NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Nature of Operations
We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries operating in the United States and Canada. Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.
Funeral service locations provide all professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles, arranging and directing services, removal, preparation, embalming, cremations, memorialization, and catering. Funeral merchandise, including burial caskets and related accessories, urns and other cremation receptacles, outer burial containers, flowers, online and video tributes, stationery products, casket and cremation memorialization products, and other ancillary merchandise, is sold at funeral service locations.
Our cemeteries provide cemetery property interment rights, including developed lots, lawn crypts, mausoleum spaces, niches, and other cremation memorialization and interment options. Cemetery merchandise and services, including memorial markers and bases, outer burial containers, flowers and floral placement, other ancillary merchandise, graveside services, merchandise installation, and burial openings and closings, are sold at our cemeteries.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
Our unaudited condensed consolidated financial statements include the accounts of Service Corporation International (SCI) and all subsidiaries in which we hold a controlling financial interest. Our financial statements also include the accounts of the merchandise and service trusts and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. Our interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair statement of our results for these periods. Our unaudited condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended
December 31, 2015
, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.
Reclassifications to Prior Period Financial Statements
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows. For the first half of 2016, we recorded in
General and administrative expenses
an out-of-period expense of $5.5 million for previously improperly capitalized acquisition costs. Such amounts are immaterial to both current and prior period financial statements.
Use of Estimates in the Preparation of Financial Statements
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in our Annual Report on Form 10-K for the year ended
December 31, 2015
. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from these estimates.
Accounting Standards Adopted in 2016
Consolidation
In February 2015, the Financial Accounting Standards Board (FASB) amended "
Consolidation"
to revise the consolidation model for limited partnerships, variable interest entities, and certain investment funds. Further, the amendment provides guidance on how fee arrangements and related parties should be considered when determining whether to consolidate variable interest entities. As a result of this amendment, all legal entities were reevaluated to determine if they should be consolidated.
We adopted the amendment effective January 1, 2016, with no impact our consolidated results of operations, consolidated financial position, and cash flows.
Debt Issuance Costs
In April 2015, the FASB amended "
Interest—Imputation of Interest"
to simplify the presentation of debt issuance costs on the balance sheet. Prior to adoption of this amendment, debt issuance costs were included in
Other current assets
and
Deferred charges and other assets
on our unaudited condensed Consolidated Balance Sheet. The amendment requires that these costs instead be presented as a direct deduction from the carrying amount of
Current maturities of long-term debt
and
Long-term debt
, consistent with the presentation of debt discounts.
In August 2015, the FASB issued an additional amendment that provides additional guidance to "
Interest—Imputation of Interest"
since it did not address presentation or subsequent measurement of debt issuance costs related to line-of-credit arrangements. The amendment noted that the SEC staff would not object to an entity deferring and presenting debt issuance costs as an asset and subsequently amortizing the deferred debt issuance costs ratably over the term of the line-of-credit arrangement, regardless of whether there are any outstanding borrowings on the line-of-credit arrangement.
This change does not impact the manner in which the debt issuance costs are expensed over the term of the debt. We have retrospectively adopted the change in presentation effective January 1, 2016. As a result, we recast our Consolidated Balance Sheet as of
December 31, 2015
to reduce
Other current assets
and
Current maturities of long-term debt
by
$8.4 million
and to reduce
Deferred charges and other assets
and
Long-term debt
by
$34.1 million
.
Cloud Computing Arrangements
In April 2015, the FASB amended "
Intangibles—Goodwill and Other—Internal-Use Software"
to provide guidance on whether a cloud computing arrangement contains a software license. If a cloud computing arrangement includes a software license, then we should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, we should account for the arrangement as a service contract. We adopted the amendment effective January 1, 2016, with no impact on our consolidated results of operations, consolidated financial position, and cash flows.
Fair Value Measurements
In May 2015, the FASB amended "
Fair Value Measurements"
to remove the requirement to disclose the fair value measurement hierarchy level associated with investments measured at net asset value as a practical expedient. Other disclosures required by the standard for these assets remain the same. This amendment does not change the underlying accounting for these investments. We retrospectively adopted the amendment effective January 1, 2016, and have made the appropriate disclosures in Notes 3, 4, and 5.
Business Combinations
In September 2015, the FASB amended "
Business Combinations"
to eliminate the requirement for an acquirer in a business combination to account for measurement-period adjustments retrospectively. Under the new guidance, acquirers must recognize measurement-period adjustments in the period in which they determine the amount of the adjustment. We adopted the amendment on January 1, 2016 and it will be applied prospectively to measurement-period adjustments occurring after that date, if any.
Recently Issued Accounting Standards
Revenue Recognition
In
May 2014
, the FASB issued
"Revenue from Contracts with Customers,"
which supersedes the revenue recognition requirements in
"Revenue Recognition"
and most industry-specific guidance. This new standard is based on the principle that revenue is recognized to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It also requires additional disclosure about the nature, amount, and timing of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. Additionally, the new standard requires the deferral of direct incremental selling costs to the period in which the underlying revenue is recognized. In August 2015, the FASB issued an amendment that defers implementation of "
Revenue from Contracts with Customers"
for all entities by one year. In 2016, the FASB issued additional amendments clarifying guidance on principal versus agent considerations, identifying performance obligations, and licensing, under the new standard. The new standard will be effective for us beginning January 1, 2018 and we intend to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. We are evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Inventory
In July 2015, the FASB amended
"Inventory"
to state that an entity using an inventory method other than last-in, first out ("LIFO") or the retail inventory method should measure inventory at the lower of cost and net realizable value. The new guidance clarifies that net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance is effective for us on January 1, 2017, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Financial Instruments
In January 2016, the FASB amended
"Financial Instruments"
to provide additional guidance on the recognition and measurement of financial assets and liabilities. The amendment requires investments in equity instruments to be measured at fair value with changes in fair value reflected in net income. The new guidance is effective for us on January 1, 2018, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
In June 2016, the FASB amended
"Financial Instruments"
to provide financial statement users with more decision-useful information about the expected credit losses on debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. This amendment replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for us on January 1, 2020, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Leases
In February 2016, the FASB amended
"Leases"
to increase transparency and comparability among organizations. Under the new standard, an entity will be required to recognize lease assets and liabilities on its balance sheet and disclose key information about leasing arrangements. In addition, the new standard offers specific accounting guidance for a lessee, a lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This new standard will be effective for us on January 1, 2019. We are evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Stock Compensation
In March 2016, the FASB amended
"Stock Compensation"
to simplify certain aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The new guidance is effective for us on January 1, 2017, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
3. Preneed Funeral Activities
Preneed funeral receivables, net and trust investments
represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, related to unperformed price-guaranteed preneed funeral contracts. Our merchandise and service trusts are variable interest entities. We have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. Our trust investments detailed in Notes 4 and 5 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from
Deferred preneed funeral revenue
into
Deferred preneed receipts held in trust.
Amounts are withdrawn from the trusts after the contract obligations are performed. Cash flows from preneed contracts are presented as operating cash flows in our unaudited condensed Consolidated Statement of Cash Flows.
Preneed funeral receivables, net and trust investments
are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in
Deferred preneed funeral revenue
until the merchandise is delivered or the service is performed.
The table below sets forth certain investment-related activities associated with these preneed merchandise and service trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Deposits
|
$
|
33,509
|
|
|
$
|
32,485
|
|
|
$
|
61,217
|
|
|
$
|
62,480
|
|
Withdrawals
|
$
|
37,960
|
|
|
$
|
41,745
|
|
|
$
|
73,130
|
|
|
$
|
87,189
|
|
Purchases of available-for-sale securities
|
$
|
70,430
|
|
|
$
|
76,404
|
|
|
$
|
180,825
|
|
|
$
|
180,635
|
|
Sales of available-for-sale securities
|
$
|
71,057
|
|
|
$
|
89,998
|
|
|
$
|
175,474
|
|
|
$
|
172,318
|
|
Realized gains from sales of available-for-sale securities
|
$
|
6,246
|
|
|
$
|
9,856
|
|
|
$
|
13,070
|
|
|
$
|
14,205
|
|
Realized losses from sales of available-for-sale securities
|
$
|
(10,201
|
)
|
|
$
|
(3,838
|
)
|
|
$
|
(29,852
|
)
|
|
$
|
(8,572
|
)
|
The components of
Preneed funeral receivables, net and trust investments
in our unaudited condensed Consolidated Balance Sheet at
June 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
Trust investments, at market
|
$
|
1,130,955
|
|
|
$
|
1,109,394
|
|
Cash and cash equivalents
|
124,644
|
|
|
134,642
|
|
Assets associated with business held for sale
|
(1,014
|
)
|
|
(39
|
)
|
Insurance-backed fixed income securities
|
272,686
|
|
|
271,116
|
|
Trust investments
|
1,527,271
|
|
|
1,515,113
|
|
Receivables from customers
|
308,098
|
|
|
290,689
|
|
Unearned finance charge
|
(12,082
|
)
|
|
(11,235
|
)
|
|
1,823,287
|
|
|
1,794,567
|
|
Allowance for cancellation
|
(35,222
|
)
|
|
(34,270
|
)
|
Preneed funeral receivables, net and trust investments
|
$
|
1,788,065
|
|
|
$
|
1,760,297
|
|
The costs and values associated with trust investments measured at market at
June 30, 2016
and
December 31, 2015
are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Value represents the value of the underlying securities held by the trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
77,474
|
|
|
$
|
1,056
|
|
|
$
|
(137
|
)
|
|
$
|
78,393
|
|
Canadian government
|
2
|
|
79,458
|
|
|
430
|
|
|
(571
|
)
|
|
79,317
|
|
Corporate
|
2
|
|
13,989
|
|
|
261
|
|
|
(71
|
)
|
|
14,179
|
|
Residential mortgage-backed
|
2
|
|
101
|
|
|
1
|
|
|
—
|
|
|
102
|
|
Asset-backed
|
2
|
|
58
|
|
|
—
|
|
|
(1
|
)
|
|
57
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
1,956
|
|
|
106
|
|
|
(88
|
)
|
|
1,974
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
340,480
|
|
|
35,330
|
|
|
(20,429
|
)
|
|
355,381
|
|
Canada
|
1
|
|
12,203
|
|
|
3,171
|
|
|
(578
|
)
|
|
14,796
|
|
Other international
|
1
|
|
30,750
|
|
|
2,188
|
|
|
(2,891
|
)
|
|
30,047
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
327,593
|
|
|
4,287
|
|
|
(37,934
|
)
|
|
293,946
|
|
Fixed income
|
1
|
|
86,275
|
|
|
1,615
|
|
|
(5,168
|
)
|
|
82,722
|
|
Other
|
3
|
|
4,319
|
|
|
1,092
|
|
|
(58
|
)
|
|
5,353
|
|
Trust investments, at fair value
|
|
|
974,656
|
|
|
49,537
|
|
|
(67,926
|
)
|
|
956,267
|
|
Fixed income commingled funds
|
|
|
134,048
|
|
|
5,345
|
|
|
—
|
|
|
139,393
|
|
Private equity
|
|
|
37,240
|
|
|
3,707
|
|
|
(5,652
|
)
|
|
35,295
|
|
Trust investments, at net asset value
|
|
|
171,288
|
|
|
9,052
|
|
|
(5,652
|
)
|
|
174,688
|
|
Trust investments, at market
|
|
|
$
|
1,145,944
|
|
|
$
|
58,589
|
|
|
$
|
(73,578
|
)
|
|
$
|
1,130,955
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
82,417
|
|
|
$
|
107
|
|
|
$
|
(1,331
|
)
|
|
$
|
81,193
|
|
Canadian government
|
2
|
|
72,488
|
|
|
532
|
|
|
(655
|
)
|
|
72,365
|
|
Corporate
|
2
|
|
19,036
|
|
|
235
|
|
|
(284
|
)
|
|
18,987
|
|
Residential mortgage-backed
|
2
|
|
1,297
|
|
|
29
|
|
|
(22
|
)
|
|
1,304
|
|
Asset-backed
|
2
|
|
5
|
|
|
—
|
|
|
—
|
|
|
5
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
1,949
|
|
|
41
|
|
|
(158
|
)
|
|
1,832
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
344,116
|
|
|
30,885
|
|
|
(19,149
|
)
|
|
355,852
|
|
Canada
|
1
|
|
11,930
|
|
|
2,652
|
|
|
(1,077
|
)
|
|
13,505
|
|
Other international
|
1
|
|
32,156
|
|
|
2,636
|
|
|
(3,907
|
)
|
|
30,885
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
323,884
|
|
|
1,263
|
|
|
(43,975
|
)
|
|
281,172
|
|
Fixed income
|
1
|
|
155,717
|
|
|
154
|
|
|
(13,092
|
)
|
|
142,779
|
|
Other
|
3
|
|
3,703
|
|
|
1,069
|
|
|
—
|
|
|
4,772
|
|
Trust investments, at fair value
|
|
|
1,048,698
|
|
|
39,603
|
|
|
(83,650
|
)
|
|
1,004,651
|
|
Fixed income commingled funds
|
|
|
69,148
|
|
|
—
|
|
|
(442
|
)
|
|
68,706
|
|
Private equity
|
|
|
38,724
|
|
|
3,780
|
|
|
(6,467
|
)
|
|
36,037
|
|
Trust investments, at net asset value
|
|
|
107,872
|
|
|
3,780
|
|
|
(6,909
|
)
|
|
104,743
|
|
Trust investments, at market
|
|
|
$
|
1,156,570
|
|
|
$
|
43,383
|
|
|
$
|
(90,559
|
)
|
|
$
|
1,109,394
|
|
Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer. Additionally, valuations are reviewed by the Investment Committee of the Board of Directors quarterly.
