10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
| |
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2016
OR
| |
o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
|
|
Commission File Number: 1-11961 |
CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)
|
| |
DELAWARE | 76-0423828 |
(State or other jurisdiction of incorporation or organization) | (I.R.S. Employer Identification No.) |
| |
3040 Post Oak Boulevard, Suite 300 |
Houston, Texas, 77056 |
(Address of principal executive offices) |
(713) 332-8400
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T 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.
|
| | | |
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 April 22, 2016 was 16,630,583.
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, 2015 | | March 31, 2016 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 535 |
| | $ | 871 |
|
Accounts receivable, net of allowance for bad debts of $1,054 in 2015 and $943 in 2016 | 18,181 |
| | 17,911 |
|
Inventories | 5,654 |
| | 5,782 |
|
Prepaid expenses | 4,684 |
| | 4,770 |
|
Other current assets | 4,707 |
| | 3,853 |
|
Total current assets | 33,761 |
| | 33,187 |
|
Preneed cemetery trust investments | 63,291 |
| | 60,432 |
|
Preneed funeral trust investments | 85,553 |
| | 83,132 |
|
Preneed receivables, net of allowance for bad debts of $2,042 in 2015 and $2,046 in 2016 | 27,998 |
| | 28,224 |
|
Receivables from preneed trusts | 13,544 |
| | 13,050 |
|
Property, plant and equipment, net of accumulated depreciation of $103,306 in 2015 and $105,016 in 2016 | 214,874 |
| | 216,864 |
|
Cemetery property, net of accumulated amortization of $30,289 in 2015 and $31,282 in 2016 | 75,597 |
| | 75,784 |
|
Goodwill | 264,416 |
| | 264,416 |
|
Deferred charges and other non-current assets | 10,978 |
| | 10,748 |
|
Cemetery perpetual care trust investments | 43,127 |
| | 41,341 |
|
Total assets | $ | 833,139 |
| | $ | 827,178 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt and capital lease obligations | $ | 12,236 |
| | $ | 12,533 |
|
Accounts payable | 7,917 |
| | 6,162 |
|
Other liabilities | 524 |
| | 2,535 |
|
Accrued liabilities | 16,541 |
| | 14,623 |
|
Total current liabilities | 37,218 |
| | 35,853 |
|
Long-term debt, net of current portion | 103,495 |
| | 139,413 |
|
Revolving credit facility | 91,514 |
| | 52,633 |
|
Convertible subordinated notes due 2021 | 115,227 |
| | 116,278 |
|
Obligations under capital leases, net of current portion | 2,875 |
| | 2,816 |
|
Deferred preneed cemetery revenue | 56,721 |
| | 56,692 |
|
Deferred preneed funeral revenue | 31,748 |
| | 31,209 |
|
Deferred tax liability | 39,956 |
| | 38,968 |
|
Other long-term liabilities | 5,531 |
| | 5,782 |
|
Deferred preneed cemetery receipts held in trust | 63,291 |
| | 60,432 |
|
Deferred preneed funeral receipts held in trust | 85,553 |
| | 83,132 |
|
Care trusts’ corpus | 42,416 |
| | 41,292 |
|
Total liabilities | 675,545 |
| | 664,500 |
|
Commitments and contingencies: |
| |
|
Stockholders’ equity: | | | |
Common stock, $.01 par value; 80,000,000 shares authorized; 22,497,873 and 22,481,301 issued as of December 31, 2015 and March 31, 2016, respectively
| 225 |
| | 225 |
|
Additional paid-in capital | 214,250 |
| | 214,763 |
|
Retained earnings | 3,385 |
| | 7,956 |
|
Treasury stock, at cost; 5,849,316 shares at December 31, 2015 and March 31, 2016
| (60,266 | ) | | (60,266 | ) |
Total stockholders’ equity | 157,594 |
| | 162,678 |
|
Total liabilities and stockholders’ equity | $ | 833,139 |
| | $ | 827,178 |
|
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 March 31, |
| 2015 | | 2016 |
Revenues: | | | |
Funeral | $ | 50,137 |
| | $ | 49,302 |
|
Cemetery | 13,116 |
| | 14,029 |
|
| 63,253 |
| | 63,331 |
|
Field costs and expenses: | | | |
Funeral | 28,415 |
| | 27,781 |
|
Cemetery | 7,302 |
| | 7,862 |
|
Depreciation and amortization | 2,802 |
| | 3,336 |
|
Regional and unallocated funeral and cemetery costs | 2,525 |
| | 3,049 |
|
| 41,044 |
| | 42,028 |
|
Gross profit | 22,209 |
| | 21,303 |
|
Corporate costs and expenses: | | | |
General and administrative costs and expenses | 7,170 |
| | 9,247 |
|
Home office depreciation and amortization | 520 |
| | 398 |
|
| 7,690 |
| | 9,645 |
|
Operating income | 14,519 |
| | 11,658 |
|
Interest expense | (2,550 | ) | | (2,851 | ) |
Accretion of discount on convertible subordinated notes | (827 | ) | | (927 | ) |
Loss on early extinguishment of debt | — |
| | (567 | ) |
Other income (loss) | (119 | ) | | 305 |
|
Income before income taxes | 11,023 |
| | 7,618 |
|
Provision for income taxes | (4,605 | ) | | (3,047 | ) |
Net income | $ | 6,418 |
| | $ | 4,571 |
|
| | | |
Basic earnings per common share: | $ | 0.35 |
| | $ | 0.27 |
|
Diluted earnings per common share: | $ | 0.34 |
| | $ | 0.27 |
|
| | | |
Dividends declared per common share | $ | 0.025 |
| | $ | 0.025 |
|
| | | |
Weighted average number of common and common equivalent shares outstanding: | | | |
Basic | 18,208 |
| | 16,459 |
|
Diluted | 18,804 |
