CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
1.
BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of deathcare services and merchandise in the United States. As of
September 30, 2017
, we operated
171
funeral homes in
28
states and
32
cemeteries in
11
states.
Our operations are reported in
two
business segments: Funeral Home Operations and Cemetery Operations. Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an at-need and preneed basis.
Principles of Consolidation and Interim Condensed Disclosures
Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended
December 31, 2016
unless otherwise disclosed herein, and should be read in conjunction therewith.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.
Funeral and Cemetery Operations
We record the revenue from sales of funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Cemetery interment rights are recorded as revenue in accordance with the accounting provisions for real estate sales. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the interment right contract price. Interment right costs, which include real property and other costs related to cemetery development, are expensed using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery property of approximately
$0.9 million
for both the three months ended
September 30, 2016
and
2017
and
$3.1 million
and
$2.4 million
for the nine months ended
September 30, 2016
and
2017
, respectively. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.
When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically
one
year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costs are expensed when incurred.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of
September 30, 2017
, CSV RIA provided these services to two institutions, which have custody of
79%
of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
Accounts receivable was comprised of the following at
December 31, 2016
and
September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Funeral receivables, net of allowance for bad debt of $189 and $197, respectively
|
$
|
8,664
|
|
|
$
|
7,865
|
|
Cemetery receivables, net of allowance for bad debt of $557 and $603, respectively
|
9,862
|
|
|
10,552
|
|
Other receivables
|
334
|
|
|
404
|
|
Accounts receivable, net
|
$
|
18,860
|
|
|
$
|
18,821
|
|
Non-current preneed receivables represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables were comprised of the following at
December 31, 2016
and
September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Funeral receivables, net of allowance for bad debt of $862 and $883, respectively
|
$
|
7,761
|
|
|
$
|
7,943
|
|
Cemetery receivables, net of allowance for bad debt of $1,304 and $1,347, respectively
|
22,622
|
|
|
23,336
|
|
Preneed receivable, net
|
$
|
30,383
|
|
|
$
|
31,279
|
|
Bad debt expense totaled approximately
$0.5 million
and
$0.6 million
for the three months ended
September 30, 2016
and
2017
, respectively, and
$1.5 million
and
$1.7 million
for the nine months ended
September 30, 2016
and
2017
, respectively.
Property, Plant and Equipment
Property, plant and equipment (including equipment under capital leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method.
Property, plant and equipment was comprised of the following at
December 31, 2016
and
September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Land
|
$
|
73,744
|
|
|
$
|
73,503
|
|
Buildings and improvements
|
195,214
|
|
|
201,444
|
|
Furniture, equipment and automobiles
|
76,664
|
|
|
74,170
|
|
Property, plant and equipment, at cost
|
345,622
|
|
|
349,117
|
|
Less: accumulated depreciation
|
(110,509
|
)
|
|
(113,616
|
)
|
Property, plant and equipment, net
|
$
|
235,113
|
|
|
$
|
235,501
|
|
We recorded depreciation expense of approximately
$2.9 million
and
$3.1 million
for the three months ended
September 30, 2016
and
2017
, respectively and
$8.4 million
and
$9.4 million
for the nine months ended
September 30, 2016
and
2017
, respectively. During the nine months ended
September 30, 2017
, we acquired real estate for
$0.7 million
for funeral home parking lot expansion projects. During the nine months ended
September 30, 2016
, we acquired real estate for
$2.7 million
for various funeral home expansion projects and we purchased land and buildings at
four
funeral homes that were previously leased for approximately
$6.3 million
.
Goodwill
Effective January 1, 2017, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”),
Intangibles (Topic 350): Goodwill and Other.
The guidance simplifies subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for
impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill.
We performed our 2017 annual impairment test of goodwill using information as of August 31, 2017. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform a quantitative goodwill impairment test. For our 2017 annual impairment test, we performed a qualitative assessment and concluded that there was not an impairment to goodwill.
For our 2016 annual impairment test, we performed a quantitative impairment test. Our intent is to perform the quantitative test at least once every
three years
unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of the methodology used for the goodwill impairment quantitative test.
In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results. No such events or changes occurred between our testing date and reporting period to trigger a subsequent impairment review. No impairments were recorded to our goodwill during the nine months ended
September 30, 2016
and
2017
.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in
Intangible and other non-current assets
on our Consolidated Balance Sheets. Our tradenames are considered to have an indefinite life and are not subject to amortization.
We performed our 2017 annual impairment test of intangible assets using information as of August 31, 2017. Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with the guidance. For our 2017 annual impairment test, we performed a qualitative assessment and concluded that there was not an impairment to intangibles assets.
For our 2016 annual impairment test, we performed a quantitative impairment test. Our intent is to perform the quantitative test at least once every
three years
unless certain indicators or events suggest otherwise. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2016, for a discussion of the methodology used for the intangibles impairment quantitative test.
In addition to our annual review, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. During the third quarter of 2016, we recorded an impairment to tradenames of
$145,000
related to a funeral home business held for sale as the carrying value exceeded fair value. No other impairments were recorded to our intangible assets during the nine months ended
September 30, 2016
and
2017
.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we grant restricted stock, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period. Fair value is determined on the date of the grant.
The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date. The fair value of the ESPP is determined
based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
Effective January 1, 2017, we adopted the FASB’s ASU,
Compensation: (Topic 718): Stock Compensation
. The guidance simplifies several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows.
The guidance requires that previously unrecognized excess tax benefits should be recognized on a modified retrospective basis. Entities are required to record a deferred tax asset for previously unrecognized excess tax benefits outstanding as of the beginning of the annual period of adoption, with a cumulative-effect adjustment to retained earnings. At January 1, 2017, we performed an analysis for unrecognized excess tax benefits and deficiencies and determined that there were no adjustments to retained earnings, as there are no unrecognized excess tax benefits.
The guidance also requires that all excess tax benefits and tax deficiencies (including tax benefits of dividends on share-based payment awards) should be recognized as income tax expense or benefit in the income statement on a prospective basis. The tax effects of exercised or vested awards should be treated as discrete items in the reporting period in which they occur. For the three and nine months ended
September 30, 2017
, the excess tax deficiency related to share-based payments was approximately
$70,000
, recorded within
Tax adjustment related to certain discrete items
on our Consolidated Statements of Operations. In addition, excess tax benefits or deficiencies related to share-based payments are now included in operating cash flows rather than financing cash flows.
The guidance also allows for a one-time accounting policy election to either account for forfeitures as they occur or continue to estimate forfeitures as required by current guidance. The Company has elected to continue estimating forfeitures under the current guidance.
The guidance also requires that the presentation of employee taxes paid when an employer withholds shares for tax-withholding purposes should be classified as a financing activity on the statement of cash flows and applied retrospectively. This resulted in
$0.6 million
of employee taxes paid from withheld shares being presented as financing activities on our Consolidated Statement of Cash Flows for both the nine months ended
September 30, 2016
and
2017
. Prior to January 1, 2017, these amounts were presented as operating activities on our Consolidated Statement of Cash Flows.
We adopted all of the provisions of this amendment in accordance with the transition requirements and it did not have a material effect on our Consolidated Financial Statements.
See Note 11 to the Consolidated Financial Statements included herein for additional information on our stock-based compensation plans.
Income Taxes
We and our subsidiaries file a consolidated U.S. federal income tax return, separate income tax returns in
15
states in which we operate and combined or unitary income tax returns in
13
states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities.
We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets.
On July 18, 2017, we received notification that the Internal Revenue Service (“IRS”) selected our tax years ended December 31, 2013, 2014 and 2015 for examination. The examination of our tax year ended December 31, 2013 had previously been completed during 2016, however, we filed an amendment on June 1, 2017. The examination related to 2013 should be limited in scope to the items revised in the amendment, which include research and development credits, state taxes and preneed cost of sales.
