Document
Table of Contents

 
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 June 30, 2018
OR
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
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 July 27, 2018 was 19,153,655.
 

Table of Contents

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

- 2 -
Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
 
(unaudited)
 
December 31, 2017
 
June 30, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
952

 
$
40,531

Accounts receivable, net of allowance for bad debts of $835 in 2017 and $854 in 2018
19,655

 
17,026

Inventories
6,519

 
6,616

Prepaid expenses
2,028

 
1,571

Other current assets
986

 
2,460

Total current assets
30,140

 
68,204

Preneed cemetery trust investments
73,853

 
70,278

Preneed funeral trust investments
90,682

 
91,203

Preneed receivables, net of allowance for bad debts of $2,278 in 2017 and $2,380 in 2018
31,644

 
21,327

Receivables from preneed trusts
15,287

 
16,313

Property, plant and equipment, net of accumulated depreciation of $115,776 in 2017 and $120,246 in 2018
247,294

 
244,579

Cemetery property, net of accumulated amortization of $37,543 in 2017 and $39,342 in 2018
76,331

 
75,599

Goodwill
287,956

 
287,956

Intangible and other non-current assets
18,117

 
21,552

Cemetery perpetual care trust investments
50,229

 
48,600

Total assets
$
921,533

 
$
945,611

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capital lease obligations
$
17,251

 
$
2,402

Accounts payable
6,547

 
5,788

Other liabilities
1,361

 
875

Accrued liabilities
17,559

 
17,021

Total current liabilities
42,718

 
26,086

Long-term debt, net of current portion
212,154

 
7,818

Convertible subordinated notes due 2021
124,441

 
25,425

Senior notes due 2026
—

 
318,807

Obligations under capital leases, net of current portion
6,361

 
6,287

Deferred preneed cemetery revenue
54,690

 
50,699

Deferred preneed funeral revenue
34,585

 
27,740

Deferred tax liability
31,159

 
30,293

Other long-term liabilities
3,378

 
2,843

Deferred preneed cemetery receipts held in trust
73,853

 
70,278

Deferred preneed funeral receipts held in trust
90,682

 
91,203

Care trusts’ corpus
49,856

 
48,154

Total liabilities
723,877

 
705,633

Commitments and contingencies:

 

Stockholders’ equity:
 
 

Common stock, $.01 par value; 80,000,000 shares authorized and 22,622,242 and 25,677,025 shares issued at December 31, 2017 and June 30, 2018, respectively
226

 
257

Additional paid-in capital
216,158

 
244,215

Retained earnings
57,904

 
72,138

Treasury stock, at cost; 6,523,370 shares at December 31, 2017 and June 30, 2018
(76,632
)
 
(76,632
)
Total stockholders’ equity
197,656

 
239,978

Total liabilities and stockholders’ equity
$
921,533

 
$
945,611

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

- 3 -
Table of Contents

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Revenues:
 
 
 
 
 
 
 
Funeral
$
48,739

 
$
48,532

 
$
102,950

 
$
107,126

Cemetery
15,113

 
15,315

 
29,059

 
30,108

 
63,852

 
63,847

 
132,009

 
137,234

Field costs and expenses:
 
 

 
 
 

Funeral
29,422

 
30,579

 
59,851

 
64,081

Cemetery
9,162

 
9,272

 
17,373

 
17,915

Depreciation and amortization
3,647

 
3,904

 
7,118

 
7,677

Regional and unallocated funeral and cemetery costs
2,954

 
3,267

 
5,908

 
6,548

 
45,185

 
47,022

 
90,250

 
96,221

Gross profit
18,667

 
16,825

 
41,759

 
41,013

Corporate costs and expenses:
 
 

 
 
 

General, administrative and other
6,568

 
6,380

 
13,415

 
12,998

Home office depreciation and amortization
378

 
464

 
754

 
907

 
6,946

 
6,844

 
14,169

 
13,905

Operating income
11,721

 
9,981

 
27,590

 
27,108

Interest expense
(3,206
)
 
(4,743
)
 
(6,235
)
 
(8,478
)
Accretion of discount on convertible subordinated notes
(1,066
)
 
(555
)
 
(2,103
)
 
(1,715
)
Net loss on early extinguishment of debt
—

 
(936
)
 
—

 
(936
)
Other, net
—

 
—

 
3

 
2

Income before income taxes
7,449

 
3,747

 
19,255

 
15,981

Provision for income taxes
(2,980
)
 
(1,030
)
 
(7,702
)
 
(4,395
)
Tax adjustment related to certain discrete items
(59
)
 
30

 
(59
)
 
517

Total provision for income taxes
(3,039
)
 
(1,000
)
 
$
(7,761
)
 
$
(3,878
)
Net income
$
4,410

 
$
2,747

 
$
11,494

 
$
12,103

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.26

 
$
0.15

 
$
0.69

 
$
0.71

Diluted earnings per common share:
$
0.24

 
$
0.15

 
$
0.63

 
$
0.67

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.050

 
$
0.075

 
$
0.100

 
$
0.150

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
16,652

 
17,916

 
16,625

 
17,010

Diluted
18,093

 
18,245

 
18,083

 
17,924

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

- 4 -
Table of Contents

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
Six Months Ended June 30,
 
2017
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
11,494

 
$
12,103

Adjustments to reconcile net income to net cash provided by operating activities:
 
