CARRIAGE SERVICES INC
10-Ks and 10-Qs
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Table of Contents
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
| þ | Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 |
| For The Fiscal Year Ended December 31, 2010 |
| o | Transition Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934 |
Commission File Number: 1-11961
CARRIAGE SERVICES, INC.
(Exact name of
registrant as specified in its charter)
| Delaware | 76-0423828 | |
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | |
| 3040 Post Oak Blvd., Suite 300, Houston, Texas | 77056 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant’s telephone number, including area code:
(713) 332-8400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
| Common Stock, $.01 Par Value | New York Stock Exchange | |
| (Title Of Class) | (Name of Exchange on which registered) |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act of 1933.
Yes
o
No
þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or
15(d) of the Securities Exchange Act of 1934. Yes
o
No
þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for
such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
þ
No
o
Indicate by check mark whether the registrant has submitted electronically and posted on its
corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes
o
No
o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is
not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K.
o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a
non-accelerated filer, or a smaller reporting company. See definitions of “large accelerator
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
(Check one):
(Check one):
| Large accelerated filer o | Accelerated filer þ | Non-Accelerated filer o | Smaller Reporting Company o | |||
| (Do not check if a smaller reporting company) |
Indicate by check mark whether the registrant is a shell company as defined by Rule 12b-2 of the
Securities Exchange Act of 1934.
Yes o No þ
Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the
registrant as of June 30, 2010 was approximately $70.0 million based on the closing price of $4.66
per share on the New York Stock Exchange.
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of
March 4, 2011 was 18,139,859.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the definitive proxy statement to be delivered in connection with the 2011 annual
meeting of stockholders are incorporated in Part III of this Report.
TABLE OF CONTENTS
Table of Contents
CAUTIONARY NOTE
This annual report contains forward-looking statements of our management regarding factors
that we believe may affect our performance in the future. Such statements typically are identified
by terms expressing our future expectations or projections of revenues, earnings, earnings per
share, cash flow, market share, capital expenditures, effects of operating and acquisition
initiatives, gross profit margin, debt levels, interest costs, tax benefits and other financial
items. All forward-looking statements, although made in good faith, are based on assumptions about
future events and are therefore inherently uncertain, and actual results may differ materially from
those expected or projected. Important factors that may cause our actual results to differ
materially from expectations or projections include those described under the heading
“Forward-Looking Statements” in Item 7. Forward-looking statements speak only as of the date of
this report, and we undertake no obligation to update or revise such statements to reflect new
circumstances or unanticipated events as they occur.
GENERAL
We are a leading provider of death care services and merchandise in the United States. We
operate two types of businesses: funeral homes, which currently account for approximately 75% of
our total revenue, and cemeteries, which currently account for approximately 25% of our total
revenue. As of December 31, 2010, we operated 147 funeral homes in 25 states and 33 cemeteries in
12 states. We primarily serve suburban and rural markets, where we primarily compete with smaller,
independent operators, and believe we are a market leader (first or second) in most of our markets.
We provide funeral and cemetery services and products on both an “at-need” (time of death) and
“preneed” (planned prior to death) basis.
Our operations are reported in two business segments:
| • | Funeral Home Operations. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Given the high fixed cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability: |
| • | demographic trends in terms of population growth and average age, which impact death rates and number of deaths; | ||
| • | our ability to establish and maintain market share positions supported by strong local heritage and relationships; | ||
| • | our ability to effectively respond to increasing cremation trends by packaging complimentary service and merchandise; | ||
| • | our ability to control salary and merchandise costs; and | ||
| • | our ability to exercise pricing leverage related to our at-need business to increase average revenues per contract. |
| • | Cemetery Operations. Cemeteries are primarily a sales business providing interment rights (grave sites and mausoleums) and related merchandise, such as markers and memorials. Our cemetery operating results are impacted by the size and success of our sales organization, as evidenced by the statistic that approximately 52% of our cemetery revenues during the year ended December 31, 2010 was generated from preneed sales of interment rights and related merchandise and services. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend money on discretionary items) may impact the amount of such cemetery revenues. The current environment of high unemployment and low consumer confidence represents a formidable challenge to the cemetery sales staff. Cemetery revenues generated from at-need service and merchandise sales generally are subject to many of the same key profitability factors as our funeral home business. Approximately 14% of our cemetery revenues during the year ended December 31, 2010 was attributable to investment earnings on trust funds and finance charges on installment contracts. Changes in the capital markets and interest rates affect this component of our cemetery revenues. |
Our business strategy is based on strong, local leadership and entrepreneurial principles that
we believe drive market share, revenue growth, and profitability in our local markets. On January
1, 2004, we introduced our Standards Operating Model, a more decentralized and entrepreneurial
operating model for our funeral homes. On January 1, 2006, we implemented a similar model to our
cemetery business. These are models based on standards designed to grow market share and increase
profitability developed from our best operations, along with an incentive compensation plan to
reward business managers for successfully meeting or exceeding the standards. To date, our
Standards Operating Model has driven significant changes in our organization, leadership and
operating practices. We use the Standards Operating Model to measure the sustainable revenue
growth and earning power of our portfolio of death care businesses. The Standards Operating Model
emphasizes growing market share and improving long-term profitability by employing leadership and
entrepreneurial principles that fit the nature of our local, personal service, high value business.
Leadership qualities are evaluated using the 4E’s — Energy, Energize Others, Edge and Execution.
This model also requires our local and corporate leaders to focus on the drivers of success that
create long-term profitability and value for our stockholders. Our Standards Operating Model
emphasizes:
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| • | decentralized management of our local businesses; | ||
| • | financial and operational standards based upon key drivers of success of our best businesses; | ||
| • | variable compensation that rewards our managers as if they were owners; | ||
| • | finding, developing and retaining the best people in our industry; and | ||
| • | information technology designed to support local businesses and corporate management decisions, measure performance of our businesses against our financial and operational standards, and ensure adherence to established internal control procedures. | ||
| Our business objectives include: | |||
| • | growing market share, creating new heritage, producing consistent, modest revenue growth and sustainable increasing earnings and cash flow; | ||
| • | continuing to improve our operating and financial performance by executing our Standards Operating Model; | ||
| • | upgrading the leadership in our businesses, as necessary; and searching for well-qualified personnel that we feel will lead and excel within our Standards Operating Model; and | ||
| • | executing our Strategic Acquisition Model, a disciplined program that will guide our acquisition strategies, to increase the sustainable earning power profile of our portfolio. | ||
HISTORY
Carriage Services, Inc. (“Carriage” or the “Company”) was incorporated in the State of
Delaware in December of 1993. During the 1990’s, Carriage grew dramatically through acquisitions
of funeral homes and cemeteries. A significant amount of debt was incurred in financing these
acquisitions. Our business strategy during the four years ended December 31, 2004 focused on
increasing operating cash flow and improving our financial condition by reducing debt to lower our
interest expense and improve our credit profile. During that same period we initiated a process to
identify underperforming businesses and, where appropriate, sold those businesses to reduce our
debt. We sold 36 funeral homes and 12 cemeteries along with 20 parcels of excess real estate. We
reduced our debt and contingent obligations by approximately $87 million during the period January
1, 2001 through December 31, 2004.
During January 2005, we refinanced our senior debt by issuing $130 million of Senior Notes due
in 2015. The refinancing was the culmination of the effort to reaccess the capital markets and to
extend the maturities of our senior debt to gain the flexibility to reinvest our cash flow in our
core business. We used the net cash proceeds from the offering and our cash flow from operations
to grow the Company through selective acquisitions. From 2005 through 2009 we completed ten
acquisitions. During 2010 we completed six acquisitions and are positioned to acquire more funeral
and cemetery businesses in the future.
During 2008 and 2009, we also used our cash to repurchase $10 million of our common stock when
the price per share was low due to the weak financial markets in the economic crisis. Beginning in
the latter half of 2008 and continuing through the first half of 2009, we completely repositioned
the trust fund investment portfolios to take advantage of what management viewed as pricing
dislocations in the financial and capital markets, which resulted in returns of 47.4% in 2009 and
18.4% in 2010, and a much higher level of recurring interest and dividend income. During 2009, we
also amended and extended the maturity of our revolving bank credit facility to November 2012 in
order to provide financing for future acquisitions, if needed.
DEATH CARE INDUSTRY
Death care companies provide products and services to families in three principal areas: (i)
ceremony and tribute, generally in the form of a funeral or memorial service; (ii) disposition of
remains, either through burial or cremation; and (iii) memorialization, generally through
monuments, markers or inscriptions. The death care industry in the United States is characterized
by the following fundamental attributes (the statistics included in this report are based on public
reports from financial research firms or public websites):
Deaths and Death Rates
Death rates and the number of deaths in the United States have been relatively stable on a
long-term historical basis. The number of deaths in the United States increased at an annual rate
of approximately 1% for the period from 1980 to 2000. Beginning in 2001, the number of deaths has
trended lower very slightly as the general population is living longer and because of low birth
rates in the period from early 1930’s to mid 1940’s during the depression and World War II.
Management understands that the number of deaths declined 0.7% in 2010 compared to 2009. The
recent trend is projected to reverse in coming years due to the aging of the “baby boomer”
generation. Based on data from the National Population Projections released in 2008 by the U.S.
Census Bureau, the number of people age 65 and over is expected to increase by approximately 16%
from 2010 to 2015, and will increase to 14.4% of the population in 2015 from 13% of the population
in 2010.
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Cremation
In recent years, there has been a steady, gradual increase in the number of families in the
United States that have chosen cremation as an alternative to traditional methods of burial.
According to industry studies, cremations represented approximately 39% of the U.S. burial market
in 2010. The proportion of families choosing cremation has increased by approximately 100 basis
points annually. Cremation rates can vary significantly based upon geographic, religious and
cultural traditions. Direct cremation has been offered as a less costly alternative to a
traditional burial. However, cremation is being increasingly accepted as part of a package of
funeral services that includes memorials, merchandise and options for the interment of cremated
remains. Cremations result in lower absolute revenue dollars, but higher gross margins.
Cemeteries are more affected by the increasing cremation trend than funeral homes.
Highly Fragmented Ownership
We understand that there are approximately 20,900 funeral homes and 10,500 cemeteries in the
United States and that the domestic death care industry generates approximately $15 billion of
revenue annually. The largest public operators, in terms of revenue, of both funeral homes and
cemeteries in the United States are Service Corporation International (“SCI”), Stewart Enterprises,
Inc. (Stewart), StoneMor Partners L.P. and Carriage Services, Inc. We believe these four companies
collectively represent approximately 10% of death care revenues in the United States. Independent
businesses represent the remaining amount of industry revenue, accounting for an estimated 80%
share. Within the independent businesses, there are a number of privately-owned consolidators.
SCI acquired what was the second largest public company in the industry at the time, Alderwoods
Group, in the latter half of 2006. In March 2010, SCI acquired Keystone North America, Inc.,
another large public operator. During 2010, we acquired five independent businesses and one
business from Stewart.
Heritage and Tradition
Death care businesses have traditionally been family-owned businesses that have built a local
heritage and tradition through successive generations, providing a foundation for ongoing business
opportunities from established client family relationships and related referrals. Given the
sensitive nature of our business, we believe that relationships fostered at the local level build
trust in the community and are a key driver of market share. While new entrants may enter any
given market, the time and resources required to develop local heritage and tradition serve as
important barriers to entry.
BUSINESS STRATEGY
Key elements of our overall business strategy include the following:
Implement Operating Initiatives.
On January 1, 2004, we introduced our Standards Operating
Model, a more decentralized and entrepreneurial operating model for our funeral homes. On January
1, 2006, we implemented a similar model to our cemetery business. These models are based on
standards designed to grow market share and increase profitability developed from our best
operations, along with an incentive compensation plan to reward business managers for successfully
meeting or exceeding the standards. Our managing partners participate in a variable bonus plan in
which they earn a percentage of their business’ earnings based upon the actual standards achieved.
The model essentially eliminated the use of financial budgets. The operating model and standards,
which we refer to as “Being the Best,” focus on what we believe are the key drivers of a successful
operation, organized around three primary areas — market share, people and operating and financial
metrics. The model and standards are the measures by which we judge the success of each business.
To date, the Standards Operating Model has driven significant changes in our organization,
leadership and operating practices. Most importantly, the Standards Operating Model allowed us to
measure the sustainable revenue growth and earning power of our portfolio of death care businesses,
which then led to the development of our Strategic Acquisition Model during 2006 which guides our
acquisition and disposition strategies. Both models, when executed effectively, should drive
longer term, sustainable increases in market share, revenue, earnings and free cash flow. The
standards are not designed to produce maximum short term earnings because we do not believe such
performance is sustainable without ultimately stressing the business, which often leads to
declining market share, revenues and earnings.
Enhancement of Funeral Services.
A significant trend is an increasing preference of our
client families for cremation. The percentages of funeral services conducted by us for
which cremation was chosen as the manner in which to dispose of remains was 42.1% for the year
ended December 31, 2009 and 44.1% for the year ended December 31, 2010. For the year ended
December 31, 2010, 55.6% of the number of our total cremation services were direct cremations
(where no memorial service or visitation is involved, although merchandise may be sold) and 44.4%
included services. One of our training initiatives throughout the Company focuses on increasing
the percentage of our cremation customers that choose services. All of our funeral homes offer
cremation products and services. While the average revenue for a cremation service is generally
lower than that of a traditional full-service funeral, we have found that these revenues can be
substantially enhanced by our emphasis on offering services and merchandise.
We have also begun using the Internet to create new sales channels and new consumer
relationships through technology referred to as CarriageOne. CarriageOne has brought us to a new
and modern level of serving our client families with video tributes, stationery items and
webcasting. These products are high quality and enable our client families to experience
personalization that helps their grieving and healing process. Through these services, we create a
culture that puts client families and their experiences first with tools that are technically
advanced, informative and easy to use. For the year ended December 31, 2010, approximately $1.5
million, or 2.8% of merchandise revenue, was earned through this channel. We anticipate that our
revenue and profits from this activity will increase along with client family satisfaction and
local brand loyalty.
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Preneed Funeral Sales Program.
We operate under a local, decentralized preneed sales strategy
whereby each business location customizes its preneed program to its local needs. Insurance-funded
contracts allow us to earn commission income to improve our near-term cash flow and offset a
significant amount of the up-front costs associated with preneed sales. Trust funded contracts
typically provide cash that is invested in various securities with the expectation that returns
will exceed the growth factor in the insurance contracts. The cash flow and earnings from
insurance contracts are more stable but are generally lower than traditional trust fund
investments. In markets that depend on preneed sales for market share, we supplement the
arrangements written by funeral directors with sales sourced by sales counselors and third party
sellers.
Preneed Cemetery Sales Program.
A significant portion of our historical cemetery revenues are
represented by sales of cemetery property sold by our counselors on a preneed basis and finance
charges earned on preneed installment contracts. The current economy and the related declines in
consumer confidence and discretionary income have reduced the preneed sales success rate. As a
countermeasure, we have increased the number of sales counselors and initiated incentives for our
customers so that they do not default on their installment obligations to us. In 2010, we were
able to reduce bad debt expense by 14% as compared to 2009.
Renewed Corporate Development Efforts.
We believe that our capital structure positions us to
pursue a strategy of disciplined growth, affording us the flexibility to redeploy our cash and cash
flow toward selective acquisitions that meet our criteria. We expect to continue to improve our
earning power as we invest in businesses that will contribute incremental revenues, earnings and
cash flow. Our Strategic Acquisition Model is a primary driver of our acquisition strategy. We
use strategic ranking criteria to assess acquisition candidates in order to optimize the
sustainable earning power of our death care portfolio.
Ideal acquisition candidates would be those that are demonstrated market leaders, are larger
businesses located in larger and growing markets with high barriers to entry and have field-level
operating margins consistent with our best performing properties. In our quest to find ideal
candidates, we have analyzed and projected key statistics in the death care industry and believe
the following will be true by 2015:
| • | The number of national deaths will begin a long-term rise as the death rate among the baby boomer generation increases, notwithstanding a longer life expectancy. | ||
| • | The aging baby boomers will possess sufficient wealth and the financial flexibility to migrate to attractive retirement and part time second career areas primarily in the Southern and Western states and other select markets. | ||
| • | The general population of the United States will continue to grow and migrate to attractive urban and suburban centers in the Southern and Western states. | ||
| • | Cremation rates will continue to increase and migrate eastward. The accelerating cremation rate will have a significant impact on the revenue base of more traditional death care businesses in the Central and Eastern regions of the United States and a lesser impact on the already high cremation states in the West. |
With the above considerations in mind, our vision over the next ten years is to change the
profile of our business to be heavily weighted in about 10-15 major markets that have an especially
attractive demographic profile and where, over time, we could acquire or build up a group of
operations in each of these markets performing one to three thousand funerals or interments
annually. We believe there are large enough markets for us to increase our presence in existing
markets by acquisition or enter a new market with a substantial acquisition while leveraging our
strong local franchise brands and entrepreneurial leadership. We will use our Standards Operating
Model to evaluate acquisition candidates to ensure they can be readily integrated into our
portfolio.
OUR STRENGTHS
Market Leader in Our Suburban and Rural Markets.
Our operations are located in principally
suburban and rural markets, where we primarily compete with smaller, independent operators. Most
of our suburban markets have populations of 100,000 or more. In over 70% of our funeral home
markets, we believe that we are either first or second in local market share.
Partnership Culture.
Our funeral homes and cemeteries are managed by individuals that we
refer to as Managing Partners, with extensive death care experience, often within their local
markets. Our Managing Partners have responsibility for day-to-day operations but are required to
follow operating and financial standards that are custom designed for each of four groupings using
size of business and cremation rate as specific grouping criteria. This strategy allows each local
business to maintain its unique identity within its local market and to capitalize on its
reputation and heritage while our senior management maintains supervisory controls and provides
support services from our corporate headquarters. We believe our culture is very attractive to
owners of premier independent businesses that fit our profile of suitable acquisition candidates.
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Flexible Capital Structure.
We have no near-term debt maturity issues. We believe that
our capital structure provides us with financial flexibility by allowing us to invest our cash flow
in growth initiatives, such as business acquisitions and inventory. Currently, we have four
primary components in our capital structure:
| • | the $130 million of fixed rate senior notes which have a 2015 maturity; | ||
| • | a $40 million revolving credit facility, of which $0.6 was drawn at December 31, 2010, described under the heading “Liquidity and Capital Resources” in Item 7; | ||
| • | the convertible junior subordinated 7% debenture payable to our affiliate trust, on which we have the ability to defer payments of interest for up to 20 quarters, with a 2029 maturity; and | ||
| • | our common stock. |
Stable Cash Flow.
We have demonstrated the ability to generate strong and stable cash flow.
Prior to 2005, our primary use of cash flow was to repay debt. Free cash flow for 2010 (cash flow
from operations less maintenance capital expenditures) totaled $18.6 million, for which the primary
use was acquisitions. Going forward, we intend to use our cash flow to acquire funeral home and
cemetery businesses and to fund internal growth projects, such as cemetery inventory development.
Our growth strategy is the primary way we expect to increase stockholder value. We will reassess
our capital allocation strategy annually, but at this point we believe that our financial goals
will best be achieved by continuing to improve the operating and financial performance of our
existing portfolio of businesses while selectively investing our net cash flow in growth
opportunities that generate a return on invested capital in excess of our weighted average cost of
capital.
Strong Field-Level Operating Margins.
We believe that our field-level operating margins are
among the highest reported by the public companies in the death care industry and that this
performance is a testament to the success of our business strategies. These strong margins and the
ability to control costs are important advantages in a business such as ours that is characterized
by a high fixed-cost structure. We will continue to seek ways to improve our financial
performance, and we believe that our Standards Operating Model will continue to yield long-term
improvement in our financial results.
Effective Management of Funeral Preneed Sales.
We believe our local, decentralized strategy
allows us to adapt our preneed sales selectively to best address the competitive situation in our
particular markets. In highly competitive markets, we execute a more aggressive preneed sales
program. In less competitive markets where we have a strong market position, we deploy a more
passive preneed sales program. In certain of our markets, we do not deploy a formal preneed
program. This approach allows us to target the investment in preneed sales to markets where we
have the opportunity to reinforce our market share. Since approximately 80% of our revenues are
generated from at-need sales, we retain significant pricing leverage in our funeral business
without having to rely on preneed sales.
Integrated Information Systems.
We have implemented information systems to support local
business decisions and to monitor performance of our businesses compared to financial and
performance standards. All of our funeral homes and cemeteries are connected to our corporate
headquarters, which allows us to monitor and assess critical operating and financial data and
analyze the performance of individual locations on a timely basis. Furthermore, our information
system infrastructure provides senior management with a critical tool for monitoring and adhering
to our established internal controls, which is critical given our decentralized model and the
sensitive nature of our business operations.
Proven Management Team.
Our management team, headed by our founder and Chief Executive
Officer Melvin C. Payne, is characterized by a dynamic culture that focuses on addressing changing
market conditions and emerging trends in the funeral services industry. We believe this culture
has been critical to our recent successful efforts and will provide an important advantage as the
death care industry evolves. We are committed to continue operating an efficient corporate
organization and strengthening our corporate and local business leadership. We believe that our
Being the Best Standards Operating Model will ensure this commitment at all levels of the
organization. Our businesses are organized into three Regions, each headed by a Regional Partner.
This promotes more cooperation and synergy between our funeral and cemetery operations and supports
the goal of market-share and volume growth in our most significant markets.
OPERATIONS
We conduct our funeral and cemetery operations only in the United States. Our operations are
reported in two segments: funeral operations and cemetery operations. Information for each of our
segments is presented below and in our financial statements set forth herein.
Funeral Home Operations
At December 31, 2010, we operated 147 funeral homes in 25 states. Funeral home revenues
currently account for approximately 75% of our total revenues. The funeral home operations are
managed by a team of experienced death care industry professionals and selected region-level
individuals with substantial management experience in our industry. See Note 21 to the
Consolidated Financial Statements for the year ended December 31, 2010 for segment data related to
funeral home operations.
Our funeral homes offer a complete range of services to meet a family’s death care needs,
including consultation, the removal and
preparation of remains, the sale of caskets and related funeral merchandise, the use of
funeral home facilities for visitation and services, and
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transportation services. Most of our
funeral homes have a non-denominational chapel on the premises, which permits family visitation and
services to take place at one location and thereby reduces transportation costs and inconvenience
to the family.
Funeral homes are principally a service business that provides burial and cremation services
and sells related merchandise, such as caskets and urns. Given the high fixed cost structure
associated with funeral home operations, we believe the following are key factors affecting our
profitability:
| • | demographic trends in terms of population growth and average age, which impact death rates and number of deaths; | ||
| • | establishing and maintaining leading market share positions supported by strong local heritage and relationships; | ||
| • | effectively responding to increasing cremation trends by packaging complementary services and merchandise; | ||
| • | controlling salary and merchandise costs; and | ||
| • | exercising pricing leverage related to our at-need business to increase average revenues per contract. |
Cemetery Operations
As of December 31, 2010, we operated 33 cemeteries in 12 states. The cemetery operations are
managed by a team of experienced death care industry and sales professionals. Cemetery revenues
currently account for approximately 25% of our total revenues. See Note 21 to the Consolidated
Financial Statements for the year ended December 31, 2010 for segment data related to cemetery
operations.
Our cemetery products and services include interment services, the rights to interment in
cemetery sites (primarily grave sites, mausoleum crypts and niches) and related cemetery
merchandise, such as memorials and vaults. Cemetery operations generate revenues through sales of
interment rights and memorials, installation fees, fees for interment and cremation services,
finance charges from installment sales contracts and investment income from preneed cemetery
merchandise trusts and perpetual care trusts.
Our cemetery operating results are impacted by the size and success of our sales organization,
evidenced by the statistic that 41% of our cemetery revenues was generated from preneed sales of
interment rights during the year ended December 31, 2010. An additional 11% of our 2010 cemetery
revenues was generated from deliveries of merchandise and services previously sold on preneed
contracts. We believe that changes in the level of consumer confidence (a measure of whether
consumers will spend money on discretionary items) impacts the success rate of preneed sales and is
currently having a significant negative impact on our preneed sales success rate and the industry
as a whole. To combat the lower success rate, we embarked on a program in late 2008 to hire
approximately 100 additional sales counselors. We completed the hiring phase in the first quarter
of 2009. Coming into a more “normal” economy, we have focused more on quality sales counselors
rather than quantity. Cemetery revenues generated from at-need services and merchandise sales
generally are subject to many of the same key profitability factors as in our funeral home
business. Approximately 14% of our cemetery revenue was attributable to investment earnings on
trust funds and finance charges on installment contracts during the year ended December 31, 2010.
Changes in the capital markets and interest rates affect this component of our cemetery revenues.
Preneed Programs
As discussed in the preceding sections, we market funeral and cemetery services and products
on a preneed basis. Preneed funeral or cemetery contracts enable families to establish, in
advance, the type of service to be performed, the products to be used and the cost of such products
and services. Preneed contracts permit families to eliminate issues of making death care plans at
the time of need and allow input from other family members before the death occurs. We guarantee
the price and performance of the preneed contracts to the customer.
Preneed funeral contracts are usually paid on an installment basis. The performance of
preneed funeral contracts is usually secured by placing the funds collected in trust for the
benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will
pay for such services at the time of need. Insurance policies, intended to fund preneed funeral
contracts, cover the original contract price and generally include an element of growth (earnings)
designed to offset future inflationary cost increases. Revenue from preneed funeral contracts,
along with accumulated earnings, is not recognized until the time the funeral service is performed.
The accumulated earnings from the trust investments and insurance policies is intended to offset
the inflation in funeral prices. Additionally, we generally earn a commission from the insurance
company from the sale of insurance-funded policies reflected as
Preneed Insurance Commission
. The
commission income is recognized as revenue when the period of refund expires (generally one year),
which helps us defray the costs we incur to originate the preneed contract (primarily commissions
we pay to our sales counselors).
In addition to preneed funeral contracts, we also offer “preplanned” funeral arrangements
whereby a client determines in advance substantially all of the details of a funeral service
without any financial commitment or other obligation on the part of the client until the actual
time of need. Preplanned funeral arrangements permit a family to avoid issues of making death care
plans at the time of need and enable a funeral home to establish relationships with a client that
may eventually lead to an at-need sale.
Preneed sales of cemetery interment rights are usually financed through interest-bearing
installment sales contracts, generally with terms of up to five years with such earnings reflected
as
Preneed Cemetery Finance Charges
. In substantially all cases, we receive an initial down
payment at the time the contract is signed. The interest rates generally range between 9.5%
and 12%. Occasionally, we have offered zero
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percent interest financing to promote sales for
limited-time offers. Preneed sales of cemetery interment rights are generally recorded as revenue
when 10% of the contract amount related to the interment right has been collected. Merchandise and
services may similarly be sold on an installment basis, but revenue is recorded when delivery has
occurred. Allowances for customer cancellations and refunds are recorded at the date that the
contract is executed and periodically evaluated thereafter based upon historical experience.
We sold 5,615 and 6,485 preneed funeral contracts during the years ended December 31, 2009 and
2010
,
respectively. At December 31, 2010, we had a backlog of 79,842 preneed funeral contracts to
be delivered in the future. Approximately 19% and 20% of the funeral revenues recognized during
the years ended December 31, 2009 and 2010, respectively, originated through preneed contracts.
Cemetery revenues that originated from preneed contracts represented approximately 57% and 52% of
our net cemetery revenues for 2009 and 2010.
As of December 31, 2010, we employed a staff of 203 advance-planning and family service
representatives for the sale of preneed products and services.
TRUST FUNDS AND INSURANCE CONTRACTS
We have established a variety of trusts in connection with funeral home and cemetery
operations as required under applicable state law. Such trusts include (i) preneed funeral trusts;
(ii) preneed cemetery merchandise and service trusts; and (iii) perpetual care trusts. These
trusts are typically administered by independent financial institutions selected by the Company.
Independent financial advisors are also used for investment management and advisory services.
Preneed funeral sales generally require deposits to a trust or purchase of a third-party
insurance product. Trust fund income earned and the receipt and recognition of any insurance
benefits are deferred until the service is performed, while trust fund holdings and deferred
revenue are reflected currently on our balance sheet. In most states, we are not permitted to
withdraw principal or investment income from such trusts until the funeral service is performed.
Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to
offset any administrative and selling expenses. The aggregate balance of our preneed funeral
contracts held in trust, insurance contracts and receivables from customers was approximately
$315.4 million as of December 31, 2010.
We are generally required under applicable state laws to deposit a specified amount (which
varies from state to state, generally 50% to 100% of selling price) into a merchandise and service
trust fund for cemetery merchandise and services preneed sales. The related trust fund income
earned is recognized when the related merchandise and services are delivered. We are generally
permitted to withdraw the trust principal and accrued income when the merchandise is actually
purchased, when the service is provided or when the contract is cancelled. Cemetery merchandise
and service trust fund balances, in the aggregate, totaled approximately $79.7 million as of
December 31, 2010.
In most states, regulations require a portion (generally 10%) of the sale amount of cemetery
property and memorials to be placed in a perpetual care trust. The income from these perpetual
care trusts provides a portion of the funds necessary to maintain cemetery property and memorials
in perpetuity. This trust fund income is recognized, as earned, in cemetery revenues. While we
are entitled to withdraw the income from perpetual care trusts to provide for maintenance of
cemetery property and memorials, we are restricted from withdrawing any of the principal balances
of the trust fund. Perpetual care trust balances totaled approximately $45.7 million at December
31, 2010.
For additional information with respect to our trusts, see Notes 6, 8, and 10 to the
Consolidated Financial Statements for the year ended December 31, 2010.
COMPETITION
The operating environment in the death care industry has been highly competitive. Publicly
traded companies operating in the United States include SCI, Stewart and StoneMor Partners L.P. In
addition, a number of smaller, non-public companies have been active in acquiring and operating
funeral homes and cemeteries.
Our funeral home and cemetery operations face competition in the markets that they serve. Our
primary competition in most of our markets is from local independent operators. We have observed
new start-up competition in certain areas of the country, which in any one market may have impacted
our profitability because of the high fixed cost nature of funeral homes. Market share for funeral
homes and cemeteries is largely a function of reputation and heritage, although competitive
pricing, professional service and attractive, well-maintained and conveniently located facilities
are also important. Because of the importance of reputation and heritage, market share increases
are usually gained over a long period of time. The sale of preneed funeral services and cemetery
property has increasingly been used by many companies as a marketing tool to build market share.
There has been increasing competition from providers specializing in specific services, such
as cremations, who offer minimal service and low-end pricing. We also face competition from
companies that market products and related merchandise over the internet and
non-traditional casket stores in certain markets. These competitors have been successful in
capturing a portion of the low-end market and product sales.
REGULATION
Our operations are subject to regulations, supervision and licensing under numerous federal,
state and local laws, ordinances and
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regulations, including extensive regulations concerning trust funds, preneed sales of funeral
and cemetery products and services and various other aspects of our business. We believe that we
comply in all material respects with the provisions of these laws, ordinances and regulations. We
operate in the United States under the Federal Trade Commission (“FTC”) comprehensive trade
regulation rule for the funeral industry. The rule contains requirements for funeral industry
practices, including extensive price and other affirmative disclosures and imposes mandatory
itemization of funeral goods and services.
We are subject to the requirements of the federal Occupational Safety and Health Act (“OSHA”)
and comparable state statutes. The OSHA hazard communication standard, the United States
Environmental Protection Agency community right-to-know regulations under Title III of the federal
Superfund Amendment and Reauthorization Act and similar state statutes require us to organize
information about hazardous materials used or produced in our operations. Certain of this
information must be provided to employees, state and local governmental authorities and local
citizens.
