CARRIAGE SERVICES INC 10-Q

Item 1. Financial Statements. CARRIAGE SERVICES, INC. CONSOLIDATED BALANCE SHEET (unaudited and in thousands, except share data) December 31, 2022 September 30, 2023 ASSETS Current assets: Cash and cash equivalents $ 1,170 $ 1,675 Accounts receivable, net 24,458 25,524 Inventories 7,613 9,088 Prepaid and other current assets 4,733 4,030 Total current assets 37,974 40,317 Preneed cemetery trust investments 95,065 92,583 Preneed funeral trust investments 104,553 106,433 Preneed cemetery receivables, net 26,672 34,332 Receivables from preneed funeral trusts, net 19,976 21,295 Property, plant and equipment, net 278,106 288,407 Cemetery property, net 104,170 113,199 Goodwill 410,137 423,643 Intangible and other non-current assets, net 32,930 37,221 Operating lease right-of-use assets 17,060 15,987 Cemetery perpetual care trust investments 66,307 82,042 Total assets $ 1,192,950 $ 1,255,459 LIABILITIES AND STOCKHOLDERS’ EQUITY Current liabilities: Current portion of debt and lease obligations $ 3,172 $ 3,811 Accounts payable 11,675 11,558 Accrued and other liabilities 30,621 37,977 Total current liabilities 45,468 53,346 Acquisition debt, net of current portion 3,438 3,335 Credit facility 188,836 185,856 Senior notes 395,243 395,737 Obligations under finance leases, net of current portion 4,743 6,724 Obligations under operating leases, net of current portion 17,315 15,736 Deferred preneed cemetery revenue 51,746 62,384 Deferred preneed funeral revenue 32,029 40,343 Deferred tax liability 48,820 48,907 Other long-term liabilities 3,065 1,504 Deferred preneed cemetery receipts held in trust 95,065 92,583 Deferred preneed funeral receipts held in trust 104,553 106,433 Care trusts’ corpus 65,495 81,299 Total liabilities 1,055,816 1,094,187 Commitments and contingencies: Stockholders’ equity: Common stock, $ 0.01 par value; 80,000,000 shares authorized and 26,359,876 and 26,609,277 shares issued, respectively and 14,732,058 and 14,981,459 shares outstanding, respectively 264 266 Additional paid-in capital 238,780 241,141 Retained earnings 176,843 198,618 Treasury stock, at cost; 11,627,818 shares ( 278,753 ) ( 278,753 ) Total stockholders’ equity 137,134 161,272 Total liabilities and stockholders’ equity $ 1,192,950 $ 1,255,459 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, 2022 2023 2022 2023 Revenue: Service revenue $ 42,992 $ 43,708 $ 135,279 $ 136,437 Property and merchandise revenue 37,607 40,287 120,495 125,928 Other revenue 6,898 6,499 20,484 21,321 87,497 90,494 276,258 283,686 Field costs and expenses: Cost of service 22,317 22,650 65,805 69,202 Cost of merchandise 28,668 30,302 87,304 92,255 Cemetery property amortization 1,278 1,318 4,314 4,411 Field depreciation expense 3,281 3,634 9,831 10,546 Regional and unallocated funeral and cemetery costs 5,096 3,771 17,409 13,339 Other expenses 1,259 1,407 3,807 4,264 61,899 63,082 188,470 194,017 Gross profit 25,598 27,412 87,788 89,669 Corporate costs and expenses: General, administrative and other 10,383 11,303 28,123 31,682 Net (gain) loss on divestitures, disposals and impairments charges ( 7 ) 423 ( 433 ) 929 Operating income 15,222 15,686 60,098 57,058 Interest expense 6,678 9,278 18,208 27,213 Net gain on property damage, net of insurance claims — ( 379 ) ( 3,275 ) ( 343 ) Other, net ( 95 ) 11 ( 78 ) ( 636 ) Income before income taxes 8,639 6,776 45,243 30,824 Expense for income taxes 2,640 2,058 12,578 8,899 Tax adjustment related to discrete items 139 73 ( 496 ) 150 Total expense for income taxes 2,779 2,131 12,082 9,049 Net income $ 5,860 $ 4,645 $ 33,161 $ 21,775 Basic earnings per common share: $ 0.40 $ 0.31 $ 2.22 $ 1.46 Diluted earnings per common share: $ 0.38 $ 0.30 $ 2.09 $ 1.39 Dividends declared per common share: $ 0.1125 $ 0.1125 $ 0.3375 $ 0.3375 Weighted average number of common and common equivalent shares outstanding: Basic 14,689 14,820 14,908 14,791 Diluted 15,537 15,514 15,849 15,480 The accompanying condensed notes are an integral part of these Consolidated Financial Statements. - 4 - CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited and in thousands) Nine months ended September 30, 2022 2023 Cash flows from operating activities: Net income $ 33,161 $ 21,775 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization 14,611 15,623 Provision for credit losses 2,292 2,314 Stock-based compensation expense 4,577 6,155 Deferred income tax expense 1,699 87 Amortization of intangibles 957 982 Amortization of debt issuance costs 397 524 Amortization and accretion of debt 368 384 Net (gain) loss on divestitures, disposals and impairment charges ( 433 ) 929 Net gain on property damage, net of insurance claims ( 3,275 ) ( 343 ) Gain on sale of real property — ( 658 ) Other ( 153 ) — Changes in operating assets and liabilities that provided (used) cash: Accounts and preneed receivables ( 3,053 ) ( 4,607 ) Inventories, prepaid and other current assets 2,785 ( 52 ) Intangible and other non-current assets ( 1,381 ) ( 2,285 ) Preneed funeral and cemetery trust investments ( 12,585 ) 990 Accounts payable ( 2,451 ) ( 117 ) Accrued and other liabilities ( 3,080 ) 5,297 Incentive payment from vendor — 6,000 Deferred preneed funeral and cemetery revenue 2,852 11,110 Deferred preneed funeral and cemetery receipts held in trust 12,758 ( 2,259 ) Net cash provided by operating activities 50,046 61,849 Cash flows from investing activities: Acquisitions of businesses and real property ( 8,876 ) ( 44,000 ) Proceeds from divestitures and sale of other assets 4,313 2,296 Proceeds from insurance claims 2,209 1,388 Capital expenditures ( 20,346 ) ( 13,069 ) Net cash used in investing activities ( 22,700 ) ( 53,385 ) Cash flows from financing activities: Borrowings from the credit facility 114,600 68,100 Payments against the credit facility ( 101,000 ) ( 71,500 ) Payment of debt issuance costs for the credit facility and senior notes ( 339 ) — Payments on acquisition debt and obligations under finance leases ( 314 ) ( 491 ) Proceeds from the exercise of stock options and employee stock purchase plan contributions 1,438 1,207 Taxes paid on restricted stock vestings and exercise of stock options ( 287 ) ( 252 ) Dividends paid on common stock ( 5,108 ) ( 5,023 ) Purchase of treasury stock ( 36,663 ) — Net cash used in financing activities ( 27,673 ) ( 7,959 ) Net increase (decrease) in cash and cash equivalents ( 327 ) 505 Cash and cash equivalents at beginning of period 1,148 1,170 Cash and cash equivalents at end of period $ 821 $ 1,675 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, 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 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 Three months ended September 30, 2023 Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Balance – June 30, 2023 14,958 $ 266 $ 240,681 $ 193,973 $ ( 278,753 ) $ 156,167 Net income — — — 4,645 — 4,645 Issuance of common stock from employee stock purchase plan 12 — 284 — — 284 Issuance of common stock to directors and board advisor 5 — 161 — — 161 Exercise of stock options 7 — ( 133 ) — — ( 133 ) Stock-based compensation expense — — 1,831 — — 1,831 Dividends on common stock — — ( 1,683 ) — — ( 1,683 ) Balance – September 30, 2023 14,982 $ 266 $ 241,141 $ 198,618 $ ( 278,753 ) $ 161,272 - 6 - CARRIAGE SERVICES, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited and in thousands) 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 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 Nine months ended September 30, 2023 Shares Outstanding Common Stock Additional Paid-in Capital Retained Earnings Treasury Stock Total Balance – December 31, 2022 14,732 $ 264 $ 238,780 $ 176,843 $ ( 278,753 ) $ 137,134 Net income — — — 21,775 — 21,775 Issuance of common stock from employee stock purchase plan 50 — 1,207 — — 1,207 Issuance of common stock to directors and board advisor 11 — 338 — — 338 Issuance of common stock to former executive 30 — 826 — — 826 Issuance of restricted stock 142 2 ( 2 ) — — — Exercise of stock options 12 — ( 174 ) — — ( 174 ) Cancellation and surrender of common and restricted stock ( 3 ) — ( 78 ) — — ( 78 ) Stock-based compensation expense — — 4,991 — — 4,991 Dividends on common stock — — ( 5,023 ) — — ( 5,023 ) Other 8 — 276 — — 276 Balance – September 30, 2023 14,982 $ 266 $ 241,141 $ 198,618 $ ( 278,753 ) $ 161,272 The accompanying condensed notes are an integral part of these Consolidated Financial Statements. - 7 - 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 accounts for approximately 70 % of our total revenue and Cemetery operations, which currently accounts for approximately 30 % of our total revenue. At September 30, 2023, we operated 171 funeral homes in 26 states and 32 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 sale of caskets and related funeral merchandise, 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. There have been no material changes in our accounting policies previously disclosed in Part II, Item 8 “Financial Statements and Supplementary Data” in Note 1 in our Annual Report on Form 10-K for the year ended December 31, 2022. In addition, 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, 2022 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. 