UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
| x | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
FOR THE FISCAL YEAR ENDED December 31, 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) |
Registrant’s telephone number, including area code (215) 826-2800
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class |
Name of each exchange on which registered | |
| Common Units | New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
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 (Check one):
| 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 Act). Yes ¨ No x
The aggregate market value of the common units held by non-affiliates of the registrant was approximately $633.8 million as of June 30, 2014 based on $24.23, the closing price per common unit as reported on the New York Stock Exchange on that date.¹
The number of the registrant’s outstanding common units at March 2, 2015 was 29,258,434.
Documents incorporated by reference: None
| ¹ | The aggregate market value of the common units set forth above equals the number of the registrant’s common units outstanding, reduced by the number of common units held by executive officers, directors and persons owning 10% or more of the registrant’s common units, multiplied by the closing price per the registrant’s common unit on June 30, 2014, the last business day of the registrant’s most recently completed second fiscal quarter. The information provided shall in no way be construed as an admission that any person whose holdings are excluded from this figure is an affiliate of the registrant or that any person whose holdings are included in this figure is not an affiliate of the registrant and any such admission is hereby disclaimed. The information provided herein is included solely for record keeping purposes of the Securities and Exchange Commission. |
FORM 10-K OF STONEMOR PARTNERS L.P.
| PART I | ||||||
| Item 1. |
3 | |||||
| Item 1A. |
12 | |||||
| Item 1B. |
25 | |||||
| Item 2. |
26 | |||||
| Item 3. |
28 | |||||
| Item 4. |
28 | |||||
| PART II | ||||||
| Item 5. |
Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities | 29 | ||||
| Item 6. |
34 | |||||
| Item 7. |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
37 | ||||
| Item 7A. |
77 | |||||
| Item 8. |
80 | |||||
| Item 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
136 | ||||
| Item 9A. |
136 | |||||
| Item 9B. |
138 | |||||
| PART III | ||||||
| Item 10. |
139 | |||||
| Item 11. |
147 | |||||
| Item 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters | 161 | ||||
| Item 13. |
Certain Relationships and Related Transactions, and Director Independence |
162 | ||||
| Item 14. |
168 | |||||
| PART IV | ||||||
| Item 15. |
169 | |||||
2
PART I
| Item 1. | Business |
Overview
We were formed as a Delaware limited partnership in April 2004 to own and operate the assets and businesses previously owned and operated by Cornerstone Family Services, Inc., (“Cornerstone”), which was converted into CFSI LLC, a limited liability company (“CFSI”), prior to our initial public offering of common units representing limited partner interests on September 20, 2004. Cornerstone had been founded in 1999 by members of our management team and a private equity investment firm, which we refer to as McCown De Leeuw, in order to acquire a group of 123 cemetery properties and 4 funeral homes. On November 30, 2010, McCown De Leeuw transferred certain of its interests to MDC IV Trust U/T/A November 30, 2010, MDC IV Associates Trust U/T/A November 30, 2010 and Delta Trust U/T/A November 30, 2010, which we collectively refer to as the MDC IV Liquidating Trusts, and McCown De Leeuw was subsequently terminated. On May 21, 2014, Cornerstone Family Services LLC, a Delaware limited liability company (“CFS”), and its direct and indirect subsidiaries: CFSI LLC and StoneMor GP LLC, our general partner (“StoneMor GP” or “general partner”), completed a series of transactions (the “Reorganization”) to streamline the ownership structure of CFSI and StoneMor GP. As a result of the Reorganization, StoneMor GP became a wholly-owned subsidiary of StoneMor GP Holdings LLC, a Delaware limited liability company (“GP Holdings”), formerly known as CFSI, and GP Holdings is owned by (i) a trustee of the trust established for the pecuniary benefit of American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (“ACII”), which trustee has exclusive voting and investment power over approximately 67.03% of membership interests in GP Holdings, and (ii) certain directors, affiliates of certain directors and current and former executive officers of our general partner. See Part III of this Annual Report on Form 10-K for a more detailed discussion of the Reorganization. In this Annual Report on Form 10-K, unless the context otherwise requires, references to “we,” “us,” “our,” “StoneMor,” the “Company,” or the “Partnership” are to StoneMor Partners L.P. and its subsidiaries.
We are currently the second largest owner and operator of cemeteries and funeral homes in the United States. As of December 31, 2014, we operated 303 cemeteries in 27 states and Puerto Rico. We own 272 of these cemeteries and we manage or operate the remaining 31 under lease, management or operating agreements with the nonprofit cemetery companies that own the cemeteries. As of December 31, 2014, we also owned and operated 98 funeral homes in 19 states and Puerto Rico. Forty-five of these funeral homes are located on the grounds of the cemeteries that we own.
The cemetery products and services that we sell include the following:
| Interment Rights |
Merchandise |
Services | ||
| • burial lots • lawn crypts • mausoleum crypts • cremation niches • perpetual care rights |
• burial vaults • caskets • grave markers and grave marker bases • memorials |
• installation of burial vaults • installation of caskets • installation of other cemetery merchandise • other service items |
We sell these 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. Our sales of real property, including burial lots (with and without installed vaults), lawn and mausoleum crypts and cremation niches, generate qualifying income sufficient for us to be treated as a partnership for federal income tax purposes. In 2014, we performed 50,566 burials and sold 35,426 interment rights (net of cancellations). Based on our sales of interment spaces in 2014, our cemeteries have an aggregated weighted average remaining sales life of 247 years.
Our cemetery properties are located in Alabama, California, Colorado, Delaware, Florida, Georgia, Hawaii, Illinois, Indiana, Iowa, Kansas, Kentucky, Maryland, Michigan, Mississippi, Missouri, New Jersey, North
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Carolina, Ohio, Oregon, Pennsylvania, Puerto Rico, Rhode Island, South Carolina, Tennessee, Virginia, Washington and West Virginia. One cemetery in Hawaii that we acquired in December 2007 is still awaiting regulatory approval and has not yet been conveyed to us. Our cemetery operations accounted for approximately 83.1%, 81.8% and 85.3% of our revenues in 2014, 2013 and 2012, respectively.
Our primary funeral home products are caskets and related items. Our funeral home services include consultation, the removal and preparation of remains, and the use of funeral home facilities for visitation and prayer services.
Our funeral homes are located in Alabama, Arkansas, California, Florida, Illinois, Indiana, Kansas, Maryland, Mississippi, Missouri, North Carolina, Ohio, Oregon, Pennsylvania, Puerto Rico, South Carolina, Tennessee, Virginia, Washington and West Virginia. Our funeral home revenues accounted for approximately 16.9%, 18.2% and 14.7% of our revenues in 2014, 2013 and 2012, respectively. Our funeral home operations are conducted through various wholly-owned subsidiaries that are treated as corporations for U.S. federal income tax purposes.
Operations
Segment Reporting and Related Information
We have five distinct reportable segments, which are classified as Cemetery Operations—Southeast, Cemetery Operations—Northeast, Cemetery Operations—West, Funeral Homes, and Corporate.
We have chosen 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 other segments; b) we have organized our management personnel at these operational levels; and c) it is the level at which our chief decision makers and other senior management evaluate performance.
Our Cemetery Operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of our customers differs in each of our regionally based Cemetery Operations 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 and prayer services. These services are distinctly different than the cemetery merchandise and services sold and provided by the Cemetery Operations segments.
Our Corporate segment includes various home office selling and administrative expenses that are not allocable to the other operating segments.
Cemetery Operations
Our cemetery operations include sales of cemetery interment rights, merchandise and services and the performance of cemetery maintenance and other services. An interment right entitles a customer to a burial space in one of our cemeteries and the perpetual care of that burial space. Burial spaces, or lots, are parcels of property that hold interred human remains. Our cemeteries require a burial vault to be placed in each burial lot. A burial vault is a rectangular container, usually made of concrete but also made of steel or plastic, which sits in the burial lot and in which the casket is placed. The top of the burial vault is buried approximately 18 to 24 inches below
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the surface of the ground, and the casket is placed inside the vault. Burial vaults prevent ground settling that otherwise occurs when a casket, placed directly in the ground, begins to decay creating uneven ground surface. Ground settling typically results in higher maintenance costs and increased potential liability for slip-and-fall accidents on the property. Lawn crypts are a series of closely spaced burial lots with preinstalled vaults and other improvements, such as landscaping, sprinkler systems and drainage. A mausoleum crypt is an above ground structure that may be designed for a particular customer, which we refer to as a private mausoleum, or it may be a larger building that serves multiple customers, which we refer to as a community mausoleum. Cremation niches are spaces in which the ashes remaining after cremation are stored. Cremation niches are often part of community mausoleums, although we sell a variety of cremation niches to accommodate our customers’ preferences.
Grave markers, monuments and memorials are above ground products that serve as memorials by showing who is remembered, the dates of birth and death and other pertinent information. These markers, monuments and memorials include simple plates, such as those used in a community mausoleum or cremation niche, flush-to-the-ground granite or bronze markers, headstones or large stone obelisks.
One of the principal services we provide at our cemeteries is an “opening and closing,” which is the digging and refilling of burial spaces to install the vault and place the casket into the vault. With pre-need sales, there are usually two openings and closings. During the initial opening and closing, we install the burial vault in the burial space. We usually perform this service shortly after the customer signs a pre-need contract. Advance installation allows us to withdraw the related funds from our merchandise trusts, making the amount in excess of our cost to purchase and install the vault available to us for other uses, and eliminates future merchandise trusting requirements for the burial vault and its installation. During the final opening and closing, we remove the dirt above the vault, open the lid of the vault, place the casket into the vault, close the vault lid and replace the ground cover. With at-need sales, we typically perform the initial opening and closing at the time we perform the final opening and closing. Our other services include the installation of other cemetery merchandise and the perpetual care related to interment rights.
As of December 31, 2014, we provided services to 31 cemeteries under long-term lease, operating or management agreements with the nonprofit cemetery companies that own the cemeteries. These nonprofit cemeteries are organized as such either because state law requires cemetery properties to be owned by nonprofit entities, such as in New Jersey, or because they were originally established as nonprofit entities. We have voting rights, along with member owners of burial spaces, in the five New Jersey nonprofit cemeteries as a result of owning all of their outstanding certificates of indebtedness or interest. To obtain the benefit of professional management services, the remaining 26 nonprofit cemeteries have entered into agreements with us. The agreements under which we operate these 31 nonprofit cemeteries generally have terms ranging from 3 to 60 years (but some are subject to early termination rights and obligations) and provide us with management or operating fees that approximate what we would earn if we owned those cemeteries and held them in for-profit entities.
In 2014, of the 31 cemeteries we operated under long-term lease, operating or management agreements, 15 cemeteries, including 13 cemeteries related to the transaction with the Archdiocese of Philadelphia that closed in the second quarter of 2014, did 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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Funeral Home Operations
As of December 31, 2014, we owned, operated or managed 98 funeral homes, 45 of which are located on the grounds of cemetery properties that we own. Our funeral homes offer a range of services to meet a family’s funeral needs, including family consultation, the removal and preparation of remains, provision of caskets and related funeral merchandise, the use of funeral home facilities for visitation, worship and performance of funeral services and transportation services. Funeral home operations primarily generate revenues from at-need sales. Our funeral home segment has continued to grow and has become a significant contributor to our consolidated revenues.
We purchase caskets from Thacker Caskets, Inc. under a supply agreement that expires on December 31, 2015. This agreement entitles us to specified discounts on the price of caskets but gives Thacker Caskets, Inc. the right of first refusal on all of our casket purchases. We do not have minimum purchase requirements under this supply agreement.
Cremation Products and Services
We operate crematories at some of our cemeteries or funeral homes, but our primary cremation operations are sales of receptacles for cremated remains, such as urns, and the inurnment of cremated remains in niches or scattering gardens. While cremation products and services usually cost less than traditional burial products and services, they yield higher margins on a percentage basis and take up less space than burials. We sell cremation products and services on both a pre-need and at-need basis.
Seasonality
The death care business is relatively stable and predictable. Although we experience seasonal increases in deaths due to extreme weather conditions and winter flu, these increases have not historically had any significant impact on our results of operations. In addition, we perform fewer initial openings and closings in the winter when the ground is frozen.
Sales Contracts
Pre-need products and services are typically sold on an installment basis. At-need products and services are generally required to be paid for in full in cash by the customer at the time of sale. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview—Cemetery Operations—Pre-need Sales” and “—At-need Sales” for a description of our pre-need and at-need products and services.
Trusts
Sales of cemetery products and services are subject to a variety of state regulations. In accordance with these regulations, we are required to establish and fund two types of trusts, merchandise trusts and perpetual care trusts, to ensure that we can meet our future obligations. Our funding obligations are generally equal to a percentage of sales proceeds of the products and services we sell. For a detailed discussion of these trusts, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trusting.”
Sales Personnel, Training and Marketing
As of December 31, 2014, we employed 876 full-time commissioned salespeople and 133 full-time sales support and telemarketing employees. We had ten regional sales vice presidents supporting our cemetery operations. They were supported by two Divisional Vice Presidents of Sales who report to our Chief Operating Officer. Individual salespersons are typically located at the cemeteries they serve and report directly to the cemetery sales manager. We have made a strong commitment to the ongoing education and training of our sales force and to salesperson retention in order to ensure our customers receive the highest quality customer service
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and to ensure compliance with all applicable requirements. Our training program includes classroom training at our headquarters, field training, continuously updated training materials that utilize media, such as the Internet, for interactive training and participation in industry seminars. We place special emphasis on training property sales managers, who are key elements to a successful pre-need sales program.
We reward our salespeople with incentives for generating new customers. Sales force performance is evaluated by sales budgets, sales mix and closing ratios, which are equal to the number of contracts written, divided by the number of presentations that are made. Substantially all of our sales force is compensated based solely on performance. Commissions are augmented with various bonus and incentive packages to ensure a high quality, motivated sales force. We pay commissions to our sales personnel on pre-need contracts based upon a percentage of the value of the underlying contracts. Such commissions vary depending upon the type of merchandise and services sold. We also pay commissions on at-need contracts that are generally equal to a fixed percentage of the contract amount. In addition, cemetery managers receive an override commission that is equal to a percentage of the gross sales price of the contracts entered into by the salespeople assigned to the cemeteries they manage.
We generate sales leads through focused telemarketing, direct mail, television advertising, funeral follow-up and sales force cold calling, with the assistance of database mining and other marketing resources. We have created a marketing department to allow us to use more sophisticated marketing techniques to focus more effectively our telemarketing and direct sales efforts. Sales leads are referred to the sales force to schedule an appointment, most often at the customer’s home. We believe these activities comply in all material respects with legal requirements.
Acquisitions and Long-Term Operating Agreements
Refer to Note 13 of our consolidated financial statements in “Item 8” of this Form 10-K for a more detailed discussion of our acquisitions and long-term operating agreements. A summary of our acquisition activities is as follows:
2014
We completed three acquisitions during the year ended December 31, 2014, which included 13 cemeteries and 11 funeral homes. The acquired properties were located in North Carolina, Pennsylvania, Virginia and Florida. The aggregate fair value of the total consideration for these acquisitions was $56.4 million. In addition, on May 28, 2014, we closed the Lease and the Management Agreement transaction with the Archdiocese of Philadelphia, pursuant to which we operate 13 cemeteries in Pennsylvania for a term of 60 years, subject to certain termination provisions. We paid up-front rent of $53.0 million to the Archdiocese of Philadelphia at closing.
2013
We completed two acquisitions during the year ended December 31, 2013, which included one cemetery in Virginia and six funeral homes in Florida. The aggregate fair value of the total consideration for these acquisitions was $21.6 million.
2012
We completed six acquisitions during the year ended December 31, 2012, which included 5 cemeteries and 17 funeral homes. The acquired properties were located in Ohio, Illinois, California, Oregon and Florida. The aggregate fair value of the total consideration paid for these acquisitions was $34.9 million. Effective March 31, 2012, we terminated a long-term operating agreement entered into in 2010 related to 3 cemeteries with the Archdiocese of Detroit, resulting in a gain of $1.7 million.
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Competition
Our cemeteries and funeral homes generally serve customers that live within a 10 to 15-mile radius of a property’s location. Within this localized area, we face competition from other cemeteries and funeral homes located in the area. Most of these cemeteries and funeral homes are independently owned and operated, and most of these owners and operators are smaller than we are and have fewer resources than we do. We generally face limited competition from the two publicly held death care companies that have U.S. operations—Service Corporation International and Carriage Services, Inc.—as they do not directly operate cemeteries in the same local geographic areas where we operate.
Within a localized area of competition, we compete primarily for at-need sales because many of the independently owned, local competitors either do not have pre-need sales programs or have pre-need programs that are not as developed as ours. Most of these competitors do not have as many of the resources that are available to us to launch and grow a substantial pre-need sales program. The number of customers that cemeteries and funeral homes are able to attract is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important factors. The sale of cemetery and funeral home products and services on a pre-need basis has increasingly been used by many companies as an important marketing tool. Due to the importance of reputation and heritage, increases in customer base are usually gained over a long period of time.
Competitors within a localized area have an advantage over us if a potential customer’s family members are already buried in the competitor’s cemetery. If either of the two publicly held death care companies identified above operated, or in the future were to operate, cemeteries within close proximity of our cemeteries, they may have a competitive advantage over us because they have greater financial resources available to them due to their size and access to the capital markets.
We believe that we currently face limited competition for cemetery acquisitions. The two publicly held death care companies identified above, as well as Stewart Enterprises, Inc., which was acquired by Service Corporation International in December 2013, have historically been the industry’s primary consolidators, but have largely curtailed cemetery acquisition activity since 1999. Furthermore, these companies continue to generate the majority of their revenues from funeral home operations. Based on the relative levels of cemetery operations and funeral home operations of these publicly traded death care companies, which are disclosed in their SEC filings, we believe that we are the only public death care company that focuses a significant portion of its efforts on cemetery operations.
Regulation
General
Our operations are subject to regulation, supervision and licensing under federal, state and local laws, which impacts the goods and services that we may sell and the manner in which we may furnish goods and services.
Cooling-Off Legislation
Each of the states where our current cemetery and funeral home properties are located has “cooling-off” legislation with respect to pre-need sales of cemetery and funeral home products and services. This legislation generally requires us to refund proceeds from pre-need sales contracts if canceled by the customer for any reason within three to thirty days, or in certain states until death, from the date of the contract, depending on the state (and some states permit cancellation and require refund beyond that time). The Federal Trade Commission, or FTC, also requires a cooling-off period of three business days for door to door sales, during which time a contract may be cancelled entitling a customer to refund of the funds paid.
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Trusting
Sales of cemetery interment rights and pre-need sales of cemetery and funeral home merchandise and services are generally subject to trusting requirements imposed by state laws in most of the states where we operate. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Trusting.”
Truth in Lending Act and Regulation Z
Our pre-need installment contracts are subject to the federal Truth-in-Lending Act, or TILA, and the regulations thereunder, which are referred to as Regulation Z. TILA and Regulation Z promote the informed use of consumer credit by requiring us to disclose, among other things, the annual percentage rate, finance charges and amount financed when extending credit to consumers.
Other Consumer Credit-Related Laws and Regulations
As a provider of consumer credit and a business that generally deals with consumers, we are subject to various other state and federal laws covering matters such as credit discrimination, the use of credit reports, identity theft, the handling of consumer information, consumer privacy, marketing and advertising, debt collection, extensions of credit to service members, and prohibitions on unfair or deceptive trade practices.
The Dodd-Frank Wall Street Reform and Consumer Protection Act, or Dodd-Frank
Dodd-Frank, signed into law by President Obama on July 21, 2010, created a new federal Bureau of Consumer Financial Protection, or the Bureau. In addition to transferring to the Bureau rule-writing authority for nearly all federal consumer finance-related laws and giving the Bureau rule-writing authority in other areas, Dodd-Frank empowers the Bureau to conduct examinations and bring enforcement actions against certain consumer credit providers and other entities offering consumer financial products or services. While not presently subject to examination by the Bureau, we potentially could be in the future in connection with our pre-need installment contracts. The Bureau also has authority to conduct investigations and bring enforcement actions against providers of consumer financial services, including providers over which it may not currently have examination authority. The Bureau may seek penalties and other relief on behalf of consumers that are substantially in excess of the remedies available under such laws prior to Dodd-Frank. On July 21, 2011, the Bureau officially assumed rule-writing and enforcement authority for most federal consumer finance laws, as well as authority to prohibit unfair, deceptive or abusive practices related to consumer financial products and services.
Telemarketing Laws
We are subject to the requirements of two federal statutes governing telemarketing practices, the Telephone Consumer Protection Act, or TCPA, and the Telemarketing and Consumer Fraud and Abuse Prevention Act, or TCFAPA. These statutes impose significant penalties on those who fail to comply with their mandates. The Federal Communications Commission, or FCC, is the federal agency with authority to enforce the TCPA, and the FTC, has jurisdiction under the TCFAPA. The FTC and FCC jointly administer a national “do not call” registry, which consumers can join in order to prevent unwanted telemarketing calls. Primarily as a result of implementation of the “do not call” legislation and regulations, the percentage of our pre-need sales generated from telemarketing leads has decreased substantially in the past ten years. We are also subject to similar telemarketing consumer protection laws in all states in which we currently operate. These states’ statutes similarly permit consumers to prevent unwanted telephone solicitations. In addition, in cases where telephone solicitations are permitted, there are various restrictions and requirements under state and federal law in connection with such calls.
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Occupational Safety and Health Act and Environmental Law Requirements
We are subject to the requirements of the Occupational Safety and Health Act, or OSHA, and comparable state statutes. OSHA’s regulatory requirement known as the Hazard Communication Standard, the Emergency Planning and Community Right-to-Know Act (“EPCRA”) and similar state statutes require us to report information about hazardous materials used or maintained for our operations to state, federal and local authorities. We may also be subject to Tier 1 or Tier 2 Emergency and Hazardous Chemical Inventory reporting requirements under EPCRA depending on the amount of hazardous materials maintained on-site at a particular facility. We are also subject to the federal Americans with Disabilities Act and similar laws, which, among other things, may require that we modify our facilities to comply with minimum accessibility requirements for disabled persons.
Federal Trade Commission
Our funeral home operations are comprehensively regulated by the FTC under Section 5 of the Federal Trade Commission Act and a trade regulation rule for the funeral industry promulgated thereunder, referred to as the “Funeral Rule.” The Funeral Rule requires funeral service providers to disclose the prices for their goods and services as soon as the subject of price arises in a discussion with a potential customer (this entails presenting various itemized price lists if the consultation is in person, and readily answering all price-related questions posed over the telephone), and to offer their goods and services on an unbundled basis. The Funeral Rule also prohibits misrepresentations in connection with our sale of goods and services, and requires that the consumer receives an itemized statement of the goods and services purchased. Through these regulations, the FTC sought to give consumers the ability to compare prices among funeral service providers and to avoid buying packages containing goods or services that they did not want. The unbundling of goods from services has also opened the way for third-party, discount casket sellers to enter the market, although they currently do not possess substantial market share.
In addition, our pre-need installment contracts for sales of cemetery and funeral home merchandise and services are subject to the FTC’s “Holder Rule,” which requires disclosure in the installment contract that any holder of the contract is subject to all claims and defenses that the consumer could assert against the seller of the goods or services, subject to certain limitations. These contracts are also subject to the FTC’s “Credit Practices Rule,” which prohibits certain credit loan terms and practices.
Future Enactments and Regulation
Federal and state legislatures and regulatory agencies frequently propose new laws, rules and regulations and new interpretations of existing laws, rules and regulations which, if enacted or adopted, could have a material adverse effect on our operations and on the death care industry in general. A significant portion of our operations is located in California, Pennsylvania, Michigan, New Jersey, Virginia, Maryland, North Carolina, Ohio, Indiana, Florida and West Virginia and any material adverse change in the regulatory requirements of those states applicable to our operations could have a material adverse effect on our results of operations. We cannot predict the outcome of any proposed legislation or regulations or the effect that any such legislation or regulations, if enacted or adopted, might have on us.
Environmental Regulations and Liabilities
Our operations are subject to federal, state and local environmental regulations in three principal areas: (1) crematories for emissions to air that may trigger requirements under the Clean Air Act; (2) funeral homes for the management of hazardous materials and medical wastes; and (3) cemeteries and funeral homes for the management of solid waste, underground and above ground storage tanks and discharges to wastewater treatment systems and/or septic systems.
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Clean Air Act
The Federal Clean Air Act and similar state laws, which regulate emissions into the air, can affect crematory operations through permitting and emissions control requirements. Our cremation operations may be subject to Clean Air Act regulations under federal and state law and may be subject to enforcement actions if these operations do not conform to the requirements of these laws.
Emergency Planning and Community Right-to-Know Act
As noted above, federal, state and local regulations apply to the storage and use of hazardous materials at our facilities. Depending on the types and quantities of materials we manage at any particular facility, we may be required to maintain and submit Material Safety Data Sheets and inventories of these materials located at our facilities to the regulatory authorities in compliance with EPCRA or similar state statutes.
Comprehensive Environmental Response, Compensation, and Liability Act
The Comprehensive Environmental Response, Compensation, and Liability Act, or CERCLA, and similar state laws affect our cemetery and funeral home operations by, among other things, imposing investigation and remediation obligations for threatened or actual releases of hazardous substances that may endanger public health or welfare or the environment. Under CERCLA and similar state laws, strict, joint and several liability may be imposed upon generators, site owners and operators, and others regardless of fault or the legality of the original disposal activity. Our operations include the use of some materials that may meet the definition of “hazardous substances” under CERCLA or state laws and thus may give rise to liability if released to the environment through a spill or release. Should we acquire new properties with pre-existing conditions triggering CERCLA or similar state liability, we may become liable for responding to those conditions under CERCLA or similar state laws. We may become involved in proceedings, litigation or investigations at one or more sites where releases of hazardous substances have occurred, and we cannot assure you that the associated costs and potential liabilities would not be material.
Underground and Above Ground Storage Tank Laws and Solid Waste Laws
Federal, state and local laws regulate the installation, removal, operations and closure of underground storage tanks, or USTs, and above ground storage tanks, or ASTs, which are located at some of our facilities, as well as the management and disposal of solid waste. Most of the USTs and ASTs contain petroleum for heating our buildings or are used for vehicle maintenance, or general operations. Depending upon the age and integrity of the USTs and ASTs, they may require upgrades, removal and/or closure, and remediation may be required if there has been a potential discharge or release of petroleum into the environment. All of the aforementioned activities may require us to incur capital costs and expenses to ensure continued compliance with environmental requirements. Should we acquire properties with existing USTs and ASTs that are not in compliance with environmental requirements, we may become liable for responding to releases to the environment or for costs associated with upgrades, removal and/or closure costs, and we cannot assure you that the costs or liabilities will not be material in that event. Solid wastes have been disposed of at some of our cemeteries, both lawfully and unlawfully. Prior to acquiring a cemetery, an environmental site assessment is usually conducted to determine, among other conditions, if a solid waste disposal area or landfill exists on the parcel which requires removal, cleaning or management. Depending upon the existence of any such solid waste disposal areas, we may be required by the applicable regulatory authority to remove the waste materials or to conduct remediation and we cannot assure you that the costs or liabilities will not be material in that event.
Employees
As of December 31, 2014, our general partner and its affiliates employed 3,304 full-time and 76 part-time employees. Fifty-six of these employees are represented by various unions in Pennsylvania, Ohio, California,
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New Jersey and Illinois, and are subject to collective bargaining agreements that have expiration dates ranging from June 2015 to January 2018. We believe that our relationship with our employees is good.
Available Information
We maintain an Internet website with the address of http://www.stonemor.com. The information on this website is not, and should not be considered part of this Annual Report on Form 10-K and is not incorporated by reference into this document. This website address is only intended to be an inactive textual reference. Copies of our reports filed with, or furnished to, the SEC on Forms 10-K, 10-Q, and 8-K and any amendments to such reports are available for viewing and copying at such Internet website, free of charge, as soon as reasonably practicable after filing such material with, or furnishing it to, the SEC.
Financial Information
Information for each of our segments is presented in “Part II, Item 8. Financial Statements and Supplementary Data” in this report.
| Item 1A. | Risk Factors |
Risk Factors Related to Our Business
Important factors that could cause actual results to differ materially from our expectations include, but are not limited to, the risks set forth below. The risks described below should not be considered comprehensive and all-inclusive. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. If any events occur that give rise to the following risks, our business, financial condition or results of operations could be materially and adversely impacted. These risk factors should be read in conjunction with other information set forth in this Annual Report on Form 10-K, including our consolidated financial statements and the related notes. Many such factors are beyond our ability to control or predict. Investors are cautioned not to put undue reliance on forward-looking statements that involve risks and uncertainties.