 

Depreciation and amortization
7,872

 
8,584

Provision for losses on accounts receivable
1,112

 
883

Stock-based compensation expense
1,609

 
2,009

Deferred income tax expense
406

 
2,044

Amortization of deferred financing costs
408

 
320

Amortization of capitalized commissions on preneed contracts
—

 
293

Accretion of discount on convertible subordinated notes
2,103

 
1,715

Amortization of debt discount on senior notes
—

 
38

Net loss on early extinguishment of debt
—

 
936

Net loss on sale and disposal of other assets
311

 
45

 
 
 
 
Changes in operating assets and liabilities that provided (required) cash:
 
 

Accounts and preneed receivables
(468
)
 
(779
)
Inventories and other current assets
2,804

 
(1,139
)
Intangible and other non-current assets
211

 
(102
)
Preneed funeral and cemetery trust investments
(1,252
)
 
3,657

Accounts payable
(3,750
)
 
(758
)
Accrued and other liabilities
(5,102
)
 
(819
)
Deferred preneed funeral and cemetery revenue
2,020

 
2,007

Deferred preneed funeral and cemetery receipts held in trust
468

 
(4,756
)
Net cash provided by operating activities
20,246

 
26,281

 
 
 

Cash flows from investing activities:
 
 

Acquisition and land for new construction
(625
)
 
—

Capital expenditures
(8,790
)
 
(5,080
)
Net cash used in investing activities
(9,415
)
 
(5,080
)
 
 
 

Cash flows from financing activities:
 
 

Payments against the term loan
(5,625
)
 
(127,500
)
Borrowings from the revolving credit facility
36,800

 
96,000

Payments against the revolving credit facility
(42,400
)
 
(188,000
)
Payment of debt issuance costs related to long-term debt
—

 
(1,551
)
Redemption of the 2.75% convertible subordinated notes
—

 
(75,229
)
Payment of transaction costs related to the redemption of the 2.75% convertible subordinated notes
—

 
(845
)
Proceeds from the issuance of the 6.625% senior notes
—

 
320,125

Payments of debt issuance costs related to the 6.625% senior notes
—

 
(1,367
)
Payments on other long-term debt and obligations under capital leases
(723
)
 
(828
)
Payments on contingent consideration recorded at acquisition date
(101
)
 
(138
)
Proceeds from the exercise of stock options and employee stock purchase plan contributions
544

 
846

Taxes paid on restricted stock vestings and exercise of non-qualified options
(509
)
 
(495
)
Dividends paid on common stock
(1,668
)
 
(2,640
)
Net cash provided by (used in) financing activities
(13,682
)
 
18,378

 
 
 


Net increase (decrease) in cash and cash equivalents
(2,851
)
 
39,579

Cash and cash equivalents at beginning of period
3,286

 
952

Cash and cash equivalents at end of period
$
435

 
$
40,531

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

- 5 -
Table of Contents

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 U.S. provider of funeral and cemetery services and merchandise. As of June 30, 2018, we operated 178 funeral homes in 29 states and 32 cemeteries in 11 states. Our operations are reported in two business segments: Funeral Home Operations, which currently account for approximately 78% of our revenues and Cemetery Operations, which currently account for approximately 22% of our revenues.
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. We market funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) 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, 2017 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 statements 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.
Revenue Recognition - Funeral Home Operations
Our funeral home operations are principally service businesses that generate revenues from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and remembrance services and transportation services. We provide funeral services and products on both an atneed and preneed basis.
Funeral arrangements sold at the time of death are referred to as atneed funeral contracts. We record the revenue from atneed funeral contracts when the merchandise is delivered or the service is performed. Merchandise delivery and service performance generally takes place shortly after the time of need. Payment is due at or before time of transfer. Outstanding balances due from customers, if any, on atneed funeral contracts are included in Accounts receivable on our Consolidated Balance Sheets.
Funeral arrangements sold prior to death occurring are referred to as preneed funeral contracts. In many instances, the customer pays for the preneed contract over a period of time. The performance of a preneed funeral contract is secured by placing the funds

