Carriage Services, Inc.
CARRIAGE SERVICES INC (Form: 10-Q, Received: 08/05/2014 16:43:13)
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, 2014
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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes   x     No   o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” 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
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 August 1, 2014 was 18,498,656 .
 


Table of Contents

CARRIAGE SERVICES, INC.
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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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, 2013
 
June 30, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,377

 
$
731

Accounts receivable, net of allowance for bad debts of $847 in 2013 and $1,015 in 2014
17,950

 
18,252

Assets held for sale
3,544

 
1,354

Inventories
5,300

 
5,345

Prepaid expenses
4,421

 
3,345

Other current assets
3,525

 
3,130

Total current assets
36,117

 
32,157

Preneed cemetery trust investments
68,341

 
75,646

Preneed funeral trust investments
97,144

 
100,347

Preneed receivables, net of allowance for bad debts of $1,825 in 2013 and $1,938 in 2014
24,521

 
26,439

Receivables from preneed trusts
11,166

 
11,780

Property, plant and equipment, net of accumulated depreciation of $88,627 in 2013 and $91,795 in 2014
160,690

 
176,283

Cemetery property
72,911

 
75,459

Goodwill
221,087

 
253,573

Deferred charges and other non-current assets
12,280

 
18,657

Cemetery perpetual care trust investments
42,342

 
52,812

Total assets
$
746,599

 
$
823,153

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capital lease obligations
$
13,424

 
$
9,908

Accounts payable
7,046

 
6,162

Other liabilities
9,939

 
9,329

Accrued liabilities
12,854

 
13,301

Liabilities associated with assets held for sale
4,357

 
360

Total current liabilities
47,620

 
39,060

Long-term debt, net of current portion
105,642

 
116,699

Revolving credit facility
36,900

 
42,400

Convertible junior subordinated debentures due in 2029 to an affiliate
89,770

 

Convertible subordinated notes due 2021

 
112,955

Obligations under capital leases, net of current portion
3,786

 
3,201

Deferred preneed cemetery revenue
55,479

 
57,394

Deferred preneed funeral revenue
30,588

 
30,597

Deferred tax liability
11,915

 
21,890

Other long-term liabilities
1,548

 
1,220

Deferred preneed cemetery receipts held in trust
68,341

 
75,646

Deferred preneed funeral receipts held in trust
97,144

 
100,347

Care trusts’ corpus
41,893

 
52,304

Total liabilities
590,626

 
653,713

Commitments and contingencies:

 

Stockholders’ equity:
 
 
 
Common stock, $.01 par value; 80,000,000 shares authorized; 22,183,000 and 22,427,000 shares issued at December 31, 2013 and June 30, 2014, respectively
222

 
224

Additional paid-in capital
204,324

 
212,325

Accumulated deficit
(33,306
)
 
(27,842
)
Treasury stock, at cost; 3,922,000 shares at December 31, 2013 and June 30, 2014
(15,267
)
 
(15,267
)
Total stockholders’ equity
155,973

 
169,440

Total liabilities and stockholders’ equity
$
746,599

 
$
823,153

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

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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2013
 
2014
 
2013
 
2014
Revenues:
 
 
 
 
 
 
 
Funeral
$
40,436

 
$
42,192

 
$
85,295

 
$
86,157

Cemetery
13,375

 
14,312

 
25,639

 
26,000

 
53,811

 
56,504

 
110,934

 
112,157

Field costs and expenses:
 
 
 
 
 
 
 
Funeral
24,287

 
26,093

 
50,463

 
51,976

Cemetery
7,637

 
8,054

 
14,452

 
15,013

Depreciation and amortization
2,694

 
2,675

 
5,162

 
5,090

Regional and unallocated funeral and cemetery costs
2,313

 
1,693

 
5,072

 
4,073

 
36,931

 
38,515

 
75,149

 
76,152

Gross profit
16,880

 
17,989

 
35,785

 
36,005

Corporate costs and expenses:
 
 
 
 
 
 
 
General and administrative costs and expenses
7,076

 
6,847

 
13,358

 
16,182

Home office depreciation and amortization
372

 
354

 
719

 
695

 
7,448

 
7,201

 
14,077

 
16,877

Operating income
9,432

 
10,788

 
21,708

 
19,128

Interest expense
(3,664
)
 
(2,686
)
 
(6,259
)
 
(5,531
)
Accretion of discount on convertible subordinated notes

 
(694
)
 

 
(865
)
Loss on early extinguishment of debt

 
(1,042
)
 

 
(1,042
)
Loss on redemption of convertible junior subordinated debentures

 

 

 
(3,779
)
Other income

 

 

 
1,130

Income from continuing operations before income taxes
5,768

 
6,366

 
15,449

 
9,041

Provision for income taxes
(2,192
)
 
(2,483
)
 
(6,469
)
 
