Document
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 September 30, 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 October 20, 2016 was 16,610,806.
CARRIAGE SERVICES, INC.
INDEX
PART I – FINANCIAL INFORMATION
| |
Item 1. | Financial Statements |
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(unaudited and in thousands, except share data)
|
| | | | | | | |
| | | |
| December 31, 2015 | | September 30, 2016 |
ASSETS | | | |
Current assets: | | | |
Cash and cash equivalents | $ | 535 |
| | $ | 855 |
|
Accounts receivable, net of allowance for bad debts of $1,054 in 2015 and $918 in 2016 | 18,181 |
| | 18,023 |
|
Inventories | 5,654 |
| | 5,853 |
|
Prepaid expenses | 4,684 |
| | 3,599 |
|
Other current assets | 4,707 |
| | 838 |
|
Total current assets | 33,761 |
| | 29,168 |
|
Preneed cemetery trust investments | 63,291 |
| | 65,896 |
|
Preneed funeral trust investments | 85,553 |
| | 85,560 |
|
Preneed receivables, net of allowance for bad debts of $2,042 in 2015 and $2,139 in 2016 | 27,998 |
| | 30,579 |
|
Receivables from preneed trusts | 13,544 |
| | 13,839 |
|
Property, plant and equipment, net of accumulated depreciation of $103,306 in 2015 and $109,106 in 2016 | 214,874 |
| | 231,465 |
|
Cemetery property, net of accumulated amortization of $30,289 in 2015 and $33,361 in 2016 | 75,597 |
| | 75,692 |
|
Goodwill | 264,416 |
| | 267,788 |
|
Intangible and other non-current assets | 10,978 |
| | 14,476 |
|
Cemetery perpetual care trust investments | 43,127 |
| | 45,048 |
|
Total assets | $ | 833,139 |
| | $ | 859,511 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Current liabilities: | | | |
Current portion of long-term debt and capital lease obligations | $ | 12,236 |
| | $ | 12,633 |
|
Accounts payable | 7,917 |
| | 5,857 |
|
Other liabilities | 524 |
| | 2,546 |
|
Accrued liabilities | 16,541 |
| | 17,714 |
|
Total current liabilities | 37,218 |
| | 38,750 |
|
Long-term debt, net of current portion | 103,495 |
| | 136,628 |
|
Revolving credit facility | 91,514 |
| | 62,073 |
|
Convertible subordinated notes due 2021 | 115,227 |
| | 118,461 |
|
Obligations under capital leases, net of current portion | 2,875 |
| | 2,689 |
|
Deferred preneed cemetery revenue | 56,721 |
| | 55,953 |
|
Deferred preneed funeral revenue | 31,748 |
| | 33,258 |
|
Deferred tax liability | 39,956 |
| | 39,318 |
|
Other long-term liabilities | 5,531 |
| | 2,629 |
|
Deferred preneed cemetery receipts held in trust | 63,291 |
| | 65,896 |
|
Deferred preneed funeral receipts held in trust | 85,553 |
| | 85,560 |
|
Care trusts’ corpus | 42,416 |
| | 44,345 |
|
Total liabilities | 675,545 |
| | 685,560 |
|
Commitments and contingencies: |
| |
|
Stockholders’ equity: | | |
|
Common stock, $.01 par value; 80,000,000 shares authorized and 22,497,873 and 22,458,007 shares issued at December 31, 2015 and September 30, 2016, respectively | 225 |
| | 225 |
|
Additional paid-in capital | 214,250 |
| | 215,153 |
|
Retained earnings | 3,385 |
| | 18,839 |
|
Treasury stock, at cost; 5,849,316 shares at December 31, 2015 and September 30, 2016 | (60,266 | ) | | (60,266 | ) |
Total stockholders’ equity | 157,594 |
| | 173,951 |
|
Total liabilities and stockholders’ equity | $ | 833,139 |
| | $ | 859,511 |
|
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, |
| 2015 | | 2016 | | 2015 | | 2016 |
Revenues: | | | | | | | |
Funeral | $ | 44,089 |
| | $ | 45,183 |
| | $ | 138,727 |
| | $ | 140,952 |
|
Cemetery | 14,289 |
| | 14,957 |
| | 42,165 |
| | 44,384 |
|
| 58,378 |
| | 60,140 |
| | 180,892 |
| | 185,336 |
|
Field costs and expenses: | | |
| | | |
|
Funeral | 26,798 |
| | 26,982 |
| | 82,476 |
| | 82,546 |
|
Cemetery | 8,292 |
| | 8,695 |
| | 24,040 |
| | 25,546 |
|
Depreciation and amortization | 3,019 |
| | 3,452 |
| | 8,814 |
| | 10,359 |
|
Regional and unallocated funeral and cemetery costs | 2,909 |
| | 2,783 |
| | 7,745 |
| | 8,547 |
|
| 41,018 |
| | 41,912 |
| | 123,075 |
| | 126,998 |
|
Gross profit | 17,360 |
| | 18,228 |
| | 57,817 |
| | 58,338 |
|
Corporate costs and expenses: | | |
| | | |
|
General and administrative costs and expenses | 6,238 |
| | 6,130 |
| | 20,294 |
| | 21,208 |
|
Home office depreciation and amortization | 418 |
| | 355 |
| | 1,310 |
| | 1,139 |
|
| 6,656 |
| | 6,485 |
| | 21,604 |
| | 22,347 |
|
Operating income | 10,704 |
| | 11,743 |
| | 36,213 |
| | 35,991 |
|
Interest expense | (2,629 | ) | | (2,903 | ) | | (7,671 | ) | | (8,722 | ) |
Accretion of discount on convertible subordinated notes | (876 | ) | | (981 | ) | | (2,554 | ) | | (2,862 | ) |
Loss on early extinguishment of debt | — |
