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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                      FORM
10-Q
(Mark One)
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2020
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 Boulevard, Suite 300
Houston, Texas, 77056
(Address of principal executive offices)
(713) 332-8400
(Registrant’s telephone number, including area code)
 
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $.01 per share
CSV
New York Stock Exchange
 
 
 
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      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      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth 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
Accelerated filer
Non-accelerated filer
  (Do not check if a smaller reporting company)
Smaller reporting company
 
 
Emerging growth company
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.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of July 29, 2020 was 17,933,918.
 




CARRIAGE SERVICES, INC.
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
 
Item 3. Defaults Upon Senior Securities
 
 
Item 4. Mine Safety Disclosures
 
 
Item 5. Other Information
 
 
 
 
 
 

- 2 -



PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(in thousands, except share data)
 
 
 
(unaudited)
 
December 31, 2019

 
June 30, 2020

ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
716

 
$
692

Accounts receivable, net
21,478

 
20,033

Inventories
6,989

 
7,410

Prepaid and other current assets
10,667

 
12,087

Total current assets
39,850

 
40,222

Preneed cemetery trust investments
72,382

 
72,569

Preneed funeral trust investments
96,335

 
90,235

Preneed cemetery receivables, net
20,173

 
20,238

Receivables from preneed trusts, net
18,024

 
17,471

Property, plant and equipment, net
279,200

 
277,564

Cemetery property, net
87,032

 
101,509

Goodwill
398,292

 
396,861

Intangible and other non-current assets, net
32,116

 
33,348

Operating lease right-of-use assets
22,304

 
21,407

Cemetery perpetual care trust investments
64,047

 
63,228

Total assets
$
1,129,755

 
$
1,134,652

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of debt and lease obligations
$
3,150

 
$
3,456

Accounts payable
8,413

 
8,042

Accrued and other liabilities
24,026

 
23,267

Convertible subordinated notes due 2021

 
6,115

Total current liabilities
35,589

 
40,880

Acquisition debt, net of current portion
5,658

 
5,285

Credit facility
82,182

 
88,327

Convertible subordinated notes due 2021
5,971

 

Senior notes due 2026
395,447

 
395,668

Obligations under finance leases, net of current portion
5,854

 
5,696

Obligations under operating leases, net of current portion
21,533

 
20,583

Deferred preneed cemetery revenue
46,569

 
47,657

Deferred preneed funeral revenue
29,145

 
28,660

Deferred tax liability
41,368

 
46,765

Other long-term liabilities
1,737

 
1,524

Deferred preneed cemetery receipts held in trust
72,382

 
72,569

Deferred preneed funeral receipts held in trust
96,335

 
90,235

Care trusts’ corpus
63,416

 
62,312

Total liabilities
903,186

 
906,161

Commitments and contingencies:

 

Stockholders’ equity:
 
 

Common stock, $.01 par value; 80,000,000 shares authorized and 25,880,362 and 25,959,257 shares issued at December 31, 2019 and June 30, 2020, respectively
259

 
260

Additional paid-in capital
242,147

 
241,868

Retained earnings
86,213

 
88,413

Treasury stock, at cost; 8,025,339 at both December 31, 2019 and June 30, 2020
(102,050
)
 
(102,050
)
Total stockholders’ equity
226,569

 
228,491

Total liabilities and stockholders’ equity
$
1,129,755

 
$
1,134,652

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

- 3 -



CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
 
Three months ended June 30,
 
Six months ended June 30,
 
2019

 
2020

 
2019

 
2020

Revenue:
 
 
 
 
 
 
 
Service revenue
$
34,659

 
$
38,880

 
$
71,311

 
$
79,612

Property and merchandise revenue
28,877

 
32,642

 
57,456

 
63,913

Other revenue
4,216

 
5,955

 
8,066

 
11,442

 
67,752

 
77,477

 
136,833

 
154,967

Field costs and expenses:
 
 

 
 
 
 