EMPLOYEES
As of December 31, 2010, we and our subsidiaries employed 1,943 employees, of whom 930 were
full-time and 1,013 part-time. All of our funeral directors and embalmers possess licenses required
by applicable regulatory agencies. We believe that our relationship with our employees is good.
None of our employees are represented by unions.
AVAILABLE INFORMATION
We file annual, quarterly and other reports, and any amendments to those reports, and
information with the United States Securities and Exchange Commission (“SEC”). You may read and
copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE,
Washington, DC 20549. You may obtain additional information about the Public Reference Room by
calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site
http://www.sec.gov
that contains reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC, including us.
Our website address is
www.carriageservices.com
. Available on this website under “Investor
Relations-Investor Relations Menu — SEC Filings,” free of charge, are Carriage’s annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, insider reports on Forms 3,
4 and 5 filed on behalf of directors and officers and amendments to those reports as soon as
reasonably practicable after such materials are electronically filed with or furnished to the SEC.
Also posted on our website, and available in print upon request, are charters for the
Company’s Audit Committee, Compensation Committee, Corporate Governance Committee, Executive
Committee and Investment Committee. Copies of the Code of Business Conduct and Ethics and the
Corporate Governance Guidelines are also posted on the Company’s website under the “Corporate
Governance” section. Within the time period required by the SEC and the New York Stock Exchange,
we will post on our website any modifications to the charters and any waivers applicable to senior
officers as defined in the applicable charters, as required by the Sarbanes-Oxley Act of 2002.
RISKS RELATED TO OUR BUSINESS
Marketing and sales activities by existing and new competitors could cause us to lose market share
and lead to lower revenues and margins.
We face competition in all of our markets. Most of our competitors are independently owned,
and some are relatively recent market entrants. Certain of the recent entrants are individuals who
were formerly employed by us or by our competitors and have relationships and name recognition
within our markets. As a group, independent competitors tend to be aggressive in distinguishing
themselves by their independent ownership, and they promote their independence through advertising,
direct mailings and personal contact. Increasing pressures from new market entrants and continued
advertising and marketing by competitors in local markets could cause us to lose market share and
revenues. In addition, competitors may change the types or mix of products or services offered.
These changes may attract customers, causing us to lose market share and revenue as well as to
incur costs in response to competition to vary the types or mix of products or services offered by
us.
Our ability to generate preneed sales depends on a number of factors, including sales incentives
and local and general economic conditions.
Declines in preneed sales would reduce our backlog and revenue and could reduce our future
market share. On the other hand, a significant increase in preneed sales can have a negative
impact on cash flow as a result of commissions and other costs incurred without corresponding
revenues.
As we have localized our preneed sales strategies, we are continuing to refine the mix of
service and product offerings in both our funeral and cemetery segments, including changes in our
sales commission and incentive structure. These changes could cause us to experience declines in
preneed sales in the short-run. In addition, economic conditions at the local or national level
could cause declines in preneed sales either as a result of less discretionary income or lower
consumer confidence. Declines in preneed cemetery property sales
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reduces current revenue, and declines in other preneed sales would reduce our backlog and
future revenue and could reduce future market share.
Preneed sales of cemetery property and funeral and cemetery merchandise and services are
generally cash flow negative initially, primarily due to the commissions paid on the sale, the
portion of the sales proceeds required to be placed into trust or escrow and the terms of the
particular contract such as the size of the down payment required and the length of the contract.
As a result, preneed sales reduce cash flow available for other activities, and, to the extent
preneed activities are increased, cash flow will be further reduced.
Price competition could also reduce our market share or cause us to reduce prices to retain or
recapture market share, either of which could reduce revenues and margins.
We have historically experienced price competition primarily from independent funeral home and
cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and
other non-traditional providers of services or products. New market entrants tend to attempt to
build market share by offering lower cost alternatives. In the past, this price competition has
resulted in our losing market share in some markets. In other markets, we have had to reduce prices
or offer discounts thereby reducing profit margins in order to retain or recapture market share.
Increased price competition in the future could further reduce revenues, profit margins and our
backlog.
Our ability to execute our growth strategy is highly dependent upon our ability to successfully
identify suitable acquisition candidates and negotiate transactions on favorable terms.
There is no assurance that we will be able to continue to identify candidates that meet our
criteria or that we will be able to reach terms with identified candidates for transactions that
are acceptable to us. We intend to apply standards established under our Strategic Acquisition
Model to evaluate acquisition candidates, and there is no assurance that we will continue to be
successful in doing so or that we will find attractive candidates that satisfy these standards.
Increased or unanticipated costs, such as insurance or taxes, may have a negative impact on our
earnings and cash flow.
We may experience material increases in certain costs, such as insurance or taxes, which
result from recent Federal legislation or state and local governments raising taxes in an effort to
balance budgets. These costs are difficult to quantify in the future and may impair our ability to
achieve earnings growth in excess of revenue growth. Our forecast assumes that we will be
successful in increasing earnings at a rate that is greater than revenue growth. We can give no
assurance that we will be successful in achieving such increases.
Improved performance in our funeral and cemetery segments is highly dependent upon successful
execution of our Standards Operating Model.
We have implemented our Standards Operating Model to improve and better measure performance in
our funeral and cemetery operations. We developed standards according to criteria, each with a
different weighting, designed around market share, people, and operational and financial metrics.
We also incentivize our location Managing Partners by giving them the opportunity to earn a fixed
percentage of the field-level earnings before interest, taxes, depreciation and amortization based
upon the number and weighting of the standards achieved. Our expectation is that, over time, the
Standards Operating Model will result in improving field-level margins, market share, customer
satisfaction and overall financial performance, but there is no assurance that these goals will be
met. We have learned that success using the model is highly dependent on having Managing Partners
who are highly motivated and implement our business plans.
The success of our businesses is typically dependent upon one or a few key employees for success
because of the localized and personal nature of our business.
Death care businesses have built local heritage and tradition through successive generations,
providing a foundation for ongoing business opportunities from established client family
relationships and related referrals. We believe these relationships build trust in the community
and are a key driver to market share. Our businesses, which tend to serve small local markets,
usually have one or a few key employees that drive our relationships. We can give no assurance
that we can retain these employees or that these relationships will drive market share.
Earnings from and principal of trust funds could be reduced by changes in financial markets and the
mix of securities owned.
Earnings and investment gains and losses on trust funds are affected by financial market
conditions and the specific fixed-income and equity securities that we choose to maintain in the
funds. We may not choose the optimal mix for any particular market condition. Declines in earnings
from perpetual care trust funds would cause a decline in current revenues, while declines in
earnings from other trust funds could cause a decline in future cash flows and revenues.
Covenant restrictions under our debt instruments may limit our flexibility in operating and growing
our business.
The terms of our credit facility and the indenture governing our Senior Notes may limit our
ability and the ability of our subsidiaries to, among other things: incur additional debt; pay
dividends or make distributions or redeem or repurchase stock; make investments; grant liens; make
capital expenditures; enter into transactions with affiliates; enter into sale-leaseback
transactions; sell assets; and acquire the assets of, or merge or consolidate with, other
companies.
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Our credit facility also requires us to maintain certain financial ratios. Complying with
these restrictive covenants and financial ratios, as well as those that may be contained in any
future debt agreements, may limit our ability to finance our future operations or capital needs or
to take advantage of other favorable business opportunities. Our ability to comply with these
restrictive covenants and financial ratios will depend on our future performance, which may be
affected by events beyond our control. Our failure to comply with any of these covenants or
restrictions when they apply will result in a default under the particular debt instrument, which
could permit acceleration of the debt under that instrument and, in some cases, the acceleration of
debt under other instruments that contain cross-default or cross-acceleration provisions. In the
case of an event of default, or in the event of a cross-default or cross-acceleration, we may not
have sufficient funds available to make the required payments under our debt instruments. If we
are unable to repay amounts owed under the terms of our amended senior secured credit facility, the
lenders thereunder may be entitled to sell certain of our funeral assets to satisfy our obligations
under the agreement.
Continued economic crisis and financial and stock market declines could reduce future potential
earnings and cash flows and could result in future goodwill impairments.
In addition to an annual review, we assess the impairment of goodwill whenever events or
changes in circumstances indicate that the carrying value may be greater than fair value. Factors
that could trigger an interim impairment review include, but are not limited to, a significant
decline in the market value of our stock or debt values, significant underperformance relative to
historical or projected future operating results, and significant negative industry or economic
trends. If these factors occur, we may have a triggering event, which could result in impairment
to our goodwill. Based on the results of our annual goodwill impairment test we performed using
August 31, 2010 fair value information, we concluded that there was no impairment of our goodwill.
However, if current economic conditions worsen causing deterioration in our operating revenues,
operating margins and cash flows, we may have another triggering event that could result in an
impairment of our goodwill.
RISKS RELATED TO THE DEATH CARE INDUSTRY
Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the
number of deaths are not predictable from market to market or over the short term.
Declines in the number of deaths could cause at-need sales of funeral and cemetery services,
property and merchandise to decline, which could decrease revenues. Although the United States
Bureau of the Census estimates that the number of deaths in the United States will increase in the
future, longer life spans could reduce the rate of deaths. In addition, changes in the number of
deaths can vary among local markets and from quarter to quarter, and variations in the number of
deaths in our markets or from quarter to quarter are not predictable. These variations may cause
our revenues to fluctuate and our results of operations to lack predictability.
The increasing number of cremations in the United States could cause revenues to decline because we
could lose market share to firms specializing in cremations. In addition, direct cremations produce
minimal revenues for cemetery operations and lower funeral revenues.
Our traditional cemetery and funeral service operations face competition from the increasing
number of cremations in the United States. Industry studies indicate that the percentage of
cremations has increased every year and that trend is expected to continue into the future. The
trend toward cremation could cause cemeteries and traditional funeral homes to lose market share
and revenues to firms specializing in cremations. In addition, direct cremations (with no funeral
service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues for
cemetery operations and lower revenues than traditional funerals and, when delivered at a
traditional funeral home, produce lower profit margins as well.
If we are not able to respond effectively to changing consumer preferences, our market share,
revenues and profitability could decrease.
Future market share, revenues and profits will depend in part on our ability to anticipate,
identify and respond to changing consumer preferences. In past years, we have implemented new
product and service strategies based on results of customer surveys that we conduct on a continuous
basis. However, we may not correctly anticipate or identify trends in consumer preferences, or we
may identify them later than our competitors do. In addition, any strategies we may implement to
address these trends may prove incorrect or ineffective.
Because the funeral and cemetery businesses are high fixed-cost businesses, changes in revenue can
have a disproportionately large effect on cash flow and profits.
Companies in the funeral home and cemetery business must incur many of the costs of operating
and maintaining facilities, land and equipment regardless of the level of sales in any given
period. For example, we must pay salaries, utilities, property taxes and maintenance costs on
funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services
or interments performed. Because we cannot decrease these costs significantly or rapidly when we
experience declines in sales, declines in sales can cause margins, profits and cash flow to decline
at a greater rate than the decline in revenues.
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Changes or increases in, or failure to comply with, regulations applicable to our business could
increase costs or decrease cash flows.
The death care industry is subject to extensive and evolving regulation and licensing
requirements under federal, state and local laws. For example, the funeral home industry is
regulated by the FTC, which requires funeral homes to take actions designed to protect consumers.
State laws impose licensing requirements and regulate preneed sales. Embalming and cremation
facilities are subject to stringent environmental and health regulations. Compliance with these
regulations is burdensome, and we are always at risk of not complying with the regulations or
facing costly and burdensome investigations from regulatory authorities.
In addition, from time to time, governments and agencies propose to amend or add regulations,
which could increase costs or decrease cash flows. For example, federal, state, local and other
regulatory agencies have considered and may enact additional legislation or regulations that could
affect the death care industry. Several states and regulatory agencies have considered or are
considering regulations that could require more liberal refund and cancellation policies for
preneed sales of products and services, limit or eliminate our ability to use surety bonding,
increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in
the same market. If adopted by the regulatory authorities of the jurisdictions in which we
operate, these and other possible proposals could have a material adverse effect on us, our
financial condition, our results of operations and our future prospects. For additional
information regarding the regulation of the death care industry, see “Business — Regulation.”
None.
At December 31, 2010, we operated 147 funeral homes in 25 states and 33 cemeteries in 12
states. We own the real estate and buildings for 79% of our funeral homes and lease facilities for
the remaining 21%. We own 28 cemeteries and operate five cemeteries under long-term contracts with
municipalities and non-profit organizations at December 31, 2010. Eleven funeral homes are
operated in combination with cemeteries as these locations are physically located on the same
property or very close proximity and under same management. The 33 cemeteries operated by us have
an inventory of unsold developed lots totaling approximately 131,500 and 138,982 at December 31,
2009 and 2010, respectively. In addition, approximately 568 acres are available for future
development. We anticipate having a sufficient inventory of lots to maintain our property sales
for the foreseeable future. The specialized nature of our business requires that our facilities be
well-maintained which management believes we currently meet this standard.
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The following table sets forth certain information as of December 31, 2010, regarding
Carriage’s properties used by the funeral homes segment and by the cemeteries segment identified by
state:
| Number of | ||||||||||||||||
| Funeral Homes | Number of Cemeteries | |||||||||||||||
| State | Owned | Leased (1) | Owned | Managed | ||||||||||||
|
California
|
23 | 3 | 4 | 0 | ||||||||||||
|
Connecticut
|
7 | 3 | 0 | 0 | ||||||||||||
|
Florida
|
6 | 9 | 6 | 3 | ||||||||||||
|
Georgia
|
3 | 0 | 0 | 0 | ||||||||||||
|
Idaho
|
6 | 1 | 3 | 0 | ||||||||||||
|
Illinois
|
1 | 3 | 1 | 0 | ||||||||||||
|
Kansas
|
6 | 0 | 0 | 0 | ||||||||||||
|
Kentucky
|
8 | 3 | 1 | 0 | ||||||||||||
|
Maryland
|
1 | 0 | 0 | 0 | ||||||||||||
|
Massachusetts
|
12 | 0 | 0 | 0 | ||||||||||||
|
Michigan
|
3 | 0 | 0 | 0 | ||||||||||||
|
Montana
|
2 | 1 | 1 | 0 | ||||||||||||
|
Nevada
|
2 | 0 | 2 | 1 | ||||||||||||
|
New Jersey
|
4 | 1 | 0 | 0 | ||||||||||||
|
New Mexico
|
1 | 0 | 0 | 0 | ||||||||||||
|
New York
|
1 | 0 | 0 | 0 | ||||||||||||
|
North Carolina
|
0 | 2 | 1 | 0 | ||||||||||||
|
Ohio
|
5 | 1 | 0 | 1 | ||||||||||||
|
Oklahoma
|
1 | 0 | 1 | 0 | ||||||||||||
|
Rhode Island
|
4 | 0 | 0 | 0 | ||||||||||||
|
Tennessee
|
3 | 0 | 0 | 0 | ||||||||||||
|
Texas
|
12 | 1 | 7 | 0 | ||||||||||||
|
Virginia
|
3 | 1 | 1 | 0 | ||||||||||||
|
Washington
|
1 | 1 | 0 | 0 | ||||||||||||
|
West Virginia
|
1 | 1 | 0 | 0 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Total
|
116 | 31 | 28 | 5 | ||||||||||||
|
|
||||||||||||||||
| (1) | The leases, with respect to these funeral homes, generally have remaining terms ranging from one to nine years, and, generally, we have the right to renew past the initial terms and a right of first refusal on any proposed sale of the property where these funeral homes are located. |
Our corporate headquarters occupy approximately 37,000 square feet of leased office space in
Houston, Texas. At December 31, 2010, we owned and operated 634 vehicles and leased 4 vehicles.
We and our subsidiaries are parties to a number of legal proceedings that arise from time to
time in the ordinary course of our business. While the outcome of these proceedings cannot be
predicted with certainty, we do not expect these matters to have a material adverse effect on the
financial statements. Information regarding litigation is set forth in Part II, Item 8, Financial
Statements and Supplementary Data, Note 15 to our Consolidated Financial Statements of this Form
10-K.
We self-insure against certain risks and carry insurance with coverage and coverage limits for
risks in excess of the coverage amounts consistent with our assessment of risks in our business and
of an acceptable level of financial exposure. Although there can be no assurance that
self-insurance reserves and insurance will be sufficient to mitigate all damages, claims or
contingencies, we believe that the reserves and our insurance provides reasonable coverage for
known asserted and unasserted claims. In the event we sustained a loss from a claim and the
insurance carrier disputed coverage or coverage limits, we may record a charge in a different
period than the recovery, if any, from the insurance carrier.
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Market Information
Our common stock is traded on the New York Stock Exchange under the symbol “CSV”. The
following table presents the quarterly high and low sale prices as reported by the New York Stock
Exchange:
| 2010 | High | Low | ||||||
|
First Quarter
|
$ | 4.65 | $ | 3.56 | ||||
|
Second Quarter
|
$ | 5.18 | $ | 4.27 | ||||
|
Third Quarter
|
$ | 5.07 | $ | 4.00 | ||||
|
Fourth Quarter
|
$ | 5.49 | $ | 4.50 | ||||
| 2009 | High | Low | ||||||
|
First Quarter
|
$ | 2.59 | $ | 1.10 | ||||
|
Second Quarter
|
$ | 4.11 | $ | 1.49 | ||||
|
Third Quarter
|
$ | 4.23 | $ | 2.62 | ||||
|
Fourth Quarter
|
$ | 4.59 | $ | 3.05 | ||||
As of March 4, 2011, there were 18,139,859 shares of our common stock outstanding and the
closing price as reported by the New York Stock Exchange was $5.85 per share. The shares of common
stock outstanding are held by approximately 250 stockholders of record. Each share is entitled to
one vote on matters requiring the vote of stockholders. We believe there are approximately 5,000
beneficial owners of our common stock.
We have never paid a cash dividend on our common stock. We currently intend to retain
earnings to fund the growth and development of our business. Any future change in our policy will
be made at the discretion of our Board of Directors in light of our financial condition, capital
requirements, earnings prospects and any limitations imposed by lenders or investors, as well as
other factors the Board of Directors may deem relevant.
Prior to March 22, 2010, we had a compensation policy for fees paid to our directors under
which the directors could choose to receive their fees either in the form of cash or equity based
on the fair market value of our common stock calculated at the closing price published by the New
York Stock Exchange on the date the fees were earned. Effective March 22, 2010, and subsequently
revised on July 14, 2010, the Board of Directors approved a new Director Compensation Policy in
which the directors no longer have an option to elect to receive all or a portion of their fees in
stock.
Purchases of Equity Securities by the Issuer
During June 2008 and November 2008, the Board of Directors approved share repurchase programs
authorizing the Company to purchase up to an aggregate of $10 million of our common stock. The
repurchases were executed in the open market and through privately negotiated transactions subject
to market conditions, normal trading restrictions and other relevant factors. Through December 31,
2008, we repurchased 1,730,969 shares of Common Stock at an aggregate cost of $5,740,442 and an
average cost per share of $3.29. During 2009, we repurchased 1,377,882 shares of common stock at
an aggregate cost of $4,259,558 and an average cost per share of $3.09. The repurchased shares are
held as treasury stock. We did not repurchase any shares of our common stock during 2010.
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The following graph compares the cumulative 5-year total return to shareholders on Carriage
Services, Inc.’s common stock relative to the cumulative total returns of the Russell MicroCap
index, and a customized peer group of three companies that includes: Service Corp. International,
Stewart Enterprises Inc and Stonemor Partners Limited Partnership. The graph tracks the
performance of a $100 investment in our common stock, in the peer group, and the index (with the
reinvestment of all dividends) from 12/31/2005 to 12/31/2010.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Carriage Services, Inc., the Russell MicroCap Index
and a Peer Group
Among Carriage Services, Inc., the Russell MicroCap Index
and a Peer Group
* $100 invested on 12/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.
Fiscal year ending December 31.
| 12/05 | 12/06 | 12/07 | 12/08 | 12/09 | 12/10 | |||||||||||||||||||
|
Carriage Services, Inc.
|
100.00 | 101.80 | 176.00 | 40.20 | 78.60 | 97.00 | ||||||||||||||||||
|
Russell MicroCap
|
100.00 | 116.54 | 107.22 | 64.57 | 82.31 | 106.09 | ||||||||||||||||||
|
Peer Group
|
100.00 | 125.32 | 172.68 | 63.38 | 109.23 | 124.29 | ||||||||||||||||||
The stock price performance included in this graph is not necessarily indicative of future stock price performance.
PEER GROUP I
Service Corp. International
Stewart Enterprises Inc
Stonemor Partners Limited Partnership
Stewart Enterprises Inc
Stonemor Partners Limited Partnership
14
Table of Contents
The table on the following page sets forth selected consolidated financial information for us
that has been derived from the audited Consolidated Financial Statements of the Company as of and
for each of the years ended December 31, 2006, 2007, 2008, 2009 and 2010. These historical results
are neither indicative of our future performance, nor necessarily comparable as a result of changes
in accounting methods discussed below.
You should read this historical financial data together with “Management’s Discussion and
Analysis of Financial Condition and Results of Operations” included in this report and our
Consolidated Financial Statements and notes thereto included elsewhere in this report.
15
Table of Contents
Selected Consolidated Financial Information
| Year ended December 31, | ||||||||||||||||||||
| 2006 | 2007 | 2008 | 2009 | 2010 | ||||||||||||||||
| (dollars in thousands, except per share amounts) | ||||||||||||||||||||
|
INCOME STATEMENT DATA:
|
||||||||||||||||||||
|
Revenues:
|
||||||||||||||||||||
|
Funeral
|
$ | 113,198 | $ | 123,839 | $ | 134,246 | $ | 131,051 | $ | 138,125 | ||||||||||
|
Cemetery
|
36,159 | 43,017 | 42,682 | 46,576 | 46,822 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total revenues
|
149,357 | 166,856 | 176,928 | 177,627 | 184,947 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Gross profit:
|
||||||||||||||||||||
|
Funeral
|
30,508 | 36,170 | 37,170 | 38,450 | 37,940 | |||||||||||||||
|
Cemetery
|
3,943 | 9,355 | 5,873 | 7,668 | 9,507 | |||||||||||||||
|
|
||||||||||||||||||||
|
Total gross profit
|
34,451 | 45,525 | 43,043 | 46,118 | 47,447 | |||||||||||||||
|
General and administrative expenses
|
12,023 | 16,015 | 18,112 | 16,003 | 16,806 | |||||||||||||||
|
|
||||||||||||||||||||
|
Operating income
|
22,428 | 29,510 | 24,931 | 30,115 | 30,641 | |||||||||||||||
|
Interest expense
|
(18,508 | ) | (18,344 | ) | (18,331 | ) | (18,498 | ) | (18,262 | ) | ||||||||||
|
Litigation settlement
|
— | — | (3,300 | ) | — | — | ||||||||||||||
|
Interest and other income
|
1,922 | 1,151 | 229 | 228 | 1,068 | |||||||||||||||
|
|
||||||||||||||||||||
|
Income before income taxes
|
5,842 | 12,317 | 3,529 | 11,845 | 13,447 | |||||||||||||||
|
Provision for income taxes
|
(2,239 | ) | (4,959 | ) | (1,725 | ) | (4,797 | ) | (5,368 | ) | ||||||||||
|
|
||||||||||||||||||||
|
Net income from continuing operations
|
3,603 | 7,358 | 1,804 | 7,048 | 8,079 | |||||||||||||||
|
Income (loss) from discontinued operations
|
(5,019 | ) | 921 | (1,546 | ) | — | — | |||||||||||||
|
Preferred Stock Dividend
|
— | — | 10 | 14 | 14 | |||||||||||||||
|
|
||||||||||||||||||||
|
Net income (loss)
|
$ | (1,416 | ) | $ | 8,279 | $ | 248 | $ | 7,034 | $ | 8,065 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Earnings (loss) per share
|
||||||||||||||||||||
|
Basic:
|
||||||||||||||||||||
|
Continuing operations
|
$ | 0.19 | $ | 0.39 | $ | 0.09 | $ | 0.40 | $ | 0.46 | ||||||||||
|
Discontinued operations
|
(0.28 | ) | 0.05 | (0.08 | ) | — | — | |||||||||||||
|
|
||||||||||||||||||||
|
Basic earnings (loss) per share
|
$ | (0.09 | ) | $ | 0.44 | $ | 0.01 | $ | 0.40 | $ | 0.46 | |||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
Diluted:
|
||||||||||||||||||||
|
Continuing operations
|
$ | 0.19 | $ | 0.38 | $ | 0.09 | $ | 0.40 | $ | 0.45 | ||||||||||
|
Discontinued operations
|
(0.27 | ) | 0.05 | (0.08 | ) | — | — | |||||||||||||
|
|
||||||||||||||||||||
|
Diluted earnings (loss) per share
|
$ | (0.08 | ) | $ | 0.43 | $ | 0.01 | $ | 0.40 | $ | 0.45 | |||||||||
|
|
||||||||||||||||||||
|
Weighted average number of common and
common equivalent shares outstanding:
|
||||||||||||||||||||
|
Basic
|
18,545 | 19,020 | 19,054 | 17,573 | 17,635 | |||||||||||||||
|
|
||||||||||||||||||||
|
Diluted
|
18,912 | 19,507 | 19,362 | 17,749 | 17,938 | |||||||||||||||
|
|
||||||||||||||||||||
|
|
||||||||||||||||||||
|
OPERATING AND FINANCIAL DATA:
|
||||||||||||||||||||
|
Funeral homes at end of period
|
131 | 139 | 136 | 138 | 147 | |||||||||||||||
|
Cemeteries at end of period
|
28 | 32 | 32 | 32 | 33 | |||||||||||||||
|
Funeral services performed
|
22,468 | 23,366 | 25,531 | 24,362 | 25,801 | |||||||||||||||
|
Preneed funeral contracts sold
|
4,998 | 5,075 | 4,916 | 5,615 | 6,485 | |||||||||||||||
|
Backlog of preneed funeral contracts
|
56,719 | 68,909 | 69,575 | 72,172 | 79,842 | |||||||||||||||
|
Average revenue per funeral contract
|
$ | 5,120 | $ | 5,207 | $ | 5,154 | $ | 5,296 | $ | 5,266 | ||||||||||
|
Cremation rate
|
34.4 | % | 35.8 | % | 39.8 | % | 42.1 | % | 44.1 | % | ||||||||||
|
Depreciation and amortization
|
$ | 8,624 | $ | 9,488 | $ | 10,368 | $ | 10,339 | $ | 9,976 | ||||||||||
|
|
||||||||||||||||||||
|
BALANCE SHEET DATA:
|
||||||||||||||||||||
|
Total assets
|
$ | 564,996 | $ | 610,807 | $ | 560,293 | $ | 619,298 | $ | 671,012 | ||||||||||
|
Working capital
|
35,755 | 11,647 | 9,100 | 12,004 | 2,535 | |||||||||||||||
|
Long-term debt, net of current maturities
|
133,841 | 132,994 | 132,345 | 131,898 | 132,416 | |||||||||||||||
|
Convertible junior subordinated debenture
|
93,750 | 93,750 | 93,750 | 93,750 | 92,858 | |||||||||||||||
|
Stockholders’ equity
|
96,373 | 106,900 | 103,510 | 108,222 | 119,673 | |||||||||||||||
16
Table of Contents
OVERVIEW
General
We operate two types of businesses: funeral homes, which account for approximately 75% of our
revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are
principally a service business that provide funeral services (traditional burial and cremation) and
sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that
sell interment rights (grave sites and mausoleum spaces) and related merchandise such as markers
and outer burial containers. As of December 31, 2010, we operated 147 funeral homes in 25 states
and 33 cemeteries in 12 states within the United States. Substantially all administrative
activities are conducted in our home office in Houston, Texas.
We have implemented long-term strategy in our operations designed to improve operating and
financial results by growing market share and increasing profitability. We introduced a more
decentralized, entrepreneurial and local operating model in 2004 that included operating and
financial standards developed from our best operations, along with an incentive compensation plan
to reward business managers for successfully meeting or exceeding the standards. The model
essentially eliminated the use of line-item financial budgets at the location level in favor of the
standards. The operating model and its standards, which we refer to as the “Standards Operating
Model,” focus on the key drivers of a successful operation, organized around three primary areas —
market share, people and operating and financial metrics. The model and standards are the measures
by which we judge the success of each business. To date, the Standards Operating Model has driven
significant changes in our organization, leadership and operating practices. Most importantly, the
Standards Operating Model allowed us to measure the sustainable revenue growth and earning power of
our portfolio of death care businesses, which then led to the development of our Strategic
Acquisition Model, described below under “Acquisitions,” during 2006, which guides our acquisition
and disposition strategies. Both models, when executed effectively, should drive longer term,
sustainable increases in market share, revenue, earnings and cash flow. The standards are not
designed to produce maximum short-term earnings because we do not believe such performance is
sustainable without ultimately stressing the business, which often leads to declining market share,
revenues and earnings. Important elements of the Standards Operating Model include:
| • | Balanced Operating Model — We believe a decentralized structure works best in the death care industry. Successful execution of the Standards Operating Model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial drive and corporate support aligned with the key drivers. |
| • | Incentives Aligned with Standards — Empowering Managing Partners to do the right things in their operations and local communities, and providing appropriate support with operating and financial practices, will enable long-term growth and sustainable profitability. Each Managing Partner participates in a variable bonus plan whereby they earn a percentage of their business’ earnings based upon the actual standards achieved. Each Managing Partner has the opportunity to share in the earnings of the business as long as the performance exceeds our minimum standards. |
| • | The Right Local Leadership — Successful execution of our operating model is highly dependent on strong local leadership as defined by our 4E Leadership Model, intelligent risk taking and entrepreneurial empowerment. Over time, a Managing Partner’s performance is judged according to achievement of the Standards for that business. |
Funeral and Cemetery Operations
Factors affecting our funeral operating results include: demographic trends in terms of
population growth and average age, which impact death rates and number of deaths; establishing and
maintaining leading market share positions supported by strong local heritage and relationships;
effectively responding to increasing cremation trends by selling complementary services and
merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to
our at-need business to increase average revenues per contract. In simple terms, volume and price
are the two variables that affect funeral revenues. The average revenue per contract is influenced
by the mix of traditional and cremation services because our average cremation service revenue is
approximately one-third of the average revenue earned from a traditional burial service.
Funeral homes have a relatively fixed cost structure. Thus, small changes in revenues, up or down,
normally cause significant changes to our profitability.
Our funeral volumes have increased gradually from 23,366 in 2007 to 25,801 in 2010 (compound
annual increase of 3.4%). Our funeral operating revenue has increased from $119.2 million in 2007
to $129.7 million in 2010 (compound annual increase of 2.9%). The increases are primarily because
of businesses we acquired from 2007 through 2010 and our ability to increase the average revenue
per funeral through expanded service offerings and packages. We experienced flat volumes in
comparing the year ended December 31, 2010 to the year ended December 31, 2009 on a same store
basis, although Funeral operating revenues for the year ended December, 2010 were up 3.7% compared
to the year ended December 31, 2009, which resulted primarily from our acquisitions.
17
Table of Contents
The percentage of funeral services involving cremations has increased from 35.8% for the year
ended 2007 to 44.1% for the year ended 2010. A significant portion of that increase is the result
of acquiring businesses in high cremation areas. On a same store basis, the cremation rate has
risen to 40.7% for the year ended December 31, 2010.
The cemetery operating results are affected by the size and success of our sales organization.
Approximately 52% of our 2010 cemetery revenues relate to preneed sales of interment rights and
related merchandise and services. We believe that changes in the level of consumer confidence (a
measure of whether consumers will spend for discretionary items) also affect the amount of cemetery
revenues. Approximately 14% of our cemetery revenues are attributable to investment earnings on
trust funds and finance charges on installment contracts. Changes in the capital markets and
interest rates affect this component of our cemetery revenues.