| | — |
| | — |
| | (567 | ) |
Other income (expense) | 52 |
| | (285 | ) | | (54 | ) | | 20 |
|
Income before income taxes | 7,251 |
| | 7,574 |
| | 25,934 |
| | 23,860 |
|
Provision for income taxes | (2,807 | ) | | (3,030 | ) | | (10,515 | ) | | (9,545 | ) |
Income tax benefit related to state tax returns | — |
| | 1,139 |
| | — |
| | 1,139 |
|
Net provision for income taxes | (2,807 | ) | | (1,891 | ) | | (10,515 | ) | | (8,406 | ) |
Net income | $ | 4,444 |
| | $ | 5,683 |
| | $ | 15,419 |
| | $ | 15,454 |
|
| | | | | | | |
Basic earnings per common share: | $ | 0.24 |
| | $ | 0.34 |
| | $ | 0.84 |
| | $ | 0.93 |
|
Diluted earnings per common share: | $ | 0.24 |
| | $ | 0.33 |
| | $ | 0.82 |
| | $ | 0.91 |
|
| | | | | | | |
Dividends declared per common share | $ | 0.025 |
| | $ | 0.050 |
| | $ | 0.075 |
| | $ | 0.100 |
|
| | | | | | | |
Weighted average number of common and common equivalent shares outstanding: | | | | | | | |
Basic | 17,874 |
| | 16,529 |
| | 18,115 |
| | 16,502 |
|
Diluted | 18,083 |
| | 17,101 |
| | 18,588 |
| | 16,962 |
|
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2015 | | 2016 |
Cash flows from operating activities: | | | |
Net income | $ | 15,419 |
| | $ | 15,454 |
|
Adjustments to reconcile net income to net cash provided by operating activities: | | |
|
Depreciation and amortization | 10,124 |
| | 11,498 |
|
Provision for losses on accounts receivable | 1,332 |
| | 1,522 |
|
Stock-based compensation expense | 3,448 |
| | 2,645 |
|
Deferred income tax expense | 2,065 |
| | 3,618 |
|
Amortization of deferred financing costs | 688 |
| | 622 |
|
Accretion of discount on convertible subordinated notes | 2,554 |
| | 2,862 |
|
Loss on early extinguishment of debt | — |
| | 567 |
|
Net (gain) loss on sale and disposal of other assets | (49 | ) | | 186 |
|
Impairment of intangible assets | — |
| | 145 |
|
| | | |
Changes in operating assets and liabilities that provided (required) cash: | | |
|
Accounts and preneed receivables | (779 | ) | | (3,945 | ) |
Inventories and other current assets | 3,277 |
| | 682 |
|
Intangible and other non-current assets | 114 |
| | 386 |
|
Preneed funeral and cemetery trust investments | 21,234 |
| | (4,828 | ) |
Accounts payable | 368 |
| | (2,149 | ) |
Accrued and other liabilities | 4,408 |
| | (268 | ) |
Deferred preneed funeral and cemetery revenue | 432 |
| | 742 |
|
Deferred preneed funeral and cemetery receipts held in trust | (21,647 | ) | | 4,541 |
|
Net cash provided by operating activities | 42,988 |
| | 34,280 |
|
| | |
|
Cash flows from investing activities: | | |
|
Acquisitions and land for new construction | (4,250 | ) | | (15,056 | ) |
Purchase of land and buildings previously leased | (6,080 | ) | | (6,258 | ) |
Net proceeds from the sale of other assets | 65 |
| | 955 |
|
Capital expenditures | (22,823 | ) | | (12,039 | ) |
Net cash used in investing activities | (33,088 | ) | | (32,398 | ) |
| | |
|
Cash flows from financing activities: | | |
|
Borrowings from the revolving credit facility | 56,200 |
| | 45,500 |
|
Payments against the revolving credit facility | (33,700 | ) | | (74,800 | ) |
Borrowings from the term loan | — |
| | 39,063 |
|
Payments against the term loan | (7,032 | ) | | (8,438 | ) |
Payments on other long-term debt and obligations under capital leases | (679 | ) | | (987 | ) |
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 575 |
| | 686 |
|
Dividends on common stock | (1,385 | ) | | (1,662 | ) |
Payment of loan origination costs related to the credit facility | (13 | ) | | (717 | ) |
Purchase of treasury stock | (23,940 | ) | | — |
|
Excess tax benefit (deficiency) of equity compensation | 57 |
| | (207 | ) |
Net cash used in financing activities | (9,917 | ) | | (1,562 | ) |
| | |
|
|
Net increase (decrease) in cash and cash equivalents | (17 | ) | | 320 |
|
Cash and cash equivalents at beginning of period | 413 |
| | 535 |
|
Cash and cash equivalents at end of period | $ | 396 |
| | $ | 855 |
|
| | | |
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, 2016, we operated 169 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 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 $0.9 million for both the three months ended September 30, 2015 and 2016 and $2.5 million and $3.1 million for the nine months ended September 30, 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. 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. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related cost of originating preneed sales contracts. These costs are expensed when incurred.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of September 30, 2016, CSV RIA provided these services to two institutions, which have custody of 78% of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
