Edgar Filing: CARRIAGE SERVICES INC

Document

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)


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

For the quarterly period ended September 30, 2017


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

For the transition period from to

Commission File Number: 1-11961

CARRIAGE SERVICES, INC.

(Exact name of registrant as specified in its charter)



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

3040 Post Oak Boulevard, Suite 300
Houston, Texas, 77056
(Address of principal executive offices)

(713) 332-8400

(Registrant’s telephone number, including area code)

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

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

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



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

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

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

The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of October 20, 2017 was 16,085,750.

Table of Contents

CARRIAGE SERVICES, INC.

INDEX



	Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	3

Consolidated Balance Sheets as of December 31, 2016 and September 30, 2017	3

Consolidated Statements of Operations for the Three and Nine Months ended September 30, 2016 and 2017	4

Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2016 and 2017	5

Condensed Notes to Consolidated Financial Statements	6

Cautionary Statement on Forward–Looking Statements	30

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	32

Item 3. Quantitative and Qualitative Disclosures About Market Risk	45

Item 4. Controls and Procedures	46

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	47

Item 1A. Risk Factors	47

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	47

Item 3. Defaults Upon Senior Securities	47

Item 4. Mine Safety Disclosures	47

Item 5. Other Information	47

Item 6. Exhibits	47

SIGNATURE	48

INDEX OF EXHIBITS	49

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PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements.

CARRIAGE SERVICES, INC.

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)



				(unaudited)
	December 31, 2016			September 30, 2017
ASSETS
Current assets:
Cash and cash equivalents	$	3,286		$	759
Accounts receivable, net of allowance for bad debts of $746 in 2016 and $800 in 2017	18,860			18,821
Inventories	6,147			6,346
Prepaid expenses	2,640			1,355
Other current assets	2,034			764
Total current assets	32,967			28,045
Preneed cemetery trust investments	69,696			71,728
Preneed funeral trust investments	89,240			89,444
Preneed receivables, net of allowance for bad debts of $2,166 in 2016 and $2,230 in 2017	30,383			31,279
Receivables from preneed trusts	14,218			15,306
Property, plant and equipment, net of accumulated depreciation of $110,509 in 2016 and $113,616 in 2017	235,113			235,501
Cemetery property, net of accumulated amortization of $34,194 in 2016 and $36,638 in 2017	76,119			76,961
Goodwill	275,487			275,487
Intangible and other non-current assets	14,957			14,616
Cemetery perpetual care trust investments	46,889			48,679
Total assets	$	885,069		$	887,046
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	13,267		$	16,323
Accounts payable	10,198			6,686
Other liabilities	717			1,811
Accrued liabilities	20,091			15,294
Total current liabilities	44,273			40,114
Long-term debt, net of current portion	137,862			125,442
Revolving credit facility	66,542			74,550
Convertible subordinated notes due 2021	119,596			123,182
Obligations under capital leases, net of current portion	2,630			2,492
Deferred preneed cemetery revenue	54,631			55,275
Deferred preneed funeral revenue	33,198			34,652
Deferred tax liability	42,810			44,025
Other long-term liabilities	2,567			2,723
Deferred preneed cemetery receipts held in trust	69,696			71,728
Deferred preneed funeral receipts held in trust	89,240			89,444
Care trusts’ corpus	46,290			48,186
Total liabilities	709,335			711,813
Commitments and contingencies:
Stockholders’ equity:
Common stock, $.01 par value; 80,000,000 shares authorized and 22,490,855 and 22,609,120 shares issued at December 31, 2016 and September 30, 2017, respectively	225			226
Additional paid-in capital	215,064			216,396
Retained earnings	20,711			35,243
Treasury stock, at cost; 5,849,316 and 6,523,370 shares at December 31, 2016 and September 30, 2017, respectively	(60,266		)	(76,632		)
Total stockholders’ equity	175,734			175,233
Total liabilities and stockholders’ equity	$	885,069		$	887,046

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

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CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share data)