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, but are not limited to, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, and increases or decreases in valuation allowances on deferred tax assets.
Income tax expense was
$1.9 million
for the three months ended
September 30, 2016
compared to
$1.5 million
for the three months ended
September 30, 2017
. We recorded income taxes at the estimated effective rate, before discrete items, of
40.0%
for both the three and nine months ended
September 30, 2016
and
2017
. Income tax expense was
$8.4 million
for the nine months ended
September 30, 2016
compared to
$9.3 million
for the nine months ended
September 30, 2017
.
During the third quarter of 2017, we recognized a tax benefit of
$0.2 million
which reduced our effective tax rate to
39.0%
for the nine months ended
September 30, 2017
. During the third quarter of 2016, we recognized a tax benefit of
$1.1 million
which reduced our effective tax rate to
35.2%
for the nine months ended
September 30, 2016
.
Correction of Immaterial Error
During the nine months ended
September 30, 2017
, we corrected an immaterial error related to 2013. The adjustment related to the correction of the deferred tax liability for the difference in book and tax basis of certain assets. The error had the impact of understating the deferred tax liability and overstating net income in 2013. Management evaluated the effect of the adjustment on previously issued interim and annual consolidated financial statements in accordance with the SEC's Staff Accounting Bulletin (“SAB”) No. 99 and SAB 108 and concluded that it was immaterial to the interim and annual periods. As a result, in accordance with SAB No. 108, we corrected our Consolidated Balance Sheets as of January 1, 2015.
The effect of this adjustment on our Consolidated Balance Sheets as of December 31, 2016 is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
% Change
|
Increase in Deferred tax liability
|
$
|
2,255
|
|
5.6
|
%
|
Increase in Total liabilities
|
$
|
2,255
|
|
0.3
|
%
|
Decrease in Retained earnings
|
$
|
2,255
|
|
9.8
|
%
|
Decrease in Total stockholders' equity
|
$
|
2,255
|
|
1.3
|
%
|
This adjustment had no impact on our Consolidated Statements of Operations or Consolidated Statement of Cash Flows for any periods presented.
Related Party Transactions
Management evaluated reportable events and transactions that occurred between us and related persons during the nine months ended
September 30, 2017
. See Note 15 to the Consolidated Financial Statements included herein for additional information on our related party transactions.
Subsequent Events
Management evaluated events and transactions during the period subsequent to
September 30, 2017
through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
See Note 16 to the Consolidated Financial Statements included herein for additional information on our subsequent events.
2.
RECENTLY ISSUED ACCOUNTING STANDARDS
Stock-Based Compensation
In May 2017, the FASB issued ASU,
Compensation: (Topic 718): Stock Compensation - Scope of Modification Accounting
. The amendments provide guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the award is modified. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. The amendments should be applied prospectively to an award modified on or after the adoption date. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Revenue Recognition
In May 2014, the FASB issued ASU,
Revenue from Contracts with Customers (Topic 606).
FASB Accounting Standards Codification (“ASC”) Topic 606 supersedes the revenue recognition requirements under Topic 605,
Revenue Recognition
, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation.
The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 using the modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application.
Currently, our sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the interment right. We have analyzed the impact on our contract portfolio by reviewing our revenue streams and our current policies and procedures to identify potential differences that would result from applying the requirements of the new standard to our contracts and we do not expect the new accounting standard to significantly impact our current accounting for the cemetery interment rights. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.
We expect the adoption of this new accounting standard to affect our accounting for the selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts. Currently, these costs are charged to operations using the specific identification method in the period incurred. Under the new accounting standard, we will capitalize and amortize these costs over the typical financing term for our preneed cemetery merchandise and services contracts and over the average preneed maturity period for our preneed funeral trust contracts. Based on our preliminary assessments, we do not expect the change to have a material impact on our Consolidated Financial Statements. The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts will continue to be charged to operations using the specific identification method in the period incurred.
We are continually evaluating the impact on our Consolidated Financial Statements and are currently modifying our financial systems to provide accounting under the new guidance.
Leases
In February 2016, the FASB issued ASU,
Leases (Topic 842).
This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3. PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed cemetery contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed cemetery trust investments can be reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of
Preneed cemetery trust investments
on our Consolidated Balance Sheets at
December 31, 2016
and
September 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Preneed cemetery trust investments, at market value
|
$
|
71,834
|
|
|
$
|
73,889
|
|
Less: allowance for contract cancellation
|
(2,138
|
)
|
|
(2,161
|
)
|
Preneed cemetery trust investments, net
|
$
|
69,696
|
|
|
$
|
71,728
|
|
Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some instances, a portion of all of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if
the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At
September 30, 2017
, none of our preneed cemetery trust investments were underfunded.
Earnings from our preneed cemetery trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were
no
transfers between Levels 1 and 2 in the three and nine months ended
September 30, 2017
. There are
no
Level 3 investments in the preneed cemetery trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at
September 30, 2017
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
4,698
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,698
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
2
|
|
4,834
|
|
|
275
|
|
|
(168
|
)
|
|
4,941
|
|
Corporate debt
|
2
|
|
19,335
|
|
|
1,145
|
|
|
(553
|
)
|
|
19,927
|
|
Preferred stock
|
2
|
|
16,329
|
|
|
383
|
|
|
(524
|
)
|
|
16,188
|
|
Mortgage-backed securities
|
2
|
|
1,089
|
|
|
240
|
|
|
(23
|
)
|
|
1,306
|
|
Common stock
|
1
|
|
24,574
|
|
|
3,376
|
|
|
(3,119
|
)
|
|
24,831
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
2
|
|
1,200
|
|
|
81
|
|
|
—
|
|
|
1,281
|
|
Trust securities
|
|
|
$
|
72,059
|
|
|
$
|
5,501
|
|
|
$
|
(4,387
|
)
|
|
$