- 6 -
Table of Contents

collected, less amounts that we may retain under state regulations, in trust for the benefit of the customer or by the customer's purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. These methods are intended to fund preneed funeral contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases.
Revenue from preneed funeral contracts, along with accumulated earnings, is deferred until the time the merchandise is delivered or the service is performed. The principal and accumulated earnings of the trusts are withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in insurance benefits on the insurance products are recognized when the service is performed. The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheets. Beginning January 1, 2018, balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet, as noted in our table of Deferred Revenue in Note 3 to the Consolidated Financial Statements included herein. See Note 2 to the Consolidated Financial Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
The earnings from our preneed funeral trust investments, as well as trust management fees charged by our wholly-owned registered investment advisory firm (“CSV RIA”) are recorded as Preneed trust earnings - funeral, as noted in our table of disaggregated revenues in Note 3 to the Consolidated Financial Statements included herein. As of June 30, 2018, CSV RIA provided these services to one institution, which has custody of 77% 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.
When preneed funeral contracts are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recorded as Preneed funeral commission income, as noted in our table of disaggregated revenues in Note 3 to the Consolidated Financial Statements included herein, at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued. Preneed funeral contracts to be funded at maturity by insurance policies totaled $371.5 million at June 30, 2018 and are not included on our Consolidated Balance Sheets.
See Note 3 to the Consolidated Financial Statements included herein for additional information on our revenues.
Revenue Recognition - Cemetery Operations
Our cemetery operations generate revenues primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis.
Cemetery arrangements sold at the time of death are referred to as atneed cemetery contracts. We record the revenue from atneed cemetery contracts when the product is delivered or the service is performed. Payment is due at or before time of transfer. Outstanding balances due from customers, if any, on completed atneed contracts are included in Accounts receivable on our Consolidated Balance Sheet.
Cemetery arrangements sold prior to death occurring are referred to as preneed cemetery contracts. Preneed cemetery contracts are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. In substantially all cases, we receive an initial down payment at the time the contract is signed.
We record revenue on the sales of cemetery property interment rights at the time the contract is signed. Customers select a specific location and space for their interment right, thus, restricting us from other use or transfer of the contracted cemetery property. The interment right is deeded to the customer when the contract is paid in full. Revenue from preneed sales of cemetery merchandise and services contracts, along with accumulated earnings, is not recognized until the time the merchandise is transferred or the service is performed. Earnings on these installment contracts are recorded as Preneed cemetery finance charges, as noted in our table of disaggregated revenues in Note 3 to the Consolidated Financial Statements included herein.
The performance of the preneed cemetery contracts is secured by placing the funds collected, less amounts that we may retain under state regulations, in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. This method is intended to fund preneed contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases. The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheets. The earnings from preneed cemetery contracts placed in trust, as well as the trust management fees charged by our CSV RIA are recorded as Preneed trust earnings - cemetery, as noted in our table of disaggregated revenues in Note 3 to the Consolidated Financial Statements included herein.
Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable and Preneed receivables on our Consolidated Balance Sheet. Beginning January 1, 2018, balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance Sheet, as noted in our table of Deferred Revenue in Note 3 to the Consolidated Financial Statements included herein. See Note 2 to the Consolidated Financial

- 7 -
Table of Contents

Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
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 interment rights of approximately $0.8 million and $0.9 million for the three months ended June 30, 2017 and 2018, respectively and approximately $1.6 million and $1.8 million for the six months ended June 30, 2017 and 2018, respectively.
See Note 3 to the Consolidated Financial Statements included herein for additional information on our revenues.
Arrangements with Multiple Performance Obligations
Some of our contracts with customers include multiple performance obligations. For these contracts, we allocate transaction price to each performance obligation based on its relative standalone selling price, which is based on prices charged to customers per our general price list. Packages for service and ancillary items are offered to help the customer make decisions during emotional/stressful times. Package discounts are reflected net in Services Revenue. We recognize revenue when the merchandise is transferred or the service is performed, in satisfaction of the corresponding performance obligation. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations
Our funeral receivables recorded in Accounts Receivable, net primarily consist of amounts due for funeral services already performed which were $8.5 million and $6.7 million at December 31, 2017 and June 30, 2018, respectively. We estimate an allowance for doubtful accounts on these receivables based on our historical experience, which amounted to 2.5% and 3.0% of funeral receivables at December 31, 2017 and June 30, 2018, respectively. In addition, our other funeral receivables not related to funeral services performed were $0.8 million and $0.6 million at December 31, 2017 and June 30, 2018, respectively.
Our cemetery financed receivables totaled $40.5 million and $42.2 million at December 31, 2017 and June 30, 2018, respectively. The unearned finance charges associated with these receivables were $5.7 million at both December 31, 2017 and June 30, 2018. If a preneed contract is canceled prior to delivery, state law determines the amount of the refund owed to the customer. Allowances for bad debts and customer cancellations on cemetery financed receivables 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. 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 4.9% of the total receivables at both December 31, 2017 and June 30, 2018. See Note 5 to the Consolidated Financial Statements included herein for additional information on cemetery financed receivables.
Our cemetery receivables recorded in Accounts Receivable, net also include approximately $1.3 million and $1.1 million related to perpetual care income receivables at December 31, 2017 and June 30, 2018, respectively. See Note 7 to the Consolidated Financial Statements included herein for additional information on our perpetual care trust investments.
Accounts receivable was comprised of the following at December 31, 2017 and June 30, 2018 (in thousands):
 
December 31, 2017
 
June 30, 2018
Funeral receivables, net of allowance for bad debt of $213 and $202, respectively
$
9,061

 
$
7,099

Cemetery receivables, net of allowance for bad debt of $622 and $652, respectively
10,331

 
9,550

Other receivables
263

 
377

Accounts receivable, net
$
19,655

 
$
17,026

Non-current preneed receivables recorded in Preneed Receivables, net represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables were comprised of the following at December 31, 2017 and June 30, 2018 (in thousands):
 
December 31, 2017
 
June 30, 2018
Funeral receivables, net of allowance for bad debt of $882
$
7,934

 
$
—

Cemetery receivables, net of allowance for bad debt of $1,396 and $1,460, respectively
23,710

