Carriage Services, Inc.
CARRIAGE SERVICES INC (Form: 10-Q, Received: 10/29/2014 16:16:06)
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 September 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 October 24, 2014 was 18,501,227 .
 


Table of Contents

CARRIAGE SERVICES, INC.
INDEX
 
 
Page
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

- 2 -

Table of Contents

PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
 
(unaudited)
 
December 31, 2013
 
September 30, 2014
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
1,377

 
$
2,966

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

 
17,762

Assets held for sale
3,544

 

Inventories
5,300

 
5,460

Prepaid expenses
4,421

 
3,939

Other current assets
3,525

 
4,187

Total current assets
36,117

 
34,314

Preneed cemetery trust investments
68,341

 
73,072

Preneed funeral trust investments
97,144

 
98,525

Preneed receivables, net of allowance for bad debts of $1,825 in 2013 and $2,093 in 2014
24,521

 
26,053

Receivables from preneed trusts
11,166

 
12,252

Property, plant and equipment, net of accumulated depreciation of $88,627 in 2013 and $93,595 in 2014
160,690

 
183,782

Cemetery property
72,911

 
75,437

Goodwill
221,087

 
257,504

Deferred charges and other non-current assets
12,280

 
14,523

Cemetery perpetual care trust investments
42,342

 
50,234

Total assets
$
746,599

 
$
825,696

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

 
$
9,883

Accounts payable
7,046

 
7,831

Other liabilities
9,939

 
2,163

Accrued liabilities
12,854

 
15,037

Liabilities associated with assets held for sale
4,357

 

Total current liabilities
47,620

 
34,914

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

 
114,311

Revolving credit facility
36,900

 
42,300

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

 

Convertible subordinated notes due 2021

 
113,737

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

 
3,151

Deferred preneed cemetery revenue
55,479

 
57,340

Deferred preneed funeral revenue
30,588

 
30,833

Deferred tax liability
11,915

 
31,369

Other long-term liabilities
1,548

 
1,490

Deferred preneed cemetery receipts held in trust
68,341

 
73,072

Deferred preneed funeral receipts held in trust
97,144

 
98,525

Care trusts’ corpus
41,893

 
50,203

Total liabilities
590,626

 
651,245

Commitments and contingencies:

 

Stockholders’ equity:
 
 
 
Common stock, $.01 par value; 80,000,000 shares authorized; 22,183,000 and 22,423,000 shares issued at December 31, 2013 and September 30, 2014, respectively
222

 
224

Additional paid-in capital
204,324

 
212,339

Accumulated deficit
(33,306
)
 
(22,845
)
Treasury stock, at cost; 3,922,000 shares at December 31, 2013 and September 30, 2014
(15,267
)
 
(15,267
)
Total stockholders’ equity
155,973

 
174,451

Total liabilities and stockholders’ equity
$
746,599

 
$
825,696

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

- 3 -


CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
 
For the Three Months Ended September 30,
 
For the Nine Months Ended September 30,
 
2013
 
2014
 
2013
 
2014
Revenues:
 
 
 
 
 
 
 
Funeral
$
37,132

 
$
41,770

 
$
122,427

 
$
127,926

Cemetery
12,369

 
12,779

 
38,008

 
38,779

 
49,501

 
54,549

 
160,435

 
166,705

Field costs and expenses:
 
 
 
 
 
 
 
Funeral
23,244

 
25,930

 
73,707

 
77,906

Cemetery
7,357

 
7,988

 
21,809

 
23,002

Depreciation and amortization
2,080

 
2,654

 
7,242

 
7,744

Regional and unallocated funeral and cemetery costs
2,720

 
2,900

 
7,792

 
6,972

 
35,401

 
39,472

 
110,550

 
115,624

Gross profit
14,100

 
15,077

 
49,885

 
51,081

Corporate costs and expenses:
 
 
 
 
 
 
 
General and administrative costs and expenses
6,868

 
6,562

 
20,226

 
22,744

Home office depreciation and amortization
851

 
341

 
1,570

 
1,037

 
7,719

 
6,903

 
21,796

 
23,781

Operating income
6,381

 
8,174

 
28,089

 
27,300

Interest expense
(3,216
)
 
