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, 2019
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
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol
Name of each exchange on which registered
Common Stock, par value $.01 per share
CSV
New York Stock Exchange
 
 
 
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of October 25, 2019 was 17,826,103.
 


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 SHEET
(in thousands, except share data)
 
 
 
(unaudited)
 
December 31, 2018
 
September 30, 2019
ASSETS
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
644

 
$
5,812

Accounts receivable, net
18,897

 
17,699

Inventories
6,751

 
6,692

Prepaid and other current assets
3,011

 
1,764

Total current assets
29,303

 
31,967

Preneed cemetery trust investments
62,432

 
68,333

Preneed funeral trust investments
82,074

 
87,059

Preneed cemetery receivables, net
18,441

 
19,467

Receivables from preneed trusts
17,073

 
17,989

Property, plant and equipment, net
260,838

 
258,035

Cemetery property, net
74,958

 
75,064

Goodwill
303,887

 
299,181

Intangible and other non-current assets, net
24,425

 
24,028

Operating lease right-of-use assets

 
22,628

Cemetery perpetual care trust investments
44,071

 
48,397

Total assets
$
917,502

 
$
952,148

LIABILITIES AND STOCKHOLDERS’ EQUITY
 
 
 
Current liabilities:
 
 
 
Current portion of long-term debt
$
2,015

 
$
1,679

Current portion of finance lease obligations
312

 
282

Current portion of operating lease obligations

 
1,524

Accounts payable
9,987

 
6,135

Accrued and other liabilities
22,644

 
29,270

Total current liabilities
34,958

 
38,890

Long-term debt, net of current portion
6,925

 
6,135

Credit facility
26,145

 
17,099

Convertible subordinated notes due 2021
5,732

 
5,902

Senior notes due 2026
319,108

 
319,577

Obligations under finance leases, net of current portion
6,143

 
5,929

Obligations under operating leases, net of current portion

 
21,758

Deferred preneed cemetery revenue
45,997

 
45,195

Deferred preneed funeral revenue
28,606

 
29,522

Deferred tax liability
31,263

 
32,533

Other long-term liabilities
3,133

 
1,935

Deferred preneed cemetery receipts held in trust
62,432

 
68,333

Deferred preneed funeral receipts held in trust
82,074

 
87,059

Care trusts’ corpus
43,494

 
47,771

Total liabilities
696,010

 
727,638

Commitments and contingencies:

 

Stockholders’ equity:
 
 

Common stock, $.01 par value; 80,000,000 shares authorized and 25,703,490 and 25,851,442 shares issued at December 31, 2018 and September 30, 2019, respectively
257

 
259

Additional paid-in capital
243,849

 
242,657

Retained earnings
71,680

 
83,644

Treasury stock, at cost; 7,625,339 and 8,025,339 at December 31, 2018 and September 30, 2019, respectively
(94,294
)
 
(102,050
)
Total stockholders’ equity
221,492

 
224,510

Total liabilities and stockholders’ equity
$
917,502

 
$
952,148

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

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Table of Contents

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,
 
2018
 
2019
 
2018
 
2019
Revenue:
 
 
 
 
 
 
 
Service revenue
$
33,003

 
$
34,133

 
$
103,660

 
$
105,444

Property and merchandise revenue
27,026

 
28,002

 
84,741

 
85,458

Other revenue
4,212

 
3,990

 
13,074

 
12,056

 
64,241

 
66,125

 
201,475

 
202,958

Field costs and expenses:
 
 

 
 
 
 
Cost of service
18,085

 
18,011

 
54,031

 
54,062

Cost of merchandise
22,505

 
21,972

 
67,796

 
66,544

Cemetery property amortization
964

 
972

 
2,763

 
2,990

Field depreciation expense
3,047

 
3,106

 
8,925

 
9,250

Regional and unallocated funeral and cemetery costs

2,114

 
3,597

 
8,662

 
10,008

Other expenses
412

 
411

 
1,171

 
1,197

 
47,127

 
48,069

 
143,348

 
144,051

Gross profit
17,114

 
18,056

 
58,127

 
58,907

Corporate costs and expenses:
 
 

 
 
 
 
General, administrative and other
6,344

 
5,755

 
19,342

 
17,059

Home office depreciation and amortization
505

 
357

 
1,412

 
1,115

 
6,849

 
6,112

 
20,754

 
18,174

Operating income
10,265

 
11,944

 
37,373

 
40,733

Interest expense
(6,285
)
 
(6,283
)
 
(14,763
)
 
(18,907
)
Accretion of discount on convertible subordinated notes
(246
)
 
(61
)
 
(1,961
)
 
(178
)
Net loss on early extinguishment of debt

 

 
(936
)
 

Other, net
(347
)
 
(4,076
)
 
(345
)
 
(3,914
)
Income before income taxes
3,387

 
1,524

 
19,368

 
17,734

Provision for income taxes
(1,028
)
 
(930
)
 
(5,423
)
 
(5,551
)
Tax adjustment related to certain discrete items
(159
)
 
(17
)
 
358

 
(219
)
Total provision for income taxes
(1,187
)
 
(947
)
 
(5,065
)
 
(5,770
)
Net income
$
2,200

 
$
577

 
$
14,303

 
$
11,964

 
 
 
 
 
 
 
 
Basic earnings per common share:
$
0.11

 
$
0.03

 
$
0.80

 
$
0.66

Diluted earnings per common share:
$
0.11

 
$
0.03

 
$
0.78

 
$
0.66

 
 
 
 
 
 
 
 
