Document
Table of Contents

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
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 (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
Large accelerated filer
o
Accelerated filer
x
Non-accelerated filer
o  (Do not check if a smaller reporting company)
Smaller reporting company
o
 
 
Emerging growth company
o
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  o    No  x
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of October 26, 2018 was 19,174,607.
 


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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PART I – FINANCIAL INFORMATION
Item 1.
Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 
 
 
(unaudited)
 
December 31, 2017
 
September 30, 2018
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
952

 
$
9,474

Accounts receivable, net of allowance for bad debts of $835 in 2017 and $765 in 2018
19,655

 
17,067

Inventories
6,519

 
6,938

Prepaid expenses
2,028

 
1,778

Other current assets
986

 
2,798

Total current assets
30,140

 
38,055

Preneed cemetery trust investments
73,853

 
69,953

Preneed funeral trust investments
90,682

 
90,051

Preneed receivables, net of allowance for bad debts of $2,278 in 2017 and $1,286 in 2018
31,644

 
18,510

Receivables from preneed trusts
15,287

 
16,815

Property, plant and equipment, net of accumulated depreciation of $115,776 in 2017 and $122,465 in 2018
247,294

 
261,565

Cemetery property, net of accumulated amortization of $37,543 in 2017 and $36,829 in 2018
76,331

 
74,887

Goodwill
287,956

 
304,733

Intangible and other non-current assets
18,117

 
25,338

Cemetery perpetual care trust investments
50,229

 
48,813

Total assets
$
921,533

 
$
948,720

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt and capital lease obligations
$
17,251

 
$
2,445

Accounts payable
6,547

 
5,810

Other liabilities
1,361

 
898

Accrued liabilities
17,559

 
21,665

Total current liabilities
42,718

 
30,818

Long-term debt, net of current portion
212,154

 
7,648

Convertible subordinated notes due 2021
124,441

 
25,697

Senior notes due 2026

 
318,956

Obligations under capital leases, net of current portion
6,361

 
6,211

Deferred preneed cemetery revenue
54,690

 
46,156

Deferred preneed funeral revenue
34,585

 
28,153

Deferred tax liability
31,159

 
31,694

Other long-term liabilities
3,378

 
3,155

Deferred preneed cemetery receipts held in trust
73,853

 
69,953

Deferred preneed funeral receipts held in trust
90,682

 
90,051

Care trusts’ corpus
49,856

 
48,396

Total liabilities
723,877

 
706,888

Commitments and contingencies:

 

Stockholders’ equity:
 
 

Common stock, $.01 par value; 80,000,000 shares authorized and 22,622,242 and 25,699,037 shares issued at December 31, 2017 and September 30, 2018, respectively
226

 
257

Additional paid-in capital
216,158

 
243,869

Retained earnings
57,904

 
74,338

Treasury stock, at cost; 6,523,370 shares at December 31, 2017 and September 30, 2018
(76,632
)
 
(76,632
)
Total stockholders’ equity
197,656

 
241,832

Total liabilities and stockholders’ equity
$
921,533

 
$
948,720

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

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CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
Revenues:
 
 
 
 
 
 
 
Funeral
$
47,329

 
$
49,843

 
$
150,279

 
$
156,969

Cemetery
13,725

 
14,398

 
42,784

 
44,506

 
61,054

 
64,241

 
193,063

 
201,475

Field costs and expenses:
 
 

 
 
 

Funeral
29,267

 
31,734

 
89,118

 
95,815

Cemetery
8,769

 
9,268

 
26,142

 
27,183

Depreciation and amortization
3,601

 
4,011

 
10,719

 
11,688

Regional and unallocated funeral and cemetery costs
3,937

 
2,114

 
9,845

 
8,662

 
45,574

 
47,127

 
135,824

 
143,348

Gross profit
15,480

 
17,114

 
57,239

 
58,127

Corporate costs and expenses:
 
 

 
 
 

General, administrative and other
6,134

 
6,344

 
19,549

 
19,342

Home office depreciation and amortization
401

 
505

 
1,155

 
1,412

 
6,535

 
6,849

 
20,704

 
20,754

Operating income
8,945

 
10,265

 
36,535

 
37,373

Interest expense
(3,282
)
 
(6,285
)
 
(9,517
)
 
(14,763
)
Accretion of discount on convertible subordinated notes
(1,097
)
 
(246
)
 
(3,200
)
 
(1,961
)
Net loss on early extinguishment of debt

 

 

 
(936
)
Other, net
(6
)
 
(347
)
 
(3
)
 
(345
)
Income before income taxes
4,560

 
3,387

 
23,815

 
19,368

Provision for income taxes
(1,824
)
 
(1,028
)
 
(9,526
)
 
(5,423
)
Tax adjustment related to certain discrete items
302

 
(159
)
 
243

 
358

Total provision for income taxes
(1,522
)
 
(1,187
)
 
(9,283
)
 
(5,065
)
Net income
$
3,038

 
$
2,200

 
$
14,532

 
$
14,303

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.18

 
$
0.11

 
$
0.87

 
$
0.80

Diluted earnings per common share:
$
0.17

 
$
0.11

 
$
0.81

 
$
0.78

 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.050

 
$
0.075

 
$
0.150

 
$
0.225

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
16,476

 
19,060

 
16,575

 
17,701

Diluted
17,598

 
19,161

 
17,887

 
18,273

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)
 
Nine Months Ended September 30,
 
2017
 
2018
Cash flows from operating activities:
 
 
 
Net income
$
14,532

 
$
14,303

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

Depreciation and amortization
11,874

 
13,100

Provision for losses on accounts receivable
1,737

 
1,511

Stock-based compensation expense
2,394

 
2,924

Deferred income tax expense
1,215

 
3,547

Amortization of deferred financing costs
614

 
420

Amortization of capitalized commissions on preneed contracts

 
449

Accretion of discount on convertible subordinated notes
3,200

 
1,961

Amortization of debt discount on senior notes

 
154

Net loss on early extinguishment of debt

 
936

Net loss on sale and disposal of other assets
341

 
408

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

Accounts and preneed receivables
(2,594
)
 
