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 March 31, 2019


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

Securities registered pursuant to Section 12(b) of the Act:



Title of each class	Trading Symbol	Name of each exchange on which registered
Common Stock, par value $.01 per share	CSV	New York Stock Exchange

The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of April 26, 2019 was 18,203,066.

Table of Contents

CARRIAGE SERVICES, INC.

INDEX



	Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	3

Consolidated Balance Sheet as of December 31, 2018 and March 31, 2019	3

Consolidated Statements of Operations for the Three Months ended March 31, 2018 and 2019	4

Consolidated Statements of Cash Flows for the Three Months ended March 31, 2018 and 2019	5

Consolidated Statements of Changes in Stockholders' Equity for the Three Months ended March 31, 2018 and 2019	6

Condensed Notes to Consolidated Financial Statements	7

Cautionary Statement on Forward–Looking Statements	37

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	38

Item 3. Quantitative and Qualitative Disclosures About Market Risk	48

Item 4. Controls and Procedures	49

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	50

Item 1A. Risk Factors	50

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	50

Item 3. Defaults Upon Senior Securities	50

Item 4. Mine Safety Disclosures	50

Item 5. Other Information	50

Item 6. Exhibits	50

SIGNATURE	51

INDEX OF EXHIBITS	52

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PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements.

CARRIAGE SERVICES, INC.

CONSOLIDATED BALANCE SHEET

(in thousands, except share data)



				(unaudited)
	December 31, 2018			March 31, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	644		$	674
Accounts receivable, net	18,897			17,732
Inventories	6,751			6,815
Prepaid and other current assets	3,011			2,063
Total current assets	29,303			27,284
Preneed cemetery trust investments	62,432			67,742
Preneed funeral trust investments	82,074			87,013
Preneed receivables, net	18,441			18,610
Receivables from preneed trusts	17,073			17,058
Property, plant and equipment, net	260,838			259,594
Cemetery property, net	74,958			75,156
Goodwill	303,887			303,887
Intangible and other non-current assets, net	24,425			24,311
Operating lease right-of-use assets	—			15,887
Cemetery perpetual care trust investments	44,071			47,970
Total assets	$	917,502		$	944,512
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt	$	2,015		$	2,083
Current portion of finance lease obligations	312			299
Current portion of operating lease obligations	—			2,653
Accounts payable	9,987			7,093
Accrued and other liabilities	22,644			21,352
Total current liabilities	34,958			33,480
Long-term debt, net of current portion	6,925			6,470
Credit facility	26,145			20,099
Convertible subordinated notes due 2021	5,732			5,796
Senior notes due 2026	319,108			319,261
Obligations under finance leases, net of current portion	6,143			6,073
Obligations under operating leases, net of current portion	—			13,990
Deferred preneed cemetery revenue	45,997			46,151
Deferred preneed funeral revenue	28,606			28,569
Deferred tax liability	31,263			32,254
Other long-term liabilities	3,133			1,771
Deferred preneed cemetery receipts held in trust	62,432			67,742
Deferred preneed funeral receipts held in trust	82,074			87,013
Care trusts’ corpus	43,494			47,734
Total liabilities	696,010			716,403
Commitments and contingencies:
Stockholders’ equity:
Common stock, $.01 par value; 80,000,000 shares authorized and 25,703,490 and 25,828,405 shares issued at December 31, 2018 and March 31, 2019, respectively	257			258
Additional paid-in capital	243,849			243,940
Retained earnings	71,680			78,205
Treasury stock, at cost; 7,625,339 shares at December 31, 2018 and March 31, 2019	(94,294		)	(94,294		)
Total stockholders’ equity	221,492			228,109
Total liabilities and stockholders’ equity	$	917,502		$	944,512

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

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CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share data)



	Three Months Ended March 31,
	2018			2019
Revenue:
Service revenue	$	38,685		$	36,652
Property and merchandise revenue	30,184			28,579
Other revenue	4,518			3,850
	73,387			69,081
Field costs and expenses:
Cost of service	18,617			18,097
Cost of merchandise	23,123			22,261
Cemetery property amortization	908			849
Field depreciation expense	2,865			3,085
Regional and unallocated funeral and cemetery costs	3,281			2,789
Other expenses	405			400
	49,199			47,481
Gross profit	24,188			21,600
Corporate costs and expenses:
General, administrative and other	6,618			5,612
Home office depreciation and amortization	443			389
	7,061			6,001
Operating income	17,127			15,599
Interest expense	(3,735		)	(6,328		)
Accretion of discount on convertible subordinated notes	(1,160		)	(57		)
Other, net	2			(13		)
Income before income taxes	12,234			9,201
Provision for income taxes	(3,365		)	(2,577		)
Tax adjustment related to certain discrete items	487			(99		)
Total provision for income taxes	(2,878		)	(2,676		)
Net income	$	9,356		$	6,525

