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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________________________ 
FORM 10-K
ý
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the year ended, December 31, 2018
 
or
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from ______________ to _____________                
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:
(Title of each class)
 
(Name of each exchange on which registered)
Common Stock, $.01 Par Value
 
New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act:
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  ¨    No  ý
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  ¨    No  ý
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  ý    No  ¨
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 (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) 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.    ¨
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 the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
Indicate by check mark whether the registrant is a shell company as defined in Rule 12b-2 of the Securities Exchange Act of 1934.     Yes  ¨    No  ý
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 29, 2018 was approximately $434.5 million based on the closing price of $24.55 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 February 22, 2019 was 18,183,198.
DOCUMENTS INCORPORATED BY REFERENCE
______________________________________ 
Portions of the registrant's definitive proxy statement for its 2019 annual meeting of stockholders, which will be filed with the Securities and Exchange Commission within 120 days of December 31, 2018, are incorporated in Part III of this Annual Report on Form 10-K.



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CAUTIONARY NOTE
Certain statements and information in this Annual Report on Form 10-K (this “Form 10-K”) may constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical information, should be deemed to be forward-looking statements. The words “may,” “will,” “estimate,” “believe,” “expect,” “anticipate,” “plan,” “intend,” “foresee,” “should,” “would,” “could” or other similar expressions are intended to identify forward-looking statements, which are generally not historical in nature. These forward-looking statements include, but are not limited to, statements regarding any projections of earnings, revenue, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic and market conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
our ability to find and retain skilled personnel;
our ability to execute our growth strategy;
the execution of our Standards Operating, 4E Leadership and Standard Acquisition Models;
the effects of competition;
changes in the number of deaths in our markets;
changes in consumer preferences;
our ability to generate preneed sales;
the investment performance of our funeral and cemetery trust funds;
fluctuations in interest rates;
our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
the timely and full payment of death benefits related to preneed funeral contracts funded through life insurance contracts;
the financial condition of third-party insurance companies that fund our preneed funeral contracts;
increased or unanticipated costs, such as insurance or taxes;
our level of indebtedness and the cash required to service our indebtedness;
changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service;
effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;
consolidation of the funeral and cemetery industry; and
other factors and uncertainties inherent in the funeral and cemetery industry.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see Part I, Item 1A, Risk Factors.
Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.


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PART I
ITEM 1.
BUSINESS.
GENERAL
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading provider of funeral and cemetery services and merchandise in the United States. We operate in two business segments: funeral home operations, which currently accounts for approximately 80% of our total revenue, and cemetery operations, which currently accounts for approximately 20% of our total revenue.
At December 31, 2018, we operated 182 funeral homes in 29 states and 29 cemeteries in 11 states. We compete with other publicly held funeral and cemetery companies and smaller, independent operators. We believe we are a market leader in most of our markets.
Our funeral homes offer a complete range of high value personal services to meet a family’s funeral 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 remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
CURRENT YEAR DEVELOPMENTS    
Acquisitions. During 2018, we acquired four funeral home businesses. On July 10, 2018, we acquired two funeral home businesses, one in Fredericksburg, Virginia and one in Stafford, Virginia. On August 21, 2018, we acquired a funeral home business in Cookeville, Tennessee and on August 28, 2018, we acquired a funeral home business in Knightdale, North Carolina. The pro forma impact of the acquisitions on prior periods is not presented as the impact is not material to our reported results. The results of the acquired businesses are included in our results of operations from the date of acquisition.
Executive Leadership Changes. On October 29, 2018, Mark R. Bruce informed us that he would resign from his position as Executive Vice President and Chief Operating Officer effective November 1, 2018.
Share Repurchase Program. During the year ended December 31, 2018, we repurchased 1,101,969 shares of common stock for a total cost of approximately $17.7 million at an average cost of $16.03 per share pursuant to our share repurchase program. Based on all repurchases to the date of this Current Report on Form 10-K, we have approximately $8.3 million available for repurchase under our approved program.
Performance-Based Stock Awards. On November 29, 2018, we cancelled all the Performance Award Agreements previously awarded to all individuals in 2016, 2017 and 2018, which resulted in a write-off of $3.3 million. Prior to such cancellation, each of the cancelled Performance Award Agreements provided for contingent compensation, which was payable to the recipients of the awards in shares of common stock, based on our performance over a five-year period from the date of grant.
Dividends. During 2018, we paid $5.5 million in dividends.
Balance Sheet Recapitalization. On April 25, 2018, we entered into an eighth amendment to our former secured credit facility, which increased the aggregate revolving credit commitment available thereunder to $200.0 million.
On May 7, 2018, we completed privately-negotiated exchanges of approximately $115.0 million in aggregate principal amount of our 2.75% Convertible Subordinated Notes due 2021 (the “Convertible Notes”) for $75.2 million in cash and 2,822,859 newly issued shares of our common stock.
On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of 6.625% Senior Notes due 2026 (the “Senior Notes”). We used $291.4 million of the net proceeds from the sale of the Senior Notes to repay all amounts outstanding under our former secured credit facility and all commitments thereunder were terminated.
On May 31, 2018, in connection with the issuance of the Senior Notes, we entered into a new $150.0 million senior secured revolving credit facility (the “New Credit Facility”).
On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes for $23.0 million in cash, leaving a principal balance of $6.3 million outstanding as of December 31, 2018.

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CARRIAGE GOOD TO GREAT JOURNEY
Over the latter part of 2018, We embarked on a rapid and transformative High Performance and Value Creation Trends Restoration Program. We performed a comprehensive analysis of each of our businesses since 2011 using both operating and financial data trends as well as the corresponding Standards Achievement trends. Our goal was to first identify the root causes of the declining performance trends over the last two years in too many of our portfolio businesses and then to quickly make the necessary changes to restore positive performance trends beginning in the first quarter of 2019 and continuing thereafter for a five year timeframe ending in 2023. We believe we have rallied and energized all of our field and support leaders around the idea of getting back on the Carriage Good To Great Journey with high and sustainable broad and deep portfolio performance.

The changing preferences of client families in our industry and the revenue challenges from higher rates of cremations versus traditional burials are not issues that have easy solutions. Yet many of our best Managing Partners and businesses have continued with High Standards Achievement in the face of these challenges. As a central element of this High Performance and Value Creation Trends Restoration Program, we have done the following:
solicited feedback on the reasons for our portfolio performance decline, first from our Standards Council and subsequently from all of our Regional Partners and Directors of Support;
Mel Payne, our Chief Executive Officer, has directed more of his time and attention to operations and is actively engaging, coaching and mentoring all of our remaining operating leadership on the proper definition of their roles in support of the long-term success of each Managing Partner and business;
updated and rebooted our Funeral and Cemetery Standards as well as the groupings that we utilize to review our businesses to ensure alignment with changing preferences of client families and our High Performance and Value Creation Trends Restoration Program;
redefined Standards Achievement success and updated criteria for the Being The Best and Good To Great incentive programs; and
continued to explore ways in which we can develop support services and resource tools, either internally or through third parties, that can be made available to our Managing Partners and Sales Managers. We expect that this support focus, on areas such as social media, will better prepare our field leaders to deal with the changing competitive dynamics in each market.
FUNERAL AND CEMETERY INDUSTRY
Funeral home and cemetery businesses 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 funeral and cemetery industry in the United States is characterized by the following fundamental attributes (the industry statistics and information included in this Form 10-K are from reports compiled by Sundale Research based on information as of September 30, 2018 from the U.S. Department of Commerce).
Deaths and Death Trends
During 2018, the number of deaths in the United States increased by approximately 1.4% following a 2.1% and a 1.2% increase in 2017 and 2016, respectively. The rapidly growing and aging population is expected to result in an increase in the number of deaths in the future. The number of Americans age 55 to 64 totaled 42.0 million in 2017 and is expected to grow 1.9% to 46.2 million by 2022, making this the second fastest-growing age group, while the fastest-growing segment of the population is Americans aged 65 and older, with 49.6 million in 2017. This age group is expected to increase to 57.3 million in 2022, reflecting an average annual growth rate of 2.9%. Overall, from 2017 to 2022, the number of deaths in the United States is expected to increase by an average of 1.8% per year, reaching an estimated 3.1 million in 2022.
Burial and Cremation Trends
While the number of deaths is expected to increase over the next few years, the burial rate is expected to continue to decline. In 2018, the number of burials in the United States decreased by an estimated 2.5%, following declines of 0.9% and 1.8% in 2017 and 2016 respectively. The number of burials in the United States is estimated to fall by an average of 1.0% per year from 2017 through 2022. In 2022, it is estimated that there will be approximately 1.29 million burials in the United States and a burial rate of 42.0%.

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In 2018, the number of cremations in the United States increased by an estimated 5.0%, following increases of 5.1% and 4.3% in 2017 and 2016, respectively. Slower growth is expected through 2022, due in part to the sheer size of the market for cremations; however, shifting preferences will continue to lead to a considerable rise in cremations. The number of cremations in the United States is expected to grow by an average of 4.2% per year from 2017 through 2022. In 2022, it is estimated that there will be approximately 1.78 million cremations in the United States and a cremation rate of 58.0%.
Highly Fragmented Ownership
Our industry remains highly fragmented, and succession planning issues for privately-owned funeral and cemetery businesses have become more difficult and complex than ever. We believe Carriage provides a unique consolidation and operating framework that offers a highly attractive succession planning solution for owners who want their legacy family business to remain operationally prosperous in their local communities. We also believe that our decentralized operating model will continue to attract the top entrepreneurial talent in our industry. Our focus is on partnering with the best of the remaining independent funeral home and cemetery owners in major strategic markets around the country where the potential for future revenue growth is the highest.
The largest publicly held operators, in terms of revenue, of both funeral homes and cemeteries in the United States are Service Corporation International (“SCI”), StoneMor Partners L.P. (“StoneMor”) and Carriage. We believe these three companies collectively represent approximately 20% of funeral and cemetery revenue in the United States. Independent businesses, along with a few privately-owned consolidators, represent the remaining amount of industry revenue, accounting for an estimated 80% share of revenue.
Heritage and Tradition
Funeral home and cemetery 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
Our business strategy is based on strong, local leadership with entrepreneurial principles that is focused on sustainable long term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, high-performance culture operating framework linked with incentive compensation programs that attract top-quality industry talent to our organization.
Our Mission Statement states that “we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry” and our Guiding Principles state our core values, which are comprised of:    
Honesty, integrity and quality in all that we do;
Hard work, pride of accomplishment and shared success through employee ownership;
Belief in the power of people through individual initiative and teamwork;
Outstanding service and profitability go hand-in-hand; and
Growth of the Company is driven by decentralization and partnership.
Our five Guiding Principles collectively embody our Being The Best high-performance cultural, operating framework. Our operations and business strategy are built upon the execution of the following three models:
Standards Operating Model;
4E Leadership Model; and
Strategic Acquisition Model.

Standards Operating Model
Our Standards Operating Model is focused on growing local market share, people development, and the key operating and financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenue and earnings.

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Important elements of our Standards Operating Model include:
Balanced Operating Model – We believe a decentralized structure works best in the funeral and cemetery industry. Successful execution of our Standards Operating Model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial drive and corporate support aligned with the key drivers of a successful operation organized around three primary areas - market share, people and operating financial metrics.
Incentives Aligned with Standards – Empowering local managers, who we call 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 he or she earns a percentage of his or her respective business’ earnings based upon the actual standards achieved as long as the performance exceeds our minimum standards. Our five year incentive award, called the “Good to Great Award,” rewards Managing Partners with a bonus at the end of five years, equal to a ratio of four to six times their average annual bonus, if they are able to achieve an annual compound growth rate of 2% over a five year period. After each five year incentive plan is achieved and paid out, a new five year plan period begins. To date, we have had three performance periods in which we have paid $3.8 million to the Managing Partners who have earned a bonus under this program.
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. A Managing Partner’s performance is judged according to achievement of the standards for that business.
  
4E Leadership Model
Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high-performance culture: Energy to get the job done; the ability to Energize others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams.