Where quoted prices are available in an active market, securities are classified as Level 1 investments pursuant to the fair value measurements hierarchy.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, ratings, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the fair value measurements hierarchy.
The valuation of other investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These funds are classified as Level 3 investments pursuant to the fair value measurements hierarchy.
Fixed income commingled funds and private equity investments are measured at net asset value. Fixed income commingled funds are redeemable for net asset value with two weeks notice. Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next
2
to
10
years. As of
June 30, 2016
, our unfunded commitment for our private equity investments was
$38.6 million
which, if called, would be funded by the assets of the trusts.
The change in our trust investments measured at fair value with significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
|
Fair value, beginning balance
|
$
|
4,811
|
|
|
$
|
4,817
|
|
|
$
|
4,772
|
|
|
$
|
4,891
|
|
Net unrealized gains included in
Accumulated other comprehensive income
(1)
|
535
|
|
|
241
|
|
|
574
|
|
|
167
|
|
Purchases
|
25
|
|
|
23
|
|
|
25
|
|
|
23
|
|
Sales
|
(18
|
)
|
|
—
|
|
|
(18
|
)
|
|
—
|
|
Fair value, ending balance
|
$
|
5,353
|
|
|
$
|
5,081
|
|
|
$
|
5,353
|
|
|
$
|
5,081
|
|
______________________________________________
|
|
(1)
|
All unrealized gains recognized in
Accumulated other comprehensive income
for our merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in
Accumulated other comprehensive income
to
Deferred preneed receipts held in trust
. See Note 6 for further information related to our
Deferred preneed receipts held in trust
.
|
Maturity dates of our fixed income securities range from
2016
to
2041
. Maturities of fixed income securities, excluding mutual funds, at
June 30, 2016
are estimated as follows:
|
|
|
|
|
|
Fair Value
|
|
(In thousands)
|
Due in one year or less
|
$
|
108,861
|
|
Due in one to five years
|
23,232
|
|
Due in five to ten years
|
33,082
|
|
Thereafter
|
6,873
|
|
|
$
|
172,048
|
|
Earnings from all our merchandise and service trust investments are recognized in revenue when merchandise is delivered or a service is performed. Fees charged by our wholly-owned registered investment advisor are also included in current revenue. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenue in the period in which they are earned. Recognized trust fund income (realized and unrealized) related to
these trust investments was
$12.1 million
and
$14.0 million
for the
three
months ended
June 30, 2016
and
2015
, respectively.
Recognized trust fund income (realized and unrealized) related to
these trust investments was
$24.1 million
and
$28.4 million
for the
six months ended
June 30, 2016
and
2015
, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in
Other expense, net
and a decrease to
Preneed funeral receivables, net and trust investments
. These investment losses, if any, are offset by the corresponding reclassification in
Other expense, net,
which reduces
Deferred preneed receipts held in trust
. See Note 6 for further information related to our
Deferred preneed receipts held in trust
. For the
three
months ended
June 30, 2016
and
2015
, we recorded a
$2.1 million
and
$1.0 million
impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments. For the
six
months ended
June 30, 2016
and
2015
, we recorded a
$3.2 million
and a
$1.5 million
impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments.
We have determined that the remaining unrealized losses in our merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our merchandise and service trust investment
unrealized losses, their associated values, and the duration of unrealized losses as of
June 30, 2016
and
December 31, 2015
, respectively, are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
1,879
|
|
|
$
|
(55
|
)
|
|
$
|
7,077
|
|
|
$
|
(82
|
)
|
|
$
|
8,956
|
|
|
$
|
(137
|
)
|
Canadian government
|
3,141
|
|
|
(99
|
)
|
|
13,203
|
|
|
(472
|
)
|
|
16,344
|
|
|
(571
|
)
|
Corporate
|
2,291
|
|
|
(23
|
)
|
|
2,412
|
|
|
(48
|
)
|
|
4,703
|
|
|
(71
|
)
|
Asset-backed
|
52
|
|
|
—
|
|
|
5
|
|
|
(1
|
)
|
|
57
|
|
|
(1
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
—
|
|
|
—
|
|
|
171
|
|
|
(88
|
)
|
|
171
|
|
|
(88
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
104,059
|
|
|
(17,424
|
)
|
|
18,077
|
|
|
(3,005
|
)
|
|
122,136
|
|
|
(20,429
|
)
|
Canada
|
1,526
|
|
|
(199
|
)
|
|
1,419
|
|
|
(379
|
)
|
|
2,945
|
|
|
(578
|
)
|
Other international
|
8,579
|
|
|
(1,175
|
)
|
|
7,176
|
|
|
(1,716
|
)
|
|
15,755
|
|
|
(2,891
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
162,848
|
|
|
(19,583
|
)
|
|
81,872
|
|
|
(18,351
|
)
|
|
244,720
|
|
|
(37,934
|
)
|
Fixed income
|
8,714
|
|
|
(726
|
)
|
|
24,381
|
|
|
(4,442
|
)
|
|
33,095
|
|
|
(5,168
|
)
|
Other
|
1,364
|
|
|
(58
|
)
|
|
—
|
|
|
—
|
|
|
1,364
|
|
|
(58
|
)
|
Trust investments, at fair value
|
294,453
|
|
|
(39,342
|
)
|
|
155,793
|
|
|
(28,584
|
)
|
|
450,246
|
|
|
(67,926
|
)
|
Private equity
|
761
|
|
|
(598
|
)
|
|
17,001
|
|
|
(5,054
|
)
|
|
17,762
|
|
|
(5,652
|
)
|
Trust investments, at net asset value
|
761
|
|
|
(598
|
)
|
|
17,001
|
|
|
(5,054
|
)
|
|
17,762
|
|
|
(5,652
|
)
|
Total temporarily impaired securities
|
$
|
295,214
|
|
|
$
|
(39,940
|
)
|
|
$
|
172,794
|
|
|
$
|
(33,638
|
)
|
|
$
|
468,008
|
|
|
$
|
(73,578
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
37,008
|
|
|
$
|
(1,273
|
)
|
|
$
|
4,687
|
|
|
$
|
(58
|
)
|
|
$
|
41,695
|
|
|
$
|
(1,331
|
)
|
Canadian government
|
2,336
|
|
|
(17
|
)
|
|
11,535
|
|
|
(638
|
)
|
|
13,871
|
|
|
(655
|
)
|
Corporate
|
4,644
|
|
|
(156
|
)
|
|
4,025
|
|
|
(128
|
)
|
|
8,669
|
|
|
(284
|
)
|
Residential mortgage-backed
|
377
|
|
|
(6
|
)
|
|
133
|
|
|
(16
|
)
|
|
510
|
|
|
(22
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
448
|
|
|
(60
|
)
|
|
42
|
|
|
(98
|
)
|
|
490
|
|
|
(158
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
128,725
|
|
|
(16,448
|
)
|
|
14,531
|
|
|
(2,701
|
)
|
|
143,256
|
|
|
(19,149
|
)
|
Canada
|
1,956
|
|
|
(355
|
)
|
|
1,097
|
|
|
(722
|
)
|
|
3,053
|
|
|
(1,077
|
)
|
Other international
|
9,458
|
|
|
(1,638
|
)
|
|
6,151
|
|
|
(2,269
|
)
|
|
15,609
|
|
|
(3,907
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
185,726
|
|
|
(23,385
|
)
|
|
79,855
|
|
|
(20,590
|
)
|
|
265,581
|
|
|
(43,975
|
)
|
Fixed income
|
108,984
|
|
|
(5,052
|
)
|
|
27,048
|
|
|
(8,040
|
)
|
|
136,032
|
|
|
(13,092
|
)
|
Trust investments, at fair value
|
479,662
|
|
|
(48,390
|
)
|
|
149,104
|
|
|
(35,260
|
)
|
|
628,766
|
|
|
(83,650
|
)
|
Fixed income commingled funds
|
68,578
|
|
|
(442
|
)
|
|
—
|
|
|
—
|
|
|
68,578
|
|
|
(442
|
)
|
Private equity
|
—
|
|
|
—
|
|
|
18,713
|
|
|
(6,467
|
)
|
|
18,713
|
|
|
(6,467
|
)
|
Trust investments, at net asset value
|
68,578
|
|
|
(442
|
)
|
|
18,713
|
|
|
(6,467
|
)
|
|
87,291
|
|
|
(6,909
|
)
|
Total temporarily impaired securities
|
$
|
548,240
|
|
|
$
|
(48,832
|
)
|
|
$
|
167,817
|
|
|
$
|
(41,727
|
)
|
|
$
|
716,057
|
|
|
$
|
(90,559
|
)
|
4. Preneed Cemetery Activities
Preneed cemetery receivables, net and trust investments
represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, for contracts sold in advance of when the property interment rights, merchandise, or services are needed. Our merchandise and service trusts are variable interest entities. We have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The trust investments detailed in Notes 3 and 5 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from
Deferred preneed cemetery revenue
into
Deferred preneed receipts held in trust.