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2017			2016			2017
Revenues:
Funeral	$	45,183		$	47,329		$	140,952		$	150,279
Cemetery	14,957			13,725			44,384			42,784
	60,140			61,054			185,336			193,063
Field costs and expenses:
Funeral	26,982			29,267			82,546			89,118
Cemetery	8,695			8,769			25,546			26,142
Depreciation and amortization	3,452			3,601			10,359			10,719
Regional and unallocated funeral and cemetery costs	2,783			3,937			8,547			9,845
	41,912			45,574			126,998			135,824
Gross profit	18,228			15,480			58,338			57,239
Corporate costs and expenses:
General, administrative and other	6,130			6,134			21,208			19,549
Home office depreciation and amortization	355			401			1,139			1,155
	6,485			6,535			22,347			20,704
Operating income	11,743			8,945			35,991			36,535
Interest expense	(2,903		)	(3,282		)	(8,722		)	(9,517		)
Accretion of discount on convertible subordinated notes	(981		)	(1,097		)	(2,862		)	(3,200		)
Loss on early extinguishment of debt	—			—			(567		)	—
Other, net	(285		)	(6		)	20			(3		)
Income before income taxes	7,574			4,560			23,860			23,815
Provision for income taxes	(3,030		)	(1,824		)	(9,545		)	(9,526		)
Tax adjustment related to certain discrete items	1,139			302			1,139			243
Total provision for income taxes	$	(1,891	)	$	(1,522	)	$	(8,406	)	$	(9,283	)
Net income	$	5,683		$	3,038		$	15,454		$	14,532

Basic earnings per common share:	$	0.34		$	0.18		$	0.93		$	0.87
Diluted earnings per common share:	$	0.33		$	0.17		$	0.91		$	0.81

Dividends declared per common share	$	0.050		$	0.050		$	0.100		$	0.150

Weighted average number of common and common equivalent shares outstanding:
Basic	16,529			16,476			16,502			16,575
Diluted	17,101			17,598			16,962			17,887

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

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CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)



	For the Nine Months Ended September 30,
	2016			2017
Cash flows from operating activities:
Net income	$	15,454		$	14,532
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,498			11,874
Provision for losses on accounts receivable	1,522			1,737
Stock-based compensation expense	2,645			2,394
Deferred income tax expense	3,618			1,215
Amortization of deferred financing costs	622			614
Accretion of discount on convertible subordinated notes	2,862			3,200
Loss on early extinguishment of debt	567			—
Net loss on sale and disposal of other assets	186			341
Impairment of intangible assets	145			—

Changes in operating assets and liabilities that provided (required) cash:
Accounts and preneed receivables	(3,945		)	(2,594		)
Inventories and other current assets	682			2,356
Intangible and other non-current assets	386			340
Preneed funeral and cemetery trust investments	(4,828		)	(5,114		)
Accounts payable	(2,149		)	(3,510		)
Accrued and other liabilities	292			(2,790		)
Deferred preneed funeral and cemetery revenue	742			2,098
Deferred preneed funeral and cemetery receipts held in trust	4,541			4,132
Net cash provided by operating activities	34,840			30,825

Cash flows from investing activities:
Acquisitions and land for new construction	(15,056		)	(723		)
Purchase of land and buildings previously leased	(6,258		)	—
Net proceeds from the sale of other assets	955			405
Capital expenditures	(12,039		)	(13,129		)
Net cash used in investing activities	(32,398		)	(13,447		)

Cash flows from financing activities:
Borrowings from the revolving credit facility	45,500			75,100
Payments against the revolving credit facility	(74,800		)	(67,300		)
Borrowings from the term loan	39,063			—
Payments against the term loan	(8,438		)	(8,438		)
Payments on other long-term debt and obligations under capital leases	(987		)	(1,084		)
Payments on contingent consideration recorded at acquisition date	—			(101		)
Proceeds from the exercise of stock options and employee stock purchase plan contributions	686			1,296
Taxes paid on restricted stock vestings and exercise of non-qualified options	(560		)	(509		)
Dividends paid on common stock	(1,662		)	(2,503		)
Purchase of treasury stock	—			(16,366		)
Payment of loan origination costs related to the credit facility	(717		)	—
Excess tax deficiency of equity compensation	(207		)	—
Net cash used in financing activities	(2,122		)	(19,905		)

Net increase (decrease) in cash and cash equivalents	320			(2,527		)
Cash and cash equivalents at beginning of period	535			3,286
Cash and cash equivalents at end of period	$	855		$	759

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

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CARRIAGE SERVICES, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company

Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of deathcare services and merchandise in the United States. As of September 30, 2017, we operated 171 funeral homes in 28 states and 32 cemeteries in 11 states.