Accounts receivable included approximately $8.2 million and $6.9 million of funeral receivables at December 31, 2015 and September 30, 2016, respectively and $9.7 million and $10.3 million of cemetery receivables at December 31, 2015 and September 30, 2016, respectively. For 2015 and 2016, accounts receivable also included minor amounts of other receivables. Non-current preneed receivables represents payments expected to be received beyond one year from the balance sheet date. Non-current preneed receivables consisted of approximately $7.3 million and $8.1 million of funeral receivables at December 31, 2015 and September 30, 2016, respectively, and $20.7 million and $22.5 million of cemetery receivables at December 31, 2015 and September 30, 2016, respectively. Bad debt expense totaled approximately $0.5 million for both the three months ended September 30, 2015 and 2016, and $1.3 million and $1.0 million for the nine months ended September 30, 2015 and 2016, 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, 2015 and September 30, 2016:
|
| | | | | | | |
| December 31, 2015 | | September 30, 2016 |
| (in thousands) |
Land | $ | 65,433 |
| | $ | 74,797 |
|
Buildings and improvements | 180,804 |
| | 190,910 |
|
Furniture, equipment and automobiles | 71,943 |
| | 74,864 |
|
Property, plant and equipment, at cost | 318,180 |
| | 340,571 |
|
Less: accumulated depreciation | (103,306 | ) | | (109,106 | ) |
Property, plant and equipment, net | $ | 214,874 |
| | $ | 231,465 |
|
We recorded depreciation expense of approximately $2.6 million and $2.9 million for the three months ended September 30, 2015 and 2016, respectively, and $7.6 million and $8.4 million for the nine months ended September 30, 2015 and 2016, respectively. During the nine months ended September 30, 2016, we acquired real estate for $2.7 million for funeral home expansion projects and we purchased land and buildings at four funeral homes that were previously leased for approximately $6.3 million. During the nine months ended September 30, 2016, we acquired $8.4 million of property, plant and equipment in connection with two funeral home businesses acquired in May 2016 and one funeral home business acquired in September 2016, as further discussed in Note 3 to the Consolidated Financial Statements included herein.
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral home businesses. Goodwill is tested annually 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 performed our annual impairment test of goodwill using information as of August 31, 2016.
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. We conducted qualitative assessments in 2014 and 2015; however, for our 2016 annual impairment test, we performed the two-step goodwill impairment test. Our intent is to perform the two-step test at least once every three years unless certain indicators or events suggest otherwise.
The two-step goodwill impairment test involves estimates and management judgment. In the first step of our goodwill impairment testing, we compare the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired, and the second step is not required. We determine fair value for each reporting unit using both an income approach, weighted 90%, and a market approach, weighted 10%. Our methodology for determining an income-based fair value was based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance and economic condition that may differ from actual future cash flows discounted at a weighted average cost of capital for the Company based on market participant assumptions. Our methodology for determining a market approach fair value utilized the guideline public company method, in which we relied on market multiples of comparable companies operating in the same industry as the individual reporting units. In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount, the second step of the goodwill impairment testing needs to be performed. This step compares the implied fair value of goodwill to the carrying amount of the reporting unit’s goodwill, and if the carrying amount exceeds the implied value, an impairment charge is recorded in an amount equal to the difference. For our 2016 annual impairment test, we performed the first step of our goodwill impairment testing and concluded that there was no impairment to goodwill for any of our reporting units.