Basic earnings per common share:	$	0.58		$	0.36
Diluted earnings per common share:	$	0.52		$	0.36

Dividends declared per common share:	$	0.075		$	0.075

Weighted average number of common and common equivalent shares outstanding:
Basic	16,094			18,057
Diluted	17,700			18,097

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)



	Three months ended March 31,
	2018			2019
Cash flows from operating activities:
Net income	$	9,356		$	6,525
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	4,216			4,323
Provision for losses on accounts receivable	459			366
Stock-based compensation expense	1,100			585
Deferred income tax expense	207			991
Amortization of deferred financing costs	208			94
Amortization of capitalized commissions on preneed contracts	149			138
Accretion of discount on convertible subordinated notes	1,160			57
Amortization of debt discount on senior notes	—			120
Net loss on sale and disposal of other assets	19			167
Other	145			294

Changes in operating assets and liabilities that provided (used) cash:
Accounts and preneed receivables	(533		)	630
Inventories, prepaid and other current assets	429			736
Intangible and other non-current assets	(85		)	(24		)
Preneed funeral and cemetery trust investments	3,886			(14,133		)
Accounts payable	727			(2,895		)
Accrued and other liabilities	(3,154		)	(1,586		)
Deferred preneed funeral and cemetery revenue	1,346			117
Deferred preneed funeral and cemetery receipts held in trust	(4,752		)	14,489
Net cash provided by operating activities	14,883			10,994

Cash flows from investing activities:
Net proceeds from the sale of other assets	—			100
Capital expenditures	(2,065		)	(3,543		)
Net cash used in investing activities	(2,065		)	(3,443		)

Cash flows from financing activities:
Payments against the term loan	(3,750		)	—
Borrowings from the credit facility	3,700			10,100
Payments against the credit facility	(11,500		)	(16,200		)
Payments on other long-term debt and obligations under finance leases	(428		)	(471		)
Payments on contingent consideration recorded at acquisition date	(138		)	(162		)
Proceeds from the exercise of stock options and employee stock purchase plan contributions	626			746
Taxes paid on restricted stock vestings and exercise of non-qualified options	(294		)	(174		)
Dividends paid on common stock	(1,207		)	(1,360		)
Net cash used in financing activities	(12,991		)	(7,521		)

Net increase (decrease) in cash and cash equivalents	(173		)	30
Cash and cash equivalents at beginning of period	952			644
Cash and cash equivalents at end of period	$	779		$	674

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

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CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(unaudited and in thousands)



	Shares Outstanding		Common Stock		Additional Paid-in Capital			Retained Earnings		Treasury Stock			Total
Balance – December 31, 2017	16,098		$	226	$	216,158		$	57,904	$	(76,632	)	$	197,656
Effect of adoption of topic 606	—		—		—			2,778		—			2,778
Balance – January 1, 2018	16,098		$	226	$	216,158		$	60,682	$	(76,632	)	$	200,434
Net Income	—		—		—			9,356		—			9,356
Issuance of common stock	14		—		307			—		—			307
Exercise of stock options	112		1		319			—		—			320
Issuance of restricted common stock	77		1		—			—		—			1
Cancellation and retirement of restricted common stock and stock options	(15	)	—		(296		)	—		—			(296		)
Stock-based compensation expense	—		—		1,100			—		—			1,100
Dividends on common stock	—		—		(1,207		)	—		—			(1,207		)
Convertible notes exchange	—		—		—			—		—			—
Treasury stock acquired	—		—		—			—		—			—
Other	6		—		145			—		—			145
Balance – March 31, 2018	16,292		$	228	$	216,526		$	70,038	$	(76,632	)	$	210,160



	Shares Outstanding		Common Stock		Additional Paid-in Capital			Retained Earnings		Treasury Stock			Total
Balance – December 31, 2018	18,078		$	257	$	243,849		$	71,680	$	(94,294	)	$	221,492
Net Income	—		—		—			6,525		—			6,525
Issuance of common stock	23		—		275			—		—			275
Exercise of stock options	71		1		471			—		—			472
Issuance of restricted common stock	25		—		—			—		—			—
Cancellation and retirement of restricted common stock and stock options	(9	)	—		(174		)	—		—			(174		)
Stock-based compensation expense	—		—		585			—		—			585
Dividends on common stock	—		—		(1,360		)	—		—			(1,360		)
Convertible notes exchange	—		—		—			—		—			—
Treasury stock acquired	—		—		—			—		—			—
Other	15		—		294			—		—			294
Balance – March 31, 2019	18,203		$	258	$	243,940		$	78,205	$	(94,294	)	$	228,109

The accompanying 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 U.S. provider of funeral and cemetery services and merchandise. As of March 31, 2019, we operated 181 funeral homes in 29 states and 29 cemeteries in 11 states. Our operations are reported in two business segments: Funeral Home Operations, which currently account for approximately 80% of our revenue and Cemetery Operations, which currently account for approximately 20% of our revenue.

