10-Q
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 September 30, 2015
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)
|
| |
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 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 October 30, 2015 was 17,331,814.
CARRIAGE SERVICES, INC.
INDEX
PART I – FINANCIAL INFORMATION
| |
Item 1. | Financial Statements |
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
| | | | | | | |
| | | (unaudited) |
| December 31, 2014 | | September 30, 2015 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 413 |
| | $ | 396 |
|
Accounts receivable, net of allowance for bad debts of $1,127 in 2014 and $986 in 2015 | 19,264 |
| | 18,093 |
|
Inventories | 5,294 |
| | 5,947 |
|
Prepaid expenses | 4,590 |
| | 3,709 |
|
Other current assets | 7,144 |
| | 2,517 |
|
Total current assets | 36,705 |
| | 30,662 |
|
Preneed cemetery trust investments | 71,972 |
| | 64,737 |
|
Preneed funeral trust investments | 97,607 |
| | 87,491 |
|
Preneed receivables, net of allowance for bad debts of $2,339 in 2014 and $1,967 in 2015 | 26,284 |
| | 26,902 |
|
Receivables from preneed trusts, net of allowance for contract cancellations of $396 in 2014 and $416 in 2015 | 12,809 |
| | 13,450 |
|
Property, plant and equipment, net of accumulated depreciation of $95,249 in 2014 and $100,857 in 2015 | 186,211 |
| | 209,151 |
|
Cemetery property, net of accumulated amortization of $26,875 in 2014 and $29,355 in 2015 | 75,564 |
| | 75,577 |
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Goodwill | 257,442 |
| | 261,291 |
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Deferred charges and other non-current assets | 14,264 |
| | 14,670 |
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Cemetery perpetual care trust investments | 48,670 |
| | 44,146 |
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Total assets | $ | 827,528 |
| | $ | 828,077 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt and capital lease obligations | $ | 9,838 |
| | $ | 11,468 |
|
Accounts payable | 6,472 |
| | 10,222 |
|
Other liabilities | 1,437 |
| | 6,286 |
|
Accrued liabilities | 15,203 |
| | 15,397 |
|
Total current liabilities | 32,950 |
| | 43,373 |
|
Long-term debt, net of current portion | 111,887 |
| | 107,242 |
|
Revolving credit facility | 40,500 |
| | 63,000 |
|
Convertible subordinated notes due 2021 | 114,542 |
| | 117,096 |
|
Obligations under capital leases, net of current portion | 3,098 |
| | 2,933 |
|
Deferred preneed cemetery revenue | 56,875 |
| | 56,786 |
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Deferred preneed funeral revenue | 31,265 |
| | 31,786 |
|
Deferred tax liability | 36,414 |
| | 36,653 |
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Other long-term liabilities | 2,401 |
| | 4,041 |
|
Deferred preneed cemetery receipts held in trust | 71,972 |
| | 64,737 |
|
Deferred preneed funeral receipts held in trust | 97,607 |
| | 87,491 |
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Care trusts’ corpus | 48,142 |
| | 43,846 |
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Total liabilities | 647,653 |
| | 658,984 |
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Commitments and contingencies: |
| |
|
Stockholders’ equity: | | | |
Common stock, $.01 par value; 80,000,000 shares authorized and 22,434,609 and 22,458,450 shares issued at December 31, 2014 and September 30, 2015, respectively | 224 |
| | 225 |
|
Additional paid-in capital | 212,386 |
| | 213,506 |
|
Accumulated deficit | (17,468 | ) | | (2,049 | ) |
Treasury stock, at cost; 3,921,651 and 5,126,636 shares at December 31, 2014 and September 30, 2015, respectively | (15,267 | ) | | (42,589 | ) |
Total stockholders’ equity | 179,875 |
| | 169,093 |
|
Total liabilities and stockholders’ equity | $ | 827,528 |
| | $ | 828,077 |
|
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, |
| 2014 | | 2015 | | 2014 | | 2015 |
Revenues: | | | | | | | |
Funeral | $ | 41,770 |
| | $ | 44,089 |
| | $ | 127,926 |
| | $ | 138,727 |
|
Cemetery | 12,779 |
| | 14,289 |
| | 38,779 |
| | 42,165 |
|
| 54,549 |
| | 58,378 |
| | 166,705 |
| | 180,892 |
|
Field costs and expenses: | | | | | | | |
Funeral | 25,930 |
| | 26,798 |
| | 77,906 |
| | 82,476 |
|
Cemetery | 7,988 |
| | 8,292 |
| | 23,002 |
| | 24,040 |
|
Depreciation and amortization | 2,654 |
| | 3,019 |
| | 7,744 |
| | 8,814 |
|
Regional and unallocated funeral and cemetery costs | 2,900 |
| | 2,909 |
| | 6,972 |
| | 7,745 |
|
| 39,472 |
| | 41,018 |
| | 115,624 |
| | 123,075 |
|
Gross profit | 15,077 |
| | 17,360 |
| | 51,081 |
| | 57,817 |
|
Corporate costs and expenses: | | | | | | | |
General and administrative costs and expenses | 6,562 |
| | 6,238 |
| | 22,744 |
| | 20,294 |
|
Home office depreciation and amortization | 341 |
| | 418 |
| | 1,037 |
| | 1,310 |
|
| 6,903 |
| | 6,656 |
| | 23,781 |
| | 21,604 |
|
Operating income | 8,174 |
| | 10,704 |
| | 27,300 |
| | 36,213 |
|
Interest expense | (2,177 | ) | | (2,577 | ) | | (7,707 | ) | | (7,725 | ) |
Accretion of discount on convertible subordinated notes | (782 | ) | | (876 | ) | | (1,647 | ) | | (2,554 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | (1,042 | ) | | — |
|
Loss on redemption of convertible junior subordinated debentures | — |
