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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 September 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)
Delaware76-0423828
(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 classTrading SymbolName of each exchange on which registered
Common Stock, par value $.01 per shareCSVNew 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 filerAccelerated 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 October 30, 2020 was 17,969,828.



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, 2019September 30, 2020
ASSETS
Current assets:
Cash and cash equivalents$716 $725 
Accounts receivable, net21,478 22,277 
Inventories6,989 7,382 
Prepaid and other current assets10,667 2,253 
Total current assets39,850 32,637 
Preneed cemetery trust investments72,382 75,580 
Preneed funeral trust investments96,335 92,823 
Preneed cemetery receivables, net20,173 20,324 
Receivables from preneed trusts, net18,024 17,794 
Property, plant and equipment, net279,200 270,371 
Cemetery property, net 87,032 101,333 
Goodwill398,292 394,483 
Intangible and other non-current assets, net32,116 29,634 
Operating lease right-of-use assets22,304 20,846 
Cemetery perpetual care trust investments64,047 64,824 
Total assets$1,129,755 $1,120,649 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt and lease obligations$3,150 $3,540 
Accounts payable8,413 9,713 
Accrued and other liabilities24,026 32,651 
Convertible subordinated notes due 2021 2,522 
Total current liabilities35,589 48,426 
Acquisition debt, net of current portion5,658 4,957 
Credit facility82,182 54,745 
Convertible subordinated notes due 20215,971  
Senior notes due 2026395,447 395,816 
Obligations under finance leases, net of current portion5,854 5,615 
Obligations under operating leases, net of current portion21,533 19,952 
Deferred preneed cemetery revenue46,569 47,666 
Deferred preneed funeral revenue29,145 28,900 
Deferred tax liability41,368 46,628 
Other long-term liabilities1,737 2,125 
Deferred preneed cemetery receipts held in trust72,382 75,580 
Deferred preneed funeral receipts held in trust96,335 92,823 
Care trusts’ corpus63,416 64,620 
Total liabilities903,186 887,853 
Commitments and contingencies:
Stockholders’ equity:
Common stock, $0.01 par value; 80,000,000 shares authorized and 25,880,362 and 25,995,167 shares issued at December 31, 2019 and September 30, 2020, respectively
259 260 
Additional paid-in capital242,147 240,648 
Retained earnings86,213 93,938 
Treasury stock, at cost; 8,025,339 at both December 31, 2019 and September 30, 2020
(102,050)(102,050)
Total stockholders’ equity226,569 232,796 
Total liabilities and stockholders’ equity$1,129,755 $1,120,649 
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 September 30,Nine months ended September 30,
2019202020192020
Revenue:
Service revenue$34,133 $41,218 $105,444 $120,830 
Property and merchandise revenue28,002 36,298 85,458 100,211 
Other revenue3,990 6,877 12,056 18,319 
66,125 84,393 202,958 239,360 
Field costs and expenses:
Cost of service18,011 19,945 54,062 59,624 
Cost of merchandise21,972 25,886 66,544 75,561 
Cemetery property amortization972 1,471 2,990 3,445 
Field depreciation expense3,106 3,233 9,250 9,770 
Regional and unallocated funeral and cemetery costs3,597 4,731 10,008 11,204 
Other expenses411 1,253 1,197 3,551 
48,069 56,519 144,051 163,155 
Gross profit18,056 27,874 58,907 76,205 
Corporate costs and expenses:
General, administrative and other5,755 6,134 17,059 18,620 
Home office depreciation and amortization357 329 1,115 1,065 
Net loss on divestitures and impairments charges4,593 4,917 4,604 19,610 
Operating income7,351 16,494 36,129 36,910 
Interest expense(6,283)(8,007)(18,907)(24,787)
Accretion of discount on convertible subordinated notes(61)(69)(178)(200)
Net loss on early extinguishment of debt (6) (6)
Other, net 517 (28)690 (34)
Income before income taxes1,524 8,384 17,734 11,883 
Expense for income taxes(930)(2,851)(5,551)(4,014)
Tax adjustment related to discrete items(17)(8)(219)(144)
Total expense for income taxes(947)(2,859)(5,770)(4,158)
Net income$577 $5,525 $11,964 $7,725 
Basic earnings per common share:$0.03 $0.31 $0.66 $0.43 
Diluted earnings per common share:$0.03 $0.31 $0.66 $0.43 
Dividends declared per common share:$0.075 $0.0875 $0.225 $0.2375 
Weighted average number of common and common equivalent shares outstanding:
Basic17,737 17,895 17,917 17,853 
Diluted17,768 17,932 17,951 17,893 
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 Nine months ended September 30,
 20192020
Cash flows from operating activities:
Net income$11,964 $7,725 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization13,355 14,280 
Provision for bad debt and credit losses1,188 1,837 
Stock-based compensation expense1,616 2,473 
Deferred income tax expense1,270 4,750 
Amortization of deferred financing costs289 592 
Amortization of capitalized commissions on preneed contracts417 430 
Accretion of discount on convertible subordinated notes178 200 
Accretion of debt discount, net of debt premium on senior notes366 228 
Net loss on divestitures and impairments charges4,604 19,610 
Net loss on sale of other assets193 245 
Gain on insurance reimbursements(638)(54)
Net loss on extinguishment of debt 6 
Other121 19 
Changes in operating assets and liabilities that provided (required) cash:
Accounts and preneed receivables(2,495)(436)
Inventories, prepaid and other current assets1,138 3,241 
Intangible and other non-current assets(241)(225)
Preneed funeral and cemetery trust investments(4,376)(2,781)
Accounts payable(3,852)1,155 
Accrued and other liabilities6,749 9,770 
Deferred preneed funeral and cemetery revenue804 1,319 
Deferred preneed funeral and cemetery receipts held in trust3,411 3,438 
Net cash provided by operating activities36,061 67,822 
Cash flows from investing activities:
Acquisitions (28,011)
Proceeds from insurance reimbursements1,247 97 
Proceeds from divestitures and sale of other assets967 7,416 
Capital expenditures(11,479)(10,034)
Net cash used in investing activities(9,265)(30,532)
Cash flows from financing activities:
Borrowings from the credit facility28,200 89,300 
Payments against the credit facility(37,300)(117,100)
Payment of debt issuance costs related to long-term debt(113) 
Repurchase of the 2.75% convertible subordinated notes
(27)(4,563)
Payment of transaction costs related to the repurchase of the 2.75% convertible subordinated notes
 (12)
Payments of debt issuance costs related to the 6.625% senior notes
 (66)
Payments on acquisition debt and obligations under finance leases(1,370)(1,060)
Payments on contingent consideration recorded at acquisition date(162)(169)
Proceeds from the exercise of stock options and employee stock purchase plan contributions1,155 921 
Taxes paid on restricted stock vestings and exercise of non-qualified options(194)(281)
Dividends paid on common stock(4,061)(4,251)
Purchase of treasury stock(7,756) 
Net cash used in financing activities(21,628)(37,281)
Net increase in cash and cash equivalents5,168 9 
Cash and cash equivalents at beginning of period644 716 
Cash and cash equivalents at end of period$5,812 $725 
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
Three months ended September 30, 2019
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance – June 30, 201917,812 $258 $243,285 $83,067 $(102,050)$224,560 
Net income— — — 577 — 577 
Issuance of common stock18 1 211 — — 212 
Cancellation and retirement of restricted common stock and stock options(4)— (16)— — (16)
Stock-based compensation expense— — 513 — — 513 
Dividends on common stock— — (1,336)— — (1,336)
Balance – September 30, 201917,826 $259 $242,657 $83,644 $(102,050)$224,510 