Strategic Acquisition Model
Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. We believe that both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic ranking criteria to assess acquisition candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses.
We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins (a non-GAAP measure). We use the following criteria, to name a few, to rank the strategic position of each potential acquisition:
cultural alignment;
volume and price trends;
size of business;
size of market;
competitive standing;
demographics;
strength of brand; and
barriers to entry.
The valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital.
Our belief in our Mission Statement and Guiding Principles that define us and proper execution of the three models that define our strategy have given us the competitive advantage in any market in which we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional

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fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin.
Other elements of our overall business strategy include the following:
Enhancement of Funeral and Cremation Services. Personalization and pre-planning continue to be two of the most important trends in the funeral and cremation services and merchandise industry, but the move toward more cremations may be the most significant. While this trend is expected to continue, other factors are expected to lead to rising industry revenue, including an increase in spending on additional or unique funeral and cremation services.
The percentage of funeral services performed by our funeral homes for which cremation was chosen was 50.7% for the year ended December 31, 2016, 51.4% for the year ended December 31, 2017 and 52.2% for the year ended December 31, 2018. Shifting preferences will likely continue to lead to a considerable rise in cremations; as such, we are focused on educating and providing our cremation customers additional services and products that are available. All of our funeral homes offer cremation products and services. While the average revenue for a cremation service is generally lower than that of an average traditional, full-service funeral, we have found that this revenue can be substantially enhanced by our emphasis on offering additional services and merchandise, including counseling referrals, video tributes, flowers, burial garments and memorial items such as urns, keepsake jewelry and other items that hold a portion of the cremated remains.
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. Approximately 20% of our funeral services performed are funded through preneed contracts, which are 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-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. Our preneed cemetery strategy is to build family heritage in our cemeteries by selling property and internment rights prior to death through full time, highly motivated and entrepreneurial local sales teams. Approximately 40% of our cemetery operating revenue is derived from preneed property sales. 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. Cemetery merchandise and services are often purchased in addition to cemetery property at the time of sale. The performance of these preneed cemetery contracts is secured by placing the funds collected in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. General consumer confidence and discretionary income have a significant impact on our preneed sales success rate.
OUR STRENGTHS
Market Leader. We compete with other public funeral and cemetery companies and smaller, independent operators and believe we are a market leader in most of our markets. We focus on markets that perform better than the industry average and are generally insulated from material economic and demographic changes.
High Performance, Decentralized, Partnership Culture. Our funeral homes and cemeteries are managed by Managing Partners with extensive funeral and cemetery industry 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 based on our Standards Operating Model that are custom designed for distinct business groupings which is based on the size (number of funerals) and average revenue per funeral. 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 leadership provides support services from our corporate headquarters in Houston, Texas. We believe our culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.
Flexible Capital Structure. We have no short-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 opportunities, such as business acquisitions and cemetery inventory projects. For additional information regarding our capital structure, please see Part II, Item 7, Management's Discussion and Analysis of Financial Condition and Results of Operations, Liquidity and Capital Resources.
Stable Cash Flow. We have demonstrated the ability to generate strong and stable cash flow. Cash flow from operations for 2018 totaled $49.0 million, which was used primarily for the acquisition of four funeral home businesses, capital expenditures and our working capital needs, including payment of dividends and our debt obligations. We intend to use our cash flow to acquire

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funeral home and cemetery businesses and to fund internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends and our debt obligations. Our growth strategy is the primary way we expect to increase stockholder value. We may also use available cash flow to repurchase shares of our common stock and remaining convertible notes from time to time. While we reassess our capital allocation strategy annually, we currently 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 Gross Profit Margins. We believe that we have strong field-level gross profit margins and that this performance is a testament to the success of our business strategies. Our 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.
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 Houston support home office, 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 Leadership Team. Our leadership team, headed by our founder, Chairman 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 our culture of emphasizing the 4Es (Energy, Energize Others, Edge and Execution) leadership characteristics is critical and will provide an important advantage as the funeral and cemetery industry evolves. We are committed to continue operating an efficient organization and strengthening our corporate and local business leadership. Our businesses are supported by a broader team of High Performance leaders across multiple disciplines located in our Houston home office. 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.
OUR OPERATIONS
We conduct our funeral and cemetery operations only in the United States. Our operations are reported in two segments: funeral home 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, 2018, we operated 182 funeral homes in 29 states. Funeral home revenue currently accounts for approximately 80% of our total revenue. The funeral home operations are managed by a team of experienced industry professionals and regional leadership with substantial management experience in our industry. See Part II, Item 8, Financial Statements and Supplementary Data, Note 22 for segment data related to our funeral home operations.
Our funeral homes offer a complete range of services to meet a family’s funeral 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 remembrance services and 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 service businesses that provide burial and cremation services and sell related merchandise, such as caskets and urns. The sources and availability of caskets and urns are from a small number of national providers that have distribution centers near our businesses. We typically order and receive the merchandise within 24 hours.
Given the high fixed-cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:
our ability to establish and maintain market share positions supported by strong local heritage and relationships;
our ability to effectively respond to the increasing trends towards cremation packaging complimentary services and merchandise;
our ability to control salary, merchandise and other controllable costs;
our ability to exercise pricing leverage related to our atneed business to increase average revenue per contract;

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demographic trends in terms of population growth and average age, which impact death rates and number of deaths; and
our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds and our securities portfolio within the trust funds, which would offset lower pricing power as preneed contracts mature.
Cemetery Operations
At December 31, 2018, we operated 29 cemeteries in 11 states. Cemetery revenue currently accounts for approximately 20% of our total revenue. The cemetery operations are managed by a team of experienced industry and sales professionals and regional leadership with substantial management experience in our industry. See Part II, Item 8, Financial Statements and Supplementary Data, Note 22 for segment data related to our 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 revenue through sales of interment rights and memorials, installation fees, fees for interment and cremation memorialization products, finance charges from installment sales contracts and investment income from preneed cemetery merchandise trusts and perpetual care trusts. Cemetery revenue generated from atneed services and merchandise sales generally is subject to many of the same key profitability factors as our funeral home business. Our cemetery operating results are affected by the following key factors:
size and success of our sales organization;
local perceptions and heritage of our cemeteries;
our ability to adapt to changes in the economy and consumer confidence; and
our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds.
Preneed Programs
Funeral and cemetery arrangements sold prior to death occurring are referred to as preneed contracts.We market funeral and cemetery services and products on a preneed basis at the local level. 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 deathcare 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.
In addition to preneed funeral contracts, we also offer “pre-planned” funeral arrangements whereby a customer 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. Pre-planned funeral arrangements permit a family to avoid issues of making deathcare plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an atneed sale.
We sold 7,444 and 8,303 preneed funeral contracts, net of cancellations, during the years ended December 31, 2017 and 2018, respectively. At December 31, 2018, we had a backlog of 96,310 preneed funeral contracts and 58,320 preneed cemetery contracts to be delivered in the future. Approximately 20% of our funeral contract volumes during the years ended December 31, 2017 and 2018 originated through preneed contracts. Cemetery revenue that originated from preneed contracts represented approximately 65% of our total cemetery revenue for 2017 and 2018.
At December 31, 2018, we employed a staff of 173 advance-planning and family service representatives for the sale of preneed products and services. Our advance-planning and family service representatives primarily assist families in making atneed and preneed funeral, memorialization and cemetery arrangements through the selection and purchase of cemetery property, merchandise and services and ensuring that the expectations of our client families and their guests are exceeded.

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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 laws. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) cemetery perpetual care trusts. These trusts are typically administered by independent financial institutions selected by us. Investment management and advisory services are provided either by our wholly-owned registered investment advisory firm, CSV RIA, or by independent financial advisors. As of December 31, 2018, CSV RIA provided these services to one institution, which has custody of approximately 75% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided. The investment advisors establish an investment policy that gives guidance on asset allocation, investment requirements, investment manager selection and performance monitoring. The investment objectives are tailored to generate long-term investment returns without assuming undue risk, while ensuring the management of assets is in compliance with applicable laws.
Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. Trust fund income earned, along with the receipt and recognition of any insurance benefits, are deferred until the service is performed or the merchandise is delivered. Trust fund holdings and deferred revenue are reflected on our Consolidated Balance Sheet, while the insurance contracts are not on our Consolidated 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 preneed trusts was $487.3 million as of December 31, 2018.
We are generally required under applicable state laws to deposit a specified amount (which varies from state to state, generally 50% to 100% of the selling price) into a merchandise and service trust fund for preneed cemetery merchandise and services 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 delivered, when the service is provided or when the contract is canceled. However, certain states allow the withdrawal of income prior to delivery when the regulations identify excess earnings in the trusts. We did not withdraw any trust income in 2017 and 2018. Cemetery merchandise and service trust fund balances totaled $62.4 million as of December 31, 2018.
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 funds necessary to maintain cemetery property and memorials in perpetuity. This trust fund income is recognized, as earned and is reflected in our Consolidated Financial Statements as Other revenue. 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 $44.1 million at December 31, 2018.
For additional information with respect to our trusts, see Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 9 and 11.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate. Generally, the number of deaths 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.
COMPETITION
The operating environment in the funeral and cemetery industry has been highly competitive. Publicly traded companies operating in the United States include SCI, StoneMor and Carriage. In addition, a number of smaller private consolidators 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 may impact our profitability in certain markets. 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

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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
General. Our operations are subject to regulations, supervision and licensing under numerous federal, state and local laws, ordinances and 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. Legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which could have a material impact on our business. We cannot predict the impact of any future laws and regulations or changes to existing laws and regulations.
Federal Trade Commission. Our funeral home operations are comprehensively regulated by the Federal Trade Commission (“FTC”) under Section 5 of the Federal Trade Commission Act and a trade regulation rule for the funeral industry promulgated thereunder referred to as the “Funeral Rule.” The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized pricing information and various other disclosures about funeral goods and services and prohibit a funeral provider from: (i) misrepresenting legal, crematory and cemetery requirements; (ii) embalming for a fee without permission; (iii) requiring the purchase of a casket for direct cremation; (iv) requiring consumers to buy certain funeral goods or services as condition for furnishing other funeral goods or services; (v) misrepresenting state and local requirements for an outer burial container; and (vi) representing that funeral goods and services have preservative and protective value. Additionally, the Funeral Rule requires the disclosure of mark-ups, commissions, additional charges and rebates related to cash advance items.
Environmental. Our operations are also subject to stringent federal, regional, state and local laws and regulations relating to environmental protection, including legal requirements governing air emissions, waste management and disposal and wastewater discharges. For instance, the federal Clean Air Act and analogous state laws, which restrict the emission of pollutants from many sources, including crematories, may require us to apply for and obtain air emissions permits, install costly emissions control equipment, and conduct monitoring and reporting tasks. Also, in the course of our operations, we store and use chemicals and other regulated substances as well as generate wastes that may subject us to strict liability under the federal Resource Conservation and Recovery Act and comparable state laws, which govern the treatment, storage, and disposal of nonhazardous and hazardous wastes, and the federal Comprehensive Environmental Response, Compensation and Liability Act, a remedial statute that imposes cleanup obligations on current and past owners or operators of facilities where hazardous substance releases occurred and anyone who transported or disposed or arranged for the transportation or disposal of hazardous substances released into the environment from such sites. In addition, the Federal Water Pollution Control Act, also known as the federal Clean Water Act, and analogous state laws regulate discharges of pollutants to state and federal waters. Underground and aboveground storage tanks that store chemicals and fuels for vehicle maintenance or general operations are located at certain of our facilities and any spills or releases from those facilities may cause us to incur remedial liabilities under the Clean Water Act or analogous state laws as well as potential liabilities for damages to properties or persons. Failure to comply with environmental laws and regulations could result in the assessment of sanctions, including administrative, civil, and criminal penalties, the imposition of investigatory, remedial and corrective action obligations, delays in permitting or performance of projects and the issuance of injunctions restricting or prohibiting some or all of our activities in affected areas. Moreover, accidental releases or spills may occur in the course of our operations, and we cannot assure you that we will not incur significant costs and liabilities as a result of such releases or spills, including any third party claims for damages to property, natural resources or persons. Also, it is possible that implementation of stricter environmental laws and regulations or more stringent enforcement of existing environmental requirements could result in additional, currently unidentifiable costs or liabilities to us, such as requirements to purchase pollution control equipment or implement operational changes or improvements. While we believe we are in substantial compliance with existing environmental laws and regulations, we cannot assure that we will not incur substantial costs in the future.
Worker Health and Safety. We are subject to the requirements of the federal Occupational Safety and Health Act, as amended (“OSHA”), and comparable state statutes whose purpose is to protect the health and safety of workers. In addition, the OSHA hazard communication standard, the Emergency Planning and Community Right to Know Act and implementing regulations and similar state statutes and regulations require that we organize and/or disclose information about hazardous materials used or produced in our operations and that this information be provided to employees, state and local governmental authorities and citizens. We believe that we are in substantial compliance with all applicable laws and regulations relating to worker health and safety.

