Carriage Services, Inc.
CARRIAGE SERVICES INC (Form: 10-Q, Received: 05/05/2015 16:23:29)
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 March 31, 2015
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 May 1, 2015 was 18,508,874 .
 


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, 2014
 
March 31, 2015
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
413

 
$
317

Accounts receivable, net of allowance for bad debts of $1,127 in 2014 and $1,102 in 2015
19,264

 
18,637

Inventories
5,294

 
5,432

Prepaid expenses
4,590

 
4,556

Other current assets
7,144

 
2,369

Total current assets
36,705

 
31,311

Preneed cemetery trust investments
71,972

 
72,534

Preneed funeral trust investments
97,607

 
97,240

Preneed receivables, net of allowance for bad debts of $2,339 in 2014 and $1,975 in 2015
26,284

 
26,431

Receivables from preneed trusts
12,809

 
12,795

Property, plant and equipment, net of accumulated depreciation of $95,249 in 2014 and $97,565 in 2015
186,211

 
193,984

Cemetery property
75,564

 
75,264

Goodwill
257,442

 
261,291

Deferred charges and other non-current assets
14,264

 
15,136

Cemetery perpetual care trust investments
48,670

 
49,249

Total assets
$
827,528

 
$
835,235

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capital lease obligations
$
9,838

 
$
10,624

Accounts payable
6,472

 
6,463

Other liabilities
1,437

 
788

Accrued liabilities
15,203

 
12,211

Total current liabilities
32,950

 
30,086

Long-term debt, net of current portion
111,887

 
112,972

Revolving credit facility
40,500

 
41,000

Convertible subordinated notes due 2021
114,542

 
115,369

Obligations under capital leases, net of current portion
3,098

 
3,044

Deferred preneed cemetery revenue
56,875

 
56,871

Deferred preneed funeral revenue
31,265

 
31,187

Deferred tax liability
36,414

 
36,487

Other long-term liabilities
2,401

 
3,086

Deferred preneed cemetery receipts held in trust
71,972

 
72,534

Deferred preneed funeral receipts held in trust
97,607

 
97,240

Care trusts’ corpus
48,142

 
49,184

Total liabilities
647,653

 
649,060

Commitments and contingencies:

 

Stockholders’ equity:
 
 
 
Common stock, $.01 par value; 80,000,000 shares authorized and 22,434,000 shares issued at December 31, 2014 and March 31, 2015
224

 
224

Additional paid-in capital
212,386

 
212,268

Accumulated deficit
(17,468
)
 
(11,050
)
Treasury stock, at cost; 3,922,000 shares at December 31, 2014 and March 31, 2015
(15,267
)
 
(15,267
)
Total stockholders’ equity
179,875

 
186,175

Total liabilities and stockholders’ equity
$
827,528

 
$
835,235

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 March 31,
 
2014
 
2015
Revenues:
 
 
 
Funeral
$
43,964

 
$
50,137

Cemetery
11,688

 
13,116

 
55,652

 
63,253

Field costs and expenses:
 
 
 
Funeral
25,883

 
28,415

Cemetery
6,960

 
7,302

Depreciation and amortization
2,415

 
2,802

Regional and unallocated funeral and cemetery costs
2,379

 
2,525

 
37,637

 
41,044

Gross profit
18,015

 
22,209

Corporate costs and expenses:
 
 
 
General and administrative costs and expenses
9,335

 
7,170

Home office depreciation and amortization
342

 
520

 
9,677

 
7,690

Operating income
8,338

 
14,519

Interest expense
(2,844
)
 
(2,550
)
Accretion of discount on convertible subordinated notes
(171
)
 
(827
)
Loss on redemption of convertible junior subordinated debentures
(3,779
)
 

Other income (loss)
1,130

 
(119
)
Income from continuing operations before income taxes
2,674

 
11,023

Provision for income taxes
(1,043
)
 
(4,605
)
Net income from continuing operations
1,631

 
6,418

Income from discontinued operations, net of tax
587

 