(3,526
)
Net income from continuing operations
3,576

 
3,883

 
8,980

 
5,515

Income (loss) from discontinued operations, net of tax
568

 
(637
)
 
423

 
(51
)
Net income
4,144

 
3,246

 
9,403

 
5,464

Preferred stock dividend

 

 
(4
)
 

Net income available to common stockholders
$
4,144

 
$
3,246

 
$
9,399

 
$
5,464

 
 
 
 
 


 
 
Basic earnings (loss) per common share:
 
 
 
 


 
 
Continuing operations
$
0.20

 
$
0.21

 
$
0.50

 
$
0.30

Discontinued operations
0.03

 
(0.03
)
 
0.02

 

Basic earnings per common share
$
0.23

 
$
0.18

 
$
0.52

 
$
0.30

 
 
 
 
 
 
 
 
Diluted earnings (loss) per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.20

 
$
0.21

 
$
0.46

 
$
0.30

Discontinued operations
0.03

 
(0.04
)
 
0.02

 
$
(0.01
)
Diluted earnings per common share
$
0.23

 
$
0.17

 
$
0.48

 
$
0.29

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.025

 
$
0.025

 
$
0.05

 
$
0.05

Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
17,830

 
18,123

 
17,744

 
18,054

Diluted
17,994

 
18,247

 
22,316

 
18,195


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

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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
For the Six Months Ended June 30,
 
2013
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
9,403

 
$
5,464

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of businesses and purchase of other assets
(146
)
 
(2,039
)
Impairment of goodwill
100

 
1,180

Loss on early extinguishment of debt and other costs

 
1,042

Depreciation and amortization
5,953

 
5,801

Amortization of deferred financing costs
(36
)
 
456

Accretion of discount on convertible subordinated notes

 
865

Provision for losses on accounts receivable
782

 
1,338

Stock-based compensation expense
1,624

 
2,782

Deferred income tax expense (benefit)
1,894

 
(1,884
)
Loss on redemption of convertible junior subordinated debentures

 
2,932

Other
210

 
(8
)
Changes in operating assets and liabilities that provided (required) cash:
 
 
 
Accounts and preneed receivables
(2,070
)
 
(1,783
)
Inventories and other current assets
1,211

 
818

Deferred charges and other
24

 
(174
)
Preneed funeral and cemetery trust investments
(1,363
)
 
(10,057
)
Accounts payable
(160
)
 
(871
)
Accrued and other liabilities
1,265

 
(2,117
)
Deferred preneed funeral and cemetery revenue
(9,755
)
 
345

Deferred preneed funeral and cemetery receipts held in trust
13,879

 
9,229

Net cash provided by operating activities
22,815

 
13,319

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisitions and land for new construction
(6,051
)
 
(54,850
)
Net proceeds from the sale of businesses and other assets
2,736

 
200

Capital expenditures
(4,468
)
 
(9,693
)
Net cash used in investing activities
(7,783
)
 
(64,343
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net (payments) borrowings on the revolving credit facility
(10,100
)
 
5,500

Net (payments) borrowings on the term loan
(5,000
)
 
8,000

Proceeds from the issuance of convertible subordinated notes

 
143,750

Payment of debt issuance costs related to the convertible subordinated notes

 
(4,650
)
Payments on other long-term debt and obligations under capital leases
(307
)
 
(542
)
Redemption of convertible junior subordinated debentures

 
(89,748
)
Payments for performance-based stock awards

 
(16,150
)
Proceeds from the exercise of stock options and employee stock purchase plan contributions
492

 
863

Dividends on common stock
(906
)
 
(917
)
Dividend on redeemable preferred stock
(4
)
 

Payment of loan origination costs related to the credit facility
(565
)
 
(797
)
Excess tax benefit of equity compensation
1,178

 
5,069

Net cash provided by (used in) financing activities
(15,212
)
 
50,378

 
 
 
 
Net decrease in cash and cash equivalents
(180
)
 
(646
)
Cash and cash equivalents at beginning of period
1,698

 
1,377

Cash and cash equivalents at end of period
$
1,518

 
$
731

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

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CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage”, the “Company”, “we”, “us” or “our”) is a leading provider of deathcare services and merchandise in the United States. As of June 30, 2014 , we operated 167 funeral homes in 27 states and 32 cemeteries in 11 states.
Our operations are reported in two business segments: Funeral Home Operations and Cemetery Operations. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily sales businesses providing interment rights (grave sites and mausoleums) and related merchandise, such as markers and memorials.
Principles of Consolidation
The accompanying Consolidated Financial Statements include us and our subsidiaries. All significant intercompany balances and transactions have been eliminated.
Interim Condensed Disclosures
The information for the three and six month periods ended June 30, 2013 and 2014 is unaudited, but in the opinion of management, reflects all adjustments which are normal, recurring and necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The accompanying Consolidated Financial Statements have been prepared consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2013 and should be read in conjunction therewith. Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on previously reported results of operations, consolidated financial position or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.
Funeral and Cemetery Operations
We record the revenue from sales of funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the interment right. Costs related to the sales of interment rights, which include real property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.