(3,010
)
Inventories and other current assets
2,356

 
(1,911
)
Intangible and other non-current assets
340

 
(345
)
Preneed funeral and cemetery trust investments
(5,114
)
 
4,419

Accounts payable
(3,510
)
 
(735
)
Accrued and other liabilities
(2,790
)
 
3,761

Deferred preneed funeral and cemetery revenue
2,098

 
6,292

Deferred preneed funeral and cemetery receipts held in trust
4,132

 
(9,467
)
Net cash provided by operating activities
30,825

 
38,717

 
 
 

Cash flows from investing activities:
 
 

Acquisition and land for new construction
(723
)
 
(37,970
)
Net proceeds from the sale of other assets
405

 

Capital expenditures
(13,129
)
 
(9,037
)
Net cash used in investing activities
(13,447
)
 
(47,007
)
 
 
 

Cash flows from financing activities:
 
 

Payments against the term loan
(8,438
)
 
(127,500
)
Borrowings from the revolving credit facility
75,100

 
96,000

Payments against the revolving credit facility
(67,300
)
 
(188,000
)
Payment of debt issuance costs related to long-term debt

 
(1,551
)
Redemption of the 2.75% convertible subordinated notes

 
(75,229
)
Payment of transaction costs related to the redemption of the 2.75% convertible subordinated notes

 
(845
)
Proceeds from the issuance of the 6.625% senior notes

 
320,125

Payments of debt issuance costs related to the 6.625% senior notes

 
(1,367
)
Payments on other long-term debt and obligations under capital leases
(1,084
)
 
(1,031
)
Payments on contingent consideration recorded at acquisition date
(101
)
 
(138
)
Proceeds from the exercise of stock options and employee stock purchase plan contributions
1,296

 
1,075

Taxes paid on restricted stock vestings and exercise of non-qualified options
(509
)
 
(651
)
Dividends paid on common stock
(2,503
)
 
(4,076
)
Purchase of treasury stock
(16,366
)
 

Net cash provided by (used in) financing activities
(19,905
)
 
16,812

 
 
 


Net increase (decrease) in cash and cash equivalents
(2,527
)
 
8,522

Cash and cash equivalents at beginning of period
3,286

 
952

Cash and cash equivalents at end of period
$
759

 
$
9,474

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 U.S. provider of funeral and cemetery services and merchandise. As of September 30, 2018, we operated 182 funeral homes in 29 states and 29 cemeteries in 11 states. Our operations are reported in two business segments: Funeral Home Operations, which currently account for approximately 78% of our revenues and Cemetery Operations, which currently account for approximately 22% of our revenues.
Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. We market funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
Principles of Consolidation and Interim Condensed Disclosures
Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 2017 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 statements 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.
Revenue Recognition - Funeral Home Operations
Our funeral home operations are principally service businesses that generate revenues from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and remembrance services and transportation services. We provide funeral services and products on both an atneed and preneed basis.
Funeral arrangements sold at the time of death are referred to as atneed funeral contracts. We record the revenue from atneed funeral contracts when the merchandise is delivered or the service is performed. Merchandise delivery and service performance generally takes place shortly after the time of need. Payment is due at or before time of transfer. Outstanding balances due from customers, if any, on atneed funeral contracts are included in Accounts receivable on our Consolidated Balance Sheets.
Funeral arrangements sold prior to death occurring are referred to as preneed funeral contracts. In many instances, the customer pays for the preneed contract over a period of time. The performance of a preneed funeral contract is secured by placing the funds

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collected, less amounts that we may retain under state regulations, in trust for the benefit of the customer or by the customer's purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. These methods are intended to fund preneed funeral contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases.
Revenue from preneed funeral contracts, along with accumulated earnings, is deferred until the time the merchandise is delivered or the service is performed. The principal and accumulated earnings of the trusts are withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in insurance benefits on the insurance products are recognized when the service is performed. The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheets. Beginning January 1, 2018, balances due on undelivered preneed funeral trust contracts have been reclassified to reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet, as noted in our table of Deferred Revenue in Note 6 to the Consolidated Financial Statements included herein. See Note 2 to the Consolidated Financial Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
The earnings from our preneed funeral trust investments, as well as trust management fees charged by our wholly-owned registered investment advisory firm (“CSV RIA”) are recorded as Preneed trust earnings - funeral, as noted in our table of disaggregated revenues in Note 6 to the Consolidated Financial Statements included herein. As of September 30, 2018, CSV RIA provided these services to one institution, which has custody of 75% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
When preneed funeral contracts are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recorded as Preneed funeral commission income, as noted in our table of disaggregated revenues in Note 6 to the Consolidated Financial Statements included herein, at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued. Preneed funeral contracts to be funded at maturity by insurance policies totaled $371.5 million at September 30, 2018 and are not included on our Consolidated Balance Sheets.
See Note 6 to the Consolidated Financial Statements included herein for additional information on our revenues.
Revenue Recognition - Cemetery Operations
Our cemetery operations generate revenues primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis.
Cemetery arrangements sold at the time of death are referred to as atneed cemetery contracts. We record the revenue from atneed cemetery contracts when the product is delivered or the service is performed. Payment is due at or before time of transfer. Outstanding balances due from customers, if any, on completed atneed contracts are included in Accounts receivable on our Consolidated Balance Sheet.
Cemetery arrangements sold prior to death occurring are referred to as preneed cemetery contracts. Preneed cemetery contracts are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. In substantially all cases, we receive an initial down payment at the time the contract is signed.
We record revenue on the sales of cemetery property interment rights at the time the contract is signed. Customers select a specific location and space for their interment right, thus, restricting us from other use or transfer of the contracted cemetery property. The interment right is deeded to the customer when the contract is paid in full. Revenue from preneed sales of cemetery merchandise and services contracts, along with accumulated earnings, is not recognized until the time the merchandise is transferred or the service is performed. Earnings on these installment contracts are recorded as Preneed cemetery finance charges, as noted in our table of disaggregated revenues in Note 6 to the Consolidated Financial Statements included herein.
The performance of the preneed cemetery contracts is secured by placing the funds collected, less amounts that we may retain under state regulations, in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. This method is intended to fund preneed contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases. The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheets. The earnings from preneed cemetery contracts placed in trust, as well as the trust management fees charged by our CSV RIA are recorded as Preneed trust earnings - cemetery, as noted in our table of disaggregated revenues in Note 6 to the Consolidated Financial Statements included herein.
Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable and Preneed receivables on our Consolidated Balance Sheet. Beginning January 1, 2018, balances due on undelivered preneed cemetery contracts have been reclassified to reduce Deferred preneed cemetery revenue on our Consolidated Balance Sheet, as noted in our table of Deferred Revenue in Note 6 to the Consolidated Financial Statements included herein. See Note 2 to the Consolidated Financial