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, 2018 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, revenue 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 revenue 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 revenue from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and 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. The performance obligation on these atneed contracts for both merchandise and services are bundled as a single performance obligation, as the performance of these obligations occur within a short time frame (usually within a few days) from the time of death to the funeral service. Although our performance activities are transferred in sequence such as, embalming the body, delivering the casket, obtaining service related items like flowers and performing the service, these are all essential to satisfy our contractual obligation to the customer, thus, bundled into a single performance obligation. Revenue is recognized on the date of funeral service, as all performance obligations

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have been satisfied. 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 Sheet.

The performance obligation is satisfied at the date of the service or the delivery of the merchandise as control has transferred to the customer and the benefit has concluded in the following manner:


•	we have the right to payment;


•	the customer has title to merchandise;


•	the deceased has used the merchandise or has been a part of the service; and


•	the customer directed the use of the merchandise or the plan of the service.

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. For preneed funeral merchandise and service contracts, the performance obligation occurs at the time of need (when death occurs) and revenue is recognized on the date of delivery of merchandise or performance of service. We do not deliver merchandise on preneed contracts or provide service prior to the time of death. The performance obligation for preneed funeral contracts is similar to the elements of the performance obligation of atneed funeral contracts. For preneed funeral services, all preneed funeral contracts are re-written upon the date of death as an atneed contract. The performance obligation is satisfied at the date of the service.

The performance of a preneed funeral contract is secured by placing the funds 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 Sheet. 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.

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 Other revenue, as noted in our table of disaggregated revenue in Note 3 to the Consolidated Financial Statements included herein. As of March 31, 2019, CSV RIA provided these services to one institution, which has custody of approximately 75% 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 subject to refund (charge-back) if the preneed policy is cancelled within a year or if there is an imminent death of beneficiary before the first year anniversary of the policy. We record these insurance commissions as Other revenue, as noted in our table of disaggregated revenue in Note 3 to the Consolidated Financial Statements included herein, when the commission is no longer subject to refund, which is typically one year after the policy is issued. All selling costs incurred pursuant to the sale of the insurance funded preneed contracts are expensed as incurred. Preneed funeral contracts to be funded at maturity by third-party insurance policies totaled $388.2 million at March 31, 2019 and are not recorded on our Consolidated Balance Sheet.

Generally, at the time of the sale of either the preneed insurance or preneed trust contract, the intent is that the beneficiary has made a commitment to assign the proceeds to us for the fulfillment of the service and merchandise obligations on the preneed contract at the time of need. However, this commitment is revocable and the proceeds from the policy are portable, so the customer can choose to use an alternative provider at the time of need.

Revenue Recognition - Cemetery Operations

Our cemetery operations generate revenue primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as 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. The performance obligation on these atneed contracts for cemetery property, merchandise and services are distinct. The performance obligations from the time of death to the disposition of the remains, include delivering cemetery property, unearthing the ground, interring remains and

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installing merchandise on the cemetery grounds. Each item on the contract is recognized as a distinct good or service. The performance obligation is satisfied and revenue is recognized on the purchase date of the interment right, on the date of the cemetery service, and on the date of delivery of the merchandise (set on cemetery grounds). 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.

The performance obligation is satisfied at the date of the service, the purchase of the interment right or the delivery of the merchandise as control has transferred to the customer and the benefit has concluded in the following manner:


•	we have the right to payment;


•	the customer has title to merchandise;


•	the deceased has used the merchandise or has been a part of the service; and


•	the customer directed the use of the merchandise or the plan of the service.

Cemetery arrangements sold prior to death occurring are referred to as preneed cemetery contracts. For preneed cemetery interment rights, the performance obligation is the sale of the interment right and revenue is recognized at the time the contract is signed. Control of cemetery interment rights is transferred to the customer upon execution of the contract as 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.

For preneed cemetery merchandise and service, the performance obligation occurs at the time of need (when death occurs) and revenue is recognized on the date of delivery of merchandise or performance of service. We do not deliver merchandise on preneed contracts or provide service prior to the time of death. The performance obligation for preneed cemetery merchandise and service is similar to the elements of the performance obligation of atneed cemetery merchandise and service.

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. Earnings on these installment contracts are not recognized until the time the merchandise is transferred or the service is performed and are recorded as Other revenue, as noted in our table of disaggregated revenue 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 Sheet. The earnings from preneed cemetery contracts placed in trust, as well as the trust management fees charged by our CSV RIA are recorded as Other revenue, as noted in our table of disaggregated revenue in Note 3 to the Consolidated Financial Statements included herein.

Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable, net and Preneed receivables, net on our Consolidated Balance Sheet. 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.

We sell memorialization merchandise and personalized marker merchandise, such as urns and markers that are supplied by a small number of national providers. We order the memorialized merchandise through a third-party on behalf of our customer. The merchandise and its memorialization is provided by the third-party. We deliver the merchandise after the time of death to the customer upon completion of the memorialization or we set the merchandise on our cemetery grounds.

Cemetery property was $112.6 million and $113.7 million, net of accumulated amortization of $37.7 million and $38.5 million at December 31, 2018 and March 31, 2019, respectively. 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 $0.9 million and $0.8 million for the three months ended March 31, 2018 and 2019, respectively.

See Note 3 to the Consolidated Financial Statements included herein for additional information on our revenue.

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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 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.

Preneed Funeral and Cemetery Trust Funds

Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. We have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheet. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.

In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.

An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in the majority of our funeral and cemetery trust funds.

We determine whether or not the assets in the preneed 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-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 and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheet. There will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.

See Notes 4, 5 and 7 to the Consolidated Financial Statements herein for additional information related to our trust funds.

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 was $8.5 million at both December 31, 2018 and March 31, 2019. We estimate an allowance for doubtful accounts on these receivables based on our historical experience, which amounted to 2.2% and 2.7% of funeral receivables at December 31, 2018 and March 31, 2019, respectively. In addition, our other funeral receivables not related to funeral services performed were $0.7 million and $0.4 million at December 31, 2018 and March 31, 2019, respectively.

Our cemetery financed receivables totaled $37.2 million and $37.3 million at December 31, 2018 and March 31, 2019, respectively. The unearned finance charges associated with these receivables were $4.6 million at both December 31, 2018 and March 31, 2019. 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

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more, which was approximately 4.6% and 4.5% of the total receivables at December 31, 2018 and March 31, 2019, respectively. 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 $1.8 million and $0.7 million related to perpetual care income receivables at December 31, 2018 and March 31, 2019, respectively. See Note 7 to the Consolidated Financial Statements included herein for additional information on our perpetual care trust investments.

Accounts receivable is comprised of the following at December 31, 2018 and March 31, 2019 (in thousands):



	December 31, 2018		March 31, 2019
Funeral receivables, net of allowance for bad debt of $189 and $229, respectively	$	9,002	$	8,701
Cemetery receivables, net of allowance for bad debt of $580 and $574, respectively	9,688		8,816
Other receivables	207		215
Accounts receivable, net	$	18,897	$	17,732

Cemetery receivables recorded in Preneed Receivables, net represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables, net are comprised of the following at December 31, 2018 and March 31, 2019 (in thousands):



	December 31, 2018			March 31, 2019
Cemetery preneed receivables	$	25,568		$	25,522
Less: unearned finance charges	(2,821		)	(2,767		)
Less: allowance for bad debt and contract cancellation	(1,228		)	(1,208		)
Less: balances due on undelivered cemetery preneed contracts	(3,078		)	(2,937		)
Preneed receivables, net	$	18,441		$	18,610

Bad debt expense totaled $0.5 million and $0.4 million for the three months ended March 31, 2018 and 2019, respectively.

Capitalized Commissions on Preneed Contracts

We capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of obtaining a contract with a customer. Our 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 $149,000 and $138,000 for the three months ended March 31, 2018 and 2019, respectively. There were no impairment losses recognized during the three months ended March 31, 2018 and 2019.

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 9 to the Consolidated Financial Statements included herein for additional information related to our capitalized commissions on preneed contracts.

Leases

We have operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to nineteen years. Many leases include one or more options to renew, some of which include options to extend the leases for up to 26 years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. We do not have lease agreements with residual value guarantees, sale-leaseback terms, material restrictive covenants or related parties. We do not have any material sublease arrangements.

We determine if an arrangement is a lease at inception based on the facts and circumstances of the agreement. A right-of-use (“ROU”) asset represents our right to use the underlying asset for the lease term and the lease liability represents our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized on our Consolidated Balance Sheet at the lease commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, while the expense for finance leases (formerly capital leases) is recognized as depreciation expense and interest expense using the accelerated interest method of recognition.

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Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense. We have real estate lease agreements which require payments for lease and non-lease components and account for these as a single lease component. Leases with an initial term of 12 months or less, that do not include an option to renew the underlying asset, are not recorded on our Consolidated Balance Sheet and expense is recognized on a straight-line basis over the lease term.

