CSV-2013.6.30-10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
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x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 2013
OR
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o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
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Commission File Number: 1-11961 |
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE | 76-0423828 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
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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. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.
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Large accelerated filer | o | Accelerated filer | x |
Non-accelerated filer | o (Do not check if a smaller reporting company) | Smaller reporting company | o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of August 5, 2013 was 18,246,232
CARRIAGE SERVICES, INC.
INDEX
PART I – FINANCIAL INFORMATION
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Item 1. | Financial Statements |
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
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| | | | | | | |
| | | (unaudited) |
| December 31, 2012 | | June 30, 2013 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 1,698 |
| | $ | 1,518 |
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Accounts receivable, net of allowance for bad debts of $1,177 in 2012 and $841 in 2013 | 17,812 |
| | 16,869 |
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Assets held for sale | 1,466 |
| | 20,108 |
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Inventories | 5,133 |
| | 4,736 |
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Prepaid expenses | 5,107 |
| | 3,518 |
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Other current assets | 1,923 |
| | 2,171 |
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Total current assets | 33,139 |
| | 48,920 |
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Preneed cemetery trust investments | 70,960 |
| | 66,749 |
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Preneed funeral trust investments | 82,896 |
| | 93,170 |
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Preneed receivables, net of allowance for bad debts of $2,059 in 2012 and $1,819 in 2013 | 23,222 |
| | 24,923 |
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Receivables from preneed trusts | 25,871 |
| | 13,557 |
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Property, plant and equipment, net of accumulated depreciation of $84,291 in 2012 and $85,151 in 2013 | 152,433 |
| | 154,415 |
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Cemetery property | 75,156 |
| | 73,404 |
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Goodwill | 218,442 |
| | 217,244 |
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Deferred charges and other non-current assets | 9,424 |
| | 8,243 |
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Cemetery perpetual care trust investments | 46,542 |
| | 39,485 |
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Total assets | $ | 738,085 |
| | $ | 740,110 |
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LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of senior long-term debt and capital lease obligations | $ | 11,218 |
| | $ | 12,139 |
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Accounts payable | 5,243 |
| | 5,064 |
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Other liabilities | 13,067 |
| | 15,782 |
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Accrued liabilities | 12,278 |
| | 12,199 |
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Liabilities associated with assets held for sale | 369 |
| | 20,158 |
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Total current liabilities | 42,175 |
| | 65,342 |
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Long-term debt, net of current portion | 118,841 |
| | 112,621 |
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Revolving credit facility | 44,700 |
| | 34,600 |
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Convertible junior subordinated debentures due in 2029 to an affiliate | 89,770 |
| | 89,770 |
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Obligations under capital leases, net of current portion | 4,013 |
| | 3,900 |
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Deferred preneed cemetery revenue | 63,998 |
| | 56,371 |
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Deferred preneed funeral revenue | 39,794 |
| | 32,838 |
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Deferred preneed cemetery receipts held in trust | 70,960 |
| | 66,749 |
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Deferred preneed funeral receipts held in trust | 82,896 |
| | 93,170 |
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Care trusts’ corpus | 45,920 |
| | 39,133 |
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Total liabilities | 603,067 |
| | 594,494 |
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Commitments and contingencies: |
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Redeemable preferred stock | 200 |
| | — |
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Stockholders’ equity: | | | |
Common stock, $.01 par value; 80,000,000 shares authorized; 22,078,000 and 22,147,000 shares issued at December 31, 2012 and June 30, 2013, respectively | 221 |
| | 221 |
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Additional paid-in capital | 202,462 |
| | 203,861 |
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Accumulated deficit | (52,598 | ) | | (43,199 | ) |
Treasury stock, at cost; 3,922,000 shares at December 31, 2012 and June 30, 2013 | (15,267 | ) | | (15,267 | ) |
Total stockholders’ equity | 134,818 |
| | 145,616 |
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Total liabilities and stockholders’ equity | $ | 738,085 |
| | $ | 740,110 |
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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)
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| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2012 | | 2013 | | 2012 | | 2013 |
Revenues: | | | | | | | |
Funeral | $ | 36,611 |
| | $ | 40,779 |
| | $ | 76,645 |
| | $ | 85,937 |
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Cemetery | 12,066 |
| | 13,375 |
| | 22,714 |
| | 25,638 |
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| 48,677 |
| | 54,154 |
| | 99,359 |
| | 111,575 |
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Field costs and expenses: | | | | | | | |
Funeral | 23,048 |
| | 24,571 |
| | 46,007 |
| | 50,995 |
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Cemetery | 7,282 |
| | 7,637 |
| | 14,078 |
| | 14,452 |
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Depreciation and amortization | 2,336 |
| | 2,706 |
| | 4,480 |
| | 5,185 |
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Regional and unallocated funeral and cemetery costs | 2,080 |
| | 2,312 |
| | 4,413 |
| | 5,073 |
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| 34,746 |
| | 37,226 |
| | 68,978 |
| | 75,705 |
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Gross profit | 13,931 |
| | 16,928 |
| | 30,381 |
| | 35,870 |
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Corporate costs and expenses: | | | | | | | |
General and administrative costs and expenses | 4,852 |
| | 7,077 |
| | 10,094 |
| | 13,355 |
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Home office depreciation and amortization | 256 |