Our operations are reported in two business segments: Funeral Home Operations and Cemetery Operations. Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an at-need and preneed basis.

Principles of Consolidation and Interim Condensed Disclosures

Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 2016 unless otherwise disclosed herein, and should be read in conjunction therewith.

Reclassifications

Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.

Cash and Cash Equivalents

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

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, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.

Funeral and Cemetery Operations

We record the revenue from sales of funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Cemetery interment rights are recorded as revenue in accordance with the accounting provisions for real estate sales. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the interment right contract price. Interment right costs, which include real property and other costs related to cemetery development, are expensed using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery property of approximately $0.9 million for both the three months ended September 30, 2016 and 2017 and $3.1 million and $2.4 million for the nine months ended September 30, 2016 and 2017, respectively. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.

Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.

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When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costs are expensed when incurred.

Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of September 30, 2017, CSV RIA provided these services to two institutions, which have custody of 79% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.

Accounts receivable was comprised of the following at December 31, 2016 and September 30, 2017 (in thousands):



	December 31, 2016		September 30, 2017
Funeral receivables, net of allowance for bad debt of $189 and $197, respectively	$	8,664	$	7,865
Cemetery receivables, net of allowance for bad debt of $557 and $603, respectively	9,862		10,552
Other receivables	334		404
Accounts receivable, net	$	18,860	$	18,821

Non-current preneed receivables represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables were comprised of the following at December 31, 2016 and September 30, 2017 (in thousands):



	December 31, 2016		September 30, 2017
Funeral receivables, net of allowance for bad debt of $862 and $883, respectively	$	7,761	$	7,943
Cemetery receivables, net of allowance for bad debt of $1,304 and $1,347, respectively	22,622		23,336
Preneed receivable, net	$	30,383	$	31,279

Bad debt expense totaled approximately $0.5 million and $0.6 million for the three months ended September 30, 2016 and 2017, respectively, and $1.5 million and $1.7 million for the nine months ended September 30, 2016 and 2017, respectively.

Property, Plant and Equipment

Property, plant and equipment (including equipment under capital leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method.

Property, plant and equipment was comprised of the following at December 31, 2016 and September 30, 2017 (in thousands):



	December 31, 2016			September 30, 2017
Land	$	73,744		$	73,503
Buildings and improvements	195,214			201,444
Furniture, equipment and automobiles	76,664			74,170
Property, plant and equipment, at cost	345,622			349,117
Less: accumulated depreciation	(110,509		)	(113,616		)
Property, plant and equipment, net	$	235,113		$	235,501

We recorded depreciation expense of approximately $2.9 million and $3.1 million for the three months ended September 30, 2016 and 2017, respectively and $8.4 million and $9.4 million for the nine months ended September 30, 2016 and 2017, respectively. During the nine months ended September 30, 2017, we acquired real estate for $0.7 million for funeral home parking lot expansion projects. During the nine months ended September 30, 2016, we acquired real estate for $2.7 million for various funeral home expansion projects and we purchased land and buildings at four funeral homes that were previously leased for approximately $6.3 million.

Goodwill

Effective January 1, 2017, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”), Intangibles (Topic 350): Goodwill and Other. The guidance simplifies subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for

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impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill.

We performed our 2017 annual impairment test of goodwill using information as of August 31, 2017. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. For our 2017 annual impairment test, we performed a qualitative assessment and concluded that there was not an impairment to goodwill.

For our 2016 annual impairment test, we performed a quantitative impairment test. Our intent is to perform the quantitative test at least once every three years unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of the methodology used for the goodwill impairment quantitative test.

In addition to our annual review, 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 adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results. No such events or changes occurred between our testing date and reporting period to trigger a subsequent impairment review. No impairments were recorded to our goodwill during the nine months ended September 30, 2016 and 2017.

Intangible Assets

Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets on our Consolidated Balance Sheets. Our tradenames are considered to have an indefinite life and are not subject to amortization.

We performed our 2017 annual impairment test of intangible assets using information as of August 31, 2017. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with the guidance. For our 2017 annual impairment test, we performed a qualitative assessment and concluded that there was not an impairment to intangibles assets.

