|
|
ITEM 7.
|
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
|
OVERVIEW
General
We operate in two business segments: funeral home operations, which account for approximately
76%
of our revenues, and cemetery operations, which account for approximately
24%
of our revenues. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily sales businesses that sell interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. We provide funeral and cemetery services and products on both an “at-need” (time of death) and “preneed” (planned prior to death) basis. At
December 31, 2016
, we operated
170
funeral homes in
28
states and
32
cemeteries in
11
states within the United States. For additional discussion about our overall business strategy, see Part I, Item 1, Business, Business Strategy.
Funeral and Cemetery Operations
Factors affecting our funeral operating results include: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our at-need business to increase average revenue per contract. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. Thus, small changes in revenues, up or down, normally cause significant changes to our profitability.
Our funeral contract volumes, including contracts from acquisitions, have increased from 27,864 in 2012 to
33,160
in
2016
(compound annual increase of 4.4%). Our funeral operating revenue, excluding financial revenue, has increased from $143.2 million in 2012 to
$180.6 million
in
2016
(compound annual increase of 6.0%). The increases are primarily a result of businesses we have acquired in the last five years and our ability to increase the average revenue per funeral through expanded service offerings and packages. Additional funeral revenue from preneed commissions and preneed funeral trust earnings has increased from $7.6 million in 2012 to
$8.8 million
in
2016
. We experienced a
1.9%
decrease in volumes in comparing the year ended
December 31, 2016
to the year ended
December 31, 2015
on a same store basis and the same store average revenue per contract for the year ended
December 31, 2016
decreased
0.1%
compared to the year ended
December 31, 2015
.
The percentage of funeral services involving cremations has increased from 46.2% for the year ended December 31, 2012 to
50.7%
for the year ended
December 31, 2016
. On a same store basis, the cremation rate has risen from 46.3% in 2012 to
51.8%
for the year ended
December 31, 2016
, while the cremation rate for our acquired funeral home businesses has risen from 43.5% for the year ended December 31, 2012 compared to
46.0%
for the year ended
December 31, 2016
.
Cemetery operating results are affected by the size and success of our sales organization. Approximately
48.0%
and
50.0%
of our cemetery revenues related to preneed sales of interment rights and related merchandise and services for the years ended
December 31, 2015
and
2016
, respectively. We believe that changes in the economy and consumer confidence affect the amount of preneed cemetery operating revenues. Our cemetery financial performance from 2012 through
2016
was characterized by increasing levels of operating revenues and field-level cemetery profit margins. Cemetery operating revenue, excluding financial revenue, increased from $38.3 million in 2012 to
$48.9 million
in
2016
(compound annual increase of 6.3%) and increased
4.9%
over
2015
. Additional cemetery revenue from preneed finance charges and trust earnings has increased from $9.1 million in 2012 to
$9.9 million
in
2016
(compound annual increase of 2.0%). Changes in the capital markets and interest rates affect this component of our cemetery revenues. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales. Additionally, a portion of our capital expenditures is designed to continually expand our cemetery product offerings.
Financial Revenue
Income recognized from the investments in the preneed funeral trust funds, the cemetery merchandise and services trust funds and the perpetual care trust funds decreased
$1.1 million
, or
6.7%
for the year ended
December 31, 2016
, as compared to
2015
, as a result of fewer preneed contract maturities and lower average revenue per preneed contract. For the five year period ended
December 31, 2016
, the performance of the funds, which includes realized income and unrealized appreciation, resulted in a
66.3%
return. Investment income realized in the perpetual care trust funds (except for capital gains) is recognized as income when earned in the portfolio. Investment income realized in the preneed funeral trust funds and the cemetery merchandise and services trust funds is allocated to the individual preneed contracts and deferred from revenue until the time that the services and merchandise are delivered to the customer.
Acquisitions
During
2016
, we acquired six funeral home businesses, two in Houston, Texas, one in Madera, California, one in Brookfield, Wisconsin, one in Burlington, North Carolina and one in Graham, North Carolina for the aggregate purchase price of approximately
$32.8 million
. The purchase price for the businesses consisted of approximately (i)
$23.9 million
paid in cash at closing and (ii)
$8.9 million
, the net present value of future deferred payments totaling
$13.5 million
. In 2015,we acquired two funeral home businesses, one in Clarksville, Tennessee and one in Wake Forest, North Carolina, for the aggregate purchase price of approximately
$15.0 million
.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, inventories, goodwill, other intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there can be no assurance the margins, operating income and net earnings, as a percentage of revenues, will be consistent from year to year.
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with United States generally accepted accounting principles (“GAAP”). Our significant accounting policies are more fully described in Part II, Item 8, Financial Statements and Supplementary Data, Note 1. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.
Funeral and Cemetery Operations
We record the revenue from sales of funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed
10%
of the contract price related to the interment right. Costs related to the sales of interment rights, which include real property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience and the current economic environment. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.
When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costs are expensed as incurred.
Preneed Contracts
We sell interment rights, merchandise and services prior to the time of need, which is referred to as preneed. In many instances the customer pays for the preneed contract over a period of time. Cash proceeds from preneed sales less amounts that we may retain under state regulations are deposited to a trust or used to purchase a third-party insurance policy. The principal and accumulated earnings of the trusts are generally withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in insurance benefits on the insurance products are deferred until the service is performed. The customer receivables and amounts deposited in trusts that we control are primarily included in the non-current asset section of our Consolidated Balance Sheets. The preneed funeral contracts secured by third party insurance policies are not recorded as assets or liabilities of the Company.
In the opinion of management, the proceeds from the trust funds and the insurance policies at the time the preneed contracts mature will exceed the estimated future costs to perform services and provide products under such arrangements. The types of securities in which the trusts may invest are regulated by state agencies.
Preneed Funeral and Cemetery Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”). In the case of preneed trusts, the customers are the legal beneficiaries of the trusts. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. We have recognized financial interests of third parties in the trust funds in our financial statements as
Deferred preneed funeral and cemetery receipts held in trust
and
Care trusts’ corpus
. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to
Deferred preneed funeral and cemetery receipts held in trust
and
Care trusts’ corpus
on our Consolidated Balance Sheets. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in
Deferred preneed funeral revenue
and
Deferred preneed cemetery revenue
until the service is performed or the merchandise is delivered.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment/entombment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in the majority of our funeral and cemetery trust funds.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of
December 31, 2016
, CSV RIA provided these services to
two
institutions, which have custody of
79%
of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
We determine whether or not the assets in the preneed trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to
Deferred preneed funeral and cemetery receipts held in trust
and
Care trusts’ corpus
on our Consolidated Balance Sheets. There will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
See Part II, Item 8, Financial Statements and Supplementary Data, Notes 6 and 10 for additional related disclosures.
Long-Lived Assets
Long-lived assets, such as property, plant and equipment subject to depreciation and amortization, are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the Property, Plant and Equipment Topic of the Accounting Standards Codification (“ASC”) 360. This guidance requires that long-lived assets to be held and used are reported at the lower of their carrying amount or fair value. We assess long-lived assets for impairment whenever events or circumstances indicate that the carrying value may be greater than the fair value. We evaluate our long-lived assets for impairment when a funeral home business has negative EBITDA for four consecutive years and if there has been a decline in EBITDA in that same period. For our cemetery business, we analyze the long-lived assets for impairment if the business has a negative operating margin and a decline in operating margin over a four year period. We review our long-lived assets deemed held-for-sale to the point of recoverability. Assets to be disposed of and assets not expected to provide any future service potential are recorded at the lower of their carrying amount or fair value less estimated cost to sell. If we determine that the carrying value is not recoverable from the proceeds of the sale, we record an impairment at that time. For the year ended December 31, 2016,
no
impairments were identified on our long-lived assets.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 1 for additional information.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 3 for additional information.
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral home businesses. Goodwill is tested annually for impairment by assessing the fair value of each of our reporting units. The funeral segment reporting units consist of our East, Central and West regions in the United States and we performed our annual impairment test of goodwill using information as of August 31, 2016.
Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. We conducted qualitative assessments in 2014 and 2015; however, for our 2016 annual impairment test, we performed the two-step goodwill impairment test. Our intent is to perform the two-step test at least once every
three years
unless certain indicators or events suggest otherwise.
The two-step goodwill impairment test involves estimates and management judgment. In the first step of our goodwill impairment testing, we compare the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired, and the second step is not required. We determine fair value for each reporting unit using both an income approach, weighted
90%
, and a market approach, weighted
10%
. Our methodology for determining an income-based fair value was based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance and economic condition that may differ from actual future cash flows discounted at a weighted average cost of capital for the Company based on market participant assumptions. Our methodology for determining a market approach fair value utilized the guideline public company method, in which we relied on market multiples of comparable companies operating in the same industry as the individual reporting units. In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount, the second step of the goodwill impairment testing needs to be performed. This step compares the implied fair value of goodwill to the carrying amount of the reporting unit’s goodwill, and if the carrying amount exceeds the implied value, an impairment charge is recorded in an amount equal to the difference. For our 2016 annual impairment test, we performed the first step of our goodwill impairment testing and concluded that there was no impairment to goodwill for any of our reporting units.
In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results.
For the year ended December 31, 2014, we recognized an impairment of approximately $1.2 million for discontinued locations as the carrying value exceeded fair value. Upon receipt of a letter of intent to sell a location, we perform an analysis to determine if the net assets of the location exceed the sales price. If the net assets exceed the sales price, we record an impairment at the location level.
No impairments were recorded to our goodwill during the years ended
December 31, 2015
and
2016
. No such events or changes occurred between the testing date and year end to trigger a subsequent impairment review.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 4 for additional information.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in
Deferred costs and other non-current assets
on our Consolidated Balance Sheets. Our tradenames are considered to have an indefinite life and are not subject to amortization.
Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further
action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with the guidance.
The Company elected to change the annual assessment date for indefinite lived intangible assets from December 31
st
to August 31
st
in 2016 because the change in date aligns with the Company’s goodwill impairment test, which should create a synergy and enhance the quality of our indefinite lived intangible assets impairment analysis. We conducted qualitative assessments in 2014 and 2015; however, for our 2016 annual impairment test, we performed our quantitative impairment test using the relief from royalty method, using information as of August 31, 2016. Our intent is to perform the quantitative impairment test at least once every
three years
unless certain indicators or events suggest otherwise.
Our intangible asset impairment test involves estimates and management judgment. Under the relief from royalty method, the value of the tradename is measured through the value of the royalties that the Company is relieved from paying due to its ownership of the asset. We determine the fair value of the assets by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows and the determination and application of an appropriate royalty rate and discount rate. To estimate the royalty rates for the individual tradename, we mainly relied on the profit split method, but also considered the comparable third-party license agreements and the return on asset method. A scorecard was used to assess the relative strength of the individual tradename to further adjust the royalty rates selected under the profit-split method for qualitative factors. For our 2016 annual impairment test, we performed our quantitative impairment testing and concluded that there was no impairment to intangible assets.
In addition to our annual review, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. During the third quarter of 2016, we recorded an impairment to tradenames of
$145,000
related to a funeral home business held for sale as the carrying value exceeded fair value. No other impairments were recorded to our intangible assets during the years ended December 31, 2014,
2015
and
2016
.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 12 for additional information.
Divested and Discontinued Operations
Effective January 1, 2015, we adopted the Financial Accounting Standards Board’s (“FASB”) guidance for reporting discontinued operations, which amended the definition of “discontinued operations” to include only disposals or held-for-sale classifications for components or groups of components of an entity that represent a strategic shift that either has or will have a major effect on an entity's operations or financial results. Examples of a strategic shift that has or will have a major effect on an entity's operations and financial results include a disposal of a major geographical area, line of business, equity method of investment or other parts of an entity. The new guidance also requires the disclosure of pre-tax income of disposals that do not qualify as discontinued operations.
During 2014, we sold a cemetery in Florida and
two
funeral homes,
one
in Ohio and
one
in Kentucky. For the year ended December 31, 2014, we recognized income from discontinued operations of
$0.4 million
. We did not divest any of our funeral home or cemetery businesses in 2015. During
2016
, we sold a funeral home business in Tennessee for
$1.35 million
. The operating results of this business, as well as the loss on the sale are included within net income from continuing operations on our Consolidated Statements of Operations.
We continually review locations to optimize the sustainable earning power and return on our invested capital. These reviews could entail selling certain non-strategic businesses.
See Part II, Item 8, Financial Statements and Supplementary Data, Notes 5 for additional information.
Fair Value Measurements
We measure the available-for-sale securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis in accordance with the Fair Value Measurements Topic of the ASC. This guidance defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
• Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
• Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.
We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. The fair value disclosures of transfers in and out of Levels 1 and 2 and the gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy are also presented in Notes 6 and 10 to the Consolidated Financial Statements included herein. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
To determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased, the exit price is used as the fair value measurement. For the year ended
December 31, 2016
, we did not incur significant decreases in the volume or level of activity of any asset or liability. We consider an impairment of debt and equity securities other-than-temporary unless (a) we have the ability and intent to hold an investment and (b) evidence indicating the cost of the investment is recoverable before we are more likely than not required to sell the investment. If an impairment is indicated, then an adjustment is made to reduce the carrying amount to fair value which is recorded as a reduction to either
Deferred preneed cemetery receipts held in trust, Deferred preneed funeral receipts held in trust or Care trusts’ corpus
on our Consolidated Balance Sheets. For the years ended
December 31, 2015
and
2016
, we recorded impairment charges of
$1.8 million
and
$2.3 million
, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments.
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing risk management techniques when appropriate and when available for a reasonable price.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 11 for additional information.
Presentation of Debt Issuance Costs
Effective January 1, 2016, we adopted the FASB’s guidance on simplifying the presentation of debt issuance costs. The guidance requires that entities that have historically presented debt issuance costs as an asset, related to a recognized debt liability, will be required to present those costs as a direct deduction from the carrying value of the related debt liability. This presentation resulted in debt issuance costs being presented in the same way debt discounts have historically been addressed. Debt issuances costs of
$4.2 million
and
$3.6 million
have been presented as a deduction from the carrying value of the related liabilities in our Consolidated Balance Sheets as of
December 31, 2015
and
2016
, respectively. The amounts related to our Credit Facility were
$1.4 million
and
$1.3 million
as of
December 31, 2015
and
2016
, respectively. The amounts related to our Convertible Notes were
$2.8 million
and
$2.3 million
as of
December 31, 2015
and
2016
, respectively.
See Part II, Item 8, Financial Statements and Supplementary Data, Notes 13 and 14 for additional information.
Income Taxes
We and our subsidiaries file a consolidated United States Federal income tax return, separate income tax returns in
15
states in which we operate and combined or unitary income tax returns in
13
states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities. Effective January 1, 2016, we adopted the FASB's new guidance requiring that deferred tax liabilities and assets be classified as noncurrent in a classified statement of financial position.
We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in the financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on the Consolidated Balance Sheets.
On August 1, 2014, we received notification that the Internal Revenue Service (“IRS”) completed its examination of our tax year ended December 31, 2011. As a result, we recognized a tax benefit of
$1.7 million
which reduced our effective tax rate for the year ended December 31, 2014. Additionally, we recognized a credit to interest expense of
$0.6 million
related to the settled portion of the uncertain tax position.
On August 15, 2016, we settled an open examination with the California Franchise Tax Board. As a result of paying the final assessment, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability of
$0.2 million
. On August 29, 2016, we received notification that the IRS completed its examination of our tax year ended December 31, 2013. As a result, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability of
$0.6 million
, which resulted in an increase to
Deferred tax liability
in the amount of
$0.6 million
.
We do not have any unrecognized tax benefits recorded as of
December 31, 2016
and we do not anticipate a material change in our unrecognized tax benefits during the next twelve months.
Effective January 1, 2016, we adopted the FASB’s guidance on Balance Sheet Classification of Deferred Taxes. The standard simplifies deferred tax reporting on the balance sheet by eliminating non-current and current classifications. The guidance requires all deferred tax assets and liabilities, along with related valuation allowances will be classified as non-current on the balance sheet. The guidance was applied prospectively and all deferred tax assets and liabilities, along with our valuation allowance are now classified as non-current at
December 31, 2016
.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 16 for additional information.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we may grant restricted stock, stock options, performance awards and our employee stock purchase plan under which stock may be purchased. We recognize compensation expense in an amount equal to the fair value of the share-based awards expected to vest over the requisite service period. Fair value is determined on the date of the grant. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards is determined using a Monte-Carlo simulation pricing model.
See Part II, Item 8, Financial Statements and Supplementary Data, Note 17 for additional information.
Computation of Earnings per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and our Convertible Notes.
Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation.
The fully diluted weighted average shares outstanding for the years ended
December 31, 2015
and
2016
, and the corresponding calculation of fully diluted earnings per share, included approximately
0.3 million
and
0.5 million
shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260. There were
no
shares that would have been issued upon conversion under the if-converted method for our convertible subordinated notes for the year ended
December 31, 2014
.
The calculations for basic and diluted earnings per share for the three years ended December 31,
2014
,
2015
and
2016
are presented in Part II, Item 8, Financial Statements and Supplementary Data, Note 19.
Subsequent Events
We have evaluated events and transactions during the period subsequent to
December 31, 2016
through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
RECENT ACCOUNTING PRONOUNCEMENTS, ACCOUNTING CHANGES AND OTHER REGULATIONS
Goodwill
In January 2017, the FASB issued ASU,
Intangibles – Goodwill and Other (Topic 350).
This ASU applies to all entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment simplifies subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill. This ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Our adoption of this ASU for our fiscal year beginning January 1, 2017 is not expected to have a material effect on our Consolidated Financial Statements.
Stock-Based Compensation
In March 2016, the FASB issued ASU,
Compensation – Stock Compensation (Topic 718).
This ASU applies to all entities that issue share-based payment awards to their employees. The amendments in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier application permitted for all entities. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. Our adoption of this ASU for our fiscal year beginning January 1, 2017 is not expected to have a material effect on our Consolidated Financial Statements.
Inventory
In July 2015, the FASB issued ASU,
Inventory – Simplifying the Measurement of Inventory (Topic 330)
. This ASU applies to all inventory, including inventory that is measured using the first-in, first-out (FIFO) or average cost method. This ASU does not apply to the last-in, first-out (LIFO) or the retail inventory method. This ASU requires an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be applied prospectively, with earlier application permitted as of the beginning of an interim or annual reporting period. Our adoption of this ASU for our fiscal year beginning January 1, 2017 is not expected to have a material effect on our Consolidated Financial Statements.
Revenue Recognition
In May 2014, the FASB issued ASU,
Revenue from Contracts with Customers. (Topic 606).
ASC Topic 606 supersedes the revenue recognition requirements under ASC Topic 605,
Revenue Recognition
, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018.
We expect the adoption of this new accounting standard to affect our accounting for cemetery interment rights. Currently, our sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed
10%
of the contract price related to the interment right.
Under the new accounting standard, we will recognize the revenue in the period in which the sale occurs, irrespective of the cumulative payments received. The impact of this is not expected to have a material impact on our Consolidated Financial Statements. Upon revenue recognition, management will book an allowance for contract cancellations based on our previous
experience of cancellations and as such will reflect a one-time catch up for the allowance at January 1, 2018, which is not expected to have a material impact on our Consolidated Financial Statements.
Costs related to the sales of interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.
We are currently modifying our financial systems to provide accounting under the new method in addition to our current method and do not anticipate any business disruption related to adopting this guidance. We are continually evaluating the impact on our Consolidated Financial Statements with more recent financial information.
Cash Flows
In August 2016, the FASB issued ASU,
Statement of Cash Flows (Topic 230).
This ASU applies to all entities that are required to present a statement of cash flows under Topic 230. The amendments provide guidance on eight specific cash flow issues and includes clarification on how these items should be classified in the statement of cash flows and is designed to help eliminate diversity in practice as to where items are classified in the cash flow statement.
In November 2016, the FASB issued additional guidance on this Topic that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
Business Combinations
In January 2017, the FASB issued Accounting Standards Update (“ASU”),
Business Combinations – Clarifying the Definition of a Business (Topic 805).
This ASU applies to all entities that must determine whether they have acquired or sold a business. The amendments in this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for fiscal years beginning after December 15, 2017, including the interim periods within those periods, with earlier application permitted. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Leases
In February 2016, the FASB issued ASU,
Leases (Topic 842).
This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
Financial Instruments
In January 2016, the FASB issued ASU,
Financial Instruments – Overall - Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825).
The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and apply to all entities that hold financial assets or owe financial liabilities. The amendments in this ASU also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. That impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite-lived intangible assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with earlier application permitted for financial statements that have not been issued. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
In June 2016, the FASB issued ASU,
Financial Instruments – Credit Losses (Topic 326).
