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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
                      FORM 10-Q
(Mark One)
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2022
OR
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
    For the transition period from ___________  to   ____________        
                         Commission File Number:1-11961
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
Delaware76-0423828
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
3040 Post Oak Boulevard, Suite 300
Houston, Texas, 77056
(Address of principal executive offices)
(713) 332-8400
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each classTrading SymbolName of each exchange on which registered
Common Stock, par value $.01 per shareCSVNew York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes      No  
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filerAccelerated filer
Non-accelerated filer
  (Do not check if a smaller reporting company)
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of October 28, 2022 was 14,714,808.



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


PART I – FINANCIAL INFORMATION
Item 1.Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEET
(unaudited and in thousands, except share data)
December 31, 2021September 30, 2022
ASSETS
Current assets:
Cash and cash equivalents$1,148 $821 
Accounts receivable, net25,314 23,352 
Inventories7,346 7,675 
Prepaid and other current assets6,404 4,131 
Total current assets40,212 35,979 
Preneed cemetery trust investments100,903 87,030 
Preneed funeral trust investments113,658 98,638 
Preneed cemetery receivables, net23,150 25,873 
Receivables from preneed funeral trusts, net19,009 20,119 
Property, plant and equipment, net269,367 275,977 
Cemetery property, net 100,701 101,691 
Goodwill391,972 393,765 
Intangible and other non-current assets, net29,378 30,451 
Operating lease right-of-use assets17,881 17,295 
Cemetery perpetual care trust investments72,400 60,569 
Total assets$1,178,631 $1,147,387 
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of debt and lease obligations$2,809 $3,104 
Accounts payable14,205 9,325 
Accrued and other liabilities43,773 37,123 
Total current liabilities60,787 49,552 
Acquisition debt, net of current portion3,979 3,846 
Credit facility153,857 167,410 
Senior notes394,610 395,082 
Obligations under finance leases, net of current portion5,157 4,842 
Obligations under operating leases, net of current portion18,520 17,638 
Deferred preneed cemetery revenue50,202 52,173 
Deferred preneed funeral revenue30,584 32,006 
Deferred tax liability45,784 47,483 
Other long-term liabilities1,419 2,700 
Deferred preneed cemetery receipts held in trust100,903 87,030 
Deferred preneed funeral receipts held in trust113,658 98,638 
Care trusts’ corpus71,156 60,067 
Total liabilities1,050,616 1,018,467 
Commitments and contingencies:
Stockholders’ equity:
Common stock, $0.01 par value; 80,000,000 shares authorized and 26,264,245 and 26,341,132 shares issued, respectively and 15,331,923 and 14,713,314 shares outstanding, respectively
263 263 
Additional paid-in capital236,809 238,787 
Retained earnings135,462 168,623 
Treasury stock, at cost; 10,932,322 and 11,627,818 shares, respectively
(244,519)(278,753)
Total stockholders’ equity128,015 128,920 
Total liabilities and stockholders’ equity$1,178,631 $1,147,387 
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
- 3 -


CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
Three months ended September 30,Nine months ended September 30,
2021202220212022
Revenue:
Service revenue$46,210 $42,992 $134,086 $135,279 
Property and merchandise revenue42,043 37,607 125,545 120,495 
Other revenue6,788 6,898 20,324 20,484 
95,041 87,497 279,955 276,258 
Field costs and expenses:
Cost of service20,523 22,317 61,073 65,805 
Cost of merchandise28,632 28,668 84,672 87,304 
Cemetery property amortization1,521 1,278 5,213 4,314 
Field depreciation expense3,154 3,281 9,432 9,831 
Regional and unallocated funeral and cemetery costs6,812 5,096 18,655 17,409 
Other expenses1,235 1,259 3,758 3,807 
61,877 61,899 182,803 188,470 
Gross profit33,164 25,598 97,152 87,788 
Corporate costs and expenses:
General, administrative and other9,041 10,383 25,340 28,123 