 
21,327

Preneed receivables, net
$
31,644

 
$
21,327


- 8 -
Table of Contents

Bad debt expense totaled approximately $0.7 million and $0.4 million for the three months ended June 30, 2017 and 2018, respectively and approximately $1.1 million and $0.9 million for the six months ended June 30, 2017 and 2018, respectively.
Capitalized Commissions on Preneed Contracts
Effective January 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”), Revenue from Contracts with Customers (Topic 606), which impacted our accounting for incremental selling costs, primarily commission costs, related to preneed cemetery merchandise and services and preneed funeral trust contracts.
Upon adoption of Topic 606, 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. We recorded a cumulative net adjustment of approximately $2.1 million to Retained earnings on our opening Consolidated Balance Sheets on January 1, 2018. See Note 2 to the Consolidated Financial Statements included herein for additional information regarding our opening balance sheet adjustment. Our capitalized commissions on preneed contracts are amortized on a straight-line basis over the average maturity period for our preneed cemetery merchandise and services contracts and preneed funeral trust contracts, of eight and ten years, respectively. Amortization expense totaled approximately $144,000 for the three months ended June 30, 2018 and $293,000 for the six months ended June 30, 2018. There were no impairment losses recognized during this period.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheet.
See Note 2 to the Consolidated Financial Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
See Note 9 to the Consolidated Financial Statements included herein for additional information regarding our capitalized commissions on preneed contracts.
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, 2017 and June 30, 2018 (in thousands):
 
December 31, 2017
 
June 30, 2018
Land
$
74,981

 
$
74,981

Buildings and improvements
211,934

 
211,938

Furniture, equipment and automobiles
76,155

 
77,906

Property, plant and equipment, at cost
363,070

 
364,825

Less: accumulated depreciation
(115,776
)
 
(120,246
)
Property, plant and equipment, net
$
247,294

 
$
244,579

We recorded depreciation expense of approximately $3.2 million and $3.5 million for the three months ended June 30, 2017 and 2018, respectively and approximately $6.3 million and $6.8 million for the six months ended June 30, 2017 and 2018, respectively. During the six months ended June 30, 2017, we acquired real estate for $0.6 million for a funeral home parking lot expansion project.
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral home businesses. Goodwill has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis, using information as of August 31st each year. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years.
We conducted qualitative assessments in 2017. For our 2016 annual impairment test, however, we performed a quantitative goodwill impairment test. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial

- 9 -
Table of Contents

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, 2017, for a discussion of the methodology used for the goodwill impairment 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 three and six months ended June 30, 2017 and 2018.
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. As such, we test our intangible assets for impairment on an annual basis, using information as of August 31st each year. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years.
We conducted qualitative assessments in 2017. For our 2016 annual impairment test, however, we performed a quantitative impairment test using the relief from royalty method. 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, 2017, for a discussion of the methodology used for the intangibles impairment test.
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. No impairments were recorded to our intangible assets during the three and six months ended June 30, 2017 and 2018.
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 (the “ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period.
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 based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
See Note 13 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 16 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 the 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.
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 finalization of income tax returns, tax audit settlements, tax effects of exercised or vested stock-based awards and increases or decreases in valuation allowances on deferred tax assets.

- 10 -
Table of Contents

We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for both the three and six months ended June 30, 2017 and approximately 27.5% for both the three and six months ended June 30, 2018. The decrease in the estimated effective tax rate, before discrete items, is primarily attributable to the reduction of the U.S. federal statutory income tax rate from 35% to 21% resulting from enactment of the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The discrete items include an income tax benefit related to stock compensation and refunds received from the completion of state income tax audits, income tax expense related to state tax rate changes and other non-material discrete state items.
Income tax expense was approximately $3.0 million and $1.0 million for the three months ended June 30, 2017 and 2018, respectively and approximately $7.8 million and $3.9 million for the six months ended June 30, 2017 and 2018, respectively.
Regulatory changes from the TCJA negatively impacted the effective tax rate for the first six months of 2018 by 0.2% due to the repeal of the domestic production activities deduction and by 0.3% due to the exclusion of performance based compensation from the overall executive compensation deduction limitation. Additionally, regulatory changes to the deductibility of meals and entertainment along with the state conformity to the federal bonus depreciation rules both had a non-material negative rate impact on the effective tax rate.
Subsequent Events
Management evaluated events and transactions during the period subsequent to June 30, 2018 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
See Note 17 to the Consolidated Financial Statements included herein for additional information on our subsequent events.
2.RECENTLY ISSUED ACCOUNTING STANDARDS
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 recognizes 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 Topic 606, 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. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized.
We adopted the provisions of this ASU on January 1, 2018 using the modified retrospective approach. As such, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Topic 606 did not materially affect the accounting for our revenue streams. Revenue from sales of preneed cemetery interment rights was previously recognized in the period in which the customer’s cumulative payments exceeded 10% of the contract price related to the interment right. Under Topic 606, we recognize revenue at the time the contract is signed. Customers select a specific location and space for their interment right, thus, restricting us from other use or transfer of the contracted cemetery property. The interment right is deeded to the customer when the contract is paid in full. Because we generally receive an initial down payment at the time the contract is signed, there is no significant difference in the timing of revenue recognition under Topic 606, as compared to previous guidance. Revenue from preneed sales of funeral and cemetery merchandise and services continues to be deferred and recognized when the merchandise is delivered or the service is performed.
Topic 606 impacted our accounting for incremental selling costs, primarily commission costs, related to preneed cemetery merchandise and services and preneed funeral trust contracts. Under Topic 606, these costs are capitalized and amortized over the average maturity period for our preneed cemetery contracts and preneed funeral trust contracts. Previously, these costs were expensed in the period incurred. Our capitalized commissions on preneed contracts are included in Intangible and other non-current assets on our Consolidated Balance Sheets. See Note 9 to the Consolidated Financial Statements included herein for additional information.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheets.
Topic 606 also impacted our classification of amounts due from customers for undelivered performance obligations. Under Topic 606 amounts due on our preneed funeral trust contracts and preneed cemetery merchandise and services contracts have been reclassified to reduce Deferred preneed funeral revenue and Deferred preneed cemetery revenue, respectively, on our Consolidated