Our cemetery financial performance from 2007 through 2010 was characterized by fluctuating
operating revenues and field level profit margins. Cemetery operating revenue decreased 4.4% over
prior year although we experienced a 75.3% increase in trust fund earnings. Also, a 3.0% increase
in at need revenues offset the decline in preneed revenue. Our goal is to build broader and deeper
teams of sales leaders and counselors in our larger and more strategically located cemeteries in
order to focus on growth of our preneed property sales. Additionally, a portion of our capital
expenditures in 2011 is designed to expand our cemetery product offerings.
Financial Revenue
We market funeral and cemetery services and products on a preneed basis. Preneed funeral or
cemetery contracts enable families to establish, in advance, the type of service to be performed,
the products to be used and the cost of such products and services. Preneed contracts permit
families to eliminate issues of making death care plans at the time of need and allow input from
other family members before the death occurs. We guarantee the price and performance of the
preneed contracts to the customer.
Preneed funeral contracts are usually paid on an installment basis. The performance of
preneed funeral contracts is usually secured by placing the funds collected in trust for the
benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will
pay for such services at the time of need. Insurance policies, intended to fund preneed funeral
contracts, cover the original contract price and generally include an element of growth (earnings)
designed to offset future inflationary cost increases. Revenue from preneed funeral contracts,
along with accumulated earnings, is not recognized until the time the funeral service is performed.
The accumulated earnings from the trust investments and insurance policies is intended to offset
the inflation in funeral prices. Additionally, we generally earn a commission from the insurance
company from the sale of insurance-funded policies reflected as
Preneed Insurance Commission
. The
commission income is recognized as revenue when the period of refund expires (generally one year),
which helps us defray the costs we incur to originate the preneed contract (primarily commissions
we pay to our sales counselors).
Preneed sales of cemetery interment rights are usually financed through interest-bearing
installment sales contracts, generally with terms of up to five years with such earnings reflected
as
Preneed Cemetery Finance Charges
. In substantially all cases, we receive an initial down payment
at the time the contract is signed. The interest rates generally range between 9.5% and 12% per
annum. Occasionally, we have offered zero percent interest financing to promote sales for
limited-time offers. In most states, regulations require a portion (generally 10%) of the sale
amount of cemetery property and memorials to be placed in a perpetual care trust.
We have established a variety of trusts in connection with funeral home and cemetery
operations as required under applicable state law. Such trusts include (i) preneed funeral trusts;
(ii) preneed cemetery merchandise and service trusts; and (iii) perpetual care trusts. These trusts
are typically administered by independent financial institutions selected by the Company.
Independent financial advisors are also used for investment management and advisory services.
Preneed funeral trust fund income earned and the receipt and recognition of any insurance
benefits are deferred until the service is performed. Applicable state laws generally require us
to deposit a specified amount (which varies from state to state, generally 50% to 100% of selling
price) into a merchandise and service trust fund for preneed cemetery merchandise and service
sales. The related trust fund income earned is recognized when the related merchandise and
services are delivered. In most states, regulations require a portion (generally 10%) of the sale
amount of cemetery property and memorials to be placed in a perpetual care trust. The income from
perpetual care trusts provides a portion of the funds necessary to maintain cemetery property and
memorials in perpetuity. This trust fund income is recognized, as earned, in cemetery revenues.
18
Table of Contents
Acquisitions
Our growth strategy includes the execution of our Strategic Acquisition Model. The goal of
that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We
use six strategic ranking criteria to assess acquisition candidates and to differentiate the price
we are willing to pay. Those criteria are:
| • | Size of business; | ||
| • | Size of market; | ||
| • | Competitive standing; | ||
| • | Demographics; | ||
| • | Strength of brand; and | ||
| • | Barriers to entry. |
In general terms, our price expectations range from four to five times pre-tax earnings before
depreciation for “tuck-ins” to six to seven times pre-tax earnings before depreciation for
businesses that rank very high in the ranking criteria. We derive the pre-tax earnings amounts
based primarily on the size and product mix of the target business applied to our standards-based
operating model. During 2009, we completed two acquisitions. During 2010, we acquired one
cemetery and five funeral home businesses. The consideration paid for these acquisitions was cash,
which was generated from our operations.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Consolidated Financial Statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an
on-going basis, we evaluate estimates and judgments, including those related to revenue
recognition, realization of accounts receivable, inventories, goodwill, other intangible assets,
property and equipment and deferred tax assets. We base our estimates on historical experience,
third party data and assumptions that we believe to be reasonable under the circumstances. The
results of these considerations form the basis for making judgments about the amount and timing of
revenues and expenses, the carrying value of assets and the recorded amounts of liabilities.
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 revenues will be consistent from year to year.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”)
is based upon our Consolidated Financial Statements presented herewith, which have been prepared in
accordance with accounting principles generally accepted in the United States. Our significant
accounting policies are more fully described in Note 1 to our Consolidated Financial Statements.
We believe the following critical accounting policies affect our more significant judgments and
estimates used in the preparation of our Consolidated Financial Statements.
Funeral and Cemetery Operations
We record the sales of funeral and cemetery merchandise and services when the merchandise is
delivered or service is performed. Sales of cemetery interment rights are recorded as revenue in
accordance with the retail land sales accounting principles. This method generally provides for
the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of
the contract price related to the real estate. Costs related to the sales of interment rights,
which include property and other costs related to cemetery development activities, are charged to
operations using the specific identification method in the period in which the sale of the
interment right is recognized as revenue. Revenues to be recognized and cash flow from the
delivery of merchandise and performance of services related to preneed contracts that were acquired
in acquisitions are typically lower than those originated by us.
Allowances for bad debts and customer cancellations are provided at the date that the sale is
recognized as revenue and are based on our historical experience and the current economic
environment. We also monitor changes in delinquency rates and provide additional bad debt and
cancellation reserves when warranted.
When preneed funeral services and merchandise are funded through third-party insurance
policies, we earn a commission on the sale of the policies. Insurance commissions earned by the
Company are recognized as revenues when the commission is no longer subject to refund, which is
usually one year after the policy is issued. Preneed selling costs consist of sales commissions
that we pay our sales counselors and other direct related costs of originating preneed sales
contracts and are expensed as incurred.
19
Table of Contents
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral
home businesses acquired in business combinations is recorded as goodwill. Goodwill has not
historically been recorded in connection with the acquisition of cemetery businesses. Goodwill is
tested for impairment by assessing the fair value of each of our reporting units. The funeral
segment reporting units consist of our East, Central and West regions in the United States and we
performed our annual impairment test of goodwill using information as of August 31, 2010. In
addition, we assess the impairment of goodwill whenever events or changes in circumstances indicate
that the carrying value may be greater than fair value. Factors that could trigger an interim
impairment review include, but are not limited to, significant adverse changes in the business
climate which may be indicated by a decline in the Company’s market capitalization or decline in
operating results.
Our goodwill impairment test involves estimates and management judgment. In the first step of
our goodwill testing, we compare the fair value of each reporting unit to its carrying value,
including goodwill. We determine fair value for each reporting unit using both a market approach,
weighted 70%, and an income approach, weighted 30%. Funeral home selling prices are typically
quoted in the marketplace as a multiple of EBITDA (earnings before interest, taxes, depreciation
and amortization). Our methodology for determining a market approach fair value utilized recent
sales transactions in the industry. Our methodology for determining an income-based fair value is
based on discounting projected future cash flows. The projected future cash flows include
assumptions concerning future operating performance that may differ from actual future cash flows
using a weighted average cost of capital for the Company and other public death care companies.
Goodwill impairment is not recorded where the fair value of the reporting unit exceeds its carrying
amount. If the fair value of the reporting unit is less than its carrying value, the implied fair
value of goodwill is compared to the carrying amount of the reporting unit’s goodwill and if the
carrying amount exceeds the implied value, an impairment charge would be recorded in an amount
equal to that excess.
A more complete discussion of the 2010 goodwill impairment testing is included below in Item 7
of this Form 10-K.
Income Taxes
The Company and its subsidiaries file a consolidated U.S. Federal income tax return and
separate income tax returns in the states in which we operate. We record deferred taxes for
temporary differences between the tax basis and financial reporting basis of assets and
liabilities, and account for uncertain tax positions in our financial statements. The Company
records a valuation allowance to reflect the estimated amount of deferred tax assets for which
realization is uncertain. Management reviews the valuation allowance at the end of each quarter
and makes adjustments if it is determined that it is more likely than not that the tax benefits
will be realized.
The Company analyzes tax benefits for uncertain tax positions and how they are to be
recognized, measured, and derecognized in financial statements; provides certain disclosures of
uncertain tax matters; and specifies how reserves for uncertain tax positions should be classified
on the Consolidated Balance Sheets. The Company has reviewed its income tax positions and
identified certain tax deductions, primarily related to business acquisitions that are not certain.
Our policy with respect to potential penalties and interest is to record them as “Other” expense
and Interest expense, respectively. The entire balance of unrecognized tax benefits, if
recognized, would affect the Company’s effective tax rate. The Company does not anticipate a
significant increase or decrease in its unrecognized tax benefits during the next twelve months.
Stock Plans and Stock-Based Compensation
The Company has stock-based employee and director compensation plans in the form of restricted
stock, stock option and employee stock purchase plans. The Company recognizes compensation expense
in an amount equal to the fair value of the share-based awards over the period of vesting. Fair
value is determined on the date of the grant. The fair value of options or awards containing
options is determined using the Black-Scholes valuation model.
Preneed Funeral and Cemetery Trust Funds
The Company’s preneed and perpetual care trust funds are reported in accordance with
principles of consolidating Variable Interest Entities. In the case of preneed trusts, the
customers are the legal beneficiaries. In the case of perpetual care trusts, the Company does not
have a right to access the corpus in the perpetual care trusts. For these reasons, the Company has
recognized financial interests of third parties in the trust funds in our financial statements as
Deferred preneed funeral and cemetery receipts held in trust
and
Care trusts’ corpus
. The
investments of such trust funds are classified as available-for-sale and are reported at market
value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income
and realized gains and losses, are recorded to
Deferred preneed receipts held in trust
and
Care
trusts’ corpus
in the Company’s Consolidated Balance Sheets. The Company’s future obligations to
deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and
cemetery trust investments are reduced by the trust investment earnings that we have been allowed
to withdraw in certain states prior to maturity. These earnings, along with preneed contract
collections not required to be placed in trust, are recorded in
Deferred preneed funeral revenue
and
Deferred preneed cemetery revenue
until the service is performed or the merchandise is
delivered.
20
Table of Contents
Effective January 1, 2009, a noncontrolling interest in a subsidiary, which is sometimes
referred to as unconsolidated investment, is an ownership interest in the consolidated entity that
is reported as a component of equity in the Consolidated Financial Statements. Consolidated net
income is reported at amounts that include the amounts attributable to both the parent and the
noncontrolling interest. The net income, on the face of the Consolidated Statements of Operations,
is of the amounts of consolidated net income attributable to the parent and to the noncontrolling
interest.
Discontinued Operations
In accordance with the Company’s Strategic Acquisition Model, non-strategic businesses are
reviewed to determine whether the business should be sold and the proceeds redeployed elsewhere. A
marketing plan is then developed for those locations which are identified as held-for-sale. When
the Company receives a letter of intent and financing commitment from the buyer and the sale is
expected to occur within one year, the location is no longer reported within the Company’s
continuing operations. The assets and liabilities associated with the location are reclassified as
held for sale on the balance sheet and the operating results, as well as impairments, are presented
on a comparative basis in the discontinued operations section of the consolidated statements of
operations, along with the income tax effect. There were no discontinued operations in 2010.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and
goodwill is recognized for any difference between the price of the acquisition and fair value. We
recognized the assets acquired, the liabilities assumed and any noncontrolling interest in the
acquiree at the acquisition date, measured at the fair values as of that date. Goodwill is
measured as a residual of the fair values at acquisition date. Acquisition related costs are
recognized separately from the acquisition and are expensed as incurred. We customarily estimate
related transaction costs known at closing. To the extent that information not available to us at
the closing date subsequently becomes available during the allocation period we may adjust
goodwill, assets, or liabilities associated with the acquisition.
Fair Value Measurements
We define fair value as the price that would be received in the sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). We disclose the extent to which fair value is used to measure financial
assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect
of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of
the measurement date. Additional required disclosures are provided in Note 11 to the Consolidated
Financial Statements. We have not elected to measure any additional financial instruments and
certain other items at fair value that are not currently required to be measured at fair value.
New guidance was issued during early 2009 on how to determine the fair value of assets and
liabilities in an environment where the volume and level of activity for the asset or liability
have significantly decreased. The new guidance reemphasizes that the objective of a fair value
measurement remains an exit price. This guidance was effective for interim reporting periods
ending after June 15, 2009, and has had no affect on our financial position or results of
operations.
New guidance was also issued during early 2009 that modifies the requirements for recognizing
other-than-temporary impairment on debt securities and significantly changes the impairment model
for such securities. The Company considers an impairment of debt and equity securities
other-than-temporary unless (a) the Company has the ability and intent to hold an investment and
(b) evidence indicating the cost of the investment is recoverable before the Company is more likely
than not required to sell the investment. If impairment is indicated, then an adjustment will be
made to reduce the carrying amount to fair value. This new guidance also modified the presentation
of other-than-temporary impairment losses and increased related disclosure requirements. This
change was effective for interim reporting periods ending after June 15, 2009 and it has had no
affect on our financial position or results of operations.
In the ordinary course of business, we are typically exposed to a variety of market risks.
Currently, these are primarily related to changes in fair market values related to long-term debt
and changes in the values of securities associated with the preneed and perpetual care trusts.
Management is actively involved in monitoring exposure to market risk and developing and utilizing
appropriate risk management techniques when appropriate and when available for a reasonable price.
The 7⅞% Senior Notes were issued to the public at par and are carried at a cost of $130 million.
At December 31, 2010, these securities were typically trading at a price of approximately $100.75,
indicating a fair market value of approximately $131.0 million. The convertible junior
subordinated debentures, payable to Carriage Services Capital Trust, pay interest at the fixed rate
of 7% and are carried on our Consolidated Balance Sheet at a cost of approximately $92.9 million.
The fair value of these securities is estimated to be $66.6 million at December 31, 2010 based on
available broker quotes of the corresponding preferred securities issued by the Trust.
21
Table of Contents
Computation of Earnings per Common Share
New guidance was issued during early 2009 addressing the accounting changes for unvested
share-based payment awards included in the calculation of earnings per share. Share-based awards
that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid,
are recognized as participating securities and included in the computation of both basic and
diluted earnings per share. Our grants of restricted stock awards to our employees and directors
are considered participating securities and we have prepared our earnings per share calculations to
include outstanding unvested restricted stock awards in the basic and diluted weighted average
shares outstanding calculation. For the three years ended December 31, 2010, there was no material
impact to basic and diluted earnings per share in connection with this accounting change.
Subsequent Events
Management of the Company evaluated events and transactions during the period beginning
subsequent to December 31, 2010 through the date the financial statements were issued, for
potential recognition or disclosure in the accompanying financial statements covered by this
report. There were no subsequent events to disclose.
Variable Interest Entities
Effective January 1, 2010, new guidance amended the current practice of accounting for
Variable Interest Entities (“VIE”) requiring an enterprise to perform an analysis to determine
whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE.
This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power
to direct the activities of a VIE that most significantly impact the entity’s economic performance
and the obligation to absorb losses of the entity that could potentially be significant to the VIE
or the right to receive benefits from the entity that could potentially be significant to the VIE.
This new guidance did not have a material impact on our Consolidated Financial Statements. Also
refer to Preneed Funeral and Cemetery Trust Funds in Note 1 to the Consolidated Financial
Statements herein for additional information on the Company’s VIE entries.
RECENT ACCOUNTING PRONOUNCMENTS AND ACCOUNTING CHANGES
Fair Value Measurements
In January 2010, new guidance was issued which requires additional fair value disclosures to
disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases,
sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value
hierarchy. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements
related to Level 3 activity. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. The disclosure requirements
on transfers between Levels 1 and 2 was effective for the Company as of March 31, 2010. The Company
currently does not have any assets that have fair values determined by Level 3 inputs and no
liabilities measured at fair value. See Note 11 to the Consolidated Financial Statements herein
for additional information on the Company’s fair value disclosures.
Allowance for Credit Losses on Financing Receivables
In July 2010, new guidance was issued which increased the disclosure requirements about the
credit quality of financing receivables and the allowance for credit losses. The intent of the
disclosure is to provide additional information about the nature of credit risks inherent in our
financing receivables, how credit risk is analyzed and assessed when determining the allowance for
credit losses, and the reasons for the change in the allowance for credit losses. The aggregate
balance of non-current, preneed cemetery financing receivables was $16.1 million as of December 31,
2010. The disclosures related to period-end information are required for annual reporting periods
ending after December 15, 2010 which is effective for the Company at December 31, 2010.
Disclosures of activity that occurs during the reporting period are required for interim periods
beginning after December 15, 2010 which will be effective for the Company at March 31, 2011. The
additional required disclosures are provided in Note 7 to the Consolidated Financial Statements.
22
Table of Contents
SELECTED INCOME AND OPERATIONAL DATA
The following table sets forth certain income statement data for Carriage expressed as a
percentage of net revenues for the periods presented:
| Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Total revenues
|
100.0 | % | 100.0 | % | 100.0 | % | ||||||
|
Total gross profit
|
24.3 | 26.0 | 25.7 | |||||||||
|
General and administrative expenses
|
10.2 | 9.0 | 9.1 | |||||||||
|
Operating income
|
14.1 | 16.9 | 16.6 | |||||||||
|
Interest expense
|
10.4 | 10.4 | 9.9 | |||||||||
The following table sets forth the number of funeral homes and cemeteries owned and operated
by us for the periods presented:
| Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Funeral homes at beginning of period
|
139 | 136 | 138 | |||||||||
|
Acquisitions
|
— | 2 | 10 | |||||||||
|
Divestitures or closures of existing funeral homes
|
(3 | ) | — | (1 | ) | |||||||
|
|
||||||||||||
|
Funeral homes at end of period
|
136 | 138 | 147 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cemeteries at beginning of period
|
32 | 32 | 32 | |||||||||
|
Acquisitions
|
— | — | 1 | |||||||||
|
Divestitures
|
— | — | — | |||||||||
|
|
||||||||||||
|
Cemeteries at end of period
|
32 | 32 | 33 | |||||||||
|
|
||||||||||||
The following is a discussion of our results of operations for the years ended December 31,
2008, 2009, and 2010. The term “same store” or “existing operations” refers to funeral homes and
cemeteries acquired prior to January 1, 2006 and owned and operated for the entirety of each period
being presented. Funeral homes and cemeteries purchased after January 1, 2006 are referred to as
“acquired.” This classification of acquisitions has been important to management and investors in
monitoring the results of these businesses and gauging the leveraging performance contribution that
a selective acquisition program can have on the total Company’s performance. Depreciation and
amortization and regional and unallocated funeral and cemetery costs are not included in operating
profit.
YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009
| The following is a discussion of our results of operations for the years ended December 31, 2010 and 2009. |
Net income from continuing operations for the year ended December 31, 2010 totaled $8.1
million, equal to $0.45 diluted share as compared to $7.0 million for the year ended December 31,
2009, or $0.40 per diluted share. Total revenue for the year ended December 31, 2010 was $184.9
million, an increase of 4.1%, compared to $177.6 million for the comparable period in 2009. The
variance between the two periods was primarily due to approximately 44% higher financial revenue in
the current period. Although we experienced single digit declines in same store operating revenue
and profit, our acquired businesses and higher financial revenues drove the overall results higher
in 2010 compared to 2009.
No businesses were sold during 2010 and 2009.
23
Table of Contents
Funeral Home Segment.
The following table sets forth certain information regarding our
revenues and operating profit from the funeral home operations for the year ended December 31, 2009
compared to the year ended December 31, 2010.
| Year Ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2009 | 2010 | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Same store operating revenue
|
$ | 108,513 | $ | 107,351 | $ | (1,162 | ) | (1.1 | )% | |||||||
|
Acquired operating revenue
|
16,603 | 22,392 | 5,789 | 34.9 | % | |||||||||||
|
Preneed funeral insurance commissions
|
2,024 | 2,265 | 241 | 11.9 | % | |||||||||||
|
Preneed funeral trust earnings
|
3,911 | 6,117 | 2,206 | 56.4 | % | |||||||||||
|
|
||||||||||||||||
|
Revenues from continuing operations
|
$ | 131,051 | $ | 138,125 | $ | 7,074 | 5.4 | % | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Operating profit:
|
||||||||||||||||
|
Same store operating profit
|
$ | 38,977 | $ | 36,035 | $ | (2,942 | ) | (7.5 | )% | |||||||
|
Acquired operating profit
|
4,809 | 5,123 | 314 | 6.5 | % | |||||||||||
|
Preneed funeral insurance commissions
|
285 | 876 | 591 | 207.4 | % | |||||||||||
|
Preneed funeral trust earnings
|
3,911 | 6,117 | 2,206 | 56.4 | % | |||||||||||
|
|
||||||||||||||||
|
Operating profit from continuing operations
|
$ | 47,982 | $ | 48,151 | $ | 169 | 0.3 | % | ||||||||
|
|
||||||||||||||||
Funeral same store operating revenues for the year ended December 31, 2010 decreased $1.2
million, or 1.1% when compared to the year ended December 31, 2009. We experienced flat volume in
the number of contracts year over year and an increase of 0.6%, to $5,610, in the average revenue
per contract for those existing operations. The average revenue per contract includes the impact
of the funeral trust fund earnings. The number of traditional burial contracts decreased 2.3%
while the average revenue per burial contract increased 2.1% to $8,100. The cremation rate for the
same store businesses rose from 39.7% to 40.7%. The average revenue per cremation contract
increased 2.9% to $3,089 and the number of cremation contracts increased 2.5%. Cremations with
services have declined from 46.2% of total cremation contracts in the year ended 2009 to 44.4% in
the year ended 2010. The average revenue for “other” contracts, which make up approximately 7.6%
of the number of contracts, declined from $2,057 to $2,016. Other contracts consist of charges for
merchandise or services for which we do not perform a funeral service for the deceased during the
period.
Same store operating profit for the year ended December 31, 2010 decreased $3.0 million, or
7.5%, from the comparable year ended December 31, 2009, and as a percentage of funeral same store
operating revenue, decreased from 35.9% to 33.6% as we have seen operating expenses increase in the
year ended December 31,2010. We have experienced increases in all same store controllable expense
categories but primarily in salaries and wages and health insurance costs for the year ended
December 31, 2010, when compared to the year ended December 31, 2009. Our costs for the self
insurance program for property, casualty and general liability risk has remained flat year over
year.
Funeral acquired revenues for the year ended December 31, 2010 increased $5.8 million, or
34.9%, when compared to the year ended December 31, 2009 as we experienced a 33.2% increase in the
number of contracts, due to the acquisitions completed in the second half of 2010, and a slight
increase of 2.0%, to $4,066, in the average revenue per contract for those acquired operations.
The 2010 period includes the results of operations attributable to the two acquisitions that closed
in the fourth quarter of 2009 and the five funeral businesses acquired in 2010. The cremation rate
for the acquired businesses was 56.2% for 2010, up from 53.1% in the prior year, as these
businesses are located in higher cremation areas compared to our existing locations. The average
revenue per cremation contract increased 8.1% to $2,465 for 2010 and the number of cremation
contracts increased 40.9% compared to 2009.
Acquired operating profit for the year ended December 31, 2010 increased $0.3 million, or
6.5%, from the year ended December 31, 2009 and, as a percentage of revenue from acquired
businesses, was 28.9% for 2009 compared to 22.9% for 2010 as those recently acquired businesses
have not fully transitioned into Carriage’s Standard Operating Model.
The two categories of financial revenue, insurance commissions and trust earnings on matured
preneed contracts, had a meaningful impact on funeral revenues and operating profit. On a combined
basis, these categories experienced an increase of $2.4 million and $2.8 million in revenue and
operating profit, respectively, compared to the year ended December 31, 2009 primarily due to
higher realization of interest income, dividends and capital gains that have been allocated to
individual maturing contracts and lower preneed expenses.
24
Table of Contents
Cemetery Segment.
The following table sets forth certain information regarding our revenues
and operating profit from the cemetery operations for the year ended December 31, 2009 compared to
the year ended December 31, 2010:
| Year Ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2009 | 2010 | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Same store operating revenue
|
$ | 36,021 | $ | 34,211 | $ | (1,810 | ) | (5.0 | )% | |||||||
|
Acquired operating revenue
|
6,276 | 6,239 | (37 | ) | (0.6 | )% | ||||||||||
|
Cemetery trust earnings
|
2,747 | 4,815 | 2,068 | 75.3 | % | |||||||||||
|
Preneed cemetery finance charges
|
1,532 | 1,557 | 25 | 1.6 | % | |||||||||||
|
|
||||||||||||||||
|
Revenues from continuing operations
|
$ | 46,576 | $ | 46,822 | $ | 246 | 0.5 | % | ||||||||
|
|
||||||||||||||||
|
Operating Profit:
|
||||||||||||||||
|
Same store operating profit
|
$ | 7,872 | $ | 7,340 | $ | (532 | ) | (6.8 | )% | |||||||
|
Acquired operating profit
|
1,441 | 1,707 | 266 | 18.5 | % | |||||||||||
|
Cemetery trust earnings
|
2,747 | 4,815 | 2,068 | 75.3 | % | |||||||||||
|
Preneed cemetery finance charges
|
1,532 | 1,557 | 25 | 1.6 | % | |||||||||||
|
|
||||||||||||||||
|
Operating profit from continuing operations
|
$ | 13,592 | $ | 15,419 | $ | 1,827 | 13.4 | % | ||||||||
|
|
||||||||||||||||
Cemetery same store operating revenues for the year ended December 31, 2010, decreased $1.8
million, or 5.0%, compared to the year ended December 31, 2009. Same store revenue from preneed
property sales decreased $1.8 million, or 10.2%, which was primarily a reflection of a 13.9%
decrease in the number of interment rights (property) sold. We experienced a 10.9% increase in the
average price per interment compared to 2009. The percentage of those we were able to recognize as
revenue, because we received at least 10% of the sales price from the customer, decreased from
87.8% to 83.4%. Revenue from deliveries of preneed merchandise and services deliveries decreased
$0.1 million, or 0.9%, and same store at-need revenues increased $0.5 million, or 3.6%.
Cemetery same store operating profit for the year ended December 31, 2010 decreased $0.5
million, or 6.8%. As a percentage of revenues, cemetery same store operating profit decreased
slightly from 21.8% to 21.4%. Promotional expenses (primarily preneed sales commissions) decreased
$0.7 million in connection with the lower preneed sales volumes and bad debts decreased $0.2
million due to better management of receivables. Overall, controllable expenses such as salaries
and benefits, transportation, and general and administrative costs declined $0.2 million, or 1.5%,
and the costs of the self insurance program for property, casualty and general liability risks
decreased $0.1 million, or 2.4%.
Cemetery acquired revenues for the year ended December 30, 2010 decreased slightly compared to
the year ended December 31, 2009. Revenue from preneed property sales increased 2.2% and preneed
revenue from merchandise and services deliveries decreased $0.1 million, or 11.0%. At-need
revenues remained flat compared to the same period in 2009. As a percentage of revenues, cemetery
acquired operating profit increased from 23.0% to 27.4%.
The two categories of financial revenue which consist of trust earnings and finance charges on
preneed receivables had a meaningful impact on cemetery revenues and operating profit. Total trust
earnings increased $2.1 million, or 75.3%, when compared to the year ended December 31, 2009.
Earnings from perpetual care trust funds totaled $4.3 million for the year ended December 31, 2010
compared to $2.3 million for the year ended December 31, 2009. Trust earnings recognized upon the
delivery of merchandise and service contracts increased $0.2 million, or 41.3%, compared to the
same period in 2009. Finance charges on the preneed contracts remained flat year over year.
Other
. General and administrative expenses totaled $16.8 million for the year ended December
31, 2010, an increase of $0.8 million compared to the year ended December 31, 2009. We incurred an
additional $0.8 million of incentive compensation costs and approximately $0.9 million of
additional costs in our Corporate Development department and the related costs of closing
acquisitions. Included in our general and administrative expenses is a $0.7 million credit for the
recovery of legal fees from a previously settled lawsuit.
Interest income and other, net
for the year ended December 31, 2010 is primarily interest
income on the short-term investments, a gain related to an insurance claim and the gain on the sale
of TIDES.
Income taxes.
See Note 16 to the Consolidated Financial Statements for a discussion of the
income taxes for 2010 and 2009.
25
Table of Contents
YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008
The following is a discussion of our results of operations for the years ended December 31,
2009 and 2008.
Net income from continuing operations for the year ended December 31, 2009 totaled $7.0
million, equal to $0.40 per diluted share as compared to $1.8 million for the year ended December
31, 2008, or $0.09 per diluted share. The variance between the two periods was primarily due to
improvement in the results of our cemetery businesses, a decrease in corporate costs and expenses
and a class action litigation settlement charge in 2008. Our cemetery businesses experienced a
$2.6 million increase in pre-tax operating profit, equal to $0.09 per diluted share. In 2009,
corporate costs and expenses decreased $2.1 million from 2008 due primarily to 2008 legal costs and
severance expenses which were absent in 2009. In 2008, the Company expensed $3.3 million in
conjunction with the litigation settlement, which was funded in 2009.
Loss from discontinued operations for the year ended December 31, 2008 totaled $1.5 million,
equal to ($0.08) per diluted share. Two funeral home businesses were sold during 2008 for
approximately $1.0 million from which a pre-tax loss of $2.4 million was recorded. No businesses
were sold during 2009.
Funeral Home Segment.
The following table sets forth certain information regarding our
revenues and operating profit from the funeral home operations for the year ended December 31, 2008
compared to the year ended December 31, 2009.
| Year Ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2008 | 2009 | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Same store operating revenue
|
$ | 110,147 | $ | 108,513 | $ | (1,634 | ) | (1.5 | )% | |||||||
|
Acquired operating revenue
|
16,341 | 16,603 | 262 | 1.6 | % | |||||||||||
|
Preneed funeral insurance commissions
|
2,670 | 2,024 | (646 | ) | (24.2 | )% | ||||||||||
|
Preneed funeral trust earnings
|
5,088 | 3,911 | (1,177 | ) | (23.1 | )% | ||||||||||
|
|
||||||||||||||||
|
Revenues from continuing operations
|
$ | 134,246 | $ | 131,051 | $ | (3,195 | ) | (2.4 | )% | |||||||
|
|
||||||||||||||||
|
Revenues from discontinued operations
|
$ | 476 | $ | — | $ | (476 | ) | * | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Operating profit:
|
||||||||||||||||
|
Same store operating profit
|
$ | 37,736 | $ | 38,977 | $ | 1,241 | 3.3 | % | ||||||||
|
Acquired operating profit
|
4,238 | 4,809 | 571 | 13.5 | % | |||||||||||
|
Preneed funeral insurance commissions
|
982 | 285 | (697 | ) | (71.0 | )% | ||||||||||
|
Preneed funeral trust earnings
|
5,088 | 3,911 | (1,177 | ) | (23.1 | )% | ||||||||||
|
|
||||||||||||||||
|
Operating profit from continuing operations
|
$ | 48,044 | $ | 47,982 | $ | (62 | ) | (0.1 | )% | |||||||
|
|
||||||||||||||||
|
Revenues from discontinued operations
|
$ | 145 | $ | — | $ | (145 | ) | * | ||||||||
|
|
||||||||||||||||
| * | not meaningful |
Funeral same store revenues for the year ended December 31, 2009 decreased $1.6 million, or
1.5%, when compared to the year ended December 31, 2008 as we experienced a 5.4% decrease in the
number of contracts and an increase of 3.6%, to $5,605, in the average revenue per contract for
those existing operations. The number of traditional burial contracts decreased 6.5% while the
average revenue per burial contract increased 3.1% to $7,947. The cremation rate for the same
store businesses rose from 37.2% to 39.5%. The average revenue per cremation contract increased
4.3% to $3,022 and the number of cremation contracts increased approximately 0.3%.