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. - 8 - Deferred Revenue During the nine months ended September 30, 2023, we withdrew $ 8.6 million of realized capital gains and earnings from our preneed funeral and cemetery trust investments. In certain states, we are allowed to make these withdrawals prior to the delivery of preneed merchandise and service contracts. The realized capital gains and earnings withdrawn increase our cash flow from operations, but are not recognized as revenue in our Consolidated Statements of Operations, however, they reduce our Preneed funeral trust investments and Preneed cemetery trust investments and increase our Deferred preneed funeral revenue and Deferred preneed cemetery revenue. Additionally, during the nine months ended September 30, 2023, we received a $ 6.0 million incentive payment from a vendor for entering into a strategic partnership agreement to market and sell prearranged funeral services in the future, which increased our cash flow from operations and Deferred preneed funeral revenue. The incentive payment will be deferred until we complete our implementation of the program and begin selling prearranged funeral services. Goodwill The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses and cemeteries we acquire 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 31 st 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. We performed our most recent annual goodwill impairment test as of August 31, 2023. We intend to perform a quantitative impairment test at least once every three years and perform a qualitative assessment during the remaining two years. We conducted a quantitative assessment in 2022 and a qualitative assessment in 2023. 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. For our 2023 annual qualitative assessment, we determined that there were no factors that would indicate the need to perform an additional quantitative goodwill impairment test. We concluded that it is more-likely-than-not that the fair value of our reporting units is greater than their carrying value and thus there was no impairment to goodwill. For our 2022 annual quantitative assessment, there was no impairment to goodwill as the fair value of our reporting units was greater than the carrying value. When we divest a portion of a reporting unit that constitutes a business in accordance with U.S. Generally Accepted Accounting Principles (“GAAP”), we allocate goodwill associated with that business to be included in the gain or loss on divestiture. The goodwill allocated is based on the relative fair value of the business being divested and the portion of the reporting unit that will be retained. Additionally, after each divestiture, we will test the goodwill remaining in the portion of the reporting unit to be retained for impairment using a qualitative assessment unless we deem a quantitative assessment to be appropriate to ensure the fair value of our reporting units is greater than their carrying value. See Note 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 31 st 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 - 9 - 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 most recent annual intangible assets impairment test as of August 31, 2023. We intend to perform a quantitative impairment test at least once every three years and perform a qualitative assessment during the remaining two years. We conducted a quantitative assessment in 2022 and a qualitative assessment in 2023. 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. As a result of our 2023 qualitative assessment, we determined that there were factors that would indicate the need to perform an additional quantitative impairment test for certain funeral home businesses. As a result of this additional quantitative impairment test, we recorded an impairment to the tradenames for two of our funeral homes of $ 0.2 million, during the three and nine months ended September 30, 2023, as the carrying amount of these tradenames exceeded the fair value. For our 2022 assessment, there was no impairment to intangibles assets. See Note 10 to the Consolidated Financial Statements included herein for additional information related to our intangible assets. Property, Plant and Equipment Property, plant and equipment is comprised of the following (in thousands): December 31, 2022 September 30, 2023 Land $ 84,405 $ 85,660 Buildings and improvements 251,778 262,856 Furniture, equipment and automobiles 70,522 76,653 Property, plant and equipment, at cost 406,705 425,169 Less: accumulated depreciation ( 128,599 ) ( 136,762 ) Property, plant and equipment, net $ 278,106 $ 288,407 During the nine months ended September 30, 2023, we acquired $ 12.8 million of property, plant and equipment related to our acquisition of a business located in Bakersfield, CA, as more fully described in Note 3 to the Consolidated Financial Statements. Additionally, we sold real property for $ 1.2 million, with a carrying value of $ 0.6 million, resulting in a gain on the sale of $ 0.6 million. We also divested one funeral home that had a carrying value of property, plant and equipment of $ 0.3 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. 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. Our growth and maintenance capital expenditures totaled $ 5.3 million and $ 2.4 million for the three months ended September 30, 2022 and 2023, respectively and $ 15.1 million and $ 7.9 million for the nine months ended September 30, 2022 and 2023, respectively, for property, plant and equipment. In addition, we recorded depreciation expense of $ 3.4 million and $ 3.8 million for the three months ended September 30, 2022 and 2023, respectively and $ 10.1 million and $ 11.0 million for the nine months ended September 30, 2022 and 2023, respectively. - 10 - Cemetery Property Cemetery property was $ 104.2 million and $ 113.2 million, net of accumulated amortization of $ 59.0 million and $ 63.0 million at December 31, 2022 and September 30, 2023, 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 $ 1.5 million and $ 1.6 million for the three months ended September 30, 2022 and 2023 and $ 5.2 million and $ 5.1 million for the nine months ended September 30, 2022 and 2023, respectively. We recorded amortization expense for cemetery interment rights of $ 1.3 million for both the three months ended September 30, 2022 and 2023 and $ 4.3 million and $ 4.4 million for the nine months ended September 30, 2022 and 2023, respectively. During the nine months ended September 30, 2023, we acquired cemetery property for $ 9.0 million related to our acquisition of a business located in Bakersfield, CA, as more fully described in Note 3 to the Consolidated Financial Statements. We also divested two cemeteries that had a carrying value of cemetery property of $ 0.8 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. Income Taxes Income tax expense was $ 2.8 million and $ 2.1 million for the three months ended September 30, 2022 and 2023, respectively and $ 12.1 million and $ 9.0 million for the nine months ended September 30, 2022 and 2023, respectively. Our operating tax rate before discrete items was 30.6 % and 30.4 % for the three months ended September 30, 2022 and 2023, respectively and 27.8 % and 28.9 % for the nine months ended September 30, 2022 and 2023, respectively. Subsequent Events We have evaluated events and transactions during the period subsequent to September 30, 2023 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report. 2. RECENTLY ISSUED ACCOUNTING STANDARDS Credit Losses - Vintage Disclosures In March 2022, the FASB issued ASU, Financial Instruments - Credit Losses (“Topic 326”) to make the requirement to disclose gross write-offs by class of financing receivable and major security type consistent for all public business entities. The amendment in this update provides specific guidance on the disclosure for current period write-offs by year of origination for financing receivables. This amendment is effective for fiscal years beginning after December 15, 2022, and therefore was effective for us beginning January 1, 2023. Our adoption of these amendments had no impact on our consolidated financial statements. 3. 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 measurement period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition. On March 22, 2023, we acquired a business consisting of three funeral homes, two cemeteries and one cremation focused business in the Bakersfield, California area for $ 44.0 million in cash. We acquired substantially all of the assets and assumed certain operating liabilities of this business. The pro forma impact of this acquisition on prior periods is not presented, as the impact is not significant to our reported results. The results of the acquired business are reflected in our Consolidated Statements of Operations from the date of acquisition. - 11 - The following table summarizes the breakdown of the purchase price allocation for our Bakersfield, CA business acquisition (in thousands): Initial Purchase Price Allocation Adjustments Adjusted Purchase Price Allocation Current assets $ 7,087 $ 131 $ 7,218 Preneed trust assets — 11,428 11,428 Property, plant & equipment 12,577 245 12,822 Cemetery property 9,035 — 9,035 Goodwill 13,612 ( 106 ) 13,506 Intangible and other non-current assets 3,763 — 3,763 Assumed liabilities ( 300 ) ( 66 ) ( 366 ) Preneed trust liabilities — ( 11,428 ) ( 11,428 ) Deferred revenue ( 1,774 ) ( 204 ) ( 1,978 ) Purchase price $ 44,000 $ — $ 44,000 The current assets relate to accounts receivable and inventory. The intangible and other non-current assets relate to the fair value of tradenames and right-of-use operating lease assets. The assumed liabilities relate to operating lease obligations and commissions payable. As of September 30, 2023, our accounting for this acquisition is complete. The following table summarizes the fair value of the assets acquired and liabilities assumed for this business (in thousands): Acquisition Date Type of Business Market Assets Acquired (Excluding Goodwill) Goodwill Recorded Liabilities and Debt Assumed March 22, 2023 Three Funeral Homes, Two Cemeteries