UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
| FORM | |||||
(Mark One)
For the quarterly period ended September 30, 2021
OR
For the transition period from ___________ to ____________
| Commission File Number: | |||||
(Exact name of registrant as specified in its charter)
| (State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) | ||||
(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 | ||||||
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 | ☐ | ☒ | |||||||||
| 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 29, 2021 was 16,652,241 .
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 | |||||
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PART I – FINANCIAL INFORMATION
Item 1.Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(unaudited and in thousands, except share data)
| December 31, 2020 | September 30, 2021 | ||||||||||
| ASSETS | |||||||||||
| Current assets: | |||||||||||
| Cash and cash equivalents | $ | $ | |||||||||
| Accounts receivable, net | |||||||||||
| Inventories | |||||||||||
| Prepaid and other current assets | |||||||||||
| Total current assets | |||||||||||
| Preneed cemetery trust investments | |||||||||||
| Preneed funeral trust investments | |||||||||||
| Preneed cemetery receivables, net | |||||||||||
| Receivables from preneed funeral trusts, net | |||||||||||
| Property, plant and equipment, net | |||||||||||
| Cemetery property, net | |||||||||||
| Goodwill | |||||||||||
| Intangible and other non-current assets, net | |||||||||||
| Operating lease right-of-use assets | |||||||||||
| Cemetery perpetual care trust investments | |||||||||||
| Total assets | $ | $ | |||||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY | |||||||||||
| Current liabilities: | |||||||||||
| Current portion of debt and lease obligations | $ | $ | |||||||||
| Accounts payable | |||||||||||
| Accrued and other liabilities | |||||||||||
| Convertible subordinated notes due 2021 | |||||||||||
| Total current liabilities | |||||||||||
| Acquisition debt, net of current portion | |||||||||||
| Credit facility | |||||||||||
| Senior notes | |||||||||||
| Obligations under finance leases, net of current portion | |||||||||||
| Obligations under operating leases, net of current portion | |||||||||||
| Deferred preneed cemetery revenue | |||||||||||
| Deferred preneed funeral revenue | |||||||||||
| Deferred tax liability | |||||||||||
| Other long-term liabilities | |||||||||||
| Deferred preneed cemetery receipts held in trust | |||||||||||
| Deferred preneed funeral receipts held in trust | |||||||||||
| Care trusts’ corpus | |||||||||||
| Total liabilities | |||||||||||
| Commitments and contingencies: | |||||||||||
| Stockholders’ equity: | |||||||||||
Common stock, $ | |||||||||||
| Additional paid-in capital | |||||||||||
| Retained earnings | |||||||||||
Treasury stock, at cost; | ( | ( | |||||||||
| Total stockholders’ equity | |||||||||||
| Total liabilities and stockholders’ equity | $ | $ | |||||||||
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
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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, | ||||||||||||||||||||||
| 2020 | 2021 | 2020 | 2021 | ||||||||||||||||||||
| Revenue: | |||||||||||||||||||||||
| Service revenue | $ | $ | $ | $ | |||||||||||||||||||
| Property and merchandise revenue | |||||||||||||||||||||||
| Other revenue | |||||||||||||||||||||||
| Field costs and expenses: | |||||||||||||||||||||||
| Cost of service | |||||||||||||||||||||||
| Cost of merchandise | |||||||||||||||||||||||
| Cemetery property amortization | |||||||||||||||||||||||
| Field depreciation expense | |||||||||||||||||||||||
| Regional and unallocated funeral and cemetery costs | |||||||||||||||||||||||
| Other expenses | |||||||||||||||||||||||
| Gross profit | |||||||||||||||||||||||
| Corporate costs and expenses: | |||||||||||||||||||||||
| General, administrative and other | |||||||||||||||||||||||
| Home office depreciation and amortization | |||||||||||||||||||||||
| Net loss on divestitures, disposals and impairments charges | |||||||||||||||||||||||
| Operating income | |||||||||||||||||||||||
| Interest expense | ( | ( | ( | ( | |||||||||||||||||||
| Accretion of discount on convertible subordinated notes | ( | ( | ( | ||||||||||||||||||||
| Loss on extinguishment of debt | ( | ( | ( | ||||||||||||||||||||
| Other, net | ( | ( | ( | ( | |||||||||||||||||||
| Income before income taxes | |||||||||||||||||||||||
| Expense for income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Tax adjustment related to discrete items | ( | ( | |||||||||||||||||||||
| Total expense for income taxes | ( | ( | ( | ( | |||||||||||||||||||
| Net income | $ | $ | $ | $ | |||||||||||||||||||
| Basic earnings per common share: | $ | $ | $ | $ | |||||||||||||||||||
| Diluted earnings per common share: | $ | $ | $ | $ | |||||||||||||||||||
| Dividends declared per common share: | $ | $ | $ | $ | |||||||||||||||||||
| Weighted average number of common and common equivalent shares outstanding: | |||||||||||||||||||||||
| Basic | |||||||||||||||||||||||
| Diluted | |||||||||||||||||||||||
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, | |||||||||||
| 2020 | 2021 | ||||||||||
| Cash flows from operating activities: | |||||||||||
| Net income | $ | $ | |||||||||
| Adjustments to reconcile net income to net cash provided by operating activities: | |||||||||||
| Depreciation and amortization | |||||||||||
| Provision for credit losses | |||||||||||
| Stock-based compensation expense | |||||||||||