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EMPLOYEES
As of December 31, 2018, we and our subsidiaries employed 2,617 employees, of whom 1,069 were full-time and 1,548 were part-time. All of our funeral directors and embalmers possess licenses required by applicable regulatory agencies. 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”). The SEC maintains a website at 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 “Investors – 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 our Audit Committee, Compensation Committee and Corporate Governance Committee. Copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines are also posted on our website under “Investors – Corporate Governance.” 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. Information contained on our website is not part of this Form 10-K.
ITEM 1A.    RISK FACTORS
RISKS RELATED TO OUR BUSINESS
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.
Funeral home and cemetery 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. Our ability to attract and retain Managing Partners, sales force and other personnel is an important factor in achieving future success. We can give no assurance that we can retain these employees or that these relationships will drive market share. Our inability to attract and maintain qualified and productive Managing Partners and sales force could have a material adverse effect on our financial condition, results of operations and cash flows.
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.
Our growth strategy is the primary way we expect to increase stockholder value. There is no assurance that we will be able to continue to identify acquisition candidates that meet our criteria or that we will be able to reach terms with identified candidates for transactions that are acceptable to us, and even if we do, we may not be able to successfully complete the transaction or integrate the new business into our existing business. 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. Due in part to the presence of competitors who have been in certain markets longer than we have, such acquisitions or investments may be more difficult or expensive than we anticipate.
Improved performance in our funeral and cemetery segments is 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. Failure to successfully implement our Standards Operating Model in our funeral and cemetery operations could have a material adverse effect on our financial condition, results of operations and cash flows.

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Marketing and sales activities by existing and new competitors could cause us to lose market share and lead to lower revenue and margins.
We face competition in all of our markets. Most of our competitors are independently owned, and some are relatively recent market entrants. Some 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 television, radio and print 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 revenue. 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. Also, increased use of the internet by customers to research and/or purchase products and services could cause us to lose potential revenue.
Our “Good to Great” incentive program could result in significant future payments to our Managing Partners.
In January, 2012, in order to continue to align our Managing Partners’ incentives with the long-term interests of our stockholders, we implemented our “Good to Great” incentive program, which rewards our Managing Partners for achieving an average net revenue compounded annual growth rate equal to at least 2% (the “Minimum Growth Rate”) over a five year performance period (the “Performance Period”) with respect to our funeral homes that they operate. To date, we have had three Performance Periods ended December 31, 2016, December 31, 2017 and December 31, 2018. Each Managing Partner that achieves the Minimum Growth Rate during the applicable Performance Period and remains continuously employed as a Managing Partner of the same business throughout the Performance Period will receive a one-time bonus, payable in a combination of cash and shares of our common stock, determined at our discretion. We believe this incentive program will result in improved field-level margins, market share and overall financial performance.
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 revenue 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 revenue, profits and our preneed backlog.
Our ability to generate preneed sales depends on a number of factors, including sales incentives and local and general economic conditions.
Significant 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 initially without corresponding revenue.
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 reduces current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.
Increased preneed sales could have a negative impact on our cash flows.
Preneed sales of funeral and cemetery products and services generally have an initial negative impact on our cash flows, as we are required to deposit a portion of the sales proceeds into trusts or escrow accounts and often incur other expenses at the time of sale. Furthermore, many preneed purchases are paid for in installments over a period of several years, further reducing our cash flows at the time of sale. Because preneed sales generally provide positive cash flows over the long term, we market the sale of such contracts at the local level. If our efforts to increase such sales are successful, however, our current cash flows could be materially and adversely affected.
Our funeral and cemetery trust funds own investments in equity securities, fixed income securities, and mutual funds, which are affected by market conditions that are beyond our control.
In connection with our backlog of preneed funeral and preneed cemetery merchandise and service contracts, funeral and cemetery trust funds own investments in equity securities, fixed income securities and mutual funds. Our returns on these investments are affected by financial market conditions that are beyond our control.

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The following table summarizes our investment returns (realized and unrealized), excluding certain fees, on our trust funds for the years ended December 31, 2016, 2017 and 2018:
 
2016
 
2017
 
2018
Preneed funeral trust funds
17.0
%
 
11.5
%
 
(6.5
)%
Preneed cemetery trust funds
19.6
%
 
13.1
%
 
(8.4
)%
Perpetual care trust funds
19.2
%
 
12.8
%
 
(8.0
)%
Generally, earnings or gains and losses on our preneed funeral and cemetery trust investments are recognized, and we withdraw cash, when the underlying service is performed, merchandise is delivered, or upon contract cancellation. Our cemetery perpetual care trusts recognize earnings, and in certain states, capital gains and losses, and we withdraw cash when we incur qualifying cemetery maintenance costs. If the investments in our trust funds experience significant, recurring and sustained declines in subsequent years, there could be insufficient funds in the trusts to cover the costs of delivering services and merchandise or maintaining cemeteries in the future. We may be required to cover any such shortfall with cash flows from operations or other sources of cash, which could have a material adverse effect on our financial condition, results of operations or cash flows. For more information related to our trust investments, see Part II, Item 8, Financial Statements and Supplementary Data, Notes 7, 9 and 11.
If the fair market value of these trusts, plus any other amount due to us upon delivery of the associated contracts, were to decline below the estimated costs to deliver the underlying products and services, we would record a charge to earnings to record a liability for the expected losses on the delivery of the associated contracts. For additional information, see Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, Critical Accounting Policies and Estimates.
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 revenue, while declines in earnings from other trust funds could cause a decline in future cash flows and revenue.
We may be required to replenish our funeral and cemetery trust funds in order to meet minimum funding requirements, which would have a negative effect on our earnings and cash flow.
In certain states, we have withdrawn allowable distributable earnings including gains prior to the maturity or cancellation of the related contract. Additionally, some states have laws that either require replenishment of investment losses under certain circumstances or impose various restrictions on withdrawals of future earnings when trust fund values drop below certain prescribed amounts. In the event of realized losses or market declines, we may be required to deposit portions or all of these amounts into the respective trusts in some future period.
Increasing death benefits related to preneed funeral contracts funded through life insurance contracts may not cover future increases in the cost of providing a price-guaranteed funeral service.
We sell price-guaranteed preneed funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. For preneed funeral contracts funded through life insurance contracts, we receive in cash a general agency commission from the third-party insurance company. Additionally, there is an increasing death benefit associated with the contract that may vary over the contract life. There is no guarantee that the increasing death benefit will cover future increases in the cost of providing a price-guaranteed funeral service, and any such excess cost could be materially adverse to our future cash flows, revenue, and operating margins.
The financial condition of third-party insurance companies that fund our preneed funeral contracts may impact our future revenue.
Where permitted by state law, our customers may arrange their preneed funeral contract by purchasing a life insurance policy from third-party insurance companies. The customer/policy holder assigns the policy benefits to our funeral home to pay for the preneed funeral contract at the time of need. If the financial condition of the third-party insurance companies were to deteriorate materially because of market conditions or otherwise, there could be an adverse effect on our ability to collect all or part of the proceeds of the life insurance policy, including the annual increase in the death benefit, when we fulfill the preneed contract at the time of need. Failure to collect such proceeds could have a material adverse effect on our financial condition, results of operations, or cash flows.

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Increased or unanticipated costs, such as insurance or other taxes, may have a negative impact on our earnings and cash flow.
We may experience material increases in certain costs, such as insurance or other taxes. Future cost increases are difficult to quantify and could materially and adversely affect our results of operations and cash flows.
New or revised tax regulations could have a material effect on our financial results.
The tax environment in which we operate is evolving rapidly with the recent enactment of sweeping corporate tax changes. On December 22, 2017, the U.S. enacted comprehensive tax legislation commonly known as the Tax Cuts and Jobs Act (the “Tax Act”). The Tax Act, among other things, contains significant changes to corporate taxation, including: (1) a reduction of the corporate tax rate from a top marginal rate of 35% to a flat rate of 21%; (2) a limitation of the tax deduction for interest expense to 30% of adjusted earnings (except for certain small businesses); (3) a limitation of the deduction for net operating losses to 80% of current year taxable income and elimination of net operating loss carrybacks; (4) limitations of certain executive compensation deductions; and (5) limitations or repeals of many business deductions and credits.The effect of the Tax Act on us may also be affected by future regulations and interpretations of the IRS regarding the Tax Act. Additionally, we operate in many states and are subject to the tax laws of those states. We are unable to predict how we may be affected by future changes, or lack of changes, to state tax laws that may be made in response to the Tax Act by the states in which we operate. Although the Tax Act had an overall positive impact on our earnings and cash flow for 2018 and, we believe it will have an overall beneficial impact on us for 2019, the longer term effect of the Tax Act on our business, cash flow, results of operations and financial condition is difficult to predict. Accordingly, the risk exists that the Tax Act, future IRS regulations and interpretations of the Tax Act and future changes in, or lack of changes in, state tax laws could materially and adversely affect our business cash flows, results of operations and financial condition.
Covenant restrictions under our debt instruments may limit our flexibility in operating and growing our business.
The terms of our New Credit Facility and the indenture governing our Senior Notes 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.
Our New 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 could result in a default under any future debt instrument, which could result in 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 New Credit Facility, the lenders thereunder may be entitled to sell certain of our funeral assets to satisfy our obligations under the agreement.
Our level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our debt obligations.
Our indebtedness requires significant interest and principal payments. As of December 31, 2018, we had $367.4 million of total debt (excluding debt issuance costs, debt discounts and capital lease obligations), consisting of $8.9 million of acquisition debt (consisting of deferred purchase price and promissory notes payable to sellers of businesses we purchased), $6.3 million of carrying value of the liability of our Convertible Notes, $325.0 million of our Senior Notes, and $27.1 million of outstanding borrowings under our New Credit Facility, with $120.9 million of availability under the New Credit Facility after giving effect to $2.0 million of outstanding letters of credit.
Our and our subsidiaries’ level of indebtedness could have important consequences to us, including:
continuing to require us and certain of our subsidiaries to dedicate a substantial portion of our cash flow from operations to the payment of our indebtedness, thereby reducing the funds available for operations and any future business opportunities;
limiting flexibility in planning for, or reacting to, changes in our business or the industry in which we operate;
placing us at a competitive disadvantage compared to our competitors that have less indebtedness;
increasing our vulnerability to adverse general economic or industry conditions;
making us and our subsidiaries more vulnerable to increases in interest rates, as borrowings under our New Credit Facility are at variable rates; and

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limiting our ability to obtain additional financing to fund working capital, capital expenditures, acquisitions or other general corporate requirements and increasing our cost of borrowing.
Our ability to make payments on and to refinance our indebtedness will depend on our ability to generate cash in the future from operations, financings or asset sales. Our ability to generate cash is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. We may not generate sufficient funds to service our debt and meet our business needs, such as funding working capital or the expansion of our operations. If we are not able to repay or refinance our debt as it becomes due, we may be forced to take certain actions, including reducing spending on day-to-day operations, reducing future financing for working capital, capital expenditures and general corporate purposes, selling assets or dedicating an unsustainable level of our cash flow from operations to the payment of principal and interest on our indebtedness. In addition, our ability to withstand competitive pressures and to react to changes in our industry could be impaired. The lenders who hold our debt could also accelerate amounts due in the event that we default, which could potentially trigger a default or acceleration of the maturity of our other debt, including the notes.
Additionally, our leverage could put us at a competitive disadvantage compared to our competitors that are less leveraged. These competitors could have greater financial flexibility to pursue strategic acquisitions and secure additional financing for their operations. Our leverage could also impede our ability to withstand downturns in our industry or the economy in general.
Despite our current levels of indebtedness, we may still incur additional indebtedness. This could further exacerbate the risks associated with our indebtedness.
We may incur additional indebtedness in the future. The terms of the New Credit Facility and the indenture governing our Senior Notes will limit, but not prohibit, us from incurring additional indebtedness. Additional indebtedness incurred in compliance with these restrictions could be substantial. These restrictions also do not prevent us or our subsidiaries from incurring obligations, such as trade payables, that do not constitute indebtedness as defined under our debt agreements. To the extent new debt is added to our current debt levels, the leverage risks associated with our indebtedness would increase.
Economic, financial and stock market fluctuations could affect future potential earnings and cash flows and could result in future goodwill, intangible assets and long-lived asset impairments.
In addition to an annual review, we assess the impairment of goodwill, intangible assets and other long-lived assets 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 under-performance 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 an impairment of our goodwill. Based on the results of our annual goodwill and intangible assets impairment test we performed as of August 31, 2018 and our annual review of long-lived assets as of December 31, 2018, we concluded that there was no impairment of our goodwill, intangible assets or other long-lived assets. However, during 2018, we recorded an impairment of $0.8 million related to a funeral home business that we intend to cease operating in 2019, as the carrying value exceeded fair value. Additionally, if current economic conditions weaken causing deterioration in our operating revenue, operating margins and cash flows, we may have a triggering event that could result in a material impairment of our goodwill, intangible assets and/or long-lived assets.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.
In the ordinary course of our business, we receive certain personal information, in both physical and electronic formats, about our customers, their loved ones, our employees, and our vendors. We maintain substantial security measures and data backup systems to protect, store, and prevent unauthorized access to such information. Nevertheless, it is possible that computer hackers and others (through cyberattacks, which are rapidly evolving and becoming increasingly sophisticated, or by other means) might defeat our security measures in the future and obtain the personal information of customers, their loved ones, our employees, and our vendors that we hold. If we fail to protect our own information, we could experience significant costs and expenses as well as damage to our reputation. Additionally, legislation relating to cyber security threats could impose additional requirements on our operations.
Our ability to manage and maintain our internal reports effectively and integration of new business acquisitions depends significantly on our enterprise resource planning system and other information systems. Some of our information technology systems may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. The failure of our systems to operate effectively or to integrate with other systems, or a breach in security or other unauthorized access of these systems, may also result in reduced efficiency of our operations and could require significant capital investments to remediate any such failure, problem or breach and to comply with applicable regulations, all of which could adversely affect our business, financial condition and results of operations.