Net (gain) loss on divestitures, disposals and impairments charges858 (7)1,377 (433)
Operating income23,265 15,222 70,435 60,098 
Interest expense(5,076)(6,678)(20,138)(18,208)
Accretion of discount on convertible subordinated notes  (20) 
Loss on extinguishment of debt  (23,807) 
Gain on insurance reimbursements   3,275 
Other, net (21)95 (87)78 
Income before income taxes18,168 8,639 26,383 45,243 
Expense for income taxes(5,125)(2,640)(7,466)(12,578)
Tax adjustment related to discrete items3 (139)895 496 
Total expense for income taxes(5,122)(2,779)(6,571)(12,082)
Net income $13,046 $5,860 $19,812 $33,161 
Basic earnings per common share:$0.74 $0.40 $1.11 $2.22 
Diluted earnings per common share:$0.71 $0.38 $1.08 $2.09 
Dividends declared per common share:$0.1000 $0.1125 $0.3000 $0.3375 
Weighted average number of common and common equivalent shares outstanding:
Basic17,499 14,689 17,809 14,908 
Diluted18,246 15,537 18,365 15,849 
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,
 20212022
Cash flows from operating activities:
Net income$19,812 $33,161 
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization15,486 14,611 
Provision for credit losses1,426 2,292 
Stock-based compensation expense3,832 4,577 
Deferred income tax expense (benefit)(3,433)1,699 
Amortization of intangibles968 957 
Amortization of debt issuance costs459 397 
Amortization and accretion of debt 319 368 
Loss on extinguishment of debt23,807  
Net (gain) loss on divestitures, disposals and impairment charges1,558 (433)
Gain on insurance reimbursements (3,275)
Other (153)
Changes in operating assets and liabilities that provided (used) cash:
Accounts and preneed receivables(4,387)(3,053)
Inventories, prepaid and other current assets(266)2,785 
Intangible and other non-current assets(887)(1,381)
Preneed funeral and cemetery trust investments(23,355)(12,585)
Accounts payable(845)(2,451)
Accrued and other liabilities9,643 (3,080)
Deferred preneed funeral and cemetery revenue3,587 2,852 
Deferred preneed funeral and cemetery receipts held in trust21,975 12,758 
Net cash provided by operating activities69,699 50,046 
Cash flows from investing activities:
Acquisitions of businesses and real estate(3,285)(8,876)
Proceeds from divestitures and sale of other assets4,375 4,313 
Proceeds from insurance reimbursements2,946 2,209 
Capital expenditures(15,252)(20,346)
Net cash used in investing activities(11,216)(22,700)
Cash flows from financing activities:
Borrowings from the credit facility154,968 114,600 
Payments against the credit facility(115,268)(101,000)
Payment to redeem the 6.625% senior notes due 2026 (400,000) 
Payment of call premium for the redemption of the 6.625% senior notes due 2026(19,876) 
Proceeds from the issuance of the 4.25% senior notes due 2029395,500  
Payment of debt issuance costs for the credit facility and the 4.25% senior notes due 2029(2,054)(339)
Conversions and maturity of the convertible notes(3,980) 
Payments on acquisition debt and obligations under finance leases(658)(314)
Payments on contingent consideration recorded at acquisition date(461) 
Proceeds from the exercise of stock options and employee stock purchase plan contributions2,107 1,438 
Taxes paid on restricted stock vestings and exercises of stock options(1,433)(287)
Dividends paid on common stock(5,390)(5,108)
Purchase of treasury stock(61,739)(36,663)
Net cash used in financing activities(58,284)(27,673)
Net increase (decrease) in cash and cash equivalents199 (327)
Cash and cash equivalents at beginning of period889 1,148 
Cash and cash equivalents at end of period$1,088 $821 
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, 2021
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance – June 30, 202117,826 $262 $237,891 $109,069 $(114,351)$232,871 
Net income— — — 13,046 — 13,046 
Issuance of common stock from employee stock purchase plan15 — 388 — — 388 
Issuance of common stock to directors and board advisor3 — 147 — — 147 
Exercise of stock options12 — (82)— — (82)
Cancellation and surrender of restricted common stock(1)— (28)— — (28)
Stock-based compensation expense— — 1,148 — — 1,148 
Dividends on common stock— — (1,783)— — (1,783)
Treasury stock acquired(1,203)— — — (53,239)(53,239)
Balance – September 30, 202116,652 $262 $237,681 $122,115 $(167,590)$192,468 

Three months ended September 30, 2022