Net income available to common stockholders
$
2,218

 
$
6,418

 
 
 
 
Basic earnings per common share:
 
 
 
Continuing operations
$
0.09

 
$
0.35

Discontinued operations
0.03

 

Basic earnings per common share
$
0.12

 
$
0.35

 
 
 
 
Diluted earnings per common share:
 
 
 
Continuing operations
$
0.09

 
$
0.34

Discontinued operations
0.03

 

Diluted earnings per common share
$
0.12

 
$
0.34

 
 
 
 
Dividends declared per common share
$
0.025

 
$
0.025

 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
Basic
17,984

 
18,208

Diluted
18,143

 
18,804

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 Three Months Ended March 31,
 
2014
 
2015
Cash flows from operating activities:
 
 
 
Net income
$
2,218

 
$
6,418

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

Depreciation and amortization
2,764

 
3,322

Amortization of deferred financing costs
232

 
226

Accretion of discount on convertible subordinated notes
171

 
827

Provision for losses on accounts receivable
700

 
424

Stock-based compensation expense
1,491

 
1,089

Deferred income tax (benefit) expense
(4,780
)
 
1,559

Loss on redemption of convertible junior subordinated debentures
2,932

 

Other
(3
)
 

Changes in operating assets and liabilities that provided (required) cash:
 
 
 
Accounts and preneed receivables
(245
)
 
56

Inventories and other current assets
299

 
3,224

Deferred charges and other
(318
)
 
111

Preneed funeral and cemetery trust investments
(5,258
)
 
(760
)
Accounts payable
(2,566
)
 
(9
)
Accrued and other liabilities
(2,387
)
 
(5,020
)
Deferred preneed funeral and cemetery revenue
(37
)
 
(82
)
Deferred preneed funeral and cemetery receipts held in trust
5,208

 
1,237

Net cash provided by (used in) operating activities
(1,618
)
 
12,622

 
 
 
 
Cash flows from investing activities:
 
 
 
Acquisitions

 
(4,250
)
Net proceeds from the sale of businesses and other assets
200

 

Capital expenditures
(5,048
)
 
(6,398
)
Net cash used in investing activities
(4,848
)
 
(10,648
)
 
 
 
 
Cash flows from financing activities:
 
 
 
Net (payments) borrowings on the revolving credit facility
(36,900
)
 
500

Net payments on the term loan
(3,000
)
 
(2,344
)
Payments on other long-term debt and obligations under capital leases
(185
)
 
(370
)
Proceeds from the exercise of stock options and employee stock purchase plan contributions
652

 
212

Dividends on common stock
(456
)
 
(463
)
Payment of loan origination costs related to the credit facility

 
(13
)
Excess tax benefit of equity compensation
5,596

 
408

Proceeds from the issuance of convertible subordinated notes
143,750

 

Payment of debt issuance costs related to the convertible subordinated notes
(4,355
)
 

Redemption of convertible junior subordinated debentures
(61,905
)
 

Payments for performance-based stock awards
(16,150
)
 

Net cash provided by (used in) financing activities
27,047

 
(2,070
)
 
 
 
 
Net increase (decrease) in cash and cash equivalents
20,581

 
(96
)
Cash and cash equivalents at beginning of period
1,377

 
413

Cash and cash equivalents at end of period
$
21,958

 
$
317

 
 
 
 
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 March 31, 2015 , we operated 165 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 that provide interment rights (grave sites and mausoleums) and related merchandise, such as markers and memorials.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Interim Condensed Disclosures
The information for the three month periods ended March 31, 2014 and 2015 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, 2014 and should be read in conjunction therewith.
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 us. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience and the current economic environment. We also monitor changes in delinquency rates

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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 $10.0 million and $8.9 million of funeral receivables at December 31, 2014 and March 31, 2015 , respectively, and $9.1 million and $9.5 million of cemetery receivables at December 31, 2014 and March 31, 2015 , respectively. For 2014 and 2015, accounts receivable also included minor amounts of other receivables. Non-current preneed receivables represented the payments expected to be received beyond one year from the balance sheet date. Non-current preneed receivables consisted of approximately $7.4 million and $7.5 million of funeral receivables at December 31, 2014 and March 31, 2015 , respectively, and $18.9 million of cemetery receivables at December 31, 2014 and March 31, 2015 . Bad debt expense totaled approximately $0.7 million and $0.4 million for the three months ended March 31, 2014 and 2015 , respectively.
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”). 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.
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 by state law 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 March 31, 2015 , CSV RIA provided these services to two institutions, which have custody of 76% 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.