Amounts are withdrawn from the trusts when the contract obligations are performed. Cash flows from preneed cemetery contracts are presented as operating cash flows in our unaudited condensed Consolidated Statement of Cash Flows.
Preneed cemetery receivables, net and trust investments
are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in
Deferred preneed cemetery revenue
until the merchandise is delivered or the service is performed.
The table below sets forth certain investment-related activities associated with these preneed merchandise and service trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Deposits
|
$
|
42,267
|
|
|
$
|
41,093
|
|
|
$
|
79,265
|
|
|
$
|
76,254
|
|
Withdrawals
|
$
|
33,952
|
|
|
$
|
51,444
|
|
|
$
|
66,363
|
|
|
$
|
82,670
|
|
Purchases of available-for-sale securities
|
$
|
238,980
|
|
|
$
|
117,257
|
|
|
$
|
371,009
|
|
|
$
|
224,194
|
|
Sales of available-for-sale securities
|
$
|
222,128
|
|
|
$
|
139,681
|
|
|
$
|
348,079
|
|
|
$
|
238,943
|
|
Realized gains from sales of available-for-sale securities
|
$
|
11,673
|
|
|
$
|
16,406
|
|
|
$
|
17,919
|
|
|
$
|
23,541
|
|
Realized losses from sales of available-for-sale securities
|
$
|
(18,596
|
)
|
|
$
|
(6,398
|
)
|
|
$
|
(41,449
|
)
|
|
$
|
(13,427
|
)
|
The components of
Preneed cemetery receivables, net and trust investments
in our unaudited condensed Consolidated Balance Sheet at
June 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
Trust investments, at market
|
$
|
1,372,530
|
|
|
$
|
1,343,916
|
|
Cash and cash equivalents
|
121,291
|
|
|
118,583
|
|
Trust investments
|
1,493,821
|
|
|
1,462,499
|
|
Receivables from customers
|
999,442
|
|
|
958,503
|
|
Unearned finance charges
|
(34,347
|
)
|
|
(31,332
|
)
|
|
2,458,916
|
|
|
2,389,670
|
|
Allowance for cancellation
|
(73,377
|
)
|
|
(71,503
|
)
|
Preneed cemetery receivables, net and trust investments
|
$
|
2,385,539
|
|
|
$
|
2,318,167
|
|
The costs and values associated with the trust investments measured at market at
June 30, 2016
and
December 31, 2015
are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Value represents the market value of the underlying securities held by the trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
66,289
|
|
|
$
|
2,106
|
|
|
$
|
—
|
|
|
$
|
68,395
|
|
Canadian government
|
2
|
|
32,674
|
|
|
292
|
|
|
(49
|
)
|
|
32,917
|
|
Corporate
|
2
|
|
3,359
|
|
|
21
|
|
|
(57
|
)
|
|
3,323
|
|
Asset-backed
|
2
|
|
170
|
|
|
24
|
|
|
—
|
|
|
194
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
535,084
|
|
|
53,161
|
|
|
(35,147
|
)
|
|
553,098
|
|
Canada
|
1
|
|
8,014
|
|
|
4,675
|
|
|
(133
|
)
|
|
12,556
|
|
Other international
|
1
|
|
48,225
|
|
|
3,537
|
|
|
(4,614
|
)
|
|
47,148
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
355,599
|
|
|
4,172
|
|
|
(40,497
|
)
|
|
319,274
|
|
Fixed income
|
1
|
|
83,983
|
|
|
977
|
|
|
(7,654
|
)
|
|
77,306
|
|
Other
|
3
|
|
1,479
|
|
|
—
|
|
|
(160
|
)
|
|
1,319
|
|
Trust investments, at fair value
|
|
|
1,134,876
|
|
|
68,965
|
|
|
(88,311
|
)
|
|
1,115,530
|
|
Fixed income commingled funds
|
|
|
213,950
|
|
|
7,769
|
|
|
—
|
|
|
221,719
|
|
Private equity
|
|
|
33,345
|
|
|
5,700
|
|
|
(3,764
|
)
|
|
35,281
|
|
Trust investments, at net asset value
|
|
|
247,295
|
|
|
13,469
|
|
|
(3,764
|
)
|
|
257,000
|
|
Trust investments, at market
|
|
|
$
|
1,382,171
|
|
|
$
|
82,434
|
|
|
$
|
(92,075
|
)
|
|
$
|
1,372,530
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
69,746
|
|
|
$
|
25
|
|
|
$
|
(1,437
|
)
|
|
$
|
68,334
|
|
Canadian government
|
2
|
|
24,648
|
|
|
183
|
|
|
(169
|
)
|
|
24,662
|
|
Corporate
|
2
|
|
5,112
|
|
|
26
|
|
|
(118
|
)
|
|
5,020
|
|
Residential mortgage-backed
|
2
|
|
129
|
|
|
3
|
|
|
(3
|
)
|
|
129
|
|
Asset-backed
|
2
|
|
170
|
|
|
15
|
|
|
—
|
|
|
185
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
532,026
|
|
|
44,181
|
|
|
(32,037
|
)
|
|
544,170
|
|
Canada
|
1
|
|
8,984
|
|
|
3,858
|
|
|
(891
|
)
|
|
11,951
|
|
Other international
|
1
|
|
50,053
|
|
|
4,207
|
|
|
(5,799
|
)
|
|
48,461
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
356,798
|
|
|
1,620
|
|
|
(49,642
|
)
|
|
308,776
|
|
Fixed income
|
1
|
|
203,983
|
|
|
92
|
|
|
(18,526
|
)
|
|
185,549
|
|
Other
|
3
|
|
1,381
|
|
|
122
|
|
|
—
|
|
|
1,503
|
|
Trust investments, at fair value
|
|
|
1,253,030
|
|
|
54,332
|
|
|
(108,622
|
)
|
|
1,198,740
|
|
Fixed income commingled funds
|
|
|
108,883
|
|
|
—
|
|
|
(570
|
)
|
|
108,313
|
|
Private equity
|
|
|
35,411
|
|
|
5,954
|
|
|
(4,502
|
)
|
|
36,863
|
|
Trust investments, at net asset value
|
|
|
144,294
|
|
|
5,954
|
|
|
(5,072
|
)
|
|
145,176
|
|
Trust investments, at market
|
|
|
$
|
1,397,324
|
|
|
$
|
60,286
|
|
|
$
|
(113,694
|
)
|
|
$
|
1,343,916
|
|
Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer. Additionally, valuations are reviewed by the Investment Committee of the Board of Directors quarterly.
Where quoted prices are available in an active market, securities held by the trusts are classified as Level 1 investments pursuant to the fair value measurements hierarchy.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, ratings, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the fair value measurements hierarchy.
The valuation of other investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These funds are classified as Level 3 investments pursuant to the fair value measurements hierarchy.
Fixed income commingled funds and private equity investments are measured at net asset value. Fixed income commingled funds are redeemable for net asset value with two weeks notice. Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next
2
to
10
years. As of
June 30, 2016
, our unfunded commitment for our private equity investments was
$39.3 million
which, if called, would be funded by the assets of the trusts.
The change in our trust investments measured at fair value with significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
|
Fair value, beginning balance
|
$
|
1,297
|
|
|
$
|
199
|
|
|
$
|
1,503
|
|
|
$
|
203
|
|
Net unrealized gains (losses) included in
Accumulated other comprehensive income
(1)
|
22
|
|
|
3
|
|
|
(184
|
)
|
|
(1
|
)
|
Purchases
|
—
|
|
|
1,374
|
|
|
—
|
|
|
1,374
|
|
Fair value, ending balance
|
$
|
1,319
|
|
|
$
|
1,576
|
|
|
$
|
1,319
|
|
|
$
|
1,576
|
|
________________________________________
|
|
(1)
|
All unrealized gains (losses) recognized in
Accumulated other comprehensive income
for our merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in
Accumulated other comprehensive income
to
Deferred preneed receipts held in trust
. See Note 6 for further information related to our
Deferred preneed receipts held in trust
.
|
Maturity dates of our fixed income securities range from
2016
to
2041
. Maturities of fixed income securities, excluding mutual funds, at
June 30, 2016
are estimated as follows:
|
|
|
|
|
|
Fair Value
|
|
(In thousands)
|
Due in one year or less
|
$
|
31,139
|
|
Due in one to five years
|
27,669
|
|
Due in five to ten years
|
35,521
|
|
Thereafter
|
10,500
|
|
|
$
|
104,829
|
|
Earnings from all our merchandise and service trust investments are recognized in current revenue when merchandise is delivered or a service is performed. Fees charged by our wholly-owned registered investment advisor are also included in current revenue. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenue in the period in which they are earned. Recognized trust fund income (realized and unrealized) related to these trust investments was
$10.6 million
and
$12.1 million
for the
three
months ended
June 30, 2016
and
2015
, respectively. Recognized trust fund income (realized and unrealized) related to these trust investments was
$20.3 million
and
$24.2 million
for the
six months ended
June 30, 2016
and
2015
, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in
Other expense, net
and a decrease to
Preneed cemetery receivables, net and trust investments
. These investment losses, if any, are offset by the corresponding reclassification in
Other expense, net,
which reduces
Deferred preneed receipts held in trust
. See Note 6 for further information related to our
Deferred preneed receipts held in trust
. For the
three
months ended
June 30, 2016
and
2015
, we recorded a
$2.6 million
and
$1.5 million
impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments. For the
six months ended
June 30, 2016
and
2015
, we recorded a
$4.7 million
and a
$2.1 million
impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments.
