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EX-10.2 - EX-10.2 - STONEMOR PARTNERS LPd191370dex102.htm
EX-32.2 - EX-32.2 - STONEMOR PARTNERS LPd191370dex322.htm
EX-32.1 - EX-32.1 - STONEMOR PARTNERS LPd191370dex321.htm
EX-10.3 - EX-10.3 - STONEMOR PARTNERS LPd191370dex103.htm
EX-31.2 - EX-31.2 - STONEMOR PARTNERS LPd191370dex312.htm
EX-31.1 - EX-31.1 - STONEMOR PARTNERS LPd191370dex311.htm

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2015

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 001-32270

 

 

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   80-0103159

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

311 Veterans Highway, Suite B

Levittown, Pennsylvania

  19056
(Address of principal executive offices)   (Zip Code)

(215) 826-2800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of the registrant’s outstanding common units at October 31, 2015 was 31,779,105.

 

 

 


Index – Form 10-Q

 

         Page  

Part I

 

Financial Information

  

Item 1.

 

Financial Statements (unaudited)

     3   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     38   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     60   

Item 4.

 

Controls and Procedures

     62   

Part II

 

Other Information

  

Item 1.

 

Legal Proceedings

     62   

Item 1A.

 

Risk Factors

     63   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     63   

Item 3.

 

Defaults Upon Senior Securities

     63   

Item 4.

 

Mine Safety Disclosures

     63   

Item 5.

 

Other Information

     63   

Item 6.

 

Exhibits

     64   
 

Signatures

     65   


Part I – Financial Information

 

Item 1. Financial Statements

StoneMor Partners L.P.

Condensed Consolidated Balance Sheet

(in thousands)

(unaudited)

 

     September 30,
2015
    December 31,
2014
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 11,792      $ 10,401   

Accounts receivable, net of allowance

     66,099        62,503   

Prepaid expenses

     7,064        4,708   

Other current assets

     33,448        24,266   
  

 

 

   

 

 

 

Total current assets

     118,403        101,878   

Long-term accounts receivable, net of allowance

     93,273        89,536   

Cemetery property

     344,662        339,848   

Property and equipment, net of accumulated depreciation

     102,671        100,391   

Merchandise trusts, restricted, at fair value

     459,320        484,820   

Perpetual care trusts, restricted, at fair value

     311,781        345,105   

Deferred financing costs, net of accumulated amortization

     7,907        9,089   

Deferred selling and obtaining costs

     108,754        97,795   

Deferred tax assets

     42        40   

Goodwill

     64,048        58,836   

Intangible assets

     67,681        68,990   

Other assets

     3,158        3,136   
  

 

 

   

 

 

 

Total assets

   $ 1,681,700      $ 1,699,464   
  

 

 

   

 

 

 

Liabilities and partners’ capital

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 37,448      $ 35,382   

Accrued interest

     4,868        1,219   

Current portion, long-term debt

     3,294        2,251   
  

 

 

   

 

 

 

Total current liabilities

     45,610        38,852   

Other long-term liabilities

     2,003        1,292   

Obligation for lease and management agreements, net

     9,307        8,767   

Long-term debt

     287,724        285,378   

Deferred cemetery revenues, net

     645,233        643,408   

Deferred tax liabilities

     17,815        17,708   

Merchandise liability

     158,592        150,192   

Perpetual care trust corpus

     311,781        345,105   
  

 

 

   

 

 

 

Total liabilities

     1,478,065        1,490,702   
  

 

 

   

 

 

 

Commitments and contingencies

    

Partners’ capital (deficit)

    

General partner deficit

     (8,612     (5,113

Common partners, 31,779 and 29,204 units outstanding as of September 30, 2015 and December 31, 2014, respectively

     212,247        213,875   
  

 

 

   

 

 

 

Total partners’ capital

     203,635        208,762   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 1,681,700      $ 1,699,464   
  

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

3


StoneMor Partners L.P.

Condensed Consolidated Statement of Operations

(in thousands, except per unit data)

(unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2015     2014     2015     2014  

Revenues:

        

Cemetery

        

Merchandise

   $ 34,709      $ 37,812      $ 97,688      $ 98,452   

Services

     14,195        14,971        42,696        37,760   

Investment and other

     15,054        13,152        43,062        42,418   

Funeral home

        

Merchandise

     6,588        4,752        19,913        14,770   

Services

     7,654        7,487        23,083        20,694   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     78,200        78,174        226,442        214,094   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of goods sold (exclusive of depreciation shown separately below):

        

Perpetual care

     1,993        1,898        5,727        5,110   

Merchandise

     6,735        7,164        19,891        20,106   

Cemetery expense

     18,245        18,076        53,789        47,546   

Selling expense

     14,647        16,494        44,326        42,544   

General and administrative expense

     8,819        9,808        27,340        26,333   

Corporate overhead (including $277 and $265 in unit-based compensation for the three months ended September 30, 2015 and 2014, and $824 and $802 for the nine months ended September 30, 2015 and 2014, respectively)

     8,152        8,392        26,979        22,394   

Depreciation and amortization

     3,311        3,112        9,207        7,993   

Funeral home expense

        

Merchandise

     1,002        1,441        5,444        4,691   

Services

     5,432        5,522        16,728        15,023   

Other

     4,774        3,396        13,335        9,367   

Acquisition related costs, net of recoveries

     963        451        1,648        2,040   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     74,073        75,754        224,414        203,147   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     4,127        2,420        2,028        10,947   

Legal settlement

     3,000        —          3,000        —     

Gain on sale of funeral home

     —          244        —          244   

Gain on acquisitions

     1,540        —          1,540        412   

Gain on settlement agreement, net

     —          —          —          888   

Interest expense

     5,669        5,268        16,902        15,990   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (3,002     (2,604     (16,334     (3,499

Income tax expense (benefit)

     400        664        799        (522
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,402   $ (3,268   $ (17,133   $ (2,977
  

 

 

   

 

 

   

 

 

   

 

 

 

General partner’s interest in net loss for the period

   $ (42   $ (44   $ (227   $ (49

Limited partners’ interest in net loss for the period

   $ (3,360   $ (3,224   $ (16,906   $ (2,928

Net loss per limited partner unit (basic and diluted)

   $ (.11   $ (.11   $ (.56   $ (.11

Weighted average number of limited partners’ units outstanding (basic and diluted)

     31,491        29,018        30,011        25,712   

Distributions declared per unit

   $ .650      $ .610      $ 1.920      $ 1.810   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

4


StoneMor Partners L.P.

Condensed Consolidated Statement of

Partners’ Capital (Deficit)

(in thousands)

(unaudited)

 

     Partners’ Capital (Deficit)  
     Common
Unit Holders
    General
Partner
    Total  

Balance, December 31, 2014

   $ 213,875      $ (5,113   $ 208,762   

Proceeds from public offerings

     67,871        —          67,871   

Issuance of common units

     4,331        —          4,331   

Compensation related to unit awards

     824        —          824   

Net loss

     (16,906     (227     (17,133

Cash distributions

     (53,417     (3,272     (56,689

Unit distributions

     (4,331     —          (4,331
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2015

   $ 212,247      $ (8,612   $ 203,635   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

5


StoneMor Partners L.P.

Condensed Consolidated Statement of Cash Flows

(in thousands)

(unaudited)

 

     For the nine months ended September 30,  
     2015     2014  

Operating activities:

    

Net loss

   $ (17,133   $ (2,977

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Cost of lots sold

     7,506        7,181   

Depreciation and amortization

     9,207        7,993   

Unit-based compensation

     824        802   

Accretion of debt discounts

     2,207        2,127   

Gain on acquisitions

     (1,540     (412

Gain on sale of funeral home

     —          (244

Changes in assets and liabilities that provided cash:

    

Accounts receivable

     (6,403     (2,958

Allowance for doubtful accounts

     1,565        2,647   

Merchandise trust fund

     (33,403     (26,547

Prepaid expenses

     (2,356     (2,913

Other current assets

     (9,128     (1,019

Other assets

     (67     (1,397

Accounts payable and accrued and other liabilities

     5,550        7,382   

Deferred selling and obtaining costs

     (10,959     (6,855

Deferred cemetery revenue

     60,572        45,475   

Deferred taxes (net)

     106        (1,254

Merchandise liability

     5,482        (3,793
  

 

 

   

 

 

 

Net cash provided by operating activities

     12,030        23,238   
  

 

 

   

 

 

 

Investing activities:

    

Cash paid for cemetery property

     (6,022     (4,692

Purchase of subsidiaries

     (13,100     (54,000

Consideration for lease and management agreements

     —          (53,000

Proceeds from divestiture of funeral home

     —          297   

Cash paid for property and equipment

     (5,011     (6,430
  

 

 

   

 

 

 

Net cash used in investing activities

     (24,133     (117,825
  

 

 

   

 

 

 

Financing activities:

    

Cash distributions

     (56,689     (45,297

Additional borrowings on long-term debt

     102,323        63,365   

Repayments of long-term debt

     (99,945     (86,788

Proceeds from public offerings

     67,871        120,345   

Proceeds from issuance of common units

     —          53,237   

Cost of financing activities

     (66     (275
  

 

 

   

 

 

 

Net cash provided by financing activities

     13,494        104,587   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     1,391        10,000   

Cash and cash equivalents - Beginning of period

     10,401        12,175   
  

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ 11,792      $ 22,175   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for interest

   $ 10,918      $ 10,303   

Cash paid during the period for income taxes

   $ 4,167      $ 3,536   

Non-cash investing and financing activities:

    

Acquisition of assets by financing

   $ 593      $ 251   

Acquisition of asset by assumption of directly related liability

   $ 876      $ 8,368   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

6


 

1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

StoneMor Partners L.P. (“StoneMor”, the “Company” or the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of September 30, 2015, the Partnership operated 306 cemeteries in 27 states and Puerto Rico, of which 275 are owned and 31 are operated under lease, management or operating agreements. The Partnership also owned and operated 103 funeral homes in 19 states and Puerto Rico.

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of September 30, 2015 and for the three and nine months ended September 30, 2015 and 2014 includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year. The December 31, 2014 condensed consolidated balance sheet data was derived from audited financial statements included in the Company’s 2014 Annual Report on Form 10-K (“2014 Form 10-K”), but does not include all disclosures required by GAAP, which are presented in the Company’s 2014 Form 10-K.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of each of the Company’s subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 31 cemeteries under long-term lease, operating or management contracts. The operations of 16 of these managed cemeteries have been consolidated in accordance with the provisions of Accounting Standards Codification (ASC) 810.

The Company operates 15 cemeteries under long-term lease, operating or management agreements that do not qualify as acquisitions for accounting purposes, including 13 cemeteries related to the transaction with the Archdiocese of Philadelphia that closed in the second quarter of 2014. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of these cemeteries’ merchandise and perpetual care trusts as variable interest entities since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under these long-term lease, operating or management agreements, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries. The Company earns revenues related to sales of merchandise, services, and interment rights and incurs expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Company has also recognized the existing merchandise liabilities that it assumed as part of these agreements.

New Accounting Pronouncements

In the second quarter of 2014, the Financial Accounting Standards Board issued Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in “Topic 605 - Revenue Recognition” and most industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. During the third quarter of 2015, Update No. 2015-14, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2015-14”) was released, deferring the effective date of the amendments to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted, only as of an annual reporting period beginning after December 15, 2016. The Company is currently in the process of evaluating the potential impact of these updates on its financial statements.

 

7


In the first quarter of 2015, the Financial Accounting Standards Board issued Update No. 2015-02, “Consolidation (Topic 810)” (“ASU 2015-02”), which amends previous consolidation analysis guidance. ASU 2015-02 requires companies to consider revised consolidation criteria regarding limited partnerships and similar legal entities. The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early application is permitted. The Company has evaluated the impact of this update, concluding that it will not have an impact on the Company’s financial position, results of operations, or cash flows.

In the second quarter of 2015, the Financial Accounting Standards Board issued Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which changes the presentation of debt issuance costs. During the third quarter of 2015, Update No. 2015-15, “Interest - Imputation of Interest (Subtopic 835-30) (“ASU 2015-15”) was released clarifying the treatment of debt issuance costs associated with line-of-credit arrangements. ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. AUS 2015-15 allows the deferral and presentation of debt issuance costs pertaining to line-of-credit arrangements as an asset. The amendments in the update are effective for annual reporting periods beginning after December 15, 2015, including interim periods within those reporting periods. Early application is permitted. The Company is currently in the process of evaluating the potential impact of these updates on its financial statements.

In the third quarter of 2015, the Financial Accounting Standards Board issued Update No. 2015-16, “Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments” (“ASU 2015-16”). ASU 2015-16 requires that an acquirer recognize adjustments to estimated amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined. The amendments are effective for fiscal years beginning after December 15, 2015. Early adoption is permitted. The Company is currently in the process of evaluating the potential impact of this update on its financial statements.

Use of Estimates

Preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. As a result, actual results could differ from those estimates. The most significant estimates in the unaudited condensed consolidated financial statements are the valuation of assets in the merchandise trusts and perpetual care trusts, allowance for cancellations, unit-based compensation, merchandise liability, deferred sales revenue, deferred margin, deferred merchandise trust investment earnings, deferred obtaining costs, assets and liabilities obtained via business combinations and income taxes. Deferred sales revenue, deferred margin and deferred merchandise trust investment earnings are included in deferred cemetery revenues, net, on the unaudited condensed consolidated balance sheet.

 

2. LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Long-term accounts receivable, net, consists of the following:

 

     As of  
     September 30,
2015
     December 31,
2014
 
     (in thousands)  

Customer receivables

   $ 203,200       $ 194,537   

Unearned finance income

     (20,125      (20,360

Allowance for contract cancellations

     (23,703      (22,138
  

 

 

    

 

 

 
     159,372         152,039   

Less: current portion, net of allowance

     66,099         62,503   
  

 

 

    

 

 

 

Long-term portion, net of allowance

   $ 93,273       $ 89,536   
  

 

 

    

 

 

 

 

8


Activity in the allowance for contract cancellations is as follows:

 

     For the nine months ended September 30,  
     2015      2014  
     (in thousands)  

Balance - Beginning of period

   $ 22,138       $ 20,275   

Provision for cancellations

     19,054         17,080   

Charge-offs - net

     (17,489      (13,610
  

 

 

    

 

 

 

Balance - End of period

   $ 23,703       $ 23,745   
  

 

 

    

 

 

 

There have been no changes to the Company’s long-term accounts receivable accounting policies since the filing of the Company’s 2014 Form 10-K.

 

3. CEMETERY PROPERTY

Cemetery property consists of the following:

 

     As of  
     September 30,
2015
     December 31,
2014
 
     (in thousands)  

Developed land

   $ 82,048       $ 79,058   

Undeveloped land

     172,610         172,238   

Mausoleum crypts and lawn crypts

     78,879         78,524   

Other land

     11,125         10,028   
  

 

 

    

 

 

 

Total

   $ 344,662       $ 339,848   
  

 

 

    

 

 

 

 

4. PROPERTY AND EQUIPMENT

Major classes of property and equipment follow:

 

     As of  
     September 30,
2015
     December 31,
2014
 
     (in thousands)  

Building and improvements

   $ 114,673       $ 108,178   

Furniture and equipment

     51,947         49,290   
  

 

 

    

 

 

 
     166,620         157,468   

Less: accumulated depreciation

     (63,949      (57,077
  

 

 

    

 

 

 

Property and equipment - net

   $ 102,671       $ 100,391   
  

 

 

    

 

 

 

Depreciation expense was $2.8 million and $7.5 million for the three and nine months ended September 30, 2015, respectively, as compared to $2.5 million and $6.5 million during the same periods last year.

 

5. MERCHANDISE TRUSTS

At September 30, 2015, the Company’s merchandise trusts consisted of the following types of assets:

 

    Money market funds that invest in low risk short term securities;

 

9


    Publicly traded mutual funds that invest in underlying debt securities;

 

    Publicly traded mutual funds that invest in underlying equity securities;

 

    Equity investments primarily in securities that are currently paying dividends or distributions. These investments include Master Limited Partnerships and global equity securities;

 

    Fixed maturity debt securities issued by various corporate entities; and

 

    Fixed maturity debt securities issued by U.S. states and local government agencies.

 

    Certain assets related to the July 21, 2015 and August 6, 2015 acquisitions of Gloria Weiss Realty, LLC and Herr Funeral Homes, LTD respectively (see Note 13). According to the terms of the agreement, the seller was required to liquidate the holdings of the related trusts upon closing and forward the proceeds to the Company as soon as practicable. As of September 30, 2015, the Company has not received all of these amounts. Accordingly, a portion of the assets are shown in a single line item in the disclosures below as “Assets acquired via acquisition” and the cost basis and fair value of such assets are based upon preliminary estimates that the Company is required to make in accordance with Accounting Topic 805.

These investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.

The merchandise trusts are variable interest entities (VIE) for which the Company is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise to which they relate. If the value of these assets falls below the cost of purchasing such merchandise, the Company may be required to fund this shortfall.

The Company has included $8.1 million and $8.3 million of investments held in trust by the West Virginia Funeral Directors Association at September 30, 2015 and December 31, 2014, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recorded at their account value, which approximates their fair value.