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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, 2014 and March 31, 2015 :
 
December 31, 2014
 
March 31, 2015
 
(in thousands)
Land
$
66,957

 
$
68,107

Buildings and improvements
148,483

 
156,257

Furniture, equipment and automobiles
66,020

 
67,185

Property, plant and equipment, at cost
281,460

 
291,549

Less: accumulated depreciation
(95,249
)
 
(97,565
)
Property, plant and equipment, net
$
186,211

 
$
193,984

We recorded depreciation expense of approximately $2.2 million and $2.6 million for the three months ended March 31, 2014 and 2015 , respectively.
Discontinued Operations
Effective January 1, 2015, we adopted the Financial Accounting Standards Board's (“FASB”) new guidance for reporting discontinued operations. In April 2014, the FASB amended the definition of “discontinued operations” to include 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. 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 three months ended March 31, 2015 , there were no divestitures of our funeral or cemetery businesses.
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 three months ended March 31, 2015 , we acquired one funeral home business in Clarksville, Tennessee. See Note 3 to the Consolidated Financial Statements herein for more information concerning this acquisition. There were no business acquisitions in the three months ended March 31, 2014 .
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 annually 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 st 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, 2014 and further discussion of current period goodwill activity is included in Note 4 to the Consolidated Financial Statements herein.

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Intangible Assets
Our intangible assets include tradenames 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 the end of each year.

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 18 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2014 . 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. See Note 15 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 and our 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 three months ended March 31, 2015 , and the corresponding calculation of fully diluted earnings per share, include approximately 0.3 million shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB Accounting Standards Codification (“ASC”) 260.
Fair Value Measurements
We define fair value as the price that would be received on 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 months ended March 31, 2015 , 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. In the three months ended March 31, 2015 , we recorded impairments totaling $1.8 million for other-than-temporary declines in the fair value related to unrealized losses on certain investments. Refer to Notes 5 and 9 for further discussion concerning these impairments. We did not record any impairments in the three months ended March 31, 2014 .

- 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 5, 9 and 10 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 14 states in which we operate and combined or unitary income tax returns in 13 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets. 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. While we do not anticipate a material change of our unrecognized tax benefits during the next twelve months, the entire balance of unrecognized tax benefits, if recognized, would affect our effective tax rate.
Subsequent Events
Management evaluated events and transactions during the period subsequent to March 31, 2015 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
Presentation of Debt Issuance Costs
In April 2015, the FASB issued Accounting Standards Update (“ASU”), Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs . To simplify the presentation of debt issuance costs, the amendments in this ASU require that entities that have historically presented debt issuance costs as an asset, related to a recognized debt liability, will be required to present those costs as a direct deduction from the carrying value of the related debt liability. This presentation will result in debt issuance costs being presented in the same way debt discounts have historically been handled. This ASU does not change the recognition, measurement or subsequent measurement guidance for debt issuance costs. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this ASU is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in an accounting principle. These disclosures include the nature and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on debt issuance costs asset and the debt liability. Our adoption of this ASU is not expected to have a material effect on our financial statements. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2016.
Extraordinary and Unusual Items
In January 2015, the FASB issued an amendment to ASC Subtopic 225-20, Income Statement - Extraordinary and Unusual Items. This amendment eliminates the concept of reporting extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Preparers will not have to assess whether a particular event or transaction is extraordinary and likewise, auditors and regulators no longer need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include such items. The amendment is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply the amendment prospectively. A reporting entity also may apply the amendment retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of