| | 372 |
| | 511 |
| | 718 |
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| 5,108 |
| | 7,449 |
| | 10,605 |
| | 14,073 |
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Operating income | 8,823 |
| | 9,479 |
| | 19,776 |
| | 21,797 |
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Interest expense, net of other income | (4,518 | ) | | (3,664 | ) | | (9,070 | ) | | (6,259 | ) |
Income from continuing operations before income taxes | 4,305 |
| | 5,815 |
| | 10,706 |
| | 15,538 |
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Provision for income taxes | (1,845 | ) | | (2,210 | ) | | (4,326 | ) | | (6,501 | ) |
Net income from continuing operations | 2,460 |
| | 3,605 |
| | 6,380 |
| | 9,037 |
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Income from discontinued operations, net of tax | 203 |
| | 539 |
| | 742 |
| | 366 |
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Net income | 2,663 |
| | 4,144 |
| | 7,122 |
| | 9,403 |
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Preferred stock dividend | (3 | ) | | — |
| | (7 | ) | | (4 | ) |
Net income available to common stockholders | $ | 2,660 |
| | $ | 4,144 |
| | $ | 7,115 |
| | $ | 9,399 |
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| | | | |
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| | |
Basic earnings per common share: | | | | |
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Continuing operations | $ | 0.14 |
| | $ | 0.20 |
| | $ | 0.35 |
| | $ | 0.50 |
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Discontinued operations | 0.01 |
| | 0.03 |
| | 0.04 |
| | 0.02 |
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Basic earnings per common share | $ | 0.15 |
| | $ | 0.23 |
| | $ | 0.39 |
| | $ | 0.52 |
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| | | | | | | |
Diluted earnings per common share: | | | | | | | |
Continuing operations | $ | 0.14 |
| | $ | 0.20 |
| | $ | 0.35 |
| | $ | 0.46 |
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Discontinued operations | 0.01 |
| | 0.03 |
| | 0.04 |
| | 0.02 |
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Diluted earnings per common share | $ | 0.15 |
| | $ | 0.23 |
| | $ | 0.39 |
| | $ | 0.48 |
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| | | | | | | |
Dividends declared per common share | $ | 0.025 |
| | $ | 0.025 |
| | $ | 0.050 |
| | $ | 0.050 |
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Weighted average number of common and common equivalent shares outstanding: | | | | | | | |
Basic | 18,077 |
| | 18,201 |
| | 18,171 |
| | 18,170 |
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Diluted | 18,153 |
| | 18,365 |
| | 18,237 |
| | 22,743 |
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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)
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| | | | | | | |
| For the Six Months Ended June 30, |
| 2012 | | 2013 |
Cash flows from operating activities: | | | |
Net income | $ | 7,122 |
| | $ | 9,403 |
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Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Gain on sale of assets | (428 | ) | | (146 | ) |
Impairment of goodwill | — |
| | 100 |
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Depreciation and amortization | 5,050 |
| | 5,953 |
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Amortization and write-off of deferred financing costs | 348 |
| | (36 | ) |
Provision for losses on accounts receivable | 1,102 |
| | 782 |
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Stock-based compensation expense | 1,182 |
| | 1,624 |
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Deferred income taxes | 2,266 |
| | 1,894 |
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Other | 38 |
| | 208 |
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Changes in operating assets and liabilities that provided (required) cash: | | | |
Accounts and preneed receivables | (1,414 | ) | | (2,070 | ) |
Inventories and other current assets | 740 |
| | 1,211 |
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Deferred charges and other | 75 |
| | 24 |
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Preneed funeral and cemetery trust investments | (146 | ) | | (1,363 | ) |
Accounts payable and accrued liabilities | (2,552 | ) | | 2,285 |
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Deferred preneed funeral and cemetery revenue | (177 | ) | | (9,755 | ) |
Deferred preneed funeral and cemetery receipts held in trust | 168 |
| | 13,879 |
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Net cash provided by operating activities | 13,374 |
| | 23,993 |
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| | | |
Cash flows from investing activities: | | | |
Acquisitions and new construction | (16,729 | ) | | (6,051 | ) |
Capital expenditures | (5,651 | ) | | (4,468 | ) |
Net proceeds from the sale of businesses | — |
| | 2,736 |
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Net cash used in investing activities | (22,380 | ) | | (7,783 | ) |
| | | |
Cash flows from financing activities: | | | |
Net borrowings from (payments against) the revolving credit facility | 14,200 |
| | (10,100 | ) |
Payments on the term loan | — |
| | (5,000 | ) |
Payments on other long-term debt and obligations under capital leases | (342 | ) | | (307 | ) |
Proceeds from the exercise of stock options and employee stock purchase plan | 440 |
| | 492 |
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Stock option benefit | 24 |
| | — |
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Dividends on common stock | (903 | ) | | (906 | ) |
Dividend on redeemable preferred stock | (7 | ) | | (4 | ) |
Payment of loan origination costs | — |
| | (565 | ) |
Purchase of treasury stock | (4,531 | ) | | — |
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Net cash provided by (used in) financing activities | 8,881 |
| | (16,390 | ) |
| | | |
Net decrease in cash and cash equivalents | (125 | ) | | (180 | ) |
Cash and cash equivalents at beginning of period | 1,137 |
| | 1,698 |
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Cash and cash equivalents at end of period | $ | 1,012 |
| | $ | 1,518 |
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The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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1. | BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
The Company
Carriage Services, Inc. (“Carriage”, the “Company”, “we”, “us” or “our”) is a leading provider of deathcare services and merchandise in the United States. As of June 30, 2013, we owned and operated 166 funeral homes in 26 states and 33 cemeteries in 11 states.
Principles of Consolidation
The accompanying Consolidated Financial Statements include us and our subsidiaries. All significant intercompany balances and transactions have been eliminated.
Interim Condensed Disclosures
The information for the three and six month periods ended June 30, 2012 and 2013 is unaudited, but in the opinion of management, reflects all adjustments which are normal, recurring and necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Certain information and footnote disclosures normally included in annual financial statements have been condensed or omitted. The accompanying Consolidated Financial Statements have been prepared consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended December 31, 2012 and should be read in conjunction therewith. 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 the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.
