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 68% of our total revenue and Cemetery Operations, which currently accounts for approximately 32% of our total revenue. At March 31, 2026, we operated 155 funeral homes in 24 states and 28 cemeteries in 9 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 ATM Offering Program On May 6, 2026, the Company announced it has entered into an Equity Distribution Agreement with Oppenheimer & Co. Inc. and Raymond James & Associates, Inc., serving as sales agents (together, the “Sales Agents”), with respect to its at-the-market offering program under which the Company may offer and sell, from time to time, shares of its common stock having an aggregate offering price of up to $100.0 million through the Sales Agents. Macroeconomic and Inflationary Factors During 2026, consumer discretionary spending has reflected mixed trends, with higher-income consumers appearing more resilient and moderate-income consumers exhibiting more cautious behavior, which could result in an overall reduction in consumer spending and demand for products and services. These trends are also influenced by moderating but still elevated inflation. Although certain indicators suggest that inflation has moderated, we continue to monitor potential impacts due to ongoing geopolitical tensions and evolving tariff and trade policies. These pressures, along with volatility in energy prices, interest rates, and ongoing tariff developments, may result in certain costs remaining elevated and contribute to broader economic uncertainty. 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. To date, these conditions have not materially impacted our business. 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 additional details related to our debt and lease obligations, including our Credit Facility, Acquisition Debt and Senior Notes, refer to Notes 10 to our unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. For 2026, our plan is to remain focused on executing our growth strategy and other strategic objectives. This includes prioritizing our capital allocation for potential strategic growth acquisitions, capital expenditures, debt repayments, the payment of dividends, and other 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 27 anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, potential growth acquisitions, 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, including, for example, through our ATM Program, 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”. Cash Flows We began 2026 with $1.7 million in cash and ended the year with $2.9 million in cash. As of March 31, 2026, we had borrowings of $120.5 million outstanding on our Credit Facility compared to $126.7 million as of December 31, 2025. The following table sets forth the elements of cash flow (in thousands): Three months ended March 31, 2026 2025 Cash and cash equivalents at beginning of period $ 1,688 $ 1,165 Net cash provided by operating activities 14,898 13,792 Capital expenditures (3,896) (3,163) Proceeds from divestitures and sale of other assets 16 18,660 Net cash (used in) provided by investing activities (3,880) 15,497 Net payments on our credit facility, acquisition debt, and finance lease obligations (6,314) (17,148) Net payments on employee equity plans (1,712) (6,941) Dividends paid on common stock (1,772) (1,722) Net cash used in financing activities (9,798) (25,811) Cash and cash equivalents at end of period $ 2,908 $ 4,643 Operating Activities For the three months ended March 31, 2026, cash provided by operating activities was $14.9 million compared to $13.8 million for the three months ended March 31, 2025. Investing Activities Our investing activities resulted in net cash outflows of $3.9 million f or the three months ended March 31, 2026, compared to net cash inflows of $15.5 million for the three months ended March 31, 2025, a decrease of $19.4 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. Capital Expenditures For the three months ended March 31, 2026, our capital expenditures (comprised of growth and maintenance spend) totaled $3.9 million compared to $3.2 million for the year ended March 31, 2025, an increase of $0.7 million. The following tables present our capital expenditures (in thousands): Three months ended March 31, 2026 2025 Growth $ 1,696 $ 1,753 Maintenance 2,200 1,410 Total Capital Expenditures $ 3,896 $ 3,163 28 Financing Activities Our financing activities resulted in a net cash outflow of $9.8 million for the three months ended March 31, 2026, compared to a net cash outflow of $25.8 million for the three months ended March 31, 2025, a decrease of $16.0 million. During the three months ended March 31, 2026, we had net payments on our Credit Facility, acquisition debt, and finance leases of $6.3 million, net payments on our employee equity plans of $1.7 million, and paid dividends of $1.8 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. FINANCIAL HIGHLIGHTS Below are our consolidated financial highlights (in thousands except for volumes and averages): Three months ended March 31, 2026 2025 Inc/(Dec) % Change Total revenue $ 106,120 $ 107,069 $ (949) (0.9) % Funeral contracts 11,218 11,319 (101) (0.9) % Average revenue per funeral contract $ 6,051 $ 5,869 $ 182 3.1 % Preneed insurance contracts sold 2,927 2,711 216 8.0 % Preneed interment rights (property) sold 3,153 3,236 (83) (2.6) % Average price per preneed interment right (property) sold $ 6,017 $ 5,419 $ 598 11.0 % Preneed sales production (M&S and property) $ 23,900 $ 21,731 $ 2,169 