- 10 -


the fiscal year of adoption. Our adoption of this amendment to Subtopic 225-20 is not expected to have a material effect on our financial statements. We plan to adopt the provisions of ASC Subtopic 225-20 for our fiscal year beginning January 1, 2016.
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. On April 1, 2015, the FASB voted to propose an amendment to delay the effective date of the new rules on revenue recognition for one year, which is currently in a comment period. If the FASB moves forward with the proposal, the new effective date will be for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Entities can still adopt the amendments as of the original effective date for annual periods beginning after December 15, 2016. We are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3.
ACQUISITIONS
Our growth strategy includes the execution of our Strategic Acquisition Model. We assess the strategic positioning of acquisition candidates based on the demographics, strength of brand, competitive standing, market size, market share, barriers to entry and volume and price trends. 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 February 25, 2015, we acquired a funeral home business in Clarksville, Tennessee for approximately $8.8 million . The purchase price consisted of cash of approximately $4.3 million which was paid at closing and $4.5 million which represents the net present value of future deferred payments totaling $5.5 million . The deferred payments are being paid in 20 equal quarterly installments of approximately $0.3 million commencing on the close date and each January 1, April 1, July 1 and October 1 for the next five years. We acquired substantially all of the assets of the business. The pro forma impact of the acquisition on the prior period is not presented as the impact is not material to our Consolidated Financial Statements. The results of this acquisition are included in our results of operations from the date of the acquisition.
The following table summarizes the fair value of the assets acquired (in thousands):
Current assets
$
39

Property, plant & equipment
3,697

Goodwill
3,849

Deferred charges and other non-current assets
1,196

Purchase price
$
8,781

The Deferred charges and other non-current assets relate to the fair value of tradenames we acquired. There were no business acquisitions in the three months ended March 31, 2014 .
4.    GOODWILL
Many of the former owners and staff of acquired funeral homes and certain cemeteries 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.

- 11 -


The following table presents the changes in goodwill on our Consolidated Balance Sheets during the three months ended March 31, 2015 (in thousands):
 
 
Goodwill as of December 31, 2014
$
257,442

Increase in goodwill related to acquisitions
3,849

Goodwill as of March 31, 2015
$
261,291

The $3.8 million increase to goodwill related to acquisitions represents the goodwill recorded in connection with the funeral home acquired in February 2015.
5.    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, 2014 and March 31, 2015 were as follows (in thousands):
 
December 31, 2014
 
March 31, 2015
Preneed cemetery trust investments, at fair value
$
74,198

 
$
74,742

Less: allowance for contract cancellation
(2,226
)
 
(2,208
)
Preneed cemetery trust investments, net
$
71,972

 
$
72,534

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 March 31, 2015 , 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 months ended March 31, 2015 . There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 10 for further information of the fair value measurement and the three-level valuation hierarchy.

- 12 -


The cost and fair market values associated with preneed cemetery trust investments at March 31, 2015 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
1,028

 
$

 
$

 
$
1,028

Fixed income securities:
 
 
 
 
 
 
 
 
 
Municipal bonds
2
 
348

 

 
(12
)
 
336

Foreign debt
2
 
6,060

 
72

 
(261
)
 
5,871

Corporate debt
2
 
29,393

 
494

 
(987
)
 
28,900

Preferred stock
2
 
18,828

 
343

 
(300
)
 
18,871

Common stock
1
 
17,952

 
2,235

 
(1,484
)
 
18,703

Trust securities
 
 
$
73,609

 
$
3,144

 
$
(3,044
)
 
$
73,709

Accrued investment income
 
 
$
1,033

 
 
 
 
 
$
1,033

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
74,742

Market value as a percentage of cost
 
 
 
 
 
 
 
 
100.1
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
18

Due in one to five years
5,998

Due in five to ten years
7,154

Thereafter
40,808

Total
$
53,978

The cost and fair market values associated with preneed cemetery trust investments at December 31, 2014 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
5,591