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Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
Interment right costs, which include real property and other costs related to cemetery development, are expensed using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery interment rights of approximately $0.9 million and $1.0 million for the three months ended September 30, 2017 and 2018, respectively and approximately $2.4 million and $2.8 million for the nine months ended September 30, 2017 and 2018, respectively.
See Note 6 to the Consolidated Financial Statements included herein for additional information on our revenues.
Arrangements with Multiple Performance Obligations
Some of our contracts with customers include multiple performance obligations. For these contracts, we allocate transaction price to each performance obligation based on its relative standalone selling price, which is based on prices charged to customers per our general price list. Packages for service and ancillary items are offered to help the customer make decisions during emotional/stressful times. Package discounts are reflected net in Revenues. We recognize revenue when the merchandise is transferred or the service is performed, in satisfaction of the corresponding performance obligation. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations
Our funeral receivables recorded in Accounts Receivable, net primarily consist of amounts due for funeral services already performed which were $8.5 million and $7.3 million at December 31, 2017 and September 30, 2018, respectively. We estimate an allowance for doubtful accounts on these receivables based on our historical experience, which amounted to 2.5% of funeral receivables at both December 31, 2017 and September 30, 2018. In addition, our other funeral receivables not related to funeral services performed were $0.8 million and $0.6 million at December 31, 2017 and September 30, 2018, respectively.
Our cemetery financed receivables totaled $40.5 million and $37.3 million at December 31, 2017 and September 30, 2018, respectively. The unearned finance charges associated with these receivables were $5.7 million and $4.7 million at December 31, 2017 and September 30, 2018, respectively. If a preneed contract is canceled prior to delivery, state law determines the amount of the refund owed to the customer. Allowances for bad debts and customer cancellations on cemetery financed receivables are provided at the date that the sale is recognized as revenue and are based on our historical experience. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately 4.9% of the total receivables at both December 31, 2017 and September 30, 2018. See Note 8 to the Consolidated Financial Statements included herein for additional information on cemetery financed receivables.
Our cemetery receivables recorded in Accounts Receivable, net also include approximately $1.3 million and $1.4 million related to perpetual care income receivables at December 31, 2017 and September 30, 2018, respectively. See Note 10 to the Consolidated Financial Statements included herein for additional information on our perpetual care trust investments.
Accounts receivable was comprised of the following at December 31, 2017 and September 30, 2018 (in thousands):
 
December 31, 2017
 
September 30, 2018
Funeral receivables, net of allowance for bad debt of $213 and $186, respectively
$
9,061

 
$
7,740

Cemetery receivables, net of allowance for bad debt of $622 and $579, respectively
10,331

 
9,110

Other receivables
263

 
217

Accounts receivable, net
$
19,655

 
$
17,067

Non-current preneed receivables recorded in Preneed Receivables, net represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables were comprised of the following at December 31, 2017 and September 30, 2018 (in thousands):
 
December 31, 2017
 
September 30, 2018
Funeral receivables, net of allowance for bad debt of $882
$
7,934

 
$

Cemetery receivables, net of allowance for bad debt of $1,396 and $1,286, respectively
23,710

 
18,510

Preneed receivables, net
$
31,644

 
$
18,510


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Bad debt expense totaled approximately $0.6 million for both the three months ended September 30, 2017 and 2018 and approximately $1.7 million and $1.5 million for the nine months ended September 30, 2017 and 2018, respectively.
Capitalized Commissions on Preneed Contracts
Effective January 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”), Revenue from Contracts with Customers (Topic 606), which impacted our accounting for incremental selling costs, primarily commission costs, related to preneed cemetery merchandise and services and preneed funeral trust contracts.
Upon adoption of Topic 606, we capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of obtaining a contract with a customer. We recorded a cumulative net adjustment of approximately $2.1 million to Retained earnings on our opening Consolidated Balance Sheets on January 1, 2018. See Note 2 to the Consolidated Financial Statements included herein for additional information regarding our opening balance sheet adjustment. Our capitalized commissions on preneed contracts are amortized on a straight-line basis over the average maturity period for our preneed cemetery merchandise and services contracts and preneed funeral trust contracts, of eight and ten years, respectively. Amortization expense totaled approximately $156,000 for the three months ended September 30, 2018 and $449,000 for the nine months ended September 30, 2018. There were no impairment losses recognized during the three and nine months ended September 30, 2018.
On September 30, 2018, our management agreement with a Florida municipality expired and as a result, we ceased to operate three of our cemetery businesses. We recorded a loss of approximately $125,000 for the write-off of capitalized commissions related to these three cemetery businesses, which was included in loss recorded for the expired management agreement and recorded in Other, net.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheet.
See Note 2 to the Consolidated Financial Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
See Note 12 to the Consolidated Financial Statements included herein for additional information regarding our capitalized commissions on preneed contracts.
See Note 5 to the Consolidated Financial Statements included herein for additional information regarding the expired management agreement for these three cemetery businesses.
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, 2017 and September 30, 2018 (in thousands):
 