We may not have sufficient cash from operations to increase distributions, to continue paying distributions at their current level, or at all, after we have paid our expenses, including the expenses of our general partner, funded merchandise and perpetual care trusts and established necessary cash reserves.
The amount of cash we can distribute on our units principally depends upon the amount of cash we generate from operations, which fluctuates from quarter to quarter based on, among other things:
| • | the volume of our sales; |
| • | the prices at which we sell our products and services; and |
| • | the level of our operating and general and administrative costs. |
In addition, the actual amount of cash we will have available for distribution will depend on other factors, such as working capital borrowings, capital expenditures and funding requirements for trusts and our ability to withdraw amounts from trusts. Therefore, our major risk is related to uncertainties associated with our 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.
If we do not generate sufficient cash to continue paying distributions at least at their current level, the market price of our common units may decline materially and the same may be true if we do not increase our distributions as projected. We expect that we will need working capital borrowings of approximately
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$49.0 million during the year ending December 31, 2015 in order to have sufficient operating surplus to pay distributions at their current level and with the projected increase on our common units, although the actual amount of working capital borrowings could be materially more or less. These working capital borrowings enable us to finance the build-up in our accounts receivables, and to construct mausoleums and purchase products for our pre-need sales in advance of the time of need, which, in turn, allows us to generate available cash for operating surplus over time by accessing the funds held in trust for the products purchased.
Our substantial level of indebtedness could materially adversely affect our ability to generate sufficient cash for distribution to our unitholders, to fulfill our debt obligations and to operate our business.
We have a substantial amount of debt, which requires significant interest and principal payments. As of December 31, 2014, we had approximately $110.9 million of total debt outstanding on a revolving credit facility that matures in December 2019, which would give us approximately $69.1 million of total available borrowing capacity under our credit facility. The revolving credit facility provides for both acquisition draws, which are used primarily to finance acquisitions, acquisition related costs and mausoleum construction costs, and working capital draws, which are used to finance all other corporate costs. As of December 31, 2014, we had approximately $85.9 million of working capital draws, which are limited to a borrowing formula of 85% of eligible account receivables. This limit was $128.6 million at December 31, 2014. In addition, as of December 31, 2014, we had $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 outstanding. Leverage makes us more vulnerable to economic downturns. Because we are obligated to dedicate a portion of our cash flow to service our debt obligations, our cash flow available for operations and for distribution to our unitholders will be reduced. The amount of indebtedness we have could limit our flexibility in planning for, or reacting to, changes in the markets in which we compete, limit our ability to obtain additional financing, if necessary, for working capital expenditures, acquisitions or other purposes, and require us to dedicate more cash flow to service our debt than we desire. Our ability to satisfy our indebtedness as required by the terms of our debt will be dependent on, among other things, the successful execution of our long-term strategic plan. Subject to limitations in our debt obligations, we may incur additional debt in the future, for acquisitions or otherwise, and servicing this debt could further limit our cash flow available for operations and distribution to unitholders.
Restrictions in our existing and future debt agreements could limit our ability to make distributions to you or capitalize on acquisition and other business opportunities.
The operating and financial restrictions and covenants in our senior notes, our revolving credit facility and any future financing agreements could restrict our ability to finance future operations or capital needs or to expand or pursue our business activities. For example, our senior notes and our revolving credit facility contain covenants that restrict or limit our ability to:
| • | enter into a new line of business; |
| • | enter into any agreement of merger or acquisition; |
| • | sell, transfer, assign or convey assets; |
| • | grant certain liens; |
| • | incur or guarantee additional indebtedness; |
| • | make certain loans, advances and investments; |
| • | declare and pay dividends and distributions; |
| • | enter into transactions with affiliates; and |
| • | make voluntary payments or modifications of indebtedness. |
In addition, our revolving credit facility contains covenants requiring us to maintain certain financial ratios and tests. These restrictions may also limit our ability to obtain future financings. Our ability to comply with the
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covenants and restrictions contained in our senior notes and revolving credit facility agreement may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If market or other economic conditions continue to deteriorate, our ability to comply with these covenants may be impaired. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources—Long-Term Debt.”
In addition, our debt obligations limit our ability to make distributions to our unitholders. Our senior notes and revolving credit facility obligations prohibit us from making such distributions if we are in default, including with regard to our revolving credit facility obligations as a result of our failure to maintain specified financial ratios. We cannot assure you that we will maintain these specified ratios and satisfy these tests for distributing available cash from operating surplus.
If we violate any of the restrictions, covenants, ratios or tests in our revolving credit facility agreement or senior notes indenture, the lenders will be able to accelerate the maturity of all borrowings thereunder, cause cross-default and demand repayment of amounts outstanding, and our lenders’ commitment to make further loans to us under the revolving credit facility may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments. Any subsequent replacement of our debt obligations or any new indebtedness could have similar or greater restrictions.
Any reductions in the principal or the earnings of the investments held in merchandise and perpetual care trusts could adversely affect our revenues and cash flow.
A substantial portion of our revenue is generated from investment returns that we realize from merchandise and perpetual care trusts. Unstable economic conditions have, at times, caused us to experience declines in the fair value of the assets held in these trusts. Future cash flows could be negatively impacted if we are forced to liquidate assets that are in impaired positions.
We invest primarily for current income. We rely on the interest and dividends paid by the assets in our trusts to provide both revenue and cash flow. Interest income from fixed-income securities is particularly susceptible to changes in interest rates and declines in credit worthiness while dividends from equity securities are susceptible to the issuer’s ability to make such payments.
Any decline in the interest rate environment or the credit worthiness of our debt issuers or any suspension or reduction of dividends could have a material adverse effect on our financial condition and results of operations.
In addition, any significant or sustained unrealized investment losses could result in merchandise trusts having insufficient funds to cover our cost of delivering products and services. In this scenario, we would be required to use our operating cash to deliver those products and perform those services, which could decrease our cash available for distribution.
Pre-need sales typically generate low or negative cash flow in the periods immediately following sales, which could adversely affect our ability to make distributions to our unitholders.
When we sell cemetery merchandise and services on a pre-need basis, we pay commissions on the sale to our salespeople and are required by state law to deposit a portion of the sales proceeds into a merchandise trust. In addition, most of our customers finance their pre-need purchases under installment contracts payable over a number of years. Depending on the trusting requirements of the states in which we operate, the applicable sales commission rates and the amount of the down payment, our cash flow from sales to customers through installment contracts is typically negative until we have collected the related receivable or until we purchase the products or perform the services and are permitted to withdraw funds we have deposited in the merchandise trust. To the extent we increase pre-need sales, state trusting requirements are increased and we delay the performance of the services we sell on a pre-need basis, our cash flow immediately following pre-need sales may be further reduced, and our ability to make distributions to our unitholders could be adversely affected.
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The cemetery and funeral home industry continues to be competitive.
We face competition in all of our markets. Most of our competitors are independent operations. Our ability to compete successfully depends on our management’s forward vision, timely responses to changes in the business environment, our cemeteries and funeral homes’ ability to maintain a good reputation and high professional standards as well as offer products and services at competitive prices. We have historically experienced price competition from independent cemetery and funeral home operators. If we are unable to compete successfully, our financial condition, results of operations and cash flows could be materially adversely affected.
Because fixed costs are inherent in our business, a decrease in our revenues can have a disproportionate effect on our cash flow and profits.
Our business requires us to incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on our cemetery properties and funeral homes regardless of the number of interments or funeral services we perform. If we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause our margins, profits and cash flow to decline at a greater rate than the decline in our revenues.
Our failure to attract and retain qualified sales personnel and management could have an adverse effect on our business and financial condition.
Our ability to attract and retain a qualified sales force and other personnel is an important factor in achieving future success. Buying cemetery and funeral home products and services, especially at-need products and services, is very emotional for most customers, so our sales force must be particularly sensitive to our customers’ needs. We cannot assure you that we will be successful in our efforts to attract and retain a skilled sales force. If we are unable to maintain a qualified and productive sales force, our revenues may decline and our cash available for distribution may decrease.
Our success also depends upon the services and capabilities of our management team. Management establishes the “tone at the top” by which an environment of ethical values, operating style and management philosophy is fostered. The inability of our senior management team to maintain a proper “tone at the top” or the loss of services of one or more members of senior management as well as the inability to attract qualified managers or other personnel could have a material adverse effect on our business, financial condition, and results of operations. We may not be able to locate or employ on acceptable terms qualified replacements for senior management or key employees if their services were no longer available. We do not maintain key employee insurance on any of our executive officers.
We may not be able to identify, complete, fund or successfully integrate our acquisitions, which could have an adverse effect on our results of operations.
A primary component of our business strategy is to grow through acquisitions of cemeteries and, to a lesser extent, funeral homes. We cannot assure you that we will be able to identify and acquire cemeteries on terms favorable to us or at all. We may face competition from other death care companies in making acquisitions. Historically, we have funded a significant portion of our acquisitions through borrowings. Our ability to make acquisitions in the future may be limited by our inability to secure adequate financing, restrictions under our existing or future debt agreements, competition from third parties or a lack of suitable properties. As of December 31, 2014, we had approximately $69.1 million of total available borrowing capacity under our revolving credit facility. The revolving credit facility provides for both acquisition draws, which are used primarily to finance acquisitions, acquisition related costs and mausoleum construction costs, and working capital draws, which are used to finance all other corporate costs. As of December 31, 2014, we had approximately $85.9 million of working capital draws, which are limited to a borrowing formula of 85% of eligible account receivables. This limit was $128.6 million at December 31, 2014.
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In addition, if we complete acquisitions, we may encounter various associated risks, including the possible inability to integrate an acquired business into our operations, diversion of management’s attention and unanticipated problems or liabilities, some or all of which could have a material adverse effect on our operations and financial performance. Also, when we acquire cemeteries that do not have an existing pre-need sales program or a significant amount of pre-need products and services that have been sold but not yet purchased or performed, the operation of the cemetery and implementation of a pre-need sales program after acquisition may require significant amounts of working capital. This may make it more difficult for us to make acquisitions.
If the trend toward cremation in the United States continues, our revenues may decline which could have an adverse effect on our business and financial condition.
We and other death care companies that focus on traditional methods of interment face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has steadily increased and that cremations will be performed for approximately 44% of the deaths in the United States in 2015. This percentage is expected to increase to approximately 56% in 2025. Because the products and services associated with cremations, such as niches and urns, produce lower revenues than the products and services associated with traditional interments, a continuing trend toward cremations may reduce our revenues.
Declines in the number of deaths in our markets can cause a decrease in revenues.
Declines in the number of deaths could cause at-need sales of cemetery and funeral home merchandise and services to decline and could cause a decline in the number of pre-need sales, both of which could decrease revenues. Changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. However, generally, the number of deaths fluctuates with the seasons with more deaths occurring during the winter months primarily resulting from pneumonia and influenza. These variations can cause revenues to fluctuate.
We rely significantly on information technology and any failure, inadequacy, interruption or security lapse of that technology, including any cybersecurity incidents, could harm our ability to operate our business effectively.
Our ability to manage and maintain our internal reports effectively and integration of new business acquisitions depends significantly on our enterprise resource planning system and other information systems. Some of our information technology systems may experience interruptions, delays or cessations of service or produce errors in connection with ongoing systems implementation work. Cybersecurity attacks in particular are evolving and include, but are not limited to, malicious software, attempts to gain unauthorized access to data and other electronic security breaches that could lead to disruptions in systems, misappropriation of our confidential or otherwise protected information and corruption of data. The failure of our systems to operate effectively or to integrate with other systems, or a breach in security or other unauthorized access of these systems, may also result in reduced efficiency of our operations and could require significant capital investments to remediate any such failure, problem or breach, and to comply with applicable regulations, all of which could adversely affect our business, financial condition and results of operations.
Our business is subject to existing federal and state laws and regulations governing data privacy, security and cybersecurity in the United States. These regulations include privacy and security rules regarding employee-related and third party information when a data breach results in the release of personally identifiable information, as well as those rules imposed by the banking and payment card industries to protect against identity theft and fraud in connection with the collection of payments from customers. Currently, there are significant federal legislative proposals, which call for a national set of laws regarding data breaches, requiring timely notification to affected individuals. One proposal aims to serve as policy for which data may be collected from individuals and how that data may be used and how data breaches must be handled and reported. To the extent any of these developments result in the adoption of new laws or regulations or increased enforcement, it could
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increase our compliance costs. Incidents in which we fail to protect our customers’ information against security breaches could result in monetary damages against us and could otherwise damage our reputation, harm our businesses and adversely impact our results of operations. If we fail to protect our own information, including information about our employees, we could experience significant costs and expenses as well as damage to our reputation.
The financial condition of third-party insurance companies that fund our pre-need funeral contracts may impact our financial condition, results of operations, or cash flows.
Where permitted, customers may arrange their pre-need funeral contract by purchasing a life insurance or annuity policy from third-party insurance companies. The customer/policy holder assigns the policy benefits to our funeral home to pay for the pre-need funeral contract at the time of need. If the financial condition of the third-party insurance companies were to deteriorate materially because of market conditions or otherwise, there could be an adverse effect on our ability to collect all or part of the proceeds of the life insurance policy, including the annual increase in the death benefit. Failure to collect such proceeds could have a material adverse effect on our financial condition, results of operations, or cash flows.
Regulatory and Legal Risks
Our operations are subject to regulation, supervision and licensing under numerous federal, state and local laws, ordinances and regulations, including extensive regulations concerning trusts/escrows, pre-need sales, cemetery ownership, funeral home ownership, marketing practices, crematories, environmental matters and various other aspects of our business.
If state laws or interpretations of existing state laws change or if new laws are enacted, we may be required to increase trust/escrow deposits or to alter the timing of withdrawals from trusts/escrows, which may have a negative impact on our revenues and cash flow.
We are required by most state laws to deposit specified percentages of the proceeds from our pre-need and at-need sales of interment rights into perpetual care trusts and generally proceeds from our pre-need sales of cemetery and funeral home products and services into merchandise trusts/escrows. These laws also determine when we are allowed to withdraw funds from those trusts/escrows. If those laws or the interpretations of those laws change or if new laws are enacted, we may be required to deposit more of the sales proceeds we receive from our sales into the trusts/escrows or to defer withdrawals from the trusts/escrows, thereby decreasing our cash flow until we are permitted to withdraw the deposited amounts. This could also reduce our cash available for distribution.
If state laws or their interpretations change, or new laws are enacted relating to the ownership of cemeteries and funeral homes, our business, financial condition and results of operations could be adversely affected.
Some states require cemeteries to be organized in the nonprofit form but permit those nonprofit entities to contract with for-profit companies for management services. If state laws change or new laws are enacted that prohibit us from managing cemeteries in those states, then our business, financial condition and results of operations could be adversely affected. Some state laws restrict ownership of funeral homes to licensed funeral directors. If state laws change or new laws are enacted that prohibit us from managing funeral homes in those instances, then our business, financial condition and results of operations could be adversely affected.
We are subject to legal restrictions on our marketing practices that could reduce the volume of our sales, which could have an adverse effect on our business, operations and financial condition.
The enactment or amendment of legislation or regulations relating to marketing activities may make it more difficult for us to sell our products and services. For example, the federal “do not call” legislation has adversely affected our ability to market our products and services using telephone solicitation by limiting whom we may call and increasing our costs of compliance. As a result, we rely heavily on direct mail marketing and telephone
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follow-up with existing contacts. Additional laws or regulations limiting our ability to market through direct mail, over the telephone, through Internet and e-mail advertising or door-to-door may make it difficult to identify potential customers, which could increase our costs of marketing. Both increases in marketing costs and restrictions on our ability to market effectively could reduce our revenues and could have an adverse effect on our business, operations and financial condition, as well as our ability to make cash distributions to you.
We are subject to environmental and health and safety laws and regulations that may adversely affect our operating results.
Our cemetery and funeral home operations are subject to numerous federal, state and local environmental and health and safety laws and regulations. We may become subject to liability for the removal of hazardous substances and solid waste under CERCLA and other federal and state laws. Under CERCLA and similar state laws, strict, joint and several liability may be imposed on various parties, regardless of fault or the legality of the original disposal activity. Our funeral home, cemetery and crematory operations include the use of some materials that may meet the definition of “hazardous substances” under CERCLA or state laws and thus may give rise to liability if released to the environment through a spill or release. We cannot assure you that we will not face liability under CERCLA or state laws for any environmental conditions at our facilities, and we cannot assure you that these liabilities will not be material. Our cemetery and funeral home operations are subject to regulation of underground and above ground storage tanks and laws managing the disposal of solid waste. If new requirements under local, state or federal laws were to be adopted, and were more stringent than existing requirements, new permits or capital expenditures may be required.
Our funeral home operations are generally subject to federal and state laws and regulations regarding the disposal of medical waste, and are also subject to regulation by federal, state or local authorities under the EPCRA. We are required by EPCRA to maintain and report to the regulatory authorities, if applicable thresholds are met, a list of any hazardous chemicals and extremely hazardous substances, which are stored or used at our facilities.
Our crematory operations may be subject to regulation under the federal Clean Air Act and any analogous state laws. If new regulations applicable to our crematory operations were to be adopted, they could require permits or capital expenditures that could increase our costs of operation and compliance.
Litigation or legal proceedings could expose us to significant liabilities and damage our reputation.
From time to time, we are party to various claims and legal proceedings, including, but not limited to, employment, cemetery or burial practices, and other litigation. We are currently a defendant in an action alleging violations of the Fair Labor Standards Act, in which plaintiff will be seeking to certify a nationwide class. Generally, plaintiffs in class action litigation may seek to recover amounts, which may be indeterminable for some period of time although potentially large. Adverse outcomes in the pending cases may result in monetary damages or injunctive relief against us, as litigation and other claims are subject to inherent uncertainties. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We base our assessments, estimates and disclosures on the information available to us at the time. Actual outcomes or losses may differ materially from assessments and estimates. Costs to defend litigation claims and legal proceedings and the cost of actual settlements, judgments or resolutions of these claims and legal proceedings may negatively affect our business and financial performance. We hold insurance policies that may reduce cash outflows with respect to an adverse outcome of certain litigation matters, but exclude certain claims, such as claims arising under the Fair Labor Standards Act. To the extent that our management will be required to participate in or otherwise devote substantial amounts of time to the defense of these matters, such activities would result in the diversion of our management resources from our business operations and the implementation of our business strategy, which may negatively impact our financial position and results of operations. Any adverse publicity resulting from allegations made in litigation claims or legal proceedings may also adversely affect our reputation, which in turn, could adversely affect our results of operations.
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Risk Factors Related to an Investment in Us
Our general partner and its affiliates have conflicts of interest and limited fiduciary duties, which may permit them to favor their own interests to your detriment.
GP Holdings, as the sole member of our general partner, owns all of the Class A units of our general partner. Conflicts of interest may arise between GP Holdings and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. As a result of these conflicts, our general partner may favor its own interests and the interests of its affiliates over the interests of the unitholders. These conflicts include, among others, the following situations:
| • | The board of directors of our general partner is elected by GP Holdings, except that Messrs. Miller and Shane acting collectively have the right to designate one director who will be Lawrence R. Miller so long as he serves as the Chief Executive Officer of StoneMor GP or desires to serve as a director of StoneMor GP and thereafter will be William R. Shane. Although our general partner has a fiduciary duty to manage us in good faith, the directors of our general partner also have a fiduciary duty to manage our general partner in a manner beneficial to GP Holdings, as the sole member of our general partner. By purchasing common units, unitholders will be deemed to have consented to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable law. |
| • | Our partnership agreement limits the liability of our general partner, reduces its fiduciary duties and restricts the remedies available to unitholders for actions that might, without the limitations, constitute breaches of fiduciary duty. |
| • | Our general partner determines the amount and timing of asset purchases and sales, capital expenditures, borrowings, issuances of additional limited partner interests and reserves, each of which can affect the amount of cash that is distributed to unitholders. |
| • | Our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf. |
| • | Our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates. |
| • | In some instances, our general partner may cause us to borrow funds or sell assets outside of the ordinary course of business in order to permit the payment of distributions, even if the purpose or effect of the borrowing is to make distributions in respect of incentive distribution rights. |
Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which the common units will trade.
Unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders did not select our general partner or elect the board of directors of our general partner and will have no right to select our general partner or elect its board of directors in the future. We are not required to have a majority of independent directors on our board. The board of directors of our general partner, including the independent directors, is not chosen by our unitholders. GP Holdings, as the sole member of StoneMor GP, is entitled to elect all directors of StoneMor GP, except that Messrs. Miller and Shane acting collectively have the right to designate one director. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
Unitholders’ voting rights are further restricted by the partnership agreement provision providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than the general
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partner, its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our general partner, cannot be voted on any matter. In addition, the partnership agreement contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders’ ability to influence the manner or direction of management.
Our general partner can transfer its ownership interest in us without unitholder consent under certain circumstances, and the control of our general partner may be transferred to a third party without unitholder consent.
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, there is no restriction in the partnership agreement on the ability of the owners of our general partner to transfer their ownership interest in the general partner to a third party. The new owner of our general partner would then be in a position to replace the board of directors and officers of the general partner with its own choices and thereby influence the decisions taken by the board of directors and officers.
We may issue additional common units without your approval, which would dilute your existing ownership interests.
We may issue an unlimited number of limited partner interests of any type without the approval of the unitholders.
The issuance of additional common units or other equity securities of equal or senior rank will have the following effects:
| • | your proportionate ownership interest in us will decrease; |
| • | the amount of cash available for distribution on each unit may decrease; |
| • | the relative voting strength of each previously outstanding unit may be diminished; |
| • | the market price of the common units may decline; and |
| • | the ratio of taxable income to distributions may increase. |
Cost reimbursements due to our general partner may be substantial and will reduce the cash available for distribution to you.
Prior to making any distribution on the common units, we will reimburse our general partner and its affiliates for all expenses they incur on our behalf. The reimbursement of expenses could adversely affect our ability to pay cash distributions to you. Our general partner determines the amount of these expenses. In addition, our general partner and its affiliates may provide us with other services for which we will be charged fees as determined by our general partner.
In establishing cash reserves, our general partner may reduce the amount of available cash for distribution to you.
Subject to the limitations on restricted payments contained in the indenture governing the 7.875% Senior Notes due 2021 and other indebtedness, the master partnership distributes all of our “available cash” each quarter to its limited partners and general partner. “Available cash” is defined in the master partnership’s partnership agreement, and it generally means, for each fiscal quarter, all cash and cash equivalents on hand on the date of determination for that quarter less the amount of cash reserves established at the discretion of the general partner to:
| • | provide for the proper conduct of our business; |
| • | comply with applicable law, the terms of any of our debt instruments or other agreements; or |
| • | provide funds for distributions to its unitholders and general partner for any one or more of the next four calendar quarters. |
These reserves will affect the amount of cash available for distribution to you.
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Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.
If, at any time, our general partner and its affiliates own more than 80% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the remaining common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon the sale of your common units.
You may be required to repay distributions that you have received from us.
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Assignees who become substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership. However, assignees are not liable for obligations unknown to the assignee at the time the assignee became a limited partner if the liabilities could not be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
Tax Risks to Common Unitholders
Our tax treatment depends on our status as a partnership for federal income tax purposes as well as our not being subject to a material amount of entity-level taxation by individual states. If the IRS were to treat us as a corporation for federal income tax purposes or we were to become subject to additional amounts of entity-level taxation for state tax purposes, it would reduce the amount of cash available for distribution to you and payments on our debt obligation.
Although we do not believe based upon our current operations that we are so treated, and despite the fact that we are a limited partnership under Delaware law, it is possible in certain circumstances for a partnership such as ours to be treated as a corporation for federal income tax purposes. A change in our business (or a change in law) could cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to taxation as an entity.
If we were treated as a corporation for U.S. federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely be liable for state income tax at varying rates. If we were required to pay tax on our taxable income, it would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units. Moreover, treatment of us as a corporation could materially and adversely affect our ability to make payments on our debt obligations.
The IRS audited our federal income tax return for the year ended December 31, 2010. The scope of that federal income tax audit included an audit of our qualifying income. In order for us to be treated as a partnership for federal income tax purposes, at least 90% of our gross income must be qualifying income. The IRS concluded its audit and notified us on April 11, 2013 that it was not proposing any adjustments to the return as filed.
Current law may change so as to cause us to be treated as a corporation for federal income tax purposes or otherwise subject us to entity-level taxation. For example, from time to time, members of the U.S. Congress propose and consider substantive changes to the federal income tax laws that affect publicly traded partnerships.
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Currently, one such legislative proposal would eliminate the exception upon which we rely for our treatment as a partnership for U.S. federal income tax purposes. We are unable to predict whether any of these changes, or other proposals, will be reconsidered or will ultimately be enacted. Any such changes could negatively impact the amount of cash available for distribution to you and payments on our debt obligations. At the state level, because of widespread state budget deficits and other reasons, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise and other forms of taxation. Imposition of such a tax on us by any state will reduce the cash available for distribution to you and payments on our debt obligations.
The tax treatment of publicly traded partnerships or an investment in our units could be subject to potential legislative, judicial or administrative changes or differing interpretations, possibly applied on a retroactive basis.
Current law may change to cause us to be treated as a corporation for U.S. federal income tax purposes or otherwise subjecting us to entity level taxation. Specifically, the present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial changes or differing interpretations at any time. For example, from time to time, members of Congress propose and consider substantive changes to the existing U.S. federal income tax laws that affect publicly traded partnerships. We are unable to predict whether any of these changes or other proposals will be reintroduced or will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units. Any modification to U.S. federal income tax laws may be applied retroactively and could make it more difficult or impossible for us to meet the qualifying income requirement to be treated as a partnership for U.S. federal income tax purposes.
We have subsidiaries that will be treated as corporations for federal income tax purposes and subject to corporate-level income taxes.
Some of our operations are conducted through subsidiaries that are organized as C corporations. Accordingly, these corporate subsidiaries are subject to corporate-level tax, which reduces the cash available for distribution to our partnership and, in turn, to you. If the IRS were to successfully assert that these corporations have more tax liability than we anticipate or legislation was enacted that increased the corporate tax rate, the cash available for distribution could be further reduced.
Audit adjustments to the taxable income of our corporate subsidiaries for prior taxable years may reduce the net operating loss carryforwards of such subsidiaries and thereby increase their tax liabilities for future taxable periods.
Our business was conducted by an affiliated group of corporations during periods prior to the completion of our initial public offering and, since the initial public offering, continues to be conducted in part by corporate subsidiaries. The amount of cash distributions we receive from our corporate subsidiaries over the next several years will depend in part upon the amount of net operating losses available to those subsidiaries to reduce the amount of income subject to federal income tax they would otherwise pay. These net operating losses will begin to expire in 2017. The amount of net operating losses available to reduce the income tax liability of our corporate subsidiaries in future taxable years could be reduced as a result of audit adjustments with respect to prior taxable years. Notwithstanding any limited indemnification rights we may have, any increase in the tax liabilities of our corporate subsidiaries because of a reduction in net operating losses will reduce our cash available for distribution.
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Changes in the ownership of our units may result in annual limitations on our corporate subsidiaries’ ability to use their net operating loss carryforwards, which could increase their tax liabilities and decrease cash available for distribution in future taxable periods.
Our corporate subsidiaries’ ability to use their net operating loss carryforwards may be limited if changes in the ownership of our units causes our corporate subsidiaries to undergo an “ownership change” under applicable provisions of the Internal Revenue Code. In general, an ownership change will occur if the percentage of our units, based on the value of the units, owned by certain unitholders or groups of unitholders increases by more than fifty percentage points during a running three-year period. Recent changes in our ownership may result in an “ownership change.” A future ownership change may result from issuances of our units, sales or other dispositions of our units by certain significant unitholders, certain acquisitions of our units, and issuances, sales or other dispositions or acquisitions of interests in significant unitholders, and we will have little to no control over any such events. To the extent that an annual net operating loss limitation for any one year does restrict the ability of our corporate subsidiaries to use their net operating loss carryforwards, an increase in tax liabilities of our corporate subsidiaries could result, which would reduce the amount of cash available for distribution to you.
If the IRS contests the federal income tax positions we take, the market for our common units may be adversely impacted, and the cost of any IRS contest will reduce our cash available for distribution to you.
We have not requested a ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of the positions we take. A court may not agree with some or all of the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In addition, our costs of any contest with the IRS will be borne indirectly by our unitholders and our general partner because the costs will reduce our cash available for distribution.
You may be required to pay taxes on income from us even if you do not receive any cash distributions from us.
Because you will be treated as a partner to whom we will allocate taxable income that could be different in amount than the cash we distribute, you may be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income even if you receive no cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability resulting from that income.
Tax gain or loss on disposition of our common units could be more or less than expected.