 
$

 
$

 
$
5,591

Fixed income securities:
 
 
 
 
 
 
 
 
 
Municipal bonds
2
 
347

 
9

 

 
356

Foreign debt
2
 
5,874

 

 
(237
)
 
5,637

Corporate debt
2
 
30,108

 
362

 
(2,167
)
 
28,303

Preferred stock
2
 
19,154

 
199

 
(325
)
 
19,028

Mortgage backed securities
2
 
1

 

 

 
1

Common stock
1
 
13,128

 
2,357

 
(966
)
 
14,519

Trust securities
 
 
$
74,203

 
$
2,927

 
$
(3,695
)
 
$
73,435

Accrued investment income
 
 
$
763

 
 
 
 
 
$
763

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
74,198

Market value as a percentage of cost
 
 
 
 
 
 
 
 
99.0
%
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 March 31, 2015 , we recorded a $0.7 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended March 31, 2014 . 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

- 13 -


performed or the merchandise is delivered causing the contract to be withdrawn from the trust in accordance with state regulations.
At March 31, 2015 , 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 March 31, 2015 and December 31, 2014 , are shown in the following tables (in thousands):
 
March 31, 2015
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
$
336

 
$
(12
)
 
$

 
$

 
$
336

 
$
(12
)
Foreign debt
3,579

 
(261
)
 

 

 
3,579

 
(261
)
Corporate debt
18,431

 
(448
)
 
2,488

 
(539
)
 
20,919

 
(987
)
Preferred stock
7,340

 
(235
)
 
4,734

 
(65
)
 
12,074

 
(300
)
Common stock
14,623

 
(1,360
)
 
139

 
(124
)
 
14,762

 
(1,484
)
Total temporary impaired securities
$
44,309

 
$
(2,316
)
 
$
7,361

 
$
(728
)
 
$
51,670

 
$
(3,044
)
 
December 31, 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
$
5,629

 
$
(237
)
 
$

 
$

 
$
5,629

 
$
(237
)
Corporate debt
18,051

 
(778
)
 
2,016

 
(1,389
)
 
20,067

 
(2,167
)
Preferred stock
10,342

 
(289
)
 
3,236

 
(36
)
 
13,578

 
(325
)
Common stock
6,904

 
(911
)
 
65

 
(55
)
 
6,969

 
(966
)
Total temporary impaired securities
$
40,926

 
$
(2,215
)
 
$
5,317

 
$
(1,480
)
 
$
46,243

 
$
(3,695
)
Preneed cemetery trust investment security transactions recorded in Interest expense on our Consolidated Statements of Operations for the three months ended March 31, 2014 and 2015 were as follows (in thousands):
 
For the Three Months Ended March 31,
 
2014
 
2015
Investment income
$
543

 
$
517

Realized gains
539

 
358

Realized losses
(188
)
 
(798
)
Expenses and taxes
(558
)
 
(319
)
(Increase) decrease in deferred preneed cemetery receipts held in trust
(336
)
 
242

 
$

 
$

Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands):
 
For the Three Months Ended March 31,
 
2014
 
2015
Purchases
$
(8,160
)
 
$
(7,008
)
Sales
$
8,537

 
$
2,752


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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, 2014 and March 31, 2015 were as follows (in thousands):
 
December 31, 2014
 
March 31, 2015
Preneed funeral trust investments, at market value
$
100,579

 
$
100,162

Less: allowance for contract cancellation
(2,972
)
 
(2,922
)
Preneed funeral trust investments, net
$
97,607

 
$
97,240

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 March 31, 2015 , 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, municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 for the three months ended March 31, 2015 . There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 10 for further information of the fair value measurement and the three-level valuation hierarchy.

