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~~June 30, ~~2017~~2019


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, or 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 20, 2017~~July 26, 2019 was ~~16,085,750.~~17,812,238.

CARRIAGE SERVICES, INC.

INDEX



	Page
PART I – FINANCIAL INFORMATION

Item 1. Financial Statements	3

Consolidated Balance ~~Sheets~~Sheet as of December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017~~2019	3

Consolidated Statements of Operations for the Three and ~~Nine~~Six Months ended ~~September~~June 30, ~~2016~~2018 and ~~2017~~2019	4

Consolidated Statements of Cash Flows for the ~~Nine~~Six Months ended ~~September~~June 30, ~~2016~~2018 and ~~2017~~2019	5

Consolidated Statements of Changes in Stockholders' Equity for the Six Months ended June 30, 2018 and 2019	6

Condensed Notes to Consolidated Financial Statements	68

Cautionary Statement on Forward–Looking Statements	3038

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3239

Item 3. Quantitative and Qualitative Disclosures About Market Risk	4553

Item 4. Controls and Procedures	4654

PART II – OTHER INFORMATION

Item 1. Legal Proceedings	4755

Item 1A. Risk Factors	4755

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	4755

Item 3. Defaults Upon Senior Securities	4755

Item 4. Mine Safety Disclosures	4755

Item 5. Other Information	4755

Item 6. Exhibits	4755

SIGNATURE	4856

INDEX OF EXHIBITS	4957

PART I – FINANCIAL INFORMATION


Item 1.	Financial Statements.

CARRIAGE SERVICES, INC.

CONSOLIDATED BALANCE ~~SHEETS~~SHEET

(in thousands, except share data)


				(unaudited)						(unaudited)
	December 31, 2016			September 30, 2017			December 31, 2018			June 30, 2019
ASSETS
Current assets:
Cash and cash equivalents	$	3,286		$	759		$	644		$	685
Accounts receivable, net of allowance for bad debts of $746 in 2016 and $800 in 2017	18,860			18,821
Accounts receivable, net							18,897			16,794
Inventories	6,147			6,346			6,751			6,756
Prepaid expenses	2,640			1,355
Other current assets	2,034			764
Prepaid and other current assets							3,011			1,412
Total current assets	32,967			28,045			29,303			25,647
Preneed cemetery trust investments	69,696			71,728			62,432			69,970
Preneed funeral trust investments	89,240			89,444			82,074			88,696
Preneed receivables, net of allowance for bad debts of $2,166 in 2016 and $2,230 in 2017	30,383			31,279
Preneed receivables, net							18,441			19,458
Receivables from preneed trusts	14,218			15,306			17,073			17,654
Property, plant and equipment, net of accumulated depreciation of $110,509 in 2016 and $113,616 in 2017	235,113			235,501
Cemetery property, net of accumulated amortization of $34,194 in 2016 and $36,638 in 2017	76,119			76,961
Property, plant and equipment, net							260,838			259,835
Cemetery property, net							74,958			75,427
Goodwill	275,487			275,487			303,887			303,887
Intangible and other non-current assets	14,957			14,616
Intangible and other non-current assets, net							24,425			24,360
Operating lease right-of-use assets							—			23,485
Cemetery perpetual care trust investments	46,889			48,679			44,071			48,969
Total assets	$	885,069		$	887,046		$	917,502		$	957,388
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and capital lease obligations	$	13,267		$	16,323
Current portion of long-term debt							$	2,015		$	1,895
Current portion of finance lease obligations							312			284
Current portion of operating lease obligations							—			1,541
Accounts payable	10,198			6,686			9,987			6,831
Other liabilities	717			1,811
Accrued liabilities	20,091			15,294
Accrued and other liabilities							22,644			21,916
Total current liabilities	44,273			40,114			34,958			32,467
Long-term debt, net of current portion	137,862			125,442			6,925			6,307
Revolving credit facility	66,542			74,550
Credit facility							26,145			23,753
Convertible subordinated notes due 2021	119,596			123,182			5,732			5,835
Obligations under capital leases, net of current portion	2,630			2,492
Senior notes due 2026							319,108			319,418
Obligations under finance leases, net of current portion							6,143			5,999
Obligations under operating leases, net of current portion							—			22,673
Deferred preneed cemetery revenue	54,631			55,275			45,997			45,540
Deferred preneed funeral revenue	33,198			34,652			28,606			29,236
Deferred tax liability	42,810			44,025			31,263			32,572
Other long-term liabilities	2,567			2,723			3,133			1,920
Deferred preneed cemetery receipts held in trust	69,696			71,728			62,432			69,970
Deferred preneed funeral receipts held in trust	89,240			89,444			82,074			88,696
Care trusts’ corpus	46,290			48,186			43,494			48,442
Total liabilities	709,335			711,813			696,010			732,828
Commitments and contingencies:
Stockholders’ equity:
Common stock, $.01 par value; 80,000,000 shares authorized and 22,490,855 and 22,609,120 shares issued at December 31, 2016 and September 30, 2017, respectively	225			226
Common stock, $.01 par value; 80,000,000 shares authorized and 25,703,490 and 25,837,577 shares issued at December 31, 2018 and June 30, 2019, respectively							257			258
Additional paid-in capital	215,064			216,396			243,849			243,285
Retained earnings	20,711			35,243			71,680			83,067
Treasury stock, at cost; 5,849,316 and 6,523,370 shares at December 31, 2016 and September 30, 2017, respectively	(60,266		)	(76,632		)
Treasury stock, at cost; 7,625,339 and 8,025,339 at December 31, 2018 and June 30, 2019, respectively							(94,294		)	(102,050		)
Total stockholders’ equity	175,734			175,233			221,492			224,560
Total liabilities and stockholders’ equity	$	885,069		$	887,046		$	917,502		$	957,388

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

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands, except per share data)


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017			2018			2019			2018			2019
Revenues:
Funeral	$	45,183		$	47,329		$	140,952		$	150,279
Cemetery	14,957			13,725			44,384			42,784
Revenue:
Service revenue													$	31,972		$	34,659		$	70,657		$	71,311
Property and merchandise revenue													27,531			28,877			57,715			57,456
Other revenue													4,344			4,216			8,862			8,066
	60,140			61,054			185,336			193,063			63,847			67,752			137,234			136,833
Field costs and expenses:
Funeral	26,982			29,267			82,546			89,118
Cemetery	8,695			8,769			25,546			26,142
Depreciation and amortization	3,452			3,601			10,359			10,719
Cost of service													17,329			17,955			35,946			36,052
Cost of merchandise													22,168			22,311			45,291			44,572
Cemetery property amortization													891			1,169			1,799			2,018
Field depreciation expense													3,013			3,059			5,878			6,144
Regional and unallocated funeral and cemetery costs	2,783			3,937			8,547			9,845			3,267			3,622			6,548			6,411
Other expenses													354			386			759			786
	41,912			45,574			126,998			135,824			47,022			48,502			96,221			95,983
Gross profit	18,228			15,480			58,338			57,239			16,825			19,250			41,013			40,850
Corporate costs and expenses:
General, administrative and other	6,130			6,134			21,208			19,549			6,380			5,692			12,998			11,304
Home office depreciation and amortization	355			401			1,139			1,155			464			369			907			758
	6,485			6,535			22,347			20,704			6,844			6,061			13,905			12,062
Operating income	11,743			8,945			35,991			36,535			9,981			13,189			27,108			28,788
Interest expense	(2,903		)	(3,282		)	(8,722		)	(9,517		)	(4,743		)	(6,296		)	(8,478		)	(12,624		)
Accretion of discount on convertible subordinated notes	(981		)	(1,097		)	(2,862		)	(3,200		)	(555		)	(60		)	(1,715		)	(117		)
Loss on early extinguishment of debt	—			—			(567		)	—
Net loss on early extinguishment of debt													(936		)	—			(936		)	—
Other, net	(285		)	(6		)	20			(3		)	—			175			2			162
Income before income taxes	7,574			4,560			23,860			23,815			3,747			7,008			15,981			16,209
Provision for income taxes	(3,030		)	(1,824		)	(9,545		)	(9,526		)	(1,030		)	(2,043		)	(4,395		)	(4,620		)
Tax adjustment related to certain discrete items	1,139			302			1,139			243			30			(103		)	517			(202		)
Total provision for income taxes	$	(1,891	)	$	(1,522	)	$	(8,406	)	$	(9,283	)	(1,000		)	(2,146		)	(3,878		)	(4,822		)
Net income	$	5,683		$	3,038		$	15,454		$	14,532		$	2,747		$	4,862		$	12,103		$	11,387

Basic earnings per common share:	$	0.34		$	0.18		$	0.93		$	0.87		$	0.15		$	0.27		$	0.71		$	0.63
Diluted earnings per common share:	$	0.33		$	0.17		$	0.91		$	0.81		$	0.15		$	0.27		$	0.67		$	0.63

Dividends declared per common share	$	0.050		$	0.050		$	0.100		$	0.150
Dividends declared per common share:													$	0.075		$	0.075		$	0.150		$	0.150

Weighted average number of common and common equivalent shares outstanding:
Basic	16,529			16,476			16,502			16,575			17,916			17,959			17,010			18,008
Diluted	17,101			17,598			16,962			17,887			18,245			17,988			17,924			18,043

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

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited and in thousands)


	For the Nine Months Ended September 30,						Six Months Ended June 30,
	2016			2017			2018			2019
Cash flows from operating activities:
Net income	$	15,454		$	14,532		$	12,103		$	11,387
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	11,498			11,874			8,584			8,920
Provision for losses on accounts receivable	1,522			1,737			883			724
Stock-based compensation expense	2,645			2,394			2,009			1,103
Deferred income tax expense	3,618			1,215			2,044			1,309
Amortization of deferred financing costs	622			614			320			189
Amortization of capitalized commissions on preneed contracts							293			277
Accretion of discount on convertible subordinated notes	2,862			3,200			1,715			117
Loss on early extinguishment of debt	567			—
Amortization of debt discount on senior notes							38			242
Net loss on early extinguishment of debt							936			—
Net loss on sale and disposal of other assets	186			341			45			168
Impairment of intangible assets	145			—
Other							145			121

Changes in operating assets and liabilities that provided (required) cash:
Changes in operating assets and liabilities that provided (used) cash:
Accounts and preneed receivables	(3,945		)	(2,594		)	(779		)	(1,116		)
Inventories and other current assets	682			2,356
Inventories, prepaid and other current assets							(1,139		)	1,446
Intangible and other non-current assets	386			340			(102		)	(212		)
Preneed funeral and cemetery trust investments	(4,828		)	(5,114		)	(5,986		)	(5,033		)
Accounts payable	(2,149		)	(3,510		)	(758		)	(3,156		)
Accrued and other liabilities	292			(2,790		)	(964		)	61
Deferred preneed funeral and cemetery revenue	742			2,098			2,007			863
Deferred preneed funeral and cemetery receipts held in trust	4,541			4,132			4,887			4,502
Net cash provided by operating activities	34,840			30,825			26,281			21,912

Cash flows from investing activities:
Acquisitions and land for new construction	(15,056		)	(723		)
Purchase of land and buildings previously leased	(6,258		)	—
Net proceeds from the sale of other assets	955			405			—			100
Capital expenditures	(12,039		)	(13,129		)	(5,080		)	(8,654		)
Net cash used in investing activities	(32,398		)	(13,447		)	(5,080		)	(8,554		)

Cash flows from financing activities:
Borrowings from the revolving credit facility	45,500			75,100
Payments against the revolving credit facility	(74,800		)	(67,300		)
Borrowings from the term loan	39,063			—
Payments against the term loan	(8,438		)	(8,438		)	(127,500		)	—
Payments on other long-term debt and obligations under capital leases	(987		)	(1,084		)
Borrowings from the credit facility							96,000			23,300
Payments against the credit facility							(188,000		)	(25,800		)
Payment of debt issuance costs related to long-term debt							(1,551		)	—
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							(828		)	(910		)
Payments on contingent consideration recorded at acquisition date	—			(101		)	(138		)	(162		)
Proceeds from the exercise of stock options and employee stock purchase plan contributions	686			1,296			846			942
Taxes paid on restricted stock vestings and exercise of non-qualified options	(560		)	(509		)	(495		)	(179		)
Dividends paid on common stock	(1,662		)	(2,503		)	(2,640		)	(2,725		)
Purchase of treasury stock	—			(16,366		)	—			(7,756		)
Payment of loan origination costs related to the credit facility	(717		)	—
Excess tax deficiency of equity compensation	(207		)	—
Net cash used in financing activities	(2,122		)	(19,905		)
Net cash provided by (used in) financing activities							18,378			(13,317		)

Net increase (decrease) in cash and cash equivalents	320			(2,527		)
Net increase in cash and cash equivalents							39,579			41
Cash and cash equivalents at beginning of period	535			3,286			952			644
Cash and cash equivalents at end of period	$	855		$	759		$	40,531		$	685

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

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

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

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

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 ~~deathcare~~funeral and cemetery services and ~~merchandise in the United States.~~merchandise. As of ~~September~~June 30, ~~2017,~~2019, we operated ~~171~~181 funeral homes in 2829 states and 3229 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.~~ 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~~containers. We market funeral and cemetery services and products on both on an ~~at-need~~“atneed” (time of death) and ~~preneed~~“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, ~~2016~~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, ~~revenues~~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 ~~revenues~~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 ~~and Cemetery~~Home Operations

~~We record the~~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 ~~cemetery~~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 ~~when~~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 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 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. ~~Cemetery interment rights~~The principal and accumulated earnings of the trusts are ~~recorded as revenue~~withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in ~~accordance with~~insurance benefits on the ~~accounting provisions for real estate sales. This method provides for~~insurance products are recognized when the ~~recognition of revenue~~service is performed. The amounts deposited in trusts that we control are included in the ~~period in which the customer’s cumulative payments exceed 10%~~non-current asset section of ~~the interment right contract price. Interment right costs, which include real property and other costs related~~our Consolidated Balance Sheet. Balances due on undelivered preneed funeral trust contracts have been reclassified to ~~cemetery development, are expensed using the specific identification method in the period in which the sale of the interment right is recognized~~reduce Deferred preneed funeral revenue on our Consolidated Balance Sheet, as revenue. We recorded amortization expense for cemetery property of approximately $0.9 million for both the three months ended September 30, 2016 and 2017 and $3.1 million and $2.4 million for the nine months ended September 30, 2016 and 2017, respectively. Sales taxes collected are recognized on a net basisnoted in our table of Deferred Revenue in Note 3 to the Consolidated Financial ~~Statements.~~Statements included herein.

~~Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized~~The earnings from our preneed funeral trust investments, as ~~revenue and are based on our historical experience. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.~~

~~When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized~~well as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costs are expensed when incurred.

~~Trust~~trust management fees ~~are earned by us for investment management and advisory services that are provided~~charged by our wholly-owned registered investment ~~advisor~~advisory firm (“CSV RIA”). are recorded as Other revenue, as noted in our table of disaggregated revenue in Note 3 to the Consolidated Financial Statements included herein. As of ~~September~~June 30, ~~2017,~~2019, CSV RIA provided these services to ~~two institutions,~~one institution, which ~~have~~has custody of ~~79%~~approximately 77% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.

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 3 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 June 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

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 3 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 3 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 3 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 $75.4 million, net of accumulated amortization of $37.7 million and $39.7 million at December 31, 2018 and June 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 $0.9 million and $1.2 million for the three months ended June 30, 2018 and 2019, respectively and $1.8 million and $2.0 million for the six months ended June 30, 2018 and 2019, respectively.

See Note 3 to the Consolidated Financial Statements included herein for additional information on our revenue.

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 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 4, 5 and 7 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 was $8.5 million and $7.8 million at December 31, 2018 and June 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 June 30, 2019, respectively. In addition, our other funeral receivables not related to funeral services performed were $0.7 million and $0.5 million at December 31, 2018 and June 30, 2019, respectively.

Our cemetery financed receivables totaled $37.2 million and $38.8 million at December 31, 2018 and June 30, 2019, respectively. The unearned finance charges associated with these receivables were $4.6 million and $4.7 million at December 31, 2018 and June 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 are 90 days past due or more, which was approximately 4.6% and 3.9% of the total receivables at December 31, 2018 and June 30,

2019, respectively. See Note 5 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 related to perpetual care income receivables at December 31, 2018. There were no receivables related to perpetual care income at June 30, 2019. See Note 7 to the Consolidated Financial Statements included herein for additional information on our perpetual care trust investments.

Accounts receivable ~~was~~is comprised of the following at December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017~~2019 (in thousands):


	December 31, 2016		September 30, 2017		December 31, 2018		June 30, 2019
Funeral receivables, net of allowance for bad debt of $189 and $197, respectively	$	8,664	$	7,865
Cemetery receivables, net of allowance for bad debt of $557 and $603, respectively	9,862		10,552
Funeral receivables, net of allowance for bad debt of $189 and $205, respectively					$	9,002	$	8,118
Cemetery receivables, net of allowance for bad debt of $580 and $554, respectively					9,688		8,453
Other receivables	334		404		207		223
Accounts receivable, net	$	18,860	$	18,821	$	18,897	$	16,794

~~Non-current preneed~~Cemetery receivables recorded in Preneed Receivables, net represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables, ~~were~~net are comprised of the following at December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017~~2019 (in thousands):

December 31, 2016 September 30, 2017
Funeral receivables, net of allowance for bad debt of $862 and $883, respectively $ 7,761
$ 7,943
Cemetery receivables, net of allowance for bad debt of $1,304 and $1,347, respectively 22,622
23,336
Preneed receivable, net $ 30,383
$ 31,279



	December 31, 2018			June 30, 2019
Cemetery preneed receivables	$	25,568		$	26,477
Less: unearned finance charges	(2,821		)	(2,811		)
Less: allowance for bad debt and contract cancellation	(1,228		)	(1,138		)
Less: balances due on undelivered cemetery preneed contracts	(3,078		)	(3,070		)
Preneed receivables, net	$	18,441		$	19,458

Bad debt expense totaled ~~approximately $0.5~~$0.4 million for both the three months ended June 30, 2018 and 2019 and $0.9 million and ~~$0.6~~$0.7 million for the six months ended June 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 approximately $144,000 and $139,000 for the three months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively and ~~$1.5 million~~$293,000 and ~~$1.7 million~~$277,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~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 9 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

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 13 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 ~~capital leases)~~finance leases ) are stated at cost. The ~~costs~~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 ~~capital~~finance leases) is computed based on the straight-line method.

Property, plant and equipment ~~was~~is comprised of the following at December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017~~2019 (in thousands):


	December 31, 2016			September 30, 2017			December 31, 2018			June 30, 2019
Land	$	73,744		$	73,503		$	81,012		$	80,901
Buildings and improvements	195,214			201,444			223,646			227,080
Furniture, equipment and automobiles	76,664			74,170			81,125			83,072
Property, plant and equipment, at cost	345,622			349,117			385,783			391,053
Less: accumulated depreciation	(110,509		)	(113,616		)	(124,945		)	(131,218		)
Property, plant and equipment, net	$	235,113		$	235,501		$	260,838		$	259,835

We recorded depreciation expense of approximately ~~$2.9~~$3.5 million and ~~$3.1~~$3.4 million for the three months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively and ~~$8.4~~approximately $6.8 million and ~~$9.4~~$6.9 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively. During the nine months ended September 30, 2017, we acquired real estate for $0.7 million for funeral home parking lot expansion projects. During the nine months ended September 30, 2016, we acquired real estate for $2.7 million for various funeral home expansion projects and we purchased land and buildings at four funeral homes that were previously leased for approximately $6.3 million.

Goodwill

~~Effective January 1, 2017, we adopted~~The excess of the ~~Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”),~~ ~~Intangibles (Topic 350): Goodwill and Other.~~ ~~The guidance simplifies subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for~~

~~impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning~~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 reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill.

~~We performed our 2017 annual~~quantitative impairment test ofat 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 ~~using information~~impairment test as of August 31 ~~2017.~~^st 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. For our ~~2017~~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 ~~not an~~no impairment to goodwill.

For our 2016 annual impairment test, we performed a quantitative impairment test. Our intent is to perform the quantitative test at least once every three years unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, for a discussion of the methodology used for the quantitative goodwill impairment ~~quantitative~~ 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 ~~nine~~three and six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017.~~2019.

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 ~~Sheets.~~Sheet. Our tradenames are considered to have an indefinite life and are not subject to amortization.

~~We performed~~ As such, we test our ~~2017~~intangible assets for impairment on an annual basis. Our intent is to perform a quantitative impairment test ofat 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 ~~using information~~impairment test as of August 31 ~~2017.~~^st each year. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the ~~indefinite-lived intangible asset and~~tradename is less than its carrying amount as a basis for determining whether it is necessary to perform ~~the~~a quantitative impairment ~~test by comparing the fair value with the carrying amount in accordance with the guidance.~~test. For our ~~2017~~2018 annual impairment test, we performed a qualitative assessment and ~~concluded~~determined that there ~~was not an impairment~~were no factors that would indicate the need to ~~intangibles assets.~~

~~For our 2016 annual impairment test, we performed~~perform a quantitative impairment ~~test. Our intent~~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 ~~perform the quantitative test at least once every three years unless certain indicators or events suggest otherwise.~~ 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, ~~2016,~~2018, for a discussion of the methodology used for the quantitative intangibles impairment ~~quantitative~~ 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. ~~During the third quarter of 2016, we recorded an impairment to tradenames of $145,000 related to a funeral home business held for sale as the carrying value exceeded fair value.~~ No ~~other~~ impairments were recorded to our intangible assets during the ~~nine~~three and six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017.~~2019.

Stock Plans and Stock-Based Compensation

We have stock-based employee and director compensation plans under which we grant restricted stock, stock options and performance awards. We also have an employee stock purchase plan ~~(“ESPP”~~(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.

~~Effective January 1, 2017, we adopted the FASB’s ASU,~~ ~~Compensation: (Topic 718): Stock Compensation~~. The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.