Cost of service
17,955

 
18,622

 
36,052

 
39,679

Cost of merchandise
22,311

 
24,612

 
44,572

 
49,675

Cemetery property amortization
1,169

 
1,097

 
2,018

 
1,974

Field depreciation expense
3,059

 
3,247

 
6,144

 
6,537

Regional and unallocated funeral and cemetery costs

3,622

 
3,717

 
6,411

 
6,473

Other expenses
386

 
1,022

 
786

 
2,298

 
48,502

 
52,317

 
95,983

 
106,636

Gross profit
19,250

 
25,160

 
40,850

 
48,331

Corporate costs and expenses:
 
 

 
 
 
 
General, administrative and other
5,692

 
6,540

 
11,304

 
12,486

Home office depreciation and amortization
369

 
354

 
758

 
736

Impairment of goodwill and other intangibles

 

 

 
(14,693
)
Operating income
13,189

 
18,266

 
28,788

 
20,416

 
 
 
 
 
 
 
 
Interest expense
(6,296
)
 
(8,352
)
 
(12,624
)
 
(16,780
)
Accretion of discount on convertible subordinated notes
(60
)
 
(66
)
 
(117
)
 
(131
)
Other, net
175

 
(2
)
 
162

 
(6
)
Income before income taxes
7,008

 
9,846

 
16,209

 
3,499

Expense for income taxes
(2,043
)
 
(3,299
)
 
(4,620
)
 
(1,163
)
Tax adjustment related to discrete items
(103
)
 
(150
)
 
(202
)
 
(136
)
Total expense for income taxes
(2,146
)
 
(3,449
)
 
(4,822
)
 
(1,299
)
Net income
$
4,862

 
$
6,397

 
$
11,387

 
$
2,200

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.27

 
$
0.36

 
$
0.63

 
$
0.12

Diluted earnings per common share:
$
0.27

 
$
0.36

 
$
0.63

 
$
0.12

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
0.075

 
$
0.075

 
$
0.150

 
$
0.150

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
17,959

 
17,860

 
18,008

 
17,833

Diluted
17,988

 
17,889

 
18,043

 
17,862

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

- 4 -



CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
Six months ended June 30,
 
2019

 
2020

Cash flows from operating activities:
 
 
 
Net income
$
11,387

 
$
2,200

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

Depreciation and amortization
8,920

 
9,247

Provision for bad debt and credit losses
724

 
1,507

Stock-based compensation expense
1,103

 
1,546

Deferred income tax expense
1,309

 
4,867

Amortization of deferred financing costs
189

 
393

Amortization of capitalized commissions on preneed contracts
277

 
285

Accretion of discount on convertible subordinated notes
117

 
131

Accretion of debt discount, net of debt premium on senior notes
242

 
151

Net loss on sale and disposal of other assets
168

 
96

Goodwill and other intangible asset impairments

 
14,693

Other
121

 
19

 
 
 
 
Changes in operating assets and liabilities that provided (required) cash:
 
 

Accounts and preneed receivables
(1,116
)
 
2,231

Inventories, prepaid and other current assets
1,446

 
(6,610
)
Intangible and other non-current assets
(212
)
 
(150
)
Preneed funeral and cemetery trust investments
(5,033
)
 
214

Accounts payable
(3,156
)
 
(516
)
Accrued and other liabilities
61

 
(411
)
Deferred preneed funeral and cemetery revenue
863

 
1,054

Deferred preneed funeral and cemetery receipts held in trust
4,502

 
54

Net cash provided by operating activities
21,912

 
31,001

 
 
 

Cash flows from investing activities:
 
 

Acquisitions

 
(28,011
)
Net proceeds from the sale of other assets
100

 
78

Capital expenditures
(8,654
)
 
(5,786
)
Net cash used in investing activities
(8,554
)
 
(33,719
)
 
 
 

Cash flows from financing activities:
 
 

Borrowings from the credit facility
23,300

 
75,900

Payments against the credit facility
(25,800
)
 
(70,000
)
Redemption of the 2.75% convertible subordinated notes
(27
)
 

Payments of debt issuance costs related to the 6.625% senior notes

 
(66
)
Payments on acquisition debt and obligations under finance leases
(910
)
 
(679
)
Payments on contingent consideration recorded at acquisition date
(162
)
 
(169
)
Proceeds from the exercise of stock options and employee stock purchase plan contributions
942

 
624

Taxes paid on restricted stock vestings and exercise of non-qualified options
(179
)
 