|
73,173
|
|
Accrued investment income
|
|
|
$
|
716
|
|
|
|
|
|
|
$
|
716
|
|
Preneed cemetery trust investments
|
|
|
|
|
|
|
|
|
$
|
73,889
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
101.5
|
%
|
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
|
|
|
|
Due in one year or less
|
$
|
15
|
|
Due in one to five years
|
2,718
|
|
Due in five to ten years
|
5,751
|
|
Thereafter
|
33,879
|
|
Total
|
$
|
42,363
|
|
The cost and fair market values associated with preneed cemetery trust investments at
December 31, 2016
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
10,852
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,852
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
2
|
|
496
|
|
|
18
|
|
|
(4
|
)
|
|
510
|
|
Foreign debt
|
2
|
|
7,574
|
|
|
160
|
|
|
(656
|
)
|
|
7,078
|
|
Corporate debt
|
2
|
|
20,621
|
|
|
1,569
|
|
|
(1,123
|
)
|
|
21,067
|
|
Preferred stock
|
2
|
|
16,287
|
|
|
8
|
|
|
(947
|
)
|
|
15,348
|
|
Mortgage-backed securities
|
2
|
|
949
|
|
|
372
|
|
|
(4
|
)
|
|
1,317
|
|
Common stock
|
1
|
|
13,250
|
|
|
2,191
|
|
|
(1,838
|
)
|
|
13,603
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
|
|
1,223
|
|
|
107
|
|
|
—
|
|
|
1,330
|
|
Trust securities
|
|
|
$
|
71,252
|
|
|
$
|
4,425
|
|
|
$
|
(4,572
|
)
|
|
$
|
71,105
|
|
Accrued investment income
|
|
|
$
|
729
|
|
|
|
|
|
|
$
|
729
|
|
Preneed cemetery trust investments
|
|
|
|
|
|
|
|
|
$
|
71,834
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
99.8
|
%
|
We determine whether or not the assets in the preneed cemetery trust investments have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in
Deferred preneed cemetery receipts held in trust
on our Consolidated Balance Sheets. In the three months ended
September 30, 2016
, we recorded a
$0.1 million
impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did
no
t record any impairments in the three months ended
September 30, 2017
. In the nine months ended
September 30, 2016
, we recorded a
$0.8 million
impairment and
no
impairments have been recorded in the nine months ended
September 30, 2017
. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At
September 30, 2017
, we had certain investments within our preneed cemetery trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
September 30, 2017
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
$
|
153
|
|
|
$
|
(2
|
)
|
|
$
|
1,657
|
|
|
$
|
(166
|
)
|
|
$
|
1,810
|
|
|
$
|
(168
|
)
|
Corporate debt
|
2,158
|
|
|
(410
|
)
|
|
624
|
|
|
(143
|
)
|
|
2,782
|
|
|
(553
|
)
|
Preferred stock
|
273
|
|
|
(2
|
)
|
|
8,111
|
|
|
(522
|
)
|
|
8,384
|
|
|
(524
|
)
|
Mortgage-backed securities
|
200
|
|
|
(23
|
)
|
|
—
|
|
|
—
|
|
|
200
|
|
|
(23
|
)
|
Common stock
|
8,473
|
|
|
(2,247
|
)
|
|
1,936
|
|
|
(872
|
)
|
|
10,409
|
|
|
(3,119
|
)
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total temporary impaired securities
|
$
|
11,257
|
|
|
$
|
(2,684
|
)
|
|
$
|
12,328
|
|
|
$
|
(1,703
|
)
|
|
$
|
23,585
|
|
|
$
|
(4,387
|
)
|
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2016
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
$
|
228
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
228
|
|
|
$
|
(4
|
)
|
Foreign debt
|
2,523
|
|
|
(180
|
)
|
|
2,868
|
|
|
(475
|
)
|
|
5,391
|
|
|
(655
|
)
|
Corporate debt
|
6,939
|
|
|
(233
|
)
|
|
2,168
|
|
|
(890
|
)
|
|
9,107
|
|
|
(1,123
|
)
|
Preferred stock
|
3,217
|
|
|
(121
|
)
|
|
11,635
|
|
|
(826
|
)
|
|
14,852
|
|
|
(947
|
)
|
Mortgage-backed securities
|
51
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
51
|
|
|
(5
|
)
|
Common stock
|
2,608
|
|
|
(202
|
)
|
|
3,385
|
|
|
(1,636
|
)
|
|
5,993
|
|
|
(1,838
|
)
|
Total temporary impaired securities
|
$
|
15,566
|
|
|
$
|
(745
|
)
|
|
$
|
20,056
|
|
|
$
|
(3,827
|
)
|
|
$
|
35,622
|
|
|
$
|
(4,572
|
)
|
Preneed cemetery trust investment security transactions recorded in
Other, net
on our Consolidated Statements of Operations for the
three and nine
months ended
September 30, 2016
and
2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Investment income
|
$
|
578
|
|
|
$
|
474
|
|
|
$
|
1,546
|
|
|
$
|
1,755
|
|
Realized gains
|
126
|
|
|
—
|
|
|
415
|
|
|
2,215
|
|
Realized losses
|
(673
|
)
|
|
—
|
|
|
(4,081
|
)
|
|
(1,312
|
)
|
Expenses and taxes
|
(139
|
)
|
|
(336
|
)
|
|
(832
|
)
|
|
(1,213
|
)
|
Decrease (increase) in deferred preneed cemetery receipts held in trust
|
108
|
|
|
(138
|
)
|
|
2,952
|
|
|
(1,445
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchases and sales of investments in the preneed cemetery trusts for the
three and nine
months ended
September 30, 2016
and
2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Purchases
|
$
|
(1,434
|
)
|
|
$
|
(915
|
)
|
|
$
|
(19,540
|
)
|
|
$
|
(19,355
|
)
|
Sales
|
$
|
5,973
|
|
|
$
|
—
|
|
|
$
|
18,003
|
|
|
$
|
13,189
|
|
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of
Preneed funeral trust investments
on our Consolidated Balance Sheets at
December 31, 2016
and
September 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Preneed funeral trust investments, at market value
|
$
|
91,980
|
|
|
$
|
92,151
|
|
Less: allowance for contract cancellation
|
(2,740
|
)
|
|
(2,707
|
)
|
Preneed funeral trust investments, net
|
$
|
89,240
|
|
|
$
|
89,444
|
|
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and in some instances, a portion of all earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized
losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At
September 30, 2017
, none of our preneed funeral trust investments were underfunded.
Earnings from our preneed funeral trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were
no
transfers between Levels 1 and 2 for the three and nine months ended
September 30, 2017
. There are
no
Level 3 investments in the preneed funeral trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed funeral trust investments at
September 30, 2017
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
15,636
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,636
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S treasury debt
|
1
|
|
1,490
|
|
|
13
|
|
|
(4
|
)
|
|
1,499
|
|
Foreign debt
|
2
|
|
4,882
|
|
|
282
|
|
|
(166
|
)
|
|
4,998
|
|
Corporate debt
|
2
|
|
20,244
|
|
|
1,165
|
|
|
(571
|
)
|
|
20,838
|
|
Preferred stock
|
2
|
|
16,837
|
|
|
457
|
|
|
(526
|
)
|
|
16,768
|
|
Mortgage-backed securities
|
2
|
|
1,273
|
|
|
255
|
|
|
(25
|
)
|
|
1,503
|
|
Common stock
|
1
|
|
24,488
|
|
|
3,392
|
|
|
(3,133
|
)
|
|
24,747
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
1,998
|
|
|
87
|
|
|
(38
|
)
|
|
2,047
|
|
Other investments
|
2
|
|
3,374
|
|
|
—
|
|
|
—
|
|
|
3,374
|
|
Trust securities
|
|
|
$
|
90,222
|
|
|
$
|
5,651
|
|
|
$
|
(4,463
|
)
|
|
$
|
91,410
|
|
Accrued investment income
|
|
|
$
|
741
|
|
|
|
|
|
|
$
|
741
|
|
Preneed funeral trust investments
|
|
|
|
|
|
|
|
|
$
|
92,151
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
101.3
|
%
|
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
|
|
|
|
Due in one year or less
|
$
|
78
|
|
Due in one to five years
|
4,320
|
|
Due in five to ten years
|
6,208
|
|
Thereafter
|
35,000
|
|
Total
|
$
|
45,606
|
|
The cost and fair market values associated with preneed funeral trust investments at
December 31, 2016
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
22,787
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,787