In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results. No impairments were recorded to our goodwill during the three and nine months ended September 30, 2015 and 2016.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in Deferred costs and other non-current assets on our Consolidated Balance Sheets. Our tradenames are considered to have an indefinite life and are not subject to amortization.
Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with the guidance.
The Company elected to change the annual assessment date for indefinite lived intangible assets from December 31st to August 31st because the change in date aligns with the Company’s goodwill impairment test, which should create a synergy and enhance the quality of our indefinite lived intangible assets impairment analysis. We conducted qualitative assessments in 2014 and 2015; however, for our 2016 annual impairment test, we performed our quantitative impairment test using the relief from royalty method, using information as of August 31, 2016. Our intent is to perform the quantitative impairment test at least once every three years unless certain indicators or events suggest otherwise.
Our intangible asset impairment test involves estimates and management judgment. Under the relief from royalty method, the value of the tradename is measured through the value of the royalties that the Company is relieved from paying due to its ownership of the asset. We determine the fair value of the assets by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows and the determination and application of an appropriate royalty rate and discount rate. To estimate the royalty rates for the individual tradename, we mainly relied on the profit split method, but also considered the comparable third-party license agreements and the return on asset method. A scorecard was used to assess the relative strength of the individual tradename to further adjust the royalty rates selected under the profit-split method for qualitative factors. For our 2016 annual impairment test, we performed our quantitative impairment testing and concluded that there was no impairment to intangible assets.
In addition to our annual review, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. During the three months ended September 30, 2016, we recorded an impairment to tradenames of $145,000 related to a funeral home business held for sale as the carrying value exceeded fair value. We had no such impairment for three months ended September 30, 2015. No other impairments were recorded to our intangible assets during the three and nine months ended September 30, 2015 and 2016.
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 resulted in debt issuance costs being presented in the same way debt discounts have historically been addressed. Debt issuances costs of $4.2 million and $3.7 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 September 30, 2016, respectively. The amounts related to our Credit Facility were $1.4 million and $1.3 million as of December 31, 2015 and September 30, 2016, respectively. The amounts related to our Convertible Notes were $2.8 million and $2.4 million as of December 31, 2015 and September 30, 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.
During the third quarter of 2016, we acquired one funeral home business in Madera, California. The pro forma impact of the acquisition on prior periods is not presented, as the impact is not material to our reported results. During the nine months ended September 30, 2016, we acquired three funeral homes. The pro forma impact of these acquisitions on prior periods is not presented, as the impact is not material to our reported results. See Note 3 to the Consolidated Financial Statements included herein for further information concerning this acquisition.
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. 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.
Income Taxes
We and our subsidiaries file a consolidated U.S. Federal income tax return, separate income tax returns in 14 states in which we operate and combined or unitary income tax returns in 13 states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets. We have reviewed our income tax positions and identified certain tax deductions, primarily related to business acquisitions that are not certain. Our policy with respect to potential penalties and interest is to record them as “Other” expense and “Interest” expense, respectively. The entire balance of unrecognized tax benefits, if recognized, would affect our effective tax rate.
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, and increases or decreases in valuation allowances on deferred tax assets.
Income tax expense was $1.9 million for the three months ended September 30, 2016 compared to $2.8 million for the three months ended September 30, 2015. We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for the three months ended September 30, 2016 compared to 38.7% for the three months ended September 30, 2015. Income tax expense was $8.4 million for the nine months ended September 30, 2016 compared to $10.5 million for the nine months ended
September 30, 2015. We recorded income taxes at the estimated effective tax rate, before discrete items, of 40.0% for both the nine months ended September 30, 2016 and 2015.
During the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016. The following items affected our effective tax rate for the nine months ended September 30, 2016:
| |
• | We recorded an income tax benefit as a result of a favorable settlement of uncertain tax positions in the state of California and an income tax benefit related to the conclusion of a “no change” Internal Revenue Service audit of our 2013 tax year. |
| |
• | We recorded an income tax benefit related to the increase in the overall accumulated deferred tax asset caused by the imposition of a unitary tax regime in the state of New York effective January 1, 2015, impacting the state return filed in September 2016. |
| |
• | We recorded an income tax benefit related to state bonus depreciation as a result of finalization of state returns. |
| |
• | We recorded other expense adjustments related to our valuation allowance and certain interim rate changes. |
Subsequent Events
Management evaluated events and transactions during the period subsequent to September 30, 2016 through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report. For more information regarding subsequent events, see Note 17 to the Consolidated Financial Statements included herein.