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Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience and the current economic environment. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued.
Accounts receivable included approximately $8.4 million and $8.3 million of funeral receivables at December 31, 2013 and June 30, 2014 , respectively, and $8.3 million and $9.6 million of cemetery receivables at December 31, 2013 and June 30, 2014 , respectively. Non-current preneed receivables represent the payments expected to be received beyond one year from the balance sheet date. Non-current preneed receivables consisted of approximately $8.1 million and $7.8 million of funeral receivables at December 31, 2013 and June 30, 2014 , respectively, and $16.5 million and $18.6 million of cemetery receivables at December 31, 2013 and June 30, 2014 , respectively. Accounts receivable also include minor amounts of other receivables. Bad debt expense totaled $0.3 million and $0.6 million for the three months ended June 30, 2013 and 2014 , respectively, and $0.8 million and $1.3 million for the six months ended June 30, 2013 and 2014 , respectively.
Property, Plant and Equipment
Property, plant and equipment (including equipment under capital leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and betterments 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, 2013 and June 30, 2014 :
 
December 31, 2013
 
June 30, 2014
 
(in thousands)
Land
$
55,639

 
$
62,435

Buildings and improvements
132,172

 
141,763

Furniture, equipment and automobiles
61,506

 
63,880

Property, plant and equipment, at cost
249,317

 
268,078

Less: accumulated depreciation
(88,627
)
 
(91,795
)
Property, plant and equipment, net
$
160,690

 
$
176,283

Significant activity in property, plant and equipment during the six months ended June 30, 2014 consisted of assets acquired from certain subsidiaries of Service Corporation International (“SCI”) and the acquisition of previously leased properties. We recorded a gain of approximately $1.1 million on the purchase of one of these properties that we had originally acquired under a capital lease. We recorded depreciation expense of approximately $2.2 million and $2.3 million for the three months ended June 30, 2013 and 2014 , respectively, and $4.4 million and $4.5 million for the six months ended June 30, 2013 and 2014 , respectively.
Discontinued Operations
We continually review locations to optimize the sustainable earning power and return on our invested capital. These reviews could entail selling certain non-strategic businesses. When we receive a letter of intent and financing commitment from a buyer and the sale is expected to occur within one year , the location is no longer reported within our continuing operations. The assets and liabilities associated with the location are reclassified as held-for-sale on our Consolidated Balance Sheets, and the operating results are presented on a comparative basis in the discontinued operations section of our Consolidated Statements of Operations. During the first quarter of 2014, we sold a cemetery in Florida which was reported as held-for-sale at December 31, 2013 . As of June 30, 2014 , we had two businesses classified as held-for-sale. See Note 4 to the Consolidated Financial Statements herein for more information.

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Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date of an acquisition subsequently becomes available during the allocation period, we may adjust goodwill, assets or liabilities associated with such acquisition. Acquisition related costs are recognized separately from acquisitions and are expensed as incurred. During the second quarter of 2014 , we acquired six businesses from certain subsidiaries of SCI. See Note 3 to the Consolidated Financial Statements herein for more information concerning this acquisition.
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral businesses. Goodwill is tested for impairment by assessing the fair value of each of our reporting units. The funeral segment reporting units consist of our East, Central and West regions in the United States, and we perform our annual impairment test of goodwill using information as of August 31 of each year. In addition, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value 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.
Our methodology for goodwill impairment testing is described in more detail in Notes 1 and 4 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 and further discussion of current period activity in Note 5 to the Consolidated Financial Statements herein.
Intangible Assets
Our intangible assets include tradenames primarily resulting from acquisitions. Our tradenames are included in Deferred charges and other non-current assets on our Consolidated Balance Sheets. Our tradenames are considered to have an indefinite life and are not subject to amortization. We test for impairment of intangible assets annually at year end.

In addition to our annual review, we assess the impairment of intangible assets whenever events or changes in circumstances indicate that the carrying value 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 results and significant negative industry or economic trends.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we may grant restricted stock, stock options, performance awards and stock from our employee stock purchase plan, which are described in more detail in Note 17 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013 . We recognize compensation expense in an amount equal to the fair value of the share-based awards expected to vest over the requisite service period. Fair value is determined on the date of the grant. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards is determined using a Monte-Carlo simulation pricing model. See Note 17 to the Consolidated Financial Statements herein for additional information on our stock-based compensation plans.
Computation of Earnings Per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options, convertible junior subordinated debentures and convertible subordinated notes.
Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation.
The fully diluted weighted average shares outstanding for the six months ended June 30, 2013 , and the corresponding calculation of fully diluted earnings per share, include approximately 4.4 million shares that would have been issued upon the