and One Cremation Focused Business Bakersfield, CA $ 44,266 $ 13,506 $ ( 13,772 ) On August 8, 2022, we acquired a business consisting of two funeral homes in Kissimmee, FL for $ 6.3 million in cash. We acquired substantially all of the assets and assumed certain operating liabilities of this business. The following table summarizes the breakdown of the purchase price allocation for our Kissimmee, FL business acquisition (in thousands): Purchase Price Allocation Current assets $ 28 Preneed trust assets 1,439 Property, plant & equipment 2,986 Goodwill 2,694 Intangible and other non-current assets 542 Preneed trust liabilities ( 1,439 ) Purchase price $ 6,250 The intangible and other non-current assets relate to the fair value of tradenames and non-compete agreements. The following table summarizes the fair value of the assets acquired and liabilities assumed for our Kissimmee, FL business acquisition (in thousands): Acquisition Date Type of Business Market Assets Acquired (Excluding Goodwill) Goodwill Recorded Liabilities and Debt Assumed August 8, 2022 Two Funeral Homes Kissimmee, FL $ 4,995 $ 2,694 $ ( 1,439 ) - 12 - 4. GOODWILL The following table presents changes in goodwill in the accompanying Consolidated Balance Sheet (in thousands): December 31, 2022 September 30, 2023 Goodwill at the beginning of the period $ 391,972 $ 410,137 Increase in goodwill related to acquisitions 19,511 13,506 Decrease in goodwill related to divestitures ( 901 ) — Decrease in goodwill related to assets held for sale ( 445 ) — Goodwill at the end of the period $ 410,137 $ 423,643 During the nine months ended September 30, 2023, we recognized $ 13.5 million in goodwill related to our acquisition of a business located in Bakersfield, CA, of which $ 4.5 million was allocated to our cemetery segment and $ 9.0 million was allocated to our funeral home segment. See Note 1 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our goodwill impairment test. 5. DIVESTED OPERATIONS During the three months ended September 30, 2023, we sold one funeral home for $ 0.3 million. During the nine months ended September 30, 2023, we sold two funeral homes and two cemeteries for an aggregate of $ 1.1 million and merged one funeral home with another business we own in a nearby market. During the three months ended September 30, 2022, we did not sell any funeral homes or cemeteries. During the nine months ended September 30, 2022, we sold two funeral homes for an aggregate of $ 0.9 million and merged one funeral home with another business we own in a nearby market. The operating results of these divested funeral homes and cemeteries are reflected on our Consolidated Statements of Operations as shown in the table below (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Revenue $ — $ 18 $ 296 $ 242 Operating income — 8 25 3 Loss on divestitures (1) — ( 24 ) ( 703 ) ( 107 ) Income tax benefit — 5 188 30 Net loss from divested operations, after tax $ — $ ( 11 ) $ ( 490 ) $ ( 74 ) (1) Loss on divestitures is recorded in Net (gain) loss on divestitures, disposals and impairments charges on our Consolidated Statements of Operations. 6. RECEIVABLES Accounts Receivable 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. Accounts receivable is comprised of the following (in thousands): September 30, 2023 Funeral Cemetery Corporate Total Trade and financed receivables $ 7,983 $ 18,240 $ — $ 26,223 Other receivables 336 391 100 827 Allowance for credit losses ( 285 ) ( 1,241 ) — ( 1,526 ) Accounts receivable, net $ 8,034 $ 17,390 $ 100 $ 25,524 - 13 - December 31, 2022 Funeral Cemetery Corporate Total Trade and financed receivables $ 9,518 $ 14,429 $ — $ 23,947 Other receivables 643 833 48 1,524 Allowance for credit losses ( 311 ) ( 702 ) — ( 1,013 ) Accounts receivable, net $ 9,850 $ 14,560 $ 48 $ 24,458 Other receivables include supplier rebates, commissions due from third party insurance companies and perpetual care income receivables. We do not provide an allowance for credit losses for these receivables as we have historically not had any collectability issues nor do we expect any in the foreseeable future. The following table summarizes the activity in our allowance for credit losses by segment (in thousands): January 1, 2023 Provision for Credit Losses Write Offs Recoveries September 30, 2023 Trade and financed receivables: Funeral $ ( 311 ) $ ( 858 ) $ 1,745 $ ( 861 ) $ ( 285 ) Cemetery ( 702 ) ( 548 ) 9 — ( 1,241 ) Total allowance for credit losses on trade and financed receivables $ ( 1,013 ) $ ( 1,406 ) $ 1,754 $ ( 861 ) $ ( 1,526 ) Balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet of $ 8.9 million and $ 10.7 million at December 31, 2022 and September 30, 2023, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of ten years for preneed funeral contracts. Preneed Cemetery Receivables Our preneed cemetery receivables are comprised of the following (in thousands): December 31, 2022 September 30, 2023 Interment rights $ 45,351 $ 58,032 Merchandise and services 8,585 10,574 Unearned finance charges 4,894 5,407 Preneed cemetery receivables $ 58,830 $ 74,013 The components of our preneed cemetery receivables are as follows (in thousands): December 31, 2022 September 30, 2023 Preneed cemetery receivables $ 58,830 $ 74,013 Less: unearned finance charges ( 4,894 ) ( 5,407 ) Preneed cemetery receivables, at amortized cost $ 53,936 $ 68,606 Less: allowance for credit losses ( 1,985 ) ( 3,548 ) Less: balances due on undelivered cemetery preneed contracts ( 11,552 ) ( 13,727 ) Less: amounts in accounts receivable ( 13,727 ) ( 16,999 ) Preneed cemetery receivables, net $ 26,672 $ 34,332 The following table summarizes the activity in our allowance for credit losses for Preneed cemetery receivables, net (in thousands): January 1, 2023 Provision for Credit Losses Write Offs September 30, 2023 Total allowance for credit losses on Preneed cemetery receivables, net $ ( 1,283 ) $ ( 908 ) $ ( 116 ) $ ( 2,307 ) The amortized cost basis of our preneed cemetery receivables by year of origination at September 30, 2023 is as follows (in thousands): 2023 2022 2021 2020 2019 Prior Total Total preneed cemetery receivables, at amortized cost $ 27,143 $ 21,505 $ 11,134 $ 5,312 $ 1,909 $ 1,603 $ 68,606 - 14 - The aging of past due preneed cemetery receivables at September 30, 2023 is as follows (in thousands): 31-60 Past Due 61-90 Past Due 91-120 Past Due >120 Past Due Total Past Due Current Total Recognized revenue $ 1,174 $ 739 $ 648 $ 3,686 $ 6,247 $ 48,632 $ 54,879 Deferred revenue 281 294 124 1,292 1,991 17,143 19,134 Total contracts $ 1,455 $ 1,033 $ 772 $ 4,978 $ 8,238 $ 65,775 $ 74,013 Balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance Sheet. The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled were $ 11.6 million and $ 13.7 million at December 31, 2022 and September 30, 2023, respectively. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue in future periods. However, we estimate an average maturity period of eight years for preneed cemetery contracts. 7. FAIR VALUE MEASUREMENTS We evaluated our financial assets and liabilities for those that met the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of our receivables on preneed cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our acquisition debt and Credit Facility (as defined in Note 11) and Senior Notes (as defined in Note 12) are classified within Level 2 of the Fair Value Measurements hierarchy. At September 30, 2023, the carrying value and fair value of our Credit Facility was $ 187.3 million. We believe that our Credit Facility bears interest at a rate that approximates prevailing market rates for instruments with similar characteristics and therefore, the carrying value of our Credit Facility approximates fair value. We estimate the fair value of our acquisition debt utilizing an income approach, which uses a present value calculation to discount payments based on current market rates as of the reporting date. At September 30, 2023, the carrying value of our acquisition debt was $ 3.9 million, which approximated its fair value. The fair value of our Senior Notes was $ 342.6 million at September 30, 2023 based on the last traded or broker quoted price. We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investments categories on our Consolidated Balance Sheet as having met the criteria for fair value measurement. Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt, common stock and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including U.S. agency obligations, foreign debt, corporate debt, preferred stocks, certificates of deposit and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. In addition, we have an investment in a limited partnership fund, whose fair value has been estimated using the net asset value per share practical expedient described in ASC 820-10-35-59, Fair Value Measurement of Investments in Certain Entities That Calculate Net Asset Value per Share (or Its Equivalent) and therefore, has not been classified in the fair value hierarchy. The value of the investments in this fund cannot be redeemed because the investments include restrictions that do not allow for redemption within the first 12 months after acquisition. Our unfunded commitment for this investment at September 30, 2023 is $ 10.0 million. Our receivables from preneed funeral trusts represent assets in trusts which 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. See Notes 8 and 9 to our Consolidated Financial Statements for the fair value hierarchy levels of our trust investments. 