SEC Filing - Carriage Services, Inc.

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549


FORM			10-Q

(Mark One)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2022

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ____________


Commission File Number:			1-11961

CARRIAGE SERVICES, INC.

(Exact name of registrant as specified in its charter)


Delaware			76-0423828
(State or other jurisdiction of incorporation or organization)			(I.R.S. Employer Identification No.)

3040 Post Oak Boulevard, Suite 300

Houston, Texas, 77056

(Address of principal executive offices)

(713) 332-8400

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $.01 per share	CSV	New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.


Large accelerated filer	☐	Accelerated filer	☒
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒

The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of July 29, 2022 was 14,697,650.

CARRIAGE SERVICES, INC.

INDEX


			Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements			3

Unaudited Consolidated Balance Sheet as of December 31, 2021 and June 30, 2022			3

Unaudited Consolidated Statements of Operations for the Three and Six Months ended June 30, 2021 and 2022			4

Unaudited Consolidated Statements of Cash Flows for the Six Months ended June 30, 2021 and 2022			5

Unaudited Consolidated Statements of Changes in Stockholders' Equity for the Three and Six Months ended June 30, 2021 and 2022			6

Condensed Notes to Consolidated Financial Statements			8

Cautionary Statement on Forward–Looking Statements			38

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			40

Item 3. Quantitative and Qualitative Disclosures About Market Risk			59

Item 4. Controls and Procedures			60

PART II – OTHER INFORMATION

Item 1. Legal Proceedings			61

Item 1A. Risk Factors			61

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			62

Item 3. Defaults Upon Senior Securities			62

Item 4. Mine Safety Disclosures			62

Item 5. Other Information			62

Item 6. Exhibits			62

SIGNATURE			63

INDEX OF EXHIBITS			64

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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, 2021		June 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	1,148	$	1,058
Accounts receivable, net	25,314		24,308
Inventories	7,346		7,645
Prepaid and other current assets	6,404		3,951
Total current assets	40,212		36,962
Preneed cemetery trust investments	100,903		91,352
Preneed funeral trust investments	113,658		102,843
Preneed cemetery receivables, net	23,150		25,699
Receivables from preneed funeral trusts, net	19,009		19,689
Property, plant and equipment, net	269,367		271,532
Cemetery property, net	100,701		101,348
Goodwill	391,972		391,071
Intangible and other non-current assets, net	29,378		29,653
Operating lease right-of-use assets	17,881		17,571
Cemetery perpetual care trust investments	72,400		63,703
Total assets	$	1,178,631	$	1,151,423
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt and lease obligations	$	2,809	$	3,023
Accounts payable	14,205		9,064
Accrued and other liabilities	43,773		30,744

Total current liabilities	60,787		42,831
Acquisition debt, net of current portion	3,979		3,891
Credit facility	153,857		173,501

Senior notes	394,610		394,923
Obligations under finance leases, net of current portion	5,157		4,945
Obligations under operating leases, net of current portion	18,520		18,005
Deferred preneed cemetery revenue	50,202		52,494
Deferred preneed funeral revenue	30,584		31,466
Deferred tax liability	45,784		47,495
Other long-term liabilities	1,419		1,829
Deferred preneed cemetery receipts held in trust	100,903		91,352
Deferred preneed funeral receipts held in trust	113,658		102,843
Care trusts’ corpus	71,156		63,004
Total liabilities	1,050,616		1,028,579
Commitments and contingencies:
Stockholders’ equity:
Common stock, $0.01 par value; 80,000,000 shares authorized and 26,264,245 and 26,325,468 shares issued, respectively and 15,331,923 and 14,697,650 shares outstanding, respectively	263		263
Additional paid-in capital	236,809		238,571
Retained earnings	135,462		162,763
Treasury stock, at cost; 10,932,322 and 11,627,818 shares, respectively	(244,519)		(278,753)
Total stockholders’ equity	128,015		122,844
Total liabilities and stockholders’ equity	$	1,178,631	$	1,151,423