10.0 % Gross profit $ 38,640 $ 37,842 $ 798 2.1 % Net income $ 13,492 $ 20,926 $ (7,434) (35.5) % Revenue for the three months ended March 31, 2026 decreased $0.9 million compared to the three months ended March 31, 2025, primarily due to a decrease in divested revenue that was partially offset by growth in acquisition revenue. In our Funeral segment, we experienced a 0.9% decrease in funeral contract volume; partially offset by a 3.1% increase in the average revenue per funeral contract, and an 8.0% increase in preneed insurance contracts sold. In our Cemetery segment, we experienced a 10.0% increase in preneed sales production (M&S and property) and an 11.0% increase in the average price per interment right (property) sold; partially offset by a 2.6% decrease in the number of preneed interment rights (property) sold. Gross profit for the three months ended March 31, 2026 increased $0.8 million compared to the three months ended March 31, 2025, primarily due to effective cost management. Net income for the three months ended March 31, 2026 decreased $7.4 million compared to the three months ended March 31, 2025, primarily due to a prior year net gain on divestitures, impairment charges, and sale of real property of $7.8 million and a $1.0 million increase in general and administrative expenses; partially offset by a $0.8 million increase in gross profit contribution from our businesses, a $0.4 million decrease in interest expense, and a $0.4 million decrease in income tax expenses. 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, 2026, dated May 6, 2026, 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. Additionally, management employs segment gross profit for product pricing evaluation and uses segment adjusted operating profit to assess each segment’s performance by comparing results. 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 GAAP. The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business. 29 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, 2026 2025 Gross profit $ 38,640 $ 37,842 Cemetery property amortization 1,995 1,828 Field depreciation expense 3,408 3,322 Regional and unallocated funeral and cemetery costs 4,391 5,235 Adjusted operating profit (1) $ 48,434 $ 48,227 (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, 2026 2025 Funeral Home $ 31,598 $ 33,179 Cemetery 16,836 15,048 Adjusted operating profit $ 48,434 $ 48,227 Adjusted operating profit margin (1) 45.6% 45.0% (1) Adjusted operating profit margin is defined as adjusted 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 months ended March 31, 2026 and 2025. The term “comparable” in the funeral home and cemetery segments refers to all funeral homes and cemeteries that we owned for the entire period beginning January 1, 2025 and ending March 31, 2026. The term “acquired” refers to the funeral homes and cemeteries acquired as discussed in Note 12 to our unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. The term “divested” refers to the funeral homes and cemeteries sold and/or merged as discussed in Note 11 to our unaudited Condensed Consolidated Financial Statements contained in Part I, Item 1 of this Quarterly Report on Form 10-Q. 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. 30 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, 2026 2025 Inc/(Dec) % Change Revenue: Comparable $ 63,276 $ 66,054 $ (2,778) (4.2) % Acquired 2,726 — 2,726 100.0 % Divested 3 3,451 (3,448) (99.9) % Ancillary 847 1,032 (185) (17.9) % Other 4,862 4,082 780 19.1 % Total $ 71,714 $ 74,619 $ (2,905) (3.9) % Adjusted operating profit Comparable $ 26,220 $ 28,701 $ (2,481) (8.6) % Acquired 823 — 823 100.0 % Divested (10) 959 (969) (101.0) % Ancillary 190 188 2 1.1 % Other 4,375 3,331 1,044 31.3 % Total $ 31,598 $ 33,179 $ (1,581) (4.8) % The following measures reflect significant metrics from comparable operations over the comparative period: Contract volume 10,663 11,319 (656) (5.8) % Average revenue per contract, excluding preneed funeral trust earnings $ 5,934 $ 5,836 $ 98 1.7 % Average revenue per contract, including preneed funeral trust earnings $ 6,099 $ 6,002 $ 263 4.5 % Cremation rate 60.5% 60.1% 0.4% 0.7% Funeral home comparable revenue decreased $2.8 million for the three months ended March 31, 2026, compared to the three months ended March 31, 2025. The decline in comparable revenue is primarily driven by a 5.8% decrease in contract volume. Funeral home comparable adjusted operating profit for the three months ended March 31, 2026 decreased $2.5 million when compared to the same period in 2025, primarily due to the increase in operating expense relative to revenue. The comparable operating profit margin decreased 210 basis points to 41.4%. Operating expenses as a percentage of revenue increased 2.0%, with the largest increases attributable to salaries and benefits expenses, facilities and grounds expenses, and general and administrative expense. Ancillary revenue decreased $0.2 million, while ancillary adjusted operating profit increased $2.0 thousand for the three months ended March 31, 2026, compared to the three months ended March 31, 2025. The decrease in ancillary revenue is primarily driven by a decline in our online cremation business. 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 $0.8 million and $1.0 million, respectively, for the three months ended March 31, 2026, compared to the same period in 2025. This increase is primarily driven by growth of $0.5 million in general agency commission income for the first quarter of 2026 compared to the same period in 2025, reflecting continued growth in preneed funeral sales through our strategic partnership with a national insurance provider. 