UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended March 31, 2012
or
¨ | 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: 001-32270
STONEMOR PARTNERS L.P.
(Exact name of registrant as specified in its charter)
Delaware | 80-0103159 | |
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
311 Veterans Highway, Suite B Levittown, Pennsylvania |
19056 | |
(Address of principal executive offices) | (Zip Code) |
(215) 826-2800
(Registrants telephone number, including area code)
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
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 ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
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 Exchange Act.
Large accelerated filer | ¨ | Accelerated filer | x | |||
Non-accelerated filer | ¨ (Do not check if smaller reporting company) | Smaller reporting company | ¨ |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x
The number of the registrants outstanding common units at May 1, 2012 was 19,370,373.
Page | ||||||
Part I |
||||||
Item 1. |
1 | |||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
25 | ||||
Item 3. |
40 | |||||
Item 4. |
41 | |||||
Part II |
||||||
Item 1. |
42 | |||||
Item 1A. |
42 | |||||
Item 2. |
42 | |||||
Item 3. |
42 | |||||
Item 4. |
42 | |||||
Item 5. |
42 | |||||
Item 6. |
43 | |||||
44 |
Part I Financial Information
Item 1. | Financial Statements |
StoneMor Partners L.P.
Condensed Consolidated Balance Sheet
(in thousands)
(unaudited)
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 8,778 | $ | 12,058 | ||||
Accounts receivable, net of allowance |
49,370 | 48,837 | ||||||
Prepaid expenses |
5,737 | 4,266 | ||||||
Other current assets |
15,120 | 16,336 | ||||||
|
|
|
|
|||||
Total current assets |
79,005 | 81,497 | ||||||
Long-term accounts receivable, net of allowance |
68,634 | 68,354 | ||||||
Cemetery property |
301,605 | 298,938 | ||||||
Property and equipment, net of accumulated depreciation |
73,049 | 73,777 | ||||||
Merchandise trusts, restricted, at fair value |
355,027 | 344,515 | ||||||
Perpetual care trusts, restricted, at fair value |
267,503 | 254,679 | ||||||
Deferred financing costs, net of accumulated amortization |
10,244 | 8,817 | ||||||
Deferred selling and obtaining costs |
70,730 | 68,542 | ||||||
Deferred tax assets |
417 | 415 | ||||||
Goodwill |
36,639 | 36,439 | ||||||
Other assets |
12,108 | 13,152 | ||||||
|
|
|
|
|||||
Total assets |
$ | 1,274,961 | $ | 1,249,125 | ||||
|
|
|
|
|||||
Liabilities and partners capital |
||||||||
Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 22,332 | $ | 26,428 | ||||
Accrued interest |
5,517 | 1,632 | ||||||
Current portion, long-term debt |
2,235 | 1,487 | ||||||
|
|
|
|
|||||
Total current liabilities |
30,084 | 29,547 | ||||||
Other long-term liabilities |
2,265 | 2,830 | ||||||
Long-term debt |
200,891 | 193,835 | ||||||
Deferred cemetery revenues, net |
458,349 | 441,878 | ||||||
Deferred tax liabilities |
17,001 | 16,968 | ||||||
Merchandise liability |
128,220 | 129,109 | ||||||
Perpetual care trust corpus |
267,503 | 254,679 | ||||||
|
|
|
|
|||||
Total liabilities |
1,104,313 | 1,068,846 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Partners capital |
||||||||
General partner |
1,783 | 2,192 | ||||||
Common partners |
168,865 | 178,087 | ||||||
|
|
|
|
|||||
Total partners capital |
170,648 | 180,279 | ||||||
|
|
|
|
|||||
Total liabilities and partners capital |
$ | 1,274,961 | $ | 1,249,125 | ||||
|
|
|
|
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
1
StoneMor Partners L.P.
Condensed Consolidated Statement of Operations
(in thousands, except unit data)
(unaudited)
Three months ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
Revenues: |
||||||||
Cemetery |
||||||||
Merchandise |
$ | 27,144 | $ | 21,435 | ||||
Services |
12,082 | 10,798 | ||||||
Investment and other |
11,424 | 9,666 | ||||||
Funeral home |
||||||||
Merchandise |
4,018 | 3,139 | ||||||
Services |
4,919 | 4,193 | ||||||
|
|
|
|
|||||
Total revenues |
59,587 | 49,231 | ||||||
|
|
|
|
|||||
Costs and Expenses: |
||||||||
Cost of goods sold (exclusive of depreciation shown separately below): |
||||||||
Perpetual care |
1,367 | 1,325 | ||||||
Merchandise |
5,053 | 3,668 | ||||||
Cemetery expense |
12,792 | 12,086 | ||||||
Selling expense |
11,787 | 9,544 | ||||||
General and administrative expense |
7,193 | 6,427 | ||||||
Corporate overhead (including $198 and $189 in unit-based compensation for the three months ended March 31, 2012 and 2011, respectively) |
6,603 | 5,958 | ||||||
Depreciation and amortization |
2,330 | 2,446 | ||||||
Funeral home expense |
||||||||
Merchandise |
1,423 | 1,206 | ||||||
Services |
3,405 | 2,546 | ||||||
Other |
1,928 | 1,557 | ||||||
Acquisition related costs |
331 | 933 | ||||||
|
|
|
|
|||||
Total cost and expenses |
54,212 | 47,696 | ||||||
|
|
|
|
|||||
Operating profit |
5,375 | 1,535 | ||||||
Expenses related to refinancing |
| 453 | ||||||
Gain on termination of operating agreement |
1,820 | | ||||||
Early extinguishment of debt |
| 4,010 | ||||||
Interest expense |
4,966 | 5,090 | ||||||
|
|
|
|
|||||
Net income (loss) before income taxes |
2,229 | (8,018 | ) | |||||
Income tax expense (benefit) |
||||||||
State |
145 | 4 | ||||||
Federal |
54 | (808 | ) | |||||
|
|
|
|
|||||
Total income tax expense (benefit) |
199 | (804 | ) | |||||
|
|
|
|
|||||
Net income (loss) |
$ | 2,030 | $ | (7,214 | ) | |||
|
|
|
|
|||||
General partners interest in net income (loss) for the period |
$ | 41 | $ | (144 | ) | |||
Limited partners interest in net income (loss) for the period |
$ | 1,989 | $ | (7,070 | ) | |||
Net income (loss) per limited partner unit (basic and diluted) |
$ | .10 | $ | (.40 | ) | |||
Weighted average number of limited partners units outstanding (basic) |
19,369 | 17,709 | ||||||
Weighted average number of limited partners units outstanding (diluted) |
20,391 | 17,709 | ||||||
Distributions declared per unit |
$ | .585 | $ | .585 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
2
StoneMor Partners L.P.
Condensed Consolidated Statement of
Partners Capital
(in thousands)
(unaudited)
Partners Capital | ||||||||||||
Common Unit Holders |
General Partner |
Total | ||||||||||
Balance, December 31, 2011 |
$ | 178,087 | $ | 2,192 | $ | 180,279 | ||||||
Compensation related to UARs |
119 | | 119 | |||||||||
Net income |
1,989 | 41 | 2,030 | |||||||||
Cash distribution |
(11,330 | ) | (450 | ) | (11,780 | ) | ||||||
|
|
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|
|
|
|||||||
Balance, March 31, 2012 |
$ | 168,865 | $ | 1,783 | $ | 170,648 | ||||||
|
|
|
|
|
|
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
3
StoneMor Partners L.P.
Condensed Consolidated Statement of Cash Flows
(in thousands)
(unaudited)
For the three months ended March 31, | ||||||||
2012 | 2011 | |||||||
Operating activities: |
||||||||
Net income (loss) |
$ | 2,030 | $ | (7,214 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
||||||||
Cost of lots sold |
1,833 | 1,478 | ||||||
Depreciation and amortization |
2,330 | 2,446 | ||||||
Unit-based compensation |
198 | 189 | ||||||
Accretion of debt discounts |
436 | 383 | ||||||
Gain on termination of operating agreement |
(1,820 | ) | | |||||
Write-off of deferred financing fees |
| 453 | ||||||
Fees paid related to early extinguishment of debt |
| 4,010 | ||||||
Changes in assets and liabilities that provided (used) cash: |
||||||||
Accounts receivable |
(1,374 | ) | (2,835 | ) | ||||
Allowance for doubtful accounts |
1,363 | 671 | ||||||
Merchandise trust fund |
(2,690 | ) | (8,612 | ) | ||||
Prepaid expenses |
(1,471 | ) | 671 | |||||
Other current assets |
1,181 | (110 | ) | |||||
Other assets |
(1,828 | ) | 197 | |||||
Accounts payable and accrued and other liabilities |
1,277 | (2,510 | ) | |||||
Deferred selling and obtaining costs |
(2,188 | ) | (3,279 | ) | ||||
Deferred cemetery revenue |
11,618 | 16,319 | ||||||
Deferred taxes (net) |
31 | (880 | ) | |||||
Merchandise liability |
(2,736 | ) | (739 | ) | ||||
|
|
|
|
|||||
Net cash provided by operating activities |
8,190 | 638 | ||||||
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|
|
|||||
Investing activities: |
||||||||
Cash paid for cemetery property |
(1,217 | ) | (706 | ) | ||||
Purchase of subsidiaries |
(1,652 | ) | (1,700 | ) | ||||
Cash paid for property and equipment |
(898 | ) | (1,759 | ) | ||||
|
|
|
|
|||||
Net cash used in investing activities |
(3,767 | ) | (4,165 | ) | ||||
|
|
|
|
|||||
Financing activities: |
||||||||
Cash distribution |
(11,780 | ) | (9,293 | ) | ||||
Additional borrowings on long-term debt |
7,350 | 4,300 | ||||||
Repayments of long-term debt |
(1,286 | ) | (73,317 | ) | ||||
Proceeds from public offering |
| 103,564 | ||||||
Proceeds from general partner contribution |
| 2,242 | ||||||
Fees paid related to early extinguishment of debt |
| (4,010 | ) | |||||
Cost of financing activities |
(1,987 | ) | | |||||
|
|
|
|
|||||
Net cash provided by (used in) financing activities |
(7,703 | ) | 23,486 | |||||
|
|
|
|
|||||
Net increase (decrease) in cash and cash equivalents |
(3,280 | ) | 19,959 | |||||
Cash and cash equivalents - Beginning of period |
12,058 | 7,535 | ||||||
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|
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|
|||||
Cash and cash equivalents - End of period |
$ | 8,778 | $ | 27,494 | ||||
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|
|
|
|||||
Supplemental disclosure of cash flow information |
||||||||
Cash paid during the period for interest |
$ | 623 | $ | 1,472 | ||||
Cash paid during the period for income taxes |
$ | 103 | $ | 87 | ||||
Non-cash investing and financing activities |
||||||||
Acquisition of assets by financing |
$ | 28 | $ | |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
4
1. | NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
Nature of Operations
StoneMor Partners L.P. (StoneMor, the Company or the Partnership) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of March 31, 2012, the Partnership operated 271 cemeteries, 253 of which are owned, in 26 states and Puerto Rico and owned and operated 69 funeral homes in 18 states and Puerto Rico.