Three months ended September 30, 2020
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance – June 30, 202017,934 $260 $241,868 $88,413 $(102,050)$228,491 
Net income— — — 5,525 — 5,525 
Issuance of common stock to employees16 — 297 — — 297 
Issuance of common stock to directors9 — 197 — — 197 
Exercise of stock options12 — (31)— — (31)
Cancellation and retirement of restricted common stock and stock options(1)— (16)— — (16)
Stock-based compensation expense— — 730 — — 730 
Dividends on common stock— — (1,569)— — (1,569)
Convertible notes repurchase— — (828)— — (828)
Balance – September 30, 202017,970 $260 $240,648 $93,938 $(102,050)$232,796 
The accompanying notes are an integral part of these Consolidated Financial Statements.


























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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
Nine months ended September 30, 2019
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance – December 31, 201818,078 $257 $243,849 $71,680 $(94,294)$221,492 
Net income— — — 11,964 — 11,964 
Issuance of common stock58 1 683 — — 684 
Exercise of stock options71 1 471 — — 472 
Issuance of restricted common stock25 — — — —  
Cancellation and retirement of restricted common stock and stock options(21)— (195)— — (195)
Stock-based compensation expense— — 1,616 — — 1,616 
Dividends on common stock— — (4,061)— — (4,061)
Treasury stock acquired(400)— — — (7,756)(7,756)
Other15 — 294 — — 294 
Balance – September 30, 201917,826 $259 $242,657 $83,644 $(102,050)$224,510 