December 31, 2017
 
September 30, 2018
Land
$
74,981

 
$
81,011

Buildings and improvements
211,934

 
223,046

Furniture, equipment and automobiles
76,155

 
79,973

Property, plant and equipment, at cost
363,070

 
384,030

Less: accumulated depreciation
(115,776
)
 
(122,465
)
Property, plant and equipment, net
$
247,294

 
$
261,565

We recorded depreciation expense of approximately $3.1 million and $3.6 million for the three months ended September 30, 2017 and 2018, respectively and approximately $9.4 million and $10.3 million for the nine months ended September 30, 2017 and 2018, respectively. During the nine months ended September 30, 2017, we acquired real estate for $0.7 million for a funeral home parking lot expansion project.

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Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral home businesses. Goodwill has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years.
We performed our 2018 annual goodwill impairment test using information as of August 31, 2018. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. For our 2018 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform a quantitative goodwill impairment test and concluded that it is more-likely-than not that the fair value of our reporting units is greater than their carrying value and thus there was no impairment to goodwill.
See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017, for a discussion of the methodology used for the quantitative goodwill impairment test.
In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate, which may be indicated by a decline in our market capitalization or decline in operating results. No such events or changes occurred between our testing date and reporting period to trigger a subsequent impairment review. No impairments were recorded to our goodwill during the three and nine months ended September 30, 2017 and 2018.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in Intangible 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. As such, we test our intangible assets for impairment on an annual basis. Our intent is to perform a quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining two years.
We performed our 2018 annual intangible assets impairment test using information as of August 31, 2018. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of the tradename is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative impairment test. For our 2018 annual impairment test, we performed a qualitative assessment and determined that there were no factors that would indicate the need to perform a quantitative impairment test and concluded that it is more-likely-than not that the fair value of our intangible assets is greater than its carrying value and thus there was no impairment to our intangible assets.
See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017, for a discussion of the methodology used for the quantitative intangibles impairment test.
In addition to our annual review, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. No impairments were recorded to our intangible assets during the three and nine months ended September 30, 2017 and 2018.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we grant restricted stock, stock options and performance awards. We also have an employee stock purchase plan (the “ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period.
Fair value is determined on the date of the grant. The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date. The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.

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See Note 16 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 16 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 the tax benefits for uncertain tax positions and how they are to be recognized, measured and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance 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 finalization of income tax returns, tax audit settlements, tax effects of exercised or vested stock-based awards and increases or decreases in valuation allowances on deferred tax assets.
We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for both the three and nine months ended September 30, 2017 and approximately 30.3% and 28.0% for the three and nine months ended September 30, 2018, respectively. The decrease in the estimated effective tax rate, before discrete items, in 2018 compared to 2017 is primarily attributable to the reduction of the U.S. federal statutory income tax rate from 35% to 21% resulting from enactment of the Tax Cuts and Jobs Act of 2017 (the “TCJA”). The discrete items include an income tax benefit related to stock compensation and refunds received from the completion of state income tax audits, income tax expense related to state tax rate changes and other non-material discrete state items.
Income tax expense was approximately $1.5 million and $1.2 million for the three months ended September 30, 2017 and 2018, respectively and approximately $9.3 million and $5.1 million for the nine months ended September 30, 2017 and 2018, respectively.
Subsequent Events
Management evaluated events and transactions during the period subsequent to September 30, 2018 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
See Note 20 to the Consolidated Financial Statements included herein for additional information on our subsequent events.
2.RECENTLY ISSUED ACCOUNTING STANDARDS
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 recognizes 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 Topic 606, 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. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized.
We adopted the provisions of this ASU on January 1, 2018 using the modified retrospective approach. As such, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Topic 606 did not materially affect the accounting for our revenue streams. Revenue from sales of preneed cemetery interment rights was previously recognized in the period in which the customer’s cumulative payments exceeded 10% of the contract price related to the interment right. Under Topic 606, we recognize revenue at the time the contract is signed. Customers select a specific location and space for their interment right, thus, restricting us from other use or transfer of the contracted cemetery property. The interment right is deeded to the customer when the contract is paid in full. Because we generally receive an initial down payment at the time the contract is signed, there is no significant difference in the timing of revenue recognition under Topic 606, as compared

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to previous guidance. Revenue from preneed sales of funeral and cemetery merchandise and services continues to be deferred and recognized when the merchandise is delivered or the service is performed.
Topic 606 impacted our accounting for incremental selling costs, primarily commission costs, related to preneed cemetery merchandise and services and preneed funeral trust contracts. Under Topic 606, these costs are capitalized and amortized over the average maturity period for our preneed cemetery contracts and preneed funeral trust contracts. Previously, these costs were expensed in the period incurred. Our capitalized commissions on preneed contracts are included in Intangible and other non-current assets on our Consolidated Balance Sheets. See Note 12 to the Consolidated Financial Statements included herein for additional information.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheets.
Topic 606 also impacted our classification of amounts due from customers for undelivered performance obligations. Under Topic 606 amounts due on our preneed funeral trust contracts and preneed cemetery merchandise and services contracts have been reclassified to reduce Deferred preneed funeral revenue and Deferred preneed cemetery revenue, respectively, on our Consolidated Balance Sheets. These amounts were previously reported as Accounts receivable and Preneed receivables on our Consolidated Balance Sheets.
The adoption of the provisions of this ASU did not have a material impact on our effective tax rate for the reporting period.
The following table presents the impact of the adoption of Topic 606 on our Consolidated Balance Sheet (in thousands):
 
