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 70% of our total revenue and Cemetery Operations, which currently accounts for approximately 30% of our total revenue. At March 31, 2025, we operated 160 funeral homes in 25 states and 28 cemeteries in 10 states. 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 Board and Leadership Changes Effective January 2, 2025, John Enwright was appointed to serve as the Company’s Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer). In connection with the appointment of Mr. Enwright as the Company’s Senior Vice President, Chief Financial Officer and Treasurer (Principal Financial Officer), effective January 2, 2025, Kathryn Shanley ceased serving as the Company’s Interim Principal Financial Officer. Ms. Shanley continues to serve as the Company’s Chief Accounting Officer (Principal Accounting Officer). On February 24, 2025, upon the recommendation of the Corporate Governance Committee of the Company, the Board unanimously elected Donald D. Patteson, Jr. to serve as the Company’s Non-Executive Chair of the Board, effective on that date. Prior to his appointment as Chair of the Board, Mr. Patteson served as the Chair of the Audit Committee and as a member of the Compensation and Corporate Governance Committees. Mr. Patteson has been a director of the Company since 2011. He succeeds Chad Fargason, who continues to serve on the Board and as a member of the Audit, Compensation and Corporate Governance Committees. Additionally, on February 24, 2025, upon the recommendation of the Corporate Governance Committee of the Company, the Board elected Dr. Edmondo Robinson as the Chair of the Audit Committee, effective on that date. The election of Dr. Robinson as the Chair of the Audit Committee was as a result of Mr. Patteson being elected the Company’s Non-Executive Chair of the Board. Dr. Robinson joined the Company’s Board in 2024 and has served on each of the Audit, Compensation, and Corporate Governance Committees since 2024. Divestitures During the three months ended March 31, 2025, we sold two funeral homes and three cemeteries for an aggregate of $15.8 million resulting in a gain of $5.9 million. Additionally, we sold real property for $2.9 million resulting in a gain of $2.0 million. Macroeconomic, Inflationary, Borrowing Cost and Volume Trends During the first quarter of 2025, consumer spending on discretionary items saw a mixed performance. Based on various economic indicators, overall consumer spending remained strong, particularly among high-income earners, but it appears there was a shift towards more cautious spending, especially for middle and low-income households. We believe this caution was influenced by factors like rising inflation, additional tariffs, and a more uncertain economic outlook. Broad economic indicators have indicated that consumer confidence in the U.S. economy has been dropping over the past five months and may continue to drop, which could further influence consumer spending and the demand for our products and services. Additionally, the U.S. has adopted new and increased tariffs on countries and specific goods, subject to evolving exemptions, with additional tariff increases proposed but currently on pause. Those policies, along with retaliatory actions by some trading partners and ongoing negotiations around trade policy, have led to increased volatility and unpredictability for global trade. Given the potential of rising tariffs, we evaluated, and continue to evaluate, our current vendor agreements for our major vendors to ensure, to the extent possible, we adequately addressed any associated risks. Two vendors are currently impacted because they source a higher 36 number of imported products from countries which have higher tariff impacts. To mitigate this risk, these vendors have shifted the source of their products to countries that have a lower tariff impact. We also continue to monitor the impacts of inflationary costs to our business. While we are encouraged by the stabilization of inflationary costs that we have continued to experience in the first quarter of 2025 and throughout 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 such conditions have not materially impacted our business to date and we expect these trends to continue in 2025, we will continue to assess these impacts and take the appropriate steps, if necessary, to mitigate any changes in consumer preferences or additional cost increases, if possible. In addition, after giving effect to the Credit Facility Amendment, executed during the third quarter of 2024, we continue to experience lower variable interest rates under our Credit Facility, which resulted in lower borrowing costs in the first quarter of 2025 compared to the same period in the prior year. Further contributing to our lower borrowing costs was the pay down of $17 million on our revolving credit facility during the first quarter of 2025. During the first quarter of 2025, we experienced higher funeral volumes compared to the same period in the prior year, which we believe was related to a delay in the flu season, resulting in continued fluctuations in the death rate. 