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conversion of our convertible junior subordinated debentures as a result of the application of the if-converted method prescribed by the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 260-10-45. For the three months ended June 30, 2013 , and the three and six months ended June 30, 2014 , shares from the conversion of our convertible junior subordinated debentures and our convertible subordinated notes are excluded from the fully diluted earnings per share calculation because the inclusion of such converted shares would result in an antidilutive impact.
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 (“VIEs”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. For these reasons, 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 Sheets. 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/entombment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide 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 a 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.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of June 30, 2014 , CSV RIA provided these services to two institutions, which have custody of 79% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
Fair Value Measurements
We define fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
To determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased, the exit price is used as the fair value measurement. For the three and six months ended June 30, 2014 , we did not incur significant decreases in the volume or level of activity of any asset or liability. We consider an impairment of debt and equity securities other-than-temporary unless (a) the investor has the ability and intent to hold an investment and (b) evidence indicating the cost of the investment is recoverable before we are more likely than not required to sell the investment. If an impairment is indicated, then an adjustment is made to reduce the carrying amount to fair value with a corresponding reduction to deferred preneed receipts held in trust. For the three months ended June 30, 2014 , we recorded a $0.4 million impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain investments.

- 9 -


In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing risk management techniques when appropriate and when available for a reasonable price.
Additional required disclosures are provided in Notes 6, 10 and 11 to the Consolidated Financial Statements herein.
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 11 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets. We have reviewed our income tax positions and identified certain tax deductions, primarily related to business acquisitions that are not certain. Our policy with respect to potential penalties and interest is to record them as “Other” expense and “Interest” expense, respectively. The entire balance of unrecognized tax benefits, if recognized, would affect our effective tax rate.
We do not anticipate a significant increase or decrease in unrecognized tax benefits during the next twelve months.
In September 2013, the U.S. Department of the Treasury and the Internal Revenue Service released final regulations relating to guidance on applying tax rules to amounts paid to acquire, produce or improve tangible personal property as well as rules for materials and supplies. The new guidance is required to be applied no later than our current tax year, which began on January 1, 2014. These regulations are not expected to have a material impact on our financial statements.
See Note 22 for further information regarding income taxes.
Subsequent Events
Management evaluated events and transactions during the period subsequent to June 30, 2014 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report. For more information regarding subsequent events, see Note 22 to the Consolidated Financial Statements herein.
2.
RECENTLY ISSUED ACCOUNTING STANDARDS
Revenue from Contracts with Customers
In May 2014, the FASB created ASC Topic 606, Revenue from Contracts with Customers. ASC Topic 606 supersedes the revenue recognition requirements under ASC Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. The new guidance is effective for the annual reporting period beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. We are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.

- 10 -


Discontinued Operations and Disclosure of Disposals of Components of an Entity
In April 2014, the FASB modified the requirements for reporting a discontinued operation. The amended definition of “discontinued operations” includes only disposals or held-for-sale classifications for components or groups of components of an entity that represent a strategic shift that either has or will have a major effect on the entity’s operations or financial results. Examples of a strategic shift that has or will have a major effect on an entity’s operations and financial results include a disposal of a major geographical area, line of business, equity method of investment or other parts of an entity. The new definition of discontinued operations will significantly reduce the volume of transactions requiring discontinued operation presentation and disclosure. However, the new guidance also expands the disclosures required when an entity reports a discontinued operation or when it disposes of or classifies as held-for-sale an individually significant component that does not meet the definition of a discontinued operation. The new guidance is effective for all disposals or classifications as held-for-sale that occur in annual periods, and interim periods within those annual periods, beginning after December 15, 2014. An entity cannot apply the amended guidance to a component or to a business that is classified as held-for-sale before the effective date, even if the component or business is disposed of after the effective date. Early adoption is permitted, but only for disposals or classifications as held-for-sale that have not been reported in previously issued financial statements. We will adopt this new guidance effective January 1, 2015.
Income Taxes
In July 2013, the FASB amended the Income Tax Topic of the ASC to eliminate the diversity in practice in the presentation of unrecognized tax benefits. The guidance requires an entity to net its liability for unrecognized tax benefits against the deferred tax assets for all same jurisdiction net operating losses or similar tax loss carryforwards or tax credit carryforwards. A gross presentation will be required only if such carryforwards are not available to settle any additional income taxes resulting from disallowance of the uncertain tax position or the entity does not intend to use these carryforwards for this purpose. This guidance is effective for the first annual or interim period beginning after December 15, 2013, thus effective for us beginning January 1, 2014. Our adoption of this new guidance effective January 1, 2014 did not have a material impact on our financial position or results of operations.
3.
ACQUISITIONS
Our growth strategy includes the execution of our Strategic Acquisition Model. We assess the strategic positioning of acquisition candidates based on the size of the business, competitive standing in the market (market share), market size, market demographics, client family revenue profile (customer preferences), barriers to entry, institutional strength of the brand, and long term volume and price trends. Acquisition candidates are prequalified using our Standards Operating Model and 4E Leadership Model to determine alignment with our operating strategy. The value of the acquisition candidates is based on local market competitive dynamic which allows for appropriate and differentiating enterprise valuations and flexibility to customize the transactions.
On May 15, 2014, we completed the acquisition of six businesses from certain subsidiaries of SCI. We acquired four businesses in New Orleans, Louisiana, consisting of four funeral homes, one of which was a combination funeral home and cemetery, and two funeral businesses in Alexandria, Virginia (collectively the “SCI Acquisition”) for $54.9 million . The assets and liabilities were recorded at fair value and included goodwill of $33.8 million . We acquired substantially all of the assets and assumed certain operating liabilities, including obligations associated with existing preneed contracts and certain capital lease obligations. The pro forma impact of the acquisition on the prior periods is not presented since the impact is not material to our Consolidated Financial Statements. The results of the acquired businesses are included in our results of operations from the date of acquisition.