Operating lease ROU assets are included in Operating lease right-of-use assets and operating lease liabilities are included in Current portion of operating lease obligations and Obligations under operating leases, net of current portion on our Consolidated Balance Sheet. Finance lease ROU assets are included in Property, plant and equipment, net and finance lease liabilities are included in Current portion of finance lease obligations and Obligations under finance leases, net of current portion on our Consolidated Balance Sheet.

See Notes 2 and 13 to the Consolidated Financial Statements included herein for additional information related to our Leases.

Property, Plant and Equipment

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

Property, plant and equipment is comprised of the following at December 31, 2018 and March 31, 2019 (in thousands):



	December 31, 2018			March 31, 2019
Land	$	81,012		$	80,901
Buildings and improvements	223,646			224,594
Furniture, equipment and automobiles	81,125			82,157
Property, plant and equipment, at cost	385,783			387,652
Less: accumulated depreciation	(124,945		)	(128,058		)
Property, plant and equipment, net	$	260,838		$	259,594

We recorded depreciation expense of approximately $3.3 million and $3.5 million for the three months ended March 31, 2018 and 2019, respectively.

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. 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 performed our 2018 annual goodwill impairment test using information as of August 31, 2018. 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 2018 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform a quantitative goodwill impairment test and concluded that it is more-likely-than not that the fair value of our reporting units is greater than their carrying value and thus there was no impairment to goodwill.

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, 2018, for a discussion of the methodology used for the quantitative 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 months ended March 31, 2018 and 2019.

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Intangible Assets

Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets, net on our Consolidated Balance Sheet. Our tradenames are considered to have an indefinite life and are not subject to amortization. As such, we test our intangible assets for impairment on an annual basis. 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 performed our 2018 annual intangible assets impairment test using information as of August 31, 2018. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of the tradename is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. For our 2018 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform a quantitative impairment test and concluded that it is more-likely-than not that the fair value of our intangible assets is greater than its carrying value and thus there was no impairment to our intangible 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. No impairments were recorded to our intangible assets during the three months ended March 31, 2018 and 2019.

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 15 to the Consolidated Financial Statements included herein for additional information related to 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 14 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 Sheet.

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.

Income tax expense was $2.9 million and $2.7 million for the three months ended March 31, 2018 and 2019, respectively.

We recorded income taxes at the estimated effective rate, before discrete items, of 27.5% and 28.0% for the three months ended March 31, 2018 and 2019, respectively. 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.

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Subsequent Events

Management evaluated events and transactions during the period subsequent to March 31, 2019 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.

2.RECENTLY ISSUED ACCOUNTING STANDARDS

Leases

In February 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) related to Leases (Topic 842) and subsequent amendments, collectively referred to as (“Topic 842”) to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet for all leases, included operating leases. The ROU asset represents the right to use the underlying asset for the lease term and the lease liability represents the obligation to make lease payments arising from the lease. Finance leases were not impacted by Topic 842, as finance lease liabilities and the corresponding ROU assets were already recorded on the balance sheet under the previous guidance Topic 840, Leases.

On January 1, 2019, we adopted Topic 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 840. While Topic 842 had a material impact on our Consolidated Balance Sheet, it did not have an impact on our Consolidated Statements of Earnings and Cash Flows, or liquidity measures, such as debt covenant ratios. It also did not have a material impact on our effective tax rate for the reporting period. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. For leases that commenced before the effective date of Topic 842, we elected the permitted practical expedients to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. We also elected to exclude leases with a term of 12 months or less in the recognized ROU assets and lease liabilities. We have real estate lease agreements which require payments for lease and non-lease components and have elected to account for these as a single lease component. We have elected the short-term lease recognition exemption for all applicable classes of underlying assets.

On January 1, 2019, we recorded operating lease ROU assets of $16.5 million and operating lease liabilities of $17.3 million, related to our real estate and equipment leases, based on the present value of the future lease payments on the date of adoption. Our opening operating lease ROU asset balance included prepaid lease expense and lease incentives on the balance sheet at December 31, 2018. The cumulative effect of changes made to our opening Consolidated Balance Sheet on January 1, 2019 for the adoption of Topic 842 is as follows (in thousands):



	December 31, 2018		Effect of Adoption of Topic 842			January 1, 2019
Assets
Prepaid expenses	$	1,456	$	(148	)	$	1,308
Operating lease right-of-use assets	$	—	$	16,470		$	16,470
			$	16,322
Liabilities
Accrued and other liabilities	$	22,644	$	(274	)	$	22,370
Other long-term liabilities	$	3,133	$	(692	)	$	2,441
Current portion of operating lease obligations	$	—	$	2,633		$	2,633
Obligations under operating leases, net of current portion	$	—	$	14,655		$	14,655
			$	16,322

See Note 13 to the Consolidated Financial Statements included herein for the additional disclosures required by Topic 842.