| | 16,650 |
|
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2015 | | 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 6,418 |
| | $ | 4,571 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | | |
Net gain on sale and disposal of assets | — |
| | (187 | ) |
Loss on early extinguishment of debt | — |
| | 567 |
|
Depreciation and amortization | 3,322 |
| | 3,734 |
|
Amortization of deferred financing costs | 226 |
| | 221 |
|
Accretion of discount on convertible subordinated notes | 827 |
| | 927 |
|
Provision for losses on accounts receivable | 424 |
| | 523 |
|
Stock-based compensation expense | 1,089 |
| | 1,297 |
|
Deferred income tax expense | 1,559 |
| | 379 |
|
Changes in operating assets and liabilities that provided (required) cash: | | | |
Accounts and preneed receivables | 56 |
| | (479 | ) |
Inventories and other current assets | 3,224 |
| | (727 | ) |
Deferred charges and other | 111 |
| | 230 |
|
Preneed funeral and cemetery trust investments | (760 | ) | | 7,560 |
|
Accounts payable | (9 | ) | | (1,755 | ) |
Accrued and other liabilities | (5,020 | ) | | (147 | ) |
Deferred preneed funeral and cemetery revenue | (82 | ) | | (568 | ) |
Deferred preneed funeral and cemetery receipts held in trust | 1,237 |
| | (6,404 | ) |
Net cash provided by operating activities | 12,622 |
| | 9,742 |
|
| | | |
Cash flows from investing activities: | | | |
Acquisitions and land for new construction | (4,250 | ) | | (2,685 | ) |
Purchase of land and buildings previously leased | (600 | ) | | — |
|
Net proceeds from the sale of assets | — |
| | 555 |
|
Capital expenditures | (5,798 | ) | | (3,595 | ) |
Net cash used in investing activities | (10,648 | ) | | (5,725 | ) |
| | | |
Cash flows from financing activities: | | | |
Borrowings on the revolving credit facility | 10,600 |
| | 11,500 |
|
Payments against the revolving credit facility | (10,100 | ) | | (50,100 | ) |
Borrowings on the term loan | — |
| | 39,063 |
|
Payments against the term loan | (2,344 | ) | | (2,813 | ) |
Payments on other long-term debt and obligations under capital leases | (370 | ) | | (321 | ) |
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 212 |
| | 228 |
|
Dividends on common stock | (463 | ) | | (415 | ) |
Payment of loan origination costs related to the credit facility | (13 | ) | | (717 | ) |
Excess tax benefit (deficiency) of equity compensation | 408 |
| | (106 | ) |
Net cash used in financing activities | (2,070 | ) | | (3,681 | ) |
| | | |
Net increase (decrease) in cash and cash equivalents | (96 | ) | | 336 |
|
Cash and cash equivalents at beginning of period | 413 |
| | 535 |
|
Cash and cash equivalents at end of period | $ | 317 |
| | $ | 871 |
|
| | | |
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 March 31, 2016, we operated 167 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 consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 2015 unless otherwise disclosed herein, and should be read in conjunction therewith.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.
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. We recorded amortization expense for cemetery property of approximately $0.8 million and $1.0 million for the three months ended March 31, 2015 and 2016, respectively. 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 $8.2 million and $7.4 million of funeral receivables at December 31, 2015 and March 31, 2016, respectively, and $9.7 million and $10.2 million of cemetery receivables at December 31, 2015 and March 31, 2016, respectively. For 2015 and 2016, 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 $7.3 million of funeral receivables at December 31, 2015 and March 31, 2016 and $20.7 million and $20.9 million of cemetery receivables at December 31, 2015 and March 31, 2016, respectively. Bad debt expense totaled approximately $0.4 million and $0.5 million for the three months ended March 31, 2015 and 2016.
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, 2015 and March 31, 2016: |
| | | | | | | |
| December 31, 2015 | | March 31, 2016 |
| (in thousands) |
Land | $ | 65,433 |
| | $ | 67,868 |
|
Buildings and improvements | 180,804 |
| | 180,711 |
|
Furniture, equipment and automobiles | 71,943 |
| | 73,301 |
|
Property, plant and equipment, at cost | 318,180 |
| | 321,880 |
|
Less: accumulated depreciation | (103,306 | ) | | (105,016 | ) |
Property, plant and equipment, net | $ | 214,874 |
| | $ | 216,864 |
|
We recorded depreciation expense of approximately $2.6 million and $2.7 million for the three months ended March 31, 2015 and 2016, respectively. During the first quarter of 2016, we acquired real estate for $2.7 million for funeral home expansion projects.
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 our employee stock purchase plan under which stock may be purchased. 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 11 to the Consolidated Financial Statements included herein for additional information on our stock-based compensation plans.
