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Stonemor Partners LP – ‘10-Q’ for 9/30/14

On:  Friday, 11/7/14, at 12:07pm ET   ·   For:  9/30/14   ·   Accession #:  1193125-14-402745   ·   File #:  1-32270

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  As Of               Filer                 Filing    For·On·As Docs:Size             Issuer                      Filing Agent

11/07/14  Stonemor Partners LP              10-Q        9/30/14   89:11M                                    Donnelley … Solutions/FA

Quarterly Report   —   Form 10-Q   —   Sect. 13 / 15(d) – SEA’34
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 10-Q        Quarterly Report                                    HTML    851K 
 2: EX-4.1      Instrument Defining the Rights of Security Holders  HTML     51K 
 3: EX-31.1     Certification -- §302 - SOA'02                      HTML     30K 
 4: EX-31.2     Certification -- §302 - SOA'02                      HTML     30K 
 5: EX-32.1     Certification -- §906 - SOA'02                      HTML     27K 
 6: EX-32.2     Certification -- §906 - SOA'02                      HTML     27K 
61: R1          Document and Entity Information                     HTML     47K 
47: R2          Condensed Consolidated Balance Sheet                HTML    132K 
58: R3          Condensed Consolidated Balance Sheet                HTML     27K 
                (Parenthetical)                                                  
63: R4          Condensed Consolidated Statement of Operations      HTML    114K 
82: R5          Condensed Consolidated Statement of Operations      HTML     27K 
                (Parenthetical)                                                  
49: R6          Condensed Consolidated Statement of Partners'       HTML     43K 
                Capital (Deficit)                                                
57: R7          Condensed Consolidated Statement of Cash Flows      HTML    154K 
42: R8          Nature of Operations, Basis of Presentation and     HTML     38K 
                Summary of Significant Accounting Policies                       
32: R9          Long-Term Accounts Receivable, Net of Allowance     HTML     40K 
83: R10         Cemetery Property                                   HTML     31K 
65: R11         Property and Equipment                              HTML     34K 
64: R12         Merchandise Trusts                                  HTML    124K 
70: R13         Perpetual Care Trusts                               HTML    109K 
71: R14         Goodwill and Intangible Assets                      HTML     51K 
68: R15         Long-Term Debt                                      HTML     45K 
72: R16         Income Taxes                                        HTML     34K 
59: R17         Deferred Cemetery Revenues, Net                     HTML     34K 
62: R18         Commitments and Contingencies                       HTML     34K 
67: R19         Partners' Capital                                   HTML     44K 
89: R20         Acquisitions                                        HTML    108K 
78: R21         Segment Information                                 HTML    183K 
53: R22         Fair Value Measurements                             HTML     95K 
66: R23         Nature of Operations, Basis of Presentation and     HTML     47K 
                Summary of Significant Accounting Policies                       
                (Policies)                                                       
55: R24         Long-Term Accounts Receivable, Net of Allowance     HTML     39K 
                (Tables)                                                         
24: R25         Property and Equipment (Tables)                     HTML     38K 
79: R26         Merchandise Trusts (Tables)                         HTML    196K 
86: R27         Goodwill and Intangible Assets (Tables)             HTML     48K 
37: R28         Long-Term Debt (Tables)                             HTML     38K 
36: R29         Deferred Cemetery Revenues, Net (Tables)            HTML     33K 
40: R30         Commitments and Contingencies (Tables)              HTML     30K 
41: R31         Partners' Capital (Tables)                          HTML     33K 
43: R32         Acquisitions (Tables)                               HTML     95K 
20: R33         Segment Information (Tables)                        HTML    174K 
76: R34         Fair Value Measurements (Tables)                    HTML     88K 
51: R35         Nature of Operations Basis of Presentation and      HTML     36K 
                Summary of Significant Accounting Policies -                     
                Additional Information (Detail)                                  
54: R36         Long-Term Accounts Receivable Net (Detail)          HTML     43K 
27: R37         Activity in Allowance for Contract Cancellations    HTML     36K 
                (Detail)                                                         
88: R38         Cemetery Property (Detail)                          HTML     31K 
13: R39         Major Classes of Property and Equipment (Detail)    HTML     40K 
44: R40         Property and Equipment - Additional Information     HTML     28K 
                (Detail)                                                         
81: R41         Merchandise Trusts - Additional Information         HTML     61K 
                (Detail)                                                         
26: R42         Cost and Market Value Associated with Assets Held   HTML     60K 
                in Merchandise Trusts (Detail)                                   
35: R43         Contractual Maturities of Debt Securities Held in   HTML     43K 
                Merchandise Trusts (Detail)                                      
39: R44         Aging of Unrealized Losses on Investments in Fixed  HTML     70K 
                Maturities and Equity Securities Held in                         
                Merchandise Trusts (Detail)                                      
48: R45         Reconciliation of Merchandise Trust Activities      HTML     46K 
                (Detail)                                                         
19: R46         Cost and Market Value Associated with Assets Held   HTML     56K 
                in Perpetual Care Trusts (Detail)                                
31: R47         Contractual Maturities of Debt Securities Held in   HTML     44K 
                Perpetual Care Trusts (Detail)                                   
15: R48         Aging of Unrealized Losses on Investments in Fixed  HTML     63K 
                Maturities and Equity Securities Held in Perpetual               
                Care Trusts (Detail)                                             
80: R49         Perpetual Care Trusts - Additional Information      HTML     54K 
                (Detail)                                                         
25: R50         Reconciliation of Perpetual Care Trust Activities   HTML     46K 
                (Detail)                                                         
77: R51         Goodwill by Reportable Segment (Detail)             HTML     33K 
28: R52         Major Classes of Intangible Assets (Detail)         HTML     39K 
45: R53         Goodwill and Intangible Assets - Additional         HTML     32K 
                Information (Detail)                                             
14: R54         Outstanding Debt (Detail)                           HTML     42K 
18: R55         Outstanding Debt (Parenthetical) (Detail)           HTML     33K 
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22: R57         Income Taxes - Additional Information (Detail)      HTML     32K 
84: R58         Deferred Cemetery Revenues Net (Detail)             HTML     38K 
50: R59         Commitments and Contingencies - Additional          HTML     32K 
                Information (Detail)                                             
69: R60         Operating Leases Future Payments (Detail)           HTML     46K 
30: R61         Compensation Expense Recognized Related to Unit     HTML     31K 
                Appreciation Rights and Restricted Phantom Unit                  
                Awards (Detail)                                                  
33: R62         Partners' Capital - Additional Information          HTML     62K 
                (Detail)                                                         
75: R63         Acquisitions - Additional Information (Detail)      HTML    133K 
73: R64         Preliminary Assessment of Fair Value of Net Assets  HTML     58K 
                Acquired and Resulting Gain on Bargain Purchase of               
                First Quarter Twenty Fourteen (Detail)                           
52: R65         Preliminary Assessment of Fair Value of Net Assets  HTML     56K 
                Acquired and Resulting Goodwill of Second Quarter                
                Twenty Fourteen (Detail)                                         
74: R66         Fixed Rent for Cemeteries (Detail)                  HTML     41K 
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                Acquired and Resulting Gain on Bargain Purchase of               
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‘10-Q’   —   Quarterly Report
Document Table of Contents

Page (sequential)   (alphabetic) Top
 
11st Page  –  Filing Submission
"Table of Contents
"Financial Information
"Financial Statements (unaudited)
"Management's Discussion and Analysis of Financial Condition and Results of Operations
"Quantitative and Qualitative Disclosures About Market Risk
"Controls and Procedures
"Other Information
"Legal Proceedings
"Risk Factors
"Unregistered Sales of Equity Securities and Use of Proceeds
"Defaults Upon Senior Securities
"Mine Safety Disclosures
"Exhibits
"Signatures

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  10-Q  
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2014

or

 

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

For the transition period from                      to                     .

Commission File Number: 001-32270

 

 

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   80-0103159

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

311 Veterans Highway, Suite B

Levittown, Pennsylvania

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

(215) 826-2800

(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, 2014 was 29,132,874.

 

 

 


Table of Contents

Index – Form 10-Q

 

          Page  

Part I

   Financial Information   

Item 1.

   Financial Statements (unaudited)      1   

Item 2.

   Management’s Discussion and Analysis of Financial Condition and Results of Operations      31   

Item 3.

   Quantitative and Qualitative Disclosures About Market Risk      54   

Item 4.

   Controls and Procedures      56   

Part II

   Other Information   

Item 1.

   Legal Proceedings      56   

Item 1A.

   Risk Factors      56   

Item 2.

   Unregistered Sales of Equity Securities and Use of Proceeds      57   

Item 3.

   Defaults Upon Senior Securities      57   

Item 4.

   Mine Safety Disclosures      57   

Item 5.

   Other Information      57   

Item 6.

   Exhibits      58   
   Signatures      59   


Table of Contents

Part I – Financial Information

 

Item 1. Financial Statements

StoneMor Partners L.P.

Condensed Consolidated Balance Sheet

(in thousands)

(unaudited)

 

     September 30,
2014
    December 31,
2013
 

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 22,175      $ 12,175   

Accounts receivable, net of allowance

     55,463        55,415   

Prepaid expenses

     6,535        3,622   

Other current assets

     23,784        22,667   
  

 

 

   

 

 

 

Total current assets

     107,957        93,879   

Long-term accounts receivable, net of allowance

     86,478        78,367   

Cemetery property

     341,178        316,469   

Property and equipment, net of accumulated depreciation

     100,746        85,007   

Merchandise trusts, restricted, at fair value

     491,641        431,556   

Perpetual care trusts, restricted, at fair value

     348,950        311,771   

Deferred financing costs, net of accumulated amortization

     7,124        8,308   

Deferred selling and obtaining costs

     94,853        87,998   

Deferred tax assets

     42        42   

Goodwill

     57,128        48,737   

Intangible assets

     67,945        9,655   

Other assets

     5,161        2,554   
  

 

 

   

 

 

 

Total assets

   $ 1,709,203      $ 1,474,343   
  

 

 

   

 

 

 

Liabilities and partners’ capital

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 40,831      $ 37,269   

Accrued interest

     4,944        1,512   

Current portion, long-term debt

     3,373        2,916   
  

 

 

   

 

 

 

Total current liabilities

     49,148        41,697   

Other long-term liabilities

     1,342        1,527   

Obligation for lease and management agreements, net

     8,594        —     

Long-term debt

     265,831        289,016   

Deferred cemetery revenues, net

     634,805        579,993   

Deferred tax liabilities

     13,106        12,407   

Merchandise liability

     153,511        130,412   

Perpetual care trust corpus

     348,950        311,771   
  

 

 

   

 

 

 

Total liabilities

     1,475,287        1,366,823   
  

 

 

   

 

 

 

Commitments and contingencies

    

Partners’ capital (deficit)

    

General partner deficit

     (4,132     (2,137

Common partners, 29,132 and 21,377 units outstanding as of September 30, 2014 and December 31, 2013, respectively

     238,048        109,657   
  

 

 

   

 

 

 

Total partners’ capital

     233,916        107,520   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 1,709,203      $ 1,474,343   
  

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

1


Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Operations

(in thousands, except per unit data)

(unaudited)

 

     Three months ended
September 30,
    Nine months ended
September 30,
 
     2014     2013     2014     2013  

Revenues:

        

Cemetery

        

Merchandise

   $ 37,812      $ 28,265      $ 98,452      $ 83,586   

Services

     14,971        11,051        37,760        33,422   

Investment and other

     13,152        11,850        42,418        34,098   

Funeral home

        

Merchandise

     4,752        4,266        14,770        13,736   

Services

     7,487        6,107        20,694        18,731   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     78,174        61,539        214,094        183,573   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

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

        

Perpetual care

     1,898        1,418        5,110        4,199   

Merchandise

     7,164        5,684        20,106        16,905   

Cemetery expense

     18,076        14,507        47,546        42,700   

Selling expense

     16,494        11,692        42,544        35,134   

General and administrative expense

     9,808        7,902        26,333        23,382   

Corporate overhead (including $265 and $348 in unit-based compensation for the three months ended September 30, 2014 and 2013, and $802 and $1,038 for the nine months ended September 30, 2014 and 2013, respectively)

     8,392        7,997        22,394        21,657   

Depreciation and amortization

     3,112        2,378        7,993        7,159   

Funeral home expense

        

Merchandise

     1,441        1,573        4,691        4,798   

Services

     5,522        4,914        15,023        14,239   

Other

     3,396        2,494        9,367        8,044   

Acquisition related costs, net of recoveries

     451        243        2,040        901   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     75,754        60,802        203,147        179,118   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit

     2,420        737        10,947        4,455   

Gain on sale of funeral home

     244        —          244        —     

Gain on acquisition

     —          2,530        412        2,530   

Gain on settlement agreement, net

     —          —          888        12,261   

Gain on sale of other assets

     —          —          —          155   

Loss on early extinguishment of debt

     —          —          —          21,595   

Interest expense

     5,268        5,193        15,990        15,788   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss before income taxes

     (2,604     (1,926     (3,499     (17,982

Income tax expense (benefit)

     664        (442     (522     (2,489
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (3,268   $ (1,484   $ (2,977   $ (15,493
  

 

 

   

 

 

   

 

 

   

 

 

 

General partner’s interest in net loss for the period

   $ (44   $ (26   $ (49   $ (284

Limited partners’ interest in net loss for the period

   $ (3,224   $ (1,458   $ (2,928   $ (15,209

Net loss per limited partner unit (basic and diluted)

   $ (.11   $ (.07   $ (.11   $ (.73

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

     29,018        21,351        25,712        20,814   

Distributions declared per unit

   $ .610      $ .600      $ 1.810      $ 1.785   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

2


Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of

Partners’ Capital (Deficit)

(in thousands)

(unaudited)

 

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

Balance, December 31, 2013

   $ 109,657      $ (2,137   $ 107,520   

Proceeds from public offerings

     120,345        —          120,345   

Issuance of common units

     54,899        —          54,899   

Compensation related to units awards

     802        —          802   

Net loss

     (2,928     (49     (2,977

Cash distributions

     (43,351     (1,946     (45,297

Unit distributions

     (1,376     —          (1,376
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2014

   $ 238,048      $ (4,132   $ 233,916   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

3


Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Cash Flows

(in thousands)

(unaudited)

 

     For the nine months ended September 30,  
     2014     2013  

Operating activities:

    

Net loss

   $ (2,977   $ (15,493

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

    

Cost of lots sold

     7,181        6,047   

Depreciation and amortization

     7,993        7,159   

Unit-based compensation

     802        1,038   

Accretion of debt discounts

     2,127        1,676   

Gain on acquisition

     (412     (2,530

Gain on sale of other assets

     —          (155

Gain on sale of funeral home

     (244     —     

Loss on early extinguishment of debt

     —          21,595   

Changes in assets and liabilities that provided (used) cash:

    

Accounts receivable

     (2,958     (2,148

Allowance for doubtful accounts

     2,647        (1,163

Merchandise trust fund

     (26,547     (23,711

Prepaid expenses

     (2,913     (1,926

Other current assets

     (1,019     (3,906

Other assets

     (1,397     3,573   

Accounts payable and accrued and other liabilities

     7,382        8,340   

Deferred selling and obtaining costs

     (6,855     (8,884

Deferred cemetery revenue

     45,475        51,181   

Deferred taxes (net)

     (1,254     (3,260

Merchandise liability

     (3,793     (537
  

 

 

   

 

 

 

Net cash provided by operating activities

     23,238        36,896   
  

 

 

   

 

 

 

Investing activities:

    

Cash paid for cemetery property

     (4,692     (4,210

Purchase of subsidiaries

     (54,000     (14,100

Consideration for lease and management agreements

     (53,000     —     

Cash paid for property and equipment

     (6,430     (5,366

Proceeds from divestiture of funeral home

     297        —     

Proceeds from sales of other assets

     —          155   
  

 

 

   

 

 

 

Net cash used in investing activities

     (117,825     (23,521
  

 

 

   

 

 

 

Financing activities:

    

Cash distributions

     (45,297     (38,653

Additional borrowings on long-term debt

     63,365        237,002   

Repayments of long-term debt

     (86,788     (218,036

Proceeds from public offerings

     120,345        38,377   

Proceeds from issuance of common units

     53,237        —     

Fees paid related to early extinguishment of debt

     —          (14,920

Cost of financing activities

     (275     (5,107
  

 

 

   

 

 

 

Net cash provided by (used in) financing activities

     104,587        (1,337
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     10,000        12,038   

Cash and cash equivalents - Beginning of period

     12,175        7,946   
  

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ 22,175      $ 19,984   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for interest

   $ 10,303      $ 10,756   

Cash paid during the period for income taxes

   $ 3,536      $ 3,315   

Non-cash investing and financing activities:

    

Acquisition of assets by financing

   $ 251      $ 107   

Issuance of limited partner units for cemetery acquisition

   $ —        $ 3,718   

Acquisition of asset by assumption of directly related liability

   $ 8,368      $ 3,924   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

4


Table of Contents

 

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

Nature of Operations

StoneMor Partners L.P. (“StoneMor”, the “Company” or the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of September 30, 2014, the Partnership operated 303 cemeteries in 27 states and Puerto Rico, of which 272 are owned and 31 are operated under management or operating agreements. The Partnership also owned and operated 98 funeral homes in 19 states and Puerto Rico.

