Carriage Services, Inc.
CARRIAGE SERVICES INC (Form: 10-Q, Received: 07/28/2017 06:04:20)
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2017
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,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o   (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o  
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes   o     No   x
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of July 24, 2017 was 16,720,045 .
 


Table of Contents

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

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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, 2016
 
June 30, 2017
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
3,286

 
$
435

Accounts receivable, net of allowance for bad debts of $1,071 in 2016 and $1,104 in 2017
18,860

 
17,015

Inventories
6,147

 
6,327

Prepaid expenses
2,640

 
1,096

Other current assets
2,034

 
594

Total current assets
32,967

 
25,467

Preneed cemetery trust investments
69,696

 
70,176

Preneed funeral trust investments
89,240

 
88,503

Preneed receivables, net of allowance for bad debts of $2,166 in 2016 and $2,215 in 2017
30,383

 
31,584

Receivables from preneed trusts
14,218

 
15,077

Property, plant and equipment, net of accumulated depreciation of $110,509 in 2016 and $110,782 in 2017
235,113

 
235,468

Cemetery property, net of accumulated amortization of $34,194 in 2016 and $35,764 in 2017
76,119

 
76,995

Goodwill
275,487

 
275,487

Intangible and other non-current assets
14,957

 
14,745

Cemetery perpetual care trust investments
46,889

 
47,539

Total assets
$
885,069

 
$
881,041

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capital lease obligations
$
13,267

 
$
15,237

Accounts payable
10,198

 
6,446

Other liabilities
717

 
775

Accrued liabilities
20,091

 
14,312

Total current liabilities
44,273

 
36,770

Long-term debt, net of current portion
137,862

 
129,627

Revolving credit facility
66,542

 
61,081

Convertible subordinated notes due 2021
119,596

 
121,955

Obligations under capital leases, net of current portion
2,630

 
2,560

Deferred preneed cemetery revenue
54,631

 
55,093

Deferred preneed funeral revenue
33,198

 
34,756

Deferred tax liability
42,810

 
43,216

Other long-term liabilities
2,567

 
2,430

Deferred preneed cemetery receipts held in trust
69,696

 
70,176

Deferred preneed funeral receipts held in trust
89,240

 
88,503

Care trusts’ corpus
46,290

 
47,015

Total liabilities
709,335

 
693,182

Commitments and contingencies:

 

Stockholders’ equity:
 
 

Common stock, $.01 par value; 80,000,000 shares authorized and 22,490,855 and 22,569,361 shares issued at December 31, 2016 and June 30, 2017, respectively
225

 
226

Additional paid-in capital
215,064

 
215,694

Retained earnings
20,711

 
32,205

Treasury stock, at cost; 5,849,316 shares at December 31, 2016 and June 30, 2017
(60,266
)
 
(60,266
)
Total stockholders’ equity
175,734

 
187,859

Total liabilities and stockholders’ equity
$
885,069

 
$
881,041

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

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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Revenues:
 
 
 
 
 
 
 
Funeral
$
46,467

 
$
48,739

 
$
95,769

 
$
102,950

Cemetery
15,398

 
15,113

 
29,427

 
29,059

 
61,865

 
63,852

 
125,196

 
132,009

Field costs and expenses:
 
 

 
 
 

Funeral
27,783

 
29,422

 
55,564

 
59,851

Cemetery
8,989

 
9,162

 
16,851

 
17,373

Depreciation and amortization
3,571

 
3,647

 
6,907

 
7,118

Regional and unallocated funeral and cemetery costs
2,715

 
2,954

 
5,764

 
5,908

 
43,058

 
45,185

 
85,086

 
90,250

Gross profit
18,807

 
18,667

 
40,110

 
41,759

Corporate costs and expenses:
 
 

 
 
 

General, administrative and other
5,831

 
6,568

 
15,078

 
13,415

Home office depreciation and amortization
386

 
378

 
784

 
754

 
6,217

 
6,946

 
15,862

 
14,169

Operating income
12,590

 
11,721

 
24,248

 
27,590

Interest expense
(2,968
)
 