Total same store operating profit for the year ended December 31, 2009 increased $1.2 million,
or 3.3%, from the comparable period in 2008, and as a percentage of funeral same store revenue,
increased from 34.3% to 35.9% as a function of our ability to reduce operating costs across
substantially all expense categories. Same store controllable expenses, such as salaries and
wages, transportation and administrative expenses declined $2.1 million, or 4.2%, for the year
ended December 31, 2009, when compared to the year ended December 31, 2008. Additionally, casket
and other merchandise costs declined $0.8 million, and as a percentage of same store revenues from
14.2% in 2008 to 13.8% in 2009.
Funeral acquired revenues for the year ended December 31, 2009 increased $0.3 million, or
1.6%, when compared to the year ended December 31, 2008 as we experienced a 0.7% decrease in the
number of contracts and a decrease of 0.9%, to $3,968, in the
26
Table of Contents
average revenue per contract for
those acquired operations. The cremation rate for the acquired businesses was 53.2% for the year
ended December 31, 2009, up from 51.3% in the prior year period. The acquired businesses are
located in higher cremation areas compared to the existing locations. The number of cremation
contracts increased 2.9% and the average revenue per cremation contract increased 7.7% to $2,263
for 2009 compared to the prior year.
Acquired operating profit for the year ended December 31, 2009 increased $0.6 million, or
13.5%, from the comparable period in 2008, and as a percentage of revenue from acquired businesses,
increased from 25.9% to 29.0% also as a function of our ability to reduce operating costs. In
total, controllable expenses for acquired funeral home operations were managed $0.5 million lower
than last year.
For the Funeral Home Segment in total, cremation services represented 42.1% of the number of
funeral services during 2009, compared to 39.8% for 2008. Cremations with services have grown
significantly from 36.1% of total cremation contracts in 2008 to 43.9% in 2009. The average
revenue for all burial contracts increased 2.4% to $7,734, while the average revenue for cremation
contracts increased 4.8% to $2,841. We have addressed the growing demand for cremation by training
the funeral directors to present multiple merchandise and service options to cremation families,
resulting in choices that produce higher revenues. The average revenue for “other” contracts,
which make up approximately 7.1% of the number of contracts, increased 1.7% to $2,004. Other
contracts consist of charges for merchandise or services for which we do not perform a funeral
service for the deceased during the period.
Cemetery Segment.
The following table sets forth certain information regarding our revenues
and gross profit from the cemetery operations for the year ended December 31, 2008 compared to the
year ended December 31, 2009:
| Year Ended | ||||||||||||||||
| December 31, | Change | |||||||||||||||
| 2008 | 2009 | Amount | Percent | |||||||||||||
| (dollars in thousands) | ||||||||||||||||
|
Revenues:
|
||||||||||||||||
|
Same store operating revenue
|
$ | 32,615 | $ | 36,021 | $ | 3,406 | 10.4 | % | ||||||||
|
Acquired operating revenue
|
6,082 | 6,276 | 194 | 3.2 | % | |||||||||||
|
Cemetery trust earnings
|
2,328 | 2,747 | 419 | 18.0 | % | |||||||||||
|
Preneed cemetery finance charges
|
1,657 | 1,532 | (125 | ) | (7.5 | )% | ||||||||||
|
|
||||||||||||||||
|
Revenues from continuing operations
|
$ | 42,682 | $ | 46,576 | $ | 3,894 | 9.1 | % | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Operating Profit:
|
||||||||||||||||
|
Same store operating profit
|
$ | 5,132 | $ | 7,872 | $ | 2,740 | 53.4 | % | ||||||||
|
Acquired operating profit
|
1,915 | 1,441 | (474 | ) | (24.7 | )% | ||||||||||
|
Cemetery trust earnings
|
2,328 | 2,747 | 419 | 18.0 | % | |||||||||||
|
Preneed cemetery finance charges
|
1,657 | 1,532 | (125 | ) | (7.5 | )% | ||||||||||
|
|
||||||||||||||||
|
Operating profit from continuing operations
|
$ | 11,032 | $ | 13,592 | $ | 2,560 | 23.2 | % | ||||||||
|
|
||||||||||||||||
Cemetery same store revenues for year ended December 31, 2009 increased $3.4 million, or
10.4%, compared to the year ended December 31, 2008. Same store revenue from preneed property
sales increased $4.2 million, or 30.4%, which was driven by a 30.3% increase in the number of
interment rights (property) sold and a 1.2% increase in the average price per interment. The
percentage of those we were able to recognize as revenue, because we received at least 10% of the
sales price from the customer, increased from 81.9% to 87.8%. Revenue from preneed merchandise and
services deliveries decreased $0.3 million, or 6.3%, and atneed revenues from property, merchandise
and services declined $0.2 million, or 1.7%, as the average sale per atneed contract remained flat
and the number of interments declined.
Cemetery same store operating profit for the year ended December 31, 2009 increased $2.7
million, or 53.4% on the strength of the higher revenues. As a percentage of revenues, cemetery
same store operating profit increased from 15.7% to 21.8%. Promotional expenses (primarily preneed
sales commissions) increased $1.9 million, or 36.9%, as a result of the higher preneed property
sales. Tighter management over expenses such as salaries and benefits, transportation, bad debts
and general and administrative costs produced a decline of $0.7 million in those expenses.
Cemetery acquired revenues for the year ended December 31, 2009 increased $0.2 million, or
3.2%, compared to the year ended December 31, 2008. Acquired revenue from preneed property sales
remained flat and preneed revenue from merchandise and
services deliveries increased $0.3 million while at-need revenues declined $0.1 million. The
number of interment rights sold declined 1.9% while the average price per interment increased 4.3%
and the percentage of those recognized remained flat.
27
Table of Contents
Cemetery acquired operating profit for the year ended December 31, 2009 decreased $0.5
million, or 24.7%. As a percentage of revenues, cemetery acquired operating profit decreased from
31.5% to 23.0%. Promotional expenses (primarily preneed sales commissions) increased $0.1 million.
Expenses such as bad debts and general and administrative costs were $0.2 million over prior year.
Financial revenues increased $0.3 million compared to the prior year period. Earnings from
perpetual care trust funds totaled $2.3 million for the year ended December 31, 2009 compared to
$1.5 million for the year ended December 31, 2008. Finance charges on the preneed contracts
declined approximately $0.1 million as we employed zero interest promotions for limited periods to
spur sales. Trust earnings from the delivery of merchandise and service contracts declined $0.4
million for the year ended December 31, 2009 compared to the same period in 2008 as a result of
realized losses on trust investments in 2009.
Other.
General and administrative expenses decreased $2.1 million for the year ended December
31, 2009 primarily related to charges in 2008 for unusually high legal costs and severance for our
former Chief Financial Officer which were absent in the current year.
Interest income and other, net for the year ended December 31, 2009 is primarily interest
income on the short-term investments.
Income taxes.
See Note 16 to the Consolidated Financial Statements for a discussion of the
income taxes for 2009 and 2008.
GOODWILL IMPAIRMENT TESTING
The excess of the purchase price over the fair value of identifiable net assets of funeral
home businesses acquired in business combinations is recorded as goodwill. Goodwill has not
historically been recorded in connection with the acquisition of cemetery businesses. Goodwill is
tested annually for impairment by assessing the fair value of each of our reporting units. Our
funeral segment reporting units consist of our East, Central and West regional divisions in the
United States. We performed our annual impairment test of goodwill using information as of August
31, 2010.
Our goodwill impairment test involves estimates and management judgment. In the first step of
our goodwill testing, we compare the fair value of each reporting unit to its carrying value,
including goodwill. We determine fair value for each reporting unit using both a market approach,
weighted 70%, and an income approach, weighted 30%. Funeral home selling prices are typically
quoted in the marketplace as a multiple of EBITDA (earnings before interest, taxes, depreciation
and amortization). Our methodology for determining a market approach fair value utilized recent
sales transactions in the industry, calculated on the basis of EBITDA multiples. Our methodology
for determining an income-based fair value is based on discounting projected future cash flows.
The projected future cash flows include assumptions concerning future operating performance using a
weighted average cost of capital for Carriage and other public death care companies. Goodwill
impairment is not recorded where the fair value of the reporting unit exceeds its carrying amount.
If the fair value of the reporting unit is less than its carrying value, the implied fair value of
goodwill is compared to the carrying amount of the reporting units goodwill and if the carrying
amount exceeds the implied value, an impairment charge would be recorded in an amount equal to that
excess. Based on our impairment test performed using August 31, 2010 data, we concluded that there
was no impairment of goodwill. The West region has the greatest risk of failing the first step of
the impairment test in the future. The fair value of the West region exceeded its carrying value
by approximately 13%. As of December 31, 2010, $50.9 million of goodwill was recorded in the West
region. Should industry sales transactions suffer a decline in the multiple of EBITDA or the
results of the West’s operations decline in the future, the risk of goodwill impairment would
increase.
In addition to our annual review, we assess the impairment of goodwill whenever events or
changes in circumstances indicate that the carrying value may be greater than fair value. Factors
that could trigger an interim impairment review include, but are not limited to, significant
adverse changes in the business climate which may be indicated by a decline in the Company’s market
capitalization or decline in operating results. The market capitalization of the Company consists
of the common stock, Senior Notes and convertible trust preferred securities. No such events or
changes occurred between the testing date and year end to trigger a subsequent impairment review.
28
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LIQUIDITY AND CAPITAL RESOURCES
Carriage began 2010 with $3.6 million in cash and other liquid investments and ended the year
with $1.3 million in cash and $0.6 drawn on the bank credit facility. The elements of cash flow
for 2010 consisted of the following (in millions):
|
Cash and liquid investments at beginning of year
|
$ | 3.6 | ||
|
Cash flow from operations
|
25.7 | |||
|
Cash used for business acquisitions
|
(19.0 | ) | ||
|
Cash drawn on the bank credit facility
|
0.6 | |||
|
Cash used for maintenance capital expenditures
|
(7.1 | ) | ||
|
Cash used for growth capital expenditures — funeral homes
|
(1.3 | ) | ||
|
Cash used for growth capital expenditures — cemeteries
|
(2.3 | ) | ||
|
Other investing and financing activities, net
|
1.1 | |||
|
|
||||
|
Cash at end of year
|
$ | 1.3 | ||
|
|
||||
For the year ended December 31, 2010, cash provided by operating activities was $25.7 million
as compared to $16.1 million for the year ended December 31, 2009. The 2009 period included a $3.3
million litigation settlement. Capital expenditures totaled $10.7 million for the year ended
December 31, 2010 compared to $9.3 million for the year ended December 31, 2009. Capital
expenditures for the year ended December 31, 2010 included $2.3 million for cemetery inventory
development projects.
The outstanding principal of senior debt at December 31, 2010 totaled $137.3 million and
consisted of $130.0 million 7⅞% in Senior Notes maturing in 2015, $0.6 drawn on our credit facility
and $6.7 million in acquisition indebtedness and capital lease obligations. Additionally, $0.1
million in letters of credit were issued and outstanding under the credit facility at December 31,
2010.
The Company has a $40.0 million senior secured revolving credit facility that matures in
November 2012 and is collateralized by all personal property and funeral home real property in
certain states. The credit facility also contains an accordion provision to borrow up to an
additional $20.0 million. Borrowings under the credit facility bear interest at either prime or
LIBOR options. At December 31, 2010, the prime rate option was equivalent to 5.75% and the LIBOR
option was equivalent to 3.756%, which is set at the 30 day LIBOR rate plus 350 basis points. The
Company had the ability to borrow an additional $39.3 million at December 31. 2010.
A total of $92.9 million was outstanding at December 31, 2010 on the convertible junior
subordinated debenture. Amounts outstanding under the debenture are payable to our affiliate
trust, Carriage Services Capital Trust, bear interest at 7.0% and mature in 2029. Substantially all
the assets of the Trust consist of the convertible junior subordinated debentures. In 1999, the
Trust issued 1.875 million shares of term income deferrable equity securities (“TIDES”). The
rights of the debentures are functionally equivalent to those of the TIDES. In June 2010, the
Company repurchased 17,850 shares of these TIDES for approximately $0.6 million and recorded a gain
of $0.3 million. In September 2010, the Company converted these preferred shares at the current
conversion rate of 2.4465 into shares of common stock equal to 43,670 shares. Immediately upon the
exchange, these common shares were cancelled and held in Treasury.
The convertible junior subordinated debenture payable to the affiliated Trust, and the TIDES,
each contain a provision for the deferral of interest payments and distributions for up to 20
consecutive quarters. During any period in which distribution payments are deferred, distributions
will continue to accumulate at the 7% annual rate. Also, the deferred distributions themselves
accumulate distributions at the annual rate of 7%. During any deferral period, Carriage is
prohibited from paying dividends on common stock or repurchasing common stock, subject to limited
exceptions. The Company currently expects to continue paying the distributions as due.
The Company intends to use its cash and credit facility primarily to acquire funeral home and
cemetery businesses and for internal growth projects, such as cemetery inventory development. The
Company has the ability to draw on our revolving credit facility, subject to customary terms and
conditions of the credit agreement.
We believe our cash on hand, cash flow from operations, and the available capacity under our
credit facility described above will be adequate to meet our working capital needs and other
financial obligations over the next twelve months.
29
Table of Contents
Balance Sheet Obligations
The following table summarizes the future payments required for the debt on our balance sheet
as of December 31, 2010. Where appropriate we have indicated the footnote to our annual
Consolidated Financial Statements where additional information is available.
| Payments By Period | ||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Note | After | |||||||||||||||||||||||||||||||
| Reference | Total | 2011 | 2012 | 2013 | 2014 | 2015 | 5 Years | |||||||||||||||||||||||||
|
Long-term debt
|
13 | $ | 132.9 | $ | 0.4 | $ | 1.0 | $ | 0.6 | $ | 0.4 | $ | 130.2 | $ | 0.3 | |||||||||||||||||
|
Capital lease obligations,
including interest
|
15 | 7.9 | 0.4 | 0.4 | 0.4 | 0.5 | 0.5 | 5.7 | ||||||||||||||||||||||||
|
Convertible junior
subordinated
debenture
(a)
|
14 | 92.9 | — | — | — | — | — | 92.9 | ||||||||||||||||||||||||
|
Total contractual obligations
|
$ | 233.7 | $ | 0.8 | $ | 1.4 | $ | 1.0 | $ | 0.9 | $ | 130.7 | $ | 98.9 | ||||||||||||||||||
| (a) | Matures in 2029 |
Off-Balance Sheet Arrangements
The following table summarizes our off-balance sheet arrangements as of December 31, 2010.
Where appropriate we have indicated the footnote to our Consolidated Financial Statements where
additional information is available.
| Payments By Period | ||||||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||
| Note | After | |||||||||||||||||||||||||||||||
| Reference | Total | 2011 | 2012 | 2013 | 2014 | 2015 | 5 Years | |||||||||||||||||||||||||
|
Operating leases
|
15 | $ | 14.9 | $ | 3.7 | $ | 3.6 | $ | 2.8 | $ | 2.4 | $ | 1.5 | $ | 0.9 | |||||||||||||||||
|
Interest payments on
long-term debt
|
13 | 41.0 | 6.9 | 6.9 | 6.8 | 6.8 | 6.8 | 6.8 | ||||||||||||||||||||||||
|
Noncompete agreements
|
15 | 6.7 | 1.7 | 1.4 | 1.0 | 0.9 | 0.7 | 1.0 | ||||||||||||||||||||||||
|
Consulting agreements
|
15 | 1.9 | 0.7 | 0.4 | 0.3 | 0.3 | 0.1 | 0.1 | ||||||||||||||||||||||||
|
Executive management
compensation agreements
|
15 | 6.0 | 2.0 | 2.0 | 2.0 | — | — | — | ||||||||||||||||||||||||
|
Total contractual cash
obligations
|
$ | 70.5 | $ | 15.0 | $ | 14.3 | $ | 12.9 | $ | 10.4 | $ | 9.1 | $ | 8.8 | ||||||||||||||||||
The obligations related to our off-balance sheet arrangements are significant to our future
liquidity; however, although we can provide no assurances, we anticipate that these obligations
will be funded from cash provided from our operating activities. If we are not able to meet these
obligations with cash provided for by our operating activities, we may be required to access the
capital markets or draw down on our credit facilities both of which may be more likely or more
difficult to access.
Uncertain tax positions recorded at December 31, 2010 total approximately $1.9 million,
excluding penalties and interest. The ultimate timing of when those obligations will be settled
cannot be determined with reasonable assurance and have been excluded from the tables above. Refer
to Note 16 in our consolidated financial statements.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate. Generally, the rate
is higher during the winter months because the incidences of death from influenza and pneumonia are
higher during this period than other periods of the year.
INFLATION
Inflation has not had a significant impact on our results of operations.
FORWARD-LOOKING STATEMENTS
In addition to historical information, this Annual Report on Form 10-K contains
forward-looking statements within the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales,
cash flow, debt levels or other financial items; any statements of the plans, strategies and
objectives of
management for future operation; any statements regarding future economic conditions or
performance; any statements of belief; and
30
Table of Contents
any statements of assumptions underlying any of the
foregoing. Forward-looking statements may include the words “may”, “will”, “estimate”, “intend”,
“believe”, “expect”, “project”, “forecast”, “plan”, “anticipate” and other similar words.
Forward-looking statements are not guarantees of performance. Important factors that could cause
actual results to differ materially from our expectations reflected in our forward-looking
statements include those risks related to our business and our industry set forth in Item 1A. Risk
Factors.
In the ordinary course of business, we are typically exposed to a variety of market risks.
Currently, these are primarily related to changes in market values related to outstanding debts and
changes in the values of securities associated with the preneed and perpetual care trusts.
Management is actively involved in monitoring exposure to market risk and developing and utilizing
appropriate risk management techniques when appropriate and when available for a reasonable price.
We are not exposed to any other significant market risks including commodity price risk, nor
foreign currency exchange risk.
We monitor current and forecasted interest rate risk in the ordinary course of business and
seek to maintain optimal financial flexibility, quality and solvency. As of December 31, 2010, our
outstanding debt is comprised entirely of fixed rate obligations except for the $0.6 million drawn
on the line of credit.
We currently have $0.6 million outstanding under our $40.0 million floating rate line of
credit. Any further borrowings against the line of credit or any change in the floating rate would
cause a change in interest expense.
The
7⅞% Senior Notes were issued to the public at par and are carried at a cost of $130
million. At December 31, 2010, these securities were typically trading at a price of approximately
$100.75, indicating a market value of approximately $131.0 million.
The convertible junior subordinated debentures, payable to Carriage Services Capital Trust,
pay interest at the fixed rate of 7% and are carried on our Consolidated Balance Sheet at a cost of
approximately $92.9 million. The estimated fair value of these securities is estimated to be
approximately $66.6 million at December 31, 2010 based on available broker quotes of the
corresponding preferred securities issued by the Trust.
Increases in market interest rates may cause the value of these debt instruments to decrease
but such changes will not affect our interest costs. The remainder of the our long-term debt and
leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a
market, nor otherwise have a quoted market value. Any increase in market interest rates causes the
fair value of those liabilities to decrease.
Securities subject to market risk consist of investments held by our preneed funeral, cemetery
merchandise and services and perpetual care trust funds. See Notes 6, 8 and 10 to our Consolidated
Financial Statements for the estimated fair values of those securities. The sensitivity of the
fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.81%
change in the value of the fixed income securities.
31
Table of Contents
CARRIAGE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
| Page | ||||
| 33 | ||||
| 34 | ||||
| 35 | ||||
| 36 | ||||
| 37 | ||||
| 38 | ||||
32
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Carriage Services, Inc.:
Carriage Services, Inc.:
We have audited the accompanying consolidated balance sheets of Carriage Services, Inc. and
subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of
operations, changes in stockholders’ equity, and cash flows for each of the years in the
three-year period ended December 31, 2010. These consolidated financial statements are the
responsibility of the Company’s management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the
financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Carriage Services, Inc. and subsidiaries of December
31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in
the three-year period ended December 31, 2010, in conformity with U.S. generally accepted
accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), Carriage Services, Inc.’s internal control over financial reporting as of
December 31, 2010, based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO),
and our report dated March 8, 2011, expressed an unqualified opinion on the effectiveness of
internal control over financial reporting.
| /s/ KPMG LLP | ||||
Houston, Texas
March 8, 2011
March 8, 2011
33
Table of Contents
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(in thousands, except share data)
| December 31, | ||||||||
| 2009 | 2010 | |||||||
|
ASSETS
|
||||||||
|
Current assets:
|
||||||||
|
Cash and cash equivalents
|
$ | 3,616 | $ | 1,279 | ||||
|
Accounts receivable, net of allowance for bad debts of $751 in 2009 and $979 in 2010
|
15,177 | 15,587 | ||||||
|
Inventories and other current assets
|
14,683 | 10,828 | ||||||
|
|
||||||||
|
Total current assets
|
33,476 | 27,694 | ||||||
|
|
||||||||
|
|
||||||||
|
Preneed cemetery trust investments
|
67,901 | 79,691 | ||||||
|
Preneed funeral trust investments
|
75,200 | 81,143 | ||||||
|
Preneed receivables, net of allowance for bad debts of $1,158 in 2009 and $1,236 in 2010.
|
16,782 | 24,099 | ||||||
|
Receivables from preneed funeral trusts
|
14,629 | 21,866 | ||||||
|
Property, plant and equipment, net of accumulated depreciation of $66,201 in 2009 and $71,700 in 2010.
|
124,800 | 128,472 | ||||||
|
Cemetery property
|
71,661 | 71,128 | ||||||
|
Goodwill
|
166,930 | 183,324 | ||||||
|
Deferred charges and other non-current assets
|
7,536 | 7,860 | ||||||
|
Cemetery perpetual care trust investments
|
40,383 | 45,735 | ||||||
|
|
||||||||
|
Total assets
|
$ | 619,298 | $ | 671,012 | ||||
|
|
||||||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
||||||||
|
Current liabilities:
|
||||||||
|
Current portion of long-term debt and obligations under capital leases
|
$ | 558 | $ | 563 | ||||
|
Accounts payable and other liabilities
|
6,877 | 9,700 | ||||||
|
Accrued liabilities
|
14,037 | 14,896 | ||||||
|
|
||||||||
|
Total current liabilities
|
21,472 | 25,159 | ||||||
|
|
||||||||
|
Senior long-term debt, net of current portion
|
131,898 | 132,416 | ||||||
|
Convertible junior subordinated debenture due in 2029 to an affiliate
|
93,750 | 92,858 | ||||||
|
Obligations under capital leases, net of current portion
|
4,418 | 4,289 | ||||||
|
Deferred preneed cemetery revenue
|
49,176 | 50,125 | ||||||
|
Deferred preneed funeral revenue
|
26,658 | 39,517 | ||||||
|
Deferred preneed cemetery receipts held in trust
|
67,901 | 79,691 | ||||||
|
Deferred preneed funeral receipts held in trust
|
75,200 | 81,143 | ||||||
|
Care trusts’ corpus
|
40,403 | 45,941 | ||||||
|
|
||||||||
|
Total liabilities
|
510,876 | 551,139 | ||||||
|
|
||||||||
|
|
||||||||
|
Commitments and contingencies
|
||||||||
|
Redeemable Preferred Stock
|
200 | 200 | ||||||
|
|
||||||||
|
Stockholders’ equity:
|
||||||||
|
Common Stock, $.01 par value; 80,000,000 shares authorized; 20,411,000 and 21,311,000 issued in 2009
and 2010, respectively
|
205 | 213 | ||||||
|
Additional paid-in capital
|
197,033 | 200,987 | ||||||
|
Accumulated deficit
|
(79,016 | ) | (70,951 | ) | ||||
|
Treasury stock, at cost; 3,109,000 and 3,153,000 shares at December 31, 2009 and 2010, respectively
|
(10,000 | ) | (10,576 | ) | ||||
|
|
||||||||
|
Total stockholders’ equity
|
108,222 | 119,673 | ||||||
|
|
||||||||
|
Total liabilities and stockholders’ equity
|
$ | 619,298 | $ | 671,012 | ||||
|
|
||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
34
Table of Contents
CARRIAGE SERVICES, INC.
(in thousands, except per share data)
| Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Revenues:
|
||||||||||||
|
Funeral
|
$ | 134,246 | $ | 131,051 | $ | 138,125 | ||||||
|
Cemetery
|
42,682 | 46,576 | 46,822 | |||||||||
|
|
||||||||||||
|
|
176,928 | 177,627 | 184,947 | |||||||||
|
Field costs and expenses:
|
||||||||||||
|
Funeral
|
86,202 | 83,069 | 89,974 | |||||||||
|
Cemetery
|
31,650 | 32,984 | 31,403 | |||||||||
|
Depreciation and amortization
|
8,757 | 8,748 | 8,621 | |||||||||
|
Regional and unallocated funeral and cemetery costs
|
7,276 | 6,708 | 7,502 | |||||||||
|
|
||||||||||||
|
|
133,885 | 131,509 | 137,500 | |||||||||
|
|
||||||||||||
|
Gross profit
|
43,043 | 46,118 | 47,447 | |||||||||
|
|
||||||||||||
|
Corporate costs and expenses:
|
||||||||||||
|
General, administrative and other
|
16,496 | 14,412 | 15,451 | |||||||||
|
Home office depreciation and amortization
|
1,616 | 1,591 | 1,355 | |||||||||
|
|
||||||||||||
|
|
18,112 | 16,003 | 16,806 | |||||||||
|
|
||||||||||||
|
Operating income
|
24,931 | 30,115 | 30,641 | |||||||||
|
Interest expense
|
(18,331 | ) | (18,498 | ) | (18,262 | ) | ||||||
|
Litigation settlement
|
(3,300 | ) | — | — | ||||||||
|
Interest income and other, net
|
229 | 228 | 1,068 | |||||||||
|
|
||||||||||||
|
Total interest and other
|
(21,402 | ) | (18,270 | ) | (17,194 | ) | ||||||
|
|
||||||||||||
|
Income from continuing operations before income taxes
|
3,529 | 11,845 | 13,447 | |||||||||
|
Provision for income taxes
|
(1,725 | ) | (4,797 | ) | (5,368 | ) | ||||||
|
|
||||||||||||
|
Net income from continuing operations
|
1,804 | 7,048 | 8,079 | |||||||||
|
Loss from discontinued operations, net of tax
|
(1,546 | ) | — | — | ||||||||
|
|
||||||||||||
|
Net Income
|
258 | 7,048 | 8,079 | |||||||||
|
Preferred stock dividend
|
10 | 14 | 14 | |||||||||
|
|
||||||||||||
|
Net income available to common stockholders
|
$ | 248 | $ | 7,034 | $ | 8,065 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||
|
Continuing operations
|
$ | 0.09 | $ | 0.40 | $ | 0.46 | ||||||
|
Discontinued operations
|
(0.08 | ) | — | — | ||||||||
|
|
||||||||||||
|
Net income
|
$ | 0.01 | $ | 0.40 | $ | 0.46 | ||||||
|
|
||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||
|
Continuing operations
|
$ | 0.09 | $ | 0.40 | $ | 0.45 | ||||||
|
Discontinued operations
|
(0.08 | ) | — | — | ||||||||
|
|
||||||||||||
|
Net income
|
$ | 0.01 | $ | 0.40 | $ | 0.45 | ||||||
|
|
||||||||||||
|
Weighted average number of common and common
equivalent shares outstanding:
|
||||||||||||
|
Basic
|
19,054 | 17,573 | 17,635 | |||||||||
|
|
||||||||||||
|
Diluted
|
19,362 | 17,749 | 17,938 | |||||||||
|
|
||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
35
Table of Contents
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
| Shares | Additional Paid-in | |||||||||||||||||||||||
| Outstanding | Common Stock | Capital | Accumulated Deficit | Treasury Stock | Total | |||||||||||||||||||
|
Balance — December 31, 2007
|
19,215 | $ | 192 | $ | 193,006 | $ | (86,298 | ) | $ | — | $ | 106,900 | ||||||||||||
|
Net Income-2008
|
— | — | — | 248 | — | 248 | ||||||||||||||||||
|
Issuance of common stock
|
133 | 1 | 661 | — | — | 662 | ||||||||||||||||||
|
Exercise of stock options
|
72 | 1 | 272 | — | — | 273 | ||||||||||||||||||
|
Issuance of restricted common stock
|
170 | 2 | (2 | ) | — | — | — | |||||||||||||||||
|
Cancellation and retirement of
restricted common stock
|
(24 | ) | — | (23 | ) | — | — | (23 | ) | |||||||||||||||
|
Amortization of restricted common
stock
|
— | — | 996 | — | — | 996 | ||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 194 | — | — | 194 | ||||||||||||||||||
|
Treasury stock acquired
|
(1,731 | ) | — | — | — | (5,740 | ) | (5,740 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance — December 31, 2008
|
17,835 | 196 | 195,104 | (86,050 | ) | (5,740 | ) | 103,510 | ||||||||||||||||
|
Net income — 2009
|
— | — | — | 7,034 | — | 7,034 | ||||||||||||||||||
|
Issuance of common stock
|
426 | 4 | 762 | — | — | 766 | ||||||||||||||||||
|
Exercise of stock options
|
76 | 1 | 153 | — | — | 154 | ||||||||||||||||||
|
Issuance of restricted common stock
|
374 | 4 | (4 | ) | — | — | — | |||||||||||||||||
|
Cancellation and retirement of
restricted common stock
|
(31 | ) | — | (121 | ) | — | — | (121 | ) | |||||||||||||||
|
Amortization of restricted common
stock
|
— | — | 1,005 | — | — | 1,005 | ||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 134 | — | — | 134 | ||||||||||||||||||
|
Treasury stock acquired
|
(1,378 | ) | — | — | — | (4,260 | ) | (4,260 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance — December 31, 2009
|
17,302 | 205 | 197,033 | (79,016 | ) | (10,000 | ) | 108,222 | ||||||||||||||||
|
Net income — 2010
|
— | — | — | 8,065 | — | 8,065 | ||||||||||||||||||
|
Issuance of common stock
|
202 | 2 | 1,113 | — | — | 1,115 | ||||||||||||||||||
|
Exercise of stock options
|
516 | 5 | 1,412 | — | — | 1,417 | ||||||||||||||||||
|
Issuance of restricted common stock
|
250 | 2 | (2 | ) | — | — | — | |||||||||||||||||
|
Cancellation and retirement of
restricted common stock
|
(68 | ) | (1 | ) | (217 | ) | — | — | (218 | ) | ||||||||||||||
|
Amortization of restricted common
stock
|
— | — | 1,394 | — | — | 1,394 | ||||||||||||||||||
|
Stock-based compensation expense
|
— | — | 254 | — | — | 254 | ||||||||||||||||||
|
Treasury stock acquired
|
(44 | ) | — | — | — | (576 | ) | (576 | ) | |||||||||||||||
|
|
||||||||||||||||||||||||
|
Balance — December 31, 2010
|
18,158 | $ | 213 | $ | 200,987 | $ | (70,951 | ) | $ | (10,576 | ) | $ | 119,673 | |||||||||||
|
|
||||||||||||||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
36
Table of Contents
CARRIAGE SERVICES, INC.