2.RECENTLY ISSUED ACCOUNTING STANDARDS
Classification of Certain Cash Receipts and Cash Payments
In August 2016, the FASB issued ASU, Statement of Cash Flows (Topic 230). This ASU applies to all entities that are required to present a statement of cash flows under Topic 230. The amendments provide guidance on the following eight specific cash flow issues: debt prepayment or debt extinguishment costs, settlement of zero-coupon debt instruments, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims and corporate-owned life insurance policies, distributions received from equity method investees, beneficial interests in securitization transactions and separately identifiable cash flows and application of the predominance principle. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. An entity will apply the amendments in this ASU using a retrospective transition method to each period presented. 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.
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU, Financial Instruments—Credit Losses (Topic 326). This ASU applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash that issue share-based payment awards to their employees. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with earlier application permitted for all entities. An entity will apply the amendments in this ASU through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2020 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
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 applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3. ACQUISITIONS
Our growth strategy includes the execution of our Strategic Acquisition Model. We assess the strategic positioning of acquisition candidates based on certain criteria, which include volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry. The value of the acquisition candidates is based on the local market competitive dynamic which allows for appropriate and differentiating enterprise valuations and flexibility to customize the transactions.
On May 31, 2016, we acquired two funeral home businesses in Houston, Texas for approximately $10.2 million. The purchase price consisted of $6.7 million paid in cash at closing and $6.5 million of deferred purchase price payments. The net present value of such future deferred purchase price payments for these two funeral home businesses was $3.5 million, which is included in Long-term debt, net of current portion on our Consolidated Balance Sheets. The deferred purchase price payments are being paid in 80 equal quarterly installments of $81,250 which commenced on the closing date and then each September 1, December 1, March 1 and June 1 for the next 20 years.
On September 20, 2016, we acquired a funeral home business in Madera, California for $5.65 million in cash. The pro forma impact of these two acquisitions on prior periods is not presented, as the impact is not material to our reported results. The results of the acquired businesses are include in the Company's results from the date of acquisition.
The following table summarizes the breakdown of the purchase price for the businesses described above (in thousands): |
| | | |
| Purchase Price |
Cash paid | $ | 12,350 |
|
Deferred payments | 3,500 |
|
Purchase Price | $ | 15,850 |
|
The following table summarizes the breakdown of the purchase price allocation for the businesses described above (in thousands): |
| | | |
| Purchase Price Allocation |
Current assets | $ | 182 |
|
Property, plant & equipment | 8,356 |
|
Goodwill | 3,372 |
|
Intangible and other non-current assets | 4,029 |
|
Assumed liabilities | (89 | ) |
Purchase Price | $ | 15,850 |
|
The intangible and other non-current assets relate to the fair value of tradenames and prepaid agreements not-to-compete, and the assumed liabilities relate to the obligations associated with certain financed automobiles we acquired.
The following table summarizes the fair value of the assets acquired for the businesses described above (in thousands): |
| | | | | | | | | | | | | | | |
Acquisition Date | Type of Business | | Market | | Assets Acquired (Excluding Goodwill) | | Goodwill Recorded | | Liabilities and Debt Assumed |
May 31, 2016 | Two Funeral Homes | | Houston, TX | | $ | 9.5 |
| | $ | 0.8 |
| | $ | (0.1 | ) |
September 20, 2016 | One Funeral Home | | Madera, CA | | $ | 3.1 |
| | $ | 2.5 |
| | $ | — |
|
4. 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. See Note 1 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for the annual goodwill impairment test.
The following table presents the changes in goodwill on our Consolidated Balance Sheets during the nine months ended September 30, 2016 (in thousands):
|
| | | |
| |
Goodwill as of December 31, 2015 | $ | 264,416 |
|
Increase in goodwill related to acquisitions | 3,372 |
|
Goodwill as of September 30, 2016 | $ | 267,788 |
|
The $3.4 million increase in goodwill related to acquisitions represents the goodwill recorded in connection with the two funeral home businesses acquired in May 2016 and the funeral home business acquired in September 2016 described in Note 3 to the Consolidated Financial Statements included herein. Our purchase price allocation for these acquisitions is dependent upon certain valuations, which have not progressed to a stage where there is sufficient information to make a definitive measure and allocation of goodwill and intangible assets, as discussed in Note 10 to the Consolidated Financial Statements included herein. Revisions to the ongoing current estimates may be necessary when the valuation process is completed, which we expect to occur within a year after the respective acquisition closing date.
5. PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed cemetery contracts are secured by payments from customers, less amounts not required by law to be deposited into trust. Preneed cemetery trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed cemetery trust investments on our Consolidated Balance Sheets at December 31, 2015 and September 30, 2016 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | September 30, 2016 |
Preneed cemetery trust investments, at market value | $ | 65,486 |
| | $ | 68,009 |
|
Less: allowance for contract cancellation | (2,195 | ) | | (2,113 | ) |
Preneed cemetery trust investments, net | $ | 63,291 |
| | $ | 65,896 |
|
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, 2016, none of our preneed cemetery trust investments were 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 CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2016. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 9 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at September 30, 2016 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 7,888 |
| | $ | — |
| | $ | — |
| | $ | 7,888 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 498 |
| | — |
| | — |
| | 498 |
|
Foreign debt | 2 | | 8,614 |
| | 268 |
| | (741 | ) | | 8,141 |
|
Corporate debt | 2 | | 23,717 |
| | 1,790 |
| | (1,413 | ) | | 24,094 |
|
Preferred stock | 2 | | 16,371 |
| | 30 |
| | (704 | ) | | 15,697 |
|
Mortgage backed securities | 2 | | 245 |
| | — |
| | (16 | ) | | 229 |
|
Common stock | 1 | | 11,888 |
| | 440 |
| | (3,144 | ) | | 9,184 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 1,229 |
| | 129 |
| | — |
| | 1,358 |
|
Trust securities | | | $ | 70,450 |
| | $ | 2,657 |
| | $ | (6,018 | ) | | $ | 67,089 |
|
Accrued investment income | | | $ | 920 |
| | | | | | $ | 920 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 68,009 |
|
Market value as a percentage of cost | | | | | | | | | 95.2 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 303 |
|
Due in one to five years | 8,065 |
|
Due in five to ten years | 5,854 |
|
Thereafter | 34,437 |
|
Total | $ | 48,659 |
|
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 |
|
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. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2015. In the nine months ended September 30, 2015 and 2016, we recorded a $0.7 million and $0.8 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments, respectively. 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, 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 September 30, 2016 and December 31, 2015, are shown in the following tables (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 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: | | | | | | | | | | | |
Foreign debt | 2,419 |
| | (138 | ) | | 2,909 |
| | (603 | ) | | 5,328 |
| | (741 | ) |
Corporate debt | 6,599 |
| | (197 | ) | | 4,707 |
| | (1,216 | ) | | 11,306 |
| | (1,413 | ) |
Preferred stock | 1,711 |
| | (10 | ) | | 11,830 |
| | (694 | ) | | 13,541 |
| | (704 | ) |
Mortgage backed securities | 229 |
| | (16 | ) | | — |
| | — |
| | 229 |
| | (16 | ) |
Common stock | 4,740 |
| | (1,407 | ) | | 2,677 |
| | (1,737 | ) | | 7,417 |
| | (3,144 | ) |
Total temporary impaired securities | $ | 15,698 |
| | $ | (1,768 | ) | | $ | 22,123 |
| | $ | (4,250 | ) | | $ | 37,821 |
| | $ | (6,018 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 and nine months ended September 30, 2015 and 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2015 | | 2016 | | 2015 | | 2016 |
Investment income | $ | 471 |
| | $ | 578 |
| | $ | 1,762 |
| | $ | 1,546 |
|
Realized gains | 1,170 |
| | 126 |
| | 2,844 |
| | 415 |
|
Realized losses | (276 | ) | | (673 | ) | | (1,166 | ) | | (4,081 | ) |
Expenses and taxes | (361 | ) | | (139 | ) | | (1,455 | ) | | (832 | ) |
Decrease (increase) in deferred preneed cemetery receipts held in trust | (1,004 | ) | | 108 |
| | (1,985 | ) | | 2,952 |
|
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
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, |
| 2015 | | 2016 | | 2015 | | 2016 |
Purchases | $ | (11,719 | ) | | $ | (1,434 | ) | | $ | (24,575 | ) | | $ | (19,540 | ) |
Sales | $ | 4,417 |
| | $ | 5,973 |
| | $ | 14,610 |
| | $ | 18,003 |
|
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less amounts not required by law to be deposited into trust. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed funeral trust investments on our Consolidated Balance Sheets at December 31, 2015 and September 30, 2016 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | September 30, 2016 |
Preneed funeral trust investments, at market value | $ | 88,444 |
| | $ | 88,281 |
|
Less: allowance for contract cancellation | (2,891 | ) | | (2,721 | ) |