- 11 -
Table of Contents

Balance Sheets. These amounts were previously reported as Accounts receivable and Preneed receivables on our Consolidated Balance Sheets.
The adoption of the provisions of this ASU did not have a material impact on our effective tax rate for the reporting period.
The following table presents the impact of the adoption of Topic 606 on our Consolidated Balance Sheet (in thousands):
 
As of June 30, 2018
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Assets
 
 
 
 
 
Accounts receivable, net of allowance for bad debts
$
17,026

 
$
18,450

 
$
(1,424
)
Preneed receivables, net of allowance for bad debts
$
21,327

 
$
32,746

 
$
(11,419
)
Intangible and other non-current assets
$
2,816

 
$
—

 
$
2,816

Liabilities
 
 
 
 
 
Deferred preneed cemetery revenue, net
$
50,699

 
$
55,264

 
$
(4,565
)
Deferred preneed funeral revenue, net
$
27,740

 
$
36,018

 
$
(8,278
)
Deferred tax liability
$
30,293

 
$
29,636

 
$
657

Stockholders’ equity:
 
 
 
 
 
Retained earnings
$
72,138

 
$
69,979

 
$
2,159

The following table presents the impact of the adoption of Topic 606 on our Consolidated Statement of Operations (in thousands, except per share data):
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Field costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Funeral
$
33,238

 
$
33,267

 
$
(29
)
 
$
69,604

 
$
69,672

 
$
(68
)
Cemetery
$
9,880

 
$
9,869

 
$
11

 
$
18,940

 
$
18,910

 
$
30

Income before income taxes
$
3,747

 
$
3,729

 
$
18

 
$
15,981

 
$
15,943

 
$
38

Net income
$
2,747

 
$
2,734

 
$
13

 
$
12,103

 
$
12,075

 
$
28

 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.15

 
$
0.15

 
$
—

 
$
0.71

 
$
0.71

 
$
—

Diluted earnings per common share:
$
0.15

 
$
0.15

 
$
—

 
$
0.67

 
$
0.67

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.075

 
$
0.075

 
$
—

 
$
0.075

 
$
0.075

 
$
—


- 12 -
Table of Contents

The following table presents the impact of the adoption of Topic 606 on our Consolidated Statement of Cash Flows (in thousands):
 
Three Months Ended June 30, 2018
 
Six Months Ended June 30, 2018
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
Amortization of capitalized commissions on preneed contracts
$
144

 
$
—

 
$
144

 
$
293

 
$
—

 
$
293

Changes in operating assets and liabilities that provided (required) cash:
 
 
 
 
 
 
 
 
 
 
 
Intangible and other non-current assets
$
(162
)
 
$
—

 
$
(162
)
 
$
(331
)
 
$
—

 
$
(331
)
The cumulative effect of changes made to our opening Consolidated Balance Sheet on January 1, 2018 for the adoption of Topic 606 was as follows (in thousands):
 
December 31, 2017
 
Effect of Adoption of
Topic 606
 
January 1, 2018
Assets
 
 
 
 
 
Accounts receivable, net of allowance for bad debts(1)
$
19,655

 
$
(1,399
)
 
$
18,256

Preneed receivables, net of allowance for bad debts(2)(3)
$
31,644

 
$
(11,129
)
 
$
20,515

Intangible and other non-current assets(4)
$
—

 
$
2,778

 
$
2,778

 
 
 
$
(9,750
)
 
 
Liabilities
 
 
 
 
 
Deferred preneed cemetery revenue(1)(2)
$
54,690

 
$
(4,594
)
 
$
50,096

Deferred preneed funeral revenue(3)
$
34,585

 
$
(7,934
)
 
$
26,651

Deferred tax liability(4)
$
31,159

 
$
647

 
$
31,806

Stockholders’ equity:
 
 
 
 
 
Retained earnings(4)
$
57,904

 
$
2,131

 
$
60,035

 
 
 
$
(9,750
)
 
 
 
 
 
 
 
(1)
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of accounts receivable, net of allowance for bad debts, of $19.7 million at December 31, 2017, included the current portion of receivables for preneed cemetery merchandise and service contracts totaling $1.4 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed cemetery revenue on January 1, 2018.
(2)
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of preneed receivables, net of allowance for bad debts, of $31.6 million at December 31, 2017, included the non-current portion of receivables for preneed cemetery merchandise and service contracts totaling $4.6 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed cemetery revenue on January 1, 2018.
(3)
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of preneed receivables, net of allowance for bad debts, $31.6 million at December 31, 2017, included the non-current portion of receivables for preneed funeral trust contracts totaling $7.9 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed funeral revenue on January 1, 2018.
(4)
Under Topic 606, certain costs incurred to obtain or fulfill a contract with a customer are capitalized. Beginning January 1, 2018, we capitalize selling costs related to undelivered preneed cemetery merchandise and services and preneed funeral trust contracts. Previously, these costs were expensed in the period incurred. We recorded a cumulative adjustment of approximately $2.1 million to our opening Retained earnings, which consisted of a $2.8 million adjustment to our Intangible and other non-current assets and a $0.6 million adjustment to our Deferred tax liability on our Consolidated Balance Sheets on January 1, 2018.