Presentation of Debt Issuance Costs
Effective January 1, 2016, we adopted the Financial Accounting Standards Board's (“FASB”) new guidance on simplifying the presentation of debt issuance costs. In April 2015, the FASB issued Accounting Standards Update (“ASU”), Imputation of Interest (Subtopic 835-30), which 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 addressed. Debt issuances costs of $4.2 million and $4.1 million have been presented as a deduction from the carrying value of the related liabilities in our Consolidated Balance Sheets as of December 31, 2015 and March 31, 2016, respectively.
Business Combinations
Effective January 1, 2016, we adopted the FASB new guidance on simplifying the accounting for measurement-period adjustments for Business Combinations. In September 2015, the FASB issued ASU, Business Combinations (Topic 805), which 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. Our adoption of this ASU did not have a material effect on our financial statements.
Extraordinary and Unusual Items
Effective January 1, 2016, we adopted the FASB new guidance on extraordinary and unusual items. In January 2015, the FASB issued ASU, Extraordinary and Unusual Items (Subtopic 225-20). This ASU eliminates the concept of reporting extraordinary items. 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. Our adoption of this ASU did not have a material effect on our financial statements.
Subsequent Events
Management evaluated events and transactions during the period subsequent to March 31, 2016 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report. See Note 14 to the Consolidated Financial Statements included herein for additional information regarding subsequent events.
2.RECENTLY ISSUED ACCOUNTING STANDARDS
Simplifying Share-Based Payment Accounting
In March 2016, the FASB issued ASU, Compensation—Stock Compensation (Topic 718). This ASU applies to all entities that issue share-based payment awards to their employees. The amendments in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier application permitted for all entities. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2017 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
Leases
In February 2016, the FASB issued ASU, Leases (Topic 842). This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and apply to all entities that that enter into a lease, with some specified scope exemptions. The amendments in this ASU aims to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3. 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, 2015 and March 31, 2016 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | March 31, 2016 |
Preneed cemetery trust investments, at market value
| $ | 65,486 |
| | $ | 62,551 |
|
Less: allowance for contract cancellation | (2,195 | ) | | (2,119 | ) |
Preneed cemetery trust investments, net | $ | 63,291 |
| | $ | 60,432 |
|
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 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. At March 31, 2016, 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 (“CSV RIA”) are included as 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 months ended March 31, 2016. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 7 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 March 31, 2016 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 4,611 |
| | $ | — |
| | $ | — |
| | $ | 4,611 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 457 |
| | — |
| | (83 | ) | | 374 |
|
Foreign debt | 2 | | 7,437 |
| | 110 |
| | (937 | ) | | 6,610 |
|
Corporate debt | 2 | | 25,871 |
| | 699 |
| | (3,238 | ) | | 23,332 |
|
Preferred stock | 2 | | 16,184 |
| | 5 |
| | (1,406 | ) | | 14,783 |
|
Common stock | 1 | | 15,006 |
| | 162 |
| | (4,403 | ) | | 10,765 |
|
Mutual Funds: | | | | | | | | | |
Fixed Income | 2 | | $ | 1,078 |
| | $ | 49 |
| | $ | — |
| | $ | 1,127 |
|
Trust securities | | | $ | 70,644 |
| | $ | 1,025 |
| | $ | (10,067 | ) | | $ | 61,602 |
|
Accrued investment income | | | $ | 949 |
| | | | | | $ | 949 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 62,551 |
|
Market value as a percentage of cost | | | | | | | | | 87.2 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 127 |
|
Due in one to five years | 8,546 |
|
Due in five to ten years | 4,591 |
|
Thereafter | 31,835 |
|
Total fixed income securities | $ | 45,099 |
|
The cost and fair market values associated with preneed cemetery trust investments at December 31, 2015 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 8,296 |
| | $ | — |
| | $ | — |
| | $ | 8,296 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 458 |
| | — |
| | (63 | ) | | 395 |
|
Foreign debt | 2 | | 4,803 |
| | — |
| | (695 | ) | | 4,108 |
|
Corporate debt | 2 | | 22,968 |
| | 85 |
| | (4,279 | ) | | 18,774 |
|
Preferred stock | 2 | | 16,236 |
| | 29 |
| | (885 | ) | | 15,380 |
|
Mortgage backed securities | 2 | | — |
| | — |
| | — |
| | — |
|
Common stock | 1 | | 20,387 |
| | 682 |
| | (3,161 | ) | | 17,908 |
|