(3,206
)
 
(5,819
)
 
(6,235
)
Accretion of discount on convertible subordinated notes
(954
)
 
(1,066
)
 
(1,881
)
 
(2,103
)
Loss on early extinguishment of debt

 

 
(567
)
 

Other, net

 

 
305

 
3

Income before income taxes
8,668

 
7,449

 
16,286

 
19,255

Provision for income taxes
(3,468
)
 
(2,980
)
 
(6,515
)
 
(7,702
)
Tax adjustment related to certain discrete items

 
(59
)
 

 
(59
)
Total provision for income taxes
$
(3,468
)
 
$
(3,039
)
 
$
(6,515
)
 
$
(7,761
)
Net income
$
5,200

 
$
4,410

 
$
9,771

 
$
11,494

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.31

 
$
0.26

 
$
0.59

 
$
0.69

Diluted earnings per common share:
$
0.30

 
$
0.24

 
$
0.57

 
$
0.63

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.025

 
$
0.050

 
$
0.050

 
$
0.100

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
16,516

 
16,652

 
16,488

 
16,625

Diluted
17,075

 
18,093

 
16,862

 
18,083

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

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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
 
For the Six Months Ended June 30,
 
2016
 
2017
Cash flows from operating activities:
 
 
 
Net income
$
9,771

 
$
11,494

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

Depreciation and amortization
7,691

 
7,872

Provision for losses on accounts receivable
1,052

 
1,112

Stock-based compensation expense
2,303

 
1,609

Deferred income tax expense
1,116

 
406

Amortization of deferred financing costs
420

 
408

Accretion of discount on convertible subordinated notes
1,881

 
2,103

Loss on early extinguishment of debt
567

 

Net (gain) loss on sale and disposal of other assets
(67
)
 
311

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

Accounts and preneed receivables
(2,271
)
 
(468
)
Inventories and other current assets
1,303

 
2,804

Intangible and other non-current assets
300

 
211

Preneed funeral and cemetery trust investments
4,941

 
(1,252
)
Accounts payable
(1,148
)
 
(3,750
)
Accrued and other liabilities
1,735

 
(5,102
)
Deferred preneed funeral and cemetery revenue
(669
)
 
2,020

Deferred preneed funeral and cemetery receipts held in trust
(3,939
)
 
468

Net cash provided by operating activities
24,986

 
20,246

 
 
 

Cash flows from investing activities:
 
 

Acquisitions and land for new construction
(9,406
)
 
(625
)
Purchase of land and buildings previously leased
(6,258
)
 

Net proceeds from the sale of other assets
555

 

Capital expenditures
(7,830
)
 
(8,790
)
Net cash used in investing activities
(22,939
)
 
(9,415
)
 
 
 

Cash flows from financing activities:
 
 

Borrowings from the revolving credit facility
27,100

 
36,800

Payments against the revolving credit facility
(59,700
)
 
(42,400
)
Borrowings from the term loan
39,063

 

Payments against the term loan
(5,625
)
 
(5,625
)
Payments on other long-term debt and obligations under capital leases
(689
)
 
(723
)
Payments on contingent consideration recorded at acquisition date

 
(101
)
Proceeds from the exercise of stock options and employee stock purchase plan contributions
457

 
544

Taxes paid on restricted stock vestings and exercise of non-qualified options
(528
)
 
(509
)
Dividends paid on common stock
(831
)
 
(1,668
)
Payment of loan origination costs related to the credit facility
(717
)
 

Excess tax deficiency of equity compensation
(229
)
 

Net cash used in financing activities
(1,699
)
 
(13,682
)
 
 
 