- 13 -
Table of Contents

The following accounting pronouncements were adopted on January 1, 2018 with no impact to our Consolidated Financial Statements:
Compensation (Topic 718): Stock Compensation – Scope of Modification Accounting
The amendments in this ASU 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.
Business Combinations (Topic 805): Clarifying the Definition of a Business
This ASU applies to all entities that must determine whether they have acquired or sold a business. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
This ASU applies to all entities that are required to present a statement of cash flows under Topic 230. The amendments provide guidance on eight specific cash flow issues and includes clarification on how these items should be classified in the statement of cash flows and is designed to help eliminate diversity in practice as to where items are classified in the cash flow statement. In November 2016, the FASB issued additional guidance on this topic that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the statement of cash flows.
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and apply to all entities that hold financial assets or owe financial liabilities. The amendments in this ASU also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. That impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite-lived intangible assets.
Accounting Pronouncements Not Yet Adopted
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 do not expect the adoption of this new accounting standard to have a material impact on our Consolidated Financial Statements.

- 14 -
Table of Contents

3.REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenues
Our operations are reported in two business segments: Funeral Home Operations and Cemetery Operations. Revenues, disaggregated by major source for each of our reportable segments was as follows (in thousands):
Three Months Ended June 30, 2018
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
29,023

 
$
2,949

 
$
31,972

Merchandise
 
17,296

 
2,372

 
19,668

Cemetery interment rights
 
—

 
7,863

 
7,863

Revenue from contracts with customers
 
$
46,319

 
$
13,184

 
$
59,503

 
 
 
 
 
 
 
Preneed funeral commission income
 
$
354

 
$
—

 
$
354

Preneed trust earnings
 
1,728

 
1,433

 
3,161

Preneed trust management fees
 
131

 
202

 
333

Preneed cemetery finance charges
 
—

 
496

 
496

Financial revenues
 
$
2,213

 
$
2,131

 
$
4,344

Total Revenues
 
$
48,532

 
$
15,315

 
$
63,847

Three Months Ended June 30, 2017
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
29,205

 
$
2,926

 
$
32,131

Merchandise
 
17,475

 
2,166

 
19,641

Cemetery interment rights
 
—

 
7,543

 
7,543

Revenue from contracts with customers
 
$
46,680

 
$
12,635

 
$
59,315

 
 
 
 
 
 
 
Preneed funeral commission income
 
$
333

 
$
—

 
$
333

Preneed trust earnings
 
1,590

 
1,828

 
3,418

Preneed trust management fees
 
136

 
200

 
336

Preneed cemetery finance charges
 
—

 
450

 
450

Financial revenues
 
$
2,059

 
$
2,478

 
$
4,537

Total Revenues
 
$
48,739

 
$
15,113

 
$
63,852

Six Months Ended June 30, 2018
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
64,587

 
$
6,069

 
$
70,656

Merchandise
 
38,014

 
4,330

 
42,344

Cemetery interment rights
 
—

 
15,372

 
15,372

Revenue from contracts with customers
 
$
102,601

 
$
25,771

 
$
128,372

 
 
 
 
 
 
 
Preneed funeral commission income
 
$
614

 
$
—

 
$
614

Preneed trust earnings
 
3,642

 
2,982

 
6,624

Preneed trust management fees
 
269

 
412

 
681

Preneed cemetery finance charges
 
—

 
943

 
943

Financial revenues
 
$
4,525

 
$
4,337

 
$
8,862

Total Revenues
 
$
107,126

 
$
30,108

 
$
137,234


- 15 -
Table of Contents

Six Months Ended June 30, 2017
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
62,004

 
$
5,925

 
$
67,929

Merchandise
 
36,638

 
4,010

 
40,648

Cemetery interment rights
 
—

 
14,448

 
14,448

Revenue from contracts with customers
 
$
98,642

 
$
24,383

 
$
123,025

 
 
 
 
 
 
 
Preneed funeral commission income
 
$
636

 
$
—

 
$
636

Preneed trust earnings
 
3,398

 
3,343

 
6,741

Preneed trust management fees
 
274

 
401

 
675

Preneed cemetery finance charges
 
—

 
932

 
932

Financial revenues
 
$
4,308

 
$
4,676

 
$
8,984

Total Revenues
 
$
102,950

 
$
29,059

 
$
132,009

Deferred Revenue
Deferred revenue is presented net of amounts due on undelivered preneed contracts shown below as of January 1, 2018 and June 30, 2018 (in thousands):
 
January 1, 2018(1)
 
June 30, 2018
Contract liabilities:
 
 
 