We have no material leases in which we are the lessor.

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Accounting Pronouncements Not Yet Adopted

Financial Instruments - Credit Losses

In June 2016, the FASB issued ASU, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. This ASU applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This amendment replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2020 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.

3.REVENUE FROM CONTRACTS WITH CUSTOMERS

Revenue

Our operations are reported in two business segments: Funeral Home Operations and Cemetery Operations. Revenue, disaggregated by major source for each of our reportable segments is as follows (in thousands):



Three Months Ended March 31, 2019
	Funeral		Cemetery		Total
Services	$	33,977	$	2,675	$	36,652
Merchandise	19,965		1,778		21,743
Cemetery property	—		6,836		6,836
Other revenue	2,221		1,629		3,850
Total	$	56,163	$	12,918	$	69,081



Three Months Ended March 31, 2018
	Funeral		Cemetery		Total
Services	$	35,564	$	3,121	$	38,685
Merchandise	20,718		1,957		22,675
Cemetery property	—		7,509		7,509
Other revenue	2,312		2,206		4,518
Total	$	58,594	$	14,793	$	73,387

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Deferred Revenue

Deferred revenue is presented net of amounts due on undelivered preneed contracts shown below as of December 31, 2018 and March 31, 2019 (in thousands):



	December 31, 2018			March 31, 2019
Contract liabilities:
Deferred preneed cemetery revenue	$	50,445		$	50,414
Less: Balances due on undelivered cemetery preneed contracts⁽¹⁾	(4,448		)	(4,263		)
Deferred preneed cemetery revenue, net	$	45,997		$	46,151

Deferred preneed funeral revenue	$	36,912		$	36,935
Less: Balances due on undelivered funeral preneed contracts⁽²⁾	(8,306		)	(8,366		)
Deferred preneed funeral revenue, net	$	28,606		$	28,569




(1)	$1.4 million and $1.3 million of cemetery accounts receivables have been reclassified to reduce deferred preneed cemetery revenue at December 31, 2018 and March 31, 2019, respectively, and $3.1 million and $2.9 million of preneed cemetery receivables have been reclassified to reduce deferred preneed cemetery revenue at December 31, 2018 and March 31, 2019, respectively.
(2)	$8.3 million and $8.4 million of preneed funeral receivables have been reclassified to reduce deferred preneed funeral revenue at December 31, 2018 and March 31, 2019, 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 December 31, 2018 and March 31, 2019 was $4.4 million and $4.3 million for preneed cemetery contracts and $8.3 million and $8.4 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.

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 Sheet at December 31, 2018 and March 31, 2019 are as follows (in thousands):



	December 31, 2018			March 31, 2019
Preneed cemetery trust investments, at market value	$	64,549		$	69,878
Less: allowance for contract cancellation	(2,117		)	(2,136		)
Preneed cemetery trust investments, net	$	62,432		$	67,742

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 March 31, 2019, 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.

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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 months ended March 31, 2019. 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 March 31, 2019 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	$	7,496	$	—	$	—		$	7,496
Fixed income securities:
Foreign debt	2	5,547		169		(249		)	5,467
Corporate debt	2	14,199		444		(455		)	14,188
Preferred stock	2	12,320		259		(774		)	11,805
Mortgage-backed securities	2	643		90		(21		)	712
Common stock	1	29,834		2,298		(3,792		)	28,340
Mutual funds:
Fixed Income	2	1,169		9		(2		)	1,176
Trust securities		$	71,208	$	3,269	$	(5,293	)	$	69,184
Accrued investment income		$	694						$	694
Preneed cemetery trust investments									$	69,878
Market value as a percentage of cost									97.2		%

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



Due in one year or less	$	—
Due in one to five years	2,985
Due in five to ten years	8,987
Thereafter	20,200
Total	$	32,172

The cost and fair market values associated with preneed cemetery trust investments at December 31, 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	$	16,194	$	—	$	—		$	16,194
Fixed income securities:
Foreign debt	2	3,802		43		(511		)	3,334
Corporate debt	2	13,987		362		(1,026		)	13,323
Preferred stock	2	11,068		54		(1,146		)	9,976
Mortgage-backed securities	2	666		161		(14		)	813
Common stock	1	24,867		903		(5,436		)	20,334
Trust securities		$	70,584	$	1,523	$	(8,133	)	$	63,974
Accrued investment income		$	575						$	575
Preneed cemetery trust investments									$	64,549
Market value as a percentage of cost									90.6		%

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

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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 Sheet. In the three months ended March 31, 2018 and 2019, 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 March 31, 2019, 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 March 31, 2019 are shown in the following table (in thousands):