As of September 30, 2018
 
As Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Assets
 
 
 
 
 
Accounts receivable, net of allowance for bad debts
$
17,067

 
$
18,457

 
$
(1,390
)
Preneed receivables, net of allowance for bad debts
$
18,510

 
$
29,914

 
$
(11,404
)
Intangible and other non-current assets
$
2,707

 
$

 
$
2,707

Liabilities
 
 
 
 
 
Deferred preneed cemetery revenue, net
$
46,156

 
$
50,642

 
$
(4,486
)
Deferred preneed funeral revenue, net
$
28,153

 
$
36,461

 
$
(8,308
)
Deferred tax liability
$
31,694

 
$
31,067

 
$
627

Stockholders’ equity:
 
 
 
 
 
Retained earnings
$
74,338

 
$
72,258

 
$
2,080

The following table presents the impact of the adoption of Topic 606 on our Consolidated Statement of Operations (in thousands, except per share data):
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Field costs and expenses:
 
 
 
 
 
 
 
 
 
 
 
Funeral
$
33,467

 
$
33,482

 
$
(15
)
 
$
103,071

 
$
103,154

 
$
(83
)
Cemetery
$
9,649

 
$
9,525

 
$
124

 
$
28,589

 
$
28,435

 
$
154

Income before income taxes
$
3,387

 
$
3,496

 
$
(109
)
 
$
19,368

 
$
19,439

 
$
(71
)
Net income
$
2,200

 
$
2,276

 
$
(76
)
 
$
14,303

 
$
14,354

 
$
(51
)
 
 
 
 
 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.11

 
$
0.11

 
$

 
$
0.80

 
$
0.80

 
$

Diluted earnings per common share:
$
0.11

 
$
0.11

 
$

 
$
0.78

 
$
0.78

 
$

 
 
 
 
 
 
 
 
 
 
 
 
Dividends declared per common share
$
0.075

 
$
0.075

 
$

 
$
0.225

 
$
0.225

 
$


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The following table presents the impact of the adoption of Topic 606 on our Consolidated Statement of Cash Flows (in thousands):
 
Three Months Ended September 30, 2018
 
Nine Months Ended September 30, 2018
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
 
As
Reported
 
Balances Without Adoption of Topic 606
 
Effect of Change
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
 
 
 
 
 
 
 
 
Amortization of capitalized commissions on preneed contracts
$
281

 
$

 
$
281

 
$
574

 
$

 
$
574

Changes in operating assets and liabilities that provided (required) cash:
 
 
 
 
 
 
 
 
 
 
 
Intangible and other non-current assets
$
(172
)
 
$

 
$
(172
)
 
$
(503
)
 
$

 
$
(503
)
The cumulative effect of changes made to our opening Consolidated Balance Sheet on January 1, 2018 for the adoption of Topic 606 was as follows (in thousands):
 
December 31, 2017
 
Effect of Adoption of
Topic 606
 
January 1, 2018
Assets
 
 
 
 
 
Accounts receivable, net of allowance for bad debts(1)
$
19,655

 
$
(1,399
)
 
$
18,256

Preneed receivables, net of allowance for bad debts(2)(3)
$
31,644

 
$
(11,129
)
 
$
20,515

Intangible and other non-current assets(4)
$

 
$
2,778

 
$
2,778

 
 
 
$
(9,750
)
 
 
Liabilities
 
 
 
 
 
Deferred preneed cemetery revenue(1)(2)
$
54,690

 
$
(4,594
)
 
$
50,096

Deferred preneed funeral revenue(3)
$
34,585

 
$
(7,934
)
 
$
26,651

Deferred tax liability(4)
$
31,159

 
$
647

 
$
31,806

Stockholders’ equity:
 
 
 
 
 
Retained earnings(4)
$
57,904

 
$
2,131

 
$
60,035

 
 
 
$
(9,750
)
 
 
 
 
 
 
 
(1)
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of accounts receivable, net of allowance for bad debts, of $19.7 million at December 31, 2017, included the current portion of receivables for preneed cemetery merchandise and service contracts totaling $1.4 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed cemetery revenue on January 1, 2018.
(2)
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of preneed receivables, net of allowance for bad debts, of $31.6 million at December 31, 2017, included the non-current portion of receivables for preneed cemetery merchandise and service contracts totaling $4.6 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed cemetery revenue on January 1, 2018.
(3)
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of preneed receivables, net of allowance for bad debts, $31.6 million at December 31, 2017, included the non-current portion of receivables for preneed funeral trust contracts totaling $7.9 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed funeral revenue on January 1, 2018.
(4)
Under Topic 606, certain costs incurred to obtain or fulfill a contract with a customer are capitalized. Beginning January 1, 2018, we capitalize selling costs related to undelivered preneed cemetery merchandise and services and preneed funeral trust contracts. Previously, these costs were expensed in the period incurred. We recorded a cumulative adjustment of approximately $2.1 million to our opening Retained earnings, which consisted of a $2.8 million adjustment to our Intangible and other non-current assets and a $0.6 million adjustment to our Deferred tax liability on our Consolidated Balance Sheets on January 1, 2018.