8. TRUST INVESTMENTS Preneed trust investments represent trust fund assets that we are generally permitted to withdraw as the services and merchandise are provided to customers. Preneed funeral and cemetery contracts are secured by payments from customers, less amounts not required by law to be deposited into trust. These earnings are recognized in Other revenue on our Consolidated Statements of Operations, when a service is performed or merchandise is delivered. Trust management fees charged by our wholly-owned registered investment advisory firm (“CSV RIA”) are included as revenue in the period in which they are earned. Our investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. - 15 - Cemetery perpetual care trust investments represent a portion of the proceeds from the sale of cemetery property interment rights that we are required by various state laws to deposit into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized in Other revenue. Changes in the fair value of our trust fund assets ( Preneed funeral, cemetery and perpetual care trust investments ) are offset by changes in the fair value of our trust fund liabilities ( Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus ) and reflected in Other, net . There is no impact on earnings until such time the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations and the gain or loss is allocated to the contract. We rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations. Preneed Cemetery Trust Investments The components of Preneed cemetery trust investments on our Consolidated Balance Sheet are as follows (in thousands): December 31, 2022 September 30, 2023 Preneed cemetery trust investments, at market value $ 98,269 $ 95,632 Less: allowance for contract cancellation ( 3,204 ) ( 3,049 ) Preneed cemetery trust investments $ 95,065 $ 92,583 The cost and market values associated with preneed cemetery trust investments at September 30, 2023 are detailed below (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 9,177 $ — $ — $ 9,177 Fixed income securities: U.S. agency obligations 2 803 — ( 75 ) 728 Foreign debt 2 9,246 959 ( 351 ) 9,854 Corporate debt 2 15,058 109 ( 4,872 ) 10,295 Preferred stock 2 11,524 528 ( 1,466 ) 10,586 Certificates of deposit 2 79 — ( 9 ) 70 Common stock 1 40,264 8,897 ( 7,508 ) 41,653 Limited partnership fund 3,572 108 — 3,680 Mutual funds: Equity 1 553 — ( 65 ) 488 Fixed income 2 11,361 2 ( 3,153 ) 8,210 Trust securities $ 101,637 $ 10,603 $ ( 17,499 ) $ 94,741 Accrued investment income $ 891 $ 891 Preneed cemetery trust investments $ 95,632 Market value as a percentage of cost 93.2 % The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands): Due in one year or less $ 138 Due in one to five years 8,981 Due in five to ten years 3,956 Thereafter 18,458 Total fixed income securities $ 31,533 - 15 - The cost and market values associated with preneed cemetery trust investments at December 31, 2022 are detailed below (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 10,434 $ — $ — $ 10,434 Fixed income securities: U.S. agency obligations 2 803 — ( 72 ) 731 Foreign debt 2 12,241 910 ( 644 ) 12,507 Corporate debt 2 15,066 104 ( 4,139 ) 11,031 Preferred stock 2 12,560 436 ( 1,789 ) 11,207 Certificate of deposit 2 79 — ( 8 ) 71 Common stock 1 42,929 5,102 ( 6,228 ) 41,803 Mutual funds: Equity 1 362 — ( 33 ) 329 Fixed income 2 12,324 10 ( 3,310 ) 9,024 Trust Securities $ 106,798 $ 6,562 $ ( 16,223 ) $ 97,137 Accrued investment income $ 1,132 $ 1,132 Preneed cemetery trust investments $ 98,269 Market value as a percentage of cost 91.0 % The following table summarizes our fixed income securities (excluding mutual funds) within our preneed cemetery trust investments in an unrealized loss position at September 30, 2023, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): September 30, 2023 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fixed income securities: U.S. agency obligations $ — $ — $ 728 $ ( 75 ) $ 728 $ ( 75 ) Foreign debt 2,885 ( 100 ) 1,711 ( 251 ) 4,596 ( 351 ) Corporate debt 3,106 ( 276 ) 4,374 ( 4,596 ) 7,480 ( 4,872 ) Preferred stock 305 ( 21 ) 7,993 ( 1,445 ) 8,298 ( 1,466 ) Certificates of deposit — — 71 ( 9 ) 71 ( 9 ) Total fixed income securities with an unrealized loss $ 6,296 $ ( 397 ) $ 14,877 $ ( 6,376 ) $ 21,173 $ ( 6,773 ) The following table summarizes our fixed income securities (excluding mutual funds) within our preneed cemetery trust investments in an unrealized loss position at December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): December 31, 2022 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fixed income securities: U.S. agency obligations $ 732 $ ( 72 ) $ — $ — $ 732 $ ( 72 ) Foreign debt 5,394 ( 308 ) 744 ( 336 ) 6,138 ( 644 ) Corporate debt 8,037 ( 3,922 ) 563 ( 217 ) 8,600 ( 4,139 ) Preferred stock 7,146 ( 1,271 ) 2,517 ( 518 ) 9,663 ( 1,789 ) Certificates of deposit 71 ( 8 ) — — 71 ( 8 ) Total fixed income securities with an unrealized loss $ 21,380 $ ( 5,581 ) $ 3,824 $ ( 1,071 ) $ 25,204 $ ( 6,652 ) - 16 - Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Investment income $ 556 $ 610 $ 1,618 $ 1,889 Realized gains 392 246 9,285 2,247 Realized losses ( 105 ) ( 190 ) ( 2,488 ) ( 1,336 ) Unrealized gains (losses), net ( 5,037 ) 1,818 ( 14,137 ) ( 6,896 ) Expenses and taxes ( 482 ) ( 454 ) ( 1,353 ) ( 1,076 ) Net change in deferred preneed cemetery receipts held in trust 4,676 ( 2,030 ) 7,075 5,172 $ — $ — $ — $ — Purchases and sales of investments in the preneed cemetery trusts are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Purchases $ ( 459 ) $ ( 5,481 ) $ ( 2,083 ) $ ( 14,619 ) Sales — 5,368 661 11,230 Preneed Funeral Trust Investments Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. The components of Preneed funeral trust investments on our Consolidated Balance Sheet are as follows (in thousands): December 31, 2022 September 30, 2023 Preneed funeral trust investments, at market value $ 107,995 $ 109,863 Less: allowance for contract cancellation ( 3,442 ) ( 3,430 ) Preneed funeral trust investments $ 104,553 $ 106,433 The cost and market values associated with preneed funeral trust investments at September 30, 2023 are detailed below (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 27,984 $ — $ — $ 27,984 Fixed income securities: U.S treasury debt 1 485 — ( 48 ) 437 Foreign debt 2 8,680 917 ( 320 ) 9,277 Corporate debt 2 13,540 98 ( 4,287 ) 9,351 Preferred stock 2 10,413 495 ( 1,380 ) 9,528 Common stock 1 36,309 8,456 ( 6,561 ) 38,204 Limited partnership fund 3,413 103 — 3,516 Mutual funds: Equity 1 405 — ( 57 ) 348 Fixed income 2 9,599 2 ( 2,712 ) 6,889 Other investments 2 3,511 — — 3,511 Trust securities $ 114,339 $ 10,071 $ ( 15,365 ) $ 109,045 Accrued investment income $ 818 $ 818 Preneed funeral trust investments $ 109,863 Market value as a percentage of cost 95.4 % - 17 - The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands): Due in one year or less $ 80 Due in one to five years 7,980 Due in five to ten years 3,636 Thereafter 16,897 Total fixed income securities $ 28,593 The cost and market values associated with preneed funeral trust investments at December 31, 2022 are detailed below (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 29,641 $ — $ — $ 29,641 Fixed income securities: U.S. treasury debt 1 484 — ( 45 ) 439 Foreign debt 2 10,851 818 ( 555 ) 11,114 Corporate debt 2 12,735 89 ( 3,443 ) 9,381 Preferred stock 2 10,730 391 ( 1,564 ) 9,557 Common stock 1 36,478 4,485 ( 5,187 ) 35,776 Mutual funds: Equity 1 326 — ( 30 ) 296 Fixed income 2 9,907 9 ( 2,691 ) 7,225 Other investments 2 3,592 — — 3,592 Trust securities $ 114,744 $ 5,792 $ ( 13,515 ) $ 107,021 Accrued investment income $ 974 $ 974 Preneed funeral trust investments $ 107,995 Market value as a percentage of cost 93.3 % The following table summarizes our fixed income securities (excluding mutual funds) within our preneed funeral trust investment in an unrealized loss position at September 30, 2023, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): September 30, 2023 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fixed income securities: U.S. treasury debt $ — $ — $ 437 $ ( 48 ) $ 437 $ ( 48 ) Foreign debt 2,709 ( 94 ) 1,542 ( 226 ) 4,251 ( 320 ) Corporate debt 2,969 ( 264 ) 3,749 ( 4,023 ) 6,718 ( 4,287 ) Preferred stock 291 ( 20 ) 7,269 ( 1,360 ) 7,560 ( 1,380 ) Total fixed income securities with an unrealized loss $ 5,969 $ ( 378 ) $ 12,997 $ ( 5,657 ) $ 18,966 $ ( 6,035 ) - 18 - The following table summarizes our fixed income securities (excluding mutual funds) within our preneed funeral trust investment in an unrealized loss position at December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): December 31, 2022 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fixed income securities: U.S. treasury debt $ 439 $ ( 45 ) $ — $ — $ 439 $ ( 45 ) Foreign debt 4,766 ( 274 ) 626 ( 281 ) 5,392 ( 555 ) Corporate debt 6,742 ( 3,248 ) 506 ( 195 ) 7,248 ( 3,443 ) Preferred stock 5,908 ( 1,099 ) 2,261 ( 465 ) 8,169 ( 1,564 ) Total fixed income securities with an unrealized loss $ 17,855 $ ( 4,666 ) $ 3,393 $ ( 941 ) $ 21,248 $ ( 5,607 ) Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Investment income $ 398 $ 479 $ 1,245 $ 1,542 Realized gains 357 235 8,247 2,178 Realized losses ( 96 ) ( 181 ) ( 2,242 ) ( 1,278 ) Unrealized gains (losses), net ( 4,394 ) 1,911 ( 11,794 ) ( 5,294 ) Expenses and taxes ( 214 ) ( 182 ) ( 751 ) ( 576 ) Net change in deferred preneed funeral receipts held in trust 3,949 ( 2,262 ) 5,295 3,428 $ — $ — $ — $ — Purchases and sales of investments in the preneed funeral trusts are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Purchases $ — $ ( 5,237 ) $ ( 590 ) $ ( 13,987 ) Sales 8 5,135 538 10,820 Cemetery Perpetual Care Trust Investments Care trusts’ corpus on our Consolidated Balance Sheet represents