Funeral and Cemetery Operations
We record the revenue from sales of funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the interment right. Costs related to the sales of interment rights, which include real property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience and the current economic environment. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance
commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued.
Accounts receivable included approximately $8.4 million and $7.9 million of funeral receivables at December 31, 2012 and June 30, 2013, respectively, and $9.2 million and $8.7 million of cemetery receivables at December 31, 2012 and June 30, 2013, respectively. Non-current preneed receivables represent the payments expected to be received beyond one year from the balance sheet date. Non-current preneed receivables consisted of approximately $7.3 million and $8.2 million of funeral receivables and $15.9 million and $16.7 million of cemetery receivables at December 31, 2012 and June 30, 2013, respectively. Accounts receivable also include minor amounts of other receivables. Bad debt expense totaled $1.1 million and $0.8 million for the six months ended June 30, 2012 and 2013, respectively.
Discontinued Operations
In accordance with our Strategic Acquisition Model, non-strategic businesses are reviewed to determine whether such businesses should be sold and the proceeds redeployed elsewhere. A marketing plan is then developed for those locations which are identified as held for sale. When we receive a letter of intent and financing commitment from a buyer and the sale is expected to occur within one year, the location is no longer reported within our continuing operations. The assets and liabilities associated with the location are reclassified as held for sale on the Consolidated Balance Sheet and the operating results are presented on a comparative basis in the discontinued operations section of the Consolidated Statements of Operations. During the second quarter of 2013, we sold a funeral home in California, which was reported as held for sale at March 31, 2013. As of June 30, 2013, we had letters of intent outstanding on funeral homes in Kansas and Ohio and cemeteries in Virginia and Florida; as such, these businesses are no longer reported within our continuing operations. The assets and liabilities associated with these locations are included in assets held for sale on the Consolidated Balance Sheet as of June 30, 2013 and the operating results are presented on a comparative basis in the discontinued operations section of the Consolidated Statements of Operations. See Note 4 and Note 20 to the Consolidated Financial Statements herein for more information.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date of an acquisition subsequently becomes available during the allocation period, we may adjust goodwill, assets, or liabilities associated with such acquisition. Acquisition related costs are recognized separately from acquisitions and are expensed as incurred. During the second quarter of 2012, we completed one acquisition comprised of two funeral homes and one cemetery. There were no acquisitions during the second quarter of 2013. See Note 3 to the Consolidated Financial Statements herein for more information.
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral businesses. Goodwill is tested for impairment by assessing the fair value of each of our reporting units. The funeral segment reporting units consist of our East, Central and West regions in the United States, and we perform our annual impairment test of goodwill using information as of August 31 of each year. In addition, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results.
Our methodology for goodwill impairment testing is described in more detail in Notes 1 and 4 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we may grant restricted stock, stock options, performance awards and stock from our employee stock purchase plan, which are described in more detail in Note 17 to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2012. We recognize compensation expense in an amount equal to the fair value of the share-based awards expected to vest over the requisite service period. Fair value is determined on the date of the grant. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards is determined using a Monte-Carlo simulation pricing model. See Note 14 to the Consolidated Financial Statements herein for additional information on our stock-based compensation plans.
Computation of Earnings Per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and convertible junior subordinated debentures.
Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in both the basic and diluted weighted average shares outstanding calculation. See Note 19 to this Consolidated Financial Statements herein for the computations of per share earnings for the three and six month periods ended June 30, 2012 and 2013.
The fully diluted weighted average shares outstanding for the six months ended June 30, 2013, and the corresponding calculation of fully diluted earnings per share, include approximately 4.4 million shares that would be issued upon conversion of our convertible junior subordinated debentures as a result of the application of the if-converted method prescribed by FASB ASC 260-10-45. For the three and six months ended June 30, 2012 and the three months ended June 30, 2013, the conversion of our convertible junior subordinated debentures is excluded from fully diluted earnings per share calculations and the fully diluted weighted average share count because the inclusion of such converted shares would result in an antidilutive impact.
Preneed Funeral and Cemetery Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIEs”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. For these reasons, we have recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus in our Consolidated Balance Sheets. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment/entombment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide care and maintenance for the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE, or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in certain of our funeral and cemetery trust funds.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor ("CSV RIA"). As of June 30, 2013, CSV RIA provides these services to one institution, which has custody of 75% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
Fair Value Measurements
We define fair value as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Additional required disclosures are provided herein in Notes 6, 10 and 11 to the Consolidated Financial Statements. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have elected not to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
To determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased, the exit price is used as the fair value measurement. For the three and six month periods ended June 30, 2013, we did not incur significant decreases in the volume or level of activity of any asset or liability. We consider an impairment of debt and equity securities other-than-temporary unless (a) the investor has the ability and intent to hold an investment and (b) evidence indicating the cost of the investment is recoverable before we are more likely than not required to sell the investment. If impairment is indicated, then an adjustment is made to reduce the carrying amount to fair value. As of June 30, 2013, no impairments have been identified.
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing risk management techniques when appropriate and when available for a reasonable price. Our convertible junior subordinated debentures, payable to Carriage Services Capital Trust (the “Trust”), pay interest at a fixed rate of 7% and are carried on our Consolidated Balance Sheets at a cost of approximately $89.8 million. The fair value of these securities is estimated to be approximately $88.0 million at June 30, 2013, based on available broker quotes of the corresponding preferred securities issued by the Trust.