We have determined that the remaining unrealized losses in our merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our merchandise and service trust investment unrealized losses, their associated values and the duration of unrealized losses as of
June 30, 2016
and
December 31, 2015
, respectively, are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Canadian government
|
$
|
5
|
|
|
$
|
—
|
|
|
$
|
1,256
|
|
|
$
|
(49
|
)
|
|
$
|
1,261
|
|
|
$
|
(49
|
)
|
Corporate
|
1,636
|
|
|
(35
|
)
|
|
811
|
|
|
(22
|
)
|
|
2,447
|
|
|
(57
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
171,032
|
|
|
(27,655
|
)
|
|
29,015
|
|
|
(7,492
|
)
|
|
200,047
|
|
|
(35,147
|
)
|
Canada
|
—
|
|
|
—
|
|
|
757
|
|
|
(133
|
)
|
|
757
|
|
|
(133
|
)
|
Other international
|
15,699
|
|
|
(2,131
|
)
|
|
9,438
|
|
|
(2,483
|
)
|
|
25,137
|
|
|
(4,614
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
193,204
|
|
|
(23,202
|
)
|
|
84,672
|
|
|
(17,295
|
)
|
|
277,876
|
|
|
(40,497
|
)
|
Fixed income
|
2,117
|
|
|
(173
|
)
|
|
44,481
|
|
|
(7,481
|
)
|
|
46,598
|
|
|
(7,654
|
)
|
Other
|
1,319
|
|
|
(160
|
)
|
|
—
|
|
|
—
|
|
|
1,319
|
|
|
(160
|
)
|
Trust investments, at fair value
|
385,012
|
|
|
(53,356
|
)
|
|
170,430
|
|
|
(34,955
|
)
|
|
555,442
|
|
|
(88,311
|
)
|
Private equity
|
—
|
|
|
—
|
|
|
8,882
|
|
|
(3,764
|
)
|
|
8,882
|
|
|
(3,764
|
)
|
Trust investments, at net asset value
|
—
|
|
|
—
|
|
|
8,882
|
|
|
(3,764
|
)
|
|
8,882
|
|
|
(3,764
|
)
|
Total temporarily impaired securities
|
$
|
385,012
|
|
|
$
|
(53,356
|
)
|
|
$
|
179,312
|
|
|
$
|
(38,719
|
)
|
|
$
|
564,324
|
|
|
$
|
(92,075
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
52,533
|
|
|
$
|
(1,435
|
)
|
|
$
|
21
|
|
|
$
|
(2
|
)
|
|
$
|
52,554
|
|
|
$
|
(1,437
|
)
|
Canadian government
|
16,039
|
|
|
(105
|
)
|
|
841
|
|
|
(64
|
)
|
|
16,880
|
|
|
(169
|
)
|
Corporate
|
1,754
|
|
|
(22
|
)
|
|
2,347
|
|
|
(96
|
)
|
|
4,101
|
|
|
(118
|
)
|
Residential mortgage-backed
|
42
|
|
|
(1
|
)
|
|
18
|
|
|
(2
|
)
|
|
60
|
|
|
(3
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
198,843
|
|
|
(26,038
|
)
|
|
21,355
|
|
|
(5,999
|
)
|
|
220,198
|
|
|
(32,037
|
)
|
Canada
|
470
|
|
|
(6
|
)
|
|
1,430
|
|
|
(885
|
)
|
|
1,900
|
|
|
(891
|
)
|
Other international
|
15,567
|
|
|
(2,507
|
)
|
|
9,412
|
|
|
(3,292
|
)
|
|
24,979
|
|
|
(5,799
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
207,349
|
|
|
(25,991
|
)
|
|
86,720
|
|
|
(23,651
|
)
|
|
294,069
|
|
|
(49,642
|
)
|
Fixed income
|
139,749
|
|
|
(6,322
|
)
|
|
44,550
|
|
|
(12,204
|
)
|
|
184,299
|
|
|
(18,526
|
)
|
Trust investments, at fair value
|
632,346
|
|
|
(62,427
|
)
|
|
166,694
|
|
|
(46,195
|
)
|
|
799,040
|
|
|
(108,622
|
)
|
Fixed income commingled funds
|
108,347
|
|
|
(570
|
)
|
|
—
|
|
|
—
|
|
|
108,347
|
|
|
(570
|
)
|
Private equity
|
—
|
|
|
—
|
|
|
9,526
|
|
|
(4,502
|
)
|
|
9,526
|
|
|
(4,502
|
)
|
Trust investments, at net asset value
|
108,347
|
|
|
(570
|
)
|
|
9,526
|
|
|
(4,502
|
)
|
|
117,873
|
|
|
(5,072
|
)
|
Total temporarily impaired securities
|
$
|
740,693
|
|
|
$
|
(62,997
|
)
|
|
$
|
176,220
|
|
|
$
|
(50,697
|
)
|
|
$
|
916,913
|
|
|
$
|
(113,694
|
)
|
5. Cemetery Perpetual Care Trusts
We are required by state and provincial law to pay into cemetery perpetual care trusts a portion of the proceeds from the sale of cemetery property interment rights. Our cemetery perpetual care trusts are variable interest entities. We have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The trust investments detailed in Notes 3 and 4 are also accounted for as variable interest entities. We consolidate our cemetery perpetual care trust investments with a corresponding amount recorded as
Care trusts’ corpus.
Cash flows from cemetery perpetual care trusts are presented as operating cash flows in our unaudited condensed Consolidated Statement of Cash Flows.
The table below sets forth certain investment-related activities associated with our cemetery perpetual care trusts:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Deposits
|
$
|
11,376
|
|
|
$
|
10,200
|
|
|
$
|
21,189
|
|
|
$
|
19,453
|
|
Withdrawals
|
$
|
14,256
|
|
|
$
|
11,518
|
|
|
$
|
30,550
|
|
|
$
|
24,676
|
|
Purchases of available-for-sale securities
|
$
|
40,379
|
|
|
$
|
43,454
|
|
|
$
|
89,637
|
|
|
$
|
145,114
|
|
Sales of available-for-sale securities
|
$
|
43,306
|
|
|
$
|
52,371
|
|
|
$
|
77,517
|
|
|
$
|
106,136
|
|
Realized gains from sales of available-for-sale securities
|
$
|
2,300
|
|
|
$
|
1,753
|
|
|
$
|
3,794
|
|
|
$
|
2,151
|
|
Realized losses from sales of available-for-sale securities
|
$
|
(3,725
|
)
|
|
$
|
(4,192
|
)
|
|
$
|
(5,341
|
)
|
|
$
|
(4,322
|
)
|
The components of
Cemetery perpetual care trust investments
in our unaudited condensed Consolidated Balance Sheet at
June 30, 2016
and
December 31, 2015
are as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
Trust investments, at market
|
$
|
1,284,338
|
|
|
$
|
1,232,592
|
|
Cash and cash equivalents
|
79,090
|
|
|
86,835
|
|
Cemetery perpetual care trust investments
|
$
|
1,363,428
|
|
|
$
|
1,319,427
|
|
The cost and values associated with trust investments, at market at
June 30, 2016
and
December 31, 2015
are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Value represents the value of the underlying securities or cash held by the trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
2,973
|
|
|
$
|
—
|
|
|
$
|
(56
|
)
|
|
$
|
2,917
|
|
Canadian government
|
2
|
|
36,908
|
|
|
401
|
|
|
(86
|
)
|
|
37,223
|
|
Corporate
|
2
|
|
7,750
|
|
|
131
|
|
|
(149
|
)
|
|
7,732
|
|
Residential mortgage-backed
|
2
|
|
381
|
|
|
1
|
|
|
—
|
|
|
382
|
|
Asset-backed
|
2
|
|
631
|
|
|
6
|
|
|
(38
|
)
|
|
599
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
1,997
|
|
|
71
|
|
|
(75
|
)
|
|
1,993
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
232,703
|
|
|
19,250
|
|
|
(11,091
|
)
|
|
240,862
|
|
Canada
|
1
|
|
4,877
|
|
|
2,613
|
|
|
(147
|
)
|
|
7,343
|
|
Other international
|
1
|
|
13,846
|
|
|
274
|
|
|
(1,387
|
)
|
|
12,733
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
19,830
|
|
|
3,981
|
|
|
(1,539
|
)
|
|
22,272
|
|
Fixed income
|
1
|
|
892,586
|
|
|
7,272
|
|
|
(38,211
|
)
|
|
861,647
|
|
Other
|
3
|
|
627
|
|
|
1,254
|
|
|
—
|
|
|
1,881
|
|
Trust investments, at fair value
|
|
|
1,215,109
|
|
|
35,254
|
|
|
(52,779
|
)
|
|
1,197,584
|
|
Private equity
|
|
|
91,068
|
|
|
3,108
|
|
|
(7,422
|
)
|
|
86,754
|
|
Trust investments, at net asset value
|
|
|
91,068
|
|
|
3,108
|
|
|
(7,422
|
)
|
|
86,754
|
|
Trust investments, at market
|
|
|
$
|
1,306,177
|
|
|
$
|
38,362
|
|
|
$
|
(60,201
|
)
|
|
$
|
1,284,338
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
3,636
|
|
|
$
|
20
|
|
|
$
|
(81
|
)
|
|
$
|
3,575
|
|
Canadian government
|
2
|
|
32,477
|
|
|
321
|
|
|
(266
|
)
|
|
32,532
|
|
Corporate
|
2
|
|
12,694
|
|
|
149
|
|
|
(284
|
)
|
|
12,559
|
|
Residential mortgage-backed
|
2
|
|
934
|
|
|
13
|
|
|
(9
|
)
|
|
938
|
|
Asset-backed
|
2
|
|
660
|
|
|
5
|
|
|
(31
|
)
|
|
634
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
5,850
|
|
|
55
|
|
|
(159
|
)
|
|
5,746
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
231,012
|
|
|
15,224
|
|
|
(10,898
|
)
|
|
235,338
|
|
Canada
|
1
|
|
5,648
|
|
|
2,112
|
|
|
(606
|
)
|
|
7,154
|
|
Other international
|
1
|
|
14,820
|
|
|
160
|
|
|
(2,390
|
)
|
|
12,590
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
21,783
|
|
|
3,138
|
|
|
(1,850
|
)
|
|
23,071
|
|
Fixed income
|
1
|
|
890,013
|
|
|
530
|
|
|
(63,913
|
)
|
|
826,630
|
|
Other
|
3
|
|
645
|
|
|
1,257
|
|
|
—
|
|
|
1,902
|
|
Trust investments, at fair value
|
|
|
1,220,172
|
|
|
22,984
|
|
|
(80,487
|
)
|
|
1,162,669
|
|
Private equity
|
|
|
75,613
|
|
|
2,406
|
|
|
(8,096
|
)
|
|
69,923
|
|
Trust investments, at net asset value
|
|
|
75,613
|
|
|
2,406
|
|
|
(8,096
|
)
|
|
69,923
|
|
Trust investments, at market
|
|
|
$
|
1,295,785
|
|
|
$
|
25,390
|
|
|
$
|
(88,583
|
)
|
|
$
|
1,232,592
|
|
Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer. Additionally, valuations are reviewed by the Investment Committee of the Board of Directors quarterly.
Where quoted prices are available in an active market, securities held by the trusts are classified as Level 1 investments pursuant to the fair value measurements hierarchy.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, ratings, and tax-exempt status. These funds are classified as Level 2 investments pursuant to the fair value measurements hierarchy.
The valuation of other investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These funds are classified as Level 3 investments pursuant to the fair value measurements hierarchy.
Private equity investments are measured at net asset value. Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next
2
to
10
years. As of
June 30, 2016
, our unfunded commitment for our private equity investments was
$39.2 million
which, if called, would be funded by the assets of the trusts.