This ASU applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial 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. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2020 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
SELECTED INCOME AND OPERATIONAL DATA
The following table sets forth certain income statement data for us expressed as a percentage of net revenues for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Total gross profit
|
31.0
|
%
|
|
32.0
|
%
|
|
32.1
|
%
|
General and administrative expenses
|
13.4
|
%
|
|
11.9
|
%
|
|
11.9
|
%
|
Operating income
|
17.6
|
%
|
|
20.1
|
%
|
|
20.2
|
%
|
Interest expense
|
4.6
|
%
|
|
4.4
|
%
|
|
4.7
|
%
|
The following table sets forth the number of funeral homes and cemeteries owned and operated by us for the periods presented:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
|
2015
|
|
|
2016
|
|
Funeral homes at beginning of period
|
161
|
|
|
164
|
|
|
167
|
|
Acquisitions
|
6
|
|
|
2
|
|
|
6
|
|
Constructed funeral homes
|
—
|
|
|
3
|
|
|
—
|
|
Divestitures
|
(2
|
)
|
|
—
|
|
|
(1
|
)
|
Mergers and relocation of funeral homes
|
(1
|
)
|
|
(2
|
)
|
|
(2
|
)
|
Funeral homes at end of period
|
164
|
|
|
167
|
|
|
170
|
|
|
|
|
|
|
|
Cemeteries at beginning of period
|
32
|
|
|
32
|
|
|
32
|
|
Acquisitions
|
1
|
|
|
—
|
|
|
—
|
|
Divestitures
|
(1
|
)
|
|
—
|
|
|
—
|
|
Cemeteries at end of period
|
32
|
|
|
32
|
|
|
32
|
|
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the year ending
December 31, 2016
dated February 15, 2017 and discussed in the corresponding earnings conference call. This Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
Historically, the dynamic nature of the evolutionary process of building our culture, especially since launching the
Good To Great Journey
in the beginning of 2012, has led to a large number of charges such as severance and retirement, consulting and other activities, which are not core to our operations and as such, have been added back to GAAP earnings as “Special Items”. The Special Items are important to add back because of the transformational nature of major changes over the last several years within our Operations and Strategic Growth Leadership Team, culminating during 2015 in a reduction from fifteen members to nine members and most recently to eight members due to the retirement of David J. DeCarlo, effective September 30, 2016. The number of these Special Items should be minimal during 2016 and thereafter.
Accordingly, beginning in the first quarter of 2016, these non-GAAP Special Items will be comprised of only those charges materially outside the normal course of business, which should result in major shrinkage of “the gap” between our GAAP and non-GAAP reported performance.
The non-GAAP financial measures in the Trend Report include such measures as “Special Items,” “Adjusted Net Income,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “Adjusted Consolidated EBITDA Margin,” “Adjusted Free Cash Flow,” “Funeral, Cemetery and Financial EBITDA,” “Total Field EBITDA,” “Total Field EBITDA Margin,” “Adjusted Basic Earnings Per Share” and “Adjusted Diluted Earnings Per Share”. These financial measurements are defined as GAAP items adjusted for Special Items and are reconciled to GAAP in our earnings release and on the Trend Reports posted on our website (www.carriageservices.com). In addition, our presentation of these measures may not be comparable to similarly titled measures in other companies’ reports.
The non-GAAP definitions we use are as follows:
|
|
•
|
Special Items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special Items are taxed at the federal statutory rate of 34 percent for the year ended December 31, 2015 and 35 percent for the year ended December 31, 2016, except for the accretion of the discount on the Convertible Notes as this is a non-tax deductible item and the tax adjustment from prior period.
|
|
|
•
|
Adjusted Net Income is defined as net income plus adjustments for Special Items.
|
|
|
•
|
Consolidated EBITDA is defined as net income before income taxes, interest expenses, non-cash stock compensation, depreciation and amortization, and interest income and other, net.
|
|
|
•
|
Adjusted Consolidated EBITDA is defined as Consolidated EBITDA plus adjustments for Special Items.
|
|
|
•
|
Adjusted Consolidated EBITDA Margin is defined as Adjusted Consolidated EBITDA as a percentage of revenue.
|
|
|
•
|
Adjusted Free Cash Flow is defined as net cash provided by operations, adjusted by cash-related Special Items, less cash for maintenance capital expenditures.
|
|
|
•
|
Funeral Field EBITDA is defined as Funeral Gross Profit, which is funeral revenue minus funeral field costs and expenses, less depreciation and amortization, regional and unallocated funeral overhead expenses and Funeral Financial EBITDA.
|
|
|
•
|
Cemetery Field EBITDA is defined as Cemetery Gross Profit, which is cemetery revenue minus cemetery field costs and expenses, less depreciation and amortization, regional and unallocated cemetery overhead expenses and Cemetery Financial EBITDA.
|
|
|
•
|
Funeral Financial EBITDA is defined as Funeral Financial Revenue less Funeral Financial Expenses.
|
|
|
•
|
Cemetery Financial EBITDA is defined as Cemetery Financial Revenue less Cemetery Financial Expenses.
|
|
|
•
|
Total Field EBITDA is defined as Gross Profit less depreciation and amortization, regional and unallocated overhead expenses.
|
|
|
•
|
Total Field EBITDA Margin is defined as Total Field EBITDA as a percentage of revenue.
|
|
|
•
|
Adjusted Basic Earnings Per Share is defined as GAAP Basic Earnings Per Share, adjusted for Special Items.
|
|
|
•
|
Adjusted Diluted Earnings Per Share is defined as GAAP Diluted Earnings Per Share, adjusted for Special Items.
|
The non-GAAP Withdrawable Trust Income in our Trend Reports prior to 2016 reflects the change in the available income we are able to withdraw from Preneed Cemetery Trusts in three states that allow cash income to be withdrawn prior to maturity of the contract. The intent of this presentation was to show the true cash earning power of our Company. However, the amount of reported Withdrawable Trust Income has been steadily declining over the past years while our Adjusted Consolidated EBITDA and Adjusted Consolidated EBITDA Margin have been materially increasing. As its financial impact is diminishing and the intrinsic value of reporting such non-GAAP affect is insignificant, we will no longer reflect Withdrawable Trust Income within the Special Items section of our Trend Reports.
Below is a reconciliation of Net Income (a GAAP measure) to Adjusted Net Income (a non-GAAP measure) for the years ended
December 31, 2015
and
2016
.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
|
2016
|
|
|
(in millions)
|
Net Income
|
$
|
20.8
|
|
|
$
|
19.6
|
|
Special Items, net of tax except for items noted by**
|
|
|
|
Withdrawable Trust Income
|
0.4
|
|
|
n/a
|
|
Acquisition and Divestiture Expenses
|
0.4
|
|
|
0.4
|
|
Severance and Retirement Costs
|
0.6
|
|
|
2.6
|
|
Consulting Fees
|
1.3
|
|
|
0.3
|
|
Accretion of Discount on Convertible Subordinated Notes**
|
3.5
|
|
|
3.9
|
|
Loss on Extinguishment of Debt
|
—
|
|
|
0.4
|
|
Net Gain/Loss on Sale of Assets
|
—
|
|
|
1.1
|
|
Other Special Items
|
0.2
|
|
|
—
|
|
Tax Adjustment from Prior Period**
|
0.1
|
|
|
—
|
|
Adjusted Net Income
|
$
|
27.3
|
|
|
$
|
28.3
|
|
YEAR ENDED DECEMBER 31, 2016 COMPARED TO YEAR ENDED DECEMBER 31, 2015
Financial Highlights
Total revenue for the year ended
December 31, 2016
and
2015
was
$248.2 million
and
$242.5 million
, respectively, which represents an increase of approximately
$5.7 million
, or
2.3%
. For the year comparatives, we experienced a
1.6%
increase in total funeral contracts and a slight increase in the average revenue per funeral contract of
0.4%
. In addition, while we experienced a decrease of
6.3%
in the number of preneed interment rights (property) sold, the average price per interment right sold increased
5.7%
. Further discussion of revenue for our funeral home and cemetery segments as well as the contract mix is presented herein under “Results of Operations.”
Operating income increased
$1.6 million
, or
3.2%
, due primarily to better cost management in our same store funeral home operations, increases in funeral acquisition revenues as well as increases in preneed property revenue in our cemetery operations. Further discussion of operating income is presented herein under “Results of Operations” within our funeral home and cemetery segments.
Net income for the year ended
December 31, 2016
decreased
$1.3 million
to
$19.6 million
, equal to
$1.12
per diluted share, compared to net income of
$20.8 million
, equal to
$1.12
per diluted share, for the year ended
December 31, 2015
. Further discussion of depreciation and amortization expense, general and administrative costs, interest expense, income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”
The following is a discussion of our results of operations for the years ended
December 31, 2016
and
2015
. The term “same store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 2012 and owned and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2011 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in operating profit.
Results of Operations
Funeral Home Segment
. The following table sets forth certain information regarding our revenues and operating profit from funeral home continuing operations for the year ended
December 31, 2015
compared to the year ended
December 31, 2016
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
2015
|
|
|
2016
|
|
|
Amount
|
|
Percent
|
|
(dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
Same store operating revenue
|
$
|
142,690
|
|
|
$
|
140,459
|
|
|
$
|
(2,231
|
)
|
|
(1.6
|
)%
|
Acquired operating revenue
|
33,678
|
|
|
40,165
|
|
|
6,487
|
|
|
19.3
|
%
|
Preneed funeral insurance commissions
|
1,484
|
|
|
1,429
|
|
|
(55
|
)
|
|
(3.7
|
)%
|
Preneed funeral trust earnings
|
7,966
|
|
|
7,348
|
|
|
(618
|
)
|
|
(7.8
|
)%
|
Revenues from continuing operations
|
$
|
185,818
|
|
|
$
|
189,401
|
|
|
$
|
3,583
|
|
|
1.9
|
%
|
|
|
|
|
|
|
|
|
Operating profit:
|
|
|
|
|
|
|
|
Same store operating profit
|
$
|
54,620
|
|
|
$
|
54,706
|
|
|
$
|
86
|
|
|
0.2
|
%
|
Acquired operating profit
|
13,693
|
|
|
16,536
|
|
|
2,843
|
|
|
20.8
|
%
|
Preneed funeral insurance commissions
|
454
|
|
|
682
|
|
|
228
|
|
|
50.2
|
%
|
Preneed funeral trust earnings
|
7,885
|
|
|
7,259
|
|
|
(626
|
)
|
|
(7.9
|
)%
|
Gross profit from continuing operations
|
$
|
76,652
|
|
|
$
|
79,183
|
|
|
$
|
2,531
|
|
|
3.3
|
%
|
Funeral home same store operating revenues for the year ended
December 31, 2016
decreased
$2.2 million
, or
1.6%
, when compared to the year ended
December 31, 2015
. This decrease was primarily due to a
1.9%
decrease in same store contract volume to
26,636
, while the average revenue per contract remained flat at
$5,273
. The average revenue per contract excludes the impact of preneed funeral trust earnings (separately reflected in Revenue above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract remained flat at
$5,471
for the year ended
December 31, 2016
. The average revenue per burial contract increased
1.8%
to
$8,819
, while the number of traditional burial contracts decreased
5.6%
to
10,875
. The number of cremation contracts increased
1.3%
to
13,801
, and the average revenue per cremation contract increased
1.0%
to
$3,274
. The burial rate decreased
170
basis points to
40.8%
and the cremation rate increased
160
basis points to
51.8%
for the year ended
December 31, 2016
when compared to the year ended
December 31, 2015
. The average revenue for “other” contracts, which are charges for merchandise and services for which we do not perform a funeral service and which make up approximately
7.4%
of the total number of contracts for the year ended
December 31, 2016
, increased
3.1%
to
$2,371
.
Same store operating profit for the year ended
December 31, 2016
increased
$0.1 million
, or
0.2%
, from the year ended
December 31, 2015
, despite the decrease in operating revenues. This is primarily the result of better management of expenses, which decreased $1.5 million or 2.1% when compared to the same period in
2015
. Those expenses with significant decreases include facilities and grounds expenses, which decreased by $0.9 million, general liability and other insurance expenses, which decreased by $0.4 million, and salaries and benefits expense, which decreased by $0.2 million.
Funeral home acquired revenues for the year ended
December 31, 2016
increased
$6.5 million
, or
19.3%
, when compared to the year ended
December 31, 2015
, as we experienced a
19.1%
increase in the acquired contract volume to
6,524
, while the average revenue per contract increased
0.2%
to
$6,157
. The average revenue per contract excludes the impact of preneed funeral trust earnings (separately reflected in Revenue above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract remained flat at
$6,342
for the year ended
December 31, 2016
. The average revenue per burial contract increased
3.4%
to
$9,258
, and the number of traditional burial contracts increased
10.5%
to
$3,012
. The number of cremation contracts increased
28.3%
to
3,003
, and the average revenue per cremation contract increased
4.0%
to
$4,110
. The 2016 funeral home acquired portfolio includes six businesses acquired during 2016 not present in 2015. These businesses increased revenue by $3.0 million and contract volume by 500 contracts in the year ended
December 31, 2016
.
Acquired operating profit for the year ended
December 31, 2016
increased
$2.8 million
, or
20.8%
, from the year ended
December 31, 2015
. This increase is a result of an increase in revenues, offset by a $2.9 million or 18.4% increase in expenses. The operating profit for the year ended
December 31, 2016
includes $1.1 million related to the 2016 funeral home acquired portfolio. The most significant change was in salaries and benefits (the largest controllable expense), which increased $1.8 million, general and administrative expenses increased $0.7 million, facilities and grounds expenses increased $0.2 million and general
liability and other insurance expenses increased $0.2 million. Expenses as a percentage of revenue however, remained flat for the year ended
December 31, 2016
compared to the same period in
2015
.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings on matured preneed contracts. Preneed funeral insurance commission revenue decreased by approximately
$0.1 million
, or
3.7%
, for the year ended
December 31, 2016
as compared to the same period in
2015
. Preneed funeral commission revenue is deferred for one year after the preneed funeral contracts are sold. For the year ended
December 31, 2015
, we sold less preneed funeral contracts for which we earn a commission than in the same period of the previous year. Preneed funeral trust earnings decreased by approximately
$0.6 million
, or
7.8%
, in the year ended
December 31, 2016
. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Operating profit for the two categories of financial revenue, on a combined basis, decreased 4.8% in the year ended
December 31, 2016
compared to the same period in
2015
due primarily to the decrease in preneed funeral trust revenue.
Cemetery Segment.
The following table sets forth certain information regarding our revenues and operating profit from the cemetery continuing operations for the year ended
December 31, 2015
compared to the year ended
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
2015
|
|
|
2016
|
|
|
Amount
|
|
Percent
|
|
(dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
Same store operating revenue
|
$
|
43,336
|
|
|
$
|
45,441
|
|
|
$
|
2,105
|
|
|
4.9
|
%
|
Acquired operating revenue
|
3,321
|
|
|
3,506
|
|
|
185
|
|
|
5.6
|
%
|
Cemetery trust earnings
|
8,440
|
|
|
8,004
|
|
|
(436
|
)
|
|
(5.2
|
)%
|
Preneed cemetery finance charges
|
1,587
|
|
|
1,848
|
|
|
261
|
|
|
16.4
|
%
|
Revenues from continuing operations
|
$
|
56,684
|
|
|
$
|
58,799
|
|
|
$
|
2,115
|
|
|
3.7
|
%
|
|
|
|
|
|
|
|
|
Operating Profit:
|
|
|
|
|
|
|
|
Same store operating profit
|
$
|
14,045
|
|
|
$
|
14,499
|
|
|
$
|
454
|
|
|
3.2
|
%
|
Acquired operating profit
|
1,088
|
|
|
1,168
|
|
|
80
|
|
|
7.4
|
%
|
Cemetery trust earnings
|
8,167
|
|
|
7,715
|
|
|
(452
|
)
|
|
(5.5
|
)%
|
Preneed cemetery finance charges
|
1,587
|
|
|
1,848
|
|
|
261
|
|
|
16.4
|
%
|
Gross profit from continuing operations
|
$
|
24,887
|
|
|
$
|
25,230
|
|
|
$
|
343
|
|
|
1.4
|
%
|
Cemetery same store operating revenues for the year ended
December 31, 2016
increased
$2.1 million
, or
4.9%
, when compared to the year ended
December 31, 2015
. Approximately
60%
of our same store operating revenues were related to preneed sales of interment rights (property) and related merchandise and services for the year ending
December 31, 2016
. Preneed property revenue increased
$1.5 million
, or
6.8%
as we experienced a
6.1%
increase in the average price per interment to
$3,169
, while the number of preneed interment rights sold decreased
7.3%
to
7,035
in the year ending
December 31, 2016
from the same period in
2015
. The increase in the average price per interment was a result of sales of higher-valued interments at gardens constructed in recent years at several of our same store locations. Same store at-need revenue, which represents approximately
40%
of our same store operating revenues, increased
4.3%
, primarily due to a
2.5%
increase in the number of contracts to
13,322
and a
1.9%
increase in the average sales per contract to
$1,369
.
Cemetery same store operating profit for the year ended
December 31, 2016
increased
$0.5 million
, or
3.2%
. As a percentage of same store revenue, cemetery same store operating profit decreased to
31.9%
in the year ended
December 31, 2016
from
32.4%
in the same period in
2015
. The increase in operating profit was primarily a result of the increase in revenue, offset by $1.5 million or 6.1% increase in operating costs for the year ended
December 31, 2016
compared with the same period in
2015
. Those expenses with significant increases include $0.7 million of promotional expenses, $0.4 million of bad debt expense, $0.3 million of salaries and benefits and $0.1 million of general and administrative expenses.
Cemetery acquired revenue and operating profit increased in the year ended
December 31, 2016
primarily due to a
3.8%
increase in preneed property revenue, as operating costs slightly increased by $0.1 million compared with the same period in
2015
. Cemetery acquired operating profit margin increased
55
basis points to
33.31%
for the year ended
December 31, 2016
compared to the same period in
2015
.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Total trust earnings decreased
5.2%
primarily due to a
$0.5 million
decrease in merchandise and service trust
income in the year ended
December 31, 2016
compared to the same period in
2015
. Financial revenue earned from finance charges on the preneed contracts increased
16.4%
in the year ended
December 31, 2016
compared to the same period in
2015
, primarily as a result of our increased collection efforts.
Other Financial Statement Items
Depreciation and Amortization Costs.
Depreciation and Amortization costs for the field and home office totaled
$15.4 million
for year the ended
December 31, 2016
, an increase of
$1.6 million
, or
11.9%
, compared to the year ended
December 31, 2015
. These increases were primarily attributable to additional depreciation expense from assets acquired in our recent acquisitions, as well as from our newly constructed funeral homes which began operating in the latter half of 2015.
Regional and Unallocated Funeral and Cemetery Costs.
Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs decreased
$1.2 million
, or
9.6%
, primarily due to a $1.1 million decrease in field incentive compensation, a $0.2 million decrease in salaries and benefits and a $0.1 million decrease in other administrative expenses, offset by $0.2 million increase in severance costs.
General, Administrative and Other.
General, administrative and other expenses totaled
$27.9 million
for the year ended
December 31, 2016
, an increase of
$0.8 million
, or
3.1%
, compared to the year ended
December 31, 2015
. The increase was partially attributable to the retirement of two former executives as we incurred $3.5 million in severance costs, which was offset by a $1.2 million decrease in non-cash stock compensation expense and a $0.7 decrease in salaries and benefits related to their retirement.
In addition, we incurred a $0.5 million increase in acquisition and divestiture expenses, offset by other changes which include a $0.4 million decrease in salaries and benefits, a $0.4 million decrease in non-cash stock compensation expense, a $0.3 million decrease in severance costs and a $0.2 million decrease in other general and administrative expense.
Interest Expense
. Interest expense was
$11.7 million
for the year ended
December 31, 2016
compared to
$10.6 million
for the year ended
December 31, 2015
, an increase of
$1.2 million
. During the year ended
December 31, 2016
, interest expense related to our term note and revolving credit facility increased by approximately $1.1 million, as a result of a higher principal balance and higher interest rate during the current period. Interest expense related to deferred purchase price increased by approximately $0.2 million, as a result of our 2016 acquisitions. These increases were offset by a $0.1 million decrease in the amortization of debt issuance costs related to the credit facility compared to the same period in
2015
.
Accretion of Discount on Convertible Subordinated Notes
. For the year ended
December 31, 2016
, we recognized accretion of the discount on our convertible subordinated notes of
$3.9 million
compared to
$3.5 million
for the same period in
2015
. Accretion is calculated using the effective interest method based on a stated interest rate of
6.75%
and will increase each year through to maturity.
Loss on Early Extinguishment of Debt
. In February 2016, we entered into the Seventh Amendment (as defined below under
Debt Obligations
) to our Credit Facility. As a result, we recognized a loss of
$0.6 million
to write-off the related unamortized debt issuance costs during the year ended
December 31, 2016
.
Other, net.
For the year ended
December 31, 2016
, we recognized a net loss of
$1.8 million
on the following transactions: (i) $1.8 million loss on the sale of land; (ii) $0.1 million loss related to an impairment of tradenames for a funeral home business sold during the year ended
December 31, 2016
; offset by, (iii) $0.1 million gain on the sale of a funeral home business and other assets.
Income taxes.
Our income tax provision was approximately
$12.7 million
for the year ended
December 31, 2016
compared to
$13.7 million
for the year ended
December 31, 2015
. Our effective tax rate was 39.7% and 39.3% for the years ended
December 31, 2015
and 2016, respectively. During 2016, the re-measurement of the tax liability for unrecognized tax benefits arising from the finalization of our IRS and California Franchise Tax Board exams, resulted in a
$0.8 million
reduction to our liability related to uncertain tax positions. At December 31, 2016, no uncertain tax positions were identified. See Part II, Item 8, Financial Statements and Supplementary Data, Note 16 for additional information regarding our income taxes.
YEAR ENDED DECEMBER 31, 2015 COMPARED TO YEAR ENDED DECEMBER 31, 2014
Financial Highlights
Total revenue for the year ended December 31, 2015 was $242.5 million compared to $226.1 million for the comparable period of 2014, an increase of $16.4 million, or 7.2% as we experienced a 3.9% increase in total funeral contracts and a 9.6% increase in cemetery preneed property sale contracts in the year ended December 31, 2015. Operating income also increased $8.9 million, or 22.5%, and our total field margins improved to 32.0% in 2015 from 31.0% in 2014. Further discussion of revenue and operating profit for our funeral home and cemetery segments is presented herein under “Results of Operations.” Net income from continuing operations for the year ended December 31, 2015 totaled $20.8 million, equal to $1.12 per diluted share, as compared to $15.4 million for the year ended December 31, 2014, or $0.83 per diluted share.