- 11 -


The following table summarizes the fair value of the assets acquired and the liabilities assumed in the SCI Acquisition (in thousands):
Current assets
$
1,998

Property, plant & equipment
16,457

Preneed cemetery trust investments
3,632

Preneed funeral trust investments
45

Goodwill
33,826

Deferred charges and other non-current assets
6,208

Cemetery perpetual care investments
7,491

Obligations under capital leases
(1,960
)
Deferred preneed cemetery revenue
(1,679
)
Deferred preneed cemetery receipts held in trust
(3,632
)
Deferred preneed funeral receipts held in trust
(45
)
Care trusts' corpus
(7,491
)
Cash paid
$
54,850

There were no business acquisitions in the six months ended June 30, 2013 . We acquired land for approximately $6.0 million during the first quarter of 2013 for funeral home expansion projects.
4.
ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS
We continually review locations to optimize the sustainable earning power and return on our invested capital. These reviews could entail selling certain non-strategic businesses.
During the first quarter of 2014, we sold a cemetery in Florida which was reported as held-for-sale at December 31, 2013 for approximately $0.2 million in cash.
As of June 30, 2014 , we had letters of intent outstanding on funeral homes in Ohio and Kentucky; as such, these businesses are no longer reported within our continuing operations. The assets and liabilities associated with these businesses are included in Assets held for sale and Liabilities associated with assets held for sale on our Consolidated Balance Sheet at June 30, 2014 and the operating results are presented on a comparative basis within discontinued operations on our Consolidated Statements of Operations.

- 12 -


Assets and liabilities associated with the businesses held for sale on our Consolidated Balance Sheets at December 31, 2013 and June 30, 2014 consisted of the following (in thousands):
 
December 31, 2013
 
June 30, 2014
Assets:
 
 
 
Current assets
$
30

 
$
7

Preneed cemetery trust investments
2,477

 

Preneed funeral trust investments

 
137

Preneed receivables
31

 

Property, plant and equipment, net
311

 
1,193

Goodwill

 
17

Cemetery perpetual care trust investments
695

 

Total
$
3,544

 
$
1,354

 
 
 
 
Liabilities:
 
 
 
Current liabilities
$
10

 
$
34

Deferred preneed cemetery revenue
1,185

 

Deferred preneed funeral revenue

 
189

Deferred preneed cemetery receipts held in trust
2,477

 

Deferred preneed funeral receipts held in trust

 
137

Care trusts corpus
685

 

Total
$
4,357

 
$
360

The operating results of the discontinued businesses for the three and six months ended June 30, 2013 and 2014 , as well as the gain or loss on the disposal, is presented within discontinued operations on our Consolidated Statements of Operations, along with the income tax effect, as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended
June 30,
 
2013
 
2014
 
2013
 
2014
Revenues
$
1,289

 
$
380

 
$
2,913

 
$
627

 
 
 
 
 
 
 
 
Operating income
$
287

 
$
136

 
$
633

 
$
188

Gain (loss) on disposition
630

 
(1,180
)
 
47

 
(271
)
Income tax (provision) benefit
(349
)
 
407

 
(257
)
 
32

Income (loss) from discontinued operations
$
568

 
$
(637
)
 
$
423

 
$
(51
)
5.
GOODWILL
Many of the former owners and staff of acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a business. The excess of the purchase price over the fair value of net identifiable assets acquired and liabilities assumed, as determined by management in business acquisition transactions accounted for as purchases, is recorded as goodwill.
The following table presents the changes in goodwill on our Consolidated Balance Sheets (in thousands):
 
 
Goodwill as of December 31, 2013
$
221,087

Increase in goodwill related to acquisitions
33,826

Impairments and changes in previous estimates
(1,323
)
Reclassification of assets held-for-sale
(17
)
Goodwill as of June 30, 2014
$
253,573