(234
)
Dividends paid on common stock
(2,725
)
 
(2,682
)
Purchase of treasury stock
(7,756
)
 

Net cash provided by (used in) financing activities
(13,317
)
 
2,694

 
 
 


Net increase (decrease) in cash and cash equivalents
41

 
(24
)
Cash and cash equivalents at beginning of period
644

 
716

Cash and cash equivalents at end of period
$
685

 
$
692

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

- 5 -



CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
 
Three months ended June 30, 2019
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Total
Balance – March 31, 2019
18,203

 
$
258

 
$
243,940

 
$
78,205

 
$
(94,294
)
 
$
228,109

Net income

 

 

 
4,862

 

 
4,862

Issuance of common stock
17

 

 
197

 

 

 
197

Cancellation and retirement of restricted common stock and stock options
(8
)
 

 
(5
)
 

 

 
(5
)
Stock-based compensation expense

 

 
518

 

 

 
518

Dividends on common stock

 

 
(1,365
)
 

 

 
(1,365
)
Treasury stock acquired
(400
)
 

 

 

 
(7,756
)
 
(7,756
)
Balance – June 30, 2019
17,812

 
$
258

 
$
243,285

 
$
83,067

 
$
(102,050
)
 
$
224,560


 
Three months ended June 30, 2020
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Total
Balance – March 31, 2020
17,909

 
$
259

 
$
242,234

 
$
82,016

 
$
(102,050
)
 
$
222,459

Net income

 

 

 
6,397

 

 
6,397

Issuance of common stock to employees
17

 
1

 
262

 

 

 
263

Issuance of common stock to directors
8

 

 
147

 

 

 
147

Stock-based compensation expense

 

 
568

 

 

 
568

Dividends on common stock

 

 
(1,343
)
 

 

 
(1,343
)
Balance – June 30, 2020
17,934

 
$
260

 
$
241,868

 
$
88,413

 
$
(102,050
)
 
$
228,491


The accompanying notes are an integral part of these Consolidated Financial Statements.



























- 6 -





CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
 
Six months ended June 30, 2019
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Total
Balance – December 31, 2018
18,078

 
$
257

 
$
243,849

 
$
71,680

 
$
(94,294
)
 
$
221,492

Net income

 

 

 
11,387

 

 
11,387

Issuance of common stock
40

 

 
472

 

 

 
472

Exercise of stock options
71

 
1

 
471

 

 

 
472

Issuance of restricted common stock
25

 

 

 

 

 

Cancellation and retirement of restricted common stock and stock options
(17
)
 

 
(179
)
 

 

 
(179
)
Stock-based compensation expense

 

 
1,103

 

 

 
1,103

Dividends on common stock

 

 
(2,725
)
 

 

 
(2,725
)
Treasury stock acquired
(400
)
 

 

 

 
(7,756
)
 
(7,756
)
Other
15

 

 
294

 

 

 
294

Balance – June 30, 2019
17,812

 
$
258

 
$
243,285

 
$
83,067

 
$
(102,050
)
 
$
224,560


 
Six months ended June 30, 2020
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Total
Balance – December 31, 2019
17,855

 
$
259

 
$
242,147

 
$
86,213

 
$
(102,050
)
 
$
226,569

Net income

 

 

 
2,200

 

 
2,200

Issuance of common stock to employees
44

 
1

 
624

 

 

 
624

Issuance of common stock to directors
17

 

 
294

 

 

 
294

Issuance of restricted common stock
10

 

 

 

 

 

Cancellation and retirement of restricted common stock and stock options
(10
)
 

 
(235
)
 

 

 
(234
)
Stock-based compensation expense

 

 
1,252

 

 

 
1,252

Dividends on common stock

 

 
(2,682
)
 

 

 
(2,682
)
Other
18

 

 
468

 

 

 
468

Balance – June 30, 2020
17,934

 
$
260

 
$
241,868

 
$
88,413

 
$
(102,050
)
 
$
228,491


The accompanying notes are an integral part of these Consolidated Financial Statements.