Income from discontinued operations, net of tax, was $0.4 million for the year ended December 31, 2014. Effective January 1, 2015, we adopted the FASB's new guidance for reporting discontinued operations. As such, we no longer report discontinued operations unless the disposal represents a strategic shift that has a major effect on our operations and financial results. There were no divestitures of any of our funeral or cemetery businesses in 2015.
We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release and discussed on our earnings call for the year ending December 31, 2015. This Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other funeral and cemetery companies. The Trend Report is a Non-GAAP statement from continuing operations that also provides insight into underlying trends in our business. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with GAAP.
The Non-GAAP financial measures in the Trend Report include such measures as “Adjusted Net Income,” “Adjusted Diluted Earnings Per Share,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “Funeral, Cemetery and Financial EBITDA” and “Total Field EBITDA. These financial measurements are defined as GAAP items adjusted for Special Items and are reconciled to GAAP in our earnings release and on the Trend Reports posted on our website (
www.carriageservices.com
). In addition, our presentation of these measures may not be comparable to similarly titled measures in other companies’ reports. We define Special Items as amounts included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations.
In certain states, we are allowed to withdraw realized trust earnings prior to delivery from cemetery merchandise and services trusts, which management describes as “Withdrawable Trust Income.” The Withdrawable Trust Income, pre-tax, totaled $0.6 million and $1.8 million for the years ended December 31, 2015 and 2014, respectively. While the Withdrawable Trust Income is not recognized as revenue in our Consolidated Statements of Operations, it increases cash flow from operations. The Withdrawable Trust Income is treated as a special item in our adjusted net income calculation.
We are providing below a reconciliation of net income from continuing operations (a GAAP measure) to Adjusted net income (a non-GAAP measure). Adjusted net income is defined as net income from continuing operations adjusted for Special Items, including Withdrawable Trust Income, acquisition and divestiture expenses, severance costs and other special items in the table below. The adjustment of Special Items in Adjusted net income allows management to focus on the evaluation of operating performance as it primarily relates to our operating expenses. The Special Items are tax affected at a rate of 34% except for the accretion of the discount on our convertible subordinated notes, which is a non-tax deductible item.
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
(in millions)
|
Net income from continuing operations, as reported
|
$
|
15.4
|
|
|
$
|
20.8
|
|
After-tax Special Items, except for items noted by
**
|
|
|
|
Withdrawable trust income
|
1.2
|
|
|
0.4
|
|
Acquisition and divestiture expenses
|
0.7
|
|
|
0.4
|
|
Severance costs
|
0.7
|
|
|
0.6
|
|
Consulting fees
|
0.3
|
|
|
1.3
|
|
Other incentive compensation
|
0.7
|
|
|
—
|
|
Accretion of discount on convertible subordinated notes
**
|
2.5
|
|
|
3.5
|
|
Costs related to the credit facility
|
0.7
|
|
|
—
|
|
Loss on redemption of convertible junior subordinated debentures
|
2.5
|
|
|
—
|
|
Net gain on asset purchase
|
(0.4
|
)
|
|
—
|
|
Other special items
|
0.5
|
|
|
0.2
|
|
Tax adjustment from prior period
**
|
—
|
|
|
0.1
|
|
Adjusted net income
|
$
|
24.8
|
|
|
$
|
27.3
|
|
The following is a discussion of our results of operations for the years ended December 31, 2015 and 2014. The term “same store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 2011 and owned and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2010 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in operating profit.
Results of Operations
Funeral Home Segment
. The following table sets forth certain information regarding our revenues and operating profit from funeral home continuing operations for the year ended December 31, 2014 compared to the year ended December 31, 2015.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
2014
|
|
2015
|
|
Amount
|
|
Percent
|
|
(dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
Same store operating revenue
|
$
|
127,487
|
|
|
$
|
131,740
|
|
|
$
|
4,253
|
|
|
3.3
|
%
|
Acquired operating revenue
|
36,765
|
|
|
44,628
|
|
|
7,863
|
|
|
21.4
|
%
|
Preneed funeral insurance commissions
|
2,036
|
|
|
1,484
|
|
|
(552
|
)
|
|
(27.1
|
)%
|
Preneed funeral trust earnings
|
7,447
|
|
|
7,966
|
|
|
519
|
|
|
7.0
|
%
|
Revenues from continuing operations
|
$
|
173,735
|
|
|
$
|
185,818
|
|
|
$
|
12,083
|
|
|
7.0
|
%
|
|
|
|
|
|
|
|
|
Operating profit:
|
|
|
|
|
|
|
|
Same store operating profit
|
$
|
46,707
|
|
|
$
|
50,563
|
|
|
$
|
3,856
|
|
|
8.3
|
%
|
Acquired operating profit
|
13,767
|
|
|
17,750
|
|
|
3,983
|
|
|
28.9
|
%
|
Preneed funeral insurance commissions
|
958
|
|
|
454
|
|
|
(504
|
)
|
|
(52.6
|
)%
|
Preneed funeral trust earnings
|
7,390
|
|
|
7,885
|
|
|
495
|
|
|
6.7
|
%
|
Gross profit from continuing operations
|
$
|
68,822
|
|
|
$
|
76,652
|
|
|
$
|
7,830
|
|
|
11.4
|
%
|
Funeral home same store operating revenues for the year ended December 31, 2015 increased $4.3 million, or 3.3%, when compared to the year ended December 31, 2014. This increase was primarily due to a 2.1% increase in the average revenue per contract to $5,441 and a slight increase of 0.9% in same store contract volume to 25,270. The average revenue per contract includes the impact of the funeral trust fund earnings recognized at the time that we provide the services pursuant to the preneed contract. Excluding funeral trust earnings, the average revenue per contract increased $122 to $5,213 for the year ended December 31, 2015. The average revenue per burial contract increased 2.1% to $8,681, while the number of traditional burial contracts increased 1.9% to 10,572. The cremation rate for same store businesses increased from 49.3% in 2014 to 50.9% in 2015 as the number of cremation contracts increased 4.3% to 12,868. The average revenue per same store cremation contract increased 5.3% to $3,217 due to a slight increase in cremations with services which generate higher average revenue per contract than direct cremations. The average revenue for “other” contracts, which are charges for merchandise and services for which we do not perform a funeral service and which make up approximately 7.2% of the total number of contracts in 2015, increased 9.9% to $2,352.
Same store operating profit for the year ended December 31, 2015 increased $3.9 million, or 8.3%, from the year ended December 31, 2014. This increase is a result of the increase in revenue coupled with better management of controllable expenses. Those expenses with a significant change include salaries and benefits, bad debt expense and transportation costs which decreased $0.6 million, offset by an increase of approximately $0.3 million in in general liability and property tax expense.
Funeral home acquired revenues for the year ended December 31, 2015 increased $7.9 million, or 21.4%, when compared to the year ended December 31, 2014, as we experienced a 15.6% increase in the number of contracts and an increase in the average revenue per contract of 5.2%, to $6,240, primarily due to the full year of reporting the acquisition of certain funeral homes from SCI in May 2014 (the “SCI Acquisition”) in 2015 and the acquisition of two funeral home businesses in 2015. Excluding funeral trust earnings, the average revenue per contract increased 5.0% to $6,066. The number of traditional burial contracts increased 12.0%, and the average revenue per burial contract increased 4.5% to $8,836. The cremation rate for the acquired businesses increased from 39.7% in 2014 to 42.0% in 2015. The number of cremation contracts increased 22.5% to 3,093 and the average revenue per cremation contract increased 9.5% to $3,879. The increase in the average revenue per contract for acquired operations is primarily due to an increase of 8.3% in cremations with services which generate higher average revenue per contract than direct cremations.
Acquired operating profit for the year ended December 31, 2015 increased $4.0 million, or 28.9%, from the year ended December 31, 2014. As a percentage of revenue from acquired businesses, acquired operating profit increased to 39.8% for 2015 from 37.4% for 2014. The increase in operating profit was a result of the increase in acquired revenues from our 2014 and 2015 funeral home acquisitions, including the SCI acquisition
and better management of
salaries and benefits (the largest controllable expense) as these acquired locations are integrated into our Standards Operating Model. The SCI Acquisition and the acquisition of two funeral home businesses in 2015 accounted for approximately one-third of our total acquired operating revenue and operating profit in the year ended December 31, 2015.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings on matured preneed contracts. Preneed funeral insurance commission revenue decreased by approximately $0.6 million, or 27.1%, for the year ended December 31, 2015 as compared to the same period of 2014. Preneed funeral commission revenue is deferred for one year after the preneed funeral contracts are sold. In 2014, we sold 1,185 fewer preneed funeral contracts than in the same period of the previous year. The majority of the decrease in the number of contracts sold were from insurance vendors for which we receive commission income. Preneed funeral trust earnings increased by approximately $0.5 million, or 7.0%, in the year ended December 31, 2015 due primarily to trust earnings from our acquired locations. Trust earnings also include trust management fees charged to our wholly-owned registered investment advisor based on the fair market value of the trust assets. Operating profit for the two categories of financial revenue, on a combined basis, decreased 0.3% in 2015 due primarily to the mix and variability of preneed funeral insurance commission revenue and preneed fund funeral trust earnings.
Cemetery Segment.
The following table sets forth certain information regarding our revenues and operating profit from the cemetery continuing operations for the year ended December 31, 2014 compared to the year ended December 31, 2015:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
Change
|
|
2014
|
|
2015
|
|
Amount
|
|
Percent
|
|
(dollars in thousands)
|
Revenues:
|
|
|
|
|
|
|
|
Same store operating revenue
|
$
|
41,257
|
|
|
$
|
43,336
|
|
|
$
|
2,079
|
|
|
5.0
|
%
|
Acquired operating revenue
|
1,599
|
|
|
3,321
|
|
|
1,722
|
|
|
107.7
|
%
|
Cemetery trust earnings
|
8,123
|
|
|
8,440
|
|
|
317
|
|
|
3.9
|
%
|
Preneed cemetery finance charges
|
1,410
|
|
|
1,587
|
|
|
177
|
|
|
12.6
|
%
|
Revenues from continuing operations
|
$
|
52,389
|
|
|
$
|
56,684
|
|
|
$
|
4,295
|
|
|
8.2
|
%
|
|
|
|
|
|
|
|
|
Operating Profit:
|
|
|
|
|
|
|
|
Same store operating profit
|
$
|
11,845
|
|
|
$
|
14,045
|
|
|
$
|
2,200
|
|
|
18.6
|
%
|
Acquired operating profit
|
351
|
|
|
1,088
|
|
|
737
|
|
|
210.0
|
%
|
Cemetery trust earnings
|
7,931
|
|
|
8,167
|
|
|
236
|
|
|
3.0
|
%
|
Preneed cemetery finance charges
|
1,410
|
|
|
1,587
|
|
|
177
|
|
|
12.6
|
%
|
Gross profit from continuing operations
|
$
|
21,537
|
|
|
$
|
24,887
|
|
|
$
|
3,350
|
|
|
15.6
|
%
|
Cemetery same store operating revenues for the year ended December 31, 2015 increased $2.1 million, or 5.0%, when compared to the year ended December 31, 2014. Preneed property revenue increased $1.6 million, or 8.2% in the year ended December 31, 2015 as compared to the same period of 2014, as we experienced a 5.0% increase in the number of interment rights (property) sold. The average price per interment increased 5.8% to $2,988 in 2015 as compared to 2014 . The percentage of those interment rights sold that we were able to recognize as revenue, because we received at least 10% of the sales price from the customer, decreased slightly from 91.3% in 2014 to 91.0% in 2015. Revenue from deliveries of preneed merchandise and services increased $0.1 million, or 2.1%, to $4.1 million in the year ended December 31, 2015. Same store at-need revenue increased $0.3 million, or 2.0%, as the number of at-need contracts increased 2.7% to 12,998 in 2015.
Cemetery same store operating profit for the year ended December 31, 2015 increased $2.2 million, or 18.6%. As a percentage of revenues, cemetery same store operating profit increased from 28.7% in 2014 to 32.4% in 2015. The increase in operating profit was due primarily to the increase in revenue and a $1.0 million decrease in bad debt expense and transportation costs, offset by an increase of $0.9 million in salaries and benefits, insurance and grounds maintenance costs.
Cemetery acquired revenue and acquired operating profit increased in 2015 primarily due to the full year reporting of the cemetery acquired from SCI in May 2014.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Total trust earnings increased 3.9% primarily due to a $0.4 million increase in merchandise and service trust income, offset by a $0.1 million decrease in the perpetual care trust income in the year ended December 31, 2015 when compared to 2014. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Finance charges on the preneed contracts increased 12.6% year over year.
|
|
ITEM 7A.
|
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
|
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks.
The following quantitative and qualitative information is provided about financial instruments to which we are a party at
December 31, 2016
, and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.
Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as of
December 31, 2016
are presented in Part II, Item 8, Financial Statements and Supplementary Data, Notes 6, 8 and 10. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate
1.49%
change in the value of the fixed income securities.
We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of
December 31, 2016
, we had
$67.7 million
outstanding under our
$150.0 million
revolving credit facility and
$138.8 million
outstanding on our term loan. Any further borrowings or voluntary prepayments against the revolving credit facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under our Credit Facility at either the prime rate or the LIBOR rate plus a margin. At
December 31, 2016
, the prime rate margin was equivalent to
1.125%
and the LIBOR margin was
2.125%
. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of
$2.1 million
. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.
Our Convertible Notes pay interest at the fixed annual rate of 2.75% and are carried on our Consolidated Balance Sheets at a cost of approximately
$121.9 million
. The fair value of the Convertible Notes was approximately
$194.6 million
at
December 31, 2016
based on the last traded or broker quoted price, as reported by the Financial Industry Regulatory Authority, Inc. Increases in market interest rates may cause the value of the Convertible Notes to decrease, but such changes will not affect our interest costs.
The remainder of our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease, but such changes will not affect our interest costs.
|
|
ITEM 8.
|
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
|
CARRIAGE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
Page
|
CONSOLIDATED FINANCIAL STATEMENTS:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Report of Independent Registered Public Accounting Firm
Board of Directors and Stockholders
Carriage Services, Inc.:
We have audited the accompanying consolidated balance sheets of Carriage Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2015 and 2016, and the related consolidated statements of operations, changes in stockholders' equity, and cash flows for each of the three years in the period ended December 31, 2016. Our audits of the basic consolidated financial statements included the financial statement schedule listed in the index appearing under Item 15(2). These financial statements and financial statement schedule are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carriage Services, Inc. and subsidiaries as of December 31, 2015 and 2016, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the related financial statement schedule, when considered in relation to the basic consolidated financial statements taken as a whole, presents fairly, in all material respects, the information set forth therein.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2016, related to the presentation of deferred income taxes and debt issuance costs.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company’s internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 23, 2017 expressed an unqualified opinion.
/s/ GRANT THORNTON LLP
Houston, Texas
February 23, 2017
Report of Independent Registered Public Accounting Firm
The Board of Directors and Stockholders
Carriage Services, Inc.:
We have audited the internal control over financial reporting of Carriage Services, Inc. (a Delaware corporation) and subsidiaries (the “Company”) as of December 31, 2016, based on criteria established in the 2013
Internal Control-Integrated Framework
issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2016, based on criteria established in the 2013
Internal Control-Integrated Framework
issued by COSO.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements of the Company as of and for the year ended December 31, 2016, and our report dated February 23, 2017 expressed an unqualified opinion on those financial statements.