The guidance requires that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. Entities are required to record a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the beginning of the annual period of adoption, with a cumulative-effect adjustment to retained earnings. At January 1, 2017, we performed an analysis for unrecognized excess tax benefits and deficiencies and determined that there were no adjustments to retained earnings, as there are no unrecognized excess tax benefits.

The guidance also requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement on a prospective basis. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. For the three and nine months ended September 30, 2017, the excess tax deficiency related to share-based payments was approximately $70,000, recorded within ~~Tax adjustment related to certain discrete items~~ on our Consolidated Statements of Operations. In addition, excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows.

The guidance also allows for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.

The guidance also requires that the presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and applied retrospectively. This resulted in $0.6 million of employee taxes paid from withheld shares being presented as financing activities on our Consolidated Statement of Cash Flows for both the nine months ended September 30, 2016 and 2017. Prior to January 1, 2017, these amounts were presented as operating activities on our Consolidated Statement of Cash Flows.

~~We adopted all of the provisions of this amendment in accordance with the transition requirements and it did not have a material effect on our Consolidated Financial Statements.~~

See Note 1115 to the Consolidated Financial Statements included herein for additional information onrelated 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 1314 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.~~

On July 18, 2017, we received notification that the Internal Revenue Service (“IRS”) selected our tax years ended December 31, 2013, 2014 and 2015 for examination. The examination of our tax year ended December 31, 2013 had previously been completed during 2016, however, we filed an amendment on June 1, 2017. The examination related to 2013 should be limited in scope to the items revised in the amendment, which include research and development credits, state taxes and preneed cost of sales.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 ~~the~~ 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 ~~$1.9~~$1.0 million and $2.1 million for the three months ended ~~September~~June 30, ~~2016 compared to $1.5~~2018 and 2019, respectively and $3.9 million and $4.8 million for the ~~three~~six months ended ~~September~~June 30, ~~2017.~~ 2018 and 2019, respectively.

We recorded income taxes at the estimated effective rate, before discrete items, of ~~40.0%~~27.5% for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017. Income~~29.2% and 28.5% for the three and six months ended June 30, 2019, respectively. 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 ~~was $8.4 million for the nine months ended September 30, 2016 compared~~related to ~~$9.3 million for the nine months ended September 30, 2017.~~

~~During the third quarter of 2017, we recognized a tax benefit of $0.2 million which reduced our effective~~state tax rate to 39.0% for the nine months ended September 30, 2017. During the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016.

~~Correction of Immaterial Error~~

~~During the nine months ended September 30, 2017, we corrected an immaterial error related to 2013. The adjustment related to the correction of the deferred tax liability for the difference in book~~changes and tax basis of certain assets. The error had the impact of understating the deferred tax liability and overstating net income in 2013. Management evaluated the effect of the adjustment on previously issued interim and annual consolidated financial statements in accordance with the SEC's Staff Accounting Bulletin (“SAB”) No. 99 and SAB 108 and concluded that it was immaterial to the interim and annual periods. As a result, in accordance with SAB No. 108, we corrected our Consolidated Balance Sheets as of January 1, 2015.

~~The effect of this adjustment on our Consolidated Balance Sheets as of December 31, 2016 is as follows (dollars in thousands):~~

% Change
Increase in Deferred tax liability $ 2,255
5.6 %
Increase in Total liabilities $ 2,255
0.3 %
Decrease in Retained earnings $ 2,255
9.8 %
Decrease in Total stockholders' equity $ 2,255
1.3 %

~~This adjustment had no impact on our Consolidated Statements of Operations or Consolidated Statement of Cash Flows for any periods presented.~~

~~Related Party Transactions~~

Management evaluated reportable events and transactions that occurred between us and related persons during the nine months ended September 30, 2017. See Note 15 to the Consolidated Financial Statements included herein for additional information on our related party transactions.other non-material discrete state items.

Subsequent Events

Management evaluated events and transactions during the period subsequent to ~~September~~June 30, ~~2017~~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 1619 to the Consolidated Financial Statements included herein for additional information onrelated to our subsequent events.

2.RECENTLY ISSUED ACCOUNTING STANDARDS

~~Stock-Based Compensation~~Leases

In ~~May 2017,~~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, included 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 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 13 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, ~~Compensation:~~Financial Instruments – Credit Losses (Topic ~~718)~~326): ~~Stock Compensation - Scope~~Measurement of ~~Modification Accounting~~Credit Losses on Financial Instruments. . This ASU applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. This amendment replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates.

In May 2019, the FASB issued ASU Financial Instruments – Credit Losses (Topic 326): Targeted Transition Relief. The amendments in the ASU provide ~~guidance about which changes~~targeted transition relief that is intended to ~~the terms and conditions~~increase comparability of ~~a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account~~financial statement information 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.~~ some entities that otherwise would have measured similar financial instruments using different measurement methodologies. The amendments also decrease costs for some financial statement preparers while providing financial statement users with decision-useful information.

This ASU is effective for fiscal years beginning after December 15, ~~2017,~~2019, and interim periods within those fiscal years, with earlier application permitted for all entities. The amendments should be applied prospectively to an award modified on or after the adoption date. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.

~~Revenue Recognition~~

~~In May 2014, the FASB issued ASU,~~ ~~Revenue from Contracts with Customers (Topic 606).~~ ~~FASB Accounting Standards Codification (“ASC”) Topic 606 supersedes the revenue recognition requirements under Topic 605,~~ ~~Revenue Recognition~~, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.

The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, ~~2018 using the modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application.~~

Currently, our sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the interment right. We have analyzed the impact on our contract portfolio by reviewing our revenue streams and our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard to our contracts and we do not expect the new accounting standard to significantly impact our current accounting for the cemetery interment rights. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.

We expect the adoption of this new accounting standard to affect our accounting for the selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts. Currently, these costs are charged to operations using the specific identification method in the period incurred. Under the new accounting standard, we will capitalize and amortize these costs over the typical financing term for our preneed cemetery merchandise and services contracts and over the average preneed maturity period for our preneed funeral trust contracts. Based on our preliminary assessments, we do not expect the change to have a material impact on our Consolidated Financial Statements. The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts will continue to be charged to operations using the specific identification method in the period incurred.

~~We are continually evaluating the impact on our Consolidated Financial Statements and are currently modifying our financial systems to provide accounting under the new guidance.~~

~~Leases~~

~~In February 2016, the FASB issued ASU,~~ ~~Leases (Topic 842).~~ This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 20192020 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.

3.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 June 30, 2019
	Funeral		Cemetery		Total
Services	$	31,931	$	2,728	$	34,659
Merchandise	18,378		1,953		20,331
Cemetery property	—		8,546		8,546
Other revenue	2,198		2,018		4,216
Total	$	52,507	$	15,245	$	67,752



Three Months Ended June 30, 2018
	Funeral		Cemetery		Total
Services	$	29,023	$	2,949	$	31,972
Merchandise	17,296		2,372		19,668
Cemetery property	—		7,863		7,863
Other revenue	2,213		2,131		4,344
Total	$	48,532	$	15,315	$	63,847



Six Months Ended June 30, 2019
	Funeral		Cemetery		Total
Services	$	65,908	$	5,403	$	71,311
Merchandise	38,343		3,731		42,074
Cemetery property	—		15,382		15,382
Other revenue	4,419		3,647		8,066
Total	$	108,670	$	28,163	$	136,833



Six Months Ended June 30, 2018
	Funeral		Cemetery		Total
Services	$	64,587	$	6,070	$	70,657
Merchandise	38,014		4,329		42,343
Cemetery property	—		15,372		15,372
Other revenue	4,525		4,337		8,862
Total	$	107,126	$	30,108	$	137,234

Deferred Revenue

Deferred revenue is presented net of amounts due on undelivered preneed contracts shown below as of December 31, 2018 and June 30, 2019 (in thousands):



	December 31, 2018			June 30, 2019
Contract liabilities:
Deferred preneed cemetery revenue	$	50,445		$	50,064
Less: Balances due on undelivered cemetery preneed contracts⁽¹⁾	(4,448		)	(4,524		)
Deferred preneed cemetery revenue, net	$	45,997		$	45,540

Deferred preneed funeral revenue	$	36,912		$	37,566
Less: Balances due on undelivered funeral preneed contracts⁽²⁾	(8,306		)	(8,330		)
Deferred preneed funeral revenue, net	$	28,606		$	29,236




(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 June 30, 2019, respectively, and $3.1 million of preneed cemetery receivables have been reclassified to reduce deferred preneed cemetery revenue at both December 31, 2018 and June 30, 2019.
(2)	$8.3 million of preneed funeral receivables have been reclassified to reduce deferred preneed funeral revenue at both December 31, 2018 and June 30, 2019.

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 June 30, 2019 was $4.4 million and $4.5 million for preneed cemetery contracts and $8.3 million for preneed funeral contracts for both periods. 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.

4. PRENEED TRUST INVESTMENTS

Preneed Cemetery Trust Investments

Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as ~~services~~merchandise and ~~merchandise~~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~~Sheet at December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017 were~~2019 are as follows (in thousands):


	December 31, 2016			September 30, 2017			December 31, 2018			June 30, 2019
Preneed cemetery trust investments, at market value	$	71,834		$	73,889		$	64,549		$	72,151
Less: allowance for contract cancellation	(2,138		)	(2,161		)	(2,117		)	(2,181		)
Preneed cemetery trust investments, net	$	69,696		$	71,728		$	62,432		$	69,970

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~~June 30, ~~2017,~~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 markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including ~~municipal bonds,~~ foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 78 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~~June 30, ~~2017~~2019 are detailed below (in ~~thousands)~~thousands, except percentages):


	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value			Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	4,698	$	—	$	—		$	4,698		1	$	9,544	$	—	$	—		$	9,544
Fixed income securities:
Foreign debt	2	4,834		275		(168		)	4,941			2	5,688		107		(273		)	5,522
Corporate debt	2	19,335		1,145		(553		)	19,927			2	13,492		603		(526		)	13,569
Preferred stock	2	16,329		383		(524		)	16,188			2	13,188		620		(334		)	13,474
Mortgage-backed securities	2	1,089		240		(23		)	1,306			2	608		11		(81		)	538
Common stock	1	24,574		3,376		(3,119		)	24,831			1	28,895		2,141		(3,366		)	27,670
Mutual funds:
Fixed Income	2	1,200		81		—			1,281			2	1,288		37		(58		)	1,267
Trust securities		$	72,059	$	5,501	$	(4,387	)	$	73,173			$	72,703	$	3,519	$	(4,638	)	$	71,584
Accrued investment income		$	716						$	716			$	567						$	567
Preneed cemetery trust investments									$	73,889										$	72,151
Market value as a percentage of cost									101.5		%									98.5		%

The estimated maturities of the fixed income securities included above are as follows (in thousands):


Due in one year or less	$	15	$	—
Due in one to five years	2,718		2,550
Due in five to ten years	5,751		9,014
Thereafter	33,879		21,539
Total	$	42,363	$	33,103

The cost and fair market values associated with preneed cemetery trust investments at December 31, ~~2016~~2018 are detailed below (in ~~thousands)~~thousands, except percentages):


	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value			Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	10,852	$	—	$	—		$	10,852		1	$	16,194	$	—	$	—		$	16,194
Fixed income securities:
Municipal bonds	2	496		18		(4		)	510
Foreign debt	2	7,574		160		(656		)	7,078			2	3,802		43		(511		)	3,334
Corporate debt	2	20,621		1,569		(1,123		)	21,067			2	13,987		362		(1,026		)	13,323
Preferred stock	2	16,287		8		(947		)	15,348			2	11,068		54		(1,146		)	9,976
Mortgage-backed securities	2	949		372		(4		)	1,317			2	666		161		(14		)	813
Common stock	1	13,250		2,191		(1,838		)	13,603			1	24,867		903		(5,436		)	20,334
Mutual funds:
Fixed income		1,223		107		—			1,330
Trust securities		$	71,252	$	4,425	$	(4,572	)	$	71,105			$	70,584	$	1,523	$	(8,133	)	$	63,974
Accrued investment income		$	729						$	729			$	575						$	575
Preneed cemetery trust investments									$	71,834										$	64,549
Market value as a percentage of cost									99.8		%									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 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.~~Sheet. In the three and six months ended ~~September~~June 30, ~~2016,~~2018 and 2019, we ~~recorded a $0.1 million impairment~~did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.8 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.

At ~~September~~June 30, ~~2017,~~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~~June 30, ~~2017~~2019 are shown in the following table (in thousands):


	September 30, 2017															June 30, 2019
	In Loss Position Less than 12 months					In Loss Position Greater than 12 months					Total					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			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
Fixed income securities:
Foreign debt	$	153	$	(2	)	$	1,657	$	(166	)	$	1,810	$	(168	)	$	1,229	$	(37	)	$	1,161	$	(236	)	$	2,390	$	(273	)
Corporate debt	2,158		(410		)	624		(143		)	2,782		(553		)	1,925		(89		)	4,571		(437		)	6,496		(526		)
Preferred stock	273		(2		)	8,111		(522		)	8,384		(524		)	553		(6		)	6,953		(328		)	7,506		(334		)
Mortgage-backed securities	200		(23		)	—		—			200		(23		)	—		—			350		(81		)	350		(81		)
Common stock	8,473		(2,247		)	1,936		(872		)	10,409		(3,119		)	11,890		(2,133		)	2,363		(1,233		)	14,253		(3,366		)
Mutual Funds:
Fixed Income	—		—			—		—			—		—			442		(58		)	—		—			442		(58		)
Total temporary impaired securities	$	11,257	$	(2,684	)	$	12,328	$	(1,703	)	$	23,585	$	(4,387	)	$	16,039	$	(2,323	)	$	15,398	$	(2,315	)	$	31,437	$	(4,638	)

Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, ~~2016~~2018 are shown in the following table (in thousands):


	December 31, 2016															December 31, 2018
	In Loss Position Less than 12 months					In Loss Position Greater than 12 months					Total					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			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
Fixed income securities:
Municipal bonds	$	228	$	(4	)	$	—	$	—		$	228	$	(4	)
Foreign debt	2,523		(180		)	2,868		(475		)	5,391		(655		)	$	2,140	$	(245	)	$	895	$	(266	)	$	3,035	$	(511	)
Corporate debt	6,939		(233		)	2,168		(890		)	9,107		(1,123		)	9,918		(813		)	443		(213		)	10,361		(1,026		)
Preferred stock	3,217		(121		)	11,635		(826		)	14,852		(947		)	5,253		(399		)	3,767		(747		)	9,020		(1,146		)
Mortgage-backed securities	51		(5		)	—		—			51		(5		)	—		—			51		(14		)	51		(14		)
Common stock	2,608		(202		)	3,385		(1,636		)	5,993		(1,838		)	14,191		(4,012		)	1,190		(1,424		)	15,381		(5,436		)
Total temporary impaired securities	$	15,566	$	(745	)	$	20,056	$	(3,827	)	$	35,622	$	(4,572	)	$	31,502	$	(5,469	)	$	6,346	$	(2,664	)	$	37,848	$	(8,133	)

Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017 were~~2019 are as follows (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017			2018			2019			2018			2019
Investment income	$	578		$	474		$	1,546		$	1,755		$	474		$	414		$	899		$	985
Realized gains	126			—			415			2,215			18			2,363			871			3,821
Realized losses	(673		)	—			(4,081		)	(1,312		)	(750		)	(1,001		)	(1,357		)	(1,636		)
Expenses and taxes	(139		)	(336		)	(832		)	(1,213		)	(221		)	(407		)	(272		)	(685		)
Decrease (increase) in deferred preneed cemetery receipts held in trust	108			(138		)	2,952			(1,445		)
Net change in deferred preneed cemetery receipts held in trust													479			(1,369		)	(141		)	(2,485		)
	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

Purchases and sales of investments in the preneed cemetery trusts for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017 were~~2019 are as follows (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017			2018			2019			2018			2019
Purchases	$	(1,434	)	$	(915	)	$	(19,540	)	$	(19,355	)	$	(6,882	)	$	(8,186	)	$	(10,258	)	$	(19,812	)
Sales	$	5,973		$	—		$	18,003		$	13,189		6,340			10,026			13,899			13,018

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~~Sheet at December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017 were~~2019 are as follows (in thousands):


	December 31, 2016			September 30, 2017			December 31, 2018			June 30, 2019
Preneed funeral trust investments, at market value	$	91,980		$	92,151		$	84,803		$	91,459
Less: allowance for contract cancellation	(2,740		)	(2,707		)	(2,729		)	(2,763		)
Preneed funeral trust investments, net	$	89,240		$	89,444		$	82,074		$	88,696

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~~June 30, ~~2017,~~2019, none of our preneed funeral trust investments were underfunded.

Earnings from our preneed funeral trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.

Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including ~~municipal bonds,~~ foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 78 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 funeral trust investments at ~~September~~June 30, ~~2017~~2019 are detailed below (in ~~thousands)~~thousands, except percentages):


	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value			Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	15,636	$	—	$	—		$	15,636		1	$	25,145	$	—	$	—		$	25,145
Fixed income securities:
U.S treasury debt	1	1,490		13		(4		)	1,499			1	944		1		(3		)	942
Foreign debt	2	4,882		282		(166		)	4,998			2	5,683		106		(264		)	5,525
Corporate debt	2	20,244		1,165		(571		)	20,838			2	13,482		595		(525		)	13,552
Preferred stock	2	16,837		457		(526		)	16,768			2	13,543		646		(333		)	13,856
Mortgage-backed securities	2	1,273		255		(25		)	1,503			2	698		10		(85		)	623
Common stock	1	24,488		3,392		(3,133		)	24,747			1	28,227		1,921		(3,258		)	26,890
Mutual funds:
Fixed income	2	1,998		87		(38		)	2,047			2	1,419		38		(50		)	1,407
Other investments	2	3,374		—		—			3,374			2	2,959		—		—			2,959
Trust securities		$	90,222	$	5,651	$	(4,463	)	$	91,410			$	92,100	$	3,317	$	(4,518	)	$	90,899
Accrued investment income		$	741						$	741			$	560						$	560
Preneed funeral trust investments									$	92,151										$	91,459
Market value as a percentage of cost									101.3		%									98.7		%

The estimated maturities of the fixed income securities included above are as follows (in thousands):


Due in one year or less	$	78	$	121
Due in one to five years	4,320		3,457
Due in five to ten years	6,208		9,164
Thereafter	35,000		21,756
Total	$	45,606	$	34,498

The cost and fair market values associated with preneed funeral trust investments at December 31, ~~2016~~2018 are detailed below (in ~~thousands)~~thousands, except percentages):


	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value			Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	22,787	$	—	$	—		$	22,787		1	$	31,375	$	—	$	—		$	31,375
Fixed income securities:
U.S. treasury debt	1	1,491		21		(10		)	1,502			1	1,319		3		(19		)	1,303
Municipal bonds	2	447		17		(4		)	460
Foreign debt	2	7,692		170		(677		)	7,185			2	3,748		44		(503		)	3,289
Corporate debt	2	21,454		1,566		(1,134		)	21,886			2	14,195		294		(1,025		)	13,464
Preferred stock	2	17,037		64		(970		)	16,131			2	11,500		54		(1,194		)	10,360
Mortgage-backed securities	2	1,165		400		(5		)	1,560			2	772		168		(18		)	922
Common stock	1	13,675		2,256		(1,850		)	14,081			1	24,803		887		(5,389		)	20,301
Mutual funds:
Fixed income	2	2,124		115		(66		)	2,173			2	275		—		(29		)	246
Other investments	2	3,463		—		—			3,463			2	3,006		—		—			3,006
Trust securities		$	91,335	$	4,609	$	(4,716	)	$	91,228			$	90,993	$	1,450	$	(8,177	)	$	84,266
Accrued investment income		$	752						$	752			$	537						$	537
Preneed funeral trust investments									$	91,980										$	84,803
Market value as a percentage of cost									99.9		%									92.6		%

We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral receipts held in trust on our Consolidated Balance ~~Sheets.~~Sheet. In the three and six months ended ~~September~~June 30, ~~2016,~~2018 and 2019, we ~~recorded a $0.1 million impairment~~did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.9 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.

At ~~September~~June 30, ~~2017,~~2019, we had certain investments within our preneed funeral trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.

Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of ~~September~~June 30, ~~2017~~2019 are shown in the following table (in thousands):


	September 30, 2017															June 30, 2019
	In Loss Position Less than 12 months					In Loss Position Greater than 12 months					Total					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			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
Fixed income securities:
U.S. treasury debt	$	837	$	(4	)	$	—	$	—		$	837	$	(4	)	$	—	$	—		$	821	$	(3	)	$	821	$	(3	)
Foreign debt	170		(4		)	1,628		(163		)	1,798		(167		)	1,271		(38		)	1,116		(226		)	2,387		(264		)
Corporate debt	2,273		(430		)	609		(141		)	2,882		(571		)	1,990		(93		)	4,518		(432		)	6,508		(525		)
Preferred stock	191		(6		)	8,183		(520		)	8,374		(526		)	347		(4		)	6,924		(329		)	7,271		(333		)
Mortgage-backed securities	234		(24		)	9		—			243		(24		)	9		—			396		(85		)	405		(85		)
Common stock	8,497		(2,241		)	1,934		(892		)	10,431		(3,133		)	11,905		(2,131		)	2,267		(1,127		)	14,172		(3,258		)
Mutual Funds:
Fixed income	79		(1		)	608		(37		)	687		(38		)	293		(36		)	261		(14		)	554		(50		)
Other Investments																430		—			—		—			430		—
Total temporary impaired securities	$	12,281	$	(2,710	)	$	12,971	$	(1,753	)	$	25,252	$	(4,463	)	$	16,245	$	(2,302	)	$	16,303	$	(2,216	)	$	32,548	$	(4,518	)

Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, ~~2016~~2018 are shown in the following table (in thousands):


	December 31, 2016															December 31, 2018
	In Loss Position Less than 12 months					In Loss Position Greater than 12 months					Total					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			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
Fixed income securities:
U.S. treasury debt	$	834	$	(10	)	$	—	$	—		$	834	$	(10	)	$	—	$	—		$	1,181	$	(19	)	$	1,181	$	(19	)
Municipal bonds	244		(5		)	—		—			244		(5		)
Foreign debt	2,654		(186		)	2,905		(490		)	5,559		(676		)	2,180		(251		)	850		(252		)	3,030		(503		)
Corporate debt	6,977		(215		)	2,234		(919		)	9,211		(1,134		)	9,990		(814		)	434		(211		)	10,424		(1,025		)
Preferred stock	3,420		(128		)	11,750		(842		)	15,170		(970		)	5,967		(460		)	3,673		(734		)	9,640		(1,194		)
Mortgage-backed securities	55		(5		)	11		(1		)	66		(6		)	11		—			120		(18		)	131		(18		)
Common stock	2,795		(216		)	3,390		(1,634		)	6,185		(1,850		)	14,327		(4,035		)	1,155		(1,354		)	15,482		(5,389		)
Mutual funds:
Fixed income	97		(7		)	644		(58		)	741		(65		)	—		—			246		(29		)	246		(29		)
Total temporary impaired securities	$	17,076	$	(772	)	$	20,934	$	(3,944	)	$	38,010	$	(4,716	)	$	32,475	$	(5,560	)	$	7,659	$	(2,617	)	$	40,134	$	(8,177	)

Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017 were~~2019 are as follows (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017			2018			2019			2018			2019
Investment income	$	596		$	524		$	1,639		$	1,801		$	479		$	409		$	891		$	982
Realized gains	131			—			525			2,296			11			2,486			2,907			3,806
Realized losses	(716		)	(2		)	(4,090		)	(1,314		)	(782		)	(1,007		)	(1,391		)	(424		)
Expenses and taxes	(253		)	(390		)	(946		)	(1,106		)	(334		)	(513		)	(478		)	(285		)
Decrease (increase) in deferred preneed funeral receipts held in trust	242			(132		)	2,872			(1,677		)
Net change in deferred preneed funeral receipts held in trust													626			(1,375		)	(1,929		)	(4,079		)
	$	—		$	—		$	—		$	—		$	—		$	—		$	—		$	—

Purchases and sales of investments in the preneed funeral trusts for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017 were~~2019 are as follows (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017			2018			2019			2018			2019
Purchases	$	(1,486	)	$	(966	)	$	(19,917	)	$	(19,548	)	$	(7,153	)	$	(8,436	)	$	(10,439	)	$	(19,195	)
Sales	$	6,336		$	23		$	19,005		$	13,266		6,617			10,816			14,212			13,601

4.5. PRENEED CEMETERY RECEIVABLES

Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years, with such interest income reflected as ~~Preneed cemetery finance charges~~Other revenue. In substantially all cases, we receive an initial down payment at the time the contract is signed. ~~At September~~

Our cemetery financed receivables at December 31, 2018 and June 30, 2017, our total financed preneed receivables were $39.9 million, of which $29.3 million and $10.6 million were for cemetery interment rights and for merchandise and services, respectively. These amounts2019 are ~~presented on our consolidated balance sheet~~ as ~~$11.7 million within~~ ~~Accounts receivable~~ ~~and $28.2 million within~~ ~~Preneed receivables~~ ~~and exclude unearned finance charges and allowance for contract cancellations.~~ follows (in thousands):



	December 31, 2018			June 30, 2019
Accounts receivable, including unearned finance charges and allowance for contract cancellations of $2,405 and $2,422, respectively	$	11,676	⁽¹⁾	$	12,344	⁽¹⁾
Preneed receivables, including unearned finance charges and allowance for contract cancellations of $4,049 and $3,949, respectively	25,568		⁽²⁾	26,477		⁽²⁾
Preneed cemetery financed receivables	$	37,244		$	38,821




(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 June 30, 2019, respectively.
(2)	$3.1 million of preneed cemetery receivables have been reclassified to reduce deferred preneed cemetery revenue at both December 31, 2018 and June 30, 2019.

The unearned finance charges associated with these receivables ~~were $5.7~~are $4.6 million and $4.7 million at ~~both~~ December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017.~~2019, respectively.

We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately ~~4.8%~~3.9% of the total receivables on recognized sales at ~~September~~June 30, ~~2017.~~2019. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level.

For the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, the change in the allowance for contract cancellations ~~was~~is as follows (in thousands):


	September 30, 2017			June 30, 2019
Beginning balance	$	1,861		$	1,808
Write-offs and cancellations	(1,004		)	(468		)
Provision	1,093			352
Ending balance	$	1,950		$	1,692

The aging of ~~past due financing~~preneed cemetery financed receivables as of ~~September~~June 30, ~~2017~~ ~~was~~2019 is as follows (in thousands):


	31-60 Past Due		61-90 Past Due		91-120 Past Due		>120 Past Due		Total Past Due		Current		Total Financing Receivables		31-60 Past Due		61-90 Past Due		91-120 Past Due		>120 Past Due		Total Past Due		Current		Total Financed Receivables
Recognized revenue	$	866	$	393	$	190	$	1,205	$	2,654	$	26,517	$	29,171	$	543	$	325	$	97	$	1,036	$	2,001	$	27,078	$	29,079
Deferred revenue	272		145		71		387		875		9,900		10,775		217		128		28		271		644		9,098		9,742
Total contracts	$	1,138	$	538	$	261	$	1,592	$	3,529	$	36,417	$	39,946
Total															$	760	$	453	$	125	$	1,307	$	2,645	$	36,176	$	38,821

5.6. RECEIVABLES FROM PRENEED TRUSTS

The receivables from preneed trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest (less than 50%) in the trust assets. We account for these investments at cost. As of December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017,~~2019, receivables from preneed trusts ~~were~~are as follows (in thousands):


	December 31, 2016			September 30, 2017			December 31, 2018			June 30, 2019
Preneed trust funds, at cost	$	14,658		$	15,780		$	17,601		$	18,200
Less: allowance for contract cancellation	(440		)	(474		)	(528		)	(546		)
Receivables from preneed trusts, net	$	14,218		$	15,306		$	17,073		$	17,654

The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at ~~September~~June 30, ~~2017~~2019 and December 31, ~~2016.~~2018. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes the unrealized gains and losses on trust assets.

The composition of the preneed trust funds at ~~September~~June 30, ~~2017 was~~2019 is as follows (in thousands):


	Historical Cost Basis		Fair Value		Historical Cost Basis		Fair Value
As of September 30, 2017
Cash and cash equivalents	$	4,054	$	4,054	$	4,382	$	4,382
Fixed income investments	9,218		9,218		11,266		11,266
Mutual funds and common stocks	2,492		2,516		2,547		2,606
Annuities	16		16		5		5
Total	$	15,780	$	15,804	$	18,200	$	18,259

The composition of the preneed trust funds at December 31, ~~2016 was~~2018 is as follows (in thousands):


	Historical Cost Basis		Fair Value		Historical Cost Basis		Fair Value
As of December 31, 2016
Cash and cash equivalents	$	3,378	$	3,378	$	4,172	$	4,172
Fixed income investments	8,809		8,809		10,668		10,668
Mutual funds and common stocks	2,455		2,463		2,755		2,709
Annuities	16		16		6		6
Total	$	14,658	$	14,666	$	17,601	$	17,555

6.7.CEMETERY PERPETUAL CARE TRUST INVESTMENTS

Care trusts’ corpus on our Consolidated Balance ~~Sheets~~Sheet represents the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017 were~~2019 are as follows (in thousands):


	December 31, 2016			September 30, 2017			December 31, 2018			June 30, 2019
Trust assets, at market value	$	46,889		$	48,679		$	44,071		$	48,969
Obligations due from trust	(599		)	(493		)	(577		)	(527		)
Care trusts’ corpus	$	46,290		$	48,186		$	43,494		$	48,442

We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in ~~Revenues: Cemetery~~Other revenue.. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At ~~September~~June 30, ~~2017,~~2019, none of our cemetery perpetual care trust investments were underfunded.

classifications quarterly. There were no transfers between Levels 1 and 2 in the three and ~~nine~~six months ended ~~September~~June 30, ~~2017.~~2019. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 78 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.

The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at ~~September~~June 30, ~~2017~~2019 (in ~~thousands)~~thousands, except percentages):


	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value			Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	2,573	$	—	$	—		$	2,573		1	$	5,113	$	—	$	—		$	5,113
Fixed income securities:
Foreign debt	2	3,568		211		(117		)	3,662			2	4,239		81		(196		)	4,124
Corporate debt	2	13,194		768		(368		)	13,594			2	9,807		499		(384		)	9,922
Preferred stock	2	11,464		260		(368		)	11,356			2	10,162		432		(240		)	10,354
Mortgage-backed securities	2	661		147		(14		)	794			2	379		6		(50		)	335
Common stock	1	15,263		1,985		(2,021		)	15,227			1	17,760		1,169		(2,063		)	16,866
Mutual funds:
Fixed Income	2	909		64		—			973			2	1,855		60		(64		)	1,851
Trust securities		$	47,632	$	3,435	$	(2,888	)	$	48,179			$	49,315	$	2,247	$	(2,997	)	$	48,565
Accrued investment income		$	500						$	500			$	404						$	404
Cemetery perpetual care investments									$	48,679										$	48,969
Market value as a percentage of cost									101.1		%									98.5		%

The estimated maturities of the fixed income securities included above are as follows (in thousands):


Due in one year or less	$	9	$	—
Due in one to five years	1,770		1,996
Due in five to ten years	4,004		6,497
Thereafter	23,622		16,242
	$	29,405
Total			$	24,735

The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, ~~2016~~2018 (in ~~thousands)~~thousands, except percentages):


	Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value			Fair Value Hierarchy Level	Cost		Unrealized Gains		Unrealized Losses			Fair Market Value
Cash and money market accounts	1	$	6,522	$	—	$	—		$	6,522		1	$	11,144	$	—	$	—		$	11,144
Fixed income securities:
Municipal bonds	2	365		13		(3		)	375
Foreign debt	2	5,100		99		(435		)	4,764			2	2,872		27		(385		)	2,514
Corporate debt	2	13,715		966		(821		)	13,860			2	9,956		227		(730		)	9,453
Preferred stock	2	11,323		5		(664		)	10,664			2	8,141		37		(820		)	7,358
Mortgage-backed securities	2	569		223		(3		)	789			2	417		101		(9		)	509
Common stock	1	8,259		1,382		(1,146		)	8,495			1	15,562		542		(3,395		)	12,709
Mutual funds:
Fixed income	2	855		76		—			931
Trust securities		$	46,708	$	2,764	$	(3,072	)	$	46,400			$	48,092	$	934	$	(5,339	)	$	43,687
Accrued investment income		$	489						$	489			$	384						$	384
Cemetery perpetual care investments									$	46,889										$	44,071
Market value as a percentage of cost									99.3		%									90.8		%

We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be ~~other-~~

~~than-temporary,~~other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus. In the three and six months ended ~~September~~June 30, ~~2016,~~2018 and 2019, we ~~recorded a $0.1 million impairment~~did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.5 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.

At ~~September~~June 30, ~~2017,~~2019, we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.

Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended ~~September~~June 30, ~~2017~~2019 are shown in the following table (in thousands):


	September 30, 2017															June 30, 2019
	In Loss Position Less than 12 months					In Loss Position Greater than 12 months					Total					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			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
Fixed income securities:
Foreign debt	$	93	$	(2	)	$	1,138	$	(115	)	$	1,231	$	(117	)	$	995	$	(29	)	$	811	$	(167	)	$	1,806	$	(196	)
Corporate debt	1,435		(276		)	417		(92		)	1,852		(368		)	1,464		(80		)	3,273		(304		)	4,737		(384		)
Preferred stock	681		(4		)	5,475		(364		)	6,156		(368		)	969		(16		)	4,816		(224		)	5,785		(240		)
Mortgage-backed securities	121		(14		)	—		—			121		(14		)	—		—			219		(50		)	219		(50		)
Common stock	5,393		(1,466		)	1,221		(555		)	6,614		(2,021		)	7,671		(1,335		)	1,473		(728		)	9,144		(2,063		)
Mutual Funds:
Fixed Income	—		—			—		—			—		—			533		(64		)	—		—			533		(64		)
Total temporary impaired securities	$	7,723	$	(1,762	)	$	8,251	$	(1,126	)	$	15,974	$	(2,888	)	$	11,632	$	(1,524	)	$	10,592	$	(1,473	)	$	22,224	$	(2,997	)

Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended December 31, ~~2016~~2018 are shown in the following table (in thousands):


	December 31, 2016															December 31, 2018
	In Loss Position Less than 12 months					In Loss Position Greater than 12 months					Total					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			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses			Fair Market Value		Unrealized Losses
Fixed income securities:
Municipal bonds	$	137	$	(3	)	$	—	$	—		$	137	$	(3	)
Foreign debt	1,619		(120		)	1,961		(315		)	3,580		(435		)	$	1,619	$	(189	)	$	639	$	(196	)	$	2,258	$	(385	)
Corporate debt	4,679		(152		)	1,439		(669		)	6,118		(821		)	7,006		(587		)	301		(143		)	7,307		(730		)
Preferred stock	2,038		(77		)	8,329		(587		)	10,367		(664		)	3,586		(279		)	2,787		(541		)	6,373		(820		)
Mortgage-backed securities	31		(3		)	—		—			31		(3		)	—		—			32		(9		)	32		(9		)
Common stock	1,563		(121		)	2,004		(1,025		)	3,567		(1,146		)	9,010		(2,557		)	733		(838		)	9,743		(3,395		)
Total temporary impaired securities	$	10,067	$	(476	)	$	13,733	$	(2,596	)	$	23,800	$	(3,072	)	$	21,221	$	(3,612	)	$	4,492	$	(1,727	)	$	25,713	$	(5,339	)

Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017 were~~2019 are as follows (in thousands):


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017		2016			2017			2018			2019			2018			2019
Realized gains	$	44		$	—	$	156		$	925		$	22		$	670		$	304		$	1,024
Realized losses	(261		)	—		(1,943		)	(630		)	(312		)	(270		)	(526		)	(441		)
Decrease (increase) in care trusts’ corpus	217			—		1,787			(295		)
Net change in care trusts’ corpus												290			(400		)	222			(583		)
Total	$	—		$	—	$	—		$	—		$	—		$	—		$	—		$	—

Perpetual care trust investment security transactions recorded in ~~Revenues: Cemetery~~Other revenue for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017 were~~2019 are as follows (in thousands):


	For the Three Months Ended September 30,					For the Nine Months Ended September 30,						Three Months Ended June 30,					Six Months Ended June 30,
	2016		2017			2016			2017			2018			2019		2018			2019
Investment income	$	1,523	$	1,539		$	4,503		$	4,831		$	1,463		$	1,107	$	2,996		$	2,194
Realized gain, net	14		(283		)	(444		)	(891		)
Realized gains (losses), net												(398		)	10		(715		)	(280		)
Total	$	1,537	$	1,256		$	4,059		$	3,940		$	1,065		$	1,117	$	2,281		$	1,914

Purchases and sales of investments in the perpetual care trusts for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017 were~~2019 are as follows (in thousands):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017			2018			2019			2018			2019
Purchases	$	(936	)	$	(556	)	$	(12,888	)	$	(12,430	)	$	(4,742	)	$	(5,117	)	$	(6,670	)	$	(14,274	)
Sales	$	3,832		$	—		$	11,702		$	8,390		4,431			6,278			9,397			7,980

7.8. FAIR VALUE MEASUREMENTS

We evaluate our financial assets and liabilities for those financial assets and liabilities that meet the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our long-term debt ~~and Credit Facility (as defined in Note 9) are~~is classified within Level 2 of the Fair Value Measurement hierarchy. The fair values of our long-term debt ~~and Credit Facility~~ approximate the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. The fair value of the 2.75% convertible subordinated notes due 2021 was approximately ~~$179.9~~$6.4 million at ~~September~~June 30, ~~2017~~2019 based on the last traded or broker quoted price. The fair value of the 6.625% senior notes due 2026 was approximately $334.8 million at June 30, 2019 based on the last traded or broker quoted price. We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust

investment categories on our Consolidated Balance ~~Sheets~~Sheet as having met the criteria for fair value measurement. As of ~~September~~June 30, ~~2017,~~2019, we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.

We account for our investments as available-for-sale and measure them at fair value under the standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities. See Notes 34 and 67 to our Consolidated Financial Statements included herein for the fair value hierarchy levels of our trust investments.

8.9. INTANGIBLE AND OTHER NON-CURRENT ASSETS

Intangibles and other non-current assets at December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017~~2019 ~~were~~are as follows (in thousands):


	December 31, 2016		September 30, 2017		December 31, 2018		June 30, 2019
Prepaid agreements not-to-compete, net of accumulated amortization of $5,501 and $5,908, respectively	$	3,244	$	2,930
Prepaid agreements not-to-compete, net of accumulated amortization of $6,672 and $7,008, respectively					$	4,048	$	3,794
Tradenames	11,663		11,663		17,635		17,635
Capitalized commissions on preneed contracts, net of accumulated amortization of $569 and $846, respectively					2,717		2,754
Other	50		23		25		177
Intangible and other non-current assets	$	14,957	$	14,616
Intangible and other non-current assets, net					$	24,425	$	24,360

Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from one to ten years. Amortization expense for our prepaid agreements not-to-compete was approximately ~~$106,000~~$153,000 and ~~$135,000~~$168,000 for the three months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively and ~~$308,000~~$292,000 and ~~$407,000~~$336,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively.

Our tradenames have indefinite lives and therefore are not amortized.

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 approximately $144,000 and $139,000 for the three months ended June 30, 2018 and 2019, respectively and $293,000 and $277,000 for the six months ended June 30, 2018 and 2019, respectively.

9.10.LONG-TERM DEBT

On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our 6.625% Senior Notes due 2026 (the “Senior Notes”) and related guarantees in a private offering under Rule 144A and Regulation S of the Securities Act. See Note 12 to the Consolidated Financial Statements included herein for further discussion of our Senior Notes.

On May 31, 2018, we used approximately $291.4 million of the net proceeds from the sale of the Senior Notes to repay all amounts outstanding under our former secured credit facility, dated as of August 20, 2012 (as amended, the “Former Credit Agreement”). In connection with the repayment in full of all amounts due thereunder, the Former Credit Agreement was retired.

On May 31, 2018, we entered into a $150.0 million senior secured revolving credit facility (the “Credit Facility”) with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Credit Facility Guarantors”). The Credit Facility also contains an accordion provision feature allowing for future increases in the facility size by an additional amount of up to $75.0 million. The Credit Facility matures on May 31, 2023.

Our long-term debt consisted of the following at December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017~~2019 (in thousands):


	December 31, 2016			September 30, 2017			December 31, 2018			June 30, 2019
Revolving credit facility, secured, floating rate	$	67,700		$	75,500
Term loan, secured, floating rate	138,750			130,313
Credit Facility							$	27,100		$	24,600
Acquisition debt	12,245			11,348			8,940			8,202
Debt issuance costs, net of accumulated amortization of $4,138 and $4,366, respectively	(1,270		)	(1,043		)
Debt issuance costs, net of accumulated amortization of $109 and $216, respectively							(955		)	(847		)
Less: current portion	(13,021		)	(16,126		)	(2,015		)	(1,895		)
Total long-term debt	$	204,404		$	199,992		$	33,070		$	30,060

As of ~~September~~June 30, 2017, we had a $300 million secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.

~~As of September 30, 2017,~~2019, we had outstanding borrowings under the ~~revolving credit facility~~Credit Facility of ~~$75.5 million and approximately $130.3 million was outstanding on the term loan.~~$24.6 million. We ~~have~~had one letter of credit issued on November 30, ~~2016~~2018 and outstanding under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% and will expire on November ~~27, 2017.~~25, 2019. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under ~~the~~our Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of ~~September~~June 30, ~~2017,~~2019, the prime rate margin was equivalent to ~~1.125%~~1.00% and the LIBOR margin was ~~2.125%~~2.00%. The weighted average interest rate on ~~the~~our Credit Facility was 3.9% and 4.0% for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2019, respectively. The weighted average interest rate on our Former Credit Agreement was ~~3.4%~~4.2% and ~~3.1%,~~4.0% for the three and six months ended June 30, 2018, respectively.

We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any Credit Facility Guarantors.

We were in compliance with the covenants contained in the Credit ~~Agreement~~Facility as of ~~September~~June 30, ~~2017. The Credit Agreement contains key ratios that we must comply~~2019, with ~~including a requirement to maintain~~ a leverage ratio of ~~no more than 3.50~~5.05 to 1.00 and ~~a covenant to maintain~~ a fixed charge coverage ratio of ~~no less than 1.20 to 1.00. As of September 30, 2017, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 1.89~~2.15 to 1.00.

Amortization of debt issuance costs related to our Credit Facility was ~~approximately $0.1 million~~$54,000 and $108,000 for ~~both~~ the three and six months ended ~~September~~June 30, ~~2016~~2019, respectively and ~~2017 and $0.3 million and $0.2 million for the nine months ended September 30, 2016 and 2017, respectively. The unamortized~~amortization of debt issuance costs related to our Former Credit Agreement was $45,000 and $140,000 for the ~~Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan~~three and ~~the straight line method for our revolving credit facility.~~six months ended June 30, 2018, respectively.

Acquisition debt ~~consists~~consisted of deferred purchase price and promissory notes payable to sellers. Imputed interest expense related to our acquisition debt was $201,000 and $160,000 for the three months ended June 30, 2018 and 2019, respectively and $425,000 and $329,000 for the six months ended June 30, 2018 and 2019, respectively.

~~10.~~11.CONVERTIBLE SUBORDINATED NOTES

On March 19, 2014, we issued $143.75 million aggregate principal amount of our 2.75% convertible ~~subordinated~~ notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were offered only to “qualified institutional buyers” in compliance with Rule 144A under the Securities Act. The Convertible Notes are governed by an indenture dated as of March 19, 2014 between Wilmington Trust, National Association, as Trustee, and us. The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.