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The following accounting pronouncements were adopted on January 1, 2018 with no impact to our Consolidated Financial Statements:
Compensation (Topic 718): Stock Compensation – Scope of Modification Accounting
The amendments in this ASU 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 is modified.
Business Combinations (Topic 805): Clarifying the Definition of a Business
This ASU applies to all entities that must determine whether they have acquired or sold a business. The amendments in this ASU clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses.
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
This ASU applies to all entities that are required to present a statement of cash flows under Topic 230. The amendments provide guidance on eight specific cash flow issues and includes clarification on how these items should be classified in the statement of cash flows and is designed to help eliminate diversity in practice as to where items are classified in the cash flow statement. In November 2016, the FASB issued additional guidance on this topic that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the statement of cash flows.
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and apply to all entities that hold financial assets or owe financial liabilities. The amendments in this ASU also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. That impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite-lived intangible assets.
Accounting Pronouncements Not Yet Adopted
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.
In July 2018, the FASB issued ASU No. 2018-11 Leases (Topic 842) — Targeted Improvements. The amendments in this Update provide entities with an additional (and optional) transition method to adopt the new leases standard. Under this new transition method, an entity initially applies the new leases standard at the adoption date and recognizes a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. Consequently, an entity’s reporting for the comparative periods presented in the financial statements in which it adopts the new leases standard will continue to be in accordance with current GAAP standards (Topic 840, Leases). An entity that elects this additional (and optional) transition method must provide the required disclosures required under Topic 840 disclosures for all periods that continue to be in accordance with Topic 840. The amendments do not change the existing disclosures in Topic 840 (for example, they do not create interim disclosure requirements that entities previously were not required to provide). We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and do not expect the adoption of this new accounting standard to have a material impact on our Consolidated Financial Statements.



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3. ACQUISITIONS
On July 10, 2018, we acquired two funeral home businesses, one in Fredericksburg, Virginia and one in Stafford, Virginia, for $29.2 million in cash. On August 21, 2018, we acquired a funeral home business in Cookeville, Tennessee for $2.8 million in cash. On August 28, 2018, we acquired a funeral home business in Knightdale, North Carolina for $6.0 million in cash.
For these acquisitions, we acquired substantially all of the assets and assumed certain operating liabilities. The pro forma impact of these acquisitions on prior periods is not presented, as the impact is not material to our reported results. The results of the acquired businesses are included in the Company's results from the date of acquisition.
The following table summarizes the breakdown of the purchase price allocation for the businesses described above (in thousands):
 
Purchase Price Allocation
Current assets
$
166

Property, plant & equipment
17,543

Goodwill
16,777

Intangible and other non-current assets
3,863

Assumed liabilities
(399
)
Purchase price
$
37,950

The intangible and other non-current assets relate to the fair value of tradenames and agreements not-to-compete and the assumed liabilities relate to the obligations associated with certain financed automobiles we acquired.
The following table summarizes the fair value of the assets acquired for these businesses (in millions):
Acquisition Date
 
Type of Business
 
Market
 
Assets
Acquired
(Excluding
Goodwill)
 
Goodwill
Recorded
 
Liabilities
and Debt
Assumed
July 10, 2018
 
Two Funeral Homes
 
Fredericksburg/Stafford, VA
 
$
13.2

 
$
16.0

 
$

August 21, 2018
 
One Funeral Home
 
Cookeville, TN
 
$
2.5

 
$
0.5

 
$
(0.2
)
August 28, 2018
 
One Funeral Home
 
Knightdale, NC
 
$
5.9

 
$
0.3

 
$
(0.2
)
As of September 30, 2018, our accounting for our 2018 acquisitions is complete. See Note 12 to the Consolidated Financial Statements included herein for additional information on our intangible and other non-current assets.
For the nine months ended September 30, 2017, we did not acquire any businesses.
4. GOODWILL
Many of the former owners and staff of our 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 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.
See Note 1 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our annual goodwill impairment test.
The following table presents changes in goodwill in the accompanying Consolidated Balance Sheets for the year ended December 31, 2017 and period ended September 30, 2018 (in thousands): 
 
December 31, 2017
 
September 30, 2018
Goodwill at the beginning of year
$
275,487

 
$
287,956

Increase in goodwill related to acquisitions
12,469

 
16,777

Goodwill at the end of the period
$
287,956

 
$
304,733



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5. DIVESTED OPERATIONS
On September 30, 2018, our management agreement with a Florida municipality expired and as a result, we ceased to operate three of our cemetery businesses.
The operating results of these three cemetery businesses, as well as the loss recorded for the expired management agreement (in Other, net) are reflected in our Consolidated Statements of Operations as shown in the table below (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2018
Revenues
$

 
$
4,712

Operating income

 
1,130

Loss recorded for the expired management agreement

 
(349
)
Income tax provision

 
(219
)
Net income for businesses related to the expired management agreement
$

 
$
562

We did not sell any of our funeral home or cemetery businesses during the three and nine months ended September 30, 2017 and 2018. We continually review locations to optimize the sustainable earning power and return on our invested capital. These reviews could entail selling or discontinuing certain non-strategic businesses.
6.REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenues
Our operations are reported in two business segments: Funeral Home Operations and Cemetery Operations. Revenues, disaggregated by major source for each of our reportable segments was as follows (in thousands):
Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
30,231

 
$
2,774

 
$
33,005

Merchandise
 
17,525

 
2,064

 
19,589

Cemetery interment rights
 

 
7,435

 
7,435

Revenue from contracts with customers
 
$
47,756

 
$
12,273

 
$
60,029

 
 
 
 
 
 
 
Preneed funeral commission income
 
$
360

 
$

 
$
360

Preneed trust earnings
 
1,594

 
1,440

 
3,034

Preneed trust management fees
 
133

 
201

 
334

Preneed cemetery finance charges
 

 
484

 
484

Financial revenues
 
2,087

 
2,125

 
4,212

Total Revenues
 
$
49,843

 
$
14,398

 
$
64,241

Three Months Ended September 30, 2017
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
28,385

 
$
2,803

 
$
31,188

Merchandise
 
17,011

 
1,932

 
18,943

Cemetery interment rights
 

 
6,773

 
6,773

Revenue from contracts with customers
 
$
45,396

 
$
11,508

 
$
56,904

 
 
 
 
 
 
 
Preneed funeral commission income
 
$
315

 
$

 
$
315

Preneed trust earnings
 
1,481

 
1,566

 
3,047

Preneed trust management fees
 
137

 
202

 
339

Preneed cemetery finance charges
 

 
449

 
449

Financial revenues
 
1,933

 
2,217

 
4,150

Total Revenues
 
$
47,329

 
$
13,725

 
$
61,054


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Nine Months Ended September 30, 2018
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
94,818