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 June 30,				Six months ended June 30,
	2021		2022		2021		2022
Revenue:
Service revenue	$	40,119	$	42,550	$	87,876	$	92,287
Property and merchandise revenue	41,606		41,276		83,502		82,888
Other revenue	6,552		6,774		13,536		13,586
	88,277		90,600		184,914		188,761
Field costs and expenses:
Cost of service	19,583		21,389		40,550		43,488
Cost of merchandise	27,520		29,306		56,040		58,636
Cemetery property amortization	2,175		1,704		3,692		3,036
Field depreciation expense	3,142		3,253		6,278		6,550
Regional and unallocated funeral and cemetery costs	5,770		5,966		11,843		12,313
Other expenses	1,160		1,270		2,523		2,548
	59,350		62,888		120,926		126,571
Gross profit	28,927		27,712		63,988		62,190
Corporate costs and expenses:
General, administrative and other	7,176		9,180		16,299		17,740

Net (gain) loss on divestitures, disposals and impairments charges	827		(1,193)		519		(426)
Operating income	20,924		19,725		47,170		44,876

Interest expense	(7,478)		(5,988)		(15,062)		(11,530)
Accretion of discount on convertible subordinated notes	—		—		(20)		—
Loss on extinguishment of debt	(23,807)		—		(23,807)		—
Gain on insurance reimbursements	—		1,376		—		3,275
Other, net	2		7		(66)		(17)
Income (loss) before income taxes	(10,359)		15,120		8,215		36,604
Benefit (expense) for income taxes	3,417		(4,234)		(2,341)		(9,938)
Tax adjustment related to discrete items	775		13		892		635
Total benefit (expense) for income taxes	4,192		(4,221)		(1,449)		(9,303)
Net income (loss)	$	(6,167)	$	10,899	$	6,766	$	27,301

Basic earnings (loss) per common share:	$	(0.34)	$	0.74	$	0.38	$	1.82
Diluted earnings (loss) per common share:	$	(0.33)	$	0.69	$	0.37	$	1.70

Dividends declared per common share:	$	0.100	$	0.1125	$	0.200	$	0.225

Weighted average number of common and common equivalent shares outstanding:
Basic	17,967		14,798		17,966		15,020
Diluted	18,511		15,712		18,364		16,033

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)


	Six months ended June 30,
	2021		2022
Cash flows from operating activities:
Net income	$	6,766	$	27,301
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	10,536		9,895
Provision for credit losses	849		1,657
Stock-based compensation expense	2,537		3,085
Deferred income tax expense (benefit)	(4,461)		1,711
Amortization of intangibles	645		634
Amortization of debt issuance costs	345		253
Amortization and accretion of debt	201		243

Loss on extinguishment of debt	23,807		—
Net (gain) loss on divestitures, disposals and impairment charges	519		(426)
Gain on insurance reimbursements	—		(3,275)
Other	181		(6)

Changes in operating assets and liabilities that provided (used) cash:
Accounts and preneed receivables	(702)		(3,200)
Inventories, prepaid and other current assets	(894)		2,967
Intangible and other non-current assets	(592)		(747)
Preneed funeral and cemetery trust investments	(18,473)		(11,100)
Accounts payable	(471)		(2,712)
Accrued and other liabilities	1,382		(10,242)
Deferred preneed funeral and cemetery revenue	1,977		2,633
Deferred preneed funeral and cemetery receipts held in trust	17,289		11,506
Net cash provided by operating activities	41,441		30,177

Cash flows from investing activities:
Acquisitions of real estate	(2,935)		(2,601)

Proceeds from divestitures and sale of other assets	3,622		3,720
Proceeds from insurance reimbursements	120		2,167
Capital expenditures	(8,751)		(13,468)
Net cash used in investing activities	(7,944)		(10,182)

Cash flows from financing activities:
Borrowings from the credit facility	100,868		97,900
Payments against the credit facility	(87,568)		(78,100)
Payment to redeem the original senior notes	(400,000)		—
Payment of call premium for the redemption of the original senior notes	(19,876)		—
Proceeds from the issuance of the senior notes	395,500		—
Payment of debt issuance costs for the credit facility and senior notes	(1,930)		(339)
Conversions and maturity of the convertible notes	(3,980)		—

Payments on acquisition debt and obligations under finance leases	(452)		(202)
Payments on contingent consideration recorded at acquisition date	(461)		—
Proceeds from the exercise of stock options and employee stock purchase plan contributions	1,495		1,060
Taxes paid on restricted stock vestings and exercises of stock options	(1,323)		(286)
Dividends paid on common stock	(3,607)		(3,455)
Purchase of treasury stock	(11,559)		(36,663)

Net cash used in financing activities	(32,893)		(20,085)