| Deferred income tax expense (benefit) | ( | ||||||||||
| Amortization of intangibles | |||||||||||
| Amortization of debt issuance costs | |||||||||||
| Amortization and accretion of debt | |||||||||||
| Loss on extinguishment of debt | |||||||||||
| Net loss on divestitures, disposals and impairment charges | |||||||||||
| Gain on insurance reimbursements | ( | ||||||||||
| Other | |||||||||||
| Changes in operating assets and liabilities that provided (used) cash: | |||||||||||
| Accounts and preneed receivables | ( | ( | |||||||||
| Inventories, prepaid and other current assets | ( | ||||||||||
| Intangible and other non-current assets | ( | ( | |||||||||
| Preneed funeral and cemetery trust investments | ( | ( | |||||||||
| Accounts payable | ( | ||||||||||
| Accrued and other liabilities | |||||||||||
| Deferred preneed funeral and cemetery revenue | |||||||||||
| Deferred preneed funeral and cemetery receipts held in trust | |||||||||||
| Net cash provided by operating activities | |||||||||||
| Cash flows from investing activities: | |||||||||||
| Acquisition of businesses and real estate | ( | ( | |||||||||
| Proceeds from divestitures and sale of other assets | |||||||||||
| Proceeds from insurance reimbursements | |||||||||||
| Capital expenditures | ( | ( | |||||||||
| Net cash used in investing activities | ( | ( | |||||||||
| Cash flows from financing activities: | |||||||||||
| Borrowings from the credit facility | |||||||||||
| Payments against the credit facility | ( | ( | |||||||||
| Payment of call premium for the redemption of the senior notes due 2026 | ( | ||||||||||
| Payments of debt issuance and transaction costs | ( | ( | |||||||||
| Conversions and maturity of the convertible subordinated notes due 2021 | ( | ( | |||||||||
| Payments on acquisition debt and obligations under finance leases | ( | ( | |||||||||
| Payments on contingent consideration recorded at acquisition date | ( | ( | |||||||||
| Proceeds from the exercise of stock options and employee stock purchase plan | |||||||||||
| Taxes paid on restricted stock vestings and exercise of stock options | ( | ( | |||||||||
| Dividends paid on common stock | ( | ( | |||||||||
| Purchase of treasury stock | ( | ||||||||||
| Net cash used in financing activities | ( | ( | |||||||||
| Net increase in cash and cash equivalents | |||||||||||
| Cash and cash equivalents at beginning of period | |||||||||||
| Cash and cash equivalents at end of period | $ | $ | |||||||||
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, 2020 | |||||||||||||||||||||||||||||||||||
| Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||||||||
| Balance – June 30, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock from employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock to directors and board advisor | — | — | — | ||||||||||||||||||||||||||||||||
| Exercise of stock options | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Cancellation and surrender of restricted common stock | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Convertible notes exchange | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Balance – September 30, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Three months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||||||||
| Balance – June 30, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock from employee stock purchase plan | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of common stock to directors and board advisor | — | — | — | ||||||||||||||||||||||||||||||||
| Exercise of stock options | — | ( | — | — | ( | ||||||||||||||||||||||||||||||
| Cancellation and surrender of restricted common stock | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Treasury stock acquired | ( | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance – September 30, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
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)
| Nine months ended September 30, 2020 | |||||||||||||||||||||||||||||||||||
| Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||||||||
| Balance – December 31, 2019 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock from employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock to directors and board advisor | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of restricted common stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Cancellation and surrender of restricted common stock | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Convertible notes exchange | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Other | — | — | — | ||||||||||||||||||||||||||||||||
| Balance – September 30, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Nine months ended September 30, 2021 | |||||||||||||||||||||||||||||||||||
| Shares Outstanding | Common Stock | Additional Paid-in Capital | Retained Earnings | Treasury Stock | Total | ||||||||||||||||||||||||||||||
| Balance – December 31, 2020 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
| Net income | — | — | — | — | |||||||||||||||||||||||||||||||
| Issuance of common stock from employee stock purchase plan | — | — | |||||||||||||||||||||||||||||||||
| Issuance of common stock to directors and board advisor | — | — | — | ||||||||||||||||||||||||||||||||
| Issuance of restricted common stock | — | — | — | — | |||||||||||||||||||||||||||||||
| Exercise of stock options | ( | — | — | ( | |||||||||||||||||||||||||||||||
| Cancellation and surrender of restricted common stock | ( | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Stock-based compensation expense | — | — | — | — | |||||||||||||||||||||||||||||||