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. 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. For 2025, 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, 2024. Cash Flows We began 2025 with $1.2 million in cash and ended the year with $4.6 million in cash. At March 31, 2025, we had borrowings of $120.0 million outstanding on our Credit Facility compared to $137.0 million at December 31, 2024. 37 The following table sets forth the elements of cash flow (in thousands): Three months ended March 31, 2025 2024 Cash and cash equivalents at beginning of period $ 1,165 $ 1,523 Net cash provided by operating activities 13,792 19,703 Proceeds from divestitures and sale of other assets 18,660 10,877 Proceeds from insurance claims — 46 Capital expenditures (3,163) (3,551) Net cash provided by investing activities 15,497 7,372 Net payments on our credit facility, acquisition debt and finance lease obligations (17,148) (25,152) Net payments on employee equity plans (6,941) (71) Dividends paid on common stock (1,722) (1,686) Net cash used in financing activities (25,811) (26,909) Cash and cash equivalents at end of period $ 4,643 $ 1,689 Operating Activities For the three months ended March 31, 2025, cash provided by operating activities was $13.8 million compared to $19.7 million for the three months ended March 31, 2024, a decrease of $5.9 million primarily due to unfavorable working capital changes related to accounts payable and accrued liabilities. Investing Activities Our investing activities resulted in a net cash outflow of $15.5 million f or the three months ended March 31, 2025 compared to $7.4 million for the three months ended March 31, 2024, an increase of $8.1 million. Acquisition and Divestiture Activity During the three months ended March 31, 2025, we sold two funeral homes and three cemeteries for an aggregate of $15.8 million. Additionally, we sold real property for $2.9 million. During the three months ended March 31, 2024, we sold six funeral homes and one cemetery for an aggregate of $10.9 million. Capital Expenditures For the three months ended March 31, 2025, our capital expenditures (comprised of growth and maintenance spend) totaled $3.2 million compared to $3.6 million for the year ended March 31, 2024, a decrease of $0.4 million. The following tables present our growth and maintenance capital expenditures (in thousands): Three months ended March 31, Growth 2025 2024 Cemetery development $ 1,602 $ 2,000 Renovations at certain businesses 35 362 Other 116 27 Total Growth $ 1,753 $ 2,389 Three months ended March 31, Maintenance 2025 2024 General equipment and furniture $ 893 $ 623 Facility repairs and improvements 268 302 Vehicles 32 14 Paving roads and parking lots 123 60 Other 94 163 Total Maintenance $ 1,410 $ 1,162 38 Financing Activities Our financing activities resulted in a net cash outflow of $25.8 million for the year ended March 31, 2025, compared to a net cash outflow of $26.9 million for the year ended March 31, 2024, a decrease of $1.1 million. During the three months ended March 31, 2025, we had net payments on our Credit Facility, acquisition debt and finance leases of $17.1 million, net payments on our employee equity plans of $6.9 million, and paid dividends of $1.7 million. During the three months ended March 31, 2024, we had net payments on our Credit Facility, acquisition debt and finance leases of $25.2 million and paid dividends of $1.7 million. Dividends Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2025 Per Share Dollar Value March 1st $ 0.1125 $ 1,722 2024 Per Share Dollar Value March 1st $ 0.1125 $ 1,686 Share Repurchases We did not repurchase any shares during the three months ended March 31, 2025 and 2024. At March 31, 2025, our share repurchase program had $48.9 million authorized for repurchases. Credit Facility, Lease Obligations and Acquisition Debt The outstanding principal of our Credit Facility, lease obligations and acquisition debt at March 31, 2025 is as follows (in thousands): March 31, 2025 Credit Facility $ 120,000 Operating leases 16,275 Finance leases 9,942 Acquisition debt 5,437 Total $ 151,654 Credit Facility At March 31, 2025, our senior secured revolving credit facility (as amended, 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. 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 11) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”). On July 31, 2024, the Company entered into a fourth amendment, (the “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 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. 