- 13 -


The increase to goodwill in the six months ended June 30, 2014 represents the goodwill recorded in connection with the SCI Acquisition completed in May 2014. During the six months ended June 30, 2014 , we recorded an impairment of $1.2 million related to a business discontinued in the second quarter of 2014 as the carrying value exceeded fair value. As such, this amount is recorded within discontinued operations on our Consolidated Statement of Operations. Additionally, we recorded a $0.1 million purchase price allocation adju stment related to a funeral home business acquisition completed in November 2013. Our purchase price allocation for this acquisition, as well as the SCI Acquisition, is dependent upon certain valuations, which have not progressed to a stage where there is sufficient information to make a definitive measure and allocation of goodwill and other intangible assets. Material revisions to the ongoing current estimates may be necessary when the valuation process is completed, which is expected to occur within a year after the respective acquisition closing dates.
6.
PRENEED TRUST INVESTMENT
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are generally permitted to withdraw when the merchandise or services are provided. The components of Preneed cemetery trust investments on our Consolidated Balance Sheets at December 31, 2013 and June 30, 2014 are as follows (in thousands):
 
December 31, 2013
 
June 30, 2014
Preneed cemetery trust investments, at fair value
$
70,386

 
$
77,790

Less: allowance for contract cancellation
(2,045
)
 
(2,144
)
Preneed cemetery trust investments, net
$
68,341

 
$
75,646

Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some cases, some or 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 some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At June 30, 2014 , our preneed cemetery trust investments were not under-funded.
Earnings from our preneed cemetery trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by our wholly-owned registered investment advisor 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 and mortgage backed securities, 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, 2014 . There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 11 for further information of the fair value measurement and the three-level valuation hierarchy.

- 14 -


The cost and fair market values associated with preneed cemetery trust investments at June 30, 2014 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
2,342

 
$

 
$

 
$
2,342

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
4,835

 
227

 

 
5,062

Corporate debt
2
 
30,451

 
906

 
(919
)
 
30,438

Preferred stock
2
 
18,271

 
916

 
(87
)
 
19,100

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
15,566

 
4,757

 
(254
)
 
20,069

Trust securities
 
 
$
71,466

 
$
6,806

 
$
(1,260
)
 
$
77,012

Accrued investment income
 
 
$
778

 
 
 
 
 
$
778

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
77,790

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
107.8
%
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
6,578

Due in five to ten years
8,752

Thereafter
39,271

Total
$
54,601

The cost and fair market values associated with preneed cemetery trust investments at December 31, 2013 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
1,541

 
$

 
$

 
$
1,541

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
3,460

 
146

 
(3
)
 
3,603

Corporate debt
2
 
32,958

 
386

 
(1,150
)
 
32,194

Preferred stock
2
 
17,754

 
178

 
(273
)
 
17,659

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
12,431

 
2,362

 
(267
)
 
14,526

Trust securities
 
 
$
68,145

 
$
3,072

 
$
(1,693
)
 
$
69,524

Accrued investment income
 
 
$
862

 
 
 
 
 
$
862

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
70,386

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
102.0
%
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. During the three months ended June 30, 2014 , we recorded a $0.2 million impairment charge for other-than temporary declines in fair value related to unrealized losses on certain investments. There will be no impact on earnings until such time that the loss is realized in the trusts, allocated to the 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.

- 15 -


At June 30, 2014 , we had corporate debt and equity 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 cemetery merchandise and service trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of June 30, 2014 and December 31, 2013 , are shown in the following tables (in thousands):
 
June 30, 2014
 
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:
 
 
 
 
 
 
 
 
 
 
 
Corporate debt
$
5,331

 
$
(395
)
 
$
2,015

 
$
(524
)
 
$
7,346

 
$
(919
)
Preferred stock
1,712

 
(16
)
 
3,371

 
(71
)
 
5,083

 
(87
)
Common stock
3,126

 
(220
)
 
102

 
(34
)
 
3,228

 
(254
)
Total temporary impaired securities
$
10,169

 
$
(631
)
 
$
5,488

 
$
(629
)
 
$
15,657

 
$
(1,260
)
 
December 31, 2013
 
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
$
802

 
$
(3
)
 
$

 
$

 
$
802

 
$
(3
)
Corporate debt
11,561

 
(553
)
 
769

 
(597
)
 
12,330

 
(1,150
)
Preferred stock
9,601

 
(273
)
 

 

 
9,601

 
(273
)
Common stock
1,077

 
(171
)
 
705

 
(96
)
 
1,782

 
(267
)
Total temporary impaired securities
$
23,041

 
$
(1,000
)
 
$
1,474

 
$
(693
)
 
$
24,515

 
$
(1,693
)
Preneed cemetery trust investment security transactions recorded in Interest expense o n our Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2014 were as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended
June 30,
 
2013
 
2014
 
2013
 
2014
Investment income
$
1,072

 
$
889

 
$
1,765

 
$
1,432

Realized gains
1,547

 
1,161

 
1,585

 
1,700

Realized losses
(144
)
 
(640
)
 
(574
)
 
(828
)
Expenses and taxes
(1,684
)
 