 

10


The cost and market value associated with the assets held in the merchandise trusts at September 30, 2015 and December 31, 2014 were as follows:

 

As of September 30, 2015

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments

   $ 27,125       $ —         $ —         $ 27,125   

Fixed maturities:

           

U.S. State and local government agency

     81         10         —           91   

Corporate debt securities

     12,550         25         (880      11,695   

Other debt securities

     7,177         —           (9      7,168   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     19,808         35         (889      18,954   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     260,872         33         (28,666      232,239   

Mutual funds - equity securities

     145,260         9         (27,011      118,258   

Equity securities

     60,169         340         (14,796      45,713   

Other invested assets

     7,046         152         —           7,198   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total managed investments

   $ 520,280       $ 569       $ (71,362    $ 449,487   
  

 

 

    

 

 

    

 

 

    

 

 

 

Assets acquired via acquisition

     1,722         —           —           1,722   

West Virginia Trust Receivable

     8,111         —           —           8,111   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 530,113       $ 569       $ (71,362    $ 459,320   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2014

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments

   $ 52,521       $ —         $ —         $ 52,521   

Fixed maturities:

           

U.S. State and local government agency

     270         —           (1      269   

Corporate debt securities

     9,400         23         (447      8,976   

Other debt securities

     7,157         —           (18      7,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     16,827         23         (466      16,384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     150,477         869         (8,666      142,680   

Mutual funds - equity securities

     167,353         12,568         (463      179,458   

Equity securities

     81,639         4,167         (5,507      80,299   

Other invested assets

     5,400         —           (241      5,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total managed investments

   $ 474,217       $ 17,627       $ (15,343    $ 476,501   
  

 

 

    

 

 

    

 

 

    

 

 

 

West Virginia Trust Receivable

     8,319         —           —           8,319   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 482,536       $ 17,627       $ (15,343    $ 484,820   
  

 

 

    

 

 

    

 

 

    

 

 

 

The contractual maturities of debt securities as of September 30, 2015 are presented below:

 

As of September 30, 2015

   Less than
1 year
     1 year through
5 years
     6 years through
10 years
     More than
10 years
 
     (in thousands)  

U.S. State and local government agency

   $ —         $ 44       $ 45       $ 2   

Corporate debt securities

     —           8,290         3,405         —     

Other debt securities

     2,136         5,032         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 2,136       $ 13,366       $ 3,450       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

11


Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost of each individual asset held in the merchandise trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at September 30, 2015 and December 31, 2014 is presented below:

 

     Less than 12 months      12 Months or more      Total      Number of
Securities in
Loss Position
 

As of September 30, 2015

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    
     (in thousands, except number of securities data)  

Fixed maturities:

                 

Corporate debt securities

   $ 6,277       $ 254       $ 4,641       $ 626       $ 10,918       $ 880         64   

Other debt securities

     160         —           6,374         9         6,534         9         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     6,437         254         11,015         635         17,452         889         75   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     20,308         1,896         208,471         26,770         228,779         28,666         45   

Mutual funds - equity securities

     105,814         24,292         12,382         2,719         118,196         27,011         9   

Equity securities

     22,291         5,088         20,096         9,708         42,387         14,796         89   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 154,850       $ 31,530       $ 251,964       $ 39,832       $ 406,814       $ 71,362         218   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 months      12 Months or more      Total      Number of
Securities in
Loss Position
 

As of December 31, 2014

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    
     (in thousands, except number of securities data)  

Fixed maturities:

                    

U.S. State and local government agency

   $ 143       $ 1       $ —         $ —         $ 143       $ 1         3   

Corporate debt securities

     5,905         342         1,506         105         7,411         447         58   

Other debt securities

     2,370         8         4,769         10         7,139         18         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     8,418         351         6,275         115         14,693         466         74   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     32,072         1,039         95,629         7,627         127,701         8,666         34   

Mutual funds - equity securities

     4,147         463         —           —           4,147         463         2   

Equity securities

     44,563         4,641         3,909         866         48,472         5,507         60   

Other invested assets

     —           —           4,881         241         4,881         241         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 89,200       $ 6,494       $ 110,694       $ 8,849       $ 199,894       $ 15,343         171   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were 218 and 171 securities in an unrealized loss position in merchandise trusts as of September 30, 2015 and December 31, 2014, respectively, of which 102 and 39, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluated the severity of the impairment, the length of time that a security has been in a loss position, and the security’s performance relative to the overall performance for the sector in which the security resides, and has concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

During the three months ended September 30, 2015, the Company determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. During the nine months ended September 30, 2015, the Company determined that there were two securities with an aggregate cost basis of approximately $0.6 million and an aggregate fair value of approximately $0.4 million, resulting in an impairment of $0.2 million, wherein such impairment was considered to be other-than-temporary. During the nine months ended September 30, 2014, the Company determined that there were two securities with an aggregate cost basis of approximately $0.2 million and an aggregate fair value of approximately $0.1 million, resulting in an impairment of $0.1 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed.

 

12


A reconciliation of the Company’s merchandise trust activities for the nine months ended September 30, 2015 is presented below:

 

Fair

Value at

12/31/2014

    Contributions     Distributions     Interest/
Dividends
    Capital
Gain
Distributions
    Realized
Net Gain/
(Loss) (1)
    Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value at
9/30/2015
 
(in thousands)  
$ 484,820        60,875        (34,477     13,642        (738     14,190        (3,441     (2,474     (73,077   $ 459,320   

 

(1) Includes $4.2 million representing the net effect of other-than-temporary impairment charges and the release of previously realized impairment charges, as a result of sales and maturities of impaired securities.

The Company made net contributions into the trusts of approximately $26.4 million during the nine months ended September 30, 2015. During the nine months ended September 30, 2015, purchases and sales of securities available for sale included in trust investments were approximately $508.1 million and $489.6 million, respectively. Contributions include $12.1 million of assets that were acquired through acquisitions during the nine months ended September 30, 2015.

 

6. PERPETUAL CARE TRUSTS

At September 30, 2015, the Company’s perpetual care trusts consisted of the following types of assets:

 

    Money market funds that invest in low risk short term securities;

 

    Publicly traded mutual funds that invest in underlying debt securities;

 

    Publicly traded mutual funds that invest in underlying equity securities;

 

    Equity investments that are currently paying dividends or distributions. These investments include Master Limited Partnerships and global equity securities;

 

    Fixed maturity debt securities issued by various corporate entities;

 

    Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and

 

    Fixed maturity debt securities issued by U.S. states and local government agencies.

All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.

 

13


The cost and market value associated with the assets held in the perpetual care trusts at September 30, 2015 and December 31, 2014 were as follows:

 

As of September 30, 2015

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments

   $ 14,455       $ —         $ —         $ 14,455   

Fixed maturities:

           

U.S. Government and federal agency

     101         12         —           113   

U.S. State and local government agency

     27         —           —           27   

Corporate debt securities

     23,953         105         (1,381      22,677   

Other debt securities

     371         —           —           371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     24,452         117         (1,381      23,188   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     229,047         1,572         (20,282      210,337   

Mutual funds - equity securities

     71,177         1,082         (10,965      61,294   

Equity securities

     1,927         407         (47      2,287   

Other invested assets

     220         —           —           220   
  

 

 

    

 

 

    

 

 

    

 

 

 
Total    $ 341,278       $ 3,178       $ (32,675    $ 311,781   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2014

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments

   $ 26,644       $ —         $ —         $ 26,644   

Fixed maturities:

           

U.S. Government and federal agency

     100         16         —           116   

U.S. State and local government agency

     78         1         —           79   

Corporate debt securities

     24,275         104         (913      23,466   

Other debt securities

     371         —           —           371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     24,824         121         (913      24,032   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     128,735         379         (5,220      123,894   

Mutual funds - equity securities

     103,701         23,003         (1,268      125,436   

Equity securities

     30,617         14,704         (247      45,074   

Other invested assets

     25         —           —           25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 314,546       $ 38,207       $ (7,648    $ 345,105   
  

 

 

    

 

 

    

 

 

    

 

 

 

The contractual maturities of debt securities as of September 30, 2015 were as follows:

 

As of September 30, 2015

   Less than
1 year
     1 year through
5 years
     6 years through
10 years
     More than
10 years
 
     (in thousands)  

U.S. Government and federal agency

   $ —         $ 113       $ —         $ —     

U.S. State and local government agency

     27         —           —           —     

Corporate debt securities

     256         15,888         6,515         18   

Other debt securities

     371         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 654       $ 16,001       $ 6,515       $ 18   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at September 30, 2015 and December 31, 2014 is presented below:

 

     Less than 12 months      12 Months or more      Total      Number of
Securities in
Loss Position
 

As of September 30, 2015

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    
     (in thousands, except number of securities data)  

Fixed maturities:

                    

Corporate debt securities

   $ 9,916       $ 455       $ 7,549       $ 926       $ 17,465       $ 1,381         68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     9,916         455         7,549         926         17,465         1,381         68   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     95,075         5,115         112,826         15,167         207,901         20,282         40   

Mutual funds - equity securities

     43,893         10,965         —           —           43,893         10,965         4   

Equity securities

     186         30         47         17         233         47         6   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 149,070       $ 16,565       $ 120,422       $ 16,110       $ 269,492       $ 32,675         118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 months      12 Months or more      Total      Number of
Securities in
Loss Position
 

As of December 31, 2014

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    
     (in thousands, except number of securities data)  

Fixed maturities:

                    

Corporate debt securities

   $ 14,434       $ 798       $ 2,519       $ 115       $ 16,953       $ 913         83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     14,434         798         2,519         115         16,953         913         83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     30,345         768         86,814         4,452         117,159         5,220         31   

Mutual funds - equity securities

     13,035         1,268         —           —           13,035         1,268         5   

Equity securities

     3,866         245         620         2         4,486         247         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 61,680       $ 3,079       $ 89,953       $ 4,569       $ 151,633       $ 7,648         148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were 118 and 148 securities in an unrealized loss position in perpetual care trusts as of September 30, 2015 and December 31, 2014, respectively, of which 55 and 20, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluated the severity of the impairment, the length of time that a security has been in a loss position, and the security’s performance relative to the overall performance for the sector in which the security resides, and has concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

During the three and nine months ended September 30, 2015 and during the three months ended September 30, 2014, the Company determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts. During the nine months ended September 30, 2014, the Company determined that there were 2 securities with an aggregate cost basis of approximately $1.3 million and an aggregate fair value of approximately $0.8 million, resulting in an impairment of $0.5 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against the liability for perpetual care trust corpus.

 

15


A reconciliation of the Company’s perpetual care trust activities for the nine months ended September 30, 2015 is presented below:

 

Fair

Value at
12/31/2014

    Contributions     Distributions     Interest/
Dividends
    Capital
Gain
Distributions
    Realized
Net Gain/
(Loss) (1)
    Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value at
9/30/2015
 
(in thousands)  
$ 345,105        12,058        (10,254     13,236        41        13,942        (637     (1,654     (60,056   $ 311,781   

 

(1) Includes $12.0 million representing the net effect of other-than-temporary impairment charges and the release of previously realized impairment charges, as a result of sales and maturities of impaired securities.

The Company made net contributions from the trusts of approximately $1.8 million during the nine months ended September 30, 2015. During the nine months, ended September 30, 2015, purchases and sales of securities available for sale included in trust investments were approximately $326.9 million and $320.2 million, respectively. Contributions include $3.6 million of assets that were acquired through acquisitions during the nine months ended September 30, 2015.

 

7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in acquisitions.

There have been no changes in the goodwill balance during the period and a summary by reportable segment is as follows:

 

     Cemeteries      Funeral
Homes
     Total  
     Southeast      Northeast      West        
     (in thousands)  

Balance as of December 31, 2014

   $ 8,950       $ 3,288       $ 11,948       $ 34,650       $ 58,836   

Goodwill acquired from acquisitions during 2015

     —           —           —           5,212         5,212   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2015

   $ 8,950       $ 3,288       $ 11,948       $ 39,862       $ 64,048   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Acquired Intangible Assets

The Company has other acquired intangible assets, most of which have been recognized as a result of acquisitions and long-term lease, management and operating agreements. All of the intangible assets are amortized as a component of depreciation and amortization in the unaudited condensed consolidated statement of operations. The major classes of intangible assets are as follows:

 

     As of
September 30, 2015
     As of
December 31, 2014
 
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Intangible
Asset
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Intangible
Asset
 
     (in thousands)  

Amortized intangible assets:

               

Lease and management agreements

   $ 59,758       $ (1,328   $ 58,430       $ 59,758       $ (581   $ 59,177   

Underlying contract value

     6,239         (975     5,264         6,239         (858     5,381   

Non-compete agreements

     5,576         (2,860     2,716         5,250         (2,126     3,124   

Other intangible assets

     1,439         (168     1,271         1,439         (131     1,308   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 73,012       $ (5,331   $ 67,681       $ 72,686       $ (3,696   $ 68,990   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

See Note 7 of the Company’s 2014 Form 10-K for a discussion of the Company’s intangible assets, including its contract-based intangible asset pertaining to the lease and management agreements with the Archdiocese of Philadelphia.

 

16


8. LONG-TERM DEBT

The Company had the following outstanding debt:

 

     As of  
   September 30,
2015
     December 31,
2014
 
     (in thousands)  

7.875% Senior Notes, due June 2021

   $ 175,000       $ 175,000   

Credit Facility, due December 2019:

     

Working Capital Draws

     75,000         85,902   

Acquisition Draws

     38,500         25,000   

Notes payable - acquisition debt

     732         861   

Notes payable - acquisition non-competes

     1,894         2,765   

Insurance and vehicle financing

     3,006         1,632   
  

 

 

    

 

 

 

Total

     294,132         291,160   

Less current portion

     3,294         2,251   

Less unamortized bond and note payable discounts

     3,114         3,531   
  

 

 

    

 

 

 

Long-term portion

   $ 287,724       $ 285,378   
  

 

 

    

 

 

 

This note includes a summary of material terms of the Company’s senior notes and revolving credit facility. For a more detailed description of the Company’s long-term debt agreements, see the Company’s 2014 Form 10-K.

7.875% Senior Notes due 2021

On May 28, 2013, the Company issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). The Company pays 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, since December 1, 2013. The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. The Company incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are amortized over the life of the Senior Notes. Based on trades made on September 30, 2015, the Company has estimated the fair value of its Senior Notes to be in excess of par and trading at a premium of 3.0%, which would imply a fair value of $180.3 million at September 30, 2015. The Senior Notes are valued using Level 2 inputs as defined by the Fair Value Measurements and Disclosures topic of the ASC in Note 15. As of September 30, 2015, the Company was in compliance with all applicable covenants of the Senior Notes.

Credit Facility

On December 19, 2014, the Partnership entered into the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”).

The Credit Agreement provides for a single revolving credit facility of $180.0 million (the “Credit Facility”) maturing on December 19, 2019. Additionally the Credit Agreement provides for an uncommitted ability to increase the Credit Facility by an additional $70.0 million. The summary of the material terms of the Credit Agreement is set forth below. Capitalized terms, which are not defined in the following description, shall have the meaning assigned to such terms in the Credit Agreement.

At September 30, 2015, amounts outstanding under the Credit Facility bore interest at rates of approximately 4.1%. The interest rates on the Credit Facility are calculated as follows:

 

    For Eurodollar Rate Loans, the outstanding principal amount thereof bears interest for each Interest Period at a rate per annum equal to the Eurodollar Rate for the Interest Period plus the Applicable Rate for Eurodollar Rate Loans; and

 

17


    For Base Rate Loans and Swing Line Loans, the outstanding principal amount thereof bears interest from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate for Base Rate Loans.

In addition, the Borrowers must pay a Letter of Credit Fee for each Letter of Credit equal to the Applicable Rate for Letter of Credit Fees times the daily amount to be drawn under such Letter of Credit. The Applicable Rate is determined based on the Consolidated Leverage Ratio of the Partnership and its Subsidiaries, and ranges from 2.25% to 4.00% for Eurodollar Rate Loans and Letter of Credit Fees, and 1.25% to 3.00% for Base Rate Loans. The current Applicable Rate for each of: (i) Eurodollar Rate Loans and Letter of Credit Fees is 3.25% and (ii) Base Rate Loans is 2.25% based on the current Consolidated Leverage Ratio. The Credit Agreement also requires the Borrowers to pay a quarterly unused commitment fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceeds the usage of such commitments.

The Credit Agreement contains financial covenants, pursuant to which the Borrowers and the Guarantors will not permit:

 

    Consolidated EBITDA for any Measurement Period to be less than the sum of (i) $80.0 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after June 30, 2014;

 

    the Consolidated Debt Service Coverage Ratio to be less than 2.50 to 1.0 for any Measurement Period; and

 

    the Consolidated Leverage Ratio to be greater than 4.00 to 1.0 for any period.

The covenants include, among other limitations, limitations on: (i) liens, (ii) the creation or incurrence of debt, (iii) investments and acquisitions, (iv) dispositions of property, (v) dividends, distributions and redemptions, and (vi) transactions with Affiliates.

The Credit Agreement provides that two types of draws are permitted with respect to the Credit Facility: Acquisition Draws and Working Capital Draws. The proceeds of Acquisition Draws may be utilized by the Borrowers to finance Permitted Acquisitions, the purchase and construction of mausoleums and related costs or the net amount of Merchandise Trust deposits made after the Closing Date under the Credit Agreement, irrespective of whether such amounts relate to new or existing cemeteries or funeral homes. The proceeds of Working Capital Draws, Letters of Credit and Swing Line Loans may be utilized by the Borrowers to finance working capital requirements, Capital Expenditures and for other general corporate purposes. The borrowing of Working Capital Advances is subject to a borrowing formula of 85% of Eligible Receivables. This limit was $135.5 million at September 30, 2015.

Each Acquisition Draw is subject to equal quarterly amortization of the principal amount of such draw, with annual principal payments comprised of ten percent (10%) of the related draw amount, commencing on the second anniversary of such draw, with the remaining principal due on the Maturity Date, subject to certain mandatory prepayment requirements. Working Capital Draws are due on the Maturity Date, subject to certain mandatory prepayment requirements.

Effective July 10, 2015, the Company entered into the First Amendment (the “First Amendment”) to the Credit Agreement to allow the Company to apply Net Cash Proceeds received from certain: (i) Dispositions of property by any Credit Party or any of its Subsidiaries, (ii) sales or issuances of Equity Interests by the Company or any of its Subsidiaries and (iii) Extraordinary Receipts received by or paid to or for the account of any Credit Party or any of its Subsidiaries and not otherwise included in clause (i) and (ii) above that are required to be prepaid to the Lenders, to Acquisition Draws or Working Capital Draws, at the Company’s discretion. Prior to the execution of the First Amendment, the Credit Agreement required that the Net Cash Proceeds from the transactions described above be applied to Acquisition Draws before they could be applied to Working Capital Draws.