the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus are as follows (in thousands): December 31, 2022 September 30, 2023 Cemetery perpetual care trust investments, at market value $ 66,307 $ 82,042 Obligations due from trust ( 812 ) ( 743 ) Care trusts’ corpus $ 65,495 $ 81,299 - 19 - The following table reflects the cost and market values associated with the trust investments held in cemetery perpetual care trust funds at September 30, 2023 (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 6,913 $ — $ — $ 6,913 Fixed income securities: Foreign debt 2 8,447 810 ( 338 ) 8,919 Corporate debt 2 13,152 137 ( 4,292 ) 8,997 Preferred stock 2 11,121 469 ( 1,334 ) 10,256 Common stock 1 33,764 7,586 ( 6,219 ) 35,131 Limited partnership fund 3,014 91 — 3,105 Mutual funds: Equity 1 464 — ( 57 ) 407 Fixed income 2 10,248 1 ( 2,737 ) 7,512 Trust securities $ 87,123 $ 9,094 $ ( 14,977 ) $ 81,240 Accrued investment income $ 802 $ 802 Cemetery perpetual care investments $ 82,042 Market value as a percentage of cost 93.2 % The estimated maturities of the fixed income securities (excluding mutual funds) included above are as follows (in thousands): Due in one year or less $ — Due in one to five years 7,107 Due in five to ten years 3,505 Thereafter 17,560 Total fixed income securities $ 28,172 The following table reflects the cost and market values associated with the trust investments held in cemetery perpetual care trust funds at December 31, 2022 (in thousands): Fair Value Hierarchy Level Cost Unrealized Gains Unrealized Losses Fair Market Value Cash and money market accounts 1 $ 5,326 $ — $ — $ 5,326 Fixed income securities: Foreign debt 2 8,746 600 ( 470 ) 8,876 Corporate debt 2 10,540 118 ( 2,961 ) 7,697 Preferred stock 2 9,831 287 ( 1,374 ) 8,744 Common stock 1 28,625 3,443 ( 4,297 ) 27,771 Mutual funds: Equity 1 345 2 ( 22 ) 325 Fixed income 2 9,046 26 ( 2,310 ) 6,762 Trust securities $ 72,459 $ 4,476 $ ( 11,434 ) $ 65,501 Accrued investment income $ 806 $ 806 Cemetery perpetual care investments $ 66,307 Market value as a percentage of cost 90.4 % - 20 - The following table summarizes our fixed income securities (excluding mutual funds) within our cemetery perpetual care trust investment in an unrealized loss position at September 30, 2023, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): September 30, 2023 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fixed income securities: Foreign debt $ 2,906 $ ( 107 ) $ 1,576 $ ( 231 ) $ 4,482 $ ( 338 ) Corporate debt 2,621 ( 233 ) 3,704 ( 4,059 ) 6,325 ( 4,292 ) Preferred stock 257 ( 18 ) 7,356 ( 1,316 ) 7,613 ( 1,334 ) Total fixed income securities with an unrealized loss $ 5,784 $ ( 358 ) $ 12,636 $ ( 5,606 ) $ 18,420 $ ( 5,964 ) The following table summarizes our fixed income securities (excluding mutual funds) within our perpetual care trust investment in an unrealized loss position at December 31, 2022, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands): December 31, 2022 In Loss Position Less than 12 months In Loss Position Greater than 12 months Total Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fair Market Value Unrealized Losses Fixed income securities: Foreign debt $ 4,123 $ ( 218 ) $ 554 $ ( 252 ) $ 4,677 $ ( 470 ) Corporate debt 5,413 ( 2,818 ) 371 ( 143 ) 5,784 ( 2,961 ) Preferred stock 6,066 ( 1,032 ) 1,659 ( 342 ) 7,725 ( 1,374 ) Total fixed income securities with an unrealized loss $ 15,602 $ ( 4,068 ) $ 2,584 $ ( 737 ) $ 18,186 $ ( 4,805 ) Cemetery perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Realized gains $ 48 $ 31 $ 1,292 $ 862 Realized losses ( 13 ) ( 24 ) ( 302 ) ( 494 ) Unrealized gains (losses), net ( 3,730 ) 1,444 ( 9,846 ) ( 5,883 ) Net change in care trusts’ corpus 3,695 ( 1,451 ) 8,856 5,515 Total $ — $ — $ — $ — Cemetery perpetual care trust investment security transactions recorded in Other revenue are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Investment income $ 3,075 $ 2,663 $ 8,613 $ 8,741 Realized losses, net ( 739 ) ( 322 ) ( 1,343 ) ( 796 ) Total $ 2,336 $ 2,341 $ 7,270 $ 7,945 Purchases and sales of investments in the cemetery perpetual care trusts are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Purchases $ ( 233 ) $ ( 4,625 ) $ ( 644 ) $ ( 11,336 ) Sales — 4,529 441 15,433 - 21 - 9. RECEIVABLES FROM PRENEED FUNERAL TRUSTS Our receivables from preneed funeral trusts represent assets in trusts which 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. Receivables from preneed funeral trusts are as follows (in thousands): December 31, 2022 September 30, 2023 Preneed funeral trust funds, at cost $ 20,594 $ 21,954 Less: allowance for contract cancellation ( 618 ) ( 659 ) Receivables from preneed funeral trusts, net $ 19,976 $ 21,295 The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations related to the underlying preneed funeral contracts at December 31, 2022 and September 30, 2023. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes unrealized gains and losses on trust assets. The composition of the preneed funeral trust funds at September 30, 2023 is as follows (in thousands): Historical Cost Basis Fair Value Cash and cash equivalents $ 6,442 $ 6,442 Fixed income investments 12,661 12,661 Mutual funds and common stocks 2,847 2,519 Annuities 4 4 Total $ 21,954 $ 21,626 The composition of the preneed funeral trust funds at December 31, 2022 is as follows (in thousands): Historical Cost Basis Fair Value Cash and cash equivalents $ 6,071 $ 6,071 Fixed income investments 11,795 11,795 Mutual funds and common stocks 2,725 2,440 Annuities 3 3 Total $ 20,594 $ 20,309 10. INTANGIBLE AND OTHER NON-CURRENT ASSETS Intangible and other non-current assets are as follows (in thousands): December 31, 2022 September 30, 2023 Tradenames $ 25,610 $ 28,863 Capitalized commissions on preneed contracts, net of accumulated amortization of $ 2,990 and $ 3,579 , respectively 4,048 4,507 Prepaid agreements not-to-compete, net of accumulated amortization of $ 3,515 and $ 3,707 , respectively 1,877 1,464 Internal-use software, net of accumulated amortization of $ 200 and $ 372 , respectively 1,271 1,968 Other 124 419 Intangible and other non-current assets, net $ 32,930 $ 37,221 Tradenames During the nine months ended September 30, 2023, we increased the value of our tradenames by $ 3.5 million, with $ 1.3 million allocated to our funeral home segment and $ 2.2 million allocated to our cemetery segment, related to our acquisition of a business located in Bakersfield, CA, as more fully described in Note 3 to the Consolidated Financial Statements. As a result of our 2023 qualitative assessment, we determined that there were factors that would indicate the need to perform an additional quantitative impairment test for certain funeral home businesses. As a result of this additional quantitative impairment test, we recorded an impairment to the tradenames for two of our funeral homes of $ 0.2 million, during the three and nine months ended September 30, 2023, as the carrying amount of these tradenames exceeded the fair value. For our 2022 - 22 - assessment, there was no impairment to intangibles assets. See Note 1 to the Consolidated Financial Statements included herein for a discussion of the methodology used for our indefinite-lived intangible asset impairment test. Capitalized Commissions 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. Amortization expense was $ 181,000 and $ 204,000 for the three months ended September 30, 2022 and 2023, respectively and $ 525,000 and $ 589,000 for the nine months ended September 30, 2022 and 2023, respectively. Prepaid Agreements Prepaid agreements not-to-compete are amortized over the term of the respective agreements, generally ranging from one to ten years . Amortization expense was $ 142,000 and $ 131,000 for the three months ended September 30, 2022 and 2023, respectively and $ 432,000 and $ 393,000 for the nine months ended September 30, 2022 and 2023, respectively. Internal-use Software Internal-use software is amortized on a straight-line basis typically over three to five years . Amortization expense was $ 56,000 and $ 72,000 for the three months ended September 30, 2022 and 2023, respectively and $ 167,000 and $ 206,000 for the nine months ended September 30, 2022 and 2023, respectively. The aggregate amortization expense for our capitalized commissions, prepaid agreements and internal-use software as of September 30, 2023 is as follows (in thousands): Capitalized Commissions Prepaid Agreements Internal-use Software Years ending December 31, Remainder of 2023 $ 209 $ 129 $ 79 2024 800 424 305 2025 735 377 409 2026 668 262 396 2027 603 142 394 Thereafter 1,492 130 385 Total amortization expense $ 4,507 $ 1,464 $ 1,968 11. CREDIT FACILITY AND ACQUISITION DEBT At September 30, 2023, our senior secured revolving credit facility (the “Credit Facility”) was comprised of: (i) a $ 250.0 million revolving credit facility, including a $ 15.0 million subfacility for letters of credit and a $ 10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $ 75.0 million in the aggregate in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 13, 2026. Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes (as defined in Note 12) and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Subsidiary Guarantors”). The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations, continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, among others. In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and the Subsidiary Guarantors to incur indebtedness, grant liens, make investments, engage in mergers and acquisitions, pay dividends and make other restricted payments, and certain financial maintenance covenants. At September 30, 2023, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed 6.00 to 1.00 and (B) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. We were in compliance with all of the covenants contained in our Credit Facility as of September 30, 2023. - 23 - Our Credit Facility and acquisition debt consisted of the following (in thousands): December 31, 2022 September 30, 2023 Credit Facility $ 190,700 $ 187,300 Debt issuance costs, net of accumulated amortization of $ 1,926 and $ 2,340 , respectively ( 1,864 ) ( 1,444 ) Total Credit Facility $ 188,836 $ 185,856 Acquisition debt $ 3,993 $ 3,924 Less: current portion ( 555 ) ( 589 ) Total acquisition debt, net of current portion $ 3,438 $ 3,335 At September 30, 2023, we had outstanding borrowings under the Credit Facility of $ 187.3 million. We also had one letter of credit for $ 2.3 million under the Credit Facility, which was increased to $ 2.6 million on July 7, 2023. The letter of credit will expire on November 27, 2023 and is expected to automatically renew annually and secures our obligations under our various self-insured policies. At September 30, 2023, we had $ 60.1 million of availability under the Credit Facility. The interest expense and amortization of debt issuance costs related to our Credit Facility are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Credit Facility interest expense $ 1,971 $ 4,508 $ 4,132 $ 12,987 Credit Facility amortization of debt issuance costs 109 138 293 414 Outstanding borrowings under our Credit Facility bear interest at a prime rate or the Bloomberg Short-Term Bank Yield Index (“BSBY”) rate, plus an applicable margin based on our leverage ratio. At September 30, 2023, the prime rate margin was equivalent to 2.375 % and the BSBY rate margin was 3.375 %. The weighted average interest rate on our Credit Facility was 4.3 % and 9.0 % for the three months ended September 30, 2022 and 2023, respectively and 3.1 % and 8.5 % for the nine months ended September 30, 2022 and 2023, respectively. Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3 % to 10.0 %. Original maturities range from nine to twenty years . The imputed interest expense related to our acquisition debt is as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Acquisition debt imputed interest expense $ 78 $ 70 $ 237 $ 212 12. SENIOR NOTES The carrying value of our 4.25 % senior notes due 2029 (the “Senior Notes”) is reflected on our Consolidated Balance Sheet as follows (in thousands): December 31, 2022 September 30, 2023 Long-term liabilities: Principal amount $ 400,000 $ 400,000 Debt discount, net of accumulated amortization of $ 794 and $ 1,178 , respectively ( 3,706 ) ( 3,322 ) Debt issuance costs, net of accumulated amortization of $ 226 and $ 336 , respectively ( 1,051 ) ( 941 ) Carrying value of the Senior Notes $ 395,243 $ 395,737 At September 30, 2023, the fair value of the Senior Notes, which are Level 2 measurements, was $ 342.6 million. The Senior Notes were issued under an indenture, dated as of May 13, 2021 (the “Indenture”), among the Company, the Subsidiary Guarantors and Wilmington Trust, National Association, as trustee. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally by each of the Subsidiary Guarantors. The Senior Notes mature on May 15, 2029, unless earlier redeemed or purchased and bear interest at 4.25 % per year, which is payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2021. - 24 - The Indenture contains restrictive covenants limiting our ability and the ability of our Restricted Subsidiaries (as defined in the Indenture) to, among other things, incur additional indebtedness or issue certain preferred shares, create liens on certain assets to secure debt, pay dividends or make other equity distributions, purchase or redeem capital stock, make certain investments, sell assets, agree to certain restrictions on the ability of Restricted Subsidiaries to make payments to us, consolidate, merge, sell or otherwise dispose of all or substantially all assets, or engage in transactions with affiliates. The Indenture also contains customary events of default. The interest expense and amortization of debt discount and debt issuance costs related to our Senior Notes are as follows (in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Senior Notes interest expense $ 4,250 $ 4,250 $ 12,730 $ 12,750 Senior Notes amortization of debt discount 125 129 368 384 Senior Notes amortization of debt issuance costs 35 37 104 110 The debt discount and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 68 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the Senior Notes for both the three and nine months ended September 30, 2022 and 2023 was 4.42 % and 4.30 %, respectively. 13. LEASES Our lease obligations consist of operating and finance leases related to real estate, equipment and vehicles. The components of lease cost are as follows (in thousands): Three months ended September 30, Nine months ended September 30, Income Statement Classification 2022 2023 2022 2023 Operating lease cost Facilities and grounds expense (1) $ 863 $ 887 $ 2,564 $ 2,638 Short-term lease cost Facilities and grounds expense (1) 82 75 260 261 Variable lease cost Facilities and grounds expense (1) 37 69 60 183 Finance lease cost: Depreciation of leased assets Depreciation and amortization (2) $ 111 $ 190 $ 328 $ 407 Interest on lease liabilities Interest expense 110 137 335 345 Total finance lease cost 221 327 663 752 Total lease cost $ 1,203 $ 1,358 $ 3,547 $ 3,834 (1) Facilities and grounds expense is included within Cost of service and General, administrative and other on our Consolidated Statements of Operations. (2) Depreciation and amortization expense is included within Field depreciation expense and General, administrative and other on our Consolidated Statements of Operations. Supplemental cash flow information related to our leases is as follows (in thousands): Nine months ended September 30, 2022 2023 Cash paid for operating leases included in operating activities $ 2,698 $ 2,840 Cash paid for finance leases included in financing activities 646 806 Right-of-use assets obtained in exchange for new leases is as follows (in thousands): Nine months ended September 30, 2022 2023 Right-of-use assets obtained in exchange for new operating lease liabilities $ 764 $ 412 Right-of-use assets obtained in exchange for new finance lease liabilities — 2,703 - 25 - Supplemental balance sheet information related to leases is as follows (in thousands): Lease Type Balance Sheet Classification December 31, 2022 September 30, 2023 Operating lease right-of-use assets Operating lease right-of-use assets $ 17,060 $ 15,987 Finance lease right-of-use assets Property, plant and equipment, net $ 6,770 $ 9,165 Accumulated depreciation Property, plant and equipment, net ( 2,881 ) ( 2,981 ) Finance lease right-of-use assets, net $ 3,889 $ 6,184 Operating lease current liabilities Current portion of operating lease obligations $ 2,203 $ 2,508 Finance lease current liabilities Current portion of finance lease obligations 414 714 Total current lease liabilities $ 2,617 $ 3,222 Operating lease non-current liabilities Obligations under operating leases, net of current portion $ 17,315 $ 15,736 Finance lease non-current liabilities Obligations under finance leases, net of current portion 4,743 6,724 Total non-current lease liabilities $ 22,058 $ 22,460 Total lease liabilities $ 24,675 $ 25,682 The average lease terms and discount rates at September 30, 2023 are as follows: Weighted-average remaining lease term (years) Weighted-average discount rate Operating leases 8.2 8.1 % Finance leases 9.7 8.3 % The aggregate future lease payments for non-cancelable operating and finance leases at September 30, 2023 are as follows (in thousands): Operating Finance Lease payments due: Remainder of 2023 $ 947 $ 337 2024 3,781 1,304 2025 3,489 1,250 2026 3,382 1,301 2027 3,249 1,185 Thereafter 9,924 5,582 Total lease payments 24,772 10,959 Less: Interest ( 6,528 ) ( 3,521 ) Present value of lease liabilities $ 18,244 $ 7,438 At September 30, 2023, we had no significant operating or finance leases that had not yet commenced. 14. STOCKHOLDERS ’ EQUITY Restricted Stock Restricted stock activity is as follows (in thousands, except shares): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Shares Fair Value Shares Fair Value Shares Fair Value Shares Fair Value Granted (1) — $ — — $ — — $ — 142,020 $ 4,634 Returned for payroll taxes — $ — — $ — 4,136 $ 205 1,473 $ 50 Cancelled 500 $ 16 — $ — 1,950 $ 63 1,826 $ 61 (1) Restricted stock granted during the nine months ended September 30 2023 vests over a three-year period, if the employee has remained continuously employed by us during the vesting period, at a weighted average stock price of $ 32.63 . - 26 - We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for restricted stock awards of $ 36,000 and $ 400,000 , for the three months ended September 30, 2022 and 2023, respectively and $ 133,000 and $ 972,000 for the nine months ended September 30, 2022 and 2023, respectively. Stock Options Stock option grants and cancellations are as follows (in thousands, except shares): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Shares Fair Value Shares Fair Value Shares Fair Value Shares Fair Value Granted (1) — $ — — $ — 58,500 $ 959 214,191 $ 2,506 Granted (2) — $ — — $ — 310,000 $ 5,388 — $ — Granted (3) 12,600 $ 143 — $ — 12,600 $ 143 — $ — Cancelled 3,652 $ 37 1,700 $ 20 28,790 $ 322 103,550 $ 1,354 (1) Stock options granted during the nine months ended September 30, 2022 and 2023 had a weighted average price of $ 49.48 and $ 32.69 , respectively. The fair value of these options was calculated using the Black-Scholes option