If you sell your common units, you will recognize a gain or loss equal to the difference between your amount realized and your tax basis in those common units. Because distributions in excess of your allocable share of our total net taxable income decrease your tax basis in your common units, the amount, if any, of such prior excess distributions with respect to the units you sell will, in effect, become taxable income to you if you sell such units at a price greater than your tax basis in those units, even if the price you receive is less than your original cost. Furthermore, a substantial portion of the amount realized, whether or not representing gain, may be taxed as ordinary income due to potential recapture items, including depreciation recapture. In addition, because the amount realized includes a unitholder’s share of our nonrecourse liabilities, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale.
Tax-exempt entities and non-U.S. persons face unique tax issues from owning common units that may result in adverse tax consequences to them.
Investment in common units by tax-exempt entities, such as employee benefit plans individual retirement accounts (known as IRAs) and non-U.S. persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans, will be unrelated business taxable income and will be taxable to them. Distributions to non-U.S. persons
23
will be reduced by withholding taxes at the highest applicable effective tax rate, and non-U.S. persons will be required to file United States federal tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or a non-U.S. person, you should consult your tax advisor before investing in our common units.
We treat each purchaser of common units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.
Due to a number of factors, including our inability to match transferors and transferees of common units, we take depreciation and amortization positions that may not conform to all aspects of the existing Treasury Regulations. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from the sale of common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns.
We have adopted certain valuation methodologies that may result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.
When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. If the IRS challenges our methodology it may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Moreover, under our valuation methods, subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our valuation methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and deduction between the general partner and certain of our unitholders.
A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
The sale or exchange of 50% or more of our capital and profits interests during any twelve-month period will result in the termination of our partnership for federal income tax purposes.
We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. For purposes of determining whether the 50% threshold has been met, multiple sales of the same interest will be counted only once. Our termination would, among other things, result in the closing of our taxable year for all unitholders which would result in our filing two tax returns for one fiscal year and could result in a deferral of depreciation deductions allowable in computing our taxable income. In the case of a unitholder reporting on a taxable year other than a calendar year, the closing of our taxable year may result in more than twelve months of our taxable income or loss being includable in his taxable income for the year of termination. Our termination currently would not affect our classification as a partnership for federal income tax purposes, but instead, we would be treated as a new partnership for tax purposes. If treated as a new partnership, we must make new tax elections and could be subject to penalties if we are unable to determine that a termination occurred. The IRS has recently announced a relief procedure whereby if a publicly traded partnership that has technically terminated requests and the IRS grants special relief, among other things, the partnership will be required to provide only a single Schedule K-1 to unitholders for the tax years in which the termination occurs.
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You will likely be subject to state and local taxes and filing requirements in jurisdictions where you do not live as a result of an investment in units.
In addition to federal income taxes, you will likely be subject to other taxes, including state and local taxes, unincorporated business taxes and estate, inheritance or intangible taxes that are imposed by the various jurisdictions in which we do business or own property, even if you do not live in any of those jurisdictions. You will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. We own assets or conduct business in the majority of states and in Puerto Rico. Most of these various jurisdictions currently impose, or may in the future impose, an income tax on individuals, corporations and other entities. As we make acquisitions or expand our business, we may own assets or do business in additional states that impose a personal income tax. It is your responsibility to file all United States federal, state and local tax returns.
A unitholder whose units are the subject of a securities loan (e.g., a loan to a “short seller” to cover a short sale of units) may be considered as having disposed of those units. If so, the unitholder would no longer be treated for tax purposes as a partner with respect to those units during the period of the loan and may recognize gain or loss from the disposition.
Because there are no specific rules governing the U.S. federal income tax consequence of loaning a partnership interest, a unitholder whose units are the subject of a securities loan may be considered as having disposed of the loaned units. In that case, you may no longer be treated for tax purposes as a partner with respect to those units during the period of the loan to the short seller and the unitholder may recognize gain or loss from such disposition. Moreover, during the period of the loan to the short seller, any of our income, gain, loss or deduction with respect to those units may not be reportable by the unitholder and any cash distributions received by the unitholder as to those units could be fully taxable as ordinary income. Unitholders desiring to assure their status as partners and avoid the risk of gain recognition from a loan to a short seller are urged to modify any applicable brokerage account agreements to prohibit their brokers from borrowing their units.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. Nonetheless, we allocate certain deductions for depreciation of capital additions based upon the date the underlying property is put in service. The use of this proration method may not be permitted under existing Treasury Regulations. Recently, however, the U.S. Treasury Department issued proposed Treasury Regulations that provide a safe harbor pursuant to which publicly traded partnerships may use a similar monthly simplifying convention to allocate tax items among transferor and transferee unitholders. Nonetheless, the proposed regulations do not specifically authorize the use of the proration method we have adopted. If the IRS were to challenge our proration method, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Vinson & Elkins L.L.P. has not rendered an opinion with respect to whether our monthly convention for allocating taxable income and losses is permitted by existing Treasury Regulations.
| Item 1B. | Unresolved Staff Comments |
None.
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| Item 2. | Properties |
Cemeteries and Funeral Homes
The following table summarizes the distribution of our cemetery and funeral home properties by state as of December 31, 2014 as well as the weighted average estimated remaining sales life in years for our cemeteries based upon the number of interment spaces sold during 2014:
| Cemeteries | Funeral Homes | Total Net Acres |
Weighted Average Estimated Net Sales Life in Years |
Number of Interment Spaces Sold in 2014 |
||||||||||||||||
| Alabama |
9 | 6 | 305 | 194 | 1,312 | |||||||||||||||
| Arkansas |
— | 2 | — | — | — | |||||||||||||||
| California |
7 | 8 | 270 | 54 | 1,334 | |||||||||||||||
| Colorado |
2 | — | 12 | 502 | 28 | |||||||||||||||
| Delaware |
1 | — | 12 | 355 | 13 | |||||||||||||||
| Florida |
8 | 24 | 255 | 130 | 764 | |||||||||||||||
| Georgia |
7 | — | 135 | 161 | 752 | |||||||||||||||
| Hawaii |
1 | — | 6 | 201 | — | |||||||||||||||
| Illinois |
8 | 1 | 276 | 59 | 2,748 | |||||||||||||||
| Indiana |
11 | 5 | 1,013 | 362 | 1,396 | |||||||||||||||
| Iowa |
1 | — | 89 | 190 | 166 | |||||||||||||||
| Kansas |
3 | 2 | 84 | 160 | 291 | |||||||||||||||
| Kentucky |
2 | — | 59 | 113 | 255 | |||||||||||||||
| Maryland |
10 | 1 | 716 | 115 | 2,057 | |||||||||||||||
| Michigan |
13 | — | 818 | 522 | 1,064 | |||||||||||||||
| Mississippi |
2 | 1 | 44 | 199 | 92 | |||||||||||||||
| Missouri |
6 | 5 | 277 | 278 | 632 | |||||||||||||||
| New Jersey |
6 | — | 341 | 40 | 1,759 | |||||||||||||||
| North Carolina |
19 | 2 | 619 | 131 | 3,199 | |||||||||||||||
| Ohio |
14 | 2 | 953 | 271 | 2,339 | |||||||||||||||
| Oregon |
7 | 11 | 162 | 285 | 496 | |||||||||||||||
| Pennsylvania |
68 | 10 | 5,319 | 441 | 6,090 | |||||||||||||||
| Puerto Rico |
7 | 5 | 209 | 256 | 461 | |||||||||||||||
| Rhode Island |
2 | — | 70 | 700 | 37 | |||||||||||||||
| South Carolina |
8 | 2 | 395 | 231 | 802 | |||||||||||||||
| Tennessee |
11 | 5 | 657 | 272 | 1,480 | |||||||||||||||
| Virginia |
34 | 2 | 1,183 | 241 | 2,553 | |||||||||||||||
| Washington |
3 | 2 | 33 | 36 | 224 | |||||||||||||||
| West Virginia |
33 | 2 | 1,404 | 465 | 1,616 | |||||||||||||||
|
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|
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|
|
|
|
|
|
|
|||||||||||
| Total |
303 | 98 | 15,716 | 247 | 33,960 | |||||||||||||||
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|
|
|
|
|
|
|
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We calculated estimated remaining sales life for each of our cemeteries by dividing the number of unsold interment spaces by the number of interment spaces sold at that cemetery in the most recent year. For purposes of estimating remaining sales life, we defined unsold interment spaces as unsold burial lots and unsold spaces in existing mausoleum crypts as of December 31, 2014. We defined interment spaces sold in 2014 as:
| • | the number of burial lots sold, net of cancellations; |
| • | the number of spaces sold in existing mausoleum crypts, net of cancellations; and |
| • | the number of spaces sold in mausoleum crypts that we have not yet built, net of cancellations. |
We count the sale of a double-depth burial lot as the sale of two interment spaces since a double-depth burial lot includes two interment rights. For the same reason we count an unsold double-depth burial lot as two
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unsold interment spaces. Because our sales of cremation niches were immaterial, we did not include cremation niches in the calculation of estimated remaining sales life. When calculating estimated remaining sales life, we did not take into account any future cemetery expansion. In addition, sales of an unusually high or low number of interment spaces in a particular year affect our calculation of estimated remaining sales life. Future sales may differ from previous years’ sales, and actual remaining sales life may differ from our estimates. We calculated the weighted average estimated remaining sales life by aggregating unsold interment spaces and interment spaces sold on a state-by-state or company-wide basis. Based on the number of interment spaces sold in 2014, we estimate that our cemeteries have an aggregate weighted average remaining sales life of 247 years.
The following table shows the cemetery properties that we owned or operated as of December 31, 2014, grouped by estimated remaining sales life:
| 0 - 25 years |
26 - 49 years |
50 - 100 years |
101 - 150 years |
151 - 200 years |
Over 200 years | |||||||||||||||||||
| Alabama |
1 | — | 2 | 3 | — | 3 | ||||||||||||||||||
| California |
2 | — | 3 | 1 | — | 1 | ||||||||||||||||||
| Colorado |
— | — | — | — | — | 2 | ||||||||||||||||||
| Delaware |
— | — | — | — | — | 1 | ||||||||||||||||||
| Florida |
— | 1 | 3 | 1 | 1 | 2 | ||||||||||||||||||
| Georgia |
— | 2 | — | 1 | 1 | 3 | ||||||||||||||||||
| Hawaii |
— | — | — | — | — | 1 | ||||||||||||||||||
| Illinois |
2 | — | 2 | 1 | — | 3 | ||||||||||||||||||
| Indiana |
— | 1 | — | — | — | 10 | ||||||||||||||||||
| Iowa |
— | — | — | — | 1 | — | ||||||||||||||||||
| Kansas |
— | — | 1 | — | 1 | 1 | ||||||||||||||||||
| Kentucky |
— | — | 1 | — | 1 | — | ||||||||||||||||||
| Maryland |
1 | 1 | 3 | 1 | — | 4 | ||||||||||||||||||
| Michigan |
— | 1 | — | — | 3 | 9 | ||||||||||||||||||
| Mississippi |
— | 1 | — | — | — | 1 | ||||||||||||||||||
| Missouri |
— | — | — | 2 | 1 | 3 | ||||||||||||||||||
| New Jersey |
2 | — | 3 | — | — | 1 | ||||||||||||||||||
| North Carolina |
— | — | 8 | 4 | 4 | 3 | ||||||||||||||||||
| Ohio |
— | — | 2 | 2 | — | 10 | ||||||||||||||||||
| Oregon |
— | — | 1 | — | — | 6 | ||||||||||||||||||
| Pennsylvania |
7 | 2 | 8 | 4 | 4 | 43 | ||||||||||||||||||
| Puerto Rico |
1 | 1 | — | — | 2 | 3 | ||||||||||||||||||
| Rhode Island |
— | — | — | — | — | 2 | ||||||||||||||||||
| South Carolina |
— | 1 | — | 1 | 3 | 3 | ||||||||||||||||||
| Tennessee |
— | — | 1 | — | 1 | 9 | ||||||||||||||||||
| Virginia |
2 | 1 | 4 | 6 | 2 | 19 | ||||||||||||||||||
| Washington |
1 | 2 | — | — | — | — | ||||||||||||||||||
| West Virginia |
3 | 2 | 3 | 2 | 2 | 21 | ||||||||||||||||||
|
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|
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|
|
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|
|
|
|||||||||||||
| Total |
22 | 16 | 45 | 29 | 27 | 164 | ||||||||||||||||||
|
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|
|
|
|
|
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|
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We believe that we have either satisfactory title to or valid rights to use all of our cemetery properties. The 31 cemetery properties that we manage or operate under long-term lease, operating or management agreements have nonprofit owners. We believe that these cemeteries have either satisfactory title to or valid rights to use these cemetery properties and that we have valid rights to use these properties under the long-term agreements. Although title to the cemetery properties is subject to encumbrances such as liens for taxes, encumbrances securing payment obligations, easements, restrictions and immaterial encumbrances, we do not believe that any of these burdens should materially detract from the value of these properties or from our interest in these properties, nor should these burdens materially interfere with the use of our cemetery properties in the operation
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of our business as described above. Many of our cemetery properties are located in zoned regions, and we believe that cemetery use is permitted for those cemeteries either (1) as expressly permitted under applicable zoning ordinances; (2) through a special exception to applicable zoning designations; or (3) as an existing non-conforming use.
Other
Our home office is located in a 37,000 square foot leased space in Levittown, Pennsylvania, with a lease that expires in 2020. We are also tenants under various leases covering office spaces other than our corporate headquarters.
In addition, we own a 13,500-square-foot plant in Butler County, Pennsylvania, where we manufacture burial vaults used in our cemetery operations.
| Item 3. | Legal Proceedings |
We and certain of our subsidiaries are parties to legal proceedings that have arisen in the ordinary course of business. We do not expect these matters to have a material adverse effect on our consolidated financial position, results of operations, or cash flows. We carry insurance with coverage and coverage limits that we believe to be customary in the funeral home and cemetery industries. Although there can be no assurance that such insurance will be sufficient to protect us against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.
| Item 4. | Mine Safety Disclosures |
Not applicable.
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PART II
| Item 5. | Market for the Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
Our common units are listed on the New York Stock Exchange (“NYSE”) under the symbol “STON”. As of March 2, 2015, there were 29,258,434 common units outstanding, representing a 98.65% limited partner interest in us. As of February 19, 2015, there were 36,241 beneficial unitholders and 63 unitholders of record. The following table sets forth the high and low sale prices of our common units for the periods indicated, based on the daily composite listing of common unit transactions for the NYSE, as applicable, and distributions declared on our common units.
| Price range | Declared | |||||||||||
| Quarter ended |
High | Low | Distributions (1) | |||||||||
| March 31, 2013 |
$ | 26.99 | $ | 21.51 | $ | 0.5900 | ||||||
| June 30, 2013 |
$ | 28.00 | $ | 23.63 | $ | 0.5950 | ||||||
| September 30, 2013 |
$ | 26.99 | $ | 21.23 | $ | 0.6000 | ||||||
| December 31, 2013 |
$ | 26.51 | $ | 23.56 | $ | 0.6000 | ||||||
| March 31, 2014 |
$ | 26.69 | $ | 21.75 | $ | 0.6000 | ||||||
| June 30, 2014 |
$ | 25.30 | $ | 23.35 | $ | 0.6000 | ||||||
| September 30, 2014 |
$ | 26.35 | $ | 23.50 | $ | 0.6100 | ||||||
| December 31, 2014 |
$ | 27.14 | $ | 24.00 | $ | 0.6200 | ||||||
| (1) | Distributions declared during each quarter were paid within 45 days of the close of the previous quarter. |
On May 21, 2014, the Partnership sold to ACII 2,255,947 common units (the “Purchased Units”) at an aggregate purchase price of $55.0 million (i.e., $24.38 per Purchased Unit) pursuant to a Common Unit Purchase Agreement (the “Common Unit Purchase Agreement”), dated May 19, 2014, by and between the Partnership and ACII. Pursuant to the Common Unit Purchase Agreement, commencing with the quarter ending June 30 2014, ACII is entitled to receive distributions equal to those paid on the 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 Partnership in its sole discretion.
If the Partnership 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 Purchased Units will receive cash distributions on the same basis as all other common units and the Partnership will no longer have the ability to elect to pay quarterly distributions in kind through the issuance of Distribution Units. On August 14, 2014 and November 14, 2014, the Company issued 57,062 and 54,678 Distribution Units, respectively, to ACII in lieu of aggregate cash distributions of approximately $2.8 million. See Notes 13 and 17 to the consolidated financial statements included in “Part II” of this Annual Report on Form 10-K for additional information on the Purchased Units and Distribution Units.
Cash Distribution Policy
Quarterly Distributions of Available Cash
General
Within 45 days after the end of each quarter, we will distribute all of our available cash to unitholders of record on the applicable record date.
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Available cash for any quarter consists of cash on hand at the end of that quarter, plus cash on hand from working capital borrowings made after the end of the quarter but before the date of determination of available cash for the quarter, less cash reserves. Cash and other investments held in merchandise trusts and perpetual care trusts are not treated as available cash until they are distributed to us.
We are prohibited from making any distributions to unitholders if the distributions would cause an event of default, or if an event of default exists, under our debt agreements.
General Partner Interest and Incentive Distribution Rights
As of December 31, 2014, our general partner is entitled to 1.35% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s interest in these distributions will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us at the time to maintain its 1.35% general partner interest.
Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 49.35%, of the cash we distribute from operating surplus in excess of $0.5125 per unit. The maximum distribution of 49.35% includes distributions paid to the general partner on its 1.35% general partner interest, and assumes that the general partner maintains its general partner interest at 1.35%, but does not include any distributions that the general partner may receive on units that it owns.
Operating Surplus and Capital Surplus
General
All cash distributed to unitholders is characterized as either “operating surplus” or “capital surplus.” We distribute available cash from operating surplus differently than available cash from capital surplus. We treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since we began operations equals the operating surplus as of the most recent date of determination of available cash. We will treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus.
Operating Surplus
Operating surplus consists of:
| • | our cash balance on September 20, 2004; plus |
| • | $5.0 million (as described below); plus |
| • | cash receipts from our operations, including cash withdrawn from merchandise and perpetual care trusts; plus |
| • | working capital borrowings made after the end of a quarter but before the date of determination of operating surplus for that quarter; less |
| • | operating expenditures, including cash deposited in merchandise and perpetual care trusts, maintenance capital expenditures and the repayment of working capital borrowings; less |
| • | the amount of cash reserves for future operating expenditures and maintenance capital expenditures. |
As reflected above, operating surplus includes $5.0 million in addition to our cash balance on September 20, 2004, cash receipts from our operations and cash from working capital borrowings. This amount does not reflect actual cash on hand that is available for distribution to our unitholders. Rather, it is a provision that will enable us, if we choose, to distribute as operating surplus up to $5.0 million of cash we receive in the future from non-operating sources, such as asset sales outside the ordinary course of business, sales of our equity and debt securities, and long-term borrowings, that would otherwise be distributed as capital surplus.
30
As described above, operating surplus is reduced by the amount of our maintenance capital expenditures but not our expansion capital expenditures. For our purposes, maintenance capital expenditures are those capital expenditures required to maintain, over the long term, the operating capacity of our capital assets, and expansion capital expenditures are those capital expenditures that increase, over the long term, the operating capacity of our capital assets.
Examples of maintenance capital expenditures include costs to build roads and install sprinkler systems on our cemetery properties and purchases of equipment for those purposes and, in most instances, costs to develop new areas of our cemeteries. Examples of expansion capital expenditures include costs to identify and complete acquisitions of new cemeteries and funeral homes and to construct new funeral homes. Costs to construct mausoleum crypts and lawn crypts may be considered to be a combination of maintenance capital expenditures and expansion capital expenditures. Our general partner, with the concurrence of its Conflicts Committee, may allocate capital expenditures between maintenance capital expenditures and expansion capital expenditures and may determine the period over which maintenance capital expenditures will be subtracted from operating surplus.
As described above, operating surplus is reduced by the amount of our operating expenditures. Our partnership agreement specifically excludes certain items from the definition of operating expenditures, such as cash expenditures made for acquisitions or capital improvements, including, without limitation, all cash expenditures, whether or not expensed or capitalized for tax or accounting purposes, incurred during the first four years following an acquisition in order to bring the operating capacity of the acquisition to the level expected to be achieved in the projections forming the basis on which our general partner approved the acquisition. Examples of such cash expenditures include certain maintenance capital expenditures and cash expenditures that we believe are necessary to develop the pre-need sales programs of businesses or assets we acquire. Where cash expenditures are made in part for acquisitions or capital improvements and in part for other purposes, our general partner, with the concurrence of our Conflicts Committee, will determine the allocation between the amounts paid for each and the period over which cash expenditures made for other purposes will be subtracted from operating surplus.
Capital Surplus
Capital surplus consists of:
| • | borrowings other than working capital borrowings; |
| • | sales of our equity and debt securities; and |
| • | sales or other dispositions of assets for cash (other than sales or other dispositions of excess cemetery property up to an aggregate amount in any four-quarter period calculated pursuant to our partnership agreement; sales or other dispositions of inventory, accounts receivable and other assets in the ordinary course of business; and sales or other dispositions of assets as a part of normal retirements or replacements). |
The exception for sales of excess cemetery property in any four-quarter period generally is calculated by multiplying $1.0 million by a fraction, the numerator of which is the number of cemeteries and funeral homes owned and operated by us on the last day of the quarter in which the sale occurs and the denominator of which is 139.
Distributions of Available Cash from Operating Surplus
The following table illustrates the priority of distributions of available cash from operating surplus between the unitholders and our general partner. The amounts set forth in the table in the column titled “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column
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titled “Total Quarterly Distribution Target Amount per Common Unit,” until the available cash from operating surplus that we distribute reaches the next target distribution level, if any. The percentage interests shown for our general partner include its 1.35% general partner interest and assume the general partner has contributed any additional capital required to maintain its current general partner interest and has not transferred the incentive distribution rights.
| Total Quarterly Distribution Target Amount per Common Unit |
Marginal Percentage Interest in Distributions |
|||||||||
| Common Unitholders |
General Partner |
|||||||||
| First Target Distribution |
Up to $0.5125 | 98.65 | % | 1.35 | % | |||||
| Second Target Distribution |
Above $0.5125 up to $0.5875 | 85.65 | % | 14.35 | % | |||||
| Third Target Distribution |
Above $0.5875 up to $0.7125 | 75.65 | % | 24.35 | % | |||||
| Thereafter |
Above $0.7125 | 50.65 | % | 49.35 | % | |||||
Distributions of Available Cash from Capital Surplus
We do not currently expect to make any distributions of available cash from capital surplus. However, based on our general partner’s current 1.35% ownership level, to the extent that we make any distributions of available cash from capital surplus, they will be made in the following manner:
| • | first, 98.65% to all common unitholders, pro rata, and 1.35% to our general partner, until we have distributed for each common unit an amount of available cash from capital surplus equal to the initial public offering price; |
| • | thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus. |
The partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from the initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the first target distribution, after any of these distributions are made, it may be easier for the general partner to receive incentive distributions.
If we distribute capital surplus on a unit in an amount equal to the initial unit price and have paid all arrearages on the common units, the target distribution levels will be reduced to zero. Once the target distribution levels are reduced to zero, all subsequent distributions will be from operating surplus, with 50.65% being paid to the holders of units and 49.35% to our general partner.
Adjustment of Target Distribution Levels
In addition to adjusting the target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, we will proportionately adjust:
| • | the target distribution levels; and |
| • | the unrecovered initial unit price. |
For example, if a two-for-one split of the common units should occur, the target distribution levels and the unrecovered initial unit price would each be reduced to 50% of its initial level. We will not make any adjustment by reason of the issuance of additional units for cash or property.
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In addition, if legislation is enacted or if existing law is modified or interpreted in a manner that causes us to become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, we will reduce the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter and the denominator of which is the sum of available cash for that quarter plus our general partner’s estimate of our aggregate liability for the income taxes payable by reason of that legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.
Distributions of Cash Upon Liquidation
If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and our general partner, in accordance with their respective capital account balances, as adjusted to reflect any taxable gain or loss upon the sale or other disposition of our assets in liquidation.
The allocations of taxable gain upon liquidation are intended, to the extent possible, to allow the holders of common units to receive proceeds equal to their unrecovered initial unit price for the quarter during which liquidation occurs prior to any allocation of gain to the common units. There may not be sufficient taxable gain upon our liquidation to enable the holders of common units to fully recover all of these amounts. Any additional taxable gain will be allocated in a manner intended to allow our general partner to receive proceeds in respect of its incentive distribution rights.
If there are losses upon liquidation, they will first be allocated to the general partner and then to the common units and the general partner interest until the capital accounts of the common units have been reduced to zero. Any remaining loss will be allocated to the general partner interest.
Equity Compensation Plan Information
See the equity compensation plan table set forth in “Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.”
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| Item 6. | Selected Financial Data |
The following tables present selected consolidated financial and operating data of the Company for the periods and as of the dates indicated derived from our audited consolidated financial statements. The following tables should be read in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our audited historical consolidated financial statements and accompanying notes thereto set forth in this Annual Report on Form 10-K. Further, data for the 2013, 2011 and 2010 years has been recast to retrospectively reflect adjustments made to our initial assessment of the net values of assets and liabilities acquired in acquisitions.