As of September 30, 2015, there were $113.5 million of outstanding borrowings under the Credit Facility. The Credit Facility approximates fair value as it consists of multiple current LIBOR borrowings with maturities of 90 days or less, with amounts that can be rolled-over or reborrowed at market rates. It is valued using Level 2 inputs. As of September 30, 2015, the Company complied with all applicable financial covenants.

The Company routinely incurs debt financing costs and fees when borrowing under, or making amendments to, the Credit Facility. These costs and fees are deferred and are amortized over the life of the Credit Facility.

 

18


9. INCOME TAXES

As of September 30, 2015, the Company’s taxable corporate subsidiaries had federal net operating loss carryforwards of approximately $223.1 million, which will begin to expire in 2017 and $272.0 million in state net operating loss carryforwards, a portion of which expires annually.

The Partnership is not a taxable entity for federal and state income tax purposes; rather, the Partnership’s tax attributes, except those of its corporate subsidiaries, are to be included in the individual tax returns of its partners. Neither the Partnership’s financial reporting income, nor the cash distributions to unit-holders, can be used as a substitute for the detailed tax calculations that the Partnership must perform annually for its partners. Net income from the Partnership is not treated as “passive income” for federal income tax purposes. As a result, partners subject to the passive activity loss rules are not permitted to offset income from the Partnership with passive losses from other sources.

The Partnership’s corporate subsidiaries account for their income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The provision for income taxes for the nine months ended September 30, 2015 and 2014 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2015 and 2014, respectively. The Company’s effective tax rate differs from its statutory tax rate primarily because the Company’s legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

The Company is not currently under examination by any federal or state jurisdictions. The federal statute of limitations and certain state statutes of limitations are open from 2011 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. Based on present information, it is the opinion of the Company’s management that there are no pending assessments that will result in a material effect on the Company’s consolidated financial statements over the next twelve months.

 

10. DEFERRED CEMETERY REVENUES, NET

At September 30, 2015 and December 31, 2014, deferred cemetery revenues, net, consisted of the following:

 

     As of  
     September 30,
2015
     December 31,
2014
 
     (in thousands)  

Deferred cemetery revenue

   $ 517,840       $ 456,632   

Deferred merchandise trust revenue

     128,779         104,717   

Deferred merchandise trust unrealized gains (losses)

     (70,793      2,284   

Deferred pre-acquisition margin

     140,389         140,378   

Deferred cost of goods sold

     (70,982      (60,603
  

 

 

    

 

 

 

Deferred cemetery revenues, net

   $ 645,233       $ 643,408   
  

 

 

    

 

 

 

Deferred selling and obtaining costs

   $ 108,754       $ 97,795   

Deferred selling and obtaining costs are carried as an asset on the unaudited condensed consolidated balance sheet in accordance with the Financial Services – Insurance topic of ASC 944.

 

19


11. COMMITMENTS AND CONTINGENCIES

Legal

During the third quarter of 2015, the Company recorded a charge pertaining to a legal settlement of a Fair Labor Standards Act claim. This $3.0 million amount is recorded under “Legal settlement” on the Consolidated Statement of Operations and consists of a charge for the settlement amount and legal fees related to the case.

The Company is party to legal proceedings in the ordinary course of its business but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material effect on the Company’s financial position, results of operations or liquidity.

Leases

At September 30, 2015, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to twenty-four years and options to renew at varying terms. Expenses under these operating leases were $0.9 million and $2.4 million for the three and nine months ended September 30, 2015, respectively, and $0.5 million and $1.7 million for the three and nine months ended September 30, 2014, respectively.

On June 5, 2015, the Company entered into a lease agreement for a new corporate office location in Trevose, Pennsylvania. The lease term will commence on February 1, 2016 and will expire on July 31, 2028, with certain contractual renewal options. The Company does not expect this new lease to have a significant impact on its cash flows.

The operating leases will result in future payments in the following approximate amounts from September 30, 2015 and beyond:

 

     (in thousands)  

2015

   $ 812   

2016

     3,087   

2017

     3,292   

2018

     3,205   

2019

     2,885   

2020

     1,691   

Thereafter

     10,471   
  

 

 

 

Total

   $ 25,443   
  

 

 

 

Other

See Note 13 of the Company’s 2014 Form 10-K for a discussion of the Company’s future commitments related to its agreements with the Archdiocese of Philadelphia.

 

12. PARTNERS’ CAPITAL

The table below reflects the activity relating to the number of common units outstanding for the nine months ended September 30, 2015:

 

     Nine months ended
September 30, 2015
 

Outstanding, beginning of period

     29,203,595   

Public offerings

     2,415,000   

Unit distributions

     152,879   

Unit-based compensation

     7,631   
  

 

 

 

Outstanding, end of period

     31,779,105   
  

 

 

 

 

20


Unit-Based Compensation

The Company has issued to certain key employees, management, and directors unit-based compensation in the form of unit appreciation rights and restricted phantom partnership units.

Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three and nine months ended September 30, 2015 and 2014 are summarized in the table below:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  
     (in thousands)      (in thousands)  

Unit appreciation rights

   $ 15       $ 21       $ 55       $ 60   

Restricted phantom units

     262         244         769         742   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unit-based compensation expense

   $ 277       $ 265       $ 824       $ 802   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2015, there was approximately $0.1 million in non-vested unit appreciation rights expense outstanding. These unit appreciation rights will be expensed through 2018.

The diluted weighted average number of limited partners’ units outstanding presented on the unaudited condensed consolidated statement of operations does not include 192,482 and 187,640 units for the three and nine months ended September 30, 2015, respectively, and 180,959 and 179,929 units for the three and nine months ended September 30, 2014, as their effects would be anti-dilutive.

During the nine months ended September 30, 2015, 7,631 common units were issued under the StoneMor Partners L.P. Long-Term Incentive Plans. See Note 11 of the Company’s 2014 Form 10-K for a description of the Company’s Long-Term Incentive Plan, as amended.

Other Unit Issuances

On July 10, 2015, the Company completed a follow-on public offering of 2,415,000 common units at a public offering price of $29.63 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.9 million. The proceeds were used to pay down outstanding indebtedness under our Credit Facility.

Pursuant to a Common Unit Purchase Agreement, dated May 19, 2014, by and between the Company and American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (“ACII”), the Company issued 54,622, 49,911 and 48,346 common units to ACII in lieu of cash distributions of approximately $1.4 million, $1.4 million and $1.5 million on February 16, 2015, May 15, 2015 and August 14, 2015, respectively. Refer to the Company’s 2014 Form 10-K, Note 17, for a detailed discussion of the Common Unit Purchase Agreement.

 

13. ACQUISITIONS

Third Quarter 2015 Acquisitions

On July 21, 2015, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Gloria Weiss Realty, LLC. (the “Seller”). Pursuant to the Agreement, the Buyer acquired one funeral home in Florida, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $0.9 million in cash.

 

21


The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired and the resulting goodwill from purchase. These amounts may be retrospectively adjusted as additional information is received. The acquired goodwill is recorded in the Company’s Funeral Homes operating segment.

 

     Preliminary
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 313   

Property and equipment

     24   

Merchandise trusts, restricted, at fair value

     1,211   
  

 

 

 

Total assets

     1,548   
  

 

 

 

Liabilities:

  

Deferred margin

     200   

Merchandise liabilities

     1,424   
  

 

 

 

Total liabilities

     1,624   
  

 

 

 

Fair value of net assets acquired

     (76
  

 

 

 

Consideration paid

     900   
  

 

 

 

Goodwill from purchase

   $ 976   
  

 

 

 

On August 6, 2015, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Herr Funeral Homes, LTD and Sunset Hill Memorial Estates, LTD. (the “Sellers”). Pursuant to the Agreement, the Buyer acquired three funeral homes and one cemetery in Illinois, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Sellers $5.7 million in cash.

 

22


The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired and the resulting gain on bargain purchase. These amounts may be retrospectively adjusted as additional information is received.

 

     Preliminary
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 62   

Cemetery and funeral home property

     3,180   

Property and equipment

     2,317   

Merchandise trusts, restricted, at fair value

     511   

Perpetual care trusts, restricted, at fair value

     2,032   

Intangible assets

     150   
  

 

 

 

Total assets

     8,252   
  

 

 

 

Liabilities:

  

Deferred margin

     139   

Merchandise liabilities

     128   

Perpetual care trust corpus

     2,032   
  

 

 

 

Total liabilities

     2,299   
  

 

 

 

Fair value of net assets acquired

     5,953   
  

 

 

 

Consideration paid

     5,700   
  

 

 

 

Gain on bargain purchase

   $ 253   
  

 

 

 

On August 20, 2015, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Bronze Stone, LLC (the “Seller”). Pursuant to the Agreement, the Buyer acquired two cemeteries in Illinois, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $1.5 million in cash.

 

23


The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired and the resulting gain on bargain purchase. These amounts may be retrospectively adjusted as additional information is received.

 

     Preliminary
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 158   

Cemetery property

     1,355   

Property and equipment

     400   

Merchandise trusts, restricted, at fair value

     1,999   

Perpetual care trusts, restricted, at fair value

     1,541   

Intangible assets

     33   
  

 

 

 

Total assets

     5,486   
  

 

 

 

Liabilities:

  

Deferred margin

     602   

Merchandise liabilities

     556   

Perpetual care trust corpus

     1,541   
  

 

 

 

Total liabilities

     2,699   
  

 

 

 

Fair value of net assets acquired

     2,787   
  

 

 

 

Consideration paid

     1,500   
  

 

 

 

Gain on bargain purchase

   $ 1,287   
  

 

 

 

On August 31, 2015, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Vista Funeral Home, Inc. (the “Seller”). Pursuant to the Agreement, the Buyer acquired one funeral home in Florida, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $5.0 million in cash and an additional $1.0 million will be paid in five equal annual installments. The Company has recorded the deferred cash payment as a liability to “Other long-term liabilities” on its balance sheet at its estimated fair value of $0.9 million.

 

24


The table below reflects the Company’s preliminary assessment of the fair value of net assets acquired and the resulting goodwill from purchase. These amounts may be retrospectively adjusted as additional information is received. The acquired goodwill is recorded in the Company’s Funeral Homes operating segment.

 

     Preliminary
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 1,961   

Funeral home property

     600   

Property and equipment

     1,464   

Merchandise trusts, restricted, at fair value

     8,380   

Intangible assets

     143   

Other assets

     56   
  

 

 

 

Total assets

     12,604   
  

 

 

 

Liabilities:

  

Deferred margin

     2,275   

Merchandise liabilities

     8,689   
  

 

 

 

Total liabilities

     10,964   
  

 

 

 

Fair value of net assets acquired

     1,640   
  

 

 

 

Consideration paid

     5,000   

Deferred cash consideration

     876   
  

 

 

 

Goodwill from purchase

   $ 4,236   
  

 

 

 

First Quarter 2014 Acquisition

On January 16, 2014, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Carriage Cemetery Services, Inc. (the “Seller”). Pursuant to the Agreement, the Buyer acquired one cemetery in Florida, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $0.2 million in cash.

 

25


The table below reflects the Company’s final assessment of the fair value of net assets acquired and the resulting gain on bargain purchase.

 

     Final
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 47   

Cemetery property

     470   

Property and equipment

     140   

Merchandise trusts, restricted, at fair value

     2,607   

Perpetual care trusts, restricted, at fair value

     691   
  

 

 

 

Total assets

     3,955   
  

 

 

 

Liabilities:

  

Deferred margin

     1,035   

Merchandise liabilities

     956   

Deferred tax liability

     641   

Perpetual care trust corpus

     691   

Other liabilities

     20   
  

 

 

 

Total liabilities

     3,343   
  

 

 

 

Fair value of net assets acquired

     612   
  

 

 

 

Consideration paid

     200   
  

 

 

 

Gain on bargain purchase

   $ 412   
  

 

 

 

Second Quarter 2014 Acquisition

On June 10, 2014, certain subsidiaries of the Company (collectively the “Buyers”) closed the transaction under the Asset Sale Agreements (the “Agreements”), with certain subsidiaries of Service Corporation International (collectively the “Sellers”) to acquire nine funeral homes, twelve cemeteries and certain related assets in Central Florida, North Carolina, Southeastern Pennsylvania and Virginia. In consideration for the net assets acquired, the Buyers paid the Sellers $53.8 million in cash.

The Company recorded an intangible asset of $1.2 million for a favorable interest in a lease at one of the acquired North Carolina funeral home businesses. This asset will be amortized over the full remaining term of the lease agreement, which is approximately 36 years, with renewals. This asset was previously reported as a component of “Other assets” on the consolidated balance sheet.

The table below reflects the Company’s final assessment of the fair value of net assets acquired and the resulting goodwill from purchase. There was no change to the amounts retrospectively adjusted in the fourth quarter of 2014. The

 

26


Company acquired goodwill of $2.8 million, $3.3 million and $2.4 million in the Company’s Cemetery Operations—Southeast, Cemetery Operations—Northeast and Funeral Homes operating segments, respectively.

 

     Final
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 6,188   

Cemetery property

     26,029   

Property and equipment

     15,776   

Merchandise trusts, restricted, at fair value

     31,534   

Perpetual care trusts, restricted, at fair value

     16,913   

Intangible assets

     1,170   

Other assets

     178   
  

 

 

 

Total assets

     97,788   
  

 

 

 

Liabilities:

  

Deferred margin

     13,570   

Merchandise liabilities

     19,905   

Deferred tax liability

     2,010   

Perpetual care trust corpus

     16,913   

Other liabilities

     63   
  

 

 

 

Total liabilities

     52,461   
  

 

 

 

Fair value of net assets acquired

     45,327   
  

 

 

 

Consideration paid

     53,800   
  

 

 

 

Goodwill from purchase

   $ 8,473   
  

 

 

 

Agreements with the Archdiocese of Philadelphia

On May 28, 2014, certain subsidiaries of the Company (“Tenant”) and the Archdiocese of Philadelphia, an archdiocese governed by Canon Law of the Roman Catholic Church (“Landlord”) closed a Lease Agreement (the “Lease”) and a Management Agreement (the “Management Agreement”), pursuant to which Tenant will operate 13 cemeteries in Pennsylvania for a term of 60 years. The Company joined the Lease and the Management Agreement as a guarantor of all of Tenant’s obligations under this operating arrangement.

Landlord agreed to lease to Tenant eight cemetery sites in the Philadelphia area. The Lease granted Tenant a sole and exclusive license (the “License”) to maintain and construct improvements in the operation of the cemeteries and to sell burial rights and all related merchandise and services, subject to the terms and conditions of the Lease. The Management Agreement enabled Tenant, subject to certain closing conditions, to serve as the exclusive operator of the remaining five cemeteries. The Lease may be terminated pursuant to the terms of the Lease, including, but not limited to, by notice of termination given by Landlord to Tenant at any time during Lease year 11 (a “Lease Year 11 Termination”) or by either party due to the default or bankruptcy of the other party in accordance with the termination provisions of the Lease. If the Lease is terminated by Landlord or Tenant pursuant to the terms of the Lease, the Management Agreement will also be terminated.

At closing, Tenant paid to Landlord an up-front rental payment of $53.0 million (the “Up-Front Rent”). Tenant shall also pay to Landlord aggregate fixed rent of $36.0 million (the “Fixed Rent”) for the Cemeteries in the following amounts:

 

Lease Years 1-5

  

None

Lease Years 6-20

  

$1,000,000 per Lease Year

Lease Years 21-25

  

$1,200,000 per Lease Year

Lease Years 26-35

  

$1,500,000 per Lease Year

Lease Years 36-60

  

None

 

27


The Fixed Rent for Lease Years 6 through 11 (the “Deferred Fixed Rent”) shall be deferred. If Landlord terminates the Lease pursuant to a Lease Year 11 Termination or Tenant terminates the Lease as a result of a Landlord’s default prior to the end of Lease Year 11 (collectively, a “Covered Termination”), the Deferred Fixed Rent shall be forfeited by Landlord and shall be retained by Tenant. If the Lease is not terminated by a Covered Termination, the Deferred Fixed Rent shall become due and payable 30 days after the end of Lease Year 11.

If Landlord terminates the Lease pursuant to a Lease Year 11 Termination, Landlord must repay to Tenant all $53.0 million of the Up-Front Rent. If the Lease is terminated for cause at any time, Landlord must repay to Tenant the unamortized portion of the Up-Front Rent: (i) based on a 60 year amortization schedule if terminated by Tenant due to Landlord’s default and (ii) based on a 30 year amortization schedule if terminated by Landlord due to Tenant’s default.

Generally, 51% of gross revenues from any source received by Tenant on account of the Cemeteries but unrelated to customary operations of the Cemeteries less Tenant’s and Landlord’s reasonable costs and expenses applicable to such unrelated activity shall be paid to Landlord as additional rent. In addition, Tenant shall have the right to request from time to time that Landlord sell (to a party that is independent and not an affiliate of StoneMor or any party that is a Tenant) all or portions of undeveloped land at the leased Cemeteries. If Landlord approves the sale of such undeveloped land, Tenant shall pay to Landlord, as additional rent, 51% of the net proceeds of any such sale.

The table below reflects the assets and liabilities recognized:

 

     (in thousands)  

Assets:

  

Accounts receivable

   $ 1,610   

Intangible asset

     59,758   
  

 

 

 

Total assets

     61,368   
  

 

 

 

Liabilities:

  

Obligation for lease and management agreements

     36,000   

Discount on obligation for lease and management agreements

     (27,632
  

 

 

 

Obligation for lease and management agreements, net

     8,368   
  

 

 

 

Total liabilities

     8,368   
  

 

 

 

Total net assets

   $ 53,000   
  

 

 

 

The Company recorded the underlying value of the Lease and Management Agreements as a contract-based intangible asset at the present value of the consideration, less the fair value of net assets received, consisting of acquired accounts receivable. A liability of $8.4 million was also recorded for the present value of the Fixed Rent, which is equal to the $36.0 million gross amount due to the Archdiocese of Philadelphia in the future, net of a discount $27.6 million. The discounted values were determined using an effective annual rate of 8.3%, which represents an estimate of the return an investor would require to make this type of investment in the Company over the rent payment period.