Net increase (decrease) in cash and cash equivalents
348

 
(2,851
)
Cash and cash equivalents at beginning of period
535

 
3,286

Cash and cash equivalents at end of period
$
883

 
$
435

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

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CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of deathcare services and merchandise in the United States. As of June 30, 2017 , we operated 171 funeral homes in 28 states and 32 cemeteries in 11 states.
Our operations are reported in two business segments: Funeral Home Operations and Cemetery Operations. Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an at-need and preneed basis.
Principles of Consolidation and Interim Condensed Disclosures
Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 2016 unless otherwise disclosed herein, and should be read in conjunction therewith.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, 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. Cemetery interment rights are recorded as revenue in accordance with the accounting provisions for real estate sales. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the interment right contract price. Interment right costs, which include real property and other costs related to cemetery development, are expensed using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery property of approximately $1.1 million and $0.8 million for the three months ended June 30, 2016 and 2017 , respectively, and $2.1 million and $1.6 million for the six months ended June 30, 2016 and 2017 , respectively. 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. 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

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is no longer subject to refund, which is typically one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costs are expensed when incurred.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of June 30, 2017 , CSV RIA provided these services to two institutions, which have custody of 79% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
Accounts receivable was comprised of the following at December 31, 2016 and June 30, 2017 (in thousands):
 
December 31, 2016
 
June 30, 2017
Funeral receivables, net of allowance for bad debt of $514 and $523, respectively
$
8,664

 
$
6,798

Cemetery receivables, net of allowance for bad debt of $557 and $581, respectively
9,862

 
9,991

Other receivables
334

 
226

Accounts receivable, net
$
18,860

 
$
17,015

Non-current preneed receivables represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables were comprised of the following at December 31, 2016 and June 30, 2017 (in thousands):
 
December 31, 2016
 
June 30, 2017
Funeral receivables, net of allowance for bad debt of $862 and $909, respectively
$
7,761

 
$
8,178

Cemetery receivables, net of allowance for bad debt of $1,304 and $1,306, respectively
22,622

 
23,406

Preneed receivable, net
$
30,383

 
$
31,584

Bad debt expense totaled approximately $0.5 million and $0.7 million for the three months ended June 30, 2016 and 2017 , respectively, and $1.0 million and $1.1 million for the six months ended June 30, 2016 and 2017 , 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 major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method.
Property, plant and equipment was comprised of the following at December 31, 2016 and June 30, 2017 (in thousands):
 
December 31, 2016
 
June 30, 2017
Land
$
73,744

 
$
73,889

Buildings and improvements
195,214

 
198,825

Furniture, equipment and automobiles
76,664

 
73,536

Property, plant and equipment, at cost
345,622

 
346,250

Less: accumulated depreciation
(110,509
)
 
(110,782
)
Property, plant and equipment, net
$
235,113

 
$
235,468

We recorded depreciation expense of approximately $2.8 million and $3.2 million for the three months ended June 30, 2016 and 2017 , respectively and $5.5 million and $6.3 million for the six months ended June 30, 2016 and 2017 , respectively. During the six months ended June 30, 2017 , we acquired real estate for $0.6 million for a funeral home parking lot expansion project. During the six months ended June 30, 2016 , we acquired real estate for $2.7 million for various funeral home expansion projects and we purchased land and buildings at four funeral homes that were previously leased for approximately $6.3 million .
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral home businesses. The funeral segment reporting units consist of our East, Central and West regions in the United States. Goodwill is tested annually for impairment by assessing the fair value of each of our reporting units, using information as of August 31 st each year. Our intent is to perform the quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise. We conducted

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qualitative assessments in 2014 and 2015; however, for our 2016 annual impairment test, we performed the two-step goodwill quantitative impairment test.
Effective January 1, 2017, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”), Intangibles (Topic 350): Goodwill and Other. The guidance simplifies subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill.
In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results. No such events or changes occurred between our testing date and reporting period to trigger a subsequent impairment review. No impairments were recorded to our goodwill during the six months ended June 30, 2016 and 2017 .
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we grant restricted stock, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period. Fair value is determined on the date of the grant.
The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date. The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
Effective January 1, 2017, we adopted the FASB’s ASU, Compensation: (Topic 718): Stock Compensation . The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The guidance requires that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. Entities are required to record a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the beginning of the annual period of adoption, with a cumulative-effect adjustment to retained earnings. At January 1, 2017, we performed an analysis for unrecognized excess tax benefits and deficiencies and determined that there were no adjustments to retained earnings, as there are no unrecognized excess tax benefits.
The guidance also requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement on a prospective basis. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. For the three and six months ended June 30, 2017 , the excess tax deficiency related to share-based payments was approximately $59,000 , recorded within Tax adjustment related to certain discrete items on our Consolidated Statements of Operations. In addition, excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows.
The guidance also allows for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.
The guidance also requires that the presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and applied retrospectively. This resulted in $0.5 million of employee taxes paid from withheld shares being presented as financing activities on our Consolidated Statement of Cash Flows for both the six months ended June 30, 2016 and 2017 . Prior to January 1, 2017, these amounts were presented as operating activities on our Consolidated Statement of Cash Flows.