Nine months ended September 30, 2020
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance – December 31, 201917,855 $259 $242,147 $86,213 $(102,050)$226,569 
Net income— — — 7,725 — 7,725 
Issuance of common stock to employees60 1 920 — — 921 
Issuance of common stock to directors26 — 491 — — 491 
Exercise of stock options12 — (31)— — (31)
Issuance of restricted common stock10 — — — —  
Cancellation and retirement of restricted common stock and stock options(11)— (250)— — (250)
Stock-based compensation expense— — 1,982 — — 1,982 
Dividends on common stock— — (4,251)— — (4,251)
Convertible notes repurchase— — (828)— — (828)
Other18 — 468 — — 468 
Balance – September 30, 202017,970 $260 $240,648 $93,938 $(102,050)$232,796 
The accompanying notes are an integral part of these Consolidated Financial Statements.
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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 September 30, 2020, we operated 180 funeral homes in 27 states and 32 cemeteries in 12 states. Our operations are reported in two business segments: Funeral Home Operations, which currently account for approximately 75% of our revenue and Cemetery Operations, which currently account for approximately 25% 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.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
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.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
- 8 -


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”). 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. 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.
Due to the economic impact of COVID-19, we decreased our allowance for credit losses on our receivables by $0.1 million during the three months ended September 30, 2020 and increased our allowance for credit losses on our receivables by $0.5 million during the nine months ended September 30, 2020.
See Notes 2 and 6 to the Consolidated Financial Statements herein for additional information related the adoption of Topic 326 on January 1, 2020 and the additional disclosures required.
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.
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.
- 9 -


Divested Operations
Prior to divesting a funeral home or cemetery, we first determine whether the sale of the net assets and activities (together referred to as a “set”) qualifies as a business. First, we perform a screen test to determine if the set is not a business. The principle of the screen is that a set is not a business if substantially all of the fair value of the gross assets sold resides in a single asset or group of similar assets. If the screen is not met then we evaluate whether the set has both inputs and a substantive process that together significantly contribute to the ability to create outputs. When both inputs and a substantive process are present then the set is determined to be a business and we apply the guidance in ASC 350 – Intangibles – Goodwill and Other to determine the accounting treatment of goodwill for that set (see discussion of Goodwill below). Goodwill is not allocated to the sale if the set is not considered to be a business.
During the three months ended September 30, 2020, we sold six funeral homes for $7.3 million. During 2019, we ceased to operate a funeral home whose lease expired and sold a funeral home for $0.9 million. The operating results of these divested funeral homes are reflected in our Consolidated Statements of Operations. We continually review our businesses to optimize the sustainable earning power and return on our invested capital.
See Notes 4, 5 and 10 to the Consolidated Financial Statements herein for additional information concerning our divestitures.
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 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 Region 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.
We performed our annual goodwill impairment test as of August 31, 2020. Under current guidance,we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. For our 2020 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform an additional quantitative goodwill impairment test. We concluded that it is more-likely-than not that the fair value of our reporting units is greater than their carrying value and thus there was no additional impairment to goodwill.
When we divest a portion of a reporting unit that constitutes a business in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we allocate goodwill associated with that business to be included in the gain or loss on divestiture. When divesting a business, goodwill is allocated based on the relative fair values of the business being divested and the portion of the reporting unit that will be retained. Additionally, after each divestiture, we will test the goodwill remaining in the portion of the reporting unit to be retained for impairment using a qualitative assessment unless we deem a quantitative assessment to be appropriate.
Subsequent to our divestitures during the three months ended September 30, 2020, we performed a qualitative assessment on the goodwill retained in our Reporting Units and concluded that is more-likely-than not that the fair value of our reporting units is greater than their carrying value and thus there was no additional impairment to goodwill.
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
- 10 -