Trust securities | | | $ | 73,148 |
| | $ | 796 |
| | $ | (9,083 | ) | | $ | 64,861 |
|
Accrued investment income | | | $ | 625 |
| | | | | | $ | 625 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 65,486 |
|
Market value as a percentage of cost | | | | | | | | | 88.7 | % |
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 and 2016 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to 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 March 31, 2016, 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 March 31, 2016 and December 31, 2015, are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2016 |
| 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 | $ | 142 |
| | $ | (28 | ) | | $ | 232 |
| | $ | (55 | ) | | $ | 374 |
| | $ | (83 | ) |
Foreign debt | 2,671 |
| | (395 | ) | | 1,984 |
| | (542 | ) | | 4,655 |
| | (937 | ) |
Corporate debt | 5,449 |
| | (853 | ) | | 8,034 |
| | (2,385 | ) | | 13,483 |
| | (3,238 | ) |
Preferred stock | 6,613 |
| | (566 | ) | | 7,730 |
| | (840 | ) | | 14,343 |
| | (1,406 | ) |
Common stock | 6,088 |
| | (2,602 | ) | | 3,278 |
| | (1,801 | ) | | 9,366 |
| | (4,403 | ) |
Total temporary impaired securities | $ | 20,963 |
| | $ | (4,444 | ) | | $ | 21,258 |
| | $ | (5,623 | ) | | $ | 42,221 |
| | $ | (10,067 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 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 | $ | 395 |
| | $ | (63 | ) | | $ | — |
| | $ | — |
| | $ | 395 |
| | $ | (63 | ) |
Foreign debt | $ | 3,680 |
| | $ | (384 | ) | | $ | 406 |
| | $ | (312 | ) | | $ | 4,086 |
| | $ | (696 | ) |
Corporate debt | 14,468 |
| | (2,992 | ) | | 3,056 |
| | (1,287 | ) | | 17,524 |
| | (4,279 | ) |
Preferred stock | 10,285 |
| | (436 | ) | | 5,168 |
| | (448 | ) | | 15,453 |
| | (884 | ) |
Common stock | 12,029 |
| | (1,989 | ) | | 3,564 |
| | (1,172 | ) | | 15,593 |
| | (3,161 | ) |
Total temporary impaired securities | $ | 40,857 |
| | $ | (5,864 | ) | | $ | 12,194 |
| | $ | (3,219 | ) | | $ | 53,051 |
| | $ | (9,083 | ) |
Preneed cemetery trust investment security transactions recorded in Interest expense on our Consolidated Statements of Operations for the three months ended March 31, 2015 and 2016 were as follows (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2015 | | 2016 |
Investment income | $ | 517 |
| | $ | 291 |
|
Realized gains | 358 |
| | 108 |
|
Realized losses | (798 | ) | | (2,480 | ) |
Expenses and taxes | (319 | ) | | (343 | ) |
Decrease in deferred preneed cemetery receipts held in trust | 242 |
| | 2,424 |
|
| $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands): |
| | | | | | | |
| For the Three Months Ended March 31,
|
| 2015 | | 2016 |
Purchases | $ | (7,008 | ) | | $ | (10,892 | ) |
Sales | $ | 2,752 |
| | $ | 7,354 |
|
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, 2015 and March 31, 2016 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | March 31, 2016 |
Preneed funeral trust investments, at market value | $ | 88,444 |
| | $ | 85,958 |
|
Less: allowance for contract cancellation | (2,891 | ) | | (2,826 | ) |
Preneed funeral trust investments, net | $ | 85,553 |
| | $ | 83,132 |
|
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. At March 31, 2016, 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 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 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 other transfers between Levels 1 and 2 for the three months ended March 31, 2016. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 7 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 March 31, 2016 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 17,828 |
| | $ | — |
| | $ | — |
| | $ | 17,828 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 1,491 |
| | 48 |
| | — |
| | 1,539 |
|
Municipal bonds | 2 | | 478 |
| | — |
| | (87 | ) | | 391 |
|
Foreign debt | 2 | | 7,823 |
| | 120 |
| | (971 | ) | | 6,972 |
|
Corporate debt | 2 | | 27,648 |
| | 793 |
| | (3,412 | ) | | 25,029 |
|
Preferred stock | 2 | | 17,464 |
| | 131 |
| | (1,455 | ) | | 16,140 |
|
Mortgage backed securities | 2 | | 267 |
| | 5 |
| | (4 | ) | | 268 |
|
Common stock | 1 | | 15,528 |
| | 160 |
| | (4,597 | ) | | 11,091 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 2,118 |
| | 54 |
| | (51 | ) | | 2,121 |
|
Other investments | 2 | | 3,562 |
| | — |
| | (24 | ) | | 3,538 |
|
Trust securities | | | $ | 94,207 |
| | $ | 1,311 |
| | $ | (10,601 | ) | | $ | 84,917 |
|
Accrued investment income | | | $ | 1,041 |
| | | | | | $ | 1,041 |
|
Preneed funeral trust investments | | | | | | | | | $ | 85,958 |
|
Market value as a percentage of cost | | | | | | | | | 90.1 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 137 |
|
Due in one to five years | 9,641 |
|
Due in five to ten years | 5,682 |
|
Thereafter | 34,879 |
|
Total | $ | 50,339 |
|
The cost and fair market values associated with preneed funeral trust investments at December 31, 2015 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 21,458 |
| | $ | — |
| | $ | — |