Income Taxes
We and our subsidiaries file a consolidated U.S. Federal income tax return, separate income tax returns in 16 states and combined or unitary income tax returns in 11 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets. We have reviewed our income tax positions and identified certain tax deductions, primarily related to business acquisitions that are not certain. Our policy with respect to potential penalties and interest is to record them as “Other” expense and “Interest” expense, respectively. The entire balance of unrecognized tax benefits, if recognized, would affect our effective tax rate. We do not anticipate a significant increase or decrease in our unrecognized tax benefits during the next twelve months.
Subsequent Events
Management evaluated events and transactions during the period subsequent to June 30, 2013 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report. For more information regarding subsequent events, see Note 20 to the Consolidated Financial Statements herein.
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2. | RECENTLY ISSUED ACCOUNTING STANDARDS |
Comprehensive Income
In February 2013, the FASB amended the Comprehensive Income Topic of the ASC to require reporting of amounts reclassified out of accumulated other comprehensive income (AOCI) by component. In addition, we are required to present significant amounts reclassified out of AOCI to net income in its entirety by the respective line items and to cross reference any disclosure elsewhere in the notes for amounts reclassified in less than their entirety. This amendment is effective prospectively for public companies for reporting periods after December 15, 2012. We adopted the provisions of the this amendment effective January 1, 2013. See Note 15 to the Consolidated Financial Statements herein for the appropriate disclosures.
Income Taxes
In July 2013, the FASB amended the Income Tax Topic of the ASC to eliminate the diversity in practice in the presentation of unrecognized tax benefits. The guidance did not include explicit information on the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. The guidance requires that an unrecognized tax benefit, or a portion of an unrecognized tax benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward unless specific circumstances exist which would then result in the unrecognized tax benefit being reflected as a liability. This amendment is effective for the first annual or interim period beginning after December 15, 2013, thus effective for us beginning January 1, 2014. We are still evaluating the impact of the adoption of this accounting standard update on our Consolidated Financial Statements.
Our growth strategy includes the execution of our Strategic Acquisition Model. We assess acquisition candidates using six strategic ranking criteria to differentiate the price we are willing to pay under a discounted cash flow methodology. Those criteria are:
| |
• | Local market demographics; |
During the second quarter of 2012, we completed one acquisition consisting of two funeral homes and one cemetery. We paid $4.8 million in cash as consideration for this acquisition. We acquired substantially all of the assets and assumed certain operating liabilities, including obligations associated with existing preneed contracts. The assets and liabilities were recorded at fair value and included goodwill of $0.5 million. We acquired land for approximately $6.0 million during the first quarter of 2013 for funeral home expansion projects. There were no acquisitions during the second quarter of 2013. The pro forma impact of the second quarter 2012 acquisition on the prior periods is not presented as the impact is not material to reported results. Thus, the results of the acquired businesses are included in our results from the date of acquisition.
| |
4. | ASSETS HELD FOR SALE AND DISCONTINUED OPERATIONS |
We continually review locations to optimize the sustainable earning power and return on our invested capital. Our strategy, the Strategic Acquisition Model, also uses strategic ranking criteria to assess potential disposition candidates. The execution of this strategy entails selling generally non-strategic businesses.
During the second quarter of 2013, we sold a funeral home in California, which was reported as held for sale at March 31, 2013. During the second quarter of 2012, we did not dispose of any business. As of June 30, 2013, we had letters of intent outstanding on funeral homes in Kansas and Ohio and cemeteries in Virginia and Florida; as such, these businesses are no longer reported within our continuing operations. The assets and liabilities associated with these locations are included in assets held for sale on the Consolidated Balance Sheet as of June 30, 2013 and the operating results are presented on a comparative basis in the discontinued operations section of the Consolidated Statements of Operations.
Assets and liabilities associated with the businesses held for sale in our Consolidated Balance Sheets at December 31, 2012 and June 30, 2013 consisted of the following (in thousands):
|
| | | | | | | |
| December 31, 2012 | | June 30, 2013 |
Assets: | | | |
Current assets | $ | 238 |
| | $ | 572 |
|
Preneed cemetery trust investments | — |
| | 7,745 |
|
Preneed funeral trust investments | — |
| | 63 |
|
Receivables from preneed trusts | 293 |
| | 691 |
|
Property, plant and equipment, net | 504 |
| | 3,069 |
|
Goodwill | 85 |
| | 1,097 |
|
Deferred charges and other non-current assets | 346 |
| | — |
|
Cemetery perpetual care trust investments | — |
| | 6,871 |
|
Total | $ | 1,466 |
| | $ | 20,108 |
|
| | | |
Liabilities: | | | |
Current liabilities | $ | 75 |
| | $ | 143 |
|
Long-term debt, net of current portion | — |
| | 70 |
|
Deferred preneed cemetery revenue | — |
| | 5,059 |
|
Deferred preneed funeral revenue | 294 |
| | 284 |
|
Deferred preneed cemetery receipts held in trust | — |
| | 7,745 |
|
Deferred preneed funeral receipts held in trust | — |
| | 63 |
|
Care trusts corpus | — |
| | $ | 6,794 |
|
Total | $ | 369 |
| | $ | 20,158 |
|
The operating results of the discontinued businesses during the periods presented, as well as the gain or loss on the disposal, are presented in the discontinued operations section of the Consolidated Statements of Operations, along with the income tax effect as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2012 | | 2013 | | 2012 | | 2013 |
Revenues | $ | 1,390 |
| | $ | 946 |
| | $ | 3,001 |
| | $ | 2,269 |
|
| | | | | | | |
Operating income | $ | 353 |
| | $ | 239 |
| | $ | 819 |
| | $ | 543 |
|
Gain (loss) on disposition | (2 | ) | | 630 |
| | 426 |
| | 47 |
|
Provision for income taxes | (148 | ) | | (330 | ) | | (503 | ) | | (224 | ) |
Income from discontinued operations | $ | 203 |
| | $ | 539 |
| | $ | 742 |
| | $ | 366 |
|
Many of the former owners and staff of acquired funeral homes have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a funeral business. The excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in business acquisition transactions accounted for as purchases, is recorded as goodwill.