| Dividends on common stock | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Convertible notes conversions | — | — | ( | — | — | ( | |||||||||||||||||||||||||||||
| Treasury stock acquired | ( | — | — | — | ( | ( | |||||||||||||||||||||||||||||
| Balance – September 30, 2021 | $ | $ | $ | $ | ( | $ | |||||||||||||||||||||||||||||
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. Our operations are reported in two business segments: Funeral Home Operations, which currently account for approximately 70 % of our revenue and Cemetery Operations, which currently account for approximately 30 % of our revenue. At September 30, 2021, we operated 171 funeral homes in 26 states and 32 cemeteries in 12 states.
Our funeral home operations are principally service businesses that generate revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and memorial services and transportation services. We provide funeral services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
Our cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as memorial markers, outer burial containers and monuments) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis.
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, which include those related to the realization of our accounts receivable, valuation of goodwill, intangible assets, deferred tax assets and liabilities and depreciation of property and equipment. 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.
Our funeral receivables are recorded in Accounts receivable, net and primarily consist of amounts due for funeral services already performed.
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. Our cemetery
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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.
For our funeral and atneed cemetery 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 payment is received or the contract is cancelled.
Our allowance for credit losses reflects our best estimate of expected credit losses over the term of both our funeral and cemetery receivables. Our policy is to write off receivables when we have determined they will no longer be collectible. Write-offs are applied as a reduction to the allowance for credit losses and any recoveries of previous write-offs are netted against bad debt expense in the period recovered.
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 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.
See Note 5 to the Consolidated Financial Statements herein for additional information related to our funeral and cemetery receivables.
Inventory
Inventory consists primarily of caskets, outer burial containers and cemetery monuments and markers and is recorded at the lower of its cost basis or net realizable value. Inventory is relieved using specific identification in fulfillment of performance obligations on our contracts.
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.
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 if substantially all of the fair value of the gross assets sold resides in a single asset or group of similar assets, the set is not a business. If the screen is not met, we perform an assessment to determine if the set is a business by evaluating 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 Accounting Standards Codification (“ASC”) Topic 350 – Intangibles – Goodwill and Other to determine the accounting treatment of goodwill for that set (see discussion of Goodwill below). Goodwill is only allocated to the sale if the set is considered to be a business.
See Notes 3 and 4 to the Consolidated Financial Statements herein for additional information related to 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
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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.
We performed our annual goodwill impairment test as of August 31, 2021. 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 2021 annual goodwill 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 impairment to goodwill. For our 2020 annual qualitative assessment, there was no impairment to goodwill as the fair value of our reporting units was greater than the carrying value.
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. The goodwill allocated is based on the relative fair value 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 to ensure the fair value of our reporting units is greater than their carrying value.
See Note 3 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.
We performed our annual intangible assets impairment test as of August 31, 2021. 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 2021 annual intangible assets 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 impairment to our intangible assets. For our 2020 annual qualitative assessment, there was no impairment to intangible assets as the fair value of our intangible assets was greater than the carrying value.
See Note 9 to the Consolidated Financial Statements included herein for additional information related to our intangible assets.
Preneed and Perpetual Care Trust Funds
Preneed sales generally require deposits to a trust or purchase of a third-party insurance product. We have established a variety of trusts in connection with funeral home and cemetery operations as required under applicable state laws. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery merchandise and service trusts; and (iii) cemetery perpetual care trusts.
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.