| | $ | 21,458 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 1,492 |
| | 24 |
| | (12 | ) | | 1,504 |
|
Municipal bonds | 2 | | 478 |
| | — |
| | (66 | ) | | 412 |
|
Foreign debt | 2 | | 4,938 |
| | — |
| | (711 | ) | | 4,227 |
|
Corporate debt | 2 | | 24,787 |
| | 133 |
| | (4,711 | ) | | 20,209 |
|
Preferred stock | 2 | | 17,496 |
| | 158 |
| | (914 | ) | | 16,740 |
|
Mortgage backed securities | 1 | | 273 |
| | 4 |
| | (4 | ) | | 273 |
|
Common stock | | | 20,864 |
| | 738 |
| | (3,114 | ) | | 18,488 |
|
Mutual funds: | | | | | | | | | |
Equity | 1 | | — |
| | — |
| | — |
| | — |
|
Fixed income | 2 | | $ | 959 |
| | $ | — |
| | $ | (82 | ) | | $ | 877 |
|
Other investments | 2 | | $ | 3,598 |
| | $ | — |
| | $ | (30 | ) | | $ | 3,568 |
|
Trust securities | | | $ | 96,343 |
| | $ | 1,057 |
| | $ | (9,644 | ) | | $ | 87,756 |
|
Accrued investment income | | | 688 |
| | | | | | $ | 688 |
|
Preneed funeral trust investments | | | | | | | | | $ | 88,444 |
|
Market value as a percentage of cost | | | | | | | | | 91.1 | % |
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 $0.8 million impairment in the first quarter of 2016 for other-than-temporary declines in the fair value related to unrealized losses on certain investments. 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 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 March 31, 2016, 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 March 31, 2016 and December 31, 2015 are shown in the following tables (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2016 |
| 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 | $ | 139 |
| | $ | (27 | ) | | $ | 252 |
| | $ | (60 | ) | | $ | 391 |
| | $ | (87 | ) |
Foreign debt | 2,692 |
| | (378 | ) | | 2,158 |
| | (593 | ) | | 4,850 |
| | (971 | ) |
Corporate debt | 5,470 |
| | (825 | ) | | 8,783 |
| | (2,587 | ) | | 14,253 |
| | (3,412 | ) |
Preferred stock | 6,384 |
| | (537 | ) | | 8,449 |
| | (918 | ) | | 14,833 |
| | (1,455 | ) |
Mortgage backed securities | 102 |
| | (3 | ) | | 15 |
| | (1 | ) | | 117 |
| | (4 | ) |
Mutual funds: | | | | | | | | | | | |
Equity | 6,087 |
| | (2,620 | ) | | 3,594 |
| | (1,977 | ) | | 9,681 |
| | (4,597 | ) |
Fixed income | 46 |
| | (1 | ) | | 818 |
| | (50 | ) | | 864 |
| | (51 | ) |
Other investments | — |
| | — |
| | 11 |
| | (24 | ) | | 11 |
| | (24 | ) |
Total temporary impaired securities | $ | 20,920 |
| | $ | (4,391 | ) | | $ | 24,080 |
| | $ | (6,210 | ) | | $ | 45,000 |
| | $ | (10,601 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 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: | | | | | | | | | | | |
U.S. debt | $ | — |
| | $ | — |
| | $ | 1,504 |
| | $ | (12 | ) | | $ | 1,504 |
| | $ | (12 | ) |
Municipal bonds | 413 |
| | (66 | ) | | — |
| | — |
| | 413 |
| | (66 | ) |
Foreign debt | 3,763 |
| | (392 | ) | | 416 |
| | (319 | ) | | 4,179 |
| | (711 | ) |
Corporate debt | 15,929 |
| | (3,294 | ) | | 3,364 |
| | (1,417 | ) | | 19,293 |
| | (4,711 | ) |
Preferred stock | 10,623 |
| | (451 | ) | | 5,338 |
| | (463 | ) | | 15,961 |
| | (914 | ) |
Mortgage backed securities | — |
| | — |
| | 272 |
| | (4 | ) | | 272 |
| | (4 | ) |
Mutual funds: | | | | | | | | | | | |
Equity | 11,848 |
| | (1,959 | ) | | 3,510 |
| | (1,154 | ) | | 15,358 |
| | (3,113 | ) |
Equity and other | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Fixed income | 1 |
| | — |
| | 876 |
| | (82 | ) | | 877 |
| | (82 | ) |
Other investments | — |
| | — |
| | 42 |
| | (31 | ) | | 42 |
| | (31 | ) |
Total temporary impaired securities | 42,577 |
| | (6,162 | ) | | 15,322 |
| | (3,482 | ) | | 57,899 |
| | (9,644 | ) |
Preneed funeral trust investment security transactions recorded in Interest expense on the Consolidated Statements of Operations for the three months ended March 31, 2015 and 2016 were as follows (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2015 | | 2016 |
Investment income | $ | 556 |
| | $ | 340 |
|
Realized gains | 294 |
| | 144 |
|
Realized losses | (625 | ) | | (2,396 | ) |
Expenses and taxes | (260 | ) | | (247 | ) |
Decrease in deferred preneed funeral receipts held in trust | 35 |
| | 2,159 |
|
| $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed funeral trusts were as follows (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31,
|
| 2015 | | 2016 |
Purchases | $ | (5,489 | ) | | $ | (11,407 | ) |
Sales | $ | 2,302 |
| | $ | 7,458 |
|
4. 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 March 31, 2016, our total financed preneed receivables was $36.8 million, of which $27.0 million and $9.8 million were for cemetery interment rights and for merchandise and services respectively. These amounts are presented on our consolidated balance sheet as $11.2 million within Accounts receivable and $25.6 million within Preneed receivables. The unearned finance charges associated with these receivables were $5.2 million and $5.3 million at December 31, 2015 and March 31, 2016, 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 4.9% of the total receivables on recognized sales at March 31, 2016. 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 three months ended March 31, 2016, the change in the allowance for contract cancellations was as follows (in thousands):