Basis of Presentation
The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year. The December 31, 2011 condensed consolidated balance sheet data was derived from audited financial statements included in the Companys 2011 Annual Report on Form 10-K (2011 Form 10-K), but does not include all disclosures required by GAAP, which are presented in the Companys 2011 Form 10-K.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of each of the Companys subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 18 cemeteries under long-term operating or management contracts. The operations of 16 of these managed cemeteries have been consolidated in accordance with the provisions of Accounting Standards Codification (ASC) 810.
The Company operates 2 cemeteries under long-term operating agreements that do not qualify as acquisitions for accounting purposes. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of each of these cemeteries merchandise and perpetual care trusts as variable interest entities since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under these long-term operating agreements, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries. The Company earns revenues related to sales of merchandise, services, and interment rights and incurs expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Company has also recognized the existing merchandise liabilities that it assumed as part of these agreements.
Use of Estimates
Preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. As a result, actual results could differ from those estimates. The most significant estimates in the unaudited condensed consolidated financial statements are the valuation of assets in the merchandise trust and perpetual care trust, allowance for cancellations, unit-based compensation, merchandise liability, deferred sales revenue, deferred margin, deferred merchandise trust investment earnings, deferred obtaining costs and income taxes. Deferred sales revenue, deferred margin and deferred merchandise trust investment earnings are included in deferred cemetery revenues, net, on the unaudited condensed consolidated balance sheet.
5
2. | LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE |
Long-term accounts receivable, net, consist of the following:
As of | ||||||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Customer receivables |
$ | 153,352 | $ | 151,500 | ||||
Unearned finance income |
(17,264 | ) | (16,727 | ) | ||||
Allowance for contract cancellations |
(18,084 | ) | (17,582 | ) | ||||
|
|
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|
|||||
118,004 | 117,191 | |||||||
Less: current portion, net of allowance |
49,370 | 48,837 | ||||||
|
|
|
|
|||||
Long-term portion, net of allowance |
$ | 68,634 | $ | 68,354 | ||||
|
|
|
|
Activity in the allowance for contract cancellations is as follows:
For the three months ended March 31, |
||||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Balance - Beginning of period |
$ | 17,582 | $ | 15,832 | ||||
Provision for cancellations |
4,671 | 4,250 | ||||||
Charge-offs - net |
(4,169 | ) | (3,580 | ) | ||||
|
|
|
|
|||||
Balance - End of period |
$ | 18,084 | $ | 16,502 | ||||
|
|
|
|
3. | CEMETERY PROPERTY |
Cemetery property consists of the following:
As of | ||||||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Developed land |
$ | 66,780 | $ | 64,266 | ||||
Undeveloped land |
165,647 | 164,723 | ||||||
Mausoleum crypts and lawn crypts |
69,178 | 69,949 | ||||||
|
|
|
|
|||||
Total |
$ | 301,605 | $ | 298,938 | ||||
|
|
|
|
6
4. | PROPERTY AND EQUIPMENT |
Major classes of property and equipment follow:
As of | ||||||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Building and improvements |
$ | 74,882 | $ | 75,076 | ||||
Furniture and equipment |
38,038 | 36,863 | ||||||
|
|
|
|
|||||
112,920 | 111,939 | |||||||
Less: accumulated depreciation |
(39,871 | ) | (38,162 | ) | ||||
|
|
|
|
|||||
Property and equipment - net |
$ | 73,049 | $ | 73,777 | ||||
|
|
|
|
Depreciation expense was $1.8 million and $1.4 million during the three months ended March 31, 2012 and 2011, respectively.
5. | MERCHANDISE TRUSTS |
At March 31, 2012, the Companys merchandise trusts consisted of the following types of assets:
| Money Market Funds that invest in low risk short term securities; |
| Publicly traded mutual funds that invest in underlying debt securities; |
| Publicly traded mutual funds that invest in underlying equity securities; |
| Equity investments that are currently paying dividends or distributions. These investments include Real Estate Investment Trusts (REITs), Master Limited Partnerships and global equity securities; |
| Fixed maturity debt securities issued by various corporate entities; |
| Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and |
| Fixed maturity debt securities issued by U.S. states and local government agencies. |
All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.
The merchandise trusts are variable interest entities (VIE) for which the Company is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise to which they relate. If the value of these assets falls below the cost of purchasing such merchandise, the Company may be required to fund this shortfall.
The Company has included $7.2 million and $6.9 million of investments held in trust by the West Virginia Funeral Directors Association at March 31, 2012 and December 31, 2011, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recorded at their account value, which approximates fair value.
7
The cost and market value associated with the assets held in merchandise trusts at March 31, 2012 and December 31, 2011 were as follows:
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
As of March 31, 2012 |
Cost | Gains | Losses | Value | ||||||||||||
(in thousands) | ||||||||||||||||
Short-term investments |
$ | 33,340 | $ | | $ | | $ | 33,340 | ||||||||
Fixed maturities: |
||||||||||||||||
U.S. Government and federal agency |
| | | | ||||||||||||
U.S. State and local government agency |
23 | | | 23 | ||||||||||||
Corporate debt securities |
10,414 | 110 | (403 | ) | 10,121 | |||||||||||
Other debt securities |
1,100 | | | 1,100 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
11,537 | 110 | (403 | ) | 11,244 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mutual funds - debt securities |
93,447 | 1,353 | (1,314 | ) | 93,486 | |||||||||||
Mutual funds - equity securities |
127,481 | 5,325 | (5,662 | ) | 127,144 | |||||||||||
Equity securities |
73,823 | 4,005 | (2,836 | ) | 74,992 | |||||||||||
Other invested assets |
7,054 | 542 | | 7,596 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total managed investments |
$ | 346,682 | $ | 11,335 | $ | (10,215 | ) | $ | 347,802 | |||||||
|
|
|
|
|
|
|
|
|||||||||
West Virginia Trust Receivable |
7,225 | | | 7,225 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 353,907 | $ | 11,335 | $ | (10,215 | ) | $ | 355,027 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
As of December 31, 2011 |
Cost | Gains | Losses | Value | ||||||||||||
(in thousands) | ||||||||||||||||
Short-term investments |
$ | 38,312 | $ | | $ | | $ | 38,312 | ||||||||
Fixed maturities: |
||||||||||||||||
U.S. Government and federal agency |
| | | | ||||||||||||
U.S. State and local government agency |
23 | | | 23 | ||||||||||||
Corporate debt securities |
10,537 | 19 | (791 | ) | 9,765 | |||||||||||
Other debt securities |
1,100 | | | 1,100 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
11,660 | 19 | (791 | ) | 10,888 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mutual funds - debt securities |
68,291 | 1,711 | (2,581 | ) | 67,421 | |||||||||||
Mutual funds - equity securities |
148,209 | 1,939 | (8,860 | ) | 141,288 | |||||||||||
Equity securities |
71,760 | 3,723 | (3,131 | ) | 72,352 | |||||||||||
Other invested assets |
7,326 | 34 | | 7,360 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total managed investments |
$ | 345,558 | $ | 7,426 | $ | (15,363 | ) | $ | 337,621 | |||||||
|
|
|
|
|
|
|
|
|||||||||
West Virginia Trust Receivable |
6,894 | | | 6,894 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 352,452 | $ | 7,426 | $ | (15,363 | ) | $ | 344,515 | |||||||
|
|
|
|
|
|
|
|
The contractual maturities of debt securities as of March 31, 2012 are as follows:
As of March 31, 2012 |
Less than 1 year |
1 year through 5 years |
6 years through 10 years |
More than 10 years |
||||||||||||
(in thousands) | ||||||||||||||||
U.S. Government and federal agency |
$ | | $ | | $ | | $ | | ||||||||
U.S. State and local government agency |
23 | | | | ||||||||||||
Corporate debt securities |
| 8,945 | 1,176 | | ||||||||||||
Other debt securities |
1,100 | | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
$ | 1,123 | $ | 8,945 | $ | 1,176 | $ | | ||||||||
|
|
|
|
|
|
|
|
8
An aging of unrealized losses on the Companys investments in fixed maturities and equity securities at March 31, 2012 and December 31, 2011 is presented below:
Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
As of March 31, 2012 |
Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. Government and federal agency |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
U.S. State and local government agency |
| | | | | | ||||||||||||||||||
Corporate debt securities |
1,799 | 102 | 4,299 | 301 | 6,098 | 403 | ||||||||||||||||||
Other debt securities |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
1,799 | 102 | 4,299 | 301 | 6,098 | 403 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Mutual funds - debt securites |
29,666 | 482 | 36,687 | 832 | 66,353 | 1,314 | ||||||||||||||||||
Mutual funds - equity securites |
11,049 | 1,301 | 61,383 | 4,361 | 72,432 | 5,662 | ||||||||||||||||||
Equity securities |
21,862 | 1,283 | 9,158 | 1,553 | 31,020 | 2,836 | ||||||||||||||||||
Other invested assets |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 64,376 | $ | 3,168 | $ | 111,527 | $ | 7,047 | $ | 175,903 | $ | 10,215 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
As of December 31, 2011 |
Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. Government and federal agency |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
U.S. State and local government agency |
| | | | | | ||||||||||||||||||
Corporate debt securities |
4,007 | 351 | 4,459 | 440 | 8,466 | 791 | ||||||||||||||||||
Other debt securities |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
4,007 | 351 | 4,459 | 440 | 8,466 | 791 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Mutual funds - debt securites |
19,691 | 1,109 | 31,916 | 1,472 | 51,607 | 2,581 | ||||||||||||||||||
Mutual funds - equity securites |
32,631 | 970 | 59,010 | 7,890 | 91,641 | 8,860 | ||||||||||||||||||
Equity securities |
20,349 | 1,941 | 5,775 | 1,190 | 26,124 | 3,131 | ||||||||||||||||||
Other invested assets |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 76,678 | $ | 4,371 | $ | 101,160 | $ | 10,992 | $ | 177,838 | $ | 15,363 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys merchandise trust activities for the three months ended March 31, 2012 is presented below:
Fair Value @ 12/31/2011 |
Contributions | Distributions | Interest/ Dividends |
Capital Gain Distributions |
Realized Gain/ Loss |
Taxes | Fees | Unrealized Change in Fair Value |
Fair Value @ 3/31/2012 |
|||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||
$ | 344,515 | 13,516 | (19,037 | ) | 3,977 | 88 | 3,388 | 64 | (541 | ) | 9,057 | $ | 355,027 |
The Company made net distributions from the trusts of approximately $5.5 million during the three months ended March 31, 2012. During the three months ended March 31, 2012, purchases and sales of securities available for sale included in trust investments were approximately $104.6 million and $103.9 million, respectively. Distributions included $5.8 million of assets that were divested as a result of the termination of an operating agreement during the three months ended March 31, 2012.