If the transactions noted above had been consummated at the beginning of the comparable prior annual reporting period, on a pro forma basis, for the three and nine months ended September 30, 2015 and 2014, consolidated revenues,

 

28


consolidated net income (loss), and net income (loss) per limited partner unit (basic and diluted) would have been as follows:

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  
     (in thousands, except per unit data)  

Revenue

   $ 78,972       $ 79,576       $ 229,971       $ 231,752   

Net income (loss)

     (4,606      (2,770      (17,358      393   

Net income (loss) per limited partner unit (basic and diluted)

   $ (.14    $ (.09    $ (.57    $ .01   

These pro forma results are unaudited, have been prepared for comparative purposes only, and may include certain adjustments such as increased interest on the acquisition of debt, changes in the timing of financing events and the recognition of gains on acquisitions. They do not purport to be indicative of the results of operations which actually would have resulted had these transactions been in effect at the beginning of the comparable prior annual reporting period or of future results of operations of the location.

The properties acquired in 2015 have contributed $0.6 million of revenue and $0.2 million of operating profit for the three and nine months ended September 30, 2015, respectively. The properties above that were acquired in 2014 contributed $10.8 million and $31.6 million of revenue, for the three and nine months ended September 30, 2015, respectively, and $1.8 million and $4.8 million of operating profit for the three and nine months ended September 30, 2015. The properties contributed $8.0 million and $10.3 million of revenue, for the three and nine months ended September 30, 2014, respectively, and $0.4 million of operating profit for both the three and nine months ended September 30, 2014.

Other 2014 Acquisitions

See Note 13 of the Company’s 2014 Form 10-K for a discussion of the Company’s other 2014 acquisitions. There have been no changes during the period to assessments of the fair value of net assets acquired in the other 2014 acquisitions. Those amounts may be retrospectively adjusted as additional information is received.

 

14. SEGMENT INFORMATION

The Company is organized into five distinct reportable segments, which are classified as Cemetery Operations – Southeast, Cemetery Operations – Northeast, Cemetery Operations – West, Funeral Homes, and Corporate.

The Company has chosen this level of organization of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from other segments; b) the Company has organized its management personnel at these operational levels; and c) it is the level at which the Company’s chief decision makers and other senior management evaluate performance.

The cemetery operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of the Company’s customers differs in each of its regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.

The Company’s Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the cemetery operations segments.

The Company’s Corporate segment includes various home office selling and administrative expenses that are not allocable to the other operating segments.

 

29


Segment information is as follows:

As of and for the three months ended September 30, 2015:

 

     Cemeteries      Funeral                     
     Southeast      Northeast      West      Homes      Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 26,264       $ 15,475       $ 12,628       $ —         $ —        $ (15,622   $ 38,745   

Service and other

     9,838         9,249         6,267         —           —          (141     25,213   

Funeral home

     —           —           —           17,077         —          (2,835     14,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     36,102         24,724         18,895         17,077         —          (18,598     78,200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     5,690         3,318         2,324         —           —          (2,604     8,728   

Cemetery

     7,534         6,608         4,103         —           —          —          18,245   

Selling

     8,471         4,931         3,940         —           692        (3,387     14,647   

General and administrative

     4,629         2,616         1,574         —           —          —          8,819   

Corporate overhead

     —           —           —           —           8,152        —          8,152   

Depreciation and amortization

     833         639         461         780         598        —          3,311   

Funeral home

     —           —           —           11,625         —          (417     11,208   

Acquisition related costs, net of recoveries

     —           —           —           —           963        —          963   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     27,157         18,112         12,402         12,405         10,405        (6,408     74,073   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit (loss)

   $ 8,945       $ 6,612       $ 6,493       $ 4,672       $ (10,405   $ (12,190   $ 4,127   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 622,820       $ 419,729       $ 427,419       $ 185,712       $ 26,020      $ —        $ 1,681,700   

Amortization of cemetery property

   $ 1,457       $ 1,131       $ 322       $ —         $ —        $ (697   $ 2,213   

Long lived asset additions

   $ 2,206       $ 502       $ 5,871       $ 4,388       $ 595      $ —        $ 13,562   

Goodwill

   $ 8,950       $ 3,288       $ 11,948       $ 39,862       $ —        $ —        $ 64,048   

 

30


As of and for the nine months ended September 30, 2015:

 

     Cemeteries      Funeral                     
     Southeast      Northeast      West      Homes      Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 78,128       $ 44,024       $ 36,809       $ —         $ —        $ (50,567   $ 108,394   

Service and other

     34,370         29,438         25,322         —           —          (14,078     75,052   

Funeral home

     —           —           —           50,226         —          (7,230     42,996   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     112,498         73,462         62,131         50,226         —          (71,875     226,442   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     17,332         9,221         7,045         —           —          (7,980     25,618   

Cemetery

     22,518         19,378         11,893         —           —          —          53,789   

Selling

     26,552         15,368         12,382         —           1,974        (11,950     44,326   

General and administrative

     13,921         7,731         5,688         —           —          —          27,340   

Corporate overhead

     —           —           —           —           26,979        —          26,979   

Depreciation and amortization

     2,443         1,883         1,417         2,381         1,083        —          9,207   

Funeral home

     —           —           —           36,911         —          (1,404     35,507   

Acquisition related costs, net of recoveries

     —           —           —           —           1,648        —          1,648   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     82,766         53,581         38,425         39,292         31,684        (21,334     224,414   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit (loss)

   $ 29,732       $ 19,881       $ 23,706       $ 10,934       $ (31,684   $ (50,541   $ 2,028   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 622,820       $ 419,729       $ 427,419       $ 185,712       $ 26,020      $ —        $ 1,681,700   

Amortization of cemetery property

   $ 4,059       $ 2,385       $ 1,062       $ —         $ —        $ (1,366   $ 6,140   

Long lived asset additions

   $ 6,451       $ 2,272       $ 6,804       $ 4,859       $ 780      $ —        $ 21,166   

Goodwill

   $ 8,950       $ 3,288       $ 11,948       $ 39,862       $ —        $ —        $ 64,048   

 

31


As of and for the three months ended September 30, 2014:

 

     Cemeteries      Funeral
Homes
                    
     Southeast      Northeast      West         Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 22,653       $ 13,228       $ 11,512       $ —         $ —        $ (4,719   $ 42,674   

Service and other

     10,097         11,040         8,633         —           —          (6,509     23,261   

Funeral home

     —           —           —           14,457         —          (2,218     12,239   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     32,750         24,268         20,145         14,457         —          (13,446     78,174   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     4,828         2,555         2,167         —           —          (488     9,062   

Cemetery

     7,533         6,576         3,967         —           —          —          18,076   

Selling

     8,173         4,572         4,001         —           631        (883     16,494   

General and administrative

     4,343         2,132         3,333         —           —          —          9,808   

Corporate overhead

     —           —           —           —           8,392        —          8,392   

Depreciation and amortization

     800         670         539         867         236        —          3,112   

Funeral home

     —           —           —           10,674         —          (315     10,359   

Acquisition related costs, net of recoveries

     —           —           —           —           451        —          451   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     25,677         16,505         14,007         11,541         9,710        (1,686     75,754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit (loss)

   $ 7,073       $ 7,763       $ 6,138       $ 2,916       $ (9,710   $ (11,760   $ 2,420   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 636,192       $ 423,434       $ 448,732       $ 163,762       $ 40,677      $ —        $ 1,712,797   

Amortization of cemetery property

   $ 1,035       $ 341       $ 435       $ —         $ —        $ 168      $ 1,979   

Long lived asset additions

   $ 1,950       $ 1,205       $ 906       $ 203       $ 183      $ —        $ 4,447   

Goodwill

   $ 8,949       $ 3,288       $ 11,948       $ 33,025       $ —        $ —        $ 57,210   

As of and for the nine months ended September 30, 2014:

 

     Cemeteries      Funeral
Homes
                    
     Southeast      Northeast      West         Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                

Sales

   $ 69,319       $ 31,583       $ 35,211       $ —         $ —        $ (26,605   $ 109,508   

Service and other

     31,085         29,529         26,768         —           —          (18,260     69,122   

Funeral home

     —           —           —           40,777         —          (5,313     35,464   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     100,404         61,112         61,979         40,777         —          (50,178     214,094   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                

Cost of sales

     15,045         6,576         7,686         —           —          (4,091     25,216   

Cemetery

     21,057         14,499         11,990         —           —          —          47,546   

Selling

     24,019         11,443         11,462         —           1,480        (5,860     42,544   

General and administrative

     13,053         5,533         7,747         —           —          —          26,333   

Corporate overhead

     —           —           —           —           22,394        —          22,394   

Depreciation and amortization

     2,094         1,244         1,593         2,346         716        —          7,993   

Funeral home

     —           —           —           29,813         —          (732     29,081   

Acquisition related costs, net of recoveries

     —           —           —           —           2,040        —          2,040   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     75,268         39,295         40,478         32,159         26,630        (10,683     203,147   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit (loss)

   $ 25,136       $ 21,817       $ 21,501       $ 8,618       $ (26,630   $ (39,495   $ 10,947   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 636,192       $ 423,434       $ 448,732       $ 163,762       $ 40,677      $ —        $ 1,712,797   

Amortization of cemetery property

   $ 3,499       $ 1,762       $ 2,237       $ —         $ —        $ (414   $ 7,084   

Long lived asset additions

   $ 28,470       $ 72,515       $ 3,350       $ 9,024       $ 443      $ —        $ 113,802   

Goodwill

   $ 8,949       $ 3,288       $ 11,948       $ 33,025       $ —        $ —        $ 57,210   

 

32


Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of individual operating segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the operating segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Revenues and associated expenses are not deferred in accordance with SAB No. 104; therefore, the deferral of these revenues and expenses is provided in the adjustment column to reconcile the Company’s managerial financial statements to those prepared in accordance with GAAP. Pre-need sales revenues included within the sales category consist primarily of the sale of burial lots, burial vaults, mausoleum crypts, grave markers and memorials, and caskets. Management accounting practices included in the Southeast, Northeast, and Western Regions reflect these pre-need sales when contracts are signed by the customer and accepted by the Company. Pre-need sales reflected in the unaudited condensed consolidated financial statements, prepared in accordance with GAAP, recognize revenues for the sale of burial lots and mausoleum crypts when the product is constructed and at least 10% of the sales price is collected. With respect to the other products, the unaudited condensed consolidated financial statements prepared under GAAP recognize sales revenues when the criteria for delivery under SAB No. 104 are met. These criteria include, among other things, purchase of the product, delivery and installation of the product in the ground, and transfer of title to the customer. In each case, costs are accrued in connection with the recognition of revenues; therefore, the unaudited condensed consolidated financial statements reflect Deferred Cemetery Revenue, Net, and Deferred Selling and Obtaining Costs on the unaudited condensed consolidated balance sheet, whereas the Company’s management accounting practices exclude these items.

 

33


15. FAIR VALUE MEASUREMENTS

The Fair Value Measurements and Disclosures topic of the ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy defined by this topic are described below.

Level 1: Quoted market prices available in active markets for identical assets or liabilities. The Company includes short-term investments, consisting primarily of money market funds, U.S. Government debt securities and publicly traded equity securities and mutual funds in its level 1 investments.

Level 2: Quoted prices in active markets for similar assets; quoted prices in non-active markets for identical or similar assets; inputs other than quoted prices that are observable. The Company includes U.S. state and municipal, corporate and other fixed income debt securities in its level 2 investments.

Level 3: Any and all pricing inputs that are generally unobservable and not corroborated by market data.

On the Company’s unaudited condensed consolidated balance sheet, current assets, long-term accounts receivable and current liabilities are recorded at amounts that approximate fair value.

 

34


The following table displays the Company’s assets measured at fair value as of September 30, 2015 and December 31, 2014.

 

As of September 30, 2015         
Merchandise Trust         
     Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 27,125       $ —         $ 27,125   

Fixed maturities:

        

U.S. state and local government agency

     —           91         91   

Corporate debt securities

     —           11,695         11,695   

Other debt securities

     —           7,168         7,168   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     —           18,954         18,954   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     232,239         —           232,239   

Mutual funds - equity securities - real estate sector

     17,366         —           17,366   

Mutual funds - equity securities - energy sector

     8,279         —           8,279   

Mutual funds - equity securities - MLP’s

     13,899         —           13,899   

Mutual funds - equity securities - other

     78,714         —           78,714   

Equity securities:

        

Master limited partnerships

     18,382         —           18,382   

Global equity securities

     27,331         —           27,331   

Other invested assets

     —           7,198         7,198   
  

 

 

    

 

 

    

 

 

 

Total

   $ 423,335       $ 26,152       $ 449,487   
  

 

 

    

 

 

    

 

 

 
Perpetual Care Trust         
     Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 14,455       $ —         $ 14,455   

Fixed maturities:

        

U.S. government and federal agency

     113         —           113   

U.S. state and local government agency

     —           27         27   

Corporate debt securities

     —           22,677         22,677   

Other debt securities

     —           371         371   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     113         23,075         23,188   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     210,337         —           210,337   

Mutual funds - equity securities - real estate sector

     15,616         —           15,616   

Mutual funds - equity securities - energy sector

     13,246         —           13,246   

Mutual funds - equity securities - MLP’s

     26,432         —           26,432   

Mutual funds - equity securities - other

     6,000         —           6,000   

Equity securities:

        

Master limited partnerships

     1,268         —           1,268   

Global equity securities

     1,019         —           1,019   

Other invested assets

     —           220         220   
  

 

 

    

 

 

    

 

 

 

Total

   $ 288,486       $ 23,295       $ 311,781   
  

 

 

    

 

 

    

 

 

 

 

35


As of December 31, 2014         
Merchandise Trust         
     Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 52,521       $ —         $ 52,521   

Fixed maturities:

        

U.S. state and local government agency

     —           269         269   

Corporate debt securities

     —           8,976         8,976   

Other debt securities

     —           7,139         7,139   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     —           16,384         16,384   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     142,680         —           142,680   

Mutual funds - equity securities - real estate sector

     58,672         —           58,672   

Mutual funds - equity securities - energy sector

     7,733         —           7,733   

Mutual funds - equity securities - MLP’s

     22,927         —           22,927   

Mutual funds - equity securities - other

     90,126         —           90,126   

Equity securities:

        

Master limited partnerships

     50,091         —           50,091   

Global equity securities

     30,208         —           30,208   

Other invested assets

     —           5,159         5,159   
  

 

 

    

 

 

    

 

 

 

Total

   $ 454,958       $ 21,543       $ 476,501   
  

 

 

    

 

 

    

 

 

 
Perpetual Care Trust         
     Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 26,644       $ —         $ 26,644   

Fixed maturities:

        

U.S. government and federal agency

     116         —           116   

U.S. state and local government agency

     —           79         79   

Corporate debt securities

     —           23,466         23,466   

Other debt securities

     —           371         371   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     116         23,916         24,032   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     123,894         —           123,894   

Mutual funds - equity securities - real estate sector

     41,753         —           41,753   

Mutual funds - equity securities - energy sector

     14,829         —           14,829   

Mutual funds - equity securities - MLP’s

     43,596         —           43,596   

Mutual funds - equity securities - other

     25,258         —           25,258   

Equity securities:

        

Master limited partnerships

     43,207         —           43,207   

Global equity securities

     1,867         —           1,867   

Other invested assets

     —           25         25   
  

 

 

    

 

 

    

 

 

 

Total

   $ 321,164       $ 23,941       $ 345,105   
  

 

 

    

 

 

    

 

 

 

 

36


Level 1 securities primarily consist of actively publicly traded money market funds, mutual funds and equity securities.

Level 2 securities primarily consist of corporate and other fixed income debt securities. The Company obtains pricing information for these securities from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the pricing vendor’s model are derived from market observable sources including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2. The Company reviews the information provided by the pricing vendor on a regular basis. In addition, the pricing vendor has an established process in place for the identification and resolution of potentially erroneous prices.

There were no level 3 assets.

 

37


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The words “we,” “us,” “our,” “StoneMor,” the “Partnership,” the “Company” and similar words refer to StoneMor Partners L.P. and its subsidiaries.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in “Part I, Item 1” of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, but not limited to, information regarding the status and progress of our operating activities, the plans and objectives of our management, assumptions regarding our future performance and plans, and any financial guidance provided or guidance related to our future distributions, as well as certain information in our other filings with the SEC and elsewhere are forward-looking statements.

Generally, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend (including, but not limited to our intent to maintain or increase our distributions),” “project,” “expect,” “predict” and similar expressions identify these forward-looking statements.

These forward-looking statements are made subject to certain risks and uncertainties that could cause actual results to differ materially from those stated or implied. Our major risk is related to uncertainties associated with the cash flow from our pre-need and at-need sales, our trusts, and financings, which may impact our ability to meet our financial projections, our ability to service our debt and pay distributions, and our ability to increase our distributions.

Our additional risks and uncertainties, include, but are not limited to, the following: uncertainties associated with future revenue and revenue growth; uncertainties associated with the integration or anticipated benefits of our recent acquisitions or any future acquisitions; our ability to complete and fund additional acquisitions; the effect of economic downturns; the impact of our significant leverage on our operating plans; the decline in the fair value of certain equity and debt securities held in our trusts; our ability to attract, train and retain an adequate number of sales people; uncertainties associated with the volume and timing of pre-need sales of cemetery services and products; increased use of cremation; changes in the death rate; changes in the political or regulatory environments, including potential changes in tax accounting and trusting policies; our ability to successfully implement a strategic plan relating to achieving operating improvements, strong cash flows and further deleveraging; our ability to successfully compete in the cemetery and funeral home industry; litigation or legal proceedings that could expose us to significant liabilities and damage our reputation; the effects of cyber security attacks due to our significant reliance on information technology; uncertainties relating to the financial condition of third-party insurance companies that fund our pre-need funeral contracts; and various other uncertainties associated with the death care industry and our operations in particular.

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (“2014 Form 10-K”), our Current Report on Form 8-K filed with the SEC on July 6, 2015 and our other reports filed with the SEC.