| | — |
| | (3,779 | ) | | — |
|
Other income | — |
| | — |
| | 1,130 |
| | — |
|
Income from continuing operations before income taxes | 5,215 |
| | 7,251 |
| | 14,255 |
| | 25,934 |
|
Provision for income taxes | (2,390 | ) | | (2,807 | ) | | (5,915 | ) | | (10,515 | ) |
Income tax benefit related to uncertain tax positions | 1,740 |
| | — |
| | 1,740 |
| | — |
|
Net provision for income taxes | (650 | ) | | (2,807 | ) | | (4,175 | ) | | (10,515 | ) |
Net income from continuing operations | 4,565 |
| | 4,444 |
| | 10,080 |
| | 15,419 |
|
Income from discontinued operations, net of tax | 431 |
| | — |
| | 381 |
| | — |
|
Net income available to common stockholders | $ | 4,996 |
| | $ | 4,444 |
| | $ | 10,461 |
| | $ | 15,419 |
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| | | | |
|
| | |
Basic earnings per common share: | | | | |
|
| | |
Continuing operations | $ | 0.25 |
| | $ | 0.24 |
| | $ | 0.55 |
| | $ | 0.84 |
|
Discontinued operations | 0.02 |
| | — |
| | 0.02 |
| | — |
|
Basic earnings per common share | $ | 0.27 |
| | $ | 0.24 |
| | $ | 0.57 |
| | $ | 0.84 |
|
| | | | | | | |
Diluted earnings per common share: | | | | | | | |
Continuing operations | $ | 0.24 |
| | $ | 0.24 |
| | $ | 0.54 |
| | $ | 0.82 |
|
Discontinued operations | 0.02 |
| | — |
| | 0.02 |
| | — |
|
Diluted earnings per common share | $ | 0.26 |
| | $ | 0.24 |
| | $ | 0.56 |
| | $ | 0.82 |
|
| | | | | | | |
Dividends declared per common share | $ | 0.025 |
| | $ | 0.025 |
| | $ | 0.075 |
| | $ | 0.075 |
|
| | | | | | | |
Weighted average number of common and common equivalent shares outstanding: | | | | | | | |
Basic | 18,150 |
| | 17,874 |
| | 18,086 |
| | 18,115 |
|
Diluted | 18,276 |
| | 18,083 |
| | 18,223 |
| | 18,588 |
|
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 Nine Months Ended September 30, |
| 2014 | | 2015 |
Cash flows from operating activities: | | | |
Net income | $ | 10,461 |
| | $ | 15,419 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Gain on sale of businesses and purchase of other assets | (2,724 | ) | | (49 | ) |
Impairment of goodwill | 1,180 |
| | — |
|
Loss on early extinguishment of debt | 1,042 |
| | — |
|
Depreciation and amortization | 8,801 |
| | 10,124 |
|
Amortization of deferred financing costs | 681 |
| | 688 |
|
Accretion of discount on convertible subordinated notes | 1,647 |
| | 2,554 |
|
Provision for losses on accounts receivable | 2,113 |
| | 1,332 |
|
Stock-based compensation expense | 3,702 |
| | 3,448 |
|
Deferred income tax (benefit) expense | (140 | ) | | 2,065 |
|
Loss on redemption of convertible junior subordinated debentures | 2,932 |
| | — |
|
Changes in operating assets and liabilities that provided (required) cash: | | | |
Accounts and preneed receivables | (1,700 | ) | | (779 | ) |
Inventories and other current assets | 725 |
| | 3,277 |
|
Deferred charges and other | (196 | ) | | 114 |
|
Preneed funeral and cemetery trust investments | (3,228 | ) | | 21,234 |
|
Accounts payable | 785 |
| | 368 |
|
Accrued and other liabilities | (1,362 | ) | | 4,408 |
|
Deferred preneed funeral and cemetery revenue | 335 |
| | 432 |
|
Deferred preneed funeral and cemetery receipts held in trust | 2,595 |
| | (21,647 | ) |
Net cash provided by operating activities | 27,649 |
| | 42,988 |
|
| | | |
Cash flows from investing activities: | | | |
Acquisitions and land for new construction | (56,850 | ) | | (4,250 | ) |
Purchase of land and buildings previously leased | (7,600 | ) | | (6,080 | ) |
Net proceeds from the sale of businesses and other assets | 1,927 |
| | 65 |
|
Capital expenditures | (10,558 | ) | | (22,823 | ) |
Net cash used in investing activities | (73,081 | ) | | (33,088 | ) |
| | | |
Cash flows from financing activities: | | | |
Net borrowings on the revolving credit facility | 5,400 |
| | 22,500 |
|
Net borrowings (payments) on the term loan | 5,656 |
| | (7,032 | ) |
Proceeds from the issuance of convertible subordinated notes | 143,750 |
| | — |
|
Payment of debt issuance costs related to the convertible subordinated notes | (4,650 | ) | | — |
|
Payments on other long-term debt and obligations under capital leases | (662 | ) | | (679 | ) |
Redemption of convertible junior subordinated debentures | (89,748 | ) | | — |
|
Payments for performance-based stock awards | (16,150 | ) | | — |
|
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 1,035 |
| | 575 |
|
Dividends on common stock | (1,379 | ) | | (1,385 | ) |
Payment of loan origination costs related to the credit facility | (825 | ) | | (13 | ) |
Purchase of treasury stock | — |
| | (23,940 | ) |
Excess tax benefit of equity compensation | 4,594 |
| | 57 |
|
Net cash provided by (used in) financing activities | 47,021 |
| | (9,917 | ) |
| | | |
Net increase (decrease) in cash and cash equivalents | 1,589 |
| | (17 | ) |
Cash and cash equivalents at beginning of period | 1,377 |
| | 413 |
|
Cash and cash equivalents at end of period | $ | 2,966 |
| | $ | 396 |
|
| | | |
The accompanying condensed 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 provider of deathcare services and merchandise in the United States. As of September 30, 2015, we operated 166 funeral homes in 27 states and 32 cemeteries in 11 states.