Deferred preneed cemetery revenue
$
54,690

 
$
55,264

Less: Balances due on undelivered cemetery preneed contracts(2)
(4,594
)
 
(4,565
)
Deferred preneed cemetery revenue, net
$
50,096

 
$
50,699

 
 
 
 
Deferred preneed funeral revenue
$
34,585

 
$
36,018

Less: Balances due on undelivered funeral preneed contracts(3)
(7,934
)
 
(8,278
)
Deferred preneed funeral revenue, net
$
26,651

 
$
27,740

 
 
 
 
 
(1)
January 1, 2018 balances have been adjusted to reflect the cumulative effect of changes for the adoption of ASC 606.
(2)
In accordance with Topic 606, $1.4 million of cemetery accounts receivables have been reclassified to reduce deferred preneed cemetery revenue at both January 1, 2018 and June 30, 2018 and $3.2 million of preneed cemetery receivables have been reclassified to reduce deferred preneed cemetery revenue at both January 1, 2018 and June 30, 2018.
(3)
In accordance with Topic 606, $7.9 million and $8.3 million of preneed funeral receivables have been reclassified to reduce deferred preneed funeral revenue at January 1, 2018 and June 30, 2018, respectively.
Our merchandise and service performance obligations related to our preneed contracts are considered fulfilled at the point in time the merchandise is delivered or the burial, cremation or interment service is performed. The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled at June 30, 2018 was $4.6 million for preneed cemetery contracts and $8.3 million for preneed funeral contracts. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue for any given period. However, we estimate an average maturity period of eight years for preneed cemetery contracts and ten years for preneed funeral contracts.

- 16 -
Table of Contents

4.    PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as merchandise and services 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, 2017 and June 30, 2018 were as follows (in thousands):
 
December 31, 2017
 
June 30, 2018
Preneed cemetery trust investments, at market value
$
75,992

 
$
72,413

Less: allowance for contract cancellation
(2,139
)
 
(2,135
)
Preneed cemetery trust investments, net
$
73,853

 
$
70,278

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 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 June 30, 2018, 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 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 six months ended June 30, 2018. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 8 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 June 30, 2018 are detailed below (in thousands, except percentages):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
6,997

 
$
—

 
$
—

 
$
6,997

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
4,528

 
127

 
(247
)
 
4,408

Corporate debt
2
 
17,905

 
559

 
(856
)
 
17,608

Preferred stock
2
 
11,482

 
57

 
(572
)
 
10,967

Mortgage-backed securities
2
 
928

 
328

 
(14
)
 
1,242

Common stock
1
 
28,100

 
4,741

 
(3,365
)
 
29,476

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed Income
2
 
1,201

 
17

 
(59
)
 
1,159

Trust securities
 
 
$
71,141

 
$
5,829

 
$
(5,113
)
 
$
71,857

Accrued investment income
 
 
$
556

 
 
 
 
 
$
556

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
72,413

Market value as a percentage of cost
 
 
 
 
 
 
 
 
101.0
%

- 17 -
Table of Contents

The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
19

Due in one to five years
3,299

Due in five to ten years
4,246

Thereafter
26,661

Total
$
34,225

The cost and fair market values associated with preneed cemetery trust investments at December 31, 2017 are detailed below (in thousands, except percentages):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
3,132

 
$
—

 
$
—

 
$
3,132

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
4,834

 
292

 
(193
)
 
4,933

Corporate debt
2
 
18,238

 
1,184

 
(273
)
 
19,149

Preferred stock
2
 
16,421

 
510

 
(588
)
 
16,343

Mortgage-backed securities
2
 
1,018

 
249

 
(24
)
 
1,243

Common stock
1
 
26,465

 
5,250

 
(2,460
)
 
29,255

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
2
 
1,198

 
50

 
(11
)
 
1,237

Trust securities
 
 
$
71,306

 
$
7,535

 
$
(3,549
)
 
$
75,292

Accrued investment income
 
 
$
700

 
 
 
 
 
$
700

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
75,992

Market value as a percentage of cost
 
 
 
 
 
 
 
 
105.6
%
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 and six months ended June 30, 2017 and 2018, we did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. 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 June 30, 2018, 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.

- 18 -
Table of Contents

Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of June 30, 2018 are shown in the following table (in thousands):
 
June 30, 2018
 
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
$
1,821

 
$
(99
)
 
$
1,015

 
$
(148
)
 
$
2,836

 
$
(247
)
Corporate debt
9,084

 
(643
)
 
968

 
(213
)
 
10,052

 
(856
)
Preferred stock
5,395

 
(162
)
 
4,687

 
(410
)
 
10,082

 
(572
)
Mortgage-backed securities
—

 
—

 
68

 
(14
)
 
68

 
(14
)
Common stock
9,570

 
(1,491
)
 
2,885

 
(1,874
)
 
12,455

 
(3,365
)
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
Fixed Income
825

 
(59
)
 
—

 
—

 
825

 
(59
)
Total temporary impaired securities
$
26,695

 
$
(2,454
)
 
$
9,623

 
$
(2,659
)
 
$
36,318

 
$
(5,113
)
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2017 are shown in the following table (in thousands):
 
December 31, 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
$
151

 
$
(6
)
 
$
1,637

 
$
(187
)
 