 

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Except as required under applicable law, we assume no obligation to update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Overview

Cemetery Operations

We are currently the second largest owner and operator of cemeteries in the United States. As of September 30, 2015, we operated 306 cemeteries in 27 states and Puerto Rico. We own 275 of these cemeteries and we manage or operate the remaining 31 under lease, operating or management agreements. As a result of the agreements, other control arrangements and applicable accounting rules, we have treated 16 of these cemeteries as acquisitions for accounting purposes.

We operate 15 cemeteries under long-term lease, operating or management agreements that do not qualify as acquisitions for accounting purposes. As a result, we did not consolidate all of the existing assets and liabilities related to these cemeteries. We have consolidated the existing assets and liabilities of these cemeteries’ merchandise and perpetual care trusts as variable interest entities since we control and receive the benefits and absorb any losses from operating these trusts. Under these long-term lease, operating or management agreements, which are subject to certain termination provisions, we are the exclusive operator of these cemeteries. We earn revenues related to sales of merchandise, services, and interment rights and incur expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, we will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. We have also recognized the existing merchandise liabilities assumed as part of these agreements.

We sell cemetery products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Revenues from cemetery operations accounted for approximately 81.8% and 81.0% of our total revenues during the three and nine months ended September 30, 2015, respectively, as compared to 84.3% and 83.4% during the same periods last year. The change in the contribution to total revenues was primarily due to one large land sale from the first quarter of 2014, as well as higher contributions during the current period from our 2014 funeral home acquisitions.

Our results of operations for our cemetery operations are determined primarily by the volume of sales of products and services and the timing of product delivery and performance of services. We derive our cemetery revenues primarily from:

 

    at-need sales of cemetery interment rights, merchandise and services, which we recognize as revenue when we have delivered the related merchandise or performed the service;

 

    pre-need sales of cemetery interment rights, which we generally recognize as revenues when we have collected 10% of the sales price from the customer;

 

    pre-need sales of cemetery merchandise, which we recognize as revenues when we satisfy the criteria specified below for delivery of the merchandise to the customer;

 

    pre-need sales of cemetery services which we recognize as revenues when we perform the services for the customer;

 

    investment income from assets held in our merchandise trust, which we recognize as revenues when we deliver the underlying merchandise or perform the underlying services and recognize the associated sales revenue as discussed above;

 

    investment income from perpetual care trusts, excluding realized gains and losses on the sale of trust assets, which we recognize as revenues as the income is earned in the trust; and

 

    other items, such as interest income on pre-need installment contracts and sales of land.

The criteria for recognizing revenue related to the sale of cemetery merchandise is that such merchandise is “delivered” to our customer, which generally means that:

 

    the merchandise is complete and ready for installation; or

 

    the merchandise is either installed or stored at an off-site location, at no additional cost to us, and specifically identified with a particular customer; and

 

    the risks and rewards of ownership have passed to the customer.

 

39


We generally satisfy these delivery criteria by purchasing the merchandise and either installing it on our cemetery property or storing it, at the customer’s request, in third-party warehouses, at no additional cost to us, until the time of need. With respect to burial vaults, we install the vaults rather than storing them to satisfy the delivery criteria. When merchandise is stored for a customer, we may issue a certificate of ownership to the customer to evidence the transfer to the customer of the risks and rewards of ownership.

Pre-need Sales

As previously noted, we do not recognize revenue on pre-need sales of merchandise and services until we have delivered the merchandise or performed the services. Accordingly, deferred revenues from pre-need sales and related merchandise trust earnings are reflected as a liability on our unaudited condensed consolidated balance sheet in deferred cemetery revenues, net.

Total deferred cemetery revenues, net, also includes deferred revenues from pre-need sales that were entered into by entities we acquired prior to the time we acquired them. This includes both those entities that we acquired at the time of the formation of Cornerstone and other subsequent acquisitions. Our profit margin on pre-need sales entered into by entities we subsequently acquired is generally less than our profit margin on other pre-need sales because, in accordance with industry practice at the time these acquired pre-need sales were made, none of the selling expenses were recognized at the time of sale. As a result, we are required to recognize all of the expenses (including deferred selling expenses) associated with these acquired pre-need sales when we recognize the revenues from that sale.

Pre-need products and services are typically sold on an installment basis. Subject to state law, these contracts are normally subject to “cooling-off” periods, generally between three and thirty days, during which the customer may elect to cancel the contract and receive a full refund of amounts paid. Also, subject to applicable state law, we are generally permitted to retain the amounts already paid on contracts, including any amounts that were required to be deposited into trust, on contracts cancelled after the “cooling-off” period. Historical post “cooling-off” period cancellations total approximately 10% of our pre-need sales (based on contract dollar amounts). If the products and services purchased under a pre-need contract are needed for interment before payment has been made in full, generally the balance due must be immediately paid in full.

Contracts related to pre-need installment sales are usually for a period not to exceed 60 months, with payments of principal and interest required. Pre-need sales contracts normally contain provisions for both principal and interest. For those contracts that do not bear a market rate of interest, we impute such interest based upon the prime rate plus 150 basis points, which resulted in a rate of 4.75% for the three and nine months ended September 30, 2015 and 2014.

We normally offer prepayment incentives to customers whose pre-need contracts are longer than 36 months and bear interest. If those customers pay their contracts in full in less than 12 months, we rebate the interest that we have collected from them. Even though this rebate policy reduces the amount of interest income we receive on our accounts receivable, the net effect is an increase in our immediate cash flow.

In certain cases, pre-need contracts will be cancelled before they are fully paid. In these circumstances, we are generally permitted to retain amounts already paid to us, including any amounts that were required to be deposited into trust. In certain other cases, the products and services purchased under a pre-need contract are needed for interment before payment has been made in full. In these cases, we are generally entitled to be immediately paid in full for any amounts still outstanding.

At-need Sales

Revenue on at-need merchandise sales is deferred until the time that such merchandise is delivered. The lag between the contract origination and delivery is normally minimal. At-need sales of products and services are generally required to be paid for in full at the time of sale. At that time, we will deposit amounts, as legally required, into our perpetual care trusts. We are not required to deposit any amounts from our at-need sales into merchandise trusts.

Expenses

We analyze and categorize our operating expenses as follows:

1. Cost of goods sold and selling expenses

 

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Cost of goods sold reflects the actual cost of purchasing products and performing services. Sales of cemetery lots and interment rights, whether at-need or pre-need, typically have a lower cost of goods sold than other merchandise that we sell.

Selling expenses consist of salesperson and sales management payroll costs, including selling commissions, bonuses and employee benefits. We self-insure medical expenses of our employees up to certain individual and aggregate limits over which we have stop-loss insurance coverage. Our self-insurance policy may result in variability in our future operating expenses. Selling expenses also include other costs of obtaining product and service sales, such as advertising, marketing, postage and telephone.

Direct costs associated with pre-need sales of cemetery merchandise and services, such as sales commissions and cost of goods sold, are reflected in the unaudited condensed consolidated balance sheet in deferred selling and obtaining costs and deferred cemetery revenues, net, respectively, and are expensed as the merchandise is delivered or the services are performed. Indirect costs, such as marketing and advertising costs, are expensed in the period in which they are incurred.

2. Cemetery Expenses

Cemetery expenses represent the cost to maintain and repair our cemetery properties and consist primarily of labor and equipment, utilities, real estate taxes and other maintenance items. Repairs necessary to maintain our cemeteries are expensed as they are incurred. Other maintenance costs required over the long term to maintain the operating capacity of our cemeteries, such as to build roads and install sprinkler systems are capitalized.

3. General and administrative expenses

General and administrative expenses, which do not include corporate overhead, primarily include personnel costs, insurance and other costs necessary to maintain our cemetery offices.

4. Depreciation and amortization

We depreciate our property and equipment on a straight-line basis over their estimated useful lives.

5. Acquisition related costs

Acquisition related costs, which include legal fees and other third party costs incurred in acquisition related activities, are expensed as incurred.

Funeral Home Operations

As of September 30, 2015, we owned and operated 103 funeral homes. These properties are located in 19 states and Puerto Rico. Forty-six of our funeral homes are located on the grounds of cemeteries that we own.

We derive revenues at our funeral homes from the sale of funeral home merchandise, including caskets and related funeral merchandise, and services, including removal and preparation of remains, the use of our facilities for visitation, worship and performance of funeral services and transportation services. We sell these services and merchandise generally at the time of need utilizing salaried licensed funeral directors. Our funeral home operations also include revenues related to the sale of term and final expense whole life insurance in markets where we do not own a funeral home, as well as pre-need whole life insurance in markets where we own a funeral home. Funeral home revenues accounted for approximately 18.2% and 19.0% of our total revenues during the three and nine months ended September 30, 2015, respectively, as compared to 15.7% and 16.6% during the same periods last year.

Pursuant to state law, a portion of proceeds received from pre-need funeral service contracts is put into trust while amounts used to defray the initial administrative costs are not. All investment earnings generated by the assets in the trust (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed. The balance of the amounts in these trusts is included within the merchandise trusts.

We generally include revenues from pre-need casket sales in the results of our cemetery operations. However, some states require that caskets be sold by funeral homes, and revenues from casket sales in those states are included in our funeral home results.

 

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Our funeral home operating expenses consist primarily of compensation to our funeral directors, day-to-day costs of managing the business and the cost of caskets.

Corporate

We incur fixed costs for corporate overhead primarily for centralized functions, such as payroll, accounting, collections and professional fees. We also incur expenses related to reporting requirements under U.S. federal securities laws and certain other additional expenses of being a public company.

2015 Developments

Significant business developments for 2015 include the following:

 

    On June 5, 2015, we entered into a lease agreement for a new corporate office location in Trevose, Pennsylvania. The lease term will commence on February 1, 2016 and will expire on July 31, 2028, with certain contractual renewal options.

 

    On July 10, 2015, we completed a follow-on public offering of 2,415,000 common units at a public offering price of $29.63 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.9 million. The proceeds were used to pay down outstanding indebtedness under our Credit Facility.

 

    During the third quarter of 2015, we acquired three cemeteries in Illinois, three funeral homes in Illinois and two funeral homes in Florida for aggregate consideration of $14.0 million. After these acquisitions, we operate 306 cemeteries and 103 funeral homes in 28 states and Puerto Rico.

Current Market Conditions and Economic Developments

As of September 30, 2015, the amortized cost of the assets in our merchandise trusts exceeded their market value by 15.4%, compared to December 31, 2014 when the market value of the assets exceeded their amortized cost by 0.5%. As of September 30, 2015, the amortized cost of the assets in our perpetual care trusts exceeded their market value by 9.5% as compared to December 31, 2014 when the market value of the assets exceeded their amortized cost by 9.7%. Changes in the cost to market ratios are due in part to the repositioning of assets within our merchandise and perpetual care trust portfolios, as well as declines in market conditions.

As of September 30, 2015, the majority of our long-term debt consisted of $175.0 million in Senior Notes due 2021, the offering of which took place in May of 2013, and $113.5 million of borrowings under our credit facility, which expires in 2019. As of September 30, 2015, we had $66.5 million of total availability under our revolving credit facility. The revolving credit facility provides for both acquisition draws, which are used primarily to finance acquisitions, acquisition related costs and mausoleum construction costs, and working capital draws, which are used to finance all other corporate costs. As of September 30, 2015, we had $75.0 million of working capital draws, which are limited to a borrowing formula of 85% of eligible account receivables. This limit was $135.5 million at September 30, 2015.

On July 10, 2015, we completed a follow-on public offering of 2,415,000 common units at a public offering price of $29.63 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.9 million. The proceeds were used to pay down outstanding indebtedness under our Credit Facility.

The aggregate values of pre-need and at-need contracts written were $86.1 million and $254.6 million for the three and nine months ended September 30, 2015, respectively, as compared to $77.6 million and $219.2 million during the same periods last year.

Impact on Our Ability to Meet Our Debt Covenants

Debt covenants in the Credit Agreement specifically relate to a certain measure of Consolidated EBITDA and certain coverage and leverage ratios as defined in the Credit Agreement described below.

Consolidated EBITDA is a non-GAAP financial measure and is primarily related to the current period value of contracts written, investment income from the merchandise and perpetual care trusts, and current expenses incurred.

 

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We have two primary debt covenants that are dependent upon our financial results, the Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio. The Consolidated Leverage Ratio relates to the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA. Our Consolidated Leverage Ratio was 3.00 at September 30, 2015 compared to a maximum allowed ratio of 4.00. The Consolidated Debt Service Coverage Ratio relates to the ratio of Consolidated EBITDA to Consolidated Debt Service. Our Consolidated Debt Service Coverage Ratio was 4.47 at September 30, 2015 compared to a minimum allowed ratio of 2.50.

Segment Reporting and Related Information

The Company is organized into five distinct reportable segments, which are classified as Cemetery Operations—Southeast, Cemetery Operations—Northeast, Cemetery Operations—West, Funeral Homes, and Corporate.

We chose this level of organization and disaggregation of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from each other; b) we have organized our management personnel at these operational levels; and c) this is the level at which our chief decision makers and other senior management evaluate performance.

The Cemetery Operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. Our cemetery operations are disaggregated into three different geographically based segments. The nature of our customers differs in each of our regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.

Our Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the Cemetery Operations segments.

Our Corporate segment includes various home office expenses, miscellaneous selling, cemetery and general administrative expenses that are not allocable to other operating segments, certain depreciation and amortization expenses and acquisition related costs.

Critical Accounting Policies and Estimates

The unaudited condensed consolidated financial statements are prepared in conformity with GAAP. The preparation of these consolidated financial statements required us to make estimates, judgments and assumptions that affected the reported amounts of assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods (see Note 1 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2014 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2014 Form 10-K.

Results of Operations – Segments

We account for and analyze the results of operations for our segments on a basis of accounting that is different from GAAP. We reconcile these non-GAAP accounting results of operations to GAAP based amounts at the consolidated level. This reconciliation is included in Note 14 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

The method of accounting we utilize to analyze our overall results of operations, including segment results, provides for a production-based view of our business. Under the production-based view, we recognize revenues at their contract value at the point in time in which the contract is written, less a historic cancellation reserve. All related costs are expensed in the period the contract is recognized as revenue. In contrast, GAAP requires that we defer all revenues, and the direct costs associated with these revenues, until we meet certain delivery and performance requirements. The nature of our business is such that there is no meaningful relationship between the time that elapses from the date a contract is

 

43


executed and the date the underlying merchandise is delivered or the service, delivery and performance requirements are met. Further, certain factors affecting this time period, such as weather and supplier issues, are out of our control. As a result, during a period of growth, operating profits as defined by GAAP will tend to lag behind operating profits on a production-based view because of the required deferral of revenues. Our performance-based view ignores these delays and presents results based upon the underlying value of contracts written. We believe this is the most reliable indicator of our performance for a given period as the value of contracts written less a historical cancellation reserve reflects the economic value added during a given period of time. Accordingly, the ensuing segment discussion is on a basis of accounting that differs from GAAP. See Note 1 to the consolidated financial statements included in the 2014 Form 10-K for a more detailed discussion of our accounting policies under GAAP.

Three Months Ended September 30, 2015 Compared to Three Months Ended September 30, 2014

Cemetery Segments

Cemetery Operations – Southeast

In June of 2014, we acquired nine properties in our Cemetery Operations – Southeast segment. The acquired properties had less impact on the results for the three months ended September 30, 2014 as compared to the results for the three months ended September 30, 2015. These properties contributed approximately $4.2 million of the revenues and $2.6 million of the costs and expenses for the three months ended September 30, 2015 as compared to $2.5 million and $1.9 million, respectively, for the same period last year.

The table below compares the results of operations for our Cemetery Operations – Southeast for the three months ended September 30, 2015 to the same period last year:

 

     Three months ended September 30,  
     2015      2014      Change ($)      Change (%)  
    

(in thousands)

(non-GAAP)

 
    

Total revenues

   $ 36,102       $ 32,750       $ 3,352         10.2

Total costs and expenses

     27,157         25,677         1,480         5.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 8,945       $ 7,073       $ 1,872         26.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $3.0 million in the value of pre-need contracts written, $0.5 million in the value of at-need contracts written and $0.5 million in interest and other income, partially offset by a $0.6 million decrease in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was primarily related to:

 

    A $0.9 million increase in the cost of goods sold primarily attributable to the increase in the value of contracts written and changes in product mix.

 

    A $0.3 million increase in selling expenses primarily due to increases in commissions and personnel costs.

 

    A $0.3 million increase in general and administrative expenses primarily due to an increase of $0.1 million in professional fees and a $0.1 million in taxes with the remainder attributable to increases in other general expense categories.

Cemetery Operations – Northeast

During the second quarter of 2014, we acquired three properties and separately obtained the rights from the Archdiocese of Philadelphia to operate thirteen properties in our Cemetery Operations – Northeast segment. These acquired properties had less impact on the results for the three months ended September 30, 2014 as compared to the

 

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results for the three months ended September 30, 2015. These properties contributed approximately $10.5 million of the revenues and $7.2 million of the costs and expenses of the segment for the three months ended September 30, 2015 as compared to $7.6 million and $5.5 million, respectively, for the same period last year.

The table below compares the results of operations for our Cemetery Operations – Northeast for the three months ended September 30, 2015 to the same period last year:

 

     Three months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 24,724       $ 24,268       $ 456         1.9

Total costs and expenses

     18,112         16,505         1,607         9.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 6,612       $ 7,763       $ (1,151      -14.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $2.2 million in the value of pre-need contracts written, $0.2 million in the value of at-need contracts written and $0.4 million in interest and other income, partially offset by a $2.3 million decrease in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was primarily related to:

 

    A $0.8 million increase in the cost of goods sold primarily attributable to the increase in the value of contracts written and changes in product mix.

 

    A $0.4 million increase in selling expenses primarily due to increases of $0.2 million in commissions and personnel costs and a $0.2 million increase in advertising and marketing costs.

 

    A $0.4 million increase in general and administrative expenses primarily due to increases of $0.1 million in both insurance costs and personnel costs and $0.2 million in professional fees.

Cemetery Operations – West

During the third quarter of 2015, we acquired three properties in our Cemetery Operations – West segment. The results of operations for these properties have no impact on the results for the three months ended September 30, 2014, but are included in the results for the three months ended September 30, 2015. The additions have contributed approximately $0.5 million of the revenues and $0.3 million of the costs and expenses of the segment for the three months ended September 30, 2015.