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RISKS RELATED TO THE FUNERAL AND CEMETERY INDUSTRY
Declines in the number of deaths in our markets can cause a decrease in revenue. 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 atneed sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenue. 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 revenue to fluctuate and our results of operations to lack predictability.
The increasing number of cremations in the United States could cause revenue to decline because we could lose market share to firms specializing in cremations.
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 this trend is expected to continue into the future. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenue to firms specializing in cremations.
If we are not able to respond effectively to changing consumer preferences, our market share, revenue and profitability could decrease.
Future market share, revenue 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 revenue.
Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.
The funeral and cemetery 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. As such, we are subject to state trust fund and preneed sales practice audits, which could result in audit adjustments as a result of non-compliance. In addition, we assume the liability for any audit adjustments for our acquired businesses for periods under audit that were prior to our ownership of the business. These audit adjustments could have a material adverse impact on our financial condition, results of operations and cash flows.
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. 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/or 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 funeral and cemetery industry, see Part I, Item 1, Business, Regulation.

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We are subject to environmental and worker health and safety laws and regulations that may expose us to significant costs and liabilities.
Our cemetery and funeral home operations are subject to stringent federal, regional, state and local laws and regulations governing worker health and safety aspects of the operations, the release or disposal of materials into the environment or otherwise relating to environmental protection. These laws and regulations may restrict or impact our business in many ways, including requiring the acquisition of a permit before conducting regulated activities, restricting the types, quantities and concentration of substances that can be released into the environment, applying specific health and safety criteria addressing worker protection, and imposing substantial liabilities for any pollution resulting from our operations. We may be required to make significant capital and operating expenditures to comply with these laws and regulations and any failure to comply may result in the assessment of sanctions, including administrative, civil and criminal penalties, imposition of investigatory, remedial or corrective action obligations, delays in permitting or performance of projects and the issuance of injunctions restricting or prohibiting our activities. Failure to appropriately transport and dispose of generated wastes, used chemicals or other regulated substances, or any spills or other unauthorized releases of regulated substances in the course of our operations could expose us to material losses, expenditures and liabilities under applicable environmental laws and regulations, and result in neighboring landowners and other third parties filing claims for personal injury, property damage and natural resource damage allegedly caused by such non-compliant activities or spills or releases. Certain of these laws may impose strict, joint and several liabilities upon us for the remediation of contaminated property resulting from our or a predecessor owner's or operator's operations. We may not be able to recover some or any of these costs from insurance or contractual indemnifications. Moreover, changes in environmental laws, regulations and enforcement policies occur frequently, and any changes that result in more stringent or costly emissions control or waste handling, storage, transport, disposal or cleanup requirements could require us to make significant expenditures to attain and maintain compliance and may otherwise have a material adverse effect on our results of operations, competitive position or financial condition.
Burial practice claims could have a material adverse impact on our financial results.
From time to time, we are party to various claims and legal proceedings, including burial practices. When cemetery disputes occur, we may be subjected to litigation and liability for improper burial practices. In addition, since we acquired most of our cemeteries through various acquisitions, we may be subject to litigation and liability based upon actions or events that occurred before we acquired or managed the cemeteries. Claims or litigation based upon our cemetery burial practices could have a material adverse impact on our financial condition, results of operations and cash flows.
ITEM 1B.
UNRESOLVED STAFF COMMENTS.
None.

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ITEM 2.
PROPERTIES.
At December 31, 2018, we operated 182 funeral homes in 29 states and 29 cemeteries in 11 states. We own the real estate and buildings for 159 of our funeral homes and lease 23 facilities. We own 28 cemeteries and operate one cemetery under a long-term contract with a municipality, which we refer to as a managed property. We operate 16 funeral homes in combination with cemeteries as these locations are physically located on the same property or in very close proximity and are under the same leadership.
The 29 cemeteries operated by us have an inventory of unsold developed lots totaling approximately 146,000 and 129,000 at December 31, 2017 and 2018, respectively. In addition, we own approximately 450 acres that are available for future development or sale. We anticipate having a sufficient inventory of lots to maintain our property sales for the foreseeable future.
The following table sets forth certain information as of December 31, 2018, regarding our properties used by the funeral home segment and by the cemetery segment identified by state:
 
 
Number of
Funeral Homes
 
Number of
Cemeteries
State
 
Owned
 
Leased(1)
 
Owned
 
Managed
California
 
23

 
5

 
4

 

Colorado
 
2

 

 

 

Connecticut
 
8

 
2

 

 

Florida
 
11

 
5

 
5

 

Georgia
 
4

 

 

 

Idaho
 
5

 
1

 
3

 

Illinois
 
2

 
1

 
1

 

Kansas
 
2

 

 

 

Kentucky
 
8

 
1

 
1

 

Louisiana
 
3

 
1

 
1

 

Maryland
 
1

 

 

 

Massachusetts
 
12

 

 

 

Michigan
 
2

 

 

 

Montana
 
2

 
1

 
1

 

Nevada
 
2

 

 
2

 
1

New Jersey
 
4

 
1

 

 

New Mexico
 
1

 

 

 

New York
 
6

 
1

 

 

North Carolina
 
7

 
1

 
1

 

Ohio
 
5

 

 

 

Oklahoma
 
6

 

 
2

 

Pennsylvania
 
2

 

 

 

Rhode Island
 
4

 

 

 

Tennessee
 
5

 

 

 

Texas
 
21

 
1

 
7

 

Virginia
 
7

 
1

 

 

Washington
 
2

 

 

 

West Virginia
 
1

 
1

 

 

Wisconsin
 
1

 

 

 

Total
 
159

 
23

 
28

 
1

 
 
 
 
 
(1)
The leases, with respect to these funeral homes, generally have remaining terms ranging from one to fifteen years, and generally, we have the right to renew past the initial terms and have a right of first refusal on any proposed sale of the property where these funeral homes are located.
Our Houston support home office occupies approximately 48,000 square feet of leased office space in Houston, Texas. At December 31, 2018, we owned and operated 743 vehicles.

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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,
 
2016

 
2017

 
2018

Funeral homes at beginning of period
167

 
170

 
178

Acquisitions
6

 
7

 
4

Constructed funeral homes

 
2

 

Divestitures
(1
)
 
(1
)
 

Mergers and relocation of funeral homes
(2
)
 

 

Funeral homes at end of period
170

 
178

 
182

 
 
 
 
 
 
Cemeteries at beginning of period
32

 
32

 
32

Acquisitions

 

 

Divestitures

 

 
(3
)
Cemeteries at end of period
32

 
32

 
29

ITEM 3.
LEGAL PROCEEDINGS.
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 our financial statements. Information regarding litigation is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 17.
Faria, et al. v. Carriage Funeral Holdings, Inc., Superior Court of California, Contra Costa County, Case No. MSC18-00606.  On March 26, 2018, six Plaintiffs filed a putative class action against Carriage Funeral Holdings, Inc., our subsidiary, their alleged employer, on behalf of themselves and all similarly situated current and former employees. Plaintiffs seek monetary damages and claim that Carriage Funeral Holdings, Inc. failed to pay minimum wages, provide meal and rest breaks, provide accurately itemized wage statements, reimburse employees for required expenses, and provide wages when due. Plaintiffs also claim that Carriage Funeral Holdings, Inc. violated California Business and Professions Code §17200 et seq. On June 5, 2018, Plaintiffs filed a First Amended Complaint to add a claim under the California Private Attorney General Act. On October 23, 2018, the parties mediated this matter and executed a Memorandum of Understanding for class settlement. In February 2019, a Class Action Settlement Agreement was fully executed, which will be submitted to the Court for preliminary approval. We anticipate that the Court will preliminarily approve the Class Action Settlement Agreement in 2019. If the Class Action Settlement Agreement is preliminarily approved by the Court, the class claims process will then proceed. At December 31, 2018, we have accrued $650,000 for the estimated settlement amount related to this case.
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 provide reasonable coverage for known asserted and unasserted claims. In the event we sustain a loss from a claim and the insurance carrier disputes coverage or coverage limits, we may record a charge in a different period than the recovery, if any, from the insurance carrier.

ITEM 4.
MINE SAFETY DISCLOSURES.
Not applicable.
PART II
 
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES.
MARKET INFORMATION
Our common stock is traded on the New York Stock Exchange under the symbol “CSV.” As of February 22, 2019, there were 18,183,198 shares of our common stock outstanding. The shares of common stock outstanding are held by approximately 400 stockholders of record. Each share is entitled to one vote on matters requiring the vote of stockholders. We believe there are approximately 6,000 beneficial owners of our common stock.

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RECENT SALES OF UNREGISTERED SECURITIES
During the year ended December 31, 2018, we did not have any sales of securities in transactions that were not registered under the Securities Act that have not been reported in a Form 8-K or Form 10-Q. 
DIVIDENDS
While we intend to pay regular quarterly cash dividends for the foreseeable future, covenant restrictions under our New Credit Facility and the indenture governing our Senior Notes may limit our ability to pay dividends in the future.
EQUITY PLANS
For information regarding securities authorized for issuance under our equity compensation plans, see Part III, Item 12, Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
PURCHASES OF EQUITY SECURITIES BY THE ISSUER
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases of our common stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act.
During the year ended December 31, 2018, we repurchased 1,101,969 shares of common stock for a total cost of $17.7 million at an average cost of $16.03 per share pursuant to this share repurchase program. Our shares were purchased in the open market. Purchases were at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares. At December 31, 2018, we had approximately $8.3 million available for repurchase under this share repurchase program.
The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended December 31, 2018:
Period
 
Total Number of Shares Purchased
 
Average Price Paid Per Share
 
Total Number of Shares Purchased as Part of Publicly Announced Program
 
Dollar Value of Shares That May Yet Be Purchased Under the Program (1)
 
 
 
 
 
 
 
 
 
October 1, 2018 - October 31, 2018
 

 
$

 

 
$
26,019,052

November 1, 2018 - November 30, 2018
 
411,227

 
$
16.65

 
411,227

 
$
19,170,594

December 1, 2018 - December 31, 2018
 
690,742

 
$
15.65

 
690,742

 
$
8,357,192

Total for quarter ended December 31, 2018
 
1,101,969

 
 
 
1,101,969

 
 
 
 
 
 
 
(1)
See the first paragraph under the caption “– Purchases of Equity Securities by the Issuer for more information on our publicly announced share repurchase program.


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PERFORMANCE
The following graph compares the cumulative 5-year total return provided to shareholders on our common stock relative to the cumulative total returns of the Russell 3000 Index, and a customized peer group of two companies that includes SCI and StoneMor. The returns of each member of the peer group are weighted according to each member’s stock market capitalization as of the beginning of each period measured. The graph assumes that the value of the investment in our common stock, the Russell 3000 Index and the peer group was $100 on the last trading day of December 2013, and that all dividends were reinvested. Performance data for Carriage, the Russell 3000 Index and the peer group is provided as of the last trading day of each of our last five fiscal years.
The following graph and related information shall not be deemed “soliciting material” or “filed” with the SEC, nor shall such information be incorporated by reference into any future filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference.
COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN(1) 
Among Carriage Services, Inc., the Russell 3000 Index and a Peer Group
http://api.tenkwizard.com/cgi/image?quest=1&rid=23&ipage=12745831&doc=14
 
12/13
 
12/14
 
12/15
 
12/16
 
12/17
 
12/18
Carriage Services, Inc.
$
100.00

 
$
107.86

 
$
124.61

 
$
149.04

 
$
134.97

 
$
82.47

Russell 3000
100.00

 
112.55

 
113.09

 
127.47

 
154.40

 
146.29

Peer Group
100.00

 
125.26

 
145.13

 
148.16

 
210.39

 
234.10

 
 
 
 
 
(1)
Fiscal year ending December 31. $100 invested on December 31, 2013 in stock or index, including reinvestment of dividends. Peer Group includes SCI and StoneMor. The stock price performance included in this graph is not necessarily indicative of future stock price performance.


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ITEM 6.
SELECTED FINANCIAL DATA.
The table below 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, 2014, 2015, 2016, 2017 and 2018. These historical results are not indicative of our future performance.
You should read this historical financial data together with “Management's Discussion and Analysis of Financial Condition and Results of Operations” included in this Form 10-K and our Consolidated Financial Statements and notes thereto included elsewhere in this Form 10-K.
 
 
Year ended December 31,
 
2014
 
2015
 
2016
 
2017
 
2018
 
(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
 
Revenue
$
226,124

 
$
242,502

 
$
248,200

 
$
258,139

 
$
267,992

Gross profit
70,008

 
77,508

 
79,650

 
76,799

 
75,947

Operating income
39,715

 
48,648

 
50,204

 
48,941

 
43,307

Income before income taxes
22,701

 
34,590

 
32,241

 
32,782

 
18,266

Net income attributable to common shareholders
15,838

 
20,853

 
19,581

 
37,193

 
11,645

 
 
 
 
 
 
 
 
 
 
Basic earnings per share
$
0.86

 
$
1.16

 
$
1.18

 
$
2.25

 
$
0.64

Diluted earnings per share
$
0.85

 
$
1.12

 
$
1.12

 
$
2.09

 
$
0.63

Dividends declared per share
$
0.100

 
$
0.100

 
$
0.150

 
$
0.225

 
$
0.300

 
 
 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
 
 
Basic
18,108

 
17,791

 
16,515

 
16,438

 
17,971

Diluted
18,257

 
18,317

 
17,460

 
17,715

 
18,374

BALANCE SHEET DATA:
 
 
 
 
 
 
 
 
 
Total assets
$
827,528

 
$
833,139

 
$
885,069

 
$
921,533

 
$
917,502

Long-term debt and credit facility, net of current maturities
152,387

 
195,009

 
204,404

 
212,154

 
33,070

Convertible subordinated notes
114,542

 
115,227

 
119,596

 
124,441

 
5,732

Stockholders’ equity
179,875

 
157,594

 
175,734

 
197,656

 
221,492


ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
OVERVIEW
General
We operate in two business segments: funeral home operations, which accounts for approximately 80% of our revenue, and cemetery operations, which accounts for approximately 20% of our revenue. Our funeral homes offer a complete range of high value personal services to meet a family’s funeral 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 remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
At December 31, 2018, we operated 182 funeral homes in 29 states and 29 cemeteries in 11 states within the United States. For additional discussion about our overall business strategy, see Part I, Item 1, Business – Business Strategy.
Funeral Home Operations
Factors affecting our funeral operating results include: demographic trends relating to 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 atneed business to increase

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average revenue per contract. In simple terms, volume and price are the two variables that affect funeral revenue. 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.
Cemetery Operations
Factors affecting our cemetery operating results include: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our New Credit Facility.
We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.
We intend to use cash on hand and borrowings under our New Credit Facility primarily to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends and our debt obligations. From time to time we may also use available cash resources (including borrowings under our New Credit Facility) to repurchase shares of our common stock and our remaining Convertible Notes in open market or privately-negotiated transactions. We have the ability to draw on our New Credit Facility, subject to its customary terms and conditions. We believe that our existing and anticipated cash resources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividends and acquisitions for the foreseeable future.
Balance Sheet Recapitalization
On April 25, 2018, we entered into an eighth amendment and commitment increase (the “Eighth Amendment”) to our former secured credit facility, dated as of August 30, 2012 (as amended, the “Former Credit Agreement”), which amended the Former Credit Agreement to, among other things, increase the aggregate revolving credit commitment available thereunder to $200 million.
On May 7, 2018, we completed privately-negotiated exchanges (the “Exchange”) of approximately $115 million in aggregate principal amount of our 2.75% Convertible Notes, which represented approximately 80% of the aggregate principal amount of our Convertible Notes then outstanding, for an aggregate of $75.2 million in cash and 2,822,859 newly issued shares of our common stock.
On May 31, 2018, we completed the issuance of $325 million in aggregate principal amount of Senior Notes in a private offering. We used $291.4 million of the net proceeds from the sale of the Senior Notes to repay all amounts outstanding under our Former Credit Agreement and all commitments thereunder were terminated.
On May 31, 2018, in connection with the issuance of the Senior Notes, we entered into a $150 million New Credit Facility with certain of our subsidiaries, as guarantors, the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent.
On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes, which represented 78% of the aggregate principal amount of our Convertible Notes then outstanding, for $23.0 million in cash, leaving a principal balance of $6.3 million outstanding as of December 31, 2018. We increased our borrowings under the New Credit Facility to fund the purchase price for the repurchases.

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Cash Flows
We began 2018 with $1.0 million in cash and other liquid investments and ended the year with $0.6 million in cash. At December 31, 2018, we had borrowings of $27.1 million outstanding on our New Credit Facility compared to $92.0 million outstanding under our Former Credit Agreement as of December 31, 2017 and $67.7 million outstanding as of December 31, 2016.
The following table sets forth the elements of cash flow for the years ended December 31, 2016, 2017 and 2018 (in thousands):
 
2016
 
2017
 
2018
Cash at beginning of year
$
535

 
$
3,286

 
$
952

 
 
 
 
 
 
Cash flow from operating activities
50,035

 
45,230

 
48,994

 
 
 
 
 
 
Acquisitions and land for new construction
(26,556
)
 
(28,799
)
 
(37,970
)
Purchase of land and buildings previously leased
(6,258
)
 

 

Net proceeds from the sale of businesses and other assets
4,385

 
5,731

 

Growth capital expenditures
(9,444
)
 
(7,973
)
 
(4,260
)
Maintenance capital expenditures
(7,402
)
 
(8,422
)
 
(9,266
)
Cash flow from investing activities
(45,275
)
 
(39,463
)
 
(51,496
)
 
 
 
 
 
 
Net borrowings (payments) on long-term debt obligations
1,124

 
11,088

 
(194,340
)
Payment of debt issuance costs related to long-term debt

 

 
(1,751
)
Acquisition of Convertible Notes

 

 
(98,266
)
Transaction costs related to the acquisition of Convertible Notes

 

 
(885
)
Proceeds from the issuance of the Senior Notes

 

 
320,125

Payment of debt issuance costs related to the Senior Notes

 

 
(1,367
)
Dividends paid on common stock
(2,492
)
 
(3,709
)
 
(5,513
)
Net proceeds from employee equity plans

 
886

 
457

Purchase of treasury stock

 
(16,366
)
 
(16,266
)
Payment of loan origination costs related to the Former Credit Agreement
(717
)
 

 

Other financing costs
76

 

 

Cash flow from financing activities
(2,009
)
 
(8,101
)
 
2,194

 
 
 
 
 
 
Cash at end of year
$
3,286

 
$
952

 
$
644

Operating Activities
For the year ended December 31, 2018, cash provided by operating activities was $49.0 million compared to $45.2 million for the year ended December 31, 2017 and $50.0 million for the year ended December 31, 2016. The increase of $3.8 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 was due primarily to the favorable impact of working capital changes.
The decrease of $4.8 million for the year ended December 31, 2017 compared to the year ended December 31, 2016 was primarily due to a decline in preneed cemetery revenue and acquired funeral home operating profit in 2017 and working capital changes, which include the timing of payments for income taxes, payments for accrued severance for the retirement of a former executive and our Good To Great incentive compensation plan during the first quarter of 2017.
Investing Activities
Our investing activities resulted in a net cash outflow of $51.5 million for the year ended December 31, 2018 compared to $39.5 million for the year ended December 31, 2017 and $45.3 million for the year ended December 31, 2016, an increase of $12.0 million and a decrease of $5.8 million, respectively.
During the year ended December 31, 2018, we acquired four funeral home businesses, two in Virginia, one in Tennessee, and one in North Carolina for an aggregate purchase price of $38.0 million.
During the year ended December 31, 2017, we acquired seven funeral home businesses, two in Colorado and five in New York for an aggregate purchase price of $27.5 million. We also purchased real estate for funeral home parking lot expansion projects for $1.3 million.

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During the year ended December 31, 2016, we acquired six funeral home businesses, two in Houston, Texas, one in Madera, California, one in Brookfield, Wisconsin, one in Burlington, North Carolina and one in Graham, North Carolina for the aggregate purchase price of $32.8 million.
For the year ended December 31, 2018, capital expenditures totaled $13.5 million compared to $16.4 million for the year ended December 31, 2017, and $16.8 million for the year ended December 31, 2016, a decrease of $2.9 million and a decrease of $0.4 million, respectively.
The following tables present our growth and maintenance capital expenditures (in millions):
 
2016
 
2017
 
2018
Growth
 
 
 
 
 
Cemetery development
$
4.0

 
$
3.7

 
$
3.1

Construction for new funeral facilities
3.1

 
3.1

 

Renovations at certain businesses
2.3

 
1.2

 
1.1

Total Growth
$
9.4

 
$
8.0

 
$
4.2

 
2016
 
2017
 
2018
Maintenance
 
 
 
 
 
Facility repairs and improvements
$
2.4

 
$
2.2

 
$
2.6

General equipment and furniture
2.1

 
2.0

 
2.2

Vehicles
1.5

 
1.9

 
2.6

Paving roads and parking lots
0.7

 
1.3

 
0.7

Information technology infrastructure improvements
0.7

 
1.0

 
1.2

Total Maintenance
$
7.4

 
$
8.4

 
$
9.3

Financing Activities
Our financing activities resulted in a net cash inflow of $2.2 million for the year ended December 31, 2018 compared to a net cash outflow of $8.1 million for the year ended December 31, 2017 and net cash outflow of $2.0 million for the year ended December 31, 2016. For the year ended December 31, 2018, we had net proceeds related to the issuance of our Senior Notes of $318.8 million, offset by net payments on our long-term debt obligations of $196.1 million and payments of $99.2 million to acquire our Convertible Notes. We purchased treasury stock for $16.3 million and paid $5.5 million in dividends on our common stock.
For the year ended December 31, 2017, we had net borrowings on our long-term debt obligations of $11.1 million. We purchased treasury stock for $16.4 million and paid $3.7 million in dividends on our common stock.
For the year ended December 31, 2016, we had net borrowings on our long-term debt obligations of $1.1 million. We paid $2.5 million in dividends on our common stock and paid transactions costs of $0.7 million related to the Seventh Amendment to our Former Credit Agreement.

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Dividends
On October 25, 2017, our Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075 per share, effective with respect to dividends payable on December 1, 2017 and later.
For the years ended December 31, 2018, 2017 and 2016, our Board declared the following dividends payable on the dates below (in millions, except per share amounts):
2018
Per Share
 
Dollar Value
March 1st
$
0.075

 
$
1.2

June 1st
$
0.075

 
$
1.4

September 1st
$
0.075

 
$
1.4

December 1st
$
0.075

 
$
1.4

 
 
 
 
2017
Per Share
 
Dollar Value
March 1st
$
0.050

 
$
0.8

June 1st
$
0.050

 
$
0.8

September 1st
$
0.050

 
$
0.8

December 1st
$
0.075

 
$
1.2

 
 
 
 
2016
Per Share
 
Dollar Value
March 1st
$
0.025

 
$
0.4

June 1st
$
0.025

 
$
0.4

September 1st
$
0.050

 
$
0.8

December 1st
$
0.050

 
$
0.8

Share Repurchases
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). On October 25, 2017, our Board approved a $15.0 million increase in its authorization for repurchases of our common stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act.
During the year ended December 31, 2018, we repurchased 1,101,969 shares of common stock for a total cost of approximately $17.7 million at an average cost of $16.03 per share pursuant to our share repurchase program. Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares. At December 31, 2018, we had approximately $8.3 million available for repurchase under our share repurchase program.
During the year ended December 31, 2017, we repurchased 574,054 shares of common stock for a total cost of approximately $14.0 million at an average cost of $24.35 per share pursuant to our share repurchase program. Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares. At December 31, 2017, we had approximately $26.0 million available for repurchase under our share repurchase program.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately-negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price we paid for these shares was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. See Note 26 to our Consolidated Financial Statements included herein for additional information on our related party transactions.
We did not purchase any shares of our common stock during 2016.