(384
)
 
(2,065
)
 
(942
)
Decrease in deferred preneed cemetery receipts held in trust
(791
)
 
(1,026
)
 
(711
)
 
(1,362
)
 
$

 
$

 
$

 
$

Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended
June 30,
 
2013
 
2014
 
2013
 
2014
Purchases
$
(11,543
)
 
$
(13,498
)
 
$
(15,705
)
 
$
(21,658
)
Sales
$
13,811

 
$
14,383

 
$
18,820

 
$
22,921


- 16 -

Table of Contents

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 funds paid by the customer to us. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw prior to our performance and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. The components of Preneed funeral trust investments on our Consolidated Balance Sheets at December 31, 2013 and June 30, 2014 were as follows (in thousands):
 
December 31, 2013
 
June 30, 2014
Preneed funeral trust investments, at market value
$
100,005

 
$
103,237

Less: allowance for contract cancellation
(2,861
)
 
(2,890
)
Preneed funeral trust investments, net
$
97,144

 
$
100,347

Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and some or 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 some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At June 30, 2014 , our preneed funeral trust investments were not under-funded.
Earnings from our preneed funeral trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by our wholly-owned registered investment advisor 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, common stock and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities including U.S. agency obligations, foreign debt, corporate debt, preferred stocks, 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 June 30, 2014 . During the six months ended June 30, 2014 , we reclassified $0.4 million of U.S. Agency obligations from Level 1 investments to Level 2 investments due to reduced trading activity of these securities which caused the fair market price to be determined by other inputs other than quoted prices. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 11 for further information of the fair value measurement and the three-level valuation hierarchy.

- 17 -

Table of Contents

The cost and fair market values associated with preneed funeral trust investments at June 30, 2014 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
13,967

 
$

 
$

 
$
13,967

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
2,605

 
39

 
(28
)
 
2,616

U.S. agency obligations
2
 
31

 

 

 
31

Foreign debt
2
 
3,886

 
182

 

 
4,068

Corporate debt
2
 
25,165

 
898

 
(741
)
 
25,322

Preferred stock
2
 
15,561

 
832

 
(70
)
 
16,323

Mortgage backed securities
2
 
342

 
11

 
(4
)
 
349

Common stock
1
 
12,737

 
3,903

 
(210
)
 
16,430

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
13,858

 
1,378

 
(1
)
 
15,235

Fixed income
2
 
5,332

 
184

 
(64
)
 
5,452

Other investments
2
 
2,838

 

 
(29
)
 
2,809

Trust securities
 
 
$
96,322

 
$
7,427

 
$
(1,147
)
 
$
102,602

Accrued investment income
 
 
$
635

 
 
 
 
 
$
635

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
103,237

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
106.5
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
571

Due in one to five years
6,403

Due in five to ten years
8,092

Thereafter
33,643

Total
$
48,709



- 18 -

Table of Contents

The cost and fair market values associated with preneed funeral trust investments at December 31, 2013 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
14,631

 
$

 
$

 
$
14,631

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
2,212

 
47

 
(54
)
 
2,205

U.S. agency obligations
1
 
401

 
8

 
(7
)
 
402

Foreign debt
2
 
2,726

 
115

 
(2
)
 
2,839

Corporate debt
2
 
27,993

 
375

 
(957
)
 
27,411

Preferred stock
2
 
15,949

 
292

 
(282
)
 
15,959

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
10,681

 
2,092

 
(237
)
 
12,536

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
11,632

 
2,708

 
(22
)
 
14,318

Fixed income
2
 
5,455

 
88

 
(179
)
 
5,364

Other investments
2
 
3,686

 

 
(26
)
 
3,660

Trust securities
 
 
$
95,367

 
$
5,725

 
$
(1,766
)
 
$
99,326

Accrued investment income
 
 
$
679

 
 
 
 
 
$
679

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
100,005

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
104.2
%
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. During the three months ended June 30, 2014 , we recorded a $0.1 million impairment charge for other-than temporary declines in fair value related to unrealized losses on certain investments. There will be 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, 2014 , we had corporate debt and equity 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.

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Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of June 30, 2014 and December 31, 2013 are shown in the following tables (in thousands):
 
June 30, 2014
 
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. debt
$
498

 
$
(2
)
 
$
826

 
$
(27
)
 
$
1,324

 
$
(29
)
Corporate debt
4,298

 
(318
)
 
1,624

 
(422
)
 
5,922

 
(740
)
Preferred stock
1,375

 
(13
)
 
2,709

 
(57
)
 
4,084

 
(70
)
Mortgage backed securities

 

 
86

 
(4
)
 
86

 
(4
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
2,589

 
(182
)
 
85

 
(28
)
 
2,674

 
(210
)
Equity and other
61

 

 
20

 
(1
)
 
81

 
(1
)
Fixed income
219

 

 
1,457

 
(64
)
 
1,676

 
(64
)
Other investments

 