The table below compares the results of operations for our Cemetery Operations – West for the three months ended September 30, 2015 to the same period last year:

 

     Three months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 18,895       $ 20,145       $ (1,250      -6.2

Total costs and expenses

     12,402         14,007         (1,605      -11.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 6,493       $ 6,138       $ 355         5.8
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Revenues

The decrease in revenues was primarily related to decreases of $2.5 million in income from our trusts and $0.1 million in the value of at-need contracts written, partially offset by increases of $1.1 million in the value of pre-need contracts written and $0.2 million in interest and other income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net decrease in costs and expenses was primarily related to:

 

    A $0.2 million increase in the cost of goods sold primarily attributable to the change in the value of contracts written and changes in product mix.

 

    A $1.8 million decrease in general and administrative expenses primarily related to a decrease of $1.7 million in professional fees and legal costs related to a legal settlement in the prior year.

Funeral Homes Segment

In the fourth quarter of 2014, we acquired two funeral homes. During the third quarter of 2015, we acquired five funeral homes. Therefore, the results of operations for these properties have no impact on the results for the three months ended September 30, 2014 as compared to the results for the three months ended September 30, 2015. The additions have contributed approximately $1.1 million of the revenues and $0.6 million of the costs and expenses of the segment for the three months ended September 30, 2015.

The table below compares the results of operations for our Funeral Homes segment for the three months ended September 30, 2015 to the same period last year:

 

     Three months ended September 30,  
     2015      2014      Change ($)      Change (%)  
    

(in thousands)

(non-GAAP)

 
  

Total revenues

   $ 17,077       $ 14,457       $ 2,620         18.1

Total costs and expenses

     12,405         11,541         864         7.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 4,672       $ 2,916       $ 1,756         60.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily attributable to increases of $1.1 million in the value of at-need contracts written, $1.6 million in insurance-related revenues and $0.4 million in other income, partially offset by a decrease of $0.5 million in the value of pre-need contracts written.

Total costs and expenses

The net increase in costs and expenses was primarily attributable to increases of $0.1 million in personnel costs, $0.2 million in facility related costs, $0.9 million in expenses related to insurance sales and $0.1 million in advertising and marketing costs, partially offset by a decrease of $0.4 million in merchandise costs.

 

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Corporate Segment

The table below compares expenses incurred by the Corporate segment for the three months ended September 30, 2015 to the same period last year:

 

     Three months ended September 30,  
     2015      2014      Change ($)      Change (%)  
    

(in thousands)

(non-GAAP)

 
  

Selling, cemetery and general and administrative expenses

   $ 692       $ 631       $ 61         100.0

Depreciation and amortization

     598         236         362         153.4

Acquisition related costs, net of recoveries

     963         451         512         113.5

Corporate expenses

           

Corporate personnel expenses

     3,598         3,425         173         5.1

Other corporate expenses

     4,554         4,967         (413      -8.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate overhead

     8,152         8,392         (240      -2.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate expenses

   $ 10,405       $ 9,710       $ 695         7.2
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in corporate expenses was primarily driven by increases of $0.5 million acquisition related costs, $0.4 million in depreciation and amortization and $0.2 million in personnel costs. These increases were partially offset by a decrease in corporate overhead of $0.4 million, primarily related to a reduction in professional fees. Acquisition costs may vary from period to period depending on the amount of acquisition activity that takes place.

Reconciliation of Segment Results of Operations to Consolidated Results of Operations

As discussed in the segment sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, revenues and their associated costs as reported at the segment level are not deferred.

Periodic consolidated revenues recorded in accordance with GAAP reflect the amount of total merchandise and services that were delivered during the period. Accordingly, period over period changes to revenues can be impacted by:

 

  Changes in the value of contracts written and other revenues generated during a period that are delivered in their period of origination and are recognized as revenue and not deferred as of the end of their period of origination.

 

  Changes in merchandise and services that are delivered during a period that had been originated during a prior period.

The table below analyzes results of operations and the changes therein for the three months ended September 30, 2015 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/or changes in the timing of when merchandise and services were delivered. Since March 31, 2014, we acquired 15 cemeteries and 16 funeral homes, and obtained the rights from the Archdiocese of Philadelphia to operate 13 cemetery properties. The results of operations for these properties had either less or no impact on the results for the three months

 

47


ended September 30, 2014, but are included in the results for the three months ended September 30, 2015. These properties are contributing a significant portion of the increases to revenues and costs and expenses in the table below.

 

     Three months ended
September 30, 2015
     Three months ended
September 30, 2014
              
     (in thousands)      (in thousands)               
     Segment
Results
(non-GAAP)
     GAAP
Adjustments
    GAAP
Results
     Segment
Results
(non-GAAP)
     GAAP
Adjustments
    GAAP
Results
     Change in
GAAP results
($)
    Change in
GAAP results
(%)
 

Revenues

                    

Pre-need cemetery revenues

   $ 42,492       $ (15,008   $ 27,484       $ 36,170       $ (5,030   $ 31,140       $ (3,656     -11.7

At-need cemetery revenues

     25,151         (618     24,533         24,746         244        24,990         (457     -1.8

Investment income from trusts

     8,691         (109     8,582         13,985         (6,740     7,245         1,337        18.5

Interest income

     2,233         —          2,233         1,807         —          1,807         426        23.6

Funeral home revenues

     17,077         (2,835     14,242         14,457         (2,218     12,239         2,003        16.4

Other cemetery revenues

     1,154         (28     1,126         455         298        753         373        49.5
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     96,798         (18,598     78,200         91,620         (13,446     78,174         26        0.0
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Costs and expenses

                    

Cost of goods sold

     11,332         (2,604     8,728         9,550         (488     9,062         (334     -3.7

Cemetery expense

     18,245         —          18,245         18,076         —          18,076         169        0.9

Selling expense

     18,034         (3,387     14,647         17,377         (883     16,494         (1,847     -11.2

General and administrative expense

     8,819         —          8,819         9,808         —          9,808         (989     -10.1

Corporate overhead

     8,152         —          8,152         8,392         —          8,392         (240     -2.9

Depreciation and amortization

     3,311         —          3,311         3,112         —          3,112         199        6.4

Funeral home expense

     11,625         (417     11,208         10,674         (315     10,359         849        8.2

Acquisition related costs, net of recoveries

     963         —          963         451         —          451         512        113.5
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     80,481         (6,408     74,073         77,440         (1,686     75,754         (1,681     -2.2
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit

   $ 16,317       $ (12,190   $ 4,127       $ 14,180       $ (11,760   $ 2,420       $ 1,707        70.5
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Revenues

Pre-need cemetery revenues were $27.5 million for the three months ended September 30, 2015, a decrease of $3.6 million, or 11.7%, as compared to $31.1 million during the same period last year. The decrease was primarily caused by an increase of $9.9 million in deferred revenue as activity on contracts written exceeded activity related to delivered products and services to a greater degree during the current period. This decrease was partially offset by an increase of $6.3 million in the value of cemetery contracts written.

At-need cemetery revenues were $24.5 million for the three months ended September 30, 2015, a decrease of $0.5 million, or 1.8%, as compared to $25.0 million during the same period last year. The decrease was primarily caused by an increase of $0.9 million in deferred revenue as activity on contracts written exceeded activity related to delivered products and services to a greater degree during the current period. This decrease was partially offset by an increase of $0.4 million in the value of cemetery contracts written.

Investment income from trusts was $8.6 million for the three months ended September 30, 2015, an increase of $1.4 million, or 18.5%, as compared to $7.2 million during the same period last year. On a segment basis, we had a decrease of $5.3 million, which was offset by an adjustment of $6.7 million related to funds for which we have met the requirements that would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Interest income on accounts receivable was $2.2 million for the three months ended September 30, 2015, an increase of $0.4 million, or 23.6%, as compared to $1.8 million during the same period last year, primarily due to an increase in accounts receivable.

Funeral home revenues were $14.2 million for the three months ended September 30, 2015, an increase of $2.0 million, or 16.4%, as compared to $12.2 million during the same period last year. The increase was primarily driven by the funeral homes we acquired in 2014 and 2015 and increased revenues from insurance sales.

Other cemetery revenues were $1.1 million during the three months ended September 30, 2015 as compared to $0.8 million in the same period last year.

Costs and Expenses

The cost of goods sold was $8.7 million for the three months ended September 30, 2015, a decrease of $0.4 million, or 3.7%, as compared to $9.1 million during the same period last year. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 16.8% during the three months ended September 30, 2015 as compared to 16.1% during the same period last year. The change in the ratio primarily relates to changes in product mix.

Cemetery expenses were $18.2 million during the three months ended September 30, 2015, an increase of $0.1 million, or 0.9%, compared to $18.1 million during the same period last year. Within this category, there was an increase

 

48


of $0.4 million in real estate tax expense, partially offset by a decrease of $0.3 million in repair and maintenance costs. Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio of such expenses to segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs relative to our overall cemetery operations. An increase in the ratio indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the ratio indicates that expense growth did not exceed increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 27.0% during the three months ended September 30, 2015 as compared to 29.7% during the same period last year.

Selling expenses were $14.6 million during the three months ended September 30, 2015, a decrease of $1.9 million, or 11.2%, as compared to $16.5 million during the same period last year. The ratio of selling expenses to cemetery revenues was 28.2% during the three months ended September 30, 2015 as compared to 29.4% during the same period last year. This is largely due to segment-based increases of $0.8 million in commissions and personnel costs, offset by a $2.5 million increase in deferred selling expenses. The ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority of our selling expenses are directly related to sales commissions and bonuses, which would be directly related to changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to follow relatively consistent trends over the long-term.

General and administrative expenses were $8.8 million during the three months ended September 30, 2015, a decrease of $1.0 million, or 10.1%, as compared to $9.8 million during the same period last year. The decrease was due to a decrease of $1.4 million in professional fees and legal costs primarily related to a legal settlement, partially offset by $0.1 million increases in both insurance and tax expenses with the remainder attributable to increases in other general expense categories. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of such expenses to segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our general and administrative costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value of contracts written, while a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to decrease slightly as many of the expenses in this category are fixed in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 13.0% during the three months ended September 30, 2015 as compared to 16.1% during the same period last year.

Total corporate overhead was $8.2 million for the three months ended September 30, 2015, a decrease of $0.2 million, or 2.9% compared to $8.4 million during the same period last year. The decrease was primarily driven by a decrease in professional fees, partially offset by an increase in personnel costs.

Depreciation and amortization was $3.3 million for the three months ended September 30, 2015, an increase of $0.2 million, or 6.4%, as compared to $3.1 million during the same period last year. The majority of the increase was attributable to acquired properties and amortization of the intangible assets relating to the lease and management agreements entered into in 2014.

Funeral home expenses were $11.2 million for the three months ended September 30, 2015, an increase of $0.8 million, or 8.2%, as compared to $10.4 million during the same period last year. The increase was primarily attributable to an increase of $0.9 million in expenses relating to insurance sales.

Acquisition related costs were $1.0 million for the three months ended September 30, 2015, an increase of $0.5 million, or 113.5%, as compared to $0.5 million during the same period last year. These costs may vary from period to period depending on the amount of acquisition activity that takes place.

 

49


Non-segment Allocated Results

Certain statement of operations amounts are not allocated to segment operations. These amounts are those line items that can be found on our unaudited condensed consolidated statement of operations below operating profit and above net income (loss).

The table below summarizes these items and the changes between the three months ended September 30, 2015 and 2014:

 

     Three months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  

Legal settlement

   $ 3,000       $ —         $ 3,000         100.0

Gain on sale of funeral home

     —           244         (244      -100.0

Gain on acquisitions

     1,540         —           1,540         100.0

Interest expense

     5,669         5,268         401         7.6

Income tax expense (benefit)

   $ 400       $ 664       $ (264      -39.8

During the third quarter of 2015, the Company recorded a charge pertaining to a legal settlement. The $3.0 million includes both the settlement amount and legal fees related to the case.

The gain on sale of funeral home recorded during the three months ended September 30, 2014 pertains to the sale of one funeral home in California during September 2014.

The gain on acquisitions recorded during the three months ended September 30, 2015 relates to our third quarter 2015 acquisitions.

There was an increase in interest expense on amounts outstanding under the credit facility due to increases in both amounts outstanding and interest rates. Average amounts outstanding under the credit facility were $116.0 million and $92.4 million during the three months ended September 30, 2015 and 2014, respectively.

We had income tax expense of $0.4 million for the three months ended September 30, 2015, as compared to an income tax expense of $0.7 million during the same period last year. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

Nine Months Ended September 30, 2015 Compared to Nine Months Ended September 30, 2014

Cemetery Operations – Southeast

During the first and second quarters of 2014, we acquired ten properties in our Cemetery Operations – Southeast segment. The results of operations for these acquired properties have less impact on the results for the nine months ended September 30, 2014 as compared to the results for the nine months ended September 30, 2015. The acquisitions contributed approximately $11.7 million of the revenues and $7.6 million of the costs and expenses for the nine months ended September 30, 2015 as compared to $3.2 million and $2.5 million, respectively, for the same period last year.

The table below compares the results of operations for our Cemetery Operations – Southeast for the nine months ended September 30, 2015 to the same period last year:

 

     Nine months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 112,498       $ 100,404       $ 12,094         12.0

Total costs and expenses

     82,766         75,268         7,498         10.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 29,732       $ 25,136       $ 4,596         18.3
  

 

 

    

 

 

    

 

 

    

 

 

 

 

50


Revenues

The increase in revenues was primarily related to increases of $5.3 million in the value of pre-need contracts written, $3.8 million in the value of at-need contracts written, $1.2 million in interest and other income and $1.8 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was primarily related to:

 

    A $2.3 million increase in cost of goods sold primarily attributable to the increase in the value of contracts written and changes in product mix.

 

    A $1.5 million increase in cemetery expenses primarily due to increases of $0.9 million in labor costs and $0.3 million in repairs and maintenance costs.

 

    A $2.5 million increase in selling expenses primarily due to increases in commissions and personnel costs.

 

    A $0.9 million increase in general and administrative expense primarily due to increases of $0.3 million in both personnel costs and insurance costs and $0.1 million in repairs and maintenance expense.

 

    A $0.3 million increase in depreciation expense.

Cemetery Operations – Northeast

During the second quarter of 2014, we acquired three properties and separately obtained the rights from the Archdiocese of Philadelphia to operate thirteen properties in our Cemetery Operations – Northeast segment. The results of operations for these acquired properties have less impact on the results for the nine months ended September 30, 2014 as compared to the results for the nine months ended September 30, 2015. The additions have contributed approximately $30.4 million of the revenues and $20.7 million of the costs and expenses of the segment for the nine months ended September 30, 2015 as compared to $9.6 million and $7.4 million, respectively, for the same period last year.

The table below compares the results of operations for our Cemetery Operations – Northeast for the nine months ended September 30, 2015 to the same period last year:

 

     Nine months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 73,462       $ 61,112       $ 12,350         20.2

Total costs and expenses

     53,581         39,295         14,286         36.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 19,881       $ 21,817       $ (1,936      -8.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $11.2 million in the value of pre-need contracts written and $7.0 million in the value of at-need contracts written, partially offset by a $3.0 million decrease in other income and $2.8 million decrease in income from our trusts. The comparison of other income was affected by the one-time land sale in the first quarter of 2014. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was primarily related to:

 

    A $2.6 million increase in cost of goods sold primarily attributable to the increase in the value of contracts written and changes in product mix.

 

    A $4.9 million increase in cemetery expenses primarily attributable to increases of $3.0 million in labor costs, $1.2 million in repairs and maintenance expense, $0.1 million in utility and fuel costs and $0.4 million in real estate tax expense.

 

51


    A $3.9 million increase in selling expenses primarily attributable to increases of $3.1 million in commissions and personnel costs and $0.6 million in advertising and marketing expenses.

 

    A $2.3 million increase in general and administrative expenses primarily due to increases of $0.5 million in insurance costs, $0.4 million in professional fees and $0.9 million in personnel costs.

 

    A $0.6 million increase in depreciation and amortization expenses, $0.4 million of which was attributable to the amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia.

Cemetery Operations – West

During the third quarter of 2015, we acquired three properties in our Cemetery Operations – West segment. The results of operations for these properties have no impact on the results for the nine months ended September 30, 2014, but are included in the results for the nine months ended September 30, 2015. The additions have contributed approximately $0.5 million of the revenues and $0.3 million of the costs and expenses of the segment for the nine months ended September 30, 2015.

The table below compares the results of operations for our Cemetery Operations – West for the nine months ended September 30, 2015 to the same period last year:

 

     Nine months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 62,131       $ 61,979       $ 152         0.2

Total costs and expenses

     38,425         40,478         (2,053      -5.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 23,706       $ 21,501       $ 2,205         10.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $1.3 million in the value of pre-need contracts written, $0.1 million in the value of at-need contracts written and $0.7 million in interest and other income, partially offset by a decrease of $1.9 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net decrease in costs and expenses was primarily related to:

 

    A $0.6 million decrease in cost of goods sold primarily attributable to changes in product mix.

 

    A $0.1 million decrease in cemetery expenses primarily due to a decrease of $0.3 million in repairs and maintenance expenses, partially offset by an increase of $0.2 million in real estate tax expense.

 

    A $0.9 million increase in selling expenses primarily due to a $0.8 million increase in commission and personnel costs and $0.1 million increase in travel expenses.

 

    A $2.1 million decrease in general and administrative expenses primarily due to a decrease in professional fees and legal costs related to a legal settlement in the prior year.

 

    A $0.2 million decrease in depreciation expense.

Funeral Homes Segment

Since January 1, 2014, we have acquired sixteen properties in our Funeral Home operations. The first nine properties were acquired during the second quarter of 2014, the next two properties were acquired during the fourth quarter of 2014 and the remaining five were acquired during the third quarter of 2015. Therefore, the results of operations for these properties have either less or no impact on the results for the nine months ended September 30, 2014 as compared to the results for the nine months ended September 30, 2015. The additions have contributed approximately $9.1 million of the revenues and $6.6 million of the costs and expenses of the segment for the nine months ended September 30, 2015 as compared to $2.9 million and $2.0 million, respectively, for the same period last year.