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of September 30, 2014 and for the three and nine months ended September 30, 2014 and 2013 includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year. The December 31, 2013 condensed consolidated balance sheet data was derived from audited financial statements included in the Company’s 2013 Annual Report on Form 10-K (“2013 Form 10-K”) and has been adjusted to include the effects of retrospective adjustments resulting from the Company’s 2013 first quarter acquisition, but does not include all disclosures required by GAAP, which are presented in the Company’s 2013 Form 10-K.

The Company’s presentation of its intangible assets within its consolidated balance sheet has changed. These assets were previously presented within the “Other assets” caption and are now presented as the separate caption, “Intangible assets.” The change in presentation is due to the recording of an intangible asset resulting from the transaction closed with the Archdiocese of Philadelphia in the second quarter of 2014. Refer to Note 13 for a detailed discussion on this transaction. This change in presentation has no effect on any other previously reported amounts, including “Total assets.”

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of each of the 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

 

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the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period. Early application is not permitted. The Company is currently in the process of evaluating the impact of this update.

Use of Estimates

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

 

2. LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

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

 

     As of  
     September 30,     December 31,  
     2014     2013  
     (in thousands)  

Customer receivables

   $ 185,724      $ 174,062   

Unearned finance income

     (20,038     (20,005

Allowance for contract cancellations

     (23,745     (20,275
  

 

 

   

 

 

 
     141,941        133,782   

Less: current portion, net of allowance

     55,463        55,415   
  

 

 

   

 

 

 

Long-term portion, net of allowance

   $ 86,478      $ 78,367   
  

 

 

   

 

 

 

Activity in the allowance for contract cancellations is as follows:

 

     For the nine months ended September 30,  
     2014     2013  
     (in thousands)  

Balance—Beginning of period

   $ 20,275      $ 17,933   

Provision for cancellations

     17,080        14,791   

Charge-offs—net

     (13,610     (12,964
  

 

 

   

 

 

 

Balance—End of period

   $ 23,745      $ 19,760   
  

 

 

   

 

 

 

 

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3. CEMETERY PROPERTY

Cemetery property consists of the following:

 

     As of  
     September 30,      December 31,  
     2014      2013  
     (in thousands)  

Developed land

   $ 78,914       $ 72,458   

Undeveloped land

     172,530         163,997   

Mausoleum crypts and lawn crypts

     79,706         70,216   

Other land

     10,028         9,798   
  

 

 

    

 

 

 

Total

   $ 341,178       $ 316,469   
  

 

 

    

 

 

 

 

4. PROPERTY AND EQUIPMENT

Major classes of property and equipment follow:

 

     As of  
     September 30,     December 31,  
     2014     2013  
     (in thousands)  

Building and improvements

   $ 106,829      $ 91,575   

Furniture and equipment

     48,490        44,828   
  

 

 

   

 

 

 
     155,319        136,403   

Less: accumulated depreciation

     (54,573     (51,396
  

 

 

   

 

 

 

Property and equipment—net

   $ 100,746      $ 85,007   
  

 

 

   

 

 

 

Depreciation expense was $2.5 million and $6.5 million for the three and nine months ended September 30, 2014, respectively, as compared to $2.0 million and $5.6 million during the same periods last year.

 

5. MERCHANDISE TRUSTS

At September 30, 2014, the Company’s merchandise trusts consisted of the following types of assets:

 

    Money Market Funds that invest in low risk short term securities;

 

    Publicly traded mutual funds that invest in underlying debt securities;

 

    Publicly traded mutual funds that invest in underlying equity securities;

 

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

 

    Fixed maturity debt securities issued by various corporate entities;

 

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

 

    Assets acquired related to the second quarter 2014 acquisition of twelve cemeteries and nine funeral homes from Service Corporation International (“SCI”) (see Note 13). According to the terms of the agreement, SCI was required to liquidate the holdings of the related trusts upon closing and forward the proceeds to the Company as soon as practicable. As of September 30, 2014, the Company had not received some of these amounts. Accordingly, the assets not received are shown in a single line item in the disclosures below as “Assets acquired via acquisition” and the cost basis and fair value of such assets are based upon preliminary estimates that the Company is required to make in accordance with Accounting Topic 805.

 

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

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

The Company has included $8.1 million and $8.3 million of investments held in trust by the West Virginia Funeral Directors Association at September 30, 2014 and December 31, 2013, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recorded at their account value, which approximates their fair value.

 

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The cost and market value associated with the assets held in merchandise trusts at September 30, 2014 and December 31, 2013 were as follows:

 

As of September 30, 2014

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

Short-term investments

   $ 51,328       $ —         $ —        $ 51,328   

Fixed maturities:

          

U.S. State and local government agency

     75         —           —          75   

Corporate debt securities

     9,438         27         (245     9,220   

Other debt securities

     7,153         —           (8     7,145   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

     16,666         27         (253     16,440   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     132,090         973         (4,763     128,300   

Mutual funds - equity securities

     168,644         13,846         (721     181,769   

Equity securities

     86,649         5,392         (1,536     90,505   

Other invested assets

     5,460         —           (220     5,240   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

   $ 460,837       $ 20,238       $ (7,493   $ 473,582   
  

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

     9,933         —           —          9,933   

West Virginia Trust Receivable

     8,126         —           —          8,126   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 478,896       $ 20,238       $ (7,493   $ 491,641   
  

 

 

    

 

 

    

 

 

   

 

 

 

 

As of December 31, 2013

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

Short-term investments

   $ 46,518       $ —         $ —        $ 46,518   

Fixed maturities:

          

Corporate debt securities

     9,105         162         (96     9,171   

Other debt securities

     7,336         —           (12     7,324   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

     16,441         162         (108     16,495   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     117,761         729         (7,157     111,333   

Mutual funds - equity securities

     144,249         16,610         (3,329     157,530   

Equity securities

     81,520         5,267         (1,092     85,695   

Other invested assets

     5,809         —           (86     5,723   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

   $ 412,298       $ 22,768       $ (11,772   $ 423,294   
  

 

 

    

 

 

    

 

 

   

 

 

 

West Virginia Trust Receivable

     8,262         —           —          8,262   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 420,560       $ 22,768       $ (11,772   $ 431,556   
  

 

 

    

 

 

    

 

 

   

 

 

 

The contractual maturities of debt securities as of September 30, 2014 were as follows:

 

As of September 30, 2014

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

U.S. State and local government agency

   $ 75       $ —         $ —         $ —     

Corporate debt securities

     18         4,309         4,871         22   

Other debt securities

     891         6,254         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 984       $ 10,563       $ 4,871       $ 22   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at September 30, 2014 and December 31, 2013 is presented below:

 

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

As of September 30, 2014

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

Fixed maturities:

                    

Corporate debt securities

   $ 6,165       $ 196       $ 1,165       $ 49       $ 7,330       $ 245         52   

Other debt securities

     1,738         2         4,772         6         6,510         8         11   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     7,903         198         5,937         55         13,840         253         63   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     20,466         340         87,823         4,423         108,289         4,763         32   

Mutual funds - equity securities

     6,443         335         4,337         386         10,780         721         16   

Equity securities

     24,415         1,013         3,174         523         27,589         1,536         108   

Other invested assets

     —           —           5,098         220         5,098         220         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 59,227       $ 1,886       $ 106,369       $ 5,607       $ 165,596       $ 7,493         220   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

As of December 31, 2013

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

Fixed maturities:

                    

Corporate debt securities

   $ 2,812       $ 43       $ 1,249       $ 53       $ 4,061       $ 96         29   

Other debt securities

     5,329         8         995         4         6,324         12         14   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     8,141         51         2,244         57         10,385         108         43   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     87,113         6,724         6,485         433         93,598         7,157         13   

Mutual funds - equity securities

     29,993         2,444         4,217         885         34,210         3,329         2   

Equity securities

     25,379         1,031         1,492         61         26,871         1,092         33   

Other invested assets

     2,266         86         —           —           2,266         86         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 152,892       $ 10,336       $ 14,438       $ 1,436       $ 167,330       $ 11,772         92   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were 220 and 92 securities in an unrealized loss position in merchandise trusts as of September 30, 2014 and December 31, 2013, respectively, of which 37 and 19, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluates the severity of the impairment and length of time that a security has been in a loss position and has concluded there is no other than temporary impairment. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

A reconciliation of the Company’s merchandise trust activities for the nine months ended September 30, 2014 is presented below:

 

Fair

Value at

12/31/2013

   Contributions      Distributions     Interest/
Dividends
     Capital
Gain
Distributions
     Realized
Gain/
Loss
     Taxes     Fees     Unrealized
Change in
Fair Value
     Fair
Value at
9/30/2014
 
     (in thousands)  

$ 431,556

     67,190         (35,725     12,822         36         18,749         (2,521     (2,215     1,749       $ 491,641   

The Company made net contributions into the trusts of approximately $31.5 million during the nine months ended September 30, 2014. During the nine months ended September 30, 2014, purchases and sales of securities available for sale included in trust investments were approximately $342.2 million and $354.4 million, respectively. Contributions include $32.1 million of assets that were acquired through acquisitions during the nine months ended September 30, 2014.

 

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Other-Than-Temporary Impairments of Trust Assets

During the nine months ended September 30, 2014, the Company determined that there were 2 securities with an aggregate cost basis of approximately $0.2 million and an aggregate fair value of approximately $0.1 million, resulting in an impairment of $0.1 million, wherein such impairment was considered to be other-than-temporary. During the three months ended September 30, 2013, the Company determined that there were 3 securities with an aggregate cost basis of approximately $1.2 million and an aggregate fair value of approximately $0.9 million, resulting in an impairment of $0.3 million, wherein such impairment was considered to be other-than-temporary. During the nine months ended September 30, 2013, the Company determined that there were 7 securities with an aggregate cost basis of approximately $2.6 million and an aggregate fair value of approximately $1.6 million, resulting in an impairment of $1.0 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed.

During the three months ended September 30, 2014, the Company determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts.

 

6. PERPETUAL CARE TRUSTS

At September 30, 2014, the 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.

 

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The cost and market value associated with the assets held in perpetual care trusts at September 30, 2014 and December 31, 2013 were as follows:

 

As of September 30, 2014

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

Short-term investments

   $ 27,257       $ —         $ —        $ 27,257   

Fixed maturities:

          

U.S. Government and federal agency

     100         17         —          117   

U.S. State and local government agency

     57         —           —          57   

Corporate debt securities

     24,693         213         (450     24,456   

Other debt securities

     371         —           —          371   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

     25,221         230         (450     25,001   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     121,292         385         (3,165     118,512   

Mutual funds - equity securities

     100,950         25,285         (136     126,099   

Equity securities

     32,395         19,971         (285     52,081   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 307,115       $ 45,871       $ (4,036   $ 348,950   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of December 31, 2013

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

Short-term investments

   $ 16,686       $ —         $ —        $ 16,686   

Fixed maturities:

          

U.S. Government and federal agency

     302         70         —          372   

Corporate debt securities

     24,378         340         (208     24,510   

Other debt securities

     371         —           —          371   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

     25,051         410         (208     25,253   
  

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     121,493         466         (5,946     116,013   

Mutual funds - equity securities

     93,243         22,521         (171     115,593   

Equity securities

     25,580         12,283         (19     37,844   

Other invested assets

     172         210         —          382   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 282,225       $ 35,890       $ (6,344   $ 311,771   
  

 

 

    

 

 

    

 

 

   

 

 

 

The contractual maturities of debt securities as of September 30, 2014 were as follows:

 

As of September 30, 2014

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

U.S. Government and federal agency

   $ —         $ 117       $ —         $ —     

U.S. State and local government agency

     57         —           —           —     

Corporate debt securities

     752         12,934         10,734         36   

Other debt securities

     371         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 1,180       $ 13,051       $ 10,734       $ 36   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at September 30, 2014 and December 31, 2013 held in perpetual care trusts is presented below:

 

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

As of September 30, 2014

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

Fixed maturities:

                    

Corporate debt securities

   $ 12,494       $ 338       $ 2,974       $ 112       $ 15,468       $ 450         69   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     12,494         338         2,974         112         15,468         450         69   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     24,706         277         82,887         2,888         107,593         3,165         29   

Mutual funds - equity securities

     7,197         64         1,230         72         8,427         136         7   

Equity securities

     3,311         281         647         4         3,958         285         65   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 47,708       $ 960       $ 87,738       $ 3,076       $ 135,446       $ 4,036         170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

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

As of December 31, 2013

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

Fixed maturities:

                    

Corporate debt securities

   $ 5,664       $ 93       $ 3,122       $ 115       $ 8,786       $ 208         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     5,664         93         3,122         115         8,786         208         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     93,473         4,781         16,367         1,165         109,840         5,946         13   

Mutual funds - equity securities

     1,185         171         —           —           1,185         171         1   

Equity securities

     513         19         —           —           513         19         3   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 100,835       $ 5,064       $ 19,489       $ 1,280       $ 120,324       $ 6,344         46   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were 170 and 46 securities in an unrealized loss position in perpetual care trusts as of September 30, 2014 and December 31, 2013, respectively, of which 21 and 13, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluates the severity of the impairment and length of time that a security has been in a loss position and has concluded there is no other than temporary impairment. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

A reconciliation of the Company’s perpetual care trust activities for the nine months ended September 30, 2014 is presented below:

 

Fair

Value at

12/31/2013

   Contributions      Distributions     Interest/
Dividends
     Capital
Gain
Distributions
     Realized
Gain/
Loss
     Taxes     Fees     Unrealized
Change in
Fair Value
     Fair
Value at
9/30/2014
 
(in thousands)  

$311,771

     25,440         (10,147     10,795         2         615         (347     (1,468     12,289       $ 348,950   

The Company made net contributions into the trusts of approximately $15.3 million during the nine months ended September 30, 2014. During the nine months ended September 30, 2014, purchases and sales of securities available for sale included in trust investments were approximately $124.1 million and $135.0 million, respectively. Contributions include $16.0 million of assets that were acquired through acquisitions during the nine months ended September 30, 2014.