The change in our trust investments measured at fair value with significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
|
|
(In thousands)
|
|
|
Fair market value, beginning balance
|
$
|
1,883
|
|
|
$
|
1,560
|
|
|
$
|
1,902
|
|
|
$
|
1,556
|
|
Net unrealized (losses) gains included in
Accumulated other comprehensive income
(1)
|
(2
|
)
|
|
1
|
|
|
(21
|
)
|
|
5
|
|
Fair market value, ending balance
|
$
|
1,881
|
|
|
$
|
1,561
|
|
|
$
|
1,881
|
|
|
$
|
1,561
|
|
_________________________________________
|
|
(1)
|
All unrealized gains (losses) recognized in
Accumulated other comprehensive income
for our cemetery perpetual care trust investments are offset by a corresponding reclassification in
Accumulated other comprehensive income
to
Care trusts’ corpus
. See Note 6 for further information related to our
Care trusts’ corpus
.
|
Maturity dates of our fixed income securities range from
2016
to
2040
. Maturities of fixed income securities at
June 30, 2016
are estimated as follows:
|
|
|
|
|
|
Fair Value
|
|
(In thousands)
|
Due in one year or less
|
$
|
28,426
|
|
Due in one to five years
|
20,109
|
|
Due in five to ten years
|
108
|
|
Thereafter
|
210
|
|
|
$
|
48,853
|
|
Distributable earnings from these cemetery perpetual care trust investments are recognized in current cemetery revenue to the extent we incur qualifying cemetery maintenance costs. Fees charged by our wholly-owned registered investment advisor are also included in current revenue. Recognized trust fund income related to these trust investments was
$17.6 million
and
$19.6 million
for the
three
months ended
June 30, 2016
and
2015
, respectively. Recognized trust fund income related to these trust investments was
$36.1 million
and
$33.0 million
for the
six months ended
June 30, 2016
and
2015
, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in
Other expense, net
and a decrease to
Cemetery perpetual care trust investments
. These investment losses, if any, are offset by the corresponding reclassification in
Other expense, net,
which reduces
Care trusts’ corpus
. See Note 6 for further information related to our
Care trusts’ corpus
. For
three
months ended
2015
, we recorded a
$1.0 million
impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain investments. For the
six
months ended
June 30, 2016
and
2015
, we recorded a
$0.1 million
and a
$1.5 million
impairment charge, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments.
We have determined that the remaining unrealized losses in our cemetery perpetual care trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our cemetery perpetual care trust investment unrealized losses, their associated values and the duration of unrealized losses as of
June 30, 2016
and
December 31, 2015
, respectively, are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
2,917
|
|
|
$
|
(56
|
)
|
|
$
|
2,917
|
|
|
$
|
(56
|
)
|
Canadian government
|
14
|
|
|
—
|
|
|
2,039
|
|
|
(86
|
)
|
|
2,053
|
|
|
(86
|
)
|
Corporate
|
2,961
|
|
|
(72
|
)
|
|
2,031
|
|
|
(77
|
)
|
|
4,992
|
|
|
(149
|
)
|
Asset-backed
|
11
|
|
|
(9
|
)
|
|
453
|
|
|
(29
|
)
|
|
464
|
|
|
(38
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
105
|
|
|
(3
|
)
|
|
422
|
|
|
(72
|
)
|
|
527
|
|
|
(75
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
77,766
|
|
|
(7,212
|
)
|
|
17,978
|
|
|
(3,879
|
)
|
|
95,744
|
|
|
(11,091
|
)
|
Canada
|
24
|
|
|
(2
|
)
|
|
673
|
|
|
(145
|
)
|
|
697
|
|
|
(147
|
)
|
Other international
|
787
|
|
|
(61
|
)
|
|
5,885
|
|
|
(1,326
|
)
|
|
6,672
|
|
|
(1,387
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
4,757
|
|
|
(380
|
)
|
|
1,553
|
|
|
(1,159
|
)
|
|
6,310
|
|
|
(1,539
|
)
|
Fixed income
|
30,203
|
|
|
(1,619
|
)
|
|
545,997
|
|
|
(36,592
|
)
|
|
576,200
|
|
|
(38,211
|
)
|
Trust investments, at fair value
|
116,628
|
|
|
(9,358
|
)
|
|
579,948
|
|
|
(43,421
|
)
|
|
696,576
|
|
|
(52,779
|
)
|
Private equity
|
669
|
|
|
(203
|
)
|
|
25,103
|
|
|
(7,219
|
)
|
|
25,772
|
|
|
(7,422
|
)
|
Trust investments, at net asset value
|
669
|
|
|
(203
|
)
|
|
25,103
|
|
|
(7,219
|
)
|
|
25,772
|
|
|
(7,422
|
)
|
Total temporarily impaired securities
|
$
|
117,297
|
|
|
$
|
(9,561
|
)
|
|
$
|
605,051
|
|
|
$
|
(50,640
|
)
|
|
$
|
722,348
|
|
|
$
|
(60,201
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
3,275
|
|
|
$
|
(80
|
)
|
|
$
|
35
|
|
|
$
|
(1
|
)
|
|
$
|
3,310
|
|
|
$
|
(81
|
)
|
Canadian government
|
18,499
|
|
|
(164
|
)
|
|
1,371
|
|
|
(102
|
)
|
|
19,870
|
|
|
(266
|
)
|
Corporate
|
5,163
|
|
|
(134
|
)
|
|
4,147
|
|
|
(150
|
)
|
|
9,310
|
|
|
(284
|
)
|
Residential mortgage-backed
|
303
|
|
|
(3
|
)
|
|
117
|
|
|
(6
|
)
|
|
420
|
|
|
(9
|
)
|
Asset-backed
|
145
|
|
|
(12
|
)
|
|
360
|
|
|
(19
|
)
|
|
505
|
|
|
(31
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
4,029
|
|
|
(159
|
)
|
|
—
|
|
|
—
|
|
|
4,029
|
|
|
(159
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
81,624
|
|
|
(7,793
|
)
|
|
14,900
|
|
|
(3,105
|
)
|
|
96,524
|
|
|
(10,898
|
)
|
Canada
|
702
|
|
|
(31
|
)
|
|
1,026
|
|
|
(575
|
)
|
|
1,728
|
|
|
(606
|
)
|
Other international
|
8,734
|
|
|
(940
|
)
|
|
2,347
|
|
|
(1,450
|
)
|
|
11,081
|
|
|
(2,390
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
4,580
|
|
|
(606
|
)
|
|
1,258
|
|
|
(1,244
|
)
|
|
5,838
|
|
|
(1,850
|
)
|
Fixed income
|
519,981
|
|
|
(18,205
|
)
|
|
294,309
|
|
|
(45,708
|
)
|
|
814,290
|
|
|
(63,913
|
)
|
Trust investments, at fair value
|
647,035
|
|
|
(28,127
|
)
|
|
319,870
|
|
|
(52,360
|
)
|
|
966,905
|
|
|
(80,487
|
)
|
Private equity
|
10,592
|
|
|
(61
|
)
|
|
24,556
|
|
|
(8,035
|
)
|
|
35,148
|
|
|
(8,096
|
)
|
Trust investments, at net asset value
|
10,592
|
|
|
(61
|
)
|
|
24,556
|
|
|
(8,035
|
)
|
|
35,148
|
|
|
(8,096
|
)
|
Total temporarily impaired securities
|
$
|
657,627
|
|
|
$
|
(28,188
|
)
|
|
$
|
344,426
|
|
|
$
|
(60,395
|
)
|
|
$
|
1,002,053
|
|
|
$
|
(88,583
|
)
|
6. Deferred Preneed Receipts Held in Trust and Care Trusts’ Corpus
Deferred Preneed Receipts Held in Trust
We consolidate the merchandise and service trusts associated with our preneed activities. Although the consolidation of the merchandise and service trusts is required by accounting standards, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these merchandise and service trusts, and therefore their interests in these trusts represent a liability to us.
The components of
Deferred preneed receipts held in trust
in our unaudited condensed Consolidated Balance Sheet at
June 30, 2016
and
December 31, 2015
are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
Preneed
Funeral
|
|
Preneed
Cemetery
|
|
Total
|
|
Preneed
Funeral
|
|
Preneed
Cemetery
|
|
Total
|
|
(In thousands)
|
Trust investments
|
$
|
1,527,271
|
|
|
$
|
1,493,821
|
|
|
$
|
3,021,092
|
|
|
$
|
1,515,113
|
|
|
$
|
1,462,499
|
|
|
$
|
2,977,612
|
|
Accrued trust operating payables and other
|
(384
|
)
|
|
(301
|
)
|
|
(685
|
)
|
|
(1,381
|
)
|
|
(2,845
|
)
|
|
(4,226
|
)
|
Deferred preneed receipts held in trust
|
$
|
1,526,887
|
|
|
$
|
1,493,520
|
|
|
$
|
3,020,407
|
|
|
$
|
1,513,732
|
|
|
$
|
1,459,654
|
|
|
$
|
2,973,386
|
|
Care Trusts’ Corpus
The
Care trusts’ corpus
reflected in our unaudited condensed Consolidated Balance Sheet represents the cemetery perpetual care trusts, including the related accrued expenses.
The components of
Care trusts’ corpus
in our unaudited condensed Consolidated Balance Sheet at
June 30, 2016
and
December 31, 2015
are detailed below.