In addition to our annual review, 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. During the third quarter of 2016, we recorded an impairment to tradenames of $145,000 related to a funeral home business held for sale as the carrying value exceeded fair value. No other impairments were recorded to our intangible assets during the nine months ended September 30, 2016 and 2017.

Stock Plans and Stock-Based Compensation

We have stock-based employee and director compensation plans under which we grant restricted stock, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period. Fair value is determined on the date of the grant.

The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date. The fair value of the ESPP is determined

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based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.

Effective January 1, 2017, we adopted the FASB’s ASU, Compensation: (Topic 718): Stock Compensation. The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.

The guidance requires that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. Entities are required to record a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the beginning of the annual period of adoption, with a cumulative-effect adjustment to retained earnings. At January 1, 2017, we performed an analysis for unrecognized excess tax benefits and deficiencies and determined that there were no adjustments to retained earnings, as there are no unrecognized excess tax benefits.

The guidance also requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement on a prospective basis. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. For the three and nine months ended September 30, 2017, the excess tax deficiency related to share-based payments was approximately $70,000, recorded within Tax adjustment related to certain discrete items on our Consolidated Statements of Operations. In addition, excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows.

The guidance also allows for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.

The guidance also requires that the presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and applied retrospectively. This resulted in $0.6 million of employee taxes paid from withheld shares being presented as financing activities on our Consolidated Statement of Cash Flows for both the nine months ended September 30, 2016 and 2017. Prior to January 1, 2017, these amounts were presented as operating activities on our Consolidated Statement of Cash Flows.

We adopted all of the provisions of this amendment in accordance with the transition requirements and it did not have a material effect on our Consolidated Financial Statements.

See Note 11 to the Consolidated Financial Statements included herein for additional information on our stock-based compensation plans.

Income Taxes

We and our subsidiaries file a consolidated U.S. federal income tax return, separate income tax returns in 15 states in which we operate and combined or unitary income tax returns in 13 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities.

We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.

We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets.

On July 18, 2017, we received notification that the Internal Revenue Service (“IRS”) selected our tax years ended December 31, 2013, 2014 and 2015 for examination. The examination of our tax year ended December 31, 2013 had previously been completed during 2016, however, we filed an amendment on June 1, 2017. The examination related to 2013 should be limited in scope to the items revised in the amendment, which include research and development credits, state taxes and preneed cost of sales.

Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, but are not limited to, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, and increases or decreases in valuation allowances on deferred tax assets.

Income tax expense was $1.9 million for the three months ended September 30, 2016 compared to $1.5 million for the three months ended September 30, 2017. We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for both the three and nine months ended September 30, 2016 and 2017. Income tax expense was $8.4 million for the nine months ended September 30, 2016 compared to $9.3 million for the nine months ended September 30, 2017.

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During the third quarter of 2017, we recognized a tax benefit of $0.2 million which reduced our effective tax rate to 39.0% for the nine months ended September 30, 2017. During the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016.

Correction of Immaterial Error

During the nine months ended September 30, 2017, we corrected an immaterial error related to 2013. The adjustment related to the correction of the deferred tax liability for the difference in book and tax basis of certain assets. The error had the impact of understating the deferred tax liability and overstating net income in 2013. Management evaluated the effect of the adjustment on previously issued interim and annual consolidated financial statements in accordance with the SEC's Staff Accounting Bulletin (“SAB”) No. 99 and SAB 108 and concluded that it was immaterial to the interim and annual periods. As a result, in accordance with SAB No. 108, we corrected our Consolidated Balance Sheets as of January 1, 2015.

The effect of this adjustment on our Consolidated Balance Sheets as of December 31, 2016 is as follows (dollars in thousands):



			% Change
Increase in Deferred tax liability	$	2,255	5.6	%
Increase in Total liabilities	$	2,255	0.3	%
Decrease in Retained earnings	$	2,255	9.8	%
Decrease in Total stockholders' equity	$	2,255	1.3	%

This adjustment had no impact on our Consolidated Statements of Operations or Consolidated Statement of Cash Flows for any periods presented.

Related Party Transactions

Management evaluated reportable events and transactions that occurred between us and related persons during the nine months ended September 30, 2017. See Note 15 to the Consolidated Financial Statements included herein for additional information on our related party transactions.