Table 1: Operating and Net Income (Loss) Data
| Year ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| (in thousands, except for per unit data) | ||||||||||||||||||||
| Cemetery revenues: |
||||||||||||||||||||
| Merchandise |
$ | 132,355 | $ | 110,673 | $ | 114,025 | $ | 108,088 | $ | 94,898 | ||||||||||
| Services |
51,827 | 44,054 | 46,094 | 46,995 | 40,951 | |||||||||||||||
| Investment and other |
55,217 | 46,959 | 46,808 | 42,901 | 35,897 | |||||||||||||||
| Funeral home revenues: |
||||||||||||||||||||
| Merchandise |
21,060 | 18,922 | 15,551 | 12,810 | 10,435 | |||||||||||||||
| Services |
27,626 | 26,033 | 20,128 | 17,594 | 15,111 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total revenues |
288,085 | 246,641 | 242,606 | 228,388 | 197,292 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Cost of goods sold (exclusive of depreciation shown separately below): |
||||||||||||||||||||
| Perpetual care |
6,867 | 5,656 | 5,715 | 5,727 | 5,094 | |||||||||||||||
| Merchandise |
26,785 | 22,203 | 22,386 | 20,388 | 18,435 | |||||||||||||||
| Cemetery expense |
64,672 | 57,566 | 55,410 | 57,145 | 48,784 | |||||||||||||||
| Selling expense |
55,277 | 47,832 | 46,878 | 45,291 | 38,245 | |||||||||||||||
| General and administrative expense |
35,110 | 31,873 | 28,928 | 29,544 | 24,591 | |||||||||||||||
| Corporate overhead (including unit-based compensation of $1,068 in 2014, $1,370 in 2013, $916 in 2012, $773 in 2011, and $711 in 2010) |
32,454 | 28,875 | 28,169 | 23,766 | 24,379 | |||||||||||||||
| Depreciation and amortization |
11,081 | 9,548 | 9,431 | 8,534 | 8,845 | |||||||||||||||
| Funeral home expense |
||||||||||||||||||||
| Merchandise |
6,659 | 5,569 | 5,200 | 4,473 | 4,001 | |||||||||||||||
| Services |
20,470 | 19,190 | 14,574 | 11,717 | 9,752 | |||||||||||||||
| Other |
12,581 | 10,895 | 8,951 | 7,364 | 6,184 | |||||||||||||||
| Acquisition related costs, net of recoveries |
2,269 | 1,051 | 3,123 | 4,604 | 5,715 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total costs and expenses |
274,225 | 240,258 | 228,765 | 218,553 | 194,025 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Operating profit |
13,860 | 6,383 | 13,841 | 9,835 | 3,267 | |||||||||||||||
| Gain on acquisitions |
412 | 2,530 | 122 | — | 7,152 | |||||||||||||||
| Gain on termination of operating agreement |
— | — | 1,737 | — | — | |||||||||||||||
| Gain on settlement agreement, net |
888 | 12,261 | — | — | — | |||||||||||||||
| Gain on sale of other assets |
— | 155 | — | — | — | |||||||||||||||
| Gain on sale of funeral home |
244 | — | — | 92 | — | |||||||||||||||
| Loss on early extinguishment of debt |
214 | 21,595 | — | 4,010 | — | |||||||||||||||
| Loss on impairment of long-lived assets |
440 | — | — | — | — | |||||||||||||||
| Increase in fair value of interest rate swap (1) |
— | — | — | — | 4,724 | |||||||||||||||
| Expenses related to refinancing (2) |
— | — | — | 453 | — | |||||||||||||||
| Interest expense |
21,610 | 21,070 | 20,503 | 19,198 | 21,973 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net loss before income taxes |
(6,860 | ) | (21,336 | ) | (4,803 | ) | (13,734 | ) | (6,830 | ) | ||||||||||
| Income tax expense (benefit) |
3,913 | (2,304 | ) | (1,790 | ) | (4,019 | ) | (5,383 | ) | |||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net loss |
$ | (10,773 | ) | $ | (19,032 | ) | $ | (3,013 | ) | $ | (9,715 | ) | $ | (1,447 | ) | |||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net loss per limited partner unit (basic and diluted) |
$ | (0.40 | ) | $ | (0.89 | ) | $ | (0.15 | ) | $ | (0.50 | ) | $ | (0.10 | ) | |||||
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| (1) | Interest rate swaps were terminated on October 20, 2010. |
| (2) | Represents write-downs in previously capitalized debt issuance costs. |
Table 2: Balance Sheet Data
| Year ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Cemetery property |
$ | 339,848 | $ | 316,469 | $ | 309,980 | $ | 298,938 | $ | 283,460 | ||||||||||
| Total assets (1) |
1,699,464 | 1,474,343 | 1,343,725 | 1,248,758 | 1,145,592 | |||||||||||||||
| Deferred cemetery revenues, net (2) |
643,408 | 579,993 | 497,861 | 441,678 | 386,465 | |||||||||||||||
| Total debt |
287,629 | 291,932 | 254,949 | 195,322 | 220,394 | |||||||||||||||
| Total partners’ capital |
$ | 208,762 | $ | 107,520 | $ | 135,182 | $ | 180,279 | $ | 128,191 | ||||||||||
| (1) | Includes the fair value of assets held in the merchandise and perpetual care trusts. Refer to Note 1 of our consolidated financial statements for a detailed discussion of the consolidation rules for these assets. |
| (2) | Represents revenues to be recognized from the sale of merchandise and services. Refer to Note 1 of our consolidated financial statements for a detailed discussion on the revenue recognition rules. |
Table 3: Cash Flow and Other Financial Data
| Year ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| (in thousands, except per unit data) | ||||||||||||||||||||
| Net cash provided by (used in): |
||||||||||||||||||||
| Operating activities |
$ | 19,448 | $ | 35,077 | $ | 31,896 | $ | 5,466 | $ | 3,106 | ||||||||||
| Investing activities |
(123,658 | ) | (26,697 | ) | (39,948 | ) | (29,186 | ) | (49,551 | ) | ||||||||||
| Financing activities |
102,436 | (4,151 | ) | 3,940 | 28,243 | 40,501 | ||||||||||||||
| Change in assets and liabilities that provided (used) cash: |
||||||||||||||||||||
| Merchandise trust |
(28,828 | ) | (36,919 | ) | (11,806 | ) | (23,889 | ) | (13,517 | ) | ||||||||||
| Merchandise liability |
(4,361 | ) | (3,861 | ) | (7,260 | ) | (5,669 | ) | (2,401 | ) | ||||||||||
| Capital expenditures: |
||||||||||||||||||||
| Maintenance capital expenditures |
8,398 | 6,986 | 4,874 | 6,040 | 7,878 | |||||||||||||||
| Expansion capital expenditures, including acquisitions |
115,557 | 19,866 | 35,074 | 23,268 | 41,327 | |||||||||||||||
| Distributions declared per common unit |
$ | 2.430 | $ | 2.385 | $ | 2.350 | $ | 2.340 | $ | 2.250 | ||||||||||
35
Table 4: Operating Data
| Year ended December 31, | ||||||||||||||||||||
| 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||||
| Interments performed |
50,566 | 45,470 | 45,128 | 45,236 | 41,556 | |||||||||||||||
| Cemetery revenues per interment performed |
$ | 4,734 | $ | 4,436 | $ | 4,585 | $ | 4,377 | $ | 4,133 | ||||||||||
| Interment rights sold (1) |
||||||||||||||||||||
| Lots |
31,774 | 27,339 | 26,638 | 26,403 | 24,353 | |||||||||||||||
| Mausoleum crypts (including pre-construction) |
2,186 | 2,108 | 2,206 | 2,518 | 2,584 | |||||||||||||||
| Niches |
1,466 | 1,096 | 985 | 1,126 | 1,071 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Net interment rights sold (1) |
35,426 | 30,543 | 29,829 | 30,047 | 28,008 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Number of contracts written |
111,519 | 102,047 | 98,297 | 101,281 | 92,661 | |||||||||||||||
| Aggregate contract amount, in thousands (excluding interest) |
$ | 299,026 | $ | 268,621 | $ | 251,999 | $ | 244,921 | $ | 221,895 | ||||||||||
| Average amount per contract (excluding interest) |
$ | 2,681 | $ | 2,632 | $ | 2,564 | $ | 2,418 | $ | 2,395 | ||||||||||
| Number of pre-need contracts written |
54,169 | 51,737 | 48,131 | 49,747 | 45,193 | |||||||||||||||
| Aggregate pre-need contract amount, in thousands (excluding interest) |
$ | 196,487 | $ | 180,326 | $ | 163,627 | $ | 157,410 | $ | 143,022 | ||||||||||
| Average amount per pre-need contract (excluding interest) |
$ | 3,627 | $ | 3,485 | $ | 3,400 | $ | 3,164 | $ | 3,165 | ||||||||||
| Number of at-need contracts written |
57,350 | 50,310 | 50,166 | 51,534 | 47,468 | |||||||||||||||
| Aggregate at-need contract amount, in thousands (excluding interest) |
$ | 102,539 | $ | 88,295 | $ | 88,372 | $ | 87,511 | $ | 78,873 | ||||||||||
| Average amount per at-need contract (excluding interest) |
$ | 1,788 | $ | 1,755 | $ | 1,762 | $ | 1,698 | $ | 1,662 | ||||||||||
| (1) | Net of cancellations. Sales of double-depth burial lots are counted as two sales. |
36
| Item 7. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion of our financial condition and results of operations in conjunction with the consolidated financial statements and notes thereto included in “Part II Item 8” of this Annual Report on Form 10-K. Those notes also give more detailed information regarding the basis of presentation for the following information.
Forward-Looking Statements
Certain statements contained in this Annual Report on Form 10-K, including, but not limited to, information regarding the status and progress of our operating activities, the plans and objectives of our management, assumptions regarding our future performance and plans, and any financial guidance provided 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.
When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth under Risk Factors in “Part I, Item 1A” 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.
Overview
Cemetery Operations
We are currently the second largest owner and operator of cemeteries in the United States. As of December 31, 2014, we operated 303 cemeteries in 27 states and Puerto Rico. We own 272 of these cemeteries and we manage or operate the remaining 31 under lease, operating or management agreements with the nonprofit cemetery companies that own the cemeteries. 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.
37
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.
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. During the year ended December 31, 2014, we performed 50,566 burials and sold 35,426 interment rights (net of cancellations) compared to 45,470 and 30,543 in 2013, and 45,128, and 29,829 in 2012, respectively. Cemetery revenues accounted for approximately 83.1%, 81.8% and 85.3% during the years ended December 31, 2014, 2013 and 2012, respectively.
Our results of operations for our cemetery operations are determined primarily by the volume of sales of products and services and the timing of product delivery and performance of services. We derive our cemetery revenues primarily from:
| • | at-need sales of cemetery interment rights, merchandise and services, which we recognize as revenue when we have delivered the related merchandise or performed the service; |
| • | pre-need sales of cemetery interment rights, which we generally recognize as revenues when we have collected 10% of the sales price from the customer; |
| • | pre-need sales of cemetery merchandise, which we recognize as revenues when we satisfy the criteria specified below for delivery of the merchandise to the customer; |
| • | pre-need sales of cemetery services which we recognize as revenues when we perform the services for the customer; |
| • | investment income from assets held in our merchandise trust, which we recognize as revenues when we deliver the underlying merchandise or perform the underlying services and recognize the associated sales revenue as discussed above; |
| • | investment income from perpetual care trusts, excluding realized gains and losses on the sale of trust assets, which we recognize as revenues as the income is earned in the trust; and |
| • | other items, such as interest income on pre-need installment contracts and sales of land. |
The criteria for recognizing revenue related to the sale of cemetery merchandise is that such merchandise is “delivered” to our customer, which generally means that:
| • | the merchandise is complete and ready for installation; or |
| • | the merchandise is either installed or stored at an off-site location, at no additional cost to us, and specifically identified with a particular customer; and |
| • | the risks and rewards of ownership have passed to the customer. |
We generally satisfy these delivery criteria by purchasing the merchandise and either installing it on our cemetery property or storing it, at the customer’s 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.
38
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 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.
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% during 2014, 2013 and 2012.
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.
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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 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.
| 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 December 31, 2014, we owned and operated 98 funeral homes. These properties are located in nineteen states and Puerto Rico. Forty-five 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 16.9%, 18.2% and 14.7% during the years ended December 31, 2014, 2013 and 2012, respectively.
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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.
Revenues by State
The following table shows the percentage of revenues attributable to each of the states in which we operate for the periods presented:
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Alabama |
3.5 | % | 3.8 | % | 3.8 | % | ||||||
| California |
8.2 | % | 8.8 | % | 8.0 | % | ||||||
| Florida |
4.9 | % | 4.3 | % | 1.0 | % | ||||||
| Georgia |
1.2 | % | 1.6 | % | 1.3 | % | ||||||
| Illinois |
3.2 | % | 2.7 | % | 2.6 | % | ||||||
| Indiana |
6.1 | % | 6.7 | % | 6.9 | % | ||||||
| Kansas |
1.2 | % | 1.3 | % | 1.3 | % | ||||||
| Maryland |
5.8 | % | 5.7 | % | 5.8 | % | ||||||
| Michigan |
5.0 | % | 6.2 | % | 6.1 | % | ||||||
| Missouri |
1.4 | % | 1.6 | % | 1.5 | % | ||||||
| New Jersey |
5.2 | % | 6.3 | % | 7.1 | % | ||||||
| North Carolina |
5.0 | % | 4.8 | % | 5.8 | % | ||||||
| Ohio |
7.2 | % | 8.1 | % | 9.3 | % | ||||||
| Oregon |
2.7 | % | 2.9 | % | 2.7 | % | ||||||
| Pennsylvania |
16.9 | % | 12.7 | % | 13.2 | % | ||||||
| Puerto Rico |
2.5 | % | 3.1 | % | 3.3 | % | ||||||
| South Carolina |
1.7 | % | 1.8 | % | 1.9 | % | ||||||
| Tennessee |
3.7 | % | 3.6 | % | 3.7 | % | ||||||
| Virginia |
7.4 | % | 6.7 | % | 6.8 | % | ||||||
| West Virginia |
5.1 | % | 5.1 | % | 5.6 | % | ||||||
| All others |
2.1 | % | 2.2 | % | 2.3 | % | ||||||
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| Total |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
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Principal Products and Services
The following table shows the percentage of revenues attributable to our principal products, services and other items during the periods presented:
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| Pre-need sales: |
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| Burial lots |
9.8 | % | 8.8 | % | 9.9 | % | ||||||
| Mausoleum crypts |
4.0 | % | 4.7 | % | 5.1 | % | ||||||
| Markers |
4.6 | % | 4.6 | % | 4.8 | % | ||||||
| Grave marker bases |
1.0 | % | 1.0 | % | 1.1 | % | ||||||
| Burial vaults |
4.0 | % | 4.2 | % | 5.1 | % | ||||||
| Lawn crypts |
1.6 | % | 1.3 | % | 1.5 | % | ||||||
| Caskets |
1.2 | % | 1.2 | % | 0.8 | % | ||||||
| Initial openings and closings (1) |
4.8 | % | 5.5 | % | 6.2 | % | ||||||
| Other (2) |
5.5 | % | 5.7 | % | 5.5 | % | ||||||
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| Total pre-need sales |
36.5 | % | 37.0 | % | 40.0 | % | ||||||
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| Interest from pre-need sales |
2.6 | % | 2.8 | % | 2.8 | % | ||||||
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| Investment income from trusts: |
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| Perpetual care trusts |
4.6 | % | 5.4 | % | 6.1 | % | ||||||
| Merchandise trusts |
4.5 | % | 4.5 | % | 3.8 | % | ||||||
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| Total investment income from trusts |
9.1 | % | 9.9 | % | 9.9 | % | ||||||
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| At-need sales: |
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| Openings and closings (3) |
11.7 | % | 10.9 | % | 11.1 | % | ||||||
| Markers |
8.4 | % | 8.2 | % | 7.8 | % | ||||||
| Burial lots |
3.3 | % | 3.2 | % | 3.4 | % | ||||||
| Mausoleum crypts |
1.2 | % | 1.0 | % | 1.3 | % | ||||||
| Grave marker bases |
1.6 | % | 1.6 | % | 1.6 | % | ||||||
| Foundations and inscriptions (4) |
0.9 | % | 0.8 | % | 0.8 | % | ||||||
| Burial vaults |
1.5 | % | 1.6 | % | 1.5 | % | ||||||
| Other (5) |
3.4 | % | 3.3 | % | 3.3 | % | ||||||
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| Total at-need sales |
32.0 | % | 30.6 | % | 30.8 | % | ||||||
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| Funeral home revenues |
16.9 | % | 18.2 | % | 14.7 | % | ||||||
| Other revenues (6) |
2.9 | % | 1.5 | % | 1.8 | % | ||||||
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| Total revenues |
100.0 | % | 100.0 | % | 100.0 | % | ||||||
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| (1) | Installation of the burial vault into the ground. |
| (2) | Includes revenues from niches, mausoleum lights, cremations, pet cemeteries, installation of burial vaults and markers sold to our customers by third parties and pre-need sales made in connection with the relocation of other cemetery interment rights. Also includes document processing fees on pre-need contracts and fees from sales of travel care protection, which covers shipping costs of a body if death occurs more than 100 miles from the place of residence. |
| (3) | Installation of the burial vault into the ground and the placement of the casket into the vault. |
| (4) | Installation of the marker on the ground and its inscription. |
| (5) | Includes revenues from lawn crypts, decorative lights installed on mausoleum crypts, installations of burial vaults, markers sold to our customers by third parties, cremation fees and document-processing fees on at-need contracts. |
| (6) | Includes sales of manufactured burial vaults to third parties, sales of cemetery and undeveloped land, commissions from sales of pre-need funeral and death benefit insurance policies provided through a third-party insurer and other miscellaneous revenues. |
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Cash Flow
Pre-need sales often generate short-term cash flow deficits due to the timing of when we receive amounts from customers, pay related commissions and deposit amounts into the perpetual care and merchandise trusts.
We generally require customers to make a down payment on a pre-need contract of at least 5% of the total sales price. When we receive a payment from a customer on a pre-need contract, we first deposit the requisite portion into trust as required by state law. Then, we pay all or a portion of the commission due to the salesperson responsible for the sale up to a maximum of total cash received. In many cases, the sum of the commission paid and amount deposited into the trust exceeds the total cash received, causing a short-term cash flow deficit.
If the down payment received from the customer is not sufficient to cover the entire commission, the remaining commission is paid from subsequent installments, but only to the extent of 80% of the cash received from the customer in each installment. Again, in the near-term there is a possibility that the sum of the commission paid and amount deposited into the trust exceeds the total cash received, causing an additional short-term cash flow deficit. These short-term deficits are eventually recaptured as the total amount received exceeds the commissions paid and we meet the requirements for withdrawing amounts deposited into the merchandise trust.
The following example assumes a pre-need contract with a total sales price of $1,000, a 10% down payment, a 40% perpetual care and merchandise trusting requirement, a 15% sales commission and a one-year term without interest, our short-term cash flow would be as follows:
| • | When we receive the $100 down payment from the customer, we would deposit 40% of the payment, or $40, in trust and pay 100% of the commission due to the salesperson, or $150, but only to the extent that we received cash from the customer, or $100. Our total cash obligations would be $140 even though we only received $100 from the customer. We would use $40 of our operating cash to pay the sales commission and, at this time, would be cash flow negative on the contract. |
| • | In month one, when we receive the first $75 installment from the customer, we would deposit 40%, or $30, into trust and pay 100% of the balance of the commission due to the sales person, or $50. Our total cash obligations would be $80 even though we only received $75 from the customer. We would use $5 of our operating cash to pay sales commission and would still be cash flow negative on the contract. |
| • | In month two, when we receive the next $75 installment from the customer, we would deposit 40%, or $30, into trust, but we would have no further commission due on the sale. The remaining $45 received from the customer would go back into our operating cash, and we would break even on the contract on a cash-flow basis. |
| • | In month three, when we receive the next $75 installment from the customer, we would deposit 40%, or $30, into trust and the remaining $45 would go back into our operating cash. In this month, we would become cash flow positive on the contract. |
We can accelerate our operating cash flow by purchasing and delivering many of our products in advance of the time of customer need, either by installing them in the customer’s burial space (in the case of burial vaults) or storing them for the customer, and by performing certain services prior to the time of need. For example, within the allowances of state law, we purchase burial vaults, grave markers and caskets, and perform initial openings and closings to install the burial vault in the ground before the time of need. When we satisfy the criteria for delivery of pre-need products or perform pre-need services, we are permitted to withdraw the related principal and any income and capital gains that we have not already withdrawn from the merchandise trust, and we recognize the amounts withdrawn, including amounts previously withdrawn, as revenues. Advance purchasing helps us to avoid the negative cash flow impact of depositing significant portions of our sales proceeds in trusts while earning rates on those trusts that are currently less than interest rates we pay on our debt. To the extent that we can purchase and deliver products and perform services in advance of the time of need, we can accelerate, within the limitations of GAAP, the timing of our revenue recognition for these products and services. As a result, decisions made by our management to purchase and deliver products or perform services in advance, for cash flow or other reasons, affect the timing of revenue recognition from the underlying sales.
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We are somewhat limited, however, in our ability to purchase some products in advance of the time of need because of their availability. Given our large volume of pre-need sales, it is unlikely that our suppliers could provide, or we could manufacture, all of the products included in our pre-need backlog at any given time. For example, we generally need more vaults per year to fulfill our pre-need contract obligations than we currently manufacture at our plants. We must purchase any excess from third party suppliers who must also meet the demands of other cemetery operators.
We currently purchase some of our burial vaults from third-party providers to assist us in meeting the demands of our accelerated purchase and delivery program. We are also limited in our ability to perform certain services in advance of the time of need because of their nature or our resources. For example, we cannot perform the final opening and closing, which is the placing of the casket into the ground, or inscribe the date of death on the monument or marker until the time of need. Even if we chose to perform all of the services in our pre-need backlog that could be performed in advance of need, such as installing all of the burial vaults in our pre-need backlog, we would not currently have the labor, equipment or other resources to perform all of those services in a short period of time.
Trusting
We are required to deposit a portion of amounts received on sales of certain cemetery merchandise and services into a perpetual care and/or merchandise trusts. These amounts are invested by third-party investment managers who are selected by the Trust Committee of the board of directors of our general partner. These investment managers are required to invest our trust funds in accordance with applicable state law and internal investment guidelines adopted by the Trust Committee. Our investment managers are monitored by third-party investment advisors selected by the Trust Committee who advise the committee on the determination of asset allocations, evaluate the investment managers and provide detailed monthly reports on the performance of each merchandise and perpetual care trust.
Perpetual Care Trust
Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. While this amount varies, it is generally 10% to 20% of the sales price of the interment right. All principal must remain in this trust into perpetuity while interest and dividends may be released to us and used to defray cemetery maintenance costs, which are expensed as incurred. Earnings from the perpetual care trusts are recognized in current cemetery revenues. To maximize this income, we have established investment guidelines for the third-party investment managers that manage the trust so that substantially all of the funds are invested in intermediate-term investment-grade fixed-income securities, high-yield fixed-income securities, master limited partnerships and real estate investment trusts.
We fund these amounts pro-rata on an “as received” basis. As payments are received from the customer, we deposit a pro-rata amount of the payment into a perpetual care trust. For example, if we receive a payment of 20% of the sales price from the customer, we would deposit into the perpetual care trust 20% of the total amount required to be placed into trust for that sale.
We consolidate the assets of the trust in accordance with the provisions of ASC 810, as the trust is considered to be a variable interest entity for which we are the primary beneficiary. Trust assets are reflected at fair market value on the asset portion of our consolidated balance sheet as an asset entitled “perpetual care trusts, restricted, at fair value,” and an equal amount is reflected as a liability as “perpetual care trust corpus.”
Merchandise Trust
We are generally required by state law to deposit a portion of the sales price of pre-need cemetery merchandise and services, or the estimated current cost of providing that merchandise and those services, into a merchandise trust to ensure that we will have sufficient funds in the future to purchase the merchandise or perform the services. The amount we are required to deposit into a merchandise trust varies from state to state but is generally 40% to 70% of the sales price of the merchandise or services.
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For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings.
For assets held in the merchandise trusts, any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.
The trust footnotes (Notes 5 and 6 of our consolidated financial statements included in “Part II, Item 8”) disclose the adjusted cost basis of the assets in the trusts and contain a more detailed discussion of other-than- temporarily impaired assets.
Current Market Conditions and Economic Developments
We are subject to fluctuations in the fair value of equity and fixed-maturity debt securities in our trusts. These values can be negatively impacted by contractions in the credit market and overall downturns in economic activity.
In general, the financial markets have trended upward over the past few years. As of December 31, 2014, the market value of the assets in our merchandise trusts exceeded their amortized cost by 0.5%, compared to December 31, 2013 when the market value of the assets exceeded their amortized cost by 2.6%. As of December 31, 2014, the market value of the assets in our perpetual care trusts exceeded their amortized cost by 9.7%, compared to December 31, 2013 when the market value of the assets exceeded their amortized cost by 10.5%.
On February 27, 2014 and June 12, 2014, we raised capital via follow-on public offerings of our common units. The proceeds from the offerings were used to pay down borrowings outstanding under our credit facility and to pay the purchase price related to the transaction with Service Corporation International, which closed in the second quarter of 2014. In addition, in May of 2014, we sold common units to ACII, at an aggregate purchase price of $55.0 million; 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. As of December 31, 2014, the majority of our long-term debt consisted of $175.0 million in Senior Notes due 2021, the offering of which took place in May of 2013, and $110.9 million of borrowings under our credit facility, which expires in 2019. As of December 31, 2014, we had $69.1 million of total availability under our revolving credit facility. The revolving credit facility provides for both acquisition draws, which are used primarily to finance acquisitions, acquisition related costs and mausoleum construction costs, and working capital draws, which are used to finance all other corporate costs. As of December 31, 2014, we had approximately $85.9 million of working capital draws, which are limited to a borrowing formula of 85% of eligible account receivables. This limit was $128.6 million at December 31, 2014.
The average dollar value of contracts written has not deteriorated and the values for the year ended December 31, 2014 exceed the values from 2013.
We will continue to monitor evolving economic conditions, including changes in inflation rates and plan accordingly.
Change in Market Value of Trust Assets
We have a substantial portfolio of invested assets in both our merchandise and perpetual care trusts. Both trusts have a mix of cash and cash equivalents, fixed maturity debt securities and equity securities. Declines in the fair value of equity securities, and to a lesser degree, fixed maturity debt securities held in our trusts, can be a critical issue for us. The financial markets have generally trended upward over the past few years and ended 2014 near record highs. During 2014 and 2013, we determined that a few select assets in our merchandise trust had been impaired and we took an impairment charge of approximately $0.4 million and $1.0 million, respectively.
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We also determined an impairment in our perpetual care trust assets in 2014, resulting in an impairment charge of approximately $0.6 million. These impairment charges are deferred until such time that we deliver the merchandise or perform the services for which the trust assets are set aside. The impairment charges reduced the cost basis of the assets to their fair value. As of December 31, 2014, the aggregate post write-down fair value of the assets in our merchandise trust exceeded its amortized cost by 0.5% and the aggregate post write-down fair value of the assets in our perpetual care trust exceeded its amortized cost by 9.7%.
Funds in our trusts are managed by third-party investment managers who are in turn monitored by a third-party investment advisor selected by our Trust Committee. The third-party investment advisor provides the committee with frequent updates on the performance of our investments. We will continue to monitor this performance closely. See “Item 7A. Quantitative and Qualitative Disclosure About Market Risk” for more information.
The perpetual care trust and merchandise trust serve vastly different purposes and the risks and implications of changes in trust asset values are dissimilar.
Perpetual Care Trust
Pursuant to state law, a portion of the proceeds from the sale of cemetery property must be deposited into a perpetual care trust.
The perpetual care trust principal does not belong to us and must remain in the trust into perpetuity. We consolidate the trust into our financial statements in accordance with ASC 810-10-15-(13 through 22) because the trust is considered a variable interest entity for which we are the primary beneficiary.
The fair value of trust assets is recorded as an asset on our consolidated balance sheet and is entirely offset by a liability. This liability is recorded as “Perpetual care trust corpus”. Changes in fair value of trust assets are recognized by adjusting both the trust asset and the offsetting liability. Impairment of the value of trust assets, whether temporary or other-than-temporary, will not impact periodic earnings nor will it impact our financial position or liquidity at any point in time.
Our primary risks related to the assets in the perpetual care trust relate to the interest and dividends paid and released to us and used to defray cemetery maintenance costs. Any material reduction in this income stream could have a material effect on our financial condition, results of operations and liquidity. Interest income earned on the perpetual care trust assets was approximately $15.0 million, $15.7 million and $16.7 million during the years ended December 31, 2014, 2013 and 2012, respectively.
Merchandise Trust
Pursuant to state law, a portion of the proceeds from the sale of pre-need cemetery and funeral home merchandise and services must be deposited into a merchandise trust.
Unlike the perpetual care trust, the principal in the merchandise trust will ultimately revert to us. This will occur once we have met the various requirements for its release, which is generally the delivery of merchandise or performance of underlying services. Accordingly, changes in the fair value of trust assets, both temporary and other-than-temporary, may ultimately impact our periodic earnings and financial position or liquidity at any point in time.
Managing the cash flow associated with the release of trust assets and investment income is a critical component of our overall corporate strategy. Our investment strategy reflects the fact that the release of trust assets and the resultant cash flow is critical to our ability to meet our profitability goals and liquidity needs. Accordingly, we set such strategy to balance the potential for return with the need to maintain asset value.
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A decline in the market value of the assets in the merchandise trust could ultimately impair our profitability and resulting financial position and liquidity should we be forced to liquidate such assets at an amount significantly below our original expectation, which is ultimately asset cost.
We mitigate this risk by ensuring that a sufficient portion of trust assets is invested in cash and cash equivalents that do not have significant risk to principal. We can then manage trust assets so that released amounts are liquidated from this pool as opposed to any pool of assets that are currently valued below cost.
Absent a substantial downturn in pre-need sales, we believe that the cash and cash equivalent allocation of the merchandise trust assets is sufficient to mitigate the risk of liquidating impaired assets in the near future.
Impact of Current Market Conditions 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 accounting principles generally accepted in the United States of America (“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 3.02 at December 31, 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 4.63 at December 31, 2014 compared to a minimum allowed ratio of 2.50.
Net Income (Loss), Operating Cash Flows and Partner Distributions
The table below details net income (loss), operating cash flows and partner distributions made in 2014, 2013 and 2012, respectively:
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (in thousands) | ||||||||||||
| Net income (loss) |
$ | (10,773 | ) | $ | (19,032 | ) | $ | (3,013 | ) | |||
| Operating cash flows |
19,448 | 35,077 | 31,896 | |||||||||
| Partner distributions |
$ | 62,836 | $ | 52,053 | $ | 47,454 | ||||||
Cash flows from operations for the years ended December 31, 2014, 2013 and 2012 were $19.4 million, $35.1 million and $31.9 million, respectively, which exceeded our net losses of $10.8 million, $19.0 million and $3.0 million, respectively, during the same periods. The differences between our operating cash flows and net losses are in large part attributable to the fact that various cash inflows for payments of amounts due under pre-need sales contracts were not and are not as of yet recognized as revenues as we had not and have not met the delivery criteria for revenue recognition. Although there is no assurance, we expect that the trend of operating cash flows exceeding our net income or net loss will continue into the foreseeable future.
Consolidation
Our historical operations are part of a consolidated group for financial reporting purposes that include the cemeteries we operate under long-term lease, operating or management agreements. We currently operate 31 cemeteries, 16 of which have been fully consolidated, under these long-term lease, operating or management agreements. Intercompany balances and transactions have been eliminated in consolidation.