Dividends declared per common share:
$
0.075

 
$
0.075

 
$
0.225

 
$
0.225

 
 
 
 
 
 
 
 
Weighted average number of common and common equivalent shares outstanding:
 
 
 
 
 
 
 
Basic
19,060

 
17,737

 
17,701

 
17,917

Diluted
19,161

 
17,768

 
18,273

 
17,951

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,
 
2018
 
2019
Cash flows from operating activities:
 
 
 
Net income
$
14,303

 
$
11,964

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

Depreciation and amortization
13,100

 
13,355

Provision for losses on accounts receivable
1,511

 
1,188

Stock-based compensation expense
2,924

 
1,616

Deferred income tax expense
3,547

 
1,270

Amortization of deferred financing costs
420

 
289

Amortization of capitalized commissions on preneed contracts
449

 
417

Accretion of discount on convertible subordinated notes
1,961

 
178

Accretion of debt discount on senior notes
154

 
366

Net loss on early extinguishment of debt
936

 

Net loss on sale of business and other assets
408

 
4,067

Gain on insurance reimbursements

 
(638
)
Goodwill and other impairments

 
730

Other

 
121

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

Accounts and preneed receivables
(3,010
)
 
(2,495
)
Inventories, prepaid and other current assets
(1,911
)
 
1,138

Intangible and other non-current assets
(345
)
 
(241
)
Preneed funeral and cemetery trust investments
(6,104
)
 
(4,376
)
Accounts payable
(735
)
 
(3,852
)
Accrued and other liabilities
3,761

 
6,749

Deferred preneed funeral and cemetery revenue
6,292

 
804

Deferred preneed funeral and cemetery receipts held in trust
1,056

 
3,411

Net cash provided by operating activities
38,717

 
36,061

 
 
 

Cash flows from investing activities:
 
 

Acquisitions and land for new construction
(37,970
)
 

Proceeds from insurance reimbursements

 
1,247

Proceeds from the sale of business and other assets

 
967

Capital expenditures
(9,037
)
 
(11,479
)
Net cash used in investing activities
(47,007
)
 
(9,265
)
 
 
 

Cash flows from financing activities:
 
 

Payments against the term loan
(127,500
)
 

Borrowings from the credit facility
96,000

 
28,200

Payments against the credit facility
(188,000
)
 
(37,300
)
Payment of debt issuance costs related to long-term debt
(1,551
)
 
(113
)
Redemption of the 2.75% convertible subordinated notes
(75,229
)
 
(27
)
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 finance leases
(1,031
)
 
(1,370
)
Payments on contingent consideration recorded at acquisition date
(138
)
 
(162
)
Proceeds from the exercise of stock options and employee stock purchase plan contributions
1,075

 
1,155

Taxes paid on restricted stock vestings and exercise of non-qualified options
(651
)
 
(194
)
Dividends paid on common stock
(4,076
)
 
(4,061
)
Purchase of treasury stock

 
(7,756
)
Net cash provided by (used in) financing activities
16,812

 
(21,628
)
 
 
 


Net increase in cash and cash equivalents
8,522

 
5,168

Cash and cash equivalents at beginning of period
952

 
644

Cash and cash equivalents at end of period
$
9,474

 
$
5,812

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

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Table of Contents

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Total
Balance – December 31, 2017
16,098

 
$
226

 
$
216,158

 
$
57,904

 
$
(76,632
)
 
$
197,656

Effect of adoption of topic 606

 

 

 
2,131

 

 
2,131

Balance – January 1, 2018
16,098

 
$
226

 
$
216,158

 
$
60,035

 
$
(76,632
)
 
$
199,787

Net income

 

 

 
9,356

 

 
9,356

Issuance of shares
91

 
1

 
307

 

 

 
308

Exercise of stock options
112

 
1

 
319

 

 

 
320

Cancellation and retirement of restricted common stock and stock options
(15
)
 

 
(296
)
 

 

 
(296
)
Stock-based compensation expense

 

 
1,100

 

 

 
1,100

Dividends on common stock

 

 
(1,207
)
 

 

 
(1,207
)
Other
6

 

 
145

 

 

 
145

Balance – March 31, 2018
16,292

 
$
228

 
$
216,526

 
$
69,391

 
$
(76,632
)
 
$
209,513

Net income

 

 

 
2,747

 

 
2,747

Issuance of shares
13

 

 
220

 

 

 
220

Exercise of stock options
27

 
1

 
(197
)
 

 

 
(196
)
Cancellation and retirement of restricted common stock and stock options
(2
)
 

 
(4
)
 

 

 
(4
)
Stock-based compensation expense

 

 
909

 

 

 
909

Dividends on common stock

 

 
(1,433
)
 

 

 
(1,433
)
Convertible notes exchange
2,823

 
28

 
28,194

 

 

 
28,222

Balance – June 30, 2018
19,153

 
$
257

 
$
244,215

 
$
72,138

 
$
(76,632
)
 
$
239,978

Net income

 

 

 
2,200

 

 
2,200

Issuance of shares
24

 

 
229

 

 

 
229

Cancellation and retirement of restricted common stock and stock options
(2
)
 

 
(156
)
 

 

 
(156
)
Stock-based compensation expense

 

 
915

 

 

 
915

Dividends on common stock

 

 
(1,436
)
 

 

 
(1,436
)
Convertible notes exchange

 

 
102

 

 

 
102

Balance – September 30, 2018
19,175

 
$
257

 
$
243,869

 
$
74,338

 
$
(76,632
)
 