Net increase (decrease) in cash and cash equivalents	604		(90)
Cash and cash equivalents at beginning of period	889		1,148
Cash and cash equivalents at end of period	$	1,493	$	1,058

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 June 30, 2021
	Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Total













Balance – March 31, 2021	18,048	$	261	$	238,056	$	115,236	$	(102,050)	$	251,503
Net loss	—	—		—		(6,167)		—		(6,167)
Issuance of common stock from employee stock purchase plan	14	—		361		—		—		361
Issuance of common stock to directors and board advisor	5	—		160		—		—		160

Exercise of stock options	85	1		52		—		—		53
Cancellation and surrender of restricted common stock	(1)	—		—		—		—		—
Stock-based compensation expense	—	—		1,070		—		—		1,070
Dividends on common stock	—	—		(1,808)		—		—		(1,808)

Treasury stock acquired	(325)	—		—		—		(12,301)		(12,301)

Balance – June 30, 2021	17,826	$	262	$	237,891	$	109,069	$	(114,351)	$	232,871


	Three months ended June 30, 2022
	Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Total
Balance – March 31, 2022	14,889	$	263	$	238,423	$	151,864	$	(270,529)	$	120,021
Net income	—	—		—		10,899		—		10,899
Issuance of common stock from employee stock purchase plan	12	—		398		—		—		398
Issuance of common stock to directors and board advisor	2	—		99		—		—		99


Cancellation and surrender of restricted common stock	—	—		2		—		—		2
Stock-based compensation expense	—	—		1,379		—		—		1,379
Dividends on common stock	—	—		(1,730)		—		—		(1,730)

Treasury stock acquired	(205)	—		—		—		(8,224)		(8,224)

Balance – June 30, 2022	14,698	$	263	$	238,571	$	162,763	$	(278,753)	$	122,844

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CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited and in thousands)


	Six months ended June 30, 2021
	Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Total













Balance – December 31, 2020	17,995	$	260	$	239,989	$	102,303	$	(102,050)	$	240,502
Net income	—	—		—		6,766		—		6,766
Issuance of common stock from employee stock purchase plan	32	1		839		—		—		840
Issuance of common stock to directors and board advisor	10	—		337		—		—		337
Issuance of restricted common stock	9	—		—		—		—		—
Exercise of stock options	115	1		(96)		—		—		(95)
Cancellation and surrender of restricted common stock	(10)	—		(347)		—		—		(347)
Stock-based compensation expense	—	—		2,200		—		—		2,200
Dividends on common stock	—	—		(3,607)		—		—		(3,607)
Convertible notes conversions	—	—		(1,424)		—		—		(1,424)
Treasury stock acquired	(325)	—		—		—		(12,301)		(12,301)

Balance – June 30, 2021	17,826	$	262	$	237,891	$	109,069	$	(114,351)	$	232,871


	Six months ended June 30, 2022
	Shares Outstanding	Common Stock		Additional Paid-in Capital		Retained Earnings		Treasury Stock		Total
Balance – December 31, 2021	15,332	$	263	$	236,809	$	135,462	$	(244,519)	$	128,015
Net income	—	—		—		27,301		—		27,301
Issuance of common stock from employee stock purchase plan	25	—		1,001		—		—		1,001
Issuance of common stock to directors and board advisor	5	—		246		—		—		246

Exercise of stock options	9	—		(22)		—		—		(22)
Cancellation and surrender of restricted common stock	(5)	—		(205)		—		—		(205)
Stock-based compensation expense	—	—		2,839		—		—		2,839
Dividends on common stock	—	—		(3,455)		—		—		(3,455)

Treasury stock acquired	(695)	—		—		—		(34,234)		(34,234)
Other	27	—		1,358		—		—		1,358
Balance – June 30, 2022	14,698	$	263	$	238,571	$	162,763	$	(278,753)	$	122,844

The accompanying condensed 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 June 30, 2022, we operated 167 funeral homes in 26 states and 31 cemeteries in 11 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.

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, 2021 unless otherwise disclosed herein, and should be read in conjunction therewith.

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 critical estimates and judgments, which include those related to the impairment of goodwill and the fair value measurements used in business combinations. These policies are considered critical because they may result in fluctuations in our reported results from period to period due to the significant judgments, estimates and assumptions about complex and inherently uncertain matters and because the use of different judgments, assumptions or estimates could have a material impact on our financial condition or results of operations. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenue, will be consistent from period to period.