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Income Taxes
Our historical financial statements include the effects of applicable U.S. federal and state income taxes in order to comply with GAAP. We are a limited partnership that has elected to be treated as a partnership for U.S. federal income tax purposes and therefore not be subject to U.S. federal or applicable state income taxes. In order to be treated as a partnership for federal income tax purposes, at least 90% of our gross income must be qualifying income, which includes income from the sale of real property, including burial lots (with and without installed vaults), lawn and mausoleum crypts and cremation niches. Most of our activities that do not generate qualifying income, such as the sale of other cemetery products, the provision of perpetual care services, the operation of our managed cemeteries and all funeral home operations, will be owned by and conducted through corporate subsidiaries, which will be subject to tax on their net taxable income. Dividends we receive from corporate subsidiaries will be qualifying income.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations are based upon our historical consolidated financial statements. We prepared these financial statements in conformity with GAAP. The preparation of these consolidated financial statements required us to make estimates, judgments and assumptions that affected the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods (see Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K). We based our estimates, judgments and assumptions on historical experience and known facts and other assumptions that we believed to be reasonable under the circumstances. In future periods, we expect to make similar estimates, judgments and assumptions on the same basis as we have historically. Our actual results in future periods may differ from these estimates under different assumptions and conditions. We believe that the following accounting policies or estimates had or will have the greatest potential impact on our consolidated financial statements for the periods discussed and for future periods.
Revenue Recognition
We sell our merchandise and services on both a pre-need and at-need basis. All at-need sales are recognized as revenues and recorded in earnings at the time that merchandise is delivered and services are performed.
Revenues from pre-need sales of cemetery interment rights in constructed burial property are deferred until at least 10% of the sales price has been collected, at which time they are fully earned.
Revenues from pre-need sales of cemetery interment rights in unconstructed burial property, such as mausoleum crypts and lawn crypts, are recognized using the percentage-of-completion method of accounting, with no revenue being recognized until at least 10% of the sales price has been received. The percentage-of-completion method of accounting requires us to make certain estimates as of our reporting dates. These estimates are made based upon information available at the reporting date and are updated on a specific identification method at the end of each reporting period. Periodic earnings are calculated based upon the total sales price, estimated costs to complete and the percentage completed during a given reporting period.
Revenues from pre-need sales of cemetery merchandise and services are deferred until the merchandise is delivered or the services are performed, at which time they are fully earned.
Investment earnings, including realized gains and losses, generated by assets in our merchandise trusts are deferred until the associated merchandise is delivered or the services are performed.
In order to appropriately match revenue and expenses, we defer certain pre-need cemetery and prearranged funeral direct obtaining costs that vary with and are primarily related to acquisitions of new pre-need cemetery and prearranged funeral business until such time that the associated revenue is recognized.
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Deferred Cemetery Revenues, Net
Revenues from the sale of services and merchandise, as well as any investment income from the merchandise trust is deferred until such time that the services are performed or the merchandise is delivered.
In addition to amounts deferred on new contracts, investment income and unrealized gains on our merchandise trust, deferred cemetery revenues, net, includes deferred revenues from pre-need sales that were entered into by entities prior to the acquisition of those entities by us, including entities that were acquired by Cornerstone Family Services, Inc. upon its formation in 1999. We provide for a reasonable profit margin for these deferred revenues (deferred margin) to account for the future costs of delivering products and providing services on pre-need contracts that we acquired through acquisitions. Deferred margin amounts are deferred until the merchandise is delivered or the services are performed.
Accounts Receivable Allowance for Cancellations
At the time of a pre-need sale, we record an account receivable in an amount equal to the total contract value less any cash deposit paid net of an estimated allowance for cancellations.
The allowance for cancellations is established based upon our estimate of expected cancellations and historical experiences and is currently approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. We will continue to evaluate cancellation rates and will make changes to the estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations at December 31, 2014 or 2013.
Merchandise Trust Assets
Assets held in our merchandise trusts are carried at fair value. Any change in unrealized gains and losses is reflected in the carrying value of the assets and is recognized as deferred revenue. Any and all investment income streams, including interest, dividends or gains and losses from the sale of trust assets, are offset against deferred revenue until such time that we deliver the underlying merchandise. Investment income generated from our merchandise trust is included in Cemetery revenues—investment and other.
We evaluate whether or not the assets in our merchandise trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to the specific issuer and our ability and intent to hold the security until it regains its value. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value. Any reduction in the cost basis of the assets held in our merchandise trusts due to an other-than-temporary impairment is offset against deferred revenue. Refer to Note 5 of our consolidated financial statements included in this Annual Report on Form 10-K for a more detailed discussion of other-than-temporarily impaired assets.
Perpetual Care Trust Assets
Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. All principal must remain in this trust into perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred.
Assets in our perpetual care trusts are carried at fair value. Any change in unrealized gains and losses is reflected in the carrying value of the assets and is offset against perpetual care trust corpus.
We evaluate whether or not the assets in our perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions, concerns related to the specific issuer
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and our ability and intent to hold the security until it recovers its value. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its market value. Any reduction in the cost basis of the assets held in our perpetual care trusts due to an other-than-temporary impairment is offset against perpetual care trust corpus. There is no impact on earnings. Refer to Note 6 of our consolidated financial statements included in this Annual Report on Form 10-K for a more detailed discussion of other-than-temporarily impaired assets.
Other-Than-Temporary Impairment of Trust Assets
We determine whether or not the impairment of a fixed maturity debt security is other-than-temporary by evaluating each of the following:
| • | Whether it is our intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary. |
| • | If there is no intent to sell, we evaluate if it is not more likely than not that we will be required to sell the debt security before its anticipated recovery. If we determine that it is more likely than not that it will be required to sell an impaired investment before its anticipated recovery, the impairment is considered to be other-than-temporary. |
We further evaluate whether or not all assets in the trusts have other-than-temporary impairments based upon a number of criteria including the severity of the impairment, length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer.
If an impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value.
For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings.
For assets held in the merchandise trusts, any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.
The trusts footnotes (Notes 5 and 6) disclose the adjusted cost basis of the assets in both the merchandise and perpetual care trusts. This adjusted cost basis includes any adjustments to the original cost basis due to other-than-temporary impairments.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. We test goodwill for impairment using a two-step test. In the first step of the test, we compare the fair value of the reporting unit to its carrying amount, including goodwill. We determine the fair value of each reporting unit using the income approach. We do not record an impairment of goodwill in instances where the fair value of a reporting unit exceeds its carrying amount. If the aggregate fair value of a reporting unit is less than the related carrying amount, we proceed to the second step of the test in which we would determine and record an impairment loss in an amount equal to the excess of the carrying amount of goodwill over the implied fair value. The goodwill impairment test is performed annually or more frequently if events or circumstances indicate that impairment may exist.
Income Taxes
Our corporate subsidiaries are subject to both federal and state income taxes. We record deferred tax assets and liabilities to recognize temporary differences between the bases of assets and liabilities in our tax and GAAP balance sheets and for federal and state net operating loss carryforwards and alternative minimum tax credits.
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We record a valuation allowance against our deferred tax assets if we deem that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realizable in future periods.
In evaluating our ability to recover deferred tax assets, we consider all available positive and negative evidence, including our past operating results, recent cumulative losses and our forecast of future taxable income. In determining future taxable income, we make assumptions for the amount of taxable income, the reversal of temporary differences and the implementation of feasible and prudent tax planning strategies. These assumptions require us to make judgments about our future taxable income and are consistent with the plans and estimates we use to manage our business. Any reduction in estimated future taxable income may require us to record an additional valuation allowance against our deferred tax assets. An increase in the valuation allowance would result in additional income tax expense in the period and could have a significant impact on our future earnings.
As of December 31, 2014, our taxable corporate subsidiaries had federal net operating loss carryforwards of approximately $223.1 million, which will begin to expire in 2017 and $272.0 million in state net operating loss carryforwards, a portion of which expires annually. Our ability to use such federal net operating loss carryforwards may be limited by changes in the ownership of our units deemed to result in an “ownership change” under the applicable provisions of the Internal Revenue Code of 1986, as amended.
Recent 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 605—Revenue 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 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. We are currently in the process of evaluating the potential impact of this update on our financial position, results of operations, and cash flows.
In the first quarter of 2015, the Financial Accounting Standards Board issued Update No. 2015-02, “Consolidation (Topic 810)” (“ASU 2015-02”), which amends previous consolidation analysis guidance. ASU 2015-02 requires companies to consider revised consolidation criteria regarding limited partnerships and similar legal entities. The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early application is permitted. We are currently in the process of evaluating the impact of this update, which is not expected to have a significant impact on our financial position, results of operations, or cash flows.
Segment Reporting and Related 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.
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
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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.
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 consolidated financial statements included in this Annual Report on Form 10-K.
The method of accounting we utilize to analyze our overall results of operations, including segment results, provides for a production based view of our business. Under the production based view, we recognize revenues at their contract value at the point in time in which the contract is written, less a historic cancellation reserve. All related costs are expensed in the period the contract is recognized as revenue. In contrast, GAAP requires that we defer all revenues, and the direct costs associated with these revenues, until we meet certain delivery and performance requirements. The nature of our business is such that there is no meaningful relationship between the time that elapses from the date a contract is executed and the date the underlying merchandise is delivered or the service, delivery and performance requirements are met. Further, certain factors affecting this time period, such as weather and supplier issues, are out of our control. As a result, during a period of growth, operating profits as defined by GAAP will tend to lag behind operating profits on a production based view because of the required deferral of revenues. Our performance based view ignores these delays and presents results based upon the underlying value of contracts written. We believe this is the most reliable indicator of our performance for a given period as the value of contracts written less a historical cancellation reserve reflects the economic value added during a given period of time. Accordingly, the ensuing segment discussion is on a basis of accounting that differs from GAAP. See Note 1 to the consolidated financial statements included in this Annual Report on Form 10-K for a more detailed discussion of our accounting policies under GAAP.
Year Ended December 31, 2014 Compared to Year Ended December 31, 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 year ended December 31, 2013, but are included in the results for the year ended December 31, 2014. The acquisitions contributed approximately $9.9 million of the revenues and $6.3 million of the costs and expenses of the segment for the year ended December 31, 2014, compared to $1.2 million and $0.7 million, respectively, for the year ended December 31, 2013.
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The table below compares the results of operations for our Cemetery Operations—Southeast for the year ended December 31, 2014 to the year ended December 31, 2013:
| Year ended December 31, | ||||||||||||||||
| 2014 | 2013 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Total revenues |
$ | 138,769 | $ | 134,046 | $ | 4,723 | 3.5 | % | ||||||||
| Total costs and expenses |
101,460 | 95,726 | 5,734 | 6.0 | % | |||||||||||
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| Operating profit |
$ | 37,309 | $ | 38,320 | $ | (1,011 | ) | -2.6 | % | |||||||
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Revenues
The increase in revenues was attributable to the new properties and was related to an overall increase in the value of contracts written, with an increase of $2.8 million in the value of at-need contracts and $1.5 million in the value of pre-need contracts written. We also had increases of $0.2 million in income from our trusts and an increase of $0.2 million in interest on accounts receivable 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 primarily related to:
| • | A $1.2 million increase in cost of goods sold attributable to the increase in the value of contracts written and product mix. |
| • | A $1.8 million increase in cemetery expenses primarily due to increases of $0.5 million in labor costs, $0.8 million in repair and maintenance costs, $0.3 million in fuel and utility costs and $0.2 million in real estate taxes. |
| • | A $1.2 million increase in selling expenses primarily attributable to an increase of $1.1 million in advertising and telemarketing costs. |
| • | A $0.9 million increase in general and administrative expenses primarily due to an increase of $0.9 million in personnel costs. |
| • | A $0.6 million increase in depreciation. |
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 year ended December 31, 2013, but are included in the results for the year ended December 31, 2014. The additions have contributed approximately $18.2 million of the revenues and $13.2 million of the costs and expenses of the segment.
The table below compares the results of operations for our Cemetery Operations—Northeast for the year ended December 31, 2014 to the year ended December 31, 2013:
| Year ended December 31, | ||||||||||||||||
| 2014 | 2013 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Total revenues |
$ | 82,216 | $ | 63,110 | $ | 19,106 | 30.3 | % | ||||||||
| Total costs and expenses |
54,354 | 43,283 | 11,071 | 25.6 | % | |||||||||||
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| Operating profit |
$ | 27,862 | $ | 19,827 | $ | 8,035 | 40.5 | % | ||||||||
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Revenues
The increase in revenues was mostly attributable to the new properties and was caused by an increase in other income of $4.7 million primarily related to one land sale during the first quarter of 2014 and an overall increase in the value of contracts written, with increases of $6.0 million in the value of pre-need contracts written and $8.5 million in the value of at-need contracts written. These increases were partially offset by a decrease of $0.1 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 primarily related to:
| • | A $0.9 million increase in cost of goods sold primarily attributable to the corresponding increase in the value of contracts written and product mix. |
| • | A $5.9 million increase in cemetery expenses primarily attributable to increases of $4.7 million in labor costs, $0.7 million in repairs and maintenance expense, $0.4 million in utility and fuel costs and $0.1 million in real estate taxes. |
| • | A $2.2 million increase in selling expenses primarily due to increases of $1.9 million in commissions and personnel costs and $0.3 million in advertising and marketing costs. |
| • | A $1.2 million increase in general and administrative expenses primarily due to increases of $0.7 million in personnel costs and $0.1 million in professional fees, with the remainder due to various general office costs. |
| • | A $0.9 million increase in depreciation expense inclusive of $0.6 million of amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia. |
Cemetery Operations—West
The table below compares the results of operations for our Cemetery Operations—West for the year ended December 31, 2014 to the year ended December 31, 2013:
| Year ended December 31, | ||||||||||||||||
| 2014 | 2013 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Total revenues |
$ | 80,255 | $ | 78,636 | $ | 1,619 | 2.1 | % | ||||||||
| Total costs and expenses |
53,351 | 48,958 | 4,393 | 9.0 | % | |||||||||||
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| Operating profit |
$ | 26,904 | $ | 29,678 | $ | (2,774 | ) | -9.3 | % | |||||||
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Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $3.3 million in the value of pre-need contracts written and increase of $1.5 million in the value of at-need contracts written. Partially offsetting these increases were decreases of $2.7 million in income from our trusts and $0.5 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 $2.4 million increase in cost of goods sold primarily attributable to product mix and the corresponding increase in the value of contracts written. |
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| • | A $0.6 million decrease in cemetery expenses primarily due to decreases of $0.6 million in real estate tax expense and $0.1 million in personnel costs, partially offset by an increase of $0.2 million in repair and maintenance expenses. |
| • | A $1.4 million increase in selling expenses primarily attributable to increases of $0.9 million in commissions and personnel expenses, $0.3 million in advertising and telemarketing costs and $0.1 million in travel costs. |
| • | A $1.2 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 and in the fourth quarter of 2014, we acquired two funeral homes. Therefore, the results of operations for these properties have either less or no impact on the results for the year ended December 31, 2013, but are included in the results for the year ended December 31, 2014. These additions are primarily responsible for the increases to revenues and costs and expenses for the Funeral Homes segment, contributing approximately $11.0 million of the revenues and $7.5 million of the costs and expenses of the segment for the year ended December 31, 2014, compared to $5.2 million and $3.4 million, respectively, for the year ended December 31, 2013.
The table below compares the results of operations for our Funeral Homes segment for the year ended December 31, 2014 to the year ended December 31, 2013:
| Year ended December 31, | ||||||||||||||||
| 2014 | 2013 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Total revenues |
$ | 55,751 | $ | 50,808 | $ | 4,943 | 9.7 | % | ||||||||
| Total costs and expenses |
43,896 | 39,355 | 4,541 | 11.5 | % | |||||||||||
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| Operating profit |
$ | 11,855 | $ | 11,453 | $ | 402 | 3.5 | % | ||||||||
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Revenues
The increase in revenues was primarily attributable to a $2.8 million increase in pre-need revenues and a $2.5 million increase in at-need revenues, partially offset by a $0.4 million decrease in other revenues.
Total costs and expenses
The increase in costs and expenses was primarily attributable to increases of $1.3 million in personnel expenses, $1.4 million in merchandise costs, $0.4 million in other funeral service related expenses, $1.2 million in facility costs, and $0.2 million in depreciation and amortization expense.
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Corporate Segment
The table below compares expenses incurred by the Corporate segment for the year ended December 31, 2014 to the year ended December 31, 2013:
| Year ended December 31, | ||||||||||||||||
| 2014 | 2013 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Selling, cemetery and general and administrative expenses |
$ | 1,538 | $ | 972 | $ | 566 | 58.2 | % | ||||||||
| Depreciation and amortization |
977 | 1,176 | (199 | ) | -16.9 | % | ||||||||||
| Acquisition related costs, net of recoveries |
2,269 | 1,051 | 1,218 | 115.9 | % | |||||||||||
| Corporate expenses: |
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| Corporate personnel expenses |
13,960 | 14,478 | (518 | ) | -3.6 | % | ||||||||||
| Other corporate expenses |
18,494 | 14,397 | 4,097 | 28.5 | % | |||||||||||
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| Total corporate overhead |
32,454 | 28,875 | 3,579 | 12.4 | % | |||||||||||
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| Total corporate expenses |
$ | 37,238 | $ | 32,074 | $ | 5,164 | 16.1 | % | ||||||||
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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, $1.2 million in acquisition related costs, $0.5 million in information technology costs, $0.2 million in travel costs, $3.0 million in professional fees reported within corporate overhead and a net $0.2 million in other general corporate costs and depreciation. These increases were partially offset by a decrease of $0.5 million in personnel costs.
Due to a legal settlement during the year ended December 31, 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 Management’s Discussion and Analysis of Financial Condition and Results of Operations, revenues and their associated costs as reported at the segment level are not deferred.
Periodic consolidated revenues recorded in accordance with GAAP reflect the amount of total merchandise and services that 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 year ended December 31, 2014 compared to the year ended December 31, 2013. 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. During 2014, we acquired 13 cemeteries and 11 funeral homes, and separately obtained the rights from the Archdiocese of Philadelphia to operate 13 cemetery properties. During 2013, we acquired 1 cemetery and 6 funeral homes. The results of operations for these properties have either less or no impact on the results for the year ended
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December 31, 2013, but are included in the results for the year ended December 31, 2014. These additions are contributing a significant portion of the increases to revenues and costs and expenses in the table below.
| Year ended December 31, 2014 |
Year ended December 31, 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 |
$ | 145,607 | $ | (40,471 | ) | $ | 105,136 | $ | 134,857 | $ | (43,714 | ) | $ | 91,143 | $ | 13,993 | 15.4 | % | ||||||||||||||
| At-need cemetery revenues |
92,724 | (559 | ) | 92,165 | 80,000 | (4,568 | ) | 75,432 | 16,733 | 22.2 | % | |||||||||||||||||||||
| Investment income from trusts |
47,912 | (21,742 | ) | 26,170 | 50,564 | (26,158 | ) | 24,406 | 1,764 | 7.2 | % | |||||||||||||||||||||
| Interest income |
7,628 | — | 7,628 | 6,926 | — | 6,926 | 702 | 10.1 | % | |||||||||||||||||||||||
| Funeral home revenues |
55,751 | (7,065 | ) | 48,686 | 50,808 | (5,853 | ) | 44,955 | 3,731 | 8.3 | % | |||||||||||||||||||||
| Other cemetery revenues |
7,369 | 931 | 8,300 | 3,445 | 334 | 3,779 | 4,521 | 119.6 | % | |||||||||||||||||||||||
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| Total revenues |
356,991 | (68,906 | ) | 288,085 | 326,600 | (79,959 | ) | 246,641 | 41,444 | 16.8 | % | |||||||||||||||||||||
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| Costs and expenses |
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| Cost of goods sold |
39,842 | (6,190 | ) | 33,652 | 35,382 | (7,523 | ) | 27,859 | 5,793 | 20.8 | % | |||||||||||||||||||||
| Cemetery expense |
64,672 | — | 64,672 | 57,566 | — | 57,566 | 7,106 | 12.3 | % | |||||||||||||||||||||||
| Selling expense |
64,175 | (8,898 | ) | 55,277 | 58,782 | (10,950 | ) | 47,832 | 7,445 | 15.6 | % | |||||||||||||||||||||
| General and administrative expense |
35,110 | — | 35,110 | 31,873 | — | 31,873 | 3,237 | 10.2 | % | |||||||||||||||||||||||
| Corporate overhead |
32,454 | — | 32,454 | 28,875 | — | 28,875 | 3,579 | 12.4 | % | |||||||||||||||||||||||
| Depreciation and amortization |
11,081 | — | 11,081 | 9,548 | — | 9,548 | 1,533 | 16.1 | % | |||||||||||||||||||||||
| Funeral home expense |
40,696 | (986 | ) | 39,710 | 36,319 | (665 | ) | 35,654 | 4,056 | 11.4 | % | |||||||||||||||||||||
| Acquisition related costs, net of recoveries |
2,269 | — | 2,269 | 1,051 | — | 1,051 | 1,218 | 115.9 | % | |||||||||||||||||||||||
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| Total costs and expenses |
290,299 | (16,074 | ) | 274,225 | 259,396 | (19,138 | ) | 240,258 | 33,967 | 14.1 | % | |||||||||||||||||||||
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| Operating profit |
$ | 66,692 | $ | (52,832 | ) | $ | 13,860 | $ | 67,204 | $ | (60,821 | ) | $ | 6,383 | $ | 7,477 | 117.1 | % | ||||||||||||||
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Revenues
Pre-need cemetery revenues were $105.1 million for the year ended December 31, 2014, an increase of $14.0 million, or 15.4%, as compared to $91.1 million during 2013. The increase was caused by an increase of $10.8 million in the value of pre-need cemetery contracts written and a decrease of $3.2 million in deferred revenue.
At-need cemetery revenues were $92.2 million for the year ended December 31, 2014, an increase of $16.8 million, or 22.2%, as compared to $75.4 million during 2013. The increase was caused by an increase of $12.8 million in the value of at-need cemetery contracts written and a decrease of $4.0 million in deferred revenue.
Investment income from trusts was $26.2 million for the year ended December 31, 2014, an increase of $1.8 million, or 7.2%, as compared to $24.4 million during 2013. We had an adjustment of $4.4 million related to funds for which we have met the requirements that would allow us to recognize them as revenue, which was partially offset by a decrease of $2.6 million in income on a segment basis. 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 $7.6 million for the year ended December 31, 2014, an increase of $0.7 million, or 10.1%, as compared to $6.9 million during 2013, primarily due to an increase in accounts receivable during the period.
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Funeral home revenues were $48.7 million for the year ended December 31, 2014, an increase of $3.7 million, or 8.3%, compared to $45.0 million during 2013. The increase was primarily attributable to the acquisition of 11 funeral homes during 2014.
Other cemetery revenues include miscellaneous items that are not grouped with our cemetery merchandise and services. Other cemetery revenues were $8.3 million for the year ended December 31, 2014, an increase of $4.5 million, or 119.6%, as compared to $3.8 million during 2013. The increase was primarily caused by one land sale during the first quarter of 2014.
Costs and Expenses
Cost of goods sold were $33.7 million for the year ended December 31, 2014, an increase of $5.8 million, or 20.8%, as compared to $27.9 million in 2013. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 17.1% for the year ended December 31, 2014 as compared to 16.7% during 2013. The change in the ratio primarily relates to changes in product mix.
Cemetery expenses were $64.7 million during the year ended December 31, 2014, an increase of $7.1 million, or 12.3%, compared to $57.6 million during 2013. Within this category, there were increases of $1.7 million in repairs and maintenance expense, $5.0 million in personnel costs and $0.7 million in utility and fuel costs, partially offset by a decrease of $0.3 million in real estate tax expense. 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 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 27.1% during the year ended December 31, 2014 as compared to 26.8% during 2013.
Selling expenses were $55.3 million during the year ended December 31, 2014, an increase of $7.5 million, or 15.6%, as compared to $47.8 million in 2013. The expense increase is comprised of segment-based increases of $2.8 million in commissions and personnel expenses, $2.3 million in advertising and telemarketing costs and $0.2 million in travel expenses and a net $0.1 million in general selling costs and a decrease in deferred selling expenses of $2.1 million. The ratio of selling expenses to cemetery revenues was 28.0% for the year ended December 31, 2014 as compared to 28.7% during 2013. This ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority 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 consistent.
General and administrative expenses were $35.1 million during the year ended December 31, 2014, an increase of $3.2 million, or 10.2%, as compared to $31.9 million during 2013. The increase was mostly due to increases of $1.7 million in personnel costs and $1.5 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
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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 decrease slightly 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 14.7% during the year ended December 31, 2014 as compared to 14.8% during 2013.
Total corporate overhead was $32.5 million during the year ended December 31, 2014, an increase of $3.6 million, or 12.4%, compared to $28.9 million during 2013. The increase in corporate overhead was primarily attributable to $0.5 million in information technology costs, $0.2 million in travel costs and $3.0 million in professional fees. These increases were partially offset by a decrease of $0.5 million in personnel costs, with the remaining increase in general corporate costs. Due to a legal settlement during the year ended December 31, 2013, we had recoveries of legal costs of $1.7 million, driving down professional fees expense for the prior period.
Depreciation and amortization was $11.1 million during the year ended December 31, 2014, an increase of $1.6 million, or 16.1%, as compared to $9.5 million during the same period last year. The increase was primarily due to additional depreciation and amortization from assets acquired in our recent acquisitions and the lease and management agreements with the Archdiocese of Philadelphia.
Funeral home expenses were $39.7 million for the year ended December 31, 2014, an increase of $4.0 million, or 11.4%, compared to $35.7 million during 2013. The increase was primarily driven by our 2014 acquisitions and was attributable to segment increases of $1.3 million in personnel expenses, $1.4 million in merchandise costs, $0.4 million in other funeral service related expenses and $1.2 million in facility costs. These increases were offset by an increase of $0.3 million in deferred funeral home expenses.
Acquisition related costs were $2.3 million for the year ended December 31, 2014, an increase of $1.2 million, or 115.9%, as compared to $1.1 million during 2013. These costs will vary from period to period depending on the amount of acquisition activity that takes place. Acquisition costs for the year ended December 31, 2013, were reduced by $1.3 million due to a legal settlement.
Non-segment Allocated Results
Certain statement of operations amounts are not allocated to segment operations. These amounts are those line items that can be found on our consolidated statement of operations below operating profit and above net loss.
The table below summarizes these items and the changes between the years ended December 31, 2014 and 2013:
| Year ended December 31, | ||||||||||||||||
| 2014 | 2013 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Gain on acquisitions |
$ | 412 | $ | 2,530 | $ | (2,118 | ) | -83.7 | % | |||||||
| Gain on settlement agreement, net |
888 | 12,261 | (11,373 | ) | -92.8 | % | ||||||||||
| Gain on sale of other assets |
— | 155 | (155 | ) | -100.0 | % | ||||||||||
| Gain on sale of funeral home |
244 | — | 244 | 100.0 | % | |||||||||||
| Loss on early extinguishment of debt |
214 | 21,595 | (21,381 | ) | -99.0 | % | ||||||||||
| Loss on impairment of long-lived assets |
440 | — | 440 | 100.0 | % | |||||||||||
| Interest expense |
21,610 | 21,070 | 540 | 2.6 | % | |||||||||||
| Income tax expense (benefit) |
$ | 3,913 | $ | (2,304 | ) | $ | 6,217 | -269.8 | % | |||||||
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The gain on acquisition recorded during the year ended December 31, 2014 relates to our first quarter 2014 acquisition. The gain on acquisition recorded during the year ended December 31, 2013 relates to our third quarter 2013 acquisition.
During the year ended December 31, 2014, we recovered an additional $1.5 million related to the settlement of claims from locations acquired in 2010. A gain of $0.9 million has been recorded as gain on settlement agreement on the consolidated statement of operations, which was net of legal fees of $0.6 million. During the year ended December 31, 2013, certain proceeds received from a legal settlement were recorded as a gain on settlement agreement on the consolidated statement of operations, resulting in a total gain on settlement of $12.3 million.
The gain on sale of funeral home recorded during the year ended December 31, 2014 pertains to the sale of one funeral home in California during September 2014.
The extinguishment of debt charge during the year ended December 31, 2014 of $0.2 million relates to the write-off of unamortized fees due to a change in the lender syndicate of our revolving credit facility. This change occurred concurrently with our entrance into the Fourth Amended and Restated Credit Agreement during the fourth quarter of 2014. The early extinguishment of debt charge during the year ended December 31, 2013 of $21.6 million relates to the tender premium of $14.9 million we paid in connection with the early repayment of $150.0 million of our 10.25% Senior Notes due 2017 and the write-off of $6.7 million of unamortized fees and discounts related to those notes.
The loss on impairment of long-lived assets recorded during the year ended December 31, 2014 pertains to one of our funeral home buildings in Florida.