$
241,832




















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Table of Contents

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(unaudited and in thousands)
 
Shares
Outstanding
 
Common
Stock
 
Additional
Paid-in
Capital
 
Retained
Earnings
 
Treasury
Stock
 
Total
Balance – December 31, 2018
18,078

 
$
257

 
$
243,849

 
$
71,680

 
$
(94,294
)
 
$
221,492

Net income

 

 

 
6,525

 

 
6,525

Issuance of shares
48

 

 
275

 

 

 
275

Exercise of stock options
71

 
1

 
471

 

 

 
472

Cancellation and retirement of restricted common stock and stock options
(9
)
 

 
(174
)
 

 

 
(174
)
Stock-based compensation expense

 

 
585

 

 

 
585

Dividends on common stock

 

 
(1,360
)
 

 

 
(1,360
)
Other
15

 

 
294

 

 

 
294

Balance – March 31, 2019
18,203

 
$
258

 
$
243,940

 
$
78,205

 
$
(94,294
)
 
$
228,109

Net income

 

 

 
4,862

 

 
4,862

Issuance of shares
17

 

 
197

 

 

 
197

Cancellation and retirement of restricted common stock and stock options
(8
)
 

 
(5
)
 

 

 
(5
)
Stock-based compensation expense

 

 
518

 

 

 
518

Dividends on common stock

 

 
(1,365
)
 

 

 
(1,365
)
Treasury stock acquired
(400
)
 

 

 

 
(7,756
)
 
(7,756
)
Balance – June 30, 2019
17,812

 
$
258

 
$
243,285

 
$
83,067

 
$
(102,050
)
 
$
224,560

Net income

 

 

 
577

 

 
577

Issuance of shares
18

 
1

 
211

 

 

 
212

Cancellation and retirement of restricted common stock and stock options
(4
)
 

 
(16
)
 

 

 
(16
)
Stock-based compensation expense

 

 
513

 

 

 
513

Dividends on common stock

 

 
(1,336
)
 

 

 
(1,336
)
Balance – September 30, 2019
17,826

 
$
259

 
$
242,657

 
$
83,644

 
$
(102,050
)
 
$
224,510

The accompanying 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, 2019, we operated 179 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 80% of our revenue and Cemetery Operations, which currently account for approximately 20% of our revenue.
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, 2018 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, revenue 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 revenue 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 revenue 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. The performance obligation on these atneed contracts for both merchandise and services are bundled as a single performance obligation, as the performance of these obligations occur within a short time frame (usually within a few days) from the time of death to the funeral service. Although our performance activities are transferred in sequence such as, embalming the body, delivering the casket, obtaining service related items like flowers and performing the service, these activities are all essential to satisfy our contractual obligation to the customer, thus, bundled into a single performance obligation. Revenue is recognized on the date of funeral service, as all performance

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Table of Contents

obligations have been satisfied. 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 Sheet.
The performance obligation is satisfied at the date of the service or the delivery of the merchandise as control has transferred to the customer and the benefit has concluded in the following manner:
we have the right to payment;
the customer has title to merchandise;
the deceased has used the merchandise or has been a part of the service; and
the customer directed the use of the merchandise or the plan of the service.
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. For preneed funeral merchandise and service contracts, the performance obligation occurs at the time of need (when death occurs) and revenue is recognized on the date of delivery of merchandise or performance of service. We do not deliver merchandise on preneed contracts or provide service prior to the time of death. The performance obligation for preneed funeral contracts is similar to the elements of the performance obligation of atneed funeral contracts. For preneed funeral services, all preneed funeral contracts are re-written upon the date of death as an atneed contract. The performance obligation is satisfied at the date of the service.
The performance of a preneed funeral contract is secured by placing the funds 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 Sheet. 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 4 to the Consolidated Financial Statements included herein.
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 Other revenue, as noted in our table of disaggregated revenue in Note 4 to the Consolidated Financial Statements included herein. As of September 30, 2019, CSV RIA provided these services to one institution, which has custody of approximately 76% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
When preneed funeral contracts are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are subject to refund (charge-back) if the preneed policy is cancelled within a year or if there is an imminent death of beneficiary before the first year anniversary of the policy. We record these insurance commissions as Other revenue, as noted in our table of disaggregated revenue in Note 5 to the Consolidated Financial Statements included herein, when the commission is no longer subject to refund, which is typically one year after the policy is issued. All selling costs incurred pursuant to the sale of the insurance funded preneed contracts are expensed as incurred. Preneed funeral contracts to be funded at maturity by third-party insurance policies totaled $388.2 million at September 30, 2019 and are not recorded on our Consolidated Balance Sheet.
Generally, at the time of the sale of either the preneed insurance or preneed trust contract, the intent is that the beneficiary has made a commitment to assign the proceeds to us for the fulfillment of the service and merchandise obligations on the preneed contract at the time of need. However, this commitment is revocable and the proceeds from the policy are portable, so the customer can choose to use an alternative provider at the time of need.
Revenue Recognition - Cemetery Operations
Our cemetery operations generate revenue 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. The performance obligation on these atneed contracts for cemetery property, merchandise and services are distinct. The performance obligations from the time of death to the disposition of the remains, include delivering cemetery property, unearthing the ground, interring remains and