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. treasury debt
|
1
|
|
1,491
|
|
|
21
|
|
|
(10
|
)
|
|
1,502
|
|
Municipal bonds
|
2
|
|
447
|
|
|
17
|
|
|
(4
|
)
|
|
460
|
|
Foreign debt
|
2
|
|
7,692
|
|
|
170
|
|
|
(677
|
)
|
|
7,185
|
|
Corporate debt
|
2
|
|
21,454
|
|
|
1,566
|
|
|
(1,134
|
)
|
|
21,886
|
|
Preferred stock
|
2
|
|
17,037
|
|
|
64
|
|
|
(970
|
)
|
|
16,131
|
|
Mortgage-backed securities
|
2
|
|
1,165
|
|
|
400
|
|
|
(5
|
)
|
|
1,560
|
|
Common stock
|
1
|
|
13,675
|
|
|
2,256
|
|
|
(1,850
|
)
|
|
14,081
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
2,124
|
|
|
115
|
|
|
(66
|
)
|
|
2,173
|
|
Other investments
|
2
|
|
3,463
|
|
|
—
|
|
|
—
|
|
|
3,463
|
|
Trust securities
|
|
|
$
|
91,335
|
|
|
$
|
4,609
|
|
|
$
|
(4,716
|
)
|
|
$
|
91,228
|
|
Accrued investment income
|
|
|
$
|
752
|
|
|
|
|
|
|
$
|
752
|
|
Preneed funeral trust investments
|
|
|
|
|
|
|
|
|
$
|
91,980
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
99.9
|
%
|
We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to
Deferred preneed funeral receipts held in trust
on our Consolidated Balance Sheets. In the three months ended
September 30, 2016
, we recorded a
$0.1 million
impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did
not
record any impairments in the three months ended
September 30, 2017
. In the nine months ended
September 30, 2016
, we recorded a
$0.9 million
impairment and
no
impairments have been recorded in the nine months ended
September 30, 2017
. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At
September 30, 2017
, we had certain investments within our preneed funeral trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
September 30, 2017
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury debt
|
$
|
837
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
837
|
|
|
$
|
(4
|
)
|
Foreign debt
|
170
|
|
|
(4
|
)
|
|
1,628
|
|
|
(163
|
)
|
|
1,798
|
|
|
(167
|
)
|
Corporate debt
|
2,273
|
|
|
(430
|
)
|
|
609
|
|
|
(141
|
)
|
|
2,882
|
|
|
(571
|
)
|
Preferred stock
|
191
|
|
|
(6
|
)
|
|
8,183
|
|
|
(520
|
)
|
|
8,374
|
|
|
(526
|
)
|
Mortgage-backed securities
|
234
|
|
|
(24
|
)
|
|
9
|
|
|
—
|
|
|
243
|
|
|
(24
|
)
|
Common stock
|
8,497
|
|
|
(2,241
|
)
|
|
1,934
|
|
|
(892
|
)
|
|
10,431
|
|
|
(3,133
|
)
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
79
|
|
|
(1
|
)
|
|
608
|
|
|
(37
|
)
|
|
687
|
|
|
(38
|
)
|
Total temporary impaired securities
|
$
|
12,281
|
|
|
$
|
(2,710
|
)
|
|
$
|
12,971
|
|
|
$
|
(1,753
|
)
|
|
$
|
25,252
|
|
|
$
|
(4,463
|
)
|
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2016
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. treasury debt
|
$
|
834
|
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
834
|
|
|
$
|
(10
|
)
|
Municipal bonds
|
244
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
244
|
|
|
(5
|
)
|
Foreign debt
|
2,654
|
|
|
(186
|
)
|
|
2,905
|
|
|
(490
|
)
|
|
5,559
|
|
|
(676
|
)
|
Corporate debt
|
6,977
|
|
|
(215
|
)
|
|
2,234
|
|
|
(919
|
)
|
|
9,211
|
|
|
(1,134
|
)
|
Preferred stock
|
3,420
|
|
|
(128
|
)
|
|
11,750
|
|
|
(842
|
)
|
|
15,170
|
|
|
(970
|
)
|
Mortgage-backed securities
|
55
|
|
|
(5
|
)
|
|
11
|
|
|
(1
|
)
|
|
66
|
|
|
(6
|
)
|
Common stock
|
2,795
|
|
|
(216
|
)
|
|
3,390
|
|
|
(1,634
|
)
|
|
6,185
|
|
|
(1,850
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
97
|
|
|
(7
|
)
|
|
644
|
|
|
(58
|
)
|
|
741
|
|
|
(65
|
)
|
Total temporary impaired securities
|
$
|
17,076
|
|
|
$
|
(772
|
)
|
|
$
|
20,934
|
|
|
$
|
(3,944
|
)
|
|
$
|
38,010
|
|
|
$
|
(4,716
|
)
|
Preneed funeral trust investment security transactions recorded in
Other, net
on the Consolidated Statements of Operations for the
three and nine
months ended
September 30, 2016
and
2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Investment income
|
$
|
596
|
|
|
$
|
524
|
|
|
$
|
1,639
|
|
|
$
|
1,801
|
|
Realized gains
|
131
|
|
|
—
|
|
|
525
|
|
|
2,296
|
|
Realized losses
|
(716
|
)
|
|
(2
|
)
|
|
(4,090
|
)
|
|
(1,314
|
)
|
Expenses and taxes
|
(253
|
)
|
|
(390
|
)
|
|
(946
|
)
|
|
(1,106
|
)
|
Decrease (increase) in deferred preneed funeral receipts held in trust
|
242
|
|
|
(132
|
)
|
|
2,872
|
|
|
(1,677
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchases and sales of investments in the preneed funeral trusts for the
three and nine
months ended
September 30, 2016
and
2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Purchases
|
$
|
(1,486
|
)
|
|
$
|
(966
|
)
|
|
$
|
(19,917
|
)
|
|
$
|
(19,548
|
)
|
Sales
|
$
|
6,336
|
|
|
$
|
23
|
|
|
$
|
19,005
|
|
|
$
|
13,266
|
|
4. PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to
five years
, with such interest income reflected as
Preneed cemetery finance charges
. In substantially all cases, we receive an initial down payment at the time the contract is signed. At
September 30, 2017
, our total financed preneed receivables were
$39.9 million
, of which
$29.3 million
and
$10.6 million
were for cemetery interment rights and for merchandise and services, respectively. These amounts are presented on our consolidated balance sheet as
$11.7 million
within
Accounts receivable
and
$28.2 million
within
Preneed receivables
and exclude unearned finance charges and allowance for contract cancellations. The unearned finance charges associated with these receivables were
$5.7 million
at both
December 31, 2016
and
September 30, 2017
.
We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at
15
days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve
100%
of the receivables on contracts in which the revenue has been recognized and payments are
90
days past due or more, which was approximately
4.8%
of the total receivables on recognized sales at
September 30, 2017
. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the nine months ended
September 30, 2017
, the change in the allowance for contract cancellations was as follows (in thousands):
|
|
|
|
|
|
September 30, 2017
|
Beginning balance
|
$
|
1,861
|
|
Write-offs and cancellations
|
(1,004
|
)
|
Provision
|
1,093
|
|
Ending balance
|
$
|
1,950
|
|
The aging of past due financing receivables as of
September 30, 2017
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60
Past Due
|
|
61-90
Past Due
|
|
91-120
Past Due
|
|
>120
Past Due
|
|
Total Past
Due
|
|
Current
|
|
Total Financing
Receivables
|
Recognized revenue
|
$
|
866
|
|
|
$
|
393
|
|
|
$
|
190
|
|
|
$
|
1,205
|
|
|
$
|
2,654
|
|
|
$
|
26,517
|
|
|
$
|
29,171
|
|
Deferred revenue
|
272
|
|
|
145
|
|
|
71
|
|
|
387
|
|
|
875
|
|
|
9,900
|
|
|
10,775
|
|
Total contracts
|
$
|
1,138
|
|
|
$
|
538
|
|
|
$
|
261
|
|
|
$
|
1,592
|
|
|
$
|
3,529
|
|
|
$
|
36,417
|
|
|
$
|
39,946
|
|
5. RECEIVABLES FROM PRENEED TRUSTS
The receivables from preneed trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest (
less than 50%
) in the trust assets. We account for these investments at cost. As of
December 31, 2016
and
September 30, 2017
, receivables from preneed trusts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Preneed trust funds, at cost
|
$
|
14,658
|
|
|
$
|
15,780
|
|
Less: allowance for contract cancellation
|
(440
|
)
|
|
(474
|
)
|
Receivables from preneed trusts, net
|
$
|
14,218
|
|
|
$
|
15,306
|
|
The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at
September 30, 2017
and
December 31, 2016
. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes the unrealized gains and losses on trust assets.