|
| | | |
| March 31, 2016 |
Beginning balance | $ | 1,765 |
|
Write-offs and cancellations | (385 | ) |
Provision | 399 |
|
Ending balance | $ | 1,779 |
|
The aging of past due financing receivables as of March 31, 2016 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 | $ | 569 |
| | $ | 351 |
| | $ | 185 |
| | $ | 1,096 |
| | $ | 2,201 |
| | $ | 23,970 |
| | $ | 26,171 |
|
Deferred revenue | 206 |
| | 119 |
| | 84 |
| | 351 |
| | 760 |
| | 9,906 |
| | 10,666 |
|
Total contracts | $ | 775 |
| | $ | 470 |
| | $ | 269 |
| | $ | 1,447 |
| | $ | 2,961 |
| | $ | 33,876 |
| | $ | 36,837 |
|
5. 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, 2015 and March 31, 2016, receivables from preneed trusts were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | March 31, 2016 |
Preneed trust funds, at cost | $ | 13,963 |
| | $ | 13,454 |
|
Less: allowance for contract cancellation | (419 | ) | | (404 | ) |
Receivables from preneed trusts, net | $ | 13,544 |
| | $ | 13,050 |
|
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 December 31, 2015 and March 31, 2016. 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 December 31, 2015 | | | |
Cash and cash equivalents | $ | 2,898 |
| | $ | 2,898 |
|
Fixed income investments | 8,423 |
| | 8,426 |
|
Mutual funds and common stocks | 2,626 |
| | 2,625 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 13,963 |
| | $ | 13,965 |
|
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
| (in thousands) |
As of March 31, 2016 | | | |
Cash and cash equivalents | $ | 2,989 |
| | $ | 2,989 |
|
Fixed income investments | 7,941 |
| | 7,941 |
|
Mutual funds and common stocks | 2,508 |
| | 2,555 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 13,454 |
| | $ | 13,501 |
|
6.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, 2015 and March 31, 2016 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | March 31, 2016 |
Trust assets, at market value | $ | 43,127 |
| | $ | 41,341 |
|
Obligations due from trust | (711 | ) | | (49 | ) |
Care trusts’ corpus | $ | 42,416 |
| | $ | 41,292 |
|
We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in Revenues from cemetery operations. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At March 31, 2016, our cemetery perpetual care trust investments were not under-funded
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, preferred stock and fixed income mutual funds, all of which are classified within Level 2 of
the valuation hierarchy. There were no transfers between Levels 1 and 2 in the three months ended March 31, 2016. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 7 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 March 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 3,085 |
| | $ | — |
| | $ | — |
| | $ | 3,085 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 327 |
| | — |
| | (60 | ) | | 267 |
|
Foreign debt | 2 | | 4,810 |
| | 66 |
| | (633 | ) | | 4,243 |
|
Corporate debt | 2 | | 17,495 |
| | 422 |
| | (2,354 | ) | | 15,563 |
|
Preferred stock | 2 | | 11,341 |
| | 4 |
| | (988 | ) | | 10,357 |
|
Common stock | 1 | | 9,151 |
| | 96 |
| | (2,722 | ) | | 6,525 |
|
Mutual Funds: | | | | | | | | | |
Fixed Income | 2 | | $ | 695 |
| | $ | 34 |
| | $ | — |
| | $ | 729 |
|
Trust securities | | | $ | 46,904 |
| | $ | 622 |
| | $ | (6,757 | ) | | $ | 40,769 |
|
Accrued investment income | | | $ | 572 |
| | | | | | $ | 572 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 41,341 |
|
Market value as a percentage of cost | | | | | | | | | 86.9 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 77 |
|
Due in one to five years | 5,405 |
|
Due in five to ten years | 3,209 |
|
Thereafter | 21,739 |
|
Total fixed income securities | $ | 30,430 |
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2015 (in thousands): |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 5,472 |
| | $ | — |
| | $ | — |
| | $ | 5,472 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 325 |
| | — |
| | (45 | ) | | 280 |
|
Foreign debt | 2 | | 3,232 |
| | — |
| | (480 | ) | | 2,752 |
|
Corporate debt | 2 | | 16,216 |
| | 57 |
| | (3,094 | ) | | 13,179 |
|
Preferred stock | 2 | | 11,263 |
| | 20 |
| | (611 | ) | | 10,672 |
|
Common stock | 1 | | 11,945 |
| | 393 |
| | (1,939 | ) | | 10,399 |
|
Trust securities | | | $ | 48,453 |
| | $ | 470 |
| | $ | (6,169 | ) | | $ | 42,754 |
|
Accrued investment income | | | $ | 373 |
| | | | | | $ | 373 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 43,127 |
|
Market value as a percentage of cost | | | | | | | | | 88.2 | % |
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 $0.4 million impairment in the first quarter of 2016 for other-than-temporary declines in the fair value related to unrealized losses on certain investments.
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.