(2,177
)
 
(9,475
)
 
(7,707
)
Accretion of discount on convertible subordinated notes

 
(782
)
 

 
(1,647
)
Loss on early extinguishment of debt

 

 

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

 

 

 
(3,779
)
Other income

 

 

 
1,130

Income from continuing operations before income taxes
3,165

 
5,215

 
18,614

 
14,255

Provision for income taxes
(1,257
)
 
(2,390
)
 
(7,726
)
 
(5,915
)
Income tax benefit related to uncertain tax positions

 
1,740

 

 
1,740

Net provision for income taxes
(1,257
)
 
(650
)
 
(7,726
)
 
(4,175
)
Net income from continuing operations
1,908

 
4,565

 
10,888

 
10,080

Income from discontinued operations, net of tax
3,986

 
431

 
4,408

 
381

Net income
5,894

 
4,996

 
15,296

 
10,461

Preferred stock dividend

 

 
(4
)
 

Net income available to common stockholders
$
5,894

 
$
4,996

 
$
15,292

 
$
10,461

 
 
 
 
 


 
 
Basic earnings per common share:
 
 
 
 


 
 
Continuing operations
$
0.10

 
$
0.25

 
$
0.60

 
$
0.55

Discontinued operations
0.22

 
0.02

 
0.24

 
0.02

Basic earnings per common share
$
0.32

 
$
0.27

 
$
0.84

 
$
0.57

 
 
 
 
 
 
 
 
Diluted earnings per common share:
 
 
 
 
 
 
 
Continuing operations
$
0.10

 
$
0.24

 
$
0.59

 
$
0.54

Discontinued operations
0.22

 
0.02

 
0.19

 
$
0.02

Diluted earnings per common share
$
0.32

 
$
0.26

 
$
0.78

 
$
0.56

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.025

 
$
0.025

 
$
0.075

 
$
0.075

Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
17,892

 
18,150

 
17,794

 
18,086

Diluted
18,057

 
18,276

 
22,361

 
18,223

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

- 4 -


CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
For the Nine Months Ended September 30,
 
2013
 
2014
Cash flows from operating activities:
 
 
 
Net income
$
15,296

 
$
10,461

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Gain on sale of businesses and purchase of other assets
(6,546
)
 
(2,724
)
Impairment of goodwill
100

 
1,180

Loss on early extinguishment of debt and other costs

 
1,042

Depreciation and amortization
8,910

 
8,801

Amortization of deferred financing costs
150

 
681

Accretion of discount on convertible subordinated notes

 
1,647

Provision for losses on accounts receivable
1,274

 
2,113

Stock-based compensation expense
2,952

 
3,702

Deferred income tax expense (benefit)
9,389

 
(140
)
Loss on redemption of convertible junior subordinated debentures

 
2,932

Other
81

 

Changes in operating assets and liabilities that provided (required) cash:
 
 
 
Accounts and preneed receivables
(1,765
)
 
(1,700
)
Inventories and other current assets
934

 
725

Deferred charges and other
(19
)
 
(196
)
Preneed funeral and cemetery trust investments
3,566

 
(3,228
)
Accounts payable
(1,543
)
 
785

Accrued and other liabilities
(452
)
 
(1,362
)
Deferred preneed funeral and cemetery revenue
2,490

 
335

Deferred preneed funeral and cemetery receipts held in trust
(3,601
)
 
2,595

Net cash provided by operating activities
31,216

 
27,649

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisitions and land for new construction
(6,051
)
 
(56,850
)
Net proceeds from the sale of businesses and other assets
8,321

 
1,927

Capital expenditures
(7,425
)
 
(18,158
)
Net cash used in investing activities
(5,155
)
 
(73,081
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net (payments) borrowings on the revolving credit facility
(18,700
)
 
5,400

Net (payments) borrowings on the term loan
(7,500
)
 
5,656

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
(445
)
 
(662
)
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
685

 
1,035

Dividends on common stock
(1,362
)
 
(1,379
)
Dividend on redeemable preferred stock
(4
)
 

Payment of loan origination costs related to the credit facility
(574
)
 
(825
)
Excess tax benefit of equity compensation
1,023

 
4,594

Net cash provided by (used in) financing activities
(26,877
)
 
47,021

 
 
 
 
Net increase (decrease) in cash and cash equivalents
(816
)
 
1,589

Cash and cash equivalents at beginning of period
1,698

 
1,377

Cash and cash equivalents at end of period
$
882

 
$
2,966

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

- 5 -


CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage”, the “Company”, “we”, “us” or “our”) is a leading provider of deathcare services and merchandise in the United States. As of September 30, 2014 , we operated 164 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 nine month periods ended September 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.