The composition of the preneed trust funds at
September 30, 2017
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Historical
Cost Basis
|
|
Fair Value
|
As of September 30, 2017
|
|
|
|
Cash and cash equivalents
|
$
|
4,054
|
|
|
$
|
4,054
|
|
Fixed income investments
|
9,218
|
|
|
9,218
|
|
Mutual funds and common stocks
|
2,492
|
|
|
2,516
|
|
Annuities
|
16
|
|
|
16
|
|
Total
|
$
|
15,780
|
|
|
$
|
15,804
|
|
The composition of the preneed trust funds at
December 31, 2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Historical
Cost Basis
|
|
Fair Value
|
As of December 31, 2016
|
|
|
|
Cash and cash equivalents
|
$
|
3,378
|
|
|
$
|
3,378
|
|
Fixed income investments
|
8,809
|
|
|
8,809
|
|
Mutual funds and common stocks
|
2,455
|
|
|
2,463
|
|
Annuities
|
16
|
|
|
16
|
|
Total
|
$
|
14,658
|
|
|
$
|
14,666
|
|
6.
CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets represents the corpus of those trusts plus undistributed income. The components of
Care trusts’ corpus
as of
December 31, 2016
and
September 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Trust assets, at market value
|
$
|
46,889
|
|
|
$
|
48,679
|
|
Obligations due from trust
|
(599
|
)
|
|
(493
|
)
|
Care trusts’ corpus
|
$
|
46,290
|
|
|
$
|
48,186
|
|
We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in
Revenues: Cemetery
. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At
September 30, 2017
, none of our cemetery perpetual care trust investments were underfunded.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stock, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy
classifications quarterly. There were
no
transfers between Levels 1 and 2 in the three and nine months ended
September 30, 2017
. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at
September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
2,573
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,573
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
2
|
|
3,568
|
|
|
211
|
|
|
(117
|
)
|
|
3,662
|
|
Corporate debt
|
2
|
|
13,194
|
|
|
768
|
|
|
(368
|
)
|
|
13,594
|
|
Preferred stock
|
2
|
|
11,464
|
|
|
260
|
|
|
(368
|
)
|
|
11,356
|
|
Mortgage-backed securities
|
2
|
|
661
|
|
|
147
|
|
|
(14
|
)
|
|
794
|
|
Common stock
|
1
|
|
15,263
|
|
|
1,985
|
|
|
(2,021
|
)
|
|
15,227
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
2
|
|
909
|
|
|
64
|
|
|
—
|
|
|
973
|
|
Trust securities
|
|
|
$
|
47,632
|
|
|
$
|
3,435
|
|
|
$
|
(2,888
|
)
|
|
$
|
48,179
|
|
Accrued investment income
|
|
|
$
|
500
|
|
|
|
|
|
|
$
|
500
|
|
Cemetery perpetual care investments
|
|
|
|
|
|
|
|
|
$
|
48,679
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
101.1
|
%
|
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
|
|
|
|
Due in one year or less
|
$
|
9
|
|
Due in one to five years
|
1,770
|
|
Due in five to ten years
|
4,004
|
|
Thereafter
|
23,622
|
|
|
$
|
29,405
|
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
6,522
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,522
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
2
|
|
365
|
|
|
13
|
|
|
(3
|
)
|
|
375
|
|
Foreign debt
|
2
|
|
5,100
|
|
|
99
|
|
|
(435
|
)
|
|
4,764
|
|
Corporate debt
|
2
|
|
13,715
|
|
|
966
|
|
|
(821
|
)
|
|
13,860
|
|
Preferred stock
|
2
|
|
11,323
|
|
|
5
|
|
|
(664
|
)
|
|
10,664
|
|
Mortgage-backed securities
|
2
|
|
569
|
|
|
223
|
|
|
(3
|
)
|
|
789
|
|
Common stock
|
1
|
|
8,259
|
|
|
1,382
|
|
|
(1,146
|
)
|
|
8,495
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
855
|
|
|
76
|
|
|
—
|
|
|
931
|
|
Trust securities
|
|
|
$
|
46,708
|
|
|
$
|
2,764
|
|
|
$
|
(3,072
|
)
|
|
$
|
46,400
|
|
Accrued investment income
|
|
|
$
|
489
|
|
|
|
|
|
|
$
|
489
|
|
Cemetery perpetual care investments
|
|
|
|
|
|
|
|
|
$
|
46,889
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
99.3
|
%
|
We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-
than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to
Care trusts’ corpus
. In the three months ended
September 30, 2016
, we recorded a
$0.1 million
impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did
no
t record any impairments in the three months ended
September 30, 2017
. In the nine months ended
September 30, 2016
, we recorded a
$0.5 million
impairment and
no
impairments have been recorded in the nine months ended
September 30, 2017
. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At
September 30, 2017
, we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended
September 30, 2017
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 30, 2017
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
$
|
93
|
|
|
$
|
(2
|
)
|
|
$
|
1,138
|
|
|
$
|
(115
|
)
|
|
$
|
1,231
|
|
|
$
|
(117
|
)
|
Corporate debt
|
1,435
|
|
|
(276
|
)
|
|
417
|
|
|
(92
|
)
|
|
1,852
|
|
|
(368
|
)
|
Preferred stock
|
681
|
|
|
(4
|
)
|
|
5,475
|
|
|
(364
|
)
|
|
6,156
|
|
|
(368
|
)
|
Mortgage-backed securities
|
121
|
|
|
(14
|
)
|
|
—
|
|
|
—
|
|
|
121
|
|
|
(14
|
)
|
Common stock
|
5,393
|
|
|
(1,466
|
)
|
|
1,221
|
|
|
(555
|
)
|
|
6,614
|
|
|
(2,021
|
)
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total temporary impaired securities
|
$
|
7,723
|
|
|
$
|
(1,762
|
)
|
|
$
|
8,251
|
|
|
$
|
(1,126
|
)
|
|
$
|
15,974
|
|
|
$
|
(2,888
|
)
|
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended
December 31, 2016
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
|
Fair Market Value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
$
|
137
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137
|
|
|
$
|
(3
|
)
|
Foreign debt
|
1,619
|
|
|
(120
|
)
|
|
1,961
|
|
|
(315
|
)
|
|
3,580
|
|
|
(435
|
)
|
Corporate debt
|
4,679
|
|
|
(152
|
)
|
|
1,439
|
|
|
(669
|
)
|
|
6,118
|
|
|
(821
|
)
|
Preferred stock
|
2,038
|
|
|
(77
|
)
|
|
8,329
|
|
|
(587
|
)
|
|
10,367
|
|
|
(664
|
)
|
Mortgage-backed securities
|
31
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
31
|
|
|
(3
|
)
|
Common stock
|
1,563
|
|
|
(121
|
)
|
|
2,004
|
|
|
(1,025
|
)
|
|
3,567
|
|
|
(1,146
|
)
|
Total temporary impaired securities
|
$
|
10,067
|
|
|
$
|
(476
|
)
|
|
$
|
13,733
|
|
|
$
|
(2,596
|
)
|
|
$
|
23,800
|
|
|
$
|
(3,072
|
)
|
Perpetual care trust investment security transactions recorded in
Other, net
on our Consolidated Statements of Operations for the
three and nine
months ended
September 30, 2016
and
2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Realized gains
|
$
|
44
|
|
|
$
|
—
|
|
|
$
|
156
|
|
|
$
|
925
|
|
Realized losses
|
(261
|
)
|
|
—
|
|
|
(1,943
|
)
|
|
(630
|
)
|
Decrease (increase) in care trusts’ corpus
|
217
|
|
|
—
|
|
|
1,787
|
|
|
(295
|
)
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Perpetual care trust investment security transactions recorded in
Revenues: Cemetery
for the
three and nine
months ended
September 30, 2016
and
2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Investment income
|
$
|
1,523
|
|
|
$
|
1,539
|
|
|
$
|
4,503
|
|
|
$
|
4,831
|
|
Realized gain, net
|
14
|
|
|
(283
|
)
|
|
(444
|
)
|
|
(891
|
)
|
Total
|
$
|
1,537
|
|
|
$
|
1,256
|
|
|
$
|
4,059
|
|
|
$
|
3,940
|
|
Purchases and sales of investments in the perpetual care trusts for the
three and nine
months ended
September 30, 2016
and
2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Purchases
|
$
|
(936
|
)
|
|
$
|
(556
|
)
|
|
$
|
(12,888
|
)
|
|
$
|
(12,430
|
)
|
Sales
|
$
|
3,832
|
|
|
$
|
—
|
|
|
$
|
11,702
|
|
|
$
|
8,390
|
|
7.