31 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, 2026 2025 Inc/(Dec) % Change Revenue: Comparable $ 29,574 $ 27,895 $ 1,679 6.0% Acquired 1,235 — 1,235 100.0 % Divested — 1,196 (1,196) (100.0)% Other 3,597 3,359 238 7.1% Total $ 34,406 $ 32,450 $ 1,956 6.0% Adjusted operating profit Comparable $ 12,829 $ 11,390 $ 1,439 12.6% Acquired 492 — 492 100.0 % Divested (1) 360 (361) (100.3)% Other 3,516 3,298 218 6.6% Total $ 16,836 $ 15,048 $ 1,788 11.9% The following measures reflect the significant comparable metrics over this comparative period: Preneed revenue as a percentage of operating revenue 69.2% 67.8% 1.4% 2.1% Preneed revenue (in thousands) $ 20,466 $ 18,920 $ 1,546 8.2% Atneed revenue (in thousands) $ 9,108 $ 8,975 $ 133 1.5% Number of preneed interment rights sold 2,871 3,091 (220) (7.1)% Average price per interment right sold $ 6,346 $ 5,504 $ 842 15.3% Cemetery comparable revenue increased $1.7 million for the three months ended March 31, 2026, compared to the three months ended March 31, 2025, as we experienced a 15.3% increase in the average price per interment right sold; partially offset by a 7.1% decrease in the number of preneed interment rights (property) sold. Cemetery atneed revenue, which represents approximately 30.8% of our total operating revenue, increased $0.1 million for the three months ended March 31, 2026, compared to the same period in 2025, primarily due to a 9.6% increase in the average price per atneed contract. Cemetery comparable adjusted operating profit increased $1.4 million for the three months ended March 31, 2026, compared to the three months ended March 31, 2025, primarily driven by higher property sales and increased deliveries of merchandise and service items both to preneed and atneed customers, while costs remained relatively stable. As a result, comparable operating profit margin increased 260 basis points to 43.4%. Other revenue and other adjusted operating profit increased $0.2 million each, for the three months ended March 31, 2026, compared to the three months ended March 31, 2025, primarily due to prior year activity in our perpetual care trust fund that did not recur in 2026. Cemetery property amortization. Cemetery property amortization totaled $2.0 million for the three months ended March 31, 2026 and 2025, respectively, primarily driven by the increase in property sold across our cemetery portfolio. Field depreciation. Depreciation expense for our field businesses totaled $3.4 million for the three months ended March 31, 2026, an increase of $0.1 million compared to the three months ended March 31, 2025, 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 $4.4 million for the three months ended March 31, 2026, a decrease of $0.8 million compared to the same period in 2025, primarily driven by a decrease in leadership and development expenses. 32 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 $13.1 million for the three months ended March 31, 2026, an increase of $1.0 million compared to the same period in 2025, primarily driven by a $0.5 million increase in salaries and wages, a $0.3 million increase in depreciation and amortization, primarily driven by amortization of costs related to the development of our digital transformation project, and a $0.2 million increase in facilities and grounds, primarily as a result of an increase in property taxes. Net (gain) loss on divestitures and impairment charges. The components of Net (gain) loss on divestitures and impairment charges are as follows (in thousands): Three months ended March 31, 2026 2025 Impairment of goodwill, intangibles, and PPE $ 236 $ 117 Net loss (gain) on divestitures 51 (5,937) Net (gain) loss on disposals of fixed assets (9) 50 Total $ 278 $ (5,770) During the three months ended March 31, 2025, we sold two funeral homes and three cemeteries for a 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. Interest expense . Interest expense related to its respective debt arrangement is as follows (in thousands): Three months ended March 31, 2026 2025 Senior Notes $ 4,437 $ 4,427 Credit Facility 2,074 2,587 Finance leases 223 188 Acquisition debt 150 94 Other — 2 Total $ 6,884 $ 7,298 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, 2026. Income taxes. Income tax expense including discrete items totaled $4.9 million for the three months ended March 31, 2026, a decrease of $0.4 million compared to the three months ended March 31, 2025. The current quarter's lower effective tax rate before discrete items, was partially offset by higher excess tax benefits recognized on the settlement of employee share-based awards in the prior year first quarter. Our effective tax rate before discrete items was 28.1% and 31.2% for the three months ended March 31, 2026 and 2025, respectively, primarily related to a decrease in non-deductible officer compensation. CRITICAL ACCOUNTING ESTIMATES The preparation of our Condensed 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 Condensed 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, 2025. 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. 33 Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. For quantitative and qualitative disclosures about market risk, see Part II, Item 7(a), “Quantitative and Qualitative Disclosures About Market Risk,” in our 2025 Annual Report on Form 10-K. Our exposure to market risk has not changed materially since December 31, 2025.