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance – June 30, 202214,698 $263 $238,571 $162,763 $(278,753)$122,844 
Net income— — — 5,860 — 5,860 
Issuance of common stock from employee stock purchase plan14 — 377 — — 377 
Issuance of common stock to directors and board advisor2 — 76 — — 76 
Cancellation and surrender of restricted common stock(1)— — —  
Stock-based compensation expense— — 1,416 — — 1,416 
Dividends on common stock— — (1,653)— — (1,653)
Balance – September 30, 202214,713 $263 $238,787 $168,623 $(278,753)$128,920 
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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
Nine months ended September 30, 2021
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance – December 31, 202017,995 $260 $239,989 $102,303 $(102,050)$240,502 
Net income— — — 19,812 — 19,812 
Issuance of common stock from employee stock purchase plan47 1 1,227 — — 1,228 
Issuance of common stock to directors and board advisor13 — 495 — — 495 
Issuance of restricted common stock9 — — — — — 
Exercise of stock options127 1 (178)— — (177)
Cancellation and surrender of restricted common stock(11)— (375)— — (375)
Stock-based compensation expense— — 3,337 — — 3,337 
Dividends on common stock— — (5,390)— — (5,390)
Convertible notes conversions— — (1,424)— — (1,424)
Treasury stock acquired(1,528)— — — (65,540)(65,540)
Balance – September 30, 202116,652 $262 $237,681 $122,115 $(167,590)$192,468 

Nine months ended September 30, 2022
Shares
Outstanding
Common
Stock
Additional
Paid-in
Capital
Retained
Earnings
Treasury
Stock
Total
Balance – December 31, 202115,332 $263 $236,809 $135,462 $(244,519)$128,015 
Net income— — — 33,161 — 33,161 
Issuance of common stock from employee stock purchase plan39 — 1,378 — — 1,378 
Issuance of common stock to directors and board advisor7 — 322 — — 322 
Exercise of stock options9 — (22)— — (22)
Cancellation and surrender of restricted common stock(6)— (205)— — (205)
Stock-based compensation expense— — 4,255 — — 4,255 
Dividends on common stock— — (5,108)— — (5,108)
Treasury stock acquired(695)— — — (34,234)(34,234)
Other27 — 1,358 — — 1,358 
Balance – September 30, 202214,713 $263 $238,787 $168,623 $(278,753)$128,920 
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 September 30, 2022, we operated 169 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 6 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.
During the three and nine months ended September 30, 2022, we acquired a business consisting of two funeral homes for $6.3 million. We did not acquire any businesses during the three and nine months ended September 30, 2021.
See Notes 3 and 4 to the Consolidated Financial Statements herein for additional information related to our acquisitions.
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 4 and 5 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.
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We performed our annual goodwill impairment test as of August 31, 2022. 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. We conducted qualitative assessments in 2020 and 2021; however, we performed a quantitative assessment in 2022. In addition to our annual test, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant negative industry or economic trends and significant adverse changes in the business climate, which may be indicated by a decline in our market capitalization or decline in operating results.
Our quantitative goodwill impairment test involves estimates and management judgment. In the quantitative analysis, we compare the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired. We determine fair value for each reporting unit using both an income approach, weighted 90%, and a market approach, weighted 10%. Our methodology for determining an income-based fair value is based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows discounted at our weighted average cost of capital based on market participant assumptions. Our methodology for determining a market approach fair value utilizes the guideline public company method, in which we rely on market multiples of comparable companies operating in the same industry as the individual reporting units. In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount an impairment charge is recorded in an amount equal to the difference.