~~The carrying values~~On May 7, 2018, we completed privately-negotiated exchanges (the “Exchange”) of ~~the liability and equity components~~approximately $115.0 million in aggregate principal amount of ~~the Convertible Notes at December 31, 2016 and September 30, 2017 are reflected in our Consolidated Balance Sheets as follows (in thousands):~~

December 31, 2016 September 30, 2017
Long-term liabilities:
Principal amount $ 143,750
$ 143,750
Unamortized discount of liability component (21,887 ) (18,687 )
Convertible Notes issuance costs, net of accumulated amortization of $1,359 and $1,746, respectively $ (2,268 ) $ (1,881 )
Carrying value of the liability component $ 119,596
$ 123,182

Equity component carrying value $ 17,973
$ 17,973

~~The fair value of the~~ Convertible Notes, which ~~are Level 2 measurements, was approximately $179.9 million at September 30, 2017.~~

Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $1.0 million for both the three months ended September 30, 2016 and 2017 and $3.0 million for both the nine months ended September 30, 2016 and 2017. Accretionrepresented 80% of the discount on the Convertible Notes was $1.0 million and $1.1 million for the three months ended September 30, 2016 and 2017, respectively, and $2.9 million and $3.2 million for the nine months ended September 30, 2016 and 2017, respectively. Amortizationaggregate principal amount of ~~debt issuance costs related to~~ our Convertible Notes ~~was~~then outstanding, with a limited number of convertible noteholders, for approximately ~~$0.1~~$74.8 million ~~for both the three months ended September 30, 2016 and 2017 and~~in cash (plus accrued interest of $0.4 million totaling $75.2 million) and 2,822,859 newly issued shares of our common stock, par value $.01 per share, pursuant to a private placement in reliance on Section 4(a)(2) of the Securities Act. The cash portion of the exchange consideration was funded from our Former Credit Agreement. Following the settlement of the Exchange, the aggregate principal amount of our Convertible Notes outstanding was reduced to approximately $28.8 million. See Note 10 to the Consolidated Financial Statements included herein for ~~both~~further discussion of our Former Credit Agreement.

On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes, which represented 78% of the ~~nine months ended September 30, 2016 and 2017.~~aggregate principal amount of our Convertible Notes then outstanding for $22.9 million in cash (plus accrued interest of approximately $0.2 million totaling $23.0 million). The consideration for the repurchases was funded from our Credit Facility. Following these repurchases, the aggregate principal amount of our Convertible Notes outstanding was reduced to $6.3 million.

On April 4, 2019, we completed a privately-negotiated repurchase of an additional $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163.

initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at ~~September~~June 30, ~~2017,~~2019, is ~~44.5392~~45.2619 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately ~~$22.45~~$22.09 per share of common stock.

The carrying values of the liability and equity components of the Convertible Notes at December 31, 2018 and June 30, 2019 are reflected on our Consolidated Balance Sheet as follows (in thousands):



	December 31, 2018			June 30, 2019
Long-term liabilities:
Principal amount	$	6,346		$	6,321
Unamortized discount of liability component	(560		)	(443		)
Convertible Notes issuance costs, net of accumulated amortization of $106 and $117, respectively	(54		)	(43		)
Carrying value of the liability component	$	5,732		$	5,835

Carrying value of the equity component	$	789		$	789

The Carrying value of the liability component and the Carrying value of the equity component are recorded in Convertible subordinated notes due 2021 and Additional paid-in capital, respectively, on our Consolidated Balance Sheet at December 31, 2018 and June 30, 2019.

The fair value of the Convertible Notes, which are Level 2 measurements, was approximately $6.4 million at June 30, 2019.

Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $514,000 and $44,000 for the three months ended June 30, 2018 and 2019, respectively and approximately $1,502,000 and $87,000 for the six months ended June 30, 2018 and 2019 respectively. Accretion of the discount on the Convertible Notes was approximately $555,000 and $60,000 for the three months ended June 30, 2018 and 2019, respectively and approximately $1,715,000 and $117,000 for the six months ended June 30, 2018 and 2019, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $62,000 and $5,000 for the three months ended June 30, 2018 and 2019, respectively and approximately $194,000 and $11,000 for the six months ended June 30, 2018 and 2019, respectively.

The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 20 months of the Convertible Notes. The effective interest rate on the unamortized debt discount for both the three and six months ended June 30, 2018 and 2019 was 11.4%. The effective interest rate on the unamortized debt issuance costs for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017~~2019 was ~~6.75%~~3.2%.

12.SENIOR NOTES

On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our Senior Notes and ~~2.75%~~related guarantees in a private offering under Rule 144A and Regulation S of the Securities Act.

We received proceeds of $320.1 million, net of a 1.5% debt discount of $4.9 million, of which we used $291.4 million to repay our existing indebtedness under our Former Credit Agreement. We incurred approximately $1.4 million in transaction costs related to the Senior Notes. See Note 10 to the Consolidated Financial Statements included herein for further discussion of the repayment of our Former Credit Agreement.

The Senior Notes bear interest at 6.625% per year. Interest on the Senior Notes began to accrue on May 31, 2018 and is payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2018 to holders of record on each May 15 and November 15 preceding an interest payment date. The Senior Notes mature on June 1, 2026, unless earlier redeemed or purchased. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by certain of our existing subsidiaries.

The debt discount of $4.9 million and the debt issuance costs of $1.4 million are being amortized using the effective interest method over the remaining term of approximately 83 months of the Senior Notes. The effective interest rate on the unamortized debt discount for both the three and six months ended June 30, 2018 and 2019 was 6.87%. The effective interest rate on the unamortized debt issuance costs for both the three and six months ended June 30, 2018 and 2019 was 6.69%.

The carrying value of the Senior Notes at December 31, 2018 and June 30, 2019 is reflected on our Consolidated Balance Sheet as follows (in thousands):



	December 31, 2018			June 30, 2019
Long-term liabilities:
Principal amount	$	325,000		$	325,000
Debt discount, net of accumulated amortization of $273 and $515, respectively	(4,602		)	(4,360		)
Debt issuance costs, net of accumulated amortization of $77 and $145, respectively	(1,290		)	(1,222		)
Carrying value of the Senior Notes	$	319,108		$	319,418

The fair value of the Senior Notes, which are Level 2 measurements, was approximately $334.8 million at June 30, 2019.

Interest expense on the Senior Notes included contractual coupon interest expense of $1.9 million and $5.4 million for the three months ended June 30, 2018 and 2019, respectively and $1.9 million and $10.8 million for the six months ended June 30, 2018 and 2019, respectively. Amortization of the debt discount on the Senior Notes was approximately $38,000 and $122,000 for the three months ended June 30, 2018 and 2019 and $38,000 and $242,000 for the six months ended June 30, 2018 and 2019, respectively. Amortization of debt issuance costs on the Senior Notes was approximately $11,000 and $34,000 for the three months ended June 30, 2018 and 2019, respectively and approximately $11,000 and $68,000 for the six months ended June 30, 2018 and 2019, respectively.

13.LEASES

The components of lease cost for the three and six months ended June 30, 2019 are as follows (in millions):



	Classification	Three Months Ended June 30, 2019		Six Months Ended June 30, 2019
Operating lease cost	Facilities and grounds expense	$	1.0	$	1.9
Short-term lease cost	Facilities and grounds expense	$	0.1	$	0.2

Finance lease cost:
Depreciation of leased assets	Depreciation and amortization	$	0.1	$	0.2
Interest on lease liabilities	Interest expense	0.1		0.2
Total finance lease cost		0.2		0.4
Total lease cost		$	1.3	$	2.5

Variable lease expense was immaterial for the three and six months ended June 30, 2019.

Supplemental cash flow information related to our leases for the six months ended June 30, 2019 is as follows (in millions):



	Six Months Ended June 30, 2019
Cash paid for operating leases included in operating activities	$	1.9
Cash paid for finance leases included in financing activities	0.4

Right-of-use assets obtained in exchange for new leases for the six months ended June 30, 2019 is as follows (in millions):



	Six Months Ended June 30, 2019
Right-of-use assets obtained in exchange for new operating lease liabilities⁽¹⁾	$	8.2
Right-of-use assets obtained in exchange for new finance lease liabilities	—




(1)	During the three months ended June 30, 2019, we modified an existing operating lease to extend the term through 2030. As a result of this modification, we increased our lease liabilities and right-of-use assets by $8.2 million.

Supplemental balance sheet information related to leases as of June 30, 2019 is as follows (in millions):



Lease Type	Balance Sheet Classification	June 30, 2019
Operating lease right-of-use assets	Operating lease right-of-use assets	$	23.5
Finance lease right-of-use assets⁽¹⁾	Property, plant and equipment, net	5.5
Total right-of-use assets		$	29.0

Operating	Current portion of operating lease obligations	$	1.5
Finance	Current portion of finance lease obligations	0.3
Total current lease liabilities		1.8
Operating	Obligations under operating leases, net of current portion	22.7
Finance	Obligations under finance leases, net of current portion	6.0
Total non-current lease liabilities		28.7
Total lease liabilities		$	30.5




(1)	Finance lease right-of-use assets are presented net of accumulated depreciation of $1.9 million.

The average lease terms and discount rates as of June 30, 2019 are as follows:



	Weighted-average remaining lease term (years)	Weighted-average discount rate
Operating leases	11.4	8.1	%
Finance leases	7.5	8.2	%

The aggregate future lease payments for operating and finance leases as of June 30, 2019 are as follows (in millions):



	Operating			Finance
Lease payments due:
Remainder of 2019	$	1.9		$	0.4
2020	3.3			0.8
2021	3.7			0.8
2022	3.3			0.8
2023	3.2			0.8
Thereafter	21.6			7.1
Total lease payments	37.0			10.7
Less: Interest	(12.8		)	(4.4		)
Present value of lease liabilities	$	24.2		$	6.3

As ofJune 30, 2019, we had no additional significant operating or finance leases that had not yet commenced.

14. COMMITMENTS AND CONTINGENCIES

Faria, et al. v. Carriage Funeral Holdings, Inc., Superior Court of California, Contra Costa County, Case No. MSC18-00606. On March 26, 2018, six Plaintiffs filed a putative class action against Carriage Funeral Holdings, Inc., ~~respectively.~~our subsidiary, their alleged employer, on behalf of themselves and all similarly situated current and former employees. Plaintiffs seek monetary damages and claim that Carriage Funeral Holdings, Inc. failed to pay minimum wages, provide meal and rest breaks, provide accurately itemized wage statements, reimburse employees for required expenses, and provide wages when due. Plaintiffs also claim that Carriage Funeral Holdings, Inc. violated California Business and Professions Code §17200 et seq. On June 5, 2018, Plaintiffs filed a First Amended Complaint to add a claim under the California Private Attorney General Act. On October 23, 2018, the parties mediated this matter and executed a Memorandum of Understanding for class settlement. In February 2019, a Class Action Settlement Agreement was fully executed, which was preliminarily approved by the Court. The class claims process is underway. At December 31, 2018, we accrued $650,000 for the estimated settlement amount related to this case. At June 30, 2019, the amount accrued remains adequate.

~~11.~~15.STOCKHOLDERS’ EQUITY

Stock-Based Compensation Plans

During the ~~nine~~six months ended ~~September~~June 30, ~~2017,~~2019, we had two stock benefits plans ~~in effect~~ under which restricted stock, stock options and performance awards have been granted or remain outstanding: the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”). The Amended and Restated 2006 Plan was terminated upon the approval of the 2017 Plan at the annual shareholders meeting on May 17, ~~2017. The~~2017, however, the termination of the Amended and Restated 2006 Plan does not affect the awards previously issued and ~~outstanding.~~outstanding under the Amended and Restated 2006 Plan.

All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). The 2017 Plan provides for grants of options as non-qualified options or incentive stock options, restricted stock and performance awards. The 2017 Plan expires on May 17, 2027.

The status of each of the plans at ~~September~~June 30, ~~2017~~2019 is as follows (shares in thousands):


	Shares Reserved		Shares Available to Issue	Options Outstanding	Performance Awards Outstanding ⁽²⁾	Shares Reserved		Shares Available to Issue	Options Outstanding	Performance Awards Outstanding ⁽²⁾
Amended and Restated 2006 Plan	—		—	1,929	319	—		—	945	—
2017 Plan	1,571	⁽¹⁾	1,541	16	9	2,705	⁽¹⁾	1,906	152	497
Total	1,571		1,541	1,945	328	2,705		1,906	1,097	497




(1)	Amount includes approximately ~~17,500~~1,150,000 shares granted from the Amended and Restated 2006 Plan that were returned to the Company due to ~~cancellations.~~cancellations, to pay taxes on restricted stock vestings and to pay option price and taxes on option exercises.
(2)	Performance Awards are reserved at 200% of shares granted which is equal to the maximum payout in shares.

Restricted Stock

We ~~did not issue any~~recorded stock-based compensation expense, which is included in General, administrative and other expenses, for restricted stock ~~during~~awards of $220,000 and $211,000, for the three months ended ~~September~~June 30, ~~2017. During~~2018 and 2019, respectively and $465,000 and $428,000 for the second quarter of 2017, we issued 5,000 restricted stock grants to a new employee of the leadership team that vest over a five-year period with an aggregate grant date market value of approximately $0.1 million. During the first quarter of 2017, we issued a total of 22,250 restricted stock grants that vest over a three-year period with an aggregate grant date market value of approximately $0.6 million.

~~During the three~~six months ended ~~September~~June 30, ~~2016~~2018 and 2017, we recorded a benefit of $21,000 and $174,000 of pre-tax compensation expense, respectively, related to the vesting of restricted stock awards, which is included in general, administrative and other expenses. The benefit was primarily related to the cancellation of 50,000 unvested restricted stock for a former executive. During the nine months ended September 30, 2016 and 2017, we recorded pre-tax compensation expense of approximately $0.5 million for both periods.2019, respectively.

As of ~~September~~June 30, ~~2017,~~2019, we had approximately ~~$1.3~~$1.8 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately ~~1.7~~1.9 years.

Stock Options

~~As of September 30, 2017, there were 1,945,656 stock options outstanding and 708,379 stock options which remain unvested.~~ We did not grant any options during the three months ended September 30, 2017. During the second quarter of 2017, we granted 16,250 options to a new employee of the leadership team at an exercise price of $26.89. These options will vest in one-fifth increments over a five-year period and have a ten-year term. The fair value of the options granted during the second quarter of 2017 was approximately $0.1 million. During the first quarter of 2017, we granted 445,450 options to our leadership team and certain key employees at a weighted average exercise price of $26.54. These options will vest in one-fifth increments over a five-year period and have a ten-year term. The fair value of the total options granted during the first quarter of 2017 was approximately $3.2 million.

~~During the three months ended September 30, 2016 and 2017, we~~ recorded ~~approximately $0.2 million and $0.3 million, respectively, of pre-tax~~ stock-based compensation expense, which is included in General, administrative and other expenses, for stock ~~options. During the nine months ended September 30, 2016~~options of $236,000 and ~~2017, we recorded approximately $1.4 million and $1.2 million, respectively, of pre-tax compensation expense for stock options.~~

~~Performance Awards~~

We did not grant any performance awards during the three months ended September 30, 2017. During the second quarter of 2017, we granted 4,500 performance awards to a new employee of the leadership team, payable in shares. The fair value of these performance awards granted during the second quarter of 2017 was approximately $0.1 million. These awards will vest (if at all) on June 30, 2022, provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Earnings Before Interest Tax Depreciation and Amortization) and Adjusted Consolidated EBITDA Margin performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents 50% of the award and the Adjusted Consolidated EBITDA Margin performance represents 50% of the award. During the first quarter of 2017, we granted 101,040 performance awards to our leadership team and certain key employees, payable in shares. The fair value of these performance awards granted during the first quarter of 2017 was approximately $2.7 million. We recorded pre-tax compensation expense for performance awards totaling $46,000 and $208,000$149,000, for the three months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively and ~~$154,000~~$716,000 and ~~$465,000~~$353,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively.

Performance Awards

We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for performance awards of $344,000 and $58,000 for the three months ended June 30, 2018 and 2019, respectively and $620,000 and $77,000 for the six months ended June 30, 2018 and 2019, respectively.

Employee Stock Purchase Plan

~~During the third quarter of 2017, employees purchased a total of 11,525 shares of common stock through our employee stock purchase plan (“ESPP”) at a weighted average price of $21.76 per share.~~ We recorded ~~pre-tax~~ stock-based compensation expense, which is included in General, administrative and other expenses, for the ESPP totaling approximately $53,000 and ~~$60,000~~$61,000 for the three months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively and ~~$197,000~~$150,000 and ~~$204,000~~$166,000 for ~~both~~ the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017.~~

The fair value of the option to purchase shares under the ESPP is estimated on the date of grant (January 1 of each year) associated with the four quarterly purchase dates using the following assumptions:



	~~2017~~
~~Dividend yield~~	~~0.82~~	%
~~Expected volatility~~	~~18.82~~	%
~~Risk-free interest rate~~	~~0.53%, 0.65%, 0.77%, 0.89%~~
~~Expected life (years)~~	~~0.25, 0.50, 0.75, 1.00~~

Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of the purchase. The expected life of the ESPP grants represents the calendar quarters from the beginning of the year to the purchase date (end of each quarter).2019, respectively.

Director Compensation

We recorded ~~pre-tax~~stock-based compensation expense, ~~related to director compensation,~~ which is included in ~~general,~~General, administrative and other expenses ~~totaling $90,000~~, related to annual retainers and common stock awards of $118,000 and $114,000 for ~~both~~ the three months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively and ~~$302,000~~$202,000 and ~~$271,000~~$228,000 for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017,~~2019, respectively.

Share Repurchase

On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the ~~three~~six months ended ~~September~~June 30, ~~2017,~~2019, we repurchased ~~574,054~~400,000 shares of common stock for a total cost of ~~$14.0~~$7.8 million at an average cost of ~~$24.35~~$19.39 per share pursuant to ~~this~~our share repurchase program. We did not repurchase any shares of common stock in the first or second quarter of 2017. Our shares were purchased in the open market. Purchases were at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares.

~~On August 18, 2017,~~At June 30, 2019, we ~~purchased 100,000 shares of~~had approximately $0.6 million available for repurchases under our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. See Note 15 to our Consolidated Financial Statements included herein for additional information on our related party transactions.

program.

Cash Dividends

~~On July 26, 2017,~~During the six months ended June 30, 2018 and 2019, our Board declared ~~a dividend of $0.05~~the following dividends payable on the dates below (in millions, except per share totaling approximately $0.8 million, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. For the three months ended September 30, 2016, we paid a quarterly dividend of $0.050 per share, totaling approximately $0.8 million. For the nine months ended September 30, 2016 and 2017, we paid total dividends of approximately $1.7 million and $2.5 million, respectively.amounts):



2018	Per Share		Dollar Value
March 1^st	$	0.075	$	1.2
June 1^st	$	0.075	$	1.4

2019	Per Share		Dollar Value
March 1^st	$	0.075	$	1.4
June 3^rd	$	0.075	$	1.4

Accumulated other comprehensive income

Our components of accumulated other comprehensive income are as follows (in ~~thousands)~~millions):



	Accumulated Other Comprehensive Income
Balance at December 31, ~~2016~~2018	$	—
~~Increase~~Decrease in net unrealized gains associated with available-for-sale securities of the trusts	~~2,849~~(3.1		)
Reclassification of net unrealized gain activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus	~~(2,849~~3.1		)
Balance at ~~September~~June 30, ~~2017~~2019	$	—

~~12.~~16.EARNINGS PER SHARE

The following table sets forth the computation of the basic and diluted earnings per share for the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017~~2019 (in thousands, except per share data):


	For the Three Months Ended September 30,						For the Nine Months Ended September 30,						Three Months Ended June 30,						Six Months Ended June 30,
	2016			2017			2016			2017			2018			2019			2018			2019
Numerator for basic and diluted earnings per share:
Net income	$	5,683		$	3,038		$	15,454		$	14,532		$	2,747		$	4,862		$	12,103		$	11,387
Less: Earnings allocated to unvested restricted stock	(25		)	(10		)	(76		)	(52		)	(14		)	(21		)	(67		)	(52		)
Income attributable to common stockholders	$	5,658		$	3,028		$	15,378		$	14,480		$	2,733		$	4,841		$	12,036		$	11,335

Denominator:
Denominator for basic earnings per common share - weighted average shares outstanding	16,529			16,476			16,502			16,575			17,916			17,959			17,010			18,008
Effect of dilutive securities:
Stock options	273			335			260			332			212			29			240			35
Convertible subordinated notes	299			787			200			980
Convertible Notes													117			—			674			—
Denominator for diluted earnings per common share - weighted average shares outstanding	17,101			17,598			16,962			17,887			18,245			17,988			17,924			18,043

Basic earnings per common share:	$	0.34		$	0.18		$	0.93		$	0.87		$	0.15		$	0.27		$	0.71		$	0.63
Diluted earnings per common share:	$	0.33		$	0.17		$	0.91		$	0.81		$	0.15		$	0.27		$	0.67		$	0.63

The fully diluted weighted average shares outstanding for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018 and the corresponding calculation of fully diluted earnings per share, include approximately ~~787,000~~117,000 and ~~980,000~~674,000 shares, respectively that would have been issued upon ~~the~~ conversion of our ~~convertible subordinated notes~~Convertible Notes as a result of the application of the if-converted method prescribed by the

FASB ASC 260, Earnings Per Share. ~~There were 299,000 and 200,000 shares for~~For the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019, there were no shares that would have been issued upon conversion under the if-converted method.

For the ~~both the~~ three and ~~nine~~six months ended ~~September~~June 30, ~~2017~~2018, approximately ~~455,000~~645,000 and ~~320,000~~600,000 stock options, respectively were excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect. For the ~~both the~~ three and ~~nine~~six months ended ~~September~~June 30, ~~2016, no~~2019, approximately 1,094,000 and 1,200,000 stock options, respectively were excluded from the computation of diluted earnings per ~~share.~~share because the inclusion of such stock options would result in an antidilutive effect.