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installing merchandise on the cemetery grounds. Each item on the contract is recognized as a distinct good or service. The performance obligation is satisfied and revenue is recognized on the purchase date of the interment right, on the date of the cemetery service, and on the date of delivery of the merchandise (set on cemetery grounds). 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.
The performance obligation is satisfied at the date of the service, the purchase of the interment right or the delivery of the merchandise as control has transferred to the customer and the benefit has concluded in the following manner:
we have the right to payment;
the customer has title to merchandise;
the deceased has used the merchandise or has been a part of the service; and
the customer directed the use of the merchandise or the plan of the service.
Cemetery arrangements sold prior to death occurring are referred to as preneed cemetery contracts. For preneed cemetery interment rights, the performance obligation is the sale of the interment right and revenue is recognized at the time the contract is signed. Control of cemetery interment rights is transferred to the customer upon execution of the contract as 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.
For preneed cemetery merchandise and service, the performance obligation occurs at the time of need (when death occurs) and revenue is recognized on the date of delivery of merchandise or performance of service. We do not deliver merchandise on preneed contracts or provide service prior to the time of death. The performance obligation for preneed cemetery merchandise and service is similar to the elements of the performance obligation of atneed cemetery merchandise and service.
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. Earnings on these installment contracts are not recognized until the time the merchandise is transferred or the service is performed and are recorded as Other revenue, as noted in our table of disaggregated revenue in Note 4 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 Sheet. The earnings from preneed cemetery contracts placed in trust, as well as the trust management fees charged by our CSV RIA are recorded as Other revenue, as noted in our table of disaggregated revenue in Note 5 to the Consolidated Financial Statements included herein.
Balances due from customers on delivered preneed cemetery contracts are included in Accounts receivable, net and Preneed receivables, net on our Consolidated Balance Sheet. 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 5 to the Consolidated Financial Statements included herein.
We sell memorialization merchandise and personalized marker merchandise, such as urns and markers that are supplied by a small number of national providers. We order the memorialized merchandise through a third-party on behalf of our customer. The merchandise and its memorialization is provided by the third-party. We deliver the merchandise after the time of death to the customer upon completion of the memorialization or we set the merchandise on our cemetery grounds.
Cemetery property was $75.0 million and $75.1 million, net of accumulated amortization of $37.7 million and $40.6 million at December 31, 2018 and September 30, 2019, respectively. 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 $1.0 million for both the three months ended September 30, 2018 and 2019 and $2.8 million and $3.0 million for the nine months ended September 30, 2018 and 2019, respectively.
See Note 5 to the Consolidated Financial Statements included herein for additional information on our revenue.

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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 and stressful times. Package discounts are reflected net in Revenue. 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.
Preneed Funeral and Cemetery Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. We have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheet. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in the majority of our funeral and cemetery trust funds.
We determine whether or not the assets in the preneed trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus on our Consolidated Balance Sheet. There will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
See Notes 6, 7 and 9 to the Consolidated Financial Statements herein for additional information related to our trust funds.
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 $7.9 million at December 31, 2018 and September 30, 2019, respectively. We estimate an allowance for doubtful accounts on these receivables based on our historical experience, which amounted to 2.2% and 2.6% of funeral receivables at December 31, 2018 and September 30, 2019, respectively. In addition, our other funeral receivables not related to funeral services performed were $0.7 million and $0.6 million at December 31, 2018 and September 30, 2019, respectively.
Our cemetery financed receivables totaled $37.2 million and $39.5 million at December 31, 2018 and September 30, 2019, respectively. The unearned finance charges associated with these receivables were $4.6 million and $4.5 million at December 31, 2018 and September 30, 2019, 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

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are 90 days past due or more, which was 4.6% and 4.2% of the total receivables at December 31, 2018 and September 30, 2019, respectively. See Note 7 to the Consolidated Financial Statements included herein for additional information on cemetery financed receivables.
Our cemetery receivables recorded in Accounts Receivable, net also include $1.8 million and $0.1 million related to perpetual care income receivables at December 31, 2018 and September 30, 2019, respectively. See Note 9 to the Consolidated Financial Statements included herein for additional information on our perpetual care trust investments.
Accounts receivable is comprised of the following at December 31, 2018 and September 30, 2019 (in thousands):
 
December 31, 2018
 
September 30, 2019
Funeral receivables, net of allowance for bad debt of $189 and $206, respectively
$
9,002

 
$
8,342

Cemetery receivables, net of allowance for bad debt of $580 and $596, respectively
9,688

 
9,144

Other receivables
207

 
213

Accounts receivable, net
$
18,897

 
$
17,699

Preneed cemetery receivables represent payments expected to be received beyond one year from the balance sheet date. Preneed cemetery receivables, net are comprised of the following at December 31, 2018 and September 30, 2019 (in thousands):
 
December 31, 2018
 
September 30, 2019
Preneed cemetery receivables
$
25,568

 
$
26,618

Less: unearned finance charges
(2,821
)
 
(2,712
)
Less: allowance for bad debt and contract cancellation
(1,228
)
 
(1,225
)
Less: balances due on undelivered cemetery preneed contracts
(3,078
)
 