(in thousands)
| For the years ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Cash flows from operating activities:
|
||||||||||||
|
Net income
|
$ | 258 | $ | 7,048 | $ | 8,079 | ||||||
|
Adjustments to reconcile net income to net cash
provided by operating activities:
|
||||||||||||
|
Loss from discontinued operations, net of tax
|
1,546 | — | — | |||||||||
|
Depreciation and amortization
|
10,372 | 10,339 | 9,976 | |||||||||
|
Amortization of deferred financing costs
|
725 | 767 | 728 | |||||||||
|
Provision for losses on accounts receivable
|
4,034 | 3,937 | 4,031 | |||||||||
|
Stock-based compensation expense
|
1,548 | 1,588 | 1,759 | |||||||||
|
Deferred income taxes
|
1,648 | 4,797 | 1,521 | |||||||||
|
Other
|
(90 | ) | (37 | ) | (470 | ) | ||||||
|
|
||||||||||||
|
Changes in operating assets and liabilities that provided (required) cash:
|
||||||||||||
|
Accounts and preneed receivables
|
2,319 | (7,241 | ) | (4,761 | ) | |||||||
|
Inventories and other current assets
|
857 | 220 | 1,830 | |||||||||
|
Deferred charges and other non-current assets
|
60 | (108 | ) | — | ||||||||
|
Preneed funeral and cemetery trust investments
|
(4,260 | ) | (3,737 | ) | (1,369 | ) | ||||||
|
Accounts payable and other liabilities and accrued liabilities
|
4,481 | (2,072 | ) | 2,975 | ||||||||
|
Litigation settlement
|
— | (3,300 | ) | — | ||||||||
|
Deferred preneed funeral and cemetery revenue
|
(11,239 | ) | (784 | ) | 168 | |||||||
|
Deferred preneed funeral and cemetery receipts held in trust
|
7,238 | 4,678 | 1,212 | |||||||||
|
Net cash provided by operating activities of discontinued operations
|
155 | — | — | |||||||||
|
|
||||||||||||
|
Net cash provided by operating activities
|
19,652 | 16,095 | 25,679 | |||||||||
|
|
||||||||||||
|
Cash flows from investing activities:
|
||||||||||||
|
Acquisitions
|
— | (3,102 | ) | (19,007 | ) | |||||||
|
Net proceeds from sales of assets
|
— | 67 | 400 | |||||||||
|
Capital expenditures
|
(12,876 | ) | (9,370 | ) | (10,661 | ) | ||||||
|
Net cash provided by investing activities of discontinued operations
|
1,029 | — | — | |||||||||
|
|
||||||||||||
|
Net cash used in investing activities
|
(11,847 | ) | (12,405 | ) | (29,268 | ) | ||||||
|
Cash flows from financing activities:
|
||||||||||||
|
Net borrowings under bank credit facility
|
— | — | 600 | |||||||||
|
Payments on senior long-term debt and obligations under capital leases
|
(1,182 | ) | (778 | ) | (474 | ) | ||||||
|
Proceeds from the exercise of stock options and employee stock purchase
plan
|
611 | 476 | 1,188 | |||||||||
|
Tax benefit from stock-based compensation
|
77 | — | 571 | |||||||||
|
Purchase of treasury stock
|
(5,740 | ) | (4,260 | ) | — | |||||||
|
Dividend on redeemable preferred stock
|
(10 | ) | (14 | ) | (14 | ) | ||||||
|
Payment of debt amendment costs
|
— | (505 | ) | — | ||||||||
|
Purchase of junior subordinated debentures
|
— | — | (576 | ) | ||||||||
|
Other financing costs
|
— | — | (43 | ) | ||||||||
|
|
||||||||||||
|
Net cash provided by (used) in financing activities
|
(6,244 | ) | (5,081 | ) | 1,252 | |||||||
|
|
||||||||||||
|
Net increase (decrease) in cash and cash equivalents
|
1,561 | (1,391 | ) | (2,337 | ) | |||||||
|
Cash and cash equivalents at beginning of year
|
3,446 | 5,007 | 3,616 | |||||||||
|
|
||||||||||||
|
Cash and cash equivalents at end of year
|
$ | 5,007 | $ | 3,616 | $ | 1,279 | ||||||
|
|
||||||||||||
The accompanying notes are an integral part of these Consolidated Financial Statements.
37
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage” or the “Company”) is a leading provider of death care
services and merchandise in the United States. As of December 31, 2010, the Company owned and
operated 147 funeral homes in 25 states and 33 cemeteries in 12 states.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the Company and its subsidiaries.
All significant intercompany balances and transactions have been eliminated.
Funeral and Cemetery Operations
Carriage records the revenue from sales of funeral and cemetery merchandise and services when
the merchandise is delivered or the service is performed. Sales of cemetery interment rights are
recorded as revenue in accordance with the retail land sales provisions for accounting for sales of
real estate. This method provides for the recognition of revenue in the period in which the
customer’s cumulative payments exceed 10% of the contract price related to the interment right.
Costs related to the sales of interment rights, which include real property and other costs related
to cemetery development activities, are charged to operations using the specific identification
method in the period in which the sale of the interment right is recognized as revenue. Revenues
to be recognized from the delivery of merchandise and performance of services related to contracts
that were acquired in acquisitions are typically lower than those originated by the Company.
Allowances for bad debts and customer cancellations are provided at the date that the sale is
recognized as revenue and are based on our historical experience and the current economic
environment. We also monitor changes in delinquency rates and provide additional bad debt and
cancellation reserves when warranted. When preneed sales of funeral services and merchandise are
funded through third-party insurance policies, we earn a commission on the sale of the policies.
Insurance commissions are recognized as revenues at the point at which the commission is no longer
subject to refund, which is typically one year after the policy is issued.
Accounts receivable include approximately $8.7 million of funeral receivables at both December
31, 2009 and 2010. Current preneed cemetery receivables, also included in accounts receivable,
total approximately $6.4 million and $6.8 million at December 31, 2009 and 2010. Non-current
preneed receivables at December 31, 2009 and 2010, represent the payments expected to be received
beyond one year from the balance sheet date. Non-current preneed receivables consist of
approximately $1.6 million and $7.9 million of funeral receivables and $15.2 million and $16.1
million of cemetery receivables at December 31, 2009 and 2010, respectively.
Preneed Contracts
Carriage sells interment rights, merchandise and services prior to the time of need, which is
referred to as preneed. In many instances the customer pays for the preneed contract over a period
of time. Cash proceeds from preneed sales less amounts that the Company may retain under state
regulations are deposited to a trust or used to purchase a third-party insurance policy. The
principal and accumulated earnings of the trusts are generally withdrawn at maturity (death) or
cancellation. The cumulative trust income earned and the increases in insurance benefits on the
insurance products are deferred until the service is performed. The customer receivables and
amounts deposited in trusts that Carriage controls are primarily included in the non-current asset
section of the balance sheet. The preneed funeral contracts secured by third party insurance
policies are not recorded as assets or liabilities of the Company.
In the opinion of management, the proceeds from the trust funds and the insurance policies at
the times the preneed contracts mature will exceed the estimated future costs to perform services
and provide products under such arrangements. The types of instruments in which the trusts may
invest are regulated by state agencies.
Preneed Funeral and Cemetery Trust Funds
The Company’s preneed and perpetual care trust funds are reported in accordance with the principles
of consolidating Variable Interest Entities. In the case of preneed trusts, the customers are the
legal beneficiaries. In the case of perpetual care trusts, the Company does not have a right to
access the corpus in the perpetual care trusts. For these reasons, the Company has recognized
financial interests of third parties in the trust funds in our financial statements as
Deferred
preneed funeral and cemetery receipts held in trust
and
Care trusts’ corpus
. The investments of
such trust funds are classified as available-for-sale and are reported at market value; therefore,
the unrealized gains and losses, as well as accumulated and undistributed income and realized gains
and losses, are recorded to
Deferred preneed receipts held in trust
and
Care trusts’ corpus
in the
Company’s Consolidated Balance Sheets. The Company’s future obligations to deliver merchandise and
services are reported at estimated settlement amounts. Preneed funeral and cemetery trust
investments are reduced by the trust investment earnings that we have been allowed to withdraw in
certain states prior
38
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
to maturity. These earnings, along with preneed contract collections not required to be placed in
trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenues
until the service is performed or the merchandise is delivered.
Effective January 1, 2009, a noncontrolling interest in a subsidiary, which is sometimes
referred to as an unconsolidated investment, is an ownership interest in the consolidated entity
that should be reported as a component of equity in the Consolidated Financial Statements.
Consolidated net income is reported at amounts that include the amounts attributable to both the
parent and the noncontrolling interest. The disclosure, on the face of the Consolidated Statements
of Operations, is of the amounts of consolidated net income attributable to the parent and to the
noncontrolling interest.
In accordance with respective state laws, the Company is required to deposit a specified
amount into perpetual and memorial care trust funds for each interment/entombment right and certain
memorials sold. Income from the trust funds is distributed to Carriage and used to provide for the
care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as
revenue when realized by the trust and distributable to the Company. The Company is restricted
from withdrawing any of the principal balances of these funds.
New guidance, effective January 1, 2010, amends the current practice of accounting for
Variable Interest Entities (“VIE”) to require an enterprise to perform an analysis to determine
whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE.
This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power
to direct the activities of a VIE that most significantly impact the entity’s economic performance
and the obligation to absorb losses of the entity that could potentially be significant to the VIE
or the right to receive benefits from the entity that could potentially be significant to the VIE.
This new guidance did not have a material impact on our Consolidated Financial Statements.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Inventory
Inventory consists primarily of caskets, outer burial containers and cemetery monuments and
markers, and is recorded at the lower of its cost basis (determined by the specific identification
method) or net realizable value.
Property, Plant and Equipment
Property, plant and equipment are stated at cost. The costs of ordinary maintenance and
repairs are charged to operations as incurred, while renewals and betterments are capitalized.
Depreciation of property, plant and equipment is computed based on the straight-line method over
the following estimated useful lives of the assets:
| Years | ||||
|
Buildings and improvements
|
15 to 40 | |||
|
Furniture and fixtures
|
7 to 10 | |||
|
Machinery and equipment
|
5 to 10 | |||
|
Automobiles
|
5 to 7 | |||
Property, plant and equipment was comprised
of the
following at December 31, 2009 and 2010:
| December 31, | December 31, | |||||||
| 2009 | 2010 | |||||||
| (in thousands) | ||||||||
|
Land
|
$ | 35,324 | $ | 37,424 | ||||
|
Buildings and improvements
|
105,686 | 109,348 | ||||||
|
Furniture, equipment and automobiles
|
49,991 | 53,400 | ||||||
|
|
||||||||
|
|
191,001 | 200,172 | ||||||
|
Less: accumulated depreciation
|
(66,201 | ) | (71,700 | ) | ||||
|
|
||||||||
|
|
$ | 124,800 | $ | 128,472 | ||||
|
|
||||||||
During 2008, 2009 and 2010, the Company recorded $7,810,000, $7,517,000 and $7,365,000
respectively, for depreciation expense against income from continuing operations.
39
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
Long-lived assets, such as property, plant and equipment, and purchased intangibles subject to
amortization, are reviewed for impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to estimated undiscounted
future cash flows expected to be generated by the asset. If the carrying amount of an asset
exceeds its estimated future cash flows, an impairment charge is recognized by the amount by which
the carrying amount of the asset exceeds the fair value of the asset. The long-lived assets to be
held and used are reported at the lower of carrying amount or fair value. Assets to be disposed of
and assets not expected to provide any future service potential to the Company are recorded at the
lower of carrying amount or fair value less estimated cost to sell.
Income Taxes
The Company and its subsidiaries file a consolidated U.S. Federal income tax return and
separate income tax returns in the states in which we operate. We record deferred taxes for
temporary differences between the tax basis and financial reporting basis of assets and
liabilities. The Company records a valuation allowance to reflect the estimated amount of deferred
tax assets for which realization is uncertain. Management reviews the valuation allowance at the
end of each quarter and makes adjustments if it is determined that it is more likely than not that
the tax benefits will be realized.
The Company analyzes tax benefits for uncertain tax positions and how they are to be
recognized, measured, and derecognized in financial statements; provides certain disclosures of
uncertain tax matters; and specifies how reserves for uncertain tax positions should be classified
on the Consolidated Balance Sheets. The Company has reviewed its income tax positions and
identified certain tax deductions, primarily related to business acquisitions that are not certain.
Our policy with respect to potential penalties and interest is to record them as “Other” expense
and Interest expense, respectively. The entire balance of unrecognized tax benefits, if
recognized, would affect the Company’s effective tax rate. The Company does not anticipate a
significant increase or decrease in its unrecognized tax benefits during the next twelve months.
Stock Plans and Stock-Based Compensation
The Company has stock-based employee and director compensation plans in the form of restricted
stock, performance units, stock options and employee stock purchase plans. The Company recognizes
compensation expense in an amount equal to the fair value of the share-based awards over the period
of vesting. Fair value is determined on the date of the grant. The fair value of options or
awards containing options is determined using the Black-Scholes valuation model.
See Note 17 to the Consolidated Financial Statements for additional information on the
Company’s stock-based compensation plans.
Computation of Earnings Per Common Share
Basic earnings per share are computed using the weighted average number of common shares
outstanding during the period. Diluted earnings per share are computed using the weighted average
number of common and dilutive common equivalent shares outstanding during the period. Dilutive
common equivalent shares consist of stock options.
Effective January 1, 2009, the accounting method changed for unvested share-based payment
awards included in the calculation of earnings per share. Share-based awards that contain
nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized
as participating securities and included in the computation of both basic and diluted earnings per
share. Our grants of restricted stock awards to our employees and directors are considered
participating securities and we have prepared our earnings per share calculations to include
outstanding unvested restricted stock awards in both the basic and diluted weighted average shares
outstanding calculation. For the three years ended December 31, 2008, 2009 and 2010, there was no
material impact to basic and diluted earnings per share as presented in Note 20 to the Consolidated
Financial Statements.
Fair Value Measurements
We define fair value as the price that would be received in the sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
for items that are recognized or disclosed at fair value in the financial statements on a recurring
basis (at least annually). We disclose the extent to which fair value is used to measure financial
assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect
of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of
the measurement date. Additional required disclosures are provided in Note 11 to the Consolidated
Financial Statements. We have not elected to measure any additional financial instruments and
certain other items at fair value that are not currently required to be measured at fair value.
40
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
New guidance was issued during early 2009 on how to determine the fair value of assets and
liabilities in an environment where the volume and level of activity for the asset or liability
have significantly decreased. The new guidance reemphasizes that the objective of a fair value
measurement remains an exit price. This guidance was effective for interim reporting periods
ending after June 15, 2009, and has had no effect on our financial position or results of
operations.
New guidance was also issued during early 2009 that modifies the requirements for recognizing
other-than-temporary impairment on debt securities and significantly changes the impairment model
for such securities. The Company considers an impairment of debt and equity securities
other-than-temporary unless (a) the investor has the ability and intent to hold an investment and
(b) evidence indicating the cost of the investment is recoverable before the Company is more likely
than not required to sell the investment. If impairment is indicated, then an adjustment will be
made to reduce the carrying amount to fair value. This new guidance also modified the presentation
of other-than-temporary impairment losses and increased related disclosure requirements. This
change was effective for interim reporting periods ending after June 15, 2009 and it has had no
affect on our financial position or results of operations.
In the ordinary course of business, we are typically exposed to a variety of market risks.
Currently, these are primarily related to changes in fair market values related to outstanding
long-term debt and changes in the values of securities associated with the preneed and perpetual
care trusts. Management is actively involved in monitoring exposure to market risk and developing
and utilizing appropriate risk management techniques when appropriate and when available for a
reasonable price. The 7⅞% Senior Notes were issued to the public at par and are carried at a cost
of $130 million. At December 31, 2010, these securities were typically trading at a price of
approximately $100.75, indicating a fair market value of approximately $131 million. The
convertible junior subordinated debentures, payable to Carriage Services Capital Trust, pay
interest at the fixed rate of 7% and are carried on our Consolidated Balance Sheet at a cost of
approximately $92.9 million. The fair value of these securities is estimated to be approximately
$66.6 million at December 31, 2010 based on available broker quotes of the corresponding preferred
securities issued by the Trust.
Discontinued Operations
In accordance with the Company’s strategic portfolio optimization model, non-strategic
businesses are reviewed to determine whether the business should be sold and proceeds redeployed
elsewhere. A marketing plan is then developed for those locations which are identified as held for
sale. When the Company receives a letter of intent and financing commitment from the buyer and the
sale is expected to occur within one year, the location is no longer reported within the Company’s
continuing operations. The assets and liabilities associated with the held for sale location are
reclassified on the balance sheet as held for sale and the operating results, as well as
impairments, are presented on a comparative basis in the discontinued operations section of the
consolidated statements of operations, along with the income tax effect.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and
goodwill is recognized for any difference between the price of the acquisition and fair value. We
customarily estimate related transaction costs known at closing. To the extent that information
not available to us at the closing date subsequently becomes available during the allocation
period, we may adjust goodwill, assets, or liabilities associated with the acquisition.
We will recognize the assets acquired, the liabilities assumed and any noncontrolling interest
in the acquiree at the acquisition date, measured at the fair values as of that date. Goodwill is
measured as a residual of the fair values at acquisition date. Acquisition related costs are
recognized separately from the acquisition and are expensed as incurred.
Goodwill
The excess of the purchase price over the fair value of net identifiable assets of funeral
homes acquired, as determined by management in transactions accounted for as purchases, is recorded
as goodwill. Many of the acquired funeral homes have provided high quality service to families for
generations. The resulting loyalty often represents a substantial portion of the value of a
funeral business. Goodwill is typically not associated with or recorded in connection with the
acquisitions of cemetery businesses. We review the carrying value of goodwill at least annually on
reporting units (aggregated geographically) to determine if facts and circumstances exist which
would suggest that this intangible asset might be carried in excess of fair value. Fair value is
determined by discounting the estimated future cash flows of the businesses in each reporting unit
at the Company’s weighted average cost of capital less debt allocable to the reporting unit and by
reference to recent sales transactions of similar businesses. The calculation of fair value can
vary dramatically with changes in estimates of the number of future services performed, inflation
in costs, and the Company’s cost of capital, which is impacted by long-term interest rates. If
impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill
to fair value.
41
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| 1. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued) |
We performed our annual impairment test of goodwill by assessing the fair value of each of our
reporting units, East, Central and West regional divisions in the United States, using information
as of August 31, 2010. Based on our 2010 impairment test, we concluded that there was no
impairment of goodwill. The West region has the greatest risk of failing the first step of the
impairment test in the future. The fair value of the West region exceeded its carrying value by
approximately 13%. As of December 31, 2010, $50.9 million of goodwill was recorded in the West
region. Should industry sales transactions suffer a decline in the multiple of EBITDA or the
results of the West’s operations decline in the future, the risk of goodwill impairment would
increase.
In addition to our annual review, we assess the impairment of goodwill whenever events or
changes in circumstances indicate that the carrying value may be greater than fair value. Factors
that could trigger an interim impairment review include, but are not limited to, significant
adverse changes in the business climate which may be indicated by a decline in the Company’s market
capitalization or decline in operating results. The market capitalization of the Company consists
of the common stock, Senior Notes and convertible trust preferred securities. No such events or
changes occurred between the testing date and year end to trigger a subsequent impairment review.
Use of Estimates
The preparation of the Consolidated Financial Statements requires us to make estimates and
judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an
on-going basis, we evaluate our estimates and judgments, including those related to revenue
recognition, realization of accounts receivable, goodwill, intangible assets, property and
equipment and deferred tax assets. We base our estimates on historical experience, third party data
and assumptions that we believe to be reasonable under the circumstances. The results of these
considerations form the basis for making judgments about the amount and timing of revenues and
expenses, the carrying value of assets and the recorded amounts of liabilities. 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, as there can be no assurance the margins, operating income and net earnings as a
percentage of revenues will be consistent from year to year.
Subsequent Events
Management of the Company evaluated events and transactions during the period beginning
subsequent to December 31, 2010 through the date the financial statements were issued, for
potential recognition or disclosure in the accompanying financial statements covered by this
report. There were no subsequent events to disclose.
2. RECENTLY ISSUED ACCOUNTING STANDARDS
Fair Value Measurements
In January 2010, new guidance was issued which requires additional fair value disclosures to
disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases,
sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value
hierarchy. This guidance is effective for interim and annual reporting periods beginning after
December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements
related to Level 3 activity. Those disclosures are effective for fiscal years beginning after
December 15, 2010 and for interim periods within those fiscal years. The disclosure requirements
on transfers between Levels 1 and 2 were effective for the Company as of March 31, 2010. The
Company currently does not have any assets that have fair values determined by Level 3 inputs and
no liabilities measured at fair value. See Note 11 to the Consolidated Financial Statements herein
for additional information on the Company’s fair value disclosures.
Allowance for Credit Losses of Financing Receivables
In July 2010, new guidance was issued which increased the disclosure requirements about the
credit quality of financing receivables and the allowance for credit losses. The intent of the
disclosure is to provide additional information about the nature of credit risks inherent in our
financing receivables, how credit risk is analyzed and assessed when determining the allowance for
credit losses, and the reasons for the change in the allowance for credit losses. The aggregate
balance of non-current, preneed cemetery financing receivables was $16.1 million as of December 31,
2010. The disclosures related to period-end information are required for annual reporting periods
ending after December 15, 2010 which is effective for the Company at December 31, 2010.
Disclosures of activity that occurs during the reporting period are required for interim periods beginning after December 15, 2010 which will be
effective for the Company at March 31, 2011. The additional required disclosures are provided in
Note 7 to the Consolidated Financial Statements.
42
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. ACQUISITIONS
Carriage completed six acquisitions in 2010, one cemetery business and five funeral home
businesses. The consideration paid for these businesses was $19.0 million in cash and the
assumption of $0.6 million of liabilities and debt. During the fourth quarter of 2009 the Company
completed two acquisitions of funeral home businesses for a total of $3.1 million in cash. The
Company acquired substantially all the assets and assumed certain operating liabilities, including
obligations associated with existing preneed contracts. The proforma impact of the acquisitions on
the prior periods is not presented as the impact is not material to reported results. There were
no acquisitions during 2008.
Selected information on the 2010 acquisitions follows (in millions):
| Assets Acquired | ||||||||||
| (Excluding | Liabilities and | |||||||||
| Acquisition Date | Type of Business | Market | Goodwill) | Goodwill Recorded | Debt Assumed | |||||
|
April 2010
|
Cemetery | Kalispell, MT | $1.2 | — | — | |||||
|
|
||||||||||
|
June 2010
|
Two Funeral Homes | Columbia, MT | $1.0 | $0.2 | — | |||||
|
|
||||||||||
|
June 2010
|
Funeral Home | Huntington Beach, CA | $0.1 | $4.7 | $0.3 | |||||
|
|
||||||||||
|
June 2010
|
Five Funeral Homes | Naples, FL | $5.0 | $9.5 | $0.3 | |||||
|
|
||||||||||
|
September 2010
|
One Funeral Home | Huntington Beach, CA | $0.2 | $1.2 | — | |||||
|
|
||||||||||
|
December 2010
|
One Funeral Home | Azusa, CA | $1.8 | $0.8 | — |
The effect of the 2010 acquisitions on the Consolidated Balance Sheet at December 31, 2010 was as
follows (in thousands):
|
Current assets
|
$ | 178 | ||
|
Property, plant & equipment
|
3,012 | |||
|
Goodwill
|
16,394 | |||
|
Receivables from preneed funeral trusts
|
535 | |||
|
Preneed trust investments
|
5,562 | |||
|
Current liabilities
|
(284 | ) | ||
|
Assumed debt
|
(293 | ) | ||
|
Deferred preneed funeral revenue
|
(535 | ) | ||
|
Deferred preneed funeral revenue held in trust
|
(5,562 | ) | ||
|
|
||||
|
Cash paid
|
$ | 19,007 | ||
|
|
||||
4. DISCONTINUED OPERATIONS
The Company continually reviews locations to optimize the sustainable earning power and return
on invested capital of the Company. The Company’s strategy, the Strategic Portfolio Optimization
Model, uses strategic ranking criteria to identify disposition candidates. The execution of this
strategy entails selling non-strategic businesses.
Two funeral home businesses were sold during 2008 for approximately $1.0 million and the
Company recognized a loss of $2.4 million. No businesses were sold during 2009 or 2010.
The operating results of businesses discontinued during the periods presented, as well as
gains or losses on the disposal, are presented in the discontinued operations section of the
Consolidated Statements of Operations, along with the income tax effect. Revenues and operating
income for the businesses presented in the discontinued operations section are as follows (in
thousands):
| Year ended December 31, | ||||
| 2008 | ||||
|
Revenues
|
$ | 476 | ||
|
Operating income
|
145 | |||
|
Loss on sale
|
(2,381 | ) | ||
|
Benefit from income taxes
|
690 | |||
|
|
||||
|
Loss from discontinued operations
|
$ | (1,546 | ) | |
|
|
||||
43
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
5. GOODWILL
Many of the acquired funeral homes have provided high quality service to families for
generations. The resulting loyalty often represents a substantial portion of the value of a
funeral business. The excess of the purchase price over the fair value of net identifiable assets
acquired, as determined by management in business acquisition transactions accounted for as
purchases, is recorded as goodwill.
The following table presents changes in goodwill in the accompanying Consolidated Balance
Sheets for the year ended December 31, 2009 and 2010 (in thousands):
| December 31, 2009 | December 31, 2010 | |||||||
|
Goodwill at beginning of year
|
$ | 164,515 | $ | 166,930 | ||||
|
Acquisitions
|
2,415 | 16,394 | ||||||
|
|
||||||||
|
Goodwill at end of year
|
$ | 166,930 | $ | 183,324 | ||||
|
|
||||||||
6. PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that the Company will withdraw
when the merchandise or services are provided. The components of Preneed cemetery trust
investments in our Consolidated Balance Sheets at December 31, 2009 and 2010 are as follows (in
thousands):
| December 31, 2009 | December 31, 2010 | |||||||
|
Preneed cemetery trust investments
|
$ | 67,901 | $ | 81,771 | ||||
|
Less: allowance for contract cancellation
|
— | (2,080 | ) | |||||
|
|
||||||||
|
|
$ | 67,901 | $ | 79,691 | ||||
|
|
||||||||
Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive
a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions,
the Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the
funds in trust, including some or all investment income. As a result, when realized or unrealized
losses of a trust result in the trust being under-funded, the Company assesses whether it is
responsible for replenishing the corpus of the trust, in which case a loss provision would be
recorded.
The cost and fair market values associated with preneed cemetery trust investments at December
31, 2010 are detailed below (in thousands). The Company determines whether or not the assets in
the preneed cemetery trusts have an other-than-temporary impairment on a security-by-security
basis. This assessment is made based upon a number of criteria including the length of time a
security has been in a loss position, changes in market conditions and concerns related to the
specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the
security is adjusted downward to its fair market value. Any reduction in the cost basis due to an
other-than-temporary impairment is recorded in Deferred preneed cemetery receipts held in trust.
There will be no impact on earnings unless and until such time that this asset is withdrawn from
the trust in accordance with state regulations at an amount that is less than its original basis.
| Unrealized | Unrealized | |||||||||||||||
| Cost | Gains | Losses | Market | |||||||||||||
|
Cash and money market accounts
|
$ | 2,114 | $ | — | $ | — | $ | 2,114 | ||||||||
|
Fixed income securities:
|
||||||||||||||||
|
Corporate debt
|
30,405 | 5,804 | (219 | ) | 35,990 | |||||||||||
|
Mortgage backed securities
|
3 | — | — | 3 | ||||||||||||
|
Common stock
|
33,265 | 5,982 | (217 | ) | 39,030 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
3,557 | 293 | — | 3,850 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Trust securities
|
$ | 69,344 | $ | 12,079 | $ | (436 | ) | $ | 80,987 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Accrued investment income
|
$ | 784 | $ | 784 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Preneed cemetery trust investments
|
$ | 81,771 | ||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Market value as a percentage of cost
|
117.9 | % | ||||||||||||||
|
|
||||||||||||||||
44
Table of Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. PRENEED TRUST INVESTMENTS (continued)
The estimated maturities of the fixed income securities included above are as follows (in
thousands):
|
Due in one year or less
|
$ | — | ||
|
Due in one to five years
|
4,015 | |||
|
Due in five to ten years
|
6,905 | |||
|
Thereafter
|
25,073 | |||
|
|
||||
|
|
$ | 35,993 | ||
|
|
||||
The cost and market values associated with preneed cemetery trust assets at December 31, 2009
are detailed below (in thousands).
| Unrealized | Unrealized | |||||||||||||||
| Cost | Gains | Losses | Market | |||||||||||||
|
Cash and money market accounts
|
$ | 1,408 | $ | — | $ | — | $ | 1,408 | ||||||||
|
Fixed income securities:
|
||||||||||||||||
|
Corporate debt
|
23,511 | 7,453 | (31 | ) | 30,933 | |||||||||||
|
Mortgage backed securities
|
3 | — | — | 3 | ||||||||||||
|
Common stock
|
24,819 | 6,802 | (330 | ) | 31,291 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
3,439 | 332 | (106 | ) | 3,665 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Trust securities
|
$ | 53,180 | $ | 14,587 | $ | (467 | ) | $ | 67,300 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Accrued investment income
|
$ | 601 | $ | 601 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Preneed cemetery trust investments
|
$ | 67,901 | ||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Market value as a percentage of cost
|
127.7 | % | ||||||||||||||
|
|
||||||||||||||||
Preneed cemetery trust investment security transactions recorded in Interest income and other,
net in the Consolidated Statements of Operations for the years ended December 31, 2009 and 2010 are
as follows (in thousands):
| Year ended December 31, | ||||||||
| 2009 | 2010 | |||||||
|
Investment income
|
$ | 3,109 | $ | 3,434 | ||||
|
Realized gains
|
2,165 | 12,563 | ||||||
|
Realized losses
|
(4,211 | ) | (821 | ) | ||||
|
Expenses and taxes
|
(381 | ) | (586 | ) | ||||
|
Increase in deferred preneed cemetery receipts held in trust
|
(682 | ) | (14,590 | ) | ||||
|
|
||||||||
|
|
$ | — | $ | — | ||||
|
|
||||||||
Purchases and sales of investments in the preneed cemetery trusts were as follows (in
thousands):
| Year ended December 31, | ||||||||
| 2009 | 2010 | |||||||
|
Purchases
|
$ | (44,661 | ) | $ | (56,431 | ) | ||
|
Sales
|
39,825 | 54,055 | ||||||
45
Table of Contents
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. PRENEED TRUST INVESTMENTS (continued)
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that the Company expects to
withdraw when the services and merchandise are provided. Preneed funeral contracts are secured by
funds paid by the customer to the Company. Preneed funeral trust investments are reduced by the
trust earnings the Company has been allowed to withdraw prior to performance by the Company and
amounts received from customers that are not required to be deposited into trust, pursuant to
various state laws. The components of Preneed funeral trust investments in our Consolidated
Balance Sheets at December 31, 2009 and 2010 are as follows (in thousands):
| December 31, 2009 | December 31, 2010 | |||||||
|
Preneed funeral trust investments
|
$ | 75,200 | $ | 83,324 | ||||
|
Less: allowance for contract cancellation
|
— | (2,181 | ) | |||||
|
|
||||||||
|
|
$ | 75,200 | $ | 81,143 | ||||
|
|
||||||||
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a
refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, the
Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the
funds in trust, including some or all investment income. As a result, when realized or unrealized
losses of a trust result in the trust being under-funded, the Company assesses whether it is
responsible for replenishing the corpus of the trust, in which case a loss provision would be
recorded.
The cost and fair market values associated with preneed funeral trust investments at December
31, 2010 are detailed below (in thousands). The Company determines whether or not the assets in
the preneed funeral trusts have an other-than-temporary impairment on a security-by-security basis.