/s/ GRANT THORNTON LLP
Houston, Texas
February 23, 2017
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2015
|
|
2016
|
ASSETS
|
|
|
|
Current assets:
|
|
|
|
Cash and cash equivalents
|
$
|
535
|
|
|
$
|
3,286
|
|
Accounts receivable, net of allowance for bad debts of $1,054 in 2015 and $1,071 in 2016
|
18,181
|
|
|
18,860
|
|
Inventories
|
5,654
|
|
|
6,147
|
|
Prepaid expenses
|
4,684
|
|
|
2,640
|
|
Other current assets
|
4,707
|
|
|
2,034
|
|
Total current assets
|
33,761
|
|
|
32,967
|
|
Preneed cemetery trust investments
|
63,291
|
|
|
69,696
|
|
Preneed funeral trust investments
|
85,553
|
|
|
89,240
|
|
Preneed receivables, net of allowance for bad debts of $2,042 in 2015 and $2,166 in 2016
|
27,998
|
|
|
30,383
|
|
Receivables from preneed trusts
|
13,544
|
|
|
14,218
|
|
Property, plant and equipment, net of accumulated depreciation of $103,306 in 2015 and $110,509 in 2016
|
214,874
|
|
|
235,113
|
|
Cemetery property, net of accumulated amortization of $30,289 in 2015 and $34,194 in 2016
|
75,597
|
|
|
76,119
|
|
Goodwill
|
264,416
|
|
|
275,487
|
|
Intangible and other non-current assets
|
10,978
|
|
|
14,957
|
|
Cemetery perpetual care trust investments
|
43,127
|
|
|
46,889
|
|
Total assets
|
$
|
833,139
|
|
|
$
|
885,069
|
|
LIABILITIES AND STOCKHOLDERS’ EQUITY
|
|
|
|
Current liabilities:
|
|
|
|
Current portion of long-term debt and capital lease obligations
|
$
|
12,236
|
|
|
$
|
13,267
|
|
Accounts payable
|
7,917
|
|
|
10,198
|
|
Other liabilities
|
524
|
|
|
717
|
|
Accrued liabilities
|
16,541
|
|
|
20,091
|
|
Total current liabilities
|
37,218
|
|
|
44,273
|
|
Long-term debt, net of current portion
|
103,495
|
|
|
137,862
|
|
Revolving credit facility
|
91,514
|
|
|
66,542
|
|
Convertible subordinated notes due 2021
|
115,227
|
|
|
119,596
|
|
Obligations under capital leases, net of current portion
|
2,875
|
|
|
2,630
|
|
Deferred preneed cemetery revenue
|
56,721
|
|
|
54,631
|
|
Deferred preneed funeral revenue
|
31,748
|
|
|
33,198
|
|
Deferred tax liability
|
39,956
|
|
|
40,555
|
|
Other long-term liabilities
|
5,531
|
|
|
2,567
|
|
Deferred preneed cemetery receipts held in trust
|
63,291
|
|
|
69,696
|
|
Deferred preneed funeral receipts held in trust
|
85,553
|
|
|
89,240
|
|
Care trusts’ corpus
|
42,416
|
|
|
46,290
|
|
Total liabilities
|
675,545
|
|
|
707,080
|
|
Commitments and contingencies:
|
|
|
|
|
|
Stockholders’ equity:
|
|
|
|
Common stock, $.01 par value; 80,000,000 shares authorized; 22,497,873 and 22,490,855 issued as of December 31, 2015 and 2016, respectively
|
225
|
|
|
225
|
|
Additional paid-in capital
|
214,250
|
|
|
215,064
|
|
Retained earnings
|
3,385
|
|
|
22,966
|
|
Treasury stock, at cost; 5,849,316 shares at December 31, 2015 and 2016, respectively
|
(60,266
|
)
|
|
(60,266
|
)
|
Total stockholders’ equity
|
157,594
|
|
|
177,989
|
|
Total liabilities and stockholders’ equity
|
$
|
833,139
|
|
|
$
|
885,069
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Revenues:
|
|
|
|
|
|
Funeral
|
$
|
173,735
|
|
|
$
|
185,818
|
|
|
$
|
189,401
|
|
Cemetery
|
52,389
|
|
|
56,684
|
|
|
58,799
|
|
|
226,124
|
|
|
242,502
|
|
|
248,200
|
|
Field costs and expenses:
|
|
|
|
|
|
Funeral
|
104,913
|
|
|
109,166
|
|
|
110,218
|
|
Cemetery
|
30,852
|
|
|
31,797
|
|
|
33,569
|
|
Depreciation and amortization
|
10,545
|
|
|
12,034
|
|
|
13,919
|
|
Regional and unallocated funeral and cemetery costs
|
9,806
|
|
|
11,997
|
|
|
10,844
|
|
|
156,116
|
|
|
164,994
|
|
|
168,550
|
|
Gross profit
|
70,008
|
|
|
77,508
|
|
|
79,650
|
|
Corporate costs and expenses:
|
|
|
|
|
|
General, administrative and other
|
28,915
|
|
|
27,114
|
|
|
27,944
|
|
Home office depreciation and amortization
|
1,378
|
|
|
1,746
|
|
|
1,502
|
|
|
30,293
|
|
|
28,860
|
|
|
29,446
|
|
Operating income
|
39,715
|
|
|
48,648
|
|
|
50,204
|
|
Interest expense
|
(10,308
|
)
|
|
(10,559
|
)
|
|
(11,738
|
)
|
Accretion of discount on convertible subordinated notes
|
(2,452
|
)
|
|
(3,454
|
)
|
|
(3,870
|
)
|
Loss on early extinguishment of debt
|
(1,042
|
)
|
|
—
|
|
|
(567
|
)
|
Loss on redemption of convertible junior subordinated debentures
|
(3,779
|
)
|
|
—
|
|
|
—
|
|
Other, net
|
567
|
|
|
(45
|
)
|
|
(1,788
|
)
|
Total interest and other, net
|
(17,014
|
)
|
|
(14,058
|
)
|
|
(17,963
|
)
|
Income from continuing operations before income taxes
|
22,701
|
|
|
34,590
|
|
|
32,241
|
|
Provision for income taxes
|
(8,995
|
)
|
|
(13,737
|
)
|
|
(12,682
|
)
|
Income tax benefit related to certain discrete items
|
1,740
|
|
|
—
|
|
|
22
|
|
Net provision for income taxes
|
(7,255
|
)
|
|
(13,737
|
)
|
|
(12,660
|
)
|
Net income from continuing operations
|
15,446
|
|
|
20,853
|
|
|
19,581
|
|
Income from discontinued operations, net of tax
|
392
|
|
|
—
|
|
|
—
|
|
Net income
|
$
|
15,838
|
|
|
$
|
20,853
|
|
|
$
|
19,581
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
Continuing operations
|
$
|
0.84
|
|
|
$
|
1.16
|
|
|
$
|
1.18
|
|
Discontinued operations
|
0.02
|
|
|
—
|
|
|
—
|
|
Basic earnings per common share
|
$
|
0.86
|
|
|
$
|
1.16
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
Continuing operations
|
$
|
0.83
|
|
|
$
|
1.12
|
|
|
$
|
1.12
|
|
Discontinued operations
|
0.02
|
|
|
—
|
|
|
—
|
|
Diluted earnings per common share
|
$
|
0.85
|
|
|
$
|
1.12
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
Dividends declared per share
|
$
|
0.10
|
|
|
$
|
0.10
|
|
|
$
|
0.15
|
|
Weighted average number of common and common equivalent shares outstanding:
|
|
|
|
|
|
Basic
|
18,108
|
|
|
17,791
|
|
|
16,515
|
|
Diluted
|
18,257
|
|
|
18,313
|
|
|
17,460
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Outstanding
|
|
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Retained
Earnings (Deficit)
|
|
Treasury
Stock
|
|
Total
|
Balance – December 31, 2013
|
18,261
|
|
|
$
|
222
|
|
|
$
|
204,324
|
|
|
$
|
(33,306
|
)
|
|
$
|
(15,267
|
)
|
|
$
|
155,973
|
|
Net Income – 2014
|
—
|
|
|
—
|
|
|
—
|
|
|
15,838
|
|
|
—
|
|
|
15,838
|
|
Issuance of common stock
|
70
|
|
|
—
|
|
|
1,110
|
|
|
—
|
|
|
—
|
|
|
1,110
|
|
Exercise of stock options
|
68
|
|
|
—
|
|
|
363
|
|
|
—
|
|
|
—
|
|
|
363
|
|
Issuance of restricted common stock
|
200
|
|
|
2
|
|
|
(2
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
Cancellation and retirement of restricted common stock and stock options
|
(87
|
)
|
|
—
|
|
|
(1,357
|
)
|
|
—
|
|
|
—
|
|
|
(1,357
|
)
|
Accelerated vesting of restricted common stock and options
|
—
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
—
|
|
|
27
|
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
4,422
|
|
|
—
|
|
|
—
|
|
|
4,422
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
(1,840
|
)
|
|
—
|
|
|
—
|
|
|
(1,840
|
)
|
Performance-based stock award payments
|
—
|
|
|
—
|
|
|
(16,624
|
)
|
|
—
|
|
|
—
|
|
|
(16,624
|
)
|
Convertible subordinated notes due 2021
|
—
|
|
|
—
|
|
|
17,973
|
|
|
—
|
|
|
—
|
|
|
17,973
|
|
Excess tax benefit on equity compensation
|
—
|
|
|
—
|
|
|
3,990
|
|
|
—
|
|
|
—
|
|
|
3,990
|
|
Balance – December 31, 2014
|
18,512
|
|
|
$
|
224
|
|
|
$
|
212,386
|
|
|
$
|
(17,468
|
)
|
|
$
|
(15,267
|
)
|
|
$
|
179,875
|
|
Net Income – 2015
|
—
|
|
|
—
|
|
|
—
|
|
|
20,853
|
|
|
—
|
|
|
20,853
|
|
Issuance of common stock
|
53
|
|
|
1
|
|
|
981
|
|
|
—
|
|
|
—
|
|
|
982
|
|
Exercise of stock options
|
43
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Issuance of restricted common stock
|
43
|
|
|
1
|
|
|
50
|
|
|
—
|
|
|
—
|
|
|
51
|
|
Cancellation and retirement of restricted common stock and stock options
|
(75
|
)
|
|
(1
|
)
|
|
(1,607
|
)
|
|
—
|
|
|
—
|
|
|
(1,608
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
4,195
|
|
|
—
|
|
|
—
|
|
|
4,195
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
(1,819
|
)
|
|
—
|
|
|
—
|
|
|
(1,819
|
)
|
Treasury stock acquired
|
(1,928
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
(44,999
|
)
|
|
(44,999
|
)
|
Excess tax benefit on equity compensation
|
—
|
|
|
—
|
|
|
64
|
|
|
—
|
|
|
—
|
|
|
64
|
|
Balance – December 31, 2015
|
16,648
|
|
|
$
|
225
|
|
|
$
|
214,250
|
|
|
$
|
3,385
|
|
|
$
|
(60,266
|
)
|
|
$
|
157,594
|
|
Net Income – 2016
|
—
|
|
|
—
|
|
|
—
|
|
|
19,581
|
|
|
—
|
|
|
19,581
|
|
Issuance of common stock
|
45
|
|
|
—
|
|
|
872
|
|
|
—
|
|
|
—
|
|
|
872
|
|
Exercise of stock options
|
48
|
|
|
1
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
Issuance of restricted common stock
|
18
|
|
|
—
|
|
|
12
|
|
|
—
|
|
|
—
|
|
|
12
|
|
Cancellation and retirement of restricted common stock and stock options
|
(118
|
)
|
|
(1
|
)
|
|
(888
|
)
|
|
—
|
|
|
—
|
|
|
(889
|
)
|
Stock-based compensation expense
|
—
|
|
|
—
|
|
|
3,526
|
|
|
—
|
|
|
—
|
|
|
3,526
|
|
Dividends on common stock
|
—
|
|
|
—
|
|
|
(2,492
|
)
|
|
—
|
|
|
—
|
|
|
(2,492
|
)
|
Excess tax deficit on equity compensation
|
—
|
|
|
—
|
|
|
(216
|
)
|
|
—
|
|
|
—
|
|
|
(216
|
)
|
Balance – December 31, 2016
|
16,641
|
|
|
$
|
225
|
|
|
$
|
215,064
|
|
|
$
|
22,966
|
|
|
$
|
(60,266
|
)
|
|
$
|
177,989
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
For the Years Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Cash flows from operating activities:
|
|
|
|
|
|
Net income
|
$
|
15,838
|
|
|
$
|
20,853
|
|
|
$
|
19,581
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Depreciation and amortization
|
11,945
|
|
|
13,780
|
|
|
15,421
|
|
Provision for losses on accounts receivable
|
2,877
|
|
|
1,679
|
|
|
2,098
|
|
Stock-based compensation expense
|
4,622
|
|
|
4,444
|
|
|
3,229
|
|
Deferred income tax expense
|
5,295
|
|
|
3,035
|
|
|
4,855
|
|
Amortization of deferred financing costs
|
908
|
|
|
921
|
|
|
824
|
|
Accretion of discount on convertible subordinated notes
|
2,452
|
|
|
3,454
|
|
|
3,870
|
|
Loss on early extinguishment of debt
|
1,042
|
|
|
—
|
|
|
567
|
|
Loss on redemption of convertible junior subordinated debentures
|
2,932
|
|
|
—
|
|
|
—
|
|
Net (gain) loss on sale of businesses and disposal of other assets
|
(2,150
|
)
|
|
(49
|
)
|
|
2,077
|
|
Impairment of intangibles
|
1,180
|
|
|
—
|
|
|
145
|
|
Changes in operating assets and liabilities that provided (required) cash:
|
|
|
|
|
|
Accounts and preneed receivables
|
(4,146
|
)
|
|
(2,310
|
)
|
|
(5,162
|
)
|
Inventories and other current assets
|
(2,590
|
)
|
|
2,582
|
|
|
1,995
|
|
Intangible and other non-current assets
|
(165
|
)
|
|
150
|
|
|
(1,155
|
)
|
Preneed funeral and cemetery trust investments
|
(203
|
)
|
|
25,543
|
|
|
(14,528
|
)
|
Accounts payable
|
(562
|
)
|
|
1,445
|
|
|
2,112
|
|
Accrued and other liabilities
|
(1,529
|
)
|
|
509
|
|
|
202
|
|
Deferred preneed funeral and cemetery revenue
|
303
|
|
|
329
|
|
|
(640
|
)
|
Deferred preneed funeral and cemetery receipts held in trust
|
(1,484
|
)
|
|
(26,461
|
)
|
|
13,966
|
|
Net cash provided by operating activities
|
36,565
|
|
|
49,904
|
|
|
49,457
|
|
|
|
|
|
|
|
Cash flows from investing activities:
|
|
|
|
|
|
Acquisitions and land for new construction
|
(57,874
|
)
|
|
(9,725
|
)
|
|
(26,556
|
)
|
Purchase of land and buildings previously leased
|
(7,600
|
)
|
|
(6,080
|
)
|
|
(6,258
|
)
|
Net proceeds from sale of businesses and other assets
|
2,192
|
|
|
65
|
|
|
4,385
|
|
Capital expenditures
|
(16,075
|
)
|
|
(29,744
|
)
|
|
(16,846
|
)
|
Net cash used in investing activities
|
(79,357
|
)
|
|
(45,484
|
)
|
|
(45,275
|
)
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
Borrowings from the revolving credit facility
|
144,600
|
|
|
103,600
|
|
|
71,200
|
|
Payments against the revolving credit facility
|
(141,000
|
)
|
|
(51,500
|
)
|
|
(96,100
|
)
|
Borrowings from the term loan
|
15,875
|
|
|
1,562
|
|
|
39,063
|
|
Payments against the term loan
|
(12,562
|
)
|
|
(10,937
|
)
|
|
(11,250
|
)
|
Payments on long-term debt and obligations under capital leases
|
(840
|
)
|
|
(1,014
|
)
|
|
(1,789
|
)
|
Proceeds from the exercise of stock options and employee stock purchase plan contributions
|
1,228
|
|
|
758
|
|
|
870
|
|
Dividends on common stock
|
(1,840
|
)
|
|
(1,819
|
)
|
|
(2,492
|
)
|
Payment of loan origination costs
|
(825
|
)
|
|
(13
|
)
|
|
(717
|
)
|
Proceeds from the issuance of convertible subordinated notes
|
143,750
|
|
|
—
|
|
|
—
|
|
Payment of debt issuance costs related to the convertible subordinated notes
|
(4,650
|
)
|
|
—
|
|
|
—
|
|
Redemption of convertible junior subordinated debentures
|
(89,748
|
)
|
|
—
|
|
|
—
|
|
Payments for performance-based stock awards
|
(16,150
|
)
|
|
—
|
|
|
—
|
|
Purchase of treasury stock
|
—
|
|
|
(44,999
|
)
|
|
—
|
|
Excess tax benefit (deficiency) of equity compensation
|
3,990
|
|
|
64
|
|
|
(216
|
)
|
Net cash provided by (used in) financing activities
|
41,828
|
|
|
(4,298
|
)
|
|
(1,431
|
)
|
|
|
|
|
|
|
Net (decrease) increase in cash and cash equivalents
|
(964
|
)
|
|
122
|
|
|
2,751
|
|
Cash and cash equivalents at beginning of year
|
1,377
|
|
|
413
|
|
|
535
|
|
Cash and cash equivalents at end of year
|
$
|
413
|
|
|
$
|
535
|
|
|
$
|
3,286
|
|
The accompanying notes are an integral part of these Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The Company
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of funeral and cemetery services and merchandise in the United States. At
December 31, 2016
, we operated
170
funeral homes in
28
states and
32
cemeteries in
11
states.
Our operations are reported in
two
business segments: Funeral Home Operations and Cemetery Operations. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business providing interment rights (grave sites and mausoleums) and related merchandise, such as markers and memorials.
Principles of Consolidation
The accompanying Consolidated Financial Statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
Reclassifications
Certain reclassifications have been made to prior period amounts to conform to the current period financial statement presentation with no effect on our previously reported results of operations, consolidated financial position, or cash flows.
Use of Estimates
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
Inventory
Inventory consists primarily of caskets, outer burial containers and cemetery monuments and markers and is recorded at the lower of its cost basis (determined by the specific identification method) or net realizable value.
Funeral and Cemetery Operations
We record the revenue from sales of funeral and cemetery merchandise and services when the merchandise is delivered or the service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed
10%
of the contract price related to the interment right. Costs related to the sales of interment rights, which include real property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We recorded amortization expense for cemetery property of approximately
$2.8 million
,
$3.4 million
and
$3.9 million
for
2014
,
2015
and
2016
, respectively. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience and the current economic environment. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.
When preneed sales of funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
is no longer subject to refund, which is typically one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts. These costs are expensed as incurred.
Accounts receivable included approximately
$8.2 million
and
$8.7 million
of funeral receivables at
December 31, 2015
and
2016
, respectively, and
$9.7 million
and
$9.9 million
of cemetery receivables at
December 31, 2015
and
2016
, respectively. For
2015
and
2016
, accounts receivable also include minor amounts of other receivables. Non-current preneed receivables represent the payments expected to be received beyond
one
year from the balance sheet date. Non-current preneed receivables consisted of approximately
$7.3 million
and
$7.8 million
of funeral receivables and
$20.7 million
and
$22.6 million
of cemetery receivables at
December 31, 2015
and
2016
, respectively. Bad debt expense totaled approximately
$2.9 million
,
$1.7 million
and
$2.1 million
for
2014
,
2015
and
2016
, respectively.
Preneed Contracts
We sell interment rights, merchandise and services prior to the time of need, which is referred to as preneed. In many instances the customer pays for the preneed contract over a period of time. Cash proceeds from preneed sales less amounts that we may retain under state regulations are deposited to a trust or used to purchase a third-party insurance policy. The principal and accumulated earnings of the trusts are generally withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in insurance benefits on the insurance products are deferred until the service is performed. The customer receivables and amounts deposited in trusts that we control are primarily included in the non-current asset section of our Consolidated Balance Sheets. The preneed funeral contracts secured by third party insurance policies are not recorded as assets or liabilities of the Company. See Note 9 to the Consolidated Financial Statements herein for further information regarding estimated revenues associated with preneed funeral contracts secured by third party insurance policies.
In the opinion of management, the proceeds from the trust funds and the insurance policies at the time the preneed contracts mature will exceed the estimated future costs to perform services and provide products under such arrangements. The types of securities in which the trusts may invest are regulated by state agencies.
Preneed Funeral and Cemetery Trust Funds
Our preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities (“VIE’s”). In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, we do not have a right to access the corpus in the perpetual care trusts. We have recognized financial interests of third parties in the trust funds in our financial statements as
Deferred preneed funeral and cemetery receipts held in trust
and
Care trusts’ corpus
. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to
Deferred preneed funeral and cemetery receipts held in trust
and
Care trusts’ corpus
on our Consolidated Balance Sheets. Our future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in
Deferred preneed funeral revenue
and
Deferred preneed cemetery revenue
until the service is performed or the merchandise is delivered.
In accordance with respective state laws, we are required to deposit a specified amount into perpetual and memorial care trust funds for each interment/entombment right and certain memorials sold. Income from the trust funds is distributed to us and used to provide for the care and maintenance of the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to us. We are restricted from withdrawing any of the principal balances of these funds.
An enterprise is required to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling financial interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of the VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. Our analysis continues to support our position as the primary beneficiary in the majority of our funeral and cemetery trust funds.
Trust management fees are earned by us for investment management and advisory services that are provided by our wholly-owned registered investment advisor (“CSV RIA”). As of
December 31, 2016
, CSV RIA provided these services to
two
institutions, which have custody of
79%
of our trust assets, for a fee based on the market value of trust assets. Under state trust laws, we are allowed to charge the trust a fee for advising on the investment of the trust assets and these fees are recognized as income in the period in which services are provided.
We determine whether or not the assets in the preneed trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to
Deferred preneed funeral and cemetery receipts held in trust
and
Care trusts’ corpus
on our Consolidated Balance Sheets. There will be no impact on earnings unless and until such time that the investment is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.
Property, Plant and Equipment
Property, plant and equipment (including equipment under capital leases) are stated at cost. The costs of ordinary maintenance and repairs are charged to operations as incurred, while renewals and betterments are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method over the following estimated useful lives of the assets:
|
|
|
|
Years
|
Buildings and improvements
|
15 to 40
|
Furniture and fixtures
|
5 to 10
|
Machinery and equipment
|
3 to 15
|
Automobiles
|
5 to 7
0
|
Property, plant and equipment was comprised of the following at
December 31, 2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2016
|
|
(in thousands)
|
Land
|
$
|
65,433
|
|
|
$
|
73,744
|
|
Buildings and improvements
|
180,804
|
|
|
195,214
|
|
Furniture, equipment and automobiles
|
71,943
|
|
|
76,664
|
|
Property, plant and equipment, at cost
|
318,180
|
|
|
345,622
|
|
Less: accumulated depreciation
|
(103,306
|
)
|
|
(110,509
|
)
|
Property, plant and equipment, net
|
$
|
214,874
|
|
|
$
|
235,113
|
|
During
2014
,
2015
and
2016
, we recorded approximately
$9.2
million,
$10.4
million and
$11.5
million, respectively, of depreciation expense. During 2016, we acquired real estate for
$2.7 million
for funeral home expansion projects and we purchased land and buildings at
four
funeral homes that were previously leased for approximately
$6.3 million
. In addition, we acquired
$16.0 million
of property, plant and equipment in connection with the six funeral home businesses we acquired during 2016, as further discussed in Note 3 to the Consolidated Financial Statements included herein.
Long-lived assets, such as property, plant and equipment subject to depreciation and amortization, are reviewed for impairment at least annually or whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable in accordance with the Property, Plant and Equipment topic of the Accounting Standards Codification (“ASC”) 360. This guidance requires that long-lived assets to be held and used are reported at the lower of their carrying amount or fair value. We assess long-lived assets for impairment whenever events or circumstances indicate that the carrying value may be greater than the fair value. We evaluate our long-lived assets for impairment when a funeral home business has negative earnings before interest, taxes, depreciation and amortization (“EBITDA”) for four consecutive years and if there has been a decline in EBITDA in that same period. For our cemetery business, we analyze the long-lived assets for impairment if the business has a negative operating margin and a decline in operating margin over a four year period. We review our long-lived assets deemed held-for-sale to the point of recoverability. Assets to be disposed of and assets not expected to provide any future service potential are recorded at the lower of their carrying amount or fair value less estimated cost to sell. If we determine that the carrying value is not recoverable from the proceeds of the sale, we record an impairment at that time. For the year ended December 31, 2016,
no
impairments were identified on our long-lived assets.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair value as of that date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period, we may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During
2016
, we acquired
six
funeral home businesses. We acquired
two
funeral home businesses in Houston, Texas in May 2016,
one
funeral home business in Madera, California in September 2016,
one
funeral home business in Brookfield, Wisconsin in November 2016 and
two
funeral home businesses in Burlington, North Carolina and Graham, North Carolina in November 2016.
See Note 3 to the Consolidated Financial Statements herein for further information concerning these acquisitions.
Goodwill
The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral home businesses. Goodwill is tested annually for impairment by assessing the fair value of each of our reporting units. The funeral segment reporting units consist of our East, Central and West regions in the United States and we performed our annual impairment test of goodwill using information as of August 31, 2016.
Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. We conducted qualitative assessments in 2014 and 2015; however, for our 2016 annual impairment test, we performed the two-step goodwill impairment test. Our intent is to perform the two-step test at least once every
three years
unless certain indicators or events suggest otherwise.
The two-step goodwill impairment test involves estimates and management judgment. In the first step of our goodwill impairment testing, we compare the fair value of each reporting unit to its carrying value, including goodwill. If the fair value of the reporting unit exceeds its carrying amount, the goodwill of that reporting unit is not considered impaired, and the second step is not required. We determine fair value for each reporting unit using both an income approach, weighted
90%
, and a market approach, weighted
10%
. Our methodology for determining an income-based fair value was based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows discounted at a weighted average cost of capital for the Company based on market participant assumptions. Our methodology for determining a market approach fair value utilized the guideline public company method, in which we relied on market multiples of comparable companies operating in the same industry as the individual reporting units. In accordance with the guidance, if the fair value of the reporting unit is less than its carrying amount, the second step of the goodwill impairment testing needs to be performed. This step compares the implied fair value of goodwill to the carrying amount of the reporting unit’s goodwill, and if the carrying amount exceeds the implied value, an impairment charge is recorded in an amount equal to the difference. For our 2016 annual impairment test, we performed the first step of our goodwill impairment testing and concluded that there was no impairment to goodwill for any of our reporting units.
In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of a reporting unit may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in our market capitalization or decline in operating results.
For the year ended December 31, 2014, we recognized an impairment of approximately
$1.2 million
for discontinued locations as the carrying value exceeded fair value. Upon receipt of a letter of intent to sell a location, we perform an analysis to determine if the net assets of the location exceed the sales price. If the net assets exceed the sales price, we record an impairment at the location level.
No impairments were recorded to our goodwill during the years ended
December 31, 2015
and
2016
. No such events or changes occurred between the testing date and year end to trigger a subsequent impairment review.
See Note 4 to the Consolidated Financial Statements herein for additional information related to our goodwill.
Intangible Assets
Our intangible assets include tradenames resulting from acquisitions and are included in
Intangible and other non-current assets
on our Consolidated Balance Sheets. Our tradenames are considered to have an indefinite life and are not subject to amortization.
Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the indefinite-lived intangible asset is impaired. If, after assessing the totality of events and circumstances, an entity concludes that it is not more likely than not that the indefinite-lived intangible asset is impaired, then the entity is not required to take further action. However, if an entity concludes otherwise, then it is required to determine the fair value of the indefinite-lived intangible asset and perform the quantitative impairment test by comparing the fair value with the carrying amount in accordance with the guidance.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The Company elected to change the annual assessment date for indefinite lived intangible assets from December 31
st
to August 31
st
in 2016 because the change in date aligns with the Company’s goodwill impairment test, which should create a synergy and enhance the quality of our indefinite lived intangible assets impairment analysis. We conducted qualitative assessments in 2014 and 2015; however, for our 2016 annual impairment test, we performed our quantitative impairment test using the relief from royalty method, using information as of August 31, 2016. Our intent is to perform the quantitative impairment test at least once every
three years
unless certain indicators or events suggest otherwise.
Our intangible asset impairment test involves estimates and management judgment. Under the relief from royalty method, the value of the tradename is measured through the value of the royalties that the Company is relieved from paying due to its ownership of the asset. We determine the fair value of the assets by discounting the cash flows that represent a savings in lieu of paying a royalty fee for use of the tradename. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions that may differ from actual future cash flows and the determination and application of an appropriate royalty rate and discount rate. To estimate the royalty rates for the individual tradename, we mainly relied on the profit split method, but also considered the comparable third-party license agreements and the return on asset method. A scorecard was used to assess the relative strength of the individual tradename to further adjust the royalty rates selected under the profit-split method for qualitative factors. For our 2016 annual impairment test, we performed our quantitative impairment testing and concluded that there was no impairment to intangible assets.
In addition to our annual review, we assess the impairment of intangible assets whenever certain events or changes in circumstances indicate that the carrying value of the intangible asset may be greater than the fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant under-performance relative to historical or projected future operating results and significant negative industry or economic trends. During the third quarter of 2016, we recorded an impairment to tradenames of
$145,000
related to a funeral home business held for sale as the carrying value exceeded fair value. No other impairments were recorded to our intangible assets during the years ended December 31, 2014,
2015
and
2016
.
See Note 12 to the Consolidated Financial Statements included herein for additional information on our intangible assets.
Divested and Discontinued Operations
Effective January 1, 2015, we adopted the Financial Accounting Standards Board’s (“FASB”) guidance for reporting discontinued operations, which amended the definition of “discontinued operations” to include only disposals or held-for-sale classifications for components or groups of components of an entity that represent a strategic shift that either has or will have a major effect on an entity's operations or financial results. Examples of a strategic shift that has or will have a major effect on an entity's operations and financial results include a disposal of a major geographical area, line of business, equity method of investment or other parts of an entity. The new guidance also requires the disclosure of pre-tax income of disposals that do not qualify as discontinued operations.
During 2014, we sold a cemetery in Florida and
two
funeral homes,
one
in Ohio and
one
in Kentucky. For the year ended December 31, 2014, we recognized income from discontinued operations of
$0.4 million
. We did not divest any of our funeral home or cemetery businesses in 2015. During
2016
, we sold a funeral home business in Tennessee for
$1.35 million
. The operating results of this business, as well as the loss on the sale are included within net income from continuing operations on our Consolidated Statements of Operations.
We continually review locations to optimize the sustainable earning power and return on our invested capital. These reviews could entail selling certain non-strategic businesses.
See Note 5 to the Consolidated Financial Statements herein for additional information concerning our discontinued operations.
Fair Value Measurements
We measure the available-for-sale securities held by our funeral merchandise and service, cemetery merchandise and service, and cemetery perpetual care trusts at fair value on a recurring basis in accordance with the Fair Value Measurements Topic of the ASC. This guidance defines fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). The guidance establishes a three-level valuation hierarchy for disclosure of fair value measurements. The valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or liability as of the measurement date. The three levels are defined as follows:
• Level 1 — inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets;
• Level 2 — inputs to the valuation methodology include quoted prices for similar assets or liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instrument; and
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
• Level 3 — inputs to the valuation methodology are unobservable and significant to the fair value measurement.
We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. The fair value disclosures of transfers in and out of Levels 1 and 2 and the gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy are also presented in Notes 6 and 10 to the Consolidated Financial Statements included herein. We currently do not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.
To determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased, the exit price is used as the fair value measurement. For the year ended
December 31, 2016
, we did not incur significant decreases in the volume or level of activity of any asset or liability. We consider an impairment of debt and equity securities other-than-temporary unless (a) we have the ability and intent to hold an investment and (b) evidence indicating the cost of the investment is recoverable before we are more likely than not required to sell the investment. If an impairment is indicated, then an adjustment is made to reduce the carrying amount to fair value which is recorded as a reduction to either
Deferred preneed cemetery receipts held in trust, Deferred preneed funeral receipts held in trust or Care trusts’ corpus
on our Consolidated Balance Sheets. For the years ended
December 31, 2015
and
2016
, we recorded impairment charges of
$1.8 million
and
$2.3 million
, respectively, for other-than-temporary declines in fair value related to unrealized losses on certain investments.
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing risk management techniques when appropriate and when available for a reasonable price.
See Notes 6, 10 and 11 to the Consolidated Financial Statements herein for additional required disclosures concerning the fair value measurement of our financial assets and liabilities.
Presentation of Debt Issuance Costs
Effective January 1, 2016, we adopted the FASB’s new guidance on simplifying the presentation of debt issuance costs. The guidance requires that entities that have historically presented debt issuance costs as an asset, related to a recognized debt liability, will be required to present those costs as a direct deduction from the carrying value of the related debt liability. This presentation resulted in debt issuance costs being presented in the same way debt discounts have historically been addressed. Debt issuances costs of
$4.2 million
and
$3.6 million
have been presented as a deduction from the carrying value of the related liabilities in our Consolidated Balance Sheets as of
December 31, 2015
and
2016
, respectively. The amounts related to our Credit Facility were
$1.4 million
and
$1.3 million
as of
December 31, 2015
and
2016
, respectively. The amounts related to our Convertible Notes were
$2.8 million
and
$2.3 million
as of
December 31, 2015
and
2016
, respectively.
See Notes 13 and 14 to the Consolidated Financial Statements included herein for additional information concerning the presentation of debt issuance costs.
Income Taxes
We and our subsidiaries file a consolidated United States Federal income tax return, separate income tax returns in
15
states in which we operate and combined or unitary income tax returns in
13
states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities.
We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in the financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on the Consolidated Balance Sheets.
On August 1, 2014, we received notification that the Internal Revenue Service (“IRS”) completed its examination of our tax year ended December 31, 2011. As a result, we recognized a tax benefit of
$1.7 million
which reduced our effective tax rate for the year ended December 31, 2014. Additionally, we recognized a credit to interest expense of
$0.6 million
related to the settled portion of the uncertain tax position.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 15, 2016, we settled an open examination with the California Franchise Tax Board. As a result of paying the final assessment, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability of
$0.2 million
. On August 29, 2016, we received notification that the IRS completed its examination of our tax year ended December 31, 2013. As a result, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability of
$0.6 million
, which resulted in an increase to
Deferred tax liability
in the amount of
$0.6 million
.
We do not have any unrecognized tax benefits recorded as of
December 31, 2016
and we do not anticipate a material change in our unrecognized tax benefits during the next twelve months.
Effective January 1, 2016, we adopted the FASB’s new guidance on Balance Sheet Classification of Deferred Taxes. The standard simplifies deferred tax reporting on the balance sheet by eliminating non-current and current classifications. The guidance requires all deferred tax assets and liabilities, along with related valuation allowances will be classified as non-current on the balance sheet. The guidance was applied prospectively and all deferred tax assets and liabilities, along with our valuation allowance are now classified as non-current at
December 31, 2016
.
See Note 16 to the Consolidated Financial Statements included herein for additional information concerning our income taxes.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we may grant restricted stock, stock options, performance awards and our employee stock purchase plan under which stock may be purchased. We recognize compensation expense in an amount equal to the fair value of the share-based awards expected to vest over the requisite service period. Fair value is determined on the date of the grant. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards is determined using a Monte-Carlo simulation pricing model.
See Note 17 to the Consolidated Financial Statements included herein for additional information on our stock-based compensation plans.
Computation of Earnings Per Common Share
Basic earnings per share is computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share is computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options and our Convertible Notes.
Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities, and we have prepared our earnings per share calculations attributable to common stockholders to exclude outstanding unvested restricted stock awards, using the two-class method, in both the basic and diluted weighted average shares outstanding calculation.
The fully diluted weighted average shares outstanding for the years ended
December 31, 2015
and
2016
, and the corresponding calculation of fully diluted earnings per share, included approximately
0.3 million
and
0.5 million
shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260. There were
no
shares that would have been issued upon conversion under the if-converted method for our convertible subordinated notes for the year ended
December 31, 2014
.
See Note 19 to the Consolidated Financial Statements included herein for the computation of per share earnings for the fiscal years ended
December 31, 2014
,
2015
and
2016
.
Subsequent Events
We have evaluated events and transactions during the period subsequent to
December 31, 2016
through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. RECENTLY ISSUED ACCOUNTING STANDARDS
Goodwill
In January 2017, the FASB issued ASU,
Intangibles – Goodwill and Other (Topic 350).
This ASU applies to all entities that have goodwill reported in their financial statements and have not elected the private company alternative for the subsequent measurement of goodwill. The amendment simplifies subsequent measurement of goodwill and eliminates Step 2 from the goodwill impairment test, which should reduce the cost and complexity of evaluating goodwill for impairment. An entity no longer will determine goodwill impairment by calculating the implied fair value of goodwill by assigning the fair value of a reporting unit to all of its assets and liabilities as if that reporting unit had been acquired in a business combination. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill. This ASU is effective for fiscal years beginning after December 15, 2019, with early adoption permitted. Our adoption of this ASU for our fiscal year beginning January 1, 2017 is not expected to have a material effect on our Consolidated Financial Statements.
Stock-Based Compensation
In March 2016, the FASB issued ASU,
Compensation – Stock Compensation (Topic 718).
This ASU applies to all entities that issue share-based payment awards to their employees. The amendments in this ASU involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2016, and interim periods within those fiscal years, with earlier application permitted for all entities. Amendments related to the presentation of employee taxes paid on the statement of cash flows when an employer withholds shares to meet the minimum statutory withholding requirement should be applied retrospectively. Amendments requiring recognition of excess tax benefits and tax deficiencies in the income statement and the practical expedient for estimating expected term should be applied prospectively. An entity may elect to apply the amendments related to the presentation of excess tax benefits on the statement of cash flows using either a prospective transition method or a retrospective transition method. Our adoption of this ASU for our fiscal year beginning January 1, 2017 is not expected to have a material effect on our Consolidated Financial Statements.
Inventory
In July 2015, the FASB issued ASU,
Inventory – Simplifying the Measurement of Inventory (Topic 330)
. This ASU applies to all inventory, including inventory that is measured using the first-in, first-out (FIFO) or average cost method. This ASU does not apply to the last-in, first-out (LIFO) or the retail inventory method. This ASU requires an entity to measure inventory at the lower of cost or net realizable value. Net realizable value is the estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal and transportation. This ASU is effective for fiscal years beginning after December 15, 2016, including interim periods within those fiscal years, and should be applied prospectively, with earlier application permitted as of the beginning of an interim or annual reporting period. Our adoption of this ASU for our fiscal year beginning January 1, 2017 is not expected to have a material effect on our Consolidated Financial Statements.
Revenue Recognition
In May 2014, the FASB issued ASU,
Revenue from Contracts with Customers. (Topic 606).
ASC Topic 606 supersedes the revenue recognition requirements under ASC Topic 605,
Revenue Recognition
, and most industry-specific guidance throughout the Industry Topics of the ASC. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which an entity expects to be entitled in exchange for those goods or services. Under the new guidance, an entity is required to perform the following five steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when (or as) the entity satisfies a performance obligation. The new guidance will significantly enhance comparability of revenue recognition practices across entities, industries, jurisdictions and capital markets. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized. On July 9, 2015, the FASB deferred the effective date by one year to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period, We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018.
We expect the adoption of this new accounting standard to affect our accounting for cemetery interment rights. Currently, our sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions for accounting for sales of real estate. This method provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed
10%
of the contract price related to the interment right.
Under the new accounting standard, we will recognize the revenue in the period in which the sale occurs, irrespective of the cumulative payments received. The impact of this is not expected to have a material impact on our Consolidated Financial Statements. Upon revenue recognition, management will book an allowance for contract cancellations based on our previous
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
experience of cancellations and as such will reflect a one-time catch up for the allowance at January 1, 2018, which is not expected to have a material impact on our Consolidated Financial Statements.
Costs related to the sales of interment rights, which include real property and other costs related to cemetery development activities, will continue to be charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. We do not expect the adoption of this accounting standard to materially affect our accounting for other revenue streams.
We are currently modifying our financial systems to provide accounting under the new method in addition to our current method and do not anticipate any business disruption related to adopting this guidance. We are continually evaluating the impact on our Consolidated Financial Statements with more recent financial information.
Cash Flows
In August 2016, the FASB issued ASU,
Statement of Cash Flows (Topic 230).
This ASU applies to all entities that are required to present a statement of cash flows under Topic 230. The amendments provide guidance on eight specific cash flow issues and includes clarification on how these items should be classified in the statement of cash flows and is designed to help eliminate diversity in practice as to where items are classified in the cash flow statement.
In November 2016, the FASB issued additional guidance on this Topic that requires amounts generally described as restricted cash and restricted cash equivalents to be included with cash and cash equivalents when reconciling the statement of cash flows. This ASU is effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
Business Combinations
In January 2017, the FASB issued Accounting Standards Update (“ASU”),
Business Combinations – Clarifying the Definition of a Business (Topic 805).
This ASU applies to all entities that must determine whether they have acquired or sold a business. The amendments in this Update clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. This ASU is effective for fiscal years beginning after December 15, 2017, including the interim periods within those periods, with earlier application permitted. Our adoption of this ASU for our fiscal year beginning January 1, 2018 is not expected to have a material effect on our Consolidated Financial Statements.
Leases
In February 2016, the FASB issued ASU,
Leases (Topic 842).
This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
Financial Instruments
In January 2016, the FASB issued ASU,
Financial Instruments – Overall - Recognition and Measurement of Financial Assets and Financial Liabilities (Topic 825).
The amendments in this ASU address certain aspects of recognition, measurement, presentation, and disclosure of financial instruments and apply to all entities that hold financial assets or owe financial liabilities. The amendments in this ASU also simplify the impairment assessment of equity investments without readily determinable fair values by requiring assessment for impairment qualitatively at each reporting period. That impairment assessment is similar to the qualitative assessment for long-lived assets, goodwill, and indefinite-lived intangible assets. This ASU is effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years, with earlier application permitted for financial statements that have not been issued. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2018 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In June 2016, the FASB issued ASU,
Financial Instruments – Credit Losses (Topic 326).
This ASU applies to all entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The main objective of the ASU is to provide financial statement users with more decision-useful information about the expected credit losses on financial 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. This ASU is effective for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with earlier application permitted for all entities. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2020 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3. ACQUISITIONS
Our growth strategy depends on the execution of our Strategic Acquisition Model. We assess the strategic positioning of acquisition candidates based on certain criteria, which include volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry. The value of the acquisition candidates is based on the local market competitive dynamic which allows for appropriate and differentiating enterprise valuations and flexibility to customize the transactions.
On May 31, 2016, we acquired
two
funeral home businesses in Houston, Texas for approximately
$10.2 million
. The purchase price consisted of
$6.72 million
paid in cash at closing and
$6.5 million
of deferred purchase price payments. The net present value of such future deferred purchase price payments for these
two
funeral home businesses was
$3.5 million
, which was recorded in
Long-term debt
on our Consolidated Balance Sheets at acquisition. The deferred purchase price payments are being paid in
80
equal quarterly installments of
$81,250
which commenced on the closing date and then each September 1, December 1, March 1 and June 1 for the next
20
years.
On September 20, 2016, we acquired a funeral home business in Madera, California for
$5.65 million
in cash.
On November 8, 2016, we acquired a funeral home business in Brookfield, Wisconsin for approximately
$6.8 million
. The purchase price consisted of
$3.5 million
paid in cash at closing and
$4.5 million
of deferred purchase price payments. The net present value of such future deferred purchase price payments for the funeral home business was
$3.3 million
, which was recorded in
Long-term debt
on our Consolidated Balance Sheets at acquisition. The deferred purchase price payments are being paid in equal annual installments of
$447,000
which commenced on the closing date and then each anniversary of the closing date for the next
10
years.
On November 15, 2016, we acquired
two
funeral home businesses;
one
in Burlington, North Carolina and
one
in Graham, North Carolina for approximately
$10.1 million
. The purchase price consisted of
$8.0 million
paid in cash at closing and
$2.5 million
of deferred purchase price payments. The net present value of such future deferred purchase price payments for the funeral home business was
$2.1 million
, which was recorded in
Long-term debt
on our Consolidated Balance Sheets at acquisition. The deferred purchase price payments are being paid in
60
equal monthly installments of
$41,667
which commenced on the first month following the closing date and then each month for the next
5
years.
The pro forma impact of these acquisitions on prior periods is not presented, as the impact is not material to our reported results. The results of the acquired businesses are included in the Company's results from the date of acquisition.
The following table summarizes the breakdown of the purchase price for the businesses described above (in thousands):
|
|
|
|
|
|
Purchase Price
|
Cash paid
|
$
|
23,871
|
|
Deferred payments
|
8,884
|
|
Purchase Price
|
$
|
32,755
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the breakdown of the purchase price allocation for the businesses described above (in thousands):
|
|
|
|
|
|
Purchase Price Allocation
|
Current assets
|
$
|
530
|
|
Property, plant & equipment
|
15,972
|
|
Goodwill
|
11,832
|
|
Intangible and other non-current assets
|
4,588
|
|
Assumed liabilities
|
(167
|
)
|
Purchase Price
|
$
|
32,755
|
|
The intangible and other non-current assets relate to the fair value of tradenames and agreements not-to-compete, and the assumed liabilities relate to the obligations associated with certain financed automobiles we acquired.
The following table summarizes the fair value of the assets acquired for these businesses (in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Date
|
|
Type of Business
|
|
Market
|
|
Assets
Acquired
(Excluding
Goodwill)
|
|
Goodwill
Recorded
|
|
Liabilities
and Debt
Assumed
|
May 31, 2016
|
|
Two Funeral Homes
|
|
Houston, TX
|
|
$
|
7.0
|
|
|
$
|
3.3
|
|
|
$
|
(0.1
|
)
|
September 20, 2016
|
|
One Funeral Home
|
|
Madera, CA
|
|
$
|
3.7
|
|
|
$
|
1.9
|
|
|
$
|
—
|
|
November 8, 2016
|
|
One Funeral Home
|
|
Brookfield, WI
|
|
$
|
5.7
|
|
|
$
|
1.2
|
|
|
$
|
(0.1
|
)
|
November 15, 2016
|
|
Two Funeral Homes
|
|
Burlington/Graham, NC
|
|
$
|
4.7
|
|
|
$
|
5.4
|
|
|
$
|
—
|
|
As of
December 31, 2016
, our accounting for our
2016
acquisitions is complete. See Note 12 to the Consolidated Financial Statements included herein for additional information on our intangible and other non-current assets.
The following table summarizes the fair value of the assets acquired during
2015
(in thousands):
|
|
|
|
|
|
Purchase Price Allocation
|
Current assets
|
$
|
92
|
|
Property, plant & equipment
|
5,966
|
|
Goodwill
|
6,974
|
|
Intangible and other non-current assets
|
1,986
|
|
Purchase Price
|
$
|
15,018
|
|
The following table summarizes the fair value of the assets acquired during
2015
(in millions):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acquisition Date
|
|
Type of Business
|
|
Market
|
|
Assets
Acquired
(Excluding
Goodwill)
|
|
Goodwill
Recorded
|
|
Liabilities
and Debt
Assumed
|
February 25, 2015
|
|
One Funeral Home
|
|
Clarksville, TN
|
|
$
|
4.9
|
|
|
$
|
3.9
|
|
|
$
|
—
|
|
November 17, 2015
|
|
One Funeral Home
|
|
Wakeforest, NC
|
|
$
|
3.1
|
|
|
$
|
3.1
|
|
|
$
|
—
|
|
4. GOODWILL
Many of the former owners and staff of our acquired funeral homes and certain cemeteries have provided high quality service to families for generations. The resulting loyalty often represents a substantial portion of the value of a business. The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired is recorded as goodwill. Goodwill has primarily been recorded in connection with the acquisition of funeral home businesses.
Under current guidance, we are permitted to first assess qualitative factors to determine whether it is more-likely-than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. We conducted qualitative assessments in 2014 and 2015; however, for our 2016 annual impairment test, we performed the two-step goodwill impairment test. Our intent is to perform the two-step test at least once every
three years
unless certain indicators or events suggest otherwise. See Note 1 to the Consolidated Financial Statements included
herein, for a discussion of the methodology used for our annual goodwill impairment test. Based on our 2016 impairment test, we concluded that there was no impairment to goodwill.
The following table presents changes in goodwill in the accompanying Consolidated Balance Sheets for the years ended
December 31, 2015
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2016
|
Goodwill at the beginning of year
|
$
|
257,442
|
|
|
$
|
264,416
|
|
Increase in goodwill related to acquisitions
|
6,974
|
|
|
11,832
|
|
Decrease in goodwill related to divestitures
|
—
|
|
|
(761
|
)
|
Goodwill at the end of the year
|
$
|
264,416
|
|
|
$
|
275,487
|
|
The
$11.8 million
increase to goodwill represents the goodwill recorded in connection with our
2016
acquisitions. The
$0.8 million
decrease to goodwill relates to a divested business in Tennessee during the fourth quarter of
2016
.