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 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.
We performed our annual intangible assets impairment test as of August 31, 2020. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of the tradename is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. For our 2020 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform an additional quantitative impairment test. We concluded that it is more-likely-than not that the fair value of our intangible assets is greater than its carrying value and thus there was no additional impairment to our intangible assets.
See Note 10 to the Consolidated Financial Statements included herein for additional information related to our intangible assets.
Preneed and Perpetual Care Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIEs”). 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 fixed income 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. 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.
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.
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 7 and 8 to the Consolidated Financial Statements herein for additional information related to our preneed and perpetual care trust funds.
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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 7 and 9 to the Consolidated Financial Statements herein for additional required disclosures related to our fair value measurement of our financial assets and liabilities.
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 10 to the Consolidated Financial Statements herein for additional information related to our capitalized commissions on preneed contracts.
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 September 30, 2020 (in thousands):
December 31, 2019September 30, 2020
Land$84,608 $83,328 
Buildings and improvements242,641 240,516 
Furniture, equipment and automobiles88,046 90,125 
Property, plant and equipment, at cost415,295 413,969 
Less: accumulated depreciation(136,095)(143,598)
Property, plant and equipment, net$279,200 $270,371 
We acquired $1.7 million of property, plant and equipment related to our acquisition that closed on January 3, 2020, described in Note 3 to the Consolidated Financial Statements included herein. During the three months ended September 30, 2020, we divested six funeral homes that had a carrying value of property, plant and equipment of $6.5 million, which was included in the gain or loss on the sale of divestitures and recorded in Net loss on divestitures and impairment charges on our Consolidated Statements of Operations, described in Note 5 to the Consolidated Financial Statements included herein. In addition, our growth and maintenance capital expenditures totaled $10.0 million for the nine months ended September 30, 2020, for property, plant, equipment and cemetery development.
We recorded depreciation expense of $3.5 million for both the three months ended September 30, 2019 and 2020 and $10.4 million and $10.8 million for the nine months ended September 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 ASC 360 – Property, Plant and Equipment. In connection with the goodwill impairment recorded for the Eastern Region Reporting Unit during the quarter ended March 31, 2020, we also evaluated the long-lived assets of our funeral homes in the Eastern Region Reporting Unit and concluded that there was no impairment to our long-lived
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assets. Subsequent to our impairment tests performed at March 31, 2020, we did not identify any new factors or events that would trigger us to perform an additional assessment of our long-lived assets.
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 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 $101.3 million, net of accumulated amortization of $41.7 million and $45.1 million at December 31, 2019 and September 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 $1.0 million and $1.5 million for the three months ended September 30, 2019 and 2020, respectively and $3.0 million and $3.4 million for the nine months ended September 30, 2019 and 2020, respectively.
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. As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. 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. Subsequent to our impairment tests performed at March 31, 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 14 to the Consolidated Financial Statements included herein for additional information related to our leases.
Equity Plans and Stock-Based Compensation
We have equity-based employee and director compensation plans under which we have granted stock, stock options and performance awards. We also have an employee stock purchase plan (the “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 equity plans and stock-based compensation.
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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.
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.
Ancillary funeral service revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation and online cremation businesses 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 September 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 $8.0 million at December 31, 2019 and September 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 $7.2 million at December 31, 2019 and September 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.
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.
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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.
In connection with the CARES Act, we filed a claim for a refund on June 30, 2020, to carryback the net operating losses generated in the tax year ending December 31, 2018. The refund claim from the 2018 tax year was received on August 7, 2020, and we have included the impact in our current provision. In an effort to maximize the expected benefits afforded by the CARES Act, we plan to amend our 2018 tax return to include the additional first year depreciation deduction for qualified improvement property. The majority of the net operating losses generated in 2018 are the result of filing non-automatic accounting method changes relating to the recognition of revenue from our cemetery property and merchandise and services sales. Due to the uncertainty of the timing of receiving Internal Revenue Service (“IRS”) 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 nine months ended September 30, 2020, the reserve for uncertain tax positions was $2.9 million. There was no reserve recorded at September 30, 2019.
Additionally, we plan to file a claim for a refund for the net operating losses generated in the tax year ending December 31, 2019, in the fourth quarter of 2020.
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 $0.9 million and $2.9 million for the three months ended September 30, 2019 and 2020, respectively and $5.8 million and $4.2 million for the nine months ended September 30, 2019 and 2020, respectively. Our operating tax rate before discrete items was 61.0% and 34.0% for the three months ended September 30, 2019 and 2020, respectively and 31.3% and 33.8% for the nine months ended September 30, 2019 and 2020, respectively.
The increase in our overall effective tax rate for the nine months ended September 30, 2019 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 September 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
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 6 and 7 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 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 nine months ended September 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.
Subsequent to our initial purchase price allocation for this acquisition made during the first quarter of 2020, we have adjusted our purchase price allocation based on additional information which became available prior to September 30, 2020. The following table summarizes the breakdown of the purchase price allocation for these businesses (in thousands):
Initial Purchase Price AllocationAdjustmentsAdjusted Purchase Price Allocation
Current assets$2,662 $(107)$2,555 
Preneed trust assets9,089 — 9,089 
Property, plant & equipment1,720 — 1,720 
Cemetery property14,753 82 14,835 
Goodwill12,916 656 13,572 
Intangible and other non-current assets2,506 (628)1,878 
Assumed liabilities(489)— (489)
Deferred tax liability(527)(3)(530)
Preneed trust liabilities(