Preneed funeral trust investments, net | $ | 85,553 |
| | $ | 85,560 |
|
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, 2016, none of our preneed funeral trust investments were 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 CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 for the three and nine months ended September 30, 2016. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 9 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed funeral trust investments at September 30, 2016 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 21,030 |
| | $ | — |
| | $ | — |
| | $ | 21,030 |
|
Fixed income securities: | | | | | | | | | |
U.S treasury debt | 1 | | 1,491 |
| | 48 |
| | — |
| | 1,539 |
|
Municipal bonds | 2 | | 441 |
| | — |
| | — |
| | 441 |
|
Foreign debt | 2 | | 8,640 |
| | 255 |
| | (748 | ) | | 8,147 |
|
Corporate debt | 2 | | 24,292 |
| | 1,800 |
| | (1,429 | ) | | 24,663 |
|
Preferred stock | 2 | | 16,815 |
| | 103 |
| | (705 | ) | | 16,213 |
|
Mortgage backed securities | 2 | | 409 |
| | 4 |
| | (17 | ) | | 396 |
|
Common stock | 1 | | 11,981 |
| | 413 |
| | (3,198 | ) | | 9,196 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 2,139 |
| | 138 |
| | (19 | ) | | 2,258 |
|
Other investments | 2 | | 3,468 |
| | — |
| | — |
| | 3,468 |
|
Trust securities | | | $ | 90,706 |
| | $ | 2,761 |
| | $ | (6,116 | ) | | $ | 87,351 |
|
Accrued investment income | | | $ | 930 |
| | | | | | $ | 930 |
|
Preneed funeral trust investments | | | | | | | | | $ | 88,281 |
|
Market value as a percentage of cost | | | | | | | | | 96.3 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 318 |
|
Due in one to five years | 9,348 |
|
Due in five to ten years | 6,061 |
|
Thereafter | 35,672 |
|
Total | $ | 51,399 |
|
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 | 2 | | 273 |
| | 4 |
| | (4 | ) | | 273 |
|
Common stock | 1 | | 20,864 |
| | 738 |
| | (3,114 | ) | | 18,488 |
|
Mutual funds: | | | | | | | | | |
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. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2015. In the nine months ended September 30, 2015 and 2016, we recorded a $0.6 million and $0.9 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments, respectively. 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, 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 September 30, 2016 and December 31, 2015 are shown in the following tables (in thousands): |
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 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: | | | | | | | | | | | |
Foreign debt | 2,492 |
| | (141 | ) | | 2,901 |
| | (608 | ) | | 5,393 |
| | (749 | ) |
Corporate debt | 6,673 |
| | (199 | ) | | 4,759 |
| | (1,228 | ) | | 11,432 |
| | (1,427 | ) |
Preferred stock | 1,749 |
| | (10 | ) | | 11,729 |
| | (695 | ) | | 13,478 |
| | (705 | ) |
Mortgage backed securities | 241 |
| | (16 | ) | | 13 |
| | (1 | ) | | 254 |
| | (17 | ) |
Mutual funds: | | | | | | | | | | | |
Equity | 4,928 |
| | (1,466 | ) | | 2,589 |
| | (1,732 | ) | | 7,517 |
| | (3,198 | ) |
Fixed income | 301 |
| | (4 | ) | | 439 |
| | (16 | ) | | 740 |
| | (20 | ) |
Total temporary impaired securities | $ | 16,384 |
| | $ | (1,836 | ) | | $ | 22,430 |
| | $ | (4,280 | ) | | $ | 38,814 |
| | $ | (6,116 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| 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 | ) |
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 and nine months ended September 30, 2015 and 2016 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2015 | | 2016 | | 2015 | | 2016 |
Investment income | $ | 554 |
| | $ | 596 |
| | $ | 1,982 |
| | $ | 1,639 |
|
Realized gains | 1,218 |
| | 131 |
| | 3,791 |
| | 525 |
|
Realized losses | (504 | ) | | (716 | ) | | (1,374 | ) | | (4,090 | ) |
Expenses and taxes | 140 |
| | (253 | ) | | (694 | ) | | (946 | ) |
Decrease (increase) in deferred preneed funeral receipts held in trust | (1,408 | ) | | 242 |
| | (3,705 | ) | | 2,872 |
|
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
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, |
| 2015 | | 2016 | | 2015 | | 2016 |
Purchases | $ | (12,323 | ) | | $ | (1,486 | ) | | $ | (23,668 | ) | | $ | (19,917 | ) |
Sales | $ | 10,998 |
| | $ | 6,336 |
| | $ | 33,736 |
| | $ | 19,005 |
|
6. 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, 2016, our total financed preneed receivables were $39.1 million, of which $28.7 million and $10.4 million were for cemetery interment rights and for merchandise and services respectively. These amounts are presented on our consolidated balance sheet as $11.7 million within Accounts receivable and $27.4 million within Preneed receivables and exclude unearned finance charges and allowance for contract cancellations. The unearned finance charges associated with these receivables were $5.2 million and $5.7 million at December 31, 2015 and September 30, 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 4.3% of the total receivables on recognized sales at September 30, 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 nine months ended September 30, 2016, the change in the allowance for contract cancellations was as follows (in thousands):