5. DIVESTED AND DISCONTINUED OPERATIONS
Effective January 1, 2015, we adopted the FASB's new guidance for reporting discontinued operations which amended the definition of “discontinued operations” to include only disposals or held-for-sale classifications for components or groups of components of an entity that represent a strategic shift that either has or will have a major effect on an entity's operations or financial results. Examples of a strategic shift that has or will have a major effect on an entity's operations and financial results include a disposal of a major geographical area, line of business, equity method of investment or other parts of an entity. The new guidance also requires the disclosure of pre-tax income of disposals that do not qualify as discontinued operations.
We did not divest any of our funeral home or cemetery businesses in 2015. During 2016, we sold a funeral home business in Tennessee for
$1.35 million
. We continually review locations to optimize the sustainable earning power and return on our invested capital. These reviews could entail selling certain non-strategic businesses.
The operating results of this divested business, as well as the loss on the sale are included within net income from continuing operations on our Consolidated Statements of Operations and is reflected in the table below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Revenues
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
744
|
|
|
|
|
|
|
|
Operating income
|
—
|
|
|
—
|
|
|
314
|
|
Net loss on disposal
|
—
|
|
|
—
|
|
|
(29
|
)
|
Income tax provision
|
—
|
|
|
—
|
|
|
(112
|
)
|
Net income from divested operations
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
173
|
|
During 2014, we sold a cemetery in Florida and
two
funeral homes,
one
in Ohio and
one
in Kentucky. The operating results of these discontinued businesses, as well as any impairments and net gains on the disposals, presented within discontinued operations on our Consolidated Statements of Operations, along with the income tax effect, were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Revenues
|
$
|
817
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Operating income
|
235
|
|
|
—
|
|
|
—
|
|
Impairment
|
(1,180
|
)
|
|
—
|
|
|
—
|
|
Net gain on disposal
|
1,594
|
|
|
—
|
|
|
—
|
|
Income tax provision
|
(257
|
)
|
|
—
|
|
|
—
|
|
Income from discontinued operations, net of tax
|
$
|
392
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are generally permitted to withdraw as the services and merchandise are provided to customers. Preneed cemetery contracts are secured by payments from customers, less amounts not required by law to be deposited into trust. Preneed cemetery trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of
Preneed cemetery trust investments
on our Consolidated Balance Sheets at
December 31, 2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
Preneed cemetery trust investments, at market value
|
$
|
65,486
|
|
|
$
|
71,834
|
|
Less: allowance for contract cancellation
|
(2,195
|
)
|
|
(2,138
|
)
|
Preneed cemetery trust investments, net
|
$
|
63,291
|
|
|
$
|
69,696
|
|
Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some cases, some or all of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At
December 31, 2016
, none of our preneed cemetery trust investments were under-funded.
Earnings from our preneed cemetery trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included as revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities including municipal bonds, foreign debt, corporate debt, preferred stock, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the year ended
December 31, 2016
. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 11 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at
December 31, 2016
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market Value
|
Cash and money market accounts
|
1
|
|
$
|
10,852
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10,852
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
2
|
|
496
|
|
|
18
|
|
|
(4
|
)
|
|
$
|
510
|
|
Foreign debt
|
2
|
|
7,574
|
|
|
160
|
|
|
(656
|
)
|
|
7,078
|
|
Corporate debt
|
2
|
|
20,621
|
|
|
1,569
|
|
|
(1,123
|
)
|
|
21,067
|
|
Preferred stock
|
2
|
|
16,287
|
|
|
8
|
|
|
(947
|
)
|
|
15,348
|
|
Mortgage-backed securities
|
2
|
|
949
|
|
|
372
|
|
|
(4
|
)
|
|
1,317
|
|
Common stock
|
1
|
|
13,250
|
|
|
2,191
|
|
|
(1,838
|
)
|
|
13,603
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
$
|
1,223
|
|
|
107
|
|
|
—
|
|
|
$
|
1,330
|
|
Trust securities
|
|
|
$
|
71,252
|
|
|
$
|
4,425
|
|
|
$
|
(4,572
|
)
|
|
$
|
71,105
|
|
Accrued investment income
|
|
|
$
|
729
|
|
|
|
|
|
|
$
|
729
|
|
Preneed cemetery trust investments
|
|
|
|
|
|
|
|
|
$
|
71,834
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
99.8
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
|
|
|
|
Due in one year or less
|
$
|
198
|
|
Due in one to five years
|
6,729
|
|
Due in five to ten years
|
5,813
|
|
Thereafter
|
32,580
|
|
Total fixed income securities
|
$
|
45,320
|
|
The cost and market values associated with preneed cemetery trust investments at
December 31, 2015
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market Value
|
Cash and money market accounts
|
1
|
|
$
|
8,296
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
8,296
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
2
|
|
458
|
|
|
—
|
|
|
(63
|
)
|
|
$
|
395
|
|
Foreign debt
|
2
|
|
4,803
|
|
|
—
|
|
|
(695
|
)
|
|
4,108
|
|
Corporate debt
|
2
|
|
22,968
|
|
|
85
|
|
|
(4,279
|
)
|
|
18,774
|
|
Preferred stock
|
2
|
|
16,236
|
|
|
29
|
|
|
(885
|
)
|
|
15,380
|
|
Mortgage-backed securities
|
2
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Common stock
|
1
|
|
20,387
|
|
|
682
|
|
|
(3,161
|
)
|
|
17,908
|
|
Trust securities
|
|
|
$
|
73,148
|
|
|
$
|
796
|
|
|
$
|
(9,083
|
)
|
|
$
|
64,861
|
|
Accrued investment income
|
|
|
$
|
625
|
|
|
|
|
|
|
$
|
625
|
|
Preneed cemetery trust investments
|
|
|
|
|
|
|
|
|
$
|
65,486
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
88.7
|
%
|
We determine whether or not the assets in the preneed cemetery trust investments have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in
Deferred preneed cemetery receipts held in trust
on our Consolidated Balance Sheets. For the years ended
December 31, 2015
and
2016
, we recorded a
$0.7 million
and
$0.9 million
impairment for other-than-temporary declines in fair value related to unrealized losses on certain investments, respectively. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to the preneed contracts and the services are performed or the merchandise is delivered causing the contract to be withdrawn from the trust in accordance with state regulations.
At
December 31, 2016
, we had certain investments within our preneed cemetery trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our cemetery merchandise and service trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2016
are shown in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
$
|
228
|
|
|
$
|
(4
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
228
|
|
|
$
|
(4
|
)
|
Foreign debt
|
2,523
|
|
|
(180
|
)
|
|
2,868
|
|
|
(475
|
)
|
|
5,391
|
|
|
(655
|
)
|
Corporate debt
|
6,939
|
|
|
(233
|
)
|
|
2,168
|
|
|
(890
|
)
|
|
9,107
|
|
|
(1,123
|
)
|
Preferred stock
|
3,217
|
|
|
(121
|
)
|
|
11,635
|
|
|
(826
|
)
|
|
14,852
|
|
|
(947
|
)
|
Mortgage-backed securities
|
51
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
51
|
|
|
(5
|
)
|
Common stock
|
2,608
|
|
|
(202
|
)
|
|
3,385
|
|
|
(1,636
|
)
|
|
5,993
|
|
|
(1,838
|
)
|
Total temporary impaired securities
|
$
|
15,566
|
|
|
$
|
(745
|
)
|
|
$
|
20,056
|
|
|
$
|
(3,827
|
)
|
|
$
|
35,622
|
|
|
$
|
(4,572
|
)
|
Our cemetery merchandise and service trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2015
are shown in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
$
|
395
|
|
|
$
|
(63
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
395
|
|
|
$
|
(63
|
)
|
Foreign debt
|
3,680
|
|
|
(384
|
)
|
|
406
|
|
|
(312
|
)
|
|
4,086
|
|
|
(696
|
)
|
Corporate debt
|
14,468
|
|
|
(2,992
|
)
|
|
3,056
|
|
|
(1,287
|
)
|
|
17,524
|
|
|
(4,279
|
)
|
Preferred stock
|
10,285
|
|
|
(436
|
)
|
|
5,168
|
|
|
(448
|
)
|
|
15,453
|
|
|
(884
|
)
|
Common stock
|
12,029
|
|
|
(1,989
|
)
|
|
3,564
|
|
|
(1,172
|
)
|
|
15,593
|
|
|
(3,161
|
)
|
Total temporary impaired securities
|
$
|
40,857
|
|
|
$
|
(5,864
|
)
|
|
$
|
12,194
|
|
|
$
|
(3,219
|
)
|
|
$
|
53,051
|
|
|
$
|
(9,083
|
)
|
Preneed cemetery trust investment security transactions recorded in
Interest expense
on our Consolidated Statements of Operations for the years ended
December 31, 2014
,
2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Investment income
|
$
|
2,840
|
|
|
$
|
2,562
|
|
|
$
|
2,250
|
|
Realized gains
|
5,712
|
|
|
2,952
|
|
|
2,141
|
|
Realized losses
|
(2,789
|
)
|
|
(3,671
|
)
|
|
(6,559
|
)
|
Expenses and taxes
|
(1,716
|
)
|
|
(1,790
|
)
|
|
(1,266
|
)
|
Decrease (increase) in deferred preneed cemetery receipts held in trust
|
(4,047
|
)
|
|
(53
|
)
|
|
3,434
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Purchases and sales of investments in the preneed cemetery trusts for the years ended
December 31, 2014
,
2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Purchases
|
$
|
(53,443
|
)
|
|
$
|
(26,757
|
)
|
|
$
|
(25,643
|
)
|
Sales
|
58,022
|
|
|
23,141
|
|
|
25,846
|
|
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less amounts not required by law to be deposited into trust. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of
Preneed funeral trust investments
on our Consolidated Balance Sheets at
December 31, 2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
Preneed funeral trust investments, at market value
|
$
|
88,444
|
|
|
$
|
91,980
|
|
Less: allowance for contract cancellation
|
(2,891
|
)
|
|
(2,740
|
)
|
Preneed funeral trust investments, net
|
$
|
85,553
|
|
|
$
|
89,240
|
|
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At
December 31, 2016
, none of our preneed funeral trust investments were under-funded.
Earnings from our preneed funeral trust investments are recognized in revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities including U.S. treasury debt, municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no other transfers between Levels 1 and 2 for the year ended
December 31, 2016
. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 11 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The cost and fair market values associated with preneed funeral trust investments at
December 31, 2016
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market Value
|
Cash and money market accounts
|
1
|
|
$
|
22,787
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
22,787
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. treasury debt
|
1
|
|
1,491
|
|
|
21
|
|
|
(10
|
)
|
|
1,502
|
|
Municipal bonds
|
2
|
|
447
|
|
|
17
|
|
|
(4
|
)
|
|
460
|
|
Foreign debt
|
2
|
|
7,692
|
|
|
170
|
|
|
(677
|
)
|
|
7,185
|
|
Corporate debt
|
2
|
|
21,454
|
|
|
1,566
|
|
|
(1,134
|
)
|
|
21,886
|
|
Preferred stock
|
2
|
|
17,037
|
|
|
64
|
|
|
(970
|
)
|
|
16,131
|
|
Mortgage-backed securities
|
2
|
|
1,165
|
|
|
400
|
|
|
(5
|
)
|
|
1,560
|
|
Common stock
|
1
|
|
13,675
|
|
|
2,256
|
|
|
(1,850
|
)
|
|
14,081
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
2,124
|
|
|
115
|
|
|
(66
|
)
|
|
2,173
|
|
Other investments
|
2
|
|
3,463
|
|
|
—
|
|
|
—
|
|
|
3,463
|
|
Trust securities
|
|
|
$
|
91,335
|
|
|
$
|
4,609
|
|
|
$
|
(4,716
|
)
|
|
$
|
91,228
|
|
Accrued investment income
|
|
|
$
|
752
|
|
|
|
|
|
|
$
|
752
|
|
Preneed funeral trust investments
|
|
|
|
|
|
|
|
|
$
|
91,980
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
99.9
|
%
|
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
|
|
|
|
Due in one year or less
|
$
|
212
|
|
Due in one to five years
|
8,105
|
|
Due in five to ten years
|
6,276
|
|
Thereafter
|
34,131
|
|
Total fixed income securities
|
$
|
48,724
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The cost and market values associated with preneed funeral trust investments at
December 31, 2015
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market Value
|
Cash and money market accounts
|
1
|
|
$
|
21,458
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
21,458
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. treasury debt
|
1
|
|
1,492
|
|
|
24
|
|
|
(12
|
)
|
|
1,504
|
|
Municipal bonds
|
2
|
|
478
|
|
|
—
|
|
|
(66
|
)
|
|
412
|
|
Foreign debt
|
2
|
|
4,938
|
|
|
—
|
|
|
(711
|
)
|
|
4,227
|
|
Corporate debt
|
2
|
|
24,787
|
|
|
133
|
|
|
(4,711
|
)
|
|
20,209
|
|
Preferred stock
|
2
|
|
17,496
|
|
|
158
|
|
|
(914
|
)
|
|
16,740
|
|
Mortgage-backed securities
|
2
|
|
273
|
|
|
4
|
|
|
(4
|
)
|
|
273
|
|
Common stock
|
1
|
|
20,864
|
|
|
738
|
|
|
(3,114
|
)
|
|
18,488
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
959
|
|
|
—
|
|
|
(82
|
)
|
|
877
|
|
Other investments
|
2
|
|
3,598
|
|
|
—
|
|
|
(30
|
)
|
|
3,568
|
|
Trust securities
|
|
|
$
|
96,343
|
|
|
$
|
1,057
|
|
|
$
|
(9,644
|
)
|
|
$
|
87,756
|
|
Accrued investment income
|
|
|
$
|
688
|
|
|
|
|
|
|
$
|
688
|
|
Preneed funeral trust investments
|
|
|
|
|
|
|
|
|
$
|
88,444
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
91.1
|
%
|
We determine whether or not the assets in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction to
Deferred preneed funeral receipts held in trust
on our Consolidated Balance Sheets. For the years ended
December 31, 2015
and
2016
, we recorded a
$0.6 million
and
$0.9 million
impairment for other-than-temporary declines in fair value related to unrealized losses on certain investments, respectively. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered causing the contract to be withdrawn from the trust in accordance with state regulations.
At
December 31, 2016
, we had certain investments within our preneed funeral trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2016
are shown the the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. debt
|
$
|
834
|
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
834
|
|
|
$
|
(10
|
)
|
Municipal bonds
|
244
|
|
|
(5
|
)
|
|
—
|
|
|
—
|
|
|
244
|
|
|
(5
|
)
|
Foreign debt
|
2,654
|
|
|
(186
|
)
|
|
2,905
|
|
|
(490
|
)
|
|
5,559
|
|
|
(676
|
)
|
Corporate debt
|
6,977
|
|
|
(215
|
)
|
|
2,234
|
|
|
(919
|
)
|
|
9,211
|
|
|
(1,134
|
)
|
Preferred stock
|
3,420
|
|
|
(128
|
)
|
|
11,750
|
|
|
(842
|
)
|
|
15,170
|
|
|
(970
|
)
|
Mortgage-backed securities
|
55
|
|
|
(5
|
)
|
|
11
|
|
|
(1
|
)
|
|
66
|
|
|
(6
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
2,795
|
|
|
(216
|
)
|
|
3,390
|
|
|
(1,634
|
)
|
|
6,185
|
|
|
(1,850
|
)
|
Equity and other
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Fixed income
|
97
|
|
|
(7
|
)
|
|
644
|
|
|
(58
|
)
|
|
741
|
|
|
(65
|
)
|
Other investments
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total temporary impaired securities
|
$
|
17,076
|
|
|
$
|
(772
|
)
|
|
$
|
20,934
|
|
|
$
|
(3,944
|
)
|
|
$
|
38,010
|
|
|
$
|
(4,716
|
)
|
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2015
are shown the the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. debt
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,504
|
|
|
$
|
(12
|
)
|
|
$
|
1,504
|
|
|
$
|
(12
|
)
|
Municipal bonds
|
413
|
|
|
(66
|
)
|
|
—
|
|
|
—
|
|
|
413
|
|
|
(66
|
)
|
Foreign debt
|
3,763
|
|
|
(392
|
)
|
|
416
|
|
|
(319
|
)
|
|
4,179
|
|
|
(711
|
)
|
Corporate debt
|
15,929
|
|
|
(3,294
|
)
|
|
3,364
|
|
|
(1,417
|
)
|
|
19,293
|
|
|
(4,711
|
)
|
Preferred stock
|
10,623
|
|
|
(451
|
)
|
|
5,338
|
|
|
(463
|
)
|
|
15,961
|
|
|
(914
|
)
|
Mortgage-backed securities
|
—
|
|
|
—
|
|
|
272
|
|
|
(4
|
)
|
|
272
|
|
|
(4
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
11,848
|
|
|
(1,959
|
)
|
|
3,510
|
|
|
(1,154
|
)
|
|
15,358
|
|
|
(3,113
|
)
|
Fixed income
|
1
|
|
|
—
|
|
|
876
|
|
|
(82
|
)
|
|
877
|
|
|
(82
|
)
|
Other investments
|
—
|
|
|
—
|
|
|
42
|
|
|
(31
|
)
|
|
42
|
|
|
(31
|
)
|
Total temporary impaired securities
|
$
|
42,577
|
|
|
$
|
(6,162
|
)
|
|
$
|
15,322
|
|
|
$
|
(3,482
|
)
|
|
$
|
57,899
|
|
|
$
|
(9,644
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Preneed funeral trust investment security transactions recorded in
Interest expense
on our Consolidated Statements of Operations for the years ended
December 31, 2014
,
2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Investment income
|
$
|
3,065
|
|
|
$
|
2,819
|
|
|
$
|
2,344
|
|
Realized gains
|
7,184
|
|
|
3,931
|
|
|
2,287
|
|
Realized losses
|
(2,313
|
)
|
|
(3,979
|
)
|
|
(6,642
|
)
|
Expenses and taxes
|
(1,470
|
)
|
|
(988
|
)
|
|
(1,174
|
)
|
Decrease (increase) in deferred preneed funeral receipts held in trust
|
(6,466
|
)
|
|
(1,783
|
)
|
|
3,185
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchases and sales of investments in the preneed funeral trusts for the years ended
December 31, 2014
,
2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Purchases
|
$
|
(57,297
|
)
|
|
$
|
(26,021
|
)
|
|
$
|
(26,457
|
)
|
Sales
|
60,352
|
|
|
42,582
|
|
|
27,425
|
|
7. PRENEED CEMETERY RECEIVABLES
Preneed sales of cemetery interment rights and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to
five
years with such interest income reflected as
Preneed cemetery finance charges
. In substantially all cases, we receive an initial down payment at the time the contract is signed. At
December 31, 2016
, our total financed preneed receivables were
$39.0 million
, of which
$28.7 million
and
$10.3 million
were for cemetery interment rights and for merchandise and services, respectively. These amounts are presented on our consolidated balance sheet as
$11.4 million
in
Accounts receivable
and
$27.6 million
within
Preneed receivables
and exclude unearned finance charges and allowance for contract cancellations. At
December 31, 2015
, our total financed preneed receivables were
$36.5 million
, of which
$26.8 million
and
$9.7 million
were for cemetery interment rights and for merchandise and services, respectively. These amounts are presented on our consolidated balance sheet as
$11.2 million
in
Accounts receivable
and
$25.3 million
within
Preneed receivables
and exclude unearned finance charges and allowance for contract cancellations. The unearned finance charges associated with these receivables was
$5.2 million
and
$5.7 million
at
December 31, 2015
and
2016
, respectively.
We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at
15
days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve
100%
of the receivables on contracts in which the revenue has been recognized and payments are
90
days past due or more, which was approximately
4.7%
of the total receivables on recognized sales at
December 31, 2016
. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the years ending
December 31, 2015
and
2016
, the changes to the allowance for contract cancellations were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
As of December 31,
|
|
2015
|
|
2016
|
Beginning balance
|
$
|
2,140
|
|
|
$
|
1,765
|
|
Write-offs and cancellations
|
(1,462
|
)
|
|
(1,332
|
)
|
Provision
|
1,087
|
|
|
1,428
|
|
Ending balance
|
$
|
1,765
|
|
|
$
|
1,861
|
|
The aging of past due financing receivables as of
December 31, 2016
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60
Past Due
|
|
61-90
Past Due
|
|
91-120
Past Due
|
|
>120
Past Due
|
|
Total Past
Due
|
|
Current
|
|
Total Financing
Receivables
|
Recognized revenue
|
$
|
674
|
|
|
$
|
356
|
|
|
$
|
233
|
|
|
$
|
1,086
|
|
|
$
|
2,349
|
|
|
$
|
26,003
|
|
|
$
|
28,352
|
|
Deferred revenue
|
310
|
|
|
112
|
|
|
86
|
|
|
316
|
|
|
824
|
|
|
9,810
|
|
|
10,634
|
|
Total contracts
|
$
|
984
|
|
|
$
|
468
|
|
|
$
|
319
|
|
|
$
|
1,402
|
|
|
$
|
3,173
|
|
|
$
|
35,813
|
|
|
$
|
38,986
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The aging of past due financing receivables as of
December 31, 2015
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
31-60
Past Due
|
|
61-90
Past Due
|
|
91-120
Past Due
|
|
>120
Past Due
|
|
Total Past
Due
|
|
Current
|
|
Total Financing
Receivables
|
Recognized revenue
|
$
|
758
|
|
|
$
|
446
|
|
|
$
|
225
|
|
|
$
|
1,061
|
|
|
$
|
2,490
|
|
|
$
|
22,742
|
|
|
$
|
25,232
|
|
Deferred revenue
|
273
|
|
|
207
|
|
|
103
|
|
|
335
|
|
|
918
|
|
|
10,380
|
|
|
11,298
|
|
Total contracts
|
$
|
1,031
|
|
|
$
|
653
|
|
|
$
|
328
|
|
|
$
|
1,396
|
|
|
$
|
3,408
|
|
|
$
|
33,122
|
|
|
$
|
36,530
|
|
8. RECEIVABLES FROM PRENEED TRUSTS
The receivables from preneed trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest (
less than 50%
) in the trust assets. We account for these investments at cost. As of
December 31, 2015
and
2016
, receivables from preneed trusts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
Preneed trust funds, at cost
|
$
|
13,963
|
|
|
$
|
14,658
|
|
Less: allowance for contract cancellation
|
(419
|
)
|
|
(440
|
)
|
Receivables from preneed trusts, net
|
$
|
13,544
|
|
|
$
|
14,218
|
|
The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at
December 31, 2015
and
2016
. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes unrealized gains and losses on trust assets.