- 8 -


We adopted all of the provisions of this amendment in accordance with the transition requirements and it did not have a material effect on our Consolidated Financial Statements.
See Note 11 to the Consolidated Financial Statements included herein for additional information on our stock-based compensation plans.
Income Taxes
We and our subsidiaries file a consolidated U.S. federal income tax return, separate income tax returns in 15 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.
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, but are not limited to, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, and increases or decreases in valuation allowances on deferred tax assets.
Income tax expense was $3.5 million for the three months ended June 30, 2016 compared to $3.0 million for the three months ended June 30, 2017 . We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for both the three and six months ended June 30, 2016 and 2017 . Income tax expense was $6.5 million for the six months ended June 30, 2016 compared to $7.8 million for the six months ended June 30, 2017 .
Correction of Immaterial Error
During the three and six months ended June 30, 2017 , we corrected an immaterial error related to 2013. The adjustment related to the correction of the deferred tax liability for the difference in book and tax basis of certain assets. The error had the impact of understating the deferred tax liability and overstating net income in 2013. Management evaluated the effect of the adjustment on previously issued interim and annual consolidated financial statements in accordance with the SEC's Staff Accounting Bulletin (“SAB”) No. 99 and SAB 108 and concluded that it was immaterial to the interim and annual periods. As a result, in accordance with SAB No. 108, we corrected our Consolidated Balance Sheets as of January 1, 2015.
The effect of this adjustment on our Consolidated Balance Sheets as of December 31, 2016 is as follows (dollars in thousands):
 
 
% Change
Increase in Deferred tax liability
$
2,255

5.6
%
Increase in Total liabilities
$
2,255

0.3
%
Decrease in Retained earnings
$
2,255

9.8
%
Decrease in Total stockholders' equity
$
2,255

1.3
%
The amounts related to balances in the prior year that are affected by these adjustments have been revised in this Quarterly Report on Form 10-Q in the Company's Consolidated Balance Sheets from those amounts previously reported. This adjustment had no impact on our Consolidated Statements of Operations or Consolidated Statement of Cash Flows for any periods presented.
Subsequent Events
Management evaluated events and transactions during the period subsequent to June 30, 2017 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
Stock-Based Compensation
In May 2017, the FASB issued ASU, Compensation: (Topic 718): Stock Compensation - Scope of Modification Accounting . The amendments provide guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the award

- 9 -


is modified. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. The amendments should be applied prospectively to an award modified on or after the adoption date. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Revenue Recognition
In May 2014, the FASB issued ASU, Revenue from Contracts with Customers (Topic 606). FASB Accounting Standards Codification (“ASC”) Topic 606 supersedes the revenue recognition requirements under Topic 605, Revenue Recognition , and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity 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. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018.
We expect the adoption of this new accounting standard to affect our accounting for the selling costs related to preneed merchandise and services. These costs will be capitalized and amortized over the typical financing term of five years. The selling costs related to the sales of interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue.
Currently, our 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. Upon further review, we do not expect the new accounting standard to significantly impact our current accounting for the cemetery interment rights. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.
We are currently modifying our financial systems to provide accounting under the new method in addition to our current method and do not anticipate any business disruption related to adopting this guidance. We are continually evaluating the impact on our Consolidated Financial Statements with more recent financial information.
Leases
In February 2016, the FASB issued ASU, Leases (Topic 842). This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.