At March 31, 2016, 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 March 31, 2016 and December 31, 2015 are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| March 31, 2016 |
| 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 | $ | 128 |
| | $ | (26 | ) | | $ | 139 |
| | $ | (33 | ) | | $ | 267 |
| | $ | (60 | ) |
Foreign debt | 1,878 |
| | (306 | ) | | 1,192 |
| | (327 | ) | | 3,070 |
| | (633 | ) |
Corporate debt | 4,569 |
| | (917 | ) | | 4,840 |
| | (1,437 | ) | | 9,409 |
| | (2,354 | ) |
Preferred stock | 5,420 |
| | (481 | ) | | 4,660 |
| | (507 | ) | | 10,080 |
| | (988 | ) |
Common stock | 3,666 |
| | (1,631 | ) | | 1,986 |
| | (1,091 | ) | | 5,652 |
| | (2,722 | ) |
Total temporary impaired securities | $ | 15,661 |
| | $ | (3,361 | ) | | $ | 12,817 |
| | $ | (3,395 | ) | | $ | 28,478 |
| | $ | (6,757 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 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 | $ | 280 |
| | $ | (45 | ) | | $ | — |
| | $ | — |
| | $ | 280 |
| | $ | (45 | ) |
Foreign debt | $ | 2,541 |
| | $ | (265 | ) | | $ | 281 |
| | $ | (215 | ) | | $ | 2,822 |
| | $ | (480 | ) |
Corporate debt | 10,463 |
| | (2,164 | ) | | 2,210 |
| | (931 | ) | | 12,673 |
| | (3,095 | ) |
Preferred stock | 7,100 |
| | (301 | ) | | 3,568 |
| | (309 | ) | | 10,668 |
| | (610 | ) |
Common stock | 7,379 |
| | (1,220 | ) | | 2,186 |
| | (719 | ) | | 9,565 |
| | (1,939 | ) |
Total temporary impaired securities | $ | 27,763 |
| | $ | (3,995 | ) | | $ | 8,245 |
| | $ | (2,174 | ) | | $ | 36,008 |
| | $ | (6,169 | ) |
Perpetual care trust investment security transactions recorded in Interest expense on our Consolidated Statements of Operations for the three months ended March 31, 2015 and 2016 were as follows (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2015 | | 2016 |
Realized gains | $ | 190 |
| | $ | 47 |
|
Realized losses | (425 | ) | | (1,249 | ) |
Decrease in care trusts’ corpus | 235 |
| | 1,202 |
|
Total | $ | — |
| | $ | — |
|
Perpetual care trust investment security transactions recorded in Cemetery revenue for the three months ended March 31, 2015 and 2016 were as follows (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2015 | | 2016 |
Investment income | $ | 1,168 |
| | $ | 1,476 |
|
Realized gain, net | (91 | ) | | (262 | ) |
Total | $ | 1,077 |
| | $ | 1,214 |
|
Purchases and sales of investments in the perpetual care trusts were as follows (in thousands):
|
| | | | | | | |
| For the Three Months Ended March 31, |
| 2015 | | 2016 |
Purchases | $ | (4,634 | ) | | $ | (6,758 | ) |
Sales | $ | 1,822 |
| | $ | 4,748 |
|
7. FAIR VALUE MEASUREMENTS
We evaluated our financial assets and liabilities for those financial assets and liabilities that met the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our long-term debt and Credit Facility (as defined in Note 9) are classified within Level 2 of the Fair Value Measurement hierarchy. The fair values of the long-term debt and Credit Facility approximate the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. The fair value of the convertible subordinated notes due 2021 was approximately $157.9 million at March 31, 2016 based on the last traded or broker quoted price. We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investment categories on our Consolidated Balance Sheets as having met the criteria for fair value measurement. As of March 31, 2016, we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.
We account for our investments as available-for-sale and measure them at fair value under the standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities. See Notes 3 and 6 to our Consolidated Financial Statements herein for the fair value hierarchy levels of our trust investments.
8. DEFERRED CHARGES AND OTHER NON-CURRENT ASSETS
Deferred charges and other non-current assets at December 31, 2015 and March 31, 2016 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | March 31, 2106 |
Prepaid agreements not to compete, net of accumulated amortization of $5,404 and $5,507, respectively | $ | 1,912 |
| | $ | 1,892 |
|
Tradenames | 8,856 |
| | 8,856 |
|
Other | 210 |
| | — |
|
Deferred charges and other non-current assets | $ | 10,978 |
| | $ | 10,748 |
|
Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from one to ten years. Amortization expense was approximately $0.1 million for both the three months ended March 31, 2015 and 2016. Our tradenames have indefinite lives and therefore are not amortized.
9.LONG-TERM DEBT
Our long-term debt consisted of the following at December 31, 2015 and March 31, 2016 (in thousands):
|
| | | | | | | |
| December 31, 2015 | | March 31, 2016 |
Revolving credit facility, secured, floating rate | $ | 92,600 |
| | $ | 54,000 |
|
Term loan, secured, floating rate | 110,937 |
| | 147,187 |
|
Acquisition debt | 4,929 |
| | 4,662 |
|
Debt issuance costs, net of accumulated amortization of $3,246 and $3,910, respectively | (1,445 | ) | | (1,498 | ) |
Less: current portion | (12,012 | ) | | (12,305 | ) |
Total long-term debt | $ | 195,009 |
| | $ | 192,046 |
|
As of March 31, 2016, we had a $300 million secured bank credit facility with Bank of America, N.A. as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in
revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.