 

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Other-Than-Temporary Impairments of Trust Assets

During the nine months ended September 30, 2014, the Company determined that there were 2 securities with an aggregate cost basis of approximately $1.3 million and an aggregate fair value of approximately $0.8 million, resulting in an impairment of $0.5 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against the liability for perpetual care trust corpus.

During the three months ended September 30, 2014 and during the three and nine months ended September 30, 2013, the Company determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts.

 

7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

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

A rollforward of goodwill by reportable segment is as follows:

 

     Cemeteries      Funeral         
     Southeast      Northeast      West      Homes      Total  
     (in thousands)  

Balance as of December 31, 2013

   $ 6,174       $ —         $ 11,948       $ 30,615       $ 48,737   

Goodwill acquired from acquisitions during the nine months ended September 30, 2014

     3,643         2,903         —           1,845         8,391   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Balance as of September 30, 2014

   $ 9,817       $ 2,903       $ 11,948       $ 32,460       $ 57,128   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Other Acquired Intangible Assets

The Company has other acquired intangible assets, most of which have been recognized as a result of acquisitions and long-term operating agreements. All of the intangible assets are subject to amortization. The major classes of intangible assets are as follows:

 

     As of
September 30, 2014
     As of
December 31, 2013
 
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Intangible
Asset
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Intangible
Asset
 
     (in thousands)  

Amortized intangible assets:

               

Lease and management agreements

   $ 59,758       $ (332   $ 59,426       $ —         $ —        $ —     

Underlying contract value

     6,239         (819     5,420         6,239         (702     5,537   

Non-compete agreements

     7,950         (5,011     2,939         7,950         (4,003     3,947   

Other intangible assets

     269         (109     160         269         (98     171   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 74,216       $ (6,271   $ 67,945       $ 14,458       $ (4,803   $ 9,655   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

On May 28, 2014, the Company and the Archdiocese of Philadelphia closed a transaction involving a lease agreement and a management agreement, pursuant to which the Company will operate 13 cemeteries in Pennsylvania for a term of 60 years, subject to certain termination provisions. Refer to Note 13 for a detailed discussion on this transaction. The Company recorded the underlying value of the lease and management agreements as a contract-based intangible asset at the present value of the consideration, less the fair value of net assets acquired. The discounted value will be amortized over the term of the agreements and was determined using an effective annual rate of 8.3%, which represents an estimate of the return an investor would require to make this type of investment in the Company over the rent payment period. The costs associated with obtaining the rights pursuant to these agreements were also capitalized and will be amortized over the life of the agreements.

 

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8. LONG-TERM DEBT

The Company had the following outstanding debt:

 

     As of  
     September 30,      December 31,  
     2014      2013  
     (in thousands)  

7.875% Senior Notes, due 2021

   $ 175,000       $ 175,000   

Revolving Credit Facility, due January 2017

     91,402         114,002   

Notes payable—acquisition debt

     903         1,571   

Notes payable—acquisition non-competes

     2,891         3,945   

Insurance and vehicle financing

     2,680         1,529   
  

 

 

    

 

 

 

Total

     272,876         296,047   

Less current portion

     3,373         2,916   

Less unamortized bond and note payable discounts

     3,672         4,115   
  

 

 

    

 

 

 

Long-term portion

   $ 265,831       $ 289,016   
  

 

 

    

 

 

 

This note includes a summary of material terms of the 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 2013 Form 10-K.

7.875% Senior Notes due 2021

On May 28, 2013, the Company issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). The Company pays 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, commencing on December 1, 2013. The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the “Prior Senior Notes”) and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. The Company incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and will be amortized over the life of these notes. Based on trades made on September 30, 2014, the Company has estimated the fair value of its Senior Notes to be in excess of par and trading at a premium of 3.50%, which would imply a fair value of $181.1 million at September 30, 2014. The Senior Notes are valued using Level 2 inputs as defined by the Fair Value Measurements and Disclosures topic of the ASC in Note 15. As of September 30, 2014, the Company was in compliance with all applicable covenants of the Senior Notes.

Credit Facility

On January 19, 2012, the Company entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”). The terms of the Credit Agreement are substantially the same as the terms of the Second Amended and Restated Credit Agreement, as amended. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the Credit Agreement or the amendments to the Credit Agreement, as applicable. The Credit Agreement was amended three times in 2013.

On May 22, 2014, the Company entered into the Fourth Amendment to the Credit Agreement. The Fourth Amendment increased the maximum Consolidated Leverage Ratio to 4.00 to 1.0 for any period and amended the definition of Consolidated EBITDA to, among other things, remove existing balance sheet adjustments and replace them with certain cash flow statement adjustments. The Fourth Amendment also contains certain conforming changes to reflect the Lenders’ consent to the closing of the transactions with the Archdiocese of Philadelphia and Service Corporation International, both of which took place in the second quarter of 2014 and are described in detail in Note 13.

As amended, the Company has a revolving credit facility (the “Credit Facility”) with a borrowing limit of $140.0 million, of which $91.4 million was outstanding at September 30, 2014, and a maturity date of January 19, 2017. The Credit Facility may be used to finance working capital requirements, Permitted Acquisitions and Capital Expenditures. The maximum Consolidated Leverage Ratio is 4.00 to 1.0 for any measurement period. The minimum Consolidated

 

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Debt Service Coverage Ratio is 2.50 for any measurement period. The ranges of the Applicable Rates are 3.00%, 4.00%, and 0.800% for Base Rate Loans, Eurodollar Rate Loans and Letter of Credit Fees, and Commitment Fees, respectively, when the Consolidated Leverage Ratio is greater than or equal to 3.75 to 1.0. The Company is not allowed to permit Consolidated EBITDA for any measurement period to be less than the sum of (i) $57.8 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after March 31, 2013.

The amount of aggregate consideration the Company may pay for a Permitted Acquisition, without Required Lender approval, is $10.0 million on an individual basis and $50.0 million when aggregated with the total Aggregate Consideration paid by or on behalf of the Company for all other Permitted Acquisitions which closed within the immediately preceding 365 days.

The amounts outstanding under the Credit Facility bore interest at rates between 2.9% and 4.0% at September 30, 2014. Amounts borrowed may be either Base Rate Loans or Eurodollar Rate Loans and amounts repaid or prepaid during the term may be reborrowed. Depending on the type of loan, borrowings bear interest at the Base Rate or Eurodollar Rate, plus applicable margins ranging from 1.25% to 3.00% and 2.25% to 4.00%, respectively, depending on the Company’s Consolidated Leverage Ratio. The Base Rate is the highest of the Prime Rate, the Federal Funds Rate plus 0.50%, or the Eurodollar Rate plus 1.0%. The Eurodollar Rate is the British Bankers Association LIBOR Rate. The Credit Facility approximates fair value as it consists of multiple current LIBOR borrowings with maturities of 90 days or less, with amounts that can be rolled-over or reborrowed at market rates. It is valued using Level 2 inputs.

The Credit Agreement requires the Company to pay an unused Commitment Fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments. The Commitment Fee Rate ranges from 0.375% to 0.800% depending on the Company’s Consolidated Leverage Ratio.

The Credit Agreement contains restrictive covenants that, among other things, prohibit distributions upon defined events of default, restrict investments and sales of assets and require the Company to maintain certain financial covenants, including specified financial ratios. A material decrease in revenues could cause the Company to breach certain of its financial covenants. Any such breach could allow the Lenders to accelerate the Company’s debt (and cause cross-default) which would have a material adverse effect on the Company’s business, financial condition or results of operations. The Company’s covenants include a certain measure of Consolidated EBITDA, a Consolidated Leverage Ratio and a Consolidated Debt Service Coverage Ratio. As of September 30, 2014, the Company was in compliance with all applicable financial covenants.

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

 

9. INCOME TAXES

As of September 30, 2014, the Company’s taxable corporate subsidiaries had federal net operating loss carryforwards of approximately $194.3 million, which will begin to expire in 2019 and $238.2 million in state net operating losses, a portion of which expires annually.

The Partnership is not a taxable entity for federal and state income tax purposes; rather, the 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.

 

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Table of Contents

The provision for income taxes for the three and nine months ended September 30, 2014 and 2013 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2014 and 2013, respectively. The 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 Internal Revenue Service (“IRS”) audited the Company’s federal income tax return for the year ended December 31, 2010. The scope of this audit included an audit of the Company’s qualifying income. In order to be treated as a partnership for federal income tax purposes, at least 90% of the Company’s gross income must be qualifying income. The IRS concluded its audit and notified the Company on April 11, 2013 that it was not proposing any adjustments to the return as filed.

The Company is not currently under examination by any federal or state jurisdictions. The federal statute of limitations and certain state statutes of limitations are open from 2010 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. On the basis of present information, it is the opinion of the 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, 2014 and December 31, 2013, deferred cemetery revenues, net, consisted of the following:

 

     As of  
     September 30,     December 31,  
     2014     2013  
     (in thousands)  

Deferred cemetery revenue

   $ 439,449      $ 403,250   

Deferred merchandise trust revenue

     102,097        88,730   

Deferred merchandise trust unrealized gains (losses)

     12,745        10,996   

Deferred pre-acquisition margin

     139,071        131,274   

Deferred cost of goods sold

     (58,557     (54,257
  

 

 

   

 

 

 

Deferred cemetery revenues, net

   $ 634,805      $ 579,993   
  

 

 

   

 

 

 

Deferred selling and obtaining costs

   $ 94,853      $ 87,998   

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

 

11. COMMITMENTS AND CONTINGENCIES

Legal

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

Leases

At September 30, 2014, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to twenty five years and options to renew at varying terms. Expenses under these operating leases were $0.5 million and $1.7 million for the three and nine months ended September 30, 2014, respectively, as compared to $0.7 million and $2.0 million during the same periods last year.

 

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Table of Contents

At September 30, 2014, the operating leases will result in future payments in the following approximate amounts from January 1, 2015 and beyond:

 

     (in thousands)  

2015

   $ 1,712   

2016

     1,521   

2017

     1,373   

2018

     1,181   

2019

     1,031   

Thereafter

     1,214   
  

 

 

 

Total

   $ 8,032   
  

 

 

 

Other

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

 

12. PARTNERS’ CAPITAL

Unit-Based Compensation

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

Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three and nine months ended September 30, 2014 and 2013 are summarized in the table below:

 

     Three months ended      Nine months ended  
     September 30,      September 30,  
     2014      2013      2014      2013  
     (in thousands)      (in thousands)  

Unit appreciation rights

   $ 21       $ 137       $ 60       $ 416   

Restricted phantom units

     244         211         742         622   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unit-based compensation expense

   $ 265       $ 348       $ 802       $ 1,038   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of September 30, 2014, there was approximately $0.2 million in non-vested unit appreciation rights expense outstanding. These unit appreciation rights will be expensed through 2018.

The diluted weighted average number of limited partners’ units outstanding presented on the unaudited condensed consolidated statement of operations does not include 180,959 and 179,929 units for the three and nine months ended September 30, 2014, respectively, and 306,723 and 318,134 units for the three and nine months ended September 30, 2013, respectively, as their effects would be anti-dilutive.

On September 10, 2014, the StoneMor Partners L.P. Long-Term Incentive Plan, as amended, expired pursuant to its terms. Outstanding awards under this plan continue in effect in accordance with their terms, but the Company is unable to grant new awards under this plan. Subject to unitholder approval, the board of directors of the general partner of the Company unanimously approved the StoneMor Partners L.P. 2014 Long-Term Incentive Plan effective September 24, 2014.

Other Unit Issuances

On February 27, 2014, the Company completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.2 million. The proceeds from the offering were used to pay down borrowings outstanding under the Credit Facility.

On April 1, 2014, the Company issued 15,363 common units in connection with Mr. Peter K. Grunebaum’s retirement from the Board of Directors of the Company’s general partner. In connection with his service as a director, Mr. Grunebaum received restricted phantom units awards and was entitled to distribution equivalent rights accruing on restricted phantom units pursuant to the StoneMor Partners L.P. Long-Term Incentive Plan, as amended. Mr. Grunebaum’s restricted phantom units were settled for the same number of common units upon his retirement.

 

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Table of Contents

On May 21, 2014, the Company sold to American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (“ACII”), 2,255,947 common units in the Company at an aggregate purchase price of $55.0 million, or $24.38 per unit, pursuant to a Common Unit Purchase Agreement (the “Common Unit Purchase Agreement”), dated May 19, 2014, by and between the Company and ACII. The proceeds were used primarily to fund the up-front rent consideration for the transaction with the Archdiocese of Philadelphia that closed during the second quarter of 2014. Refer to Note 13 for a more detailed discussion on the transaction with the Archdiocese of Philadelphia.

Pursuant to the Common Unit Purchase Agreement, commencing with the quarter ended June 30 2014, ACII is entitled to receive distributions equal to those paid on common units generally. Through the quarterly distribution payable for the quarter ending June 30, 2018, such distributions may be paid in cash, common units issued to ACII in lieu of cash distributions (the “Distribution Units”), or a combination of cash and Distribution Units, as determined by the Company in its sole discretion. If the Company elects to pay distributions through the issuance of Distribution Units, the number of common units to be issued in connection with a quarterly distribution will be the quotient of (A) the amount of the quarterly distribution paid on the common units by (B) the volume-weighted average price of the common units for the thirty (30) trading days immediately preceding the date a quarterly distribution is declared with respect to the common units. Beginning with the quarterly distribution payable with respect to the quarter ending September 30, 2018, the common units purchased by ACII will receive cash distributions on the same basis as all other common units and the Company will no longer have the ability to elect to pay quarterly distributions in kind through the issuance of Distribution Units.

Under the Common Unit Purchase Agreement, the units purchased by ACII are also subject to a lock-up period (the “Lock-Up Period”) ending on July 1, 2018. During the Lock-Up Period, ACII may not directly or indirectly (a) offer for sale, sell, pledge or otherwise dispose of these units, (b) enter into any swap or other derivatives transaction that transfers to another, in whole or in part, any of the economic benefits or risks of ownership of these units, or (c) publicly disclose the intention to do any of the foregoing. However, ACII may transfer the units to any affiliate or any investment fund or other entity controlled or managed by ACII who agrees to be bound by the terms of the Common Unit Purchase Agreement. Distribution Units are not subject to the Lock-Up Period.

On August 14, 2014, the Company issued 57,062 Distribution Units to ACII in lieu of a cash distribution of approximately $1.4 million.

On June 12, 2014, after the exercise of the underwriters’ over-allotment option, the Company completed a follow-on public offering of 2,990,000 common units at a price of $23.67 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.1 million. The proceeds from the offering were used to pay the purchase price related to the transaction with Service Corporation International, which closed in the second quarter of 2014, with the remainder used to pay down borrowings outstanding under the Credit Facility. Refer to Note 13 for a more detailed discussion of the acquisition.

During the nine months ended September 30, 2014 an additional 136,361 units were issued under the StoneMor Partners L.P. Long-Term Incentive Plan.