	March 31, 2019
	In Loss Position Less than 12 months					In Loss Position Greater than 12 months					Total
	Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
Fixed income securities:
Foreign debt	$	2,002	$	(41	)	$	1,185	$	(208	)	$	3,187	$	(249	)
Corporate debt	1,062		(60		)	5,209		(395		)	6,271		(455		)
Preferred stock	4,641		(236		)	3,974		(538		)	8,615		(774		)
Mortgage-backed securities	—		—			119		(21		)	119		(21		)
Common stock	13,544		(2,310		)	1,457		(1,482		)	15,001		(3,792		)
Mutual Funds:
Fixed Income	455		(2		)	—		—			455		(2		)
Total temporary impaired securities	$	21,704	$	(2,649	)	$	11,944	$	(2,644	)	$	33,648	$	(5,293	)

Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2018 are shown in the following table (in thousands):



	December 31, 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	$	2,140	$	(245	)	$	895	$	(266	)	$	3,035	$	(511	)
Corporate debt	9,918		(813		)	443		(213		)	10,361		(1,026		)
Preferred stock	5,253		(399		)	3,767		(747		)	9,020		(1,146		)
Mortgage-backed securities	—		—			51		(14		)	51		(14		)
Common stock	14,191		(4,012		)	1,190		(1,424		)	15,381		(5,436		)
Total temporary impaired securities	$	31,502	$	(5,469	)	$	6,346	$	(2,664	)	$	37,848	$	(8,133	)

Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three months ended March 31, 2018 and 2019 are as follows (in thousands):



	Three Months Ended March 31,
	2018			2019
Investment income	$	425		$	571
Realized gains	853			1,458
Realized losses	(607		)	(635		)
Expenses and taxes	(51		)	(278		)
Net change in deferred preneed cemetery receipts held in trust	(620		)	(1,116		)
	$	—		$	—

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Purchases and sales of investments in the preneed cemetery trusts for the three months ended March 31, 2018 and 2019 are as follows (in thousands):



	Three Months Ended March 31,
	2018			2019
Purchases	$	(3,376	)	$	(11,626	)
Sales	7,559			2,992

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 Sheet at December 31, 2018 and March 31, 2019 are as follows (in thousands):



	December 31, 2018			March 31, 2019
Preneed funeral trust investments, at market value	$	84,803		$	89,743
Less: allowance for contract cancellation	(2,729		)	(2,730		)
Preneed funeral trust investments, net	$	82,074		$	87,013

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 March 31, 2019, 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 U.S treasury debt, 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 months ended March 31, 2019. 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.

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The cost and fair market values associated with preneed funeral trust investments at March 31, 2019 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	$	23,147	$	—	$	—		$	23,147
Fixed income securities:
U.S treasury debt	1	1,318		2		(12		)	1,308
Foreign debt	2	5,531		171		(241		)	5,461
Corporate debt	2	14,589		515		(454		)	14,650
Preferred stock	2	12,675		273		(772		)	12,176
Mortgage-backed securities	2	740		93		(24		)	809
Common stock	1	28,750		2,173		(3,680		)	27,243
Mutual funds:
Fixed income	2	1,294		9		(22		)	1,281
Other investments	2	2,976		—		—			2,976
Trust securities		$	91,020	$	3,236	$	(5,205	)	$	89,051
Accrued investment income		$	692						$	692
Preneed funeral trust investments									$	89,743
Market value as a percentage of cost									97.8		%

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



Due in one year or less	$	496
Due in one to five years	3,889
Due in five to ten years	8,925
Thereafter	21,094
Total	$	34,404

The cost and fair market values associated with preneed funeral trust investments at December 31, 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	$	31,375	$	—	$	—		$	31,375
Fixed income securities:
U.S. treasury debt	1	1,319		3		(19		)	1,303
Foreign debt	2	3,748		44		(503		)	3,289
Corporate debt	2	14,195		294		(1,025		)	13,464
Preferred stock	2	11,500		54		(1,194		)	10,360
Mortgage-backed securities	2	772		168		(18		)	922
Common stock	1	24,803		887		(5,389		)	20,301
Mutual funds:
Fixed income	2	275		—		(29		)	246
Other investments	2	3,006		—		—			3,006
Trust securities		$	90,993	$	1,450	$	(8,177	)	$	84,266
Accrued investment income		$	537						$	537
Preneed funeral trust investments									$	84,803
Market value as a percentage of cost									92.6		%

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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 Sheet. In the three months ended March 31, 2018 and 2019, 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 March 31, 2019, 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 March 31, 2019 are shown in the following table (in thousands):