- 6 -


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 $7.6 million of funeral receivables at December 31, 2013 and September 30, 2014 , respectively, and $8.3 million and $9.9 million of cemetery receivables at December 31, 2013 and September 30, 2014 , respectively. Accounts receivable also include minor amounts of other receivables. 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 $7.6 million of funeral receivables at December 31, 2013 and September 30, 2014 , respectively, and $16.5 million and $18.5 million of cemetery receivables at December 31, 2013 and September 30, 2014 , respectively. Bad debt expense totaled approximately $0.5 million and $0.8 million for the three months ended September 30, 2013 and 2014 , respectively, and $1.3 million and $2.1 million for the nine months ended September 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 September 30, 2014 :
 
December 31, 2013
 
September 30, 2014
 
(in thousands)
Land
$
55,639

 
$
66,080

Buildings and improvements
132,172

 
146,352

Furniture, equipment and automobiles
61,506

 
64,945

Property, plant and equipment, at cost
249,317

 
277,377

Less: accumulated depreciation
(88,627
)
 
(93,595
)
Property, plant and equipment, net
$
160,690

 
$
183,782

Significant activity in property, plant and equipment during the nine months ended September 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 in the first quarter of 2014 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 September 30, 2013 and 2014 , respectively, and $6.6 million and $6.8 million for the nine months ended September 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 discontinued operations on 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 . During the third quarter of 2014 , we sold two funeral homes, one in Ohio and one in Kentucky, which were reported as held-for-sale at June 30, 2014. As of September 30, 2014, we had no businesses classified as held-for-sale. See Note 4 to the Consolidated Financial Statements herein for more information.

- 7 -


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. We did not acquire any businesses in the third quarter of 2014 . 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 nine months ended September 30, 2013 , and the corresponding calculation of fully diluted earnings per share, include approximately 4.4 million shares that would have been

- 8 -


issued upon the 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 September 30, 2013 , 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. The convertible junior subordinated notes were redeemed in March 2014 and there has been no impact on our 2014 calculation of fully diluted earnings per share.
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 September 30, 2014 , CSV RIA provided these services to two institutions, which have custody of 77% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
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 nine months ended September 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. We did not record any impairments in the three months ended September 30, 2014 . During the second quarter of 2014, we recorded a $0.4 million impairment charge for other-

- 9 -


than-temporary declines in fair value related to unrealized losses on certain investments. There were no impairments recorded in the three and nine months ended September 30, 2013 .
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.
On August 1, 2014, we received notification that the Internal Revenue Service (“IRS”) completed its examination of our tax year ended December 31, 2011. As a result, we have re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability by $7.3 million. This change resulted in a tax benefit recognized in the amount of $1.7 million which reduced our effective tax rate for the nine month period ended September 30, 2014. The remainder of the re-measurement resulted in an increase to Deferred tax liability in the amount of $5.6 million . Additionally, we recognized a credit to interest expense of $0.6 million related to the settled portion of the uncertain tax position.
The following table summarizes our unrecognized tax benefit as of December 31, 2013 and September 30, 2014 :
 
 
December 31, 2013
 
September 30, 2014
 
 
(in thousands)
Unrecognized tax benefit
 
$
7,832

 
$
515

Interest accrued on unrecognized tax benefits
 
506

 

We do not anticipate a material change of our unrecognized tax benefits during the next twelve months.
In September 2013, the U.S. Department of the Treasury and the IRS 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. We adopted the new guidance for our current tax year, which began on January 1, 2014. These regulations have not had a material impact on our financial statements.
Subsequent Events
Management evaluated events and transactions during the period subsequent to September 30, 2014 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