This assessment is made based upon a number of criteria including the length of time a security
has been in a loss position, changes in market conditions and concerns related to the specific
issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is
adjusted downward to its fair market value. Any reduction in the cost basis due to an
other-than-temporary impairment is recorded as a reduction to Deferred preneed funeral receipts
held in trust. There will be no impact on earnings unless and until such time that this asset is
withdrawn from the trust in accordance with state regulations at an amount that is less than its
original basis.
| Unrealized | Unrealized | |||||||||||||||
| Cost | Gains | Losses | Market | |||||||||||||
|
Cash and money market accounts
|
$ | 10,735 | $ | — | $ | — | $ | 10,735 | ||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury debt
|
5,461 | 126 | (39 | ) | 5,548 | |||||||||||
|
Mortgage backed securities
|
694 | 32 | — | 726 | ||||||||||||
|
Corporate debt
|
21,791 | 5,408 | (62 | ) | 27,137 | |||||||||||
|
Common stock
|
21,305 | 3,995 | (115 | ) | 25,185 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
6,209 | 561 | (211 | ) | 6,559 | |||||||||||
|
Fixed income
|
6,513 | 357 | (76 | ) | 6,794 | |||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Trust Securities
|
$ | 72,708 | $ | 10,479 | $ | (503 | ) | $ | 82,684 | |||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Accrued investment income
|
$ | 640 | $ | 640 | ||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Preneed funeral trust investments
|
$ | 83,324 | ||||||||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Market value as a percentage of
cost
|
114.6 | % | ||||||||||||||
|
|
||||||||||||||||
The estimated maturities of the fixed income securities included above are as follows (in
thousands):
|
Due in one year or less
|
$ | 1,771 | ||
|
Due in one to five years
|
6,424 | |||
|
Due in five to ten years
|
4,848 | |||
|
Thereafter
|
20,368 | |||
|
|
||||
|
|
$ | 33,411 | ||
|
|
||||
46
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. PRENEED TRUST INVESTMENTS (continued)
The cost and market values associated with preneed funeral trust assets at December 31, 2009
are detailed below (in thousands).
| Unrealized | Unrealized | |||||||||||||||
| Cost | Gains | Losses | Market | |||||||||||||
|
Cash and money market accounts
|
$ | 10,909 | $ | — | $ | — | $ | 10,909 | ||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury debt
|
6,236 | 199 | (18 | ) | 6,417 | |||||||||||
|
Mortgage backed securities
|
799 | 47 | — | 846 | ||||||||||||
|
Corporate debt
|
16,762 | 5,991 | (32 | ) | 22,721 | |||||||||||
|
Common stock
|
16,253 | 6,856 | (157 | ) | 22,952 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
5,855 | 40 | (709 | ) | 5,186 | |||||||||||
|
Fixed income
|
5,117 | 569 | (57 | ) | 5,629 | |||||||||||
|
Other Investments
|
137 | — | (20 | ) | 117 | |||||||||||
|
|
||||||||||||||||
|
Trust Securities
|
$ | 62,068 | $ | 13,702 | $ | (993 | ) | $ | 74,777 | |||||||
|
|
||||||||||||||||
|
Accrued investment income
|
$ | 423 | $ | 423 | ||||||||||||
|
|
||||||||||||||||
|
Preneed funeral trust investments
|
$ | 75,200 | ||||||||||||||
|
|
||||||||||||||||
|
Market value as a percentage of
cost
|
121.1 | % | ||||||||||||||
|
|
||||||||||||||||
Preneed funeral trust investment security transactions recorded in Interest income and other,
net in the Consolidated Statements of Operations for the years ended December 31, 2009 and 2010 are
as follows (in thousands):
| Year ended December 31, | ||||||||
| 2009 | 2010 | |||||||
|
Investment income
|
$ | 3,063 | $ | 3,410 | ||||
|
Realized gains
|
3,198 | 11,023 | ||||||
|
Realized losses
|
(6,588 | ) | (532 | ) | ||||
|
Expenses and taxes
|
(722 | ) | (873 | ) | ||||
|
(Increase) decrease in deferred preneed funeral receipts held in trust
|
1,049 | (13,028 | ) | |||||
|
|
||||||||
|
|
$ | — | $ | — | ||||
|
|
||||||||
Purchases and sales of investments in the preneed funeral trusts were as follows (in
thousands):
| Year ended December 31, | ||||||||
| 2009 | 2010 | |||||||
|
Purchases
|
$ | (40,596 | ) | $ | (11,800 | ) | ||
|
Sales
|
34,596 | 8,321 | ||||||
7. PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights are usually financed through interest-bearing
installment sales contracts, generally with terms of up to five years with such earnings reflected
as
Preneed Cemetery Finance Charges
. In substantially all cases, we receive an initial down payment
at the time the contract is signed. The interest rates generally range between 9.5% and 12%.
Occasionally, we have offered zero percent interest financing to promote sales for limited-time
offers. Preneed sales of cemetery interment rights are generally recorded as revenue when 10% of
the contract amount related to the interment right has been collected. For the year ending December
31, 2010, 84.2% of sales of interment rights were recognized in the current year. Merchandise and
services may similarly be sold on an installment basis, but revenue is recorded when delivery has
occurred. For all contracts, receivables are recorded at cost and finance charges are recorded
upon receipt of payment. At December 31, 2010, the balance of preneed receivables for cemetery
interment rights and for merchandise and services was $17.4 million and $10.2 million,
respectively.
As we have localized our preneed sales strategies, we are continuing to refine the mix of
service and product offerings. These changes could cause us to experience declines in preneed
sales and thus our earning ability of finance charges in the short-run. In
47
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. PRENEED CEMETERY RECEIVABLES (continued)
addition, economic conditions at the local or national level could cause declines in preneed sales
and an increase in the rate of default either as a result of less discretionary income or lower
consumer confidence.
The Company determines an allowance for customer cancellations and refunds on contracts in
which revenue has been recognized on sales of cemetery interment rights. The allowance is recorded
at the date that the contract is executed and periodically adjusted thereafter based upon actual
collection experience at the business level. At December 31, 2010, the allowance for contract
cancellations was $1.0 million.
The Company has a collections policy whereas past due notification is sent to the customers
beginning at 15 days past due and thereafter periodically until 90 days past due. Any items on
contracts that are past due 120 days are sent to a third-party collector. We reserve 100% of the
receivables on contracts in which the revenue has been recognized and payments are 120 days past
due or more, which was approximately 1.4% of the total receivables on recognized sales at December
31, 2010. No uncollectible financing receivables are directly charged off to the statement of
operations.
The aging of past due financing receivables as of December 31, 2010 is as follows (in
thousands):
| 31-60 | 61-90 | 91-120 | >120 | Total Past | Total Financing | |||||||||||||||||||||||
| Past Due | Past Due | Past Due | Past Due | Due | Current | Receivables | ||||||||||||||||||||||
|
Recognized revenue
|
$ | 661 | $ | 420 | $ | 249 | $ | 263 | $ | 1,593 | $ | 16,912 | $ | 18,505 | ||||||||||||||
|
Deferred revenue
|
276 | 184 | 95 | 122 | 677 | 8,432 | 9,109 | |||||||||||||||||||||
|
Total contracts
|
$ | 937 | $ | 604 | $ | 344 | $ | 385 | $ | 2,270 | $ | 25,344 | $ | 27,614 | ||||||||||||||
8. RECEIVABLES FROM PRENEED FUNERAL TRUSTS
The receivables from preneed funeral trusts represent assets in trusts which are controlled
and operated by third parties in which the Company does not have a controlling financial interest
(less than 50%) in the trust assets. The Company accounts for these investments at cost.
| December 31, 2009 | December 31, 2010 | |||||||
| (in thousands) | ||||||||
|
Preneed funeral trust funds
|
$ | 16,329 | $ | 22,542 | ||||
|
Less: allowance for contract cancellation
|
(1,700 | ) | (676 | ) | ||||
|
|
||||||||
|
|
$ | 14,629 | $ | 21,866 | ||||
|
|
||||||||
The following summary reflects the composition of the assets held in trust and controlled by
third parties to satisfy Carriage’s future obligations under preneed funeral arrangements related
to the preceding contracts at December 31, 2010 and 2009. The cost basis includes reinvested
interest and dividends that have been earned on the trust assets. Fair value includes unrealized
gains and losses on trust assets.
| Historical | ||||||||
| Cost Basis | Fair Value | |||||||
| (in thousands) | ||||||||
|
As of December 31, 2010:
|
||||||||
|
Cash and cash equivalents
|
$ | 3,554 | $ | 3,554 | ||||
|
Fixed income investments
|
13,990 | 14,009 | ||||||
|
Mutual funds and common stocks
|
76 | 76 | ||||||
|
Annuities
|
4,922 | 5,407 | ||||||
|
|
||||||||
|
Total
|
$ | 22,542 | $ | 23,046 | ||||
|
|
||||||||
48
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. RECEIVABLES FROM PRENEED FUNERAL TRUSTS (continued)
| Historical | ||||||||
| Cost Basis | Fair Value | |||||||
| (in thousands) | ||||||||
|
As of December 31, 2009:
|
||||||||
|
Cash and cash equivalents
|
$ | 2,593 | $ | 2,593 | ||||
|
Fixed income investments
|
9,394 | 9,347 | ||||||
|
Mutual funds and common stocks
|
4,275 | 4,511 | ||||||
|
Annuities
|
67 | 67 | ||||||
|
|
||||||||
|
Total
|
$ | 16,329 | $ | 16,518 | ||||
|
|
||||||||
9. CONTRACTS SECURED BY INSURANCE
Certain preneed funeral contracts are secured by life insurance contracts. Generally, the
proceeds of the life insurance policies have been assigned to the Company and will be paid upon the
death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the
preneed contract for services and merchandise. Preneed funeral contracts secured by insurance
totaled $195.0 million and $205.0 million at December 31, 2009 and 2010, respectively and are not
included in the Company’s Consolidated Balance Sheets.
10. CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Cemetery Care trusts’ corpus on the Consolidated Balance Sheets represent the corpus of those
trusts plus undistributed income. The components of Cemetery Care trusts’ corpus as of December
31, 2009 and December 31, 2010 are as follows (in thousands):
| December 31, 2009 | December 31, 2010 | |||||||
|
Trust assets, at market value
|
$ | 40,383 | $ | 45,735 | ||||
|
Obligations due to trust
|
20 | 206 | ||||||
|
|
||||||||
|
Care trusts’ corpus
|
$ | 40,403 | $ | 45,941 | ||||
|
|
||||||||
The Company is required by various state laws to pay a portion of the proceeds from the sale
of cemetery property interment rights into perpetual care trust funds. The following table
reflects the cost and fair market values associated with the trust investments held in perpetual
care trust funds at December 31, 2010 (in thousands). The Company determines whether or not the
assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a
security-by-security basis. This assessment is made based upon a number of criteria including the
length of time a security has been in a loss position, changes in market conditions and concerns
related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis
of the security is adjusted downward to its fair market value. Any reduction in the cost basis due
to an other-than-temporary impairment is recorded as a reduction to Care trusts’ corpus.
| Unrealized | Unrealized | |||||||||||||||
| Cost | Gains | Losses | Market | |||||||||||||
|
Cash and money market accounts
|
$ | 784 | $ | — | $ | — | $ | 784 | ||||||||
|
Fixed income securities:
|
||||||||||||||||
|
Corporate debt
|
23,458 | 4,120 | (129 | ) | 27,449 | |||||||||||
|
Common stock
|
14,704 | 2,299 | (143 | ) | 16,860 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
64 | — | (17 | ) | 47 | |||||||||||
|
Fixed income
|
15 | — | (3 | ) | 12 | |||||||||||
|
|
||||||||||||||||
|
Trust Securities
|
$ | 39,025 | $ | 6,419 | $ | (292 | ) | $ | 45,152 | |||||||
|
|
||||||||||||||||
|
Accrued investment income
|
$ | 583 | $ | 583 | ||||||||||||
|
|
||||||||||||||||
|
Cemetery perpetual care investments
|
$ | 45,735 | ||||||||||||||
|
|
||||||||||||||||
|
Market value as a percentage of cost
|
117.2 | % | ||||||||||||||
|
|
||||||||||||||||
49
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. CEMETERY PERPETUAL CARE TRUST INVESTMENTS (continued)
The estimated maturities of the fixed income securities included above are as follows (in
thousands):
|
Due in one year or less
|
$ | — | ||
|
Due in one to five years
|
3,456 | |||
|
Due in five to ten years
|
6,474 | |||
|
Thereafter
|
17,519 | |||
|
|
||||
|
|
$ | 27,449 | ||
|
|
||||
The cost and market values associated with the trust investments held in perpetual care trust
funds at December 31, 2009 are detailed below (in thousands).
| Unrealized | Unrealized | |||||||||||||||
| Cost | Gains | Losses | Market | |||||||||||||
|
Cash and money market accounts
|
$ | 583 | $ | — | $ | — | $ | 583 | ||||||||
|
Fixed income securities:
|
||||||||||||||||
|
Corporate debt
|
15,968 | 4,729 | (30 | ) | 20,667 | |||||||||||
|
Common stock
|
16,557 | 2,600 | (483 | ) | 18,674 | |||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
79 | — | (33 | ) | 46 | |||||||||||
|
Fixed income
|
15 | — | (4 | ) | 11 | |||||||||||
|
|
||||||||||||||||
|
Trust Securities
|
$ | 33,202 | $ | 7,329 | $ | (550 | ) | $ | 39,981 | |||||||
|
|
||||||||||||||||
|
Accrued investment income
|
$ | 402 | $ | 402 | ||||||||||||
|
|
||||||||||||||||
|
Cemetery perpetual care investments
|
$ | 40,383 | ||||||||||||||
|
|
||||||||||||||||
|
Market value as a percentage of cost
|
121.6 | % | ||||||||||||||
|
|
||||||||||||||||
Perpetual care trust investment security transactions recorded in Interest income and other,
net in the Consolidated Statements of Operations for the years ended December 31, 2009 and 2010 are
as follows (in thousands):
| Year ended December 31, | ||||||||
| 2009 | 2010 | |||||||
|
Undistributable realized gains
|
$ | 2,118 | $ | 5,774 | ||||
|
Undistributable realized losses
|
(3,567 | ) | (780 | ) | ||||
|
Decrease (increase) in Care trusts’ corpus
|
1,449 | (4,994 | ) | |||||
|
|
||||||||
|
|
$ | — | $ | — | ||||
|
|
||||||||
Perpetual care trust investment security transactions recorded in Cemetery revenue for the
years ended December 31, 2009 and 2010 are as follows (in thousands):
| Year ended December 31, | ||||||||
| 2009 | 2010 | |||||||
|
Interest and dividend income
|
$ | 2,375 | $ | 2,145 | ||||
|
Realized gains, net
|
154 | 2,132 | ||||||
|
Expenses
|
(178 | ) | (21 | ) | ||||
|
|
||||||||
|
Total
|
$ | 2,351 | $ | 4,256 | ||||
|
|
||||||||
Purchases and sales of investments in the perpetual care trusts were as follows (in
thousands):
| Year ended December 31, | ||||||||
| 2009 | 2010 | |||||||
|
Purchases
|
$ | (38,833 | ) | $ | (38,736 | ) | ||
|
Sales
|
39,299 | 39,819 | ||||||
50
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to
transfer a liability in an orderly transaction between market participants at the measurement date
applicable for items that are recognized or disclosed at fair value in the financial statements on
a recurring basis. We disclose the extent to which fair value is used to measure financial assets
and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the
measurement of significant unobservable inputs on earnings, or changes in net assets, as of the
measurement date.
The Company evaluated its financial assets and liabilities for those financial assets and
liabilities that met the criteria of the disclosure requirements and fair value framework. The
Company identified investments in fixed income securities, common stock and mutual funds presented
within the preneed and perpetual trust investments categories on the Consolidated Balance Sheets as
having met such criteria. The following three-level valuation hierarchy based upon the
transparency of inputs is utilized in the measurement and valuation of financial assets or
liabilities as of the measurement date:
| • | Level 1—Fair value of securities based on unadjusted quoted prices for identical assets or liabilities in active markets. Our investments classified as Level 1 securities include common stock, certain fixed income securities, and equity mutual funds; |
| • | Level 2—Fair value of securities estimated based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation. These inputs include interest rates, yield curves, credit risk, prepayment speeds, rating and tax-exempt status. Our investments classified as Level 2 securities include corporate and U.S. agency fixed income securities, and fixed income mutual funds; and |
| • | Level 3—Unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability. As of December 31, 2010, the Company did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value. |
The Company accounts for its investments as available-for-sale and measures them at fair value
under standards of financial accounting and reporting for investments in equity instruments that
have readily determinable fair values and for all investments in debt securities.
The table below presents information about our assets measured at fair value on a recurring
basis and summarizes the fair value hierarchy of the valuation techniques utilized by us to
determine the fair values as of December 31, 2010 (in thousands). Certain fixed income and other
securities are reported at fair value using Level 2 inputs. For these securities, the Company uses
pricing services and dealer quotes. As of December 31, 2010, the Company did not have any
liabilities measured at fair value.
| Quoted Prices in | Significant Other | Significant | ||||||||||||||
| Active Markets | Observable Inputs | Unobservable | December 31, | |||||||||||||
| (Level 1) | (Level 2) | Inputs (Level 3) | 2010 | |||||||||||||
|
Assets:
|
||||||||||||||||
|
Fixed income securities:
|
||||||||||||||||
|
U.S. Treasury debt
|
$ | 5,548 | $ | — | $ | — | $ | 5,548 | ||||||||
|
Mortgage backed
securities
|
— | 728 | — | 728 | ||||||||||||
|
Corporate debt
|
— | 90,576 | — | 90,576 | ||||||||||||
|
Common stock
|
81,076 | — | — | 81,076 | ||||||||||||
|
Mutual funds:
|
||||||||||||||||
|
Equity
|
10,456 | — | — | 10,456 | ||||||||||||
|
Fixed income
|
— | 6,806 | — | 6,806 | ||||||||||||
|
|
||||||||||||||||
|
Total Assets
|
$ | 97,080 | $ | 98,110 | $ | — | $ | 195,190 | ||||||||
|
|
||||||||||||||||
There were no significant transfers between Levels 1 and 2 for the year ended December 31,
2010.
51
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. DEFERRED CHARGES AND OTHER NON-CURRENT ASSETS
Deferred charges and other non-current assets at December 31, 2009 and 2010 were as follows
(in thousands):
| December 31, | December 31, | |||||||
| 2009 | 2010 | |||||||
|
Prepaid agreements not to compete, net of
accumulated amortization of $497 and
$602, respectively
|
$ | 762 | $ | 529 | ||||
|
Deferred loan costs, net of accumulated
amortization of $2,181 and $2,775,
respectively
|
2,627 | 2,086 | ||||||
|
Deferred income tax asset
|
— | 1,211 | ||||||
|
Convertible junior subordinated debenture
origination costs, net of accumulated
amortization of $1,429 and $1,563,
respectively
|
2,615 | 2,480 | ||||||
|
Other
|
1,532 | 1,554 | ||||||
|
|
||||||||
|
|
$ | 7,536 | $ | 7,860 | ||||
|
|
||||||||
Agreements not to compete are amortized over the term of the respective agreements, ranging
from four to ten years. Deferred loan costs are being amortized over the term of the related debt.
The Company’s senior long-term debt consisted of the following at December 31, 2009 and 2010
(in thousands):
| December 31, | December 31, | |||||||
| 2009 | 2010 | |||||||
|
$40 million Credit Facility, secured, floating rate, due November 2012
|
$ | — | $ | 600 | ||||
|
7⅞% Senior Notes due 2015
|
130,000 | 130,000 | ||||||
|
Acquisition debt
|
200 | 208 | ||||||
|
Other
|
2,135 | 2,042 | ||||||
|
Less: current portion
|
(437 | ) | (434 | ) | ||||
|
|
||||||||
|
|
$ | 131,898 | $ | 132,416 | ||||
|
|
||||||||
The
Company has outstanding a principal amount of $130 million of
7⅞% unsecured Senior Notes,
due in 2015, with interest payable semi-annually. The Company has a $40.0 million senior secured
revolving credit facility that matures in November 2012 and is collateralized by all personal
property and funeral home real property in certain states. The credit facility also contains an
accordion provision to borrow up to an additional $20.0 million. Borrowings under the credit
facility bear interest at either prime or LIBOR options. At December 31, 2010, the prime rate
option was equivalent to 5.75% and the LIBOR option was set at the 30 day LIBOR rate plus 350 basis
points. During the fourth quarter of fiscal year 2009, the Company recorded a charge of
approximately $72,000 to write-off the remaining unamortized fees when Carriage amended and
extended its credit facility. The fees related to the current credit facility, were approximately
$411,000 and are being amortized over the life of the amendment. At December 31, 2010, $0.6
million was drawn under the credit facility. Additionally, $0.1 million in letters of credit were
issued and outstanding under the credit facility at December 31, 2010. Interest is payable
quarterly.
Carriage, the parent entity, has no material assets or operations independent of its
subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which
(except for Carriage Services Capital Trust, which is a single purpose entity that holds our 7%
debentures issued in connection with issuance of the Trust’s TIDES 7% convertible preferred
securities) have fully and unconditionally guaranteed the Company’s obligations under the 7⅞%
Senior Notes. Additionally, the Company does not currently have any significant restrictions on
its ability to receive dividends or loans from any subsidiary guarantor under the 7⅞% Senior Notes.
The Company was in compliance with the covenants contained in the credit facility and the
Senior Notes as of and for the years ended December 31, 2009 and 2010.
Acquisition debt consists of deferred purchase prices payable to sellers. The deferred
purchase price notes bear interest at 0%, discounted at imputed interest rates ranging from 6% to
8%, with original maturities from three to 15 years.
The aggregate maturities of long-term debt for the next five years as of December 31, 2010 are
approximately $435,000, $1,047,000, $586,000, $399,000, and $130,224,000, respectively and $300,000
thereafter.
52
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| 14. | CONVERTIBLE JUNIOR SUBORDINATED DEBENTURE PAYABLE TO AFFILIATE AND COMPANY OBLIGATED MANDATORILY REDEEMABLE CONVERTIBLE PREFERRED SECURITIES OF CARRIAGE SERVICES CAPITAL TRUST |
Carriage’s wholly-owned subsidiary, Carriage Services Capital Trust, issued 1,875,000 units of
7% convertible preferred securities (TIDES) during June 1999, resulting in approximately $90.0
million in net proceeds, and the Company issued a 7% convertible junior subordinated debenture to
the Trust in the amount of $93.75 million. The convertible preferred securities have a liquidation
amount of $50 per unit, and are convertible into Carriage’s common stock at the equivalent
conversion price of $20.4375 per share of common stock. The subordinated debentures and the TIDES
mature in 2029 and the TIDES are guaranteed on a subordinated basis by the Company. Both the
subordinated debentures and the TIDES contain a provision for the deferral of distributions for up
to 20 consecutive quarters. During the period in which distribution payments are deferred,
distributions will continue to accumulate at the 7% annual rate. Also, the deferred distributions
will themselves accumulate distributions at the annual rate of 7%. During the period in which
distributions are deferred, Carriage is prohibited from paying dividends on its common stock or
repurchasing its common stock, with limited exceptions. There are no deferred distributions at
December 31, 2010.
In June 2010, the Company repurchased 17,850 shares of these TIDES for approximately $0.6
million and recorded a gain of $0.3 million. In September 2010, the Company converted these
preferred shares at the current conversion rate of 2.4465 into shares of common stock equal to
43,670 shares. Immediately upon the exchange, these common shares were cancelled and held in
Treasury. At December 31, 2010, the convertible junior subordinated debenture was $92.9 million.
| 15. | COMMITMENTS AND CONTINGENCIES |
Leases
Carriage leases certain office facilities, vehicles and equipment under operating leases for
terms ranging from one to 15 years. Certain of these leases provide for an annual adjustment and
contain options for renewal. Rent expense totaled $3,835,000, $3,850,000 and $4,807,000 for 2008,
2009 and 2010, respectively. Assets acquired under capital leases are included in property, plant
and equipment in the accompanying Consolidated Balance Sheets in the amount of $1,204,000 in 2009
and $1,128,000 in 2010, net of accumulated depreciation. Capital lease obligations are included in
current and long-term debt as indicated below.
At December 31, 2010, future minimum lease payments under noncancellable lease agreements were
as follows:
| Future Minimum Lease Payments | ||||||||
| Operating | Capital | |||||||
| Leases | Leases | |||||||
| (in thousands) | ||||||||
|
Years ending December 31,
|
||||||||
|
2011
|
$ | 3,721 | $ | 425 | ||||
|
2012
|
3,565 | 433 | ||||||
|
2013
|
2,812 | 437 | ||||||
|
2014
|
2,377 | 462 | ||||||
|
2015
|
1,547 | 503 | ||||||
|
Thereafter
|
879 | 5,696 | ||||||
|
|
||||||||
|
Total future minimum lease payments
|
$ | 14,901 | $ | 7,956 | ||||
|
|
||||||||
|
Less: amount representing interest (rates ranging from
7% to 11.5%)
|
(3,539 | ) | ||||||
|
Less: current portion of obligations under capital leases
|
(128 | ) | ||||||
|
|
||||||||
|
Long-term obligations under capital leases
|
$ | 4,289 | ||||||
|
|
||||||||
Agreements and Employee Benefits
Carriage has obtained various agreements not to compete from former owners and employees.
These agreements are generally for one to 10 years and provide for periodic payments over the term
of the agreements. The aggregate payments due under these agreements for the next five years total
$1,671,000, $1,453,000, $1,031,000, $891,000 and $684,000, respectively and $979,000 thereafter.
The Company has entered into various consulting agreements with former owners of businesses.
Payments for such agreements are generally not made in advance. These agreements are generally for
one to 10 years and provide for future payments monthly or
bi-weekly. The aggregate payments for the next five years total $686,000, $443,000, $338,000,
$276,000 and $119,000, respectively and $41,000 thereafter.
The Company has entered into employment agreements with its executive officers and certain
management personnel. These agreements are generally for three years and provide for participation
in various incentive compensation arrangements. These
53
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| 15. | COMMITMENTS AND CONTINGENCIES (continued) |
agreements automatically renew on an annual basis after their initial term has expired. The
minimum payments due under these agreements is approximately $2,000,000 for each of the next three
years.
Carriage sponsors a defined contribution plan (401K) for the benefit of its employees. The
Company’s matching contributions and plan administrative expenses totaled $972,000, $1,220,000 and
$1,243,000 for 2008, 2009 and 2010, respectively. The Company does not offer any post-retirement
or post-employment benefits.
Other Commitments
The Company has an agreement to outsource the processing of transactions for the cemetery
business and certain accounting activities. The Company and the contractor may terminate the
contract for various reasons upon written notification. Payments vary based on the level of
resources provided. The Company paid $1.7 million, $2.1 million and $1.9 million to the contractor
for services in 2008, 2009 and 2010, respectively.
Litigation
We are a party to various litigation matters and proceedings. For each of our outstanding
legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or
settlement strategies, and the likelihood of an unfavorable outcome. We intend to defend ourselves
in the lawsuits described herein; however, if we determine that an unfavorable outcome is probable
and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance
policies that may reduce cash outflows with respect to an adverse outcome of certain of these
litigation matters.
Leathermon, et al. v. Grandview Memorial Gardens, Inc., et al.
, United States District Court,
Southern District of Indiana, Case No. 4:07-cv-137. On August 17, 2007, five plaintiffs filed a
punitive class action against the current and past owners of Grandview Cemetery in Madison,
Indiana—including the Carriage subsidiaries that owned the cemetery from January 1997 until
February 2001—on behalf of all individuals who purchased cemetery and burial goods and services at
Grandview Cemetery. Plaintiffs claim that the cemetery owners performed burials negligently,
breached Plaintiffs’ contracts, and made misrepresentations regarding the cemetery. The Plaintiffs
also allege that the claims occurred prior, during and after the Company owned the cemetery. On
October 15, 2007, the case was removed from Jefferson County Circuit Court, Indiana to the Southern
District of Indiana. On April 24, 2009, shortly before Defendants had been scheduled to file their
briefs in opposition to Plaintiffs’ motion for class certification, Plaintiffs moved to amend their
complaint to add new class representatives and claims, while also seeking to abandon other claims.
The Company, as well as several other Defendants, opposed Plaintiffs’ motion to amend their
complaint and add parties. In April 2009, two Defendants moved to disqualify Plaintiffs’ counsel
from further representing Plaintiffs in this action. On March 31, 2010, the Court granted the
Defendants’ motion to disqualify Plaintiffs’ counsel. In that order, the Court gave Plaintiffs 60
days within which to retain new counsel. In addition, all discovery has been stayed and all
pending motions including Plaintiffs’ motion for leave to file an amended complaint and Plaintiffs’
motion for class certification were dismissed without prejudice to re-file with leave of Court upon
retention of new counsel. On May 6, 2010, Plaintiffs filed a petition for writ of mandamus with
the Seventh Circuit Court of Appeals seeking relief from the trial court’s order of
disqualification of counsel. On May 19, 2010, the Defendants responded to the petition of
mandamus. On July 8, 2010, the Seventh Circuit denied Plaintiffs’ petition for writ of mandamus.
Thus, pursuant to the trial court’s order, the Plaintiffs were given 60 days from July 8, 2010 in
which to retain new counsel to prosecute this action on their behalf. Plaintiffs have now retained
new counsel and the trial Court provided the newly retained Plaintiffs’ counsel ninety 90 days to
review the case and 120 days to advise the Court with respect to whether or not Plaintiffs will
seek leave to amend their complaint to add and/or change the allegations as are currently stated
therein and whether or not they will seek leave to amend the proposed class representatives for
class certification. Following the expiration of the 120 days, Plaintiffs moved to amend their
complaint to add new allegations as well as change the proposed class representatives. Defendants
have filed an opposition to Plaintiffs’ motion. Carriage intends to defend this action vigorously.
Because the lawsuit is in its preliminary stages, we are unable to evaluate the likelihood of an
unfavorable outcome to the Company or to estimate the amount or range of any potential loss, if
any, at this time.
Kendall v. Carriage Funeral Holdings, Inc., et al.
, Indiana Circuit Court, Jefferson County,
Indiana, Case No. 39C01-0707-CT-386 (filed July 27, 2007). In this individual
action, Plaintiffs allege improper handling of remains and/or improper burial practices by
Vail-Holt Funeral Home in Madison, Indiana and/or Grandview Memorial Gardens, Inc. Carriage has
denied these allegations because these burials all occurred before Carriage owned Grandview
Cemetery and Vail-Holt Funeral Home. Carriage has moved to dismiss Plaintiffs’ claims with respect to the funeral home because, among other
reasons, Carriage purchased only Vail-Holt’s assets under an asset purchase agreement and did not
assume its liabilities. Carriage has also moved to dismiss certain claims with respect to
Grandview Cemetery because Plaintiffs released Grandview Cemetery from contractual liability
pursuant to an exculpatory clause. On May 3, 2010, the Court entered an order relieving Carriage
from any liability and dismissing all of Plaintiffs’ funeral home claims against Carriage in the
Kendall v. Carriage Funeral Holdings, Inc.
matter. The cemetery allegations remain and the Company
intends to defend against this action vigorously. At this time we are unable to evaluate the
likelihood of an unfavorable outcome to the Company or to estimate the amount or range of any
potential loss, if any.