- 10 -


3.    PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed cemetery contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed cemetery trust investments can be reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed cemetery trust investments on our Consolidated Balance Sheets at December 31, 2016 and June 30, 2017 were as follows (in thousands):
 
December 31, 2016
 
June 30, 2017
Preneed cemetery trust investments, at market value
$
71,834

 
$
72,336

Less: allowance for contract cancellation
(2,138
)
 
(2,160
)
Preneed cemetery trust investments, net
$
69,696

 
$
70,176

Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some instances, a portion of all of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At June 30, 2017 , none of our preneed cemetery trust investments were underfunded.
Earnings from our preneed cemetery trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three and six months ended June 30, 2017 . There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at June 30, 2017 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
5,565

 
$

 
$

 
$
5,565

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
4,826

 
212

 
(252
)
 
4,786

Corporate debt
2
 
19,323

 
969

 
(637
)
 
19,655

Preferred stock
2
 
16,304

 
185

 
(496
)
 
15,993

Mortgage-backed securities
2
 
1,151

 
264

 
(22
)
 
1,393

Common stock
1
 
23,621

 
2,425

 
(2,975
)
 
23,071

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed Income
2
 
1,198

 
66

 
(1
)
 
1,263

Trust securities
 
 
$
71,988

 
$
4,121

 
$
(4,383
)
 
$
71,726

Accrued investment income
 
 
$
610

 
 
 
 
 
$
610

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
72,336

Market value as a percentage of cost
 
 
 
 
 
 
 
 
99.6
%

- 11 -


The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
15

Due in one to five years
2,922

Due in five to ten years
5,519

Thereafter
33,371

Total
$
41,827

The cost and fair market values associated with preneed cemetery trust investments at December 31, 2016 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
10,852

 
$

 
$

 
$
10,852

Fixed income securities:
 
 
 
 
 
 
 
 
 
Municipal bonds
2
 
496

 
18

 
(4
)
 
510

Foreign debt
2
 
7,574

 
160

 
(656
)
 
7,078

Corporate debt
2
 
20,621

 
1,569

 
(1,123
)
 
21,067

Preferred stock
2
 
16,287

 
8

 
(947
)
 
15,348

Mortgage-backed securities
2
 
949

 
372

 
(4
)
 
1,317

Common stock
1
 
13,250

 
2,191

 
(1,838
)
 
13,603

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
 
 
1,223

 
107

 

 
1,330

Trust securities
 
 
$
71,252

 
$
4,425

 
$
(4,572
)
 
$
71,105

Accrued investment income
 
 
$
729

 
 
 
 
 
$
729

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
71,834

Market value as a percentage of cost
 
 
 
 
 
 
 
 
99.8
%
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 no t record any impairments in the three months ended June 30, 2016 and 2017 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. In the six months ended June 30, 2016 , we recorded a $0.7 million impairment and no impairments have been recorded in the six months ended June 30, 2017 . There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.

- 12 -


At June 30, 2017 , we had certain investments within our preneed cemetery trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of June 30, 2017 are shown in the following table (in thousands):
 
June 30, 2017
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Foreign debt
$
504

 
$
(32
)
 
$
1,600

 
$
(220
)
 
$
2,104

 
$
(252
)
Corporate debt
5,580

 
(469
)
 
571

 
(168
)
 
6,151

 
(637
)
Preferred stock
405

 
(1
)
 
8,399

 
(495
)
 
8,804

 
(496
)
Mortgage-backed securities
221

 
(22
)
 

 

 
221

 
(22
)
Common stock
7,961

 
(1,874
)
 
2,922

 
(1,101
)
 
10,883

 
(2,975
)
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
Fixed Income
340

 
(1
)
 

 

 
340

 
(1
)
Total temporary impaired securities
$
15,011

 
$
(2,399
)
 
$
13,492

 
$
(1,984
)
 
$
28,503

 
$
(4,383
)
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):
 
December 31, 2016
 
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
$
228

 
$
(4
)
 