The following table presents the changes in goodwill in our Consolidated Balance Sheets (in thousands):
|
| | | |
| |
Goodwill as of December 31, 2012 | $ | 218,442 |
|
Impairment | (101 | ) |
Reclassification of assets held for sale | (1,097 | ) |
Goodwill as of June 30, 2013 | $ | 217,244 |
|
The impairment of $0.1 million is related to a business discontinued in the first quarter of 2013 as the carrying value exceeded fair value.
| |
6. | PRENEED TRUST INVESTMENT |
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are generally permitted to withdraw when the merchandise or services are provided. The components of Preneed cemetery trust investments in our Consolidated Balance Sheets at December 31, 2012 and June 30, 2013 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2012 | | June 30, 2013 |
Preneed cemetery trust investments, at fair value | $ | 73,126 |
| | $ | 68,784 |
|
Less: allowance for contract cancellation | (2,166 | ) | | (2,035 | ) |
Preneed cemetery trust investments, net | $ | 70,960 |
| | $ | 66,749 |
|
Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, we are obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded.
Earnings from our preneed cemetery trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by our wholly-owned registered investment advisor are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, common stock, U.S. treasury debt, U.S. agency obligations and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are corporate debt, preferred stocks, foreign debt, mortgage backed securities and fixed income securities, all of which are classified within Level 2 of the valuation hierarchy. There were no significant transfers between Levels 1 and 2 for the three and six months ended June 30, 2013. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 11 for further information of the fair value measurement and the three-level valuation hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at June 30, 2013 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 7,588 |
| | $ | — |
| | $ | — |
| | $ | 7,588 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 2,524 |
| | 69 |
| | (71 | ) | | 2,522 |
|
Corporate debt | 2 | | 32,730 |
| | 660 |
| | (947 | ) | | 32,443 |
|
Preferred stock | 2 | | 16,931 |
| | 283 |
| | (33 | ) | | 17,181 |
|
Mortgage backed securities | 2 | | — |
| | — |
| | — |
| | — |
|
Common stock | 1 | | 8,068 |
| | 759 |
| | (646 | ) | | 8,181 |
|
Trust securities | | | $ | 67,841 |
| | $ | 1,771 |
| | $ | (1,697 | ) | | $ | 67,915 |
|
Accrued investment income | | | $ | 869 |
| | | | | | $ | 869 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 68,784 |
|
Fair market value as a percentage of cost | | | | | | | | | 100.1 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | — |
|
Due in one to five years | 8,400 |
|
Due in five to ten years | 14,087 |
|
Thereafter | 29,659 |
|
Total | $ | 52,146 |
|
The cost and fair market values associated with preneed cemetery trust investments at December 31, 2012 are detailed below (in thousands): |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 758 |
| | $ | — |
| | $ | — |
| | $ | 758 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 2,008 |
| | 450 |
| | — |
| | 2,458 |
|
Corporate debt | 2 | | 38,299 |
| | 863 |
| | (507 | ) | | 38,655 |
|
Preferred stock | 2 | | 22,362 |
| | 824 |
| | (294 | ) | | 22,892 |
|
Mortgage backed securities | 2 | | 1 |
| | — |
| | — |
| | 1 |
|
Common stock | 1 | | 8,759 |
| | 34 |
| | (1,526 | ) | | 7,267 |
|
Trust securities | | | $ | 72,187 |
| | $ | 2,171 |
| | $ | (2,327 | ) | | $ | 72,031 |
|
Accrued investment income | | | $ | 1,095 |
| | | | | | $ | 1,095 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 73,126 |
|
Market value as a percentage of cost | | | | | | | | | 99.8 | % |
We determine whether or not the assets in the preneed cemetery 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 in Deferred preneed cemetery receipts held in trust. There will be no impact on earnings unless and until such time as the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
We have determined that the unrealized losses in our preneed cemetery trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our cemetery merchandise and service trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of June 30, 2013 and December 31, 2012, respectively, are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2013 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 1,762 |
| | $ | (71 | ) | | $ | — |
| | $ | — |
| | $ | 1,762 |
| | $ | (71 | ) |
Corporate debt | 14,850 |
| | (526 | ) | | 996 |
| | (420 | ) | | 15,846 |
| | (946 | ) |
Preferred stock | 3,267 |
| | (34 | ) | | — |
| | — |
| | 3,267 |
| | (34 | ) |
Common stock | 2,023 |
| | (402 | ) | | 752 |
| | (244 | ) | | 2,775 |
| | (646 | ) |
Total temporary impaired securities | $ | 21,902 |
| | $ | (1,033 | ) | | $ | 1,748 |
| | $ | (664 | ) | | $ | 23,650 |
| | $ | (1,697 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Corporate debt | $ | 11,363 |
| | $ | (325 | ) | | $ | 622 |
| | $ | (182 | ) | | $ | 11,985 |
| | $ | (507 | ) |
Preferred stock | 1,040 |
| | (54 | ) | | 2,284 |
| | (240 | ) | | 3,324 |
| | (294 | ) |
Common stock | 5,088 |
| | (934 | ) | | 957 |
| | (592 | ) | | 6,045 |
| | (1,526 | ) |
Total temporary impaired securities | $ | 17,491 |
| | $ | (1,313 | ) | | $ | 3,863 |
| | $ | (1,014 | ) | | $ | 21,354 |
| | $ | (2,327 | ) |
Preneed cemetery trust investment security transactions recorded in Interest expense, net of other income in the Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2013 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2012 | | 2013 | | 2012 | | 2013 |
Investment income | $ | 1,290 |
| | $ | 1,072 |
| | $ | 2,052 |
| | $ | 1,765 |
|
Realized gains | 2,681 |
| | 1,547 |
| | 5,054 |
| | 1,585 |
|
Realized losses | (2,195 | ) | | (144 | ) | | (2,309 | ) | | (574 | ) |
Expenses and taxes | (1,894 | ) | | (1,684 | ) | | (2,025 | ) | | (2,065 | ) |
Increase (decrease) in deferred preneed cemetery receipts held in trust | 118 |
| | (791 | ) | | (2,772 | ) | | (711 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands): |
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2012 | | 2013 | | 2012 | | 2013 |
Purchases | $ | (33,060 | ) | | $ | (11,543 | ) | | $ | (57,099 | ) | | $ | (15,705 | ) |
Sales | 33,404 |
| | 13,811 |
| | 57,492 |
| | 18,820 |
|
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by funds paid by the customer to us. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw prior to our performance and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. The components of Preneed funeral trust investments in our Consolidated Balance Sheets at December 31, 2012 and June 30, 2013 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2012 | | June 30, 2013 |
Preneed funeral trust investments, at fair value | $ | 85,415 |
| | $ | 95,972 |
|
Less: allowance for contract cancellation | (2,519 | ) | | (2,802 | ) |
Preneed funeral trust investments, net | $ | 82,896 |
| | $ | 93,170 |
|
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, we are obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded.