FAIR VALUE MEASUREMENTS
We evaluate our financial assets and liabilities for those financial assets and liabilities that meet the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our long-term debt and Credit Facility (as defined in Note 9) are classified within Level 2 of the Fair Value Measurement hierarchy. The fair values of our long-term debt and Credit Facility approximate the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. The fair value of the convertible subordinated notes due 2021 was approximately
$179.9 million
at
September 30, 2017
based on the last traded or broker quoted price. We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investment categories on our Consolidated Balance Sheets as having met the criteria for fair value measurement. As of
September 30, 2017
, we did not have any assets that had fair values determined by Level 3 inputs and
no
liabilities measured at fair value.
We account for our investments as available-for-sale and measure them at fair value under the standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities. See Notes 3 and 6 to our Consolidated Financial Statements included herein for the fair value hierarchy levels of our trust investments.
8. INTANGIBLE AND OTHER NON-CURRENT ASSETS
Intangibles and other non-current assets at
December 31, 2016
and
September 30, 2017
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Prepaid agreements not-to-compete, net of accumulated amortization of $5,501 and $5,908, respectively
|
$
|
3,244
|
|
|
$
|
2,930
|
|
Tradenames
|
11,663
|
|
|
11,663
|
|
Other
|
50
|
|
|
23
|
|
Intangible and other non-current assets
|
$
|
14,957
|
|
|
$
|
14,616
|
|
Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from
one
to
ten
years. Amortization expense was approximately
$106,000
and
$135,000
for the
three months ended September 30, 2016
and
2017
, respectively, and
$308,000
and
$407,000
for the nine months ended
September 30, 2016
and
2017
, respectively. Our tradenames have indefinite lives and therefore are not amortized.
9.
LONG-TERM DEBT
Our long-term debt consisted of the following at
December 31, 2016
and
September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Revolving credit facility, secured, floating rate
|
$
|
67,700
|
|
|
$
|
75,500
|
|
Term loan, secured, floating rate
|
138,750
|
|
|
130,313
|
|
Acquisition debt
|
12,245
|
|
|
11,348
|
|
Debt issuance costs, net of accumulated amortization of $4,138 and $4,366, respectively
|
(1,270
|
)
|
|
(1,043
|
)
|
Less: current portion
|
(13,021
|
)
|
|
(16,126
|
)
|
Total long-term debt
|
$
|
204,404
|
|
|
$
|
199,992
|
|
As of
September 30, 2017
, we had a
$300 million
secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a
$150 million
revolving credit facility and a
$150 million
term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional
$75 million
in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.
As of
September 30, 2017
, we had outstanding borrowings under the revolving credit facility of
$75.5 million
and approximately
$130.3 million
was outstanding on the term loan. We have one letter of credit issued on November 30, 2016 and outstanding under the Credit Facility for approximately
$2.0 million
, which bears interest at
2.125%
and will expire on November 27, 2017. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under the Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of
September 30, 2017
, the prime rate margin was equivalent to
1.125%
and the LIBOR margin was
2.125%
. The weighted average interest rate on the Credit Facility for the three and nine months ended
September 30, 2017
was
3.4%
and
3.1%
, respectively.
We were in compliance with the covenants contained in the Credit Agreement as of
September 30, 2017
. The Credit Agreement contains key ratios that we must comply with, including a requirement to maintain a leverage ratio of no more than
3.50
to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than
1.20
to 1.00. As of
September 30, 2017
, the leverage ratio was
2.99
to 1.00 and the fixed charge coverage ratio was
1.89
to 1.00.
Amortization of debt issuance costs related to our Credit Facility was approximately
$0.1 million
for both the three months ended
September 30, 2016
and
2017
and
$0.3 million
and
$0.2 million
for the nine months ended
September 30, 2016
and
2017
, respectively. The unamortized debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers.
10.
CONVERTIBLE SUBORDINATED NOTES
On March 19, 2014, we issued
$143.75 million
aggregate principal amount of
2.75%
convertible subordinated notes due
March 15, 2021
(the “Convertible Notes”). The Convertible Notes bear interest at
2.75%
per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.
The carrying values of the liability and equity components of the Convertible Notes at
December 31, 2016
and
September 30, 2017
are reflected in our Consolidated Balance Sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Long-term liabilities:
|
|
|
|
Principal amount
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized discount of liability component
|
(21,887
|
)
|
|
(18,687
|
)
|
Convertible Notes issuance costs, net of accumulated amortization of $1,359 and $1,746, respectively
|
$
|
(2,268
|
)
|
|
$
|
(1,881
|
)
|
Carrying value of the liability component
|
$
|
119,596
|
|
|
$
|
123,182
|
|
|
|
|
|
Equity component carrying value
|
$
|
17,973
|
|
|
$
|
17,973
|
|
The fair value of the Convertible Notes, which are Level 2 measurements, was approximately
$179.9 million
at
September 30, 2017
.
Interest expense on the Convertible Notes included contractual coupon interest expense of approximately
$1.0 million
for both the three months ended
September 30, 2016
and
2017
and
$3.0 million
for both the nine months ended
September 30, 2016
and
2017
. Accretion of the discount on the Convertible Notes was
$1.0 million
and
$1.1 million
for the three months ended
September 30, 2016
and
2017
, respectively, and
$2.9 million
and
$3.2 million
for the nine months ended
September 30, 2016
and
2017
, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately
$0.1 million
for both the three months ended
September 30, 2016
and
2017
and
$0.4 million
for both the nine months ended
September 30, 2016
and
2017
.
The initial conversion rate of the Convertible Notes, as of March 19, 2014, was
44.3169
shares of our common stock per
$1,000
principal amount of Convertible Notes, equivalent to an initial conversion price of approximately
$22.56
per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at September 30, 2017, is
44.5392
shares of our common stock per
$1,000
principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately
$22.45
per share of common stock.
The unamortized discount and the unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized discount and the debt issuance costs for both the three and nine months ended
September 30, 2016
and
2017
was
6.75%
and
2.75%
, respectively.
11.
STOCKHOLDERS
’
EQUITY
Stock-Based Compensation Plans
During the nine months ended
September 30, 2017
, we had two stock benefits plans in effect under which restricted stock, stock options and performance awards have been granted or remain outstanding: the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”). The Amended and Restated 2006 Plan was terminated upon the approval of the 2017 Plan at the annual shareholders meeting on May 17, 2017. The termination of the Amended and Restated 2006 Plan does not affect the awards previously issued and outstanding.
All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). The 2017 Plan provides for grants of options as non-qualified options or incentive stock options, restricted stock and performance awards. The 2017 Plan expires on May 17, 2027.