Our operations are reported in two business segments: Funeral Home Operations and Cemetery Operations. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily sales businesses that provide interment rights (grave sites and mausoleums) and related merchandise, such as markers and memorials.
Principles of Consolidation and Interim Condensed Disclosures
Our unaudited condensed consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Our interim condensed 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 condensed 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, 2014 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.
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of 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, 2014 and further discussion of current period activity in Note 3 to the Consolidated Financial Statements herein.
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. 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 $10.0 million and $7.7 million of funeral receivables at December 31, 2014 and September 30, 2015, respectively, and $9.1 million and $10.0 million of cemetery receivables at December 31, 2014 and September 30, 2015, respectively. For 2014 and 2015, accounts receivable also included minor amounts of other receivables. Non-current preneed receivables represented the payments expected to be received beyond one year from the balance sheet date. Non-current preneed receivables consisted of approximately $7.4 million of funeral receivables at December 31, 2014 and September 30, 2015 and $18.9 million and $19.5 million of cemetery receivables at December 31, 2014 and September 30, 2015, respectively. Bad debt expense totaled approximately $0.8 million and $0.5 million for the three months ended September 30, 2014 and 2015, respectively, and $2.1 million and $1.3 million for the nine months ended September 30, 2014 and 2015, respectively.
Property, Plant and Equipment
Property, plant and equipment (including equipment under capital leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method.
Property, plant and equipment was comprised of the following at December 31, 2014 and September 30, 2015: |
| | | | | | | |
| December 31, 2014 | | September 30, 2015 |
| (in thousands) |
Land | $ | 66,957 |
| | $ | 72,055 |
|
Buildings and improvements | 148,483 |
| | 167,933 |
|
Furniture, equipment and automobiles | 66,020 |
| | 70,020 |
|
Property, plant and equipment, at cost | 281,460 |
| | 310,008 |
|
Less: accumulated depreciation | (95,249 | ) | | (100,857 | ) |
Property, plant and equipment, net | $ | 186,211 |
| | $ | 209,151 |
|
We recorded depreciation expense of approximately $2.3 million and $2.6 million for the three months ended September 30, 2014 and 2015, respectively, and $6.8 million and $7.6 million for the nine months ended September 30, 2014 and 2015, respectively. During the third quarter of 2015, we opened a newly constructed funeral home in Katy, Texas.
Discontinued Operations
Effective January 1, 2015, we adopted the Financial Accounting Standards Board's (“FASB”) new guidance for reporting discontinued operations. In April 2014, the FASB amended the definition of “discontinued operations” to include only disposals or held-for-sale classifications for components or groups of components of an entity that represent a strategic shift that either has or will have a major effect on the entity's operations or financial results. Examples of a strategic shift that has or will have a major effect on an entity's operations and financial results include a disposal of a major geographical area, line of business, equity method of investment or other parts of an entity. The new guidance also requires the disclosure of pre-tax income of disposals that do not qualify as discontinued operations. We continually review locations to optimize the sustainable earning power and return on our invested capital. These reviews could entail selling certain non-strategic businesses. During the three and nine months ended September 30, 2015, there were no divestitures of our funeral home or cemetery businesses.
Subsequent Events
Management evaluated events and transactions during the period subsequent to September 30, 2015 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
2.RECENTLY ISSUED ACCOUNTING STANDARDS
Simplifying the Accounting for Measurement-Period Adjustments for Business Combinations
In September 2015, the FASB issued Accounting Standards Update (“ASU”), Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments (Topic 805). This ASU applies to all entities that have reported provisional amounts for items in a business combination for which the accounting is incomplete by the end of the reporting period in which the combination occurs and during the measurement period that have an adjustment to provisional amounts recognized. This ASU requires that an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. These include the effect on earnings of changes in depreciation, amortization, or other income effects as if the accounting had been completed at the acquisition date. The entity is required to present separately on the face of the income statement or disclose in the notes the portion of the amount recorded in the current
period earnings by line item that would have been recorded in previous reporting periods if the adjustment to the provisional amounts had been recognized as of the acquisition date. This ASU is effective for fiscal years beginning after December 15, 2015, including interim periods within those fiscal years. This ASU should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this ASU, with earlier application permitted for financial statements that have not been issued. Our adoption of this ASU for our fiscal year beginning January 1, 2016 is not expected to have a material effect on our financial statements.