Earnings from our preneed funeral trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by our wholly-owned registered investment advisor are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U. S. government, agencies and municipalities, common stocks and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are corporate debt, preferred stocks, foreign debt, mortgage backed securities and fixed income securities, all of which are classified within Level 2 of the valuation hierarchy. There were no significant transfers between Levels 1 and 2 for the three and six months ended June 30, 2013. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 11 for further information of the fair value measurement and the three-level valuation hierarchy.
The cost and fair market values associated with preneed funeral trust investments at June 30, 2013 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 19,257 |
| | $ | — |
| | $ | — |
| | $ | 19,257 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 2,752 |
| | 61 |
| | (33 | ) | | 2,780 |
|
U.S. agency obligations | 1 | | 559 |
| | 13 |
| | (6 | ) | | 566 |
|
Foreign debt | 2 | | 1,981 |
| | 54 |
| | (56 | ) | | 1,979 |
|
Corporate debt | 2 | | 27,405 |
| | 659 |
| | (787 | ) | | 27,277 |
|
Preferred stock | 2 | | 14,765 |
| | 452 |
| | (59 | ) | | 15,158 |
|
Mortgage backed securities | 2 | | 1 |
| | — |
| | — |
| | 1 |
|
Common stock | 1 | | 6,989 |
| | 690 |
| | (553 | ) | | 7,126 |
|
Mutual funds: | | | | | | | | | |
Equity | 1 | | 11,598 |
| | 1,610 |
| | (25 | ) | | 13,183 |
|
Fixed income | 2 | | 5,403 |
| | 19 |
| | (145 | ) | | 5,277 |
|
Other investments | 2 | | 2,688 |
| | — |
| | (26 | ) | | 2,662 |
|
Trust securities | | | $ | 93,398 |
| | $ | 3,558 |
| | $ | (1,690 | ) | | $ | 95,266 |
|
Accrued investment income | | | $ | 706 |
| | | | | | $ | 706 |
|
Preneed funeral trust investments | | | | | | | | | $ | 95,972 |
|
Fair market value as a percentage of cost | | | | | | | | | 102.0 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 736 |
|
Due in one to five years | 8,515 |
|
Due in five to ten years | 12,603 |
|
Thereafter | 25,907 |
|
Total | $ | 47,761 |
|
The cost and fair market values associated with preneed funeral trust investments at December 31, 2012 are detailed below (in thousands): |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 13,448 |
| | $ | — |
| | $ | — |
| | $ | 13,448 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 3,001 |
| | 75 |
| | — |
| | 3,076 |
|
U.S agency obligations | 1 | | 142 |
| | 4 |
| | — |
| | 146 |
|
Foreign debt | 2 | | 1,217 |
| | 273 |
| | — |
| | 1,490 |
|
Corporate debt | 2 | | 25,060 |
| | 661 |
| | (331 | ) | | 25,390 |
|
Preferred stock | 2 | | 15,228 |
| | 715 |
| | (193 | ) | | 15,750 |
|
Common stock | 1 | | 5,770 |
| | 27 |
| | (996 | ) | | 4,801 |
|
Mutual funds: |
| | | | | | | | |
Equity | | | 11,843 |
| | 487 |
| | (78 | ) | | 12,252 |
|
Fixed income | 1 | | 6,105 |
| | 181 |
| | (40 | ) | | 6,246 |
|
Other investments | 2 | | 2,143 |
| | — |
| | (15 | ) | | 2,128 |
|
Trust securities | 2 | | $ | 83,957 |
| | $ | 2,423 |
| | $ | (1,653 | ) | | $ | 84,727 |
|
Accrued investment income | | | $ | 688 |
| | | | | | $ | 688 |
|
Preneed funeral trust investments | | | | | | | | | $ | 85,415 |
|
Market value as a percentage of cost | | | | | | | | | 100.9 | % |
We determine whether or not the assets in the preneed funeral trusts 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. There will be no impact on earnings unless and until such time as the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
We have determined that the unrealized losses in our preneed funeral trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of June 30, 2013 and
December 31, 2012, respectively, are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2013 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. debt | $ | 838 |
| | $ | (33 | ) | | $ | — |
| | $ | — |
| | $ | 838 |
| | $ | (33 | ) |
U.S. agency obligations | 206 |
| | (6 | ) | | — |
| | — |
| | 206 |
| | (6 | ) |
Foreign debt | 1,383 |
| | (56 | ) | | — |
| | — |
| | 1,383 |
| | (56 | ) |
Corporate debt | 12,342 |
| | (438 | ) | | 828 |
| | (349 | ) | | 13,170 |
| | (787 | ) |
Preferred stock | 5,860 |
| | (59 | ) | | — |
| | — |
| | 5,860 |
| | (59 | ) |
Common stock | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Mutual funds: | | | | | | | | | | | |
Equity | 1,732 |
| | (344 | ) | | 644 |
| | (209 | ) | | 2,376 |
| | (553 | ) |
Equity and other | 33 |
| | — |
| | 542 |
| | (25 | ) | | 575 |
| | (25 | ) |
Fixed income | 2,691 |
| | (145 | ) | | — |
| | — |
| | 2,691 |
| | (145 | ) |
Other investments | — |
| | — |
| | 44 |
| | (26 | ) | | 44 |
| | (26 | ) |