Interest expense was relatively consistent period over period. There was an increase in discount accretion expense primarily relating to the obligation for the lease and management agreements with the Archdiocese of Philadelphia and amortization of deferred finance fees relating to our recent amendments to the revolving credit facility. This increase was partially offset by a reduction in interest expense related to our senior notes, which have a lower interest rate than the prior senior notes that were refinanced in the second quarter of 2013. Average amounts outstanding under the credit facility were relatively consistent at $95.5 million and $101.3 million during the years ended December 31, 2014 and 2013, respectively.
We had an income tax expense of $3.9 million for the year ended December 31, 2014, compared to an income tax benefit of $2.3 million during 2013. The increase in income tax expense is primarily due to revised estimates regarding the usage of our federal net operating loss carryforwards. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.
Year Ended December 31, 2013 Compared to Year Ended December 31, 2012
Cemetery Segments
Cemetery Operations—Southeast
In 2012 and 2013 we acquired five properties in our Cemetery Operations—Southeast segment. Of these acquisitions, four occurred during the third quarter of 2012 and one occurred during the third quarter of 2013. Therefore, the results of operations for these properties have either a lesser or no impact on the results for the year ended December 31, 2012, but are included in the results for the year ended December 31, 2013. These additions are responsible for approximately two-thirds of the increase to revenues and approximately one half of the increase to costs and expenses for this segment.
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The table below compares the results of operations for our Cemetery Operations—Southeast for the year ended December 31, 2013 to the year ended December 31, 2012:
| Year ended December 31, | ||||||||||||||||
| 2013 | 2012 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Total revenues |
$ | 134,046 | $ | 129,212 | $ | 4,834 | 3.7 | % | ||||||||
| Total costs and expenses |
95,726 | 91,239 | 4,487 | 4.9 | % | |||||||||||
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| Operating profit |
$ | 38,320 | $ | 37,973 | $ | 347 | 0.9 | % | ||||||||
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Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $1.6 million in the value of at-need contracts and $0.2 million in the value of pre-need contracts. We also had increases of $3.4 million in income from our trusts, partially offset by a decrease of $0.4 million in interest on accounts receivable 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 increase in costs and expenses was primarily related to:
| • | A $0.1 million increase in cost of goods sold primarily attributable to the increase in the value of contracts written and product mix. |
| • | A $1.0 million increase in cemetery expenses primarily due to increases of $0.6 million in labor costs and $0.4 million in repair and maintenance costs. |
| • | A $1.7 million increase in selling expenses primarily attributable to increases of $0.9 million in commissions and personnel expenses, $0.5 million in advertising and telemarketing costs, $0.2 million in travel costs, and $0.1 million in supplies and printing expenses. |
| • | A $1.5 million increase in general and administrative expenses primarily due to increases of $0.3 million in personnel costs, $0.3 million in insurance costs, $0.2 million in professional fees, $0.1 million in travel costs, $0.1 million in repair and maintenance expense, and $0.1 million in rent expense, with the remaining increase due to general office costs. |
| • | A $0.2 million increase in depreciation primarily due to the acquired properties. |
Cemetery Operations—Northeast
The table below compares the results of operations for our Cemetery Operations—Northeast for the year ended December 31, 2013 to the year ended December 31, 2012:
| Year ended December 31, | ||||||||||||||||
| 2013 | 2012 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Total revenues |
$ | 63,110 | $ | 60,357 | $ | 2,753 | 4.6 | % | ||||||||
| Total costs and expenses |
43,283 | 40,620 | 2,663 | 6.6 | % | |||||||||||
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| Operating profit |
$ | 19,827 | $ | 19,737 | $ | 90 | 0.5 | % | ||||||||
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Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $2.5 million in the value of pre-need contracts, partially offset by a decrease of $0.6 million in the value of at-need contracts. In addition, we had an increase of $1.6 million in income from our trusts, partially offset by a
61
decrease of $0.7 million in 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 increase in costs and expenses was primarily related to:
| • | A $0.5 million increase in cost of goods sold primarily attributable to the corresponding increase in the value of contracts written and product mix. |
| • | A $0.9 million increase in cemetery expenses primarily due to increases of $0.4 million in labor costs, $0.2 million in repair and maintenance expense, $0.2 million in utility costs and $0.1 million in automobile and equipment expenses. |
| • | A $0.9 million increase in selling expenses primarily attributable to increases of $0.5 million in commissions and personnel expenses, $0.3 million in advertising and telemarketing costs and $0.1 million in travel costs. |
| • | A $0.4 million increase in general and administrative expenses primarily due to increases of $0.2 million in personnel costs and $0.2 million in insurance costs. |
Cemetery Operations—West
Effective March 31, 2012, we terminated our operating agreement with the Archdiocese of Detroit. Therefore, the results of operations for these properties are only included in the year ended December 31, 2012 up to that point, and have no impact on the results for the year ended December 31, 2013. The removal of these properties from our results of operations resulted in a $1.8 million decrease in revenues and $1.6 million decrease in costs and expenses period over period. In the second quarter of 2012 we made one acquisition in our Cemetery Operations—West segment. This acquisition did not have a significant impact on the comparison of the segment’s results of operations below.
The table below compares the results of operations for our Cemetery Operations—West for the year ended December 31, 2013 to the year ended December 31, 2012:
| Year ended December 31, | ||||||||||||||||
| 2013 | 2012 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Total revenues |
$ | 78,636 | $ | 68,766 | $ | 9,870 | 14.4 | % | ||||||||
| Total costs and expenses |
48,958 | 45,437 | 3,521 | 7.7 | % | |||||||||||
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| Operating profit |
$ | 29,678 | $ | 23,329 | $ | 6,349 | 27.2 | % | ||||||||
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Revenues
The increase in revenues was related to an overall increase in the value of contracts written, with an increase of $3.7 million in the value of pre-need contracts, partially offset by a decrease of $0.4 million in the value of at-need contracts. In addition, we had an increase of $7.0 million in income from our trusts, partially offset by a 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 increase in costs and expenses was primarily related to:
| • | A $1.1 million increase in cost of goods sold primarily attributable to the corresponding increase in the value of contracts written and product mix. |
| • | A $0.2 million increase in cemetery expenses primarily due to increases of $0.3 million in repair and maintenance expense and $0.2 million in real estate taxes, partially offset by a decrease of $0.3 million in personnel costs. |
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| • | A $1.4 million increase in selling expenses primarily attributable to increases of $1.0 million in commissions and personnel expenses, $0.3 million in advertising and telemarketing costs and $0.2 million in travel costs, partially offset by a net $0.1 million decrease in miscellaneous selling costs. |
| • | A $1.0 million increase in general and administrative expenses comprised of increases of $0.2 million in personnel costs, $0.2 million in legal costs, $0.1 million in insurance costs, $0.1 million in professional fees, and $0.1 million in travel costs, with the remaining increase due to general office costs. |
| • | A $0.2 million decrease in depreciation. |
Funeral Homes Segment
In 2012 and 2013 we acquired twenty three funeral homes. Of these acquisitions, two occurred during the second quarter of 2012, fourteen occurred during the third quarter of 2012, one occurred during the fourth quarter of 2012 and six occurred during the first quarter of 2013. Therefore, the results of operations for these properties have either a lesser or no impact on the results for the year ended December 31, 2012, but are included in the results for the year ended December 31, 2013. These additions are primarily responsible for the increases to revenues and costs and expenses for the Funeral Homes segment.
The table below compares the results of operations for our Funeral Homes segment for the year ended December 31, 2013 to the year ended December 31, 2012:
| Year ended December 31, | ||||||||||||||||
| 2013 | 2012 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Total revenues |
$ | 50,808 | $ | 37,988 | $ | 12,820 | 33.7 | % | ||||||||
| Total costs and expenses |
39,355 | 31,486 | 7,869 | 25.0 | % | |||||||||||
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| Operating profit |
$ | 11,453 | $ | 6,502 | $ | 4,951 | 76.1 | % | ||||||||
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Revenues
The increase in revenues was primarily attributable to a $7.3 million increase in pre-need revenues, a $3.3 million increase in at-need revenues and a $2.2 million increase in other revenues.
Total costs and expenses
The increase in costs and expenses was primarily attributable to increases of $4.3 million in personnel expenses, $0.6 million in merchandise costs, $0.4 million in other service and supplies expenses, $0.7 million in advertising costs, $0.7 million in facility costs, and $0.5 million in depreciation and amortization expense, with the remainder attributable to increases in other general expense categories.
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Corporate Segment
The table below compares expenses incurred by the Corporate segment for the year ended December 31, 2013 to the year ended December 31, 2012:
| Year ended December 31, | ||||||||||||||||
| 2013 | 2012 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| (non-GAAP) | ||||||||||||||||
| Selling, cemetery and general and administrative expenses |
$ | 972 | $ | 870 | $ | 102 | 11.7 | % | ||||||||
| Depreciation and amortization |
1,176 | 1,542 | (366 | ) | -23.7 | % | ||||||||||
| Acquisition related costs, net of recoveries |
1,051 | 3,123 | (2,072 | ) | -66.3 | % | ||||||||||
| Corporate expenses: |
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| Corporate personnel expenses |
14,478 | 12,309 | 2,169 | 17.6 | % | |||||||||||
| Other corporate expenses |
14,397 | 15,860 | (1,463 | ) | -9.2 | % | ||||||||||
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| Total corporate overhead |
28,875 | 28,169 | 706 | 2.5 | % | |||||||||||
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| Total corporate expenses |
$ | 32,074 | $ | 33,704 | $ | (1,630 | ) | -4.8 | % | |||||||
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Selling, cemetery and general and administrative expenses allocated to the Corporate segment remained relatively consistent period over period.
The decrease in depreciation and amortization was due to a decrease in the amortization of deferred financing fees.
Acquisition related costs include legal fees and other third party costs incurred in acquisition related activities. These costs will vary from period to period depending on the amount of acquisition activity that takes place. There was a decrease in the expense related to a recovery of legal fees in the first and second quarters of 2013 resulting from a legal settlement.
The increase in total corporate overhead was attributable to increases of $2.2 million in personnel expenses and $0.4 million in unit-based compensation expense. These increases were partially offset by a $1.0 million decrease in professional fees, primarily related to a recovery of legal fees from a legal settlement during the second quarter of 2013, and a $0.9 million decrease in advertising and public relations costs.
Reconciliation of Segment Results of Operations to Consolidated Results of Operations
As discussed in the segment sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, revenues and their associated costs as reported at the segment level are not deferred.
Periodic consolidated revenues recorded in accordance with GAAP reflect the amount of total merchandise and services that 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 year ended December 31, 2013 compared to the year ended December 31, 2012. 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. During 2013
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we acquired 1 cemetery and 6 funeral homes. During 2012 we acquired 5 cemeteries and 17 funeral homes. The results of operations for these properties have either a lesser or no impact on the results for the year ended December 31, 2012, but are included in the results for the year ended December 31, 2013. These additions are contributing a significant portion of the increases to revenues and costs and expenses in the table below. Effective March 31, 2012, we terminated our operating agreement with the Archdiocese of Detroit; consequently, the results of operations for these properties are included in 2012 up to that point, and are not included in 2013.
| Year ended December 31, 2013 |
Year ended December 31, 2012 |
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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 |
$ | 134,857 | $ | (43,714 | ) | $ | 91,143 | $ | 128,437 | $ | (31,437 | ) | $ | 97,000 | $ | (5,857 | ) | -6.0 | % | |||||||||||||
| At-need cemetery revenues |
80,000 | (4,568 | ) | 75,432 | 79,346 | (4,552 | ) | 74,794 | 638 | 0.9 | % | |||||||||||||||||||||
| Investment income from trusts |
50,564 | (26,158 | ) | 24,406 | 38,571 | (14,446 | ) | 24,125 | 281 | 1.2 | % | |||||||||||||||||||||
| Interest income |
6,926 | — | 6,926 | 6,698 | — | 6,698 | 228 | 3.4 | % | |||||||||||||||||||||||
| Funeral home revenues |
50,808 | (5,853 | ) | 44,955 | 37,988 | (2,309 | ) | 35,679 | 9,276 | 26.0 | % | |||||||||||||||||||||
| Other cemetery revenues |
3,445 | 334 | 3,779 | 5,283 | (973 | ) | 4,310 | (531 | ) | -12.3 | % | |||||||||||||||||||||
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| Total revenues |
326,600 | (79,959 | ) | 246,641 | 296,323 | (53,717 | ) | 242,606 | 4,035 | 1.7 | % | |||||||||||||||||||||
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| Costs and expenses |
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| Cost of goods sold |
35,382 | (7,523 | ) | 27,859 | 33,807 | (5,706 | ) | 28,101 | (242 | ) | -0.9 | % | ||||||||||||||||||||
| Cemetery expense |
57,566 | — | 57,566 | 55,410 | — | 55,410 | 2,156 | 3.9 | % | |||||||||||||||||||||||
| Selling expense |
58,782 | (10,950 | ) | 47,832 | 54,641 | (7,763 | ) | 46,878 | 954 | 2.0 | % | |||||||||||||||||||||
| General and administrative expense |
31,873 | — | 31,873 | 28,928 | — | 28,928 | 2,945 | 10.2 | % | |||||||||||||||||||||||
| Corporate overhead |
28,875 | — | 28,875 | 28,169 | — | 28,169 | 706 | 2.5 | % | |||||||||||||||||||||||
| Depreciation and amortization |
9,548 | — | 9,548 | 9,431 | — | 9,431 | 117 | 1.2 | % | |||||||||||||||||||||||
| Funeral home expense |
36,319 | (665 | ) | 35,654 | 28,977 | (252 | ) | 28,725 | 6,929 | 24.1 | % | |||||||||||||||||||||
| Acquisition related costs, net of recoveries |
1,051 | — | 1,051 | 3,123 | — | 3,123 | (2,072 | ) | -66.3 | % | ||||||||||||||||||||||
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| Total costs and expenses |
259,396 | (19,138 | ) | 240,258 | 242,486 | (13,721 | ) | 228,765 | 11,493 | 5.0 | % | |||||||||||||||||||||
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| Operating profit |
$ | 67,204 | $ | (60,821 | ) | $ | 6,383 | $ | 53,837 | $ | (39,996 | ) | $ | 13,841 | $ | (7,458 | ) | -53.9 | % | |||||||||||||
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Revenues
Pre-need cemetery revenues were $91.1 million for the year ended December 31, 2013, a decrease of $5.9 million, or 6.0%, as compared to $97.0 million during 2012. An increase of $6.4 million in the value of pre-need cemetery contracts written was offset by an increase of $12.3 million in deferred revenue.
At-need cemetery revenues were $75.4 million for the year ended December 31, 2013, an increase of $0.6 million, or 0.9%, as compared to $74.8 million during 2012. The increase was caused by an increase in the value of at-need cemetery contracts written.
Investment income from trusts was $24.4 million for the year ended December 31, 2013, an increase of $0.3 million, or 1.2%, as compared to $24.1 million during 2012. On a segment basis, we had an increase of $12.0 million, which was offset by an adjustment of $11.7 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 $6.9 million for the year ended December 31, 2013, an increase of $0.2 million, or 3.4%, as compared to $6.7 million during 2012.
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Funeral home revenues were $45.0 million for the year ended December 31, 2013, an increase of $9.3 million, or 26.0%, compared to $35.7 million during 2012. The increase was primarily attributable to the acquisitions of 23 funeral homes made during 2012 and 2013.
Other cemetery revenues include miscellaneous items that are not grouped with our cemetery merchandise and services. Other cemetery revenues were $3.8 million for the year ended December 31, 2013, a decrease of $0.5 million, or 12.3%, as compared to $4.3 million during 2012. The decrease was primarily related to non-recurring other income from the sale of assets that occurred in 2012.
Costs and Expenses
Cost of goods sold were $27.9 million for the year ended December 31, 2013, a decrease of $0.2 million, or 0.9%, as compared to $28.1 million in 2012. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 16.7% for the year ended December 31, 2013 as compared to 16.4% during 2012. The change in the ratio primarily relates to changes in product mix.
Cemetery expenses were $57.6 million during the year ended December 31, 2013, an increase of $2.2 million, or 3.9%, compared to $55.4 million during 2012. This increase was comprised of increases of $0.7 million in labor costs, $0.4 million in utility and fuel costs, $0.3 million in travel costs and $0.9 million in repair and maintenance expenses, which were partially offset by a net decrease of $0.1 million in cemetery overhead and other costs. 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 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 26.8% during the year ended December 31, 2013 as compared to 26.7% during 2012.
Selling expenses were $47.8 million during the year ended December 31, 2013, an increase of $0.9 million, or 2.0%, as compared to $46.9 million in 2012. The expense increase is comprised of segment-based increases of $2.3 million in commissions and personnel expenses, $1.1 million in advertising and telemarketing costs and $0.5 million in travel expenses and a net $0.2 million in general selling costs, which were offset by an increase in deferred selling expenses of $3.2 million. The ratio of selling expenses to cemetery revenues was 28.7% for the year ended December 31, 2013 as compared to 27.3% during 2012. This ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority 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 $31.9 million during the year ended December 31, 2013, an increase of $3.0 million, or 10.2%, as compared to $28.9 million during 2012. This increase was due to increases of $0.7 million in personnel costs, $0.6 million in insurance costs, $0.3 million in professional fees, $0.2 million in travel costs and $0.1 million increases each in supplies, office rent, and repairs and maintenance. The remaining increase was due to general office and miscellaneous costs. 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
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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 14.8% during the year ended December 31, 2013 as compared to 13.9% during 2012.
Total corporate overhead was $28.9 million during the year ended December 31, 2013, an increase of $0.7 million, or 2.5%, compared to $28.2 million during 2012. The increase in total corporate overhead was attributable to increases of $2.2 million in personnel expenses and $0.4 million in unit-based compensation expense. These increases were partially offset by a $1.0 million decrease in professional fees, primarily related to a recovery of legal fees from a legal settlement during the second quarter of 2013, and a $0.9 million decrease in advertising and public relations costs.
Depreciation and amortization was $9.5 million during the year ended December 31, 2013, an increase of $0.1 million, or 1.2%, as compared to $9.4 million during the same period last year. The increase was primarily due to additional depreciation and amortization from our recent acquisitions offset by runoff of existing assets, including deferred financing fees.
Funeral home expenses were $35.7 million for the year ended December 31, 2013, an increase of $7.0 million, or 24.1%, compared to $28.7 million during 2012. The increase was primarily driven by our acquisitions and was attributable to segment increases of $4.3 million in personnel expenses, $0.6 million in merchandise costs, $0.4 million in other service and supplies expenses, $0.7 million in advertising costs, and $0.7 million in facility costs, with the remainder attributable to increases in other general expense categories. These increases were offset by an increase of $0.4 million in deferred funeral home expenses.
Acquisition related costs were $1.1 million for the year ended December 31, 2013, a decrease of $2.0 million, or 66.3%, as compared to $3.1 million during 2012. The decrease was primarily due to a legal settlement, which resulted in a recovery of legal fees in the first and second quarters of 2013. These costs will vary from period to period depending on the amount of acquisition activity that takes place.
Non-segment Allocated Results
Certain statement of operations amounts are not allocated to segment operations. These amounts are those line items that can be found on our consolidated statement of operations below operating profit and above net income (loss).
The table below summarizes these items and the changes between the years ended December 31, 2013 and 2012:
| Year ended December 31, | ||||||||||||||||
| 2013 | 2012 | Change ($) | Change (%) | |||||||||||||
| (in thousands) | ||||||||||||||||
| Gain on acquisitions |
$ | 2,530 | $ | 122 | $ | 2,408 | 1973.8 | % | ||||||||
| Gain on termination of operating agreement |
— | 1,737 | (1,737 | ) | -100.0 | % | ||||||||||
| Gain on settlement agreement, net |
12,261 | — | 12,261 | 100.0 | % | |||||||||||
| Gain on sale of other assets |
155 | — | 155 | 100.0 | % | |||||||||||
| Loss on early extinguishment of debt |
21,595 | — | 21,595 | 100.0 | % | |||||||||||
| Interest expense |
21,070 | 20,503 | 567 | 2.8 | % | |||||||||||
| Income tax expense (benefit) |
$ | (2,304 | ) | $ | (1,790 | ) | $ | (514 | ) | 28.7 | % | |||||
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The gain on acquisition recorded during the year ended December 31, 2013 relates to our third quarter 2013 acquisition. The gain on acquisition recorded during the year ended December 31, 2012 relates to one of our second quarter 2012 acquisitions.
During the year ended December 31, 2012, we recognized a gain of $1.7 million related to the termination of an operating agreement. Refer to Note 13 of our consolidated financial statements in “Item 8” of this Form 10-K for a more detailed discussion.
During the year ended December 31, 2013, certain proceeds received from a legal settlement were recorded as a gain on settlement agreement on the consolidated statement of operations, resulting in a total gain on settlement of $12.3 million.
The early extinguishment of debt charge of $21.6 million relates to the tender premium of $14.9 million we paid in connection with the early repayment of $150.0 million of our 10.25% Senior Notes due 2017 and the write-off of $6.7 million of unamortized fees and discounts related to those notes.
Interest expense has increased during the year ended December 31, 2013 as compared to the same period last year. This increase is primarily caused by an increase in the aggregate principal amount outstanding on our credit facility, partially offset by a reduction of interest expense related to the refinancing of our Senior Notes in the second quarter of 2013. Average amounts outstanding under our credit facility were $101.3 million and $80.7 million during the years ended December 31, 2013 and 2012, respectively.
We had an income tax benefit of $2.3 million for the year ended December 31, 2013, an increase in the benefit of $0.5 million, or 28.7%, compared to a benefit of $1.8 million during 2012. The increase in the income tax benefit is primarily due to an increase in pre-tax losses at our corporate subsidiaries that are subject to corporate tax. 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.
Liquidity and Capital Resources
Overview
Our primary short-term liquidity needs are to fund general working capital requirements, repay our debt obligations, service our debt, make routine maintenance capital improvements and pay distributions. We will need additional liquidity to construct mausoleum and lawn crypts on the grounds of our cemetery properties.
Our primary sources of liquidity are cash flows from operations and amounts available under our revolving credit facility as described below. In the past, we have been able to increase our liquidity through long-term bank borrowings and the issuance of additional common units and other partnership securities, including debt, subject to the restrictions in our revolving credit facility and under our senior notes.
We believe that cash generated from operations and our borrowing capacity under our revolving credit facility, which is discussed below, will be sufficient to meet our working capital requirements as well as our anticipated capital expenditures for the foreseeable future.
In addition to macroeconomic conditions, our ability to satisfy our debt service obligations, fund planned capital expenditures, make acquisitions and pay distributions to partners will depend upon our future operating performance. Our operating performance is primarily dependent on the sales volume of customer contracts, the cost of purchasing cemetery merchandise that we have sold, the amount of funds withdrawn from merchandise trusts and perpetual care trusts and the timing and amount of collections on our pre-need installment contracts.
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Offerings of Common Units
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 our revolving credit facility.
On May 21, 2014, we sold to ACII, 2,255,947 common units at an aggregate purchase price of $55.0 million, or $24.38 per unit. 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, 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 our revolving credit facility. Refer to Note 13 of our consolidated financial statements included in this Annual Report on Form 10-K for a more detailed discussion of these transactions.
Long-term Debt
7.875% Senior Notes due 2021
Purchase Agreement
On May 16, 2013, we, Cornerstone Family Services of West Virginia Subsidiary, Inc., our wholly owned subsidiary (“Cornerstone Co.” and together with us, the “Issuers”), and certain subsidiary guarantors (the “Guarantors”) entered into a Purchase Agreement (the “Purchase Agreement”) with Merrill Lynch, Pierce, Fenner & Smith Incorporated, acting on behalf of itself and as the representative for the other initial purchasers named in the Purchase Agreement (collectively, the “Initial Purchasers”). Pursuant to the Purchase Agreement, the Issuers, as joint and several obligors, agreed to sell to the Initial Purchasers $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”), with an original issue discount of approximately $3.8 million, in a private placement exempt from the registration requirements under the Securities Act of 1933, as amended (the “Securities Act”), for resale by the Initial Purchasers (i) to qualified institutional buyers pursuant to Rule 144A under the Securities Act or (ii) outside the United States to non-U.S. persons in compliance with Regulation S under the Securities Act (the “Notes Offering”). The Notes Offering closed on May 28, 2013.
The Purchase Agreement contains customary representations and warranties of the parties and indemnification and contribution provisions under which the Issuers and the Guarantors, on one hand, and the Initial Purchasers, on the other, have agreed to indemnify each other against certain liabilities, including liabilities under the Securities Act.
The net proceeds from the Notes Offering were used to retire our previously outstanding $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017, 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. We 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. We also entered into a Registration Rights Agreement (described below) for the benefit of holders of the Senior Notes.
Indenture
On May 28, 2013, the Issuers, the Guarantors, and Wilmington Trust, National Association, as successor trustee by merger to Wilmington Trust FSB (the “Trustee”), entered into an indenture (the “Indenture”) governing the Senior Notes.
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The Issuers pay 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 Senior Notes mature on June 1, 2021.
The Senior Notes are senior unsecured obligations of the Issuers that:
| • | rank equally in right of payment with all existing and future senior debt of the Issuers; |
| • | rank senior in right of payment to all existing and future senior subordinated and subordinated debt of the Issuers; |
| • | are effectively subordinated in right of payment to existing and future secured debt of the Issuers, to the extent of the value of the assets securing such debt; and |
| • | are structurally subordinated to all of the existing and future liabilities of each subsidiary of the Issuers that does not guarantee the Senior Notes. |
The Issuers’ obligations under the Senior Notes and the Indenture are jointly and severally guaranteed (the “Note Guarantees”) by each of our subsidiary, other than Cornerstone Co., that we have caused or will cause to become a Guarantor pursuant to the terms of the Indenture (each, a “Restricted Subsidiary”).
At any time on or after June 1, 2016, the Issuers, at their option, may redeem the Senior Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning June 1 of the years indicated:
| Year |
Percentage | |||
| 2016 |
105.906 | % | ||
| 2017 |
103.938 | % | ||
| 2018 |
101.969 | % | ||
| 2019 and thereafter |
100.000 | % | ||
At any time prior to June 1, 2016, the Issuers may, on one or more occasions, redeem all or any portion of the Senior Notes, upon not less than 30 nor more than 60 days’ notice, at a redemption price equal to 100% of the principal amount of the Senior Notes redeemed, plus the Applicable Premium (as defined in the Indenture) as of the redemption date, including accrued and unpaid interest to the redemption date.
In addition, at any time prior to June 1, 2016, the Issuers, at their option, may redeem up to 35% of the aggregate principal amount of the Senior Notes issued under the Indenture with the net cash proceeds of certain our equity offerings described in the Indenture at a redemption price equal to 107.875% of the principal amount of the Senior Notes to be redeemed, plus accrued and unpaid interest, if any, to the redemption date provided, however, that (i) at least 65% of the aggregate principal amount of the Senior Notes issued under the Indenture remain outstanding immediately after the occurrence of such redemption and (ii) the redemption occurs within 180 days of the closing date of such offering.
Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of the Senior Notes will have the right to require the Issuers to purchase that holder’s Senior Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest to the date of purchase.
The Indenture requires the Issuers and/or the Guarantors, as applicable, to comply with various covenants including, but not limited to, covenants that, subject to certain exceptions, limit our and our Restricted Subsidiaries’ ability to (i) incur additional indebtedness; (ii) make certain dividends, distributions, redemptions or investments; (iii) enter into certain transactions with affiliates; (iv) create, incur, assume or permit to exist
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certain liens against their assets; (v) make certain sales of their assets; and (vi) engage in certain mergers, consolidations or sales of all or substantially all of their assets. The Indenture also contains various affirmative covenants regarding, among other things, delivery of certain reports filed with the SEC and materials required pursuant to Rule 144A under the Securities Act to holders of the Senior Notes and joinder of future subsidiaries as Guarantors under the Indenture. As of December 31, 2014, we were in compliance with all applicable covenants under the Indenture.