Subsequent Events

Management evaluated events and transactions during the period subsequent to September 30, 2017 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.

See Note 16 to the Consolidated Financial Statements included herein for additional information on our subsequent events.

2.RECENTLY ISSUED ACCOUNTING STANDARDS

Stock-Based Compensation

In May 2017, the FASB issued ASU, Compensation: (Topic 718): Stock Compensation - Scope of Modification Accounting. The amendments provide guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the award is modified. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. The amendments should be applied prospectively to an award modified on or after the adoption date. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.

Revenue Recognition

In May 2014, the FASB issued ASU, Revenue from Contracts with Customers (Topic 606). FASB Accounting Standards Codification (“ASC”) Topic 606 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

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The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 using the modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application.

Currently, our sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the interment right. We have analyzed the impact on our contract portfolio by reviewing our revenue streams and our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard to our contracts and we do not expect the new accounting standard to significantly impact our current accounting for the cemetery interment rights. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.

We expect the adoption of this new accounting standard to affect our accounting for the selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts. Currently, these costs are charged to operations using the specific identification method in the period incurred. Under the new accounting standard, we will capitalize and amortize these costs over the typical financing term for our preneed cemetery merchandise and services contracts and over the average preneed maturity period for our preneed funeral trust contracts. Based on our preliminary assessments, we do not expect the change to have a material impact on our Consolidated Financial Statements. The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts will continue to be charged to operations using the specific identification method in the period incurred.

We are continually evaluating the impact on our Consolidated Financial Statements and are currently modifying our financial systems to provide accounting under the new guidance.

Leases

In February 2016, the FASB issued ASU, Leases (Topic 842). This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.

3. PRENEED TRUST INVESTMENTS

Preneed Cemetery Trust Investments

Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed cemetery contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed cemetery trust investments can be reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.

The components of Preneed cemetery trust investments on our Consolidated Balance Sheets at December 31, 2016 and September 30, 2017 were as follows (in thousands):



	December 31, 2016			September 30, 2017
Preneed cemetery trust investments, at market value	$	71,834		$	73,889
Less: allowance for contract cancellation	(2,138		)	(2,161		)
Preneed cemetery trust investments, net	$	69,696		$	71,728

Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some instances, a portion of all of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if

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the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At September 30, 2017, none of our preneed cemetery trust investments were underfunded.

Earnings from our preneed cemetery trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.

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 and common stock. Where quoted market prices are not available for the specific security, fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2017. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.

The cost and fair market values associated with preneed cemetery trust investments at September 30, 2017 are detailed below (in thousands):



	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	4,698	$	—	$	—		$	4,698
Fixed income securities:
Foreign debt	2	4,834		275		(168		)	4,941
Corporate debt	2	19,335		1,145		(553		)	19,927
Preferred stock	2	16,329		383		(524		)	16,188
Mortgage-backed securities	2	1,089		240		(23		)	1,306
Common stock	1	24,574		3,376		(3,119		)	24,831
Mutual funds:
Fixed Income	2	1,200		81		—			1,281
Trust securities		$	72,059	$	5,501	$	(4,387	)	$	73,173
Accrued investment income		$	716						$	716
Preneed cemetery trust investments									$	73,889
Market value as a percentage of cost									101.5		%

The estimated maturities of the fixed income securities included above are as follows (in thousands):



Due in one year or less	$	15
Due in one to five years	2,718
Due in five to ten years	5,751
Thereafter	33,879
Total	$	42,363

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The cost and fair market values associated with preneed cemetery trust investments at December 31, 2016 are detailed below (in thousands):



	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	10,852	$	—	$	—		$	10,852
Fixed income securities:
Municipal bonds	2	496		18		(4		)	510
Foreign debt	2	7,574		160		(656		)	7,078
Corporate debt	2	20,621		1,569		(1,123		)	21,067
Preferred stock	2	16,287		8		(947		)	15,348
Mortgage-backed securities	2	949		372		(4		)	1,317
Common stock	1	13,250		2,191		(1,838		)	13,603
Mutual funds:
Fixed income		1,223		107		—			1,330
Trust securities		$	71,252	$	4,425	$	(4,572	)	$	71,105
Accrued investment income		$	729						$	729
Preneed cemetery trust investments									$	71,834
Market value as a percentage of cost									99.8		%

We determine whether or not the assets in the preneed cemetery trust investments have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in Deferred preneed cemetery receipts held in trust on our Consolidated Balance Sheets. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.8 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.