 
44

 
(29
)
 
44

 
(29
)
Total temporary impaired securities
$
9,040

 
$
(515
)
 
$
6,851

 
$
(632
)
 
$
15,891

 
$
(1,147
)
 
December 31, 2013
 
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. debt
$

 
$

 
$
816

 
$
(54
)
 
$
816

 
$
(54
)
U.S. agency obligations

 

 
211

 
(7
)
 
211

 
(7
)
Foreign debt
632

 
(2
)
 

 

 
632

 
(2
)
Corporate debt
9,620

 
(460
)
 
640

 
(497
)
 
10,260

 
(957
)
Preferred stock
9,918

 
(282
)
 

 

 
9,918

 
(282
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
954

 
(152
)
 
626

 
(85
)
 
1,580

 
(237
)
Equity and other
314

 
(13
)
 
195

 
(9
)
 
509

 
(22
)
Fixed income
865

 
(43
)
 
1,420

 
(136
)
 
2,285

 
(179
)
Other investments

 

 
44

 
(26
)
 
44

 
(26
)
Total temporary impaired securities
$
22,303

 
$
(952
)
 
$
3,952

 
$
(814
)
 
$
26,255

 
$
(1,766
)
Preneed funeral trust investment security transactions recorded in Interest expense o n the Consolidated Statements of Operations for the three and six months ended June 30, 2013 and 2014 were as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended
June 30,
 
2013
 
2014
 
2013
 
2014
Investment income
$
917

 
$
846

 
$
1,523

 
$
1,491

Realized gains
1,087

 
2,937

 
6,214

 
3,431

Realized losses
(221
)
 
(538
)
 
(5,553
)
 
(736
)
Expenses and taxes
(807
)
 
(493
)
 
(1,055
)
 
(898
)
Decrease in deferred preneed funeral receipts held in trust
(976
)
 
(2,752
)
 
(1,129
)
 
(3,288
)
 
$

 
$

 
$

 
$


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Purchases and sales of investments in the preneed funeral trusts were as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended
June 30,
 
2013
 
2014
 
2013
 
2014
Purchases
$
(7,903
)
 
$
(22,526
)
 
$
(11,089
)
 
$
(29,517
)
Sales
$
10,313

 
$
22,612

 
$
14,228

 
$
30,149

7.
PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years with such interest income reflected as Preneed cemetery finance charges . In substantially all cases, we receive an initial down payment at the time the contract is signed. At June 30, 2014 , the balances of preneed receivables for cemetery interment rights and for merchandise and services were $23.5 million and $9.3 million , respectively, of which $10.3 million is presented in Accounts receivable and $22.5 million is presented in Preneed receivables . The unearned finance charges associated with these receivables were $3.8 million and $4.3 million at December 31, 2013 and June 30, 2014 , respectively.
We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately 4.8% of the total receivables on recognized sales at June 30, 2014 . An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level.  For the six months ended June 30, 2014 , the change in the allowance for contract cancellations was as follows (in thousands):
 
June 30, 2014
Beginning balance
$
1,347

Write-offs and cancellations
(622
)
Provision
828

Ending balance
$
1,553

The aging of past due financing receivables as of June 30, 2014 was as follows (in thousands):
 
31-60
Past Due
 
61-90
Past Due
 
91-120
Past Due
 
>120
Past Due
 
Total Past
Due
 
Current
 
Total Financing
Receivables
Recognized revenue
$
709

 
$
300

 
$
160

 
$
951

 
$
2,120

 
$
21,097

 
$
23,217

Deferred revenue
309

 
130

 
105

 
418

 
962

 
8,655

 
9,617

Total contracts
$
1,018

 
$
430

 
$
265

 
$
1,369

 
$
3,082

 
$
29,752

 
$
32,834


The aging of past due financing receivables as of December 31, 2013 was as follows (in thousands):
 
31-60
Past Due
 
61-90
Past Due
 
91-120
Past Due
 
>120
Past Due
 
Total Past
Due
 
Current
 
Total Financing
Receivables
Recognized revenue
$
895

 
$
372

 
$
266

 
$
683

 
$
2,216

 
$
18,628

 
$
20,844

Deferred revenue
355

 
191

 
85

 
271

 
902

 
7,890

 
8,792

Total contracts
$
1,250

 
$
563

 
$
351

 
$
954

 
$
3,118

 
$
26,518

 
$
29,636


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8.
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, 2013 and June 30, 2014 , receivables from preneed trusts were as follows (in thousands):
 
December 31, 2013
 
June 30, 2014
Preneed trust funds, at cost
$
11,511

 
$
12,144

Less: allowance for contract cancellation
(345
)
 
(364
)
Receivables from preneed trusts, net
$
11,166

 
$
11,780


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 June 30, 2014 and December 31, 2013 . 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.
 
Historical
Cost Basis
 
Fair Value
 
(in thousands)
As of June 30, 2014