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 September 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 October 28, 2022 was 14,714,808.

CARRIAGE SERVICES, INC.

INDEX


			Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements			3

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

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

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

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

Condensed Notes to Consolidated Financial Statements			8

Cautionary Statement on Forward–Looking Statements			39

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			41

Item 3. Quantitative and Qualitative Disclosures About Market Risk			61

Item 4. Controls and Procedures			62

PART II – OTHER INFORMATION

Item 1. Legal Proceedings			63

Item 1A. Risk Factors			63

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			64

Item 3. Defaults Upon Senior Securities			64

Item 4. Mine Safety Disclosures			64

Item 5. Other Information			64

Item 6. Exhibits			64

SIGNATURE			65

INDEX OF EXHIBITS			66

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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		September 30, 2022
ASSETS
Current assets:
Cash and cash equivalents	$	1,148	$	821
Accounts receivable, net	25,314		23,352
Inventories	7,346		7,675
Prepaid and other current assets	6,404		4,131
Total current assets	40,212		35,979
Preneed cemetery trust investments	100,903		87,030
Preneed funeral trust investments	113,658		98,638
Preneed cemetery receivables, net	23,150		25,873
Receivables from preneed funeral trusts, net	19,009		20,119
Property, plant and equipment, net	269,367		275,977
Cemetery property, net	100,701		101,691
Goodwill	391,972		393,765
Intangible and other non-current assets, net	29,378		30,451
Operating lease right-of-use assets	17,881		17,295
Cemetery perpetual care trust investments	72,400		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 payable	14,205		9,325
Accrued and other liabilities	43,773		37,123

Total current liabilities	60,787		49,552
Acquisition debt, net of current portion	3,979		3,846
Credit facility	153,857		167,410

Senior notes	394,610		395,082
Obligations under finance leases, net of current portion	5,157		4,842
Obligations under operating leases, net of current portion	18,520		17,638
Deferred preneed cemetery revenue	50,202		52,173
Deferred preneed funeral revenue	30,584		32,006
Deferred tax liability	45,784		47,483
Other long-term liabilities	1,419		2,700
Deferred preneed cemetery receipts held in trust	100,903		87,030
Deferred preneed funeral receipts held in trust	113,658		98,638
Care trusts’ corpus	71,156		60,067
Total liabilities	1,050,616		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 capital	236,809		238,787
Retained earnings	135,462		168,623
Treasury stock, at cost; 10,932,322 and 11,627,818 shares, respectively	(244,519)		(278,753)
Total stockholders’ equity	128,015		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.

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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,
	2021		2022		2021		2022
Revenue:
Service revenue	$	46,210	$	42,992	$	134,086	$	135,279
Property and merchandise revenue	42,043		37,607		125,545		120,495
Other revenue	6,788		6,898		20,324		20,484
	95,041		87,497		279,955		276,258
Field costs and expenses:
Cost of service	20,523		22,317		61,073		65,805
Cost of merchandise	28,632		28,668		84,672		87,304
Cemetery property amortization	1,521		1,278		5,213		4,314
Field depreciation expense	3,154		3,281		9,432		9,831
Regional and unallocated funeral and cemetery costs	6,812		5,096		18,655		17,409
Other expenses	1,235		1,259		3,758		3,807
	61,877		61,899		182,803		188,470
Gross profit	33,164		25,598		97,152		87,788
Corporate costs and expenses:
General, administrative and other	9,041		10,383		25,340		28,123

Net (gain) loss on divestitures, disposals and impairments charges	858		(7)		1,377		(433)
Operating income	23,265		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 taxes	18,168		8,639		26,383		45,243
Expense for income taxes	(5,125)		(2,640)		(7,466)		(12,578)
Tax adjustment related to discrete items	3		(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:
Basic	17,499		14,689		17,809		14,908
Diluted	18,246		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,
	2021		2022
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 amortization	15,486		14,611
Provision for credit losses	1,426		2,292
Stock-based compensation expense	3,832		4,577
Deferred income tax expense (benefit)	(3,433)		1,699
Amortization of intangibles	968		957
Amortization of debt issuance costs	459		397
Amortization and accretion of debt	319		368

Loss on extinguishment of debt	23,807		—
Net (gain) loss on divestitures, disposals and impairment charges	1,558		(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 liabilities	9,643		(3,080)
Deferred preneed funeral and cemetery revenue	3,587		2,852
Deferred preneed funeral and cemetery receipts held in trust	21,975		12,758
Net cash provided by operating activities	69,699		50,046

Cash flows from investing activities:
Acquisitions of businesses and real estate	(3,285)		(8,876)

Proceeds from divestitures and sale of other assets	4,375		4,313
Proceeds from insurance reimbursements	2,946		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 facility	154,968		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 2029	395,500		—
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 contributions	2,107		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 equivalents	199		(327)
Cash and cash equivalents at beginning of period	889		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.

- 5 -

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, 2021	17,826	$	262	$	237,891	$	109,069	$	(114,351)	$	232,871
Net income	—	—		—		13,046		—		13,046
Issuance of common stock from employee stock purchase plan	15	—		388		—		—		388
Issuance of common stock to directors and board advisor	3	—		147		—		—		147

Exercise of stock options	12	—		(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, 2021	16,652	$	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, 2022	14,698	$	263	$	238,571	$	162,763	$	(278,753)	$	122,844
Net income	—	—		—		5,860		—		5,860
Issuance of common stock from employee stock purchase plan	14	—		377		—		—		377
Issuance of common stock to directors and board advisor	2	—		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, 2022	14,713	$	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, 2020	17,995	$	260	$	239,989	$	102,303	$	(102,050)	$	240,502
Net income	—	—		—		19,812		—		19,812
Issuance of common stock from employee stock purchase plan	47	1		1,227		—		—		1,228
Issuance of common stock to directors and board advisor	13	—		495		—		—		495
Issuance of restricted common stock	9	—		—		—		—		—
Exercise of stock options	127	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, 2021	16,652	$	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, 2021	15,332	$	263	$	236,809	$	135,462	$	(244,519)	$	128,015
Net income	—	—		—		33,161		—		33,161
Issuance of common stock from employee stock purchase plan	39	—		1,378		—		—		1,378
Issuance of common stock to directors and board advisor	7	—		322		—		—		322

Exercise of stock options	9	—		(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)
Other	27	—		1,358		—		—		1,358
Balance – September 30, 2022	14,713	$	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.

- 9 -

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, 2021		September 30, 2022
Land	$	82,095	$	83,757
Buildings and improvements	240,387		250,890
Furniture, equipment and automobiles	73,377		68,919
Property, plant and equipment, at cost	395,859		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 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 13 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.