(3,214
)
Preneed cemetery receivables, net
$
18,441

 
$
19,467

Bad debt expense totaled $0.6 million and $0.5 million for the three months ended September 30, 2018 and 2019, respectively and $1.5 million and $1.2 million for the nine months ended September 30, 2018 and 2019, respectively.
Capitalized Commissions on Preneed Contracts
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. 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 $156,000 and $140,000 for the three months ended September 30, 2018 and 2019, respectively and $449,000 and $417,000 for the nine months ended September 30, 2018 and 2019, respectively.
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 11 to the Consolidated Financial Statements included herein for additional information related to our capitalized commissions on preneed contracts.
Leases
We have operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to nineteen years. Many leases include one or more options to renew, some of which include options to extend the leases for up to 26 years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years. We do not have lease agreements with residual value guarantees, sale-leaseback terms, material restrictive covenants or related parties. We do not have any material sublease arrangements.
We determine if an arrangement is a lease at inception based on the facts and circumstances of the agreement. A right-of-use (“ROU”) asset represents our right to use the underlying asset for the lease term and the lease liability represents our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized on our Consolidated Balance Sheet at the lease commencement date based on the present value of lease payments over the lease term. As our leases do not provide an implicit interest rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The lease terms used to calculate the ROU asset and related lease liability include options to extend the lease when it is reasonably certain that we will exercise that option. Lease expense for operating leases is recognized on a straight-line basis over the lease term as an operating expense, while the expense for finance leases (formerly

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capital leases) is recognized as depreciation expense and interest expense using the accelerated interest method of recognition. Variable lease payment amounts that cannot be determined at the commencement of the lease such as increases in lease payments based on changes in index rates or usage, are not included in the ROU assets or liabilities. These are expensed as incurred and recorded as variable lease expense. We have real estate lease agreements which require payments for lease and non-lease components and account for these as a single lease component. Leases with an initial term of 12 months or less, that do not include an option to renew the underlying asset, are not recorded on our Consolidated Balance Sheet and expense is recognized on a straight-line basis over the lease term.
Operating lease ROU assets are included in Operating lease right-of-use assets and operating lease liabilities are included in Current portion of operating lease obligations and Obligations under operating leases, net of current portion on our Consolidated Balance Sheet. Finance lease ROU assets are included in Property, plant and equipment, net and finance lease liabilities are included in Current portion of finance lease obligations and Obligations under finance leases, net of current portion on our Consolidated Balance Sheet.
See Notes 2 and 15 to the Consolidated Financial Statements included herein for additional information related to our leases.
Property, Plant and Equipment
Property, plant and equipment (including equipment under finance leases ) are stated at cost. The cost 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 finance leases) is computed based on the straight-line method.
Property, plant and equipment is comprised of the following at December 31, 2018 and September 30, 2019 (in thousands):
 
December 31, 2018
 
September 30, 2019
Land
$
81,012

 
$
80,801

Buildings and improvements
223,646

 
226,290

Furniture, equipment and automobiles
81,125

 
84,002

Property, plant and equipment, at cost
385,783

 
391,093

Less: accumulated depreciation
(124,945
)
 
(133,058
)
Property, plant and equipment, net
$
260,838

 
$
258,035

We recorded depreciation expense of $3.6 million and $3.5 million for the three months ended September 30, 2018 and 2019, respectively and $10.3 million and $10.4 million for the nine months ended September 30, 2018 and 2019, respectively.
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 perform our annual goodwill impairment test as of August 31st each year. 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. We conducted qualitative assessments in 2017 and 2018; however, we performed a quantitative assessment in 2019. In addition to our annual test, 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.
Our quantitative goodwill impairment test involves estimates and management judgment. In the quantitative analysis, we compare the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired. We determine fair value for each reporting unit using both an income approach, weighted 90%, and a market approach, weighted 10%. Our methodology for determining an income-based fair value is based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows discounted at our weighted average cost of capital based on market participant assumptions. Our methodology for determining a market approach fair value utilizes the guideline public company method, in which we rely on market multiples of comparable companies operating

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in the same industry as the individual reporting units. In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount an impairment charge is recorded in an amount equal to the difference.
For our 2019 quantitative assessment, there was no impairment to goodwill as the fair value of our reporting units was greater than the carrying value. However, we recorded a goodwill impairment of $0.5 million during the three and nine months ended September 30, 2019 related to a funeral home business (at a leased facility) that we intend to cease operating in the fourth quarter of 2019. No impairments were recorded to our goodwill during the three and nine months ended September 30, 2018.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in Intangible and other non-current assets, net on our Consolidated Balance Sheet. 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 perform our annual intangible assets impairment test as of August 31st each year. 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. We conducted qualitative assessments in 2017 and 2018; however, we performed a quantitative assessment in 2019. In addition to our annual test, 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.
Our quantitative intangible asset impairment test involves estimates and management judgment. Our quantitative analysis is performed using the relief from royalty method, which measures the tradenames by determining the value of the royalties that we are relieved from paying due to our ownership of the asset. We determine the fair value of the asset by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows and the determination and application of an appropriate royalty rate and discount rate. To estimate the royalty rates for the individual tradename, we mainly rely on the profit split method, but also consider the comparable third-party license agreements and the return on asset method. A scorecard is used to assess the relative strength of the individual tradename to further adjust the royalty rates selected under the profit-split method for qualitative factors. In accordance with the guidance, if the fair value of the tradename is less than its carrying amount, then an impairment charge is recorded in an amount equal to the difference.
For our 2019 quantitative assessment, we recorded an impairment for tradenames of $0.2 million for the three and nine months ended September 30, 2019, as the fair value of the tradenames of certain businesses was greater than the carrying value. No impairments were recorded to our intangible assets during the three and nine months ended September 30, 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.
See Note 17 to the Consolidated Financial Statements included herein for additional information related to 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 14 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities.