$

 
$

 
$
228

 
$
(4
)
Foreign debt
2,523

 
(180
)
 
2,868

 
(475
)
 
5,391

 
(655
)
Corporate debt
6,939

 
(233
)
 
2,168

 
(890
)
 
9,107

 
(1,123
)
Preferred stock
3,217

 
(121
)
 
11,635

 
(826
)
 
14,852

 
(947
)
Mortgage-backed securities
51

 
(5
)
 

 

 
51

 
(5
)
Common stock
2,608

 
(202
)
 
3,385

 
(1,636
)
 
5,993

 
(1,838
)
Total temporary impaired securities
$
15,566

 
$
(745
)
 
$
20,056

 
$
(3,827
)
 
$
35,622

 
$
(4,572
)
Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2017 were as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Investment income
$
677

 
$
692

 
$
968

 
$
1,281

Realized gains
181

 
1,395

 
289

 
2,215

Realized losses
(928
)
 
(929
)
 
(3,408
)
 
(1,312
)
Expenses and taxes
(350
)
 
(332
)
 
(693
)
 
(877
)
Decrease (increase) in deferred preneed cemetery receipts held in trust
420

 
(826
)
 
2,844

 
(1,307
)
 
$

 
$

 
$

 
$


- 13 -


Purchases and sales of investments in the preneed cemetery trusts for the three and six months ended June 30, 2016 and 2017 were as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Purchases
$
(7,215
)
 
$
(10,831
)
 
$
(18,106
)
 
$
(18,440
)
Sales
$
4,676

 
$
7,208

 
$
12,030

 
$
13,189

Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed funeral trust investments on our Consolidated Balance Sheets at December 31, 2016 and June 30, 2017 were as follows (in thousands):
 
December 31, 2016
 
June 30, 2017
Preneed funeral trust investments, at market value
$
91,980

 
$
91,225

Less: allowance for contract cancellation
(2,740
)
 
(2,722
)
Preneed funeral trust investments, net
$
89,240

 
$
88,503

Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and in some instances, a portion of all earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At June 30, 2017 , none of our preneed funeral trust investments were underfunded.
Earnings from our preneed funeral trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including 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 and six months ended June 30, 2017 . There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.

- 14 -


The cost and fair market values associated with preneed funeral trust investments at June 30, 2017 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
16,550

 
$

 
$

 
$
16,550

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S treasury debt
1
 
1,491

 
16

 
(5
)
 
1,502

Foreign debt
2
 
4,910

 
219

 
(252
)
 
4,877

Corporate debt
2
 
20,373

 
1,007

 
(654
)
 
20,726

Preferred stock
2
 
16,934

 
261

 
(501
)
 
16,694

Mortgage-backed securities
2
 
1,360

 
282

 
(24
)
 
1,618

Common stock
1
 
23,659

 
2,460

 
(2,986
)
 
23,133

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
2
 
2,030

 
72

 
(45
)
 
2,057

Other investments
2
 
3,430

 

 

 
3,430

Trust securities
 
 
$
90,737

 
$
4,317

 
$
(4,467
)
 
$
90,587

Accrued investment income
 
 
$
638

 
 
 
 
 
$
638

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
91,225

Market value as a percentage of cost
 
 
 
 
 
 
 
 
99.8
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
16

Due in one to five years
4,562

Due in five to ten years
5,881

Thereafter
34,958

Total
$
45,417


The cost and fair market values associated with preneed funeral trust investments at December 31, 2016 are detailed below (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
22,787

 
$

 
$

 
$
22,787

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
1,491

 
21

 
(10
)
 
1,502

Municipal bonds
2
 
447

 
17

 
(4
)
 
460

Foreign debt
2
 
7,692

 
170

 
(677
)
 
7,185

Corporate debt
2
 
21,454

 
1,566

 
(1,134
)
 
21,886

Preferred stock
2
 
17,037

 
64

 
(970
)
 
16,131

Mortgage-backed securities
2
 
1,165

 
400

 
(5
)
 
1,560

Common stock
1
 
13,675

 
2,256

 
(1,850
)
 