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Long-term Debt
On April 25, 2018, we entered into an eighth amendment, which amended the Former Credit Agreement as follows:
(i) increase the aggregate revolving credit commitment to $200.0 million;
(ii) permit the Company to use the proceeds of revolving loans (a) to repay certain indebtedness; (b) for working capital and acquisitions; (c) to make certain capital expenditures; (d) to pay interest on certain subordinated indebtedness and refinancing indebtedness (subject to the satisfaction of certain terms and conditions); (e) to prepay, repay, purchase or redeem certain subordinated indebtedness; and (f) for general corporate purposes;
(iii) modify the maximum senior secured leverage ratio covenant; and
(iv) release the mortgage liens of the Administrative Agent on certain real property collateral located in a flood plain, among other things.
Following the effectiveness of the Eighth Amendment, the Former Credit Agreement was comprised of a $200.0 million revolving credit facility and a $150.0 million term loan. Under the Former Credit Agreement, as amended by the Eighth Amendment, we were required to comply with a covenant to maintain a maximum senior secured leverage ratio. We incurred $0.7 million in transaction costs related to the Eighth Amendment of our Former Credit Agreement, which were recorded in Net loss on early extinguishment of debt.
On May 7, 2018, we used the remaining capacity under the Former Credit Agreement from the Eighth Amendment to fund the cash consideration used in our privately-negotiated exchanges of approximately 80% of the then outstanding aggregate principal amount of our Convertible Notes. We recognized (i) a net gain of $1.2 million related to the acquisition of our Convertible Notes; and (ii) a loss of $0.5 million related to transaction costs incurred for the acquisition of our Convertible Notes, all of which were recorded in Net loss on early extinguishment of debt.
On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our Senior Notes.
On May 31, 2018, we used $291.4 million of the net proceeds from the sale of the Senior Notes to repay all amounts outstanding under our Former Credit Agreement and all commitments thereunder were terminated. In connection with the repayment in full of all amounts due thereunder, the Former Credit Agreement was retired and $2.0 million of letters of credit previously issued under the Former Credit Agreement were deemed issued under (and remain outstanding under) the New Credit Facility. We did not incur any material early termination penalties in connection with the repayment of the Former Credit Agreement. In connection with the termination of the Former Credit Agreement, we recognized (i) a loss of $0.7 million related to the Eighth Amendment transaction costs; and (ii) a loss of $0.9 million of unamortized debt issuance costs related to the Former Credit Agreement, all of which were recorded in Net loss on early extinguishment of debt.
On May 31, 2018, in connection with the issuance of the Senior Notes, we entered into a $150.0 million New Credit Facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. Our obligations under the New Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Credit Facility Guarantors”).
At closing of the New Credit Facility, we had no outstanding borrowings under the New Credit Facility and $148.0 million of availability after giving effect to the $2.0 million of letters of credit previously issued under the Former Credit Agreement that were deemed issued under (and remain outstanding under) the New Credit Facility. The New Credit Facility includes an accordion feature allowing for future increases in the facility size by an additional amount of up to $75.0 million. The New Credit Facility matures on May 31, 2023.
On November 8, 2018, we entered into a first amendment (the “Amendment”) to the New Credit Facility. The Amendment (i) modified the definition of “EBITDA” in the New Credit Facility to increase from $1,000,000 to $2,000,000 the aggregate amount of severance costs that may be added back to Net Income (as defined in the New Credit Facility) when calculating EBITDA for any period, and (ii) modified the negative covenant restriction on Restricted Payments (as defined in the New Credit Facility) to permit us to acquire or purchase Equity Interests (as defined in the New Credit Facility) subject to the satisfaction of certain conditions and provided that, if before and after giving pro-forma effect to such acquisition or purchase the Total Leverage Ratio (as defined in the New Credit Facility) is (x) equal to or greater than 4.50 to 1.00 but less than or equal to 5.25 to 1.00, then the aggregate amount may not exceed $30,000,000 during the term of the New Credit Facility, and (y) less than 4.50 to 1.00, then the aggregate amount is unlimited.
We incurred $1.1 million in transactions costs related to our New Credit Facility, which were capitalized and will be amortized over the remaining term of the related debt using the straight-line method.
The New Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of our personal property assets and those of the Credit Facility Guarantors, and includes provisions which require us and such subsidiaries, upon

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the occurrence of an event of default under the New Credit Facility, to grant additional liens on real property assets accounting for no less than 50% of our and the Credit Facility Guarantors' funeral operations.
The New Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to
the use of proceeds, payment of taxes and other obligations, continuation of our business and the maintenance of existing rights
and privileges, the maintenance of property and insurance, amongst others.
In addition, the New Credit Facility also contains customary negative covenants, including, but not limited to, covenants that, among other things, restrict (subject to certain exceptions) our ability and the Credit Facility Guarantor's ability to incur indebtedness, grant liens, make investments, engage in acquisitions, mergers or consolidations, and pay dividends and other restricted payments, and the following financial covenants: a total leverage ratio not to exceed 5.50 to 1.00, and a fixed charge coverage ratio of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. We will calculate the financial covenants on a consolidated basis.
As of December 31, 2018, we had outstanding borrowings under the New Credit Facility of $27.1 million and acquisition indebtedness and capital lease obligations of $15.4 million. We had one letter of credit issued on November 30, 2018 and outstanding under the New Credit Facility for $2.0 million, which bears interest at 2.0% and will expire on November 25, 2019. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under our New Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of December 31, 2018, the prime rate margin was equivalent to 0.875% and the LIBOR margin was 1.875%. The weighted average interest rate on our New Credit Facility for the six months ended December 31, 2018 was 0.4%. For the six months ended June 30, 2018, the weighted average interest rate on our Former Credit Agreement was 4.0%.
We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the New Credit Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any New Credit Facility Guarantors.
We were in compliance with the covenants contained in our New Credit Facility as of December 31, 2018, with a leverage ratio of 5.10 to 1.00 and a fixed charge coverage ratio of 1.84 to 1.00.
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear interest at 0% and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from five to twenty years. Imputed interest expense related to our acquisition debt was $0.5 million, $0.9 million and $0.8 million for the years ended December 31, 2016, 2017 and 2018, respectively.
Amortization of debt issuance costs related to our New Credit Facility was $0.1 million for the year ended December 31, 2018. Amortization of debt issuance costs related to our Former Credit Agreement was $0.4 million, $0.3 million and $0.1 million for the years ended December 31, 2016, 2017 and 2018, respectively.
Convertible Notes
On March 19, 2014, we issued $143.75 million aggregate principal amount of our Convertible Notes. The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.
On May 7, 2018, we completed our Exchange of approximately $115.0 million in aggregate principal amount of Convertible Notes in privately-negotiated exchange agreements with a limited number of convertible noteholders for $74.8 million in cash (plus accrued interest of $0.4 million totaling $75.2 million) and 2,822,859 newly issued shares of our common stock, par value $.01 per share, pursuant to a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The cash portion of the exchange consideration was funded from our Former Credit Agreement as amended by the Eighth Amendment. Following the settlement of the Convertible Note exchange, the aggregate principal amount of our Convertible Notes outstanding was reduced to $28.8 million.
On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes, which represented 78% of the aggregate principal amount of our Convertible Notes then outstanding for $22.9 million in cash (plus accrued interest of approximately $0.2 million totaling $23.0 million). The consideration for the repurchases was funded from our New Credit Facility. Following these repurchases, the aggregate principal amount of our Convertible Notes outstanding was reduced to $6.3 million.
We recognized a net gain of $1.7 million, which was recorded in Net loss on early extinguishment of debt, related to the May exchanges and the December repurchases of our Convertible Notes. The gain is composed of a difference of $3.1 million between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding each exchange and repurchase, as applicable, partially offset by a write-off of $1.4 million in unamortized debt issuance costs related

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to the exchange and repurchase of our Convertible Notes. The gain does not include the impact of any transaction costs we incurred to exchange or the repurchase the Convertible Notes.
We incurred $0.9 million in transactions costs related to the exchange and repurchase of our Convertible Notes, of which $0.6 million was expensed and recorded in Net loss on early extinguishment of debt and $0.3 million was allocated to the equity component and recorded in Additional paid-in capital.
The Convertible Notes are general unsecured obligations and are subordinated in the right of payment to all of our existing and future senior indebtedness and equal in right of payment with our other existing and future subordinated indebtedness. The initial conversion rate of the Convertible Notes as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of $22.56 per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain events, as described in the indenture governing the Convertible Notes. During 2017, an adjustment to the conversion rate of the Convertible Notes was triggered when our Board increased the dividends declared per common share from $0.05 per share to $0.075 per share. At December 31, 2018, the adjusted conversion rate of the Convertible Notes was 45.0228 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of $22.21 per share of common stock.
At December 31, 2018, the carrying amount of the equity component was $0.8 million, the principal amount of the liability component was $6.3 million and the net carrying amount was $5.7 million. The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 26 months of the Convertible Notes. The effective interest rate on the unamortized debt discount for the years ended December 31, 2017 and 2018 was 11.3% and 11.4%, respectively. The effective interest rate on the unamortized discount and the debt issuance costs for both years ended December 31, 2017 and 2018 was 3.2%.
Interest expense on the Convertible Notes included contractual coupon interest expense of $4.0 million, $4.0 million and $1.9 million for the years ended December 31, 2016, 2017 and 2018, respectively. Accretion of the discount on the Convertible Notes was $3.9 million, $4.3 million and $2.2 million for the years ended December 31, 2016, 2017 and 2018, respectively. Amortization of debt issuance costs related to our Convertible Notes was $0.5 million, $0.5 million and $0.2 million for the years ended December 31, 2016, 2017 and 2018, respectively.
Senior Notes
On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our Senior Notes and related guarantees in a private offering under Rule 144A and Regulation S under the Securities Act.
We received proceeds of $320.1 million, net of a 1.5% debt discount of $4.9 million, of which we used $291.4 million to repay our existing indebtedness under our Former Credit Agreement and intend to use the remaining net proceeds for general corporate purposes, including acquisitions. We incurred $1.4 million in transaction costs related to the Senior Notes.
The Senior Notes were issued under an indenture, dated as of May 31, 2018 (the “Indenture”), among us, certain of our
existing subsidiaries (collectively, the “Subsidiary Guarantors”), as guarantors, and Wilmington Trust, National Association., as
trustee.
The Senior Notes bear interest at 6.625% per year. Interest on the Senior Notes began to accrue on May 31, 2018 and is payable semi-annually in arrears on September 1 and December 1 of each year, beginning on December 1, 2018 to holders of record on each May 15 and November 15 preceding an interest payment date. The Senior Notes mature on June 1, 2026, unless earlier redeemed or repurchased. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by each of the Subsidiary Guarantors.
We may redeem all or part of the Senior Notes at any time prior to June 1, 2021 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed, plus a “make whole” premium, and accrued and unpaid interest, if any, to the date of redemption. We have the right to redeem the Senior Notes at any time on or after June 1, 2021 at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to the date of redemption. Additionally, at any time before June 1, 2021, we may redeem up to 40% of the aggregate principal amount of the Senior Notes issued with an amount equal to the net proceeds of certain equity offerings, at a price equal to 106.625% of the principal amount of the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption; provided that (1) at least 60% of the aggregate principal amount of the Senior Notes (including any additional Senior Notes) originally issued under the Indenture remain outstanding immediately after the occurrence of such redemption (excluding Senior Notes held by us); and (2) each such redemption must occur within 180 days of the date of the closing of each such equity offering.
If a “change of control” occurs, holders of the Senior Notes will have the option to require us to purchase for cash all or a
portion of their Senior Notes at a price equal to 101% of the principal amount of the Senior Notes, plus accrued and unpaid interest. In addition, if we make certain asset sales and do not reinvest the proceeds thereof or use such proceeds to repay certain debt, we

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will be required to use the proceeds of such asset sales to make an offer to purchase the Senior Notes at a price equal to 100% of the principal amount of the Senior Notes, plus accrued and unpaid interest.
The Indenture contains restrictive covenants limiting our ability and our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default.
The debt discount of $4.9 million and the debt issuance costs of $1.4 million are being amortized using the effective interest method over the remaining term of approximately 89 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for year ended December 31, 2018 was 6.87% and 6.69%, respectively.
Interest expense on the Senior Notes included contractual coupon interest expense of $12.6 million for the year ended December 31, 2018. Amortization of the debt discount on the Senior Notes was $0.3 million for the year ended December 31, 2018 and amortization of debt issuance costs on the Senior Notes was $0.1 million for the year ended December 31, 2018.
CONTRACTUAL OBLIGATIONS
The following table summarizes the known future payments required for the debt on our Consolidated Balance Sheet as of December 31, 2018. Where appropriate we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes to Consolidated Financial Statements where additional information is available. 
 