 

52


The table below compares the results of operations for our Funeral Homes segment for the nine months ended September 30, 2015 to the same period last year:

 

     Nine months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 50,226       $ 40,777       $ 9,449         23.2

Total costs and expenses

     39,292         32,159         7,133         22.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 10,934       $ 8,618       $ 2,316         26.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $2.3 million in the value of pre-need contracts written, $4.5 million in the value of at-need contracts written, $2.3 million in insurance-related revenues and $0.3 million in other income.

Total costs and expenses

The increase in costs and expenses was primarily attributable to increases of $2.4 million in personnel costs, $0.9 million in merchandise costs, $0.7 million in other service and supplies costs, $0.6 million in facility costs, $0.6 million in general and administrative expenses, $1.8 million in expenses related to insurance sales and $0.1 million in advertising and marketing expenses.

Corporate Segment

The table below compares expenses incurred by the Corporate segment for the nine months ended September 30, 2015 to the same period last year:

 

     Nine months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Selling, cemetery and general and administrative expenses

   $ 1,974       $ 1,480       $ 494         33.4

Depreciation and amortization

     1,083         716         367         51.3

Acquisition related costs, net of recoveries

     1,648         2,040         (392      -19.2

Corporate expenses

           

Corporate personnel expenses

     10,987         9,784         1,203         12.3

Other corporate expenses

     15,992         12,610         3,382         26.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate overhead

     26,979         22,394         4,585         20.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate expenses

   $ 31,684       $ 26,630       $ 5,054         19.0
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in corporate expenses was primarily driven by an increase in corporate overhead of $4.6 million, which included increases of $1.4 million in professional fees, $1.2 million in personnel costs, $0.7 million in advertising expenses, $0.1 million in utility costs, $0.1 million in bank fees and $0.3 million in information technology costs with the remainder attributable to increases in other general expense categories. There was also an increase in corporate selling expenses, which included increases of $0.3 million in personnel costs and $0.2 million in advertising expenses. There was also an increase of $0.4 million in depreciation and amortization expenses. These increases were partially offset by a $0.4 million decrease in acquisition related costs. Acquisition costs may vary from period to period depending on the amount of acquisition activity that takes place.

 

53


Reconciliation of Segment Results of Operations to Consolidated Results of Operations

As discussed in the segment sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, cemetery revenues and their associated costs as reported at the segment level are not deferred.

The table below analyzes results of operations and the changes therein for the nine months ended September 30, 2015 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/or changes in the timing of when merchandise and services were delivered. During 2014, we acquired 13 cemeteries and 11 funeral homes, and obtained the rights from the Archdiocese of Philadelphia to operate 13 cemetery properties and during the third quarter of 2015, we acquired three cemeteries and five funeral homes. The results of operations for these properties have either less or no impact on the results for the nine months ended September 30, 2014, but are included in the results for the nine months ended September 30, 2015. These properties are contributing a significant portion of the increases to revenues and costs and expenses in the table below:

 

    Nine months ended
September 30, 2015
    Nine months ended
September 30, 2014
             
    (in thousands)     (in thousands)              
    Segment
Results
(non-GAAP)
    GAAP
Adjustments
    GAAP
Results
    Segment
Results
(non-GAAP)
    GAAP
Adjustments
    GAAP
Results
    Change in
GAAP results
($)
    Change in
GAAP results
(%)
 

Revenues

               

Pre-need cemetery revenues

  $ 122,397      $ (46,426   $ 75,971      $ 104,555      $ (26,957   $ 77,598      $ (1,627     -2.1

At-need cemetery revenues

    78,562        (4,476     74,086        67,704        614        68,318        5,768        8.4

Investment income from trusts

    36,317        (14,120     22,197        39,225        (19,529     19,696        2,501        12.7

Interest income

    6,617        —          6,617        5,848        —          5,848        769        13.1

Funeral home revenues

    50,226        (7,230     42,996        40,777        (5,313     35,464        7,532        21.2

Other cemetery revenues

    4,198        377        4,575        6,163        1,007        7,170        (2,595     -36.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

    298,317        (71,875     226,442        264,272        (50,178     214,094        12,348        5.8
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses

               

Cost of goods sold

    33,598        (7,980     25,618        29,307        (4,091     25,216        402        1.6

Cemetery expense

    53,789        —          53,789        47,546        —          47,546        6,243        13.1

Selling expense

    56,276        (11,950     44,326        48,404        (5,860     42,544        1,782        4.2

General and administrative expense

    27,340        —          27,340        26,333        —          26,333        1,007        3.8

Corporate overhead

    26,979        —          26,979        22,394        —          22,394        4,585        20.5

Depreciation and amortization

    9,207        —          9,207        7,993        —          7,993        1,214        15.2

Funeral home expense

    36,911        (1,404     35,507        29,813        (732     29,081        6,426        22.1

Acquisition related costs, net of recoveries

    1,648        —          1,648        2,040        —          2,040        (392     -19.2
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total costs and expenses

    245,748        (21,334     224,414        213,830        (10,683     203,147        21,267        10.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

  $ 52,569      $ (50,541   $ 2,028      $ 50,442      $ (39,495   $ 10,947      $ (8,919     -81.5
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Revenues

Pre-need cemetery revenues were $76.0 million for the nine months ended September 30, 2015, a decrease of $1.6 million, or 2.1%, as compared to $77.6 million during the same period last year. The decrease was primarily caused by an increase of $19.5 million in deferred revenue as activity on contracts written exceeded activity related to delivered products and services to a greater degree during the current period. This decrease was partially offset by an increase of $17.9 million in the value of cemetery contracts written.

At-need cemetery revenues were $74.1 million for the nine months ended September 30, 2015, an increase of $5.8 million, or 8.4%, as compared to $68.3 million during the same period last year. The increase was primarily caused by an increase of $10.9 million in the value of cemetery contracts written, partially offset by an increase of $5.1 million in deferred revenue as activity on contracts written exceeded activity related to delivered products and services to a greater degree during the current period.

Investment income from trusts was $22.2 million for the nine months ended September 30, 2015, an increase of $2.5 million, or 12.7%, as compared to $19.7 million during the same period last year. On a segment basis, we had a decrease of $2.9 million, which was offset by an adjustment of $5.4 million related to funds where we have met the requirements that allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Interest income on accounts receivable was $6.6 million for the nine months ended September 30, 2015, an increase of $0.8 million or 13.1%, as compared to $5.8 million during the same period last year, primarily due to a larger accounts receivable balance.

 

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Funeral home revenues were $43.0 million for the nine months ended September 30, 2015, an increase of $7.5 million, or 21.2%, compared to $35.5 million during the same period last year. The increase was primarily driven by the 16 funeral homes we acquired in 2014 and 2015.

Other cemetery revenues were $4.6 million for the nine months ended September 30, 2015, as compared to $7.2 million during the same period last year. The comparison of other cemetery revenues was affected by the one-time land sale in the first quarter of 2014.

Costs and Expenses

The cost of goods sold was $25.6 million for the nine months ended September 30, 2015, an increase of $0.4 million, or 1.6%, as compared to $25.2 million during the same period last year. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 17.1% during the nine months ended September 30, 2015 as compared to 17.3% during the same period last year. The change in the ratio primarily relates to changes in product mix.

Cemetery expenses were $53.8 million during the nine months ended September 30, 2015, an increase of $6.3 million, or 13.1%, compared to $47.5 million during the same period last year. Within this category, there were increases of $1.2 million in repairs and maintenance expenses, $4.0 million in personnel costs and $0.6 million in real estate tax expense with the remaining increase in general cemetery costs. Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio of such expenses to segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs relative to our overall cemetery operations. An increase in the ratio indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the ratio indicates that expense growth did not exceed increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 26.8% during the nine months ended September 30, 2015 as compared to 27.6% during the same period last year.

Selling expenses were $44.3 million during the nine months ended September 30, 2015, an increase of $1.8 million, or 4.2%, as compared to $42.5 million during the same period last year. The overall expense increase was primarily caused by segment-based increases of $6.9 million in commissions and personnel costs, $0.7 million in advertising and marketing expenses, $0.1 million in supplies and printing costs and $0.2 million in travel expenses, partially offset by an increase in deferred selling expenses of $6.1 million. The ratio of selling expenses to cemetery revenues was 29.5% during the nine months ended September 30, 2015 as compared to 29.2% during the same period last year. The ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority of our selling expenses are directly related to sales commissions and bonuses, which would be directly related to changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to follow relatively consistent trends over the long-term.

General and administrative expenses were $27.3 million during the nine months ended September 30, 2015, an increase of $1.0 million, or 3.8%, compared to $26.3 million during the same period last year. The majority of the increase was due to increases of $1.3 million in personnel costs, $0.9 million in insurance costs and $0.2 million in repairs and maintenance costs, partially offset by a decrease of $1.5 million in professional fees and legal costs, primarily related to a legal settlement. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of such expenses to segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our general and administrative costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value of contracts written, while a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to decrease slightly as many of the expenses in this category are fixed in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 13.6% during the nine months ended September 30, 2015 as compared to 15.3% during the same period last year.

Total corporate overhead was $27.0 million for the nine months ended September 30, 2015, an increase of $4.6 million, or 20.5% compared to $22.4 million during the same period last year. The increase in corporate expenses was

 

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primarily attributable to increases of $1.4 million in professional fees, $1.2 million in personnel costs, $0.7 million in advertising expenses, $0.3 million in information technology costs, $0.1 million in utility costs and $0.1 million in bank fees with the remainder attributable to increases in other general expense categories.

Depreciation and amortization was $9.2 million during the nine months ended September 30, 2015, an increase of $1.2 million, or 15.2%, as compared to $8.0 million during the same period last year. The majority of the increase was attributable to acquired properties and amortization of the intangible assets relating to the lease and management agreements entered into in 2014.

Funeral home expenses were $35.5 million for the nine months ended September 30, 2015, an increase of $6.4 million, or 22.1%, compared to $29.1 million during the same period last year. The increase was primarily attributable to increases of $1.7 million in personnel costs, $0.8 million in merchandise costs, $0.5 million in other service and supplies costs, $0.5 million in facility costs, $0.5 million in general and administrative expenses and $1.8 million in expenses related to insurance sales with the remainder attributable to increases in other general expense categories.

Acquisition related costs were $1.6 million for the nine months ended September 30, 2015, a decrease of $0.4 million, or 19.2%, as compared to $2.0 million during the same period last year. These costs may vary from period to period depending on the amount of acquisition activity that takes place.

Non-segment Allocated Results

As previously mentioned, certain statement of operations amounts are not allocated to segment operations. These amounts are those line items that can be found on our unaudited condensed consolidated statement of operations below operating profit and above net income (loss).

The table below summarizes these items and the changes between the nine months ended September 30, 2015 and 2014:

 

     Nine months ended September 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  

Legal settlement

   $ 3,000       $ —         $ 3,000         100.0

Gain on sale of funeral home

     —           244         (244      -100.0

Gain on acquisitions

     1,540         412         1,128         273.8

Gain on settlement agreement, net

     —           888         (888      -100.0

Interest expense

     16,902         15,990         912         5.7

Income tax expense (benefit)

   $ 799       $ (522    $ 1,321         -253.1

During the third quarter of 2015, the Company recorded a charge pertaining to a legal settlement. The $3.0 million includes both the settlement amount and legal fees related to the case.

The gain on sale of funeral home recorded during the nine months ended September 30, 2014 pertains to the sale of one funeral home in California during September 2014.

The gain on acquisitions recorded during the nine months ended September 30, 2015 relates to our third quarter 2015 acquisitions. The gain on acquisition recorded during the nine months ended September 30, 2014 relates to our first quarter 2014 acquisition.

During the nine months ended September 30, 2014, we recovered an additional $1.5 million related to the settlement of claims from locations acquired in 2010. A gain of $0.9 million has been recorded as gain on settlement agreement on the unaudited condensed consolidated statement of operations, which was net of legal fees of $0.6 million.

There was an increase in interest expense on amounts outstanding under the credit facility due to an increase in amounts outstanding. Average amounts outstanding under the credit facility were $127.5 million and $92.6 million during the nine months ended September 30, 2015 and 2014, respectively.

We had an income tax expense of $0.8 million for the nine months ended September 30, 2015, as compared to an income tax benefit of $0.5 million during the same period last year. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

 

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Supplemental Data

The following table presents supplemental operating data for the periods presented:

 

    Three months ended
September 30, 2015
    Three months ended
September 30, 2014
    Nine months ended
September 30, 2015
    Nine months ended
September 30, 2014
 

Operating Data:

       

Interments performed

    12,878        13,079        41,514        36,580   

Interment rights sold (1):

       

Lots

    8,086        8,613        23,980        24,360   

Mausoleum crypts (including pre-construction)

    446        494        1,779        1,697   

Niches

    441        363        1,285        1,144   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interment rights sold (1)

    8,973        9,470        27,044        27,201   
 

 

 

   

 

 

   

 

 

   

 

 

 

Number of contracts written

    30,722        29,633        92,664        82,286   

Aggregate contract amount, in thousands (excluding interest)

  $ 86,092      $ 77,568      $ 254,600      $ 219,178   

Average amount per contract (excluding interest)

  $ 2,802      $ 2,618      $ 2,748      $ 2,664   

Number of pre-need contracts written

    15,257        14,215        44,687        40,474   

Aggregate pre-need contract amount, in thousands (excluding interest)

  $ 58,211      $ 50,222      $ 168,216      $ 144,233   

Average amount per pre-need contract (excluding interest)

  $ 3,815      $ 3,533      $ 3,764      $ 3,564   

Number of at-need contracts written

    15,465        15,418        47,977        41,812   

Aggregate at-need contract amount, in thousands (excluding interest)

  $ 27,881      $ 27,346      $ 86,384      $ 74,945   

Average amount per at-need contract (excluding interest)

  $ 1,803      $ 1,774      $ 1,801      $ 1,792   

 

(1) Net of cancellations. Sales of double-depth burial lots are counted as two sales.

Liquidity and Capital Resources

Overview

Our primary short-term liquidity needs are to fund general working capital requirements, repay our debt obligations, service our debt, make routine maintenance capital improvements and pay distributions. We will need additional liquidity to construct mausoleum and lawn crypts on the grounds of our cemetery properties.

Our primary sources of liquidity are cash flows from operations and amounts available under our revolving credit facility as described below. In the past, we have been able to increase our liquidity through long-term bank borrowings and the issuance of additional common units and other partnership securities, including debt, subject to the restrictions in our revolving credit facility and under our senior notes.

        We believe that cash generated from operations and our borrowing capacity under our revolving credit facility, which is discussed below, will be sufficient to meet our working capital requirements as well as our anticipated capital expenditures for the foreseeable future.

In addition to macroeconomic conditions, our ability to satisfy our debt service obligations, fund planned capital expenditures, make acquisitions and pay distributions to partners will depend upon our future operating performance. Our operating performance is primarily dependent on the sales volume of customer contracts, the cost of purchasing cemetery merchandise that we have sold, the amount of funds withdrawn from merchandise trusts and perpetual care trusts and the timing and amount of collections on our pre-need installment contracts.

Long-term Debt

7.875% Senior Notes due 2021

On May 28, 2013, we issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). We pay 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, since December 1, 2013. The net proceeds from the offering were used to retire our previously outstanding $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. We incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are amortized over the life of the Senior Notes. As of September 30, 2015, we were in compliance with all applicable covenants of the Senior Notes.

 

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Credit Facility

On December 19, 2014, we entered into the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”).

The Credit Agreement provides for a single revolving credit facility of $180.0 million (the “Credit Facility”) maturing on December 19, 2019. Additionally the Credit Agreement provides for an uncommitted ability to increase the Credit Facility by an additional $70.0 million. The summary of the material terms of the Credit Agreement is set forth below. Capitalized terms, which are not defined in the following description, shall have the meaning assigned to such terms in the Credit Agreement.

At September 30, 2015, amounts outstanding under the Credit Facility bore interest at rates of approximately 4.1%. The interest rates on the Credit Facility are calculated as follows:

 

    For Eurodollar Rate Loans, the outstanding principal amount thereof bears interest for each Interest Period at a rate per annum equal to the Eurodollar Rate for the Interest Period plus the Applicable Rate for Eurodollar Rate Loans; and

 

    For Base Rate Loans and Swing Line Loans, the outstanding principal amount thereof bears interest from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate for Base Rate Loans.

In addition, the Borrowers must pay a Letter of Credit Fee for each Letter of Credit equal to the Applicable Rate for Letter of Credit Fees times the daily amount to be drawn under such Letter of Credit. The Applicable Rate is determined based on our Consolidated Leverage Ratio, and ranges from 2.25% to 4.00% for Eurodollar Rate Loans and Letter of Credit Fees, and 1.25% to 3.00% for Base Rate Loans. The current Applicable Rate for each of: (i) Eurodollar Rate Loans and Letter of Credit Fees is 3.25% and (ii) Base Rate Loans is 2.25% based on the current Consolidated Leverage Ratio. The Credit Agreement also requires the Borrowers to pay a quarterly unused commitment fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments.

The Credit Agreement contains financial covenants, pursuant to which the Borrowers and the Guarantors will not permit:

 

    Consolidated EBITDA for any Measurement Period to be less than the sum of (i) $80.0 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after June 30, 2014;

 

    the Consolidated Debt Service Coverage Ratio to be less than 2.50 to 1.0 for any Measurement Period; and

 

    the Consolidated Leverage Ratio to be greater than 4.00 to 1.0 for any period.

The covenants include, among other limitations, limitations on: (i) liens, (ii) the creation or incurrence of debt, (iii) investments and acquisitions, (iv) dispositions of property, (v) dividends, distributions and redemptions, and (vi) transactions with Affiliates.

As of September 30, 2015, we were in compliance with all applicable financial covenants.

