an increase in market performance in our perpetual care trust fund, an increase in realized gains on preneed merchandise and services that were delivered in the third quarter of 2024, and an increase finance charge revenue related to the increase in cemetery sales during the current year. Cemetery property amortization . Cemetery property amortization totaled $2.0 million and $6.3 million for the three and nine months ended September 30, 2024, respectively, an increase of $0.6 million and $1.9 million compared to the same periods in 2023, primarily driven by the increase in property sold across our cemetery portfolio. Field depreciation. Depreciation expense for our field businesses totaled $3.4 million and $10.3 million for the three and nine months ended September 30, 2024, respectively, a decrease of $0.2 million and $0.3 million compared to the same periods in 2023, primarily driven by our business decision in 2023 to lease vehicles rather than purchase them. 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 $4.1 million for the three months ended September 30, 2024, an increase of $0.3 million compared to the same period in 2023, primarily driven by an increase in leadership and development - 49 - expenses as we focus on the continued education of our teams to ensure the successful implementation of our various initiatives. Regional and unallocated funeral and cemetery costs totaled $12.2 million for the nine months ended September 30, 2024, a decrease of $1.2 million compared to the same period in 2023, primarily driven by a decrease in incentive compensation costs. Other Financial Statement Items General, administrative and other. General, administrative and other expenses, which include salaries and benefits and cash and equity incentive compensation for our Houston support office, totaled $12.2 million for the three months ended September 30, 2024, an increase of $0.9 million compared to the same period in 2023, primarily driven by the following: i) a $1.1 million expected increase in other professional fees primarily related to the development of our digital transformation project; ii) a $0.3 million increase primarily related to consulting fees paid to our former Executive Chairman of the Board pursuant to his Transition Agreement and to our former Chief Financial Officer pursuant to his Separation and Release Agreement, and iii) a $0.4 million net increase in all other expenses. These increases were offset by a $0.9 million decrease in consulting fees related to the Company's previously concluded review of strategic alternatives. General, administrative and other expenses totaled $47.0 million for the nine months ended September 30, 2024, an increase of $15.4 million compared to the same period in 2023, primarily driven by the following: i) a $6.2 million increase in salary and benefits expenses and cash and equity incentive compensation costs, primarily driven by the termination expense of our former Executive Chairman of the Board pursuant to his Transition Agreement and termination expense for our former Chief Financial Officer pursuant to his Separation and Release Agreement; ii) a $5.2 million increase primarily related to our agreement to pay our financial advisor in connection with the Company's previously concluded review of strategic alternatives; iii) a $3.1 million expected increase in other professional fees primarily related to the development of our digital transformation project; iv) a $0.6 million increase related to consulting fees paid to our former Executive Chairman of the Board pursuant to his Transition Agreement and our former Chief Financial Officer pursuant to his Separation and Release Agreement; and v) a $0.3 million net increase in all other expenses. 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 September 30, Nine months ended September 30, 2024 2023 2024 2023 Net (gain) loss on divestitures $ (295) $ 24 $ 1,214 $ 106 Impairment of intangibles and PPE 637 211 637 454 Net loss on disposals of fixed assets 45 188 104 369 Total $ 387 $ 423 $ 1,955 $ 929 During the nine months ended September 30, 2024, we sold six funeral homes and one cemetery for an aggregate loss of $1.2 million. We also recognized an impairment of $0.6 million as a result of our 2024 qualitative assessment of tradenames and an impairment of $40 thousand related to property, plant and equipment for assets held for sale. During the nine months ended September 30, 2023, we sold two funeral homes and two cemeteries for an aggregate 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. 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, 2024 2023 2024 2023 Senior Notes $ 4,424 $ 4,416 $ 13,266 $ 13,244 Credit Facility 3,335 4,647 11,050 13,402 Finance leases 119 137 366 345 Acquisition debt 102 70 309 212 Other 55 8 80 10 Total $ 8,035 $ 9,278 $ 25,071 $ 27,213 Net gain on property damage, net of insurance claims. During the nine months ended September 30, 2024, we recorded a $0.4 million gain, net of insurance proceeds, for damages from Hurricane Ian, which occurred during the third quarter of 2022. We did not record any gain or loss activity during the three months ended September 30, 2024. - 50 - During the three and nine months ended September 30, 2023, we recorded a $0.4 million and $0.3 million gain, respectively, net of insurance proceeds, for damages from Hurricane Ian, which occurred during the third quarter of 2022. 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 $5.0 million for the three months ended September 30, 2024, an increase of $2.9 million compared to the same period in 2023, primarily driven by an increase in tax expense on discrete items related to equity. Our operating tax rate before discrete items was 33.2% and 30.4% for the three months ended September 30, 2024 and 2023, respectively. Income tax expense totaled $12.9 million for the nine months ended September 30, 2024, an increase of $3.9 million compared to the same period in 2023, primarily driven by an increase in tax expense on discrete items related to equity. Our operating tax rate before discrete items was 33.2% and 28.9% for the nine months ended September 30, 2024 and 2023, respectively. CRITICAL ACCOUNTING 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, 2023. 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 (also referred to as a “pull forward effect”). As a result, we are unable to predict or forecast the duration or variation of the current death rate with any certainty.