- 7 -



CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of funeral and cemetery services and merchandise in the United States. As of June 30, 2020, we operated 186 funeral homes in 29 states and 32 cemeteries in 11 states. Our operations are reported in two business segments: Funeral Home Operations, which currently account for approximately 80% of our revenue and Cemetery Operations, which currently account for approximately 20% of our revenue.
Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and remembrance services and transportation services. We provide funeral services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
Our cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis.
Principles of Consolidation and Interim Condensed Disclosures
Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 2019 unless otherwise disclosed herein, and should be read in conjunction therewith.
On March 11, 2020, the World Health Organization declared the 2019 novel coronavirus disease (“COVID-19”), to be a pandemic, which has spread across the globe and is impacting worldwide economic activity. In light of the recent developments relating to COVID-19, the Company has evaluated the impact of COVID-19 on our Consolidated Financial Statements and related disclosures.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenue and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenue and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.
Inventory
Inventory consists primarily of caskets, outer burial containers and cemetery monuments and markers and is recorded at the lower of its cost basis (determined by the specific identification method) or net realizable value.

- 8 -



Revenue Recognition
Funeral and Cemetery Operations Revenue is recognized when control of the merchandise or services is transferred to the customer. Our performance obligations include the delivery of funeral and cemetery merchandise and services and cemetery property interment rights. Control transfers when merchandise is delivered or services are performed. For cemetery property interment rights, control transfers to the customer when the property is developed and the interment right has been sold and can no longer be marketed or sold to another customer. Sales taxes collected are recognized on a net basis in our consolidated financial statements. On our atneed contracts, we generally deliver the merchandise and perform the services at the time of need.
Memorial services frequently include performance obligations to direct the service, provide facilities and motor vehicles, catering, flowers, and stationary products. All other performance obligations on these contracts, including arrangement, removal, preparation, embalming, cremation, interment, and delivery of urns and caskets and related memorialization merchandise are fulfilled at the time of need. Personalized marker merchandise and marker installation services sold on atneed contracts are recognized when control is transferred to the customer, generally when the marker is delivered and installed in the cemetery.
Due to limitations on gatherings imposed to mitigate the spread of COVID-19, some customers have requested that we delay the memorial service until after the limitations have been lifted.
Ancillary funeral service revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation business and online cremation business in Texas.
The earnings from our preneed trust investments, as well as trust management fees charged by our wholly-owned registered investment advisory firm (“CSV RIA”) are recorded in Other revenue. As of June 30, 2020, CSV RIA provided investment management and advisory services to approximately 80% 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.
Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet of $8.9 million and $8.6 million at December 31, 2019 and June 30, 2020, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of ten years for preneed funeral contracts.
Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable, net and Preneed cemetery receivables, net on our Consolidated Balance Sheet. Balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance Sheet. The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled were $4.8 million and $6.7 million at December 31, 2019 and June 30, 2020, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of eight years for preneed cemetery contracts.
See Notes 17 to the Consolidated Financial Statements herein for additional information related to revenue.
Arrangements with Multiple Performance Obligations
Some of our contracts with customers include multiple performance obligations. For these contracts, we allocate the transaction price to each performance obligation based on its relative standalone selling price, which is based on prices charged to customers per our general price list. Packages for service and ancillary items are offered to help the customer make decisions during emotional and stressful times. Package discounts are reflected net in Revenue. We recognize revenue when the merchandise is transferred or the service is performed, in satisfaction of the corresponding performance obligation. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Preneed Funeral and Cemetery Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. We have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheet. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.