14,081

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
2
 
2,124

 
115

 
(66
)
 
2,173

Other investments
2
 
3,463

 

 

 
3,463

Trust securities
 
 
$
91,335

 
$
4,609

 
$
(4,716
)
 
$
91,228

Accrued investment income
 
 
$
752

 
 
 
 
 
$
752

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
91,980

Market value as a percentage of cost
 
 
 
 
 
 
 
 
99.9
%

- 15 -


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 no t record any impairments in the three months ended June 30, 2016 and 2017 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. In the six months ended June 30, 2016 , we recorded a $0.8 million impairment and no impairments have been recorded in the six months ended June 30, 2017 . There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At June 30, 2017 , we had certain investments within our preneed funeral trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of June 30, 2017 are shown in the following table (in thousands):
 
June 30, 2017
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury debt
$
838

 
$
(5
)
 
$

 
$

 
$
838

 
$
(5
)
Foreign debt
536

 
(34
)
 
1,593

 
(218
)
 
2,129

 
(252
)
Corporate debt
5,727

 
(485
)
 
592

 
(169
)
 
6,319

 
(654
)
Preferred stock
431

 
(1
)
 
8,451

 
(500
)
 
8,882

 
(501
)
Mortgage-backed securities
259

 
(23
)
 
9

 
(1
)
 
268

 
(24
)
Common stock
7,966

 
(1,872
)
 
2,872

 
(1,114
)
 
10,838

 
(2,986
)
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
Fixed income
448

 
(3
)
 
619

 
(42
)
 
1,067

 
(45
)
Total temporary impaired securities
$
16,205

 
$
(2,423
)
 
$
14,136

 
$
(2,044
)
 
$
30,341

 
$
(4,467
)
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):
 
December 31, 2016
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
U.S. treasury debt
$
834

 
$
(10
)
 
$

 
$

 
$
834

 
$
(10
)
Municipal bonds
244

 
(5
)
 

 

 
244

 
(5
)
Foreign debt
2,654

 
(186
)
 
2,905

 
(490
)
 
5,559

 
(676
)
Corporate debt
6,977

 
(215
)
 
2,234

 
(919
)
 
9,211

 
(1,134
)
Preferred stock
3,420

 
(128
)
 
11,750

 
(842
)
 
15,170

 
(970
)
Mortgage-backed securities
55

 
(5
)
 
11

 
(1
)
 
66

 
(6
)
Common stock
2,795

 
(216
)
 
3,390

 
(1,634
)
 
6,185

 
(1,850
)
Mutual funds:
 
 
 
 
 
 
 
 
 
 
 
Fixed income
97

 
(7
)
 
644

 
(58
)
 
741

 
(65
)
Total temporary impaired securities
$
17,076

 
$
(772
)
 
$
20,934

 
$
(3,944
)
 
$
38,010

 
$
(4,716
)

- 16 -


Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three and six months ended June 30, 2016 and 2017 were as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Investment income
$
703

 
$
686

 
$
1,043

 
$
1,277

Realized gains
250

 
1,472

 
394

 
2,296

Realized losses
(978
)
 
(933
)
 
(3,374
)
 
(1,312
)
Expenses and taxes
(446
)
 
(377
)
 
(693
)
 
(716
)
Decrease (increase) in deferred preneed funeral receipts held in trust
471

 
(848
)
 
2,630

 
(1,545
)
 
$

 
$

 
$

 
$

Purchases and sales of investments in the preneed funeral trusts for the three and six months ended June 30, 2016 and 2017 were as follows (in thousands):
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2016
 
2017
 
2016
 
2017
Purchases
$
(7,024
)
 
$
(10,974
)
 
$
(18,431
)
 