39 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 liens, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial maintenance covenants. At March 31, 2025, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 5.00 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 at March 31, 2025. At March 31, 2025, we had outstanding borrowings under the Credit Facility of $120.0 million. We also had one letter of credit for $2.2 million under the Credit Facility. The letter of credit will expire on November 25, 2025 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At March 31, 2025, we had $127.8 million of availability under the Credit Facility. At March 31, 2025, 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 March 31, 2025, the prime rate margin was equivalent to 1.50% and the SOFR term margin was 2.50%. The weighted average interest rate on our Credit Facility was 6.9% and 8.9% for the three months ended March 31, 2025 and 2024, respectively. The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands): Three months ended March 31, 2025 2024 Credit Facility interest expense $ 2,499 $ 3,916 Credit Facility amortization of debt issuance costs 88 138 The interest payments on our remaining borrowings under the Credit Facility will be determined based on the average outstanding balance of our borrowings and the prevailing interest rate during that time. Lease Obligations Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes, 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. The components of lease cost are as follows (in thousands): Three months ended March 31, 2025 2024 Operating lease cost $ 993 $ 978 Short-term lease cost 56 18 Variable lease cost (60) 104 Finance lease cost: Depreciation of leased assets $ 147 $ 126 Interest on lease liabilities 188 125 At March 31, 2025, non-cancelable operating and finance lease obligations were $33.2 million with $5.7 million payable within 12 months. 40 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 typically range from nine to twenty years. The imputed interest expense related to our acquisition debt is as follows (in thousands): Three months ended March 31, 2025 2024 Acquisition debt imputed interest expense $ 94 $ 104 At March 31, 2025, acquisition debt obligations were $8.2 million, with $0.9 million payable within 12 months. Senior Notes At March 31, 2025, 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 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 50 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 months ended March 31, 2025 and 2024 were 4.42% and 4.30%, respectively. The fair value of the Senior Notes, which are Level 2 measurements, was $364.4 million at March 31, 2025. The interest expense and amortization of debt discount and debt issuance costs related to our Senior Notes are as follows (in thousands): Three months ended March 31, 2025 2024 Senior Notes interest expense $ 4,250 $ 4,250 Senior Notes amortization of debt discount 138 132 Senior Notes amortization of debt issuance costs 39 38 We have future interest payments on our outstanding balance of $76.5 million, with $17.0 million payable within 12 months. FINANCIAL HIGHLIGHTS Below are our financial highlights (in thousands except for volumes and averages): Three months ended March 31, 2025 2024 Total revenue $ 107,069 $ 103,493 Funeral contracts 12,172 12,091 Average revenue per funeral contract excluding preneed interest $ 5,710 $ 5,580 Preneed interment rights (property) sold 3,236 3,437 Average price per preneed interment right sold $ 5,419 $ 4,849 Gross profit $ 37,842 $ 37,262 Net income $ 20,926 $ 6,973 41 Revenue for the three months ended March 31, 2025 increased $3.6 million compared to the three months ended March 31, 2024. We experienced an 11.8% increase in the average price per interment right sold, offset by a 5.8% decrease in the number of preneed interment rights (property) sold. Additionally, we experienced a 2.3% increase in the average revenue per funeral contract excluding preneed interest and a 0.7% increase in funeral contract volume. 