The Credit Agreement provides that two types of draws are permitted with respect to the Credit Facility: Acquisition Draws and Working Capital Draws. The proceeds of Acquisition Draws may be utilized by the Borrowers to finance Permitted Acquisitions, the purchase and construction of mausoleums and related costs or the net amount of Merchandise Trust deposits made after the Closing Date under the Credit Agreement, irrespective of whether such amounts relate to new or existing cemeteries or funeral homes. The proceeds of Working Capital Draws, Letters of Credit and Swing Line Loans may be utilized by the Borrowers to finance working capital requirements, Capital Expenditures and for other general corporate purposes. The borrowing of Working Capital Advances is subject to a borrowing formula of 85% of Eligible Receivables.

Each Acquisition Draw is subject to equal quarterly amortization of the principal amount of such draw, with annual principal payments comprised of ten percent (10%) of the related draw amount, commencing on the second anniversary of such draw, with the remaining principal due on the Maturity Date, subject to certain mandatory prepayment requirements. Working Capital Draws are due on the Maturity Date, subject to certain mandatory prepayment requirements.

 

58


Effective July 10, 2015, we entered into the First Amendment (the “First Amendment”) to the Credit Agreement to allow us to apply Net Cash Proceeds received from certain: (i) Dispositions of property by any Credit Party or any of its Subsidiaries, (ii) sales or issuances of Equity Interests by us or any of our Subsidiaries and (iii) Extraordinary Receipts received by or paid to or for the account of any Credit Party or any of its Subsidiaries and not otherwise included in clause (i) and (ii) above that are required to be prepaid to the Lenders, to Acquisition Draws or Working Capital Draws, at the Company’s discretion. Prior to the execution of the First Amendment, the Credit Agreement required that the Net Cash Proceeds from the transactions described above be applied to Acquisition Draws before they could be applied to Working Capital Draws. We used the proceeds from the follow-on public offering in July 2015 to reduce our Working Capital Draws.

Amounts outstanding under our Credit Facility fluctuated during the nine months ended September 30, 2015 and 2014. At the beginning of 2014, we had $114.0 million outstanding on our Credit Facility. During the first quarter of 2014, we reduced our borrowings on the Credit Facility by $36.6 million as we had borrowed $17.0 million prior to February 27, 2014 and then we used the net proceeds from our February 27, 2014 follow-on public offering and other available cash to repay $53.6 million of amounts outstanding on our Credit Facility. During the second quarter of 2014, we increased our borrowings on the Credit Facility by $1.0 million as we had borrowed $19.0 million prior to June 12, 2014 and then we used a portion of the proceeds from our June 12, 2014 follow-on public offering and other available cash to repay $18.0 million of amounts outstanding on our Credit Facility. During the third quarter of 2014, we increased our borrowings on the Credit Facility by a net $13.0 million resulting in outstanding borrowings of $91.4 million at September 30, 2014. At the beginning of 2015, we had $110.9 million outstanding on our Credit Facility. During the first quarter of 2015, we increased our borrowings on the Credit Facility by a net $12.0 million. During the second quarter of 2015, we increased our borrowings on the Credit Facility by a net $29.0 million. During the third quarter of 2015, we reduced our borrowings on the Credit Facility by $38.4 million. We used the net proceeds from our July follow-on public offering to repay amounts borrowed on our working capital line and we had additional borrowings to fund our working capital needs, as well as borrowings of $13.5 million related to our third quarter 2015 acquisitions, resulting in outstanding borrowings of $113.5 million at September 30, 2015. The average amounts outstanding under our Credit Facility were $127.5 million and $92.6 million for the nine months ended September 30, 2015 and 2014, respectively.

For a more detailed description of our long-term debt agreements, see our 2014 Form 10-K.

Legal Settlement

During the third quarter of 2015, the Company recorded a charge pertaining to a legal settlement of a Fair Labor Standards Act claim. This $3.0 million amount is recorded under “Legal settlement” on the Consolidated Statement of Operations and consists of a charge for the settlement amount and legal fees related to the case.

Corporate Office Lease

On June 5, 2015, the Company entered into a lease agreement for a new corporate office location in Trevose, Pennsylvania. Refer to Note 11 of our unaudited condensed consolidated financial statements in Item 1 of this Form 10-Q for a more detailed discussion.

Cash Flow from Operating Activities

Net cash flows provided by operating activities were $12.0 million during the nine months ended September 30, 2015, compared to net cash flows provided by operating activities of $23.2 million during the same period last year. The main factors contributing to the net decrease in cash flows were contributions to trust and less cash generated from accounts receivable.

Cash Flow from Investing Activities

Net cash used in investing activities was $24.1 million during the nine months ended September 30, 2015 as compared to $117.8 million during the same period last year. Cash flows used for investing activities during the nine months ended September 30, 2015 were $13.1 million for the acquisitions of 5 funeral homes and 3 cemeteries and $11.0 million for other capital expenditures. Cash flows used for investing activities during the nine months ended September 30, 2014 were $54.0 million for the acquisition of 13 cemeteries and 9 funeral homes, $53.0 million for up-front rent for the transaction with the Archdiocese of Philadelphia and $11.1 million for other capital expenditures.

 

59


Cash Flow from Financing Activities

Net cash flows provided by financing activities were $13.5 million during the nine months ended September 30, 2015 as compared to $104.6 million during the same period last year. Cash flows provided by financing activities for the nine months ended September 30, 2015 consisted of $2.4 million of net increases in long-term debt offset by cash distributions to unit holders of $56.7 million. In addition, proceeds of $67.9 million from our follow-on public offering on July 10, 2015 were used to pay down outstanding indebtedness under our Credit Facility. Cash flows provided by financing activities for the nine months ended September 30, 2014 consisted of $173.6 million of net proceeds from our follow-on public offerings and our issuance of common units to ACII, partially offset by net repayments of long-term debt of $23.4 million, cost of financing activities of $0.3 million, and cash distributions to unit holders of $45.3 million.

Capital Expenditures

The following table summarizes total maintenance capital expenditures and expansion capital expenditures, including expenditures for acquisitions described in Note 13 of our unaudited condensed consolidated financial statements in Item 1 of Part I of this Form 10-Q and the construction of mausoleums for the periods presented. Prior period expansion capital expenditures are higher as a result of acquisitions and lease and management agreements completed during the period.

 

     Three months ended
September 30,
     Nine months ended
September 30,
 
     2015      2014      2015      2014  
     (in thousands)      (in thousands)  

Maintenance capital expenditures

   $ 1,632       $ 2,326       $ 5,011       $ 6,430   

Expansion capital expenditures

     15,251         1,778         19,122         111,692   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 16,883       $ 4,104       $ 24,133       $ 118,122   
  

 

 

    

 

 

    

 

 

    

 

 

 

Seasonality

The death care business is relatively stable and predictable. Although we experience seasonal increases in deaths due to extreme weather conditions and winter flu, these increases have not historically had any significant impact on our results of operations. In addition, we perform fewer initial openings and closings in the winter when the ground is frozen.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

The information presented below should be read in conjunction with the notes to our unaudited condensed consolidated financial statements included under “Part I, Item 1. Financial Statements” in this Quarterly Report on Form 10-Q.

The market risk inherent in our market risk sensitive instruments and positions is the potential change arising from increases or decreases in interest rates and the prices of marketable equity securities, as discussed below. Our exposure to market risk includes forward-looking statements and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in interest rates or debt and equity markets. Our views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based on actual fluctuations in interest rates, equity markets and the timing of transactions. We classify our market risk sensitive instruments and positions as “other than trading.”

Interest-Bearing Investments

Our fixed-income securities subject to market risk consist primarily of investments in our merchandise trusts and perpetual care trusts. As of September 30, 2015, the fair value of fixed-income securities in our merchandise trusts represented 4.1% of the fair value of total trust assets while the fair value of fixed-income securities in our perpetual care trusts represented 7.4% of the fair value of total trust assets. The aggregate quoted fair value of these fixed-income securities was $19.0 million and $23.2 million in merchandise trusts and perpetual care trusts, respectively, as of September 30, 2015. Each 1% change in interest rates on these fixed-income securities would result in changes of approximately $190,000 and $232,000 in the fair market value of the assets in our merchandise trusts and perpetual care trusts, respectively, based on discounted expected future cash flows. If these securities are held to maturity, no change in fair market value will be realized.

Our money market and other short-term investments subject to market risk consist primarily of investments in our merchandise trusts and perpetual care trusts. As of September 30, 2015, the fair value of money market and short-term

 

60


investments in our merchandise trusts represented 5.9% of the fair value of total trust assets while the fair value of money market and short-term investments in our perpetual care trusts represented 4.6% of the fair value of total trust assets. The aggregate quoted fair value of these money market and short-term investments was $27.1 million and $14.5 million in the merchandise trusts and perpetual care trusts, respectively, as of September 30, 2015. Each 1% change in interest rates on these money market and short-term investments would result in changes of approximately $271,000 and $145,000 in the fair market value of the assets in our merchandise trusts and perpetual care trusts, respectively, based on discounted expected future cash flows.

Marketable Equity Securities

Our marketable equity securities subject to market risk consist primarily of investments held in our merchandise trusts and perpetual care trusts. These assets consist of investments in both individual equity securities as well as closed and open-ended mutual funds. As of September 30, 2015, the fair value of marketable equity securities in our merchandise trusts represented 10.0% of the fair value of total trust assets while the fair value of marketable equity securities in our perpetual care trusts represented 0.7% of total trust assets. The aggregate quoted fair market value of these marketable equity securities was $45.7 million and $2.3 million in our merchandise trusts and perpetual care trusts, respectively, as of September 30, 2015, based on final quoted sales prices. Each 10% change in the average market prices of the equity securities would result in a change of approximately $4.6 million and $0.2 million in the fair market value of securities held in the merchandise trusts and perpetual care trusts, respectively. As of September 30, 2015, the fair value of marketable closed and open-ended mutual funds in our merchandise trusts represented 76.3% of the fair value of total trust assets, 66.3% of which pertained to fixed-income mutual funds. As of September 30, 2015, the fair value of closed and open-ended mutual funds in our perpetual care trusts represented 87.1% of total trust assets, 77.4% of which pertained to fixed-income mutual funds. The aggregate quoted fair market value of these closed and open-ended mutual funds was $350.5 million and $271.6 million, respectively, in the merchandise trusts and perpetual care trusts as of September 30, 2015, based on final quoted sales prices, of which $232.2 million and $210.3 million, respectively, pertained to fixed-income mutual funds. Each 10% change in the average market prices of the closed and open-ended mutual funds would result in a change of approximately $35.1 million and $27.2 million in the fair market value of securities held in our merchandise trusts and perpetual care trusts, respectively.

Investment Strategies and Objectives

Our internal investment strategies and objectives for funds held in the merchandise trusts and perpetual care trusts are specified in an Investment Policy Statement that requires us to do the following:

 

    State in a written document our expectations, objectives, tolerances for risk and guidelines in the investment of our assets;

 

    Set forth a disciplined and consistent structure for managing all trust assets. This structure is based on a long-term asset allocation strategy, which is diversified across asset classes, investment styles and strategies. We believe this structure is likely to meet our stated objectives within our tolerances for risk and variability. This structure also includes ranges around the target allocations allowing for adjustments when appropriate to reduce risk or enhance returns. It further includes guidelines for the selection of investment managers and vehicles through which to implement the investment strategy;

 

    Provide specific guidelines for each investment manager. These guidelines control the level of overall risk and liquidity assumed in each portfolio;

 

    Appoint third-party investment advisors to oversee the specific investment managers and advise our Trust Committee; and

 

    Establish criteria to monitor, evaluate and compare the performance results achieved by the overall trust portfolios and by our investment managers. This allows us to compare the performance results of the trusts to our objectives and other benchmarks, including peer performance, on a regular basis.

Our investment guidelines are based on relatively long investment horizons, which vary with the type of trust. Because of this, interim fluctuations should be viewed with appropriate perspective. The strategic asset allocation of the trust portfolios is also based on this longer-term perspective. However, in developing our investment policy, we have taken into account the potential negative impact on our operations and financial performance of significant short-term declines in market value.

We recognize the challenges we face in achieving our investment objectives in light of the uncertainties and complexities of contemporary investment markets. Furthermore, we recognize that in order to achieve the stated long-term objectives we may have short-term declines in market value. Given the need to maintain consistent values in the

 

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portfolio, we have attempted to develop a strategy, which is likely to maximize returns and earnings without experiencing overall declines in value in excess of 3% over any 12-month period. However, we are considering alternative strategies in light of current market conditions.

In order to consistently achieve the stated return objectives within our tolerance for risk, we use a strategy of allocating appropriate portions of our portfolio to a variety of asset classes with attractive risk and return characteristics, and low to moderate correlations of returns. See the notes to our unaudited condensed consolidated financial statements for a breakdown of the assets held in our merchandise trusts and perpetual care trusts by asset class.

Debt Instruments

Our Credit Facility bears interest at a floating rate, based on LIBOR, which is adjusted quarterly. This subjects us to increases in interest expense resulting from movements in interest rates. As of September 30, 2015, we had $113.5 million of borrowings outstanding under our Credit Facility. After these borrowings, our total available borrowing capacity under the Credit Facility is $66.5 million. The revolving credit facility provides for both acquisition draws, which are used primarily to finance acquisitions, acquisition related costs and mausoleum construction costs, and working capital draws, which are used to finance all other corporate costs. As of September 30, 2015, we had approximately $75.0 million of working capital draws, which are limited to a borrowing formula of 85% of eligible account receivables. This limit was $135.5 million at September 30, 2015. The amounts outstanding under the Credit Facility bore interest at rates of approximately 4.1% at September 30, 2015.

 

Item 4. Controls and Procedures

Disclosure Controls and Procedures

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including our Chief Executive Officer and our Interim Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon, and as of the date of this evaluation, our Chief Executive Officer and our Interim Chief Financial Officer concluded that our disclosure controls and procedures were effective to provide reasonable assurance that information we are required to disclose in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Interim Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control over Financial Reporting

There have been no changes in our internal control over financial reporting that occurred during our last fiscal quarter ended September 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Part II – Other Information

 

Item 1. Legal Proceedings

We and certain of our subsidiaries are parties to legal proceedings that have arisen in the ordinary course of business. We do not expect these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows. We carry insurance with coverage and coverage limits that we believe to be customary in the funeral home and cemetery industries. Although there can be no assurance that such insurance will be sufficient to protect us against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

 

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Item 1A. Risk Factors

In addition to the other information set forth in this Quarterly Report on Form 10-Q, you should carefully consider the risk factors discussed in “Part I, Item 1A. Risk Factors” in our 2014 Form 10-K, Current Report on Form 8-K filed with the SEC on July 6, 2015 and other reports that we file with the SEC, which could materially affect our business, financial condition or future results.

The risks described in the 2014 Form 10-K, Current Report on Form 8-K filed with the SEC on July 6, 2015 and other reports that we file with the SEC are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results.

This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of many factors, including the risks faced by us described in our 2014 Form 10-K, Current Report on Form 8-K filed with the SEC on July 6, 2015 and other reports that we file with the SEC.

 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

 

Item 3. Defaults Upon Senior Securities

None.

 

Item 4. Mine Safety Disclosures

None.

 

Item 5. Other Information

None.

 

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Item 6. Exhibits

 

Exhibit
Number

  

Description

  10.1    First Amendment to Fourth Amended and Restated Credit Agreement, dated July 10, 2015, by and among StoneMor Operating LLC, its Subsidiaries, StoneMor GP LLC, StoneMor Partners L.P., the Lenders party thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).
  10.2    Letter Agreement by and between Sean P. McGrath and StoneMor GP LLC.
  10.3    Confidentiality and Non-Compete Agreement by and between Sean P. McGrath and StoneMor GP LLC.
  31.1    Certification pursuant to Exchange Act Rule 13a-14(a) of Lawrence Miller, Chief Executive Officer, President and Chairman of the Board of Directors.
  31.2    Certification pursuant to Exchange Act Rule 13a-14(a) of Sean P. McGrath, Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Lawrence Miller, Chief Executive Officer, President and Chairman of the Board of Directors (furnished herewith).
  32.2    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Sean P. McGrath, Chief Financial Officer (furnished herewith).
101    Attached as Exhibit 101 to this report are the following Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets as of September 30, 2015, and December 31, 2014; (ii) Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2015 and 2014; (iii) Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit); (iv) Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2015 and 2014; and (v) Notes to the Unaudited Condensed Consolidated Financial Statements. Users of this data are advised that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of StoneMor Partners L.P.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    STONEMOR PARTNERS L.P.
    By: StoneMor GP LLC
    its general partner
November 9, 2015    

/s/ Lawrence Miller

    Lawrence Miller
    Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer)
November 9, 2015    

/s/ Sean P. McGrath

    Sean P. McGrath
    Chief Financial Officer (Principal Financial Officer)

 

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Exhibit Index

 

Exhibit
Number

  

Description

  10.1    First Amendment to Fourth Amended and Restated Credit Agreement, dated July 10, 2015, by and among StoneMor Operating LLC, its Subsidiaries, StoneMor GP LLC, StoneMor Partners L.P., the Lenders party thereto and Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer (incorporated by reference to Exhibit 10.1 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 2015).
  10.2    Letter Agreement by and between Sean P. McGrath and StoneMor GP LLC.
  10.3   

Confidentiality and Non-Compete Agreement by and between Sean P. McGrath and StoneMor GP LLC.

  31.1    Certification pursuant to Exchange Act Rule 13a-14(a) of Lawrence Miller, Chief Executive Officer, President and Chairman of the Board of Directors.
  31.2    Certification pursuant to Exchange Act Rule 13a-14(a) of Sean P. McGrath, Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Lawrence Miller, Chief Executive Officer, President and Chairman of the Board of Directors (furnished herewith).
  32.2    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Sean P. McGrath, Chief Financial Officer (furnished herewith).
101    Attached as Exhibit 101 to this report are the following Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets as of September 30, 2015, and December 31, 2014; (ii) Unaudited Condensed Consolidated Statements of Operations for the three months and nine months ended September 30, 2015 and 2014; (iii) Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit); (iv) Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2015 and 2014; and (v) Notes to the Unaudited Condensed Consolidated Financial Statements. Users of this data are advised that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of StoneMor Partners L.P.

 

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