Our trust fund assets are reflected in our financial statements as Preneed cemetery trust investments, Preneed funeral trust investments and Cemetery perpetual care trust investments. 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 fair value of our trust fund assets are accounted for as Collateralized Financing Entities (“CFEs”) in ASC Topic 810. The accounting guidance for CFEs allows companies to elect to measure both the financial assets and financial liabilities using the more observable of the fair value of the financial assets or fair value of the financial liabilities. Pursuant to this guidance, we have determined the fair value of the financial assets of the trusts are more observable and we first measure those financial assets at fair value. Our fair value of the financial liabilities mirror the fair value of the financial assets, in accordance with the ASC. Any changes in fair value are recognized in earnings.
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In accordance with ASC Topic 326, we present our credit losses for fixed income securities as an allowance rather than as a write-down on the fixed income securities we do not intend to sell and it is likely that we will not be required to sell prior to their anticipated recovery.
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. 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 and perpetual care trust funds.
Fair Value Measurements
We measure the securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis in accordance with ASC Topic 820. This guidance defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date.
We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
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.
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 of ten years for our preneed funeral trust contracts and eight years for our preneed cemetery merchandise and services contracts.
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.
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 Topic 360 – Property, Plant and Equipment.
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Property, plant and equipment is comprised of the following (in thousands):
| December 31, 2020 | September 30, 2021 | ||||||||||
| Land | $ | $ | |||||||||
| Buildings and improvements | |||||||||||
| Furniture, equipment and automobiles | |||||||||||
| Property, plant and equipment, at cost | |||||||||||
| Less: accumulated depreciation | ( | ( | |||||||||
| Property, plant and equipment, net | $ | $ | |||||||||
During the nine months ended September 30, 2021, we acquired real property for $3.3 million. We also divested three funeral homes that had a carrying value of property, plant and equipment of $2.4 million, which was included in the Gain (loss) on divestitures and recorded in Net loss on divestitures, disposals and impairment charges on our Consolidated Statements of Operations, described in Note 4 to the Consolidated Financial Statements included herein.
Additionally, during the nine months ended September 30, 2021, we sold real property for $0.7 million and recognized a loss on sale of $0.3 million, which was recorded in Net loss on divestitures, disposals and impairment charges. At September 30, 2021, we had $2.3 million carrying value of property, plant and equipment assets held for sale and we recognized a $0.5 million impairment loss related to these assets recorded in Net loss on divestitures, disposals and impairment charges.
Our growth and maintenance capital expenditures totaled $4.2 million and $6.5 million for the three months ended September 30, 2020 and 2021, respectively and $10.0 million and $15.3 million for the nine months ended September 30, 2020 and 2021, respectively, for property, plant, equipment and cemetery development. In addition, we recorded depreciation expense of $3.5 million and $3.4 million for the three months ended September 30, 2020 and 2021, respectively and $10.8 million and $10.2 million for the nine months ended September 30, 2020 and 2021, respectively.
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, we are 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 $101.1 million and $100.5 million at December 31, 2020 and September 30, 2021, respectively, net of accumulated amortization of $46.6 million and $51.8 million, 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 $1.5 million for both the three months ended September 30, 2020 and 2021 and $3.4 million and $5.2 million for the nine months ended September 30, 2020 and 2021, 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 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 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. ROU assets and lease liabilities are recognized on our Consolidated Balance Sheet at the lease commencement date based on the present value of lease payments over the lease term. 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. The lease terms used to calculate the ROU asset and related lease liability include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, while the expense for finance leases is recognized as depreciation expense and interest expense using the effective interest method of
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recognition. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense. We have real estate lease agreements which require payments for lease and non-lease components and we account for these as a single lease component. Leases with an initial term of 12 months or less, that do not include an option to renew the underlying asset, are not recorded on our Consolidated Balance Sheet and expense is recognized on a straight-line basis over the lease term.
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.
See Notes 12 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 awards, 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 or the Monte-Carlo simulation pricing model. The fair value of the performance awards related to market performance conditions is determined using the 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.
We recognize all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) as income tax benefit or expense in the income statement. We treat the tax effects of exercised or vested awards as discrete items in the reporting period in which they occur. Excess tax benefits or deficiencies related to share-based payments are included in operating cash flows on the Consolidated Statements of Cash Flows.
See Note 14 to the Consolidated Financial Statements included herein for additional information related to our equity plans and stock-based compensation.
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. 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.
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, 2021, CSV RIA
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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 $