At September 30, 2017, we had certain investments within our preneed cemetery trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.

Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2017 are shown in the following table (in thousands):



	September 30, 2017
	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	$	153	$	(2	)	$	1,657	$	(166	)	$	1,810	$	(168	)
Corporate debt	2,158		(410		)	624		(143		)	2,782		(553		)
Preferred stock	273		(2		)	8,111		(522		)	8,384		(524		)
Mortgage-backed securities	200		(23		)	—		—			200		(23		)
Common stock	8,473		(2,247		)	1,936		(872		)	10,409		(3,119		)
Mutual Funds:
Fixed Income	—		—			—		—			—		—
Total temporary impaired securities	$	11,257	$	(2,684	)	$	12,328	$	(1,703	)	$	23,585	$	(4,387	)

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Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):



	December 31, 2016
	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:
Municipal bonds	$	228	$	(4	)	$	—	$	—		$	228	$	(4	)
Foreign debt	2,523		(180		)	2,868		(475		)	5,391		(655		)
Corporate debt	6,939		(233		)	2,168		(890		)	9,107		(1,123		)
Preferred stock	3,217		(121		)	11,635		(826		)	14,852		(947		)
Mortgage-backed securities	51		(5		)	—		—			51		(5		)
Common stock	2,608		(202		)	3,385		(1,636		)	5,993		(1,838		)
Total temporary impaired securities	$	15,566	$	(745	)	$	20,056	$	(3,827	)	$	35,622	$	(4,572	)

Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2017			2016			2017
Investment income	$	578		$	474		$	1,546		$	1,755
Realized gains	126			—			415			2,215
Realized losses	(673		)	—			(4,081		)	(1,312		)
Expenses and taxes	(139		)	(336		)	(832		)	(1,213		)
Decrease (increase) in deferred preneed cemetery receipts held in trust	108			(138		)	2,952			(1,445		)
	$	—		$	—		$	—		$	—

Purchases and sales of investments in the preneed cemetery trusts for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2017			2016			2017
Purchases	$	(1,434	)	$	(915	)	$	(19,540	)	$	(19,355	)
Sales	$	5,973		$	—		$	18,003		$	13,189

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. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.

The components of Preneed funeral trust investments on our Consolidated Balance Sheets at December 31, 2016 and September 30, 2017 were as follows (in thousands):



	December 31, 2016			September 30, 2017
Preneed funeral trust investments, at market value	$	91,980		$	92,151
Less: allowance for contract cancellation	(2,740		)	(2,707		)
Preneed funeral trust investments, net	$	89,240		$	89,444

Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and in some instances, a portion of all earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized

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losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At September 30, 2017, none of our preneed funeral trust investments were underfunded.

Earnings from our preneed funeral trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.

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 and common stock. 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 other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 for the three and nine months ended September 30, 2017. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.

The cost and fair market values associated with preneed funeral trust investments at September 30, 2017 are detailed below (in thousands):



	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	15,636	$	—	$	—		$	15,636
Fixed income securities:
U.S treasury debt	1	1,490		13		(4		)	1,499
Foreign debt	2	4,882		282		(166		)	4,998
Corporate debt	2	20,244		1,165		(571		)	20,838
Preferred stock	2	16,837		457		(526		)	16,768
Mortgage-backed securities	2	1,273		255		(25		)	1,503
Common stock	1	24,488		3,392		(3,133		)	24,747
Mutual funds:
Fixed income	2	1,998		87		(38		)	2,047
Other investments	2	3,374		—		—			3,374
Trust securities		$	90,222	$	5,651	$	(4,463	)	$	91,410
Accrued investment income		$	741						$	741
Preneed funeral trust investments									$	92,151
Market value as a percentage of cost									101.3		%

The estimated maturities of the fixed income securities included above are as follows (in thousands):



Due in one year or less	$	78
Due in one to five years	4,320
Due in five to ten years	6,208
Thereafter	35,000
Total	$	45,606

The cost and fair market values associated with preneed funeral trust investments at December 31, 2016 are detailed below (in thousands):