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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 Sheet.
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.
Income tax expense was $1.2 million and $0.9 million for the three months ended September 30, 2018 and 2019, respectively and $5.1 million and $5.8 million for the nine months ended September 30, 2018 and 2019, respectively.
Below is a breakdown of our income tax expense and effective rate for the three and nine months ended September 30, 2018 and 2019 (in thousands except percentages):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2019
 
2018
 
2019
Income tax expense on operations at estimated rate
$
1,028

 
$
70

 
$
5,423

 
$
4,691

Impact of discrete items
159

 
17

 
(358
)
 
219

Impact of divested business

 
860

 

 
860

Total tax provision
$
1,187

 
$
947

 
$
5,065

 
$
5,770

 
 
 
 
 
 
 
 
Tax rate on operations (including discrete items)
35.0
%
 
5.7
%
 
26.2
%
 
27.7
%
Impact of divested business
%
 
56.4
%
 
%
 
4.8
%
Total effective tax rate
35.0
%
 
62.1
%
 
26.2
%
 
32.5
%
We recorded income taxes before discrete items at an estimated rate of 30.3% and 4.6% for the three months ended September 30, 2018 and 2019, respectively and 28.0% and 26.5% for the nine months ended September 30, 2018 and 2019, respectively. The increase in our total effective tax rate is primarily due to the additional tax expense we recorded related to a divested business previously acquired as a stock acquisition during three and nine months ended September 30, 2019. See Note 4 to the Consolidated Financial Statements included herein, for a discussion of our divested businesses.
Subsequent Events
Management has evaluated the events and transactions during the period subsequent to September 30, 2019 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
See Note 21 to the Consolidated Financial Statements included herein for additional information related to our subsequent events.
2.RECENTLY ISSUED ACCOUNTING STANDARDS
Leases
In February 2016, the Financial Accounting Standards Board (“FASB”) issued an Accounting Standards Update (“ASU”) related to Leases (Topic 842) and subsequent amendments, collectively referred to as (“Topic 842”) to increase transparency and comparability among organizations by requiring the recognition of ROU assets and lease liabilities on the balance sheet for all leases, including operating leases. The ROU asset represents the right to use the underlying asset for the lease term and the lease liability represents the obligation to make lease payments arising from the lease. Finance leases were not impacted by Topic 842, as finance lease liabilities and the corresponding ROU assets were already recorded on the balance sheet under the previous guidance Topic 840, Leases.
On January 1, 2019, we adopted Topic 842 using the modified retrospective method for all lease arrangements at the beginning of the period of adoption. Results for reporting periods beginning January 1, 2019 are presented under Topic 842, while prior period amounts have not been adjusted and continue to be reported in accordance with Topic 840. While Topic 842 had a material impact on our Consolidated Balance Sheet, it did not have an impact on our Consolidated Statements of Operations or Cash Flows, or liquidity measures, such as debt covenant ratios. It also did not have a material impact on our effective tax rate for the reporting

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period. The most significant impact was the recognition of ROU assets and lease liabilities for operating leases. For leases that commenced before the effective date of Topic 842, we elected the permitted practical expedients to not reassess the following: (i) whether any expired or existing contracts contain leases; (ii) the lease classification for any expired or existing leases; and (iii) initial direct costs for any existing leases. We also elected to exclude leases with a term of 12 months or less in the recognized ROU assets and lease liabilities. We have real estate lease agreements which require payments for lease and non-lease components and have elected to account for these as a single lease component. We have elected the short-term lease recognition exemption for all applicable classes of underlying assets.
On January 1, 2019, we recorded operating lease ROU assets of $16.5 million and operating lease liabilities of $17.3 million, related to our real estate and equipment leases, based on the present value of the future lease payments on the date of adoption. Our opening operating lease ROU asset balance included prepaid lease expense and lease incentives on our Consolidated Balance Sheet at December 31, 2018. The cumulative effect of changes made to our opening Consolidated Balance Sheet on January 1, 2019 for the adoption of Topic 842 is as follows (in thousands):
 
December 31, 2018
 
Effect of Adoption of
Topic 842
 
January 1, 2019
Assets
 
 
 
 
 
Prepaid expenses
$
1,456

 
$
(148
)
 
$
1,308

Operating lease right-of-use assets

 
16,470

 
16,470

 
 
 
$
16,322

 
 
Liabilities
 
 
 
 
 
Accrued and other liabilities
$
22,644

 
$
(274
)
 
$
22,370

Other long-term liabilities
3,133

 
(692
)
 
2,441

Current portion of operating lease obligations

 
2,633

 
2,633

Obligations under operating leases, net of current portion

 
14,655

 
14,655

 
 
 
$
16,322

 
 
See Note 15 to the Consolidated Financial Statements included herein for the additional disclosures required by Topic 842.
We have no material leases in which we are the lessor.
Accounting Pronouncements Not Yet Adopted
Financial Instruments - Credit Losses
In June 2016, the FASB issued ASU, Financial Instruments – Credit Losses: Measurement of Credit Losses on Financial Instruments and subsequent amendments collectively known as (Topic 326). This ASU applies to all entities holding financial assets measured at amortized cost, including loans, trade and financed receivables and other financial instruments. The guidance introduces a new credit reserving model known as Current Expected Credit Loss (“CECL”), which requires earlier recognition of credit losses, while also providing additional transparency about credit risk. The CECL model utilizes a lifetime expected credit loss measurement objective for the recognition of credit losses at the time the financial asset is originated or acquired. The CECL model requires all expected credit losses to be measured based on historical experience, current conditions and reasonable and supportable forecasts about collectability.
This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2020 using the modified retrospective approach.
We are in the process of implementing changes to our accounting policies and procedures for this ASU and believe the most notable impact will relate to our processes around the assessment of the adequacy of our allowance for doubtful accounts on trade receivables and the allowance for contract cancellations on financed receivables and the recognition of credit losses. We do not expect the adoption of this ASU to have a material impact on our consolidated financial statements.
In addition, for available-for-sale debt securities, the new guidance prospectively replaces the other-than-temporary impairment model and requires the recognition of an allowance for reductions in a security's fair value attributable to declines in credit quality, instead of a direct write-down of the security, when a valuation decline is determined to be other-than-temporary. We do not expect the impact of the new guidance on available-for-sale securities to be material to our consolidated financial statements upon adoption.