Our 2022 quantitative assessment is not complete at the time of this filing, but we do not expect any impairment to goodwill as a result of our testing. For our 2020 and 2021 annual qualitative assessments, 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 4 to the Consolidated Financial Statements included herein for additional information related to our goodwill.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets, net on our Consolidated Balance Sheet. Our tradenames are considered to have an indefinite life and are not subject to amortization. As such, we test our intangible assets for impairment on an annual basis as of August 31st each year. 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.
We performed our annual intangible assets impairment test as of August 31, 2022. 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. We conducted qualitative assessments in 2020 and 2021; however, we performed a quantitative assessment in 2022. 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.
Our quantitative intangible asset impairment test involves estimates and management judgment. Our quantitative analysis is performed using the relief from royalty method, which measures the tradenames by determining the value of the royalties that we are relieved from paying due to our ownership of the asset. We determine the fair value of the asset by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows and the determination and application of an appropriate royalty rate and discount rate. To estimate the royalty rates for the individual tradename, we mainly rely on the profit split method, but also consider the comparable third-party license agreements and the return on asset method. A scorecard is used to assess the relative strength of the individual tradename to further adjust the royalty rates selected under the profit-split method for qualitative factors. In accordance with the guidance, if the fair value of the tradename is less than its carrying amount, then an impairment charge is recorded in an amount equal to the difference.
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Our 2022 quantitative assessment is not complete at the time of this filing, but we do not expect any impairment to intangible assets as a result of our testing. For our 2020 and 2021 qualitative assessments, there was no impairment to intangibles assets as the fair value of our intangible assets was greater than the carrying value.
See Note 10 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 7 and 8 to the Consolidated Financial Statements herein for additional information related to 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.
See Notes 7 and 9 to the Consolidated Financial Statements herein for additional required disclosures related to our fair value measurement of our financial assets and liabilities.
Capitalized Commissions on Preneed Contracts
We capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of obtaining a contract with a customer. Our
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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 10 to the Consolidated Financial Statements herein for additional information related to our capitalized commissions on preneed contracts.
Property, Plant and Equipment
Property, plant and equipment (including equipment under finance leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under finance leases) is computed based on the straight-line method over the estimated useful lives of the assets.
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, 2021September 30, 2022
Land$82,095 $83,757 
Buildings and improvements240,387 250,890 
Furniture, equipment and automobiles73,377 68,919 
Property, plant and equipment, at cost395,859 403,566 
Less: accumulated depreciation(126,492)(127,589)
Property, plant and equipment, net$269,367 $275,977 
During the nine months ended September 30, 2022, we acquired real property for $5.6 million. Additionally, we sold real property for $3.3 million, with a carrying value of $1.8 million, resulting in a gain on the sale of $1.4 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 5 to the Consolidated Financial Statements included herein.
During the nine months ended September 30, 2021, we acquired real property for $3.3 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.
Our growth and maintenance capital expenditures totaled $5.0 million and $5.3 million for the three months ended September 30, 2021 and 2022, respectively, and $11.1 million and $15.1 million for the nine months ended September 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 September 30, 2021 and 2022 and $10.2 million and $10.1 million, for the nine months ended September 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 $101.7 million, net of accumulated amortization of $53.1 million and $57.4 million at December 31, 2021 and September 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
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sale of the interment right is recognized as revenue. Our growth capital expenditures for cemetery property development totaled $1.5 million for both the three months ended September 30, 2021 and 2022 and $4.1 million and $5.2 million, for the nine months ended September 30, 2021 and 2022, respectively. We recorded amortization expense for cemetery interment rights of $1.5 million and $1.3 million for the three months ended September 30, 2021 and 2022, respectively, and $5.2 million and $4.3 million, for the nine months ended September 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 paymen