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	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	22,787	$	—	$	—		$	22,787
Fixed income securities:
U.S. treasury debt	1	1,491		21		(10		)	1,502
Municipal bonds	2	447		17		(4		)	460
Foreign debt	2	7,692		170		(677		)	7,185
Corporate debt	2	21,454		1,566		(1,134		)	21,886
Preferred stock	2	17,037		64		(970		)	16,131
Mortgage-backed securities	2	1,165		400		(5		)	1,560
Common stock	1	13,675		2,256		(1,850		)	14,081
Mutual funds:
Fixed income	2	2,124		115		(66		)	2,173
Other investments	2	3,463		—		—			3,463
Trust securities		$	91,335	$	4,609	$	(4,716	)	$	91,228
Accrued investment income		$	752						$	752
Preneed funeral trust investments									$	91,980
Market value as a percentage of cost									99.9		%

We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral receipts held in trust on our Consolidated Balance Sheets. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.9 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.

At September 30, 2017, we had certain investments within our preneed funeral trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.

Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2017 are shown in the following table (in thousands):

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	September 30, 2017
	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	$	837	$	(4	)	$	—	$	—		$	837	$	(4	)
Foreign debt	170		(4		)	1,628		(163		)	1,798		(167		)
Corporate debt	2,273		(430		)	609		(141		)	2,882		(571		)
Preferred stock	191		(6		)	8,183		(520		)	8,374		(526		)
Mortgage-backed securities	234		(24		)	9		—			243		(24		)
Common stock	8,497		(2,241		)	1,934		(892		)	10,431		(3,133		)
Mutual Funds:
Fixed income	79		(1		)	608		(37		)	687		(38		)
Total temporary impaired securities	$	12,281	$	(2,710	)	$	12,971	$	(1,753	)	$	25,252	$	(4,463	)

Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):



	December 31, 2016
	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	$	834	$	(10	)	$	—	$	—		$	834	$	(10	)
Municipal bonds	244		(5		)	—		—			244		(5		)
Foreign debt	2,654		(186		)	2,905		(490		)	5,559		(676		)
Corporate debt	6,977		(215		)	2,234		(919		)	9,211		(1,134		)
Preferred stock	3,420		(128		)	11,750		(842		)	15,170		(970		)
Mortgage-backed securities	55		(5		)	11		(1		)	66		(6		)
Common stock	2,795		(216		)	3,390		(1,634		)	6,185		(1,850		)
Mutual funds:
Fixed income	97		(7		)	644		(58		)	741		(65		)
Total temporary impaired securities	$	17,076	$	(772	)	$	20,934	$	(3,944	)	$	38,010	$	(4,716	)

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Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2017			2016			2017
Investment income	$	596		$	524		$	1,639		$	1,801
Realized gains	131			—			525			2,296
Realized losses	(716		)	(2		)	(4,090		)	(1,314		)
Expenses and taxes	(253		)	(390		)	(946		)	(1,106		)
Decrease (increase) in deferred preneed funeral receipts held in trust	242			(132		)	2,872			(1,677		)
	$	—		$	—		$	—		$	—

Purchases and sales of investments in the preneed funeral trusts for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):



	For the Three Months Ended September 30,						For the Nine Months Ended September 30,
	2016			2017			2016			2017
Purchases	$	(1,486	)	$	(966	)	$	(19,917	)	$	(19,548	)
Sales	$	6,336		$	23		$	19,005		$	13,266

4. PRENEED CEMETERY RECEIVABLES

Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years, with such interest income reflected as Preneed cemetery finance charges. In substantially all cases, we receive an initial down payment at the time the contract is signed. At September 30, 2017, our total financed preneed receivables were $39.9 million, of which $29.3 million and $10.6 million were for cemetery interment rights and for merchandise and services, respectively. These amounts are presented on our consolidated balance sheet as $11.7 million within Accounts receivable and $28.2 million within Preneed receivables and exclude unearned finance charges and allowance for contract cancellations. The unearned finance charges associated with these receivables were $5.7 million at both December 31, 2016 and September 30, 2017.