Going Concern

In August 2014, the FASB issued ASC Subtopic 205-40, Presentation of Financial Statements - Going Concern: Disclosure of Uncertainties about an Entity s Ability to Continue as a Going Concern. ASC Subtopic 205-40 provides guidance as to management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures by incorporating and expanding upon certain principles that are

- 10 -


currently in U.S. auditing standards. The new guidance requires an entity to evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued). The new guidance allows the entity to consider the mitigating effects of management’s plans that will alleviate the substantial doubt and requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans. If conditions or events raise substantial doubt that is not alleviated, an entity should disclose that there is substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued (or available to be issued), along with the principal conditions or events that raise substantial doubt, management’s evaluation of the significance of those conditions or events in relation to the entity’s ability to meet its obligations and management’s plans that are intended to mitigate those conditions. The guidance is effective for annual periods ending after December 15, 2016, and interim and annual periods thereafter. Early adoption is permitted. We plan to adopt the provisions of ASC Subtopic 205-40 for our fiscal year ending December 31, 2016 and the interim periods beginning in 2017.
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.
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.
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.
We acquired land for $2.0 million for funeral home expansion projects during the third quarter of 2014. We completed the acquisition of six businesses from certain subsidiaries of SCI (collectively, the “SCI Acquisition”), for $54.9 million during the

- 11 -


second quarter of 2014. We acquired land for approximately $6.0 million during the first quarter of 2013 for funeral home expansion projects. There were no acquisitions in the three and nine months ended September 30, 2013 .
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 and recognized a gain of $0.9 million . During the third quarter of 2014, we sold a funeral home in Ohio and a funeral home in Kentucky for approximately $0.6 million and $1.1 million , respectively, which were reported as held-for-sale at June 30, 2014, and recognized a net gain of approximately $0.7 million . At September 30, 2014 , we had no assets classified as held-for-sale.
The operating results of the discontinued businesses for the three and nine months ended September 30, 2013 and 2014 , as well as any impairments and net gain 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 September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2014
 
2013
 
2014
Revenues
$
751

 
$
188

 
$
3,664

 
$
815

 
 
 
 
 
 
 
 
Operating income
$
66

 
$
48

 
$
700

 
$
236

Impairment

 

 
(100
)
 
(1,180
)
Net gain on disposal
6,399

 
685

 
6,546

 
1,594

Income tax provision
(2,479
)
 
(302
)
 
(2,738
)
 
(269
)
Income from discontinued operations
$
3,986

 
$
431

 
$
4,408

 
$
381

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.
We performed our 2014 annual impairment test of goodwill using information as of August 31, 2014. 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 the two-step goodwill impairment test. For our 2013 annual impairment test, we performed the two-step impairment test. Our intent is to perform the two-step test at least once every three years unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 2, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2013, for a discussion of the methodology used for the annual goodwill impairment test. For our 2014 annual impairment test, we performed a qualitative review and concluded that there was not an impairment to goodwill.
The following table presents the changes in goodwill on our Consolidated Balance Sheets during the nine months ended September 30, 2014 (in thousands):
 
 
Goodwill as of December 31, 2013
$
221,087

Increase in goodwill related to acquisitions
33,826

Changes in previous estimates
3,788

Net impairment and write-off related to divestitures
(1,197
)
Goodwill as of September 30, 2014
$
257,504

The $33.8 million increase to goodwill related to acquisitions represents the goodwill recorded in connection with the SCI Acquisition completed in May 2014. The changes in previous estimates relate to a $0.1 million reduction in goodwill relating to adjustments in inventory for the November 2013 funeral home business acquisition and a $3.9 million increase in

- 12 -


goodwill relating to a reclass from tradenames for the SCI Acquisition. In the second quarter of 2014, we recorded an impairment of $1.2 million related to a business held for sale as the carrying value exceeded fair value. As such, this amount is recorded within discontinued operations on our Consolidated Statements of Operations. Our purchase price allocations for these acquisitions are 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 September 30, 2014 were as follows (in thousands):
 
December 31, 2013
 
September 30, 2014
Preneed cemetery trust investments, at fair value
$
70,386

 
$
75,271

Less: allowance for contract cancellation
(2,045
)
 
(2,199
)
Preneed cemetery trust investments, net
$
68,341

 
$
73,072

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 September 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 municipal bonds, 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 in the three and nine months ended September 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.