|
| | | |
| September 30, 2016 |
Beginning balance | $ | 1,765 |
|
Write-offs and cancellations | (1,047 | ) |
Provision | 1,055 |
|
Ending balance | $ | 1,773 |
|
The aging of past due financing receivables as of September 30, 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 | $ | 560 |
| | $ | 402 |
| | $ | 175 |
| | $ | 1,056 |
| | $ | 2,193 |
| | $ | 26,127 |
| | $ | 28,320 |
|
Deferred revenue | 218 |
| | 148 |
| | 70 |
| | 316 |
| | 752 |
| | 9,985 |
| | 10,737 |
|
Total contracts | $ | 778 |
| | $ | 550 |
| | $ | 245 |
| | $ | 1,372 |
| | $ | 2,945 |
| | $ | 36,112 |
| | $ | 39,057 |
|
7. 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 September 30, 2016, receivables from preneed trusts were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | September 30, 2016 |
Preneed trust funds, at cost | $ | 13,963 |
| | $ | 14,267 |
|
Less: allowance for contract cancellation | (419 | ) | | (428 | ) |
Receivables from preneed trusts, net | $ | 13,544 |
| | $ | 13,839 |
|
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, 2016 and December 31, 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, 2016 | | | |
Cash and cash equivalents | $ | 3,382 |
| | $ | 3,382 |
|
Fixed income investments | 8,453 |
| | 8,452 |
|
Mutual funds and common stocks | 2,417 |
| | 2,477 |
|
Annuities | 15 |
| | 15 |
|
Total | $ | 14,267 |
| | $ | 14,326 |
|
|
| | | | | | | |
| 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 |
|
8.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 September 30, 2016 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2015 | | September 30, 2016 |
Trust assets, at market value | $ | 43,127 |
| | $ | 45,048 |
|
Obligations due from trust | (711 | ) | | (703 | ) |
Care trusts’ corpus | $ | 42,416 |
| | $ | 44,345 |
|
We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in Revenues: Cemetery. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At September 30, 2016, none of our cemetery perpetual care trust investments were 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, mortgage backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There
were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2016. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 9 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at September 30, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 4,656 |
| | $ | — |
| | $ | — |
| | $ | 4,656 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 368 |
| | — |
| | — |
| | 368 |
|
Foreign debt | 2 | | 5,772 |
| | 175 |
| | (497 | ) | | 5,450 |
|
Corporate debt | 2 | | 15,927 |
| | 1,099 |
| | (1,059 | ) | | 15,967 |
|
Preferred stock | 2 | | 11,465 |
| | 18 |
| | (493 | ) | | 10,990 |
|
Mortgage backed securities | 2 | | 149 |
| | — |
| | (10 | ) | | 139 |
|
Common stock | 1 | | 7,507 |
| | 344 |
| | (1,950 | ) | | 5,901 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 867 |
| | 90 |
| | — |
| | 957 |
|
Trust securities | | | $ | 46,711 |
| | $ | 1,726 |
| | $ | (4,009 | ) | | $ | 44,428 |
|
Accrued investment income | | | $ | 620 |
| | | | | | $ | 620 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 45,048 |
|
Market value as a percentage of cost | | | | | | | | | 95.1 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 183 |
|
Due in one to five years | 5,053 |
|
Due in five to ten years | 4,145 |
|
Thereafter | 23,533 |
|
| $ | 32,914 |
|
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. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2015. In the nine months ended September 30, 2015 and 2016, we recorded a $0.5 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 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 September 30, 2016 and December 31, 2015 are shown in the following tables (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 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: | | | | | | | | | | | |
Foreign debt | 1,632 |
| | (91 | ) | | 1,990 |
| | (406 | ) | | 3,622 |
| | (497 | ) |
Corporate debt | 4,948 |
| | (148 | ) | | 3,529 |
| | (911 | ) | | 8,477 |
| | (1,059 | ) |
Preferred stock | 1,126 |
| | (8 | ) | | 8,537 |
| | (485 | ) | | 9,663 |
| | (493 | ) |
Mortgage backed securities | 140 |
| | (10 | ) | | — |
| | — |
| | 140 |
| | (10 | ) |
Common stock | 2,932 |
| | (872 | ) | | 1,561 |
| | (1,078 | ) | | 4,493 |
| | (1,950 | ) |
Total temporary impaired securities | $ | 10,778 |
| |