pricing model. The options granted in 2022 vest over a five-year period and have a ten-year term. The options granted in 2023 vest over a three-year period and have a ten-year term. These options will vest if the employee has remained continuously employed by us through the vesting period. (2) Stock options granted during the nine months ended September 30, 2022 had a weighted average price of $ 49.48 . The fair value of these options was calculated using the Black-Scholes option pricing model and vest over a seven-year period and have a ten-year term. These options will vest if the employee has remained continuously employed by us through the vesting period. (3) Stock options granted during the three and nine months ended September 30, 2022 had a weighted average price of $ 31.58 . The fair value of these options was calculated using the Black-Scholes option pricing model and vest over a three-year period and have a ten-year term. These options will vest if the employee has remained continuously employed by us through the vesting period. The fair value of the options granted during the nine months ended September 30, 2023 was estimated using the Black-Scholes option pricing model with the following assumptions: Grant Date February 22, 2023 Expected holding period (years) 4.00 Awards granted 214,191 Dividend yield 1.38 % Expected volatility 43.68 % Risk-free interest rate 4.27 % Black-Scholes value $ 11.70 Additional stock option activity is as follows (in thousands, except shares): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Shares Cash Shares Cash Shares Cash Shares Cash Exercised (1) — N/A 44,900 N/A 18,736 N/A 74,200 N/A Returned for option price (2) — $ — 34,160 $ — 8,125 $ 60 56,957 $ — Returned for payroll taxes (3) — $ — 4,021 $ 133 1,601 $ 82 5,486 $ 174 (1) Stock options exercised during the three months ended September 30, 2023 had a weighted average exercise price of $ 25.1 with an aggregate intrinsic value of $ 0.4 million. Stock options exercised during the nine months ended September 30, 2022 and 2023 had a weighted average exercise price of $ 25.88 and $ 23.98 , respectively, with an aggregate intrinsic value of $ 0.5 million and $ 0.5 million, respectively. (2) Represents shares withheld/cash received for the payment of the option price. (3) Represents shares withheld/cash paid for the payment of payroll taxes. We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for stock options of $ 559,000 and $ 735,000 , for the three months ended September 30, 2022 and 2023, respectively and $ 1,747,000 and $ 2,180,000 for the nine months ended September 30, 2022 and 2023, respectively. - 27 - Performance Awards Performance award activity is as follows (in thousands, except shares): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Shares Fair Value Shares Fair Value Shares Fair Value Shares Fair Value Granted — $ — — $ — 27,013 $ 1,262 — $ — Cancelled — $ — — $ — 20,961 $ 201 40,181 $ 1,012 We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for performance awards of $ 701,000 and $ 622,000 for the three months ended September 30, 2022 and 2023, respectively and $ 1,904,000 and $ 1,350,000 for the nine months ended September 30, 2022 and 2023, respectively. Employee Stock Purchase Plan ESPP activity is as follows (in thousands, except shares): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Shares Price Shares Price Shares Price Shares Price ESPP 13,795 $ 27.34 11,782 $ 24.01 38,884 $ 35.42 49,824 $ 24.21 The fair value of the right (option) to purchase shares under the ESPP is estimated at the date of purchase with the four quarterly purchase dates using the following assumptions: 2023 Dividend yield 1.30 % Expected volatility 53.51 % Risk-free interest rate 4.53 %, 4.77 %, 4.75 %, 4.72 % Expected life (years) 0.25 , 0.50 , 0.75 , 1.00 We recorded stock-based compensation expense, which is included in General, administrative and other expenses and Regional and unallocated funeral and cemetery costs , for the ESPP totaling $ 120,000 and $ 74,000 for the three months ended September 30, 2022 and 2023, respectively and $ 471,000 and $ 489,000 for the nine months ended September 30, 2022 and 2023, respectively. Common Stock Former Employee Common stock activity is as follows (in thousands, except shares): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Shares Fair Value Shares Fair Value Shares Fair Value Shares Fair Value Granted (1) — $ — — $ — — $ — 30,000 $ 826 Returned for payroll taxes — $ — — $ — — $ — 1,001 $ 28 (1) During the nine months ended September 30, 2023, we issued 30,000 shares of common stock to a former executive at a stock price of $ 27.54 , in accordance with his Separation and Release agreement pertaining to his resignation from his position as the Company’s Executive Vice President, Chief Financial Officer & Treasurer effective January 2, 2023. We recorded stock-based compensation expense, which is included in General, administrative and other expenses , for common stock awards of $ 826,000 , for the nine months ended September 30, 2023. Good To Great Incentive Program During the nine months ended September 30, 2023, we issued 8,444 shares of our common stock to certain employees, which were valued at $ 0.3 million at a grant date stock price of $ 32.69 . During the nine months ended September 30, 2022, we issued 27,448 shares of our common stock to certain employees, which were valued at $ 1.4 million at a grant date stock price of $ 49.48 . - 28 - Non-Employee Director and Board Advisor Compensation Non-Employee Director and Board Advisor common stock activity is as follows (in thousands, except shares): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Shares Fair Value Shares Fair Value Shares Fair Value Shares Fair Value Board of Directors (1) 2,214 $ 71 3,747 $ 106 7,255 $ 307 8,342 $ 248 Advisor to the Board (1) 155 $ 5 176 $ 5 374 $ 15 492 $ 15 (1) Common stock granted during the three months ended September 30, 2022 and 2023 had a weighted average price of $ 32.16 and $ 28.25 , respectively and $ 42.20 and $ 29.78 for nine months ended September 30, 2022 and 2023, respectively. On July 5, 2023, our Board of Directors (the “Board”) elected Somer Webb to serve as a Class I Director until our 2024 annual meeting of shareholders. Ms. Webb was appointed to serve as the Chair of the Compensation Committee and a member of the Audit and Corporate Governance Committees. Concurrently with her appointment, the Board granted Ms. Webb 769 shares of our common stock under our Director Compensation Policy, which were valued at approximately $ 25,000 based on the closing price of our common stock on the grant date. On July 25, 2023, the Board elected Julie Sanders to serve as a Class II Director until our 2025 annual meeting of shareholders. Ms. Sanders was appointed to serve as a member of the Corporate Governance, Audit and Compensation Committees. Concurrently with her appointment, the Board granted Ms. Sanders 743 shares of our common stock under our Director Compensation Policy, which were valued at approximately $ 25,000 based on the closing price of our common stock on the grant date. We recorded compensation expense, which is included in General, administrative and other expenses , related to annual retainers, including the value of stock granted to non-employee Directors and an advisor to our Board, of $ 167,000 and $ 250,000 for the three months ended September 30, 2022 and 2023, respectively and $ 552,000 and $ 605,000 for the nine months ended September 30, 2022 and 2023, respectively. Share Repurchase Share repurchase activity is as follows (dollar value in thousands): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Number of Shares Repurchased — — 695,496 — Average Price Paid Per Share $ — $ — $ 49.22 $ — Dollar Value of Shares Repurchased $ — $ — $ 34,234 $ — Our shares were purchased in the open market at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury stock. At September 30, 2023, our share repurchase program had $ 48.9 million authorized for repurchases. Cash Dividend Our Board declared the following dividends payable on the dates below (in thousands, except per share amounts): 2023 Per Share Dollar Value March 1 st $ 0.1125 $ 1,661 June 1 st $ 0.1125 $ 1,679 September 1 st $ 0.1125 $ 1,683 2022 Per Share Dollar Value March 1 st $ 0.1125 $ 1,725 June 1 st $ 0.1125 $ 1,730 September 1 st $ 0.1125 $ 1,653 - 29 - 15. EARNINGS PER SHARE The following table sets forth the computation of the basic and diluted earnings per share (in thousands, except per share data): Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Numerator for basic and diluted earnings per share: Net income $ 5,860 $ 4,645 $ 33,361 $ 21,775 Less: Earnings allocated to unvested restricted stock ( 3 ) ( 44 ) ( 21 ) ( 194 ) Income attributable to common stockholders $ 5,857 $ 4,601 33,340 21,581 Denominator: Denominator for basic earnings per common share – weighted average shares outstanding 14,689 14,820 14,908 14,791 Effect of dilutive securities: Stock options 160 83 253 78 Performance awards 688 611 688 611 Denominator for diluted earnings per common share – weighted average shares outstanding 15,537 15,514 15,849 15,480 Basic earnings per common share: $ 0.40 $ 0.31 $ 2.22 $ 1.46 Diluted earnings per common share: $ 0.38 $ 0.30 $ 2.09 $ 1.39 Stock options excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect are as follows: Three months ended September 30, Nine months ended September 30, 2022 2023 2022 2023 Antidilutive stock options 363,073 1,233,784 294,310 1,200,211 Our performance awards are considered to be contingently issuable shares because their issuance is contingent upon the satisfaction of certain performance and service conditions. At September 30, 2023, we had satisfied certain performance criteria for the first, second and third predetermined growth targets of our performance awards to be considered outstanding. Therefore, we included these awards in the computation of diluted earnings per share as of the beginning of the reporting period. 