- 9 -



In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in the majority of our funeral and cemetery trust funds.
See Notes 6 and 7 to the Consolidated Financial Statements herein for additional information related to our preneed funeral and cemetery trust funds.
Funeral and Cemetery Receivables
Our funeral receivables are recorded in Accounts Receivable, net and primarily consist of amounts due for funeral services already performed. Our cemetery receivables generally consist of preneed sales of cemetery interment rights and related products and services, which are typically financed through interest-bearing installment sales contracts, generally with terms of up to five years, with such interest income reflected as Other revenue. In substantially all cases, we receive an initial down payment at the time the contract is signed. We do not accrue interest on preneed receivables if they are not paid in accordance with the contractual payment terms given the nature of our merchandise and services, the nature of our contracts with customers and the timing of the delivery of our services. Atneed cemetery receivables and preneed cemetery receivables with payments expected to be received within one year from the balance sheet date are recorded in Accounts receivable, net. Preneed cemetery receivables with payments expected to be received beyond one year from the balance sheet date are recorded in Preneed cemetery receivables, net.
For our funeral receivables, we have a collections policy where statements are sent to the customer at 30 days past due. Past due notification letters are sent at 45 days and continue until payment is received or the contract is placed with a third-party collections agency. For our preneed cemetery receivables, we have a collections policy where past due notification letters are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received.
In June 2016, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”), Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments and subsequent amendments collectively known as (“Topic 326”). Prior to adoption of Topic 326, we provided allowances for bad debt and contract cancellations on our receivables based on an analysis of historical trends of collection activity.
For both funeral and cemetery receivables, we determine our allowance for credit losses by using a loss-rate methodology, in which we assess our historical write-off of receivables against our total receivables over several years. From this historical loss-rate approach, we also consider the current and forecasted economic conditions expected to be in place over the life of our receivables. These estimates are impacted by a number of factors, including changes in the economy, demographics and competition in our local communities. We monitor our ongoing credit exposure through an active review of our customers’ receivables balance against contract terms and due dates. Our activities include timely performance of our accounts receivable reconciliations, assessment of our aging of receivables, dispute resolution and payment confirmation. We will also monitor any change in our historical write-off of receivables utilized in our loss-rate methodology and assess forecasted changes in market conditions within our credit reserve. In the first six months of 2020, we increased our allowance for credit losses on our receivables by $0.6 million as a result of the economic impact of COVID-19.
See Notes 2 and 5 to the Consolidated Financial Statements herein for additional information related the adoption of Topic 326 on January 1, 2020 and the additional disclosures required.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition.
See Note 3 to the Consolidated Financial Statements herein for further information related to our acquisitions.

- 10 -



Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses and cemeteries acquired is recorded as goodwill. Goodwill has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis as of August 31st each year. In addition to our annual test, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant negative industry or economic trends and significant adverse changes in the business climate, which may be indicated by a decline in our market capitalization or decline in operating results.
As a result of economic conditions caused by the response to COVID-19, we performed a quantitative assessment of our goodwill at March 31, 2020 and we recorded an impairment for goodwill of $13.6 million during the quarter ended March 31, 2020, as the carrying amount of our funeral homes in the Eastern Reporting Unit exceeded the fair value. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows. During the three months ended June 30, 2020, we did not identify any new factors or events that would trigger us to perform an additional interim assessment of our goodwill. We will perform our annual goodwill impairment test as of August 31, 2020.
See Note 4 to the Consolidated Financial Statements included herein for additional information related to our goodwill.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets, net on our Consolidated Balance Sheet. Our tradenames are considered to have an indefinite life and are not subject to amortization. As such, we test our intangible assets for impairment on an annual basis as of August 31st each year. In addition to our annual test, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends.
As a result of economic conditions caused by the response to COVID-19, we performed a quantitative assessment of our tradenames at March 31, 2020 and we recorded an impairment for certain of our tradenames of $1.1 million during the quarter ended March 31, 2020 as the carrying amount of these tradenames exceeded the fair value. In determining the fair value of the tradenames, we used the relief from royalty method whereby we determine the fair value of the assets by discounting the cash flows that represent a savings over having to pay a royalty fee for use of the tradenames. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows and the determination and application of an appropriate royalty rate and discount rate. During the three months ended June 30, 2020, we did not identify any new factors or events that would trigger us to perform an additional interim assessment of our tradenames. We will perform our annual intangible assets impairment test as of August 31, 2020.
See Note 9 to the Consolidated Financial Statements included herein for additional information related to our intangible assets.
Capitalized Commissions on Preneed Contracts
We capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of obtaining a contract with a customer. Our capitalized commissions on preneed contracts are amortized on a straight-line basis over the average maturity period for our preneed cemetery merchandise and services contracts and preneed funeral trust contracts, of eight and ten years, respectively.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheet.
See Note 9 to the Consolidated Financial Statements herein for additional information related to our capitalized commissions on preneed contracts.