Simplifying the Measurement of Inventory
In July 2015, the FASB issued ASU, Inventory - Simplifying the Measurement of Inventory (Topic 330). This ASU applies to all inventory, including inventory that is measured using the first-in, first-out (FIFO) or average cost method. This ASU does not apply to the last-in, first-out (LIFO) or the retail inventory method. This ASU requires an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years. This ASU should be applied prospectively, with earlier application permitted as of the beginning of an interim or annual reporting period. Our adoption of this ASU for our fiscal year beginning January 1, 2017 is not expected to have a material effect on our financial statements.
Presentation of Debt Issuance Costs
In April 2015, the FASB issued ASU, Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs. To simplify the presentation of debt issuance costs, this ASU requires that entities that have historically presented debt issuance costs as an asset, related to a recognized debt liability, will be required to present those costs as a direct deduction from the carrying value of the related debt liability. This presentation will result in debt issuance costs being presented in the same way debt discounts have historically been handled. This ASU does not change the recognition, measurement or subsequent measurement guidance for debt issuance costs. This ASU is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. Early adoption of this ASU is permitted for financial statements that have not been previously issued. The new guidance should be applied on a retrospective basis, wherein the balance sheet of each individual period presented should be adjusted to reflect the period-specific effects of applying the new guidance. Upon transition, an entity is required to comply with the applicable disclosures for a change in accounting principle. These disclosures include the nature and reason for the change in accounting principle, the transition method, a description of the prior-period information that has been retrospectively adjusted, and the effect of the change on debt issuance costs asset and the debt liability. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2016. Our adoption of this ASU is not expected to have a material effect on our financial statements.
Cloud Computing Arrangements
In April 2015, the FASB issued ASU, Intangibles–Goodwill and Other–Internal-Use Software (Subtopic 350-40), to provide guidance on whether a cloud computing arrangement contains a software license. If a cloud computing arrangement includes a software license, then an entity should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, an entity should account for the arrangement as a service contract. The new guidance is effective for fiscal years beginning after December 15, 2015, and interim periods within those fiscal years. We plan to adopt these provisions for our fiscal year beginning January 1, 2016. Our adoption of this ASU is not expected to have a material effect on our financial statements.
Extraordinary and Unusual Items
In January 2015, the FASB issued ASU, Income Statement - Extraordinary and Unusual Items (Subtopic 225-20). This ASU eliminates the concept of reporting extraordinary items. Extraordinary items are events and transactions that are distinguished by their unusual nature and by the infrequency of their occurrence. Preparers will not have to assess whether a particular event or transaction is extraordinary and likewise, auditors and regulators no longer need to evaluate whether a preparer treated an unusual and/or infrequent item appropriately. The presentation and disclosure guidance for items that are unusual in nature or occur infrequently will be retained and will be expanded to include such items. This ASU is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. A reporting entity may apply this ASU prospectively. A reporting entity may also apply this ASU retrospectively to all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption. We plan to adopt these provisions for our fiscal year beginning January 1, 2016. Our adoption of this ASU is not expected to have a material effect on our financial statements.
Going Concern
In August 2014, the FASB issued ASU, Presentation of Financial Statements - Going Concern (Subtopic 205-40). This ASU provides guidance about management's responsibility to evaluate whether there is substantial doubt about an entities ability to continue as a going concern or to provide related footnote disclosures. This ASU requires management to assess an entity's ability to continue as a going concern by incorporating and expanding upon certain principles that are currently U.S. auditing standards. Specifically, this ASU provides a definition of the term substantial doubt, requires evaluation of every reporting period including interim periods, provides principles for considering the mitigating effect of management's plans, requires certain disclosures when substantial doubt is alleviated as a result of consideration of management's plans, requires an express statement and other disclosures when substantial doubt is not alleviated and requires an assessment for a period of one year after the date that the financial statements are issued or available to be issued. The ASU is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter. Early application is permitted. We plan to adopt these provisions for our fiscal year beginning January 1, 2017.
Revenue from Contracts with Customers
In May 2014, the FASB issued ASU, Revenue from Contracts with Customers. (Topic 606). ASC Topic 606 supersedes the revenue recognition requirements under ASC 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. The guidance was effective for the annual reporting period beginning after December 15, 2016, including interim periods within that reporting period. Early adoption is not permitted. 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 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3. GOODWILL
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 business. The excess of the purchase price over the fair value of net identifiable assets acquired and liabilities assumed, as determined by management in business acquisition transactions accounted for as purchases, is recorded as goodwill.
We performed our 2015 annual impairment test of goodwill using information as of August 31, 2015. 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 the two-step goodwill impairment test. For our 2013 annual impairment test, we performed the two-step impairment test. For our 2014 and 2015 annual impairment tests, we performed qualitative reviews. Our intent is to perform the two-step 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, 2014, for a discussion of the methodology used for the annual goodwill impairment test. For our 2015 annual impairment test, we performed a qualitative review and concluded that there was not an impairment to goodwill.
The following table presents the changes in goodwill on our Consolidated Balance Sheets during the nine months ended September 30, 2015 (in thousands):
|
| | | |
| |
Goodwill as of December 31, 2014 | $ | 257,442 |
|
Increase in goodwill related to acquisitions | 3,849 |
|
Goodwill as of September 30, 2015 | $ | 261,291 |
|
The $3.8 million increase in goodwill related to acquisitions represents the goodwill recorded in connection with the funeral home acquired in February 2015.