Other-than-temporary Impairments of Trust Assets
During the three months ended March 31, 2012 and 2011, the Company determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts.
9
6. | PERPETUAL CARE TRUSTS |
At March 31, 2012, the Companys perpetual care trusts consisted of the following types of assets:
| Money Market Funds that invest in low risk short term securities; |
| Publicly traded mutual funds that invest in underlying debt securities; |
| Publicly traded mutual funds that invest in underlying equity securities; |
| Equity investments that are currently paying dividends or distributions. These investments include REITs, Master Limited Partnerships; |
| Fixed maturity debt securities issued by various corporate entities; |
| Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and |
| Fixed maturity debt securities issued by U.S. states and local agencies. |
All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.
10
The cost and market value associated with the assets held in perpetual care trusts at March 31, 2012 and December 31, 2011 were as follows:
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
As of March 31, 2012 |
Cost | Gains | Losses | Value | ||||||||||||
(in thousands) | ||||||||||||||||
Short-term investments |
$ | 24,901 | $ | | $ | | $ | 24,901 | ||||||||
Fixed maturities: |
||||||||||||||||
U.S. Government and federal agency |
408 | 109 | | 517 | ||||||||||||
U.S. State and local government agency |
66 | 81 | | 147 | ||||||||||||
Corporate debt securities |
22,981 | 481 | (638 | ) | 22,824 | |||||||||||
Other debt securities |
371 | | | 371 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
23,826 | 671 | (638 | ) | 23,859 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mutual funds - debt securities |
107,898 | 948 | (431 | ) | 108,415 | |||||||||||
Mutual funds - equity securities |
57,489 | 4,832 | (1,674 | ) | 60,647 | |||||||||||
Equity Securities |
40,035 | 9,203 | (41 | ) | 49,197 | |||||||||||
Other invested assets |
219 | 265 | | 484 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 254,368 | $ | 15,919 | $ | (2,784 | ) | $ | 267,503 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Gross | Gross | |||||||||||||||
Unrealized | Unrealized | Fair | ||||||||||||||
As of December 31, 2011 |
Cost | Gains | Losses | Value | ||||||||||||
(in thousands) | ||||||||||||||||
Short-term investments |
$ | 22,607 | $ | | $ | | $ | 22,607 | ||||||||
Fixed maturities: |
||||||||||||||||
U.S. Government and federal agency |
408 | 105 | | 513 | ||||||||||||
U.S. State and local government agency |
66 | 81 | | 147 | ||||||||||||
Corporate debt securities |
23,359 | 229 | (1,434 | ) | 22,154 | |||||||||||
Other debt securities |
371 | | | 371 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
24,204 | 415 | (1,434 | ) | 23,185 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mutual funds - debt securities |
61,700 | 185 | (1,079 | ) | 60,806 | |||||||||||
Mutual funds - equity securities |
104,824 | 4,295 | (9,621 | ) | 99,498 | |||||||||||
Equity Securities |
39,199 | 9,326 | (112 | ) | 48,413 | |||||||||||
Other invested assets |
327 | 156 | (313 | ) | 170 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 252,861 | $ | 14,377 | $ | (12,559 | ) | $ | 254,679 | |||||||
|
|
|
|
|
|
|
|
The contractual maturities of debt securities as of March 31, 2012 are as follows:
As of March 31, 2012 |
Less than 1 year |
1 year through 5 years |
6 years through 10 years |
More than 10 years |
||||||||||||
(in thousands) | ||||||||||||||||
U.S. Government and federal agency |
$ | | $ | 517 | $ | | $ | | ||||||||
U.S. State and local government agency |
147 | | | | ||||||||||||
Corporate debt securities |
127 | 19,815 | 2,882 | | ||||||||||||
Other debt securities |
371 | | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
$ | 645 | $ | 20,332 | $ | 2,882 | $ | | ||||||||
|
|
|
|
|
|
|
|
11
An aging of unrealized losses on the Companys investments in fixed maturities and equity securities at March 31, 2012 and December 31, 2011 held in perpetual care trusts is presented below:
Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
As of March 31, 2012 |
Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. Government and federal agency |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
U.S. State and local government agency |
| | | | | | ||||||||||||||||||
Corporate debt securities |
3,886 | 227 | 7,761 | 411 | 11,647 | 638 | ||||||||||||||||||
Other debt securities |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
3,886 | 227 | 7,761 | 411 | 11,647 | 638 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Mutual funds - debt securites |
105 | 1 | 3,966 | 430 | 4,071 | 431 | ||||||||||||||||||
Mutual funds - equity securites |
8,528 | 1,674 | | | 8,528 | 1,674 | ||||||||||||||||||
Equity securities |
2,430 | 39 | 269 | 2 | 2,699 | 41 | ||||||||||||||||||
Other invested assets |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 14,949 | $ | 1,941 | $ | 11,996 | $ | 843 | $ | 26,945 | $ | 2,784 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Less than 12 months | 12 Months or more | Total | ||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||
As of December 31, 2011 |
Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||
U.S. Government and federal agency |
$ | | $ | | $ | | $ | | $ | | $ | | ||||||||||||
U.S. State and local government agency |
| | | | | | ||||||||||||||||||
Corporate debt securities |
7,967 | 727 | 8,471 | 707 | 16,438 | 1,434 | ||||||||||||||||||
Other debt securities |
| | | | | | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total fixed maturities |
7,967 | 727 | 8,471 | 707 | 16,438 | 1,434 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Mutual funds - debt securites |
37,956 | 772 | 1,675 | 307 | 39,631 | 1,079 | ||||||||||||||||||
Mutual funds - equity securites |
21,483 | 3,023 | 44,416 | 6,598 | 65,899 | 9,621 | ||||||||||||||||||
Equity securities |
2,978 | 106 | 351 | 6 | 3,329 | 112 | ||||||||||||||||||
Other invested assets |
170 | 313 | | | 170 | 313 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total |
$ | 70,554 | $ | 4,941 | $ | 54,913 | $ | 7,618 | $ | 125,467 | $ | 12,559 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
A reconciliation of the Companys perpetual care trust activities for the three months ended March 31, 2012 is presented below:
Fair Value @ 12/31/2011 |
Contributions | Distributions | Interest/ Dividends |
Capital Gain Distributions |
Realized Gain/ Loss |
Taxes | Fees | Unrealized Change in Fair Value |
Fair Value @ 3/31/2012 |
|||||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||||
$ | 254,679 | 1,956 | (3,293 | ) | 3,718 | 9 | (353 | ) | (96 | ) | (434 | ) | 11,317 | $ | 267,503 |
The Company made net distributions from the trusts of approximately $1.3 million during the three months ended March 31, 2012. During the three months ended March 31, 2012, purchases and sales of securities available for sale included in trust investments were approximately $155.3 million and $156.1 million, respectively.
Other-than-temporary Impairments of Trust Assets
During the three months ended March 31, 2012 and 2011, the Company determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts.
12
7. | GOODWILL AND INTANGIBLE ASSETS |
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in acquisitions.
A rollforward of goodwill by reportable segment is as follows:
Cemeteries | Funeral | |||||||||||||||||||
Southeast | Northeast | West | Homes | Total | ||||||||||||||||
(in thousands) | ||||||||||||||||||||
Balance as of December 31, 2011 |
$ | 7,271 | $ | | $ | 11,948 | $ | 17,220 | $ | 36,439 | ||||||||||
Goodwill acquired from acquisitions during the three months ended March 31, 2012 |
200 | | | | 200 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance as of March 31, 2012 |
$ | 7,471 | $ | | $ | 11,948 | $ | 17,220 | $ | 36,639 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Other Acquired Intangible Assets
The Company has other acquired intangible assets, most of which have been recognized as a result of acquisitions and long-term operating agreements. These amounts are included within other assets on the condensed consolidated balance sheet. All of the intangible assets are subject to amortization. The major classes of intangible assets are as follows:
As of | As of | |||||||||||||||||||||||
March 31, 2012 | December 31, 2011 | |||||||||||||||||||||||
Gross Carrying | Accumulated | Net Intangible | Gross Carrying | Accumulated | Net Intangible | |||||||||||||||||||
Amount | Amortization | Asset | Amount | Amortization | Asset | |||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Amortized Intangible Assets: |
||||||||||||||||||||||||
Underlying contract value |
$ | 6,151 | $ | (487 | ) | $ | 5,664 | $ | 8,484 | $ | (546 | ) | $ | 7,938 | ||||||||||
Non-compete agreements |
3,820 | (1,641 | ) | 2,179 | 3,820 | (1,413 | ) | 2,407 | ||||||||||||||||
Other intangible assets |
205 | (70 | ) | 135 | 205 | (67 | ) | 138 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total Intangible Assets |
$ | 10,176 | $ | (2,198 | ) | $ | 7,978 | $ | 12,509 | $ | (2,026 | ) | $ | 10,483 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The decrease in the underlying contract value is mostly the result of the Company entering into an amended operating agreement with Kingwood Memorial Park Association. See Note 13 for further details.
13
8. | LONG-TERM DEBT |
The Company had the following outstanding debt:
As of | ||||||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Insurance premium financing |
$ | 984 | $ | 211 | ||||
Vehicle Financing |
1,046 | 1,147 | ||||||
Acquisition Credit Facility, due January 2017 |
| 10,750 | ||||||
Revolving Credit Facility, due January 2017 |
51,100 | 33,000 | ||||||
Note Payable - Greenlawn acquisition |
1,286 | 1,321 | ||||||
Note Payable - Nelms acquisition (net of discount) |
525 | 623 | ||||||
Note Payable - acquisition non-competes (net of discounts) |
1,304 | 1,490 | ||||||
10.25% senior notes, due 2017 |
150,000 | 150,000 | ||||||
|
|
|
|
|||||
Total |
206,245 | 198,542 | ||||||
Less current portion |
2,235 | 1,487 | ||||||
Less unamortized bond discount |
3,119 | 3,220 | ||||||
|
|
|
|
|||||
Long-term portion |
$ | 200,891 | $ | 193,835 | ||||
|
|
|
|
This note includes a summary of material terms of the Companys senior notes, senior secured notes, credit facilities and other debt obligations. For a more detailed description of the Companys long-term debt agreements, see the Companys 2011 Form 10-K.
10.25% Senior Notes due 2017
The Company has outstanding a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the Senior Notes), with an original issue discount of approximately $4.0 million. The Company pays 10.25% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year. The Senior Notes mature on December 1, 2017.
Credit Facility
On January 19, 2012, the Company entered into the Third Amended and Restated Credit Agreement (the Credit Agreement). The terms of the Credit Agreement are substantially the same as the terms of the prior agreement. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the Credit Agreement.