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
Cemetery perpetual care trust investments
|
$
|
1,363,428
|
|
|
$
|
1,319,427
|
|
Accrued trust operating payables and other
|
616
|
|
|
137
|
|
Care trusts’ corpus
|
$
|
1,364,044
|
|
|
$
|
1,319,564
|
|
Other Expense, Net
The components of
Other expense, net
in our unaudited condensed Consolidated Statement of Operations for the
three
and
six months ended June 30, 2016
and
2015
are detailed below. See Notes 3, 4, and 5 for further discussion of the amounts related to the funeral, cemetery, and cemetery perpetual care trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2016
|
|
Funeral
Trusts
|
|
Cemetery
Trusts
|
|
Cemetery Perpetual
Care Trusts
|
|
Other, Net
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Realized gains
|
$
|
6,246
|
|
|
$
|
11,673
|
|
|
$
|
2,300
|
|
|
$
|
—
|
|
|
$
|
20,219
|
|
Realized losses
|
(10,201
|
)
|
|
(18,596
|
)
|
|
(3,725
|
)
|
|
—
|
|
|
(32,522
|
)
|
Impairment charges
|
(2,082
|
)
|
|
(2,632
|
)
|
|
—
|
|
|
—
|
|
|
(4,714
|
)
|
Interest, dividend, and other ordinary income
|
5,955
|
|
|
1,355
|
|
|
14,065
|
|
|
—
|
|
|
21,375
|
|
Trust expenses and income taxes
|
(3,752
|
)
|
|
(1,367
|
)
|
|
(8,147
|
)
|
|
—
|
|
|
(13,266
|
)
|
Net trust investment (loss) income
|
(3,834
|
)
|
|
(9,567
|
)
|
|
4,493
|
|
|
—
|
|
|
(8,908
|
)
|
Reclassification to deferred preneed receipts held in trust and care trusts’ corpus
|
3,834
|
|
|
9,567
|
|
|
(4,493
|
)
|
|
—
|
|
|
8,908
|
|
Other expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(535
|
)
|
|
(535
|
)
|
Total other expense, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(535
|
)
|
|
$
|
(535
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2016
|
|
Funeral
Trusts
|
|
Cemetery
Trusts
|
|
Cemetery Perpetual
Care Trusts
|
|
Other, Net
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Realized gains
|
$
|
13,070
|
|
|
$
|
17,919
|
|
|
$
|
3,794
|
|
|
$
|
—
|
|
|
$
|
34,783
|
|
Realized losses
|
(29,852
|
)
|
|
(41,449
|
)
|
|
(5,341
|
)
|
|
—
|
|
|
(76,642
|
)
|
Impairment charges
|
(3,200
|
)
|
|
(4,681
|
)
|
|
(115
|
)
|
|
—
|
|
|
(7,996
|
)
|
Interest, dividend, and other ordinary income
|
8,728
|
|
|
3,715
|
|
|
27,055
|
|
|
—
|
|
|
39,498
|
|
Trust expenses and income taxes
|
(8,194
|
)
|
|
(6,220
|
)
|
|
(13,904
|
)
|
|
—
|
|
|
(28,318
|
)
|
Net trust investment (loss) income
|
(19,448
|
)
|
|
(30,716
|
)
|
|
11,489
|
|
|
—
|
|
|
(38,675
|
)
|
Reclassification to deferred preneed receipts held in trust and care trusts’ corpus
|
19,448
|
|
|
30,716
|
|
|
(11,489
|
)
|
|
—
|
|
|
38,675
|
|
Other expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(746
|
)
|
|
(746
|
)
|
Total other expense, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(746
|
)
|
|
$
|
(746
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended June 30, 2015
|
|
Funeral
Trusts
|
|
Cemetery
Trusts
|
|
Cemetery Perpetual
Care Trusts
|
|
Other, Net
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Realized gains
|
$
|
9,856
|
|
|
$
|
16,406
|
|
|
$
|
1,753
|
|
|
$
|
—
|
|
|
$
|
28,015
|
|
Realized losses
|
(3,838
|
)
|
|
(6,398
|
)
|
|
(4,192
|
)
|
|
—
|
|
|
(14,428
|
)
|
Impairment charges
|
(1,023
|
)
|
|
(1,531
|
)
|
|
(996
|
)
|
|
—
|
|
|
(3,550
|
)
|
Interest, dividend, and other ordinary income
|
8,820
|
|
|
8,262
|
|
|
15,789
|
|
|
—
|
|
|
32,871
|
|
Trust expenses and income taxes
|
(4,010
|
)
|
|
(6,592
|
)
|
|
(16,570
|
)
|
|
—
|
|
|
(27,172
|
)
|
Net trust investment (loss) income
|
9,805
|
|
|
10,147
|
|
|
(4,216
|
)
|
|
—
|
|
|
15,736
|
|
Reclassification to deferred preneed receipts held in trust and care trusts’ corpus
|
(9,805
|
)
|
|
(10,147
|
)
|
|
4,216
|
|
|
—
|
|
|
(15,736
|
)
|
Other expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(109
|
)
|
|
(109
|
)
|
Total other expense, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(109
|
)
|
|
$
|
(109
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2015
|
|
Funeral
Trusts
|
|
Cemetery
Trusts
|
|
Cemetery Perpetual
Care Trusts
|
|
Other, Net
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Realized gains
|
$
|
14,205
|
|
|
$
|
23,541
|
|
|
$
|
2,151
|
|
|
$
|
—
|
|
|
$
|
39,897
|
|
Realized losses
|
(8,572
|
)
|
|
(13,427
|
)
|
|
(4,322
|
)
|
|
—
|
|
|
(26,321
|
)
|
Impairment charges
|
(1,495
|
)
|
|
(2,050
|
)
|
|
(1,507
|
)
|
|
—
|
|
|
(5,052
|
)
|
Interest, dividend, and other ordinary income
|
12,882
|
|
|
11,778
|
|
|
26,334
|
|
|
—
|
|
|
50,994
|
|
Trust expenses and income taxes
|
(9,837
|
)
|
|
(15,107
|
)
|
|
(22,843
|
)
|
|
—
|
|
|
(47,787
|
)
|
Net trust investment (loss) income
|
7,183
|
|
|
4,735
|
|
|
(187
|
)
|
|
—
|
|
|
11,731
|
|
Reclassification to deferred preneed receipts held in trust and care trusts’ corpus
|
(7,183
|
)
|
|
(4,735
|
)
|
|
187
|
|
|
—
|
|
|
(11,731
|
)
|
Other expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(167
|
)
|
|
(167
|
)
|
Total other expense, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(167
|
)
|
|
$
|
(167
|
)
|
7. Income Taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitation, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was
51.3%
and
36.7%
for the
three
months ended
June 30, 2016
and
2015
, respectively. Our effective tax rate was
43.6%
and
37.1%
for the six months ended June 30, 2016 and 2015, respectively. The effective tax rate for the three and six months ended June 30, 2016 is above the
35%
federal statutory tax rate primarily due to state tax expense and impairment charges related to the planned divestiture of certain funeral homes in Los Angeles, California, as well as the changes in uncertain tax liability, partially offset by lower rates on foreign earnings.
Unrecognized Tax Benefits
As of
June 30, 2016
, the total amount of our unrecognized tax benefits was
$179.8 million
and the total amount of our accrued interest was
$54.3 million
. Additional interest expense of
$2.6 million
was accrued during the
six months ended June 30, 2016
.
A number of years may elapse before particular tax matters, for which we have unrecognized tax benefits, are settled. While we have effectively concluded our
2003
through
2005
tax years with respect to our affiliate, SCI Funeral & Cemetery Purchasing Cooperative, Inc., SCI and subsidiaries' tax years
1999
through
2005
remain under review at the IRS Appeals level. The completion of the audit for the amended returns for the tax years 2006 through 2007 is also pending IRS Appeals finalization of the tax years 1999-2005. Furthermore, SCI and its affiliates are under audit by various state and foreign
jurisdictions for years 2010 through 2014. The outcome of each of these audits cannot be predicted at this time. It is reasonably possible that the amount of our unrecognized tax benefits could significantly increase or decrease over the next twelve months either because we prevail on positions or because the tax authorities prevail. Due to the uncertainty regarding the timing of completion of audits and possible outcomes, a current estimate of the range of increases or decreases that may occur within the next twelve months cannot be made.
8. Debt
Debt as of
June 30, 2016
and
December 31, 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
7.0% Senior Notes due June 2017
|
$
|
—
|
|
|
$
|
295,000
|
|
7.625% Senior Notes due October 2018
|
250,000
|
|
|
250,000
|
|
4.5% Senior Notes due November 2020
|
200,000
|
|
|
200,000
|
|
8.0% Senior Notes due November 2021
|
150,000
|
|
|
150,000
|
|
5.375% Senior Notes due January 2022
|
425,000
|
|
|
425,000
|
|
5.375% Senior Notes due May 2024
|
850,000
|
|
|
850,000
|
|
7.5% Senior Notes due April 2027
|
200,000
|
|
|
200,000
|
|
Term Loan due July 2018
|
—
|
|
|
310,000
|
|
Bank Credit Facility due July 2018
|
—
|
|
|
270,000
|
|
Term Loan due March 2021
|
691,250
|
|
|
—
|
|
Bank Credit Facility due March 2021
|
250,000
|
|
|
—
|
|
Obligations under capital leases
|
210,037
|
|
|
204,246
|
|
Mortgage notes and other debt, maturities through 2050
|
3,952
|
|
|
4,037
|
|
Unamortized premiums, net
|
8,730
|
|
|
8,636
|
|
Unamortized debt issuance costs
|
(35,686
|
)
|
|
(42,491
|
)
|
Total debt
|
3,203,283
|
|
|
3,124,428
|
|
Less: Current maturities of long-term debt
|
(90,104
|
)
|
|
(86,823
|
)
|
Total long-term debt
|
$
|
3,113,179
|
|
|
$
|
3,037,605
|
|
Current maturities of debt at
June 30, 2016
include amounts due under our Term Loan, mortgage notes and other debt, and capital leases within the next year. Our consolidated debt had a weighted average interest rate of
4.6%
and
5.2%
at
June 30, 2016
and
December 31, 2015
, respectively. Approximately
65%
and
76%
of our total debt had a fixed interest rate at
June 30, 2016
and
December 31, 2015
, respectively.
During the
six months ended June 30, 2016
and
2015
, we paid
$80.2 million
and
$81.1 million
in cash interest, respectively.
Bank Credit Agreement
In
March 2016
, we entered into a new
$1.4 billion
bank credit agreement due
March 2021
with a syndicate of banks.
As of
June 30, 2016
, we have
$250.0 million
of outstanding borrowings under our Bank Credit Facility due
March 2021
;
$691.3 million
of outstanding borrowings under our Term Loan due
March 2021
; and have issued
$33.3 million
of letters of credit. The bank credit agreement due
March 2021
provides us with flexibility for working capital, if needed, and is guaranteed by a majority of our domestic subsidiaries. The subsidiary guaranty is a guaranty of payment of the outstanding amount of the total lending commitment, including letters of credit. The bank credit agreement contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, and certain dividend and share repurchase restrictions. We pay a quarterly fee on the unused commitment, which was
0.30%
at
June 30, 2016
. As of
June 30, 2016
, we have
$416.7 million
in borrowing capacity under the Bank Credit Facility.
As of
December 31, 2015
, we had a
$500.0 million
Bank Credit Facility due
July 2018
with a syndicate of financial institutions, including a sublimit of
$175.0 million
for letters of credit. In March 2016, the new
$1.4 billion
credit agreement replaced the existing
$500.0 million
Bank Credit Facility due
July 2018
and
$600.0 million
Term Loan due
July 2018
providing for a new
$700.0 million
Bank Credit Facility and a
$700.0 million
Term Loan, both maturing in
March 2021
, including a sublimit of
$100.0 million
for letters of credit.
Debt Issuances and Additions
In
June 2016
, we drew
$50.0 million
on our Bank Credit Facility due
March 2021
to fund acquisition activity and make required payments on our Term Loan due
March 2021
.
In
April 2016
, we drew
$170.0 million
on our Bank Credit Facility due
March 2021
, and
$150.0 million
on our Term Loan due
March 2021
, to repay our
$295.0 million
7.0% Senior Notes due June 2017
and associated transaction costs.
In January 2016, we drew
$10.0 million
on our Bank Credit Facility due
July 2018
for general corporate purposes. In
March 2016
, we drew
$30.0 million
on our Bank Credit Facility due
March 2021
and
$550.0 million
on our Term Loan due
March 2021
to repay outstanding borrowings under our Bank Credit Facility due
July 2018
and our Term Loan due
July 2018
. These transactions resulted in the addition of
$5.2 million
in debt issuance costs.
During the six months ended June 30, 2015, we drew $
30.0 million
on our Bank Credit Facility due
July 2018
, which was used to make required payments on our Term Loan due
July 2018
.
Debt Extinguishments and Reductions
During the
six months ended June 30, 2016
, we made debt payments of
$893.8 million
for scheduled and early extinguishment payments including:
|
|
•
|
$310.0 million
in aggregate principal of our Term Loan due
July 2018
;
|
|
|
•
|
$295.0 million
in aggregate principal of our 7.0% Senior Notes due 2017;
|
|
|
•
|
$280.0 million
in aggregate principal of our Bank Credit Facility due
July 2018
; and
|
|
|
•
|
$8.8 million
in aggregate principal of our Term Loan due
March 2021
.
|
Certain of the above transactions resulted in a loss of
$22.5 million
recorded in
Loss on early extinguishment of debt
in our unaudited condensed Consolidated Statement of Operations.
During the
six months ended June 30, 2015
, we made a scheduled debt payment of
$30.1 million
on our Term Loan due
July 2018
.
Capital Leases
During the
six months ended June 30, 2016
and
2015
, we acquired
$23.4 million
and
$22.5 million
, respectively, of capital leases, primarily related to transportation equipment. We made aggregate principal payments of
$16.9 million
and
$15.3 million
on our capital lease obligations for the
six months ended June 30, 2016
and
2015
, respectively.