- 15 -

Table of Contents

The cost and fair market values associated with preneed funeral trust investments at March 31, 2015 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
13,589

 
$

 
$

 
$
13,589

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S treasury debt
1
 
2,035

 
40

 

 
2,075

U.S. agency obligations
2
 
30

 
1

 

 
31

Municipal bonds
2
 
272

 

 
(10
)
 
262

Foreign debt
2
 
4,740

 
56

 
(206
)
 
4,590

Corporate debt
2
 
23,619

 
556

 
(771
)
 
23,404

Preferred stock
2
 
15,721

 
397

 
(235
)
 
15,883

Mortgage backed securities
2
 
295

 
6

 
(2
)
 
299

Common stock
1
 
14,179

 
1,803

 
(1,183
)
 
14,799

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
14,082

 
1,547

 
(97
)
 
15,532

Fixed income
2
 
5,296

 
139

 
(54
)
 
5,381

Other investments
2
 
3,529

 

 
(31
)
 
3,498

Trust securities
 
 
$
97,387

 
$
4,545

 
$
(2,589
)
 
$
99,343

Accrued investment income
 
 
$
819

 
 
 
 
 
$
819

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
100,162

Market value as a percentage of cost
 
 
 
 
 
 
 
 
102.0
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
562

Due in one to five years
5,415

Due in five to ten years
6,476

Thereafter
34,091

Total
$
46,544



- 16 -

Table of Contents

The cost and fair market values associated with preneed funeral trust investments at December 31, 2014 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
17,501

 
$

 
$

 
$
17,501

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
2,037

 
32

 
(15
)
 
2,054

U.S. agency obligations
2
 
30

 

 

 
30

Foreign debt
2
 
4,653

 

 
(188
)
 
4,465

Corporate debt
2
 
24,761

 
469

 
(1,718
)
 
23,512

Preferred stock
2
 
16,166

 
256

 
(261
)
 
16,161

Mortgage backed securities
2
 
309

 
8

 
(3
)
 
314

Common stock
1
 
10,544

 
1,926

 
(783
)
 
11,687

Mutual funds:
 
 
 
 
 
 
 
 
 
Equity
1
 
14,126

 
1,370

 
(181
)
 
15,315

Fixed income
2
 
5,351

 
115

 
(72
)
 
5,394

Other investments
2
 
3,560

 

 
(29
)
 
3,531

Trust securities
 
 
$
99,038

 
$
4,176

 
$
(3,250
)
 
$
99,964

Accrued investment income
 
 
$
615

 
 
 
 
 
$
615

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
100,579

Market value as a percentage of cost
 
 
 
 
 
 
 
 
100.9
%
We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral receipts held in trust on our Consolidated Balance Sheets. In the three months ended March 31, 2015 , we recorded a $0.6 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not have any impairments in the three months ended March 31, 2014 . 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 March 31, 2015 , 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.

- 17 -

Table of Contents

Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of March 31, 2015 and December 31, 2014 are shown in the following tables (in thousands):
 
March 31, 2015
 
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
$
259

 
$

 
$

 
$

 
$
259

 
$

Municipal bonds
262

 
(10
)
 

 

 
262

 
(10
)
Foreign debt
2,825

 
(206
)
 

 

 
2,825

 
(206
)
Corporate debt
14,413

 
(350
)
 
1,946

 
(422
)
 
16,359

 
(772
)
Preferred stock
5,754

 
(184
)
 
3,711

 
(51
)
 
9,465

 
(235
)
Mortgage backed securities

 

 
45

 
(2
)
 
45

 
(2
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
11,655

 
(1,084
)
 
110

 
(98
)
 
11,765

 
(1,182
)
Equity and other
6,576

 
(97
)
 
1,114

 

 
7,690

 
(97
)
Fixed income
2,784

 
(23
)
 
701

 
(31
)
 
3,485

 
(54
)
Other investments

 

 
42

 
(31
)
 
42

 
(31
)
Total temporary impaired securities
$
44,528

 
$
(1,954
)
 
$
7,669

 
$
(635
)
 
$
52,197

 
$
(2,589
)
 
December 31, 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
$
500

 
$

 
$
836

 
$
(15
)
 