~~13.~~17.MAJOR SEGMENTS OF BUSINESS

We conduct funeral and cemetery operations only in the United States. The following table presents ~~revenues from operations,~~revenue, operating income (loss) ~~from operations~~, income (loss) before income taxes and total assets by segment (in thousands):

Funeral Cemetery Corporate Consolidated
Revenues from operations:
Three months ended September 30, 2017 $ 47,329
$ 13,725
$ —
$ 61,054
Three months ended September 30, 2016 $ 45,183
$ 14,957
$ —
$ 60,140

Nine months ended September 30, 2017 $ 150,279
$ 42,784
$ —
$ 193,063
Nine months ended September 30, 2016 $ 140,952
$ 44,384
$ —
$ 185,336

Income (loss) from operations before income taxes:
Three months ended September 30, 2017 $ 12,394
$ 3,002
$ (10,836 ) $ 4,560
Three months ended September 30, 2016 $ 13,478
$ 4,327
$ (10,231 ) $ 7,574

Nine months ended September 30, 2017 $ 45,414
$ 11,609
$ (33,208 ) $ 23,815
Nine months ended September 30, 2016 $ 44,322
$ 12,875
$ (33,337 ) $ 23,860

Total assets:
September 30, 2017 $ 637,075
$ 245,674
$ 4,297
$ 887,046
December 31, 2016 $ 634,145
$ 241,621
$ 9,303
$ 885,069



	Funeral		Cemetery		Corporate			Consolidated
Revenue:
Three Months Ended June 30, 2019	$	52,507	$	15,245	$	—		$	67,752
Three Months Ended June 30, 2018	48,532		15,315		—			63,847

Six Months Ended June 30, 2019	$	108,670	$	28,163	$	—		$	136,833
Six Months Ended June 30, 2018	107,126		30,108		—			137,234

Operating income (loss):
Three Months Ended June 30, 2019	$	14,624	$	4,626	$	(6,061	)	$	13,189
Three Months Ended June 30, 2018	12,654		4,171		(6,844		)	9,981

Six Months Ended June 30, 2019	$	32,700	$	8,150	$	(12,062	)	$	28,788
Six Months Ended June 30, 2018	32,318		8,695		(13,905		)	27,108

Income (loss) before income taxes:
Three Months Ended June 30, 2019	$	14,418	$	4,852	$	(12,262	)	$	7,008
Three Months Ended June 30, 2018	12,414		4,254		(12,921		)	3,747

Six Months Ended June 30, 2019	$	32,279	$	8,438	$	(24,508	)	$	16,209
Six Months Ended June 30, 2018	31,828		8,846		(24,693		)	15,981

Total assets:
June 30, 2019	$	702,202	$	239,799	$	15,387		$	957,388
December 31, 2018	686,470		226,475		4,557			917,502

~~14.~~18.SUPPLEMENTARY DATA

Balance Sheet

The detail of certain balance sheet accounts as of December 31, ~~2016~~2018 and ~~September~~June 30, ~~2017~~2019 (in thousands):


	December 31, 2016		September 30, 2017		December 31, 2018		June 30, 2019
Other current assets:
Income taxes receivable	$	1,932	$	671
Prepaid and other current assets:
Prepaid expenses					$	1,456	$	1,300
Federal income taxes receivable					923		—
State income taxes receivable					422		—
Other current assets	102		93		210		112
Total other current assets	$	2,034	$	764
Total prepaid and other current assets					$	3,011	$	1,412

Current portion of long-term debt and capital lease obligations:
Term note	$	11,250	$	14,063
Acquisition debt	1,771		2,063
Capital leases	246		197
Total current portion of long-term debt and capital lease obligations	$	13,267	$	16,323

Other current liabilities:
Income taxes payable	$	509	$	1,579
Deferred rent	208		232
Total other current liabilities	$	717	$	1,811

Accrued liabilities:
Accrued and other liabilities:
Accrued salaries and wages	$	4,005	$	1,365	$	4,088	$	3,948
Accrued incentive compensation	8,237		4,864		7,395		3,993
Accrued vacation	2,305		2,614		2,358		2,494
Accrued insurance	1,726		2,053		3,188		3,992
Accrued interest	1,235		257		1,856		1,928
Accrued ad valorem and franchise taxes	981		2,314		904		1,561
Accrued commissions	543		410		441		466
Other accrued liabilities	1,059		1,417		1,178		1,683
Total accrued liabilities	$	20,091	$	15,294
Federal income taxes payable					962		1,851
Deferred rent					274		—
Total accrued and other liabilities					$	22,644	$	21,916

Other long-term liabilities:
Deferred rent	$	1,207	$	1,029	$	692	$	—
Incentive compensation	575		924		1,563		1,249
Contingent consideration	785		770		878		671
Total other long-term liabilities	$	2,567	$	2,723	$	3,133	$	1,920

~~15.~~19.~~RELATED PARTY TRANSACTIONS~~SUBSEQUENT EVENTS

On ~~August 18, 2017,~~July 31, 2019, we ~~purchased 100,000~~entered into a second amendment to the Credit Facility. The Amendment increases the amount of proceeds of revolving loans that we are permitted to use for the repurchase of shares of our common stock from ~~Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. These shares had been held by Mr. Payne prior~~$30 million to ~~such repurchase for over one year. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4~~$50 million. The purchase price was the stock's trading price at the time of the transaction. These shares are currently held as treasury shares. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.

~~16.SUBSEQUENT EVENTS~~

On ~~October 14, 2017, we completed construction of and began operating a new funeral home in Pennsylvania.~~

On October 25, 2017, our Board approved an increase in our quarterly dividend on our common stock from $0.050 to $0.075 per share, effective with respect to dividends payable on December 1, 2017 and later.

~~On October 25, 2017,~~July 31, 2019, our Board approved a ~~$15.0~~share repurchase program authorizing us to purchase up to an aggregate of $25 million ~~increase in its authorization for repurchases~~ of ourcommon stock in ~~addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in~~ accordance with Rule 10b-18 of the Exchange ~~Act.~~Act of 1934, as amended. The shares may be purchased from time to time in the open market or in privately negotiated transactions.

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS

In addition to historical information, this Quarterly Report on Form 10-Q contains certain statements and information that may constitute forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical information, should be deemed to be forward-looking statements. These statements include, but are not limited to, statements regarding any projections of earnings, ~~revenues,~~revenue, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. The words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions are intended to identify forward-looking statements, which are generally not historical in nature. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future ~~revenues~~revenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:

~~our~~the ability to find and retain skilled personnel;

our ability to execute our growth strategy;

the ~~effects of competition;~~

~~the~~ execution of our Standards Operating, 4E Leadership and ~~Strategic~~Standard Acquisition Models;

the effects of competition;

changes in the number of deaths in our markets;

changes in consumer preferences;

our ability to generate preneed sales;

the investment performance of our funeral and cemetery trust funds;

fluctuations in interest rates;

our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;

the timely and full payment of death benefits related to preneed funeral contracts funded through life insurance contracts;

the financial condition of third-party insurance companies that fund our preneed funeral contracts;

increased or unanticipated costs, such as insurance or taxes;

our level of indebtedness and the cash required to service our indebtedness;

changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service;

effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;

consolidation of the ~~deathcare~~funeral and cemetery industry; and

other factors and uncertainties inherent in the ~~deathcare~~funeral and cemetery industry.

For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (i) Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018.

~~Readers~~Investors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.


Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations.

OVERVIEW

General

Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was ~~incorporated~~founded in 1991 to strategically consolidate and operate funeral homes and cemeteries in the ~~State of Delaware in December 1993 and is~~fragmented death care industry. We are a leading U.S. provider of funeral and cemetery services and ~~merchandise in the United States.~~merchandise. We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis. We operate in two business segments: funeral home operations, which currently account for approximately ~~78%~~80% of our ~~revenues,~~revenue, and cemetery operations, which currently account for approximately ~~22%~~20% of our ~~revenues.~~revenue.

At ~~September~~June 30, ~~2017,~~2019, we operated ~~171~~181 funeral homes in 2829 states and 3229 cemeteries in 11 states. We compete with other ~~public~~publicly held funeral and cemetery companies and smaller, privately-owned independent operators. We believe we are a market leader in most of our markets. ~~We provide funeral and cemetery services and products on both an “at-need” (time of death) and “preneed” (planned prior to death) basis.~~

Funeral Home Operations

Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Factors affecting our funeral operating results include, but are not limited to: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage to increase average revenue per contract.

Cemetery Operations

Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an ~~at-need~~atneed and preneed basis. Factors affecting our cemetery operating results include, but are not limited to: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds.

Business Strategy

Our business strategy is based on ~~having~~ strong, local leadership with entrepreneurial principles that is focused on sustainable ~~long term~~long-term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, ~~high performance~~high-performance culture operating framework linked with incentive compensation programs that attract top-quality industry talent to our ~~organization~~organization.

Our Mission Statement states that “we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry” and our Guiding Principles state our core values, which are comprised of:

~~honesty, integrity~~Honesty, Integrity and ~~quality~~Quality in ~~all that we do;~~All That We Do

~~hard~~Hard work, ~~pride~~Pride of ~~accomplishment~~Accomplishment, and ~~shared success through employee ownership;~~Shared Success Through Employee Ownership

~~belief~~Belief in the ~~power~~Power of ~~people through individual initiative~~People Through Individual Initiative and ~~teamwork;~~Teamwork

~~outstanding service~~Outstanding Service and ~~profitability go hand-in-hand; and~~Profitability Go Hand-in-Hand

~~growth~~Growth of the Company ~~is driven~~Is Driven by ~~decentralization~~Decentralization and ~~partnership.~~Partnership

Our five Guiding Principles collectively embody our Being The Best high-performance culture, operating framework. Our operations and business strategy are built upon the execution of the following three models:

Standards Operating ~~Model;~~Model

4E Leadership ~~Model; and~~Model

Strategic Acquisition ~~Model.~~Model

Standards Operating Model

Our Standards Operating Model is focused on growing local market share, ~~people development,~~service and ~~the~~guest experience and key operating and financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, ~~revenues~~revenue and earnings.

4E Leadership Model

Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high-performance culture: Energy to get the job done; the ability to Energize others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams.

Strategic Acquisition Model

Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. ~~Both~~We believe that both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic ranking criteria to assess acquisition candidates. As we execute this strategy over time, we ~~will~~expect to acquire larger, higher margin strategic businesses.

Our belief in our Mission Statement and Guiding Principles that define us and proper execution of the three models that define our strategy have given us the competitive advantage in any market in which we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin.

LIQUIDITY AND CAPITAL RESOURCES

Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our senior secured revolving credit facility (the “Credit Facility”).

We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018.

We intend to use cash on hand and future borrowings under our Credit Facility to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends and our debt obligations. From time to time we may also use our cash resources (including borrowings under our Credit Facility) to repurchase shares of our common stock and our remaining 2.75% convertible notes due 2021 in open market or privately negotiated transactions. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions. We believe that our existing and anticipated cash resources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividends and acquisitions for the foreseeable future.

Cash Flows

We began 2019 with $0.6 million in cash and ended the second quarter with $0.7 million. As of June 30, 2019, we had borrowings of $24.6 million outstanding on our Credit Facility compared to $27.1 million outstanding as of December 31, 2018.

The following table sets forth the elements of cash flow for the six months ended June 30, 2018 and 2019 (in thousands):



	Six Months Ended June 30,
	2018			2019
Cash at beginning of year	$	952		$	644

Cash flow from operating activities	26,281			21,912

Net proceeds from the sale of other assets	—			100
Growth capital expenditures	(1,366		)	(4,479		)
Maintenance capital expenditures	(3,714		)	(4,175		)
Cash flow from investing activities	(5,080		)	(8,554		)

Net payments on long-term debt obligations	(220,328		)	(3,410		)
Payment of debt issuance costs related to long-term debt	(1,551		)	—
Redemption of the Convertibles Notes	(75,229		)	(27		)
Payment of transaction costs related to the redemption of the Convertibles Notes	(845		)	—
Proceeds from the issuance of the Senior Notes	320,125			—
Payment of debt issuance costs related to the Senior Notes	(1,367		)	—
Net proceeds from employee equity plans	213			601
Dividends paid on common stock	(2,640		)	(2,725		)
Purchase of treasury stock	—			(7,756		)
Cash flow from financing activities	18,378			(13,317		)

Cash at end of the period	$	40,531		$	685

Operating Activities

For the six months ended June 30, 2019, cash flow provided by operating activities was $21.9 million compared to cash flow provided by operating activities of $26.3 million for the six months ended June 30, 2018. The decrease of $4.4 million was due primarily to a $5.0 million net increase in interest payments on our Senior Notes, Convertible Notes and Credit Facility.

Investing Activities

Our investing activities, resulted in a net cash outflow of $8.6 million for the six months ended June 30, 2019 compared to $5.1 million for the six months ended June 30, 2018, an increase of $3.5 million.

For the six months ended June 30, 2019, capital expenditures totaled $8.7 million compared to $5.1 million for the six months ended June 30, 2018, an increase of $3.6 million. The following tables present our growth and maintenance capital expenditures (in millions):



	Six Months Ended June 30,
	2018		2019
Growth
Cemetery development	$	0.9	$	2.6
Construction for new funeral facilities	0.1		—
Renovations at certain businesses⁽¹⁾	0.4		1.9
Total	$	1.4	$	4.5




(1)	During the six months ended June 30, 2019, we spent approximately $1.0 million for renovations on our four Panama City businesses that were affected by Hurricane Michael, which was reimbursed by our property insurance policy.



	Six Months Ended June 30,
	2018		2019
Maintenance
Facility repairs and improvements	$	0.7	$	1.0
Vehicles	1.3		1.2
General equipment and furniture	1.1		1.5
Paving roads and parking lots	0.3		0.4
Information technology infrastructure improvements	0.3		0.1
Total	$	3.7	$	4.2

Financing Activities

Our financing activities resulted in a net cash outflow of $13.3 million for the six months ended June 30, 2019 compared to a net cash inflow of $18.4 million for the six months ended June 30, 2018, a decrease of $31.7 million. During the six months ended June 30, 2019, we had net payments on our long-term debt obligations of $3.4 million, paid $2.7 million in dividends and repurchased treasury stock for $7.8 million.

During the six months ended June 30, 2018, we had net borrowings on our Senior Notes of $318.8 million, offset by net payments on our long-term debt obligations of $221.9 million and a payment of $76.1 million to exchange our Convertible Notes. We also paid $2.6 million in dividends.

Dividends

During the six months ended June 30, 2018 and 2019, our Board declared the following dividends payable on the dates below (in millions, except per share amounts):



2018	Per Share		Dollar Value
March 1^st	$	0.075	$	1.2
June 1^st	$	0.075	$	1.4

2019	Per Share		Dollar Value
March 1^st	$	0.075	$	1.4
June 3^rd	$	0.075	$	1.4

Share Repurchase

During the six months ended June 30, 2019, we repurchased 400,000 shares of common stock for a total cost of $7.8 million at an average cost of $19.39 per share pursuant to our share repurchase program. At June 30, 2019, we had approximately $0.6 million available for repurchases under our share repurchase program.

Long-term Debt and Lease Obligations

The outstanding principal of our long-term debt and lease obligations at June 30, 2019 is as follows:



	June 30, 2019
Credit Facility	$	24.6
Finance leases	6.3
Operating leases	24.2
Acquisition debt	8.2
Total long-term debt and lease obligations	$	63.3

Credit Facility

On May 31, 2018, we entered into a $150.0 million Credit Facility with the financial institutions party thereto, as lenders, and Bank of America, N.A., as administrative agent. Our obligations under the Credit Facility are unconditionally guaranteed on a joint and several basis by the same subsidiaries which guarantee the Senior Notes and certain of our subsequently acquired or organized domestic subsidiaries (collectively, the “Credit Facility Guarantors”). The Credit Facility also contains an accordion provision feature allowing for future increases in the facility size by an additional amount of up to $75.0 million. The Credit Facility matures on May 31, 2023.

We have one letter of credit issued on November 30, 2018 and outstanding under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% and will expire on November 25, 2019. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under our Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of June 30, 2019, the prime rate margin was equivalent to 1.00% and the LIBOR margin was 2.00%. The weighted average interest rate on our Credit Facility was 3.9% and 4.0% for the three and six months ended June 30, 2019, respectively. The weighted average interest rate on our Former Credit Agreement was 4.2% and 4.0% for the three and six months ended June 30, 2018, respectively.

We were in compliance with the covenants contained in the Credit Facility as of June 30, 2019, with a leverage ratio of 5.05 to 1.00 and a fixed charge coverage ratio of 2.15 to 1.00.

Amortization of debt issuance costs related to our Credit Facility was $54,000 and $108,000 for the three and six months ended June 30, 2019, respectively and amortization of debt issuance costs related to our Former Credit Agreement was $45,000 and $140,000 for the three and six months ended June 30, 2018, respectively.

Lease Obligations

On January 1, 2019, we adopted Accounting Standards Update No. 2016-02, Leases (Topic 842) and subsequent amendments, collectively referred to as (“Topic 842”). As a result, on January 1, 2019, we recorded operating lease right-of-use (“ROU”) assets of $16.5 million and operating lease liabilities of $17.3 million related to real estate and equipment leases, based on the present value of the future lease payments on the date of adoption. Lease expense related to our operating leases and short-term leases was $1.0 million and $0.1 million, respectively, for the three months ended June 30, 2019 and $1.9 million and $0.2 million, respectively, for the six months ended June 30, 2019. Depreciation expense related to our finance leases was $0.1 million and $0.2 million for the three and six months ended June 30, 2019, respectively. Interest expense related to our finance leases was $0.1 million and $0.2 million for the three and six months ended June 30, 2019, respectively.

During the three months ended June 30, 2019, we modified an existing operating lease to extend the term through 2030. As a result of this modification, we increased our lease liabilities and right-of-use assets by $8.2 million.

Acquisition Debt

Acquisition debt consisted of deferred purchase price and promissory notes payable to sellers. Imputed interest expense related to our acquisition debt was $201,000 and $160,000 for the three months ended June 30, 2018 and 2019, respectively and $425,000 and $329,000 for the six months ended June 30, 2018 and 2019, respectively.

Convertible Subordinated Notes due 2021

On March 19, 2014, we issued $143.75 million aggregate principal amount of our 2.75% convertible notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.

On May 7, 2018, we completed privately-negotiated exchanges (the “Exchange”) of approximately $115.0 million in aggregate principal amount of Convertible Notes, which represented 80% of the aggregate principal amount of our Convertible Notes then outstanding, with a limited number of convertible noteholders, for approximately $74.8 million in cash (plus accrued interest of $0.4 million totaling $75.2 million) and 2,822,859 newly issued shares of our common stock, par value $.01 per share, pursuant to a private placement in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended (the “Securities Act”). The cash portion of the exchange consideration was funded from our Former Credit Agreement. Following the settlement of the Exchange, the aggregate principal amount of our Convertible Notes outstanding was reduced to approximately $28.8 million.

On December 24, 2018, we completed privately-negotiated repurchases of an additional $22.4 million in aggregate principal amount of Convertible Notes, which represented 78% of the aggregate principal amount of our Convertible Notes then outstanding for $22.9 million in cash (plus accrued interest of approximately $0.2 million totaling $23.0 million). The consideration for the repurchases was funded from our Credit Facility. Following these repurchases, the aggregate principal amount of our Convertible Notes outstanding was reduced to $6.3 million.

On April 4, 2019, we completed a privately-negotiated repurchase of an additional $25,000 in aggregate principal amount of Convertible Notes then outstanding for $27,163.

At June 30, 2019, the carrying amount of the equity component was approximately $0.8 million, the principal amount of the liability component was approximately $6.3 million and the net carrying amount was approximately $5.8 million. The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized debt discount for both the three and six months ended June 30, 2018 and 2019 was 11.4%. The effective interest rate on the unamortized debt issuance costs for both the three and six months ended June 30, 2018 and 2019 was 3.2%.

The Convertible Notes are general unsecured obligations and are subordinated in the right of payment to all of our existing and future senior indebtedness and equal in right of payment with our other existing and future subordinate indebtedness. The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at June 30, 2019, is 45.2619 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.09 per share of common stock.

Senior Notes due 2026

On May 31, 2018, we completed the issuance of $325.0 million in aggregate principal amount of our Senior Notes and related guarantees in a private offering under Rule 144A and Regulation S of the Securities Act.

The Senior Notes bear interest at 6.625% per year. Interest on the Senior Notes began to accrue on May 31, 2018 and is payable semi-annually in arrears on September 1 and December 1 of each year, beginning on December 1, 2018 to holders of record on each May 15 and November 15 preceding an interest payment date. The Senior Notes mature on September 1, 2026, unless earlier redeemed or purchased, as such redemption or purchase may be allowed pursuant to the indenture governing the Senior Notes. The Senior Notes are unsecured, senior obligations and are fully and unconditionally guaranteed on a senior unsecured basis, jointly and severally, by certain of our existing subsidiaries.

Financial Highlights

Below are our financial highlights for the three months ended June 30, 2018 and 2019 (dollars in thousands except for volumes and averages):



	Three Months Ended June 30,
	2018		2019
Revenue	$	63,847	$	67,752
Funeral contracts	8,653		9,366
Average revenue per contract, including preneed funeral trust earnings	$	5,553	$	5,557
Preneed interment rights (property) sold	1,521		2,056
Average price per interment right sold	$	3,999	$	3,660
Gross profit	$	16,825	$	19,250
Net income	$	2,747	$	4,862

Revenue for the three months ended June 30, 2019 and 2018 was $67.7 million and $63.8 million, respectively, which represents an increase of approximately $3.9 million, or 6.1%. Funeral revenue increased $4.0 million to $52.5 million and cemetery revenue decreased $0.1 million to $15.2 million in the three months ended June 30, 2019 compared to the same period in 2018. However, excluding revenue from the three cemetery businesses divested in the second half of 2018, cemetery revenue increased $1.3 million in the three months ended June 30, 2018. For the quarter comparatives, we experienced an 8.2% increase in total funeral contracts, while the average revenue per funeral contract remained flat. In addition, we experienced an increase of 35.2% in the number of preneed interment rights (property) sold, while we experienced a decrease of 8.5% in the average price per interment right sold. Further discussion of Revenue for our funeral home and cemetery segments is presented herein under “Results of Operations.”