9. Credit Risk and Fair Value of Financial Instruments
Fair Value Estimates
The fair value estimates of the following financial instruments have been determined using available market information and appropriate valuation methodologies. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair value of receivables on preneed contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms.
The fair value of our debt instruments at
June 30, 2016
and
December 31, 2015
was as follows:
|
|
|
|
|
|
|
|
|
|
June 30, 2016
|
|
December 31, 2015
|
|
(In thousands)
|
7.0% Senior Notes due June 2017
|
$
|
—
|
|
|
$
|
314,618
|
|
7.625% Senior Notes due October 2018
|
278,750
|
|
|
279,375
|
|
4.5% Senior Notes due November 2020
|
203,500
|
|
|
201,500
|
|
8.0% Senior Notes due November 2021
|
176,718
|
|
|
176,438
|
|
5.375% Senior Notes due January 2022
|
438,983
|
|
|
445,188
|
|
5.375% Senior Notes due May 2024
|
896,214
|
|
|
884,094
|
|
7.5% Senior Notes due April 2027
|
231,000
|
|
|
216,500
|
|
Term Loan due March 2021
|
691,250
|
|
|
—
|
|
Bank Credit Facility due March 2021
|
250,000
|
|
|
—
|
|
Term Loan due July 2018
|
—
|
|
|
310,000
|
|
Bank Credit Facility due July 2018
|
—
|
|
|
270,000
|
|
Mortgage notes and other debt, maturities through 2050
|
3,953
|
|
|
4,047
|
|
Total fair value of debt instruments
|
$
|
3,170,368
|
|
|
$
|
3,101,760
|
|
The fair value of our long-term, fixed-rate loans were estimated using market prices for those loans, and therefore they are classified within Level 2 of the fair value measurements hierarchy. The Term Loan, Bank Credit Facility agreement and the mortgage and other debt are classified within Level 3 of the fair value measurements hierarchy. The fair value of these instruments have been estimated using a discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. An increase (decrease) in the inputs results in a directionally opposite change in the fair value of the instruments.
10. Share-Based Compensation
Stock Benefit Plans
We maintain benefit plans whereby shares of our common stock may be issued pursuant to the exercise of stock options, restricted stock, or other stock based awards granted to officers and key employees. In May 2016, our shareholders approved the 2016 Equity Incentive Plan that reserves
13,000,000
shares of common stock for outstanding and future awards of stock options, restricted stock, and other stock based awards to officers and key employees.
We utilize the Black-Scholes option valuation model for estimating the fair value of our stock options. This model uses a range of assumptions related to volatility, the risk-free interest rate, the expected life, and the dividend yield. The fair values of our stock options are calculated using the following weighted average assumptions for the
six
months ended
June 30, 2016
:
|
|
|
|
Dividend yield
|
2.0
|
%
|
Expected volatility
|
19.7
|
%
|
Risk-free interest rate
|
1.0
|
%
|
Expected holding period (in years)
|
4.0
|
|
Stock Options
The following table sets forth stock option activity for the
six
months ended
June 30, 2016
:
|
|
|
|
|
|
|
|
|
Options
|
|
Weighted-Average
Exercise Price
|
Outstanding at December 31, 2015
|
11,047,920
|
|
|
$
|
13.98
|
|
Granted
|
1,863,700
|
|
|
$
|
22.28
|
|
Exercised
|
(871,422
|
)
|
|
$
|
10.18
|
|
Canceled
|
(19,798
|
)
|
|
$
|
20.98
|
|
Outstanding at June 30, 2016
|
12,020,400
|
|
|
$
|
15.53
|
|
Exercisable at June 30, 2016
|
8,153,847
|
|
|
$
|
12.67
|
|
As of
June 30, 2016
, the unrecognized compensation expense related to stock options of
$14.8 million
is expected to be recognized over a weighted average period of
1.5
years.
Restricted Stock Awards
Restricted stock awards activity for the
six
months ended
June 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Restricted
Stock Awards
|
|
Weighted-Average
Grant-Date
Fair Value
|
Nonvested restricted stock awards at December 31, 2015
|
573,739
|
|
|
$
|
19.32
|
|
Granted
|
241,510
|
|
|
$
|
22.28
|
|
Vested
|
(313,247
|
)
|
|
$
|
18.14
|
|
Forfeited
|
(1,258
|
)
|
|
$
|
20.85
|
|
Nonvested restricted stock awards at June 30, 2016
|
500,744
|
|
|
$
|
21.48
|
|
As of
June 30, 2016
, the unrecognized compensation expense related to restricted stock awards of
$8.6 million
is expected to be recognized over a weighted average period of
2.0
years.
Restricted Stock Units
Restricted stock units (RSU) activity for the
six
months ended
June 30, 2016
was as follows:
|
|
|
|
|
|
|
|
|
Restricted
Stock Units
|
|
Weighted-Average
Grant-Date
Fair Value
|
Nonvested restricted stock units at December 31, 2015
|
—
|
|
|
$
|
—
|
|
Granted
|
130,660
|
|
|
$
|
25.72
|
|
Forfeited
|
(3,900
|
)
|
|
$
|
25.72
|
|
Nonvested restricted stock units at June 30, 2016
|
126,760
|
|
|
$
|
25.72
|
|
As of
June 30, 2016
, the unrecognized compensation expense related to restricted stock units of
$3.2 million
is expected to be recognized over a weighted average period of
2.6
years.
11. Equity
(All shares reported in whole numbers)
Our components of
Accumulated other comprehensive income
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Unrealized
Gains and
Losses
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2015
|
$
|
6,164
|
|
|
$
|
—
|
|
|
$
|
6,164
|
|
Activity in 2016
|
23,125
|
|
|
—
|
|
|
23,125
|
|
Decrease in net unrealized losses associated with available-for-sale securities of the trusts, net of taxes
|
—
|
|
|
70,208
|
|
|
70,208
|
|
Reclassification of net unrealized loss activity attributable to the
Deferred preneed receipts held in trust
and
Care trusts’ corpus,
net of taxes
|
—
|
|
|
(70,208
|
)
|
|
(70,208
|
)
|
Balance at June 30, 2016
|
$
|
29,289
|
|
|
$
|
—
|
|
|
$
|
29,289
|
|
|
|
|
|
|
|
Balance at December 31, 2014
|
$
|
59,414
|
|
|
$
|
—
|
|
|
$
|
59,414
|
|
Activity in 2015
|
(14,746
|
)
|
|
—
|
|
|
(14,746
|
)
|
Increase in net unrealized losses associated with available-for-sale securities of the trusts, net of taxes
|
—
|
|
|
29,761
|
|
|
29,761
|
|
Reclassification of net unrealized loss activity attributable to the
Deferred preneed receipts held in trust
and
Care trusts’ corpus
, net of taxes
|
—
|
|
|
(29,761
|
)
|
|
(29,761
|
)
|
Balance at June 30, 2015
|
$
|
44,668
|
|
|
$
|
—
|
|
|
$
|
44,668
|
|
The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. The U.S. dollar amount that arises from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the foreign currency translation adjustment in
Accumulated other comprehensive income
.
Cash Dividends
On
May 11, 2016
, our Board of Directors approved a cash dividend of
$0.13
per common share. This dividend, totaling
$25.2 million
, was paid on
June 30, 2016
.
Share Repurchases
Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our stock repurchase program. During the
six
months ended
June 30, 2016
, we repurchased
3,309,944
shares of common stock at an aggregate cost of
$81.5 million
, which is an average cost per share of
$24.62
. After these repurchases the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately
$199.5 million
at
June 30, 2016
.
Subsequent to
June 30, 2016
, we repurchased
267,158
shares of common stock at an aggregate cost of
$7.5 million
, which is an average cost per share of
$28.06
. After these third quarter repurchases, the remaining dollar value of shares authorized to be repurchased under our repurchase program is
$192.0 million
.
12. Segment Reporting
Our operations are both product-based and geographically-based, and the reportable operating segments presented below include our funeral and cemetery operations. Our geographic areas include the United States and Canada, where we conduct both funeral and cemetery operations.
Our reportable segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral
|
|
Cemetery
|
|
Reportable
Segments
|
|
(In thousands)
|
Three months ended June 30,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2016
|
$
|
467,092
|
|
|
$
|
284,618
|
|
|
$
|
751,710
|
|
2015
|
$
|
471,520
|
|
|
$
|
282,834
|
|
|
$
|
754,354
|
|
Gross profit:
|
|
|
|
|
|
2016
|
$
|
87,999
|
|
|
$
|
73,372
|
|
|
$
|
161,371
|
|
2015
|
$
|
94,260
|
|
|
$
|
71,997
|
|
|
$
|
166,257
|
|
Six months ended June 30,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2016
|
$
|
959,201
|
|
|
$
|
541,780
|
|
|
$
|
1,500,981
|
|
2015
|
$
|
979,207
|
|
|
$
|
523,264
|
|
|
$
|
1,502,471
|
|
Gross profit:
|
|
|
|
|
|
2016
|
$
|
194,980
|
|
|
$
|
127,887
|
|
|
$
|
322,867
|
|
2015
|
$
|
221,197
|
|
|
$
|
122,504
|
|
|
$
|
343,701
|
|
The following table reconciles gross profit from reportable segments to our consolidated income before income taxes:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
|
June 30,
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Gross profit from reportable segments
|
|
$
|
161,371
|
|
|
$
|
166,257
|
|
|
$
|
322,867
|
|
|
$
|
343,701
|
|
General and administrative expenses
|
|
(36,260
|
)
|
|
(33,095
|
)
|
|
(73,768
|
)
|
|
(67,645
|
)
|
Losses on divestitures and impairment charges, net
|
|
(30,641
|
)
|
|
(5,582
|
)
|
|
(30,988
|
)
|
|
(7,361
|
)
|
Operating income
|
|
94,470
|
|
|
127,580
|
|
|
218,111
|
|
|
268,695
|
|
Interest expense
|
|
(39,398
|
)
|
|
(42,982
|
)
|
|
(82,480
|
)
|
|
(85,921
|
)
|
Loss on early extinguishment of debt
|
|
(21,898
|
)
|
|
—
|
|
|
(22,479
|
)
|
|
—
|
|
Other expense, net
|
|
(535
|
)
|
|
(109
|
)
|
|
(746
|
)
|
|
(167
|
)
|
Income before income taxes
|
|
$
|
32,639
|
|
|
$
|
84,489
|
|
|
$
|
112,406
|
|
|
$
|
182,607
|
|
Our geographic area information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United
States
|
|
Canada
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Three months ended June 30,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2016
|
$
|
707,750
|
|
|
$
|
43,960
|
|
|
$
|
751,710
|
|
2015
|
$
|
705,074
|
|
|
$
|
49,280
|
|
|
$
|
754,354
|
|
Six months ended June 30,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2016
|
$
|
1,416,688
|
|
|
$
|
84,293
|
|
|
$
|
1,500,981
|
|
2015
|
$
|
1,405,526
|
|
|
$
|
96,945
|
|
|
$
|
1,502,471
|
|
13. Supplementary Information
Revenue and Costs and Expenses
The detail of certain income statement accounts as presented in the unaudited condensed consolidated Statement of Operations is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Property and merchandise revenue:
|
|
|
|
|
|
|
|
Funeral
|
$
|
152,395
|
|
|
$
|
151,926
|
|
|
$
|
313,926
|
|
|
$
|
314,127
|
|
Cemetery
|
221,596
|
|
|
220,290
|
|
|
415,460
|
|
|
395,111
|
|
Total property and merchandise revenue
|
373,991
|
|
|
372,216
|
|
|
729,386
|
|
|
709,238
|
|
Services revenue:
|
|
|
|
|
|
|
|
Funeral
|
277,416
|
|
|
283,810
|
|
|
574,403
|
|
|
600,677
|
|
Cemetery
|
55,016
|
|
|
54,340
|
|
|
110,650
|
|
|
112,309
|
|
Total services revenue
|
332,432
|
|
|
338,150
|
|
|
685,053
|
|
|
712,986
|
|
Other revenue
|
45,287
|
|
|
43,988
|
|
|
86,542
|
|
|
80,247
|
|
Total revenue
|
$
|
751,710
|
|
|
$
|
754,354
|
|
|
$
|
1,500,981
|
|
|
$
|
1,502,471
|
|
Property and merchandise costs and expenses:
|
|
|
|
|
|
|
|
Funeral
|
$
|
72,065
|
|
|
$
|
72,637
|
|
|
$
|
147,862
|
|
|
$
|
148,622
|
|
Cemetery
|
128,614
|
|
|
128,304
|
|
|
247,816
|
|
|
235,263
|
|
Total cost of property and merchandise
|
200,679
|
|
|
200,941
|
|
|
395,678
|
|
|
383,885
|
|
Services costs and expenses:
|
|
|
|
|
|
|
|
Funeral
|
160,090
|
|
|
159,397
|
|
|
319,508
|
|
|
315,498
|
|
Cemetery
|
18,238
|
|
|
17,792
|
|
|
37,210
|
|
|
36,815
|
|
Total cost of services
|
178,328
|
|
|
177,189
|
|
|
356,718
|
|
|
352,313
|
|
Overhead and other expenses
|
211,332
|
|
|
209,967
|
|
|
425,718
|
|
|
422,572
|
|
Total costs and expenses
|
$
|
590,339
|
|
|
$
|
588,097
|
|
|
$
|
1,178,114
|
|
|
$
|
1,158,770
|
|
Non-Cash Investing and Financing Transactions
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended
|
|
|
June 30,
|
|
|
2016
|
|
2015
|
|
|
(In thousands)
|
Net change in capital expenditure accrual
|
|
$
|
(5,301
|
)
|
|
$
|
1,513
|
|
14. Commitments and Contingencies
Insurance Loss Reserves
We purchase comprehensive general liability, morticians’ and cemetery professional liability, automobile liability, and workers’ compensation insurance coverage all of which one structured with high deductibles. The high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. As of
June 30, 2016
and
December 31, 2015
, we have self-insurance reserves of
$76.9 million
and
$76.6 million
, respectively.