The Credit Agreement provides for a total Revolving Credit Facility of $130.0 million (the Credit Facility). Previously, the agreement had an Acquisition Credit Facility and a Revolving Credit Facility with different borrowing limits. The proceeds of the Credit Facility may be used to finance working capital requirements, Permitted Acquisitions and the purchase and construction of mausoleums. The maturity date of the Credit Facility is January 19, 2017.
At March 31, 2012, amounts outstanding under the Credit Facility bear interest at a rate of 3.8%. Amounts borrowed may be either Base Rate Loans or Eurodollar Rate Loans and amounts repaid or prepaid during the term may be reborrowed. Depending on the type of loan, borrowings bear interest at the Base Rate or Eurodollar Rate, plus applicable margins ranging from 1.25% to 2.75% and 2.25% to 3.75%, respectively, depending on the Companys Consolidated Leverage Ratio. The Base Rate is the highest of the Prime Rate, the Federal Funds Rate plus 0.50%, or the Eurodollar Rate plus 1.0%. The Eurodollar rate is the British Bankers Association LIBOR Rate.
The Credit Agreement requires the Company to pay an unused Commitment Fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments. The Commitment Fee under the Credit Agreement ranges from 0.375% to 0.75% depending on the Companys Consolidated Leverage Ratio.
The Credit Agreement contains restrictive covenants that, among other things, prohibit distributions upon defined events of default, restrict investments and sales of assets and require the Company to maintain certain financial covenants, including specified financial ratios. A material decrease in revenues could cause the Company to breach certain of its financial covenants. Any such breach could allow the Lenders to accelerate the Companys debt which would have a material adverse effect on the Companys business, financial condition or results of operations. The Companys covenants include a Consolidated Leverage Ratio and a Consolidated Debt Service Coverage Ratio. As of March 31, 2012, the Company was in compliance with all applicable financial covenants.
14
9. | INCOME TAXES |
As of March 31, 2012, the Companys taxable corporate subsidiaries had a federal net operating loss carryforwards of approximately $152.8 million, which will begin to expire in 2019 and $184.1 million in state net operating losses, a portion of which expires annually.
The Partnership is not a taxable entity for federal and state income tax purposes; rather, the Partnerships tax attributes (except those of its corporate subsidiaries) are to be included in the individual tax returns of its partners. Neither the Partnerships financial reporting income, nor the cash distributions to unit-holders, can be used as a substitute for the detailed tax calculations that the Partnership must perform annually for its partners. Net income from the Partnership is not treated as passive income for federal income tax purposes. As a result, partners subject to the passive activity loss rules are not permitted to offset income from the Partnership with passive losses from other sources.
The Partnerships corporate subsidiaries account for their income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and operating loss and tax credit carry forwards.
Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
The provision for income taxes for the three months ended March 31, 2012 and 2011 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2012 and 2011, respectively. The Companys effective tax rate differs from its statutory tax rate primarily because the Companys legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.
The Company is not currently under examination by any federal or state jurisdictions. The federal statute of limitations and certain state statutes of limitations are open from 2008 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. On the basis of present information, it is the opinion of the Companys management that there are no pending assessments that will result in a material effect on the Companys unaudited condensed consolidated financial statements over the next twelve months.
10. | DEFERRED CEMETERY REVENUES, NET |
At March 31, 2012 and December 31, 2011, deferred cemetery revenues, net, consisted of the following:
As of | ||||||||
March 31, | December 31, | |||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Deferred cemetery revenue |
$ | 313,249 | $ | 306,488 | ||||
Deferred merchandise trust revenue |
55,425 | 50,419 | ||||||
Deferred merchandise trust unrealized gains (losses) |
1,120 | (7,937 | ) | |||||
Deferred pre-acquisition margin |
131,083 | 135,243 | ||||||
Deferred cost of goods sold |
(42,528 | ) | (42,335 | ) | ||||
|
|
|
|
|||||
Deferred cemetery revenues, net |
$ | 458,349 | $ | 441,878 | ||||
|
|
|
|
|||||
Deferred selling and obtaining costs |
$ | 70,730 | $ | 68,542 |
Deferred selling and obtaining costs are carried as an asset on the unaudited condensed consolidated balance sheet in accordance with the Financial Services Insurance topic of the ASC.
15
11. | COMMITMENTS AND CONTINGENCIES |
Legal
The Company is party to legal proceedings in the ordinary course of its business but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material effect on the Companys financial position, results of operations or liquidity.
Leases
At March 31, 2012, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to five years and options to renew at varying terms. Expenses under operating leases were $0.6 million for the three months ended March 31, 2012 and 2011.
At March 31, 2012, operating leases will result in future payments in the following approximate amounts:
(in thousands) | ||||
2013 |
$ | 1,670 | ||
2014 |
1,043 | |||
2015 |
694 | |||
2016 |
668 | |||
2017 |
626 | |||
Thereafter |
1,242 | |||
|
|
|||
Total |
$ | 5,943 | ||
|
|
12. | PARTNERS CAPITAL |
Unit-Based Compensation
The Company has issued to certain key employees and management unit-based compensation in the form of unit appreciation rights and phantom partnership units.
Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three months ended March 31, 2012 and 2011 are summarized in the table below:
Three months ended | ||||||||
March 31, | ||||||||
2012 | 2011 | |||||||
(in thousands) | ||||||||
Unit appreciation rights |
$ | 119 | $ | 119 | ||||
Restricted phantom units |
79 | 70 | ||||||
|
|
|
|
|||||
Total unit-based compensation expense |
$ | 198 | $ | 189 | ||||
|
|
|
|
As of March 31, 2012, there was approximately $0.8 million in non-vested unit appreciation rights outstanding. These unit appreciation rights will be expensed through the first quarter of 2014.
16
13. | ACQUISITIONS |
First Quarter 2012 Acquisition
In second quarter of 2009, the Company entered into a long-term operating agreement (the Operating Agreement) with Kingwood Memorial Park Association (Kingwood) wherein the Company became the exclusive operator of the cemetery. At that time, the Operating Agreement did not qualify as an acquisition for accounting purposes. However, the existing merchandise and perpetual care trusts were consolidated as variable interest entities. In addition, merchandise and other liabilities assumed by the Company were also recorded as of the initial contract date. The consideration paid for this transaction, including cash and an assumed liability, exceeded the net assets recorded as of the initial contract date and an intangible asset was recorded for this amount.
In January of 2012, the Company entered into an amended and restated operating agreement (the Amended Operating Agreement), that supersedes the Operating Agreement. The Amended Operating Agreement has a term of 40 years and the Company remains the exclusive operator of the cemetery. As consideration for entering into the Amended Operating Agreement, the Company paid $1.7 million in cash and was relieved of a note payable to Kingwood. In addition, the prior trustees of Kingwood have resigned in favor of new trustees appointed by the Company. As a result of the changes in the Amended Operating Agreement, for accounting purposes, the Company has gained control of Kingwood, and acquisition accounting is now applicable.
The table below reflects the Companys preliminary assessment of the fair value of net assets acquired, the elimination of debt and other assets and the purchase price, which results in the recognition of goodwill. These amounts may be retrospectively adjusted as additional information is received.
Preliminary | ||||
Assessment | ||||
(in thousands) | ||||
Net Assets Acquired: |
||||
Accounts receivable |
$ | 66 | ||
Cemetery property |
3,001 | |||
Property and equipment |
102 | |||
|
|
|||
Total net assets acquired |
3,169 | |||
|
|
|||
Assets and Liabilities divested: |
||||
Note payable to Kingwood |
519 | |||
Intangible asset representing underlying contract value |
(2,236 | ) | ||
|
|
|||
Fair value of net assets acquired and divested |
1,452 | |||
|
|
|||
Consideration paid |
1,652 | |||
|
|
|||
Goodwill from purchase |
$ | 200 | ||
|
|
17
First Quarter 2011 Acquisition
On January 5, 2011, the Operating Company, StoneMor North Carolina LLC, a North Carolina limited liability company and StoneMor North Carolina Subsidiary LLC, a North Carolina limited liability company, each a wholly-owned subsidiary of the Company (collectively the Buyer), entered into an Asset Purchase and Sale Agreement (the 1st Quarter Purchase Agreement) with Heritage Family Services, Inc., a North Carolina corporation and an individual (collectively the Seller).
Pursuant to the 1st Quarter Purchase Agreement, the Buyer acquired three cemeteries in North Carolina, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $1.7 million in cash.
The table below reflects the Companys final assessment of the fair value of net assets acquired, the purchase price and the resulting goodwill from the purchase.
Final | ||||
Assessment | ||||
Assets: |
||||
Accounts receivable |
$ | 97 | ||
Cemetery property |
1,710 | |||
Merchandise trusts, restricted, at fair value |
880 | |||
Perpetual care trusts, restricted, at fair value |
344 | |||
Property and equipment |
332 | |||
Other assets |
100 | |||
|
|
|||
Total assets |
3,463 | |||
|
|
|||
Liabilities: |
||||
Deferred margin |
795 | |||
Merchandise liabilities |
734 | |||
Deferred tax liabilities |
64 | |||
Perpetual care trust corpus |
344 | |||
|
|
|||
Total liabilities |
1,937 | |||
|
|
|||
Fair value of net assets acquired |
1,526 | |||
|
|
|||
Consideration paid |
1,700 | |||
|
|
|||
Goodwill from purchase |
$ | 174 | ||
|
|
The results of operations and pro forma results related to the acquisitions made in 2012 and 2011 are not material to the unaudited condensed consolidated financial statements taken as a whole.
First Quarter 2012 Contract Termination
During the third quarter of 2010, certain subsidiaries of the Company entered into a long-term operating agreement (the Operating Agreement) with the Archdiocese of Detroit (the Archdiocese) wherein the Company became the exclusive operator of certain cemeteries in Michigan owned by the Archdiocese. The Operating Agreement did not qualify as an acquisition for accounting purposes. However, the existing merchandise trust had been consolidated as a variable interest entity as the Company controlled and directly benefited from the operations of the merchandise trust. In addition, liabilities assumed were also recorded as of the contract date. As no consideration was paid in this transaction, the Company had recorded a deferred gain of approximately $3.1 million within deferred cemetery revenues, net, which represented the excess of the value of the merchandise trust over the liabilities assumed.
Effective March 31, 2012, the Company and the Archdiocese agreed to terminate the Operating Agreement. As of the termination date, the Company no longer operated these properties. All activity occurring after March 31, 2012 is the responsibility of the Archdiocese and the Company has no remaining obligation to fulfill any merchandise liabilities or responsibility to perform any obligations of the properties.
18
As part of the termination, the Company will receive a payment of approximately $2.1 million from the Archdiocese. Of this payment, 25% is due in April of 2012 and the remainder is due in quarterly installments over the next three years on the first day of July, October, January and April beginning July 1, 2012. The payment is subject to adjustment for expenses incurred by the Archdiocese for the period prior to March 31, 2012. Upon termination, the Company recognized a gain of $1.8 million, which is the amount by which the receivable from the Archdiocese exceeded the value of the net assets transferred to the Archdiocese.
14. | SEGMENT INFORMATION |
The Company is organized into five distinct reportable segments which are classified as Cemetery Operations Southeast, Cemetery Operations Northeast, Cemetery Operations West, Funeral Homes, and Corporate.
The Company has chosen this level of organization of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from other segments; b) the Company has organized its management personnel at these operational levels; and c) it is the level at which the Companys chief decision makers and other senior management evaluate performance.
The cemetery operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of the Companys customers differs in each of our regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.
The Companys Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the cemetery operations segments.
The Companys Corporate segment includes various home office selling and administrative expenses that are not allocable to the other operating segments.
19
Segment information is as follows:
As of and for the three months ended March 31, 2012:
Cemeteries | Funeral | |||||||||||||||||||||||||||
Southeast | Northeast | West | Homes | Corporate | Adjustment | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Sales |
$ | 20,880 | $ | 8,458 | $ | 10,031 | $ | | $ | | $ | (8,347 | ) | $ | 31,022 | |||||||||||||
Service and other |
9,528 | 6,575 | 7,523 | | | (3,998 | ) | 19,628 | ||||||||||||||||||||
Funeral home |
| | | 9,273 | | (336 | ) | 8,937 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenues |
30,408 | 15,033 | 17,554 | 9,273 | | (12,681 | ) | 59,587 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Costs and expenses |
||||||||||||||||||||||||||||
Cost of sales |
4,290 | 1,674 | 1,664 | | 3 | (1,211 | ) | 6,420 | ||||||||||||||||||||
Cemetery |
5,704 | 3,065 | 4,023 | | | | 12,792 | |||||||||||||||||||||
Selling |
7,025 | 3,136 | 3,212 | | 461 | (2,047 | ) | 11,787 | ||||||||||||||||||||
General and administrative |
3,623 | 1,526 | 2,044 | | | | 7,193 | |||||||||||||||||||||
Corporate overhead |
| | | | 6,603 | | 6,603 | |||||||||||||||||||||
Depreciation and amortization |
536 | 224 | 568 | 620 | 382 | | 2,330 | |||||||||||||||||||||
Funeral home |
| | | 6,799 | | (43 | ) | 6,756 | ||||||||||||||||||||
Acquisition related costs |
| | | | 331 | | 331 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
21,178 | 9,625 | 11,511 | 7,419 | 7,780 | (3,301 | ) | 54,212 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating profit |
$ | 9,230 | $ | 5,408 | $ | 6,043 | $ | 1,854 | $ | (7,780 | ) | $ | (9,380 | ) | $ | 5,375 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 487,479 | $ | 294,230 | $ | 386,786 | $ | 79,211 | $ | 27,255 | $ | | $ | 1,274,961 | ||||||||||||||
Amortization of cemetery property |
$ | 979 | $ | 560 | $ | 294 | $ | | $ | | $ | 18 | $ | 1,851 | ||||||||||||||
Long lived asset additions |
$ | 3,963 | $ | 549 | $ | 470 | $ | 59 | $ | 412 | $ | | $ | 5,453 | ||||||||||||||
Goodwill |
$ | 7,471 | $ | | $ | 11,948 | $ | 17,220 | $ | | $ | | $ | 36,639 |
20
As of and for the three months ended March 31, 2011:
Cemeteries | Funeral | |||||||||||||||||||||||||||
Southeast | Northeast | West | Homes | Corporate | Adjustment | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Sales |
$ | 18,743 | $ | 7,969 | $ | 10,091 | $ | | $ | 2 | $ | (12,277 | ) | $ | 24,528 | |||||||||||||
Service and other |
8,360 | 5,962 | 8,815 | | | (5,766 | ) | 17,371 | ||||||||||||||||||||
Funeral home |
| | | 7,480 | | (148 | ) | 7,332 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenues |
27,103 | 13,931 | 18,906 | 7,480 | 2 | (18,191 | ) | 49,231 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Costs and expenses |
||||||||||||||||||||||||||||
Cost of sales |
3,718 | 1,600 | 1,554 | | | (1,879 | ) | 4,993 | ||||||||||||||||||||
Cemetery |
4,951 | 3,070 | 4,065 | | | | 12,086 | |||||||||||||||||||||
Selling |
6,416 | 2,818 | 2,931 | | 583 | (3,204 | ) | 9,544 | ||||||||||||||||||||
General and administrative |
2,976 | 1,527 | 1,927 | | (3 | ) | | 6,427 | ||||||||||||||||||||
Corporate overhead |
| | | | 5,958 | | 5,958 | |||||||||||||||||||||
Depreciation and amortization |
331 | 214 | 509 | 397 | 995 | | 2,446 | |||||||||||||||||||||
Funeral home |
| | | 5,309 | | | 5,309 | |||||||||||||||||||||
Acquisition related costs |
| | | | 933 | | 933 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
18,392 | 9,229 | 10,986 | 5,706 | 8,466 | (5,083 | ) | 47,696 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating profit |
$ | 8,711 | $ | 4,702 | $ | 7,920 | $ | 1,774 | $ | (8,464 | ) | $ | (13,108 | ) | $ | 1,535 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 429,736 | $ | 290,298 | $ | 377,936 | $ | 48,354 | $ | 45,712 | $ | | $ | 1,192,036 | ||||||||||||||
Amortization of cemetery property |
$ | 753 | $ | 549 | $ | 179 | $ | | $ | | $ | (98 | ) | $ | 1,383 | |||||||||||||
Long lived asset additions |
$ | 2,940 | $ | 263 | $ | 1,263 | $ | 46 | $ | 112 | $ | | $ | 4,624 | ||||||||||||||
Goodwill |
$ | 629 | $ | | $ | 11,801 | $ | 5,897 | $ | | $ | | $ | 18,327 |
Results of individual business units are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to accounting principles generally accepted in the United States of America; therefore, the financial results of individual business units are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the business units. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Revenues and associated expenses are not deferred in accordance with SAB No. 104 therefore, the deferral of these revenues and expenses is provided in the adjustment column to reconcile the Companys managerial financial statements to those prepared in accordance with GAAP. Pre-need sales revenues included within the sales category consist primarily of the sale of burial lots, burial vaults, mausoleum crypts, grave markers and memorials, and caskets. Management accounting practices included in the Southeast, Northeast, and Western Regions reflect these pre-need sales when contracts are signed by the customer and accepted by the Company. Pre-need sales reflected in the consolidated financial statements, prepared in accordance with GAAP, recognize revenues for the sale of burial lots and mausoleum crypts when the product is constructed and at least 10% of the sales price is collected. With respect to the other products, the consolidated financial statements prepared under GAAP recognize sales revenues when the criteria for delivery under SAB No. 104 are met. These criteria include, among other things, purchase of the product, delivery and installation of the product in the ground, and transfer of title to the customer. In each case, costs are accrued in connection with the recognition of revenues; therefore, the consolidated financial statements reflect Deferred Cemetery Revenue, Net and Deferred Selling and Obtaining Costs on the balance sheet, whereas the Companys management accounting practices exclude these items.
15. | FAIR VALUE MEASUREMENTS |
The Fair Value Measurements and Disclosures topic of the ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy defined by this topic are described below.
Level 1: Quoted market prices available in active markets for identical assets or liabilities. The Company includes short-term investments, consisting primarily of money market funds, U.S. Government debt securities and publicly traded equity securities and mutual funds in its level 1 investments.
21
Level 2: Quoted prices in active markets for similar assets; quoted prices in non-active markets for identical or similar assets; inputs other than quoted prices that are observable. The Company includes U.S. state and municipal, corporate and other fixed income debt securities in its level 2 investments.
Level 3: Any and all pricing inputs that are generally unobservable and not corroborated by market data.
The following table allocates the Companys assets measured at fair value as of March 31, 2012 and December 31, 2011.
22
As of March 31, 2012
Merchandise Trust
Description |
Level 1 | Level 2 | Total | |||||||||
(in thousands) | ||||||||||||
Assets |
||||||||||||
Short-term investments |
$ | 33,340 | $ | | $ | 33,340 | ||||||
Fixed maturities: |
||||||||||||
U.S. government and federal agency |
| | | |||||||||
U.S. state and local government agency |
| 23 | 23 | |||||||||
Corporate debt securities |
| 10,121 | 10,121 | |||||||||
Other debt securities |
| 1,100 | 1,100 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturity investments |
| 11,244 | 11,244 | |||||||||
|
|
|
|
|
|
|||||||
Mutual funds - debt securities |
93,486 | | 93,486 | |||||||||
Mutual funds - equity securities - real estate sector |
26,503 | | 26,503 | |||||||||
Mutual funds - equity securities - energy sector |
6,265 | | 6,265 | |||||||||
Mutual funds - equity securities - MLPs |
21,057 | | 21,057 | |||||||||
Mutual funds - equity securities - other |
73,319 | | 73,319 | |||||||||
Equity securities |
||||||||||||
Preferred REITs |
9,471 | | 9,471 | |||||||||
Master limited partnerships |
41,819 | | 41,819 | |||||||||
Global equity securities |
23,702 | | 23,702 | |||||||||
Other invested assets |
| 7,596 | 7,596 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 328,962 | $ | 18,840 | $ | 347,802 | ||||||
|
|
|
|
|
|
Perpetual Care Trust
Description |
Level 1 | Level 2 | Total | |||||||||
(in thousands) | ||||||||||||
Assets |
||||||||||||
Short-term investments |
$ | 24,901 | $ | | $ | 24,901 | ||||||
Fixed maturities: |
||||||||||||
U.S. government and federal agency |
517 | | 517 | |||||||||
U.S. state and local government agency |
| 147 | 147 | |||||||||
Corporate debt securities |
| 22,824 | 22,824 | |||||||||
Other debt securities |
| 371 | 371 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturity investments |
517 | 23,342 | 23,859 | |||||||||
|
|
|
|
|
|
|||||||
Mutual funds - debt securities |
108,415 | | 108,415 | |||||||||
Mutual funds - equity securities - real estate sector |
16,661 | | 16,661 | |||||||||
Mutual funds - equity securities - energy sector |
15,331 | | 15,331 | |||||||||
Mutual funds - equity securities - MLPs |
14,374 | | 14,374 | |||||||||
Mutual funds - equity securities - other |
14,281 | | 14,281 | |||||||||
Equity securities |
||||||||||||
Preferred REITs |
20,202 | | 20,202 | |||||||||
Master limited partnerships |
28,247 | | 28,247 | |||||||||
Global equity securities |
748 | | 748 | |||||||||
Other invested assets |
| 484 | 484 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 243,677 | $ | 23,826 | $ | 267,503 | ||||||
|
|
|
|
|
|
23
As of December 31, 2011
Merchandise Trust
Description |
Level 1 | Level 2 | Total | |||||||||
(in thousands) | ||||||||||||
Assets |
||||||||||||
Short-term investments |
$ | 38,312 | $ | | $ | 38,312 | ||||||
Fixed maturities: |
||||||||||||
U.S. government and federal agency |
| | | |||||||||
U.S. state and local government agency |
| 23 | 23 | |||||||||
Corporate debt securities |
| 9,765 | 9,765 | |||||||||
Other debt securities |
| 1,100 | 1,100 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturity investments |
| 10,888 | 10,888 | |||||||||
|
|
|
|
|
|
|||||||
Mutual funds - debt securities |
67,421 | | 67,421 | |||||||||
Mutual funds - equity securities - real estate sector |
22,847 | | 22,847 | |||||||||
Mutual funds - equity securities - energy sector |
28,057 | | 28,057 | |||||||||
Mutual funds - equity securities - MLPs |
20,308 | | 20,308 | |||||||||
Mutual funds - equity securities - other |
70,076 | | 70,076 | |||||||||
Equity securities |
||||||||||||
Preferred REITs |
9,001 | | 9,001 | |||||||||
Master limited partnerships |
41,469 | | 41,469 | |||||||||
Global equity securities |
21,882 | | 21,882 | |||||||||
Other invested assets |
| 7,360 | 7,360 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 319,373 | $ | 18,248 | $ | 337,621 | ||||||
|
|
|
|
|
|
Perpetual Care Trust
Description |
Level 1 | Level 2 | Total | |||||||||
(in thousands) | ||||||||||||
Assets |
||||||||||||
Short-term investments |
$ | 22,607 | $ | | $ | 22,607 | ||||||
Fixed maturities: |
||||||||||||
U.S. government and federal agency |
513 | | 513 | |||||||||
U.S. state and local government agency |
| 147 | 147 | |||||||||
Corporate debt securities |
| 22,154 | 22,154 | |||||||||
Other debt securities |
| 371 | 371 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturity investments |
513 | 22,672 | 23,185 | |||||||||
|
|
|
|
|
|
|||||||
Mutual funds - debt securities |
60,806 | | 60,806 | |||||||||
Mutual funds - equity securities - real estate sector |
24,580 | | 24,580 | |||||||||
Mutual funds - equity securities - energy sector |
20,069 | | 20,069 | |||||||||
Mutual funds - equity securities - MLPs |
13,515 | | 13,515 | |||||||||
Mutual funds - equity securities - other |
41,334 | | 41,334 | |||||||||
Equity securities |
||||||||||||
Preferred REITs |
19,720 | | 19,720 | |||||||||
Master limited partnerships |
27,998 | | 27,998 | |||||||||
Global equity securities |
695 | | 695 | |||||||||
Other invested assets |
| 170 | 170 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 231,837 | $ | 22,842 | $ | 254,679 | ||||||
|
|
|
|
|
|
All level 2 assets are priced utilizing independent pricing services. There were no level 3 assets.
24
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
The words we, us, our, StoneMor, the Partnership, the Company and similar words, when used in a historical context prior to the closing of the initial public offering of StoneMor Partners L.P. on September 20, 2004, refer to Cornerstone Family Services, Inc. (Cornerstone), (and, after its conversion, CFSI LLC), and its subsidiaries and thereafter refer to StoneMor Partners L.P. and its subsidiaries.
This discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q (including the notes thereto).
Forward-Looking Statements
Certain statements contained in this Quarterly Report on Form 10-Q, including, but not limited to, information regarding the status and progress of our operating activities, the plans and objectives of our management, assumptions regarding our future performance and plans, and any financial guidance provided, as well as certain information in other filings with the SEC and elsewhere are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. The words believe, may, will, estimate, continue, anticipate, intend, project, expect, predict and similar expressions identify these forward-looking statements. These forward-looking statements are made subject to certain risks and uncertainties that could cause actual results to differ materially from those stated, including, but not limited to, the following: uncertainties associated with future revenue and revenue growth; the effect of the current economic downturn; the impact of our significant leverage on our operating plans; our ability to service our debt and pay distributions; the decline in the fair value of certain equity and debt securities held in our trusts; our ability to attract, train and retain an adequate number of sales people; uncertainties associated with the volume and timing of pre-need sales of cemetery services and products; increased use of cremation; changes in the death rate; changes in the political or regulatory environments, including potential changes in tax accounting and trusting policies; our ability to successfully implement a strategic plan relating to producing operating improvements, strong cash flows and further deleveraging; our ability to successfully compete in the cemetery and funeral home industry; uncertainties associated with the integration or anticipated benefits of our recent acquisitions or any future acquisitions; our ability to complete and fund additional acquisitions; our ability to maintain effective disclosure controls and procedures and internal control over financial reporting; the effects of cyber security attacks due to our significant reliance on information technology; uncertainties relating to the financial condition of third-party insurance companies that fund our pre-need funeral contracts; and various other uncertainties associated with the death care industry and our operations in particular.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2011, this Quarterly Report on Form 10-Q and our other reports filed with the SEC. We assume no obligation to update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.
Organization
We were organized on April 2, 2004 to own and operate the cemetery and funeral home business conducted by Cornerstone and its subsidiaries. On September 20, 2004, in connection with our initial public offering of common units representing limited partner interests, Cornerstone contributed to us substantially all of its assets, liabilities and businesses, and then converted into CFSI LLC, a limited liability company.
Cornerstone had been founded in 1999 by members of our management team and a private equity investment firm in order to acquire a group of 123 cemetery properties and 4 funeral homes. Since that time, Cornerstone, succeeded by us, has acquired additional cemeteries and funeral homes, entered into long term cemetery operating agreements, built funeral homes, and sold cemeteries and funeral homes, resulting in the operation of 271 cemeteries and 69 funeral homes.
Capitalization
On September 20, 2004, we completed our initial public offering. Since that time, we have completed additional follow on public offerings and debt offerings. Our most recent follow on public offering was on February 9, 2011.
Overview
Cemetery Operations
We are currently the second largest owner and operator of cemeteries in the United States. As of March 31, 2012, we operated 271 cemeteries in 26 states and Puerto Rico. We own 253 of these cemeteries, and we operate the remaining 18 under management or operating agreements with the nonprofit cemetery corporations that own the cemeteries. As a result of the agreements, other control arrangements and applicable accounting rules, as of March 31, 2012, we have treated 16 of these cemeteries as acquisitions for accounting purposes.
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We operate 2 cemeteries under long-term operating agreements that do not qualify as acquisitions for accounting purposes. As a result, we did not consolidate all of the existing assets and liabilities related to these cemeteries. We have consolidated the existing assets and liabilities of each of these cemeteries merchandise and perpetual care trusts as variable interest entities since we control and receive the benefits and absorb any losses from operating these trusts. Under these long-term operating agreements, which are subject to certain termination provisions, we are the exclusive operator of these cemeteries. We earn revenues related to sales of merchandise, services, and interment rights and incur expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, we will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. We have also recognized the existing merchandise liabilities assumed as part of these agreements.
We sell cemetery products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Revenues from cemetery operations accounted for approximately 85.0% and 85.1% of our revenues during the three months ended March 31, 2012 and 2011, respectively.
Our results of operations for our Cemetery Operations are determined primarily by the volume of sales of products and services and the timing of product delivery and performance of services. We derive our cemetery revenues primarily from:
| at-need sales of cemetery interment rights, merchandise and services, which we recognize as revenue when we have delivered the related merchandise or performed the service; |
| pre-need sales of cemetery interment rights, which we generally recognize as revenues when we have collected 10% of the sales price from the customer; |
| pre-need sales of cemetery merchandise, which we recognize as revenues when we satisfy the criteria specified below for delivery of the merchandise to the customer; |
| pre-need sales of cemetery services which we recognize as revenues when we perform the services for the customer; |
| investment income from assets held in our merchandise trust, which we recognize as revenues when we deliver the underlying merchandise or perform the underlying services and recognize the associated sales revenue as discussed above; |
| investment income from perpetual care trusts, excluding realized gains and losses on the sale of trust assets, which we recognize as revenues as the income is earned in the trust; and |
| other items, such as interest income on pre-need installment contracts and sales of land. |
The criteria for recognizing revenue related to the sale of cemetery merchandise is that such merchandise is delivered to our customer, which generally means that:
| the merchandise is complete and ready for installation; or |
| the merchandise is either installed or stored at an off-site location, at no additional cost to us, and specifically identified with a particular customer; and |
| the risks and rewards of ownership have passed to the customer. |
We generally satisfy these delivery criteria by purchasing the merchandise and either installing it on our cemetery property or storing it, at the customers request, in third-party warehouses, at no additional cost to us, until the time of need. With respect to burial vaults, we install the vaults rather than storing them to satisfy the delivery criteria. When merchandise is stored for a customer, we may issue a certificate of ownership to the customer to evidence the transfer to the customer of the risks and rewards of ownership.
Pre-need Sales
As previously noted, we do not recognize revenue on pre-need sales of merchandise and services until we have delivered the merchandise or performed the services. Accordingly, deferred revenues from pre-need sales and related merchandise trust earnings are reflected as a liability on our balance sheet in deferred cemetery revenues, net.
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Total deferred cemetery revenues, net, also includes deferred revenues from pre-need sales that were entered into by entities we acquired prior to the time we acquired them. This includes both those entities that we acquired at the time of the formation of Cornerstone and other subsequent acquisitions. Our profit margin on pre-need sales entered into by entities we subsequently acquired is generally less than our profit margin on other pre-need sales because, in accordance with industry practice at the time these acquired pre-need sales were made, none of the selling expenses were recognized at the time of sale. As a result, we are required to recognize all of the expenses (including deferred selling expenses) associated with these acquired pre-need sales when we recognize the revenues from that sale.
Pre-need products and services are typically sold on an installment basis. Subject to state law, these contracts are normally subject to cooling-off periods, generally between three and thirty days, during which the customer may elect to cancel the contract and receive a full refund of amounts paid. Also subject to applicable state law, we are generally permitted to retain the amounts already paid on contracts, including any amounts that were required to be deposited into trust, on contracts cancelled after the cooling-off period. Historical post cooling-off period cancellations total approximately 10% of our pre-need sales (based on contract dollar amounts). If the products and services purchased under a pre-need contract are needed for interment before payment has been made in full, generally the balance due must be immediately paid in full.
Contracts related to pre-need installment sales are usually for a period not to exceed 60 months, with payments of principal and interest required. Pre-need sales contracts normally contain provisions for both principal and interest. For those contracts that do not bear a market rate of interest, we impute such interest based upon the prime rate plus 150 basis points, which resulted in a rate of 4.75% for the three months ended March 31, 2012 and 2011.
We normally offer prepayment incentives to customers whose pre-need contracts are longer than 36 months and bear interest. If those customers pay their contracts in full in less than 12 months, we rebate the interest that we have collected from them. Even though this rebate policy reduces the amount of interest income we receive on our accounts receivable, the net effect is an increase in our immediate cash flow.
In certain cases, pre-need contracts will be cancelled before they are fully paid. In these circumstances, we are generally permitted to retain amounts already paid to us, including any amounts that were required to be deposited into trust. In certain other cases, the products and services purchased under a pre-need contract are needed for interment before payment has been made in full. In these cases, we are generally entitled to be immediately paid in full for any amounts still outstanding.
At-need Sales
Revenue on at-need merchandise sales is deferred until the time that such merchandise is delivered. The lag between the contract origination and delivery is normally minimal. At-need sales of products and services are generally required to be paid for in full at the time of sale. At that time, we will deposit amounts, as legally required, into our perpetual care trusts. We are not required to deposit any amounts into merchandise trusts for products or services that have already been delivered.
Expenses
We analyze and categorize our operating expenses as follows:
1. Cost of goods sold and selling expenses
Cost of goods sold reflects the actual cost of purchasing products and performing services. Sales of cemetery lots and interment rights, whether at-need or pre-need, typically have a lower cost of goods sold than other merchandise that we sell.
Selling expenses consist of salesperson and sales management payroll costs, including selling commissions, bonuses and employee benefits. We self-insure medical expenses of our employees up to certain individual and aggregate limits over which we have stop-loss insurance coverage. Our self-insurance policy may result in variability in our future operating expenses. Selling expenses also includes other costs of obtaining product and service sales, such as advertising, marketing, postage and telephone.
Direct costs associated with pre-need sales of cemetery merchandise and services, such as sales commissions and cost of goods sold, are reflected in the balance sheet in deferred selling and obtaining costs and deferred cemetery revenues, net, respectively and are expensed as the merchandise is delivered or the services are performed. Indirect costs, such as marketing and advertising costs, are expensed in the period in which they are incurred.
2. Cemetery Expenses
Cemetery expenses represent the cost to maintain and repair our cemetery properties and consist primarily of labor and equipment, utilities, real estate taxes and other maintenance items. Repairs necessary to maintain our cemeteries are expensed as they are incurred. Other maintenance costs required over the long term to maintain the operating capacity of our cemeteries, such as to build roads and install sprinkler systems, are capitalized.
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3. General and administrative expenses
General and administrative expenses, which do not include corporate overhead, primarily includes personnel costs, insurance and other costs necessary to maintain our cemetery offices.
4. Depreciation and amortization
We depreciate our property and equipment on a straight-line basis over their estimated useful lives.
5. Acquisition related costs
Acquisition related costs which include legal fees and other third party costs incurred in acquisition related activities are expensed as incurred.
Funeral Home Operations
As of March 31, 2012, we owned and operated 69 funeral homes. These properties are located in eighteen states and Puerto Rico. Thirty-nine of our funeral homes are located on the grounds of cemeteries that we own.
We derive revenues at our funeral homes from the sale of funeral home merchandise, including caskets and related funeral merchandise, and services, including removal and preparation of remains, the use of our facilities for visitation, worship and performance of funeral services and transportation services. We sell these services and merchandise almost exclusively at the time of need utilizing salaried licensed funeral directors. Funeral home revenues accounted for approximately 15.0% of our revenues during the three months ended March 31, 2012 as compared to 14.9% during the same periods last year.
Pursuant to state law, a portion of proceeds received from pre-need funeral service contracts is put into trust while amounts used to defray the initial administrative costs are not. All investment earnings generated by the assets in the trust (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed. The balance of the amounts in these trusts is included within the merchandise trusts above.
We generally include revenues from pre-need casket sales in the results of our cemetery operations. However, some states require that caskets be sold by funeral homes, and revenues from casket sales in those states are included in our funeral home results.
Our funeral home operating expenses consist primarily of compensation to our funeral directors, day to day costs of managing the business and the cost of caskets.
Corporate
We incur fixed costs for corporate overhead primarily for centralized functions, such as payroll, accounting, collections and professional fees. We also incur expenses relating to reporting requirements under U.S. federal securities laws and certain other additional expenses of being a public company.
2012 Developments
Significant business developments for the three months ended March 31, 2012 include the following:
| Effective March 31, 2012, we and the Archdiocese of Detroit terminated an operating agreement where we had been the exclusive operator of three cemeteries in Michigan. All activity occurring after March 31, 2012 is the responsibility of the Archdiocese and we have no remaining obligations under this agreement. Upon termination, we recognized a gain of $1.8 million which is the amount by which payments owed to us from the Archdiocese exceeded the value of the net assets transferred back to the Archdiocese. |
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| On January 19, 2012, we amended our Credit Agreement. See Liquidity and Capital Resources for further discussion. |
Current Market Conditions and Economic Developments
In the third quarter of 2011, the markets took a downturn over fears of a European debt crisis. During the fourth quarter of 2011, there was some improvement in the markets and this improvement continued into the first quarter of 2012. As a result, as of March 31, 2012, the aggregate market value of our investments exceeded their amortized cost in both our merchandise and perpetual care trusts. As of March 31, 2012 the market value of the assets in our merchandise trust exceeded their amortized cost by 0.3%, an improvement from December 31, 2011 when the ratio of market value to the amortized cost of these assets was 97.7%. As of March 31, 2012 and December 31, 2011, the market value of the assets in our perpetual care trust exceeded their amortized cost by 5.2% and 0.7%, respectively.
As of March 31, 2012, the majority of our long-term debt consists of $150.0 million in Senior Notes due in 2017 and $51.1 million of borrowings on our Credit Facility which expires in 2017. We also have an unused line of $78.9 million under our Credit Facility.
The value of pre-need and at-need contracts written has not deteriorated and the aggregate values of contracts written were $61.0 million for the three months ended March 31, 2012 as compared to $56.9 million during the same period last year.
Impact on Our Ability to Meet Our Debt Covenants
Current market conditions have not negatively impacted our ability to meet our significant debt covenants. These covenants specifically relate to a certain measure of profitability (the Profitability Measure) and certain coverage and leverage ratios as defined in the Credit Agreement described below.
The Profitability Measure is primarily related to the current period value of contracts written, investment income from the merchandise and perpetual care trusts, and current expenses incurred. The revenue recognition rules that we must follow for GAAP purposes is not considered.
We have two primary debt covenants that are dependent upon our financial results, the leverage ratio and the consolidated debt service coverage ratio. The leverage ratio relates to the ratio of consolidated debt to the Profitability Measure. Our leverage ratio was 3.13 at March 31, 2012 as opposed to a maximum allowed ratio of 3.65. The consolidated debt service coverage ratio relates to the ratio of Consolidated EBITDA to Consolidated Debt Service. Our consolidated debt service coverage ratio was 3.54 at March 31, 2012 as opposed to a minimum allowed ratio of 2.50.
Segment Reporting and Related Information
The Company is organized into five distinct reportable segments which are classified as Cemetery OperationsSoutheast, Cemetery OperationsNortheast, Cemetery OperationsWest, Funeral Homes, and Corporate.
We chose this level of organization and disaggregation of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from each other; b) we have organized our management personnel at these operational levels; and c) this is the level at which our chief decision makers and other senior management evaluate performance.
The Cemetery Operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of our customers differs in each of our regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.
Our Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the Cemetery Operations segments.
Our Corporate segment includes various home office selling and administrative expenses that are not allocable to the other operating segments.
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Critical Accounting Policies and Estimates
The unaudited condensed consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America. The preparation of these financial statements required us to make estimates, judgments and assumptions that affected the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods (see Note 1 to the unaudited condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require managements most difficult, subjective and complex judgment. These critical accounting policies are discussed in the Managements Discussion and Analysis of Financial Condition and Results of Operations section of our 2011 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2011 Form 10-K.
Results of Operations Segments
Three Months Ended March 31, 2012 Compared to Three Months Ended March 31, 2011
Cemetery Segments
Our cemetery operations are disaggregated into three different geographically based segments. We have chosen this level of disaggregation due to the fact that a) each reportable segment has unique characteristics that set it apart from each other; b) we have organized our management personnel at these operational levels; and c) this is the level at which our chief decision makers and other senior management evaluate performance.
We account for and analyze the results of operations for each of these segments on a basis of accounting that is different from generally accepted accounting principals. We reconcile these non-GAAP accounting results of operations to GAAP based amounts at the consolidated level. This reconciliation is included in Note 14 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.
The method of accounting we utilize to analyze our overall results of operations, including segment results, provides for a production based view of our business. Under the production based view, we recognize revenues at their contract value at the point in time in which the contract is written, less a historic cancellation reserve. All related costs are expensed in the period the contract is recognized as revenue. In contrast, GAAP requires that we defer all revenues, and the direct costs associated with these revenues, until we meet certain delivery and performance requirements. The nature of our business is such that there is no meaningful relationship between the time that elapses from the date a contract is executed and the date the underlying merchandise is delivered or the service, delivery and performance requirements are met. Further, certain factors affecting this time period, such as weather and supplier issues, are out of our control. As a result, during a period of growth, operating profits as defined by GAAP will tend to lag behind operating profits on a production based view because of the required deferral of revenues. Our performance based view ignores these delays and presents results based upon the underlying value of contracts written. We believe this is the most reliable indicator of our performance for a given period as the value of contracts written less a historical cancellation reserve reflects the economic value added during a given period of time. Accordingly, the ensuing segment discussion is on a basis of accounting that differs from generally accepted accounting principles. See Note 1 to the consolidated financial statements included in the Annual Report on Form 10-K for the fiscal year ended December 31, 2011 for a more detailed discussion of our accounting policies under GAAP.
Cemetery Operations Southeast
In 2011 we made several acquisitions in our Cemetery Operations Southeast segment. Of these acquisitions, 6 occurred during the third quarter of 2011 and 5 occurred during the fourth quarter of 2011. Therefore, the results of operations for these properties have no impact on the three months ended March 31, 2011, but are included in the three months ended March 31, 2012. These additions are contributing the majority of the increase in revenues and costs and expenses for this segment.
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The table below compares the results of operations for our Cemetery Operations Southeast for the three months ended March 31, 2012 to the same period last year:
Three months ended March 31, | ||||||||||||||||
2012 | 2011 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 30,408 | $ | 27,103 | $ | 3,305 | 12.2 | % | ||||||||
Total costs and expenses |
21,178 | 18,392 | 2,786 | 15.1 | % | |||||||||||
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Operating profit |
$ | 9,230 | $ | 8,711 | $ | 519 | 6.0 | % | ||||||||
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Revenues
Revenues for Cemetery Operations Southeast were $30.4 million for the three months ended March 31, 2012, an increase of $3.3 million, or 12.2%, compared to $27.1 million during the same period last year.
The increase was related to an overall increase in the value of contracts written, with an increase of $1.6 million in the value of pre-need contracts and $0.8 million in the value of at-need contracts. In addition, we had an increase of $0.4 million in income from our trusts.
Total costs and expenses
Total costs and expenses for Cemetery Operations Southeast were $21.2 million for the three months ended March 31, 2012, an increase of $2.8 million, or 15.1%, compared to $18.4 million during the same period last year.
The increase was primarily related to:
| A $0.6 million increase in cost of goods sold. This was attributable to the corresponding increase in the value of contracts written. |
| A $0.6 million increase in selling expenses. This was primarily attributable to an increase of $0.4 million in labor costs and $0.3 million in commission related expenses, offset by a decrease of $0.1 million in advertising costs. |
| A $0.8 million increase in cemetery expenses. The increase was primarily due to increases of $0.6 million in labor costs, $0.1 million in repair and maintenance costs and $0.1 million in utility and fuel costs. |
| A $0.6 million increase in general and administrative expense primarily due to increases of $0.4 million in labor costs, $0.1 million in insurance costs and $0.1 million in professional fees. |
| A $0.2 million increase in depreciation. |
Cemetery Operations Northeast
The table below compares the results of operations for our Cemetery Operations Northeast for the three months ended March 31, 2012 to the same period last year:
Three months ended March 31, | ||||||||||||||||
2012 | 2011 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 15,033 | $ | 13,931 | $ | 1,102 | 7.9 | % | ||||||||
Total costs and expenses |
9,625 | 9,229 | 396 | 4.3 | % | |||||||||||
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Operating profit |
$ | 5,408 | $ | 4,702 | $ | 706 | 15.0 | % | ||||||||
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Revenues
Revenues for Cemetery Operations Northeast were $15.0 million for the three months ended March 31, 2012, an increase of $1.1 million, or 7.9%, compared to $13.9 million during the same period last year.
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The increase was related in part to an overall increase in the value of contracts written, with an increase of $0.7 million in the value of pre-need contracts being offset with a decrease in of $0.3 million in the value of at-need contracts written. In addition, we had an increase of $0.7 million in income from our trusts.
Total costs and expenses
Total costs and expenses for Cemetery Operations Northeast were $9.6 million for the three months ended March 31, 2012, an increase of $0.4 million, or 4.3%, compared to $9.2 million during the same period last year.
The increase was primarily related to:
| A $0.1 million increase in cost of goods sold. This was attributable to the corresponding increase in the value of contracts written. |
| A $0.3 million increase in selling expenses. This was primarily attributable to increases of $0.1 million in labor costs, $0.1 million in commission related expenses and $0.1 million in advertising costs. |
Cemetery Operations West
In 2011 we made 3 acquisitions in our Cemetery Operations West segment. These acquisitions occurred during the second quarter of 2011. Therefore, the results of operations for these properties have no impact on the three months ended March 31, 2011, but are included in the three months ended March 31, 2012. These additions are contributing an increase of approximately $0.2 million to revenues and $0.2 million to costs and expenses for this segment.
The table below compares the results of operations for our Cemetery Operations West for the three months ended March 31, 2012 to the same period last year:
Three months ended March 31, | ||||||||||||||||
2012 | 2011 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 17,554 | $ | 18,906 | $ | (1,352 | ) | -7.2 | % | |||||||
Total costs and expenses |
11,511 | 10,986 | 525 | 4.8 | % | |||||||||||
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Operating profit |
$ | 6,043 | $ | 7,920 | $ | (1,877 | ) | -23.7 | % | |||||||
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Revenues
Revenues for Cemetery Operations West were $17.6 million for the three months ended March 31, 2012, a decrease of $1.3 million, or 7.2%, compared to $18.9 million during the same period last year.
Almost all of the decrease was driven by a decrease in income from our trusts. There was a small increase in the value of contracts written with an increase of $0.3 million in the value of at-need contracts written being offset by a decrease of $0.2 million in the value of pre-need contracts written.
Total costs and expenses
Total costs and expenses for Cemetery Operations West were $11.5 million for the three months ended March 31, 2012, an increase of $0.5 million, or 4.8%, compared to $11.0 million during the same period last year.
The increase was primarily related to:
| A $0.1 million increase in the cost of goods sold. |
| A $0.3 million increase in selling expense. This was primarily attributable to increases of $0.1 million in commission related expenses and $0.2 million in advertising, telephone and telemarketing costs. |
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| A $0.1 million increase in general and administrative expenses. The increase was primarily due to increases in insurance costs and general office costs. |
Funeral Home Segment
In 2011 we acquired 12 funeral homes. Of these acquisitions, 4 occurred during the second quarter of 2011, 4 occurred during the third quarter of 2011 and 4 occurred during the fourth quarter of 2011. Therefore, the results of operations for these properties have no impact on the three months ended March 31, 2011, but are included in the three months ended March 31, 2012. These additions are contributing just over 90% of the increase to revenues and 80% of the increase to costs and expenses for this segment.
The table below compares the results of operations for our Funeral Home segment for the three months ended March 31, 2012 as compared to the same period last year:
Three months ended March 31, | ||||||||||||||||
2012 | 2011 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 9,273 | $ | 7,480 | $ | 1,793 | 24.0 | % | ||||||||
Total costs and expenses |
7,419 | 5,706 | 1,713 | 30.0 | % | |||||||||||
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Operating profit |
$ | 1,854 | $ | 1,774 | $ | 80 | 4.5 | % | ||||||||
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Revenues
Revenues for the Funeral Home segment were $9.3 million for the three months ended March 31, 2012, an increase of $1.8 million, or 24.0%, compared to $7.5 million during the same period last year.
The increase was primarily attributable to a $0.6 million increase in pre-need revenues, a $0.8 million increase in at-need revenues and a $0.4 million increase in other revenues.
Total costs and expenses
Total costs and expenses for the Funeral Home segment were $7.4 million for the three months ended March 31, 2012, an increase of $1.7 million, or 30.0%, compared to $5.7 million during the same period last year.
The increase was primarily attributable to an increase of $0.9 million in personnel expenses, $0.2 in merchandise costs, $0.2 million in facility costs and $0.1 million in depreciation expense, with the remainder attributable to various increases in general and administrative and other expense categories.
Corporate Segment
Amounts allocated to the Corporate segment include each of the following:
| Miscellaneous selling, cemetery and general administrative expenses that are not allocable to other operating segments. |
| Various home office and other expenses. These expenses equal the total corporate expenses as shown on the face of the income statement. |
| Certain depreciation and amortization expenses. |
| Acquisition related costs. |
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The table below details expenses incurred by the Corporate segment for the three months ended March 31, 2012 and for the same period last year:
Three months ended March 31, | ||||||||||||||||
2012 | 2011 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Selling, cemetery and general and administrative expenses |
$ | 464 | $ | 580 | $ | (116 | ) | -20.0 | % | |||||||
Depreciation and amortization |
382 | 995 | (613 | ) | -61.6 | % | ||||||||||
Acquisition related costs |
331 | 933 | (602 | ) | -64.5 | % | ||||||||||
Corporate expenses |
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Corporate personnel expenses |
3,148 | 2,764 | 384 | 13.9 | % | |||||||||||
Other corporate expenses |
3,455 | 3,194 | 261 | 8.2 | % | |||||||||||
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Total corporate overhead |
6,603 | 5,958 | 645 | 10.8 | % | |||||||||||
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Total corporate expenses |
$ | 7,780 | $ | 8,466 | $ | (686 | ) | -8.1 | % | |||||||
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Selling, cemetery and general administrative expenses allocated to the Corporate segment were $0.5 million for the three months ended March 31, 2012, a decrease of $0.1 million, or 20.0% compared to $0.6 million during the same period last year.
Total corporate overhead was $6.6 million for the three months ended March 31, 2012, an increase of $0.6 million, or 10.8% compared to $6.0 million during the same period last year. The increase was primarily attributable to an increase of $0.4 million in labor costs, $0.1 million in advertising and $0.1 million in other corporate expenses.
Reconciliation of Segment Results of Operations to Consolidated Results of Operations
As discussed in the segment sections of this Managements Discussion and Analysis of Financial Condition and Results of Operations, cemetery revenues and their associated costs as reported at the segment level are not deferred until such time that we meet the delivery component for revenue recognition.
Periodic consolidated revenues reflect the amount of total merchandise and services which were delivered during the period. Accordingly, period over period changes to revenues can be impacted by:
| Changes in the value of contracts written and other revenues generated during a period that are delivered in their period of origin and are recognized as revenue and not deferred as of the end of their period of origination. |
| Changes in merchandise and services that are delivered during a period that had been originated during a prior period. |
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The table below analyzes results of operations and the changes therein for the three months ended March 31, 2012 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/ or changes in the timing of when merchandise and services were delivered:
Three months ended | Three months ended | |||||||||||||||||||||||||||||||
March 31, 2012 | March 31, 2011 | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Revenues | Segment Results (non-GAAP) |
Non-segment Results |
GAAP Results |
Segment Results (non-GAAP) |
Non-segment Results |
GAAP Results |
Change in GAAP results ($) |
Change in GAAP results (%) |
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Pre-need cemetery revenues |
$ | 29,842 | $ | (7,096 | ) | $ | 22,746 | $ | 27,820 | $ | (10,408 | ) | $ | 17,412 | $ | 5,334 | 30.6 | % | ||||||||||||||
At-need cemetery revenues |
20,432 | (1,128 | ) | 19,304 | 19,645 | (2,328 | ) | 17,317 | 1,987 | 11.5 | % | |||||||||||||||||||||
Investment income from trusts |
9,864 | (4,383 | ) | 5,481 | 10,290 | (5,521 | ) | 4,769 | 712 | 14.9 | % | |||||||||||||||||||||
Interest income |
1,938 | | 1,938 | 1,543 | | 1,543 | 395 | 25.6 | % | |||||||||||||||||||||||
Funeral home revenues |
9,273 | (336 | ) | 8,937 | 7,480 | (148 | ) | 7,332 | 1,605 | 21.9 | % | |||||||||||||||||||||
Other cemetery revenues |
919 | 262 | 1,181 | 644 | 214 | 858 | 323 | 37.6 | % | |||||||||||||||||||||||
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Total revenues |
72,268 | (12,681 | ) | 59,587 | 67,422 | (18,191 | ) | 49,231 | 10,356 | 21.0 | % | |||||||||||||||||||||
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Costs and expenses |
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Cost of goods sold |
7,631 | (1,211 | ) | 6,420 | 6,872 | (1,879 | ) | 4,993 | 1,427 | 28.6 | % | |||||||||||||||||||||
Cemetery expense |
12,792 | | 12,792 | 12,086 | | 12,086 | 706 | 5.8 | % | |||||||||||||||||||||||
Selling expense |
13,834 | (2,047 | ) | 11,787 | 12,748 | (3,204 | ) | 9,544 | 2,243 |