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. The increase in average revenue per funeral contract highlights the successful execution of our enhanced pricing strategy and the increase in funeral contract volume is primarily a result of a delayed flu season, which contributed to higher death rates in the first quarter of 2025 compared to the same period in the prior year. Gross profit for the three months ended March 31, 2025 increased $0.6 million compared to the three months ended March 31, 2024, primarily due to the increase in revenue from our funeral home segment, which was offset by an increase in operating expenses in our cemetery segment. Net income for the three months ended March 31, 2025 increased $14.0 million compared to the three months ended March 31, 2024. We experienced a $9.4 million increase in gain on sale of divestitures and real property, a $4.2 million decrease in general, administrative and other expenses, a $1.4 million decrease in interest expense, and a $0.6 million increase in gross profit; offset by a $1.6 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 March 31, 2025, dated April 30, 2025, and discussed in the corresponding earnings conference call. This 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 adjusted operating profit (a non-GAAP financial measure) (in thousands): Three months ended March 31, 2025 2024 Gross profit $ 37,842 $ 37,262 Cemetery property amortization 1,828 1,756 Field depreciation expense 3,322 3,467 Regional and unallocated funeral and cemetery costs 5,235 3,842 Adjusted operating profit (1) $ 48,227 $ 46,327 (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 March 31, 2025 2024 Funeral Home $ 33,179 $ 30,602 Cemetery 15,048 15,725 Adjusted operating profit $ 48,227 $ 46,327 Adjusted operating profit margin (1) 45.0% 44.8% (1) Adjusted operating profit margin is defined as adjusted operating profit as a percentage of revenue. 42 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 months ended March 31, 2025 and 2024. 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 homes we sold during the three months ended March 31, 2025, and six funeral home we sold during the three months ended March 31, 2024. The term “divested” when discussed in the cemetery segment refers to three cemeteries we sold during the three months ended March 31, 2025, and one cemetery we sold during the three months ended March 31, 2024. 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. 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 March 31, 2025 2024 Revenue: Operating $ 69,090 $ 66,048 Divested 415 1,418 Ancillary 1,032 1,247 Other 4,082 3,118 Total $ 74,619 $ 71,831 Adjusted operating Operating $ 29,540 $ 27,349 Divested 120 277 Ancillary 188 173 Other 3,331 2,803 Total $ 33,179 $ 30,602 The following consolidated operating measures reflect the significant metrics over this comparative period: Contract volume 12,172 12,091 Average revenue per contract, excluding preneed funeral trust earnings $ 5,710 $ 5,580 Average revenue per contract, including preneed funeral trust earnings $ 5,869 $ 5,756 Cremation rate 60% 59% Funeral home operating revenue increased $3.0 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024. The increase in operating revenue is primarily driven by a 2.3% increase in the average revenue per contract excluding preneed interest and a 0.7% increase in contract volume. The increase in average revenue per funeral contract highlights the successful execution of our enhanced pricing strategy and the increase in funeral contract volume is primarily a result of a delayed flu season, which contributed to higher death rates in the first quarter of 2025 compared to the same period in the prior year. 43 Funeral home adjusted operating profit for the three months ended March 31, 2025 increased $2.2 million when compared to the same period in 2024, primarily due to the increase in operating revenue. The comparable operating profit margin increased 140 basis points to 42.8%. Operating expenses as a percentage of revenue decreased 1.3%, with the largest decrease in salaries and benefits expenses of 1.1% and transportation costs of 0.3%, 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 $0.2 million, while ancillary adjusted operating profit remained flat for the three months ended March 31, 2025, compared to the three months ended March 31, 2024. 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 $1.0 million and $0.5 million, respectively, for the three months ended March 31, 2025, compared to the same period in 2024. These increases are primarily due to an increase of $1.1 million in our general agency commission income for the first quarter of 2025 compared to the same period in 2024, which is a result of our continued focus on growth of our preneed funeral sales through our strategic partnership with a national insurance provider. 