The number of common units outstanding was 29,131,835 and 21,377,102 as of September 30, 2014 and December 31, 2013, respectively.

 

13. ACQUISITIONS

First Quarter 2014 Acquisition

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

 

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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

   $ 47   

Cemetery property

     470   

Property and equipment

     140   

Merchandise trusts, restricted, at fair value

     2,607   

Perpetual care trusts, restricted, at fair value

     691   
  

 

 

 

Total assets

     3,955   
  

 

 

 

Liabilities:

  

Deferred margin

     1,035   

Merchandise liabilities

     956   

Deferred tax liability

     641   

Perpetual care trust corpus

     691   

Other liabilities

     20   
  

 

 

 

Total liabilities

     3,343   
  

 

 

 

Fair value of net assets acquired

     612   
  

 

 

 

Consideration paid

     200   
  

 

 

 

Gain on bargain purchase

   $ 412   
  

 

 

 

Second Quarter 2014 Acquisition

On June 10, 2014, certain subsidiaries of the Company (collectively the “Buyers”) closed the transaction under the Asset Sale Agreements (the “Agreements”), with certain subsidiaries of Service Corporation International (collectively the “Sellers”) to acquire nine funeral homes, twelve cemeteries and certain related assets in Central Florida, North Carolina, Southeastern Pennsylvania and Virginia. In consideration for the net assets acquired, the Buyers paid the Sellers $53.8 million in cash. This amount is subject to post-closing adjustments dependent upon the actual amounts of accounts receivable, merchandise trusts net of merchandise liabilities and perpetual care trusts transferred.

The table below reflects the 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 Cemetery Operations – Southeast, Cemetery Operations – Northeast and Funeral Homes operating segments.

 

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Table of Contents
     Preliminary  
     Assessment  
     (in thousands)  

Assets:

  

Accounts receivable

   $ 6,191   

Cemetery property

     26,033   

Property and equipment

     15,782   

Merchandise trusts, restricted, at fair value

     29,512   

Perpetual care trusts, restricted, at fair value

     15,350   

Other assets

     1,408   
  

 

 

 

Total assets

     94,276   
  

 

 

 

Liabilities:

  

Deferred margin

     11,233   

Merchandise liabilities

     20,918   

Deferred tax liability

     1,315   

Perpetual care trust corpus

     15,350   

Other liabilities

     51   
  

 

 

 

Total liabilities

     48,867   
  

 

 

 

Fair value of net assets acquired

     45,409   
  

 

 

 

Consideration paid

     53,800   
  

 

 

 

Goodwill from purchase

   $ 8,391   
  

 

 

 

Agreements with the Archdiocese of Philadelphia

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

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.

 

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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.

First Quarter 2013 Acquisition

On February 19, 2013, StoneMor Florida Subsidiary LLC, a subsidiary of the Company, (the “Buyer) entered into an Asset Purchase and Sale Agreement (the “Seawinds Agreement”) with several Florida limited liability companies and one individual (collectively the “Seller”). Pursuant to the Agreement, the Buyer acquired six funeral homes in Florida, including certain related assets, and assumed certain related liabilities.

In consideration for the net assets acquired, the Buyer paid the Seller $9.1 million in cash and issued 159,635 common units, which equates to approximately $3.6 million worth of common units under the terms of the Seawinds Agreement. The Buyer also issued an unsecured promissory note in the amount of $3.0 million that was payable on February 19, 2014 and bore interest at 5.0%. In addition, the Buyer will also pay an aggregate amount of $1.2 million in six equal annual installments commencing on February 19, 2014 in exchange for a non-compete agreement with the Seller. The non-compete agreement will be amortized over the 6 year term of the agreement.

The table below reflects the Company’s final assessment of the fair value of net assets acquired and displays the adjustments made to the revised values reported at December 31, 2013. The Company obtained additional information in the first quarter of 2014 and has retrospectively adjusted these values as noted below. The resulting goodwill is recorded in the Company’s Funeral Homes operating segment.

 

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     Revised            Final  
     Assessment      Adjustments     Assessment  
     (in thousands)  

Assets:

       

Accounts receivable

   $ 695       $ 311      $ 1,006   

Property and equipment

     8,315         —          8,315   

Merchandise trusts, restricted, at fair value

     4,853         —          4,853   

Non-compete agreements

     1,927         —          1,927   
  

 

 

    

 

 

   

 

 

 

Total assets

     15,790         311        16,101   
  

 

 

    

 

 

   

 

 

 

Liabilities:

       

Deferred margin

     2,419         (1,592     827   

Merchandise liabilities

     2,233         2,606        4,839   

Other liabilities

     164         —          164   
  

 

 

    

 

 

   

 

 

 

Total liabilities

     4,816         1,014        5,830   
  

 

 

    

 

 

   

 

 

 

Fair value of net assets acquired

     10,974         (703     10,271   
  

 

 

    

 

 

   

 

 

 

Consideration paid—cash

     9,100         —          9,100   

Consideration paid—units

     3,592         —          3,592   

Fair value of note payable

     3,000         —          3,000   

Fair value of debt assumed for non-compete agreement

     924         —          924   
  

 

 

    

 

 

   

 

 

 

Total consideration paid

     16,616         —          16,616   
  

 

 

    

 

 

   

 

 

 

Goodwill from purchase

   $ 5,642       $ 703      $ 6,345   
  

 

 

    

 

 

   

 

 

 

Third Quarter 2013 Acquisition

On August 1, 2013, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Carriage Cemetery Services, Inc. (the “Seller”). Pursuant to the agreement, the Buyer acquired 1 cemetery in Virginia, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $5.0 million in cash.

The table below reflects the 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

   $ 525   

Cemetery property

     3,900   

Property and equipment

     1,047   

Merchandise trusts, restricted, at fair value

     5,461   

Perpetual care trusts, restricted, at fair value

     5,888   
  

 

 

 

Total assets

     16,821   
  

 

 

 

Liabilities:

  

Merchandise liabilities

     1,252   

Deferred margin

     1,356   

Perpetual care trust corpus

     5,888   

Other liabilities

     94   

Deferred tax liability

     701   
  

 

 

 

Total liabilities

     9,291   
  

 

 

 

Fair value of net assets acquired

     7,530   
  

 

 

 

Consideration paid

     5,000   
  

 

 

 

Gain on bargain purchase

   $ 2,530   
  

 

 

 

 

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If the acquisitions from 2014 and 2013 had been consummated at the beginning of the comparable prior annual reporting period, on a pro forma basis, for the three and nine months ended September 30, 2014 and 2013, consolidated revenues, consolidated net losses and net losses per limited partner unit (basic and diluted) would have been as follows:

 

     Three months ended     Nine months ended  
     September 30,     September 30,  
     2014     2013     2014     2013  
     (in thousands, except per unit data)  

Revenue

   $ 78,174      $ 69,616      $ 227,593      $ 208,327   

Net loss

     (3,268     (1,108     (2,625     (13,980

Net loss per limited partner unit (basic and diluted)

   $ (.11   $ (.04   $ (.09   $ (.53

These pro forma results are unaudited and have been prepared for comparative purposes only and include certain adjustments such as increased interest on the acquisition of debt, changes in the timing of financing events and the recognition of a gain on acquisition occurring during 2014 in 2013 rather than in the current period. They do not purport to be indicative of the results of operations which actually would have resulted had the combinations been in effect at the beginning of the comparable prior annual reporting period or of future results of operations of the locations.

The properties acquired in 2014 have contributed $8.0 million and $10.3 million of revenue, for the three and nine months ended September 30, 2014, respectively, and $0.4 million of operating profit for both the three and nine months ended September 30, 2014. The properties acquired in 2013 have contributed $1.6 million and $4.3 million of revenue for the three and nine months ended September 30, 2014, respectively, and $0.2 million and $0.3 million of operating profit for the three and nine months ended September 30, 2014, respectively.

Second Quarter 2014 Settlement

During the nine months ended September 30, 2014, the Company received $1.5 million in cash proceeds related to the settlement of claims from locations acquired by the Company in 2010. Of this amount, $0.3 million is for the reimbursement of legal fees and is recorded as a recovery to corporate overhead and another $0.3 million has been accrued for contingent legal fees payable. A gain of $0.9 million has been recorded as gain on settlement agreement, net, on the unaudited condensed consolidated statement of operations for the proceeds received, net of legal fees.

First and Second Quarter 2013 Settlement

During the nine months ended September 30, 2013, the Company recovered $18.4 million, net of legal fees, costs, and contractual obligations related to the settlement of claims from locations that the Company acquired in 2010 and 2011. Of this amount, $6.5 million was contributed directly to the related perpetual care and merchandise trusts on the Company’s behalf. $3.4 million of these direct payments represent a gain on settlement agreement on the unaudited condensed consolidated statement of operations due to an increase in the merchandise trusts not previously accrued for in purchase accounting.

The Company received $11.9 million in cash proceeds from the settlement. Of this amount, $1.7 million and $1.3 million are for the reimbursement of legal fees and are recorded as recoveries to corporate overhead and acquisition related costs, respectively. The remaining proceeds were recorded as a gain on settlement agreement on the unaudited condensed consolidated statement of operations. The total gain on settlement for the nine months ended September 30, 2013 was $12.3 million. Of the amounts noted above, $1.3 million, inclusive of a gain on settlement agreement of $0.9 million and $0.4 million of recovery of legal fees, was recognized during the first quarter of 2013.

 

14. SEGMENT INFORMATION

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

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

 

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Table of Contents

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.

Segment information is as follows:

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

 

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

Revenues

                  

Sales

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

Service and other

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

Funeral home

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

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

Cemetery

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

Selling

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

General and administrative

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

Corporate overhead

     —           —           —           —           8,392        —          8,392   

Depreciation and amortization

     800         670         539         867         236        —          3,112   

Funeral home

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

Acquisition related costs, net of recoveries

     —           —           —           —           451        —          451   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 634,012       $ 422,601       $ 448,732       $ 163,181       $ 40,677      $ —        $ 1,709,203   

Amortization of cemetery property

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

Long lived asset additions

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

Goodwill

   $ 9,817       $ 2,903       $ 11,948       $ 32,460       $ —        $ —        $ 57,128   

 

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Table of Contents

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

 

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

Revenues

                  

Sales

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

Service and other

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

Funeral home

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

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

Cemetery

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

Selling

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

General and administrative

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

Corporate overhead

     —           —           —           —           22,394        —          22,394   

Depreciation and amortization

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

Funeral home

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

Acquisition related costs, net of recoveries

     —           —           —           —           2,040        —          2,040   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit

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

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 634,012       $ 422,601       $ 448,732       $ 163,181       $ 40,677      $ —        $ 1,709,203   

Amortization of cemetery property

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

Long lived asset additions

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

Goodwill

   $ 9,817       $ 2,903       $ 11,948       $ 32,460       $ —        $ —        $ 57,128   

As of and for the three months ended September 30, 2013:

 

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

Revenues

                  

Sales

   $ 24,304       $ 8,963       $ 10,440       $ —         $ —        $ (11,230   $ 32,477   

Service and other

     9,200         7,078         8,494         —           —          (6,083     18,689   

Funeral home

     —           —           —           12,094         —          (1,721     10,373   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     33,504         16,041         18,934         12,094         —          (19,034     61,539   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     4,929         1,811         2,202         —           —          (1,840     7,102   

Cemetery

     6,787         3,691         4,029         —           —          —          14,507   

Selling

     7,769         3,081         3,367         —           —          (2,525     11,692   

General and administrative

     4,064         1,582         2,256         —           —          —          7,902   

Corporate overhead

     —           —           —           —           7,997        —          7,997   

Depreciation and amortization

     575         224         548         859         172        —          2,378   

Funeral home

     —           —           —           9,161         —          (180     8,981   

Acquisition related costs, net of recoveries

     —           —           —           —           243        —          243   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     24,124         10,389         12,402         10,020         8,412        (4,545     60,802   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit

   $ 9,380       $ 5,652       $ 6,532       $ 2,074       $ (8,412   $ (14,489   $ 737   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 557,308       $ 306,577       $ 418,119       $ 132,928       $ 35,061      $ —        $ 1,449,993   

Amortization of cemetery property

   $ 1,152       $ 585       $ 305       $ —         $ —        $ (132   $ 1,910   

Long lived asset additions

   $ 6,287       $ 451       $ 1,477       $ 362       $ 15      $ —        $ 8,592   

Goodwill

   $ 6,174       $ —         $ 11,948       $ 30,615       $ —        $ —        $ 48,737   

 

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Table of Contents

As of and for the nine months ended September 30, 2013:

 

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

Revenues

                  

Sales

   $ 70,941       $ 27,664       $ 32,483       $ —         $ —        $ (36,332   $ 94,756   

Service and other

     28,779         19,382         24,238         —           —          (16,049     56,350   

Funeral home

     —           —           —           36,904         —          (4,437     32,467   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     99,720         47,046         56,721         36,904         —          (56,818     183,573   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     14,704         6,336         5,801         —           —          (5,737     21,104   

Cemetery

     19,746         10,809         12,145         —           —          —          42,700   

Selling

     22,913         9,675         10,128         —           833        (8,415     35,134   

General and administrative

     12,266         4,774         6,342         —           —          —          23,382   

Corporate overhead

     —           —           —           —           21,657        —          21,657   

Depreciation and amortization

     1,688         679         1,613         2,268         911        —          7,159   

Funeral home

     —           —           —           27,582         —          (501     27,081   

Acquisition related costs, net of recoveries

     —           —           —           —           901        —          901   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     71,317         32,273         36,029         29,850         24,302        (14,653     179,118   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit

   $ 28,403       $ 14,773       $ 20,692       $ 7,054       $ (24,302   $ (42,165   $ 4,455   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 557,308       $ 306,577       $ 418,119       $ 132,928       $ 35,061      $ —        $ 1,449,993   

Amortization of cemetery property

   $ 3,182       $ 1,943       $ 866       $ —         $ —        $ (470   $ 5,521   

Long lived asset additions

   $ 8,613       $ 1,710       $ 2,735       $ 9,287       $ 763      $ —        $ 23,108   

Goodwill

   $ 6,174       $ —         $ 11,948       $ 30,615       $ —        $ —        $ 48,737   

Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting equivalent to GAAP; therefore, the financial results of individual operating segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the operating segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Revenues and associated expenses are not deferred in accordance with SAB No. 104; therefore, the deferral of these revenues and expenses is provided in the adjustment column to reconcile the 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.

 

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15. FAIR VALUE MEASUREMENTS

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

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

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

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

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

The following table displays the Company’s assets measured at fair value as of September 30, 2014 and December 31, 2013.