We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately 4.8% of the total receivables on recognized sales at September 30, 2017. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the nine months ended September 30, 2017, the change in the allowance for contract cancellations was as follows (in thousands):



	September 30, 2017
Beginning balance	$	1,861
Write-offs and cancellations	(1,004		)
Provision	1,093
Ending balance	$	1,950

The aging of past due financing receivables as of September 30, 2017 was as follows (in thousands):



	31-60 Past Due		61-90 Past Due		91-120 Past Due		>120 Past Due		Total Past Due		Current		Total Financing Receivables
Recognized revenue	$	866	$	393	$	190	$	1,205	$	2,654	$	26,517	$	29,171
Deferred revenue	272		145		71		387		875		9,900		10,775
Total contracts	$	1,138	$	538	$	261	$	1,592	$	3,529	$	36,417	$	39,946

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5. RECEIVABLES FROM PRENEED TRUSTS

The receivables from preneed 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. As of December 31, 2016 and September 30, 2017, receivables from preneed trusts were as follows (in thousands):



	December 31, 2016			September 30, 2017
Preneed trust funds, at cost	$	14,658		$	15,780
Less: allowance for contract cancellation	(440		)	(474		)
Receivables from preneed trusts, net	$	14,218		$	15,306

The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at September 30, 2017 and December 31, 2016. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes the unrealized gains and losses on trust assets.

The composition of the preneed trust funds at September 30, 2017 was as follows (in thousands):



	Historical Cost Basis		Fair Value
As of September 30, 2017
Cash and cash equivalents	$	4,054	$	4,054
Fixed income investments	9,218		9,218
Mutual funds and common stocks	2,492		2,516
Annuities	16		16
Total	$	15,780	$	15,804

The composition of the preneed trust funds at December 31, 2016 was as follows (in thousands):



	Historical Cost Basis		Fair Value
As of December 31, 2016
Cash and cash equivalents	$	3,378	$	3,378
Fixed income investments	8,809		8,809
Mutual funds and common stocks	2,455		2,463
Annuities	16		16
Total	$	14,658	$	14,666

6.CEMETERY PERPETUAL CARE TRUST INVESTMENTS

Care trusts’ corpus on our Consolidated Balance Sheets represents the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2016 and September 30, 2017 were as follows (in thousands):



	December 31, 2016			September 30, 2017
Trust assets, at market value	$	46,889		$	48,679
Obligations due from trust	(599		)	(493		)
Care trusts’ corpus	$	46,290		$	48,186

We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights 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, as earned, in Revenues: Cemetery. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At September 30, 2017, none of our cemetery perpetual care trust investments were underfunded.

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classifications quarterly. There were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2017. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.

The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at September 30, 2017 (in thousands):



	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	2,573	$	—	$	—		$	2,573
Fixed income securities:
Foreign debt	2	3,568		211		(117		)	3,662
Corporate debt	2	13,194		768		(368		)	13,594
Preferred stock	2	11,464		260		(368		)	11,356
Mortgage-backed securities	2	661		147		(14		)	794
Common stock	1	15,263		1,985		(2,021		)	15,227
Mutual funds:
Fixed Income	2	909		64		—			973
Trust securities		$	47,632	$	3,435	$	(2,888	)	$	48,179
Accrued investment income		$	500						$	500
Cemetery perpetual care investments									$	48,679
Market value as a percentage of cost									101.1		%

The estimated maturities of the fixed income securities included above are as follows (in thousands):



Due in one year or less	$	9
Due in one to five years	1,770
Due in five to ten years	4,004
Thereafter	23,622
	$	29,405

The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2016 (in thousands):



	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	6,522	$	—	$	—		$	6,522
Fixed income securities:
Municipal bonds	2	365		13		(3		)	375
Foreign debt	2	5,100		99		(435		)	4,764
Corporate debt	2	13,715		966		(821		)	13,860
Preferred stock	2	11,323		5		(664		)	10,664
Mortgage-backed securities	2	569		223		(3		)	789
Common stock	1	8,259		1,382		(1,146		)	8,495
Mutual funds:
Fixed income	2	855		76		—			931
Trust securities		$	46,708	$	2,764	$	(3,072	)	$	46,400
Accrued investment income		$	489						$	489
Cemetery perpetual care investments									$	46,889
Market value as a percentage of cost									99.3		%

We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-

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than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.5 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.

At September 30, 2017, we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.

Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended September 30, 2017 are shown in the following table (in thousands):



	September 30, 2017
	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	$	93	$	(2	)	$	1,138	$	(115	)	$	1,231	$