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 March 31, 2025 2024 Revenue: Operating $ 27,938 $ 26,405 Divested 1,153 1,330 Other 3,359 3,927 Total $ 32,450 $ 31,662 Adjusted operating profit Operating $ 11,365 $ 11,535 Divested 385 382 Other 3,298 3,808 Total $ 15,048 $ 15,725 The following consolidated measures reflect the significant metrics over this comparative period: Preneed revenue as a percentage of operating revenue 67% 65% Preneed revenue (in thousands) $ 19,575 $ 17,993 Atneed revenue (in thousands) $ 9,516 $ 9,742 Number of preneed interment rights sold 3,236 3,437 Average price per interment right sold $ 5,419 $ 4,849 Cemetery operating revenue increased $1.5 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, as we experienced an 11.8% increase in the average price per interment right sold, offset by a 5.8% decrease in the number of preneed interment rights (property) sold. Cemetery atneed revenue, which represents approximately 33.0% of our total operating revenue, decreased $0.2 million for the three months ended March 31, 2025, compared to the same period in 2024, primarily due to a decrease 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 decreased $0.2 million for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to an increase in operating expenses as a percentage of revenue. The comparable operating profit margin decreased 300 basis points to 40.7%. Operating expenses as a percentage of revenue increased 3.0%, with the largest increases in promotional expenses of 2.2%, allowance for credit losses of 0.9%, and salaries 44 and benefits expenses of 0.7%, slightly offset by decreases in merchandise costs of 0.5% and general and administrative expenses of 0.3%. Other revenue and other adjusted operating profit, which consist of preneed cemetery trust revenue and preneed cemetery finance charges, decreased $0.6 million and $0.5 million, respectively, for the three months ended March 31, 2025, compared to the three months ended March 31, 2024, primarily due to a decrease in expected earnings for the current year in our perpetual care trust fund compared to earnings in prior year. Cemetery property amortization. Cemetery property amortization totaled $1.8 million for the three months ended March 31, 2025, an increase of $0.1 million compared to the three months ended March 31, 2024, primarily driven by the increase in property sold across our cemetery portfolio. Field depreciation. Depreciation expense for our field businesses totaled $3.3 million for the three months ended March 31, 2025, a decrease of $0.1 million compared to the three months ended March 31, 2024, primarily driven by our business decision 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 $5.2 million for the three months ended March 31, 2025, an increase of $1.4 million compared to the three months ended March 31, 2024, primarily driven by a $1.4 million increase in leadership and development expenses. 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 $ 12.0 million for the three months ended March 31, 2025, a decrease of $4.2 million compared to the same period in 2024, primarily driven by the following: i) a $4.3 million decrease in salary and benefits expenses and incentive compensation costs, primarily driven by termination expense recorded in the first quarter of 2024 for our former Executive Chairman of the Board pursuant to his Transition Agreement, and ii) a $1.2 million decrease in consulting fees related to the Company's previously concluded review of strategic alternatives. These decreases were offset by an $0.8 million increase in professional fees primarily related to the development of our digital transformation project and a $0.5 million increase in all other expenses. Net (gain) loss on divestitures, disposals and impairment charges. The components of Net (gain) loss on divestitures, disposals and impairment charges are as follows (in thousands): Three months ended March 31, 2025 2024 Impairment of goodwill, intangibles and PPE $ 117 $ — Net (gain) loss on divestitures (5,937) 1,501 Net loss on disposals of fixed assets 50 44 Total $ (5,770) $ 1,545 During the three months ended March 31, 2025, we sold two funeral homes and three cemeteries for an aggregate gain of $5.9 million. We also recognized an impairment of $0.1 million on land held for sale during the three months ended March 31, 2025. During the three months ended March 31, 2024, we sold six funeral homes and one cemetery for a loss of $1.5 million. Interest expense . Interest expense related to its respective debt arrangement is as follows (in thousands): Three months ended March 31, 2025 2024 Senior Notes $ 4,428 $ 4,420 Credit Facility 2,587 4,054 Finance leases 188 125 Acquisition debt 94 104 Other 1 9 Total $ 7,298 $ 8,712 Other, net. During the three months ended March 31, 2025, we recorded a $2.0 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 March 31, 2024. 45 Income taxes. Income tax expense totaled $5.3 million for the three months ended March 31, 2025, an increase of $1.6 million compared to the three months ended March 31, 2024. Our operating tax rate before discrete items was 31.2% and 32.8% for the three months ended March 31, 2025 and 2024, 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, 2024. 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.