Events of default under the Indenture that could, subject to certain conditions, cause all amounts owing under the Senior Notes to become immediately due and payable include, but are not limited to, the following:
| • | failure by the Issuers to pay interest on any of the Senior Notes when it becomes due and the continuance of any such failure for 30 days; |
| • | failure by the Issuers to pay the principal on any of the Senior Notes when it becomes due and payable, whether at stated maturity, upon redemption, upon purchase, upon acceleration or otherwise; |
| • | the Issuers’ failure to comply with the agreements and covenants relating to limitations on entering into certain mergers, consolidations or sales of all or substantially all of their assets or in respect of their obligations to purchase the Senior Notes in connection with a Change of Control; |
| • | failure by the Issuers to comply with any other agreement or covenant in the Indenture and the continuance of this failure for 60 days after notice of the failure has been given to the Company by the Trustee or holders of at least 25% of the aggregate principal amount of the Senior Notes then outstanding; |
| • | failure by the Company to comply with its covenant to deliver certain reports and the continuance of such failure to comply for a period of 120 days after written notice thereof has been given to the Company by the Trustee or by the holders of at least 25% in aggregate principal amount of the Senior Notes then outstanding; |
| • | certain defaults under mortgages, indentures or other instruments or agreements under which there may be issued or by which there may be secured or evidenced indebtedness of the Company or any Restricted Subsidiary, whether such indebtedness now exists or is incurred after the date of the Indenture; |
| • | certain judgments or orders that exceed $10.0 million in the aggregate for the payment of money have been entered by a court of competent jurisdiction against the Company or any Restricted Subsidiary and such judgments have not been satisfied, stayed, annulled or rescinded within 60 days of being entered; |
| • | certain events of bankruptcy of the Company, StoneMor GP LLC, the general partner of the Company (the “General Partner”), or any Significant Subsidiary (as defined in the Indenture); or |
| • | other than in accordance with the terms of the Note Guarantee and the Indenture, the Note Guarantee of any Significant Subsidiary ceasing to be in full force and effect, being declared null and void and unenforceable, found to be invalid or any Guarantor denying its liability under its Note Guarantee. |
Registration Rights Agreement
In connection with the sale of the Senior Notes, the Issuers, the Guarantors party thereto and Merrill Lynch, Pierce, Fenner & Smith Incorporated, as representative of the initial purchasers of the Senior Notes, entered into a Registration Rights Agreement (the “Registration Rights Agreement”), pursuant to which the Issuers and the Guarantors agreed, for the benefit of the holders of the Senior Notes, to use their commercially reasonable efforts to file a registration statement with the SEC with respect to a registered offer to exchange the Senior Notes for new “exchange” notes having terms substantially identical in all material respects to the Senior Notes, with certain exceptions (the “Exchange Offer”). In 2014, we complied with the terms of the Registration Rights Agreement.
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Credit Facility
On April 29, 2011, we replaced our Amended and Restated Credit Agreement (the “Original Credit Agreement”) with the Second Amended and Restated Credit Agreement (the “Second Credit Agreement”) among the Operating Company as the Borrower, each of the subsidiaries of the Operating Company as additional Borrowers, the General Partner and us as Guarantors, the Lenders identified therein, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. The terms of the Second Credit Agreement were substantially the same as the terms of the Original Credit Agreement, as amended. The primary purpose of entering into the Second Credit Agreement was to consolidate the amendments to the Original Credit Agreement and to update outdated references. The Second Credit Agreement provided for an Acquisition Credit Facility of $65.0 million and a Revolving Credit Facility of $55.0 million. The Second Credit Agreement was further amended two times prior to January 19, 2012.
On January 19, 2012, we entered into the Third Amended and Restated Credit Agreement (the “Third Credit Agreement”). The terms of the Third Credit Agreement were substantially the same as the terms of the Second Credit Agreement, as amended. The Third Credit Agreement consolidated the Acquisition Credit Facility and the Revolving Credit Facility into a single revolving credit facility with a borrowing limit of $130.0 million.
The Third Credit Agreement was amended four times prior to December 19, 2014, to, among other things, amend borrowing levels, interest rates and covenants, and to allow additional indebtedness in connection with the Senior Notes issuance. On May 22, 2014, we 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 contained 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 to the consolidated financial statements included in this Annual Report on Form 10-K.
On December 19, 2014, we entered into the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”) among StoneMor Operating LLC as a Borrower (the “Operating Company”), each of the subsidiaries of the Operating Company as additional Borrowers (together with the Operating Company, the “Borrowers”), StoneMor GP LLC, the general partner of the Partnership, and the Partnership as Guarantors, the Lenders identified therein, and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer. In addition, on the same date, the Borrowers, the Guarantors and Bank of America, N.A. entered into the Second Amended and Restated Security Agreement (the “Security Agreement”) and the Second Amended and Restated Pledge Agreement (the “Pledge Agreement”, and together with the Credit Agreement and the Security Agreement, the “New Agreements”).
The New Agreements replaced the Third Amended and Restated Credit Agreement, dated January 19, 2012, as amended (the “Prior Credit Agreement”), Amended and Restated Security Agreement, dated April 29, 2011, as amended, and Amended and Restated Pledge Agreement, dated April 29, 2011, as amended (collectively, the “Prior Agreements”). The primary purposes of entering into the New Agreements were to consolidate the amendments to the Prior Agreements into the New Agreements, increase the aggregate principal amount of permitted borrowings under the Credit Agreement and modify the mechanics of the revolving credit facility to provide for Acquisition Draws and Working Capital Draws.
The Credit Agreement provides for a single revolving credit facility of $180.0 million (the “Credit Facility”) maturing on December 19, 2019. Additionally the Credit Agreement provides for an uncommitted ability to increase the Credit Facility by an additional $70.0 million. The summary of the material terms of the New Agreements is set forth below. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the New Agreements.
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At December 31, 2014, amounts outstanding under the Credit Facility bore interest at rates between 3.5% and 5.5%. The interest rates on the Credit Facility are calculated as follows:
| • | For Eurodollar Rate Loans, the outstanding principal amount thereof bears interest for each Interest Period at a rate per annum equal to the Eurodollar Rate for the Interest Period plus the Applicable Rate for Eurodollar Rate Loans; and |
| • | For Base Rate Loans and Swing Line Loans, the outstanding principal amount thereof bears interest from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate for Base Rate Loans. |
In addition, the Borrowers must pay a Letter of Credit Fee for each Letter of Credit equal to the Applicable Rate for Letter of Credit Fees times the daily amount to be drawn under such Letter of Credit. The Applicable Rate is determined based on our Consolidated Leverage Ratio and our Subsidiaries, and ranges from 2.25% to 4.00% for Eurodollar Rate Loans and Letter of Credit Fees, and 1.25% to 3.00% for Base Rate Loans. The current Applicable Rate for each of: (i) Eurodollar Rate Loans and Letter of Credit Fees is 3.25% and (ii) Base Rate Loans is 2.25% based on the current Consolidated Leverage Ratio. The Credit Agreement also requires the Borrowers to pay a quarterly 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 Credit Agreement contains financial covenants, pursuant to which the Borrowers and the Guarantors will not permit:
| • | Consolidated EBITDA for any Measurement Period to be less than the sum of (i) $80.0 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after June 30, 2014; |
| • | the Consolidated Debt Service Coverage Ratio to be less than 2.50 to 1.0 for any Measurement Period; and |
| • | the Consolidated Leverage Ratio to be greater than 4.00 to 1.0 for any period. |
The covenants include, among other limitations, limitations on: (i) liens, (ii) the creation or incurrence of debt, (iii) investments and acquisitions, (iv) dispositions of property, (v) dividends, distributions and redemptions, and (vi) transactions with Affiliates.
As of December 31, 2014, we were in compliance with all applicable financial covenants.
The Credit Agreement provides that two types of draws are permitted with respect to the Credit Facility: Acquisition Draws and Working Capital Draws. The proceeds of Acquisition Draws may be utilized by the Borrowers to finance Permitted Acquisitions, the purchase and construction of mausoleums and related costs or the net amount of Merchandise Trust deposits made after the Closing Date under the Credit Agreement, irrespective of whether such amounts relate to new or existing cemeteries or funeral homes. The proceeds of Working Capital Draws, Letters of Credit and Swing Line Loans may be utilized by the Borrowers to finance working capital requirements, Capital Expenditures and for other general corporate purposes. The borrowing of Working Capital Advances is subject to a borrowing formula of 85% of Eligible Receivables.
Each Acquisition Draw is subject to equal quarterly amortization of the principal amount of such draw, with annual principal payments comprised of ten percent (10%) of the related draw amount, commencing on the second anniversary of such draw, with the remaining principal due on the Maturity Date, subject to certain mandatory prepayment requirements. Working Capital Draws are due on the Maturity Date, subject to certain mandatory prepayment requirements.
The Borrowers’ obligations under the Credit Agreement are guaranteed by both us and the General Partner.
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Pursuant to the Security Agreement and the Pledge Agreement, the Borrowers’ obligations under the Credit Facility are secured by a first priority lien and security interest in substantially all of the Borrowers’ assets, whether then owned or thereafter acquired, excluding: (i) trust accounts, certain proceeds required by law to be placed into such trust accounts and funds held in trust accounts; (ii) the General Partner’s interest in us, the incentive distribution rights under our partnership agreement and the deposit accounts of the General Partner into which distributions are received; (iii) Equipment subject to a purchase money security interest or equipment lease permitted under the Credit Agreement and certain other contract rights under which contractual, legal or other restrictions on assignment would prohibit the creation of a security interest or such creation of a security interest would result in a default thereunder.
Events of Default under the Credit Agreement include, but are not limited to, the following:
| • | non-payment of any principal, interest or other amounts due under the Credit Agreement or any other Credit Document; |
| • | failure to observe or perform any covenants related to: (i) the delivery of financial statements, compliance certificates, reports and other information; (ii) providing prompt notice of Defaults and other events; (iii) the preservation of the legal existence and good standing of each Borrower and Guarantor; (iv) the ability of the Administrative Agent and each Lender to visit and inspect properties, examine books and records, and discuss financial and business affairs with directors, officers and independent public accountants of each Borrower and Guarantor; (v) restrictions on the use of proceeds; (vi) guarantees by new Subsidiaries; (vii) the maintenance of corporate formalities for each Borrower and Guarantor; (viii) the maintenance of Trust Accounts and Trust Funds; and (ix) any of the negative covenants or financial covenants contained in the Credit Agreement; |
| • | failure to observe or perform any other covenant, if uncured 30 days after notice thereof is provided by the Administrative Agent or Lenders; |
| • | any default under any other Indebtedness of the Borrowers or Guarantors; |
| • | any insolvency proceedings by a Borrower or Guarantor; |
| • | the insolvency of any Borrower or Guarantor, or a writ of attachment or execution or similar process issuing or being levied against any material part of the property of a Borrower or Guarantor; and |
| • | any Change in Control. |
Amounts outstanding under our Credit Facility fluctuated during the years ended December 31, 2014 and 2013. At the beginning of 2013, we had $101.7 million outstanding on our Credit Facility. During the first quarter of 2013, we reduced our borrowings on the Credit Facility by $19.8 million as we had borrowed $18.6 million prior to March 26, 2013 and then we used the net proceeds of approximately $38.4 million from our March 26, 2013 follow-on public offering to pay down amounts outstanding on our Credit Facility. We borrowed an additional $21.0 million during the second quarter of 2013 and then we used the remaining proceeds of approximately $11.9 million from our May 28, 2013 debt offering to further pay down amounts outstanding on our Credit Facility. During the third and fourth quarters of 2013, we had net borrowings of $8.5 million and $14.5 million, respectively, resulting in outstanding borrowings of $114.0 million on our Credit Facility at December 31, 2013. During the first quarter of 2014, we reduced our borrowings on the Credit Facility by $36.6 million as we had borrowed $17.0 million prior to February 27, 2014 and then we used the net proceeds from our February 27, 2014 follow-on public offering and other available cash to pay down $53.6 million of amounts outstanding on our Credit Facility. During the second quarter of 2014, we increased our borrowings on the Credit Facility by $1.0 million as we had borrowed $19.0 million prior to June 12, 2014 and then we used a portion of the proceeds from our June 12, 2014 follow-on public offering and other available cash to pay down $18.0 million of amounts outstanding on our Credit Facility. During the third and fourth quarters of 2014, we increased our borrowings on the Credit Facility by a net $13.0 million and $19.5 million, respectively, resulting in outstanding borrowings of $110.9 million on our Credit Facility at December 31, 2014. The average amounts borrowed under our Credit Facility were $95.5 million and $101.3 million for the years ended December 31, 2014 and 2013, respectively.
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Notes Payable Acquisitions
In July of 2009, certain of our subsidiaries entered into a $1.4 million note purchase agreement in connection with an operating agreement in which we became the exclusive operator of Green Lawn Cemetery (the “Green Lawn Note”). The Green Lawn Note bears interest at a rate of 6.5% per year on unpaid principal and is payable monthly, beginning on August 1, 2009. Principal on the note is due in 96 equal installments beginning on July 1, 2011. At December 31, 2014 and 2013, the liability related to the installment note was stated on our consolidated balance sheet at approximately $0.9 million and $1.0 million, respectively.
Acquisition Non-Compete Notes
In connection with several of our 2013, 2012, 2011 and 2010 acquisitions, certain of our subsidiaries issued installment notes in consideration for non-compete agreements executed with the former owners of the acquired entities. The installment notes have varying payment terms and mature through February 19, 2019. The installment notes do not have a stated rate of interest. At inception, we recorded the installment notes at their fair market value of approximately $4.0 million. The face amounts of the installment notes were discounted approximately $0.9 million, and the discount is being amortized to interest expense over the life of the installment notes. At December 31, 2014 and 2013, the liability related to the installment notes, net of discounts, was stated on our consolidated balance sheet at approximately $2.5 million and $3.4 million, respectively.
Cash Flow from Operating Activities
Net cash flows provided by operating activities were $19.4 million during 2014, a decrease of $15.7 million, compared to $35.1 million during 2013. Cash flows provided by operating activities were higher in 2013 primarily due to the $11.9 million of cash received in our first and second quarter 2013 legal settlement. Further, in 2013 less cash was used for accounts payable and accounts receivable. These were offset in part by more of an inflow into our merchandise trusts during 2013.
Net cash flows provided by operating activities were $35.1 million during 2013, an increase of $3.2 million, compared to cash provided by operating activities of $31.9 million in 2012. Factors contributing to a net increase in cash flows from operations include cash received in our legal settlement, more cash generated from normal revenue producing activities, and less cash used for accounts payable, offset by increased uses of cash into our merchandise trusts.
Net cash flows from operations in 2014, 2013 and 2012 exceeded our net losses of $10.8 million, $19.0 million and $3.0 million, respectively, during the same periods. The differences between our operating cash flows and net losses are in large part attributable to the fact that various cash inflows for payments of amounts due under pre-need sales contracts were not and are not as of yet recognized as revenues as we had not and have not met the delivery criteria for revenue recognition. Although there is no assurance, we expect that the trend of operating cash flows exceeding our net income or net loss will continue into the foreseeable future.
Cash Flow from Investing Activities
Net cash used in investing activities was $123.7 million during 2014, an increase of $97.0 million, compared to $26.7 million during 2013. Cash flows used for investing activities during 2014 were $56.4 million for the acquisition of 13 cemeteries and 11 funeral homes, $53.0 million for up-front rent for the transaction with the Archdiocese of Philadelphia and $14.6 million for other capital expenditures, partially offset by $0.3 million in proceeds from the sale of a funeral home, compared to $14.1 million utilized for the acquisition of 6 funeral homes and one cemetery and $12.8 million for other capital expenditures, partially offset by $0.2 million in proceeds from the sale of other assets in 2013.
Net cash used in investing activities was $26.7 million during 2013, a decrease in cash used of $13.2 million, compared to $39.9 million during 2012. Cash flows used for investing activities during 2013 primarily were $14.1 million for the acquisition of 6 funeral homes and one cemetery and $12.8 million for other capital
75
expenditures, partially offset by $0.2 million in proceeds from the sale of other assets, compared to $28.0 million utilized for the acquisition of 5 cemetery properties and 17 funeral homes and $11.9 million for other capital expenditures in 2012.
Cash Flow from Financing Activities
Net cash flows provided by financing activities were $102.4 million during 2014, compared to $4.1 million net cash used in financing activities during 2013. Cash flows provided by financing activities during 2014 consisted of $173.5 million of net proceeds from our follow-on public offerings and our issuance of common units to ACII, partially offset by net repayments of long-term debt of $5.3 million, costs of financing activities of $3.0 million, and cash distributions to unit holders of $62.8 million. Cash flows provided by financing activities during 2013 consisted of $38.4 million of proceeds from our follow-on public offering and $269.5 million from long-term borrowings, inclusive of the issuance of $175.0 million of Senior Notes. These in-flows were offset by repayments of long-term debt of $239.9 million, inclusive of the retirement of our $150.0 million of Prior Senior Notes, as well as fees associated with this retirement of $14.9 million, costs of financing activities of $5.1 million and cash distributions to unit holders of $52.1 million. Additionally, we borrow to fund working capital as a result of cash build-ups in our accounts receivable and merchandise trusts and to fund acquisitions related to pre-need sales growth.
Net cash used in financing activities was $4.1 million during 2013, compared to $3.9 million net cash provided by financing activities during 2012. Cash flows provided by financing activities during 2013 consisted of $38.4 million of proceeds from our follow-on public offering and $269.5 million from long-term borrowings, inclusive of the issuance of $175.0 million of Senior Notes. These in-flows were offset by repayments of long-term debt of $239.9 million, inclusive of the retirement of our $150.0 million of Prior Senior Notes, as well as fees associated with this retirement of $14.9 million, costs of financing activities of $5.1 million and cash distributions to unit holders of $52.1 million. Cash flows provided by financing activities during 2012 primarily were $54.0 million of net borrowing of long-term debt, offset by cash distributions to unit holders of $47.5 million and costs of financing activities of $2.4 million.
Capital Expenditures
The following table summarizes total maintenance capital expenditures and expansion capital expenditures, including expenditures for acquisitions described in Note 13 of our consolidated financial statements included in this Annual Report on Form 10-K and the construction of mausoleums for the periods presented:
| Year ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (in thousands) | ||||||||||||
| Maintenance capital expenditures |
$ | 8,398 | $ | 6,986 | $ | 4,874 | ||||||
| Expansion capital expenditures |
115,557 | 19,866 | 35,074 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total capital expenditures |
$ | 123,955 | $ | 26,852 | $ | 39,948 | ||||||
|
|
|
|
|
|
|
|||||||
Pursuant to our partnership agreement, in connection with determining operating cash flows available for distribution, costs to construct mausoleum crypts and lawn crypts may be considered to be a combination of maintenance capital expenditures and expansion capital expenditures depending on the purposes for construction. Our general partner, with the concurrence of its Conflicts Committee, has the discretion to determine how to allocate a capital expenditure for the construction of a mausoleum crypt or a lawn crypt between maintenance capital expenditures and expansion capital expenditures. In addition, maintenance capital expenditures for the construction of a mausoleum crypt or a lawn crypt are not subtracted from operating surplus in the quarter incurred but rather are subtracted from operating surplus ratably during the estimated number of years it will take to sell all of the available spaces in the mausoleum or lawn crypt. Estimated life is determined by our general partner, with the concurrence of its Conflicts Committee.
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Off Balance Sheet Arrangements, Contractual Obligations and Contingencies
We had no off-balance sheet arrangements as of December 31, 2014 or 2013.
We have assumed various financial obligations and commitments in the ordinary course of conducting our business. We have contractual obligations requiring future cash payments related to debt maturities, interest on debt, operating lease agreements, and liabilities to purchase merchandise related to our in force pre-need sales contracts.
A summary of our total contractual obligations as of December 31, 2014 is presented in the table below:
| Total | Less than 1 year |
1-3 years |
3-5 years |
More than 5 years |
||||||||||||||||
| (in thousands) | ||||||||||||||||||||
| Debt (1) |
$ | 399,648 | $ | 20,124 | $ | 37,822 | $ | 147,175 | $ | 194,527 | ||||||||||
| Operating leases |
11,535 | 2,392 | 4,219 | 3,365 | 1,559 | |||||||||||||||
| Lease and management agreements (2) |
36,650 | — | — | — | 36,650 | |||||||||||||||
| Merchandise liabilities (3) |
150,192 | — | — | — | — | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| Total |
$ | 598,025 | $ | 22,516 | $ | 42,041 | $ | 150,540 | $ | 232,736 | ||||||||||
|
|
|
|
|
|
|
|
|
|
|
|||||||||||
| (1) | Represents the interest payable and par value of debt due and does not include the unamortized debt discounts of $3.5 million at December 31, 2014. This table assumes that current amounts outstanding under our Credit Facility are not repaid until the maturity date of December 2019. |
| (2) | Represents the aggregate future rent payments due, with interest, from 2025 through 2049, and does not include the unamortized discount. Refer to the “Liquidity and Capital Resources: Agreements with the Archdiocese of Philadelphia” section below for more information on the payments to be made. |
| (3) | Total cannot be separated into periods because we are unable to anticipate when the merchandise will be needed. |
Agreements with the Archdiocese of Philadelphia
In accordance with the lease and management agreements with the Archdiocese of Philadelphia, we have agreed pay to the Archdiocese aggregate fixed rent of $36.0 million 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 shall be deferred. If the Archdiocese terminates the agreements pursuant to a lease year 11 termination or we terminate the agreements as a result of a default by the Archdiocese, prior to the end of lease year 11, the deferred fixed rent shall be retained by us. If the agreements are not terminated, the deferred fixed rent shall become due and payable 30 days after the end of lease year 11.
| Item 7A. | Quantitative and Qualitative Disclosure About Market Risk |
The information presented below should be read in conjunction with the notes to our audited consolidated financial statements included under “Item 8. Financial Statements and Supplementary Data” in this Annual Report on Form 10-K.
The market risk inherent in our market risk sensitive instruments and positions is the potential change arising from increases or decreases in interest rates and the prices of marketable equity securities, as discussed below. Our exposure to market risk includes forward-looking statements and represents an estimate of possible
77
changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates or debt and equity markets. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based on actual fluctuations in interest rates, equity markets and the timing of transactions. We classify our market risk sensitive instruments and positions as “other than trading.”
Interest-bearing Investments
Our fixed-income securities subject to market risk consist primarily of investments in our merchandise trusts and perpetual care trusts. As of December 31, 2014, the fair value of fixed-income securities in our merchandise trusts represented 3.4% of the fair value of total trust assets while the fair value of fixed-income securities in our perpetual care trusts represented 7.0% of the fair value of total trust assets. The aggregate quoted fair value of these fixed-income securities was $16.4 million and $24.0 million in the merchandise trusts and perpetual care trusts, respectively, as of December 31, 2014. Each 1% change in interest rates on these fixed-income securities would result in changes of approximately $164,000 and $240,000 in the fair market value of the assets in our merchandise trusts and perpetual care trusts, respectively, based on discounted expected future cash flows. If these securities are held to maturity, no change in fair market value will be realized.
Our money market and other short-term investments subject to market risk consist primarily of investments in our merchandise trusts and perpetual care trusts. As of December 31, 2014, the fair value of money market and short-term investments in our merchandise trusts represented 10.8% of the fair value of total trust assets while the fair value of money market and short-term investments in our perpetual care trusts represented 7.7% of the fair value of total trust assets. The aggregate quoted fair value of these money market and short-term investments was $52.5 million and $26.6 million in the merchandise trusts and perpetual care trusts, respectively, as of December 31, 2014. Each 1% change in interest rates on these money market and short-term investments would result in changes of approximately $525,000 and $266,000 in the fair market value of the assets in our merchandise trusts and perpetual care trusts, respectively, based on discounted expected future cash flows.
Marketable Equity Securities
Our marketable equity securities subject to market risk consist primarily of investments held in our merchandise trusts and perpetual care trusts. These assets consist of investments in both individual equity securities as well as closed and open ended mutual funds. As of December 31, 2014, the fair value of marketable equity securities in our merchandise trusts represented 16.6% of the fair value of total trust assets while the fair value of marketable equity securities in our perpetual care trusts represented 13.1% of total trust assets. The aggregate quoted fair market value of these marketable equity securities was $80.3 million and $45.1 million in our merchandise trusts and perpetual care trusts, respectively, as of December 31, 2014, based on final quoted sales prices. Each 10% change in the average market prices of the equity securities would result in a change of approximately $8.0 million and $4.5 million in the fair market value of securities held in the merchandise trusts and perpetual care trusts, respectively. As of December 31, 2014, the fair value of marketable closed and open ended mutual funds in our merchandise trusts represented 66.4% of the fair value of total trust assets, 29.4% of which pertained to fixed-income mutual funds. As of December 31, 2014, the fair value of closed and open ended mutual funds in our perpetual care trusts represented 72.2% of total trust assets, 35.9% of which pertained to fixed-income mutual funds. The aggregate quoted fair market value of these closed and open ended mutual funds was $322.1 million and $249.3 million, respectively, in the merchandise trusts and perpetual care trusts as of December 31, 2014, based on final quoted sales prices, of which $142.7 million and $123.9 million, respectively, pertained to fixed-income mutual funds. Each 10% change in the average market prices of the closed and open ended mutual funds would result in a change of approximately $32.2 million and $24.9 million in the fair market value of securities held in our merchandise trusts and perpetual care trusts, respectively.
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Investment Strategies and Objectives
Our internal investment strategies and objectives for funds held in the merchandise trusts and perpetual care trusts are specified in an Investment Policy Statement that requires us to do the following:
| • | State in a written document our expectations, objectives, tolerances for risk and guidelines in the investment of our assets; |
| • | Set forth a disciplined and consistent structure for managing all trust assets. This structure is based on a long-term asset allocation strategy, which is diversified across asset classes, investment styles and strategies. We believe this structure is likely to meet our stated objectives within our tolerances for risk and variability. This structure also includes ranges around the target allocations allowing for adjustments when appropriate to reduce risk or enhance returns. It further includes guidelines for the selection of investment managers and vehicles through which to implement the investment strategy; |
| • | Provide specific guidelines for each investment manager. These guidelines control the level of overall risk and liquidity assumed in each portfolio; |
| • | Appoint third-party investment advisors to oversee the specific investment managers and advise our Trust Committee; and |
| • | Establish criteria to monitor, evaluate and compare the performance results achieved by the overall trust portfolios and by our investment managers. This allows us to compare the performance results of the trusts to our objectives and other benchmarks, including peer performance, on a regular basis. |
Our investment guidelines are based on relatively long investment horizons, which vary with the type of trust. Because of this, interim fluctuations should be viewed with appropriate perspective. The strategic asset allocation of the trust portfolios is also based on this longer-term perspective. However, in developing our investment policy, we have taken into account the potential negative impact on our operations and financial performance of significant short-term declines in market value.
We recognize the challenges we face in achieving our investment objectives in light of the uncertainties and complexities of contemporary investment markets. Furthermore, we recognize that in order to achieve the stated long-term objectives we may have short-term declines in market value. Given the need to maintain consistent values in the portfolio, we have attempted to develop a strategy, which is likely to maximize returns and earnings without experiencing overall declines in value in excess of 3% over any 12-month period. We were able to achieve our investment objective in 2014, 2013 and 2012.
In order to consistently achieve the stated return objectives within our tolerance for risk, we use a strategy of allocating appropriate portions of our portfolio to a variety of asset classes with attractive risk and return characteristics, and low to moderate correlations of returns. See the notes to our consolidated financial statements for a breakdown of the assets held in our merchandise trusts and perpetual care trusts by asset class.
Debt Instruments
Our Credit Facility bears interest at a floating rate, based on LIBOR, which is adjusted quarterly. This subjects us to increases in interest expense resulting from movements in interest rates. As of December 31, 2014, we had $110.9 million of borrowings outstanding under our Credit Facility. After these borrowings, our total available borrowing capacity under the Credit Facility is $69.1 million. The revolving credit facility provides for both acquisition draws, which are used primarily to finance acquisitions, acquisition related costs and mausoleum construction costs, and working capital draws, which are used to finance all other corporate costs. As of December 31, 2014, we had approximately $85.9 million of working capital draws, which are limited to a borrowing formula of 85% of eligible account receivables. This limit was $128.6 million at December 31, 2014. The amounts outstanding under the Credit Facility bore interest at rates between 3.5% and 5.5% at December 31, 2014. A 1% increase in our interest rates would increase our annual interest expense by approximately $1.1 million, based on our borrowings outstanding under the Credit Facility as of December 31, 2014.
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| Item 8. | Financial Statements and Supplementary Data |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors of StoneMor GP LLC and Unitholders of StoneMor Partners L.P.
Levittown, Pennsylvania
We have audited the accompanying consolidated balance sheets of StoneMor Partners L.P. and subsidiaries (the “Company”) as of December 31, 2014 and 2013, and the related consolidated statements of operations, partners’ capital (deficit), and cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of StoneMor Partners L.P. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2014, based on the criteria established in Internal Control—Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 16, 2015 expressed an unqualified opinion on the Company’s internal control over financial reporting.
| /s/ Deloitte & Touche LLP |
| Philadelphia, Pennsylvania |
| March 16, 2015 |
80
StoneMor Partners L.P.