Litigation
We are a party to various litigation matters, investigations, and proceedings. Some of the more frequent ordinary routine litigations incidental to our business are based on burial practices claims and employment related matters, including discrimination, harassment, and wage and hour laws and regulations. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable
outcome. We intend to vigorously defend ourselves in the lawsuits described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.
Wage and Hour Claims.
We are named a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour pay, including but not limited to the
Samborsky
lawsuit described below.
Charles Samborsky, et al, individually and on behalf of those persons similarly situated, v. SCI California Funeral Services, Inc., et al
; Case No. BC544180; in the Superior Court of the State of California for the County of Los Angeles, Central District-Central Civil West Courthouse. This lawsuit was filed in April 2014 against an SCI subsidiary and purports to have been brought on behalf of employees who worked as family service counselors in California since April 2010. The plaintiffs allege causes of action for various violations of state laws regulating wage and hour pay. The plaintiffs seek unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The claims have been sent to arbitration. We cannot quantify our ultimate liability, if any, in this lawsuit.
Claims Regarding Acquisition of Stewart Enterprises
. We are involved in the following lawsuits.
Karen Moulton, Individually and on behalf of all others similarly situated v. Stewart Enterprises, Inc., Service Corporation International and others
; Case No. 2013-5636; in the Civil District Court Parish of New Orleans. This case was filed as a class action in June 2013 against SCI and our subsidiary in connection with SCI's proposed acquisition of Stewart Enterprises, Inc. The plaintiffs allege that SCI aided and abetted breaches of fiduciary duties by Stewart Enterprises and its board of directors in negotiating the combination of Stewart Enterprises with a subsidiary of SCI. The plaintiffs seek damages concerning the combination. We filed exceptions to the plaintiffs’ complaint that were granted in June 2014. Thus, subject to appeals, SCI will no longer be party to the suit. The case will continue against our subsidiary Stewart Enterprises and its former individual directors. We cannot quantify our ultimate liability, if any, for the payment of damages.
S.E. Funeral Homes of California, Inc. v. The Roman Catholic Archbishop of Los Angeles, et al.
; Case No. BC559142; in the Superior Court of the State of California for the County of Los Angeles. The plaintiff is a company indirectly owned by Stewart Enterprises, Inc. The plaintiff filed this action in September 2014 to prevent The Roman Catholic Archbishop of Los Angeles (the “Archdiocese”) from terminating six ground leases. In reliance on the leases having 40 year terms beginning at the earliest in 1997, the plaintiff had previously made material investments since 1997 in constructing and operating funeral homes, chapels, mausoleums, and other improvements on the leased premises. In addition, the plaintiff has created a material backlog of deferred preneed revenue that plaintiff expects to receive in the coming years. In September 2014, the Archdiocese delivered notices purporting to terminate the leases and alleging that the leases were breached because the plaintiff did not obtain the Archdiocese’s consent before Stewart Enterprises, Inc. entered into a reverse merger with an affiliate of SCI. The plaintiff disputes this contention and seeks, among other things, a declaratory judgment declaring that the Archdiocese’s purported termination notices are invalid, requiring specific performance of the leases, or, in the alternative, awarding plaintiff compensatory damages. The Archdiocese filed a counterclaim and a separate action for unlawful detainer in October 2014, and all claims and actions of the respective parties have been consolidated into one case for all purposes. In February 2016, the Court entered a ruling on the parties’ cross motions for summary adjudication based on the parties’ opposing interpretations of the relevant lease provisions and adopted the Archdiocese’s interpretation of its right to terminate the leases.
On July 27, 2016, the parties executed an agreement to settle the consolidated case. Under the settlement agreement, the Company has agreed to sell to the Archdiocese substantially all of the assets used in the operations of the six mortuaries located on cemeteries of the Archdiocese and to terminate its rights under the related ground leases. In exchange, the Archdiocese will pay the Company
$24.0 million
when the Company closes on the sale of the assets, as well as make three additional annual payments, based on a formula related to gross revenue of the mortuary operations going forward of between
$800,000
to
$1,000,000
per payment. The closing of the sale is expected to take place on November 30, 2016. As a result of the settlement, the consolidated case pending between the parties will be dismissed.
The ultimate outcome of the matters described above cannot be determined at this time. We intend to vigorously defend all of the above lawsuits; however, an adverse decision in one or more of such matters could have a material effect on us, our financial condition, results of operations, and cash flows.
15. Earnings Per Share
Basic earnings per common share (EPS) excludes dilution and is computed by dividing
Net income attributable to common stockholders
by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common shares that then shared in our earnings.
A reconciliation of the numerators and denominators of the basic and diluted EPS computations is presented below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands, except per share amounts)
|
Amounts attributable to common stockholders:
|
|
|
|
|
|
|
|
Net income:
|
|
|
|
|
|
|
|
Net income — basic
|
$
|
15,620
|
|
|
$
|
52,595
|
|
|
$
|
63,065
|
|
|
$
|
113,970
|
|
After tax interest on convertible debt
|
10
|
|
|
12
|
|
|
22
|
|
|
25
|
|
Net income — diluted
|
$
|
15,630
|
|
|
$
|
52,607
|
|
|
$
|
63,087
|
|
|
$
|
113,995
|
|
Weighted average shares (denominator):
|
|
|
|
|
|
|
|
Weighted average shares — basic
|
193,806
|
|
|
202,466
|
|
|
194,366
|
|
|
202,966
|
|
Stock options
|
2,788
|
|
|
4,159
|
|
|
2,975
|
|
|
4,134
|
|
Restricted stock units
|
3
|
|
|
—
|
|
|
1
|
|
|
—
|
|
Convertible debt
|
121
|
|
|
121
|
|
|
121
|
|
|
121
|
|
Weighted average shares — diluted
|
196,718
|
|
|
206,746
|
|
|
197,463
|
|
|
207,221
|
|
Net income per share:
|
|
|
|
|
|
|
|
Basic
|
$
|
0.08
|
|
|
$
|
0.26
|
|
|
$
|
0.32
|
|
|
$
|
0.56
|
|
Diluted
|
$
|
0.08
|
|
|
$
|
0.25
|
|
|
$
|
0.32
|
|
|
$
|
0.55
|
|
Earnings per share from discontinued operations were less than $0.005 for all periods; therefore, net income from continuing operations attributable to common stockholders per share is the same as net income per share in the table above.
The computation of diluted EPS excludes outstanding stock options and restricted stock units in certain periods in which the inclusion of such options and restricted share units would be anti-dilutive in the periods presented. Total options and restricted share units not included in the computation of dilutive EPS are as follows (in shares):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
|
2015
|
|
2016
|
|
2015
|
|
(In thousands)
|
Antidilutive options
|
1,799
|
|
|
1
|
|
|
2,338
|
|
|
1,034
|
|
Antidilutive restricted stock units
|
—
|
|
|
—
|
|
|
24
|
|
|
—
|
|
Total common stock equivalents excluded from computation
|
1,799
|
|
|
1
|
|
|
2,362
|
|
|
1,034
|
|
16. Divestiture-Related Activities
As divestitures occur in the normal course of business, gains or losses on the sale of such locations are recognized in the income statement line item
Losses on divestitures and impairment charges, net,
which consist of the following:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
Six Months Ended
|
|
June 30,
|
|
June 30,
|
|
2016
|
2015
|
|
2016
|
2015
|
|
(In thousands)
|
Gains (losses) on divestitures, net
|
$
|
685
|
|
$
|
(4,940
|
)
|
|
$
|
2,111
|
|
$
|
(3,027
|
)
|
Impairment losses
|
(31,326
|
)
|
(642
|
)
|
|
(33,099
|
)
|
(4,334
|
)
|
|
$
|
(30,641
|
)
|
$
|
(5,582
|
)
|
|
$
|
(30,988
|
)
|
$
|
(7,361
|
)
|
We classified certain funeral homes as held-for-sale in connection with the settlement of litigation with the Archdiocese of Los Angeles and recognized a
$31.2 million
non-cash impairment charge related to this planned divestiture. The carrying value of assets held-for-sale at June 30, 2016 is as follows:
|
|
|
|
|
|
(In thousands)
|
Preneed funeral receivables, net and trust investments
|
966
|
|
Property and equipment, net
|
23,212
|
|
Goodwill
|
25,355
|
|
Deferred charges and other assets
|
12,495
|
|
Assets held-for-sale
|
$
|
62,028
|
|
Less: impairment on assets held-for-sale
|
(31,837
|
)
|
Assets held-for-sale, net
|
$
|
30,191
|
|