Total temporary impaired securities | $ | 25,085 |
| | $ | (1,081 | ) | | $ | 2,058 |
| | $ | (609 | ) | | $ | 27,143 |
| | $ | (1,690 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Corporate debt | $ | 7,419 |
| | $ | (212 | ) | | $ | 406 |
| | $ | (119 | ) | | $ | 7,825 |
| | $ | (331 | ) |
Preferred stock | 685 |
| | (35 | ) | | 1,504 |
| | (158 | ) | | 2,189 |
| | (193 | ) |
Common stock | 3,323 |
| | (609 | ) | | 625 |
| | (387 | ) | | 3,948 |
| | (996 | ) |
Mutual funds: | | | | | | | | | | | |
Equity | 1,613 |
| | (25 | ) | | 632 |
| | (53 | ) | | 2,245 |
| | (78 | ) |
Fixed income | 3,085 |
| | (40 | ) | | — |
| | — |
| | 3,085 |
| | (40 | ) |
Other investments | — |
| | — |
| | 30 |
| | (15 | ) | | 30 |
| | (15 | ) |
Total temporary impaired securities | $ | 16,125 |
| | $ | (921 | ) | | $ | 3,197 |
| | $ | (732 | ) | | $ | 19,322 |
| | $ | (1,653 | ) |
Preneed funeral trust investment security transactions recorded in Interest expense, net of other income in the Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2013 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2012 | | 2013 | | 2012 | | 2013 |
Investment income | $ | 1,089 |
| | $ | 917 |
| | $ | 1,951 |
| | $ | 1,523 |
|
Realized gains | 603 |
| | 1,087 |
| | 1,338 |
| | 6,214 |
|
Realized losses | (1,727 | ) | | (221 | ) | | (2,177 | ) | | (5,553 | ) |
Expenses and taxes | (793 | ) | | (807 | ) | | (1,003 | ) | | (1,055 | ) |
Increase (decrease) in deferred preneed funeral receipts held in trust | 828 |
| | (976 | ) | | (109 | ) | | (1,129 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed funeral trusts are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2012 | | 2013 | | 2012 | | 2013 |
Purchases | $ | (13,721 | ) | | $ | (7,903 | ) | | $ | (31,594 | ) | | $ | (11,089 | ) |
Sales | 13,619 |
| | 10,313 |
| | 31,793 |
| | 14,228 |
|
| |
7. | PRENEED CEMETERY RECEIVABLES |
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years with such interest income reflected as Preneed cemetery finance charges. In substantially all cases, we receive an initial down payment at the time the contract is signed. Occasionally, we offer zero percent interest financing to promote sales as limited-time offers. At June 30, 2013, the balances of preneed receivables for cemetery interment rights and for merchandise and services were $21.4 million and $8.7 million, respectively, of which $10.3 million is presented in Accounts receivable and $19.8 million is presented in Preneed receivables. The unearned finance charges associated with these receivables were $3.3 million and $3.7 million at December 31, 2012 and June 30, 2013, 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 4.6% of the total receivables on recognized sales at June 30, 2013. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the six months ended June 30, 2013, changes in the allowance for contract cancellations were as follows (in thousands):
|
| | | |
| June 30, 2013 |
Beginning balance | $ | 1,903 |
|
Write-offs and cancellations | (934 | ) |
Provision | 438 |
|
Assets held for sale reclassification | (57 | ) |
Ending balance | $ | 1,350 |
|
The aging of past due financing receivables as of June 30, 2013 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 |
Recognized revenue | $ | 506 |
| | $ | 315 |
| | $ | 165 |
| | $ | 789 |
| | $ | 1,775 |
| | $ | 19,034 |
| | $ | 20,809 |
|
Deferred revenue | 215 |
| | 121 |
| | 87 |
| | 320 |
| | 743 |
| | 8,568 |
| | 9,311 |
|
Total contracts | $ | 721 |
| | $ | 436 |
| | $ | 252 |
| | $ | 1,109 |
| | $ | 2,518 |
| | $ | 27,602 |
| | $ | 30,120 |
|
| |
8. | 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. During the second quarter, we moved approximately $14.3 million of these trust assets were transferred to third parties for which we do have a controlling financial interest. As of December 31, 2012 and June 30, 2013, receivables from preneed trusts are as follows (in thousands):
|
| | | | | | | |
| December 31, 2012 | | June 30, 2013 |
Preneed trust funds, at cost | $ | 26,671 |
| | $ | 13,976 |
|
Less: allowance for contract cancellation | (800 | ) | | (419 | ) |
Receivables from preneed trusts, net | $ | 25,871 |
| | $ | 13,557 |
|
| |
9. | CONTRACTS SECURED BY INSURANCE |
Certain preneed funeral contracts are secured by life insurance contracts. Generally, the proceeds of the life insurance policies have been assigned to us and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the preneed contract for services and merchandise. Preneed funeral contracts secured by insurance totaled $237.4 million and $280.0 million at December 31, 2012 and June 30, 2013, respectively, and are not included in our Consolidated Balance Sheets.