The status of each of the plans at
September 30, 2017
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
Shares
Available to
Issue
|
|
Options
Outstanding
|
|
Performance Awards Outstanding
(2)
|
Amended and Restated 2006 Plan
|
—
|
|
|
—
|
|
|
1,929
|
|
|
319
|
|
2017 Plan
|
1,571
|
|
(1)
|
1,541
|
|
|
16
|
|
|
9
|
|
Total
|
1,571
|
|
|
1,541
|
|
|
1,945
|
|
|
328
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amount includes approximately 17,500 shares granted from the Amended and Restated 2006 Plan that were returned to the Company due to cancellations.
|
(2)
|
Performance Awards are reserved at 200% of shares granted which is equal to the maximum payout in shares.
|
Restricted Stock
We did
not
issue any restricted stock during the
three months ended September 30, 2017
. During the second quarter of
2017
, we issued
5,000
restricted stock grants to a new employee of the leadership team that vest over a
five
-year period with an aggregate grant date market value of approximately
$0.1 million
. During the first quarter of
2017
, we issued a total of
22,250
restricted stock grants that vest over a
three
-year period with an aggregate grant date market value of approximately
$0.6 million
.
During the
three months ended September 30, 2016
and
2017
, we recorded a benefit of
$21,000
and
$174,000
of pre-tax compensation expense, respectively, related to the vesting of restricted stock awards, which is included in general, administrative and other expenses. The benefit was primarily related to the cancellation of
50,000
unvested restricted stock for a former executive. During the
nine months ended September 30, 2016
and
2017
, we recorded pre-tax compensation expense of approximately
$0.5 million
for both periods.
As of
September 30, 2017
, we had approximately
$1.3 million
of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately
1.7
years.
Stock Options
As of
September 30, 2017
, there were
1,945,656
stock options outstanding and
708,379
stock options which remain unvested. We did
not
grant any options during the
three months ended September 30, 2017
. During the second quarter of
2017
, we granted
16,250
options to a new employee of the leadership team at an exercise price of
$26.89
. These options will vest in
one-fifth
increments over a
five
-year period and have a
ten
-year term. The fair value of the options granted during the second quarter of
2017
was approximately
$0.1 million
. During the first quarter of
2017
, we granted
445,450
options to our leadership team and certain key employees at a weighted average exercise price of
$26.54
. These options will vest in
one-fifth
increments over a
five
-year period and have a
ten
-year term. The fair value of the total options granted during the first quarter of
2017
was approximately
$3.2 million
.
During the
three months ended September 30, 2016
and
2017
, we recorded approximately
$0.2 million
and
$0.3 million
, respectively, of pre-tax stock-based compensation expense for stock options. During the
nine months ended September 30, 2016
and
2017
, we recorded approximately
$1.4 million
and
$1.2 million
, respectively, of pre-tax compensation expense for stock options.
Performance Awards
We did
not
grant any performance awards during the
three months ended September 30, 2017
. During the second quarter of
2017
, we granted
4,500
performance awards to a new employee of the leadership team, payable in shares. The fair value of these performance awards granted during the second quarter of
2017
was approximately
$0.1 million
. These awards will vest (if at all) on June 30, 2022, provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Earnings Before Interest Tax Depreciation and Amortization) and Adjusted Consolidated EBITDA Margin performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents
50%
of the award and the Adjusted Consolidated EBITDA Margin performance represents
50%
of the award. During the first quarter of
2017
, we granted
101,040
performance awards to our leadership team and certain key employees, payable in shares. The fair value of these performance awards granted during the first quarter of
2017
was approximately
$2.7 million
. We recorded pre-tax compensation expense for performance awards totaling
$46,000
and
$208,000
for the
three months ended September 30, 2016
and
2017
, respectively, and
$154,000
and
$465,000
for the
nine months ended September 30, 2016
and
2017
, respectively.
Employee Stock Purchase Plan
During the
third quarter
of
2017
, employees purchased a total of
11,525
shares of common stock through our employee stock purchase plan (“ESPP”) at a weighted average price of
$21.76
per share. We recorded pre-tax stock-based compensation expense for the ESPP totaling approximately
$53,000
and
$60,000
for the
three months ended September 30, 2016
and
2017
, respectively, and
$197,000
and
$204,000
for both the
nine months ended September 30, 2016
and
2017
.
The fair value of the option to purchase shares under the ESPP is estimated on the date of grant (January 1 of each year) associated with the four quarterly purchase dates using the following assumptions:
|
|
|
|
|
2017
|
Dividend yield
|
0.82
|
%
|
Expected volatility
|
18.82
|
%
|
Risk-free interest rate
|
0.53%, 0.65%, 0.77%, 0.89%
|
|
Expected life (years)
|
0.25, 0.50, 0.75, 1.00
|
|
Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of the purchase. The expected life of the ESPP grants represents the calendar quarters from the beginning of the year to the purchase date (end of each quarter).
Director Compensation
We recorded pre-tax compensation expense related to director compensation, which is included in general, administrative and other expenses, totaling
$90,000
for both the
three months ended September 30, 2016
and
2017
, respectively, and
$302,000
and
$271,000
for the
nine months ended September 30, 2016
and
2017
, respectively.
Share Repurchase
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of
$25.0 million
of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the three months ended
September 30, 2017
, we repurchased
574,054
shares of common stock for a total cost of
$14.0 million
at an average cost of
$24.35
per share pursuant to this share repurchase program. We did not repurchase any shares of common stock in the first or second quarter of
2017
. Our shares were purchased in the open market. Purchases were at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares.
On August 18, 2017, we purchased
100,000
shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of
$23.85
per share for a total purchase price of
$2.4 million
. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. See Note 15 to our Consolidated Financial Statements included herein for additional information on our related party transactions.
Cash Dividends
On July 26, 2017, our Board declared a dividend of
$0.05
per share, totaling approximately
$0.8 million
, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. For the
three months ended September 30, 2016
, we paid a quarterly dividend of
$0.050
per share, totaling approximately
$0.8 million
. For the
nine months ended September 30, 2016
and
2017
, we paid total dividends of approximately
$1.7 million
and
$2.5 million
, respectively.
Accumulated other comprehensive income
Our components of accumulated other comprehensive income are as follows (in thousands):
|
|
|
|
|
|
Accumulated Other Comprehensive Income
|
Balance at December 31, 2016
|
$
|
—
|
|
Increase in net unrealized gains associated with available-for-sale securities of the trusts
|
2,849
|
|
Reclassification of net unrealized gain activity attributable to the
Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus
|
(2,849
|
)
|
Balance at September 30, 2017
|
$
|
—
|
|
12.
EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings per share for the three and nine months ended
September 30, 2016
and
2017
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Three Months Ended September 30,
|
|
For the Nine Months Ended September 30,
|
|
2016
|
|
2017
|
|
2016
|
|
2017
|
Numerator for basic and diluted earnings per share:
|
|
|
|
|
|
|
|
Net income
|
$
|
5,683
|
|
|
$
|
3,038
|
|
|
$
|
15,454
|
|
|
$
|
14,532
|
|
Less: Earnings allocated to unvested restricted stock
|
(25
|
)
|
|
(10
|
)
|
|
(76
|
)
|
|
(52
|
)
|
Income attributable to common stockholders
|
$
|
5,658
|
|
|
$
|
3,028
|
|
|
$
|
15,378
|
|
|
$
|
14,480
|
|
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
|
|
Denominator for basic earnings per common share - weighted average shares outstanding
|
16,529
|
|
|
16,476
|
|
|
16,502
|
|
|
16,575
|
|
Effect of dilutive securities:
|
|
|
|
|
|
|
|
Stock options
|
273
|
|
|
335
|
|
|
260
|
|
|
332
|
|
Convertible subordinated notes
|
299
|
|
|
787
|
|
|
200
|
|
|
980
|
|
Denominator for diluted earnings per common share - weighted average shares outstanding
|
17,101
|
|
|
17,598
|
|
|
16,962
|
|
|
17,887
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
$
|
0.34
|
|
|
$
|
0.18
|
|
|
$
|
0.93
|
|
|
$
|
0.87
|
|
Diluted earnings per common share:
|
$
|
0.33
|
|
|
$
|
0.17
|
|
|
$
|
0.91
|
|
|
$
|
0.81
|
|
The fully diluted weighted average shares outstanding for the three and nine months ended
September 30, 2017
and the corresponding calculation of fully diluted earnings per share, include approximately
787,000
and
980,000
shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260,
Earnings Per Share
. There were
299,000
and
200,000
shares for the three and nine months ended
September 30, 2016
that would have been issued upon conversion under the if-converted method.