$
1,788

 
$
(193
)
Corporate debt
3,735

 
(72
)
 
846

 
(201
)
 
4,581

 
(273
)
Preferred stock
48

 
—

 
8,109

 
(588
)
 
8,157

 
(588
)
Mortgage-backed securities
127

 
(15
)
 
27

 
(9
)
 
154

 
(24
)
Common stock
8,249

 
(1,512
)
 
1,742

 
(948
)
 
9,991

 
(2,460
)
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
Fixed Income
496

 
(11
)
 
—

 
—

 
496

 
(11
)
Total temporary impaired securities
$
12,806

 
$
(1,616
)
 
$
12,361

 
$
(1,933
)
 
$
25,167

 
$
(3,549
)
Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and six months ended June 30, 2017 and 2018 were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Investment income
$
692

 
$
474

 
$
1,281

 
$
899

Realized gains
1,395

 
18

 
2,215

 
871

Realized losses
(929
)
 
(750
)
 
(1,312
)
 
(1,357
)
Expenses and taxes
(332
)
 
(221
)
 
(877
)
 
(272
)
Net change in deferred preneed cemetery receipts held in trust
(826
)
 
479

 
(1,307
)
 
(141
)
 
$
—

 
$
—

 
$
—

 
$
—


- 19 -
Table of Contents

Purchases and sales of investments in the preneed cemetery trusts for the three and six months ended June 30, 2017 and 2018 were as follows (in thousands):
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2017
 
2018
 
2017
 
2018
Purchases
$
(10,831
)
 
$
(6,882
)
 
$
(18,440
)
 
$
(10,258
)
Sales
7,208

 
6,340

 
13,189

 
13,899

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, 2017 and June 30, 2018 were as follows (in thousands):
 
December 31, 2017
 
June 30, 2018
Preneed funeral trust investments, at market value
$
93,341

 
$
93,987

Less: allowance for contract cancellation
(2,659
)
 
(2,784
)
Preneed funeral trust investments, net
$
90,682

 
$
91,203

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 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 June 30, 2018, 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 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 six months ended June 30, 2018. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 8 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.

- 20 -
Table of Contents

The cost and fair market values associated with preneed funeral trust investments at June 30, 2018 are detailed below (in thousands, except percentages):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
23,912

 
$
—

 
$
—

 
$
23,912

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S treasury debt
1
 
1,490

 
6

 
(28
)
 
1,468

Foreign debt
2
 
4,515

 
129

 
(243
)
 
4,401

Corporate debt
2
 
18,110

 
520

 
(874
)
 
17,756

Preferred stock
2
 
11,549

 
49

 
(575
)
 
11,023

Mortgage-backed securities
2
 
1,061

 
341

 
(16
)
 
1,386

Common stock
1
 
27,604

 
4,686

 
(3,301
)
 
28,989

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
2
 
1,525

 
17

 
(89
)
 
1,453

Other investments
2
 
3,040

 
—

 
—

 
3,040

Trust securities
 
 
$
92,806

 
$
5,748

 
$
(5,126
)
 
$
93,428

Accrued investment income
 
 
$
559

 
 
 
 
 
$
559

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
93,987

Market value as a percentage of cost
 
 
 
 
 
 
 
 
100.7
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
21

Due in one to five years
5,057

Due in five to ten years
4,182

Thereafter
26,774

Total
$
36,034


The cost and fair market values associated with preneed funeral trust investments at December 31, 2017 are detailed below (in thousands, except percentages):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
14,349

 
$
—

 
$
—

 
$
14,349

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
1,490

 
10

 
(15
)
 
1,485

Foreign debt
2
 
4,870

 
298

 
(189
)
 
4,979

Corporate debt
2
 
18,963

 
1,197

 
(278
)
 
19,882

Preferred stock
2
 
16,335

 
501

 
(585
)
 
16,251

Mortgage-backed securities
2
 
1,187

 
263

 
(27
)
 
1,423

Common stock
1
 
26,129

 
5,253

 
(2,468
)
 
28,914

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
2
 
1,974

 
52

 
(48
)
 
1,978

Other investments
2
 
3,341

 
—

 
—

 
3,341

Trust securities
 
 
$
88,638

 
$
7,574

 
$
(3,610
)
 
$
92,602

Accrued investment income
 
 
$
739

 
 
 
 
 
$
739

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
93,341

Market value as a percentage of cost
 
 
 
 
 
 
 
 
104.5
%

- 21 -
Table of Contents

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 and six months ended June 30, 2017 and 2018, we did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. 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 June 30, 2018, 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 June 30, 2018 are shown in the following table (in thousands):
 
June 30, 2018
 
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
$
1,310

 
$
(28
)
 
$
—

 
$
—

 
$
1,310

 
$
(28
)
Foreign debt
1,853

 
(101
)
 
966

 
(142
)
 
2,819

 
(243
)
Corporate debt
9,208

 
(661
)
 
960

 
(213
)
 
10,168

 
(874
)
Preferred stock
5,600

 
(168
)
 
4,586

 
(407
)
 
10,186

 
(575
)
Mortgage-backed securities
—

 
—

 
164

 
(16
)
 
164

 
(16
)
Common stock
9,459

 
(1,440
)
 
2,873

 
(1,861
)
 
12,332

 
(3,301
)
Mutual Funds: