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 September 30, 2014
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 a 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 October 31, 2014 was 29,132,874.
Page | ||||||
Part I |
Financial Information | |||||
Item 1. |
Financial Statements (unaudited) | 1 | ||||
Item 2. |
Managements Discussion and Analysis of Financial Condition and Results of Operations | 31 | ||||
Item 3. |
Quantitative and Qualitative Disclosures About Market Risk | 54 | ||||
Item 4. |
Controls and Procedures | 56 | ||||
Part II |
Other Information | |||||
Item 1. |
Legal Proceedings | 56 | ||||
Item 1A. |
Risk Factors | 56 | ||||
Item 2. |
Unregistered Sales of Equity Securities and Use of Proceeds | 57 | ||||
Item 3. |
Defaults Upon Senior Securities | 57 | ||||
Item 4. |
Mine Safety Disclosures | 57 | ||||
Item 5. |
Other Information | 57 | ||||
Item 6. |
Exhibits | 58 | ||||
Signatures | 59 |
Part I Financial Information
Item 1. | Financial Statements |
StoneMor Partners L.P.
Condensed Consolidated Balance Sheet
(in thousands)
(unaudited)
September 30, 2014 |
December 31, 2013 |
|||||||
Assets |
||||||||
Current assets: |
||||||||
Cash and cash equivalents |
$ | 22,175 | $ | 12,175 | ||||
Accounts receivable, net of allowance |
55,463 | 55,415 | ||||||
Prepaid expenses |
6,535 | 3,622 | ||||||
Other current assets |
23,784 | 22,667 | ||||||
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Total current assets |
107,957 | 93,879 | ||||||
Long-term accounts receivable, net of allowance |
86,478 | 78,367 | ||||||
Cemetery property |
341,178 | 316,469 | ||||||
Property and equipment, net of accumulated depreciation |
100,746 | 85,007 | ||||||
Merchandise trusts, restricted, at fair value |
491,641 | 431,556 | ||||||
Perpetual care trusts, restricted, at fair value |
348,950 | 311,771 | ||||||
Deferred financing costs, net of accumulated amortization |
7,124 | 8,308 | ||||||
Deferred selling and obtaining costs |
94,853 | 87,998 | ||||||
Deferred tax assets |
42 | 42 | ||||||
Goodwill |
57,128 | 48,737 | ||||||
Intangible assets |
67,945 | 9,655 | ||||||
Other assets |
5,161 | 2,554 | ||||||
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Total assets |
$ | 1,709,203 | $ | 1,474,343 | ||||
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Liabilities and partners capital |
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Current liabilities: |
||||||||
Accounts payable and accrued liabilities |
$ | 40,831 | $ | 37,269 | ||||
Accrued interest |
4,944 | 1,512 | ||||||
Current portion, long-term debt |
3,373 | 2,916 | ||||||
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Total current liabilities |
49,148 | 41,697 | ||||||
Other long-term liabilities |
1,342 | 1,527 | ||||||
Obligation for lease and management agreements, net |
8,594 | | ||||||
Long-term debt |
265,831 | 289,016 | ||||||
Deferred cemetery revenues, net |
634,805 | 579,993 | ||||||
Deferred tax liabilities |
13,106 | 12,407 | ||||||
Merchandise liability |
153,511 | 130,412 | ||||||
Perpetual care trust corpus |
348,950 | 311,771 | ||||||
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Total liabilities |
1,475,287 | 1,366,823 | ||||||
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Commitments and contingencies |
||||||||
Partners capital (deficit) |
||||||||
General partner deficit |
(4,132 | ) | (2,137 | ) | ||||
Common partners, 29,132 and 21,377 units outstanding as of September 30, 2014 and December 31, 2013, respectively |
238,048 | 109,657 | ||||||
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Total partners capital |
233,916 | 107,520 | ||||||
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Total liabilities and partners capital |
$ | 1,709,203 | $ | 1,474,343 | ||||
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See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
1
StoneMor Partners L.P.
Condensed Consolidated Statement of Operations
(in thousands, except per unit data)
(unaudited)
Three months ended September 30, |
Nine months ended September 30, |
|||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenues: |
||||||||||||||||
Cemetery |
||||||||||||||||
Merchandise |
$ | 37,812 | $ | 28,265 | $ | 98,452 | $ | 83,586 | ||||||||
Services |
14,971 | 11,051 | 37,760 | 33,422 | ||||||||||||
Investment and other |
13,152 | 11,850 | 42,418 | 34,098 | ||||||||||||
Funeral home |
||||||||||||||||
Merchandise |
4,752 | 4,266 | 14,770 | 13,736 | ||||||||||||
Services |
7,487 | 6,107 | 20,694 | 18,731 | ||||||||||||
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Total revenues |
78,174 | 61,539 | 214,094 | 183,573 | ||||||||||||
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Costs and expenses: |
||||||||||||||||
Cost of goods sold (exclusive of depreciation shown separately below): |
||||||||||||||||
Perpetual care |
1,898 | 1,418 | 5,110 | 4,199 | ||||||||||||
Merchandise |
7,164 | 5,684 | 20,106 | 16,905 | ||||||||||||
Cemetery expense |
18,076 | 14,507 | 47,546 | 42,700 | ||||||||||||
Selling expense |
16,494 | 11,692 | 42,544 | 35,134 | ||||||||||||
General and administrative expense |
9,808 | 7,902 | 26,333 | 23,382 | ||||||||||||
Corporate overhead (including $265 and $348 in unit-based compensation for the three months ended September 30, 2014 and 2013, and $802 and $1,038 for the nine months ended September 30, 2014 and 2013, respectively) |
8,392 | 7,997 | 22,394 | 21,657 | ||||||||||||
Depreciation and amortization |
3,112 | 2,378 | 7,993 | 7,159 | ||||||||||||
Funeral home expense |
||||||||||||||||
Merchandise |
1,441 | 1,573 | 4,691 | 4,798 | ||||||||||||
Services |
5,522 | 4,914 | 15,023 | 14,239 | ||||||||||||
Other |
3,396 | 2,494 | 9,367 | 8,044 | ||||||||||||
Acquisition related costs, net of recoveries |
451 | 243 | 2,040 | 901 | ||||||||||||
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Total cost and expenses |
75,754 | 60,802 | 203,147 | 179,118 | ||||||||||||
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Operating profit |
2,420 | 737 | 10,947 | 4,455 | ||||||||||||
Gain on sale of funeral home |
244 | | 244 | | ||||||||||||
Gain on acquisition |
| 2,530 | 412 | 2,530 | ||||||||||||
Gain on settlement agreement, net |
| | 888 | 12,261 | ||||||||||||
Gain on sale of other assets |
| | | 155 | ||||||||||||
Loss on early extinguishment of debt |
| | | 21,595 | ||||||||||||
Interest expense |
5,268 | 5,193 | 15,990 | 15,788 | ||||||||||||
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Net loss before income taxes |
(2,604 | ) | (1,926 | ) | (3,499 | ) | (17,982 | ) | ||||||||
Income tax expense (benefit) |
664 | (442 | ) | (522 | ) | (2,489 | ) | |||||||||
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Net loss |
$ | (3,268 | ) | $ | (1,484 | ) | $ | (2,977 | ) | $ | (15,493 | ) | ||||
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General partners interest in net loss for the period |
$ | (44 | ) | $ | (26 | ) | $ | (49 | ) | $ | (284 | ) | ||||
Limited partners interest in net loss for the period |
$ | (3,224 | ) | $ | (1,458 | ) | $ | (2,928 | ) | $ | (15,209 | ) | ||||
Net loss per limited partner unit (basic and diluted) |
$ | (.11 | ) | $ | (.07 | ) | $ | (.11 | ) | $ | (.73 | ) | ||||
Weighted average number of limited partners units outstanding - basic and diluted |
29,018 | 21,351 | 25,712 | 20,814 | ||||||||||||
Distributions declared per unit |
$ | .610 | $ | .600 | $ | 1.810 | $ | 1.785 |
See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.
2
StoneMor Partners L.P.
Condensed Consolidated Statement of
Partners Capital (Deficit)
(in thousands)
(unaudited)
Partners Capital (Deficit) | ||||||||||||
Common Unit Holders |
General Partner |
Total | ||||||||||
Balance, December 31, 2013 |
$ | 109,657 | $ | (2,137 | ) | $ | 107,520 | |||||
Proceeds from public offerings |
120,345 | | 120,345 | |||||||||
Issuance of common units |
54,899 | | 54,899 | |||||||||
Compensation related to units awards |
802 | | 802 | |||||||||
Net loss |
(2,928 | ) | (49 | ) | (2,977 | ) | ||||||
Cash distributions |
(43,351 | ) | (1,946 | ) | (45,297 | ) | ||||||
Unit distributions |
(1,376 | ) | | (1,376 | ) | |||||||
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Balance, September 30, 2014 |
$ | 238,048 | $ | (4,132 | ) | $ | 233,916 | |||||
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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 nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
Operating activities: |
||||||||
Net loss |
$ | (2,977 | ) | $ | (15,493 | ) | ||
Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||
Cost of lots sold |
7,181 | 6,047 | ||||||
Depreciation and amortization |
7,993 | 7,159 | ||||||
Unit-based compensation |
802 | 1,038 | ||||||
Accretion of debt discounts |
2,127 | 1,676 | ||||||
Gain on acquisition |
(412 | ) | (2,530 | ) | ||||
Gain on sale of other assets |
| (155 | ) | |||||
Gain on sale of funeral home |
(244 | ) | | |||||
Loss on early extinguishment of debt |
| 21,595 | ||||||
Changes in assets and liabilities that provided (used) cash: |
||||||||
Accounts receivable |
(2,958 | ) | (2,148 | ) | ||||
Allowance for doubtful accounts |
2,647 | (1,163 | ) | |||||
Merchandise trust fund |
(26,547 | ) | (23,711 | ) | ||||
Prepaid expenses |
(2,913 | ) | (1,926 | ) | ||||
Other current assets |
(1,019 | ) | (3,906 | ) | ||||
Other assets |
(1,397 | ) | 3,573 | |||||
Accounts payable and accrued and other liabilities |
7,382 | 8,340 | ||||||
Deferred selling and obtaining costs |
(6,855 | ) | (8,884 | ) | ||||
Deferred cemetery revenue |
45,475 | 51,181 | ||||||
Deferred taxes (net) |
(1,254 | ) | (3,260 | ) | ||||
Merchandise liability |
(3,793 | ) | (537 | ) | ||||
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Net cash provided by operating activities |
23,238 | 36,896 | ||||||
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Investing activities: |
||||||||
Cash paid for cemetery property |
(4,692 | ) | (4,210 | ) | ||||
Purchase of subsidiaries |
(54,000 | ) | (14,100 | ) | ||||
Consideration for lease and management agreements |
(53,000 | ) | | |||||
Cash paid for property and equipment |
(6,430 | ) | (5,366 | ) | ||||
Proceeds from divestiture of funeral home |
297 | | ||||||
Proceeds from sales of other assets |
| 155 | ||||||
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Net cash used in investing activities |
(117,825 | ) | (23,521 | ) | ||||
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Financing activities: |
||||||||
Cash distributions |
(45,297 | ) | (38,653 | ) | ||||
Additional borrowings on long-term debt |
63,365 | 237,002 | ||||||
Repayments of long-term debt |
(86,788 | ) | (218,036 | ) | ||||
Proceeds from public offerings |
120,345 | 38,377 | ||||||
Proceeds from issuance of common units |
53,237 | | ||||||
Fees paid related to early extinguishment of debt |
| (14,920 | ) | |||||
Cost of financing activities |
(275 | ) | (5,107 | ) | ||||
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Net cash provided by (used in) financing activities |
104,587 | (1,337 | ) | |||||
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Net increase in cash and cash equivalents |
10,000 | 12,038 | ||||||
Cash and cash equivalents - Beginning of period |
12,175 | 7,946 | ||||||
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Cash and cash equivalents - End of period |
$ | 22,175 | $ | 19,984 | ||||
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Supplemental disclosure of cash flow information: |
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Cash paid during the period for interest |
$ | 10,303 | $ | 10,756 | ||||
Cash paid during the period for income taxes |
$ | 3,536 | $ | 3,315 | ||||
Non-cash investing and financing activities: |
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Acquisition of assets by financing |
$ | 251 | $ | 107 | ||||
Issuance of limited partner units for cemetery acquisition |
$ | | $ | 3,718 | ||||
Acquisition of asset by assumption of directly related liability |
$ | 8,368 | $ | 3,924 |
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 September 30, 2014, the Partnership operated 303 cemeteries in 27 states and Puerto Rico, of which 272 are owned and 31 are operated under management or operating agreements. The Partnership also owned and operated 98 funeral homes in 19 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 September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 includes 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, 2013 condensed consolidated balance sheet data was derived from audited financial statements included in the Companys 2013 Annual Report on Form 10-K (2013 Form 10-K) and has been adjusted to include the effects of retrospective adjustments resulting from the Companys 2013 first quarter acquisition, but does not include all disclosures required by GAAP, which are presented in the Companys 2013 Form 10-K.
The Companys presentation of its intangible assets within its consolidated balance sheet has changed. These assets were previously presented within the Other assets caption and are now presented as the separate caption, Intangible assets. The change in presentation is due to the recording of an intangible asset resulting from the transaction closed with the Archdiocese of Philadelphia in the second quarter of 2014. Refer to Note 13 for a detailed discussion on this transaction. This change in presentation has no effect on any other previously reported amounts, including Total assets.
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 31 cemeteries under long-term lease, 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 15 cemeteries under long-term lease, operating or management agreements that do not qualify as acquisitions for accounting purposes, including 13 cemeteries related to the transaction with the Archdiocese of Philadelphia that closed in the second quarter of 2014. 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 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 lease, operating or management 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.
New Accounting Pronouncements
In the second quarter of 2014, the Financial Accounting Standards Board issued Update No. 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), which supersedes the revenue recognition requirements in Topic 605Revenue Recognition and most industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects
5
the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently in the process of evaluating the impact of this update.
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 trusts and perpetual care trusts, allowance for cancellations, unit-based compensation, merchandise liability, deferred sales revenue, deferred margin, deferred merchandise trust investment earnings, deferred obtaining costs, assets and liabilities obtained via business combinations 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.
2. | LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE |
Long-term accounts receivable, net, consists of the following:
As of | ||||||||
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Customer receivables |
$ | 185,724 | $ | 174,062 | ||||
Unearned finance income |
(20,038 | ) | (20,005 | ) | ||||
Allowance for contract cancellations |
(23,745 | ) | (20,275 | ) | ||||
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141,941 | 133,782 | |||||||
Less: current portion, net of allowance |
55,463 | 55,415 | ||||||
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Long-term portion, net of allowance |
$ | 86,478 | $ | 78,367 | ||||
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Activity in the allowance for contract cancellations is as follows:
For the nine months ended September 30, | ||||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
BalanceBeginning of period |
$ | 20,275 | $ | 17,933 | ||||
Provision for cancellations |
17,080 | 14,791 | ||||||
Charge-offsnet |
(13,610 | ) | (12,964 | ) | ||||
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BalanceEnd of period |
$ | 23,745 | $ | 19,760 | ||||
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6
3. | CEMETERY PROPERTY |
Cemetery property consists of the following:
As of | ||||||||
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Developed land |
$ | 78,914 | $ | 72,458 | ||||
Undeveloped land |
172,530 | 163,997 | ||||||
Mausoleum crypts and lawn crypts |
79,706 | 70,216 | ||||||
Other land |
10,028 | 9,798 | ||||||
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Total |
$ | 341,178 | $ | 316,469 | ||||
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4. | PROPERTY AND EQUIPMENT |
Major classes of property and equipment follow:
As of | ||||||||
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Building and improvements |
$ | 106,829 | $ | 91,575 | ||||
Furniture and equipment |
48,490 | 44,828 | ||||||
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155,319 | 136,403 | |||||||
Less: accumulated depreciation |
(54,573 | ) | (51,396 | ) | ||||
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Property and equipmentnet |
$ | 100,746 | $ | 85,007 | ||||
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Depreciation expense was $2.5 million and $6.5 million for the three and nine months ended September 30, 2014, respectively, as compared to $2.0 million and $5.6 million during the same periods last year.
5. | MERCHANDISE TRUSTS |
At September 30, 2014, 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 primarily in securities that are currently paying dividends or distributions. These investments include Master Limited Partnerships and global equity securities; |
| Fixed maturity debt securities issued by various corporate entities; |
| Fixed maturity debt securities issued by U.S. states and local government agencies; and |
| Assets acquired related to the second quarter 2014 acquisition of twelve cemeteries and nine funeral homes from Service Corporation International (SCI) (see Note 13). According to the terms of the agreement, SCI was required to liquidate the holdings of the related trusts upon closing and forward the proceeds to the Company as soon as practicable. As of September 30, 2014, the Company had not received some of these amounts. Accordingly, the assets not received are shown in a single line item in the disclosures below as Assets acquired via acquisition and the cost basis and fair value of such assets are based upon preliminary estimates that the Company is required to make in accordance with Accounting Topic 805. |
7
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 $8.1 million and $8.3 million of investments held in trust by the West Virginia Funeral Directors Association at September 30, 2014 and December 31, 2013, 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 their fair value.
8
The cost and market value associated with the assets held in merchandise trusts at September 30, 2014 and December 31, 2013 were as follows:
As of September 30, 2014 |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
Short-term investments |
$ | 51,328 | $ | | $ | | $ | 51,328 | ||||||||
Fixed maturities: |
||||||||||||||||
U.S. State and local government agency |
75 | | | 75 | ||||||||||||
Corporate debt securities |
9,438 | 27 | (245 | ) | 9,220 | |||||||||||
Other debt securities |
7,153 | | (8 | ) | 7,145 | |||||||||||
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|
|
|
|
|||||||||
Total fixed maturities |
16,666 | 27 | (253 | ) | 16,440 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mutual funds - debt securities |
132,090 | 973 | (4,763 | ) | 128,300 | |||||||||||
Mutual funds - equity securities |
168,644 | 13,846 | (721 | ) | 181,769 | |||||||||||
Equity securities |
86,649 | 5,392 | (1,536 | ) | 90,505 | |||||||||||
Other invested assets |
5,460 | | (220 | ) | 5,240 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total managed investments |
$ | 460,837 | $ | 20,238 | $ | (7,493 | ) | $ | 473,582 | |||||||
|
|
|
|
|
|
|
|
|||||||||
Assets acquired via acquisition |
9,933 | | | 9,933 | ||||||||||||
West Virginia Trust Receivable |
8,126 | | | 8,126 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 478,896 | $ | 20,238 | $ | (7,493 | ) | $ | 491,641 | |||||||
|
|
|
|
|
|
|
|
As of December 31, 2013 |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
Short-term investments |
$ | 46,518 | $ | | $ | | $ | 46,518 | ||||||||
Fixed maturities: |
||||||||||||||||
Corporate debt securities |
9,105 | 162 | (96 | ) | 9,171 | |||||||||||
Other debt securities |
7,336 | | (12 | ) | 7,324 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
16,441 | 162 | (108 | ) | 16,495 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mutual funds - debt securities |
117,761 | 729 | (7,157 | ) | 111,333 | |||||||||||
Mutual funds - equity securities |
144,249 | 16,610 | (3,329 | ) | 157,530 | |||||||||||
Equity securities |
81,520 | 5,267 | (1,092 | ) | 85,695 | |||||||||||
Other invested assets |
5,809 | | (86 | ) | 5,723 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total managed investments |
$ | 412,298 | $ | 22,768 | $ | (11,772 | ) | $ | 423,294 | |||||||
|
|
|
|
|
|
|
|
|||||||||
West Virginia Trust Receivable |
8,262 | | | 8,262 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 420,560 | $ | 22,768 | $ | (11,772 | ) | $ | 431,556 | |||||||
|
|
|
|
|
|
|
|
The contractual maturities of debt securities as of September 30, 2014 were as follows:
As of September 30, 2014 |
Less than 1 year |
1 year through 5 years |
6 years through 10 years |
More than 10 years |
||||||||||||
(in thousands) | ||||||||||||||||
U.S. State and local government agency |
$ | 75 | $ | | $ | | $ | | ||||||||
Corporate debt securities |
18 | 4,309 | 4,871 | 22 | ||||||||||||
Other debt securities |
891 | 6,254 | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
$ | 984 | $ | 10,563 | $ | 4,871 | $ | 22 | ||||||||
|
|
|
|
|
|
|
|
9
An aging of unrealized losses on the Companys investments in fixed maturities and equity securities at September 30, 2014 and December 31, 2013 is presented below:
Less than 12 months | 12 Months or more | Total | Number of Securities in Loss Position |
|||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||
As of September 30, 2014 |
Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||||||
(in thousands, except number of securities data) | ||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
Corporate debt securities |
$ | 6,165 | $ | 196 | $ | 1,165 | $ | 49 | $ | 7,330 | $ | 245 | 52 | |||||||||||||||
Other debt securities |
1,738 | 2 | 4,772 | 6 | 6,510 | 8 | 11 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total fixed maturities |
7,903 | 198 | 5,937 | 55 | 13,840 | 253 | 63 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Mutual funds - debt securities |
20,466 | 340 | 87,823 | 4,423 | 108,289 | 4,763 | 32 | |||||||||||||||||||||
Mutual funds - equity securities |
6,443 | 335 | 4,337 | 386 | 10,780 | 721 | 16 | |||||||||||||||||||||
Equity securities |
24,415 | 1,013 | 3,174 | 523 | 27,589 | 1,536 | 108 | |||||||||||||||||||||
Other invested assets |
| | 5,098 | 220 | 5,098 | 220 | 1 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 59,227 | $ | 1,886 | $ | 106,369 | $ | 5,607 | $ | 165,596 | $ | 7,493 | 220 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months | 12 Months or more | Total | Number of Securities in Loss Position |
|||||||||||||||||||||||||
As of December 31, 2013 |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||||||
(in thousands, except number of securities data) | ||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
Corporate debt securities |
$ | 2,812 | $ | 43 | $ | 1,249 | $ | 53 | $ | 4,061 | $ | 96 | 29 | |||||||||||||||
Other debt securities |
5,329 | 8 | 995 | 4 | 6,324 | 12 | 14 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total fixed maturities |
8,141 | 51 | 2,244 | 57 | 10,385 | 108 | 43 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Mutual funds - debt securities |
87,113 | 6,724 | 6,485 | 433 | 93,598 | 7,157 | 13 | |||||||||||||||||||||
Mutual funds - equity securities |
29,993 | 2,444 | 4,217 | 885 | 34,210 | 3,329 | 2 | |||||||||||||||||||||
Equity securities |
25,379 | 1,031 | 1,492 | 61 | 26,871 | 1,092 | 33 | |||||||||||||||||||||
Other invested assets |
2,266 | 86 | | | 2,266 | 86 | 1 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 152,892 | $ | 10,336 | $ | 14,438 | $ | 1,436 | $ | 167,330 | $ | 11,772 | 92 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 220 and 92 securities in an unrealized loss position in merchandise trusts as of September 30, 2014 and December 31, 2013, respectively, of which 37 and 19, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluates the severity of the impairment and length of time that a security has been in a loss position and has concluded there is no other than temporary impairment. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.
A reconciliation of the Companys merchandise trust activities for the nine months ended September 30, 2014 is presented below:
Fair Value at 12/31/2013 |
Contributions | Distributions | Interest/ Dividends |
Capital Gain Distributions |
Realized Gain/ Loss |
Taxes | Fees | Unrealized Change in Fair Value |
Fair Value at 9/30/2014 |
|||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
$ 431,556 |
67,190 | (35,725 | ) | 12,822 | 36 | 18,749 | (2,521 | ) | (2,215 | ) | 1,749 | $ | 491,641 |
The Company made net contributions into the trusts of approximately $31.5 million during the nine months ended September 30, 2014. During the nine months ended September 30, 2014, purchases and sales of securities available for sale included in trust investments were approximately $342.2 million and $354.4 million, respectively. Contributions include $32.1 million of assets that were acquired through acquisitions during the nine months ended September 30, 2014.
10
Other-Than-Temporary Impairments of Trust Assets
During the nine months ended September 30, 2014, the Company determined that there were 2 securities with an aggregate cost basis of approximately $0.2 million and an aggregate fair value of approximately $0.1 million, resulting in an impairment of $0.1 million, wherein such impairment was considered to be other-than-temporary. During the three months ended September 30, 2013, the Company determined that there were 3 securities with an aggregate cost basis of approximately $1.2 million and an aggregate fair value of approximately $0.9 million, resulting in an impairment of $0.3 million, wherein such impairment was considered to be other-than-temporary. During the nine months ended September 30, 2013, the Company determined that there were 7 securities with an aggregate cost basis of approximately $2.6 million and an aggregate fair value of approximately $1.6 million, resulting in an impairment of $1.0 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed.
During the three months ended September 30, 2014, the Company determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts.
6. | PERPETUAL CARE TRUSTS |
At September 30, 2014, 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 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.
11
The cost and market value associated with the assets held in perpetual care trusts at September 30, 2014 and December 31, 2013 were as follows:
As of September 30, 2014 |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
Short-term investments |
$ | 27,257 | $ | | $ | | $ | 27,257 | ||||||||
Fixed maturities: |
||||||||||||||||
U.S. Government and federal agency |
100 | 17 | | 117 | ||||||||||||
U.S. State and local government agency |
57 | | | 57 | ||||||||||||
Corporate debt securities |
24,693 | 213 | (450 | ) | 24,456 | |||||||||||
Other debt securities |
371 | | | 371 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
25,221 | 230 | (450 | ) | 25,001 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mutual funds - debt securities |
121,292 | 385 | (3,165 | ) | 118,512 | |||||||||||
Mutual funds - equity securities |
100,950 | 25,285 | (136 | ) | 126,099 | |||||||||||
Equity securities |
32,395 | 19,971 | (285 | ) | 52,081 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 307,115 | $ | 45,871 | $ | (4,036 | ) | $ | 348,950 | |||||||
|
|
|
|
|
|
|
|
|||||||||
As of December 31, 2013 |
Cost | Gross Unrealized Gains |
Gross Unrealized Losses |
Fair Value |
||||||||||||
(in thousands) | ||||||||||||||||
Short-term investments |
$ | 16,686 | $ | | $ | | $ | 16,686 | ||||||||
Fixed maturities: |
||||||||||||||||
U.S. Government and federal agency |
302 | 70 | | 372 | ||||||||||||
Corporate debt securities |
24,378 | 340 | (208 | ) | 24,510 | |||||||||||
Other debt securities |
371 | | | 371 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
25,051 | 410 | (208 | ) | 25,253 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Mutual funds - debt securities |
121,493 | 466 | (5,946 | ) | 116,013 | |||||||||||
Mutual funds - equity securities |
93,243 | 22,521 | (171 | ) | 115,593 | |||||||||||
Equity securities |
25,580 | 12,283 | (19 | ) | 37,844 | |||||||||||
Other invested assets |
172 | 210 | | 382 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total |
$ | 282,225 | $ | 35,890 | $ | (6,344 | ) | $ | 311,771 | |||||||
|
|
|
|
|
|
|
|
The contractual maturities of debt securities as of September 30, 2014 were as follows:
As of September 30, 2014 |
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 |
$ | | $ | 117 | $ | | $ | | ||||||||
U.S. State and local government agency |
57 | | | | ||||||||||||
Corporate debt securities |
752 | 12,934 | 10,734 | 36 | ||||||||||||
Other debt securities |
371 | | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total fixed maturities |
$ | 1,180 | $ | 13,051 | $ | 10,734 | $ | 36 | ||||||||
|
|
|
|
|
|
|
|
12
An aging of unrealized losses on the Companys investments in fixed maturities and equity securities at September 30, 2014 and December 31, 2013 held in perpetual care trusts is presented below:
Less than 12 months | 12 Months or more | Total | Number of Securities in Loss Position |
|||||||||||||||||||||||||
Fair | Unrealized | Fair | Unrealized | Fair | Unrealized | |||||||||||||||||||||||
As of September 30, 2014 |
Value | Losses | Value | Losses | Value | Losses | ||||||||||||||||||||||
(in thousands, except number of securities data) | ||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
Corporate debt securities |
$ | 12,494 | $ | 338 | $ | 2,974 | $ | 112 | $ | 15,468 | $ | 450 | 69 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total fixed maturities |
12,494 | 338 | 2,974 | 112 | 15,468 | 450 | 69 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Mutual funds - debt securities |
24,706 | 277 | 82,887 | 2,888 | 107,593 | 3,165 | 29 | |||||||||||||||||||||
Mutual funds - equity securities |
7,197 | 64 | 1,230 | 72 | 8,427 | 136 | 7 | |||||||||||||||||||||
Equity securities |
3,311 | 281 | 647 | 4 | 3,958 | 285 | 65 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 47,708 | $ | 960 | $ | 87,738 | $ | 3,076 | $ | 135,446 | $ | 4,036 | 170 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months | 12 Months or more | Total | Number of Securities in Loss Position |
|||||||||||||||||||||||||
As of December 31, 2013 |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
Fair Value |
Unrealized Losses |
||||||||||||||||||||||
(in thousands, except number of securities data) | ||||||||||||||||||||||||||||
Fixed maturities: |
||||||||||||||||||||||||||||
Corporate debt securities |
$ | 5,664 | $ | 93 | $ | 3,122 | $ | 115 | $ | 8,786 | $ | 208 | 29 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total fixed maturities |
5,664 | 93 | 3,122 | 115 | 8,786 | 208 | 29 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Mutual funds - debt securities |
93,473 | 4,781 | 16,367 | 1,165 | 109,840 | 5,946 | 13 | |||||||||||||||||||||
Mutual funds - equity securities |
1,185 | 171 | | | 1,185 | 171 | 1 | |||||||||||||||||||||
Equity securities |
513 | 19 | | | 513 | 19 | 3 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total |
$ | 100,835 | $ | 5,064 | $ | 19,489 | $ | 1,280 | $ | 120,324 | $ | 6,344 | 46 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There were 170 and 46 securities in an unrealized loss position in perpetual care trusts as of September 30, 2014 and December 31, 2013, respectively, of which 21 and 13, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluates the severity of the impairment and length of time that a security has been in a loss position and has concluded there is no other than temporary impairment. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.
A reconciliation of the Companys perpetual care trust activities for the nine months ended September 30, 2014 is presented below:
Fair Value at 12/31/2013 |
Contributions | Distributions | Interest/ Dividends |
Capital Gain Distributions |
Realized Gain/ Loss |
Taxes | Fees | Unrealized Change in Fair Value |
Fair Value at 9/30/2014 |
|||||||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||||||||||
$311,771 |
25,440 | (10,147 | ) | 10,795 | 2 | 615 | (347 | ) | (1,468 | ) | 12,289 | $ | 348,950 |
The Company made net contributions into the trusts of approximately $15.3 million during the nine months ended September 30, 2014. During the nine months ended September 30, 2014, purchases and sales of securities available for sale included in trust investments were approximately $124.1 million and $135.0 million, respectively. Contributions include $16.0 million of assets that were acquired through acquisitions during the nine months ended September 30, 2014.
13
Other-Than-Temporary Impairments of Trust Assets
During the nine months ended September 30, 2014, the Company determined that there were 2 securities with an aggregate cost basis of approximately $1.3 million and an aggregate fair value of approximately $0.8 million, resulting in an impairment of $0.5 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against the liability for perpetual care trust corpus.
During the three months ended September 30, 2014 and during the three and nine months ended September 30, 2013, the Company determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts.
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, 2013 |
$ | 6,174 | $ | | $ | 11,948 | $ | 30,615 | $ | 48,737 | ||||||||||
Goodwill acquired from acquisitions during the nine months ended September 30, 2014 |
3,643 | 2,903 | | 1,845 | 8,391 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Balance as of September 30, 2014 |
$ | 9,817 | $ | 2,903 | $ | 11,948 | $ | 32,460 | $ | 57,128 | ||||||||||
|
|
|
|
|
|
|
|
|
|
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. All of the intangible assets are subject to amortization. The major classes of intangible assets are as follows:
As of September 30, 2014 |
As of December 31, 2013 |
|||||||||||||||||||||||
Gross Carrying Amount |
Accumulated Amortization |
Net Intangible Asset |
Gross Carrying Amount |
Accumulated Amortization |
Net Intangible Asset |
|||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||
Amortized intangible assets: |
||||||||||||||||||||||||
Lease and management agreements |
$ | 59,758 | $ | (332 | ) | $ | 59,426 | $ | | $ | | $ | | |||||||||||
Underlying contract value |
6,239 | (819 | ) | 5,420 | 6,239 | (702 | ) | 5,537 | ||||||||||||||||
Non-compete agreements |
7,950 | (5,011 | ) | 2,939 | 7,950 | (4,003 | ) | 3,947 | ||||||||||||||||
Other intangible assets |
269 | (109 | ) | 160 | 269 | (98 | ) | 171 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Total intangible assets |
$ | 74,216 | $ | (6,271 | ) | $ | 67,945 | $ | 14,458 | $ | (4,803 | ) | $ | 9,655 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
On May 28, 2014, the Company and the Archdiocese of Philadelphia closed a transaction involving a lease agreement and a management agreement, pursuant to which the Company will operate 13 cemeteries in Pennsylvania for a term of 60 years, subject to certain termination provisions. Refer to Note 13 for a detailed discussion on this transaction. The Company recorded the underlying value of the lease and management agreements as a contract-based intangible asset at the present value of the consideration, less the fair value of net assets acquired. The discounted value will be amortized over the term of the agreements and was determined using an effective annual rate of 8.3%, which represents an estimate of the return an investor would require to make this type of investment in the Company over the rent payment period. The costs associated with obtaining the rights pursuant to these agreements were also capitalized and will be amortized over the life of the agreements.
14
8. | LONG-TERM DEBT |
The Company had the following outstanding debt:
As of | ||||||||
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
7.875% Senior Notes, due 2021 |
$ | 175,000 | $ | 175,000 | ||||
Revolving Credit Facility, due January 2017 |
91,402 | 114,002 | ||||||
Notes payableacquisition debt |
903 | 1,571 | ||||||
Notes payableacquisition non-competes |
2,891 | 3,945 | ||||||
Insurance and vehicle financing |
2,680 | 1,529 | ||||||
|
|
|
|
|||||
Total |
272,876 | 296,047 | ||||||
Less current portion |
3,373 | 2,916 | ||||||
Less unamortized bond and note payable discounts |
3,672 | 4,115 | ||||||
|
|
|
|
|||||
Long-term portion |
$ | 265,831 | $ | 289,016 | ||||
|
|
|
|
This note includes a summary of material terms of the Companys senior notes and revolving credit facility. For a more detailed description of the Companys long-term debt agreements, see the Companys 2013 Form 10-K.
7.875% Senior Notes due 2021
On May 28, 2013, the Company issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the Senior Notes). The Company pays 7.875% 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, commencing on December 1, 2013. The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the Prior Senior Notes) and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. The Company incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and will be amortized over the life of these notes. Based on trades made on September 30, 2014, the Company has estimated the fair value of its Senior Notes to be in excess of par and trading at a premium of 3.50%, which would imply a fair value of $181.1 million at September 30, 2014. The Senior Notes are valued using Level 2 inputs as defined by the Fair Value Measurements and Disclosures topic of the ASC in Note 15. As of September 30, 2014, the Company was in compliance with all applicable covenants of the Senior Notes.
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 Second Amended and Restated Credit Agreement, as amended. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the Credit Agreement or the amendments to the Credit Agreement, as applicable. The Credit Agreement was amended three times in 2013.
On May 22, 2014, the Company entered into the Fourth Amendment to the Credit Agreement. The Fourth Amendment increased the maximum Consolidated Leverage Ratio to 4.00 to 1.0 for any period and amended the definition of Consolidated EBITDA to, among other things, remove existing balance sheet adjustments and replace them with certain cash flow statement adjustments. The Fourth Amendment also contains certain conforming changes to reflect the Lenders consent to the closing of the transactions with the Archdiocese of Philadelphia and Service Corporation International, both of which took place in the second quarter of 2014 and are described in detail in Note 13.
As amended, the Company has a revolving credit facility (the Credit Facility) with a borrowing limit of $140.0 million, of which $91.4 million was outstanding at September 30, 2014, and a maturity date of January 19, 2017. The Credit Facility may be used to finance working capital requirements, Permitted Acquisitions and Capital Expenditures. The maximum Consolidated Leverage Ratio is 4.00 to 1.0 for any measurement period. The minimum Consolidated
15
Debt Service Coverage Ratio is 2.50 for any measurement period. The ranges of the Applicable Rates are 3.00%, 4.00%, and 0.800% for Base Rate Loans, Eurodollar Rate Loans and Letter of Credit Fees, and Commitment Fees, respectively, when the Consolidated Leverage Ratio is greater than or equal to 3.75 to 1.0. The Company is not allowed to permit Consolidated EBITDA for any measurement period to be less than the sum of (i) $57.8 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after March 31, 2013.
The amount of aggregate consideration the Company may pay for a Permitted Acquisition, without Required Lender approval, is $10.0 million on an individual basis and $50.0 million when aggregated with the total Aggregate Consideration paid by or on behalf of the Company for all other Permitted Acquisitions which closed within the immediately preceding 365 days.
The amounts outstanding under the Credit Facility bore interest at rates between 2.9% and 4.0% at September 30, 2014. 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 3.00% and 2.25% to 4.00%, 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 Facility approximates fair value as it consists of multiple current LIBOR borrowings with maturities of 90 days or less, with amounts that can be rolled-over or reborrowed at market rates. It is valued using Level 2 inputs.
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 Rate ranges from 0.375% to 0.800% 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 (and cause cross-default) which would have a material adverse effect on the Companys business, financial condition or results of operations. The Companys covenants include a certain measure of Consolidated EBITDA, a Consolidated Leverage Ratio and a Consolidated Debt Service Coverage Ratio. As of September 30, 2014, the Company was in compliance with all applicable financial covenants.
The Company routinely incurs debt financing costs and fees when borrowing under, or making amendments to, the Credit Facility. These costs and fees are deferred and are amortized over the life of the Credit Facility.
9. | INCOME TAXES |
As of September 30, 2014, the Companys taxable corporate subsidiaries had federal net operating loss carryforwards of approximately $194.3 million, which will begin to expire in 2019 and $238.2 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 bases and operating loss and tax credit carryforwards.
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.
16
The provision for income taxes for the three and nine months ended September 30, 2014 and 2013 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2014 and 2013, 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 Internal Revenue Service (IRS) audited the Companys federal income tax return for the year ended December 31, 2010. The scope of this audit included an audit of the Companys qualifying income. In order to be treated as a partnership for federal income tax purposes, at least 90% of the Companys gross income must be qualifying income. The IRS concluded its audit and notified the Company on April 11, 2013 that it was not proposing any adjustments to the return as filed.
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 2010 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 consolidated financial statements over the next twelve months.
10. | DEFERRED CEMETERY REVENUES, NET |
At September 30, 2014 and December 31, 2013, deferred cemetery revenues, net, consisted of the following:
As of | ||||||||
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
(in thousands) | ||||||||
Deferred cemetery revenue |
$ | 439,449 | $ | 403,250 | ||||
Deferred merchandise trust revenue |
102,097 | 88,730 | ||||||
Deferred merchandise trust unrealized gains (losses) |
12,745 | 10,996 | ||||||
Deferred pre-acquisition margin |
139,071 | 131,274 | ||||||
Deferred cost of goods sold |
(58,557 | ) | (54,257 | ) | ||||
|
|
|
|
|||||
Deferred cemetery revenues, net |
$ | 634,805 | $ | 579,993 | ||||
|
|
|
|
|||||
Deferred selling and obtaining costs |
$ | 94,853 | $ | 87,998 |
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.
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 September 30, 2014, 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 twenty five years and options to renew at varying terms. Expenses under these operating leases were $0.5 million and $1.7 million for the three and nine months ended September 30, 2014, respectively, as compared to $0.7 million and $2.0 million during the same periods last year.
17
At September 30, 2014, the operating leases will result in future payments in the following approximate amounts from January 1, 2015 and beyond:
(in thousands) | ||||
2015 |
$ | 1,712 | ||
2016 |
1,521 | |||
2017 |
1,373 | |||
2018 |
1,181 | |||
2019 |
1,031 | |||
Thereafter |
1,214 | |||
|
|
|||
Total |
$ | 8,032 | ||
|
|
Other
See Note 13 for a discussion of the Companys future commitments related to its agreements with the Archdiocese of Philadelphia.
12. | PARTNERS CAPITAL |
Unit-Based Compensation
The Company has issued to certain key employees, management, and directors 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 and nine months ended September 30, 2014 and 2013 are summarized in the table below:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in thousands) | (in thousands) | |||||||||||||||
Unit appreciation rights |
$ | 21 | $ | 137 | $ | 60 | $ | 416 | ||||||||
Restricted phantom units |
244 | 211 | 742 | 622 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total unit-based compensation expense |
$ | 265 | $ | 348 | $ | 802 | $ | 1,038 | ||||||||
|
|
|
|
|
|
|
|
As of September 30, 2014, there was approximately $0.2 million in non-vested unit appreciation rights expense outstanding. These unit appreciation rights will be expensed through 2018.
The diluted weighted average number of limited partners units outstanding presented on the unaudited condensed consolidated statement of operations does not include 180,959 and 179,929 units for the three and nine months ended September 30, 2014, respectively, and 306,723 and 318,134 units for the three and nine months ended September 30, 2013, respectively, as their effects would be anti-dilutive.
On September 10, 2014, the StoneMor Partners L.P. Long-Term Incentive Plan, as amended, expired pursuant to its terms. Outstanding awards under this plan continue in effect in accordance with their terms, but the Company is unable to grant new awards under this plan. Subject to unitholder approval, the board of directors of the general partner of the Company unanimously approved the StoneMor Partners L.P. 2014 Long-Term Incentive Plan effective September 24, 2014.
Other Unit Issuances
On February 27, 2014, the Company completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.2 million. The proceeds from the offering were used to pay down borrowings outstanding under the Credit Facility.
On April 1, 2014, the Company issued 15,363 common units in connection with Mr. Peter K. Grunebaums retirement from the Board of Directors of the Companys general partner. In connection with his service as a director, Mr. Grunebaum received restricted phantom units awards and was entitled to distribution equivalent rights accruing on restricted phantom units pursuant to the StoneMor Partners L.P. Long-Term Incentive Plan, as amended. Mr. Grunebaums restricted phantom units were settled for the same number of common units upon his retirement.
18
On May 21, 2014, the Company sold to American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (ACII), 2,255,947 common units in the Company at an aggregate purchase price of $55.0 million, or $24.38 per unit, pursuant to a Common Unit Purchase Agreement (the Common Unit Purchase Agreement), dated May 19, 2014, by and between the Company and ACII. The proceeds were used primarily to fund the up-front rent consideration for the transaction with the Archdiocese of Philadelphia that closed during the second quarter of 2014. Refer to Note 13 for a more detailed discussion on the transaction with the Archdiocese of Philadelphia.
Pursuant to the Common Unit Purchase Agreement, commencing with the quarter ended June 30 2014, ACII is entitled to receive distributions equal to those paid on common units generally. Through the quarterly distribution payable for the quarter ending June 30, 2018, such distributions may be paid in cash, common units issued to ACII in lieu of cash distributions (the Distribution Units), or a combination of cash and Distribution Units, as determined by the Company in its sole discretion. If the Company elects to pay distributions through the issuance of Distribution Units, the number of common units to be issued in connection with a quarterly distribution will be the quotient of (A) the amount of the quarterly distribution paid on the common units by (B) the volume-weighted average price of the common units for the thirty (30) trading days immediately preceding the date a quarterly distribution is declared with respect to the common units. Beginning with the quarterly distribution payable with respect to the quarter ending September 30, 2018, the common units purchased by ACII will receive cash distributions on the same basis as all other common units and the Company will no longer have the ability to elect to pay quarterly distributions in kind through the issuance of Distribution Units.
Under the Common Unit Purchase Agreement, the units purchased by ACII are also subject to a lock-up period (the Lock-Up Period) ending on July 1, 2018. During the Lock-Up Period, ACII may not directly or indirectly (a) offer for sale, sell, pledge or otherwise dispose of these units, (b) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of these units, or (c) publicly disclose the intention to do any of the foregoing. However, ACII may transfer the units to any affiliate or any investment fund or other entity controlled or managed by ACII who agrees to be bound by the terms of the Common Unit Purchase Agreement. Distribution Units are not subject to the Lock-Up Period.
On August 14, 2014, the Company issued 57,062 Distribution Units to ACII in lieu of a cash distribution of approximately $1.4 million.
On June 12, 2014, after the exercise of the underwriters over-allotment option, the Company completed a follow-on public offering of 2,990,000 common units at a price of $23.67 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.1 million. The proceeds from the offering were used to pay the purchase price related to the transaction with Service Corporation International, which closed in the second quarter of 2014, with the remainder used to pay down borrowings outstanding under the Credit Facility. Refer to Note 13 for a more detailed discussion of the acquisition.
During the nine months ended September 30, 2014 an additional 136,361 units were issued under the StoneMor Partners L.P. Long-Term Incentive Plan.
The number of common units outstanding was 29,131,835 and 21,377,102 as of September 30, 2014 and December 31, 2013, respectively.
13. | ACQUISITIONS |
First Quarter 2014 Acquisition
On January 16, 2014, certain subsidiaries of the Company (collectively the Buyer) entered into an Asset Purchase and Sale Agreement with Carriage Cemetery Services, Inc. (the Seller). Pursuant to the Agreement, the Buyer acquired one cemetery in Florida, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $0.2 million in cash.
19
The table below reflects the Companys preliminary assessment of the fair value of net assets acquired and the resulting gain on bargain purchase. These amounts may be retrospectively adjusted as additional information is received.
Preliminary | ||||
Assessment | ||||
(in thousands) | ||||
Assets: |
||||
Accounts receivable |
$ | 47 | ||
Cemetery property |
470 | |||
Property and equipment |
140 | |||
Merchandise trusts, restricted, at fair value |
2,607 | |||
Perpetual care trusts, restricted, at fair value |
691 | |||
|
|
|||
Total assets |
3,955 | |||
|
|
|||
Liabilities: |
||||
Deferred margin |
1,035 | |||
Merchandise liabilities |
956 | |||
Deferred tax liability |
641 | |||
Perpetual care trust corpus |
691 | |||
Other liabilities |
20 | |||
|
|
|||
Total liabilities |
3,343 | |||
|
|
|||
Fair value of net assets acquired |
612 | |||
|
|
|||
Consideration paid |
200 | |||
|
|
|||
Gain on bargain purchase |
$ | 412 | ||
|
|
Second Quarter 2014 Acquisition
On June 10, 2014, certain subsidiaries of the Company (collectively the Buyers) closed the transaction under the Asset Sale Agreements (the Agreements), with certain subsidiaries of Service Corporation International (collectively the Sellers) to acquire nine funeral homes, twelve cemeteries and certain related assets in Central Florida, North Carolina, Southeastern Pennsylvania and Virginia. In consideration for the net assets acquired, the Buyers paid the Sellers $53.8 million in cash. This amount is subject to post-closing adjustments dependent upon the actual amounts of accounts receivable, merchandise trusts net of merchandise liabilities and perpetual care trusts transferred.
The table below reflects the Companys preliminary assessment of the fair value of net assets acquired and the resulting goodwill from purchase. These amounts may be retrospectively adjusted as additional information is received. The acquired goodwill is recorded in the Companys Cemetery Operations Southeast, Cemetery Operations Northeast and Funeral Homes operating segments.
20
Preliminary | ||||
Assessment | ||||
(in thousands) | ||||
Assets: |
||||
Accounts receivable |
$ | 6,191 | ||
Cemetery property |
26,033 | |||
Property and equipment |
15,782 | |||
Merchandise trusts, restricted, at fair value |
29,512 | |||
Perpetual care trusts, restricted, at fair value |
15,350 | |||
Other assets |
1,408 | |||
|
|
|||
Total assets |
94,276 | |||
|
|
|||
Liabilities: |
||||
Deferred margin |
11,233 | |||
Merchandise liabilities |
20,918 | |||
Deferred tax liability |
1,315 | |||
Perpetual care trust corpus |
15,350 | |||
Other liabilities |
51 | |||
|
|
|||
Total liabilities |
48,867 | |||
|
|
|||
Fair value of net assets acquired |
45,409 | |||
|
|
|||
Consideration paid |
53,800 | |||
|
|
|||
Goodwill from purchase |
$ | 8,391 | ||
|
|
Agreements with the Archdiocese of Philadelphia
On May 28, 2014, certain subsidiaries of the Company (Tenant) and the Archdiocese of Philadelphia, an archdiocese governed by Canon Law of the Roman Catholic Church (Landlord) closed a Lease Agreement (the Lease) and a Management Agreement (the Management Agreement), pursuant to which Tenant will operate 13 cemeteries in Pennsylvania for a term of 60 years. The Company joined the Lease and the Management Agreement as a guarantor of all of Tenants obligations under this operating arrangement.
Landlord agreed to lease to Tenant eight cemetery sites in the Philadelphia area. The Lease granted Tenant a sole and exclusive license (the License) to maintain and construct improvements in the operation of the cemeteries and to sell burial rights and all related merchandise and services, subject to the terms and conditions of the Lease. The Management Agreement enabled Tenant, subject to certain closing conditions, to serve as the exclusive operator of the remaining five cemeteries. The Lease may be terminated pursuant to the terms of the Lease, including, but not limited to, by notice of termination given by Landlord to Tenant at any time during Lease year 11 (a Lease Year 11 Termination) or by either party due to the default or bankruptcy of the other party in accordance with the termination provisions of the Lease. If the Lease is terminated by Landlord or Tenant pursuant to the terms of the Lease, the Management Agreement will also be terminated.
At closing, Tenant paid to Landlord an up-front rental payment of $53.0 million (the Up-Front Rent). Tenant shall also pay to Landlord aggregate fixed rent of $36.0 million (the Fixed Rent) for the Cemeteries in the following amounts:
Lease Years 1-5 |
None | |
Lease Years 6-20 |
$1,000,000 per Lease Year | |
Lease Years 21-25 |
$1,200,000 per Lease Year | |
Lease Years 26-35 |
$1,500,000 per Lease Year | |
Lease Years 36-60 |
None |
The Fixed Rent for Lease Years 6 through 11 (the Deferred Fixed Rent) shall be deferred. If Landlord terminates the Lease pursuant to a Lease Year 11 Termination or Tenant terminates the Lease as a result of a Landlords default prior to the end of Lease Year 11 (collectively, a Covered Termination), the Deferred Fixed Rent shall be forfeited by Landlord and shall be retained by Tenant. If the Lease is not terminated by a Covered Termination, the Deferred Fixed Rent shall become due and payable 30 days after the end of Lease Year 11.
21
If Landlord terminates the Lease pursuant to a Lease Year 11 Termination, Landlord must repay to Tenant all $53.0 million of the Up-Front Rent. If the Lease is terminated for cause at any time, Landlord must repay to Tenant the unamortized portion of the Up-Front Rent: (i) based on a 60 year amortization schedule if terminated by Tenant due to Landlords default and (ii) based on a 30 year amortization schedule if terminated by Landlord due to Tenants default.
Generally, 51% of gross revenues from any source received by Tenant on account of the Cemeteries but unrelated to customary operations of the Cemeteries less Tenants and Landlords reasonable costs and expenses applicable to such unrelated activity shall be paid to Landlord as additional rent. In addition, Tenant shall have the right to request from time to time that Landlord sell (to a party that is independent and not an affiliate of StoneMor or any party that is a Tenant) all or portions of undeveloped land at the leased Cemeteries. If Landlord approves the sale of such undeveloped land, Tenant shall pay to Landlord, as additional rent, 51% of the net proceeds of any such sale.
The table below reflects the assets and liabilities recognized:
(in thousands) | ||||
Assets: |
||||
Accounts receivable |
$ | 1,610 | ||
Intangible asset |
59,758 | |||
|
|
|||
Total assets |
61,368 | |||
|
|
|||
Liabilities: |
||||
Obligation for lease and management agreements |
36,000 | |||
Discount on obligation for lease and management agreements |
(27,632 | ) | ||
|
|
|||
Obligation for lease and management agreements, net |
8,368 | |||
|
|
|||
Total liabilities |
8,368 | |||
|
|
|||
Total net assets |
$ | 53,000 | ||
|
|
The Company recorded the underlying value of the Lease and Management Agreements as a contract-based intangible asset at the present value of the consideration, less the fair value of net assets received, consisting of acquired accounts receivable. A liability of $8.4 million was also recorded for the present value of the Fixed Rent, which is equal to the $36.0 million gross amount due to the Archdiocese of Philadelphia in the future, net of a discount $27.6 million. The discounted values were determined using an effective annual rate of 8.3%, which represents an estimate of the return an investor would require to make this type of investment in the Company over the rent payment period.
First Quarter 2013 Acquisition
On February 19, 2013, StoneMor Florida Subsidiary LLC, a subsidiary of the Company, (the Buyer) entered into an Asset Purchase and Sale Agreement (the Seawinds Agreement) with several Florida limited liability companies and one individual (collectively the Seller). Pursuant to the Agreement, the Buyer acquired six funeral homes in Florida, including certain related assets, and assumed certain related liabilities.
In consideration for the net assets acquired, the Buyer paid the Seller $9.1 million in cash and issued 159,635 common units, which equates to approximately $3.6 million worth of common units under the terms of the Seawinds Agreement. The Buyer also issued an unsecured promissory note in the amount of $3.0 million that was payable on February 19, 2014 and bore interest at 5.0%. In addition, the Buyer will also pay an aggregate amount of $1.2 million in six equal annual installments commencing on February 19, 2014 in exchange for a non-compete agreement with the Seller. The non-compete agreement will be amortized over the 6 year term of the agreement.
The table below reflects the Companys final assessment of the fair value of net assets acquired and displays the adjustments made to the revised values reported at December 31, 2013. The Company obtained additional information in the first quarter of 2014 and has retrospectively adjusted these values as noted below. The resulting goodwill is recorded in the Companys Funeral Homes operating segment.
22
Revised | Final | |||||||||||
Assessment | Adjustments | Assessment | ||||||||||
(in thousands) | ||||||||||||
Assets: |
||||||||||||
Accounts receivable |
$ | 695 | $ | 311 | $ | 1,006 | ||||||
Property and equipment |
8,315 | | 8,315 | |||||||||
Merchandise trusts, restricted, at fair value |
4,853 | | 4,853 | |||||||||
Non-compete agreements |
1,927 | | 1,927 | |||||||||
|
|
|
|
|
|
|||||||
Total assets |
15,790 | 311 | 16,101 | |||||||||
|
|
|
|
|
|
|||||||
Liabilities: |
||||||||||||
Deferred margin |
2,419 | (1,592 | ) | 827 | ||||||||
Merchandise liabilities |
2,233 | 2,606 | 4,839 | |||||||||
Other liabilities |
164 | | 164 | |||||||||
|
|
|
|
|
|
|||||||
Total liabilities |
4,816 | 1,014 | 5,830 | |||||||||
|
|
|
|
|
|
|||||||
Fair value of net assets acquired |
10,974 | (703 | ) | 10,271 | ||||||||
|
|
|
|
|
|
|||||||
Consideration paidcash |
9,100 | | 9,100 | |||||||||
Consideration paidunits |
3,592 | | 3,592 | |||||||||
Fair value of note payable |
3,000 | | 3,000 | |||||||||
Fair value of debt assumed for non-compete agreement |
924 | | 924 | |||||||||
|
|
|
|
|
|
|||||||
Total consideration paid |
16,616 | | 16,616 | |||||||||
|
|
|
|
|
|
|||||||
Goodwill from purchase |
$ | 5,642 | $ | 703 | $ | 6,345 | ||||||
|
|
|
|
|
|
Third Quarter 2013 Acquisition
On August 1, 2013, certain subsidiaries of the Company (collectively the Buyer) entered into an Asset Purchase and Sale Agreement with Carriage Cemetery Services, Inc. (the Seller). Pursuant to the agreement, the Buyer acquired 1 cemetery in Virginia, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $5.0 million in cash.
The table below reflects the Companys final assessment of the fair value of net assets acquired and the resulting gain on bargain purchase.
Final | ||||
Assessment | ||||
(in thousands) | ||||
Assets: |
||||
Accounts receivable |
$ | 525 | ||
Cemetery property |
3,900 | |||
Property and equipment |
1,047 | |||
Merchandise trusts, restricted, at fair value |
5,461 | |||
Perpetual care trusts, restricted, at fair value |
5,888 | |||
|
|
|||
Total assets |
16,821 | |||
|
|
|||
Liabilities: |
||||
Merchandise liabilities |
1,252 | |||
Deferred margin |
1,356 | |||
Perpetual care trust corpus |
5,888 | |||
Other liabilities |
94 | |||
Deferred tax liability |
701 | |||
|
|
|||
Total liabilities |
9,291 | |||
|
|
|||
Fair value of net assets acquired |
7,530 | |||
|
|
|||
Consideration paid |
5,000 | |||
|
|
|||
Gain on bargain purchase |
$ | 2,530 | ||
|
|
23
If the acquisitions from 2014 and 2013 had been consummated at the beginning of the comparable prior annual reporting period, on a pro forma basis, for the three and nine months ended September 30, 2014 and 2013, consolidated revenues, consolidated net losses and net losses per limited partner unit (basic and diluted) would have been as follows:
Three months ended | Nine months ended | |||||||||||||||
September 30, | September 30, | |||||||||||||||
2014 | 2013 | 2014 | 2013 | |||||||||||||
(in thousands, except per unit data) | ||||||||||||||||
Revenue |
$ | 78,174 | $ | 69,616 | $ | 227,593 | $ | 208,327 | ||||||||
Net loss |
(3,268 | ) | (1,108 | ) | (2,625 | ) | (13,980 | ) | ||||||||
Net loss per limited partner unit (basic and diluted) |
$ | (.11 | ) | $ | (.04 | ) | $ | (.09 | ) | $ | (.53 | ) |
These pro forma results are unaudited and have been prepared for comparative purposes only and include certain adjustments such as increased interest on the acquisition of debt, changes in the timing of financing events and the recognition of a gain on acquisition occurring during 2014 in 2013 rather than in the current period. They do not purport to be indicative of the results of operations which actually would have resulted had the combinations been in effect at the beginning of the comparable prior annual reporting period or of future results of operations of the locations.
The properties acquired in 2014 have contributed $8.0 million and $10.3 million of revenue, for the three and nine months ended September 30, 2014, respectively, and $0.4 million of operating profit for both the three and nine months ended September 30, 2014. The properties acquired in 2013 have contributed $1.6 million and $4.3 million of revenue for the three and nine months ended September 30, 2014, respectively, and $0.2 million and $0.3 million of operating profit for the three and nine months ended September 30, 2014, respectively.
Second Quarter 2014 Settlement
During the nine months ended September 30, 2014, the Company received $1.5 million in cash proceeds related to the settlement of claims from locations acquired by the Company in 2010. Of this amount, $0.3 million is for the reimbursement of legal fees and is recorded as a recovery to corporate overhead and another $0.3 million has been accrued for contingent legal fees payable. A gain of $0.9 million has been recorded as gain on settlement agreement, net, on the unaudited condensed consolidated statement of operations for the proceeds received, net of legal fees.
First and Second Quarter 2013 Settlement
During the nine months ended September 30, 2013, the Company recovered $18.4 million, net of legal fees, costs, and contractual obligations related to the settlement of claims from locations that the Company acquired in 2010 and 2011. Of this amount, $6.5 million was contributed directly to the related perpetual care and merchandise trusts on the Companys behalf. $3.4 million of these direct payments represent a gain on settlement agreement on the unaudited condensed consolidated statement of operations due to an increase in the merchandise trusts not previously accrued for in purchase accounting.
The Company received $11.9 million in cash proceeds from the settlement. Of this amount, $1.7 million and $1.3 million are for the reimbursement of legal fees and are recorded as recoveries to corporate overhead and acquisition related costs, respectively. The remaining proceeds were recorded as a gain on settlement agreement on the unaudited condensed consolidated statement of operations. The total gain on settlement for the nine months ended September 30, 2013 was $12.3 million. Of the amounts noted above, $1.3 million, inclusive of a gain on settlement agreement of $0.9 million and $0.4 million of recovery of legal fees, was recognized during the first quarter of 2013.
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.
24
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 its 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.
Segment information is as follows:
As of and for the three months ended September 30, 2014:
Cemeteries | Funeral | |||||||||||||||||||||||||||
Southeast | Northeast | West | Homes | Corporate | Adjustment | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Sales |
$ | 22,653 | $ | 13,228 | $ | 11,512 | $ | | $ | | $ | (4,719 | ) | $ | 42,674 | |||||||||||||
Service and other |
10,097 | 11,040 | 8,633 | | | (6,509 | ) | 23,261 | ||||||||||||||||||||
Funeral home |
| | | 14,457 | | (2,218 | ) | 12,239 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenues |
32,750 | 24,268 | 20,145 | 14,457 | | (13,446 | ) | 78,174 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Costs and expenses |
||||||||||||||||||||||||||||
Cost of sales |
4,828 | 2,555 | 2,167 | | | (488 | ) | 9,062 | ||||||||||||||||||||
Cemetery |
7,533 | 6,576 | 3,967 | | | | 18,076 | |||||||||||||||||||||
Selling |
8,173 | 4,572 | 4,001 | | 631 | (883 | ) | 16,494 | ||||||||||||||||||||
General and administrative |
4,343 | 2,132 | 3,333 | | | | 9,808 | |||||||||||||||||||||
Corporate overhead |
| | | | 8,392 | | 8,392 | |||||||||||||||||||||
Depreciation and amortization |
800 | 670 | 539 | 867 | 236 | | 3,112 | |||||||||||||||||||||
Funeral home |
| | | 10,674 | | (315 | ) | 10,359 | ||||||||||||||||||||
Acquisition related costs, net of recoveries |
| | | | 451 | | 451 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
25,677 | 16,505 | 14,007 | 11,541 | 9,710 | (1,686 | ) | 75,754 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating profit |
$ | 7,073 | $ | 7,763 | $ | 6,138 | $ | 2,916 | $ | (9,710 | ) | $ | (11,760 | ) | $ | 2,420 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 634,012 | $ | 422,601 | $ | 448,732 | $ | 163,181 | $ | 40,677 | $ | | $ | 1,709,203 | ||||||||||||||
Amortization of cemetery property |
$ | 1,035 | $ | 341 | $ | 435 | $ | | $ | | $ | 168 | $ | 1,979 | ||||||||||||||
Long lived asset additions |
$ | 1,950 | $ | 1,205 | $ | 906 | $ | 203 | $ | 183 | $ | | $ | 4,447 | ||||||||||||||
Goodwill |
$ | 9,817 | $ | 2,903 | $ | 11,948 | $ | 32,460 | $ | | $ | | $ | 57,128 |
25
As of and for the nine months ended September 30, 2014:
Cemeteries | Funeral | |||||||||||||||||||||||||||
Southeast | Northeast | West | Homes | Corporate | Adjustment | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Sales |
$ | 69,319 | $ | 31,583 | $ | 35,211 | $ | | $ | | $ | (26,605 | ) | $ | 109,508 | |||||||||||||
Service and other |
31,085 | 29,529 | 26,768 | | | (18,260 | ) | 69,122 | ||||||||||||||||||||
Funeral home |
| | | 40,777 | | (5,313 | ) | 35,464 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenues |
100,404 | 61,112 | 61,979 | 40,777 | | (50,178 | ) | 214,094 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Costs and expenses |
||||||||||||||||||||||||||||
Cost of sales |
15,045 | 6,576 | 7,686 | | | (4,091 | ) | 25,216 | ||||||||||||||||||||
Cemetery |
21,057 | 14,499 | 11,990 | | | | 47,546 | |||||||||||||||||||||
Selling |
24,019 | 11,443 | 11,462 | | 1,480 | (5,860 | ) | 42,544 | ||||||||||||||||||||
General and administrative |
13,053 | 5,533 | 7,747 | | | | 26,333 | |||||||||||||||||||||
Corporate overhead |
| | | | 22,394 | | 22,394 | |||||||||||||||||||||
Depreciation and amortization |
2,094 | 1,244 | 1,593 | 2,346 | 716 | | 7,993 | |||||||||||||||||||||
Funeral home |
| | | 29,813 | | (732 | ) | 29,081 | ||||||||||||||||||||
Acquisition related costs, net of recoveries |
| | | | 2,040 | | 2,040 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
75,268 | 39,295 | 40,478 | 32,159 | 26,630 | (10,683 | ) | 203,147 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating profit |
$ | 25,136 | $ | 21,817 | $ | 21,501 | $ | 8,618 | $ | (26,630 | ) | $ | (39,495 | ) | $ | 10,947 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 634,012 | $ | 422,601 | $ | 448,732 | $ | 163,181 | $ | 40,677 | $ | | $ | 1,709,203 | ||||||||||||||
Amortization of cemetery property |
$ | 3,499 | $ | 1,762 | $ | 2,237 | $ | | $ | | $ | (414 | ) | $ | 7,084 | |||||||||||||
Long lived asset additions |
$ | 28,470 | $ | 72,515 | $ | 3,350 | $ | 9,024 | $ | 443 | $ | | $ | 113,802 | ||||||||||||||
Goodwill |
$ | 9,817 | $ | 2,903 | $ | 11,948 | $ | 32,460 | $ | | $ | | $ | 57,128 |
As of and for the three months ended September 30, 2013:
Cemeteries | Funeral | |||||||||||||||||||||||||||
Southeast | Northeast | West | Homes | Corporate | Adjustment | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Sales |
$ | 24,304 | $ | 8,963 | $ | 10,440 | $ | | $ | | $ | (11,230 | ) | $ | 32,477 | |||||||||||||
Service and other |
9,200 | 7,078 | 8,494 | | | (6,083 | ) | 18,689 | ||||||||||||||||||||
Funeral home |
| | | 12,094 | | (1,721 | ) | 10,373 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenues |
33,504 | 16,041 | 18,934 | 12,094 | | (19,034 | ) | 61,539 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Costs and expenses |
||||||||||||||||||||||||||||
Cost of sales |
4,929 | 1,811 | 2,202 | | | (1,840 | ) | 7,102 | ||||||||||||||||||||
Cemetery |
6,787 | 3,691 | 4,029 | | | | 14,507 | |||||||||||||||||||||
Selling |
7,769 | 3,081 | 3,367 | | | (2,525 | ) | 11,692 | ||||||||||||||||||||
General and administrative |
4,064 | 1,582 | 2,256 | | | | 7,902 | |||||||||||||||||||||
Corporate overhead |
| | | | 7,997 | | 7,997 | |||||||||||||||||||||
Depreciation and amortization |
575 | 224 | 548 | 859 | 172 | | 2,378 | |||||||||||||||||||||
Funeral home |
| | | 9,161 | | (180 | ) | 8,981 | ||||||||||||||||||||
Acquisition related costs, net of recoveries |
| | | | 243 | | 243 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
24,124 | 10,389 | 12,402 | 10,020 | 8,412 | (4,545 | ) | 60,802 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating profit |
$ | 9,380 | $ | 5,652 | $ | 6,532 | $ | 2,074 | $ | (8,412 | ) | $ | (14,489 | ) | $ | 737 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 557,308 | $ | 306,577 | $ | 418,119 | $ | 132,928 | $ | 35,061 | $ | | $ | 1,449,993 | ||||||||||||||
Amortization of cemetery property |
$ | 1,152 | $ | 585 | $ | 305 | $ | | $ | | $ | (132 | ) | $ | 1,910 | |||||||||||||
Long lived asset additions |
$ | 6,287 | $ | 451 | $ | 1,477 | $ | 362 | $ | 15 | $ | | $ | 8,592 | ||||||||||||||
Goodwill |
$ | 6,174 | $ | | $ | 11,948 | $ | 30,615 | $ | | $ | | $ | 48,737 |
26
As of and for the nine months ended September 30, 2013:
Cemeteries | Funeral | |||||||||||||||||||||||||||
Southeast | Northeast | West | Homes | Corporate | Adjustment | Total | ||||||||||||||||||||||
(in thousands) | ||||||||||||||||||||||||||||
Revenues |
||||||||||||||||||||||||||||
Sales |
$ | 70,941 | $ | 27,664 | $ | 32,483 | $ | | $ | | $ | (36,332 | ) | $ | 94,756 | |||||||||||||
Service and other |
28,779 | 19,382 | 24,238 | | | (16,049 | ) | 56,350 | ||||||||||||||||||||
Funeral home |
| | | 36,904 | | (4,437 | ) | 32,467 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total revenues |
99,720 | 47,046 | 56,721 | 36,904 | | (56,818 | ) | 183,573 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Costs and expenses |
||||||||||||||||||||||||||||
Cost of sales |
14,704 | 6,336 | 5,801 | | | (5,737 | ) | 21,104 | ||||||||||||||||||||
Cemetery |
19,746 | 10,809 | 12,145 | | | | 42,700 | |||||||||||||||||||||
Selling |
22,913 | 9,675 | 10,128 | | 833 | (8,415 | ) | 35,134 | ||||||||||||||||||||
General and administrative |
12,266 | 4,774 | 6,342 | | | | 23,382 | |||||||||||||||||||||
Corporate overhead |
| | | | 21,657 | | 21,657 | |||||||||||||||||||||
Depreciation and amortization |
1,688 | 679 | 1,613 | 2,268 | 911 | | 7,159 | |||||||||||||||||||||
Funeral home |
| | | 27,582 | | (501 | ) | 27,081 | ||||||||||||||||||||
Acquisition related costs, net of recoveries |
| | | | 901 | | 901 | |||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total costs and expenses |
71,317 | 32,273 | 36,029 | 29,850 | 24,302 | (14,653 | ) | 179,118 | ||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Operating profit |
$ | 28,403 | $ | 14,773 | $ | 20,692 | $ | 7,054 | $ | (24,302 | ) | $ | (42,165 | ) | $ | 4,455 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||
Total assets |
$ | 557,308 | $ | 306,577 | $ | 418,119 | $ | 132,928 | $ | 35,061 | $ | | $ | 1,449,993 | ||||||||||||||
Amortization of cemetery property |
$ | 3,182 | $ | 1,943 | $ | 866 | $ | | $ | | $ | (470 | ) | $ | 5,521 | |||||||||||||
Long lived asset additions |
$ | 8,613 | $ | 1,710 | $ | 2,735 | $ | 9,287 | $ | 763 | $ | | $ | 23,108 | ||||||||||||||
Goodwill |
$ | 6,174 | $ | | $ | 11,948 | $ | 30,615 | $ | | $ | | $ | 48,737 |
Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of individual operating segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the operating segments. 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 unaudited condensed 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 unaudited condensed 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 unaudited condensed consolidated financial statements reflect Deferred Cemetery Revenue, Net, and Deferred Selling and Obtaining Costs on the unaudited condensed consolidated balance sheet, whereas the Companys management accounting practices exclude these items.
27
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, publicly traded equity securities and mutual funds in its level 1 investments.
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 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.
On the Companys unaudited condensed consolidated balance sheet, current assets, long-term accounts receivable and current liabilities are recorded at amounts that approximate fair value.
The following table displays the Companys assets measured at fair value as of September 30, 2014 and December 31, 2013.
28
As of September 30, 2014
Merchandise Trust
Level 1 | Level 2 | Total | ||||||||||
(in thousands) | ||||||||||||
Assets |
||||||||||||
Short-term investments |
$ | 51,328 | $ | | $ | 51,328 | ||||||
Fixed maturities: |
||||||||||||
U.S. state and local government agency |
| 75 | 75 | |||||||||
Corporate debt securities |
| 9,220 | 9,220 | |||||||||
Other debt securities |
| 7,145 | 7,145 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturity investments |
| 16,440 | 16,440 | |||||||||
|
|
|
|
|
|
|||||||
Mutual fundsdebt securities |
128,300 | | 128,300 | |||||||||
Mutual fundsequity securitiesreal estate sector |
52,379 | | 52,379 | |||||||||
Mutual fundsequity securitiesenergy sector |
8,498 | | 8,498 | |||||||||
Mutual fundsequity securitiesMLPs |
29,821 | | 29,821 | |||||||||
Mutual fundsequity securitiesother |
91,071 | | 91,071 | |||||||||
Equity securities: |
||||||||||||
Master limited partnerships |
56,196 | | 56,196 | |||||||||
Global equity securities |
34,309 | | 34,309 | |||||||||
Other invested assets |
| 5,240 | 5,240 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 451,902 | $ | 21,680 | $ | 473,582 | ||||||
|
|
|
|
|
|
Perpetual Care Trust
Level 1 | Level 2 | Total | ||||||||||
(in thousands) | ||||||||||||
Assets |
||||||||||||
Short-term investments |
$ | 27,257 | $ | | $ | 27,257 | ||||||
Fixed maturities: |
||||||||||||
U.S. government and federal agency |
117 | | 117 | |||||||||
U.S. state and local government agency |
| 57 | 57 | |||||||||
Corporate debt securities |
| 24,456 | 24,456 | |||||||||
Other debt securities |
| 371 | 371 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturity investments |
117 | 24,884 | 25,001 | |||||||||
|
|
|
|
|
|
|||||||
Mutual fundsdebt securities |
118,512 | | 118,512 | |||||||||
Mutual fundsequity securitiesreal estate sector |
38,183 | | 38,183 | |||||||||
Mutual fundsequity securitiesenergy sector |
16,296 | | 16,296 | |||||||||
Mutual fundsequity securitiesMLPs |
47,863 | | 47,863 | |||||||||
Mutual fundsequity securitiesother |
23,757 | | 23,757 | |||||||||
Equity securities: |
||||||||||||
Master limited partnerships |
47,283 | | 47,283 | |||||||||
Global equity securities |
4,798 | | 4,798 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 324,066 | $ | 24,884 | $ | 348,950 | ||||||
|
|
|
|
|
|
29
As of December 31, 2013
Merchandise Trust
Level 1 | Level 2 | Total | ||||||||||
(in thousands) | ||||||||||||
Assets |
||||||||||||
Short-term investments |
$ | 46,518 | $ | | $ | 46,518 | ||||||
Fixed maturities: |
||||||||||||
Corporate debt securities |
| 9,171 | 9,171 | |||||||||
Other debt securities |
| 7,324 | 7,324 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturity investments |
| 16,495 | 16,495 | |||||||||
|
|
|
|
|
|
|||||||
Mutual fundsdebt securities |
111,333 | | 111,333 | |||||||||
Mutual fundsequity securitiesreal estate sector |
49,103 | | 49,103 | |||||||||
Mutual fundsequity securitiesMLPs |
36,193 | | 36,193 | |||||||||
Mutual fundsequity securitiesother |
72,234 | | 72,234 | |||||||||
Equity securities: |
||||||||||||
Master limited partnerships |
57,258 | | 57,258 | |||||||||
Global equity securities |
28,437 | | 28,437 | |||||||||
Other invested assets |
| 5,723 | 5,723 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 401,076 | $ | 22,218 | $ | 423,294 | ||||||
|
|
|
|
|
|
Perpetual Care Trust
Level 1 | Level 2 | Total | ||||||||||
(in thousands) | ||||||||||||
Assets |
||||||||||||
Short-term investments |
$ | 16,686 | $ | | $ | 16,686 | ||||||
Fixed maturities: |
||||||||||||
U.S. government and federal agency |
372 | | 372 | |||||||||
Corporate debt securities |
| 24,510 | 24,510 | |||||||||
Other debt securities |
| 371 | 371 | |||||||||
|
|
|
|
|
|
|||||||
Total fixed maturity investments |
372 | 24,881 | 25,253 | |||||||||
|
|
|
|
|
|
|||||||
Mutual fundsdebt securities |
116,013 | | 116,013 | |||||||||
Mutual fundsequity securitiesreal estate sector |
40,763 | | 40,763 | |||||||||
Mutual fundsequity securitiesenergy sector |
14,761 | | 14,761 | |||||||||
Mutual fundsequity securitiesMLPs |
46,817 | | 46,817 | |||||||||
Mutual fundsequity securitiesother |
13,252 | | 13,252 | |||||||||
Equity securities: |
||||||||||||
Master limited partnerships |
36,925 | | 36,925 | |||||||||
Global equity securities |
919 | | 919 | |||||||||
Other invested assets |
| 382 | 382 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 286,508 | $ | 25,263 | $ | 311,771 | ||||||
|
|
|
|
|
|
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Level 1 securities primarily consist of actively publicly traded money market funds, mutual funds and equity securities.
Level 2 securities primarily consist of corporate and other fixed income debt securities. The Company obtains pricing information for these securities from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the pricing vendors model are derived from market observable sources including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings and matrix pricing. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2. The Company reviews the information provided by the pricing vendor on a regular basis. In addition, the pricing vendor has an established process in place for the identification and resolution of potentially erroneous prices.
There were no level 3 assets.
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 Managements Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q.
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 or guidance related to our future distributions, as well as certain information in our other filings with the SEC and elsewhere are forward-looking statements.
Generally, the words believe, may, will, estimate, continue, anticipate, intend (including, but not limited to our intent to maintain or increase our distributions), 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 or implied. Our major risk is related to uncertainties associated with the cash flow from our pre-need and at-need sales, our trusts, and financings, which may impact our ability to meet our financial projections, our ability to service our debt and pay distributions, and our ability to increase our distributions.
Our additional risks and uncertainties, include, but are not limited to, the following: uncertainties associated with future revenue and revenue growth; uncertainties associated with the integration or anticipated benefits of our recent acquisitions or any future acquisitions; our ability to complete and fund additional acquisitions; the effect of economic downturns; the impact of our significant leverage on our operating plans; 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 achieving operating improvements, strong cash flows and further deleveraging; our ability to successfully compete in the cemetery and funeral home industry; litigation or legal proceedings that could expose us to significant liabilities and damage our reputation; 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.
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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, 2013 (2013 Form 10-K) and our other reports filed with the SEC. Except as required under applicable law, 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, Cornerstone contributed to us substantially all of its assets, liabilities and businesses, and then converted into CFSI LLC, a limited liability company. This transfer represented a reorganization of entities under common control and was recorded at historical cost.
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 303 cemeteries and 98 funeral homes as of September 30, 2014.
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.
On February 27, 2014, we completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.2 million. The proceeds from the offering were used to pay down borrowings outstanding under the Credit Facility.
On May 21, 2014, we sold 2,255,947 common units to American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (ACII), at an aggregate purchase price of $55.0 million, or $24.38 per unit, pursuant to a Common Unit Purchase Agreement dated May 19, 2014. The proceeds were used primarily to fund the up-front rent consideration for the transaction with the Archdiocese of Philadelphia that closed during the second quarter of 2014.
On June 12, 2014, after the exercise of the underwriters over-allotment option, we completed our most recent follow-on public offering of 2,990,000 common units at a price of $23.67 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.1 million. The proceeds from the offering were used primarily to pay the purchase price related to our acquisition from Service Corporation International, which closed in the second quarter of 2014, with the remainder used to pay down borrowings outstanding under our Credit Facility. Refer to Note 13 of our unaudited condensed consolidated financial statements in Item 1 of Part I of this Form 10-Q for a more detailed discussion of the acquisition.
Overview
Cemetery Operations
We are currently the second largest owner and operator of cemeteries in the United States. As of September 30, 2014, we operated 303 cemeteries in 27 states and Puerto Rico. We own 272 of these cemeteries, and we operate the remaining 31 under lease, operating or management contracts. As a result of the agreements, other control arrangements and applicable accounting rules, we have treated 16 of these cemeteries as acquisitions for accounting purposes.
We operate 15 cemeteries under long-term lease, operating or management 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 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 lease, operating or management 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.
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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 84.3% and 83.4% of our total revenues during the three and nine months ended September 30, 2014 as compared to 83.1% and 82.3% during the same periods last year.
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 trust, 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 unaudited condensed consolidated balance sheet in deferred cemetery revenues, net.
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.
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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 and nine months ended September 30, 2014 and 2013.
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 from our at-need sales into merchandise trusts.
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 include 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 unaudited condensed consolidated 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.
3. General and administrative expenses
General and administrative expenses, which do not include corporate overhead, primarily include personnel costs, insurance and other costs necessary to maintain our cemetery offices.
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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 September 30, 2014, we owned and operated 98 funeral homes. These properties are located in 19 states and Puerto Rico. Forty-six 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 generally at the time of need utilizing salaried licensed funeral directors. Funeral home revenues accounted for approximately 15.7% and 16.6% of our total revenues during the three and nine months ended September 30, 2014 as compared to 16.9% and 17.7% 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.
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 related to reporting requirements under U.S. federal securities laws and certain other additional expenses of being a public company.
2014 Developments
Significant business developments for the nine months ended September 30, 2014 include the following:
| On February 27, 2014, we completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.2 million. The proceeds were used to pay down borrowings outstanding on our revolving credit facility. |
| On May 21, 2014, we sold 2,255,947 common units to ACII, at an aggregate purchase price of $55.0 million, or $24.38 per unit, pursuant to a Common Unit Purchase Agreement dated May 19, 2014. The proceeds were used primarily to fund the up-front rent consideration for the transaction with the Archdiocese of Philadelphia that closed during the second quarter of 2014. ACII is an affiliate of American Infrastructure Funds, L.L.C., an investment adviser registered with the SEC. Robert B. Hellman, Jr., a director of our general partner, is a managing member of American Infrastructure Funds, L.L.C. and he is affiliated with entities that own membership interests in ACII and the entity that is the manager of ACII. |
| On May 21, 2014, Cornerstone Family Services LLC, and its direct and indirect subsidiaries: CFSI LLC (CFSI) and our general partner completed a series of transactions to streamline the ownership structure of CFSI and our general partner. As a result, our general partner has become a wholly-owned subsidiary of StoneMor GP Holdings LLC (GP Holdings), formerly known as CFSI. Also, Mr. Hellman, as Trustee of a trust, for the pecuniary benefit of ACII, has exclusive voting and investment power over approximately 67% of membership interests in GP Holdings, and Lawrence Miller, our President and Chief Executive Officer and a |
35
director of our general partner, William Shane, Allen Freedman, and Martin Lautman, directors of our general partner, Michael Stache and Robert Stache, retired executive officers of our general partner, and two family partnerships affiliated with Messrs. Miller and Shane collectively hold approximately 33% of membership interests in GP Holdings. |
| On May 22, 2014, we entered into the Fourth Amendment to the Third Amended and Restated Credit Agreement. The Amendment obtained the Lenders approval for the closing of the transactions with the Archdiocese of Philadelphia and Service Corporation International, increased the Consolidated Leverage Ratio to 4.00 to 1.0 for any measurement period and amended the definition of Consolidated EBITDA to, among other things, remove existing balance sheet adjustments and replace them with certain cash flow statement adjustments. See Liquidity and Capital Resources for further discussion. |
| On May 28, 2014, we and the Archdiocese of Philadelphia closed the transaction, pursuant to which we will operate 13 cemeteries in Pennsylvania for a term of 60 years, subject to certain termination provisions. At closing we paid an up-front rent of $53.0 million to the Archdiocese of Philadelphia. We recorded a contract-based intangible asset of $59.8 million, representing the underlying value from the agreements, at the present value of the total consideration less the fair value of net assets received, consisting of acquired accounts receivable of $1.6 million. A liability of $8.4 million was also recorded for the present value of future rent payments. |
| On June 10, 2014, we closed the transaction with certain subsidiaries of Service Corporation International to acquire nine funeral homes, twelve cemeteries and certain related assets in Central Florida, North Carolina, Southeastern Pennsylvania and Virginia. In consideration for the net assets acquired, we paid $53.8 million in cash, subject to certain post-closing adjustments dependent upon the final value of certain net assets actually transferred. |
| On June 12, 2014, after the exercise of the underwriters over-allotment option, we completed a follow-on public offering of 2,990,000 common units at a price of $23.67 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.1 million. The proceeds from the offering were used primarily to pay the purchase price related to our transaction with Service Corporation International, with the remainder used to pay down borrowings outstanding under our revolving credit facility. |
Current Market Conditions and Economic Developments
In general, the financial markets have trended upward over the past few years. As of September 30, 2014, the market value of the assets in our merchandise trusts exceeded their amortized cost by 2.7%, which is a slight improvement from December 31, 2013 when the market value of the assets exceeded their amortized cost by 2.6%. As of September 30, 2014, the market value of the assets in our perpetual care trusts exceeded their amortized cost by 13.6%, which is an improvement from December 31, 2013 when the market value of the assets exceeded their amortized cost by 10.5%.
As of September 30, 2014, the majority of our long-term debt consisted of $175.0 million in Senior Notes due 2021 and $91.4 million of borrowings under our revolving credit facility which expires in 2017. As of September 30, 2014, we had $48.6 million of availability under our revolving credit facility. Further, on February 27, 2014 and June 12, 2014, we raised capital via follow-on public offerings of our common units.
The aggregate values of pre-need and at-need contracts written were $77.6 million and $219.2 million for the three and nine months ended September 30, 2014 as compared to $66.7 million and $201.9 million during the same periods 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 Consolidated EBITDA and certain coverage and leverage ratios as defined in the Credit Agreement described below.
Consolidated EBITDA 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 we must follow in accordance with GAAP are not considered.
We have two primary debt covenants that are dependent upon our financial results, the Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio. The Consolidated Leverage Ratio relates to the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA. Our Consolidated Leverage Ratio was 2.67 at September 30, 2014 compared to a maximum allowed ratio of 4.00. The Consolidated Debt Service Coverage Ratio relates to the ratio of Consolidated EBITDA to Consolidated Debt Service. Our Consolidated Debt Service Coverage Ratio was 4.42 at September 30, 2014 compared to a minimum allowed ratio of 2.50.
36
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. Our cemetery operations are disaggregated into three different geographically based segments. 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 expenses, miscellaneous selling, cemetery and general administrative expenses that are not allocable to other operating segments, certain depreciation and amortization expenses and acquisition related costs.
Critical Accounting Policies and Estimates
The unaudited condensed consolidated financial statements are prepared in conformity with GAAP. 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 2013 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2013 Form 10-K.
Results of Operations Segments
We account for and analyze the results of operations for our segments on a basis of accounting that is different from GAAP. 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
37
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 2013 Form 10-K for a more detailed discussion of our accounting policies under GAAP.
Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013
Cemetery Segments
Cemetery Operations Southeast
Since June 30, 2013, we have acquired eleven properties in our Cemetery Operations Southeast segment. The first acquisition occurred during the third quarter of 2013, the second occurred during the first quarter of 2014 and the remaining nine occurred during the second quarter of 2014. The results of operations for these acquired properties have either less or no impact on the results for the three months ended September 30, 2013, but are included in the results for the three months ended September 30, 2014. The acquisitions contributed approximately $3.3 million of the revenues and $2.4 million of the costs and expenses of the segment for the three months ended September 30, 2014.
The table below compares the results of operations for our Cemetery Operations Southeast for the three months ended September 30, 2014 to the same period last year:
Three months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 32,750 | $ | 33,504 | $ | (754 | ) | -2.3 | % | |||||||
Total costs and expenses |
25,677 | 24,124 | 1,553 | 6.4 | % | |||||||||||
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Operating profit |
$ | 7,073 | $ | 9,380 | $ | (2,307 | ) | -24.6 | % | |||||||
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Revenues
The decrease in revenues was primarily related to a decrease of $2.2 million in the value of pre-need contracts written, partially offset by increases of $1.0 million in the value of at-need contracts written, $0.3 million in income from our trusts and $0.1 million in interest and other income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:
| A $0.7 million increase in cemetery expenses due to increases of $0.3 million in labor costs, $0.2 million in repairs and maintenance expense, and $0.1 million in both utility and fuel costs and real estate tax expense. |
| A $0.4 million increase in selling expenses due to increases of $0.2 million in commissions and personnel costs and $0.1 million in both advertising and marketing costs and travel expenses. |
| A $0.3 million increase in general and administrative expenses primarily due to a $0.3 million increase in personnel costs. |
| A $0.2 million increase in depreciation expense. |
Cemetery Operations Northeast
During the second quarter of 2014, we acquired three properties and separately obtained the rights from the Archdiocese of Philadelphia to operate thirteen properties in our Cemetery Operations Northeast segment. The results of operations for these properties have no impact on the results for the three months ended September 30, 2013, but are included in the results for the three months ended September 30, 2014. The additions have contributed approximately $7.6 million of the revenues and $5.5 million of the costs and expenses of the segment for the three months ended September 30, 2014.
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The table below compares the results of operations for our Cemetery Operations Northeast for the three months ended September 30, 2014 to the same period last year:
Three months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 24,268 | $ | 16,041 | $ | 8,227 | 51.3 | % | ||||||||
Total costs and expenses |
16,505 | 10,389 | 6,116 | 58.9 | % | |||||||||||
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Operating profit |
$ | 7,763 | $ | 5,652 | $ | 2,111 | 37.3 | % | ||||||||
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Revenues
The increase in revenues was primarily related to increases of $3.9 million in the value of at-need contracts written, $3.3 million in the value of pre-need contracts written and $1.0 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:
| A $0.7 million increase in the cost of goods sold primarily attributable to changes in product mix. |
| A $2.9 million increase in cemetery expenses primarily due to increases of $2.2 million in labor costs, $0.4 million in repairs and maintenance expense and $0.2 million in utility and fuel costs. |
| A $1.5 million increase in selling expenses attributable to a $1.3 million increase in commissions and personnel costs and a $0.2 million increase in advertising and marketing costs. |
| A $0.5 million increase in general and administrative expenses mostly related to increases in personnel costs. |
| A $0.5 million increase in depreciation expense, $0.3 million of which was attributable to the amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia. |
Cemetery Operations West
The table below compares the results of operations for our Cemetery Operations West for the three months ended September 30, 2014 to the same period last year:
Three months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 20,145 | $ | 18,934 | $ | 1,211 | 6.4 | % | ||||||||
Total costs and expenses |
14,007 | 12,402 | 1,605 | 12.9 | % | |||||||||||
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Operating profit |
$ | 6,138 | $ | 6,532 | $ | (394 | ) | -6.0 | % | |||||||
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Revenues
The increase in revenues was primarily related to increases of $0.8 million in the value of at-need contracts written, $0.5 million in the value of pre-need contracts written and $0.2 million in income from our trusts. These increases were partially offset by a decrease of $0.3 million in interest and other income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
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Total costs and expenses
The net increase in costs and expenses was primarily related to:
| A $0.1 million decrease in cemetery expenses primarily related to a decrease in real estate tax expense. |
| A $0.6 million increase in selling expenses primarily related to commissions and personnel costs. |
| A $1.1 million increase in general and administrative expenses primarily due to an increase in legal costs related to a legal settlement. |
Funeral Homes Segment
In the second quarter of 2014 we acquired nine funeral homes. Therefore, the results of operations for these properties have no impact on the results for the three months ended September 30, 2013, but are included in the results for the three months ended September 30, 2014. The additions have contributed approximately $2.2 million of the revenues and $1.5 million of the costs and expenses of the segment for the three months ended September 30, 2014.
The table below compares the results of operations for our Funeral Homes segment for the three months ended September 30, 2014 to the same period last year:
Three months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 14,457 | $ | 12,094 | $ | 2,363 | 19.5 | % | ||||||||
Total costs and expenses |
11,541 | 10,020 | 1,521 | 15.2 | % | |||||||||||
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Operating profit |
$ | 2,916 | $ | 2,074 | $ | 842 | 40.6 | % | ||||||||
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Revenues
The increase in revenues was primarily attributable to increases of $1.3 million in the value of pre-need contracts written and $1.0 million in the value of at-need contracts written.
Total costs and expenses
The net increase in costs and expenses was primarily attributable to increases of $0.7 million in personnel costs and $0.4 million in facility related costs, largely due to the acquired properties, with the remaining increase in general and administrative expenses and other costs.
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Corporate Segment
The table below compares expenses incurred by the Corporate segment for the three months ended September 30, 2014 to the same period last year:
Three months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Selling, cemetery and general and administrative expenses |
$ | 631 | $ | | $ | 631 | 100.0 | % | ||||||||
Depreciation and amortization |
236 | 172 | 64 | 37.2 | % | |||||||||||
Acquisition related costs, net of recoveries |
451 | 243 | 208 | 85.6 | % | |||||||||||
Corporate expenses |
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Corporate personnel expenses |
3,425 | 3,145 | 280 | 8.9 | % | |||||||||||
Other corporate expenses |
4,967 | 4,852 | 115 | 2.4 | % | |||||||||||
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Total corporate overhead |
8,392 | 7,997 | 395 | 4.9 | % | |||||||||||
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Total corporate expenses |
$ | 9,710 | $ | 8,412 | $ | 1,298 | 15.4 | % | ||||||||
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The increase in corporate expenses was driven by increases of $0.6 million in selling expenses, primarily due to an increase in advertising costs, $0.3 million in corporate personnel expense and $0.2 million in acquisition related costs. Acquisition related costs will vary from period to period depending on the amount of acquisition activity that takes place.
Reconciliation of Segment Results of Operations to Consolidated Results of Operations
As discussed in the segment sections of this Managements Discussion and Analysis of Financial Condition and Results of Operations, cemetery revenues and their associated costs as reported at the segment level are not deferred until such time that we satisfy the delivery criteria for revenue recognition.
Periodic consolidated revenues recorded in accordance with GAAP reflect the amount of total merchandise and services which were delivered during the period. Accordingly, period over period changes to revenues can be impacted by:
| Changes in the value of contracts written and other revenues generated during a period that are delivered in their period of origin and are recognized as revenue and not deferred as of the end of their period of origination. |
| Changes in merchandise and services that are delivered during a period that had been originated during a prior period. |
The table below analyzes results of operations and the changes therein for the three months ended September 30, 2014 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/ or changes in the timing of when merchandise and services were delivered:
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Three months ended | Three months ended | |||||||||||||||||||||||||||||||
September 30, 2014 | September 30, 2013 | |||||||||||||||||||||||||||||||
(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Segment Results (non-GAAP) |
GAAP Adjustments |
GAAP Results |
Segment Results (non-GAAP) |
GAAP Adjustments |
GAAP Results |
Change in GAAP results ($) |
Change in GAAP results (%) |
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Revenues |
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Pre-need cemetery revenues |
$ | 36,170 | $ | (5,030 | ) | $ | 31,140 | $ | 34,642 | $ | (10,124 | ) | $ | 24,518 | $ | 6,622 | 27.0 | % | ||||||||||||||
At-need cemetery revenues |
24,746 | 244 | 24,990 | 19,052 | (1,325 | ) | 17,727 | 7,263 | 41.0 | % | ||||||||||||||||||||||
Investment income from trusts |
13,985 | (6,740 | ) | 7,245 | 12,411 | (6,015 | ) | 6,396 | 849 | 13.3 | % | |||||||||||||||||||||
Interest income |
1,807 | | 1,807 | 1,484 | | 1,484 | 323 | 21.8 | % | |||||||||||||||||||||||
Funeral home revenues |
14,457 | (2,218 | ) | 12,239 | 12,094 | (1,721 | ) | 10,373 | 1,866 | 18.0 | % | |||||||||||||||||||||
Other cemetery revenues |
455 | 298 | 753 | 890 | 151 | 1,041 | (288 | ) | -27.7 | % | ||||||||||||||||||||||
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Total revenues |
91,620 | (13,446 | ) | 78,174 | 80,573 | (19,034 | ) | 61,539 | 16,635 | 27.0 | % | |||||||||||||||||||||
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Costs and expenses |
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Cost of goods sold |
9,550 | (488 | ) | 9,062 | 8,942 | (1,840 | ) | 7,102 | 1,960 | 27.6 | % | |||||||||||||||||||||
Cemetery expense |
18,076 | | 18,076 | 14,507 | | 14,507 | 3,569 | 24.6 | % | |||||||||||||||||||||||
Selling expense |
17,377 | (883 | ) | 16,494 | 14,217 | (2,525 | ) | 11,692 | 4,802 | 41.1 | % | |||||||||||||||||||||
General and administrative expense |
9,808 | | 9,808 | 7,902 | | 7,902 | 1,906 | 24.1 | % | |||||||||||||||||||||||
Corporate overhead |
8,392 | | 8,392 | 7,997 | | 7,997 | 395 | 4.9 | % | |||||||||||||||||||||||
Depreciation and amortization |
3,112 | | 3,112 | 2,378 | | 2,378 | 734 | 30.9 | % | |||||||||||||||||||||||
Funeral home expense |
10,674 | (315 | ) | 10,359 | 9,161 | (180 | ) | 8,981 | 1,378 | 15.3 | % | |||||||||||||||||||||
Acquisition related costs, net of recoveries |
451 | | 451 | 243 | | 243 | 208 | 85.6 | % | |||||||||||||||||||||||
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Total costs and expenses |
77,440 | (1,686 | ) | 75,754 | 65,347 | (4,545 | ) | 60,802 | 14,952 | 24.6 | % | |||||||||||||||||||||
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Operating profit |
$ | 14,180 | $ | (11,760 | ) | $ | 2,420 | $ | 15,226 | $ | (14,489 | ) | $ | 737 | $ | 1,683 | 228.4 | % | ||||||||||||||
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Revenues
Pre-need cemetery revenues were $31.1 million for the three months ended September 30, 2014, an increase of $6.6 million, or 27.0%, as compared to $24.5 million during the same period last year. The increase was the result of an increase of $1.5 million in the value of cemetery contracts written and a decrease of $5.1 million in deferred revenue.
At-need cemetery revenues were $25.0 million for the three months ended September 30, 2014, an increase of $7.3 million, or 41.0%, as compared to $17.7 million during the same period last year. The increase was primarily caused by an increase of $5.7 million in the value of cemetery contracts written and a decrease of $1.6 million in deferred revenue.
Investment income from trusts was $7.2 million for the three months ended September 30, 2014, an increase of $0.8 million, or 13.3%, as compared to $6.4 million during the same period last year. On a segment basis, we had an increase of $1.5 million, which was partially offset by an adjustment of $0.7 million related to funds for which we have not met the requirements that would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Interest income on accounts receivable was $1.8 million for the three months ended September 30, 2014, an increase of $0.3 million, or 21.8%, as compared to $1.5 million during the same period last year.
Funeral home revenues were $12.2 million for the three months ended September 30, 2014, an increase of $1.8 million, or 18.0%, as compared to $10.4 million during the same period last year. The increase was primarily caused by an increase of $2.3 million in the value of contracts written and other revenue, which was partially offset by an increase of $0.5 million in deferred revenue.
Other cemetery revenues were $0.8 million during the three months ended September 30, 2014 as compared to $1.0 million in the same period last year, a 27.7% decrease.
Costs and Expenses
The cost of goods sold was $9.1 million for the three months ended September 30, 2014, an increase of $2.0 million, or 27.6%, as compared to $7.1 million during the same period last year. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 16.1% during the three months ended September 30, 2014 as compared to 16.8% during the same period last year. The change in the ratio primarily relates to changes in product mix.
Cemetery expenses were $18.1 million during the three months ended September 30, 2014, an increase of $3.6 million, or 24.6%, compared to $14.5 million during the same period last year. Within this category, there were increases of $2.5 million in personnel costs largely due to additional properties, $0.7 million in repairs and maintenance expense, $0.2 million in utility and fuel costs and a net $0.2 million increase in other expenses. Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio
42
of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs relative to our overall cemetery operations. An increase in the ratio indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the ratio indicates that expense growth did not exceed increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 29.7% during the three months ended September 30, 2014 as compared to 27.0% during the same period last year.
Selling expenses were $16.5 million during the three months ended September 30, 2014, an increase of $4.8 million, or 41.1%, as compared to $11.7 million during the same period last year. The ratio of selling expenses to cemetery revenues was 29.4% during the three months ended September 30, 2014 as compared to 27.7% during the same period last year, largely due to increases of $2.1 million in commissions and personnel costs and $1.0 million in advertising and marketing costs and the $1.6 million reduction in deferred selling expenses. This ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, most of our selling expenses are directly related to sales commissions and bonuses, which would be directly related to changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to remain fairly consistent.
General and administrative expenses were $9.8 million during the three months ended September 30, 2014, an increase of $1.9 million, or 24.1%, as compared to $7.9 million during the same period last year. The increase was due to increases of $0.7 million in personnel costs and $1.2 million in legal costs, primarily related to a legal settlement. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our general and administrative costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value of contracts written, while a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decrease as many of the expenses in this category are fixed in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 16.1% during the three months ended September 30, 2014 as compared to 14.7% during the same period last year.
Total corporate overhead was $8.4 million for the three months ended September 30, 2014, an increase of $0.4 million, or 4.9% compared to $8.0 million during the same period last year. The increase was primarily due to an increase of $0.3 million in corporate personnel expense.
Depreciation and amortization was $3.1 million for the three months ended September 30, 2014, an increase of $0.7 million, or 30.9%, as compared to $2.4 million during the same period last year. The majority of the increase was attributable to acquired properties and amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia.
Funeral home expenses were $10.4 million for the three months ended September 30, 2014, an increase of $1.4 million, or 15.3%, as compared to $9.0 million during the same period last year. The increase was primarily due to increases of $0.8 million in personnel costs and $0.4 million in facility costs.
Acquisition related costs were $0.5 million for the three months ended September 30, 2014, an increase of $0.3 million, or 85.6%, as compared to $0.2 million during the same period last year. These costs will vary from period to period depending on the amount of acquisition activity that takes place.