Consolidated Balance Sheet
(in thousands)
| December 31, 2014 |
December 31, 2013 |
|||||||
| Assets |
||||||||
| Current assets: |
||||||||
| Cash and cash equivalents |
$ | 10,401 | $ | 12,175 | ||||
| Accounts receivable, net of allowance |
62,503 | 55,415 | ||||||
| Prepaid expenses |
4,708 | 3,622 | ||||||
| Other current assets |
24,266 | 22,667 | ||||||
|
|
|
|
|
|||||
| Total current assets |
101,878 | 93,879 | ||||||
| Long-term accounts receivable, net of allowance |
89,536 | 78,367 | ||||||
| Cemetery property |
339,848 | 316,469 | ||||||
| Property and equipment, net of accumulated depreciation |
100,391 | 85,007 | ||||||
| Merchandise trusts, restricted, at fair value |
484,820 | 431,556 | ||||||
| Perpetual care trusts, restricted, at fair value |
345,105 | 311,771 | ||||||
| Deferred financing costs, net of accumulated amortization |
9,089 | 8,308 | ||||||
| Deferred selling and obtaining costs |
97,795 | 87,998 | ||||||
| Deferred tax assets |
40 | 42 | ||||||
| Goodwill |
58,836 | 48,737 | ||||||
| Intangible assets |
68,990 | 9,655 | ||||||
| Other assets |
3,136 | 2,554 | ||||||
|
|
|
|
|
|||||
| Total assets |
$ | 1,699,464 | $ | 1,474,343 | ||||
|
|
|
|
|
|||||
| Liabilities and partners’ capital |
||||||||
| Current liabilities: |
||||||||
| Accounts payable and accrued liabilities |
$ | 35,382 | $ | 37,269 | ||||
| Accrued interest |
1,219 | 1,512 | ||||||
| Current portion, long-term debt |
2,251 | 2,916 | ||||||
|
|
|
|
|
|||||
| Total current liabilities |
38,852 | 41,697 | ||||||
| Other long-term liabilities |
1,292 | 1,527 | ||||||
| Obligation for lease and management agreements, net |
8,767 | — | ||||||
| Long-term debt |
285,378 | 289,016 | ||||||
| Deferred cemetery revenues, net |
643,408 | 579,993 | ||||||
| Deferred tax liabilities |
17,708 | 12,407 | ||||||
| Merchandise liability |
150,192 | 130,412 | ||||||
| Perpetual care trust corpus |
345,105 | 311,771 | ||||||
|
|
|
|
|
|||||
| Total liabilities |
1,490,702 | 1,366,823 | ||||||
|
|
|
|
|
|||||
| Commitments and contingencies |
||||||||
| Partners’ capital (deficit) |
||||||||
| General partner deficit |
(5,113 | ) | (2,137 | ) | ||||
| Common partners, 29,204 and 21,377 units outstanding as of December 31, 2014 and December 31, 2013, respectively |
213,875 | 109,657 | ||||||
|
|
|
|
|
|||||
| Total partners’ capital |
208,762 | 107,520 | ||||||
|
|
|
|
|
|||||
| Total liabilities and partners’ capital |
$ | 1,699,464 | $ | 1,474,343 | ||||
|
|
|
|
|
|||||
See Accompanying Notes to the Consolidated Financial Statements.
81
StoneMor Partners L.P.
Consolidated Statement of Operations
(in thousands, except per unit data)
| 2014 | 2013 | 2012 | ||||||||||
| Revenues: |
||||||||||||
| Cemetery |
||||||||||||
| Merchandise |
$ | 132,355 | $ | 110,673 | $ | 114,025 | ||||||
| Services |
51,827 | 44,054 | 46,094 | |||||||||
| Investment and other |
55,217 | 46,959 | 46,808 | |||||||||
| Funeral home |
||||||||||||
| Merchandise |
21,060 | 18,922 | 15,551 | |||||||||
| Services |
27,626 | 26,033 | 20,128 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total revenues |
288,085 | 246,641 | 242,606 | |||||||||
|
|
|
|
|
|
|
|||||||
| Costs and Expenses: |
||||||||||||
| Cost of goods sold (exclusive of depreciation shown separately below): |
||||||||||||
| Perpetual care |
6,867 | 5,656 | 5,715 | |||||||||
| Merchandise |
26,785 | 22,203 | 22,386 | |||||||||
| Cemetery expense |
64,672 | 57,566 | 55,410 | |||||||||
| Selling expense |
55,277 | 47,832 | 46,878 | |||||||||
| General and administrative expense |
35,110 | 31,873 | 28,928 | |||||||||
| Corporate overhead (including $1,068, $1,370 and $916 in unit-based compensation for 2014, 2013 and 2012, respectively) |
32,454 | 28,875 | 28,169 | |||||||||
| Depreciation and amortization |
11,081 | 9,548 | 9,431 | |||||||||
| Funeral home expense |
||||||||||||
| Merchandise |
6,659 | 5,569 | 5,200 | |||||||||
| Services |
20,470 | 19,190 | 14,574 | |||||||||
| Other |
12,581 | 10,895 | 8,951 | |||||||||
| Acquisition related costs, net of recoveries |
2,269 | 1,051 | 3,123 | |||||||||
|
|
|
|
|
|
|
|||||||
| Total cost and expenses |
274,225 | 240,258 | 228,765 | |||||||||
|
|
|
|
|
|
|
|||||||
| Operating profit |
13,860 | 6,383 | 13,841 | |||||||||
| Gain on acquisitions |
412 | 2,530 | 122 | |||||||||
| Gain on termination of operating agreement |
— | — | 1,737 | |||||||||
| Gain on settlement agreement, net |
888 | 12,261 | — | |||||||||
| Gain on sale of other assets |
— | 155 | — | |||||||||
| Gain on sale of funeral home |
244 | — | — | |||||||||
| Loss on early extinguishment of debt |
214 | 21,595 | — | |||||||||
| Loss on impairment of long-lived assets |
440 | — | — | |||||||||
| Interest expense |
21,610 | 21,070 | 20,503 | |||||||||
|
|
|
|
|
|
|
|||||||
| Net loss before income taxes |
(6,860 | ) | (21,336 | ) | (4,803 | ) | ||||||
| Income tax expense (benefit) |
3,913 | (2,304 | ) | (1,790 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Net loss |
$ | (10,773 | ) | $ | (19,032 | ) | $ | (3,013 | ) | |||
|
|
|
|
|
|
|
|||||||
| General partner’s interest in net loss for the period |
$ | (155 | ) | $ | (350 | ) | $ | (60 | ) | |||
| Limited partners’ interest in net loss for the period |
$ | (10,618 | ) | $ | (18,682 | ) | $ | (2,953 | ) | |||
| Net loss per limited partner unit (basic and diluted) |
$ | (0.40 | ) | $ | (0.89 | ) | $ | (0.15 | ) | |||
| Weighted average number of limited partners’ units outstanding (basic and diluted) |
26,582 | 20,954 | 19,445 | |||||||||
| Distributions declared per unit |
$ | 2.430 | $ | 2.385 | $ | 2.350 | ||||||
See Accompanying Notes to the Consolidated Financial Statements.
82
StoneMor Partners L.P.
Consolidated Statement of Partners’ Capital (Deficit)
(in thousands)
| Partners’ Capital (Deficit) | ||||||||||||
| Common Unit Holders |
General Partner |
Total | ||||||||||
| Balance, December 31, 2011 |
$ | 178,087 | $ | 2,192 | $ | 180,279 | ||||||
|
|
|
|
|
|
|
|||||||
| Issuance of common units |
4,754 | — | 4,754 | |||||||||
| General partner contribution |
— | 89 | 89 | |||||||||
| Compensation related to units awards |
527 | — | 527 | |||||||||
| Net loss |
(2,953 | ) | (60 | ) | (3,013 | ) | ||||||
| Cash distributions |
(45,619 | ) | (1,835 | ) | (47,454 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance, December 31, 2012 |
134,796 | 386 | 135,182 | |||||||||
|
|
|
|
|
|
|
|||||||
| Proceeds from public offering |
38,377 | — | 38,377 | |||||||||
| Issuance of common units |
3,718 | — | 3,718 | |||||||||
| Compensation related to units awards |
1,328 | — | 1,328 | |||||||||
| Net loss |
(18,682 | ) | (350 | ) | (19,032 | ) | ||||||
| Cash distributions |
(49,880 | ) | (2,173 | ) | (52,053 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Balance, December 31, 2013 |
109,657 | (2,137 | ) | 107,520 | ||||||||
|
|
|
|
|
|
|
|||||||
| Proceeds from public offerings |
120,345 | — | 120,345 | |||||||||
| Issuance of common units |
56,213 | — | 56,213 | |||||||||
| Compensation related to units awards |
1,068 | — | 1,068 | |||||||||
| Net loss |
(10,618 | ) | (155 | ) | (10,773 | ) | ||||||
| Cash distributions |
(60,015 | ) | (2,821 | ) | (62,836 | ) | ||||||
| Unit distributions |
(2,775 | ) | — | (2,775 | ) | |||||||
|
|
|
|
|
|
|
|||||||
| Balance, December 31, 2014 |
$ | 213,875 | $ | (5,113 | ) | $ | 208,762 | |||||
|
|
|
|
|
|
|
|||||||
See Accompanying Notes to the Consolidated Financial Statements.
83
StoneMor Partners L.P.
Consolidated Statement of Cash Flows
(in thousands)
| 2014 | 2013 | 2012 | ||||||||||
| Operating activities: |
||||||||||||
| Net loss |
$ | (10,773 | ) | $ | (19,032 | ) | $ | (3,013 | ) | |||
| Adjustments to reconcile net loss to net cash provided by operating activities: |
||||||||||||
| Cost of lots sold |
10,291 | 8,019 | 7,818 | |||||||||
| Depreciation and amortization |
11,081 | 9,548 | 9,431 | |||||||||
| Unit-based compensation |
1,068 | 1,370 | 916 | |||||||||
| Accretion of debt discounts |
2,939 | 2,303 | 1,739 | |||||||||
| Gain on termination of operating agreement |
— | — | (1,737 | ) | ||||||||
| Gain on acquisitions |
(412 | ) | (2,530 | ) | (122 | ) | ||||||
| Gain on sale of other assets |
— | (155 | ) | — | ||||||||
| Gain on sale of funeral home |
(244 | ) | — | — | ||||||||
| Loss on early extinguishment of debt |
214 | 21,595 | — | |||||||||
| Loss on impairment of long-lived assets |
440 | — | — | |||||||||
| Changes in assets and liabilities that provided (used) cash: |
||||||||||||
| Accounts receivable |
(11,337 | ) | (8,926 | ) | (5,475 | ) | ||||||
| Allowance for doubtful accounts |
981 | 92 | 1,210 | |||||||||
| Merchandise trust fund |
(28,828 | ) | (36,919 | ) | (11,806 | ) | ||||||
| Prepaid expenses |
(1,064 | ) | 210 | 527 | ||||||||
| Other current assets |
(1,500 | ) | (5,248 | ) | (2,165 | ) | ||||||
| Other assets |
(615 | ) | 2,861 | 128 | ||||||||
| Accounts payable and accrued and other liabilities |
(2,219 | ) | 7,588 | 4,330 | ||||||||
| Deferred selling and obtaining costs |
(9,797 | ) | (11,681 | ) | (7,775 | ) | ||||||
| Deferred cemetery revenue |
60,841 | 72,708 | 47,548 | |||||||||
| Deferred taxes (net) |
2,743 | (2,865 | ) | (2,398 | ) | |||||||
| Merchandise liability |
(4,361 | ) | (3,861 | ) | (7,260 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by operating activities |
19,448 | 35,077 | 31,896 | |||||||||
|
|
|
|
|
|
|
|||||||
| Investing activities: |
||||||||||||
| Cash paid for cemetery property |
(6,176 | ) | (5,766 | ) | (7,098 | ) | ||||||
| Purchase of subsidiaries |
(56,381 | ) | (14,100 | ) | (27,976 | ) | ||||||
| Consideration for lease and management agreements |
(53,000 | ) | — | — | ||||||||
| Proceeds from divestiture of funeral home |
297 | — | — | |||||||||
| Cash paid for property and equipment |
(8,398 | ) | (6,986 | ) | (4,874 | ) | ||||||
| Proceeds from sales of other assets |
— | 155 | — | |||||||||
|
|
|
|
|
|
|
|||||||
| Net cash used in investing activities |
(123,658 | ) | (26,697 | ) | (39,948 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Financing activities: |
||||||||||||
| Cash distributions |
(62,836 | ) | (52,053 | ) | (47,454 | ) | ||||||
| Additional borrowings on long-term debt |
92,865 | 269,502 | 84,000 | |||||||||
| Repayments of long-term debt |
(98,140 | ) | (239,932 | ) | (30,271 | ) | ||||||
| Proceeds from public offering |
120,345 | 38,377 | — | |||||||||
| Proceeds from issuance of common units |
53,152 | — | — | |||||||||
| Proceeds from general partner contributions |
— | — | 89 | |||||||||
| Fees paid related to early extinguishment of debt |
— | (14,920 | ) | — | ||||||||
| Cost of financing activities |
(2,950 | ) | (5,125 | ) | (2,424 | ) | ||||||
|
|
|
|
|
|
|
|||||||
| Net cash provided by (used in) financing activities |
102,436 | (4,151 | ) | 3,940 | ||||||||
|
|
|
|
|
|
|
|||||||
| Net increase (decrease) in cash and cash equivalents |
(1,774 | ) | 4,229 | (4,112 | ) | |||||||
| Cash and cash equivalents—Beginning of period |
12,175 | 7,946 | 12,058 | |||||||||
|
|
|
|
|
|
|
|||||||
| Cash and cash equivalents—End of period |
$ | 10,401 | $ | 12,175 | $ | 7,946 | ||||||
|
|
|
|
|
|
|
|||||||
| Supplemental disclosure of cash flow information: |
||||||||||||
| Cash paid during the period for interest |
$ | 18,796 | $ | 18,907 | $ | 18,481 | ||||||
| Cash paid during the period for income taxes |
$ | 4,315 | $ | 3,891 | $ | 4,101 | ||||||
| Non-cash investing and financing activities: |
||||||||||||
| Acquisition of assets by financing |
$ | 387 | $ | 190 | $ | 287 | ||||||
| Issuance of limited partner units for cemetery acquisition |
$ | — | $ | 3,718 | $ | 4,753 | ||||||
| Acquisition of assets by assumption of directly related liability |
$ | 8,368 | $ | 3,924 | $ | 2,469 | ||||||
See Accompanying Notes to the Consolidated Financial Statements.
84
| 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 December 31, 2014, the Partnership operated 303 cemeteries in 27 states and Puerto Rico, of which 272 are owned and 31 are operated under lease, management or operating agreements. The Partnership also owned and operated 98 funeral homes in 19 states and Puerto Rico.
Basis of Presentation
The consolidated financial statements included in this Form 10-K have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).
The Company’s 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 with the Archdiocese of Philadelphia that closed 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 consolidated financial statements include the accounts of each of the Company’s 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 financial statements also include the effects of retrospective adjustments resulting from the Company’s 2013 first quarter acquisition (see Note 13).
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.
Total revenues derived from the cemeteries under long-term lease, operating or management agreements totaled approximately $42.5 million, $33.2 million and $39.2 million for the years ended December 31, 2014, 2013 and 2012, respectively.
85
Summary of Significant Accounting Policies
The significant accounting policies followed by the Company are summarized below:
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents.
Cemetery Property
Cemetery property consists of developed and undeveloped cemetery property, constructed mausoleum crypts and lawn crypts and other cemetery property. Cemetery property is valued at cost, which is not in excess of market value.
Property and Equipment
Property and equipment is recorded at cost and depreciated on a straight-line basis. Maintenance and repairs are charged to expense as incurred, whereas additions and major replacements are capitalized and depreciation is recorded over their estimated useful lives as follows:
| Buildings and improvements | 10 to 40 years | |
| Furniture and equipment | 3 to 10 years | |
| Leasehold improvements | over the shorter of the term of the lease or the life of the asset |
Merchandise Trusts
Pursuant to state law, a portion of the proceeds from pre-need sales of merchandise and services is put into trust (the “merchandise trust”) until such time that the Company meets the requirements for releasing trust principal, which is generally delivery of merchandise or performance of services. All investment earnings generated by the assets in the merchandise trusts (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed (see Note 5).
Perpetual Care Trusts
Pursuant to state law, a portion of the proceeds from the sale of cemetery property is required to be paid into perpetual care trusts. The perpetual care trust principal does not belong to the Company and must remain in this trust into perpetuity while interest and dividends may be released and used to defray cemetery maintenance costs, which are expensed as incurred. The Company consolidates the trust into the Company’s financial statements in accordance with ASC 810-10-15 (13 through 22) because the trust is considered a variable interest entity for which the Company is the primary beneficiary. Earnings from the perpetual care trusts are recognized in current cemetery revenues (see Note 6).
Inventories
Inventories are classified within other current assets on the Company’s consolidated balance sheet and include cemetery and funeral home merchandise valued at the lower of cost or net realizable value. Cost is determined primarily on a specific identification basis on a first-in, first-out basis. Inventories were approximately $5.6 million and $5.4 million at December 31, 2014 and 2013, respectively.
Impairment of Long-Lived Assets
The Company monitors the recoverability of long-lived assets, including cemetery property, property and equipment and other assets, based on estimates using factors such as current market value, future asset
86
utilization, business and regulatory climate and future undiscounted cash flows expected to result from the use of the related assets, at a location level. The Company’s policy is to evaluate an asset for impairment when events or circumstances indicate that a long-lived asset’s carrying value may not be recovered. An impairment charge is recorded to write-down the asset to its fair value if the sum of future undiscounted cash flows is less than the carrying value of the asset. During the fourth quarter of 2014, the Company recorded an impairment loss of $0.4 million relating to a funeral home building in Florida. The impairment loss was based on the difference between the building’s estimated fair value and its carrying value. No impairment charges were recorded during the years ended December 31, 2013 and 2012, respectively.
Other-Than-Temporary Impairment of Trust Assets
The Company determines whether or not the impairment of a fixed maturity debt security is other-than-temporary by evaluating each of the following:
| • | Whether it is the Company’s intent to sell the security. If there is intent to sell, the impairment is considered to be other-than-temporary. |
| • | If there is no intent to sell, the Company evaluates if it is not more likely than not that the Company will be required to sell the debt security before its anticipated recovery. If the Company determines that it is more likely than not that it will be required to sell an impaired investment before its anticipated recovery, the impairment is considered to be other-than-temporary. |
The Company further evaluates whether or not all assets in the trusts have other-than-temporary impairments based upon a number of criteria including the severity of the impairment, length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer.
If an impairment is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair value.
For assets held in the perpetual care trusts, any reduction in the cost basis due to an other-than-temporary impairment is offset with an equal and opposite reduction in the perpetual care trust corpus and has no impact on earnings.
For assets held in the merchandise trusts, any reduction in the cost basis due to an other-than-temporary impairment is recorded in deferred revenue.
The trust footnotes (Notes 5 and 6) disclose the adjusted cost basis of the assets in both the merchandise and perpetual care trusts. This adjusted cost basis includes any adjustments to the original cost basis due to other-than-temporary impairments.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. The Company tests goodwill for impairment using a two-step test. In the first step of the test, the Company compares the fair value of the reporting unit to its carrying amount, including goodwill. The Company determines the fair value of each reporting unit using the income approach. The Company does not record an impairment of goodwill in instances where the fair value of a reporting unit exceeds its carrying amount. If the aggregate fair value of a reporting unit is less than the related carrying amount, the Company proceeds to the second step of the test in which it determines and records an impairment loss in an amount equal to the excess of the carrying amount of goodwill over the implied fair value. The goodwill impairment test is performed annually or more frequently if events or circumstances indicate that impairment may exist.
Deferred Cemetery Revenues, Net
Revenues from the sale of services and merchandise, as well as any investment income from the merchandise trust is deferred until such time that the services are performed or the merchandise is delivered.
87
In addition to amounts deferred on new contracts, and investment income and unrealized gains on our merchandise trust, deferred cemetery revenues, net, includes deferred revenues from pre-need sales that were entered into by entities prior to the acquisition of those entities by the Company, including entities that were acquired by Cornerstone Family Services, Inc. upon its formation in 1999. The Company provides for a reasonable profit margin for these deferred revenues (deferred margin) to account for the future costs of delivering products and providing services on pre-need contracts that the Company acquired through acquisition. Deferred margin amounts are deferred until the merchandise is delivered or services are performed.
Sales of Cemetery Merchandise and Services
The Company sells its merchandise and services on both a pre-need and at-need basis. Sales of at-need cemetery services and merchandise are recognized as revenue when the service is performed or merchandise is delivered.
Pre-need sales are usually made on an installment contract basis. Contracts are usually for a period not to exceed 60 months with payments of principal and interest required. For those contracts that do not bear a market rate of interest, the Company imputes such interest based upon the prime rate plus 150 basis points, which resulted in a rate of 4.75% for contracts entered into during the years ended December 31, 2014, 2013 and 2012, in order to segregate the principal and interest component of the total contract value.
At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income and any cash deposit paid, net of an estimated allowance for customer cancellations. The revenue from both the sales and interest component is deferred. Interest revenue is recognized utilizing the effective interest method. Sales revenue is recognized in accordance with the rules discussed below.
The allowance for customer cancellations is established based on management’s estimates of expected cancellations and historical experiences and is currently averaging approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. Management will continue to evaluate cancellation rates and will make changes to the estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations at December 31, 2014 and December 31, 2013, respectively.
Revenue recognition related to sales of cemetery merchandise and services is governed by Securities and Exchange Commission Staff Accounting Bulletin No. 104, Revenue Recognition in Financial Statements (“SAB No. 104”), and the retail land sales provisions of ASC 976. Per this guidance, revenue from the sale of burial lots and constructed mausoleum crypts is deferred until such time that 10% of the sales price has been collected, at which time it is fully earned; revenues from the sale of unconstructed mausoleums are recognized using the percentage-of-completion method of accounting while revenues from merchandise and services are recognized once such merchandise is delivered (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to us) or services are performed.
In order to appropriately match revenue and expenses, the Company defers certain pre-need cemetery and prearranged funeral direct obtaining costs that vary with and are primarily related to the acquisition of new pre-need cemetery and prearranged funeral business. Such costs are accounted for under the provisions of ASC 944, and are expensed as revenues are recognized.
The Company records a merchandise liability equal to the estimated cost to provide services and purchase merchandise for all outstanding and unfulfilled pre-need contracts. The merchandise liability is established and recorded at the time of the sale but is not recognized as an expense until such time that the associated revenue for the underlying contract is also recognized. The merchandise liability is established based on actual costs incurred
88
or an estimate of future costs, which may include a provision for inflation. The merchandise liability is reduced when services are performed or when payment for merchandise is made by the Company and title is transferred to the customer.
Sales of Funeral Home Services
Revenue from funeral home services is recognized as services are performed and merchandise is delivered.
Pursuant to state law, a portion of proceeds received from pre-need funeral service contracts is put into trust while amounts used to defray the initial administrative costs are not. All investment earnings generated by the assets in the trust (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed. The balance of the amounts in these trusts is included within the merchandise trusts above.
Income Taxes
The Company’s subsidiaries are subject to both federal and state income taxes. The Company records deferred tax assets and deferred tax liabilities to recognize temporary differences between the bases of assets and liabilities in its tax and GAAP balance sheets and for federal and state net operating loss carryforwards and alternative minimum tax credits. The Company records a valuation allowance against its deferred tax assets if it deems that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realizable in future periods.
Net Income per Unit
Basic net income per unit is determined by dividing net income, after deducting the amount of net income allocated to the general partner interest from its issuance date of September 20, 2004, by the weighted average number of units outstanding during the period. Diluted net income per unit is calculated in the same manner as basic net income per unit, except that the weighted average number of outstanding units is increased to include the dilutive effect of outstanding unit options and phantom unit awards. All outstanding unit appreciation rights (see Note 11) that would have a dilutive effect were assumed to be exercised and converted to common units using the average fair market value of a common unit for the period presented. Also, the average phantom units outstanding during the period were assumed to be converted to common units for the period presented. The diluted weighted average number of limited partners’ units outstanding presented on the consolidated statement of operations does not include 164,709 units, 297,078 units and 253,384 units for the years ended December 31, 2014, 2013 and 2012, respectively, as their effects would be anti-dilutive.
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 605—Revenue 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 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 potential impact of this update on its financial statements.
In the first quarter of 2015, the Financial Accounting Standards Board issued Update No. 2015-02, “Consolidation (Topic 810)” (“ASU 2015-02”), which amends previous consolidation analysis guidance. ASU 2015-02 requires companies to consider revised consolidation criteria regarding limited partnerships and similar
89
legal entities. The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early application is permitted. The Company is currently in the process of evaluating the impact of this update, which is not expected to have a significant impact on its financial position, results of operations, or cash flows.
Use of Estimates
Preparation of these 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 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 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 consolidated balance sheet.
| 2. | LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE |
Long-term accounts receivable, net, consisted of the following:
| As of December 31, | ||||||||
| 2014 | 2013 | |||||||
| (in thousands) | ||||||||
| Customer receivables |
$ | 194,537 | $ | 174,062 | ||||
| Unearned finance income |
(20,360 | ) | (20,005 | ) | ||||
| Allowance for contract cancellations |
(22,138 | ) | (20,275 | ) | ||||
|
|
|
|
|
|||||
| 152,039 | 133,782 | |||||||
| Less: current portion—net of allowance |
62,503 | 55,415 | ||||||
|
|
|
|
|
|||||
| Long-term portion—net of allowance |
$ | 89,536 | $ | 78,367 | ||||
|
|
|
|
|
|||||
Activity in the allowance for contract cancellations is as follows:
| For the Year Ended December 31, | ||||||||||||
| 2014 | 2013 | 2012 | ||||||||||
| (in thousands) | ||||||||||||
| Balance—Beginning of period |
$ | 20,275 | $ | 17,933 | $ | 17,582 | ||||||
| Provision for cancellations |
20,870 | 20,069 | 16,768 | |||||||||
| Charge-offs—net |
(19,007 | ) | (17,727 | ) | (16,417 | ) | ||||||
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| Balance—End of period |
$ | 22,138 | $ | 20,275 | $ | 17,933 | ||||||
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The Company’s customer receivables are considered financing receivables as they primarily relate to pre-need sales. These sales are usually made using interest-bearing installment contracts and result in interest income over the contract term. The interest income is recorded when the interest amount is considered realizable and collectible, which coincides with payment. Interest income is not recognized until payments are collected in accordance with the contract. At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income and any cash deposit paid, net of an estimated allowance for customer cancellations. Contracts are usually for a period not to exceed 60 months. The Company has a standard contractual agreement that it executes related to these receivables and therefore the Company only has one portfolio segment of receivables with no separate classes of receivables within that segment. The customer receivables are pledged as collateral for certain of the Company’s long-term borrowings.
90
Management evaluates customer receivables for impairment on an individual contract basis based upon the age of the receivable and the customer’s payment history. Since the Company’s receivables primarily relate to pre-need sales, the Company has not performed the service or fulfilled all of its obligations for the merchandise to which the receivable relates. As a result, the Company can be flexible with customers that have difficulty making payments and the Company usually does not write-off a receivable until all possible collection efforts have been exhausted and when a write-off occurs, it is usually for the full remaining balance.
Since the Company has not yet provided consideration under the pre-need contracts, a payment term modification as described in the preceding paragraph is not deemed a concession since it is a better economic alternative than cancelling the contract or payment default. Similarly, due to the lack of loss exposure since the entity has not yet fulfilled its obligations, the Company defines the past due period as the time since a payment was received. Collection efforts and impairment analyses are focused on those receivables that are 90 days past due. As of December 31, 2014 and 2013, approximately 11% and 10%, respectively, of the Company’s gross accounts receivable balance were 90 days past due.
The allowance for customer cancellations is established based on management’s estimates of expected cancellations primarily from historical experiences, and is currently averaging approximately 10% of total contract values. Future cancellation rates may differ from this current estimate. Management will continue to evaluate cancellation rates and will make changes to the estimate should the need arise. Actual cancellations did not vary significantly from the estimates of expected cancellations for the reporting periods presented.
| 3. | CEMETERY PROPERTY |
Cemetery property consists of the following:
| As of December 31, | ||||||||
| 2014 | 2013 | |||||||
| (in thousands) | ||||||||
| Developed land |
$ | 79,058 | $ | 72,458 | ||||
| Undeveloped land |
172,238 | 163,997 | ||||||
| Mausoleum crypts and lawn crypts |
78,524 | 70,216 | ||||||
| Other land |
10,028 | 9,798 | ||||||
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| Total |
$ | 339,848 | $ | 316,469 | ||||
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| 4. | PROPERTY AND EQUIPMENT |
Major classes of property and equipment follow:
| As of December 31, | ||||||||
| 2014 | 2013 | |||||||
| (in thousands) | ||||||||
| Building and improvements |
$ | 108,178 | $ | 91,575 | ||||
| Furniture and equi | ||||||||