| |
10. | CEMETERY PERPETUAL CARE TRUST INVESTMENTS |
Care trusts’ corpus on our Consolidated Balance Sheets represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2012 and June 30, 2013 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2012 | | June 30, 2013 |
Trust assets, at fair value | $ | 46,542 |
| | $ | 39,485 |
|
Pending withdrawals of income | (659 | ) | | (464 | ) |
Pending deposits | 37 |
| | 112 |
|
Care trusts’ corpus | $ | 45,920 |
| | $ | 39,133 |
|
The income from these perpetual care trusts provides funds necessary to maintain cemetery property and memorials in perpetuity. This trust fund income is recognized, as earned, in cemetery revenues. Trust management fees charged by our wholly-owned registered investment advisor are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, common stock, U.S. treasury debt, U.S. agency obligations and equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are corporate debt, preferred stocks, foreign debt, mortgage backed securities and fixed income securities, all of which are classified within Level 2 of the valuation hierarchy. There were no significant transfers between Levels 1 and 2 for the three months ended June 30, 2013. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 11 for further information of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at June 30, 2013 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 4,025 |
| | $ | — |
| | $ | — |
| | $ | 4,025 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 1,451 |
| | 40 |
| | (41 | ) | | 1,450 |
|
Corporate debt | 2 | | 18,961 |
| | 391 |
| | (549 | ) | | 18,803 |
|
Preferred stock | 2 | | 9,818 |
| | 169 |
| | (22 | ) | | 9,965 |
|
Mortgage backed securities | 2 | | — |
| | — |
| | — |
| | — |
|
Common stock | 1 | | 4,672 |
| | 439 |
| | (376 | ) | | 4,735 |
|
Trust securities |
| | $ | 38,927 |
| | $ | 1,039 |
| | $ | (988 | ) | | $ | 38,978 |
|
Accrued investment income | | | $ | 507 |
| | | | | | $ | 507 |
|
Cemetery perpetual care trust investments | | | | | | | | | $ | 39,485 |
|
Fair market value as a percentage of cost | | | | | | | | | 100.1 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | — |
|
Due in one to five years | 4,877 |
|
Due in five to ten years | 8,146 |
|
Thereafter | 17,195 |
|
| $ | 30,218 |
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2012 (in thousands): |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 545 |
| | $ | — |
| | $ | — |
| | $ | 545 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 1,267 |
| | 284 |
| | — |
| | 1,551 |
|
Corporate debt | 2 | | 24,324 |
| | 556 |
| | (323 | ) | | 24,557 |
|
Preferred stock | 2 | | 14,225 |
| | 525 |
| | (187 | ) | | 14,563 |
|
Mortgage backed securities | 2 | | 1 |
| | — |
| | — |
| | 1 |
|
Common stock | 1 | | 5,563 |
| | 22 |
| | (969 | ) | | 4,616 |
|
Trust securities |
| | $ | 45,925 |
| | $ | 1,387 |
| | $ | (1,479 | ) | | $ | 45,833 |
|
Accrued investment income | | | $ | 709 |
| | | | | | $ | 709 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 46,542 |
|
Market value as a percentage of cost | | | | | | | | | 99.8 | % |
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. We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus.
We have determined that the unrealized losses in our perpetual care trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the securities are other-than-temporarily impaired based on our analysis of the investments. Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the period as of June 30, 2013 and December 31, 2012, respectively, are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2013 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 1,013 |
| | $ | (41 | ) | | $ | — |
| | $ | — |
| | $ | 1,013 |
| | $ | (41 | ) |
Corporate debt | 8,616 |
| | (306 | ) | | 578 |
| | (244 | ) | | 9,194 |
| | (550 | ) |
Preferred stock | 2,097 |
| | (21 | ) | | — |
| | — |
| | 2,097 |
| | (21 | ) |
Common stock | 1,177 |
| | (234 | ) | | 438 |
| | (142 | ) | | 1,615 |
| | (376 | ) |
Total temporary impaired securities | $ | 12,903 |
| | $ | (602 | ) | | $ | 1,016 |
| | $ | (386 | ) | | $ | 13,919 |
| | $ | (988 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2012 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Corporate debt | $ | 7,236 |
| | $ | (207 | ) | | $ | 396 |
| | $ | (116 | ) | | $ | 7,632 |
| | $ | (323 | ) |
Preferred stock | 664 |
| | (34 | ) | | 1,459 |
| | (153 | ) | | 2,123 |
| | (187 | ) |
Common stock | 3,231 |
| | (593 | ) | | 608 |
| | (376 | ) | | 3,839 |
| | (969 | ) |
Total temporary impaired securities | $ | 11,131 |
| | $ | (834 | ) | | $ | 2,463 |
| | $ | (645 | ) | | $ | 13,594 |
| | $ | (1,479 | ) |
Perpetual care trust investment security transactions recorded in Interest expense, net of other income in the Consolidated Statements of Operations for the three and six months ended June 30, 2012 and 2013 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended June 30, | | For the Six Months Ended June 30, |
| 2012 | | 2013 | | 2012 | | 2013 |
Undistributable realized gains | $ | 1,269 |
| | |