Non-segment Allocated Results
Certain statement of operations amounts are not allocated to segment operations. These amounts are those line items that can be found on our unaudited condensed consolidated statement of operations below operating profit and above net loss.
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The table below summarizes these items and the changes between the three months ended September 30, 2014 and 2013:
Three months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
Gain on sale of funeral home |
$ | 244 | $ | | $ | 244 | 100.0 | % | ||||||||
Gain on acquisition |
| 2,530 | (2,530 | ) | -100.0 | % | ||||||||||
Interest expense |
5,268 | 5,193 | 75 | 1.4 | % | |||||||||||
Income tax expense (benefit) |
$ | 664 | $ | (442 | ) | $ | 1,106 | -250.2 | % |
The gain on sale of funeral home recorded during the three months ended September 30, 2014 pertains to the sale of one funeral home in California during September 2014.
The gain on acquisition recorded during the three months ended September 30, 2013 relates to our third quarter 2013 acquisition.
Interest expense was relatively consistent period over period. In general, there was an increase in discount accretion expense primarily relating to the obligation for the lease and management agreements with the Archdiocese of Philadelphia, which was partly offset due to a reduction in interest expense primarily due to a decrease in the amounts outstanding under the credit facility. Average amounts outstanding under the credit facility were $92.4 million and $101.2 million during the three months ended September 30, 2014 and 2013, respectively.
We had income tax expense of $0.7 million for the three months ended September 30, 2014, as compared to an income tax benefit of $0.4 million during the same period last year. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.
Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013
Cemetery Operations Southeast
Since June 30, 2013, we have acquired eleven properties in our Cemetery Operations Southeast segment. The first acquisition occurred during the third quarter of 2013, the second occurred during the first quarter of 2014 and the remaining nine occurred during the second quarter of 2014. The results of operations for these acquired properties have either less or no impact on the results for the nine months ended September 30, 2013, but are included in the results for the nine months ended September 30, 2014. The acquisitions contributed approximately $5.5 million of the revenues and $3.7 million of the costs and expenses of the segment for the nine months ended September 30, 2014.
The table below compares the results of operations for our Cemetery Operations Southeast for the nine months ended September 30, 2014 to the same period last year:
Nine months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 100,404 | $ | 99,720 | $ | 684 | 0.7 | % | ||||||||
Total costs and expenses |
75,268 | 71,317 | 3,951 | 5.5 | % | |||||||||||
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Operating profit |
$ | 25,136 | $ | 28,403 | $ | (3,267 | ) | -11.5 | % | |||||||
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Revenues
The increase in revenues was related to increases of $1.6 million in income from our trusts, $1.1 million in the value of at-need contracts written and $0.1 million in interest and other income, partially offset by a $2.1 million decrease in the value of pre-need contracts written. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
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Total costs and expenses
The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:
| A $0.4 million increase in the cost of goods sold attributable to product mix. |
| A $1.3 million increase in cemetery expenses primarily due to increases of $0.4 million in labor costs, $0.5 million in repairs and maintenance expense and $0.3 million in utility and fuel costs. |
| A $1.1 million increase in selling expenses primarily attributable to an increase of $1.0 million in advertising and marketing costs and an increase of $0.1 million in commissions and personnel costs. |
| A $0.8 million increase in general and administrative expense primarily due to a $0.6 million increase in personnel expenses and $0.1 million increases in both rent and repairs and maintenance expense. |
| A $0.4 million increase in depreciation expense. |
Cemetery Operations Northeast
During the second quarter of 2014, we acquired three properties and separately obtained the rights from the Archdiocese of Philadelphia to operate thirteen properties in our Cemetery Operations Northeast segment. The results of operations for these properties have no impact on the results for the nine months ended September 30, 2013, but are included in the results for the nine months ended September 30, 2014. The additions have contributed approximately $9.6 million of the revenues and $7.4 million of the costs and expenses of the segment for the nine months ended September 30, 2014.
The table below compares the results of operations for our Cemetery Operations Northeast for the nine months ended September 30, 2014 to the same period last year:
Nine months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 61,112 | $ | 47,046 | $ | 14,066 | 29.9 | % | ||||||||
Total costs and expenses |
39,295 | 32,273 | 7,022 | 21.8 | % | |||||||||||
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Operating profit |
$ | 21,817 | $ | 14,773 | $ | 7,044 | 47.7 | % | ||||||||
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Revenues
The increase in revenues was primarily caused by an increase in other income of $4.5 million primarily related to one land sale during the first quarter of 2014. Also, we had increases of $2.8 million in the value of pre-need contracts written, $4.8 million in the value of at-need contracts written and $2.0 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:
| A $0.2 million increase in the cost of goods sold attributable to changes in product mix. |
| A $3.7 million increase in cemetery expenses primarily attributable to increases of $2.8 million in labor costs, $0.5 million in repairs and maintenance expense, $0.3 million in utility and fuel costs and $0.1 million in real estate tax expense. |
| A $1.8 million increase in selling expenses primarily due to increases of $1.3 million in commissions and personnel costs and $0.4 million in advertising and marketing costs. |
| A $0.7 million increase in general and administrative expenses primarily due increases of $0.5 million in personnel costs and $0.1 million in professional fees. |
| A $0.6 million increase in depreciation expense inclusive of $0.3 million of amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia. |
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Cemetery Operations West
The table below compares the results of operations for our Cemetery Operations West for the nine months ended September 30, 2014 to the same period last year:
Nine months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 61,979 | $ | 56,721 | $ | 5,258 | 9.3 | % | ||||||||
Total costs and expenses |
40,478 | 36,029 | 4,449 | 12.3 | % | |||||||||||
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Operating profit |
$ | 21,501 | $ | 20,692 | $ | 809 | 3.9 | % | ||||||||
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Revenues
The increase in revenues was caused by a $1.6 million increase in the value of pre-need contracts written, a $1.4 million increase in the value of at-need contracts written, and an increase of $2.7 million in income from our trusts. These increases were partially offset by a net decrease of $0.4 million in interest and other income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Total costs and expenses
The net increase in costs and expenses was primarily related to:
| A $1.9 million increase in the cost of goods sold attributable to the corresponding increase in the value of contracts written and change in product mix. |
| A $0.2 million decrease in cemetery expenses primarily due to a decrease of $0.4 million in real estate tax expense, partially offset by an increase of approximately $0.2 million in repairs and maintenance expense. |
| A $1.3 million increase in selling expenses primarily due to a $1.0 million increase in commission and personnel related costs and a $0.3 million increase in advertising and marketing costs. |
| A $1.4 million increase in general and administrative expenses primarily due to an increase in legal costs, principally related to a legal settlement. |
Funeral Homes Segment
In the first quarter of 2013 we acquired six funeral homes. In the second quarter of 2014 we acquired nine funeral homes. Therefore, the results of operations for these properties have either less or no impact on the results for the nine months ended September 30, 2013, but are included in the results for the nine months ended September 30, 2014. These additions are primarily responsible for the increases to revenues and costs and expenses for the Funeral Homes segment.
The table below compares the results of operations for our Funeral Homes segment for the nine months ended September 30, 2014 to the same period last year:
Nine months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
(in thousands) | ||||||||||||||||
(non-GAAP) | ||||||||||||||||
Total revenues |
$ | 40,777 | $ | 36,904 | $ | 3,873 | 10.5 | % | ||||||||
Total costs and expenses |
32,159 | 29,850 | 2,309 | 7.7 | % | |||||||||||
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Operating profit |
$ | 8,618 | $ | 7,054 | $ | 1,564 | 22.2 | % | ||||||||
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Revenues
The increase in revenues was primarily attributable to a $2.4 million increase in the value of pre-need contracts written and a $1.3 million increase in the value of at-need contracts written.
Total costs and expenses
The net increase in costs and expenses was primarily attributable to increases of $0.9 million in facility costs and $0.8 million in personnel costs, with the remainder attributable to increases in depreciation and other general expense categories.
Corporate Segment
The table below compares expenses incurred by the Corporate segment for the nine months ended September 30, 2014 to the same period last year:
Nine months ended September 30, | ||||||||||||||||
2014 | 2013 | Change ($) | Change (%) | |||||||||||||
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(non-GAAP) | ||||||||||||||||
Selling, cemetery and general and administrative expenses |
$ | 1,480 | $ | 833 | $ | 647 | 77.7 | % | ||||||||
Depreciation and amortization |
716 | 911 | (195 | ) | -21.4 | % | ||||||||||
Acquisition related costs, net of recoveries |
2,040 | 901 | 1,139 | 126.4 | % | |||||||||||
Corporate expenses |
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Corporate personnel expenses |
9,784 | 10,599 | (815 | ) | -7.7 | % | ||||||||||
Other corporate expenses |
12,610 | 11,058 | 1,552 | 14.0 | % | |||||||||||
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Total corporate overhead |
22,394 | 21,657 | 737 | 3.4 | % | |||||||||||
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Total corporate expenses |
$ | 26,630 | $ | 24,302 | $ | 2,328 | 9.6 | % | ||||||||
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The increase in corporate expenses was primarily attributable to increases of $0.6 million in selling expenses due to increased advertising costs, $1.1 million in acquisition related costs and $1.3 million in professional fees, reported within corporate overhead. These increases were partially offset by a decrease of $0.8 million in personnel costs. Due to a legal settlement during the nine months ended September 30, 2013, acquisition related costs were reduced by $1.3 million. This legal settlement also resulted in recoveries of legal costs of $1.7 million, driving down professional fees expense for the prior period. Acquisition related costs will vary from period to period depending on the amount of acquisition activity that takes place.
Reconciliation of Segment Results of Operations to Consolidated Results of Operations
As discussed in the segment sections of this Managements Discussion and Analysis of Financial Condition and Results of Operations, cemetery revenues and their associated costs as reported at the segment level are not deferred until such time that we satisfy the delivery criteria for revenue recognition.
The table below analyzes results of operations and the changes therein for the nine months ended September 30, 2014 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/ or changes in the timing of when merchandise and services were delivered:
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Nine months ended September 30, 2014 |
Nine months ended September 30, 2013 |
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(in thousands) | (in thousands) | |||||||||||||||||||||||||||||||
Segment Results (non-GAAP) |
GAAP Adjustments |
GAAP Results |
Segment Results (non-GAAP) |
GAAP Adjustments |
GAAP Results |
Change in GAAP results ($) |
Change in GAAP results (%) |
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Revenues |
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Pre-need cemetery revenues |
$ | 104,555 | $ | (26,957 | ) | $ | 77,598 | $ | 102,383 | $ | (32,513 | ) | $ | 69,870 | $ | 7,728 | 11.1 | % | ||||||||||||||
At-need cemetery revenues |
67,704 | 614 | 68,318 | 60,387 | (4,259 | ) | 56,128 | 12,190 | 21.7 | % | ||||||||||||||||||||||
Investment income from trusts |
39,225 | (19,529 | ) | 19,696 | 32,916 | (15,892 | ) | 17,024 | 2,672 | 15.7 | % | |||||||||||||||||||||
Interest income |
5,848 | | 5,848 | 5,209 | | 5,209 | 639 | 12.3 | % | |||||||||||||||||||||||
Funeral home revenues |
40,777 | (5,313 | ) | 35,464 | 36,904 | (4,437 | ) | 32,467 | 2,997 | 9.2 | % | |||||||||||||||||||||
Other cemetery revenues |
6,163 | 1,007 | 7,170 | 2,592 | 283 | 2,875 | 4,295 | 149.4 | % | |||||||||||||||||||||||
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Total revenues |
264,272 | (50,178 | ) | 214,094 | 240,391 | (56,818 | ) | 183,573 | 30,521 | 16.6 | % | |||||||||||||||||||||
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Costs and expenses |
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Cost of goods sold |
29,307 | (4,091 | ) | 25,216 | 26,841 | (5,737 | ) | 21,104 | 4,112 | 19.5 | % | |||||||||||||||||||||
Cemetery expense |
47,546 | | 47,546 | 42,700 | | 42,700 | 4,846 | 11.3 | % | |||||||||||||||||||||||
Selling expense |
48,404 | (5,860 | ) | 42,544 | 43,549 | (8,415 | ) | 35,134 | 7,410 | 21.1 | % | |||||||||||||||||||||
General and administrative expense |
26,333 | | 26,333 | 23,382 | | 23,382 | 2,951 | 12.6 | % | |||||||||||||||||||||||
Corporate overhead |
22,394 | | 22,394 | 21,657 | | 21,657 | 737 | 3.4 | % | |||||||||||||||||||||||
Depreciation and amortization |
7,993 | | 7,993 | 7,159 | | 7,159 | 834 | 11.6 | % | |||||||||||||||||||||||
Funeral home expense |
29,813 | (732 | ) | 29,081 | 27,582 | (501 | ) | 27,081 | 2,000 | 7.4 | % | |||||||||||||||||||||
Acquisition related costs, net of recoveries |
2,040 | | 2,040 | 901 | | 901 | 1,139 | 126.4 | % | |||||||||||||||||||||||
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Total costs and expenses |
213,830 | (10,683 | ) | 203,147 | 193,771 | (14,653 | ) | 179,118 | 24,029 | 13.4 | % | |||||||||||||||||||||
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Operating profit |
$ | 50,442 | $ | (39,495 | ) | $ | 10,947 | $ | 46,620 | $ | (42,165 | ) | $ | 4,455 | $ | 6,492 | 145.7 | % | ||||||||||||||
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Revenues
Pre-need cemetery revenues were $77.6 million for the nine months ended September 30, 2014, an increase of $7.7 million, or 11.1%, as compared to $69.9 million during the same period last year. The increase was primarily caused by an increase of $2.2 million in the value of cemetery contracts written and a decrease of $5.5 million in deferred revenue.
At-need cemetery revenues were $68.3 million for the nine months ended September 30, 2014, an increase of $12.2 million, or 21.7%, as compared to $56.1 million during the same period last year. The increase was primarily caused by an increase of $7.3 million in the value of cemetery contracts written and a decrease of $4.9 million in deferred revenue.
Investment income from trusts was $19.7 million for the nine months ended September 30, 2014, an increase of $2.7 million, or 15.7%, as compared to $17.0 million during the same period last year. On a segment basis, we had an increase of $6.3 million, which was partially offset by an adjustment of $3.6 million related to funds for which we have not met the requirements that would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.
Interest income on accounts receivable was $5.8 million for the nine months ended September 30, 2014 as compared to $5.2 million for the nine months ended September 30, 2013, a 12.3% increase, primarily due to a larger accounts receivable balance.
Funeral home revenues were $35.5 million for the nine months ended September 30, 2014, an increase of $3.0 million, or 9.2%, compared to $32.5 million during the same period last year. The increase was primarily driven