 

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As of September 30, 2014

Merchandise Trust

 

     Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 51,328       $ —         $ 51,328   

Fixed maturities:

        

U.S. state and local government agency

     —           75         75   

Corporate debt securities

     —           9,220         9,220   

Other debt securities

     —           7,145         7,145   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     —           16,440         16,440   
  

 

 

    

 

 

    

 

 

 

Mutual funds—debt securities

     128,300         —           128,300   

Mutual funds—equity securities—real estate sector

     52,379         —           52,379   

Mutual funds—equity securities—energy sector

     8,498         —           8,498   

Mutual funds—equity securities—MLP’s

     29,821         —           29,821   

Mutual funds—equity securities—other

     91,071         —           91,071   

Equity securities:

        

Master limited partnerships

     56,196         —           56,196   

Global equity securities

     34,309         —           34,309   

Other invested assets

     —           5,240         5,240   
  

 

 

    

 

 

    

 

 

 

Total

   $ 451,902       $ 21,680       $ 473,582   
  

 

 

    

 

 

    

 

 

 

Perpetual Care Trust

 

     Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 27,257       $ —         $ 27,257   

Fixed maturities:

        

U.S. government and federal agency

     117         —           117   

U.S. state and local government agency

     —           57         57   

Corporate debt securities

     —           24,456         24,456   

Other debt securities

     —           371         371   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     117         24,884         25,001   
  

 

 

    

 

 

    

 

 

 

Mutual funds—debt securities

     118,512         —           118,512   

Mutual funds—equity securities—real estate sector

     38,183         —           38,183   

Mutual funds—equity securities—energy sector

     16,296         —           16,296   

Mutual funds—equity securities—MLP’s

     47,863         —           47,863   

Mutual funds—equity securities—other

     23,757         —           23,757   

Equity securities:

        

Master limited partnerships

     47,283         —           47,283   

Global equity securities

     4,798         —           4,798   
  

 

 

    

 

 

    

 

 

 

Total

   $ 324,066       $ 24,884       $ 348,950   
  

 

 

    

 

 

    

 

 

 

 

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As of December 31, 2013

Merchandise Trust

 

     Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 46,518       $ —         $ 46,518   

Fixed maturities:

        

Corporate debt securities

     —           9,171         9,171   

Other debt securities

     —           7,324         7,324   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     —           16,495         16,495   
  

 

 

    

 

 

    

 

 

 

Mutual funds—debt securities

     111,333         —           111,333   

Mutual funds—equity securities—real estate sector

     49,103         —           49,103   

Mutual funds—equity securities—MLP’s

     36,193         —           36,193   

Mutual funds—equity securities—other

     72,234         —           72,234   

Equity securities:

        

Master limited partnerships

     57,258         —           57,258   

Global equity securities

     28,437         —           28,437   

Other invested assets

     —           5,723         5,723   
  

 

 

    

 

 

    

 

 

 

Total

   $ 401,076       $ 22,218       $ 423,294   
  

 

 

    

 

 

    

 

 

 

Perpetual Care Trust

 

     Level 1      Level 2      Total  
     (in thousands)  

Assets

        

Short-term investments

   $ 16,686       $ —         $ 16,686   

Fixed maturities:

        

U.S. government and federal agency

     372         —           372   

Corporate debt securities

     —           24,510         24,510   

Other debt securities

     —           371         371   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     372         24,881         25,253   
  

 

 

    

 

 

    

 

 

 

Mutual funds—debt securities

     116,013         —           116,013   

Mutual funds—equity securities—real estate sector

     40,763         —           40,763   

Mutual funds—equity securities—energy sector

     14,761         —           14,761   

Mutual funds—equity securities—MLP’s

     46,817         —           46,817   

Mutual funds—equity securities—other

     13,252         —           13,252   

Equity securities:

        

Master limited partnerships

     36,925         —           36,925   

Global equity securities

     919         —           919   

Other invested assets

     —           382         382   
  

 

 

    

 

 

    

 

 

 

Total

   $ 286,508       $ 25,263       $ 311,771   
  

 

 

    

 

 

    

 

 

 

 

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

Level 2 securities primarily consist of corporate and other fixed income debt securities. The Company obtains pricing information for these securities from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and assumptions to the pricing 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.

 

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, when used in a historical context prior to the closing of the initial public offering of StoneMor Partners L.P. on September 20, 2004, refer to Cornerstone Family Services, Inc. (“Cornerstone”), (and, after its conversion, CFSI LLC), and its subsidiaries and thereafter refer to StoneMor Partners L.P. and its subsidiaries.

This 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 or guidance related to our future distributions, as well as certain information in our other filings with the SEC and elsewhere are forward-looking statements.

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

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

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

 

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When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2013 (“2013 Form 10-K”) and our other reports filed with the SEC. Except as required under applicable law, we assume no obligation to update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Organization

We were organized on April 2, 2004 to own and operate the cemetery and funeral home business conducted by Cornerstone and its subsidiaries. On September 20, 2004, in connection with our initial public offering of common units, Cornerstone contributed to us substantially all of its assets, liabilities and businesses, and then converted into CFSI LLC, a limited liability company. This transfer represented a reorganization of entities under common control and was recorded at historical cost.

Cornerstone had been founded in 1999 by members of our management team and a private equity investment firm in order to acquire a group of 123 cemetery properties and 4 funeral homes. Since that time, Cornerstone, succeeded by us, has acquired additional cemeteries and funeral homes, entered into long term cemetery operating agreements, built funeral homes, and sold cemeteries and funeral homes, resulting in the operation of 303 cemeteries and 98 funeral homes as of September 30, 2014.

Capitalization

On September 20, 2004, we completed our initial public offering. Since that time, we have completed additional follow-on public offerings and debt offerings.

On February 27, 2014, we completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.2 million. The proceeds from the offering were used to pay down borrowings outstanding under the Credit Facility.

On May 21, 2014, we sold 2,255,947 common units to American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (“ACII”), at an aggregate purchase price of $55.0 million, or $24.38 per unit, pursuant to a Common Unit Purchase Agreement dated May 19, 2014. The proceeds were used primarily to fund the up-front rent consideration for the transaction with the Archdiocese of Philadelphia that closed during the second quarter of 2014.

On June 12, 2014, after the exercise of the underwriters’ over-allotment option, we completed our most recent follow-on public offering of 2,990,000 common units at a price of $23.67 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.1 million. The proceeds from the offering were used primarily to pay the purchase price related to our acquisition from Service Corporation International, which closed in the second quarter of 2014, with the remainder used to pay down borrowings outstanding under our Credit Facility. Refer to Note 13 of our unaudited condensed consolidated financial statements in Item 1 of Part I of this Form 10-Q for a more detailed discussion of the acquisition.

Overview

Cemetery Operations

We are currently the second largest owner and operator of cemeteries in the United States. As of September 30, 2014, we operated 303 cemeteries in 27 states and Puerto Rico. We own 272 of these cemeteries, and we operate the remaining 31 under lease, operating or management contracts. As a result of the agreements, other control arrangements and applicable accounting rules, we have treated 16 of these cemeteries as acquisitions for accounting purposes.

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

 

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We sell cemetery products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Revenues from cemetery operations accounted for approximately 84.3% and 83.4% of our total revenues during the three and nine months ended September 30, 2014 as compared to 83.1% and 82.3% during the same periods last year.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

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

 

    the merchandise is complete and ready for installation; or

 

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

 

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

We generally satisfy these delivery criteria by purchasing the merchandise and either installing it on our cemetery property or storing it, at the 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.

 

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Contracts related to pre-need installment sales are usually for a period not to exceed 60 months, with payments of principal and interest required. Pre-need sales contracts normally contain provisions for both principal and interest. For those contracts that do not bear a market rate of interest, we impute such interest based upon the prime rate plus 150 basis points, which resulted in a rate of 4.75% for the three and nine months ended September 30, 2014 and 2013.

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

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

At-need Sales

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

Expenses

We analyze and categorize our operating expenses as follows:

1. Cost of goods sold and selling expenses

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

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

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

2. Cemetery Expenses

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

3. General and administrative expenses

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

 

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4. Depreciation and amortization

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

5. Acquisition related costs

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

Funeral Home Operations

As of September 30, 2014, we owned and operated 98 funeral homes. These properties are located in 19 states and Puerto Rico. Forty-six of our funeral homes are located on the grounds of cemeteries that we own.

We derive revenues at our funeral homes from the sale of funeral home merchandise, including caskets and related funeral merchandise, and services, including removal and preparation of remains, the use of our facilities for visitation, worship and performance of funeral services and transportation services. We sell these services and merchandise generally at the time of need utilizing salaried licensed funeral directors. Funeral home revenues accounted for approximately 15.7% and 16.6% of our total revenues during the three and nine months ended September 30, 2014 as compared to 16.9% and 17.7% during the same periods last year.

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

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

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

Corporate

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

2014 Developments

Significant business developments for the nine months ended September 30, 2014 include the following:

 

    On February 27, 2014, we completed a follow-on public offering of 2,300,000 common units at a price of $24.45 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $53.2 million. The proceeds were used to pay down borrowings outstanding on our revolving credit facility.

 

    On May 21, 2014, we sold 2,255,947 common units to ACII, at an aggregate purchase price of $55.0 million, or $24.38 per unit, pursuant to a Common Unit Purchase Agreement dated May 19, 2014. The proceeds were used primarily to fund the up-front rent consideration for the transaction with the Archdiocese of Philadelphia that closed during the second quarter of 2014. ACII is an affiliate of American Infrastructure Funds, L.L.C., an investment adviser registered with the SEC. Robert B. Hellman, Jr., a director of our general partner, is a managing member of American Infrastructure Funds, L.L.C. and he is affiliated with entities that own membership interests in ACII and the entity that is the manager of ACII.

 

   

On May 21, 2014, Cornerstone Family Services LLC, and its direct and indirect subsidiaries: CFSI LLC (“CFSI”) and our general partner completed a series of transactions to streamline the ownership structure of CFSI and our general partner. As a result, our general partner has become a wholly-owned subsidiary of StoneMor GP Holdings LLC (“GP Holdings”), formerly known as CFSI. Also, Mr. Hellman, as Trustee of a trust, for the pecuniary benefit of ACII, has exclusive voting and investment power over approximately 67% of membership interests in GP Holdings, and Lawrence Miller, our President and Chief Executive Officer and a

 

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director of our general partner, William Shane, Allen Freedman, and Martin Lautman, directors of our general partner, Michael Stache and Robert Stache, retired executive officers of our general partner, and two family partnerships affiliated with Messrs. Miller and Shane collectively hold approximately 33% of membership interests in GP Holdings.

 

    On May 22, 2014, we entered into the Fourth Amendment to the Third Amended and Restated Credit Agreement. The Amendment obtained the Lenders’ approval for the closing of the transactions with the Archdiocese of Philadelphia and Service Corporation International, increased the Consolidated Leverage Ratio to 4.00 to 1.0 for any measurement period and amended the definition of Consolidated EBITDA to, among other things, remove existing balance sheet adjustments and replace them with certain cash flow statement adjustments. See Liquidity and Capital Resources for further discussion.

 

    On May 28, 2014, we and the Archdiocese of Philadelphia closed the transaction, pursuant to which we will operate 13 cemeteries in Pennsylvania for a term of 60 years, subject to certain termination provisions. At closing we paid an up-front rent of $53.0 million to the Archdiocese of Philadelphia. We recorded a contract-based intangible asset of $59.8 million, representing the underlying value from the agreements, at the present value of the total consideration less the fair value of net assets received, consisting of acquired accounts receivable of $1.6 million. A liability of $8.4 million was also recorded for the present value of future rent payments.

 

    On June 10, 2014, we closed the transaction with certain subsidiaries of Service Corporation International to acquire nine funeral homes, twelve cemeteries and certain related assets in Central Florida, North Carolina, Southeastern Pennsylvania and Virginia. In consideration for the net assets acquired, we paid $53.8 million in cash, subject to certain post-closing adjustments dependent upon the final value of certain net assets actually transferred.

 

    On June 12, 2014, after the exercise of the underwriters’ over-allotment option, we completed a follow-on public offering of 2,990,000 common units at a price of $23.67 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.1 million. The proceeds from the offering were used primarily to pay the purchase price related to our transaction with Service Corporation International, with the remainder used to pay down borrowings outstanding under our revolving credit facility.

Current Market Conditions and Economic Developments

In general, the financial markets have trended upward over the past few years. As of September 30, 2014, the market value of the assets in our merchandise trusts exceeded their amortized cost by 2.7%, which is a slight improvement from December 31, 2013 when the market value of the assets exceeded their amortized cost by 2.6%. As of September 30, 2014, the market value of the assets in our perpetual care trusts exceeded their amortized cost by 13.6%, which is an improvement from December 31, 2013 when the market value of the assets exceeded their amortized cost by 10.5%.

As of September 30, 2014, the majority of our long-term debt consisted of $175.0 million in Senior Notes due 2021 and $91.4 million of borrowings under our revolving credit facility which expires in 2017. As of September 30, 2014, we had $48.6 million of availability under our revolving credit facility. Further, on February 27, 2014 and June 12, 2014, we raised capital via follow-on public offerings of our common units.

The aggregate values of pre-need and at-need contracts written were $77.6 million and $219.2 million for the three and nine months ended September 30, 2014 as compared to $66.7 million and $201.9 million during the same periods last year.

Impact on Our Ability to Meet Our Debt Covenants

Current market conditions have not negatively impacted our ability to meet our significant debt covenants. These covenants specifically relate to a certain measure of Consolidated EBITDA and certain coverage and leverage ratios as defined in the Credit Agreement described below.

Consolidated EBITDA is primarily related to the current period value of contracts written, investment income from the merchandise and perpetual care trusts, and current expenses incurred. The revenue recognition rules we must follow in accordance with GAAP are not considered.

We have two primary debt covenants that are dependent upon our financial results, the Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio. The Consolidated Leverage Ratio relates to the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA. Our Consolidated Leverage Ratio was 2.67 at September 30, 2014 compared to a maximum allowed ratio of 4.00. The Consolidated Debt Service Coverage Ratio relates to the ratio of Consolidated EBITDA to Consolidated Debt Service. Our Consolidated Debt Service Coverage Ratio was 4.42 at September 30, 2014 compared to a minimum allowed ratio of 2.50.

 

 

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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 financial statements required us to make estimates, judgments and assumptions that affected the reported amounts of assets and liabilities at the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods (see Note 1 to the unaudited condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require 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 2013 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2013 Form 10-K.

Results of Operations – Segments

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

The method of accounting we utilize to analyze our overall results of operations, including segment results, provides for a production based view of our business. Under the production based view, we recognize revenues at their contract value at the point in time in which the contract is written, less a historic cancellation reserve. All related costs are expensed in the period the contract is recognized as revenue. In contrast, GAAP requires that we defer all revenues and the direct costs associated with these revenues, until we meet certain delivery and performance requirements. The nature of our business is such that there is no meaningful relationship between the time that elapses from the date a contract is executed and the date the underlying merchandise is delivered or the service, delivery and performance requirements are met. Further, certain factors affecting this time period, such as weather and supplier issues, are out of our control. As a result, during a period of growth, operating profits as defined by GAAP will tend to lag behind operating profits on a production based view because of the required deferral of revenues. Our performance based view ignores these delays

 

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and presents results based upon the underlying value of contracts written. We believe this is the most reliable indicator of our performance for a given period as the value of contracts written less a historical cancellation reserve reflects the economic value added during a given period of time. Accordingly, the ensuing segment discussion is on a basis of accounting that differs from generally accepted accounting principles. See Note 1 to the consolidated financial statements included in the 2013 Form 10-K for a more detailed discussion of our accounting policies under GAAP.

Three Months Ended September 30, 2014 Compared to Three Months Ended September 30, 2013

Cemetery Segments

Cemetery Operations – Southeast

Since June 30, 2013, we have acquired eleven properties in our Cemetery Operations – Southeast segment. The first acquisition occurred during the third quarter of 2013, the second occurred during the first quarter of 2014 and the remaining nine occurred during the second quarter of 2014. The results of operations for these acquired properties have either less or no impact on the results for the three months ended September 30, 2013, but are included in the results for the three months ended September 30, 2014. The acquisitions contributed approximately $3.3 million of the revenues and $2.4 million of the costs and expenses of the segment for the three months ended September 30, 2014.