4. PRENEED TRUST INVESTMENTS
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 on our Consolidated Balance Sheets at December 31, 2014 and September 30, 2015 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2014 | | September 30, 2015 |
Preneed cemetery trust investments, at fair value | $ | 74,198 |
| | $ | 67,000 |
|
Less: allowance for contract cancellation | (2,226 | ) | | (2,263 | ) |
Preneed cemetery trust investments, net | $ | 71,972 |
| | $ | 64,737 |
|
Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some cases, some or 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 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. At September 30, 2015, our preneed cemetery trust investments were not under-funded.
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 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 and mortgage backed securities, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2015. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 8 for further information of the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at September 30, 2015 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 1,991 |
| | $ | — |
| | $ | — |
| | $ | 1,991 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 457 |
| | — |
| | (49 | ) | | 408 |
|
Foreign debt | 2 | | 5,567 |
| | 11 |
| | (488 | ) | | 5,090 |
|
Corporate debt | 2 | | 25,636 |
| | 122 |
| | (3,063 | ) | | 22,695 |
|
Preferred stock | 2 | | 16,196 |
| | 41 |
| | (666 | ) | | 15,571 |
|
Common stock | 1 | | 25,602 |
| | 316 |
| | (5,586 | ) | | 20,332 |
|
Trust securities | | | $ | 75,449 |
| | $ | 490 |
| | $ | (9,852 | ) | | $ | 66,087 |
|
Accrued investment income | | | $ | 913 |
| | | | | | $ | 913 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 67,000 |
|
Market value as a percentage of cost | | | | | | | | | 87.6 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 145 |
|
Due in one to five years | 5,852 |
|
Due in five to ten years | 4,783 |
|
Thereafter | 32,984 |
|
Total | $ | 43,764 |
|
The cost and fair market values associated with preneed cemetery trust investments at December 31, 2014 are detailed below (in thousands): |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 5,591 |
| | $ | — |
| | $ | — |
| | $ | 5,591 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 347 |
| | 9 |
| | — |
| | 356 |
|
Foreign debt | 2 | | 5,874 |
| | — |
| | (237 | ) | | 5,637 |
|
Corporate debt | 2 | | 30,108 |
| | 362 |
| | (2,167 | ) | | 28,303 |
|
Preferred stock | 2 | | 19,154 |
| | 199 |
| | (325 | ) | | 19,028 |
|
Mortgage backed securities | 2 | | 1 |
| | — |
| | — |
| | 1 |
|
Common stock | 1 | | 13,128 |
| | 2,357 |
| | (966 | ) | | 14,519 |
|
Trust securities | | | $ | 74,203 |
| | $ | 2,927 |
| | $ | (3,695 | ) | | $ | 73,435 |
|
Accrued investment income | | | $ | 763 |
| | | | | | $ | 763 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 74,198 |
|
Market value as a percentage of cost | | | | | | | | | 99.0 | % |
We determine whether or not the assets in the preneed cemetery trust investments have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in Deferred preneed cemetery receipts held in trust on our Consolidated Balance Sheets. We recorded a $0.7 million impairment in the first quarter of 2015 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. There were no other impairments recorded during the nine months ended September 30, 2015. We recorded a $0.2 million impairment in the second quarter of 2014 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. There were no other impairments recorded in the nine months ended September 30, 2014. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to the preneed contracts and the services are performed or the merchandise is delivered causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2015, 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 cemetery merchandise and service trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2015 and December 31, 2014, are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2015 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | $ | 408 |
| | $ | (49 | ) | | $ | — |
| | $ | — |
| | $ | 408 |
| | $ | (49 | ) |
Foreign debt | 2,776 |
| | (427 | ) | | 717 |
| | (61 | ) | | 3,493 |
| | (488 | ) |
Corporate debt | 17,779 |
| | (2,260 | ) | | 2,972 |
| | (803 | ) | | 20,751 |
| | (3,063 | ) |
Preferred stock | 15,636 |
| | (666 | ) | | — |
| | — |
| | 15,636 |
| | (666 | ) |
Common stock | 18,538 |
| | (4,794 | ) | | 1,007 |
| | (792 | ) | | 19,545 |
| | (5,586 | ) |
Total temporary impaired securities | $ | 55,137 |
| | $ | (8,196 | ) | | $ | 4,696 |
| | $ | (1,656 | ) | | $ | 59,833 |
| | $ | (9,852 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 |
| 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 | $ | 5,629 |
| | $ | (237 | ) | | $ | — |
| | $ | — |
| | $ | 5,629 |
| | $ | (237 | ) |
Corporate debt | 18,051 |
| | (778 | ) | | 2,016 |
| | (1,389 | ) | | 20,067 |
| | (2,167 | ) |
Preferred stock | 10,342 |
| | (289 | ) | | 3,236 |
| | (36 | ) | | 13,578 |
| | (325 | ) |
Common stock | 6,904 |
| | (911 | ) | | 65 |
| | (55 | ) | | 6,969 |
| | (966 | ) |
Total temporary impaired securities | $ | 40,926 |
| | $ | (2,215 | ) | | $ | 5,317 |
| | $ | (1,480 | ) | | $ | 46,243 |
| | $ | (3,695 | ) |
Preneed cemetery trust investment security transactions recorded in Interest expense on our Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2015 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Investment income | $ | 504 |
| | $ | 471 |
| | $ | 1,936 |
| | $ | 1,762 |
|
Realized gains | 1,970 |
| | 1,170 |
| | 3,670 |
| | 2,844 |
|
Realized losses | (124 | ) | | (276 | ) | | (952 | ) | | (1,166 | ) |
Expenses and taxes | (387 | ) | | (361 | ) | | (1,329 | ) | | (1,455 | ) |
Increase in deferred preneed cemetery receipts held in trust | (1,963 | ) | | (1,004 | ) | | (3,325 | ) | | (1,985 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands): |
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Purchases | $ | (17,814 | ) | | $ | (11,719 | ) | | $ | (39,472 | ) | | $ | (24,575 | ) |
Sales | $ | 18,061 |
| | $ | 4,417 |
| | $ | 40,981 |
| | $ | 14,610 |
|
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 on our Consolidated Balance Sheets at December 31, 2014 and September 30, 2015 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2014 | | September 30, 2015 |
Preneed funeral trust investments, at market value | $ | 100,579 |
| | $ | 90,467 |
|
Less: allowance for contract cancellation | (2,972 | ) | | (2,976 | ) |
Preneed funeral trust investments, net | $ | 97,607 |
| | $ | 87,491 |
|
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 may be 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. At September 30, 2015, our preneed funeral trust investments were not under-funded.