Gross profit for the three months ended June 30, 2019 increased $2.4 million, or 14.4%, to $19.2 million, from $16.8 million for the three months ended June 30, 2018, primarily due to the increase in same store funeral revenue. Further discussion of the components of Gross profit for our funeral home and cemetery segments is presented herein under “Results of Operations.”

Net income for the three months ended June 30, 2019 increased $2.1 million to $4.9 million, equal to $0.27 per diluted share, compared to net income of $2.7 million, equal to $0.15 per diluted share, for the three months ended June 30, 2018. Further discussion of General, administrative and other expenses, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”

Below are our financial highlights for the six months ended June 30, 2018 and 2019 (dollars in thousands except for volumes and averages):



	Six Months Ended June 30,
	2018		2019
Revenue	$	137,234	$	136,833
Funeral contracts	18,765		19,247
Average revenue per contract, including preneed funeral trust earnings	$	5,662	$	5,597
Preneed interment rights (property) sold	3,210		3,518
Average price per interment right sold	$	3,608	$	3,721
Gross profit	$	41,013	$	40,850
Net income	$	12,103	$	11,387

Revenue for the six months ended June 30, 2019 and 2018 was $136.8 million and $137.2 million, respectively, which represents a decrease of approximately $0.4 million, or 0.3%. Funeral revenue increased $1.5 million to $108.7 million and cemetery revenue decreased $1.9 million to $28.2 million in the six months ended June 30, 2019 compared to the same period in 2018. However, excluding revenue from the three cemetery businesses divested in the second half of 2018, cemetery revenue increased $1.4 million in the six months ended June 30, 2018. For the period comparatives, we experienced a 2.6% increase in total funeral contracts, while we experienced a 1.1% decrease in the average revenue per funeral contract. In addition, we experienced an increase of 9.6% in the number of preneed interment rights (property) sold and an increase of 3.1% in the average price per interment right sold. Further discussion of Revenue for our funeral home and cemetery segments is presented herein under “Results of Operations.”

Gross profit for the six months ended June 30, 2019 decreased $0.2 million, or 0.4%, to $40.8 million, from $41.0 million for the six months ended June 30, 2018, primarily due to the three cemetery businesses that were divested in the second half of

2018. Further discussion of the components of Gross profit for our funeral home and cemetery segments is presented herein under “Results of Operations.”

Net income for the six months ended June 30, 2019 decreased $0.7 million to $11.4 million, equal to $0.63 per diluted share, compared to net income of $12.1 million, equal to $0.67 per diluted share, for the six months ended June 30, 2018. Further discussion of General, administrative and other expenses, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”

REPORTING AND NON-GAAP FINANCIAL MEASURES

We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the quarter ending ~~September~~June 30, ~~2017~~2019 dated ~~October 25, 2017~~July 31, 2019 and discussed in the corresponding earnings conference call. This Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.

~~Historically, the dynamic nature of the evolutionary process of building our culture, especially since launching the~~ ~~Good To Great Journey~~ in the beginning of 2012, has led to a large number of charges such as severance and retirement, consulting and other activities, which are not core to our operations and as such, have been added back to GAAP earnings as “Special Items”. The ~~Special Items are important to add back because of the transformational nature of major changes over the last several years within our Operations and Strategic Growth Leadership Team.~~

Accordingly, these non-GAAP Special Items will be comprised of only those charges materially outside the normal course of business. The number of these Special Items were minimal in 2016 and should continue to be minimal thereafter, which should result in major shrinkage of “the gap” between our GAAP and non-GAAP reported performance.

~~The non-GAAP financial measures in the~~ Trend Report ~~include such measures as “Special Items,” “Adjusted~~is not a part of or incorporated by reference into this Quarterly Report on Form 10-Q.

Below is a reconciliation of Net Income,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “Adjusted Consolidated EBITDA Margin,” “Adjusted Free Cash Flow,” “Funeral Field EBITDA,” “Cemetery Field EBITDA,” “Funeral Financial EBITDA,” “Cemetery Financial EBITDA,” “Total Field EBITDA,” “Total Field EBITDA Margin,” “Operating Profit,” “Operating Profit Margin,” “Adjusted Basic Earnings Per Share” and “Adjusted Diluted Earnings Per Share.” These financial measurements are defined asincome (a GAAP ~~items adjusted~~measure) to Adjusted net income (a non-GAAP measure) for Special Items and are reconciled to GAAP in our earnings release and on the Trend Reports posted on our website (www.carriageservices.com). Our presentation of these measures may not be comparable to similarly titled measures in other companies’ reports.

~~The non-GAAP definitions we use are as follows:~~

Special Items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special Items are taxed at the federal statutory rate of 35% for both the three and ~~nine~~six months ended ~~September~~June 30, ~~2016~~2018 and ~~2017, except for the accretion of the discount on the Convertible Notes~~2019 (in thousands):



	Three Months Ended June 30,				Six Months Ended June 30,
	2018		2019		2018		2019
Net income	$	2,747	$	4,862	$	12,103	$	11,387
Special items ⁽¹⁾, net of tax except for items noted by **
Severance and retirement costs	—		483		—		654
Accretion of discount on convertible subordinated notes**	555		60		1,715		117
Net loss on early extinguishment of debt	740		—		740
Litigation reserve	—		281		—		380
Adjusted net income⁽²⁾	$	4,042	$	5,686	$	14,558	$	12,538




(1)	Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special items are typically taxed at the federal statutory rate, except for the Accretion of the discount on convertible subordinated notes, as this is a non-tax deductible item.
(2)	Adjusted net income is defined as Net income plus adjustments for Special items and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations.

Below is ~~a non-tax deductible item.~~

~~Adjusted Net Income is defined as net income plus adjustments for Special Items.~~

~~Consolidated EBITDA is defined as net income before income taxes, interest expenses, non-cash stock compensation, depreciation and amortization, and interest income and other, net.~~

~~Adjusted Consolidated EBITDA is defined as Consolidated EBITDA plus adjustments for Special Items.~~

~~Adjusted Consolidated EBITDA Margin is defined as Adjusted Consolidated EBITDA as a percentage of revenue.~~

~~Adjusted Free Cash Flow is defined as net cash provided by operations, adjusted by Special Items as deemed necessary, less cash for maintenance capital expenditures.~~

Funeral Field EBITDA is defined as Funeral Gross Profit, which is funeral revenue minus funeral field costs and expenses, less depreciation and amortization, regional and unallocated funeral costs and Funeral Financial EBITDA.

Cemetery Field EBITDA is defined as Cemetery Gross Profit, which is cemetery revenue minus cemetery field costs and expenses, less depreciation and amortization, regional and unallocated cemetery costs and Cemetery Financial EBITDA.

~~Funeral Financial EBITDA is defined as Funeral Financial Revenue less Funeral Financial Expenses.~~

~~Cemetery Financial EBITDA is defined as Cemetery Financial Revenue less Cemetery Financial Expenses.~~

~~Total Field EBITDA is defined as Gross Profit less depreciation and amortization, regional and unallocated costs.~~

~~Total Field EBITDA Margin is defined as Total Field EBITDA as a percentage of revenue.~~

Operating Profit is defined as Gross Profit, which is funeral and cemetery revenue minus funeral and cemetery field costs and expenses, less field depreciation and amortization and regional and unallocated funeral and cemetery costs.

~~Operating Profit Margin is defined as Operating Profit as a percentage of revenue.~~

~~Adjusted Basic Earnings Per Share is defined as GAAP Basic Earnings Per Share, adjusted for Special Items.~~

~~Adjusted Diluted Earnings Per Share is defined as GAAP Diluted Earnings Per Share, adjusted for Special Items.~~

~~We are providing below~~ a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 compared to the three~~2018 and ~~nine months ended September 30, 2016~~2019 (in thousands):


	For the Three Months Ended September 30,				For the Nine Months Ended September 30,				Three Months Ended June 30,				Six Months Ended June 30,
	2016		2017		2016		2017		2018		2019		2018		2019
Gross profit	$	18,228	$	15,480	$	58,338	$	57,239	$	16,825	$	19,250	$	41,013	$	40,850

Field depreciation and amortization	3,452		3,601		10,359		10,719
Cemetery property amortization									891		1,169		1,799		2,018
Field depreciation expense									3,013		3,059		5,878		6,144
Regional and unallocated funeral and cemetery costs	2,783		3,937		8,547		9,845		3,267		3,622		6,548		6,411
Operating profit	$	24,463	$	23,018	$	77,244	$	77,803	$	23,996	$	27,100	$	55,238	$	55,423

Our operations are ~~providing below~~reported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP measure) by ~~Segment~~segment for the three and ~~nine~~six months ended ~~September~~June 30, ~~2017 compared to the three~~2018 and ~~nine months ended September 30, 2016~~2019 (in thousands):

For the Three Months Ended September 30, For the Nine Months Ended September 30,
2016 2017 2016 2017
Funeral Home Segment $ 18,201
$ 18,062
$ 58,406
$ 61,161
Cemetery Segment 6,262
4,956
18,838
16,642
Operating profit $ 24,463
$ 23,018
$ 77,244
$ 77,803



	Three Months Ended June 30,						Six Months Ended June 30,
	2018			2019			2018			2019
Funeral Home	$	17,953		$	20,420		$	43,045		$	43,587
Cemetery	6,043			6,680			12,193			11,836
Operating profit	$	23,996		$	27,100		$	55,238		$	55,423

Operating profit margin⁽¹⁾	37.6		%	40.0		%	40.3		%	40.5		%




(1)	Operating profit margin is defined as Operating profit as a percentage of Revenue.

Further discussion of Operating profit for our ~~Funeral Home~~funeral home and ~~Cemetery Segments~~cemetery segments is presented herein under “Results of Operations.”

RESULTS OF OPERATIONS

~~Financial Highlights~~

~~Three~~The following is a discussion of our results of operations for the three and six months ended June 30, 2019 compared to the same period of 2018. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2015 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2014 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance.

The term “divested” when discussed in the Funeral Home Segment, refers to a business sold in December 2017 that had trailing expenses in 2018. The term “divested” when discussed in the Cemetery Segment, refers to three cemetery businesses that we ceased to operate on September 30, ~~2017 compared~~2018, as a result of an expired management agreement. Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure.

Funeral Home Segment

The following tables set forth certain information related to our Revenue and Operating profit from our funeral home operations for the three months ended ~~September~~June 30, ~~2016~~2019 compared to the three months ended June 30, 2018 (in thousands):

~~Total~~



	Three Months Ended June 30,
	2018		2019
Revenue:
Same store operating revenue	$	40,653	$	42,127
Acquired operating revenue	5,666		8,182
Preneed funeral insurance commissions	354		329
Preneed funeral trust earnings	1,859		1,869
Total	$	48,532	$	52,507

Operating profit:
Same store operating profit	$	14,254	$	15,370
Acquired operating profit	1,721		3,091
Preneed funeral insurance commissions	154		134
Preneed funeral trust earnings	1,824		1,825
Total	$	17,953	$	20,420

The following measures reflect the significant metrics over this comparative period:



	Three Months Ended June 30,
	2018			2019
Same store:
Contract volume	7,703			7,993
Average revenue per contract, excluding preneed funeral trust earnings	$	5,278		$	5,271
Average revenue per contract, including preneed funeral trust earnings	$	5,491		$	5,470
Burial rate	38.9		%	38.6		%
Cremation rate	53.4		%	53.7		%

Acquired:
Contract volume	950			1,373
Average revenue per contract, excluding preneed funeral trust earnings	$	5,964		$	5,959
Average revenue per contract, including preneed funeral trust earnings	$	6,050		$	6,064
Burial rate	40.3		%	42.1		%
Cremation rate	51.7		%	50.3		%

Funeral home same store operating revenue for the three months ended ~~September~~June 30, ~~2017~~2019 increased $1.5 million, primarily due to a 3.8% increase in same store contract volumes, while the average revenue per contract remained flat compared to the three months ended June 30, 2018.

Same store operating profit for the three months ended June 30, 2019 increased $1.1 million when compared to the three months ended June 30, 2018 and ~~2016 was $61.1~~the comparable operating profit margin increased 140 basis points to 36.5%. The increase is primarily due to the increase in same store revenue coupled with better management of controllable expenses. The higher operating profit margin is a result of the company wide changes implemented in the fourth quarter of 2018 to refocus on operational leadership and high performance operating standards.

Funeral home acquired operating revenue for the three months ended June 30, 2019 increased $2.5 million, ~~and $60.1 million, respectively, which represents an increase~~as our funeral home acquired portfolio for the three months ended June 30, 2019 includes four businesses acquired in the third quarter of ~~approximately $0.9 million, or 1.5%. Funeral revenue increased $2.1 million to $47.3 million, while cemetery revenue decreased $1.2 million to $13.7 million~~2018 not present in the three months ended ~~September~~June 30, ~~2017~~2018.

Acquired operating profit for the three months ended June 30, 2019 increased $1.4 million when compared to the three months ended June 30, 2018. Operating profit margin increased by 740 basis points to 37.8% for the three months ended June 30, 2019 compared to the same period in ~~2016. For~~2018. The increase is primarily due to the businesses acquired in the third quarter ~~comparatives, we experienced~~of 2018, as operating profit margins for these acquired businesses were higher compared to our remaining acquired portfolio. We additionally had margin improvements in the remaining acquired portfolio as a ~~3.3% increase~~result of the company wide changes implemented in ~~total~~the fourth quarter of 2018.

Preneed funeral ~~contracts~~insurance commissions and ~~an increase~~preneed funeral trust earnings, which are recorded in Other revenue, on a combined basis, remained flat for the three months ended June 30, 2019 compared to the same period in 2018. Operating profit for preneed funeral insurance commissions and preneed funeral trust earnings, on a combined basis, also remained flat for the three months ended June 30, 2019 compared to the same period in 2018.

The following tables set forth certain information related to our Revenue and Operating profit from our funeral home operations for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 (in thousands):



	Six Months Ended June 30,
	2018			2019
Revenue:
Same store operating revenue	$	89,773		$	87,629
Acquired operating revenue	12,828			16,622
Preneed funeral insurance commissions	614			688
Preneed funeral trust earnings	3,911			3,731
Total	$	107,126		$	108,670

Operating profit:
Same store operating profit	$	34,577		$	33,338
Acquired operating profit	4,446			6,336
Divested operating (loss)	(3		)	—
Preneed funeral insurance commissions	192			265
Preneed funeral trust earnings	3,833			3,648
Total	$	43,045		$	43,587

The following measures reflect the significant metrics over this comparative period:



	Six Months Ended June 30,
	2018			2019
Same store:
Contract volume	16,705			16,483
Average revenue per contract, excluding preneed funeral trust earnings	$	5,374		$	5,316
Average revenue per contract, including preneed funeral trust earnings	$	5,582		$	5,509
Burial rate	39.9		%	38.9		%
Cremation rate	52.8		%	53.4		%

Acquired:
Contract volume	2,060			2,764
Average revenue per contract, excluding preneed funeral trust earnings	$	6,227		$	6,014
Average revenue per contract, including preneed funeral trust earnings	$	6,306		$	6,122
Burial rate	43.0		%	42.8		%
Cremation rate	49.5		%	49.5		%

Funeral home same store operating revenue for the six months ended June 30, 2019 decreased $2.1 million, primarily due to the decrease in same store contract volumes, as well as the slight decrease in the average revenue per contract compared to the six months ended June 30, 2018. The contract volume in the first quarter of 2018 was significantly influenced by a severe flu season.

Same store operating profit for the six months ended June 30, 2019 decreased $1.2 million when compared to the six months ended June 30, 2018 and the comparable operating profit margin decreased 50 basis points to 38.0%. The decrease is primarily due to the decrease in same store revenue. Although we experienced an overall decrease in operating expenses of $0.9 million, as a percentage of revenue, certain expenses increased such as general liability insurance costs. This increase was partially offset by a reduction in salaries and benefits as a result of the company wide changes implemented in the fourth quarter of 2018, as well as decreased health insurance costs.

Funeral home acquired operating revenue for the six months ended June 30, 2019 increased $3.8 million, as our funeral home acquired portfolio for the six months ended June 30, 2019 includes four businesses acquired in the third quarter of 2018 not present in the three months ended June 30, 2018. Although we experienced an increase in acquired contract volumes, we experienced decreases in acquired average revenue per burial and cremation contracts due to increased discounts.

Acquired operating profit for the six months ended June 30, 2019 increased $1.9 million when compared to the six months ended June 30, 2018. Operating profit margin increased by 340 basis points to 38.1% for the six months ended June 30, 2019

compared to the same period in 2018. The increase is primarily due to the businesses acquired in the third quarter of ~~1.8%. In addition, while~~2018, as operating profit margins for these acquired businesses were higher compared to our remaining acquired portfolio.

Preneed funeral insurance commissions and preneed funeral trust earnings, which are recorded in Other revenue, on a combined basis, decreased $0.1 million for the six months ended June 30, 2019 compared to the same period in 2018 due to a decrease in earnings from the maturity of preneed contracts, offset by an increase in preneed funeral insurance commission income. Operating profit for preneed funeral insurance commissions and preneed funeral trust earnings, on a combined basis, decreased $0.1 million for the six months ended June 30, 2019 compared to the same period in 2018 primarily due to the decrease in the earnings from the maturity of preneed contracts.

Cemetery Segment

The following tables set forth certain information related to our Revenue and Operating profit from our cemetery operations for the three months ended June 30, 2019 compared to the three months ended June 30, 2018 (in thousands):



	Three Months Ended June 30,
	2018		2019
Revenue:
Same store operating revenue	$	11,886	$	13,227
Divested revenue	1,622		—
Cemetery trust earnings	1,383		1,623
Preneed cemetery finance charges	424		395
Total	$	15,315	$	15,245

Operating profit:
Same store operating profit	$	3,883	$	4,808
Divested operating profit	472		—
Cemetery trust earnings	1,264		1,477
Preneed cemetery finance charges	424		395
Total	$	6,043	$	6,680

The following measures reflect the significant metrics over this comparative period (dollars in thousands):



	Three Months Ended June 30,
	2018			2019
Same store:
Preneed revenue as a percentage of operating revenue	59		%	64		%
Preneed revenue	$	7,001		$	8,454
Number of preneed interment rights sold	1,521			2,056
Atneed revenue	$	4,885		$	4,773

Cemetery same store operating revenue for the three months ended June 30, 2019 increased $1.3 million, or 11.3%, as we experienced a ~~decrease of 6.3%~~35.2% increase in the number of preneed interment rights ~~(property)~~ sold, partially offset by an 8.5% decrease in the average price ~~per interment right~~of interments sold ~~increased 1.2%. Further discussion~~for the three months ended June 30, 2019 compared to the same period in 2018. Same store atneed revenue, which represents approximately 36% of ~~revenue for~~ our ~~funeral home and cemetery segments on a~~ same store ~~and acquired basis is presented herein under “Results~~operating revenue decreased $0.1 million, as we experienced a a 5.5% decrease in the average sale per contract, which was partially offset by a 3.4% increase in the number of ~~Operations.”~~atneed contracts sold in the period.

~~Gross~~Cemetery same store operating profit for the three months ended ~~September~~June 30, ~~2017 decreased $2.7 million, or 15.1%, to $15.5~~2019 increased $0.9 million from ~~$18.2~~the same period in 2018. The comparable operating profit margin increased 360 basis points to 36.3% for the three months ended June 30, 2019 from 32.7% in the same period in 2018. The higher operating profit margin is a result of the company wide changes implemented in the fourth quarter of 2018 to refocus on operational leadership and high performance operating standards as total cemetery expenses only increased 5.0% compared to the 11.3% increase in operating revenue.

Preneed cemetery trust earnings and preneed cemetery finance charges, which are recorded in Other Revenue, on a combined basis, increased $0.2 million for the three months ended ~~September~~June 30, 2016 primarily due to a decline in preneed cemetery revenue and higher costs as a percentage of revenue in the six businesses we acquired in 2016. As these acquired businesses transition into our Standards Operating Model, we expect to see their gross profit margins rise towards those on a same store basis.

Further discussion of the components of Gross profit, excluding field depreciation and amortization and regional and unallocated funeral and cemetery costs is presented herein under “Results of Operations” within our funeral home and cemetery segments. Further discussion of field depreciation and amortization and regional and unallocated funeral and cemetery costs are presented herein under “Other Financial Statement Items.”

Net income for the three months ended September 30, 2017 decreased $2.6 million to $3.0 million, equal to $0.17 per diluted share, compared to net income of $5.7 million, equal to $0.33 per diluted share, for the three months ended September 30, 2016. Further discussion of general, administrative and other expenses, home office depreciation and amortization expense, interest expense, income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”

~~Nine months ended September 30, 2017 compared to Nine months ended September 30, 2016~~

Total revenue for the nine months ended September 30, 2017 and 2016 was $193.1 million and $185.3 million, respectively, which represents an increase of approximately $7.7 million, or 4.2%. Funeral revenue increased $9.3 million to $150.3 million, while cemetery revenue decreased $1.6 million to $42.8 million in the nine months ended September 30, 20172019 compared to the same period in ~~2016. For~~2018. The increase is primarily due to increased capital gains from our perpetual care trust in the three months ended June 30, 2019 compared to the same period ~~comparatives,~~in 2018.