- 11 -



Leases
We have operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to nineteen years. Many leases include one or more options to renew, some of which include options to extend the leases for up to 26 years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. We do not have lease agreements with residual value guarantees, sale-leaseback terms, material restrictive covenants or related parties. We do not have any material sublease arrangements. We determine if an arrangement is a lease at inception based on the facts and circumstances of the agreement. A right-of-use (“ROU”) asset represents our right to use the underlying asset for the lease term and the lease liability represents our obligation to make lease payments arising from the lease.
Operating lease ROU assets are included in Operating lease right-of-use assets and operating lease liabilities are included in Current portion of operating lease obligations and Obligations under operating leases, net of current portion on our Consolidated Balance Sheet. Finance lease ROU assets are included in Property, plant and equipment, net and finance lease liabilities are included in Current portion of finance lease obligations and Obligations under finance leases, net of current portion on our Consolidated Balance Sheet.
In connection with the goodwill and intangible impairment tests performed at March 31, 2020, we also evaluated the operating and finance leases of our funeral homes in the Eastern Reporting Unit and concluded that there was no impairment to our operating and finance lease assets. During the three months ended June 30, 2020, we did not identify any new factors or events that would trigger us to perform an additional assessment of our operating and finance leases.
See Notes 13 to the Consolidated Financial Statements included herein for additional information related to our leases.
Property, Plant and Equipment
Property, plant and equipment (including equipment under finance leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under finance leases) is computed based on the straight-line method over the estimated useful lives of the assets.
Property, plant and equipment is comprised of the following at December 31, 2019 and June 30, 2020 (in thousands):
 
December 31, 2019

 
June 30, 2020

Land
$
84,608

 
$
85,014

Buildings and improvements
242,641

 
244,582

Furniture, equipment and automobiles
88,046

 
90,399

Property, plant and equipment, at cost
415,295

 
419,995

Less: accumulated depreciation
(136,095
)
 
(142,431
)
Property, plant and equipment, net
$
279,200

 
$
277,564


During the six months ended June 30, 2020, we acquired $1.7 million of property, plant and equipment related to our acquisition described in Note 3 to the Consolidated Financial Statements included herein. In addition, our growth and maintenance capital expenditures totaled $5.8 million for the six months ended June 30, 2020, for property, plant, equipment and cemetery development.
We recorded depreciation expense of $3.4 million and $3.6 million for the three months ended June 30, 2019 and 2020, respectively and $6.9 million and $7.2 million for the six months ended June 30, 2019 and 2020, respectively.
Long-lived assets, such as property, plant and equipment subject to depreciation and amortization, are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the Property, Plant and Equipment topic of the Accounting Standards Codification (“ASC”) 360. In connection with the goodwill and intangible impairment tests performed at March 31, 2020, we also evaluated the long-lived assets of our funeral homes in the Eastern Reporting Unit and concluded that there was no impairment to our long-lived assets. During the three months ended June 30, 2020, we did not identify any new factors or events that would trigger us to perform an additional assessment of our long-lived assets.