For the both the three and nine months ended
September 30, 2017
approximately
455,000
and
320,000
stock options were excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect. For the both the three and nine months ended
September 30, 2016
,
no
stock options were excluded from the computation of diluted earnings per share.
13.
MAJOR SEGMENTS OF BUSINESS
We conduct funeral and cemetery operations only in the United States. The following table presents revenues from operations, income (loss) from operations before income taxes and total assets by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral
|
|
Cemetery
|
|
Corporate
|
|
Consolidated
|
Revenues from operations:
|
|
|
|
|
|
|
|
Three months ended September 30, 2017
|
$
|
47,329
|
|
|
$
|
13,725
|
|
|
$
|
—
|
|
|
$
|
61,054
|
|
Three months ended September 30, 2016
|
$
|
45,183
|
|
|
$
|
14,957
|
|
|
$
|
—
|
|
|
$
|
60,140
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017
|
$
|
150,279
|
|
|
$
|
42,784
|
|
|
$
|
—
|
|
|
$
|
193,063
|
|
Nine months ended September 30, 2016
|
$
|
140,952
|
|
|
$
|
44,384
|
|
|
$
|
—
|
|
|
$
|
185,336
|
|
|
|
|
|
|
|
|
|
Income (loss) from operations before income taxes:
|
|
|
|
|
|
|
|
Three months ended September 30, 2017
|
$
|
12,394
|
|
|
$
|
3,002
|
|
|
$
|
(10,836
|
)
|
|
$
|
4,560
|
|
Three months ended September 30, 2016
|
$
|
13,478
|
|
|
$
|
4,327
|
|
|
$
|
(10,231
|
)
|
|
$
|
7,574
|
|
|
|
|
|
|
|
|
|
Nine months ended September 30, 2017
|
$
|
45,414
|
|
|
$
|
11,609
|
|
|
$
|
(33,208
|
)
|
|
$
|
23,815
|
|
Nine months ended September 30, 2016
|
$
|
44,322
|
|
|
$
|
12,875
|
|
|
$
|
(33,337
|
)
|
|
$
|
23,860
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
September 30, 2017
|
$
|
637,075
|
|
|
$
|
245,674
|
|
|
$
|
4,297
|
|
|
$
|
887,046
|
|
December 31, 2016
|
$
|
634,145
|
|
|
$
|
241,621
|
|
|
$
|
9,303
|
|
|
$
|
885,069
|
|
14.
SUPPLEMENTARY DATA
Balance Sheet
The detail of certain balance sheet accounts as of
December 31, 2016
and
September 30, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
September 30, 2017
|
Other current assets:
|
|
|
|
Income taxes receivable
|
$
|
1,932
|
|
|
$
|
671
|
|
Other current assets
|
102
|
|
|
93
|
|
Total other current assets
|
$
|
2,034
|
|
|
$
|
764
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations:
|
|
|
|
Term note
|
$
|
11,250
|
|
|
$
|
14,063
|
|
Acquisition debt
|
1,771
|
|
|
2,063
|
|
Capital leases
|
246
|
|
|
197
|
|
Total current portion of long-term debt and capital lease obligations
|
$
|
13,267
|
|
|
$
|
16,323
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
Income taxes payable
|
$
|
509
|
|
|
$
|
1,579
|
|
Deferred rent
|
208
|
|
|
232
|
|
Total other current liabilities
|
$
|
717
|
|
|
$
|
1,811
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
Accrued salaries and wages
|
$
|
4,005
|
|
|
$
|
1,365
|
|
Accrued incentive compensation
|
8,237
|
|
|
4,864
|
|
Accrued vacation
|
2,305
|
|
|
2,614
|
|
Accrued insurance
|
1,726
|
|
|
2,053
|
|
Accrued interest
|
1,235
|
|
|
257
|
|
Accrued ad valorem and franchise taxes
|
981
|
|
|
2,314
|
|
Accrued commissions
|
543
|
|
|
410
|
|
Other accrued liabilities
|
1,059
|
|
|
1,417
|
|
Total accrued liabilities
|
$
|
20,091
|
|
|
$
|
15,294
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
Deferred rent
|
$
|
1,207
|
|
|
$
|
1,029
|
|
Incentive compensation
|
575
|
|
|
924
|
|
Contingent consideration
|
785
|
|
|
770
|
|
Total other long-term liabilities
|
$
|
2,567
|
|
|
$
|
2,723
|
|
15.
RELATED PARTY TRANSACTIONS
On August 18, 2017, we purchased
100,000
shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. These shares had been held by Mr. Payne prior to such repurchase for over one year. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of
$23.85
per share for a total purchase price of
$2.4 million
. The purchase price was the stock's trading price at the time of the transaction. These shares are currently held as treasury shares. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.
16.
SUBSEQUENT EVENTS
On October 14, 2017, we completed construction of and began operating a new funeral home in Pennsylvania.
On October 25, 2017, our Board approved an increase in our quarterly dividend on our common stock from
$0.050
to
$0.075
per share, effective with respect to dividends payable on December 1, 2017 and later.
On October 25, 2017, our Board approved a
$15.0 million
increase in its authorization for repurchases of our
common stock in addition to the
$25.0 million
approved on February 25, 2016, bringing the total authorized repurchase amount to
$40.0 million
, in accordance with the Exchange Act.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
In addition to historical information, this Form 10-Q contains certain statements and information that may constitute forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include statements regarding any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. The words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions are intended to identify forward-looking statements, which are generally not historical in nature. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
|
|
•
|
our ability to find and retain skilled personnel;
|
|
|
•
|
our ability to execute our growth strategy;
|
|
|
•
|
the effects of competition;
|
|
|
•
|
the execution of our Standards Operating, 4E Leadership and Strategic Acquisition Models;
|
|
|
•
|
changes in the number of deaths in our markets;
|
|
|
•
|
changes in consumer preferences;
|
|
|
•
|
our ability to generate preneed sales;
|
|
|
•
|
the investment performance of our funeral and cemetery trust funds;
|
|
|
•
|
fluctuations in interest rates;
|
|
|
•
|
our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
|
|
|
•
|
the timely and full payment of death benefits related to preneed funeral contracts funded through life insurance contracts;
|
|
|
•
|
the financial condition of third-party insurance companies that fund our preneed funeral contracts;
|
|
|
•
|
increased or unanticipated costs, such as insurance or taxes;
|
|
|
•
|
effects of the application of applicable laws and regulations, including changes in such regulations or the interpretation thereof;
|
|
|
•
|
consolidation of the deathcare industry; and
|
|
|
•
|
other factors and uncertainties inherent in the deathcare industry.
|
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (i) Part II, Item 1A “Risk Factors” in this Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2016
.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.