Cash and Cash Equivalents

We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.

Funeral and Cemetery Receivables

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 also 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 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.

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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.

We did not acquire any businesses during the six months ended June 30, 2021 and 2022.

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 consider 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. 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.

Our intent is to perform a quantitative impairment test at least once every three years and perform a qualitative assessment during the remaining two years. 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

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significant adverse changes in the business climate, which may be indicated by a decline in our market capitalization or decline in operating results.

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. 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.

Our intent is to perform a quantitative impairment test at least once every three years and perform a qualitative assessment during the remaining two years. In addition to our intangible assets 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.

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.

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.

We also have preneed funeral trust fund assets in trusts that are controlled and operated by third parties in which we do not have a controlling financial interest (less than 50%) in the trust assets. We account for these investments at cost, reflected in our financial statements as Receivables from preneed funeral trusts, net.

Our preneed funeral and preneed cemetery merchandise and service trusts are reflected in our financial statements net of an allowance for contract cancellations. We determine this allowance based on our five-year historical experience of contract cancellations. On an ongoing basis, we monitor our historical trend and adjust our allowance accordingly.

See Notes 6 and 7 to the Consolidated Financial Statements herein for additional information related to preneed and perpetual care trust funds.

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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.

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.

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.

Long-lived assets, such as property, plant and equipment and right-of-use assets (see discussion of Leases below) are reported at the lower of their carrying amount or fair value and are reviewed for impairment whenever events, such as significant negative industry or economic trends or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.

Property, plant and equipment is comprised of the following (in thousands):


	December 31, 2021		June 30, 2022
Land	$	82,095	$	82,628
Buildings and improvements	240,387		244,793
Furniture, equipment and automobiles	73,377		68,406
Property, plant and equipment, at cost	395,859		395,827
Less: accumulated depreciation	(126,492)		(124,295)
Property, plant and equipment, net	$	269,367	$	271,532

During the six months ended June 30, 2022, we acquired real property for $2.6 million. Additionally, we sold real property for $2.7 million, with a carrying value of $1.4 million, resulting in a gain on the sale of $1.3 million. We also divested two funeral homes that had a carrying value of property, plant and equipment of $0.7 million, which was included in the loss on the sale of divestitures and recorded in Net (gain) loss on divestitures, disposals and impairment charges on our Consolidated Statements of Operations, described in Note 4 to the Consolidated Financial Statements included herein.

During the six months ended June 30, 2021, we acquired real property for $2.9 million. Additionally, we 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 the sale of divestitures and recorded in Net (gain) loss on divestitures, disposals and impairment charges.

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Our growth and maintenance capital expenditures totaled $3.2 million and $5.2 million for the three months ended June 30, 2021 and 2022, respectively and $6.1 million and $9.8 million for the six months ended June 30, 2021 and 2022, respectively, for property, plant and equipment. In addition, we recorded depreciation expense of $3.4 million for both the three months ended June 30, 2021 and 2022 and $6.8 million and $6.7 million, for the six months ended June 30, 2021 and 2022, 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 $100.7 million and $101.3 million, net of accumulated amortization of $53.1 million and $56.2 million at December 31, 2021 and June 30, 2022, 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. Our growth capital expenditures for cemetery property development totaled $1.2 million and $1.4 million for the three months ended June 30, 2021 and 2022, respectively and $2.7 million and $3.7 million, for the six months ended June 30, 2021 and 2022, respectively. We recorded amortization expense for cemetery interment rights of $2.2 million and $1.7 million for the three months ended June 30, 2021 and 2022, respectively and $3.7 million and $3.0 million, for the six months ended June 30, 2021 and 2022, 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 twenty years. Many leases include one or more options to renew, some of which include options to extend the leases for up to forty years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. We do not have lease agreements with residual value guarantees, sale-leaseback terms, material restrictive covenants or related parties. We do not have any material sublease arrangements.

We determine if an arrangement is a lease at inception based on the facts and circumstances of the agreement. A right-of-use (“ROU”) asset represents our right to use the underlying asset for the lease term and the lease liability represents our obligation to make lease payments arising from the lease. 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 to determine 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 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

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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. The excess tax benefit and tax deficiencies are recorded within Tax adjustment related to discrete items on our Consolidated Statements of Operations and the 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. 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 June 30, 2022, CSV RIA provided investment management and advisory services to approximately