$
1,336

 
$
(15
)
Foreign debt
4,471

 
(188
)
 

 

 
4,471

 
(188
)
Corporate debt
14,310

 
(617
)
 
1,598

 
(1,101
)
 
15,908

 
(1,718
)
Preferred stock
8,300

 
(232
)
 
2,597

 
(29
)
 
10,897

 
(261
)
Mortgage backed securities

 

 
51

 
(3
)
 
51

 
(3
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Equity
5,594

 
(739
)
 
53

 
(44
)
 
5,647

 
(783
)
Equity and other
4,204

 
(180
)
 
6

 
(1
)
 
4,210

 
(181
)
Fixed income
888

 
(19
)
 
1,026

 
(53
)
 
1,914

 
(72
)
Other investments

 

 
42

 
(29
)
 
42

 
(29
)
Total temporary impaired securities
$
38,267

 
$
(1,975
)
 
$
6,209

 
$
(1,275
)
 
$
44,476

 
$
(3,250
)

- 18 -

Table of Contents

Preneed funeral trust investment security transactions recorded in Interest expense on the Consolidated Statements of Operations for the three months ended March 31, 2014 and 2015 were as follows (in thousands):
 
For the Three Months Ended March 31,
 
2014
 
2015
Investment income
$
645

 
$
556

Realized gains
494

 
294

Realized losses
(198
)
 
(625
)
Expenses and taxes
(405
)
 
(260
)
(Increase) decrease in deferred preneed funeral receipts held in trust
(536
)
 
35

 
$

 
$

Purchases and sales of investments in the preneed funeral trusts were as follows (in thousands):
 
For the Three Months Ended March 31,
 
2014
 
2015
Purchases
$
(6,990
)
 
$
(5,489
)
Sales
$
7,537

 
$
2,302

6.    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 March 31, 2015 , the balances of preneed receivables for cemetery interment rights and for merchandise and services were $24.4 million and $9.2 million , respectively, of which $10.6 million is presented in Accounts receivable and $23.0 million is presented in Preneed receivables . The unearned finance charges associated with these receivables were $4.6 million at December 31, 2014 and March 31, 2015 .
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 4.9% of the total receivables on recognized sales at March 31, 2015 . 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 three months ended March 31, 2015 , the change in the allowance for contract cancellations was as follows (in thousands):
 
March 31, 2015
Beginning balance
$
2,140

Write-offs and cancellations
(603
)
Provision
116

Ending balance
$
1,653

The aging of past due financing receivables as of March 31, 2015 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
$
791

 
$
271

 
$
193

 
$
1,000

 
$
2,255

 
$
21,937

 
$
24,192

Deferred revenue
304

 
193

 
87

 
418

 
1,002

 
8,394

 
9,396

Total contracts
$
1,095

 
$
464

 
$
280

 
$
1,418

 
$
3,257

 
$
30,331

 
$
33,588



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The aging of past due financing receivables as of December 31, 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
$
756

 
$
407

 
$
250

 
$
1,439

 
$
2,852

 
$
21,394

 
$
24,246

Deferred revenue
296

 
204

 
116

 
720

 
1,336

 
8,333

 
9,669

Total contracts
$
1,052

 
$
611

 
$
366

 
$
2,159

 
$
4,188

 
$
29,727

 
$
33,915

7.    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, 2014 and March 31, 2015 , receivables from preneed trusts were as follows (in thousands):
 
December 31, 2014
 
March 31, 2015
Preneed trust funds, at cost
$
13,205

 
$
13,191

Less: allowance for contract cancellation
(396
)
 
(396
)
Receivables from preneed trusts, net
$
12,809

 
$
12,795


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 December 31, 2014 and March 31, 2015 . 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 December 31, 2014
 
 
 
Cash and cash equivalents
$
2,834

 
$
2,834

Fixed income investments
7,880

 
7,893

Mutual funds and common stocks
2,467

 
2,586

Annuities
24

 
24

Total
$
13,205

 
$
13,337



 
Historical
Cost Basis
 
Fair Value
 
(in thousands)
As of March 31, 2015
 
 
 