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3.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, which 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 Sheet for the year ended December 31, 2018 and period ended September 30, 2019 (in thousands):
 
December 31, 2018
 
September 30, 2019
Goodwill at the beginning of the period
$
287,956

 
$
303,887

Increase in goodwill related to acquisitions
16,777

 

Decrease in goodwill related to divestitures

 
(4,197
)
Decrease in goodwill related to impairments
(846
)
 
(509
)
Goodwill at the end of the period
$
303,887

 
$
299,181

During the three months ended September 30, 2019, we sold a funeral home business with a $4.2 million carrying value of goodwill for a loss recorded in Other, net. See Note 4 to the Consolidated Financial Statements included herein, for a discussion of our divested businesses.
We also recorded a goodwill impairment of $0.5 million in Other, net, related to a funeral home business (at a leased facility) that we intend to cease operating in the fourth quarter of 2019.
4.DIVESTED OPERATIONS
During 2019, we ceased to operate a funeral home business whose lease expired and sold a funeral home business for $0.9 million. In addition, we merged a funeral home business with a business in an existing market. During 2018, our management agreement with a Florida municipality expired and, as a result, we ceased to operate three of our cemetery businesses. We continually review locations to optimize the sustainable earning power and return on our invested capital. We may decide to sell certain non-strategic businesses as a result of these reviews.
The operating results of these divested businesses are reflected in our Consolidated Statements of Operations as shown in the table below (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2019
 
2018
 
2019
Revenue
$
1,478

 
$
108

 
$
4,712

 
$
471

 
 
 
 
 
 
 
 
Operating income (loss)
345

 
(31
)
 
1,130

 
4

Other, net(1)
(349
)
 
(3,863
)
 
(349
)
 
(3,874
)
Income tax benefit (provision)
1

 
1,149

 
(219
)
 
1,211

Net income (loss) from divested operations
$
(3
)
 
$
(2,745
)
 
$
562

 
$
(2,659
)
 
 
 
(1)
Reflects the net loss on disposal of divested businesses.

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5.REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenue
Our operations are reported in two business segments: Funeral Home Operations and Cemetery Operations. Revenue, disaggregated by major source for each of our reportable segments is as follows (in thousands):
Three Months Ended September 30, 2019
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
31,400

 
$
2,733

 
$
34,133

Merchandise
 
17,918

 
2,060

 
19,978

Cemetery property
 

 
8,024

 
8,024

Other revenue
 
2,199

 
1,791

 
3,990

Total
 
$
51,517

 
$
14,608

 
$
66,125

Three Months Ended September 30, 2018
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
30,231

 
$
2,774

 
$
33,005

Merchandise
 
17,525

 
2,064

 
19,589

Cemetery property
 

 
7,435

 
7,435

Other revenue
 
2,087

 
2,125

 
4,212

Total
 
$
49,843

 
$
14,398

 
$
64,241

Nine Months Ended September 30, 2019
 
 
 
 
 
 
 
 
Funeral
 
Cemetery
 
Total
Services
 
$
97,308

 
$
8,136

 
$
105,444

Merchandise
 
56,261

 
5,791

 
62,052

Cemetery property
 

 
23,406

 
23,406

Other revenue
 
6,618

 
5,438

 
12,056

Total
 
$
160,187

 
$
42,771

 
$
202,958

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

 
$
8,850

 
$
103,668

Merchandise
 
55,539

 
6,386

 
61,925

Cemetery property
 

 
22,808

 
22,808

Other revenue
 
6,612

 
6,462

 
13,074

Total
 
$
156,969

 
$
44,506

 
$
201,475


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Deferred Revenue
Deferred revenue is presented net of amounts due on undelivered preneed contracts shown below as of December 31, 2018 and September 30, 2019 (in thousands):
 
December 31, 2018
 
September 30, 2019
Contract liabilities:
 
 
 
Deferred preneed cemetery revenue
$
50,445

 
$
49,903

Less: Balances due on undelivered cemetery preneed contracts(1)
(4,448
)
 
(4,708
)
Deferred preneed cemetery revenue, net
$
45,997

 
$
45,195

 
 
 
 
Deferred preneed funeral revenue
$
36,912

 
$
37,973

Less: Balances due on undelivered funeral preneed contracts(2)
(8,306
)
 
(8,451
)
Deferred preneed funeral revenue, net
$
28,606

 
$
29,522

 
 
 
 
 
(1)
$1.4 million and $1.5 million of cemetery accounts receivables have been reclassified to reduce deferred preneed cemetery revenue at December 31, 2018 and September 30, 2019, respectively and $3.1 million and $3.2 million of preneed cemetery receivables have been reclassified to reduce deferred preneed cemetery revenue at December 31, 2018 and September 30, 2019, respectively.
(2)
$8.3 million and $8.5 million of preneed funeral receivables have been reclassified to reduce deferred preneed funeral revenue at December 31, 2018 and September 30, 2019, 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 December 31, 2018 and September 30, 2019 was $4.4 million and $4.7 million for preneed cemetery contracts and $8.3 million and $8.5 million for preneed funeral contracts, respectively. 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.
6.
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 Sheet at December 31, 2018 and September 30, 2019 are as follows (in thousands):
 