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, 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, common stock 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 fixed income securities including U.S. agency obligations, 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 months ended September 30, 2015. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 8 for further information of the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed funeral trust investments at September 30, 2015 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 14,687 |
| | $ | — |
| | $ | — |
| | $ | 14,687 |
|
Fixed income securities: | | | | | | | | | |
U.S treasury debt | 1 | | 1,747 |
| | 38 |
| | — |
| | 1,785 |
|
Municipal bonds | 2 | | 480 |
| | — |
| | (52 | ) | | 428 |
|
Foreign debt | 2 | | 5,783 |
| | 12 |
| | (500 | ) | | 5,295 |
|
Corporate debt | 2 | | 27,568 |
| | 169 |
| | (3,453 | ) | | 24,284 |
|
Preferred stock | 2 | | 17,571 |
| | 137 |
| | (694 | ) | | 17,014 |
|
Mortgage backed securities | 2 | | 277 |
| | 5 |
| | (3 | ) | | 279 |
|
Common stock | 1 | | 26,509 |
| | 364 |
| | (5,673 | ) | | 21,200 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 959 |
| | — |
| | (68 | ) | | 891 |
|
Other investments | 2 | | 3,627 |
| | — |
| | (31 | ) | | 3,596 |
|
Trust securities | | | $ | 99,208 |
| | $ | 725 |
| | $ | (10,474 | ) | | $ | 89,459 |
|
Accrued investment income | | | $ | 1,008 |
| | | | | | $ | 1,008 |
|
Preneed funeral trust investments | | | | | | | | | $ | 90,467 |
|
Market value as a percentage of cost | | | | | | | | | 90.2 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 416 |
|
Due in one to five years | 6,861 |
|
Due in five to ten years | 5,738 |
|
Thereafter | 36,070 |
|
Total | $ | 49,085 |
|
The cost and fair market values associated with preneed funeral trust investments at December 31, 2014 are detailed below (in thousands): |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 17,501 |
| | $ | — |
| | $ | — |
| | $ | 17,501 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 2,037 |
| | 32 |
| | (15 | ) | | 2,054 |
|
U.S. agency obligations | 2 | | 30 |
| | — |
| | — |
| | 30 |
|
Foreign debt | 2 | | 4,653 |
| | — |
| | (188 | ) | | 4,465 |
|
Corporate debt | 2 | | 24,761 |
| | 469 |
| | (1,718 | ) | | 23,512 |
|
Preferred stock | 2 | | 16,166 |
| | 256 |
| | (261 | ) | | 16,161 |
|
Mortgage backed securities | 2 | | 309 |
| | 8 |
| | (3 | ) | | 314 |
|
Common stock | 1 | | 10,544 |
| | 1,926 |
| | (783 | ) | | 11,687 |
|
Mutual funds: | | | | | | | | | |
Equity | 1 | | 14,126 |
| | 1,370 |
| | (181 | ) | | 15,315 |
|
Fixed income | 2 | | 5,351 |
| | 115 |
| | (72 | ) | | 5,394 |
|
Other investments | 2 | | 3,560 |
| | — |
| | (29 | ) | | 3,531 |
|
Trust securities | | | $ | 99,038 |
| | $ | 4,176 |
| | $ | (3,250 | ) | | $ | 99,964 |
|
Accrued investment income | | | $ | 615 |
| | | | | | $ | 615 |
|
Preneed funeral trust investments | | | | | | | | | $ | 100,579 |
|
Market value as a percentage of cost | | | | | | | | | 100.9 | % |
We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to Deferred preneed funeral receipts held in trust on our Consolidated Balance Sheets. We recorded a $0.6 million impairment in the first quarter of 2015 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. There were no other impairments recorded in the nine months ended September 30, 2015. We recorded a $0.1 million impairment in the second quarter of 2014 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. There were on other impairments recorded in the nine months ended September 30, 2014. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2015, 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 30, 2015 and December 31, 2014 are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2015 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | 429 |
| | (52 | ) | | — |
| | — |
| | 429 |
| | (52 | ) |
Foreign debt | 2,844 |
| | (438 | ) | | 735 |
| | (62 | ) | | 3,579 |
| | (500 | ) |
Corporate debt | 20,047 |
| | (2,548 | ) | | 3,351 |
| | (905 | ) | | 23,398 |
| | (3,453 | ) |
Preferred stock | 16,280 |
| | (694 | ) | | — |
| | — |
| | 16,280 |
| | (694 | ) |
Mortgage backed securities | 125 |
| | (2 | ) | | 17 |
| | (1 | ) | | 142 |
| | (3 | ) |
Common Stock | 18,830 |
| | (4,869 | ) | | 1,023 |
| | (804 | ) | | 19,853 |
| | (5,673 | ) |
Mutual funds: | | | | | | | | | | | |