16. SEGMENT REPORTING Revenue, disaggregated by major source for each of our reportable segments was as follows (in thousands): Three months ended September 30, 2023 Funeral Cemetery Total Services $ 39,090 $ 4,618 $ 43,708 Merchandise 20,325 4,067 24,392 Cemetery property — 15,895 15,895 Other revenue 3,211 3,288 6,499 Total $ 62,626 $ 27,868 $ 90,494 Three months ended September 30, 2022 Funeral Cemetery Total Services $ 38,477 $ 4,515 $ 42,992 Merchandise 20,777 3,651 24,428 Cemetery property — 13,179 13,179 Other revenue 3,526 3,372 6,898 Total $ 62,780 $ 24,717 $ 87,497 - 30 - Nine months ended September 30, 2023 Funeral Cemetery Total Services $ 122,491 $ 13,946 $ 136,437 Merchandise 64,505 12,245 76,750 Cemetery property — 49,178 49,178 Other revenue 10,220 11,101 21,321 Total $ 197,216 $ 86,470 $ 283,686 Nine months ended September 30, 2022 Funeral Cemetery Total Services $ 122,133 $ 13,146 $ 135,279 Merchandise 66,587 10,529 77,116 Cemetery property — 43,379 43,379 Other revenue 10,353 10,131 20,484 Total $ 199,073 $ 77,185 $ 276,258 The following table presents operating income (loss), income (loss) before income taxes and total assets (in thousands): Funeral Cemetery Corporate Consolidated Operating income (loss): Three months ended September 30, 2023 $ 18,145 $ 8,844 $ ( 11,303 ) $ 15,686 Three months ended September 30, 2022 17,584 8,023 ( 10,385 ) 15,222 Nine months ended September 30, 2023 $ 58,236 $ 30,496 $ ( 31,674 ) $ 57,058 Nine months ended September 30, 2022 61,531 26,662 ( 28,095 ) 60,098 Income (loss) before income taxes: Three months ended September 30, 2023 $ 18,377 $ 8,902 $ ( 20,503 ) $ 6,776 Three months ended September 30, 2022 17,605 7,985 ( 16,951 ) 8,639 Nine months ended September 30, 2023 $ 58,824 $ 30,757 $ ( 58,757 ) $ 30,824 Nine months ended September 30, 2022 64,577 26,671 ( 46,005 ) 45,243 Total assets: September 30, 2023 $ 799,740 $ 439,175 $ 16,544 $ 1,255,459 December 31, 2022 779,500 396,389 17,061 1,192,950 - 31 - 17. SUPPLEMENTARY DATA Balance Sheet The following table presents the detail of certain balance sheet accounts (in thousands): December 31, 2022 September 30, 2023 Prepaid and other current assets: Prepaid expenses $ 4,077 $ 3,350 Federal income taxes receivable 507 540 Other current assets 149 140 Total prepaid and other current assets $ 4,733 $ 4,030 Current portion of debt and lease obligations: Acquisition debt $ 555 $ 589 Finance lease obligations 414 714 Operating lease obligations 2,203 2,508 Total current portion of debt and lease obligations $ 3,172 $ 3,811 Accrued and other liabilities: Incentive compensation $ 12,140 $ 11,165 Insurance 3,051 3,685 Unrecognized tax benefit 3,294 3,360 Vacation 3,430 3,635 Interest 2,329 6,667 Salaries and wages 2,263 3,983 Employee meetings and award trips 746 966 Commissions 743 918 Income tax payable 459 — Ad valorem and franchise taxes 455 2,188 Perpetual care trust payable 222 493 Other accrued liabilities 1,489 917 Total accrued and other liabilities $ 30,621 $ 37,977 Other long-term liabilities: Incentive compensation $ 2,541 $ 1,357 Other long-term liabilities 524 147 Total other long-term liabilities $ 3,065 $ 1,504 Cash Flow The following information is supplemental disclosure for the Consolidated Statements of Cash Flows (in thousands): Nine months ended September 30, 2022 2023 Cash paid for interest $ 12,981 $ 21,754 Cash paid for taxes 7,046 9,388 - 32 - CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS In addition to historical information, this Quarterly Report on Form 10-Q contains certain statements and information that may constitute forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical information, should be deemed to be forward-looking statements. Words such as “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions may be used to identify forward-looking statements; however, the absence of these words does not mean that the statements are not forward-looking. These forward-looking statements include, but are not limited to, statements regarding any projections of earnings, revenue, cash flow, investment returns, capital allocation, debt levels, equity performance, death rates, market share growth, cost inflation, overhead, including talent recruitment, field and corporate incentive compensation, preneed sales or other financial items; any statements of the plans, strategies and objectives of management for future operations or financing activities, including, but not limited to, capital allocation, the ability to obtain credit or financing, organizational performance, anticipated integration, performance and other benefits of recently completed and anticipated acquisitions, and cost management and debt reductions; any statements of the plans, timing and objectives of management for acquisition and divestiture activities; any statements regarding future economic and market conditions or performance; any statements regarding the timing of the strategic alternatives review; the outcome of the strategic alternatives review, including whether any transaction occurs, if at all; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. While we believe these assumptions concerning future events are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to: • our ability to find and retain skilled personnel; • the effects of our talent recruitment efforts, incentive and compensation plans and programs, including such effects on our Standards Operating Model and the Company’s operational and financial performance; • our ability to execute our growth strategy, if at all; • our ability to execute and meet the objectives of our High Performance and Credit Profile Restoration Plan, if at all; • the execution of our Standards Operating, 4E Leadership and Strategic Acquisition Models; • the effects of competition; • changes in the number of deaths in our markets, which are not predictable from market to market or over the short term; • changes in consumer preferences and our ability to adapt to or meet those changes; • our ability to generate preneed sales, including implementing our cemetery portfolio sales strategy, product development and optimization plans; • the investment performance of our funeral and cemetery trust funds; • fluctuations in interest rates, including, but not limited to, the effects of increased borrowing costs under our Credit Facility and our ability to minimize such costs, if at all; • the effects of inflation on our operational and financial performance, including the increased overall costs for our goods and services, the impact on customer preferences as a result of changes in discretionary income, and our ability, if at all, to mitigate such effects; • our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness; • our ability to meet the timing, objectives and expectations related to our capital allocation framework, including our forecasted rates of return, planned uses of free cash flow and future capital allocation, including share repurchases, potential strategic acquisitions, internal growth projects, dividend increases, or debt repayment plans; • our ability to meet the projected financial and equity performance goals to our updated full year outlook, if at all; • the timely and full payment of death benefits related to preneed funeral contracts funded through life insurance contracts; • the financial condition of third-party insurance companies that fund our preneed funeral contracts; • increased or unanticipated costs, such as merchandise, goods, insurance or taxes, and our ability to mitigate or minimize such costs, if at all; • our level of indebtedness and the cash required to service our indebtedness; - 33 - • changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service; • effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof; • the potential impact of epidemics and pandemics, such as the COVID-19 coronavirus, including any new or emerging public health threats, on customer preferences and on our business; • government, social, business and other actions that have been and will be taken in response to pandemics and epidemics, such as those that were taken with the COVID-19 coronavirus, including potential responses to any new or emerging public health threats; • effects and expense of litigation; • consolidation in the funeral and cemetery industry; • our ability to identify and consummate strategic acquisitions, if at all, and successfully integrate acquired businesses with our existing businesses, including expected performance and financial improvements related thereto; • potential adverse impacts resulting from our recent announcement regarding our Board’s review of potential strategic alternatives for the Company; • economic, financial and stock market fluctuations; • interruptions or security lapses of our information technology, including any cybersecurity or ransomware incidents; • adverse developments affecting the financial services industry; • acts of war or terrorists acts and the governmental or military response to such acts; • our failure to maintain effective control over financial reporting; and • other factors and uncertainties inherent in the funeral and cemetery industry. For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (i) Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022. Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise. - 34 -