54
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
| 16. | INCOME TAXES |
The provision for income taxes from continuing operations for the years ended December 31,
2008, 2009 and 2010 consisted of (in thousands):
| Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Current:
|
||||||||||||
|
U. S. Federal
|
$ | 166 | $ | 80 | $ | 1,489 | ||||||
|
State
|
145 | 284 | 960 | |||||||||
|
|
||||||||||||
|
Total current provision
|
311 | 364 | 2,449 | |||||||||
|
Deferred:
|
||||||||||||
|
U. S. Federal
|
1,187 | 3,597 | 2,667 | |||||||||
|
State
|
227 | 836 | 252 | |||||||||
|
|
||||||||||||
|
Total deferred provision
|
1,414 | 4,433 | 2,919 | |||||||||
|
|
||||||||||||
|
Total income tax provision
|
$ | 1,725 | $ | 4,797 | $ | 5,368 | ||||||
|
|
||||||||||||
A reconciliation of taxes from continuing operations calculated at the U.S. Federal statutory
rate to those reflected in the Consolidated Statements of Operations for the years ended December
31, 2008, 2009 and 2010 is as follows:
| Year Ended December 31, | ||||||||||||||||||||||||
| 2008 | 2009 | 2010 | ||||||||||||||||||||||
| Amount | Percent | Amount | Percent | Amount | Percent | |||||||||||||||||||
|
Federal statutory rate
|
$ | 1,200 | 34.0 | % | $ | 4,027 | 34.0 | % | $ | 4,572 | 34.0 | % | ||||||||||||
|
Effect of state income taxes,
net of Federal benefit
|
302 | 8.6 | 667 | 5.6 | 858 | 6.4 | ||||||||||||||||||
|
Effect of non-deductible
expenses and other, net
|
233 | 6.6 | 322 | 2.7 | 143 | 1.1 | ||||||||||||||||||
|
Change in valuation allowance
|
(10 | ) | (0.3 | ) | (219 | ) | (1.8 | ) | (198 | ) | (1.5 | ) | ||||||||||||
|
|
||||||||||||||||||||||||
|
|
$ | 1,725 | 48.9 | % | $ | 4,797 | 40.5 | % | $ | 5,375 | 40.0 | % | ||||||||||||
|
|
||||||||||||||||||||||||
The tax effects of temporary differences from total operations that give rise to significant
deferred tax assets and liabilities at December 31, 2009 and 2010 were as follows (in thousands):
| Year Ended December 31, | ||||||||
| 2009 | 2010 | |||||||
|
Deferred income tax assets:
|
||||||||
|
Net operating loss carryforwards
|
$ | 6,678 | $ | 3,597 | ||||
|
Minimum tax credit carryforwards
|
390 | — | ||||||
|
State tax credit carryforwards
|
102 | 92 | ||||||
|
State bonus depreciation
|
105 | 259 | ||||||
|
Accrued liabilities and other
|
3,585 | 2,355 | ||||||
|
Amortization of non-compete agreements
|
791 | 539 | ||||||
|
Preneed liabilities, net
|
22,095 | 27,234 | ||||||
|
|
||||||||
|
Total deferred income tax assets
|
33,746 | 34,076 | ||||||
|
Less valuation allowance
|
(1,743 | ) | (1,545 | ) | ||||
|
|
||||||||
|
Total deferred income tax assets
|
$ | 32,003 | $ | 32,531 | ||||
|
|
||||||||
|
|
||||||||
|
Deferred income tax liabilities:
|
||||||||
|
Amortization and depreciation
|
$ | (24,739 | ) | $ | (28,107 | ) | ||
|
Other
|
(1,264 | ) | (856 | ) | ||||
|
|
||||||||
|
Total deferred income tax liabilities
|
(26,003 | ) | (28,963 | ) | ||||
|
|
||||||||
|
|
||||||||
|
Total net deferred tax assets
|
$ | 6,000 | $ | 3,568 | ||||
|
|
||||||||
|
|
||||||||
|
Current deferred tax asset
|
$ | 6,000 | $ | 2,357 | ||||
|
Non-current deferred tax asset
|
— | 1,211 | ||||||
|
|
||||||||
|
Total net deferred tax assets
|
$ | 6,000 | $ | 3,568 | ||||
|
|
||||||||
The current deferred tax asset is included in Inventories and other current assets at December
31, 2009 and 2010. The non-current deferred tax asset is included in Deferred charges
and other non-current assets at December 31, 2009 and 2010.
55
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
16. INCOME TAXES (continued)
Carriage records a valuation allowance to reflect the estimated amount of deferred tax assets
for which realization is uncertain. Management reviews the valuation allowance at the end of each
quarter and makes adjustments if it is determined that it is more likely than not that the tax
benefits will be realized. The Company recognized a $0.2 million decrease in its valuation
allowance during 2010.
For federal income tax reporting purposes, Carriage has net operating loss carryforwards
totaling approximately $12.6 million available at December 31, 2010 to offset future Federal
taxable income, which will expire between 2025 and 2029 if not utilized. For state reporting
purposes, Carriage also has approximately $58.5 million of net operating loss carryforwards that
will expire between 2013 and 2030, if not utilized. Based on management’s assessment of the
various state net operating losses, it was determined that it is more likely than not that the
Company will not be able to realize tax benefits on a substantial amount of the state losses. The
valuation allowance at December 31, 2010 is attributable to the deferred tax asset related to the
state operating losses.
The Company analyzes tax benefits for uncertain tax positions and how they are to be
recognized, measured, and derecognized in financial statements; provides certain disclosures of
uncertain tax matters; and specifies how reserves for uncertain tax positions should be classified
on the Consolidated Balance Sheets. The Company has reviewed its income tax positions and
identified certain tax deductions, primarily related to business acquisitions that are not certain.
Our policy with respect to potential penalties and interest is to record them as “Other” expense
and “Interest” expense, respectively. The entire balance of unrecognized tax benefits, if
recognized, would affect the Company’s effective tax rate. The Company does not anticipate a
significant increase or decrease in its unrecognized tax benefits during the next year.
The Company has unrecognized tax benefits for federal and state income tax purposes totaling
$7.4 million as of December 31, 2010, resulting from deductions totaling $19.6 million on Federal
returns and $19.3 million on various state returns. The Company has state net operating loss
carryforwards exceeding these deductions, and has accounted for these unrecognized tax benefits by
reducing the deferred income tax asset related to the net operating loss carryforwards by the
amount of these unrecognized deductions. For federal and certain states without net operating loss
carryforwards, the Company has increased its taxes payable by deductions that are not considered
more likely than not. A reconciliation of the beginning and ending amount of unrecognized tax
benefits is as follows (in thousands):
| December 31, | December 31, | December 31, | ||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Unrecognized tax benefit at beginning of year
|
$ | 6,017 | $ | 6,327 | $ | 6,863 | ||||||
|
Additions based on tax positions related to the current year
|
583 | 560 | 562 | |||||||||
|
Reductions for tax positions of prior years
|
(249 | ) | — | — | ||||||||
|
Reductions as a result of a lapse of the applicable statute
of limitations
|
(24 | ) | (24 | ) | (29 | ) | ||||||
|
|
||||||||||||
|
Unrecognized tax benefit at end of year
|
$ | 6,327 | $ | 6,863 | $ | 7,396 | ||||||
|
|
||||||||||||
The entire balance of unrecognized tax benefits, if recognized, would affect the Company’s
effective tax rate. The effects of recognizing the tax benefits of uncertain tax positions for the
year ended December 31, 2010 were not material to the Company’s operations. The Company does not
anticipate a significant increase or decrease in its unrecognized tax benefits during the next
twelve months. The amount of penalty and interest recognized in the balance sheet and statement of
operations was not material for the year ended December 31, 2010.
The Company’s federal income tax returns for 2001 through 2009 are open tax years that may be
examined by the Internal Revenue Service. The Company’s unrecognized state tax benefits are
related to state returns open from 2001 through 2009.
17. STOCKHOLDERS’ EQUITY
Stock Based Compensation Plans
During the three year period ended December 31, 2010, Carriage had five stock benefit plans in
effect under which stock option grants or restricted stock have been issued or remain outstanding:
the 1995 Stock Incentive Plan (the “1995 Plan”), the 1996 Stock Option Plan (the “1996 Plan”), the
1996 Directors’ Stock Option Plan (the “Directors’ Plan”) and the 2006 Long Term Incentive Plan
(the “2006 Plan”). All of the options granted under the plans have ten-year terms. The 1995 Plan
expired in 2005 and the 1996 Plan and the Director’s Plan were terminated during 2006. The 2006
Plan expires on May 24, 2016. On February 24, 2010 the Board of Directors approved an amendment to
the 2006 Plan, to increase the number of shares reserved for issuance by 1,500,000 shares of common
stock so that a total of 2,850,000 in the aggregate will be reserved for issuance under the Amended
and Restated 2006 Long-Term Incentive Plan (2006 Amended and Restated Plan). The effective date of
the A mended and Restated Plan was May 18, 2010. The expiration and termination of these plans
does not affect the options previously issued and outstanding.
56
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. STOCKHOLDERS’ EQUITY (continued)
All stock-based plans are administered by the Compensation Committee appointed by the Board of
Directors. The 2006 Amended and Restated Plan provides for grants of options as non-qualified
options or incentive stock options, restricted stock, stock appreciation rights and performance
awards. Option grants are required by the 2006 Amended and Restated Plan to be issued with an
exercise price equal to or greater than the fair market value of Carriage’s common stock as
determined by the closing price on the date of the option grant. The options have ten year terms.
The status of each of the plans at December 31, 2010 is as follows (in thousands):
| Shares | Shares | Options | ||||||||||
| Reserved | Available to Issue | Outstanding | ||||||||||
|
1995 Plan
|
— | — | 59 | |||||||||
|
1996 Plan
|
— | — | 122 | |||||||||
|
Directors’ Plan
|
— | — | 72 | |||||||||
|
2006 Amended and Restated Plan
|
2,850 | 1,235 | 192 | |||||||||
|
|
||||||||||||
|
Total
|
2,850 | 1,235 | 445 | |||||||||
|
|
||||||||||||
Stock Options
In the second quarter of 2010, a total of 211,401 stock options were awarded to officers and
certain employees. The fair value of the option grant is estimated on the date of grant using the
Black-Scholes option pricing model with the following weighted-average assumptions: risk-free
interest rates of 3.52%; expected dividend yield of 0% for each year; expected termination rate of
4.39%; expected lives of five years; expected volatility of 50.5%. The stock options vest in 33⅓%
increments over a three year period and expire May 18, 2020. All other outstanding stock options
previously granted have fully vested.
A summary of the stock options at December 31, 2008, 2009 and 2010 and changes during the
three years ended is presented in the table and narrative below (shares in thousands):
| Year Ended December 31, | ||||||||||||||||||||||||
| 2008 | 2009 | 2010 | ||||||||||||||||||||||
| Wtd. Avg. | Wtd. Avg. | Wtd. Avg. | ||||||||||||||||||||||
| Shares | Ex. Price | Shares | Ex. Price | Shares | Ex. Price | |||||||||||||||||||
|
Outstanding at beginning
of period
|
996 | $ | 3.12 | 907 | $ | 2.97 | 787 | $ | 2.71 | |||||||||||||||
|
Granted
|
— | — | — | — | 211 | $ | 4.78 | |||||||||||||||||
|
Exercised
|
(72 | ) | 2.73 | (76 | ) | 2.01 | (516 | ) | $ | 1.56 | ||||||||||||||
|
Canceled or expired
|
(17 | ) | 15.54 | (44 | ) | 9.25 | (37 | ) | $ | 4.79 | ||||||||||||||
|
|
||||||||||||||||||||||||
|
Outstanding at end of year
|
907 | 2.97 | 787 | 2.71 | 445 | $ | 4.74 | |||||||||||||||||
|
|
||||||||||||||||||||||||
|
Exercisable at end of year
|
907 | 2.97 | 787 | 2.71 | 253 | $ | 4.71 | |||||||||||||||||
|
|
||||||||||||||||||||||||
The aggregate intrinsic value of the outstanding and exercisable stock options at December 31,
2010 totaled $83,200 and $69,800, respectively.
The total intrinsic value of options exercised during 2008, 2009 and 2010 totaled $233,000,
$151,000 and $1,628,000, respectively. As of December 31, 2010, there was $401,500 of unrecognized
compensation cost, net of estimated forfeitures, related to nonvested stock options. The Company
recorded compensation expense totaling $4,000 in 2008, less than $1,000 in 2009 and $81,000 in
2010.
57
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. STOCKHOLDERS’ EQUITY (continued)
The following table further describes the Company’s outstanding stock options at December 31, 2010
(shares in thousands):
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Actual | ||||||||||||||||||||
| Ranges of | Number | Weighted-Average | Number | |||||||||||||||||
| Exercise Prices | Outstanding | Remaining | Weighted-Average | Exercisable | Weighted-Average | |||||||||||||||
| 150% increment | at 12/31/10 | Contractual Life | Exercise Price | at 12/31/10 | Exercise Price | |||||||||||||||
|
$2.06-3.09
|
8 | 0.33 | $ | 3.00 | 8 | $ | 3.00 | |||||||||||||
|
$3.12-4.77
|
189 | 1.51 | $ | 4.56 | 189 | $ | 4.56 | |||||||||||||
|
$4.78-4.78
|
192 | 9.39 | — | — | — | |||||||||||||||
|
$4.78-6.19
|
56 | 3.02 | $ | 5.44 | 56 | $ | 5.44 | |||||||||||||
|
|
||||||||||||||||||||
|
$2.06-6.19
|
445 | 5.08 | $ | 4.71 | 253 | $ | 4.71 | |||||||||||||
Employee Stock Purchase Plan
Carriage provides all employees the opportunity to purchase common stock through payroll
deductions. Purchases are made quarterly; the price being 85% of the lower of the price on the
grant date or the purchase date. In 2008, employees purchased a total of 107,803 shares at a
weighted average price of $3.52 per share. In 2009, employees purchased a total of 219,262 shares
at a weighted average price of $2.52 per share. In 2010, employees purchased a total of 106,880
shares at a weighted average price of $3.38 per share. Compensation cost for the Plan totaling
approximately $189,000, $159,000 and $173,000 was expensed in 2008, 2009 and 2010, respectively.
The fair values of the grants at the beginning of each of the years pursuant to the Company’s
employee stock purchase plan (“ESPP”) were estimated using the following assumptions:
| 2008 | 2009 | 2010 | ||||||||||
|
Dividend yield
|
0 | % | 0 | % | 0 | % | ||||||
|
Expected volatility
|
39 | % | 76 | % | 70 | % | ||||||
|
Risk-free interest
rate
|
3.26%, 3.32%, 3.25%, 3.17 | % | 0.09%, 0.27%, 0.31%, 0.35 | % | 0.08%, 0.18% , 0.31% , 0.45 | % | ||||||
|
Expected life (years)
|
.25, .50, .75, 1 | .25, .50, .75, 1 | .25, .50, .75, 1 | |||||||||
Expected volatilities are based on the historical volatility during the previous twelve months
of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on
the U.S. Treasury yields in effect at the time of grant (January 1). The expected life of the ESPP
grants represents the calendar quarters from the grant date (January 1) to the purchase date (end
of each quarter).
Restricted Stock Grants
The Company, from time to time, issues shares of restricted common stock to certain officers,
directors, and key employees of the Company from its stock benefit plans. The restricted stock
issued to officers and key employees vest in either 25% or 33⅓% increments over four or three year
terms, respectively. A summary of the status of unvested restricted stock awards as of
December 31, 2010, and changes during 2010, is presented below (shares in thousands):
| Weighted Average | ||||||||
| Grant Date | ||||||||
| Unvested stock awards | Shares | Fair Value | ||||||
|
Unvested at January 1, 2010
|
695 | $ | 4.41 | |||||
|
Awards
|
250 | 4.51 | ||||||
|
Vestings
|
(246 | ) | 4.70 | |||||
|
Cancellations
|
(39 | ) | 4.24 | |||||
|
|
||||||||
|
Unvested at December 31, 2010
|
660 | $ | 4.29 | |||||
|
|
||||||||
Related to the vesting of restricted stock awards previously awarded to our officers and
employees, the Company recorded compensation expense, included in general, administrative and other
expenses, $1.0 million for both years ended December 31, 2008 and 2009, and $1.3 million for the
year ended December 31, 2010.
As of December 31, 2010, the Company had $1.9 million of total unrecognized compensation costs
related to unvested restricted stock awards, which are expected to be recognized over a weighted
average period of approximately 1.8 years.
58
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. STOCKHOLDERS’ EQUITY (continued)
Director Compensation Plans
The Company’s Director Compensation Plan entitles the directors to be compensated in the form
of quarterly retainers for service as a director, annual retainers for committee chair positions
and fees for attending meetings. In 2008 and 2009, the Company’s directors could elect to receive
all or a portion of their fees in stock. For the years 2008 and 2009, the Company issued 27,312
and 72,278 shares, respectively, of unrestricted common stock to directors in lieu of payment in
cash for their fees. Two new directors joined the Board of Directors during the first quarter of
2009, at which time they were granted shares valued in total at $200,000. One-half of those shares
vested immediately; the remainder vest over two years. Effective March 22, 2010, and subsequently
revised on July 14, 2010, the Board of Directors approved a new Director Compensation Policy in
which the directors no longer have an option to elect to receive all or a portion of their fees in
stock. Also, in accordance with this new policy, each independent director is entitled to a fully
vested annual equity retainer equal to $40,000 of the Company’s common stock. On March 22, 2010,
the Company issued 8,968 shares of common stock to each of the four independent directors for such
retainer. For the year ended December 31, 2010, all meeting fees were paid in cash. The Company
recorded $334,000, $431,000 and $450,000 in pre-tax compensation expense, included in general,
administrative and other expenses, for 2008, 2009 and 2010, respectively, related to the director
fees and deferred compensation amortization.
18. PREFERRED STOCK
The Company has 40,000,000 authorized shares of preferred stock. The Company has issued
20,000 shares of a newly designated series of mandatorily redeemable convertible preferred stock to
a key employee in exchange for certain intellectual property rights. The preferred stock has a
liquidation value of $10 per share and is convertible at any time prior to February 22, 2013 into
the Company’s common stock on a one-for-one basis. If not converted into the Company’s common
stock, the preferred stock is subject to mandatory redemption on February 22, 2013. Dividends
accrue on a cumulative basis at the rate of 7% per year, payable quarterly.
19. RELATED PARTY TRANSACTIONS
The Company engaged a law firm in which one of their partners is the spouse of the Company’s
Executive Vice President and General Counsel. The firm was used for various legal matters during
the periods. During the three years ended December 31, 2008, 2009 and 2010, the Company paid the
law firm $811,000, $389,000 and $112,000 in legal fees, respectively.
The Company consolidates an entity that provides cremation services in accordance with the
accounting for Variable Interest Entities. The Company also provides 100% of the financing needs
for the entity. Carriage’s Executive Vice President and Chief Operating Officer is a one-third
owner in a company that owns 52.8% of this entity. As of December 31, 2010, the entity owed
Carriage approximately $1.8 million in the form of a working capital line of credit.
A member of the Company’s Board of Directors is a key member of management and Chief
Investment Officer of an otherwise unrelated company that holds $7.3 million of the Company’s 7⅞%
Senior Notes for investment purposes.
59
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
20. EARNINGS PER SHARE
Effective January 1, 2009, the accounting for unvested share-based payment awards included in
the calculation of earnings per share has changed. Share-based awards that contain nonforfeitable
rights to dividends or dividend equivalents, whether paid or unpaid, are now participating
securities and included in the computation of both basic and diluted earnings per share. Our
grants of restricted stock awards to our employees and directors are considered participating
securities and we have prepared our earnings per share calculations to include outstanding unvested
restricted stock awards in the basic and diluted weighted average shares outstanding calculation.
The following table sets forth the computation of the basic and diluted earnings per share for
the years ended December 31, 2008, 2009 and 2010:
| Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (in thousands, except per share data) | ||||||||||||
|
Net income
|
$ | 1,767 | $ | 6,780 | $ | 7,777 | ||||||
|
Net income allocated to non-vested share awards
|
37 | 268 | 302 | |||||||||
|
Preferred stock dividend
|
(10 | ) | (14 | ) | (14 | ) | ||||||
|
|
||||||||||||
|
Undistributed earnings from continuing operations
available to common stockholders
|
1,794 | 7,034 | 8,065 | |||||||||
|
Loss from discontinued operations
|
(1,546 | ) | — | — | ||||||||
|
|
||||||||||||
|
Undistributed earnings available to common stockholders
|
$ | 248 | $ | 7,034 | $ | 8,065 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Weighted average number of common shares outstanding
for basic EPS computation
|
19,054 | 17,573 | 17,635 | |||||||||
|
Effect of dilutive securities:
|
||||||||||||
|
Stock options
|
308 | 176 | 303 | |||||||||
|
|
||||||||||||
|
Weighted average number of common and common
equivalent shares outstanding for diluted EPS
computation
|
19,362 | 17,749 | 17,938 | |||||||||
|
|
||||||||||||
|
|
||||||||||||
|
Basic earnings (loss) per common share:
|
||||||||||||
|
Undistributed earnings
|
$ | 0.09 | $ | 0.39 | $ | 0.44 | ||||||
|
Allocation of earnings to non-vested share awards
|
— | 0.01 | 0.02 | |||||||||
|
Discontinued operations
|
(0.08 | ) | — | — | ||||||||
|
|
||||||||||||
|
Total
|
$ | 0.01 | $ | 0.40 | $ | 0.46 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Diluted earnings (loss) per common share:
|
||||||||||||
|
Undistributed earnings
|
$ | 0.09 | $ | 0.39 | $ | 0.43 | ||||||
|
Allocation of earnings to non-vested share awards
|
— | 0.01 | 0.02 | |||||||||
|
Discontinued operations
|
(0.08 | ) | — | — | ||||||||
|
|
||||||||||||
|
Total
|
$ | 0.01 | $ | 0.40 | $ | 0.45 | ||||||
|
|
||||||||||||
Options to purchase 0.4 million shares were not included in the computation of diluted
earnings per share for the year ended December 31, 2008, because the effect would be antidilutive
as the exercise prices exceeded the average market price of the common shares.
Options to purchase 0.2 million shares were not included in the computation of diluted
earnings per share for the year ended December 31, 2009, because the effect would be antidilutive
as the exercise prices exceeded the average market price of the common shares.
Options to purchase 0.7 million shares were not included in the computation of diluted
earnings per share for the year ended December 31, 2010, because the effect would be antidilutive
as the exercise prices were greater than the average market price of the common shares.
60
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. MAJOR SEGMENTS OF BUSINESS
Carriage conducts funeral and cemetery operations only in the United States. The following
table presents external revenues from continuing operations, net income (loss) from continuing
operations, total assets, depreciation and amortization, capital expenditures, number of operating
locations, interest expense, and income tax expense (benefit) from continuing operations by
segment:
| Funeral | Cemetery | Corporate | Consolidated | |||||||||||||
| (in thousands, except number of operating locations) | ||||||||||||||||
|
External revenues from continuing
operations:
|
||||||||||||||||
|
2010
|
$ | 138,125 | $ | 46,822 | $ | $ | 184,947 | |||||||||
|
2009
|
131,051 | 46,576 | — | 177,627 | ||||||||||||
|
2008
|
134,246 | 42,682 | — | 176,928 | ||||||||||||
|
Income (loss) from continuing operations
before income taxes:
|
||||||||||||||||
|
2010
|
$ | 23,284 | $ | 5,981 | $ | (21,186 | ) | $ | 8,079 | |||||||
|
2009
|
11,666 | 2,845 | (7,463 | ) | 7,048 | |||||||||||
|
2008
|
22,524 | 3,439 | (24,159 | ) | 1,804 | |||||||||||
|
Total assets:
|
||||||||||||||||
|
2010
|
$ | 409,329 | $ | 242,461 | $ | 19,222 | $ | 671,012 | ||||||||
|
2009
|
370,058 | 223,743 | 25,497 | 619,298 | ||||||||||||
|
2008
|
347,906 | 181,408 | 30,979 | 560,293 | ||||||||||||
|
Depreciation and amortization:
|
||||||||||||||||
|
2010
|
$ | 5,362 | $ | 3,259 | $ | 1,355 | $ | 9,976 | ||||||||
|
2009
|
5,531 | 3,217 | 1,591 | 10,339 | ||||||||||||
|
2008
|
6,136 | 2,620 | 1,616 | 10,372 | ||||||||||||
|
Capital expenditures:
|
||||||||||||||||
|
2010
|
$ | 6,467 | $ | 3,448 | $ | 746 | $ | 10,661 | ||||||||
|
2009
|
3,422 | 4,875 | 1,073 | 9,370 | ||||||||||||
|
2008
|
7,016 | 5,132 | 728 | 12,876 | ||||||||||||
|
Number of operating locations at year
end:
|
||||||||||||||||
|
2010
|
147 | 33 | — | 180 | ||||||||||||
|
2009
|
138 | 32 | — | 170 | ||||||||||||
|
2008
|
136 | 32 | — | 168 | ||||||||||||
|
Interest expense
|
||||||||||||||||
|
2010
|
$ | 312 | $ | 76 | $ | 17,874 | $ | 18,262 | ||||||||
|
2009
|
410 | 92 | 17,996 | 18,498 | ||||||||||||
|
2008
|
418 | 104 | 17,809 | 18,331 | ||||||||||||
|
Income tax expense (benefit) from
continuing operations:
|
||||||||||||||||
|
2010
|
$ | 14,345 | $ | 3,449 | $ | (12,426 | ) | $ | 5,368 | |||||||
|
2009
|
26,374 | 4,731 | (26,308 | ) | 4,797 | |||||||||||
|
2008
|
14,239 | 2,330 | (14,844 | ) | 1,725 | |||||||||||
61
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. SUPPLEMENTAL DISCLOSURE OF STATEMENT OF OPERATIONS INFORMATION
| Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
| (in thousands) | ||||||||||||
|
Revenues
|
||||||||||||
|
Goods
|
||||||||||||
|
Funeral
|
$ | 54,695 | $ | 54,171 | $ | 55,386 | ||||||
|
Cemetery
|
28,564 | 32,950 | 30,909 | |||||||||
|
|
||||||||||||
|
Total goods
|
$ | 83,259 | $ | 87,121 | $ | 86,295 | ||||||
|
|
||||||||||||
|
Services
|
||||||||||||
|
Funeral
|
$ | 71,793 | $ | 70,945 | $ | 74,357 | ||||||
|
Cemetery
|
10,133 | 9,347 | 9,541 | |||||||||
|
|
||||||||||||
|
Total services
|
$ | 81,926 | $ | 80,292 | $ | 83,898 | ||||||
|
|
||||||||||||
|
Financial revenue
|
||||||||||||
|
Preneed funeral commission income
|
$ | 5,088 | $ | 3,911 | $ | 2,265 | ||||||
|
Preneed funeral trust earnings
|
2,670 | 2,024 | 6,117 | |||||||||
|
Cemetery trust earnings
|
2,328 | 2,747 | 4,815 | |||||||||
|
Cemetery finance charges
|
1,657 | 1,532 | 1,557 | |||||||||
|
|
||||||||||||
|
Total financial revenue
|
$ | 11,743 | $ | 10,214 | $ | 14,754 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total revenues
|
$ | 176,928 | $ | 177,627 | $ | 184,947 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Cost of revenues
|
||||||||||||
|
Goods
|
||||||||||||
|
Funeral
|
$ | 46,981 | $ | 45,207 | $ | 47,700 | ||||||
|
Cemetery
|
24,879 | 26,523 | 24,729 | |||||||||
|
|
||||||||||||
|
Total goods
|
$ | 71,860 | $ | 71,730 | $ | 72,429 | ||||||
|
|
||||||||||||
|
Services
|
||||||||||||
|
Funeral
|
$ | 37,359 | $ | 36,125 | $ | 40,885 | ||||||
|
Cemetery
|
6,771 | 6,461 | 6,674 | |||||||||
|
|
||||||||||||
|
Total services
|
$ | 44,130 | $ | 42,586 | $ | 47,559 | ||||||
|
|
||||||||||||
|
Financial expenses
|
||||||||||||
|
Preneed funeral commissions
|
$ | 1,862 | $ | 1,737 | $ | 1,389 | ||||||
|
|
||||||||||||
|
Total financial expenses
|
$ | 1,862 | $ | 1,737 | $ | 1,389 | ||||||
|
|
||||||||||||
|
|
||||||||||||
|
Total cost of revenues
|
$ | 117,852 | $ | 116,053 | $ | 121,377 | ||||||
|
|
||||||||||||
The costs of revenues, for purposes of this supplemental disclosure, include only field costs
and expenses that are directly allocable between the goods, services and financial categories in
the funeral and cemetery segments. Depreciation and amortization and regional and unallocated
funeral and cemetery costs are not included in this disclosure.
62
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
23. QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below set forth consolidated operating results by fiscal quarter for the years
ended December 31, 2009 and 2010, in thousands, except earnings per share.
| First | Second | Third | Fourth | |||||||||||||
| Quarter | Quarter | Quarter | Quarter | |||||||||||||
|
2010
|
||||||||||||||||
|
Revenue from continuing operations
|
$ | 46,847 | $ | 44,517 | $ | 45,485 | $ | 48,098 | ||||||||
|
Gross profit from continuing operations
|
13,517 | 12,032 | 10,059 | 11,838 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
$ | 2,774 | $ | 2,299 | $ | 859 | $ | 2,147 | ||||||||
|
Preferred stock dividend
|
3 | 4 | 3 | 4 | ||||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 2,771 | $ | 2,295 | $ | 856 | $ | 2,143 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic earnings per common share:
|
$ | 0.16 | $ | 0.13 | $ | 0.05 | $ | 0.12 | ||||||||
|
Diluted earnings per common share
(a)
:
|
$ | 0.16 | $ | 0.13 | $ | 0.05 | $ | 0.12 | ||||||||
|
|
||||||||||||||||
|
2009
|
||||||||||||||||
|
Revenue from continuing operations
|
$ | 45,803 | $ | 44,550 | $ | 42,167 | $ | 45,107 | ||||||||
|
Gross profit from continuing operations
|
12,525 | 11,803 | 9,972 | 11,818 | ||||||||||||
|
|
||||||||||||||||
|
Income from continuing operations
|
$ | 2,354 | $ | 2,034 | $ | 860 | $ | 1,800 | ||||||||
|
Preferred stock dividend
|
3 | 4 | 3 | 4 | ||||||||||||
|
|
||||||||||||||||
|
Net income
|
$ | 2,351 | $ | 2,030 | $ | 857 | $ | 1,796 | ||||||||
|
|
||||||||||||||||
|
|
||||||||||||||||
|
Basic earnings per common share:
|
$ | 0.13 | $ | 0.12 | $ | 0.05 | $ | 0.10 | ||||||||
|
Diluted earnings per common share:
|
$ | 0.13 | $ | 0.12 | $ | 0.05 | $ | 0.10 | ||||||||
| (a) | Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts does not equal the total computed for the year 2010 due to rounding and stock transactions which occurred during the period. |
63
Table of Contents
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
24. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information is supplemental disclosure for the Consolidated Statements of Cash Flows (in thousands):
| Year Ended December 31, | ||||||||||||
| 2008 | 2009 | 2010 | ||||||||||
|
Cash paid for interest and financing costs
|
$ | 18,230 | $ | 17,887 | $ | 17,818 | ||||||
|
Cash paid for income taxes
|
898 | 126 | 393 | |||||||||
|
Fair value of stock issued to directors or officers
|
1,227 | 1,123 | 1,129 | |||||||||
|
Restricted common stock withheld for payroll taxes
|
134 | 128 | 131 | |||||||||
|
Net (deposits) withdrawals in preneed funeral trusts
|
776 | (222 | ) | 148 | ||||||||
|
Net deposits in preneed cemetery trusts
|
(2,020 | ) | (2,879 | ) | (1,848 | ) | ||||||
|
Net (deposits) withdrawals in perpetual care trusts
|
(5,333 | ) | (1,552 | ) | 674 | |||||||
|
Net (increase) decrease in preneed funeral receivables
|
4,003 | (340 | ) | 376 | ||||||||
|
Net (increase) decrease in preneed cemetery receivables
|
547 | (2,423 | ) | (696 | ) | |||||||
|
Net withdrawals of receivables from preneed funeral trusts
|
2,317 | 916 | (343 | ) | ||||||||
|
Net change in preneed funeral receivables decreasing
deferred revenue
|
(10,156 | ) | (304 | ) | (872 | ) | ||||||
|
Net change in preneed cemetery receivables increasing
(decreasing) deferred revenue
|
(1,083 | ) | (480 | ) | 1,040 | |||||||
|
Net deposits (withdrawals) into (from) preneed funeral
trust accounts increasing (decreasing) deferred preneed
funeral receipts
|
(776 | ) | 222 | (148 | ) | |||||||
|
Net deposits in cemetery trust accounts increasing
deferred cemetery receipts
|
2,020 | 2,879 | 1,848 | |||||||||
|
Net deposits (withdrawals) in perpetual care trust
accounts increasing (decreasing) perpetual care trusts’
corpus
|
5,994 | 1,577 | (488 | ) | ||||||||
64
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Carriage Services, Inc.:
Carriage Services, Inc.:
We have audited and reported separately herein on the consolidated financial statements of Carriage
Services, Inc. and subsidiaries as of and for the years ended December 31, 2010 and 2009.