- 12 -



Cemetery Property
When we acquire a cemetery, we utilize an internal and external approach to determine the fair value of the cemetery property. From an external perspective, we obtain an accredited appraisal to provide reasonable assurance for property existence, property availability (unrestricted) for development, property lines, available spaces to sell, identifiable obstacles or easements and general valuation inclusive of known variables in that market. From an internal perspective, we conduct a detailed analysis of the acquired cemetery property using other cemeteries in our portfolio as a benchmark. This provides the added benefit of relevant and accurate data that is not available to third party appraisers. Through this thorough internal process, the Company is able to identify viable costs of property based on historical experience, particular markets and demographics, reasonable margins, practical retail prices and park infrastructure and condition.
Cemetery property was $87.0 million and $101.5 million, net of accumulated amortization of $41.7 million and $43.6 million at December 31, 2019 and June 30, 2020, respectively. When cemetery property is sold, the value of the cemetery property (interment right costs) is expensed as amortization using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery interment rights of $1.2 million and $1.1 million for the three months ended June 30, 2019 and 2020, respectively and $2.0 million for both the six months ended June 30, 2019 and 2020.
Fair Value Measurements
In August 2018, the FASB amended “Fair Value Measurements” to modify the disclosure requirements related to fair value. The amendment removes requirements to disclose (1) the amount of and reasons for transfers between Levels 1 and 2 of the fair value hierarchy, (2) our policy related to the timing of transfers between levels, and (3) the valuation processes used in Level 3 measurements. It clarifies that the narrative disclosure of the effect of changes in Level 3 inputs should be based on changes that could occur at the reporting date. The amendment adds a requirement to disclose the range and weighted average of the significant unobservable inputs used in Level 3 measurements. We adopted the new standard as of January 1, 2020 and it had no impact on our consolidated results of operations, consolidated financial position, and cash flows.
See Notes 6 and 8 to the Consolidated Financial Statements herein for additional required disclosures related to our fair value measurement of our financial assets and liabilities.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we grant stock, restricted stock, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period. We recognize the effect of forfeitures in compensation cost when they occur and any previously recognized compensation cost for an award is reversed in the period that the award is forfeited.
Fair value is determined on the date of the grant. The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance conditions is determined using a Monte-Carlo simulation pricing model. The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
See Note 15 to the Consolidated Financial Statements included herein for additional information related to our stock-based compensation plans.
Income Taxes
We and our subsidiaries file a consolidated U. S. federal income tax return, separate income tax returns in 15 states in which we operate and combined or unitary income tax returns in 14 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. We classify our deferred tax liabilities and assets as non-current on our Consolidated Balance Sheet.
We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in the financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheet. Our unrecognized tax benefits reserve for uncertain tax positions primarily relates to pending accounting method changes filed for the tax year ended December 31, 2018. During the latter half of 2020, we

- 13 -



plan to modify the proposed accounting method filed to exclude the tax position that resulted in the need for an uncertain tax position reserve.
The recently passed Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) has certain provisions that are applicable to the Company as follows:
(i) allowing net operating losses (“NOLs”) arising in 2018, 2019 and 2020 to be carried back five years;
(ii) increasing the taxable income threshold on the interest deduction from 30% to 50% for tax years beginning in 2019 and 2020;
(iii) suspending payment requirements for the 6.2% employer portion of Social Security taxes from the date of enactment through the end of 2020, with half the balance due by the end of 2021, and the other half due by the end of 2022; and
(iv) our ability to receive employee retention credits up to $5,000 for paying wages to employees who are unable to work, while business operations are suspended.
Although the CARES Act allows for a carryback of the net operating losses generated in 2018 and 2019, due to uncertainty in the timing of receiving Internal Revenue Service approval for non-automatic accounting method changes, a reserve has been recorded against the benefit derived from this carrying back that the net operating losses generated; therefore, for the six months ended June 30, 2020, the reserve for uncertain tax positions was $2.9 million. The 2018 refund claim was filed June 30, 2020. There is no reserve recorded at June 30, 2019. Although we expect to take advantage of certain tax relief provisions of the CARES Act, we do not believe it will have a significant impact on our short-term or long-term liquidity position.
Income tax expense during interim periods is based on our forecasted annual effective tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, but are not limited to, such events as changes in estimates due to finalization of income tax returns, tax audit settlements, tax effects of exercised or vested stock-based awards and increases or decreases in valuation allowances on deferred tax assets.
Our income tax expense was $2.1 million and $3.4 million for the three months ended June 30, 2019 and 2020, respectively and $4.8 million and $1.3 million for the six months ended June 30, 2019 and 2020, respectively. Our operating tax rate before discrete items was 29.2% and 33.5% for the three months ended June 30, 2019 and 2020, respectively and 28.5% and 33.3% for the six months ended June 30, 2019 and 2020, respectively.
The increase in our overall effective tax rate is due to the unfavorable tax impact of impairment of goodwill and other intangibles recorded in the first quarter of 2020 for businesses that were previously acquired through stock acquisitions.
Computation of Earnings Per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options.
Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation. 
See Note 16 to the Consolidated Financial Statements included herein for the additional information related to computation of earnings per share.
Subsequent Events
We have evaluated events and transactions during the period subsequent to June 30, 2020 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
See Note 19 to the Consolidated Financial Statements included herein for additional information related to our subsequent events.