The following tables set forth certain information related to our Revenue and Operating profit from our cemetery operations for the six months ended June 30, 2019 compared to the six months ended June 30, 2018 (in thousands):



	Six Months Ended June 30,
	2018		2019
Revenue:
Same store operating revenue	$	23,137	$	24,516
Divested revenue	3,233		—
Cemetery trust earnings	2,935		2,874
Preneed cemetery finance charges	803		773
Total	$	30,108	$	28,163

Operating profit:
Same store operating profit	$	7,746	$	8,469
Divested operating profit	969		—
Cemetery trust earnings	2,675		2,594
Preneed cemetery finance charges	803		773
Total	$	12,193	$	11,836

The following measures reflect the significant metrics over this comparative period (dollars in thousands):



	Six Months Ended June 30,
	2018			2019
Same store:
Preneed revenue as a percentage of operating revenue	58		%	62		%
Preneed revenue	$	13,445		$	15,114
Number of preneed interment rights sold	3,210			3,518
Atneed revenue	$	9,692		$	9,402

Cemetery same store operating revenue for the six months ended June 30, 2019 increased $1.4 million, or 6.0%, as we experienced a ~~5.2%~~9.6% increase ~~in total funeral contracts and an increase in the average revenue per funeral contract of 1.7%. In addition, while we experienced a decrease of 10.4%~~ in the number of preneed interment rights ~~(property)~~ sold, as well as a 3.1% increase in the average price ~~per interment right~~of interments sold ~~increased 4.6%. Further discussion~~for the six months ended June 30, 2019 compared to the same period in 2018. Same store atneed revenue, which represents approximately 38% of ~~revenue for~~ our ~~funeral home and cemetery segments on a~~ same store ~~and acquired basis is presented herein under “Results~~operating revenue decreased $0.3 million, as we experienced a 2.5% decrease in the number of ~~Operations.”~~atneed contracts.

~~Gross~~Cemetery same store operating profit for the ~~nine~~six months ended ~~September~~June 30, ~~2017 decreased $1.1 million, or 1.9%, to $57.2~~2019 increased $0.7 million from ~~$58.3~~the same period in 2018. The comparable operating profit margin increased 100 basis points to 34.5% for the six months ended June 30, 2019 from 33.5% in the same period in 2018. The higher operating profit margin is a result of the company wide changes implemented in the fourth quarter of 2018 to refocus on operational leadership and high performance operating standards.

Preneed cemetery trust earnings and preneed cemetery finance charges, which are recorded in Other revenue, on a combined basis, decreased $0.1 million for the ~~nine~~six months ended ~~September~~June 30, ~~2016~~2019 compared to the same period in 2018. The decrease is primarily due to a ~~decline~~decrease in ~~preneed cemetery revenue and higher costs as a percentage~~trust fund earnings due to realized capital losses in our perpetual care trust.

Cemetery property amortization. Cemetery property amortization totaled $1.2 million for the three months ended June 30, 2019, an increase of ~~revenue~~$0.3 million compared to the three months ended June 30, 2018. Cemetery property amortization totaled $2.0 million for the six months ended June 30, 2019, an increase of $0.2 million compared to the six months ended June 30, 2018. The increase in both periods was primarily attributable to the increases in interment rights sold in 2019 compared to 2018.

Field depreciation. Depreciation expense for our field businesses remained flat at $3.1 million for the three months ended June 30, 2019 compared to the three months ended June 30, 2018. However, depreciation expense for our field businesses increased $0.3 million to $6.1 million for the six months ended June 30, 2019 compared to the six months ended June 30, 2018. The increase in the six ~~businesses we acquired~~months ended June 30, 2019, with no increase in ~~2016. As these acquired businesses transition into our Standards Operating Model, we expect~~the three month period was primarily attributable to ~~see their gross profit margins rise towards those on a same store basis.~~assets becoming fully depreciated in the first quarter of 2019.

~~Further discussion of the components of Gross profit, excluding field depreciation~~Regional and ~~amortization~~unallocated funeral and ~~regional~~cemetery costs. Regional and unallocated funeral and cemetery costs ~~is presented herein under “Results~~consist of ~~Operations” within our funeral home~~salaries and ~~cemetery segments. Further discussion of~~benefits for regional management, field ~~depreciation~~incentive compensation and ~~amortization and regional~~other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled $3.6 million for the three months ended June 30, 2019, an increase of $0.4 million

primarily due to a $0.6 million increase in severance expense from the separation of executive operating leadership, offset by a $0.2 million decrease in incentive compensation and other general administrative costs.

Regional and unallocated funeral and cemetery costs totaled $6.4 million for the six months ended June 30, 2019, a decrease of $0.1 million primarily due to a $0.5 million decrease in incentive and stock-based compensation expenses and a $0.3 million decrease in other general administrative costs, offset by a $0.7 million increase in severance expense. These decreases are ~~presented herein under “Other~~primarily related to both the separation of executive operating leadership and the cancellation of our performance awards in late 2018.

Other Financial Statement ~~Items.”~~Items

Net income for the nine months ended September 30, 2017 decreased $0.9 million to $14.5 million, equal to $0.81 per diluted share, compared to net income of $15.4 million, equal to $0.91 per diluted share, for the nine months ended September 30, 2016. Further discussion of general,General, administrative and other. General, administrative and other expenses ~~home~~totaled $5.7 million for the three months ended June 30, 2019, a decrease of $0.7 million compared to the three months ended June 30, 2018. The decrease was primarily attributable to a $0.4 million decrease in incentive and stock-based compensation expenses, a $0.3 million decrease in salaries and benefits, and a $0.3 million decrease in health costs, offset by a $0.3 million increase in acquisition expenses, severance expenses and other general administrative costs.

General, administrative and other expenses totaled $11.3 million for the six months ended June 30, 2019, a decrease of $1.7 million compared to the six months ended June 30, 2018. The decrease was primarily attributable to a $0.9 million decrease in incentive and stock-based compensation expenses, a $0.7 million decrease in salaries and benefits, and a $0.3 million decrease in health costs, offset by a $0.2 million increase in severance expenses. These decreases are primarily related to both the separation of executive operating leadership and the cancellation of our performance awards in late 2018.

Home office depreciation and amortization. Home office depreciation and amortization expense totaled $0.4 million for the three months ended June 30, 2019, a decrease of $0.1 million compared to the three months ended June 30, 2018. The decrease was primarily attributable to corporate machinery and equipment becoming fully depreciated in the first quarter of 2019.

Home office depreciation and amortization expense totaled $0.8 million for the six months ended June 30, 2019, a decrease of $0.1 million compared to the six months ended June 30, 2018. The decrease was primarily attributable to corporate machinery and equipment being fully depreciated in the first quarter of 2019.

Interest expense. Interest expense was $6.3 million for the three months ended June 30, 2019 compared to $4.7 million for the three months ended June 30, 2018, an increase of $1.6 million, which was attributable to the following: (i) an increase of $3.6 million related to our Senior Notes that were issued in May 2018; offset by (ii) a decrease of $1.5 million related to our Former Credit Agreement; and (ii) a decrease of $0.5 million related to the Exchange of our Convertible Notes.

Interest expense was $12.6 million for the six months ended June 30, 2019 compared to $8.5 million for the six months ended June 30, 2018, an increase of $4.1 million, which was attributable to the following: (i) an increase of $9.1 million related to our Senior Notes that were issued in May 2018; offset by (ii) a decrease of $3.5 million related to our Former Credit Agreement; (ii) a decrease of $1.4 million related to the Exchange of our Convertible Notes; and (iii) a decrease of $0.1 million related to normal amortization of interest on our notes payable.

Accretion of discount on convertible notes. For the three months ended June 30, 2019, we recognized accretion of the discount on our Convertible Notes of $0.1 million compared to $0.6 million for the same period in 2018, a decrease of $0.5 million, which was attributable to the Exchange of our Convertible Notes.

For the six months ended June 30, 2019, we recognized accretion of the discount on our Convertible Notes of $0.1 million compared to $1.7 million for the same period in 2018, a decrease of $1.6 million, which was attributable to the Exchange of our Convertible Notes.

Income taxes. Income tax expense was $2.1 million for the three months ended June 30, 2019, an increase of $1.1 million compared to the three months ended June 30, 2018. Income tax expense was $4.8 million for the six months ended June 30, 2019, an increase of $0.9 million compared to the six months ended June 30, 2018. We recorded income taxes at the estimated effective rate, before discrete items, of 29.2% and 28.5% for the three and six months ended June 30, 2019, respectively and 27.5% for both the three and six months ended June 30, 2018. The discrete items include an income tax expense related to stock compensation, refunds received from the completion of state income tax audits, and income tax expense related to state tax rate changes and other ~~components~~non-material discrete state items.

We have approximately $31.9 million of ~~income~~state net operating loss carry forwards that will expire between 2020 and ~~expenses are presented herein under “Other Financial Statement Items.”~~2040, if not utilized. Based on management’s assessment of the various state net operating losses, it has been determined that it is more likely than not that we will not be able to realize the tax benefits of certain portions of the state losses. Accordingly, a valuation allowance has been established and is reviewed quarterly. At June 30, 2019, the valuation allowance totaled $0.2 million.

OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. 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~~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 because there

can be no assurance ~~the~~that our margins, operating income and net ~~earnings,~~income, as a percentage of ~~revenues,~~revenue, will be consistent from year to year.

Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with GAAP. Our critical accounting policies are discussed in MD&A in our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~

~~RESULTS OF OPERATIONS~~

The following is a discussion of our results of operations for the three and nine months ended September 30, 2017 compared to the same periods of 2016. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2013 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2012 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. Depreciation and amortization, within our field costs and expenses and regional and unallocated funeral and cemetery costs, are not included in operating profit, a non-GAAP financial measure. Adding back these items will result in Gross Profit, a GAAP financial measure.

~~Funeral Home Segment.~~ The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the three months ended September 30, 2017 compared to three months ended September 30, 2016 (dollars in thousands):

For the Three Months Ended September 30, Change
2016 2017 Amount %
Revenues:
Same store operating revenue $ 37,094
$ 38,032
$ 938
2.5 %
Acquired operating revenue 5,996
7,363
1,367
22.8 %
Preneed funeral insurance commissions 361
315
(46 ) (12.7 )%
Preneed funeral trust earnings 1,732
1,618
(114 ) (6.6 )%
Total $ 45,183
$ 47,328
$ 2,145
4.7 %

Operating profit:

Same store operating profit $ 13,894
$ 13,938
$ 44
0.3 %
Acquired operating profit 2,431
2,419
(12 ) (0.5 )%
Preneed funeral insurance commissions 166
120
(46 ) (27.7 )%
Preneed funeral trust earnings 1,710
1,585
(125 ) (7.3 )%
Total $ 18,201
$ 18,062
$ (139 ) (0.8 )%

Funeral home same store operating revenues for the three months ended September 30, 2017 increased $0.9 million or 2.5%, when compared to the three months ended September 30, 2016. This was due primarily to a 0.7% increase in same store contract volumes to 7,093 and a 1.8% increase in the average revenue per contract to $5,362. The average revenue per contract excludes the impact of the preneed funeral trust earnings (separately reflected in ~~Revenues~~ above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 1.6% to $5,543 in the three months ended September 30, 2017. The average revenue per burial contract increased 0.2% to $8,832 and the number of burial contracts increased 1.9% to 2,898. The average revenue per cremation contract increased 1.1% to $3,352 and the number of cremation contracts increased 1.7% to 3,702.

The burial rate for our same store businesses increased 50 basis points to 40.9% and the cremation rate also increased 50 basis points to 52.2% for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 6.9% of the total number of contracts in the three months ended September 30, 2017, increased 16.6% to $2,669.

Same store operating profit for the three months ended September 30, 2017 remained flat, when compared to the three months ended September 30, 2016. Although revenue increased, operating profit margin decreased by 90 basis points to 36.6% for the three months ended September 30, 2017 compared to the same period in 2016. The decline in operating profit margin largely relates to significant increases in certain expenses including $0.4 million of general liability and other insurance related expenses, $0.2 million of salaries and benefits and $0.1 million of bad debt expense.

Funeral home acquired operating revenues for the three months ended September 30, 2017 increased $1.4 million, or 22.8%, when compared to the three months ended September 30, 2016. The funeral home acquired portfolio for the three months ended September 30, 2017 includes four businesses acquired in the latter half of 2016, not fully present in the three months ended September 30, 2016 results. We experienced a slight increase in the average revenue per contract of 0.2% to $6,370 and a 22.6% increase in the total number of contracts to 1,156. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in ~~Revenues~~ above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract slightly decreased 0.4% to $6,538 in the three months ended September 30, 2017. The average revenue per burial contract decreased 1.7% to $9,458, while the number of burial contracts increased 22.4% to 525. The average revenue per cremation contract increased 6.1% to $4,421 and the number of cremation contracts increased 18.3% to 531.

The burial rate for our acquired businesses slightly decreased 10 basis points to 45.4% and the cremation rate also decreased 170 basis points to 45.9% for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 8.7% of the total number of contracts in the three months ended September 30, 2017, decreased 17.6% to $2,446.

Acquired operating profit for the three months ended September 30, 2017 remained flat when compared to the three months ended September 30, 2016. Although revenue increased, operating profit margin decreased 760 basis points to 32.9% for the three months ended September 30, 2017 compared to the same period in 2016. The decrease is primarily due to the businesses we acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.

The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased by 12.7% for the three months ended September 30, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the three months ended September 30, 2017 is from the preneed funeral insurance contracts sold in the three months ended September 30, 2016. The number of preneed insurance contracts sold in the three months ended September 30, 2016 decreased 4.9% and the face value of the insurance products that earned commissions decreased 2.3% compared to the contracts sold during the same period of the prior year. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and earnings from the maturity of preneed funeral contracts. Trust earnings decreased $0.1 million or 6.6% for the three months ended September 30, 2017, which is comprised of a 7.8% decrease in earnings from the maturity of preneed contracts, offset by an 8.9% increase in earnings from trust management fees.

Operating profit for our two categories of financial revenue, on a combined basis, decreased 9.1% in the three months ended September 30, 2017 due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.

The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 (dollars in thousands):

For the Nine Months Ended September 30, Change
2016 2017 Amount %
Revenues:
Same store operating revenue $ 117,029
$ 119,310
$ 2,281
1.9 %
Acquired operating revenue 17,303
24,727
7,424
42.9 %
Preneed funeral insurance commissions 1,138
951
(187 ) (16.4 )%
Preneed funeral trust earnings 5,482
5,290
(192 ) (3.5 )%
Total $ 140,952
$ 150,278
$ 9,326
6.6 %

Operating profit:
Same store operating profit $ 45,119
$ 46,111
$ 992
2.2 %
Acquired operating profit 7,293
9,515
2,222
30.5 %
Preneed funeral insurance commissions 577
329
(248 ) (43.0 )%
Preneed funeral trust earnings 5,417
5,206
(211 ) (3.9 )%
Total $ 58,406
$ 61,161
$ 2,755
4.7 %

Funeral home same store operating revenues for the nine months ended September 30, 2017 increased $2.3 million, or 1.9%, when compared to the nine months ended September 30, 2016. The increase was due primarily to a 0.9% increase in same store contract volumes to 22,296 and a 1.0% increase in the average revenue per contract to $5,351. The average revenue per contract excludes the impact of the preneed funeral trust earnings (separately reflected in ~~Revenues~~ above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 0.9% to $5,540 in the nine months ended September 30, 2017. The average revenue per burial contract increased 1.1% to $8,877, while the number of burial contracts decreased 0.6% to 9,037. The average revenue per cremation contract increased ~~1.3% to $3,363 and the number of cremation contracts increased 3.0% to 11,664.~~

The burial rate for our same store businesses decreased 70 basis points to 40.5%, while the cremation rate increased 100 basis points to 52.3% for the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 7.2% of the total number of contracts in the nine months ended September 30, 2017, increased 10.8% to $2,561.

Same store operating profit for the nine months ended September 30, 2017 increased $1.0 million, or 2.2%, when compared to the nine months ended September 30, 2016. This increase is a result of increased revenue and better management of expenses as operating profit margin remained stable at 38.6% for the nine months ended September 30, 2017 compared to the same period in 2016.

Funeral home acquired operating revenues for the nine months ended September 30, 2017 increased $7.4 million, or 42.9%, when compared to the nine months ended September 30, 2016. The funeral home acquired portfolio for the nine months ended September 30, 2017 includes six businesses acquired during 2016, not fully present in the nine months ended September 30, 2016 results. We experienced an increase in the average revenue per contract of 1.7% to $6,524 and a 40.5% increase in the total number of contracts to 3,790. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in ~~Revenues~~ above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract increased 1.2% to $6,699 in the nine months ended September 30, 2017. The average revenue per burial contract decreased 1.3% to $9,505, while the number of burial contracts increased 43.4% to 1,817. The average revenue per cremation contract increased 5.9% to $4,396 and the number of cremation contracts increased 35.8% to 1,661.

The burial rate for our acquired businesses increased 90 basis points to 47.9%, while the cremation rate decreased 150 basis points to 43.8%. This is the result of an increase in the number of burial versus cremation contract sales at the businesses that were acquired the latter half of 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 8.3% of the total number of contracts in the nine months ended September 30, 2017, decreased 5.1% to $2,625.

Acquired operating profit for the nine months ended September 30, 2017 increased $2.2 million, or 30.5%, from the nine months ended September 30, 2016, primarily due to the six businesses acquired during 2016 and not fully present in the nine months ended September 30, 2016 results. Although revenues increased, operating profit margin decreased 360 basis points to 38.5% for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease is primarily due to the

businesses we acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.

The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased $0.2 million or 16.4% for the nine months ended September 30, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the nine months ended September 30, 2017 is from the preneed funeral insurance contracts sold in the nine months ended September 30, 2016. The number of preneed insurance contracts sold in the nine months ended September 30, 2016 decreased 1.1% and the face value of the insurance products that earned commissions decreased 7.1% over the same period of the prior year. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and earnings from the maturity of preneed funeral contracts. Trust earnings decreased $0.2 million or 3.5% for the nine months ended September 30, 2017, which is comprised of a 4.6% decrease in earnings from the maturity of preneed contracts, offset by a 12.3% increase in earnings from trust management fees.

Operating profit for our two categories of financial revenue, on a combined basis, decreased 7.7% in the nine months ended September 30, 2017 due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.

~~Cemetery Segment.~~ The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the three months ended September 30, 2017 compared to three months ended September 30, 2016 (dollars in thousands):

For the Three Months Ended September 30, Change
2016 2017 Amount %
Revenues:
Same store operating revenue $ 11,467
$ 10,748
$ (719 ) (6.3 )%
Acquired operating revenue 978
761
(217 ) (22.2 )%
Cemetery trust earnings 2,025
1,768
(257 ) (12.7 )%
Preneed cemetery finance charges 487
449
(38 ) (7.8 )%
Total $ 14,957
$ 13,726
$ (1,231 ) (8.2 )%

Operating profit:
Same store operating profit $ 3,342
$ 2,649
$ (693 ) (20.7 )%
Acquired operating profit 479
200
(279 ) (58.2 )%
Cemetery trust earnings 1,954
1,658
(296 ) (15.1 )%
Preneed cemetery finance charges 487
449
(38 ) (7.8 )%
Total $ 6,262
$ 4,956
$ (1,306 ) (20.9 )%

Cemetery same store operating revenues for the three months ended September 30, 2017 decreased $0.7 million, or 6.3%, when compared to the three months ended September 30, 2016. Approximately 55.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the three months ended September 30, 2017. Preneed revenue decreased $0.9 million, or 13.6%, as we experienced a 5.7% decrease in the number of preneed interment rights sold to 1,542 and a 5.9% decrease in average price per interment to $3,278 for the three months ended September 30, 2017 compared to the same period in 2016. The decrease in preneed revenue was due to the attrition of key sales personnel at certain businesses, the absence of approximately $0.4 million of large private estate sales we had in the third quarter of last year, as well as the impact of the Texas and Florida hurricanes which caused business closures and displaced workers in these States during the period. Same store at-need revenue, which represents approximately 45.0% of our same store operating revenues, increased $0.2 million, or 4.4%, due primarily to a 7.9% increase in the average sale per contract to $1,562.

Cemetery same store operating profit for the three months ended September 30, 2017 decreased $0.7 million, or 20.7% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 24.6% in the three months ended September 30, 2017 compared to 29.1% in the same period in 2016. The decline in operating profit margin largely relates to significant increases in certain expenses including $0.2 million of general liability and other insurance related expenses, $0.1 million of salaries and benefits and $0.1 million of facilities and grounds expenses, offset by a $0.4 million decrease in promotional expenses.

Cemetery acquired operating revenue and acquired operating profit decreased for the three months ended September 30, 2017 primarily due to a $0.2 million decrease in preneed revenue. The decrease in preneed revenue was primarily due to the absence of approximately $0.2 million of large private estate sales we had in the third quarter of last year. In addition, we experienced a 14% decrease in the number of preneed interment rights sold compared with the same period in 2016 and increases in facilities and grounds expenses and bad debt expense for the three months ended September 30, 2017 compared to the same period in 2016.

The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Total trust earnings decreased $0.3 million or 12.7%, primarily due to a $0.3 million decrease in capital gains from our perpetual care trust in the three months ended September 30, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts remained flat in the three months ended September 30, 2017 compared to the same period in 2016.

~~Cemetery Segment.~~ The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the nine months ended September 30, 2017 compared to nine months ended September 30, 2016 (dollars in thousands):

For the Nine Months Ended September 30, Change
2016 2017 Amount %
Revenues:
Same store operating revenue $ 35,093
$ 33,522
$ (1,571 ) (4.5 )%
Acquired operating revenue 2,312
2,370
58
2.5 %
Cemetery trust earnings 5,622
5,512
(110 ) (2.0 )%
Preneed cemetery finance charges 1,357
1,381
24
1.8 %
Total $ 44,384
$ 42,785
$ (1,599 ) (3.6 )%

Operating profit:
Same store operating profit $ 11,283
$ 9,287
$ (1,996 ) (17.7 )%
Acquired operating profit 791
743
(48 ) (6.1 )%
Cemetery trust earnings 5,407
5,231
(176 ) (3.3 )%
Preneed cemetery finance charges 1,357
1,381
24
1.8 %
Total $ 18,838
$ 16,642
$ (2,196 ) (11.7 )%

Cemetery same store operating revenues for the nine months ended September 30, 2017 decreased $1.6 million, or 4.5%, when compared to the nine months ended September 30, 2016. Approximately 56.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the nine months ended September 30, 2017. Preneed revenue decreased $2.4 million, or 11.2%, as we experienced a 11.4% decrease in the number of preneed interment rights sold to 4,942 in the nine months ended September 30, 2017 compared to the same period in 2016. The decrease was primarily a result of attrition of key sales personnel at certain businesses during the period. In addition, preneed sales were negatively impacted in our Texas and Florida businesses due to the hurricanes affecting those areas in the third quarter of 2017, as well as the absence of approximately $0.4 million of large private estate sales we had in the third quarter of last year. The decrease was slightly offset by a 4.0% increase in the average price per interment to $3,256. Same store at-need revenue, which represents approximately 44.0% of our same store operating revenues, increased $0.8 million, or 5.7%, due primarily to a 9.0% increase in the average sale per contract to $1,459.