On February 9, 2016, we entered into a seventh amendment (the “Seventh Amendment”) to our Credit Facility. The Seventh Amendment resulted in, among other things, (i) reducing our LIBOR based variable interest rate 37.5 basis points, (ii) extending the maturity so that the Credit Agreement will mature at the earlier of (a) any date that is 91 days prior to the maturity of any subordinated debt (including the $143.75 million in principal amount of the Convertible Notes) or (b) February 9, 2021, (iii) increasing and funding the term loan so that $150 million was outstanding upon the effectiveness of the Seventh Amendment, (iv) reducing the size of the revolver to $150 million, (v) increasing the accordion to $75 million and (vi) updating the amortization payments for the term loan facility so that the borrowings under the term loan facility are subject to amortization payments of $2.81 million at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2016 through the fiscal quarter ending December 31, 2017, $3.75 million at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2018 through the fiscal quarter ending March 31, 2020 and $4.69 million at the end of each fiscal quarter beginning with the fiscal quarter ending June 30, 2020 through the fiscal quarter ending December 31, 2020. In connection with the Seventh Amendment, we recognized a loss of $0.6 million to write-off the related unamortized debt issuance costs.
As of March 31, 2016, we had outstanding borrowings under the revolving credit facility of $54.0 million and approximately $147.2 million was outstanding on the term loan. No letters of credit were issued and outstanding under the Credit Facility at March 31, 2016. Outstanding borrowings under the Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of March 31, 2016, the prime rate margin was equivalent to 1.125% and the LIBOR margin was 2.125%. The weighted average interest rate on the Credit Facility for the three months ended March 31, 2016 was 2.7%.
We were in compliance with the covenants contained in the Credit Agreement as of March 31, 2016. The Credit Agreement contains key ratios that we must comply with including a requirement to maintain a leverage ratio of no more than 3.50 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of March 31, 2016, the leverage ratio was 3.05 to 1.00 and the fixed charge coverage ratio was 2.54 to 1.00.
Beginning January 1, 2016, debt issuance costs are retroactively reflected as a direct deduction from the carrying value of the related debt liability (refer herein to Note 1 to the Consolidated Financial Statements). Debt issuance costs are being amortized over the term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers.
10.CONVERTIBLE SUBORDINATED NOTES
On March 19, 2014, we issued $143.75 million aggregate principal amount of 2.75% convertible subordinated notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes bear interest at 2.75%. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.
The carrying values of the liability and equity components of the Convertible Notes at December 31, 2015 and March 31, 2016 are reflected in our Consolidated Balance Sheets as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | March 31, 2016 |
Long-term liabilities: | | | |
Principal amount | $ | 143,750 |
| | $ | 143,750 |
|
Unamortized discount of liability component | (25,754 | ) | | (24,827 | ) |
Convertible Notes issuance costs, net of accumulated amortization of $858 and $982, respectively | $ | (2,769 | ) | | $ | (2,645 | ) |
Carrying value of the liability component | $ | 115,227 |
| | $ | 116,278 |
|
| | | |
Equity component carrying value | $ | 17,973 |
| | $ | 17,973 |
|
The fair value of the Convertible Notes, which are Level 2 measurements, was approximately $157.9 million at March 31, 2016.
Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $1.0 million for both the three months ended March 31, 2015 and 2016. Amortization of debt issuance costs was approximately $0.1 million for both the three months ended March 31, 2015 and 2016. Accretion of the discount on the Convertible Notes was $0.8 million and $0.9 million for the three months ended March 31, 2015 and 2016, respectively.
Beginning January 1, 2016, debt issuance costs are retroactively reflected as a direct deduction from the carrying value of the related debt liability (refer herein to Note 1 to the Consolidated Financial Statements). The unamortized discount and the unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the liability component and the debt issuance costs for the three months ended March 31, 2015 and 2016 was 6.75% and 2.75%, respectively.
11.STOCKHOLDERS’ EQUITY
Stock Options
As of March 31, 2016, there were 1,869,754 stock options outstanding and 799,067 stock options which remain unvested. On February 23, 2016, we granted 235,500 options to certain certain officers and key employees at an option price of $20.06. These options will vest in one-fifth increments over a five-year period and have a ten-year term. The fair value of the total options granted during the first quarter of 2016 was approximately $1.3 million. We recorded pre-tax stock-based compensation expense for stock options totaling approximately $0.6 million for the three months ended March 31, 2015 and 2016.
The fair value of the option grants were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
| | |
| February 23, 2016 |
Dividend yield | 0.5 | % |
Expected volatility | 31.85 | % |
Risk-free interest rate | 1.23 | % |
Expected life (years) | 5.0 |
|
Black-Scholes value | $5.60 |
Performance Awards
During the first quarter of 2016, we granted 73,700 performance awards to certain certain officers and key employees, payable in shares. These awards will vest (if at all) on December 31, 2020 provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Consolidated Earnings Before Interest Tax Depreciation and Amortization) and Relative Shareholder Return performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents 25% of the award and the Relative Shareholder Return performance represents 75% of the award. The fair value of these performance awards granted during the first quarter of 2016 was approximately $1.6 million. The pre-tax compensation expense associated with these awards for the three months ended March 31, 2016 was approximately $27,000.
The fair value of the performance awards are estimated on the date of the grant using a Monte-Carlo simulation pricing model with the following assumptions:
|
| | |
| February 23, 2016 |
Performance period | January 1, 2016 - December 31, 2020 |
Simulation period (years) | 4.86 |
|
Share price at grant date | $20.06 |
Expected volatility | 31.2 | % |
Risk-free interest rate | 1.21 | % |
Forfeiture rate | 2.0 | % |
Restricted Stock Grants
During the first quarter of 2016, we issued restricted stock awards totaling 16,900 to certain employees that vest over a three-year period and had an aggregate grant date market value of approximately