 
$
8,850

 
$
103,668

Merchandise
 
55,539

 
6,386

 
61,925

Cemetery interment rights
 

 
22,808

 
22,808

Revenue from contracts with customers
 
$
150,357

 
$
38,044

 
$
188,401

 
 
 
 
 
 
 
Preneed funeral commission income
 
$
974

 
$

 
$
974

Preneed trust earnings
 
5,236

 
4,422

 
9,658

Preneed trust management fees
 
402

 
613

 
1,015

Preneed cemetery finance charges
 

 
1,427

 
1,427

Financial revenues
 
6,612

 
6,462

 
13,074

Total Revenues
 
$
156,969

 
$
44,506

 
$
201,475

Nine Months Ended September 30, 2017
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
90,392

 
$
8,734

 
$
99,126

Merchandise
 
53,649

 
5,936

 
59,585

Cemetery interment rights
 

 
21,221

 
21,221

Revenue from contracts with customers
 
$
144,041

 
$
35,891

 
$
179,932

 
 
 
 
 
 
 
Preneed funeral commission income
 
$
951

 
$

 
$
951

Preneed trust earnings
 
4,875

 
4,908

 
9,783

Preneed trust management fees
 
412

 
604

 
1,016

Preneed cemetery finance charges
 

 
1,381

 
1,381

Financial revenues
 
6,238

 
6,893

 
13,131

Total Revenues
 
$
150,279

 
$
42,784

 
$
193,063


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Deferred Revenue
Deferred revenue is presented net of amounts due on undelivered preneed contracts shown below as of January 1, 2018 and September 30, 2018 (in thousands):
 
January 1, 2018(1)
 
September 30, 2018
Contract liabilities:
 
 
 
Deferred preneed cemetery revenue
$
54,690

 
$
50,642

Less: Balances due on undelivered cemetery preneed contracts(2)
(4,594
)
 
(4,486
)
Deferred preneed cemetery revenue, net
$
50,096

 
$
46,156

 
 
 
 
Deferred preneed funeral revenue
$
34,585

 
$
36,461

Less: Balances due on undelivered funeral preneed contracts(3)
(7,934
)
 
(8,308
)
Deferred preneed funeral revenue, net
$
26,651

 
$
28,153

 
 
 
 
 
(1)
January 1, 2018 balances have been adjusted to reflect the cumulative effect of changes for the adoption of ASC 606.
(2)
In accordance with Topic 606, $1.4 million of cemetery accounts receivables have been reclassified to reduce deferred preneed cemetery revenue at both January 1, 2018 and September 30, 2018 and $3.2 million and $3.1 million of preneed cemetery receivables have been reclassified to reduce deferred preneed cemetery revenue at January 1, 2018 and September 30, 2018, respectively.
(3)
In accordance with Topic 606, $7.9 million and $8.3 million of preneed funeral receivables have been reclassified to reduce deferred preneed funeral revenue at January 1, 2018 and September 30, 2018, respectively.
Our merchandise and service performance obligations related to our preneed contracts are considered fulfilled at the point in time the merchandise is delivered or the burial, cremation or interment service is performed. The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled at September 30, 2018 was $4.5 million for preneed cemetery contracts and $8.3 million for preneed funeral contracts. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue for any given period. However, we estimate an average maturity period of eight years for preneed cemetery contracts and ten years for preneed funeral contracts.
7.    PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as merchandise and services are provided to customers. Preneed cemetery contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed cemetery trust investments can be reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed cemetery trust investments on our Consolidated Balance Sheets at December 31, 2017 and September 30, 2018 were as follows (in thousands):
 
December 31, 2017
 
September 30, 2018
Preneed cemetery trust investments, at market value
$
75,992

 
$
72,095

Less: allowance for contract cancellation
(2,139
)
 
(2,142
)
Preneed cemetery trust investments, net
$
73,853

 
$
69,953

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 September 30, 2018, 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

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prices are not available for the specific security, fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including foreign debt, corporate debt, preferred stocks, 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 nine months ended September 30, 2018. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 11 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 September 30, 2018 are detailed below (in thousands, except percentages):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
10,388

 
$

 
$

 
$
10,388

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
4,353

 
179

 
(138
)
 
4,394

Corporate debt
2
 
16,756

 
672

 
(478
)
 
16,950

Preferred stock
2
 
10,667

 
54

 
(490
)
 
10,231

Mortgage-backed securities
2
 
845

 
343

 
(10
)
 
1,178

Common stock
1
 
28,388

 
3,306

 
(3,376
)
 
28,318

Trust securities
 
 
$
71,397

 
$
4,554

 
$
(4,492
)
 
$
71,459

Accrued investment income
 
 
$
636

 
 
 
 
 
$
636

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
72,095

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
$

Due in one to five years
2,775

Due in five to ten years
5,683

Thereafter
24,295

Total
$
32,753

The cost and fair market values associated with preneed cemetery trust investments at December 31, 2017 are detailed below (in thousands, except percentages):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
3,132

 
$

 
$

 
$
3,132

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
4,834

 
292

 
(193
)
 
4,933

Corporate debt
2
 
18,238

 
1,184

 
(273
)
 
19,149

Preferred stock
2
 
16,421

 
510

 
(588
)
 
16,343

Mortgage-backed securities
2
 
1,018

 
249

 
(24
)
 
1,243

Common stock
1
 
26,465

 
5,250

 
(2,460
)
 
29,255

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
2
 
1,198

 
50

 
(11
)
 
1,237

Trust securities
 
 
$
71,306

 
$
7,535

 
$
(3,549
)
 
$
75,292

Accrued investment income
 
 
$
700

 
 
 
 
 
$
700

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
75,992

Market value as a percentage of cost
 
 
 