	March 31, 2019
	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	$	—	$	—		$	812	$	(12	)	$	812	$	(12	)
Foreign debt	2,025		(42		)	1,138		(199		)	3,163		(241		)
Corporate debt	1,097		(63		)	5,117		(391		)	6,214		(454		)
Preferred stock	4,796		(244		)	3,855		(528		)	8,651		(772		)
Mortgage-backed securities	6		—			188		(24		)	194		(24		)
Common stock	13,083		(2,282		)	1,409		(1,398		)	14,492		(3,680		)
Mutual Funds:
Fixed income	284		(1		)	254		(21		)	538		(22		)
Total temporary impaired securities	$	21,291	$	(2,632	)	$	12,773	$	(2,573	)	$	34,064	$	(5,205	)

Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2018 are shown in the following table (in thousands):



	December 31, 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	$	—	$	—		$	1,181	$	(19	)	$	1,181	$	(19	)
Foreign debt	2,180		(251		)	850		(252		)	3,030		(503		)
Corporate debt	9,990		(814		)	434		(211		)	10,424		(1,025		)
Preferred stock	5,967		(460		)	3,673		(734		)	9,640		(1,194		)
Mortgage-backed securities	11		—			120		(18		)	131		(18		)
Common stock	14,327		(4,035		)	1,155		(1,354		)	15,482		(5,389		)
Mutual funds:
Fixed income	—		—			246		(29		)	246		(29		)
Total temporary impaired securities	$	32,475	$	(5,560	)	$	7,659	$	(2,617	)	$	40,134	$	(8,177	)

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Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three months ended March 31, 2018 and 2019 are as follows (in thousands):



	Three Months Ended March 31,
	2018			2019
Investment income	$	412		$	573
Realized gains	2,896			1,320
Realized losses	(609		)	(583		)
Expenses and taxes	(144		)	(228		)
Net change in deferred preneed funeral receipts held in trust	(2,555		)	(1,082		)
	$	—		$	—

Purchases and sales of investments in the preneed funeral trusts for the three months ended March 31, 2018 and 2019 are as follows (in thousands):



	Three Months Ended March 31,
	2018			2019
Purchases	$	(3,286	)	$	(10,759	)
Sales	7,595			2,785

5. 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 Other revenue. In substantially all cases, we receive an initial down payment at the time the contract is signed.

Our cemetery financed receivables at December 31, 2018 and March 31, 2019 are as follows (in thousands):



	December 31, 2018			March 31, 2019
Accounts receivable, including unearned finance charges and allowance for contract cancellations of $2,405 and $2,381, respectively	$	11,676	⁽¹⁾	$	11,803	⁽¹⁾
Preneed receivables, including unearned finance charges and allowance for contract cancellations of $4,049 and $3,975, respectively	25,568		⁽²⁾	25,522		⁽²⁾
Preneed cemetery financed receivables	$	37,244		$	37,325




(1)	$1.4 million and $1.3 million of cemetery accounts receivables have been reclassified to reduce deferred preneed cemetery revenue at December 31, 2018 and March 31, 2019, respectively.
(2)	$3.1 million and $2.9 million of preneed cemetery receivables have been reclassified to reduce deferred preneed cemetery revenue at December 31, 2018 and March 31, 2019, respectively.

The unearned finance charges associated with these receivables were $4.6 million at both December 31, 2018 and March 31, 2019.

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 4.5% of the total receivables on recognized sales at March 31, 2019. 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.

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For the three months ended March 31, 2019, the change in the allowance for contract cancellations is as follows (in thousands):



	March 31, 2019
Beginning balance	$	1,808
Write-offs and cancellations	(242		)
Provision	216
Ending balance	$	1,782

The aging of preneed cemetery financed receivables as of March 31, 2019 is as follows (in thousands):



	31-60 Past Due		61-90 Past Due		91-120 Past Due		>120 Past Due		Total Past Due		Current		Total Financed Receivables
Recognized revenue	$	470	$	315	$	61	$	1,187	$	2,033	$	25,925	$	27,958
Deferred revenue	154		109		30		332		625		8,742		9,367
Total	$	624	$	424	$	91	$	1,519	$	2,658	$	34,667	$	37,325

6. 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, 2018 and March 31, 2019, receivables from preneed trusts are as follows (in thousands):



	December 31, 2018			March 31, 2019
Preneed trust funds, at cost	$	17,601		$	17,586
Less: allowance for contract cancellation	(528		)	(528		)
Receivables from preneed trusts, net	$	17,073		$	17,058

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 March 31, 2019 and December 31, 2018. 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 March 31, 2019 is as follows (in thousands):



	Historical Cost Basis		Fair Value
Cash and cash equivalents	$	4,267	$	4,267
Fixed income investments	10,744		10,744
Mutual funds and common stocks	2,571		2,585
Annuities	4		4
Total	$	17,586	$	17,600

The composition of the preneed trust funds at December 31, 2018 is as follows (in thousands):



	Historical Cost Basis		Fair Value
Cash and cash equivalents	$	4,172	$	4,172