- 13 -


The cost and fair market values associated with preneed cemetery trust investments at September 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
 
$
2,428

 
$

 
$

 
$
2,428

Fixed income securities:
 
 
 
 
 
 
 
 
 
Municipal bonds
2
 
344

 
12

 

 
356

Foreign debt
2
 
4,945

 
91

 
(102
)
 
4,934

Corporate debt
2
 
30,384

 
433

 
(1,984
)
 
28,833

Preferred stock
2
 
18,432

 
647

 
(203
)
 
18,876

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
16,756

 
3,019

 
(948
)
 
18,827

Trust securities
 
 
$
73,290

 
$
4,202

 
$
(3,237
)
 
$
74,255

Accrued investment income
 
 
$
1,016

 
 
 
 
 
$
1,016

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
75,271

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
101.3
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$

Due in one to five years
6,299

Due in five to ten years
7,670

Thereafter
39,031

Total
$
53,000

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. We did not record any impairments in the three months ended September 30, 2014 . In the second quarter of 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.

- 14 -


At September 30, 2014 , 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 cemetery merchandise and service trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2014 and December 31, 2013 , are shown in the following tables (in thousands):
 
September 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:
 
 
 
 
 
 
 
 
 
 
 
Foreign debt
$
4,039

 
$
(102
)
 
$

 
$

 
$
4,039

 
$
(102
)
Corporate debt
19,306

 
(846
)
 
2,224

 
(1,137
)
 
21,530

 
(1,983
)
Preferred stock
6,456

 
(191
)
 
3,238

 
(12
)
 
9,694

 
(203
)
Common stock
9,520

 
(911
)
 
81

 
(38
)
 
9,601

 
(949
)
Total temporary impaired securities
$
39,321

 
$
(2,050
)
 
$
5,543

 
$
(1,187
)
 
$
44,864

 
$
(3,237
)
 
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 on our Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2014 were as follows (in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2014
 
2013
 
2014
Investment income
$
671

 
$
504

 
$
2,436

 
$
1,936

Realized gains
835

 
1,970

 
2,420

 
3,670

Realized losses
(94
)
 
(124
)
 
(668
)
 
(952
)
Expenses and taxes
(436
)
 
(387
)
 
(2,501
)
 
(1,329
)
Increase in deferred preneed cemetery receipts held in trust
(976
)
 
(1,963
)
 
(1,687
)
 
(3,325
)
 
$

 
$

 
$

 
$

Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2014
 
2013
 
2014
Purchases
$
(18,569
)
 
$
(17,814
)
 
$
(34,273
)
 
$
(39,472
)
Sales
$
16,409

 
$
18,061

 
$
35,229

 
$
40,981


- 15 -

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 September 30, 2014 were as follows (in thousands):
 
December 31, 2013
 
September 30, 2014
Preneed funeral trust investments, at market value
$
100,005

 
$
101,480

Less: allowance for contract cancellation
(2,861
)
 
(2,955
)
Preneed funeral trust investments, net
$
97,144

 
$
98,525

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 September 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 September 30, 2014 . During the first quarter of 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.

- 16 -

Table of Contents

The cost and fair market values associated with preneed funeral trust investments at September 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
 
$
14,018

 
$

 
$

 
$
14,018

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
2,602

 
34

 
(34
)
 
2,602

U.S. agency obligations
2
 
31

 

 
(1
)
 
30

Foreign debt
2
 
3,961

 
73

 
(82
)
 
3,952

Corporate debt
2
 
25,294

 
527

 
(1,595
)
 
24,226

Preferred stock
2
 
15,777

 
588

 
(163
)
 
16,202

Mortgage backed securities
2
 
323

 
9

 
(3
)
 
329

Common stock
1
 
13,611

 
2,475

 
(782
)
 
15,304

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
13,991

 
1,237

 
(118
)
 
15,110

Fixed income
2
 
5,280

 
105

 
(85
)
 
5,300

Other investments
2
 
3,614

 

 
(31
)
 
3,583

Trust securities
 
 
$
98,502

 
$
5,048

 
$
(2,894
)
 
$
100,656

Accrued investment income
 
 
$
824

 
 
 
 
 
$
824

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
101,480

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
102.2
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
855

Due in one to five years
6,162

Due in five to ten years
7,013

Thereafter
33,311

Total
$
47,341



- 17 -

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. We did not record any impairments in the three months ended September 30, 2014 . During the second quarter of 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 September 30, 2014 , 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.