The composition of the preneed trust funds at
December 31, 2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Historical
Cost Basis
|
|
Fair Value
|
As of December 31, 2016
|
|
|
|
Cash and cash equivalents
|
$
|
3,378
|
|
|
$
|
3,378
|
|
Fixed income investments
|
8,809
|
|
|
8,809
|
|
Mutual funds and common stocks
|
2,455
|
|
|
2,463
|
|
Annuities
|
16
|
|
|
16
|
|
Total
|
$
|
14,658
|
|
|
$
|
14,666
|
|
The composition of the preneed trust funds at
December 31, 2015
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Historical
Cost Basis
|
|
Fair Value
|
As of December 31, 2015
|
|
|
|
Cash and cash equivalents
|
$
|
2,898
|
|
|
$
|
2,898
|
|
Fixed income investments
|
8,423
|
|
|
8,426
|
|
Mutual funds and common stocks
|
2,626
|
|
|
2,625
|
|
Annuities
|
16
|
|
|
16
|
|
Total
|
$
|
13,963
|
|
|
$
|
13,965
|
|
9. CONTRACTS SECURED BY INSURANCE
Certain preneed funeral contracts are secured by life insurance contracts. Generally, the proceeds of the life insurance policies have been assigned to us and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the preneed contract for services and merchandise. Preneed funeral contracts secured by insurance policies totaled
$324.0 million
and
$357.4 million
at
December 31, 2015
and
2016
, respectively, and are not included on our Consolidated Balance Sheets.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus
on our Consolidated Balance Sheets represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of
December 31, 2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
|
December 31, 2016
|
|
Trust assets, at market value
|
$
|
43,127
|
|
|
$
|
46,889
|
|
Obligations due from trust
|
(711
|
)
|
|
(599
|
)
|
Care trusts’ corpus
|
$
|
42,416
|
|
|
$
|
46,290
|
|
We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in
Revenues: Cemetery
. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At
December 31, 2016
, none of our cemetery perpetual care trust investments were under-funded.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are municipal bonds, foreign debt, corporate debt, preferred stock, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. There were no transfers between Levels 1 and 2 for the year ended
December 31, 2016
. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 11 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at
December 31, 2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market Value
|
Cash and money market accounts
|
1
|
|
$
|
6,522
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
6,522
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
2
|
|
365
|
|
|
13
|
|
|
(3
|
)
|
|
375
|
|
Foreign debt
|
2
|
|
5,100
|
|
|
99
|
|
|
(435
|
)
|
|
4,764
|
|
Corporate debt
|
2
|
|
13,715
|
|
|
966
|
|
|
(821
|
)
|
|
13,860
|
|
Preferred stock
|
2
|
|
11,323
|
|
|
5
|
|
|
(664
|
)
|
|
10,664
|
|
Mortgage-backed securities
|
2
|
|
569
|
|
|
223
|
|
|
(3
|
)
|
|
789
|
|
Common stock
|
1
|
|
8,259
|
|
|
1,382
|
|
|
(1,146
|
)
|
|
8,495
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
855
|
|
|
76
|
|
|
—
|
|
|
931
|
|
Trust securities
|
|
|
$
|
46,708
|
|
|
$
|
2,764
|
|
|
$
|
(3,072
|
)
|
|
$
|
46,400
|
|
Accrued investment income
|
|
|
$
|
489
|
|
|
|
|
|
|
$
|
489
|
|
Cemetery perpetual care investments
|
|
|
|
|
|
|
|
|
$
|
46,889
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
99.3
|
%
|
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
|
|
|
|
Due in one year or less
|
$
|
119
|
|
Due in one to five years
|
4,073
|
|
Due in five to ten years
|
4,083
|
|
Thereafter
|
22,177
|
|
Total fixed income securities
|
$
|
30,452
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table reflects the cost and market values associated with the trust investments held in perpetual care trust funds at
December 31, 2015
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market Value
|
Cash and money market accounts
|
1
|
|
$
|
5,472
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,472
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
2
|
|
325
|
|
|
—
|
|
|
(45
|
)
|
|
280
|
|
Foreign debt
|
2
|
|
3,232
|
|
|
—
|
|
|
(480
|
)
|
|
2,752
|
|
Corporate debt
|
2
|
|
16,216
|
|
|
57
|
|
|
(3,094
|
)
|
|
13,179
|
|
Preferred stock
|
2
|
|
11,263
|
|
|
20
|
|
|
(611
|
)
|
|
10,672
|
|
Common stock
|
1
|
|
11,945
|
|
|
393
|
|
|
(1,939
|
)
|
|
10,399
|
|
Trust securities
|
|
|
$
|
48,453
|
|
|
$
|
470
|
|
|
$
|
(6,169
|
)
|
|
$
|
42,754
|
|
Accrued investment income
|
|
|
$
|
373
|
|
|
|
|
|
|
$
|
373
|
|
Cemetery perpetual care investments
|
|
|
|
|
|
|
|
|
$
|
43,127
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
88.2
|
%
|
We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to
Care trusts’ corpus
. For both years ended
December 31, 2015
and
2016
, we recorded a
$0.4 million
impairment charge for other-than-temporary declines in fair value related to unrealized losses on certain investments.
At
December 31, 2016
, we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investments losses are temporary in nature.
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2016
are shown in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
$
|
137
|
|
|
$
|
(3
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
137
|
|
|
$
|
(3
|
)
|
Foreign debt
|
1,619
|
|
|
(120
|
)
|
|
1,961
|
|
|
(315
|
)
|
|
3,580
|
|
|
(435
|
)
|
Corporate debt
|
4,679
|
|
|
(152
|
)
|
|
1,439
|
|
|
(669
|
)
|
|
6,118
|
|
|
(821
|
)
|
Preferred stock
|
2,038
|
|
|
(77
|
)
|
|
8,329
|
|
|
(587
|
)
|
|
10,367
|
|
|
(664
|
)
|
Mortgage-backed securities
|
31
|
|
|
(3
|
)
|
|
—
|
|
|
—
|
|
|
31
|
|
|
(3
|
)
|
Common stock
|
1,563
|
|
|
(121
|
)
|
|
2,004
|
|
|
(1,025
|
)
|
|
3,567
|
|
|
(1,146
|
)
|
Total temporary impaired securities
|
$
|
10,067
|
|
|
$
|
(476
|
)
|
|
$
|
13,733
|
|
|
$
|
(2,596
|
)
|
|
$
|
23,800
|
|
|
$
|
(3,072
|
)
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2015
are shown in the following tables (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
In Loss Position Less than 12 months
|
|
In Loss Position Greater than 12 months
|
|
Total
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
|
Fair market value
|
|
Unrealized Losses
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Municipal bonds
|
$
|
280
|
|
|
$
|
(45
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
280
|
|
|
$
|
(45
|
)
|
Foreign debt
|
2,541
|
|
|
(265
|
)
|
|
281
|
|
|
(215
|
)
|
|
2,822
|
|
|
(480
|
)
|
Corporate debt
|
10,463
|
|
|
(2,164
|
)
|
|
2,210
|
|
|
(931
|
)
|
|
12,673
|
|
|
(3,095
|
)
|
Preferred stock
|
7,100
|
|
|
(301
|
)
|
|
3,568
|
|
|
(309
|
)
|
|
10,668
|
|
|
(610
|
)
|
Common stock
|
7,379
|
|
|
(1,220
|
)
|
|
2,186
|
|
|
(719
|
)
|
|
9,565
|
|
|
(1,939
|
)
|
Total temporary impaired securities
|
$
|
27,763
|
|
|
$
|
(3,995
|
)
|
|
$
|
8,245
|
|
|
$
|
(2,174
|
)
|
|
$
|
36,008
|
|
|
$
|
(6,169
|
)
|
Perpetual care trust investment security transactions recorded in
Interest expense
on our Consolidated Statements of Operations for the years ended
December 31, 2014
,
2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Realized gains
|
$
|
3,468
|
|
|
$
|
1,773
|
|
|
$
|
872
|
|
Realized losses
|
(1,748
|
)
|
|
(2,431
|
)
|
|
(3,069
|
)
|
Decrease (increase) in Care trusts’ corpus
|
(1,720
|
)
|
|
658
|
|
|
2,197
|
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Perpetual care trust investment security transactions recorded in
Revenues: Cemetery
for the years ended
December 31, 2014
,
2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Investment income
|
$
|
4,713
|
|
|
$
|
5,315
|
|
|
$
|
6,451
|
|
Realized gains (losses), net
|
1,112
|
|
|
436
|
|
|
(434
|
)
|
Total
|
$
|
5,825
|
|
|
$
|
5,751
|
|
|
$
|
6,017
|
|
Purchases and sales of investments in the perpetual care trusts for the years ended
December 31, 2014
,
2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Purchases
|
$
|
(38,413
|
)
|
|
$
|
(16,694
|
)
|
|
$
|
(16,546
|
)
|
Sales
|
35,402
|
|
|
14,710
|
|
|
16,534
|
|
11. FAIR VALUE MEASUREMENTS
Fair value is defined as the price that would be received from the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date applicable for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date.
We evaluated our financial assets and liabilities for those financial assets and liabilities that met the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our long-term debt and Credit Facility (as defined in Note 13) are classified within Level 2 of the Fair Value Measurements hierarchy. The fair values of the long-term debt and Credit Facility approximate the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. The
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
fair value of the Convertible Notes issued in March 2014 was approximately
$194.6 million
at
December 31, 2016
based on the last traded or broker quoted price. We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investments categories on our Consolidated Balance Sheets as having met the criteria for fair value measurement.
The following three-level valuation hierarchy based upon the transparency of inputs is utilized in the measurement and valuation of financial assets or liabilities as of the measurement date:
|
|
•
|
Level 1—Fair value of securities based on unadjusted quoted prices for identical assets or liabilities in active markets. Our investments classified as Level 1 securities include cash, common stock and U.S. treasury debt;
|
|
|
•
|
Level 2—Fair value of securities estimated based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation. These inputs include interest rates, yield curves, credit risk, prepayment speeds, rating and tax-exempt status. Our investments classified as Level 2 securities include state obligations, municipal bonds, corporate debt, preferred stocks, foreign debt, mortgage-backed securities, fixed income mutual funds and other investments.
|
|
|
•
|
Level 3—Unobservable inputs based upon the reporting entity’s internally developed assumptions, which market participants would use in pricing the asset or liability. As of
December 31, 2015
and
2016
, we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.
|
We account for our investments as available-for-sale and measure them at fair value under standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities. See Notes 6 and 10 to our Consolidated Financial Statements herein for the fair value hierarchy levels of our trust investments.
12. INTANGIBLE AND OTHER NON-CURRENT ASSETS
Intangible and other non-current assets at
December 31, 2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2016
|
Prepaid agreements not-to-compete, net of accumulated amortization of $5,404 and $5,501, respectively
|
$
|
1,912
|
|
|
$
|
3,244
|
|
Tradenames
|
8,856
|
|
|
11,663
|
|
Other
|
210
|
|
|
50
|
|
Intangible and other non-current assets
|
$
|
10,978
|
|
|
$
|
14,957
|
|
Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from
one
to
ten
years. Amortization expense was approximately
$349,000
,
$300,000
and
$435,000
for the years ended
December 31, 2014
,
2015
and
2016
, respectively. During the year ended
December 31, 2016
, we increased prepaid agreements not-to-compete by
$1.6 million
related to our 2016 acquisitions described in Note 3 to the Consolidated Financial Statements included herein.
Our tradenames have indefinite lives and therefore are not amortized. During the year ended
December 31, 2016
, we increased tradenames by approximately
$3.0 million
related to our 2016 acquisitions described in Note 3 to the Consolidated Financial Statements included herein. We recorded an impairment to tradenames of
$145,000
related to a funeral home business held for sale at
September 30, 2016
, as the carrying value exceeded its fair value. The impairment was recorded in
Other, net
on our Consolidated Statements of Operations. See Note 1 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our annual indefinite-lived intangible asset impairment test.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
13. LONG-TERM DEBT
Our long-term debt consisted of the following at
December 31, 2015
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2016
|
Revolving credit facility, secured, floating rate
|
$
|
92,600
|
|
|
$
|
67,700
|
|
Term loan, secured, floating rate
|
110,937
|
|
|
138,750
|
|
Acquisition debt
|
4,929
|
|
|
12,245
|
|
Debt issuance costs, net of accumulated amortization of $3,246 and $4,138, respectively
|
(1,445
|
)
|
|
(1,270
|
)
|
Less: current portion
|
(12,012
|
)
|
|
(13,021
|
)
|
Total long-term debt, net of current portion
|
$
|
195,009
|
|
|
$
|
204,404
|
|
As of
December 31, 2016
, we had a
$300 million
secured bank credit facility with Bank of America, N.A. as Administrative Agent (the “Credit Agreement”), comprised of a
$150 million
revolving credit facility and a
$150 million
term loan, (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional
$75 million
in revolving loans, subject to certain conditions. The Credit Facility matures on
February 9, 2021
and is collateralized by all personal property and funeral home real property in certain states.
On February 9, 2016, we entered into a seventh amendment (the “Seventh Amendment”) to our Credit Facility. The Seventh Amendment resulted in, among other things, (i) reducing our LIBOR based variable interest rate
37.5
basis points, (ii) extending the maturity so that the Credit Agreement will mature at the earlier of (a) any date that is
91 days
prior to the maturity of any subordinated debt (including the
$143.75 million
in principal amount of the Convertible Notes, as defined in Note 12 to the Consolidated Financial Statements included herein) or (b) February 9, 2021, (iii) increasing and funding the term loan so that
$150 million
was outstanding upon the effectiveness of the Seventh Amendment, (iv) reducing the size of the revolver to
$150 million
, (v) increasing the accordion to
$75 million
and (vi) updating the amortization payments for the term loan facility so that the borrowings under the term loan facility are subject to amortization payments of (a)
$2.81 million
at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2016 through the fiscal quarter ending December 31, 2017, (b)
$3.75 million
at the end of each fiscal quarter beginning with the fiscal quarter ending March 31, 2018 through the fiscal quarter ending March 31, 2020 and (c)
$4.69 million
at the end of each fiscal quarter beginning with the fiscal quarter ending June 30, 2020 through the fiscal quarter ending December 31, 2020. In connection with the Seventh Amendment, we recognized a loss of
$0.6 million
to write-off the related unamortized debt issuance costs.
As of
December 31, 2016
, we had outstanding borrowings under the revolving credit facility of
$67.7 million
and approximately
$138.8 million
was outstanding on the term loan. We have one letter of credit issued and outstanding under the Credit Facility at
December 31, 2016
. The letter of credit was issued on November 30, 2016 for approximately
$2.0 million
, bears interest at
2.125%
and will expire on November 27, 2017. Outstanding borrowings under the Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon the Company’s leverage ratio. As of
December 31, 2016
, the prime rate margin was equivalent to
1.125%
and the LIBOR margin was
2.125%
. The weighted average interest rate on the Credit Facility for the year ended
December 31, 2016
was
2.8%
.
We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Agreement. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Agreement.
We were in compliance with the covenants contained in our Credit Agreement as of
December 31, 2015
and
2016
. The Credit Agreement contains key ratios that we must comply with including a requirement to maintain a leverage ratio of no more than
3.50
to
1.00
and a covenant to maintain a fixed charge coverage ratio of no less than
1.20
to
1.00
. As of
December 31, 2016
, the leverage ratio was
2.92
to
1.00
and the fixed charge coverage ratio was
2.21
to
1.00
.
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear interest at
0%
and are discounted at imputed interest rates ranging from
7.3%
to
10.0%
. We have one promissory note that bears interest at a rate of
8.0%
. Original maturities range from
five
to
twenty
years. The increase in acquisition debt was primarily related to the
$8.9 million
of deferred purchase price payments for the funeral home businesses acquired in 2016.
Beginning January 1, 2016, debt issuance costs are retroactively reflected as a direct deduction from the carrying value of the related debt liability (refer herein to Note 1 to the Consolidated Financial Statements). Amortization of debt issuance costs related to our Credit Facility was approximately
$0.5 million
and
$0.4 million
for the years ended
December 31, 2015
and
2016
,
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
respectively. Debt issuance costs are being amortized over the term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.
The aggregate maturities of our long-term debt for the next five years subsequent to
December 31, 2016
and thereafter are as follows (in thousands):
|
|
|
|
|
Years ending December 31,
|
|
2017
|
$
|
13,021
|
|
2018
|
16,854
|
|
2019
|
16,918
|
|
2020
|
19,042
|
|
2021
|
148,379
|
|
2022 and thereafter
|
4,481
|
|
|
$
|
218,695
|
|
14. CONVERTIBLE SUBORDINATED NOTES
On March 19, 2014, we issued
$143.75 million
aggregate principal amount of
2.75%
convertible subordinated notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes have not been registered under the Securities Act of 1933, as amended (the “Securities Act”), and were offered only to “qualified institutional buyers” in compliance with Rule 144A under the Securities Act. The Convertible Notes are governed by an indenture dated as of March 19, 2014 between Wilmington Trust, National Association, as Trustee, and us (the “Indenture”). The Convertible Notes bear interest at
2.75%
. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.
The Convertible Notes are general unsecured obligations and are subordinated in the right of payment to all of our existing and future senior indebtedness and equal in right of payment with our other existing and future subordinated indebtedness. The initial conversion rate of the Convertible Notes was
44.3169
shares of our common stock per
$1,000
principal amount of the Convertible Notes, equivalent to an initial conversion price of approximately
$22.56
per share of common stock. The conversion rate is subject to adjustment upon the occurrence of certain events, as described in the Indenture. During the year ended
December 31, 2016
, an adjustment to the conversion rate of the Convertible Notes was triggered when our Board increased the dividends declared per common share from
$0.025
per share to
$0.05
per share. At
December 31, 2016
, the adjusted conversion rate of the Convertible Notes is
44.4108
shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately
$22.52
per share of common stock.
The Convertible Notes mature on
March 15, 2021
, unless earlier converted or purchased by us. The conversion option of the Convertible Notes is not an embedded derivative. Holders of the Convertible Notes may convert their Convertible Notes at their option at any time prior to December 15, 2020, if certain conditions are met. We may not redeem the Convertible Notes prior to maturity. However, in the event of a fundamental change (as defined in the Indenture), subject to certain conditions, a holder of the Convertible Notes will have the option to require us to purchase all or a portion of its Convertible Notes for cash. The fundamental change purchase price will equal
100%
of the principal amount of the Convertible Notes to be purchased, plus any accrued and unpaid interest up to, but excluding, the fundamental change purchase date.
Beginning January 1, 2016, debt issuance costs are retroactively reflected as a direct deduction from the carrying value of the related debt liability (refer herein to Note 1 to the Consolidated Financial Statements). The unamortized discount and the unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately
50 months
of the Convertible Notes. The effective interest rate on the unamortized discount and the debt issuance costs for the years ended
December 31, 2015
and
2016
was
6.75%
and
2.75%
, respectively.
Equity issuance costs are included in APIC on our Consolidated Balance Sheets and are not amortized. Additionally, the recognition of the Convertible Notes as
two
separate components results in a basis difference associated with the liability component which represents a temporary tax difference. As a result, we recognized a deferred tax liability of
$12.7 million
related to this temporary difference which was recorded as a reduction to APIC and an increase to our deferred tax liability. The deferred tax liability is being amortized over the
seven
year term of the Convertible Notes. At
December 31, 2016
, the balance of our deferred tax liability related to our Convertible Notes was
$8.6 million
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The carrying values of the liability and equity components of the Convertible Notes at
December 31, 2015
and
2016
are reflected on our Consolidated Balance Sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2016
|
Long-term liabilities:
|
|
|
|
Principal amount
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized discount of liability component
|
(25,754
|
)
|
|
(21,887
|
)
|
Convertible Notes issuance costs, net of accumulated amortization of $858 and $1,359, respectively
|
(2,769
|
)
|
|
(2,268
|
)
|
Carrying value of the liability component
|
$
|
115,227
|
|
|
$
|
119,596
|
|
|
|
|
|
Equity component carrying value
|
$
|
17,973
|
|
|
$
|
17,973
|
|
The fair value of the Convertible Notes, which are Level 2 measurements, was approximately
$194.6 million
at
December 31, 2016
.