 
 
 
 
 
105.6
%
We determine whether or not the assets in the preneed cemetery trust investments have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security

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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. In the three and nine months ended September 30, 2017 and 2018, we did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2018, 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 September 30, 2018 are shown in the following table (in thousands):
 
September 30, 2018
 
In Loss Position Less than 12 months
 
In Loss Position Greater than 12 months
 
Total
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
 
Fair Market Value
 
Unrealized Losses
Fixed income securities:
 
 
 
 
 
 
 
 
 
 
 
Foreign debt
$
1,635

 
$
(33
)
 
$
1,015

 
$
(105
)
 
$
2,650

 
$
(138
)
Corporate debt
7,814

 
(284
)
 
437

 
(194
)
 
8,251

 
(478
)
Preferred stock
5,362

 
(134
)
 
3,996

 
(356
)
 
9,358

 
(490
)
Mortgage-backed securities

 

 
60

 
(10
)
 
60

 
(10
)
Common stock
14,106

 
(1,598
)
 
2,335

 
(1,778
)
 
16,441

 
(3,376
)
Total temporary impaired securities
$
28,917

 
$
(2,049
)
 
$
7,843

 
$
(2,443
)
 
$
36,760

 
$
(4,492
)
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2017 are shown in the following table (in thousands):
 
December 31, 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
$
151

 
$
(6
)
 
$
1,637

 
$
(187
)
 
$
1,788

 
$
(193
)
Corporate debt
3,735

 
(72
)
 
846

 
(201
)
 
4,581

 
(273
)
Preferred stock
48

 

 
8,109

 
(588
)
 
8,157

 
(588
)
Mortgage-backed securities
127

 
(15
)
 
27

 
(9
)
 
154

 
(24
)
Common stock
8,249

 
(1,512
)
 
1,742

 
(948
)
 
9,991

 
(2,460
)
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
Fixed Income
496

 
(11
)
 

 

 
496

 
(11
)
Total temporary impaired securities
$
12,806

 
$
(1,616
)
 
$
12,361

 
$
(1,933
)
 
$
25,167

 
$
(3,549
)

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Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2017 and 2018 were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
Investment income
$
474

 
$
315

 
$
1,755

 
$
1,214

Realized gains

 
1,376

 
2,215

 
2,247

Realized losses

 
(1,141
)
 
(1,312
)
 
(2,498
)
Expenses and taxes
(336
)
 
(365
)
 
(1,213
)
 
(637
)
Net change in deferred preneed cemetery receipts held in trust
(138
)
 
(185
)
 
(1,445
)
 
(326
)
 
$

 
$

 
$

 
$

Purchases and sales of investments in the preneed cemetery trusts for the three and nine months ended September 30, 2017 and 2018 were as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2018
 
2017
 
2018
Purchases
$
(915
)
 
$
(8,165
)
 
$
(19,355
)
 
$
(18,423
)
Sales

 
8,878

 
13,189

 
22,776

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, 2017 and September 30, 2018 were as follows (in thousands):
 
December 31, 2017
 
September 30, 2018
Preneed funeral trust investments, at market value
$
93,341

 
$
92,816

Less: allowance for contract cancellation
(2,659
)
 
(2,765
)
Preneed funeral trust investments, net
$
90,682

 
$
90,051

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 September 30, 2018, 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 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 nine months ended September 30, 2018. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 11 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.

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The cost and fair market values associated with preneed funeral trust investments at September 30, 2018 are detailed below (in thousands, except percentages):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
22,200

 
$

 
$

 
$
22,200

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S treasury debt
1
 
1,455

 
3

 
(30
)
 
1,428

Foreign debt
2
 
4,613

 
195

 
(143
)
 
4,665

Corporate debt
2
 
18,130

 
643

 
(516
)
 
18,257

Preferred stock
2
 
11,876

 
46

 
(524
)
 
11,398

Mortgage-backed securities
2
 
1,024

 
380

 
(14
)
 
1,390

Common stock
1
 
29,568

 
3,506

 
(3,522
)
 
29,552

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
2
 
275

 

 
(29
)
 
246

Other investments
2
 
3,002

 

 

 
3,002

Trust securities
 
 
$
92,143

 
$
4,773

 
$
(4,778
)
 
$
92,138

Accrued investment income
 
 
$
678

 
 
 
 
 
$
678

Preneed funeral trust investments
 
 
 
 
 
 
 
 
$
92,816

Market value as a percentage of cost
 
 
 
 
 
 
 
 
100.0
%
The estimated maturities of the fixed income securities included above are as follows (in thousands):
Due in one year or less
$

Due in one to five years
4,640

Due in five to ten years
6,276

Thereafter
26,222

Total
$
37,138


The cost and fair market values associated with preneed funeral trust investments at December 31, 2017 are detailed below (in thousands, except percentages):
 
Fair Value Hierarchy Level
 
Cost
 
Unrealized
Gains
 
Unrealized
Losses
 
Fair Market
Value
Cash and money market accounts
1
 
$
14,349

 
$

 
$

 
$
14,349

Fixed income securities:
 
 
 
 
 
 
 
 
 
U.S. treasury debt
1
 
1,490

 
10

 
(15
)
 
1,485

Foreign debt
2
 
4,870

 
298

 
(189
)
 
4,979

Corporate debt
2
 
18,963

 
1,197

 
(278
)
 
19,882

Preferred stock
2
 
16,335

 
501

 
(585
)
 
16,251

Mortgage-backed securities
2
 
1,187

 
263

 
(27
)
 
1,423

Common stock
1
 
26,129

 
5,253

 
(2,468
)
 
28,914

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed income
2
 
1,974

 
52

 
(48
)
 
1,978

Other investments
2
 
3,341

 

 

 
3,341

Trust securities
 
 
$
88,638

 
$
7,574

 
$
(3,610
)
 
$
92,602

Accrued investment income