December 31, 2018
 
September 30, 2019
Preneed cemetery trust investments, at market value
$
64,549

 
$
70,503

Less: allowance for contract cancellation
(2,117
)
 
(2,170
)
Preneed cemetery trust investments, net
$
62,432

 
$
68,333

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, 2019, 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

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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, 2019. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 10 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, 2019 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
 
$
7,657

 
$

 
$

 
$
7,657

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
6,380

 
125

 
(471
)
 
6,034

Corporate debt
2
 
17,404

 
812

 
(660
)
 
17,556

Preferred stock
2
 
13,193

 
1,000

 
(137
)
 
14,056

Mortgage-backed securities
2
 
567

 

 
(210
)
 
357

Common stock
1
 
25,679

 
1,169

 
(4,231
)
 
22,617

Mutual funds:
 
 
 
 
 
 
 
 
 
Fixed Income
2
 
1,462

 
36

 
(69
)
 
1,429

Trust securities
 
 
$
72,342

 
$
3,142

 
$
(5,778
)
 
$
69,706

Accrued investment income
 
 
$
797

 
 
 
 
 
$
797

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
70,503

Market value as a percentage of cost
 
 
 
 
 
 
 
 
96.4
%
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
2,582

Due in five to ten years
12,924

Thereafter
22,497

Total
$
38,003

The cost and fair market values associated with preneed cemetery trust investments at December 31, 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
 
$
16,194

 
$

 
$

 
$
16,194

Fixed income securities:
 
 
 
 
 
 
 
 
 
Foreign debt
2
 
3,802

 
43

 
(511
)
 
3,334

Corporate debt
2
 
13,987

 
362

 
(1,026
)
 
13,323

Preferred stock
2
 
11,068

 
54

 
(1,146
)
 
9,976

Mortgage-backed securities
2
 
666

 
161

 
(14
)
 
813

Common stock
1
 
24,867

 
903

 
(5,436
)
 
20,334

Trust securities
 
 
$
70,584

 
$
1,523

 
$
(8,133
)
 
$
63,974

Accrued investment income
 
 
$
575

 
 
 
 
 
$
575

Preneed cemetery trust investments
 
 
 
 
 
 
 
 
$
64,549

Market value as a percentage of cost
 
 
 
 
 
 
 
 
90.6
%
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 has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be

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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 Sheet. In the three and nine months ended September 30, 2018 and 2019, 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, 2019, 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, 2019 are shown in the following table (in thousands):
 
September 30, 2019
 
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
$
1,824

 
$
(130
)
 
$
1,057

 
$
(341
)
 
$
2,881

 
$
(471
)
Corporate debt
3,465

 
(434
)
 
4,777

 
(226
)
 
8,242

 
(660
)
Preferred stock
2,282

 
(26
)
 
2,477

 
(111
)
 
4,759

 
(137
)
Mortgage-backed securities

 

 
357

 
(210
)
 
357

 
(210
)
Common stock
12,130

 
(2,791
)
 
2,970

 
(1,440
)
 
15,100

 
(4,231
)
Mutual Funds:
 
 
 
 
 
 
 
 
 
 
 
Fixed Income
662

 
(69
)
 

 

 
662

 
(69
)
Total temporary impaired securities
$
20,363

 
$
(3,450
)
 
$
11,638

 
$
(2,328
)
 
$
32,001

 
$
(5,778
)
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2018 are shown in the following table (in thousands):
 
December 31, 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
$
2,140

 
$
(245
)
 
$
895

 
$
(266
)
 
$
3,035

 
$
(511
)
Corporate debt
9,918

 
(813
)
 
443

 
(213
)
 
10,361

 
(1,026
)
Preferred stock
5,253

 
(399
)
 
3,767

 
(747
)
 
9,020

 
(1,146
)
Mortgage-backed securities

 

 
51

 
(14
)
 
51

 
(14
)
Common stock
14,191

 
(4,012
)
 
1,190

 
(1,424
)
 
15,381

 
(5,436
)
Total temporary impaired securities
$
31,502

 
$
(5,469
)
 
$
6,346

 
$
(2,664
)
 
$
37,848

 
$
(8,133
)

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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, 2018 and 2019 are as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2019
 
2018
 
2019
Investment income
$
315

 
$
323

 
$
1,214

 
$
1,308

Realized gains
1,376

 
1,180

 
2,247

 
5,001

Realized losses
(1,141
)
 
(1,527
)
 
(2,498
)
 
(3,163
)
Expenses and taxes
(365
)
 
(396
)
 
(637
)
 
(1,081
)
Net change in deferred preneed cemetery receipts held in trust
(185
)
 
420

 
(326
)
 
(2,065
)
 
$

 
$

 
$

 
$

Purchases and sales of investments in the preneed cemetery trusts for the three and nine months ended September 30, 2018 and 2019 are as follows (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2018
 
2019
 
2018
 
2019
Purchases
$
(8,165
)
 
$
(13,488
)
 
$
(18,423
)
 
$
(33,299
)
Sales
8,878

 
11,672

 
22,776

 
24,690

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 Sheet at December 31, 2018 and September 30, 2019 are as follows (in thousands):
 
December 31, 2018
 
September 30, 2019
Preneed funeral trust investments, at market value
$
84,803

 
$
89,802

Less: allowance for contract cancellation
(2,729
)
 
(2,743
)
Preneed funeral trust investments, net
$
82,074

 
$