 
 
 Payments Due By Period (in millions)
  
Financial Note
Reference
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
After
5 Years
Long-term debt obligations
14
 
$
36.0

 
$
2.0

 
$
1.3

 
$
1.0

 
$
0.6

 
$
27.7

 
$
3.4

Interest obligation on long-term debt (a)
14
 
5.9

 
1.2

 
1.0

 
0.9

 
0.8

 
0.4

 
1.6

Capital lease obligations, including interest
17
 
11.3

 
0.9

 
0.8

 
0.8

 
0.8

 
0.9

 
7.1

Senior Notes (b)
16
 
325.0

 

 

 

 

 

 
325.0

Convertible Notes (c)
15
 
6.3

 

 

 
6.3

 

 

 

Interest on Senior Notes
16
 
159.7

 
21.5

 
21.5

 
21.6

 
21.6

 
21.5

 
52.0

Interest on Convertible Notes
15
 
0.4

 
0.2

 
0.2

 

 

 

 

Operating lease obligations
17
 
11.5

 
3.7

 
3.2

 
2.7

 
0.5

 
0.3

 
1.1

Total contractual obligations
 
 
$
556.1

 
$
29.5

 
$
28.0

 
$
33.3

 
$
24.3

 
$
50.8

 
$
390.2

 
 
 
(a)
Based on interest rates in effect at December 31, 2018.
(b)
Matures in 2026.
(c)
Matures in 2021.
 





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OFF-BALANCE SHEET ARRANGEMENTS
The following table summarizes our off-balance sheet arrangements as of December 31, 2018. Where appropriate, we have indicated the footnote in Part II, Item 8, Financial Statements and Supplementary Data, Notes to the Consolidated Financial Statements where additional information is available. We have various non-compete agreements with former owners and employees of businesses we have acquired. These agreements are generally for one to ten years and provide for periodic payments over the term of the agreements. We have various consulting agreements with former owners of businesses we have acquired. Payments for such agreements are generally not made in advance. These agreements are generally for one to five years and provide for bi-weekly or monthly payments. We have employment agreements with certain of our executive officers and senior leadership. These agreements are generally for three to five years and provide for participation in various incentive compensation arrangements. These agreements generally renew automatically on an annual basis after their initial term has expired.
 
 
 
 Payments Due By Period (in millions)
  
Financial Note
Reference
 
Total
 
2019
 
2020
 
2021
 
2022
 
2023
 
After
5 Years
Non-compete agreements
17
 
$
8.1

 
$
1.9

 
$
1.6

 
$
1.5

 
$
1.1

 
$
0.7

 
$
1.3

Consulting agreements
17
 
2.8

 
0.9

 
0.7

 
0.6

 
0.4

 
0.2

 

Employment agreements (a)
17
 
5.7

 
1.9

 
1.2

 
0.9

 
0.8

 
0.7

 
0.2

Total contractual cash obligations
 
 
$
16.6

 
$
4.7

 
$
3.5

 
$
3.0

 
$
2.3

 
$
1.6

 
$
1.5

 
 
 
(a)
Melvin C. Payne, our Chairman of the Board and Chief Executive Officer, has an employment agreement that does not renew after the initial term of five years.

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 by our operating activities, we may be required to access the capital markets or draw down on our New Credit Facility, both of which may be more difficult to access.
FINANCIAL HIGHLIGHTS
 
Year Ended December 31,
 
2016

 
2017

 
2018

Revenue
$
248,200

 
$
258,139

 
$
267,992

Funeral contracts
33,160

 
34,894

 
36,816

Average revenue per contract
$
5,642

 
$
5,705

 
$
5,674

Preneed interment rights (property) sold
7,606

 
6,959

 
7,063

Average price per interment right sold
$
3,172

 
$
3,294

 
$
3,472

Gross profit
$
79,650

 
$
76,799

 
$
75,947

Net income
$
19,581

 
$
37,193

 
$
11,645

Revenue for the year increased $9.9 million in 2018 compared to 2017, as we experienced a 5.5% increase in total funeral contracts, offset by a slight decrease in the average revenue per funeral contract of 0.5%. In addition, the average price per interment right (property) sold increased 5.4% and we experienced an increase of 1.5% in the number of preneed interment rights sold.
Revenue for the year increased $9.9 million in 2017 compared to 2016, as we experienced a 5.2% increase in total funeral contracts and an increase in the average revenue per funeral contract of 1.1%. In addition, while we experienced a decrease of 8.5% in the number of preneed interment rights sold, the average price per interment right sold increased 3.8%. Further discussion of Revenue for our funeral home and cemetery segments is presented herein under “– Results of Operations.”
Gross profit decreased $0.9 million in 2018 compared to 2017, primarily due to a decline in revenue from our funeral home segment and higher salaries and benefits costs (including higher health care costs) across all businesses.
Gross profit decreased $2.9 million in 2017 compared to 2016 primarily due to a decline in preneed cemetery revenue, higher insurance costs and higher costs as a percentage of revenue in the six businesses we acquired in 2016. Further discussion of the components of Gross profit for our funeral home and cemetery segments, is presented herein under “– Results of Operations.”
Net income in 2018 decreased $25.5 million compared to 2017 primarily due to a $17.5 million discrete tax benefit recorded due to the re-measurement of our deferred tax assets and liabilities to reflect the impact of the recent tax law change. Additionally, we experienced an increase of $8.2 million in interest expense related to our Senior Notes.

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Net income in 2017 increased $17.6 million compared to 2016 primarily due to the $17.5 million discrete tax benefit. Further discussion of General, administrative and other expenses, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under “– Other Financial Statement Items.”
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the year ending December 31, 2018 dated February 20, 2019 and discussed in the corresponding earnings conference call. This Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
Below is a reconciliation of Net Income (a GAAP measure) to Adjusted Net Income (a non-GAAP measure) for the years ended December 31, 2016, 2017, and 2018 (in thousands):
 
2016

 
2017

 
2018

Net income
$
19,581

 
$
37,193

 
$
11,645

Special items, net of tax except for items noted by**(1)
 
 
 
 
 
Acquisition and divestiture expenses
456

 

 

Severance and retirement costs
2,587

 

 
1,134

Performance Awards cancellation write-off

 

 
2,594

Consulting fees
323

 

 

Accretion of discount on Convertible Notes**
3,870

 
4,329

 
2,192

Net Loss on early extinguishment of debt
369

 

 
397

Loss on sale of business and other costs
1,152

 

 
439

Goodwill and other impairments

 

 
805

Litigation reserve

 

 
790

Natural disaster costs

 
403

 
345

Tax adjustment related to certain discrete items**

 
(17,176
)
 
1,225

Adjusted net income(2)
$
28,338

 
$
24,749

 
$
21,566

 
 
 
 
 
(1)
Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special Items are taxed at the federal statutory rate of 35 percent for both years ended December 31, 2016 and 2017 and 21 percent for the year ended December 31, 2018 except for the Accretion of the discount on the Convertible Notes and the Tax adjustment related to certain discrete items, as these are non-tax deductible items.
(2)
Adjusted net income is defined as Net income plus adjustments for Special items and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations.
Below is a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the years ended December 31, 2016, 2017, and 2018 (in thousands):
 
2016

 
2017

 
2018

Gross profit
$
79,650

 
$
76,799

 
$
75,947

 
 
 
 
 
 
Cemetery property amortization
3,904

 
3,350

 
3,602

Field depreciation expense
10,015

 
11,024

 
12,015

Regional and unallocated funeral and cemetery costs
10,844

 
13,339

 
12,749

Operating profit(1)
$
104,413

 
$
104,512

 
$
104,313

 
 
 
 
 
(1)
Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs.

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Our operations are reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP measure) by Segment for the years ended December 31, 2016, 2017, and 2018 (in thousands):
 
2016

 
2017

 
2018

Funeral Home
$
79,183

 
$
81,981

 
$
82,154

Cemetery
25,230

 
22,531

 
22,159

Operating profit
$
104,413

 
$
104,512

 
$
104,313

 
 
 
 
 
 
Operating profit margin(1)

42.1
%
 
40.5
%
 
38.9
%
 
 
 
 
 
(1)
Operating profit margin is defined as Operating profit as a percentage of Revenue.
Further discussion of Operating profit for our funeral home and cemetery segments is presented herein under “– Results of Operations.”
YEAR ENDED DECEMBER 31, 2018 COMPARED TO YEAR ENDED DECEMBER 31, 2017
Results of Operations
The following is a discussion of our results of operations for the years ended December 31, 2018 and 2017. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2014 and owned and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2013 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. The term “divested” when discussed in the Funeral Home Segment, refers to one business sold during 2017. The term “divested” when discussed in the Cemetery Segment, refers to three cemetery businesses that we ceased to operate on September 30, 2018, as a result of an expired management agreement. Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure.
Funeral Home Segment. The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations for the year ended December 31, 2018 compared to the years ended December 31, 2017 (in thousands):
 
Year Ended December 31,
 
2017

 
2018

Revenue:
 
 
 
Same store operating revenue
$
161,690

 
$
160,459

Acquired operating revenue
30,108

 
41,447

Divested revenue
606

 

Preneed funeral insurance commissions
1,254

 
1,294

Preneed funeral trust earnings
7,228

 
7,525

Total
$
200,886

 
$
210,725

 
 
 
 
Operating profit:
 
 
 
Same store operating profit
$
62,361

 
$
58,976

Acquired operating profit
11,770

 
15,397

Divested operating profit (loss)
302

 
(3
)
Preneed funeral insurance commissions
436

 
415

Preneed funeral trust earnings
7,112

 
7,369

Total
$
81,981

 
$
82,154


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The following measures reflect the significant metrics over this comparative period:
 
Year Ended December 31,
 
2017

 
2018

Same store:
 
 
 
Contract volume
30,162

 
30,088

Average revenue per contract, excluding preneed funeral trust earnings
$
5,361

 
$
5,333

Average revenue per contract, including preneed funeral trust earnings
$
5,559

 
$
5,542

Burial rate
40.6
%
 
39.6
%
Cremation rate
52.2
%
 
52.9
%
 
 
 
 
Acquired:
 
 
 
Contract volume
4,680

 
6,728

Average revenue per contract, excluding preneed funeral trust earnings
$
6,433

 
$
6,160

Average revenue per contract, including preneed funeral trust earnings
$
6,581

 
$
6,265

Burial rate
44.7
%
 
42.5
%
Cremation rate
46.5
%
 
49.2
%
Funeral home same store operating revenue for the year ended December 31, 2018 decreased $1.2 million, primarily due to the slight decrease in both the same store contract volumes and the average revenue per contract compared to year ended December 31, 2017.
Same store operating profit for the year ended December 31, 2018 decreased $3.4 million when compared to the year ended December 31, 2017 and the comparable operating profit margin decreased 180 basis points to 36.8%. The decrease is primarily due to the decrease in same store revenue, as well as an increase in operating expenses of $2.1 million, mostly related to salaries and benefits expenses.
Funeral home acquired operating revenue for the year ended December 31, 2018 increased $11.3 million, as our funeral home acquired portfolio for the year ended December 31, 2018 includes seven businesses acquired in the fourth quarter of 2017, and four businesses in the third quarter of 2018 not fully present in the year ended December 31, 2017. The decrease in acquired average revenue per contract is primarily due to an increase in the acquired cremation rate and a decrease in the acquired average revenue per cremation contract.
Acquired operating profit for the year ended December 31, 2018 increased $3.6 million when compared to the year ended December 31, 2017. Although operating profit increased, operating profit margin decreased by 200 basis points to 37.1% for the year ended December 31, 2018 compared to the same period in 2017. The decrease is primarily due to the seven businesses we acquired in the fourth quarter of 2017, as operating profit margins for these acquired businesses were lower compared to our other acquired businesses, particularly with regard to higher salaries and benefits expenses.
Preneed funeral insurance commissions and preneed funeral trust earnings, which are recorded in Other revenue, on a combined basis, increased $0.3 million for the year ended December 31, 2018 compared to the same period in 2017 due to an increase in earnings from the maturity of preneed contracts. Operating profit for preneed funeral insurance commissions and preneed funeral trust earning, on a combined basis, increased $0.2 million for the year ended December 31, 2018 compared to the same period in 2017 primarily due to the increase in revenue, offset by an increase in commission and preneed selling expenses.