The table below compares the results of operations for our Cemetery Operations – Southeast for the three months ended September 30, 2014 to the same period last year:

 

     Three months ended September 30,  
     2014      2013      Change ($)     Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 32,750       $ 33,504       $ (754     -2.3

Total costs and expenses

     25,677         24,124         1,553        6.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating profit

   $ 7,073       $ 9,380       $ (2,307     -24.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Revenues

The decrease in revenues was primarily related to a decrease of $2.2 million in the value of pre-need contracts written, partially offset by increases of $1.0 million in the value of at-need contracts written, $0.3 million in income from our trusts and $0.1 million in interest and other income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:

 

    A $0.7 million increase in cemetery expenses due to increases of $0.3 million in labor costs, $0.2 million in repairs and maintenance expense, and $0.1 million in both utility and fuel costs and real estate tax expense.

 

    A $0.4 million increase in selling expenses due to increases of $0.2 million in commissions and personnel costs and $0.1 million in both advertising and marketing costs and travel expenses.

 

    A $0.3 million increase in general and administrative expenses primarily due to a $0.3 million increase in personnel costs.

 

    A $0.2 million increase in depreciation expense.

Cemetery Operations – Northeast

During the second quarter of 2014, we acquired three properties and separately obtained the rights from the Archdiocese of Philadelphia to operate thirteen properties in our Cemetery Operations – Northeast segment. The results of operations for these properties have no impact on the results for the three months ended September 30, 2013, but are included in the results for the three months ended September 30, 2014. The additions have contributed approximately $7.6 million of the revenues and $5.5 million of the costs and expenses of the segment for the three months ended September 30, 2014.

 

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The table below compares the results of operations for our Cemetery Operations – Northeast for the three months ended September 30, 2014 to the same period last year:

 

     Three months ended September 30,  
     2014      2013      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 24,268       $ 16,041       $ 8,227         51.3

Total costs and expenses

     16,505         10,389         6,116         58.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 7,763       $ 5,652       $ 2,111         37.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $3.9 million in the value of at-need contracts written, $3.3 million in the value of pre-need contracts written and $1.0 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:

 

    A $0.7 million increase in the cost of goods sold primarily attributable to changes in product mix.

 

    A $2.9 million increase in cemetery expenses primarily due to increases of $2.2 million in labor costs, $0.4 million in repairs and maintenance expense and $0.2 million in utility and fuel costs.

 

    A $1.5 million increase in selling expenses attributable to a $1.3 million increase in commissions and personnel costs and a $0.2 million increase in advertising and marketing costs.

 

    A $0.5 million increase in general and administrative expenses mostly related to increases in personnel costs.

 

    A $0.5 million increase in depreciation expense, $0.3 million of which was attributable to the amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia.

Cemetery Operations – West

The table below compares the results of operations for our Cemetery Operations – West for the three months ended September 30, 2014 to the same period last year:

 

     Three months ended September 30,  
     2014      2013      Change ($)     Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 20,145       $ 18,934       $ 1,211        6.4

Total costs and expenses

     14,007         12,402         1,605        12.9
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating profit

   $ 6,138       $ 6,532       $ (394     -6.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Revenues

The increase in revenues was primarily related to increases of $0.8 million in the value of at-need contracts written, $0.5 million in the value of pre-need contracts written and $0.2 million in income from our trusts. These increases were partially offset by a decrease of $0.3 million in interest and other income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

 

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Total costs and expenses

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

 

    A $0.1 million decrease in cemetery expenses primarily related to a decrease in real estate tax expense.

 

    A $0.6 million increase in selling expenses primarily related to commissions and personnel costs.

 

    A $1.1 million increase in general and administrative expenses primarily due to an increase in legal costs related to a legal settlement.

Funeral Homes Segment

In the second quarter of 2014 we acquired nine funeral homes. Therefore, the results of operations for these properties have no impact on the results for the three months ended September 30, 2013, but are included in the results for the three months ended September 30, 2014. The additions have contributed approximately $2.2 million of the revenues and $1.5 million of the costs and expenses of the segment for the three months ended September 30, 2014.

The table below compares the results of operations for our Funeral Homes segment for the three months ended September 30, 2014 to the same period last year:

 

     Three months ended September 30,  
     2014      2013      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 14,457       $ 12,094       $ 2,363         19.5

Total costs and expenses

     11,541         10,020         1,521         15.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 2,916       $ 2,074       $ 842         40.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily attributable to increases of $1.3 million in the value of pre-need contracts written and $1.0 million in the value of at-need contracts written.

Total costs and expenses

The net increase in costs and expenses was primarily attributable to increases of $0.7 million in personnel costs and $0.4 million in facility related costs, largely due to the acquired properties, with the remaining increase in general and administrative expenses and other costs.

 

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Corporate Segment

The table below compares expenses incurred by the Corporate segment for the three months ended September 30, 2014 to the same period last year:

 

    Three months ended September 30,  
    2014     2013     Change ($)     Change (%)  
    (in thousands)  
    (non-GAAP)  

Selling, cemetery and general and administrative expenses

  $ 631      $ —        $ 631        100.0

Depreciation and amortization

    236        172        64        37.2

Acquisition related costs, net of recoveries

    451        243        208        85.6

Corporate expenses

       

Corporate personnel expenses

    3,425        3,145        280        8.9

Other corporate expenses

    4,967        4,852        115        2.4
 

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate overhead

    8,392        7,997        395        4.9
 

 

 

   

 

 

   

 

 

   

 

 

 

Total corporate expenses

  $ 9,710      $ 8,412      $ 1,298        15.4
 

 

 

   

 

 

   

 

 

   

 

 

 

The increase in corporate expenses was driven by increases of $0.6 million in selling expenses, primarily due to an increase in advertising costs, $0.3 million in corporate personnel expense and $0.2 million in acquisition related costs. Acquisition related costs will vary from period to period depending on the amount of acquisition activity that takes place.

Reconciliation of Segment Results of Operations to Consolidated Results of Operations

As discussed in the segment sections of this 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 until such time that we satisfy the delivery criteria for revenue recognition.

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

 

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

 

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

The table below analyzes results of operations and the changes therein for the three months ended September 30, 2014 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/ or changes in the timing of when merchandise and services were delivered:

 

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     Three months ended      Three months ended               
     September 30, 2014      September 30, 2013               
     (in thousands)      (in thousands)               
     Segment
Results
(non-GAAP)
     GAAP
Adjustments
    GAAP
Results
     Segment
Results
(non-GAAP)
     GAAP
Adjustments
    GAAP
Results
     Change in
GAAP results
($)
    Change in
GAAP results
(%)
 

Revenues

                    

Pre-need cemetery revenues

   $ 36,170       $ (5,030   $ 31,140       $ 34,642       $ (10,124   $ 24,518       $ 6,622        27.0

At-need cemetery revenues

     24,746         244        24,990         19,052         (1,325     17,727         7,263        41.0

Investment income from trusts

     13,985         (6,740     7,245         12,411         (6,015     6,396         849        13.3

Interest income

     1,807         —          1,807         1,484         —          1,484         323        21.8

Funeral home revenues

     14,457         (2,218     12,239         12,094         (1,721     10,373         1,866        18.0

Other cemetery revenues

     455         298        753         890         151        1,041         (288     -27.7
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     91,620         (13,446     78,174         80,573         (19,034     61,539         16,635        27.0
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Costs and expenses

                    

Cost of goods sold

     9,550         (488     9,062         8,942         (1,840     7,102         1,960        27.6

Cemetery expense

     18,076         —          18,076         14,507         —          14,507         3,569        24.6

Selling expense

     17,377         (883     16,494         14,217         (2,525     11,692         4,802        41.1

General and administrative expense

     9,808         —          9,808         7,902         —          7,902         1,906        24.1

Corporate overhead

     8,392         —          8,392         7,997         —          7,997         395        4.9

Depreciation and amortization

     3,112         —          3,112         2,378         —          2,378         734        30.9

Funeral home expense

     10,674         (315     10,359         9,161         (180     8,981         1,378        15.3

Acquisition related costs, net of recoveries

     451         —          451         243         —          243         208        85.6
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     77,440         (1,686     75,754         65,347         (4,545     60,802         14,952        24.6
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit

   $ 14,180       $ (11,760   $ 2,420       $ 15,226       $ (14,489   $ 737       $ 1,683        228.4
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Revenues

Pre-need cemetery revenues were $31.1 million for the three months ended September 30, 2014, an increase of $6.6 million, or 27.0%, as compared to $24.5 million during the same period last year. The increase was the result of an increase of $1.5 million in the value of cemetery contracts written and a decrease of $5.1 million in deferred revenue.

At-need cemetery revenues were $25.0 million for the three months ended September 30, 2014, an increase of $7.3 million, or 41.0%, as compared to $17.7 million during the same period last year. The increase was primarily caused by an increase of $5.7 million in the value of cemetery contracts written and a decrease of $1.6 million in deferred revenue.

Investment income from trusts was $7.2 million for the three months ended September 30, 2014, an increase of $0.8 million, or 13.3%, as compared to $6.4 million during the same period last year. On a segment basis, we had an increase of $1.5 million, which was partially offset by an adjustment of $0.7 million related to funds for which we have not met the requirements that would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Interest income on accounts receivable was $1.8 million for the three months ended September 30, 2014, an increase of $0.3 million, or 21.8%, as compared to $1.5 million during the same period last year.

Funeral home revenues were $12.2 million for the three months ended September 30, 2014, an increase of $1.8 million, or 18.0%, as compared to $10.4 million during the same period last year. The increase was primarily caused by an increase of $2.3 million in the value of contracts written and other revenue, which was partially offset by an increase of $0.5 million in deferred revenue.

Other cemetery revenues were $0.8 million during the three months ended September 30, 2014 as compared to $1.0 million in the same period last year, a 27.7% decrease.

Costs and Expenses

The cost of goods sold was $9.1 million for the three months ended September 30, 2014, an increase of $2.0 million, or 27.6%, as compared to $7.1 million during the same period last year. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 16.1% during the three months ended September 30, 2014 as compared to 16.8% during the same period last year. The change in the ratio primarily relates to changes in product mix.

Cemetery expenses were $18.1 million during the three months ended September 30, 2014, an increase of $3.6 million, or 24.6%, compared to $14.5 million during the same period last year. Within this category, there were increases of $2.5 million in personnel costs largely due to additional properties, $0.7 million in repairs and maintenance expense, $0.2 million in utility and fuel costs and a net $0.2 million increase in other expenses. Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio

 

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of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs relative to our overall cemetery operations. An increase in the ratio indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the ratio indicates that expense growth did not exceed increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 29.7% during the three months ended September 30, 2014 as compared to 27.0% during the same period last year.

Selling expenses were $16.5 million during the three months ended September 30, 2014, an increase of $4.8 million, or 41.1%, as compared to $11.7 million during the same period last year. The ratio of selling expenses to cemetery revenues was 29.4% during the three months ended September 30, 2014 as compared to 27.7% during the same period last year, largely due to increases of $2.1 million in commissions and personnel costs and $1.0 million in advertising and marketing costs and the $1.6 million reduction in deferred selling expenses. This ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, most of our selling expenses are directly related to sales commissions and bonuses, which would be directly related to changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to remain fairly consistent.

General and administrative expenses were $9.8 million during the three months ended September 30, 2014, an increase of $1.9 million, or 24.1%, as compared to $7.9 million during the same period last year. The increase was due to increases of $0.7 million in personnel costs and $1.2 million in legal costs, primarily related to a legal settlement. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our general and administrative costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value of contracts written, while a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decrease as many of the expenses in this category are fixed in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 16.1% during the three months ended September 30, 2014 as compared to 14.7% during the same period last year.

Total corporate overhead was $8.4 million for the three months ended September 30, 2014, an increase of $0.4 million, or 4.9% compared to $8.0 million during the same period last year. The increase was primarily due to an increase of $0.3 million in corporate personnel expense.

Depreciation and amortization was $3.1 million for the three months ended September 30, 2014, an increase of $0.7 million, or 30.9%, as compared to $2.4 million during the same period last year. The majority of the increase was attributable to acquired properties and amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia.

Funeral home expenses were $10.4 million for the three months ended September 30, 2014, an increase of $1.4 million, or 15.3%, as compared to $9.0 million during the same period last year. The increase was primarily due to increases of $0.8 million in personnel costs and $0.4 million in facility costs.

Acquisition related costs were $0.5 million for the three months ended September 30, 2014, an increase of $0.3 million, or 85.6%, as compared to $0.2 million during the same period last year. These costs will vary from period to period depending on the amount of acquisition activity that takes place.

Non-segment Allocated Results

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

 

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The table below summarizes these items and the changes between the three months ended September 30, 2014 and 2013:

 

    Three months ended September 30,  
    2014     2013     Change ($)     Change (%)  
    (in thousands)  

Gain on sale of funeral home

  $ 244      $ —        $ 244        100.0

Gain on acquisition

    —          2,530        (2,530     -100.0

Interest expense

    5,268        5,193        75        1.4

Income tax expense (benefit)

  $ 664      $ (442   $ 1,106        -250.2

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

The gain on acquisition recorded during the three months ended September 30, 2013 relates to our third quarter 2013 acquisition.

Interest expense was relatively consistent period over period. In general, there was an increase in discount accretion expense primarily relating to the obligation for the lease and management agreements with the Archdiocese of Philadelphia, which was partly offset due to a reduction in interest expense primarily due to a decrease in the amounts outstanding under the credit facility. Average amounts outstanding under the credit facility were $92.4 million and $101.2 million during the three months ended September 30, 2014 and 2013, respectively.

We had income tax expense of $0.7 million for the three months ended September 30, 2014, as compared to an income tax benefit of $0.4 million during the same period last year. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

Nine Months Ended September 30, 2014 Compared to Nine Months Ended September 30, 2013

Cemetery Operations – Southeast

Since June 30, 2013, we have acquired eleven properties in our Cemetery Operations – Southeast segment. The first acquisition occurred during the third quarter of 2013, the second occurred during the first quarter of 2014 and the remaining nine occurred during the second quarter of 2014. The results of operations for these acquired properties have either less or no impact on the results for the nine months ended September 30, 2013, but are included in the results for the nine months ended September 30, 2014. The acquisitions contributed approximately $5.5 million of the revenues and $3.7 million of the costs and expenses of the segment for the nine months ended September 30, 2014.

The table below compares the results of operations for our Cemetery Operations – Southeast for the nine months ended September 30, 2014 to the same period last year:

 

     Nine months ended September 30,  
     2014      2013      Change ($)     Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 100,404       $ 99,720       $ 684        0.7

Total costs and expenses

     75,268         71,317         3,951        5.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Operating profit

   $ 25,136       $ 28,403       $ (3,267     -11.5
  

 

 

    

 

 

    

 

 

   

 

 

 

Revenues

The increase in revenues was related to increases of $1.6 million in income from our trusts, $1.1 million in the value of at-need contracts written and $0.1 million in interest and other income, partially offset by a $2.1 million decrease in the value of pre-need contracts written. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

 

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Total costs and expenses

The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:

 

    A $0.4 million increase in the cost of goods sold attributable to product mix.

 

    A $1.3 million increase in cemetery expenses primarily due to increases of $0.4 million in labor costs, $0.5 million in repairs and maintenance expense and $0.3 million in utility and fuel costs.