Cemetery same store operating profit for the nine months ended September 30, 2017 decreased $2.0 million, or 17.7% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 27.7% in the nine months ended September 30, 2017 compared to 32.2% in the same period in 2016. The decrease in operating profit was primarily a result of the decrease in revenue, combined with a $0.4 million, or 1.8%, increase in operating costs for the nine months ended September 30, 2017 compared with the same period in 2016. Those expenses with significant increases include $0.2 million of salaries and benefits and $0.2 million of facilities and grounds expenses.

Cemetery acquired operating revenue and acquired operating profit remained flat for the nine months ended September 30, 2017. Cemetery acquired operating profit margin decreased from 34.2% to 31.4% for the nine months ended September 30, 2017 compared to the same period in 2016 as we experienced increases in salaries and benefits and bad debt expense.

the trust assets. Total trust earnings decreased $0.1 million or 2.0%, primarily due to decreased capital gains from our perpetual care trust in the nine months ended September 30, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts remained flat at $1.4 million in the nine months ended September 30, 2017 compared to the same period in 2016.

~~Other Financial Statement Items~~

~~Depreciation and Amortization~~. Depreciation and amortization costs for the field and home office totaled $4.0 million for the three months ended September 30, 2017, an increase of $0.2 million, or 5.1%, from the three months ended September 30, 2016 and $11.9 million for the nine months ended September 30, 2017, an increase of $0.4 million or 3.3%, from the nine months ended September 30, 2016. These increases were primarily attributable to additional depreciation expense from assets acquired in our 2016 acquisitions.

~~Regional and Unallocated Funeral and Cemetery Costs~~. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled $3.9 million for the three months ended September 30, 2017, an increase of $1.2 million, or 41.5%, compared to the same period in 2016, primarily due to a $0.5 million increase in field incentive compensation, a $0.4 million increase in natural disaster related costs and a $0.3 million increase in other general administrative costs.

Regional and unallocated funeral and cemetery costs totaled $9.8 million for the nine months ended September 30, 2017, an increase of $1.3 million, or 15.2%, compared to the same period in 2016, primarily due a $0.4 million increase in field incentive compensation, a $0.4 million increase in natural disaster related costs, a $0.4 million increase in other general administrative costs and $0.1 million increase in salaries and benefits.

On Friday, August 25, 2017 and Sunday, September 10, 2017, hurricanes Harvey and Irma struck Texas and Florida, respectively. Thirteen of our funeral homes and six of our cemeteries were impacted by either or both property damage and business interruption. Based on our preliminary review of our property, flood and business interruption insurance policies, we believe that much of the loss we have experienced will be covered by insurance. As of September 30, 2017, we have spent approximately $0.5 million for employee assistance and property repair costs. We have recognized approximately $0.4 million in expenses and recorded a receivable for insurance reimbursement of approximately $0.1 million.

~~General, Administrative and Other.~~ General, administrative and other expenses remained flat at $6.1 million for both the three months ended September 30, 2016 and 2017. Those expenses with significant increases include $0.4 million of equity compensation, $0.2 million of salaries and benefits for leadership investments in our Houston support office, $0.2 million of other general administrative costs, $0.2 million of incentive compensation and $0.2 million of public company and regulatory costs related to tax planning, offset by a $1.2 million decrease in severance and retirement expenses primarily related to the retirement of a former executive.

General, administrative and other expenses totaled $19.5 million for the nine months ended September 30, 2017, a decrease of $1.7 million, or 7.8%, from the nine months ended September 30, 2016. The decrease was attributable to a $3.5 million decrease in retirement expenses primarily related to the retirement of two former executives during 2016, a $0.7 million decrease in acquisition costs, offset by a $0.9 million increase in salaries and benefits for leadership investments in our Houston support office, a $0.7 million increase in public company, regulatory and legal costs related to tax planning, filing our current shelf registration statement and adopting a new long-term incentive plan, a $0.6 million increase in other general administrative costs and a $0.3 million increase in incentive and equity compensation.

~~Interest Expense.~~ Interest expense was $3.3 million for the three months ended September 30, 2017 compared to $2.9 million for the three months ended September 30, 2016, an increase of approximately $0.4 million. During the three months ended September 30, 2017, interest expense increased by approximately $0.3 million related to our term note and revolving credit facility and by approximately $0.1 million related to our deferred purchase obligations for our 2016 acquisitions. During the three months ended September 30, 2017, the weighted average interest rate increased 0.6% compared to the same period in 2016.

Interest expense was $9.5 million for the nine months ended September 30, 2017 compared to $8.7 million for the nine months ended September 30, 2016, an increase of approximately $0.8 million. During the nine months ended September 30, 2017, interest expense increased by approximately $0.4 million related to our term note and revolving credit facility and by approximately $0.4 million related to our deferred purchase obligations for our 2016 acquisitions. During the nine months ended September 30, 2017, the weighted average interest rate increased 0.3% compared to the same period in 2016.

~~Accretion of Discount on Convertible Subordinated Notes.~~ For the three and nine months ended September 30, 2017, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $1.1 million and $3.2 million respectively,

compared to $1.0 million and $2.9 million for the three and nine months ended September 30, 2016, respectively. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%.

~~Income Taxes.~~ Income tax expense was $1.5 million for the three months ended September 30, 2017 compared to $1.9 million for the three months ended September 30, 2016. 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 2016. Income tax expense was $9.3 million for the nine months ended September 30, 2017 compared to $8.4 million for the nine months ended September 30, 2016.

During the third quarter of 2017, we recognized a tax benefit of $0.2 million which reduced our effective tax rate to 39% for the nine months ended September 30, 2017. During the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016.

We have approximately $36.8 million of state net operating loss carry forwards that will expire between 2018 and 2038, if not utilized. Based on management’s assessment of the various state net operating losses, it has been determined that it is more likely than not that we will not be able to realize the tax benefits of certain portions of the state losses. Accordingly, a valuation allowance has been established and the deferred tax asset for the state operating losses is reviewed every quarter. At September 30, 2017, the valuation allowance totaled $0.2 million.

~~LIQUIDITY AND CAPITAL RESOURCES~~

~~Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.~~

We generate cash in our operations primarily from at-need sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and costs of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.

We intend to use cash on hand and borrowings under our Credit Facility primarily to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends. From time to time we may also use available cash to repurchase shares of our common stock in open market or privately negotiated transactions. We have the ability to draw on our revolving credit facility, subject to customary terms and conditions of the Credit Agreement. We believe that our existing cash balance, future cash flows from operations and borrowings under our Credit Facility described below will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividends and acquisitions for the foreseeable future.

~~Cash Flows~~

We began 2017 with $3.3 million in cash and other liquid investments and ended the third quarter with $0.8 million in cash. As of September 30, 2017, we had borrowings of $75.5 million outstanding on our revolving credit facility compared to $67.7 million outstanding as of December 31, 2016.

~~The following table sets forth the elements of cash flow for the nine months ended September 30, 2016 and 2017 (in millions):~~

For the Nine Months Ended September 30,
2016 2017
Cash at January 1^st
$ 0.5
$ 3.3
Cash flow from operating activities 34.8
30.8
Acquisitions and land for new construction (15.1 ) (0.7 )
Purchase of land and buildings previously leased (6.3 ) —
Net proceeds from the sale of other assets 1.0
0.4
Growth capital expenditures (6.8 ) (6.8 )
Maintenance capital expenditures (5.2 ) (6.3 )
Net (payments) borrowings on our revolving credit facility, term loan and long-term debt obligations 0.3
(1.7 )
Taxes paid on restricted stock vestings and exercise of non-qualified options (0.6 ) (0.5 )
Dividends paid on common stock (1.7 ) (2.5 )
Proceeds from the exercise of stock options and employee stock purchase plan contributions 0.7
1.2
Purchase of treasury stock —
(16.4 )
Payment of loan origination costs related to the credit facility (0.7 ) —
Other financing costs (0.1 ) —
Cash at September 30th $ 0.8
$ 0.8

~~Operating Activities~~

For the nine months ended September 30, 2017, cash provided by operating activities was $30.8 million compared to cash provided by operating activities of $34.8 million for the nine months ended September 30, 2016, a decrease of $4.0 million, due primarily to the decline in preneed cemetery revenue and acquired funeral home operating profit margin in the second and third quarters of 2017 and unfavorable working capital changes, which include, the timing of payments for income taxes, payments for accrued severance for the retirement of a former executive and our ~~Good To Great~~ ~~incentive compensation plan during the first quarter of 2017.~~

~~Investing Activities~~

Our investing activities resulted in a net cash outflow of $13.4 million for the nine months ended September 30, 2017 compared to $32.4 million for the nine months ended September 30, 2016, a decrease of $19.0 million. During the nine months ended September 30, 2017, we purchased real estate for funeral home parking lot expansion projects for approximately $0.7 million. Capital expenditures totaled $13.1 million, of which $6.8 million and $6.3 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily related to cemetery development costs of $3.0 million, construction costs related to two new funeral home facilities of approximately $2.5 million and renovations at certain businesses of $1.3 million. Maintenance capital expenditures in the nine months ended September 30, 2017 were primarily related to maintenance projects for facility repairs and improvements of $1.8 million, vehicle purchases of $1.7 million, IT infrastructure improvements, general equipment, and furniture purchases of $1.8 million, and paving roads, parking lots and landscaping projects of $1.0 million.

During the nine months ended September 30, 2016, we acquired three funeral home businesses for approximately $15.8 million. We purchased land for funeral home expansion projects for approximately $2.7 million. Additionally, we purchased land and buildings at four funeral home locations that were previously leased for approximately $6.3 million. Capital expenditures totaled $12.0 million, of which $6.8 million and $5.2 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily construction costs related to funeral home facilities of approximately $2.3 million, renovations at certain business locations of $1.3 million and cemetery development costs of $3.2 million. Maintenance capital expenditures in the nine months ended September 30, 2016 were primarily related to vehicle purchases of $1.2 million, general

~~equipment and furniture purchases of $1.6 million and maintenance projects such as paving roads, parking lots, facility repairs and general improvements of $2.4 million.~~

~~Financing Activities~~

Our financing activities resulted in a net cash outflow of $19.9 million for the nine months ended September 30, 2017 compared to $2.1 million for the nine months ended September 30, 2016, an increase of $17.8 million. During the nine months ended September 30, 2017, we had net payments on our revolving credit facility and term loan of $0.6 million. We also purchased treasury stock for $16.4 million and paid $2.5 million in dividends.

During the nine months ended September 30, 2016, we had net borrowings on our revolving credit facility and term loan of $1.3 million. We also paid transaction costs of approximately $0.7 million related to the Seventh Amendment of our Credit Facility and paid $1.7 million in dividends.

~~Dividends~~

On July 26, 2017 our Board declared a dividend of $0.05 per share, totaling approximately $0.8 million, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. For the three months ended September 30, 2016, we paid a quarterly dividend of $0.050 per share, totaling approximately $0.8 million. For the nine months ended September 30, 2016 and 2017, we paid total dividends of approximately $1.7 million and $2.5 million, respectively.

~~Share Repurchase~~

On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the three months ended September 30, 2017, we repurchased 574,054 shares of common stock for a total cost of $14.0 million at an average cost of $24.35 per share pursuant to this share repurchase program. We did not purchase any shares of common stock in the first or second quarter of 2017. Our shares were purchased in the open market. Purchases were at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares.

On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.

~~Debt Obligations~~

The outstanding principal of our total long-term debt and capital lease obligations at September 30, 2017 totaled $218.8 million and consisted of $130.3 million under our term loan, $75.5 million outstanding under our revolving credit facility and $14.0 million in acquisition indebtedness and capital lease obligations.

As of September 30, 2017, we had a $300 million secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.

We have one letter of credit issued on November 30, 2016 and outstanding under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% and will expire on November 27, 2017. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Under the Credit Facility, outstanding borrowings bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. At September 30, 2017, the prime rate margin was equivalent to 1.125% and the LIBOR margin was 2.125%. The weighted average interest rate on the Credit Facility for the three and nine months ended September 30, 2017 was 3.4% and 3.1%, respectively.

We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by our subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Facility.

We were in compliance with the covenants contained in the Credit Agreement as of September 30, 2017. The Credit Agreement contains key ratios with which we must comply, including a requirement to maintain a leverage ratio of no more than 3.5 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of September 30, 2017, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 1.89 to 1.00.

Amortization of debt issuance costs related to our Credit Facility was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 and $0.3 million and $0.2 million for the nine months ended September 30, 2016 and 2017, respectively. The unamortized debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.

~~Convertible Subordinated Notes due 2021~~

On March 19, 2014, we issued $143.75 million aggregate principal amount of 2.75% convertible subordinated notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.

At September 30, 2017, the carrying amount of the equity component was approximately $18.0 million. At September 30, 2017, the principal amount of the liability component was $143.75 million and the net carrying amount was $123.2 million. The unamortized discount of $18.7 million and the unamortized debt issuance costs of $1.9 million as of September 30, 2017 are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized discount and the debt issuance costs for the three and nine months ended September 30, 2016 and 2017 was 6.75% and 2.75%, respectively.

The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at September 30, 2017, is 44.5392 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.45 per share of common stock.2018.

SEASONALITY

Our business can be affected by seasonal fluctuations in the death rate. Generally, the death rate is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.


Item 3.	Quantitative and Qualitative Disclosures About Market Risk.

In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks.

The following quantitative and qualitative information is provided about financial instruments to which we are a party at ~~September~~June 30, ~~2017~~2019 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.

Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.

The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”

In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as of ~~September~~June 30, ~~2017~~2019 are presented in Item 1, “Condensed Notes to Consolidated Financial Statements,” Notes 34, 5 and 67 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates ~~causes an approximate 1.51%~~could change in the value of the fixed income ~~securities.~~securities by approximately 1.69%.

We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of ~~September~~June 30, ~~2017,~~2019, we had outstanding borrowings under the Credit Facility of ~~$75.5 million under our $150.0~~

~~million revolving credit facility and approximately $130.3 million outstanding on our term loan.~~$24.6 million. Any ~~further~~future borrowings or voluntary prepayments against the ~~revolving credit facility~~Credit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under the Credit Facility at either prime rate or LIBOR rate plus a margin. At ~~September~~June 30, ~~2017,~~2019, the prime rate margin was equivalent to ~~1.125%~~1.00% and the LIBOR margin was ~~2.125%~~2.00%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of ~~$2.1~~$0.2 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.

Our Convertible Notes bear interest at a fixed rate of 2.75% per year. The Convertible Notes do not contain a call feature. At ~~September~~June 30, ~~2017,~~2019, the cost of the Convertible Notes on our Consolidated Balance Sheet was $5.8 million and the fair value of these notes was ~~approximately $179.9~~$6.4 million based on the last traded or broker quoted ~~price.~~price, as reported by the Financial Industry Regulatory Authority, Inc. (“FINRA”). Increases in market interest rates may cause the value of the Convertible Notes to decrease, but such changes will not affect our interest costs.

Our Senior Notes bear interest at a fixed rate of 6.625% per year. We may redeem all or part of the Senior Notes at any time prior to June 1, 2021 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed, plus a “make whole” premium, and accrued and unpaid interest, if any, to the date of redemption. We have the right to redeem the Senior Notes at any time on or after June 1, 2021 at the redemption prices described in the Indenture, plus accrued and unpaid interest, if any, to the

date of redemption. At June 30, 2019, the cost of the Senior Notes on our Consolidated Balance Sheet was $319.4 million and the fair value of these notes was $334.8 million based on the last traded or broker quoted price, as reported by FINRA. Increases in market interest rates may cause the value of the Senior Notes to decrease, but such changes will not affect our interest costs.

The remainder of our long-term debt and leases consists of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates could cause the fair value of those liabilities to decrease, but such changes will not affect our interest costs.


Item 4.	Controls and Procedures.

Management’s Evaluation of Disclosure Controls and Procedures

Our management, including our principal executive and principal financial ~~officer, has~~officers, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial ~~officer,~~officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial ~~officer~~officers concluded that our disclosure controls and procedures are effective as of ~~September~~June 30, ~~2017~~2019 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with US GAAP.

Changes in Internal Control over Financial Reporting

There was no change in our system of internal control over financial reporting (defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this ~~quarterly report~~Quarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION


Item 1.	Legal Proceedings.

We and our subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of our business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial statements. Information regarding legal proceedings is set forth in Note 14 in Item 1 of this Form 10-Q, which information is hereby incorporated by reference herein.

We self-insure against certain risks and carry insurance with coverage and coverage limits for risk in excess of the coverage amounts consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there can be no assurance that self-insurance reserves and insurance will be sufficient to mitigate all damages, claims, or contingencies, we believe that the reserves and our insurance provides reasonable coverage for known asserted and unasserted claims. In the event we sustain a loss from a claim and the insurance carrier disputes coverage or coverage limits, we may record a charge in a different period than the recovery, if any, from the insurance carrier.


Item 1A.	Risk Factors.

There have been no material changes in our risk factors as previously disclosed in Part I, Item 1A “Risk Factors” ofin our Annual Report on Form 10-K for the year ended December 31, ~~2016.~~2018. Readers should carefully consider the factors discussed in Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, ~~2016,~~2018, which could materially affect our business, financial condition or future results. The risks described in our Annual Report on Form 10-K for the year ended December 31, ~~2016~~2018 are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition or future results.


Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.

The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended ~~September~~June 30, ~~2017:~~2019:

Period
Total Number of Shares Purchased⁽¹⁾
Average Price Paid Per Share Total Number of Shares Purchased as Part of Publicly Announced Program Dollar Value of Shares That May Yet Be Purchased Under the Program

July 1, 2017 - July 31, 2017 —
$ —
—
$ —
August 1, 2017 - August 31, 2017 285,353
$ 24.30
185,353
$ 20,450,852
September 1, 2017 - September 30, 2017 388,701
$ 24.26
388,701
$ 11,019,052
Total for quarter ended September 30, 2017 674,054
574,054



Period	Total Number of Shares Purchased⁽¹⁾	Average Price Paid Per Share		Total Number of Shares Purchased as Part of Publicly Announced Program	Dollar Value of Shares That May Yet Be Purchased Under the Program⁽²⁾

April 1, 2019 - April 30, 2019	—	$	—	—	$	8,357,192
May 1, 2019 - May 31, 2019	—	$	19.60	250,000	$	3,456,323
June 1, 2019 - June 30, 2019	234	$	19.03	150,000	$	601,446
Total for quarter ended June 30, 2019	234			400,000




(1(1)	)Represents shares surrendered by employees to pay taxes withheld upon the vesting of restricted stock awards.
(2)	~~On August 18, 2017, we purchased 100,000 shares of~~See Note 15 to the Consolidated Financial Statements included herein for additional information on our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million.The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of thepublicly announced share repurchase ~~program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining~~. program.


Item 3.	Defaults Upon Senior Securities.

Not applicable.


Item 4.	Mine Safety Disclosures.

Not applicable.


Item 5.	Other Information.

None.


Item 6.	Exhibits.

The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the Exhibit Index accompanying this Quarterly Report on Form 10-Q and are incorporated herein by reference.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.



		CARRIAGE SERVICES, INC.
Date:	~~October 25, 2017~~July 31, 2019	/s/ Viki K. Blinderman
		Viki K. Blinderman
		Senior Vice President, Principal Financial Officer and Secretary

CARRIAGE SERVICES, INC.

INDEX OF EXHIBITS



Exhibit No.		Description

*31.1		Certification of Periodic Financial Reports by Melvin C. Payne in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

*31.2		Certification of Periodic Financial Reports by Viki K. Blinderman in satisfaction of Section 302 of the Sarbanes-Oxley Act of 2002.

**32		Certification of Periodic Financial Reports by Melvin C. Payne and Viki K. Blinderman in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002 and 18 U.S.C. Section 1350.

*101		Interactive Data Files.

__________________



(*)	Filed herewith.



(**)	Furnished herewith.



~~(†)~~	~~Management contract or compensatory plan or arrangement.~~

- 4957 -



			% Change
Increase in Deferred tax liability	$	2,255	5.6	%
Increase in Total liabilities	$	2,255	0.3	%
Decrease in Retained earnings	$	2,255	9.8	%
Decrease in Total stockholders' equity	$	2,255	1.3	%



	For the Three Months Ended September 30,				Change
	2016		2017		Amount			%
Revenues:
Same store operating revenue	$	37,094	$	38,032	$	938		2.5	%
Acquired operating revenue	5,996		7,363		1,367			22.8	%
Preneed funeral insurance commissions	361		315		(46		)	(12.7	)%
Preneed funeral trust earnings	1,732		1,618		(114		)	(6.6	)%
Total	$	45,183	$	47,328	$	2,145		4.7	%

Operating profit:
Same store operating profit	$	13,894	$	13,938	$	44		0.3	%
Acquired operating profit	2,431		2,419		(12		)	(0.5	)%
Preneed funeral insurance commissions	166		120		(46		)	(27.7	)%
Preneed funeral trust earnings	1,710		1,585		(125		)	(7.3	)%
Total	$	18,201	$	18,062	$	(139	)	(0.8	)%