Fixed income | 330 |
| | (32 | ) | | 560 |
| | (36 | ) | | 890 |
| | (68 | ) |
Other investments | — |
| | — |
| | 42 |
| | (31 | ) | | 42 |
| | (31 | ) |
Total temporary impaired securities | $ | 58,885 |
| | $ | (8,635 | ) | | $ | 5,728 |
| | $ | (1,839 | ) | | $ | 64,613 |
| | $ | (10,474 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 |
| 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 | $ | 500 |
| | $ | — |
| | $ | 836 |
| | $ | (15 | ) | | $ | 1,336 |
| | $ | (15 | ) |
Foreign debt | 4,471 |
| | (188 | ) | | — |
| | — |
| | 4,471 |
| | (188 | ) |
Corporate debt | 14,310 |
| | (617 | ) | | 1,598 |
| | (1,101 | ) | | 15,908 |
| | (1,718 | ) |
Preferred stock | 8,300 |
| | (232 | ) | | 2,597 |
| | (29 | ) | | 10,897 |
| | (261 | ) |
Mortgage backed securities | — |
| | — |
| | 51 |
| | (3 | ) | | 51 |
| | (3 | ) |
Mutual funds: | | | | | | | | | | | |
Equity | 5,594 |
| | (739 | ) | | 53 |
| | (44 | ) | | 5,647 |
| | (783 | ) |
Equity and other | 4,204 |
| | (180 | ) | | 6 |
| | (1 | ) | | 4,210 |
| | (181 | ) |
Fixed income | 888 |
| | (19 | ) | | 1,026 |
| | (53 | ) | | 1,914 |
| | (72 | ) |
Other investments | — |
| | — |
| | 42 |
| | (29 | ) | | 42 |
| | (29 | ) |
Total temporary impaired securities | $ | 38,267 |
| | $ | (1,975 | ) | | $ | 6,209 |
| | $ | (1,275 | ) | | $ | 44,476 |
| | $ | (3,250 | ) |
Preneed funeral trust investment security transactions recorded in Interest expense on the Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2015 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Investment income | $ | 576 |
| | $ | 554 |
| | $ | 2,067 |
| | $ | 1,982 |
|
Realized gains | 1,605 |
| | 1,218 |
| | 5,036 |
| | 3,791 |
|
Realized losses | (105 | ) | | (504 | ) | | (841 | ) | | (1,374 | ) |
Expenses and taxes | (260 | ) | | 140 |
| | (1,158 | ) | | (694 | ) |
Increase in deferred preneed funeral receipts held in trust | (1,816 | ) | | (1,408 | ) | | (5,104 | ) | | (3,705 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed funeral trusts were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2014 | | 2015 | | 2014 | | 2015 |
Purchases | $ | (14,630 | ) | | $ | (12,323 | ) | | $ | (44,147 | ) | | $ | (23,668 | ) |
Sales | $ | 14,691 |
| | $ | 10,998 |
| | $ | 44,840 |
| | $ | 33,736 |
|
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. In substantially all cases, we receive an initial down payment at the time the contract is signed. At September 30, 2015, our total financed preneed receivables was $35.0 million, of which $25.5 million and $9.5 million were for cemetery interment rights and for merchandise and services respectively. These amounts are presented on our consolidated balance sheet as $11.1 million within Accounts receivable and $23.9 million within Preneed receivables. The unearned finance charges associated with these receivables were $4.6 million and $4.9 million at December 31, 2014 and September 30, 2015, 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% of the total receivables on recognized sales at September 30, 2015. 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 months ended September 30, 2015, the change in the allowance for contract cancellations was as follows (in thousands):
|
| | | |
| September 30, 2015 |
Beginning balance | $ | 2,140 |
|
Write-offs and cancellations | (1,274 | ) |
Provision | 803 |
|
Ending balance | $ | 1,669 |
|
The aging of past due financing receivables as of September 30, 2015 was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total Financing Receivables |
Recognized revenue | $ | 570 |
| | $ | 326 |
| | $ | 232 |
| | $ | 963 |
| | $ | 2,091 |
| | $ | 22,843 |
| | $ | 24,934 |
|
Deferred revenue | 239 |
| | 171 |
| | 143 |
| | 290 |
| | 843 |
| | 9,187 |
| | 10,030 |
|
Total contracts | $ | 809 |
| | $ | 497 |
| | $ | 375 |
| | $ | 1,253 |
| | $ | 2,934 |
| | $ | 32,030 |
| | $ | 34,964 |
|
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, 2014 and September 30, 2015, receivables from preneed trusts were as follows (in thousands):
|
| | | | | | | |
| December 31, 2014 | | September 30, 2015 |
Preneed trust funds, at cost | $ | 13,205 |
| | $ | 13,866 |
|
Less: allowance for contract cancellation | (396 | ) | | (416 | ) |
Receivables from preneed trusts, net | $ | 12,809 |
| | $ | 13,450 |
|
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 30, 2015. 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.