 

    A $1.1 million increase in selling expenses primarily attributable to an increase of $1.0 million in advertising and marketing costs and an increase of $0.1 million in commissions and personnel costs.

 

    A $0.8 million increase in general and administrative expense primarily due to a $0.6 million increase in personnel expenses and $0.1 million increases in both rent and repairs and maintenance expense.

 

    A $0.4 million increase in depreciation expense.

Cemetery Operations – Northeast

During the second quarter of 2014, we acquired three properties and separately obtained the rights from the Archdiocese of Philadelphia to operate thirteen properties in our Cemetery Operations – Northeast segment. The results of operations for these properties have no impact on the results for the nine months ended September 30, 2013, but are included in the results for the nine months ended September 30, 2014. The additions have contributed approximately $9.6 million of the revenues and $7.4 million of the costs and expenses of the segment for the nine months ended September 30, 2014.

The table below compares the results of operations for our Cemetery Operations – Northeast for the nine months ended September 30, 2014 to the same period last year:

 

     Nine months ended September 30,  
     2014      2013      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 61,112       $ 47,046       $ 14,066         29.9

Total costs and expenses

     39,295         32,273         7,022         21.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 21,817       $ 14,773       $ 7,044         47.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily caused by an increase in other income of $4.5 million primarily related to one land sale during the first quarter of 2014. Also, we had increases of $2.8 million in the value of pre-need contracts written, $4.8 million in the value of at-need contracts written and $2.0 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:

 

    A $0.2 million increase in the cost of goods sold attributable to changes in product mix.

 

    A $3.7 million increase in cemetery expenses primarily attributable to increases of $2.8 million in labor costs, $0.5 million in repairs and maintenance expense, $0.3 million in utility and fuel costs and $0.1 million in real estate tax expense.

 

    A $1.8 million increase in selling expenses primarily due to increases of $1.3 million in commissions and personnel costs and $0.4 million in advertising and marketing costs.

 

    A $0.7 million increase in general and administrative expenses primarily due increases of $0.5 million in personnel costs and $0.1 million in professional fees.

 

    A $0.6 million increase in depreciation expense inclusive of $0.3 million of amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia.

 

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Cemetery Operations – West

The table below compares the results of operations for our Cemetery Operations – West for the nine months ended September 30, 2014 to the same period last year:

 

     Nine months ended September 30,  
     2014      2013      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 61,979       $ 56,721       $ 5,258         9.3

Total costs and expenses

     40,478         36,029         4,449         12.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 21,501       $ 20,692       $ 809         3.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was caused by a $1.6 million increase in the value of pre-need contracts written, a $1.4 million increase in the value of at-need contracts written, and an increase of $2.7 million in income from our trusts. These increases were partially offset by a net decrease of $0.4 million in interest and other income. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

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

 

    A $1.9 million increase in the cost of goods sold attributable to the corresponding increase in the value of contracts written and change in product mix.

 

    A $0.2 million decrease in cemetery expenses primarily due to a decrease of $0.4 million in real estate tax expense, partially offset by an increase of approximately $0.2 million in repairs and maintenance expense.

 

    A $1.3 million increase in selling expenses primarily due to a $1.0 million increase in commission and personnel related costs and a $0.3 million increase in advertising and marketing costs.

 

    A $1.4 million increase in general and administrative expenses primarily due to an increase in legal costs, principally related to a legal settlement.

Funeral Homes Segment

In the first quarter of 2013 we acquired six funeral homes. In the second quarter of 2014 we acquired nine funeral homes. Therefore, the results of operations for these properties have either less or no impact on the results for the nine months ended September 30, 2013, but are included in the results for the nine months ended September 30, 2014. These additions are primarily responsible for the increases to revenues and costs and expenses for the Funeral Homes segment.

The table below compares the results of operations for our Funeral Homes segment for the nine months ended September 30, 2014 to the same period last year:

 

     Nine months ended September 30,  
     2014      2013      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 40,777       $ 36,904       $ 3,873         10.5

Total costs and expenses

     32,159         29,850         2,309         7.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 8,618       $ 7,054       $ 1,564         22.2
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Revenues

The increase in revenues was primarily attributable to a $2.4 million increase in the value of pre-need contracts written and a $1.3 million increase in the value of at-need contracts written.

Total costs and expenses

The net increase in costs and expenses was primarily attributable to increases of $0.9 million in facility costs and $0.8 million in personnel costs, with the remainder attributable to increases in depreciation and other general expense categories.

Corporate Segment

The table below compares expenses incurred by the Corporate segment for the nine months ended September 30, 2014 to the same period last year:

 

     Nine months ended September 30,  
     2014      2013      Change ($)     Change (%)  
     (in thousands)  
     (non-GAAP)  

Selling, cemetery and general and administrative expenses

   $ 1,480       $ 833       $ 647        77.7

Depreciation and amortization

     716         911         (195     -21.4

Acquisition related costs, net of recoveries

     2,040         901         1,139        126.4

Corporate expenses

          

Corporate personnel expenses

     9,784         10,599         (815     -7.7

Other corporate expenses

     12,610         11,058         1,552        14.0
  

 

 

    

 

 

    

 

 

   

 

 

 

Total corporate overhead

     22,394         21,657         737        3.4
  

 

 

    

 

 

    

 

 

   

 

 

 

Total corporate expenses

   $ 26,630       $ 24,302       $ 2,328        9.6
  

 

 

    

 

 

    

 

 

   

 

 

 

The increase in corporate expenses was primarily attributable to increases of $0.6 million in selling expenses due to increased advertising costs, $1.1 million in acquisition related costs and $1.3 million in professional fees, reported within corporate overhead. These increases were partially offset by a decrease of $0.8 million in personnel costs. Due to a legal settlement during the nine months ended September 30, 2013, acquisition related costs were reduced by $1.3 million. This legal settlement also resulted in recoveries of legal costs of $1.7 million, driving down professional fees expense for the prior period. Acquisition related costs will vary from period to period depending on the amount of acquisition activity that takes place.

Reconciliation of Segment Results of Operations to Consolidated Results of Operations

As discussed in the segment sections of this 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 until such time that we satisfy the delivery criteria for revenue recognition.

The table below analyzes results of operations and the changes therein for the nine months ended September 30, 2014 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/ or changes in the timing of when merchandise and services were delivered:

 

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     Nine months ended
September 30, 2014
     Nine months ended
September 30, 2013
               
     (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

   $ 104,555       $ (26,957   $ 77,598       $ 102,383       $ (32,513   $ 69,870       $ 7,728         11.1

At-need cemetery revenues

     67,704         614        68,318         60,387         (4,259     56,128         12,190         21.7

Investment income from trusts

     39,225         (19,529     19,696         32,916         (15,892     17,024         2,672         15.7

Interest income

     5,848         —          5,848         5,209         —          5,209         639         12.3

Funeral home revenues

     40,777         (5,313     35,464         36,904         (4,437     32,467         2,997         9.2

Other cemetery revenues

     6,163         1,007        7,170         2,592         283        2,875         4,295         149.4
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total revenues

     264,272         (50,178     214,094         240,391         (56,818     183,573         30,521         16.6
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Costs and expenses

                     

Cost of goods sold

     29,307         (4,091     25,216         26,841         (5,737     21,104         4,112         19.5

Cemetery expense

     47,546         —          47,546         42,700         —          42,700         4,846         11.3

Selling expense

     48,404         (5,860     42,544         43,549         (8,415     35,134         7,410         21.1

General and administrative expense

     26,333         —          26,333         23,382         —          23,382         2,951         12.6

Corporate overhead

     22,394         —          22,394         21,657         —          21,657         737         3.4

Depreciation and amortization

     7,993         —          7,993         7,159         —          7,159         834         11.6

Funeral home expense

     29,813         (732     29,081         27,582         (501     27,081         2,000         7.4

Acquisition related costs, net of recoveries

     2,040         —          2,040         901         —          901         1,139         126.4
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Total costs and expenses

     213,830         (10,683     203,147         193,771         (14,653     179,118         24,029         13.4
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Operating profit

   $ 50,442       $ (39,495   $ 10,947       $ 46,620       $ (42,165   $ 4,455       $ 6,492         145.7
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

    

 

 

 

Revenues

Pre-need cemetery revenues were $77.6 million for the nine months ended September 30, 2014, an increase of $7.7 million, or 11.1%, as compared to $69.9 million during the same period last year. The increase was primarily caused by an increase of $2.2 million in the value of cemetery contracts written and a decrease of $5.5 million in deferred revenue.

At-need cemetery revenues were $68.3 million for the nine months ended September 30, 2014, an increase of $12.2 million, or 21.7%, as compared to $56.1 million during the same period last year. The increase was primarily caused by an increase of $7.3 million in the value of cemetery contracts written and a decrease of $4.9 million in deferred revenue.

Investment income from trusts was $19.7 million for the nine months ended September 30, 2014, an increase of $2.7 million, or 15.7%, as compared to $17.0 million during the same period last year. On a segment basis, we had an increase of $6.3 million, which was partially offset by an adjustment of $3.6 million related to funds for which we have not met the requirements that would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Interest income on accounts receivable was $5.8 million for the nine months ended September 30, 2014 as compared to $5.2 million for the nine months ended September 30, 2013, a 12.3% increase, primarily due to a larger accounts receivable balance.

Funeral home revenues were $35.5 million for the nine months ended September 30, 2014, an increase of $3.0 million, or 9.2%, compared to $32.5 million during the same period last year. The increase was primarily driven by the 15 funeral homes we acquired in 2013 and 2014.

Other cemetery revenues were $7.2 million for the nine months ended September 30, 2014, as compared to $2.9 million during the same period last year, a $4.3 million increase. The increase was primarily caused by one land sale during the first quarter of 2014.

Costs and Expenses

The cost of goods sold was $25.2 million for the nine months ended September 30, 2014, an increase of $4.1 million, or 19.5%, as compared to $21.1 million during the same period last year. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 17.3% during the nine months ended September 30, 2014 as compared to 16.7% during the same period last year. The change in the ratio primarily relates to changes in product mix.

 

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Cemetery expenses were $47.5 million during the nine months ended September 30, 2014, an increase of $4.8 million, or 11.3%, compared to $42.7 million during the same period last year. Within this category, there were increases of $1.2 million in repairs and maintenance expense, $3.2 million in personnel costs and $0.6 million in utility and fuel costs, partially offset by a decrease of $0.2 million in real estate tax expense. Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs relative to our overall cemetery operations. An increase in the ratio indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the ratio indicates that expense growth did not exceed increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 27.6% during the nine months ended September 30, 2014 as compared to 26.2% during the same period last year.

Selling expenses were $42.5 million during the nine months ended September 30, 2014, an increase of $7.4 million, or 21.1%, as compared to $35.1 million during the same period last year. The overall expense increase was primarily caused by a decrease in deferred selling expenses of $2.6 million, an increase of $2.4 million in commissions and personnel related expenses and $2.3 million in advertising and marketing costs, with the remaining increase in other general selling expenses. The ratio of selling expenses to cemetery revenues was 29.2% during the nine months ended September 30, 2014 as compared to 27.9% during the same period last year. This ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority of our selling expenses are directly related to sales commissions and bonuses, which would be directly related to changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to remain fairly consistent.

General and administrative expenses were $26.3 million during the nine months ended September 30, 2014, an increase of $2.9 million, or 12.6%, compared to $23.4 million during the same period last year. The majority of the increase was due to increases of $1.2 million in personnel costs and $1.6 million in legal costs, primarily related to a legal settlement. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our general and administrative costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value of contracts written, while a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decrease as many of the expenses in this category are fixed in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 15.3% during the nine months ended September 30, 2014 as compared to 14.4% during the same period last year.

Total corporate overhead was $22.4 million for the nine months ended September 30, 2014, an increase of $0.7 million, or 3.4% compared to $21.7 million during the same period last year. The increase in corporate expenses was primarily attributable to an increase of $1.3 million in professional fees, partially offset by a decrease of $0.8 million in corporate personnel costs. Due to a legal settlement during the nine months ended September 30, 2013, we had recoveries of legal costs of $1.7 million, driving down professional fees expense for the prior period.

Depreciation and amortization was $8.0 million during the nine months ended September 30, 2014, an increase of $0.8 million, or 11.6%, as compared to $7.2 million during the same period last year. The increase was primarily due to additional depreciation and amortization from assets acquired in our recent acquisitions and the lease and management agreements with the Archdiocese of Philadelphia.

Funeral home expenses were $29.1 million for the nine months ended September 30, 2014, an increase of $2.0 million, or 7.4%, compared to $27.1 million during the same period last year. The increase was primarily driven by our 2013 and 2014 acquisitions and was primarily attributable to increases in facility and personnel costs.

Acquisition related costs were $2.0 million for the nine months ended September 30, 2014, an increase of $1.1 million, or 126.4%, as compared to $0.9 million during the same period last year. These costs will vary from period to period depending on the amount of acquisition activity that takes place. Acquisition costs for the nine months ended September 30, 2013, were reduced by $1.3 million due to a legal settlement.

 

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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 loss.

The table below summarizes these items and the changes between the nine months ended September 30, 2014 and 2013:

 

    Nine months ended September 30,  
    2014     2013     Change ($)     Change (%)  
    (in thousands)  

Gain on sale of funeral home

  $ 244      $ —        $ 244        100.0

Gain on acquisition

    412        2,530        (2,118     -83.7

Gain on settlement agreement, net

    888        12,261        (11,373     -92.8

Gain on sale of other assets

    —          155        (155     -100.0

Loss on early extinguishment of debt

    —          21,595        (21,595     -100.0

Interest expense

    15,990        15,788        202        1.3

Income tax expense (benefit)

  $ (522   $ (2,489   $ 1,967        -79.0

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 acquisition recorded during the nine months ended September 30, 2014 relates to our first quarter 2014 acquisition. The gain on acquisition recorded during the nine months ended September 30, 2013 relates to our third quarter 2013 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. During the nine months ended September 30, 2013 certain proceeds received from a legal settlement were recorded as a gain on settlement agreement on the unaudited condensed consolidated statement of operations, resulting in a total gain on settlement of $12.3 million.

The early extinguishment of debt charge during the nine months ended September 30, 2013 of $21.6 million relates to the tender premium of $14.9 million we paid in connection with the early repayment of $150.0 million of our 10.25% Senior Notes due 2017 and the write-off of $6.7 million of unamortized fees and discounts related to those notes.

Interest expense was relatively consistent period over period. In general, there was an increase in discount accretion expense primarily relating to the obligation for the lease and management agreements with the Archdiocese of Philadelphia, which was partially offset due to a reduction in interest expense primarily due to a decrease in the amounts outstanding under the credit facility. Average amounts outstanding under the credit facility were $92.6 million and $98.9 million during the nine months ended September 30, 2014 and 2013, respectively.