$
(18,582
)
Sales
$
5,211

 
$
7,242

 
$
12,669

 
$
13,243

4.    PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years , with such interest income reflected as Preneed cemetery finance charges . In substantially all cases, we receive an initial down payment at the time the contract is signed. At June 30, 2017 , our total financed preneed receivables were $40.0 million , of which $29.4 million and $10.6 million were for cemetery interment rights and for merchandise and services, respectively. These amounts are presented on our consolidated balance sheet as $11.6 million within Accounts receivable and $28.4 million within Preneed receivables and exclude unearned finance charges and allowance for contract cancellations. The unearned finance charges associated with these receivables were $5.7 million and $5.8 million at December 31, 2016 and June 30, 2017 , respectively.
We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately 4.5% of the total receivables on recognized sales at June 30, 2017 . An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the six months ended June 30, 2017 , the change in the allowance for contract cancellations was as follows (in thousands):
 
June 30, 2017
Beginning balance
$
1,861

Write-offs and cancellations
(696
)
Provision
722

Ending balance
$
1,887

The aging of past due financing receivables as of June 30, 2017 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
$
528

 
$
346

 
$
162

 
$
1,165

 
$
2,201

 
$
27,112

 
$
29,313

Deferred revenue
219

 
161

 
81

 
350

 
811

 
9,846

 
10,657

Total contracts
$
747

 
$
507

 
$
243

 
$
1,515

 
$
3,012

 
$
36,958

 
$
39,970


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5.    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, 2016 and June 30, 2017 , receivables from preneed trusts were as follows (in thousands):
 
December 31, 2016
 
June 30, 2017
Preneed trust funds, at cost
$
14,658

 
$
15,543

Less: allowance for contract cancellation
(440
)
 
(466
)
Receivables from preneed trusts, net
$
14,218

 
$
15,077

The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at June 30, 2017 and December 31, 2016 . The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes the unrealized gains and losses on trust assets.
The composition of the preneed trust funds at June 30, 2017 was as follows (in thousands):
 
Historical
Cost Basis
 
Fair Value
As of June 30, 2017
 
 
 
Cash and cash equivalents
$
3,859

 
$
3,860

Fixed income investments
9,080

 
9,080

Mutual funds and common stocks
2,588

 
2,607

Annuities
16

 
16

Total
$
15,543

 
$
15,563

The composition of the preneed trust funds at December 31, 2016 was as follows (in thousands):
 
Historical
Cost Basis
 
Fair Value
As of December 31, 2016
 
 
 
Cash and cash equivalents
$
3,378

 
$
3,378

Fixed income investments
8,809

 
8,809

Mutual funds and common stocks
2,455

 
2,463

Annuities
16

 
16

Total
$
14,658

 
$
14,666

6. CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets represents the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2016 and June 30, 2017 were as follows (in thousands):
 
December 31, 2016
 
June 30, 2017
Trust assets, at market value
$
46,889

 
$
47,539

Obligations due from trust
(599
)
 
(524
)
Care trusts’ corpus
$
46,290

 
$
47,015

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 Revenues: Cemetery . Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At June 30, 2017 , none of our cemetery perpetual care trust investments were underfunded.
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 fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stock, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy

- 18 -


classifications quarterly. There were no transfers between Levels 1 and 2 in the three and six months ended June 30, 2017 . There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein 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 June 30, 2017 (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
3,106

 
$

 
$

 
$
3,106

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
3,546

 
164

 
(176
)
 
3,534

Corporate debt
2
 
13,121

 
639

 
(424
)
 
13,336

Preferred stock
2
 
11,396

 
126

 
(348
)
 
11,174

Mortgage-backed securities
2
 
695

 
159

 
(13
)
 
841

Common stock
1
 
14,609

 
1,450

 
(1,883
)
 
14,176

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed Income
2
 
904

 
52

 
(1
)
 
955

Trust securities
 
 
$
47,377

 
$
2,590

 
$
(2,845
)
 
$
47,122

Accrued investment income
 
 
$
417

 
 
 
 
 
$
417

Cemetery perpetual care investments
 
 
 
 
 
 
 
 
$
47,539

Market value as a percentage of cost
 
 
 
 
 
 
 
 
99.5
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$
9

Due in one to five years
1,876

Due in five to ten years
3,843

Thereafter
23,157

 
$
28,885

The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2016 (in thousands):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
6,522

 
$