- 18 -

Table of Contents

Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2014 and December 31, 2013 are shown in the following tables (in thousands):
 
September 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
$
1,320

 
$
(6
)
 
$
822

 
$
(29
)
 
$
2,142

 
$
(35
)
U.S. agency obligations
30

 

 

 

 
30

 

Foreign debt
3,234

 
(82
)
 

 

 
3,234

 
(82
)
Corporate debt
15,519

 
(680
)
 
1,787

 
(914
)
 
17,306

 
(1,594
)
Preferred stock
5,195

 
(154
)
 
2,606

 
(10
)
 
7,801

 
(164
)
Mortgage backed securities

 

 
63

 
(3
)
 
63

 
(3
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
7,848

 
(751
)
 
67

 
(31
)
 
7,915

 
(782
)
Equity and other
9,315

 
(116
)
 
1,917

 
(2
)
 
11,232

 
(118
)
Fixed income
462

 
(9
)
 
4,838

 
(76
)
 
5,300

 
(85
)
Other investments

 

 
44

 
(31
)
 
44

 
(31
)
Total temporary impaired securities
$
42,923

 
$
(1,798
)
 
$
12,144

 
$
(1,096
)
 
$
55,067

 
$
(2,894
)
 
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
)

- 19 -

Table of Contents

Preneed funeral trust investment security transactions recorded in Interest expense on the Consolidated Statements of Operations for the three and nine months ended September 30, 2013 and 2014 were as follows (in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2014
 
2013
 
2014
Investment income
$
709

 
$
576

 
$
2,232

 
$
2,067

Realized gains
942

 
1,605

 
7,156

 
5,036

Realized losses
(111
)
 
(105
)
 
(5,664
)
 
(841
)
Expenses and taxes
(269
)
 
(260
)
 
(1,324
)
 
(1,158
)
Increase in deferred preneed funeral receipts held in trust
(1,271
)
 
(1,816
)
 
(2,400
)
 
(5,104
)
 
$

 
$

 
$

 
$

Purchases and sales of investments in the preneed funeral trusts were as follows (in thousands):
 
For the Three Months Ended September 30,
 
For the Nine Months Ended
September 30,
 
2013
 
2014
 
2013
 
2014
Purchases
$
(17,266
)
 
$
(14,630
)
 
$
(28,355
)
 
$
(44,147
)
Sales
$
15,697

 
$
14,691

 
$
29,924

 
$
44,840

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 September 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 $10.2 million is presented in Accounts receivable and $22.6 million is presented in Preneed receivables . The unearned finance charges associated with these receivables were $3.8 million and $4.4 million at December 31, 2013 and September 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 5.9% of the total receivables on recognized sales at September 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 nine months ended September 30, 2014 , the change in the allowance for contract cancellations was as follows (in thousands):
 
September 30, 2014
Beginning balance
$
1,347

Write-offs and cancellations
(959
)
Provision
1,414

Ending balance
$
1,802

The aging of financing receivables as of September 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
$
816

 
$
421

 
$
263

 
$
1,113

 
$
2,613

 
$
20,555

 
$
23,168

Deferred revenue
347

 
183

 
158

 
556

 
1,244

 
8,368

 
9,612

Total contracts
$
1,163

 
$
604

 
$
421

 
$
1,669

 
$
3,857

 
$
28,923

 
$
32,780



- 20 -

Table of Contents

The aging of 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

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

 
$
12,631

Less: allowance for contract cancellation
(345
)
 
(379
)
Receivables from preneed trusts, net
$
11,166

 
$
12,252


The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at September 30, 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 September 30, 2014
 
 
 
Cash and cash equivalents
$
2,834

 
$
2,834

Fixed income investments
7,344

 
7,364

Mutual funds and common stocks
2,429

 
2,508

Annuities
24

 
24

Total
$
12,631

 
$
12,730