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
| (in thousands) |
As of September 30, 2015 | | | |
Cash and cash equivalents | $ | 2,893 |
| | $ | 2,893 |
|
Fixed income investments | 8,328 |
| | 8,338 |
|
Mutual funds and common stocks | 2,629 |
| | 2,661 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 13,866 |
| | $ | 13,908 |
|
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
| (in thousands) |
As of December 31, 2014 | | | |
Cash and cash equivalents | $ | 2,834 |
| | $ | 2,834 |
|
Fixed income investments | 7,880 |
| | 7,893 |
|
Mutual funds and common stocks | 2,467 |
| | 2,586 |
|
Annuities | 24 |
| | 24 |
|
Total | $ | 13,205 |
| | $ | 13,337 |
|
7.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, 2014 and September 30, 2015 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2014 | | September 30, 2015 |
Trust assets, at fair value | $ | 48,670 |
| | $ | 44,146 |
|
Obligations due from trust | (528 | ) | | (300 | ) |
Care trusts’ corpus | $ | 48,142 |
| | $ | 43,846 |
|
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 Cemetery revenues. Trust management fees charged by our wholly-owned registered investment advisor, 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, 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 municipal bonds, foreign debt, corporate debt and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three
and nine months ended September 30, 2015. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 8 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 30, 2015 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 830 |
| | $ | — |
| | $ | — |
| | $ | 830 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 324 |
| | — |
| | (35 | ) | | 289 |
|
Foreign debt | 2 | | 3,722 |
| | 7 |
| | (341 | ) | | 3,388 |
|
Corporate debt | 2 | | 18,226 |
| | 79 |
| | (2,221 | ) | | 16,084 |
|
Preferred stock | 2 | | 11,232 |
| | 30 |
| | (461 | ) | | 10,801 |
|
Common stock | 1 | | 15,444 |
| | 183 |
| | (3,417 | ) | | 12,210 |
|
Trust securities | | | $ | 49,778 |
| | $ | 299 |
| | $ | (6,475 | ) | | $ | 43,602 |
|
Accrued investment income | | | $ | 544 |
| | | | | | $ | 544 |
|
Cemetery perpetual care trust investments | | | | | | | | | $ | 44,146 |
|
Market value as a percentage of cost | | | | | | | | | 87.6 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 85 |
|
Due in one to five years | 4,166 |
|
Due in five to ten years | 3,457 |
|
Thereafter | 22,854 |
|
| $ | 30,562 |
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2014 (in thousands): |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 3,206 |
| | $ | — |
| | $ | — |
| | $ | 3,206 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 229 |
| | 5 |
| | — |
| | 234 |
|
Foreign debt | 2 | | 3,871 |
| | — |
| | (156 | ) | | 3,715 |
|
Corporate debt | 2 | | 19,911 |
| | 248 |
| | (1,428 | ) | | 18,731 |
|
Preferred stock | 2 | | 12,694 |
| | 137 |
| | (214 | ) | | 12,617 |
|
Common stock | 1 | | 8,747 |
| | 1,568 |
| | (653 | ) | | 9,662 |
|
Trust securities | | | $ | 48,658 |
| | $ | 1,958 |
| | $ | (2,451 | ) | | $ | 48,165 |
|
Accrued investment income | | | $ | 505 |
| | | | | | $ | 505 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 48,670 |
|
Fair market value as a percentage of cost | | | | | | | | | 99.0 | % |
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 recorded a $0.5 million impairment in the first quarter of 2015 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We have not recorded any other impairments in the nine months ended September 30, 2015. We recorded a $0.1 million impairment in the second quarter of 2014 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any other impairments in the nine months ended September 2014.
At September 30, 2015, 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 30, 2015 and December 31, 2014 are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2015 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | $ | 289 |
| | $ | (35 | ) | | $ | — |
| | $ | — |
| | $ | 289 |
| | $ | (35 | ) |
Foreign debt | 1,941 |
| | (299 | ) | | 501 |
| | (42 | ) | | 2,442 |
| | (341 | ) |
Corporate debt | 12,893 |
| | (1,639 | ) | | 2,156 |
| | (583 | ) | | 15,049 |
| | (2,222 | ) |
Preferred stock | 10,794 |
| | (460 | ) | | — |
| | — |
| | 10,794 |
| | (460 | ) |
Common stock | 11,342 |
| | (2,933 | ) | | 616 |
| | (484 | ) | | 11,958 |
| | (3,417 | ) |
Total temporary impaired securities | $ | 37,259 |
| | $ | (5,366 | ) | | $ | 3,273 |
| | $ | (1,109 | ) | | $ | 40,532 |
| | $ | (6,475 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2014 |
| 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 | $ | 3,716 |
| | $ | (156 | ) | | $ | — |
| | $ | — |
| | $ | 3,716 |
| | $ | (156 | ) |
Corporate debt | 11,893 |
| | (513 | ) | | 1,328 |
| | (915 | ) | | 13,221 |
| | (1,428 | ) |
Preferred stock | 6,821 |
| | (191 | ) | | 2,133 |
| | (23 | ) | | 8,954 |
| | (214 | ) |
Common stock | 4,663 |
| | (616 | ) | | 44 |
| | (37 | ) | | 4,707 |
| | (653 | ) |
Total temporary impaired securities | $ | 27,093 |