Cash and cash equivalents
$
2,773

 
$
2,773

Fixed income investments
7,939

 
7,989

Mutual funds and common stocks
2,463

 
2,559

Annuities
16

 
16

Total
$
13,191

 
$
13,337

 
8.    CONTRACTS SECURED BY INSURANCE
Certain preneed funeral contracts are secured by life insurance contracts. Generally, the proceeds of the life insurance policies have been assigned to us and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the preneed contract for services and merchandise. Preneed funeral contracts secured by insurance totaled $313.0 million and $317.3 million at December 31, 2014 and March 31, 2015 , respectively, and are not included on our Consolidated Balance Sheets.

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9.
CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2014 and March 31, 2015 were as follows (in thousands):
 
December 31, 2014
 
March 31, 2015
Trust assets, at fair value
$
48,670

 
$
49,249

Obligations due from trust
(528
)
 
(65
)
Care trusts’ corpus
$
48,142

 
$
49,184

We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in Cemetery revenues . Trust management fees charged by our wholly-owned registered investment advisor, CSV RIA, are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, 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 municipal bonds, foreign debt, corporate debt and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three months ended March 31, 2015 . There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 10 for further information of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at March 31, 2015 (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
197

 
$

 
$

 
$
197

Fixed income securities:
 
 
 
 
 
 
 
 
 
Municipal bonds
2
 
230

 

 
(8
)
 
222

Foreign debt
2
 
4,012

 
48

 
(174
)
 
3,886

Corporate debt
2
 
19,530

 
337

 
(654
)
 
19,213

Preferred stock
2
 
12,539

 
234

 
(198
)
 
12,575

Common stock
1
 
11,978

 
1,492

 
(1,001
)
 
12,469

Trust securities
 
 
$
48,486

 
$
2,111

 
$
(2,035
)
 
$
48,562

Accrued investment income
 
 
$
687

 
 
 
 
 
$
687

Cemetery perpetual care trust investments
 
 
 
 
 
 
 
 
$
49,249

Market value as a percentage of cost
 
 
 
 
 
 
 
 
100.2
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
12

Due in one to five years
3,990

Due in five to ten years
4,732

Thereafter
27,162

 
$
35,896


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The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2014 (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
3,206

 
$

 
$

 
$
3,206

Fixed income securities:
 
 
 
 
 
 
 
 
 
Municipal bonds
2
 
229

 
5

 

 
234

Foreign debt
2
 
3,871

 

 
(156
)
 
3,715

Corporate debt
2
 
19,911

 
248

 
(1,428
)
 
18,731

Preferred stock
2
 
12,694

 
137

 
(214
)
 
12,617

Common stock
1
 
8,747

 
1,568

 
(653
)
 
9,662

Trust securities
 
 
$
48,658

 
$
1,958

 
$
(2,451
)
 
$
48,165

Accrued investment income
 
 
$
505

 
 
 
 
 
$
505

Cemetery perpetual care investments
 
 
 
 
 
 
 
 
$
48,670

Fair market value as a percentage of cost
 
 
 
 
 
 
 
 
99.0
%
We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus . In the three months ended March 31, 2015 , we recorded a $0.5 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended March 31, 2014 . At March 31, 2015 , we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.

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Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended March 31, 2015 and December 31, 2014 are shown in the following tables (in thousands):
 
March 31, 2015
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Municipal bonds
$
222

 
$
(8
)
 
$

 
$

 
$
222

 
$
(8
)
Foreign debt
2,382

 
(174
)
 

 

 
2,382

 
(174
)
Corporate debt
12,214

 
(297
)
 
1,648

 
(357
)
 
13,862

 
(654
)
Preferred stock
4,865

 
(156
)
 
3,137

 
(42
)
 
8,002

 
(198
)
Common stock
9,865

 
(918
)
 
94

 
(83
)
 
9,959

 
(1,001
)
Total temporary impaired securities
$
29,548

 
$