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2.RECENTLY ISSUED ACCOUNTING STANDARDS
Financial Instruments - Credit Losses
Topic 326 applies to all entities holding financial assets measured at amortized cost, including loans, trade and financed receivables and other financial instruments. The guidance introduces a new credit reserving model known as Current Expected Credit Loss (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model requires all expected credit losses to be measured based on historical experience, current conditions and reasonable and supportable forecasts about collectability. In addition, Topic 326 made changes to the accounting for available-for-sale debt securities. One such change is to require credit losses to be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believes that it is more likely than not will be required to sell.
On January 1, 2020, we adopted Topic 326 using the modified retrospective method and the impact was not material to our Consolidated Financial Statements. See Notes 5 and 6 to the Consolidated Financial Statements herein for additional disclosures required by Topic 326.
Income Taxes
In December 2019, the FASB issued ASU, Income Taxes (“Topic 740”), to simplify the accounting for income taxes. The amendments in this update are effective for fiscal years beginning after December 15, 2020, with early adoption permitted. On January 1, 2020, we early adopted the provisions of this ASU using the prospective method and the impact was not material to our Consolidated Financial Statements.
Accounting Pronouncements Not Yet Adopted
Reference Rate Reform
In March 2020, the FASB issued ASU, Reference Rate Reform (“Topic 848”) to provide optional guidance for a limited time to ease the potential burden in accounting for reference rate reform. The new guidance provides optional expedients and exceptions for applying U.S. Generally Accepted Accounting Principles (“GAAP”) to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments apply only to contracts and hedging relationships that reference London InterBank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. These amendments are effective immediately and may be applied prospectively to contract modifications made and hedging relationships entered into or evaluated on or before December 31, 2022. The Company did not utilize the optional expedients and exceptions provided by this ASU during the six months ended June 30, 2020.
3.    ACQUISITIONS
On January 3, 2020, we acquired one funeral home and cemetery combination business in Lafayette, California for $33.0 million in cash, of which $5.0 million was deposited in escrow in 2019 and $28.0 million was paid at closing in 2020. We acquired substantially all of the assets and assumed certain operating liabilities of these businesses.
The pro forma impact of this acquisition on prior periods is not presented, as the impact is not significant to our reported results. The results of the acquired business is reflected in our Consolidated Statements of Operations from the date of acquisition.

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During the three months ended June 30, 2020, we recorded adjustments to the purchase price allocation for our acquisition made during the first quarter of 2020. The following table summarizes the breakdown of the purchase price allocation for these businesses and the subsequent adjustments made based on additional information which became available prior to June 30, 2020 (in thousands):
 
Initial Purchase Price Allocation
 
Adjustments
 
Adjusted Purchase Price Allocation
Current assets
$
2,662

 
$
(107
)
 
$
2,555

Preneed trust assets
9,089

 
 
 
9,089

Property, plant & equipment
1,720

 
 
 
1,720

Cemetery property
14,753

 
 
 
14,753

Goodwill
12,916

 
110

 
13,026

Intangible and other non-current assets
2,506

 
 
 
2,506

Assumed liabilities
(489
)
 
 
 
(489
)
Deferred tax liability
(527
)
 
(3
)
 
(530
)
Preneed trust liabilities
(9,089
)
 
 
 
(9,089
)
Deferred revenue
(541
)
 
 
 
(541
)
Purchase price
$
33,000

 
$

 
$
33,000


The current assets primarily relate to preneed cemetery receivables. The intangible and other non-current assets relate to the fair value of tradenames. The assumed liabilities primarily relate to the obligations associated with delivered preneed merchandise that was not paid for prior to acquisition. As of June 30, 2020, our accounting for cemetery receivables, cemetery property, deferred revenue and deferred tax liabilities for this acquisition has not been finalized.
During the six months ended June 30, 2020, we recorded adjustments to the purchase price allocation for three acquisitions closed in the fourth quarter of 2019. The following table summarizes the breakdown of the purchase price allocation for these businesses and the subsequent adjustments made based on additional information which became available prior to June 30, 2020 (in thousands):
 
Initial Purchase Price Allocation
 
Adjustments
 
Adjusted Purchase Price Allocation
Current assets
$
1,482

 
$
187

 
$