Our audits were made for the purpose of forming an opinion on the basic consolidated financial
statements of Carriage Services, Inc. and subsidiaries taken as a whole. The supplementary
information included in Part IV, Item 15 (a)(2) is presented for purposes of additional analysis
and is not a required part of the basic consolidated financial statements. Such information has
been subjected to the auditing procedures applied in the audits of the basic consolidated financial
statements and, in our opinion, is fairly stated in all material respects in relation to the basic
consolidated financial statements taken as a whole.
/s/ KPMG LLP
Houston, Texas
March 8, 2011
March 8, 2011
65
Table of Contents
CARRIAGE
SERVICES, INC.
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
(in thousands)
(in thousands)
| Balance at beginning | Charged to costs | Balance at end | ||||||||||||||
| Description | of year | and expenses | Deduction | of year | ||||||||||||
|
Year ended December 31, 2008:
|
||||||||||||||||
|
Allowance for bad debts, current portion
|
$ | 1,142 | $ | 3,878 | $ | 4,187 | $ | 833 | ||||||||
|
Allowance for cemetery bad debts,
contract cancellations and
receivables from preneed funeral
trusts, noncurrent portion
|
$ | 1,159 | $ | 3,125 | $ | 3,437 | $ | 847 | ||||||||
|
Employee severance accruals
|
$ | — | $ | 564 | $ | 427 | $ | 137 | ||||||||
|
Litigation reserves
|
$ | — | $ | 4,973 | $ | — | $ | 4,973 | ||||||||
|
|
||||||||||||||||
|
Year ended December 31, 2009:
|
||||||||||||||||
|
Allowance for bad debts, current portion
|
$ | 833 | $ | 3,617 | $ | 3,699 | $ | 751 | ||||||||
|
Allowance for cemetery bad debts,
contract cancellations and receivables
from preneed funeral trusts, noncurrent
portion
|
$ | 847 | $ | 564 | $ | 253 | $ | 1,158 | ||||||||
|
Employee severance accruals
|
$ | 137 | $ | 37 | $ | 174 | $ | — | ||||||||
|
Litigation reserves
|
$ | 4,973 | $ | — | $ | 3,914 | $ | 1,059 | ||||||||
|
|
||||||||||||||||
|
Year ended December 31, 2010:
|
||||||||||||||||
|
Allowance for bad debts, current portion
|
$ | 751 | $ | 3,942 | $ | 3,714 | $ | 979 | ||||||||
|
Allowance for cemetery bad debts,
contract cancellations and receivables
from preneed funeral trusts, noncurrent
portion
|
$ | 1,158 | $ | 285 | $ | 207 | $ | 1,236 | ||||||||
|
Employee severance accruals
|
$ | — | $ | 237 | $ | — | $ | 237 | ||||||||
|
Litigation reserves
|
$ | 1,059 | $ | — | $ | 6 | $ | 1,053 | ||||||||
66
Table of Contents
None.
Management’s Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive and financial officers, has evaluated the
effectiveness of our disclosure controls and procedures to ensure that the information required to
be disclosed in our filings under the Securities Exchange Act of 1934, as amended, (the “Exchange
Act”) is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and to ensure that such information is accumulated and communicated to
management, including our principal executive and financial officers, as appropriate to allow
timely decisions regarding required disclosure. Based on such evaluation, our principal executive
and financial officers have concluded that such disclosure controls and procedures were effective,
as of December 31, 2010 (the end of the period covered by this Annual Report on Form 10-K).
Assessment of Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over
financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). Management’s report
on our internal control over financial reporting is presented on the following page of this Annual
Report on Form 10-K. KPMG LLP, an independent registered public accounting firm that audited the
financial statements included in this report, has issued an attestation report on our internal
control over financial reporting which is also presented in Item 9A.
67
Table of Contents
MANAGEMENT’S REPORT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as such term is defined under Rule 13a-15(f) promulgated under the
Securities Exchange Act of 1934, as amended.
Internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of the Company’s
Consolidated Financial Statements for external purposes in accordance with generally accepted
accounting principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
Management conducted an assessment of the Company’s internal control over financial reporting
as of December 31, 2010 using the framework specified in
Internal Control — Integrated Framework
,
published by the Committee of Sponsoring Organizations of the Treadway Commission. Based on such
assessment, management has concluded that the Company’s internal control over financial reporting
was effective as of December 31, 2010.
The Company’s internal control over financial reporting as of December 31, 2010 has been
audited by KPMG LLP, an independent registered public accounting firm, which also audited the
financial statements of the Company for the year ended December 31, 2010, as stated in their report
which is presented in this Annual Report.
| /s/ Melvin C. Payne | ||||
| Melvin C. Payne | ||||
| Chairman of the Board and Chief Executive Officer | ||||
| /s/ Terry E. Sanford | ||||
| Terry E. Sanford | ||||
| Executive Vice President and Chief Financial Officer | ||||
March 8, 2011
68
Table of Contents
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Stockholders
Carriage Services, Inc.:
Carriage Services, Inc.:
We have audited Carriage Services, Inc.’s and subsidiaries internal control over financial
reporting as of December 31, 2010, based on criteria established in
Internal Control—Integrated
Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO)
.
Carriage Services, Inc.’s management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control Over Financial
Reporting
.
Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight
Board (United States). Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether effective internal control over financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal
control over financial reporting, assessing the risk that a material weakness exists, and testing
and evaluating the design and operating effectiveness of internal control based on the assessed
risk. Our audit also included performing such other procedures as we considered necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (1)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (2) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Carriage Services, Inc. maintained, in all material respects, effective internal
control over financial reporting as of December 31, 2010, based on criteria established in
Internal
Control—Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight
Board (United States), the consolidated balance sheets of Carriage Services, Inc. and subsidiaries
as of December 31, 2010 and 2009, and the related consolidated statements of operations,
changes in
stockholders’ equity, and cash flows for each of the years
in the three-year period ended December 31,
2010, and our report dated March 8, 2011, expressed an unqualified opinion on those
consolidated financial statements.
/s/ KPMG LLP
Houston, Texas
March 8, 2011
March 8, 2011
69
Table of Contents
Changes in Internal Control Over Financial Reporting
Our management report on internal control over financial reporting for the year ended
December 31, 2010 did not report any material weaknesses in our internal control over financial
reporting or any changes in our internal control over financial reporting.
None.
The information required by Item 10 is incorporated by reference to the registrant’s
definitive proxy statement relating to its 2011 annual meeting of stockholders, which proxy
statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the
end of the last fiscal year.
The information required by Item 11 is incorporated by reference to the registrant’s
definitive proxy statement relating to its 2011 annual meeting of stockholders, which proxy
statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the
end of the last fiscal year.
The information required by Item 12 is incorporated by reference to the registrant’s
definitive proxy statement relating to its 2011 annual meeting of stockholders, which proxy
statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the
end of the last fiscal year.
The information required by Item 13 is incorporated by reference to the registrant’s
definitive proxy statement relating to its 2011 annual meeting of stockholders, which proxy
statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the
end of the last fiscal year.
The information required by Item 14 is incorporated by reference to the registrant’s
definitive proxy statement relating to its 2011 annual meeting of stockholders, which proxy
statement will be filed pursuant to Regulation 14A of the Exchange Act within 120 days after the
end of the last fiscal year.
The following table, required by Item 201(d) of Regulation S-K, summarizes information
regarding the number of shares of our common stock that are available for issuance under all of our
existing equity compensation plans as of December 31, 2010.
| Number of | ||||||||||||
| securities | ||||||||||||
| Number of | remaining available | |||||||||||
| securities to be | for future issuance | |||||||||||
| issued upon | Weighted-average | under equity | ||||||||||
| exercise of | exercise price of | compensation plans | ||||||||||
| outstanding | outstanding | (excluding | ||||||||||
| options, warrants | options, warrants | securities | ||||||||||
| and rights | and rights | reflected in column (a)) | ||||||||||
| Plan Category | (a) | (b) | (c) | |||||||||
|
Equity compensation
plans approved by
security holders
|
445,431 | $ | 4.74 | 1,234,662 | ||||||||
|
Equity compensation
plans not approved
by security holders
|
— | — | — | |||||||||
|
|
||||||||||||
|
Total
|
445,431 | $ | 4.74 | 1,234,662 | ||||||||
|
|
||||||||||||
70
Table of Contents
(a) (1) FINANCIAL STATEMENTS
The following financial statements and the Report of Independent Registered Public Accounting
Firm are filed as a part of this report on the pages indicated:
| Page | ||||
| 33 | ||||
| 34 | ||||
| 35 | ||||
| 36 | ||||
| 37 | ||||
| 38 | ||||
| 68 | ||||
| 69 | ||||
(2) FINANCIAL STATEMENT SCHEDULES
The following Financial Statement Schedule and the Report of Independent Registered Public
Accounting Firm on Financial Statement Schedule are included in this report on the pages indicated:
| Page | ||||
| 65 | ||||
| 66 | ||||
All other schedules are omitted as the required information is inapplicable or the information
is presented in the Consolidated Financial Statements or related notes.
(3) EXHIBITS
The exhibits to this report have been included only with the copies of this report filed with
the SEC. Copies of individual exhibits will be furnished to stockholders upon written request to
Carriage and payment of a reasonable fee.
| Exhibit No. | Description | |
|
3.1
|
Amended and Restated Certificate of Incorporation, as amended, of the Company. Incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 1996. | |
|
|
||
|
3.2
|
Certificate of Amendment dated May 7, 1997. Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 1997. | |
|
|
||
|
3.3
|
Certificate of Amendment dated May 7, 2002. Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2002. | |
|
|
||
|
3.4
|
Certificate of Designation of the Company’s Series G Junior Participating Preferred Stock. Incorporated by reference to Exhibit C to the Rights Agreement with American Stock Transfer & Trust Company dated December 18, 2000, which is attached as Exhibit 1 to the Company’s Form 8-A filed December 29, 2000. | |
|
|
||
|
3.5
|
Amended and Restated Certificate of Designations of mandatorily Redeemable Convertible Preferred Stock, Series A. Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A filed April 22, 2008. | |
|
|
||
|
3.6
|
Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 333-05545). |
71
Table of Contents
| Exhibit No. | Description | |
|
3.7
|
Amendments to the Bylaws of the Company effective December 18, 2000. Incorporated by reference to Exhibit 3.9 to the Company’s Annual Report on Form 10-K for its year ended December 31, 2001. | |
|
|
||
|
3.8
|
Amendments to the Bylaws of the Company effective May 20, 2008. Incorporated by reference to Exhibit to the Company’s current report on Form 8-K filed May 28, 2008. | |
|
|
||
|
4.1
|
Certificate of Trust of Carriage Services Capital Trust. Incorporated by reference to Exhibit 4.6 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.2
|
Amended and Restated Declaration of Trust of Carriage Services Capital Trust, dated June 3, 1999 among the Company, Wilmington Trust Company, Wilmington Trust Company, and Mark W. Duffey, Thomas C. Livengood and Terry E. Sanford. Incorporated by reference to Exhibit 4.7 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.3
|
Indenture for the Convertible Junior Subordinated Debentures due 2029 dated June 3, 1999 between the Company and Wilmington Trust Company. Incorporated by reference to Exhibit 4.8 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.4
|
Form of Carriage Services Capital Trust 7% Convertible Preferred Securities. Incorporated by reference to Exhibit 4.10 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.5
|
Form of the Company’s Convertible Junior Subordinated Debentures due 2029. Incorporated by reference to Exhibit 4.11 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.6
|
Preferred Securities Guarantee dated June 3, 1999 between the Company and Wilmington Trust Company. Incorporated by reference to Exhibit 4.12 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.7
|
Common Securities Guarantee, dated June 3, 1999 by Carriage Services, Inc. as Guarantor. Incorporated by reference to Exhibit 4.13 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.8
|
Amendment No. 1 to Amended and Restated Declaration of Trust of Carriage Services Capital Trust. Incorporated by reference to Exhibit 4.14 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.9
|
Rights Agreement with American Stock Transfer & Trust Company dated December 18, 2000. Incorporated by reference to Exhibit 1 to the Company’s Form 8-A filed December 29, 2000. | |
|
|
||
|
4.10
|
Indenture dated as of January 27, 2005 between Carriage Services, Inc., the Guarantors named therein, as Guarantors, and Wells Fargo Bank, National Association, as trustee. Incorporated herein by reference to Exhibit 4.1 to the Company’s current report on Form 8-K dated January 27, 2005. | |
|
|
||
|
4.11
|
Credit Agreement dated April 27, 2005 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, National Association, as Syndication Agent and Other Lenders. Incorporated by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2005. | |
|
|
||
|
4.12
|
Amendment No. 1 to the Credit Agreement dated August 31, 2005 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, National Association, as Syndication Agent and Other Lenders. Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2005. | |
|
|
||
|
4.13
|
Amendment No. 2 to the Credit Agreement dated May 4, 2007 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2007. |
72
Table of Contents
| Exhibit No. | Description | |
|
4.14
|
Amendment No. 3 to the Credit Agreement dated December 1, 2007 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2008. | |
|
|
||
|
4.15
|
Amendment No. 4 to the Credit Agreement dated November 19, 2008 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 4.15 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2008. | |
|
|
||
|
4.16
|
Amendment No. 5 to the Credit Agreement dated December 31, 2008 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 4.16 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2008. | |
|
|
||
|
4.17
|
Amendment No. 6 to the Credit Agreement dated May 4, 2009 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 4, 2009. | |
|
|
||
|
4.18
|
Amendment No. 7 to the Credit Agreement dated November 4, 2009 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 4, 2009. | |
|
|
||
|
10.4
|
Second Amended and Restated 1996 Director’s Stock Option Plan. Incorporated by reference to Exhibit 99.1 to the Company’s 2000 Schedule 14A. † | |
|
|
||
|
10.5
|
Indemnity Agreement with Melvin C. Payne dated December 18, 2000. Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2000. † | |
|
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||
|
10.6
|
Indemnity Agreement with Ronald A. Erickson dated December 18, 2000. Incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2000. † | |
|
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||
|
10.7
|
Indemnity Agreement with Vincent D. Foster dated December 18, 2000. Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2000. † | |
|
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||
|
10.8
|
Indemnity Agreement with George J. Klug dated May 13, 2003. Incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2003. † | |
|
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||
|
10.9
|
Contingent Asset Sale Agreement dated November 22, 2006 among Carriage Cemetery Services, Inc. and SCI Funeral Services, Inc. Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2006. | |
|
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||
|
10.10
|
Asset Purchase Agreement dated December 15, 2006 among Carriage Cemetery Services, Inc. and Seaside Cemetery, Inc. Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2006. | |
|
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||
|
10.11
|
Amendment No. 1 to the Contingent Asset Sale Agreement dated January 22, 2007 among Carriage Cemetery Services, Inc. and Alderwoods Group (California), Inc. Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2006. | |
|
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||
|
10.12
|
Amendment No. 2 to the Contingent Asset Sale Agreement dated February 26, 2007 among Carriage Cemetery Services, Inc. and Alderwoods Group (California), Inc. Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for its Annual Report on Form 10-K for its fiscal year ended December 31, 2006. |
73
Table of Contents
| Exhibit No. | Description | |
|
10.13
|
Long Term Incentive Plan. Incorporated by reference to Exhibit 3.1 to the Company’s Form S-8 Registration Statement No. 333-136313 filed August 4, 2006. | |
|
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||
|
10.14
|
Amendment No. 1 to the 2006 Long Term Incentive Plan. Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2007. † | |
|
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||
|
10.15
|
Stock Purchase agreement as of June 12, 2007 among Carriage Cemetery Services of Idaho, Inc., buyer, and Timothy T. Gibson, seller, for 100 percent of the issued and outstanding capital stock of Cloverdale Park, Inc. Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2007. | |
|
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||
|
10.16
|
Asset Purchase Agreement dated October 10, 2007 among Carriage Funeral Services of California, Inc. and Thaddeus M. Luyben, Sr. and Thaddeus Enterprises. Incorporated by reference to Exhibit 10.26 on Form 10-K for its fiscal year ended December 31, 2007. | |
|
|
||
|
10.17
|
Carriage Services, Inc. 2007 Employee Stock Purchase Plan. Incorporated by reference to Appendix A to the Proxy Statement relating to Carriage’s 2007 annual meeting of stockholders, as filed with the Commission on April 20, 2007, Commission File No. 001-11961. | |
|
|
||
|
10.18
|
Employment agreement with Melvin C. Payne dated December 29, 2010. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 4, 2011. † | |
|
|
||
|
10.19
|
Employment agreement with Terry E. Sanford dated January 4, 2011. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 7, 2011. † | |
|
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||
|
10.20
|
Employment agreement with Jay D. Dodds dated January 4, 2011. Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 7, 2011. † | |
|
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||
|
10.21
|
Employment agreement with J. Bradley Green dated January 4, 2011. Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed January 7, 2011.. † | |
|
|
||
|
10.22
|
Employment agreement with George J. Klug dated January 4, 2011. Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed January 7, 2011. † | |
|
|
||
|
*12
|
Calculation of Ratio of Earnings to Fixed Charges. | |
|
|
||
|
14
|
Code of Business Conduct and Ethics. Carriage’s Code of Business Conduct and Ethics is available on the website www.carriageservices.com . | |
|
|
||
|
*21.1
|
Subsidiaries of the Company. | |
|
|
||
|
*23.1
|
Consent of KPMG LLP. | |
|
|
||
|
*31.1
|
Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
*31.2
|
Certification of Periodic Financial Reports by Terry E. Sanford in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
*32
|
Certification of Periodic Financial Reports by Melvin C. Payne and Terry E. Sanford in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. |
| (*) | Filed herewith. | |
| (†) | Management contract or compensatory plan or arrangement. |
74
Table of Contents
SIGNATURES
Pursuant to the requirements of section 13 or 15(d) of the Exchange Act, the registrant has duly
caused this report to be signed on its behalf by the undersigned, thereunto duly authorized on
March 8, 2011.
|
CARRIAGE SERVICES, INC.
|
||||
| By: | /s/ Melvin C. Payne | |||
| Melvin C. Payne | ||||
| Chairman of the Board and Chief Executive Officer | ||||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the registrant and in the capacities and on the
dates indicated.
| Signature | Title | Date | ||
|
|
||||
|
/s/ Melvin C. Payne
|
Chairman of the Board, Chief Executive | |||
|
|
||||
|
Melvin C. Payne
|
Officer and Director (Principal Executive Officer) | March 8, 2011 | ||
|
|
||||
|
/s/ Terry E. Sanford
|
Executive Vice President and Chief Financial | |||
|
|
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|
Terry E. Sanford
|
Officer (Principal Financial and Accounting Officer) | March 8, 2011 | ||
|
|
||||
|
/s/ Ronald A. Erickson
|
Director | March 8, 2011 | ||
|
|
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|
Ronald A. Erickson
|
||||
|
|
||||
|
/s/ Vincent D. Foster
|
Director | March 8, 2011 | ||
|
|
||||
|
Vincent D. Foster
|
||||
|
|
||||
|
/s/ L. William Heiligbrodt
|
Director | March 8, 2011 | ||
|
|
||||
|
L. William Heiligbrodt
|
||||
|
|
||||
|
/s/ Richard W. Scott
|
Director | March 8, 2011 | ||
|
|
||||
|
Richard W. Scott
|
75
Table of Contents
EXHIBIT INDEX
| Exhibit No. | Description | |
|
3.1
|
Amended and Restated Certificate of Incorporation, as amended, of the Company. Incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 1996. | |
|
|
||
|
3.2
|
Certificate of Amendment dated May 7, 1997. Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 1997. | |
|
|
||
|
3.3
|
Certificate of Amendment dated May 7, 2002. Incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2002. | |
|
|
||
|
3.4
|
Certificate of Designation of the Company’s Series G Junior Participating Preferred Stock. Incorporated by reference to Exhibit C to the Rights Agreement with American Stock Transfer & Trust Company dated December 18, 2000, which is attached as Exhibit 1 to the Company’s Form 8-A filed December 29, 2000. | |
|
|
||
|
3.5
|
Amended and Restated Certificate of Designations of mandatorily Redeemable Convertible Preferred Stock, Series A. Incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K/A filed April 22, 2008. | |
|
|
||
|
3.6
|
Amended and Restated Bylaws of the Company. Incorporated by reference to Exhibit 3.2 to the Company’s Registration Statement on Form S-1 (File No. 333-05545). | |
|
|
||
|
3.7
|
Amendments to the Bylaws of the Company effective December 18, 2000. Incorporated by reference to Exhibit 3.9 to the Company’s Annual Report on Form 10-K for its year ended December 31, 2001. | |
|
|
||
|
3.8
|
Amendments to the Bylaws of the Company effective May 20, 2008. Incorporated by reference to Exhibit to the Company’s current report on Form 8-K filed May 28, 2008. | |
|
|
||
|
4.1
|
Certificate of Trust of Carriage Services Capital Trust. Incorporated by reference to Exhibit 4.6 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.2
|
Amended and Restated Declaration of Trust of Carriage Services Capital Trust, dated June 3, 1999 among the Company, Wilmington Trust Company, Wilmington Trust Company, and Mark W. Duffey, Thomas C. Livengood and Terry E. Sanford. Incorporated by reference to Exhibit 4.7 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.3
|
Indenture for the Convertible Junior Subordinated Debentures due 2029 dated June 3, 1999 between the Company and Wilmington Trust Company. Incorporated by reference to Exhibit 4.8 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.4
|
Form of Carriage Services Capital Trust 7% Convertible Preferred Securities. Incorporated by reference to Exhibit 4.10 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.5
|
Form of the Company’s Convertible Junior Subordinated Debentures due 2029. Incorporated by reference to Exhibit 4.11 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.6
|
Preferred Securities Guarantee dated June 3, 1999 between the Company and Wilmington Trust Company. Incorporated by reference to Exhibit 4.12 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.7
|
Common Securities Guarantee, dated June 3, 1999 by Carriage Services, Inc. as Guarantor. Incorporated by reference to Exhibit 4.13 to the Company’s Form S-3 Registration Statement No. 333-84141. | |
|
|
||
|
4.8
|
Amendment No. 1 to Amended and Restated Declaration of Trust of Carriage Services Capital Trust. Incorporated by reference to Exhibit 4.14 to the Company’s Form S-3 Registration Statement No. 333-84141. |
76
Table of Contents
| Exhibit No. | Description | |
|
4.9
|
Rights Agreement with American Stock Transfer & Trust Company dated December 18, 2000. Incorporated by reference to Exhibit 1 to the Company’s Form 8-A filed December 29, 2000. | |
|
|
||
|
4.10
|
Indenture dated as of January 27, 2005 between Carriage Services, Inc., the Guarantors named therein, as Guarantors, and Wells Fargo Bank, National Association, as trustee. Incorporated herein by reference to Exhibit 4.1 to the Company’s current report on Form 8-K dated January 27, 2005. | |
|
|
||
|
4.11
|
Credit Agreement dated April 27, 2005 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, National Association, as Syndication Agent and Other Lenders. Incorporated by reference to Exhibit 4.5 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended June 30, 2005. | |
|
|
||
|
4.12
|
Amendment No. 1 to the Credit Agreement dated August 31, 2005 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer, Wells Fargo Bank of Texas, National Association, as Syndication Agent and Other Lenders. Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for its fiscal quarter ended September 30, 2005. | |
|
|
||
|
4.13
|
Amendment No. 2 to the Credit Agreement dated May 4, 2007 among Carriage Services, Inc., as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2007. | |
|
|
||
|
4.14
|
Amendment No. 3 to the Credit Agreement dated December 1, 2007 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 4.14 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2008. | |
|
|
||
|
4.15
|
Amendment No. 4 to the Credit Agreement dated November 19, 2008 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 4.15 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2008. | |
|
|
||
|
4.16
|
Amendment No. 5 to the Credit Agreement dated December 31, 2008 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 4.16 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2008. | |
|
|
||
|
4.17
|
Amendment No. 6 to the Credit Agreement dated May 4, 2009 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed May 4, 2009. | |
|
|
||
|
4.18
|
Amendment No. 7 to the Credit Agreement dated November 4, 2009 among Carriage Services, Inc. as the Borrower, Bank of America, N.A. as the Administrative Agent, Swing Line Lender and L/C Issuer and Wells Fargo Bank of Texas National Association, as Syndication Agent. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed November 4, 2009. | |
|
|
||
|
10.4
|
Second Amended and Restated 1996 Director’s Stock Option Plan. Incorporated by reference to Exhibit 99.1 to the Company’s 2000 Schedule 14A. † | |
|
|
||
|
10.5
|
Indemnity Agreement with Melvin C. Payne dated December 18, 2000. Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2000. † | |
|
|
||
|
10.6
|
Indemnity Agreement with Ronald A. Erickson dated December 18, 2000. Incorporated by reference to Exhibit 10.27 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2000. † |
77
Table of Contents
| Exhibit No. | Description | |
|
10.7
|
Indemnity Agreement with Vincent D. Foster dated December 18, 2000. Incorporated by reference to Exhibit 10.28 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2000. † | |
|
|
||
|
10.8
|
Indemnity Agreement with George J. Klug dated May 13, 2003. Incorporated by reference to Exhibit 10.5 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2003. † | |
|
|
||
|
10.9
|
Contingent Asset Sale Agreement dated November 22, 2006 among Carriage Cemetery Services, Inc. and SCI Funeral Services, Inc. Incorporated by reference to Exhibit 10.20 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2006. | |
|
|
||
|
10.10
|
Asset Purchase Agreement dated December 15, 2006 among Carriage Cemetery Services, Inc. and Seaside Cemetery, Inc. Incorporated by reference to Exhibit 10.21 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2006. | |
|
|
||
|
10.11
|
Amendment No. 1 to the Contingent Asset Sale Agreement dated January 22, 2007 among Carriage Cemetery Services, Inc. and Alderwoods Group (California), Inc. Incorporated by reference to Exhibit 10.22 to the Company’s Annual Report on Form 10-K for its fiscal year ended December 31, 2006. | |
|
|
||
|
10.12
|
Amendment No. 2 to the Contingent Asset Sale Agreement dated February 26, 2007 among Carriage Cemetery Services, Inc. and Alderwoods Group (California), Inc. Incorporated by reference to Exhibit 10.23 to the Company’s Annual Report on Form 10-K for its Annual Report on Form 10-K for its fiscal year ended December 31, 2006. | |
|
|
||
|
10.13
|
Long Term Incentive Plan. Incorporated by reference to Exhibit 3.1 to the Company’s Form S-8 Registration Statement No. 333-136313 filed August 4, 2006. | |
|
|
||
|
10.14
|
Amendment No. 1 to the 2006 Long Term Incentive Plan. Incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2007. † | |
|
|
||
|
10.15
|
Stock Purchase agreement as of June 12, 2007 among Carriage Cemetery Services of Idaho, Inc., buyer, and Timothy T. Gibson, seller, for 100 percent of the issued and outstanding capital stock of Cloverdale Park, Inc. Incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for its quarter ended June 30, 2007. | |
|
|
||
|
10.16
|
Asset Purchase Agreement dated October 10, 2007 among Carriage Funeral Services of California, Inc. and Thaddeus M. Luyben, Sr. and Thaddeus Enterprises. Incorporated by reference to Exhibit 10.26 on Form 10-K for its fiscal year ended December 31, 2007. | |
|
|
||
|
10.17
|
Carriage Services, Inc. 2007 Employee Stock Purchase Plan. Incorporated by reference to Appendix A to the Proxy Statement relating to Carriage’s 2007 annual meeting of stockholders, as filed with the Commission on April 20, 2007, Commission File No. 001-11961. | |
|
|
||
|
10.18
|
Employment agreement with Melvin C. Payne dated December 29, 2010. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 4, 2011. † | |
|
10.19
|
Employment agreement with Terry E. Sanford dated January 4, 2011. Incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed January 7, 2011. † | |
|
|
||
|
10.20
|
Employment agreement with Jay D. Dodds dated January 4, 2011. Incorporated by reference to Exhibit 10.2 to the Company’s Current Report on Form 8-K filed January 7, 2011. † | |
|
|
||
|
10.21
|
Employment agreement with J. Bradley Green dated January 4, 2011. Incorporated by reference to Exhibit 10.3 to the Company’s Current Report on Form 8-K filed January 7, 2011.. † | |
|
|
||
|
10.22
|
Employment agreement with George J. Klug dated January 4, 2011. Incorporated by reference to Exhibit 10.4 to the Company’s Current Report on Form 8-K filed January 7, 2011. † | |
|
|
||
|
*12
|
Calculation of Ratio of Earnings to Fixed Charges. | |
|
|
||
|
14
|
Code of Business Conduct and Ethics. Carriage’s Code of Business Conduct and Ethics is available on the website www.carriageservices.com . | |
|
|
||
|
*21.1
|
Subsidiaries of the Company. |
78
Table of Contents
| Exhibit No. | Description | |
|
*23.1
|
Consent of KPMG LLP. | |
|
|
||
|
*31.1
|
Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
*31.2
|
Certification of Periodic Financial Reports by Terry E. Sanford in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002. | |
|
|
||
|
*32
|
Certification of Periodic Financial Reports by Melvin C. Payne and Terry E. Sanford in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. |
| (*) | Filed herewith. | |
| (†) | Management contract or compensatory plan or arrangement. |
79
TABLE OF CONTENTS
Part IItem 1. BusinessItem 1A. Risk FactorsItem 1B. Unresolved Staff CommentsItem 2. PropertiesItem 3. Legal ProceedingsItem 4. [removed and Reserved]Part IIItem 5. Market For Registrant S Common Equity, Related Stockholder Matters and Issuer Purchases Of Equity SecuritiesItem 6. Selected Financial DataItem 7. Management S Discussion and Analysis Of Financial Condition and Results Of OperationsItem 7A. Quantitative and Qualitative Disclosures About Market RiskItem 8. Financial Statements and Supplementary DataItem 9. Changes in and Disagreements with Accountants on Accounting and Financial DisclosureItem 9A. Controls and ProceduresItem 9B. Other InformationPart IIIItem 10. Directiors, Executive Officers and Corporate GovernanceItem 11. Executive CompensationItem 12. Security Ownership Of Certain Beneficial Owners and Management and Related Stockholder MattersItem 13. Certain Relationships and Related Transactions, and Director IndependenceItem 14. Principal Accountant Fees and ServicesPart IVItem 15. Exhibits and Financial Statement Schedules