We had an income tax benefit of $0.5 million for the nine months ended September 30, 2014, as compared to $2.5 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, 2014
    Three months ended
September 30, 2013
    Nine months ended
September 30, 2014
    Nine months ended
September 30, 2013
 

Operating Data:

       

Interments performed

    13,079        10,712        36,580        34,156   

Interment rights sold (1):

       

Lots

    8,613        7,112        24,360        21,099   

Mausoleum crypts (including pre-construction)

    494        437        1,697        1,489   

Niches

    363        248        1,144        806   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interment rights sold (1)

    9,470        7,797        27,201        23,394   
 

 

 

   

 

 

   

 

 

   

 

 

 

Number of contracts written

    29,633        25,301        82,286        76,842   

Aggregate contract amount, in thousands (excluding interest)

  $ 77,568      $ 66,735      $ 219,178      $ 201,886   

Average amount per contract (excluding interest)

  $ 2,618      $ 2,638      $ 2,664      $ 2,627   

Number of pre-need contracts written

    14,215        13,218        40,474        38,937   

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

  $ 50,222      $ 45,523      $ 144,233      $ 135,360   

Average amount per pre-need contract (excluding interest)

  $ 3,533      $ 3,444      $ 3,564      $ 3,476   

Number of at-need contracts written

    15,418        12,083        41,812        37,905   

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

  $ 27,346      $ 21,212      $ 74,945      $ 66,526   

Average amount per at-need contract (excluding interest)

  $ 1,774      $ 1,756      $ 1,792      $ 1,755   

 

  (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, commencing on December 1, 2013. The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 (the

 

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“Prior Senior Notes”) and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. We incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and will be amortized over the life of these notes. As of September 30, 2014, we were in compliance with all applicable covenants of the Senior Notes.

Credit Facility

On January 19, 2012, we entered into the Third Amended and Restated Credit Agreement (the “Credit Agreement”). The terms of the Credit Agreement are substantially the same as the terms of the Second Amended and Restated Credit Agreement, as amended. Capitalized terms which are not defined in the following description shall have the meaning assigned to such terms in the Credit Agreement or the amendments to the Credit Agreement, as applicable. The Credit Agreement was amended three times in 2013.

On May 22, 2014, we entered into the Fourth Amendment to the Credit Agreement. The Fourth Amendment increased the maximum Consolidated Leverage Ratio to 4.00 to 1.0 for any period and amended the definition of Consolidated EBITDA to, among other things, remove existing balance sheet adjustments and replace them with certain cash flow statement adjustments. The Fourth Amendment also contains certain conforming changes to reflect the Lenders’ consent to the closing of the transactions with the Archdiocese of Philadelphia and Service Corporation International, both of which took place in the second quarter of 2014 and described in detail in Note 13 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

As amended, we have a revolving credit facility (the “Credit Facility”) with a borrowing limit of $140.0 million and a maturity date of January 19, 2017. The Credit Facility may be used to finance working capital requirements, Permitted Acquisitions and Capital Expenditures. The maximum Consolidated Leverage Ratio is 4.00 to 1.0 for any measurement period. The minimum Consolidated Debt Service Coverage Ratio is 2.50 for any measurement period. The ranges of the Applicable Rates are 3.00%, 4.00%, and 0.800% for Base Rate Loans, Eurodollar Rate Loans and Letter of Credit Fees, and Commitment Fees, respectively, when the Consolidated Leverage Ratio is greater than or equal to 3.75 to 1.0. We are not allowed to permit Consolidated EBITDA for any measurement period to be less than the sum of (i) $57.8 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after March 31, 2013.

The amount of aggregate consideration we may pay for a Permitted Acquisition, without Required Lender approval, is $10.0 million on an individual basis and $50.0 million when aggregated with the total Aggregate Consideration paid by or on behalf of us for all other Permitted Acquisitions which closed within the immediately preceding 365 days.

The amounts outstanding under the Credit Facility bore interest at rates between 2.9% and 4.0% at September 30, 2014. Amounts borrowed may be either Base Rate Loans or Eurodollar Rate Loans and amounts repaid or prepaid during the term may be reborrowed. Depending on the type of loan, borrowings bear interest at the Base Rate or Eurodollar Rate, plus applicable margins ranging from 1.25% to 3.00% and 2.25% to 4.00%, respectively, depending on our Consolidated Leverage Ratio. The Base Rate is the highest of the Prime Rate, the Federal Funds Rate plus 0.50%, or the Eurodollar Rate plus 1.0%. The Eurodollar Rate is the British Bankers Association LIBOR Rate.

The Credit Agreement requires us to pay an unused Commitment Fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments. The Commitment Fee Rate ranges from 0.375% to 0.800% depending on our Consolidated Leverage Ratio.

The Credit Agreement contains restrictive covenants that, among other things, prohibit distributions upon defined events of default, restrict investments and sales of assets and require us to maintain certain financial covenants, including specified financial ratios. A material decrease in revenues could cause us to breach certain of our financial covenants. Any such breach could allow the Lenders to accelerate our debt (and cause cross-default) which would have a material adverse effect on our business, financial condition or results of operations. Our covenants include a certain measure of Consolidated EBITDA, a Consolidated Leverage Ratio and a Consolidated Debt Service Coverage Ratio. As of September 30, 2014, we were in compliance with all applicable financial covenants.

Amounts outstanding under our Credit Facility fluctuated during the nine months ended September 30, 2014 and 2013. 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

 

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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 2013, we had $101.7 million outstanding on our Credit Facility. During the first quarter of 2013, we reduced our borrowings on the Credit Facility by $19.8 million as we had borrowed $18.6 million prior to March 26, 2013 and then we used the net proceeds of approximately $38.4 million from our March 26, 2013 follow-on public offering to repay amounts outstanding on our Credit Facility. We borrowed an additional $21.0 million during the second quarter of 2013 and then we used the remaining proceeds of approximately $11.9 million from our May 28, 2013 debt offering to further repay amounts outstanding on our Credit Facility. During the third quarter of 2013, we had net borrowings of $8.5 million, resulting in outstanding borrowings of $99.5 million on our Credit Facility at September 30, 2013. The average amounts borrowed under our Credit Facility were $92.6 million and $98.9 million for the nine months ended September 30, 2014 and 2013, respectively.

For a more detailed description of our long-term debt agreements, see our 2013 Form 10-K.

Cash Flow from Operating Activities

Cash flows provided by operating activities were $23.2 million during the nine months ended September 30, 2014, compared to $36.9 million during the same period last year. The prior year amount is primarily higher as a result of cash received in a legal settlement during our second quarter of 2013. We also had an increased use of cash to settle merchandise liabilities during 2014. In addition, increased cash inflows into our merchandise trusts were offset by an increase in cash generated from accounts receivable when compared to the prior period.

Cash Flow from Investing Activities

Net cash used in investing activities was $117.8 million during the nine months ended September 30, 2014 as compared to $23.5 million during the same period last year. 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, partially offset by $0.3 million in proceeds from the sale of a funeral home. Cash flows used for investing activities during the nine months ended September 30, 2013 were $14.1 million for the acquisition of 6 funeral homes and one cemetery and $9.6 million for other capital expenditures partially offset by $0.2 million in proceeds from the sale of other assets.

Cash Flow from Financing Activities

Cash flows provided by financing activities were $104.6 million during the nine months ended September 30, 2014 as compared to net cash used of $1.3 million during the same period last year. 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, costs of financing activities of $0.3 million, and cash distributions to unit holders of $45.3 million. Cash flows provided by financing activities for the nine months ended September 30, 2013 consisted of $38.4 million of proceeds from our follow-on public offering and $237.0 million from long term borrowings, inclusive of the issuance of $175.0 million of Senior Notes. These in-flows were offset by repayments of long-term debt of $218.0 million, inclusive of the retirement of our $150.0 million of Prior Senior Notes, and fees associated with this retirement of $14.9 million, costs of financing activities of $5.1 million and cash distributions to unit holders of $38.7 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:

 

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     Three months ended
September 30,
     Nine months ended
September 30,
 
     2014      2013      2014      2013  
     (in thousands)      (in thousands)  

Maintenance capital expenditures

   $ 2,326       $ 1,446       $ 6,430       $ 5,366   

Expansion capital expenditures

     1,778         6,958         111,692         18,310   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 4,104       $ 8,404       $ 118,122       $ 23,676   
  

 

 

    

 

 

    

 

 

    

 

 

 

Pursuant to our partnership agreement, in connection with determining operating cash flows available for distribution, costs to construct mausoleum crypts and lawn crypts may be considered to be a combination of maintenance capital expenditures and expansion capital expenditures depending on the purposes for construction. Our general partner, with the concurrence of its Conflicts Committee, has the discretion to determine how to allocate a capital expenditure for the construction of a mausoleum crypt or a lawn crypt between maintenance capital expenditures and expansion capital expenditures. In addition, maintenance capital expenditures for the construction of a mausoleum crypt or a lawn crypt are not subtracted from operating surplus in the quarter incurred but rather are subtracted from operating surplus ratably during the estimated number of years it will take to sell all of the available spaces in the mausoleum or lawn crypt. Estimated life is determined by our general partner, with the concurrence of its Conflicts Committee.

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, 2014, the fair value of fixed-income securities in our merchandise trusts represented 3.3% of the fair value of total trust assets while the fair value of fixed-income securities in our perpetual care trusts represented 7.2% of the fair value of total trust assets. The aggregate quoted fair value of these fixed-income securities was $16.4 million and $25.0 million in merchandise trusts and perpetual care trusts, respectively, as of September 30, 2014. Each 1% change in interest rates on these fixed-income securities would result in changes of approximately $164,000 and $250,000 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, 2014, the fair value of money market and short-term investments in our merchandise trusts represented 10.4% of the fair value of total trust assets while the fair value of money market and short-term investments in our perpetual care trusts represented 7.8% of the fair value of total trust assets. The aggregate quoted fair value of these money market and short-term investments was $51.3 million and $27.3 million in the merchandise trusts and perpetual care trusts, respectively, as of September 30, 2014. Each 1% change in interest rates on these money market and short-term investments would result in changes of approximately $513,000 and $273,000 in the fair market value of the assets in our merchandise trusts and perpetual care trusts, respectively, based on discounted expected future cash flows.

 

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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, 2014, the fair value of marketable equity securities in our merchandise trusts represented 18.4% of the fair value of total trust assets while the fair value of marketable equity securities in our perpetual care trusts represented 14.9% of total trust assets. The aggregate quoted fair market value of these marketable equity securities was $90.5 million and $52.1 million in our merchandise trusts and perpetual care trusts, respectively, as of September 30, 2014, based on final quoted sales prices. Each 10% change in the average market prices of the equity securities would result in a change of approximately $9.1 million and $5.2 million in the fair market value of securities held in the merchandise trusts and perpetual care trusts, respectively. As of September 30, 2014, the fair value of marketable closed and open ended mutual funds in our merchandise trusts represented 63.1% of the fair value of total trust assets while the fair value of closed and open ended mutual funds in our perpetual care trusts represented 70.1% of total trust assets. The aggregate quoted fair market value of these closed and open ended mutual funds was $310.1 million and $244.6 million in the merchandise trusts and perpetual care trusts, respectively, as of September 30, 2014, based on final quoted sales prices. Each 10% change in the average market prices of the closed and open ended mutual funds would result in a change of approximately $31.0 million and $24.5 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 merchandise trusts and perpetual care trusts are specified in an Investment Policy Statement which requires us to do the following:

 

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

 

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

 

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

 

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

 

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

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

We recognize the challenges we face in achieving our investment objectives in light of the uncertainties and complexities of contemporary investment markets. Furthermore, we recognize that, in order to achieve the stated long-term objectives, we may have short-term declines in market value. Given the need to maintain consistent values in the portfolio, we have attempted to develop a strategy which is likely to maximize returns and earnings without experiencing overall declines in value in excess of 3% over any 12-month period.

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.

 

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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, 2014, we had $91.4 million of borrowings outstanding under our Credit Facility. After these borrowings, our unused line of credit under the Credit Facility is $48.6 million. The amounts outstanding under the Credit Facility bore interest at rates between 2.9% and 4.0% at September 30, 2014.

 

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 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 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 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 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 fiscal quarter ended September 30, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

In May 2013, the Committee of Sponsoring Organizations of the Treadway Commission (COSO) issued an updated version of its Internal Control – Integrated Framework (2013 Framework). Originally issued in 1992 (1992 Framework), the 1992 framework remains available during the transition period, which extends to December 15, 2014. As of September 30, 2014, we continue to utilize the 1992 Framework and anticipate transition to the 2013 Framework by the end of the transition period.

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.

 

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 2013 Form 10-K and other reports that we file with the SEC, which could materially affect our business, financial condition or future results.

 

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The risks described in the 2013 Form 10-K 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 2013 Form 10-K 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

  4.1    Supplemental Indenture No. 1, dated as of August 8, 2014, by and among Kirk & Nice, Inc., Kirk & Nice Suburban Chapel, Inc., StoneMor Operating LLC, and Osiris Holding of Maryland Subsidiary, Inc., subsidiaries of StoneMor Partners L.P. (or its successor), and Cornerstone Family Services of West Virginia Subsidiary, Inc., the Guarantors under the Indenture, dated as of May 28, 2013, and Wilmington Trust, National Association, as trustee.
10.1    StoneMor Partners L.P. 2014 Long-Term Incentive Plan (adopted by the Board of Directors effective September 24, 2014 subject to unitholders’ approval) (incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed on October 9, 2014).
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 Timothy K. Yost, 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 Timothy K. Yost, 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, 2014, and December 31, 2013; (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013; (iii) Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit); (iv) Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 and 2013; 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 7, 2014  

/s/ Lawrence Miller

  Lawrence Miller
  Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer)
November 7, 2014  

/s/ Timothy K. Yost

  Timothy K. Yost
  Chief Financial Officer (Principal Financial Officer)

 

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Exhibit Index

 

Exhibit
Number

  

Description

  4.1    Supplemental Indenture No. 1, dated as of August 8, 2014, by and among Kirk & Nice, Inc., Kirk & Nice Suburban Chapel, Inc., StoneMor Operating LLC, and Osiris Holding of Maryland Subsidiary, Inc., subsidiaries of StoneMor Partners L.P. (or its successor), and Cornerstone Family Services of West Virginia Subsidiary, Inc., the Guarantors under the Indenture, dated as of May 28, 2013, and Wilmington Trust, National Association, as trustee.
10.1    StoneMor Partners L.P. 2014 Long-Term Incentive Plan (adopted by the Board of Directors effective September 24, 2014 subject to unitholders’ approval) (incorporated by reference to Appendix A to Registrant’s Definitive Proxy Statement filed on October 9, 2014).
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 Timothy K. Yost, 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 Timothy K. Yost, 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, 2014, and December 31, 2013; (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2014 and 2013; (iii) Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit); (iv) Unaudited Condensed Consolidated Statement of Cash Flows for the nine months ended September 30, 2014 and 2013; 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.

 

60


Dates Referenced Herein   and   Documents Incorporated by Reference

This ‘10-Q’ Filing    Date    Other Filings
9/30/1810-Q,  NT 10-Q
7/1/18
6/30/1810-Q,  NT 10-Q
1/19/17
12/15/16S-3
1/1/15
12/31/1410-K,  5
12/15/14
Filed on:11/7/148-K
10/31/14
10/9/14DEF 14A
For Period end:9/30/144
9/24/14
9/10/14
8/14/144,  424B5
8/8/1410-Q,  8-K
6/12/14
6/10/14
5/28/14424B5
5/22/14
5/21/144
5/19/144,  8-K
4/1/144
2/27/14
2/19/144
1/16/14
12/31/1310-K,  8-K
12/1/133
9/30/1310-Q
8/1/134
6/30/1310-Q
5/28/138-K
4/11/13
3/31/1310-Q
3/26/138-K
2/19/134,  8-K
1/19/128-K
12/31/1010-K,  NT 10-K
9/20/043,  4,  8-K
4/2/04
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