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Cemetery Segment. The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations for the year ended December 31, 2017 compared to the year ended December 31, 2018 (in thousands): 
 
Year Ended December 31,
 
2017

 
2018

Revenue:
 
 
 
Same store operating revenue
$
40,047

 
$
41,740

Acquired operating revenue
3,195

 
3,395

Divested revenue
6,173

 
4,712

Preneed cemetery trust earnings
6,300

 
5,761

Preneed cemetery finance charges
1,538

 
1,659

Total
$
57,253

 
$
57,267

 
 
 
 
Operating profit:
 
 
 
Same store operating profit
$
12,368

 
$
12,733

Acquired operating profit
1,038

 
1,147

Divested operating profit
1,675

 
1,376

Preneed cemetery trust earnings
5,912

 
5,244

Preneed cemetery finance charges
1,538

 
1,659

Total
$
22,531

 
$
22,159

The following measures reflect the significant metrics over this comparative period:
 
Year Ended December 31,
 
2017

 
2018

Same store:
 
 
 
Preneed revenue as a percentage of operating revenue
57
%
 
58
%
Preneed revenue
$
22,608

 
$
24,374

Number of preneed internment rights sold
5,673

 
5,991

Atneed revenue
$
17,439

 
$
17,366

 
 
 
 
Acquired:
 
 
 
Preneed revenue as a percentage of operating revenue
65
%
 
60
%
Preneed revenue
$
2,076

 
$
2,034

Number of preneed internment rights sold
523

 
484

Atneed revenue
$
1,119

 
$
1,361

Cemetery same store operating revenue for the year ended December 31, 2018 increased $1.7 million, as we experienced a 5.6% increase in the number of preneed interment rights sold and a 4.4% increase in the average price of internments sold for the year ended December 31, 2018 compared to the same period in 2017. In early 2018, we invested in additional leadership at certain businesses which contributed to the increase in revenue. In addition, we recognized revenue from the completion of large gardens at two of our cemeteries. Same store atneed revenue, which represents approximately 42% of our same store operating revenue decreased $0.1 million, as we experienced a 4.2% decrease in the number of atneed contracts, offset by a 3.9% increase in the average sale per contract.
Cemetery same store operating profit for the year ended December 31, 2018 increased $0.4 million from the same period in 2017 primarily due to the $1.8 million increase in preneed revenue, offset by increases in certain expenses. The expense categories with the largest increases include $0.7 million of facilities and grounds expenses, $0.6 million of salaries and benefits and $0.2 million of property tax expense. The comparable operating profit margin decreased to 30.5% for the year ended December 31, 2018 from 30.9% in the same period in 2017.
Cemetery acquired operating profit margin increased to 33.8% for the year ended December 31, 2018 from 32.5% in the same period in 2017. The increase in operating margin is primarily due to the $0.2 million increase in cemetery acquired revenue coupled with effective cost management.

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Preneed cemetery trust earnings and preneed cemetery finance charges, which are recorded in Other revenue, on a combined basis, decreased $0.4 million for the year ended December 31, 2018 compared to the same period in 2017, primarily due to market fluctuations in the fourth quarter of 2018 which caused the revenue in our perpetual care trust to decline by $0.5 million.
Cemetery property amortization. Cemetery property amortization totaled $3.6 million for year the ended December 31, 2018, an increase of $0.3 million compared to the year ended December 31, 2017. The increase was primarily attributable to additional sales of cemetery property in 2018 compared to 2017.
Field depreciation. Depreciation expense for our field businesses totaled $12.0 million for year the ended December 31, 2018, an increase of $1.0 million compared to the year ended December 31, 2017. The increase was primarily attributable to additional depreciation expense from assets acquired in our 2017 and 2018 acquisitions.
Regional and unallocated funeral and cemetery costs. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled $12.7 million for the year ended December 31, 2018, a decrease of $0.6 million primarily due to a decrease of $0.9 million in other general administrative costs, offset by a $0.2 million increase in severance costs, and a $0.1 million increase in salaries and benefits.
Other Financial Statement Items
General, administrative and other. General, administrative and other expenses totaled $30.8 million for the year ended December 31, 2018, an increase of $4.6 million compared to the year ended December 31, 2017. The increase was attributable to a $3.4 million increase in incentive and equity compensation related to the cancellation of performance awards in 2018, a $1.0 million increase in litigation reserves, a $0.9 million increase in severance costs, a $0.3 million increase in group health insurance, offset by a $0.1 million decrease in acquisition costs, a $0.2 million decrease in salaries and benefits, a $0.4 million decrease in public company costs, and $0.3 million decrease in other general administrative costs.
Home office depreciation and amortization. Home office depreciation and amortization expense totaled $1.8 million for the year ended December 31, 2018, an increase of $0.2 million compared to the year ended December 31, 2017. The increase was primarily attributable to additional depreciation expense from assets related to our IT infrastructure.
Interest expense. Interest expense was $21.1 million for the year ended December 31, 2018 compared to $12.9 million for the year ended December 31, 2017, an increase of $8.2 million due to the following: (i) an increase of $12.9 million related to our Senior Notes; offset by (ii) a decrease of $2.6 million related to our Former Credit Agreement; and (ii) a decrease of $2.1 million related to the Exchange of our Convertibles Notes.
Accretion of discount on convertible notes. For the year ended December 31, 2018, we recognized accretion of the discount on our Convertible Notes of $2.2 million compared to $4.3 million for the same period in 2017, a decrease of $2.1 million, which was attributable to the Exchange of our Convertible Notes.
Net loss on early extinguishment of debt. For the year ended December 31, 2018, we recognized a net loss of $0.5 million on the early extinguishment of debt for the following transactions:
(i) a loss of $1.6 million related to the termination of our Former Credit Agreement, which consisted of a write-off of $0.7 million of transaction costs related to the Eighth Amendment and a write-off of $0.9 million of unamortized debt issuance costs related to the Former Credit Agreement;
(ii) a net gain of $1.7 million related to the May exchanges and the December repurchases of our Convertible Notes, which consisted of a gain of $3.1 million on the difference between the fair value and the carrying amount of the liability component of our Convertible Notes immediately preceding each exchange and repurchase, and a loss of $1.4 million related to the write-off of unamortized debt issuance costs due to the exchange and repurchase of our Convertible Notes; and
(iii) a loss of $0.6 million related to transaction costs incurred for the exchange and repurchase of our Convertible Notes.
Other, net. For the year ended December 31, 2018, Other, net costs were $1.2 million related to the following transactions: (i) an impairment of $0.8 million related to a funeral home business that we intend to cease operating in 2019; (ii) a $0.3 million loss related to an expired cemetery management agreement; (iii) an impairment of $0.2 million related to the real property of a funeral home business held for sale; and offset by (iv) $0.1 million in refunds received for the reimbursement of expenses related to divested businesses.
Income taxes. Our income tax provision was $6.6 million for the year ended December 31, 2018 compared to our income tax benefit of $4.4 million for the year ended December 31, 2017. Our tax rate, before discrete items was 31.5% and 40.0% for the years ended December 31, 2018 and 2017, respectively. We recorded discrete tax expense of $0.8 million of which $1.2 million was recorded under ASU 2016-09, as a result of the cancellation of Performance Award Agreements. A discrete tax benefit of $0.5

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million was recorded as a result of return to provision adjustments that adjusted the previously re-measured deferred tax assets and/or liabilities.
Our operating effective tax rate primarily increased as a result of the cancellation of the Performance Award Agreements due to the impact the additional expense had on our state tax provision. We file both consolidated and separate entity state returns. The expenses recorded for the cancellation of the Performance Award Agreements were recorded in an entity that is included in our consolidated filings, but no expenses were allocable to the entities where we file on a separate entity basis. Thus, the state provision in the separate entity states is higher relative to the state provision where we file on a consolidated basis. The increase in our effective tax rate attributable to this occurrence represents 2.7% of the total effective tax rate. An additional contributing factor was pre-tax book income (“PTBI”) was lower in 2018 compared to 2017, as such, as PTBI decreases, the percentage impact of the permanent adjustments on the effective tax rate increases resulting in a higher effective tax rate. At December 31, 2018, no uncertain tax positions were identified.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 18 for additional information regarding our income taxes.
YEAR ENDED DECEMBER 31, 2017 COMPARED TO YEAR ENDED DECEMBER 31, 2016
Results of Operations
The following is a discussion of our results of operations for the years ended December 31, 2017 and 2016. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2013 and owned and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2012 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure.
Funeral Home Segment. The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations for the year ended December 31, 2016 compared to the year ended December 31, 2017 (in thousands):
 
Year Ended December 31,
 
2016

 
2017

Revenue:
 
 
 
Same store operating revenue
$
155,710

 
$
158,106

Acquired operating revenue
24,914

 
34,294

Preneed funeral insurance commissions
1,429

 
1,254

Preneed funeral trust earnings
7,348

 
7,232

Total
$
189,401

 
$
200,886

 
 
 
 
Operating profit:
 
 
 
Same store operating profit
$
60,823

 
$
60,864

Acquired operating profit
10,419

 
13,565

Preneed funeral insurance commissions
682

 
436

Preneed funeral trust earnings
7,259

 
7,116

Total
$
79,183

 
$
81,981


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The following measures reflect the significant metrics over this comparative period:
 
Year Ended December 31,
 
2016

 
2017

Same store:
 
 
 
Contract volume
29,274

 
29,587

Average revenue per contract, excluding preneed funeral trust earnings
$
5,319

 
$
5,344

Average revenue per contract, including preneed funeral trust earnings
$
5,512

 
$
5,535

Burial rate
41.2
%
 
40.3
%
Cremation rate
51.5
%
 
52.5
%
 
 
 
 
Acquired:
 
 
 
Contract volume
3,886

 
5,307

Average revenue per contract, excluding preneed funeral trust earnings
$
6,411

 
$
6,462

Average revenue per contract, including preneed funeral trust earnings
$
6,628

 
$
6,654

Burial rate
46.9
%
 
46.5
%
Cremation rate
44.7
%
 
45.1
%
 
 
 
 
Funeral home same store operating revenue for the year ended December 31, 2017 increased $2.4 million, primarily due to a slight increase in both the same store contract volumes and the average revenue per contract compared to the year ended December 31, 2016.
Same store operating profit for the year ended December 31, 2017 remained flat at $60.9 million when compared to the year ended December 31, 2016, despite the increase in operating revenue. Same store operating margin decreased 60 basis points to 38.5% for the year ended December 31, 2017 as we focused on hiring additional Managing Partners to increase market share and grow revenue in our same store businesses. In 2017, we began a process of de-clustering businesses in certain markets by adding Managing Partners to a business that may have been grouped with two or more businesses led by a single Managing Partner. While this results in shorter-term higher salaries and benefits, we believe that having the right Managing Partners in these businesses will increase market share and grow same store revenue. Same store salaries and benefits for the year ended December 31, 2017 increased $1.4 million when compared to same period in 2016. Additionally, general liability and other insurance related expenses increased $0.6 million for the year ended December 31, 2017 over the same period in 2016.
Funeral home acquired operating revenue for the year ended December 31, 2017 increased $9.4 million, as our funeral home acquired portfolio for the year ended December 31, 2017, includes six businesses acquired during the second half of 2016, not fully present in the year ended December 31, 2016. Additionally, we acquired seven businesses in the fourth quarter of 2017. Our 2016 and 2017 acquired businesses accounted for approximately 90% of the total increase in acquired revenue and volume for the year ended December 31, 2017.
Acquired operating profit for the year ended December 31, 2017 increased $3.1 million, from the year ended December 31, 2016, primarily due to the six businesses acquired during 2016, not fully present in the year ended December 31, 2016. Although revenue increased, operating profit margin decreased 220 basis points to 39.6% for the year ending December 31, 2017 compared to the same period in 2016. The decrease is primarily due to the businesses acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses become fully integrated into our Being the Best Standards Operating Model, we expect to see their operating profit margins rise.
Preneed funeral insurance commissions and preneed funeral trust earnings, which are recorded in Other revenue, on a combined basis, decreased by $0.3 million compared to the same period in 2016 due to a decrease in earnings from the maturity of preneed contracts, as well as a decrease in preneed insurance contracts sold for which we earn a commission. Operating profit for preneed funeral insurance commissions and preneed funeral trust earning, on a combined basis, decreased $0.4 million for the year ended December 31, 2017 compared to the same period in 2016 due to the decrease in revenue, along with an increase in commission and preneed selling expenses.

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Cemetery Segment. The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations for the year ended December 31, 2016 compared to the year ended December 31, 2017 (in thousands): 
 
Year Ended December 31,
 
2016

 
2017

Revenue:
 
 
 
Same store operating revenue
$
45,893

 
$
45,044

Acquired operating revenue
3,054

 
3,194

Preneed cemetery trust earnings
8,004

 
7,193

Preneed cemetery finance charges
1,848

 
1,822

Total
$
58,799

 
$
57,253

 
 
 
 
Operating profit:
 
 
 
Same store operating profit
$
14,613

 
$
12,864

Acquired operating profit
1,054

 
1,039

Preneed cemetery trust earnings
7,715

 
6,806

Preneed cemetery finance charges
1,848

 
1,822

Total
$
25,230