Interest expense on the Convertible Notes included contractual coupon interest expense of
$4.0 million
for both the years ended
December 31, 2015
and
2016
. Amortization of debt issuance costs related to our Convertible Notes was approximately
$0.5 million
for both the years ended
December 31, 2015
and
2016
. Accretion of the discount on the Convertible Notes was approximately
$3.5 million
and
$3.9 million
for the years ended
December 31, 2015
and
2016
, respectively.
The aggregate maturities of our Convertible Notes for the five years subsequent to
December 31, 2016
and thereafter are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal Maturity
|
|
Discount Amortization
|
|
Present
Value
|
Years ending December 31,
|
|
|
|
|
|
|
2017
|
|
$
|
—
|
|
|
$
|
(4,328
|
)
|
|
$
|
(4,328
|
)
|
2018
|
|
—
|
|
|
(4,844
|
)
|
|
(4,844
|
)
|
2019
|
|
—
|
|
|
(5,422
|
)
|
|
(5,422
|
)
|
2020
|
|
—
|
|
|
(6,068
|
)
|
|
(6,068
|
)
|
2021
|
|
143,750
|
|
|
(1,225
|
)
|
|
142,525
|
|
|
|
$
|
143,750
|
|
|
$
|
(21,887
|
)
|
|
$
|
121,863
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. COMMITMENTS AND CONTINGENCIES
Leases
We lease certain office facilities, certain funeral homes, vehicles and equipment under operating leases with original terms ranging from
one
to
twelve years
. Certain of these leases provide for an annual adjustment and contain options for renewal. Rent expense totaled
$6.4 million
,
$6.5 million
and
$6.1 million
for the years ended December 31,
2014
,
2015
and
2016
, respectively. Assets acquired under capital leases are included in property, plant and equipment in our accompanying Consolidated Balance Sheets in the amount of
$2.9 million
in
2015
and
$2.7 million
in
2016
, net of accumulated depreciation. Capital lease obligations are included in current and long-term debt as indicated below. At
December 31, 2016
, future minimum lease payments under non-cancelable lease agreements were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Future Minimum Lease
Payments
|
|
Operating
Leases
|
|
Capital
Leases
|
Years ending December 31,
|
|
|
|
2017
|
$
|
4,243
|
|
|
$
|
483
|
|
2018
|
2,660
|
|
|
421
|
|
2019
|
2,380
|
|
|
388
|
|
2020
|
1,840
|
|
|
334
|
|
2021
|
1,446
|
|
|
334
|
|
Thereafter
|
566
|
|
|
2,996
|
|
Total future minimum lease payments
|
$
|
13,135
|
|
|
$
|
4,956
|
|
Less: amount representing interest (rates ranging from 7.0% to 10.0%)
|
|
|
(2,080
|
)
|
Less: current portion of obligations under capital leases
|
|
|
(246
|
)
|
Long-term obligations under capital leases
|
|
|
$
|
2,630
|
|
Non-Compete, Consulting and Employment Agreements
We have various non-compete agreements with former owners and employees. These agreements are generally for
one
to
ten years
and provide for periodic future payments over the term of the agreements.
We have various consulting agreements with former owners of businesses we have acquired. Payments for such agreements are generally not made in advance. These agreements are generally for
one
to
ten years
and provide for bi-weekly or monthly payments.
We have employment agreements with certain of our executive officers and senior leadership. These agreements are generally for
three
or
four
years and provide for participation in various incentive compensation arrangements. These agreements automatically renew on an annual basis after their initial term has expired.
At
December 31, 2016
, the maximum estimated future cash commitments under these agreements with remaining commitment terms, and with original terms of more than one year, are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-Compete
|
|
Consulting
|
|
Employment
|
|
Total
|
Years ending December 31,
|
|
|
|
|
|
|
|
2017
|
$
|
2,407
|
|
|
$
|
1,509
|
|
|
$
|
1,720
|
|
|
$
|
5,636
|
|
2018
|
1,326
|
|
|
680
|
|
|
119
|
|
|
2,125
|
|
2019
|
1,111
|
|
|
439
|
|
|
—
|
|
|
1,550
|
|
2020
|
881
|
|
|
301
|
|
|
—
|
|
|
1,182
|
|
2021
|
776
|
|
|
218
|
|
|
—
|
|
|
994
|
|
Thereafter
|
1,576
|
|
|
17
|
|
|
—
|
|
|
1,593
|
|
|
$
|
8,077
|
|
|
$
|
3,164
|
|
|
$
|
1,839
|
|
|
$
|
13,080
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
401(K) Plan
We sponsor a defined contribution plan (401K) for the benefit of our employees. Matching contributions and plan administrative expenses totaled
$1.6 million
,
$1.7 million
and
$1.8 million
for
2014
,
2015
and
2016
, respectively. We do not offer any post-retirement or post-employment benefits.
Other Commitments
Effective April 30, 2016, we terminated an agreement to outsource the processing of transactions for our cemetery business and certain accounting activities. At that time, all transaction processing returned in-house and we retained most of the personnel of the service provider that resided in our home office. We believe that the costs associated with performing these formerly outsourced activities internally should, for the foreseeable future, be less than the costs we incurred under the outsourcing arrangement. For both years ended December 31,
2014
and
2015
, we incurred costs of approximately
$1.9 million
, respectively for services rendered under this agreement, of which we paid approximately
$1.0 million
, each year, with the remainder paid by the Preneed cemetery trust investments portfolio. For the year ended
December 31, 2016
, we incurred costs of approximately
$0.9 million
for services rendered under this agreement, of which we paid approximately
$0.6 million
, with the remainder paid by the Preneed cemetery trust investments portfolio.
Litigation
We are a party to various litigation matters and proceedings. 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. 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.
16. INCOME TAXES
The provision for income taxes from continuing operations for the years ended
December 31, 2014
,
2015
and
2016
consisted of (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Current:
|
|
|
|
|
|
U. S. federal provision
|
$
|
1,188
|
|
|
$
|
9,840
|
|
|
$
|
6,609
|
|
State provision
|
772
|
|
|
862
|
|
|
1,195
|
|
Total current provision
|
$
|
1,960
|
|
|
$
|
10,702
|
|
|
$
|
7,804
|
|
Deferred:
|
|
|
|
|
|
U. S. federal provision
|
$
|
5,117
|
|
|
$
|
1,928
|
|
|
$
|
3,475
|
|
State provision
|
178
|
|
|
1,107
|
|
|
1,381
|
|
Total deferred provision
|
$
|
5,295
|
|
|
$
|
3,035
|
|
|
$
|
4,856
|
|
Total income tax provision
|
$
|
7,255
|
|
|
$
|
13,737
|
|
|
$
|
12,660
|
|
A reconciliation of taxes from continuing operations calculated at the U.S. federal statutory rate to those reflected in the Consolidated Statements of Operations for the years ended
December 31, 2014
,
2015
and
2016
is as follows (dollars in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
2014
|
|
2015
|
|
2016
|
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Amount
|
|
Percent
|
|
Federal statutory rate
|
$
|
7,719
|
|
|
34.0
|
|
%
|
$
|
12,105
|
|
|
35.0
|
|
%
|
$
|
11,300
|
|
|
35.0
|
%
|
Effect of state income taxes, net of federal benefit
|
831
|
|
|
3.7
|
|
|
1,618
|
|
|
4.7
|
|
|
1,127
|
|
|
3.5
|
|
Effect of non-deductible expenses and other, net
|
583
|
|
|
2.6
|
|
|
155
|
|
|
0.4
|
|
|
213
|
|
|
0.7
|
|
Change in valuation allowance
|
(138
|
)
|
|
(0.6
|
)
|
|
(141
|
)
|
|
(0.4
|
)
|
|
20
|
|
|
0.1
|
|
Reduction for tax year 2011 federal audit
|
(1,740
|
)
|
|
(7.7
|
)
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
Total
|
$
|
7,255
|
|
|
32.0
|
|
%
|
$
|
13,737
|
|
|
39.7
|
|
%
|
$
|
12,660
|
|
|
39.3
|
%
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
On August 1, 2014, we received notification that the IRS completed its examination of our tax year ended December 31, 2011. As a result, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability by
$7.3 million
. This change resulted in a tax benefit recognized in the amount of
$1.7 million
which reduced our effective tax rate for the year ended
December 31, 2015
. The remainder of the re-measurement resulted in an increase to
Deferred tax liability
in the amount of
$5.6 million
. Additionally, we recognized a credit to interest expense of
$0.6 million
related to the settled portion of the uncertain tax position.
On August 15, 2016, we settled an open examination with the California Franchise Tax Board. As a result of paying the final assessment, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability of
$0.2 million
. On August 29, 2016, we received notification that the IRS completed its examination of our tax year ended December 31, 2013. As a result, we re-measured our tax liability for unrecognized tax benefits reflecting a reduction to our liability of
$0.6 million
, which resulted in an increase to
Deferred tax liability
in the amount of
$0.6 million
.
The following table summarizes our unrecognized tax benefit as of
December 31, 2015
and
2016
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2015
|
|
December 31, 2016
|
Unrecognized tax benefit
|
|
$
|
814
|
|
|
$
|
—
|
|
Interest accrued on unrecognized tax benefits
|
|
$
|
44
|
|
|
$
|
—
|
|
The tax effects of temporary differences from total operations that give rise to significant deferred tax assets and liabilities at
December 31, 2015
and
2016
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2015
|
|
2016
|
Deferred income tax assets:
|
|
|
|
Net operating loss carryforwards
|
$
|
2,132
|
|
|
$
|
1,947
|
|
Tax credit carryforwards
|
133
|
|
|
135
|
|
State bonus depreciation
|
993
|
|
|
373
|
|
Accrued liabilities and other
|
9,949
|
|
|
11,163
|
|
Amortization of non-compete agreements
|
897
|
|
|
1,433
|
|
Preneed liabilities, net
|
10,324
|
|
|
9,315
|
|
Total deferred income tax assets
|
24,428
|
|
|
24,366
|
|
Less valuation allowance
|
(189
|
)
|
|
(209
|
)
|
Total deferred income tax assets
|
$
|
24,239
|
|
|
$
|
24,157
|
|
Deferred income tax liabilities:
|
|
|
|
Amortization and depreciation
|
$
|
(48,318
|
)
|
|
$
|
(55,461
|
)
|
Convertible subordinated notes due 2021
|
(10,184
|
)
|
|
(8,636
|
)
|
Prepaids and other
|
(1,436
|
)
|
|
(615
|
)
|
Total deferred income tax liabilities
|
(59,938
|
)
|
|
(64,712
|
)
|
Total net deferred tax liabilities
|
$
|
(35,699
|
)
|
|
$
|
(40,555
|
)
|
Current deferred tax asset
|
$
|
4,257
|
|
|
$
|
—
|
|
Non-current deferred tax liabilities
|
(39,956
|
)
|
|
(40,555
|
)
|
Total net deferred tax liabilities
|
$
|
(35,699
|
)
|
|
$
|
(40,555
|
)
|
Beginning January 1, 2016, we adopted the FASB’s guidance on Balance Sheet Classification of Deferred Taxes, which simplifies deferred tax reporting on the balance sheet and requires all deferred tax assets and liabilities, along with related valuation allowances will be classified as non-current on the balance sheet. The guidance was applied prospectively and all deferred tax assets and liabilities, along with our valuation allowance are now classified as non-current at
December 31, 2016
.
At December 31, 2015, our current deferred tax asset is included in
Other current assets
and the non-current deferred tax liability is disclosed on a separate line item on our Consolidated Balance Sheets. At December 31, 2016, our total net deferred tax liability is disclosed as a separate line item on our Consolidated Balance Sheets and is classified as a non-current liability.
We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized. We recognized a net increase of approximately
$20,000
in our valuation allowance during
2016
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
For federal income tax reporting purposes, we have no net operating loss carryforwards. For state reporting purposes, we have approximately
$43.2 million
of net operating loss carryforwards that will expire between 2017 and 2036, if not utilized. Based on management’s assessment of the various state net operating losses, it was determined that it is more likely than not that we will be able to realize tax benefits on some portion of the amount of the state losses. The valuation allowance at
December 31, 2016
was attributable to the deferred tax asset related to a portion of the state operating losses.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on the Consolidated Balance Sheets. During 2016, the re-measurement of the tax liability for unrecognized tax benefits arising from the finalization of our IRS and California Franchise Tax Board exams, resulted in an
$0.8 million
reduction to our liability related to uncertain tax positions.
We do not have any unrecognized tax benefits recorded as of
December 31, 2016
and we do not anticipate a material change in our unrecognized tax benefits during the next twelve months.
A reconciliation of the beginning and ending amount of unrecognized tax benefits is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Unrecognized tax benefit at beginning of year
|
$
|
7,832
|
|
|
$
|
515
|
|
|
$
|
814
|
|
Reductions based on tax positions related to the prior year
|
—
|
|
|
—
|
|
|
(17
|
)
|
Reductions for tax year 2011 federal audit
|
(7,310
|
)
|
|
—
|
|
|
(568
|
)
|
Additions (reductions) based on tax positions related to the current year
|
—
|
|
|
299
|
|
|
(229
|
)
|
Reductions as a result of a lapse of the applicable statute of limitations
|
(7
|
)
|
|
—
|
|
|
—
|
|
Unrecognized tax benefit at end of year
|
$
|
515
|
|
|
$
|
814
|
|
|
$
|
—
|
|
Our federal income tax returns for 2014 and
2015
are open tax years that may be examined by the IRS.
17. STOCKHOLDERS’ EQUITY
Share Authorization
We are authorized to issue
80,000,000
shares of common stock,
$0.01
per share par value. We had
22,490,855
and
22,497,873
shares issued and outstanding, net of
5,849,316
shares held in treasury at par, at
December 31, 2016
and
2015
, respectively.
Stock Based Compensation Plans
All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). At
December 31, 2016
, we had one stock benefit plan in effect, the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”), under which restricted stock, stock options and performance awards have been granted or remain outstanding. The Amended and Restated 2006 Plan expires on May 24, 2022. The expiration and termination of these plans does not affect the options previously issued and outstanding.
The status of the Amended and Restated 2006 Plan at
December 31, 2016
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
Shares
Available to
Issue
|
|
Options
Outstanding
|
Amended and Restated 2006 Plan
|
5,000
|
|
|
1,126
|
|
|
1,650
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Stock Options
Employee stock options have historically been granted annually, as approved by the Compensation Committee of the Board. The options are granted with an exercise price equal to the closing price of our common stock on the date of grant. All of the options granted under this plan have either
five
,
seven
or
ten
-year terms. We utilize the Black-Scholes option valuation model for estimating the fair value of our stock options. This model allows the use of a range of assumptions related to volatility, risk-free interest rate, expected holding period and dividend yield. The expected volatility utilized in the valuation model is based on the historical volatility of our stock price. The dividend yield and expected holding period are based on historical experience and management's estimate of future events. The risk-free interest rate is derived from the U.S. Treasury yield curve based on the expected life of the option in effect at the time of grant. The fair values of our stock options were calculated using the following weighted average of assumptions, based on the methods described above for the years ended December 31, 2014, 2015 and 2016:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
Dividend yield
|
0.50
|
%
|
|
0.44
|
%
|
|
0.50
|
%
|
Expected volatility
|
33.34
|
%
|
|
32.62
|
%
|
|
31.21
|
%
|
Risk-free interest rate
|
0.99
|
%
|
|
1.13
|
%
|
|
1.23
|
%
|
Expected holding period (years)
|
3.7
|
|
|
3.6
|
|
|
5.0
|
|
During the first quarter of 2016, we granted
235,500
options to certain officers and key employees at an option price of
$20.06
. These options will vest in
one-fifth
increments over a
five
year period and have a
ten
year term. The fair value of these stock options is approximately
$1.3 million
. During the third quarter of 2016, we canceled
146,100
options related to the retirement of a former executive. In
2015
, a total of
628,000
stock options were awarded, the fair value of which is approximately
$3.7 million
. In
2014
, a total of
803,700
stock options were awarded, the fair value of which is approximately
$4.1 million
.
A summary of the stock options at
December 31, 2014
,
2015
and
2016
and changes during the three years ended
December 31, 2016
is presented in the table and narrative below (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
Shares
|
|
Wtd. Avg.
Ex. Price
|
|
Shares
|
|
Wtd. Avg.
Ex. Price
|
|
Shares
|
|
Wtd. Avg.
Ex. Price
|
Outstanding at beginning of period
|
766
|
|
|
$
|
13.03
|
|
|
1,381
|
|
|
$
|
17.07
|
|
|
1,695
|
|
|
$
|
18.95
|
|
Adjustment to beginning balance
|
—
|
|
|
$
|
—
|
|
|
—
|
|
|
$
|
—
|
|
|
18
|
|
|
$
|
18.94
|
|
Granted
|
804
|
|
|
$
|
20.20
|
|
|
653
|
|
|
$
|
22.66
|
|
|
236
|
|
|
$
|
20.06
|
|
Exercised
|
(68
|
)
|
|
$
|
5.47
|
|
|
(110
|
)
|
|
$
|
14.36
|
|
|
(112
|
)
|
|
$
|
13.76
|
|
Canceled or expired
|
(121
|
)
|
|
$
|
18.80
|
|
|
(229
|
)
|
|
$
|
20.39
|
|
|
(187
|
)
|
|
$
|
21.30
|
|
Outstanding at end of year
|
1,381
|
|
|
$
|
17.07
|
|
|
1,695
|
|
|
$
|
18.95
|
|
|
1,650
|
|
|
$
|
19.18
|
|
Exercisable at end of year
|
329
|
|
|
$
|
10.97
|
|
|
583
|
|
|
$
|
15.00
|
|
|
1,106
|
|
|
$
|
18.21
|
|
The aggregate intrinsic value of the outstanding and exercisable stock options at
December 31, 2016
was
$15.6 million
and
$11.5 million
, respectively. The total intrinsic value of options exercised during
2014
,
2015
and
2016
totaled
$1.0 million
,
$1.1 million
and
$1.2 million
, respectively.
The total fair value of stock options vested during
2014
,
2015
and
2016
totaled approximately
$0.8 million
,
$1.8 million
and
$2.8 million
, respectively. We recorded pre-tax stock-based compensation expense for stock options totaling approximately
$1.6 million
,
$2.4 million
and
$1.7 million
in
2014
,
2015
and
2016
, respectively. The significant decrease in expense for the year ended
December 31, 2016
as compared to 2015 was due to the cancellation of options for the retirement of a former executive which resulted in a decrease of approximately
$0.2 million
and the full vesting of a grant in the second quarter of 2016 resulting in a decrease of approximately
$0.3 million
.
As of
December 31, 2016
, there was
$1.5 million
of unrecognized compensation cost, net of estimated forfeitures, related to unvested stock options expected to be recognized over a weighted average period of approximately
two
years.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table further describes our outstanding stock options at
December 31, 2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
Options Exercisable
|
Actual Ranges of Exercise Prices
|
Number Outstanding at 12/31/16
|
|
Weighted-Average
Remaining
Contractual Life
|
|
Weighted-Average
Exercise Price
|
|
Number Exercisable at 12/31/16
|
|
Weighted-Average
Exercise Price
|
$4.78 - $5.94
|
105,603
|
|
|
4.50
|
|
$
|
5.66
|
|
|
105,603
|
|
|
$
|
5.66
|
|
$16.73 - $20.06
|
569,400
|
|
|
5.30
|
|
$
|
17.84
|
|
|
380,000
|
|
|
$
|
16.73
|
|
$20.26 - $22.58
|
974,943
|
|
|
3.60
|
|
$
|
21.43
|
|
|
620,877
|
|
|
$
|
21.26
|
|
$4.78 - $22.58
|
1,649,946
|
|
|
4.89
|
|
$
|
19.18
|
|
|
1,106,480
|
|
|
$
|
18.21
|
|
Employee Stock Purchase Plan
We provide all employees the opportunity to purchase common stock through payroll deductions in our employee stock purchase plan (“ESPP”). Purchases are made quarterly; the price being
85%
of the lower of the price on the first day of the plan entry date (beginning of a quarter) or the actual date of purchase (end of quarter). In
2016
, employees purchased a total of
44,774
shares at a weighted average price of
$19.48
per share. In
2015
, employees purchased a total of
44,074
shares at a weighted average price of
$17.17
per share. In
2014
, employees purchased a total of
55,877
shares at a weighted average price of
$15.50
per share. Pre-tax compensation expense for the ESPP totaling approximately
$260,000
,
$197,000
, and
$234,000
was expensed in
2014
,
2015
and
2016
, respectively.
The fair values of the right (option) to purchase shares under the ESPP are estimated at the date of purchase with the four quarterly purchase dates using the following assumptions:
|
|
|
|
|
|
|
|
|
|
|
2014
|
|
2015
|
|
2016
|
Dividend yield
|
0.6
|
%
|
|
0.4
|
%
|
|
0.6
|
%
|
Expected volatility
|
33
|
%
|
|
24
|
%
|
|
25
|
%
|
Risk-free interest rate
|
0.07%, 0.09%,0.11%, 0.13%
|
|
|
0.02%, 0.11%,0.18%, 0.25%
|
|
|
0.22%, 0.49%,0.55%, 0.61%
|
|
Expected life (years)
|
.25, .50, .75, 1.00
|
|
|
.25, .50, .75, 1.00
|
|
|
.25, .50, .75, 1.00
|
|
Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of purchase. The expected life of the ESPP grants represents the calendar quarters from the beginning of the year to the purchase date (end of each quarter).
Restricted Stock
From time to time, we issue shares of restricted stock to certain officers, key employees and directors of the Company from our Amended and Restated 2006 Plan. The restricted stock issued to officers and key employees vest in either
25%
or
33.33%
increments over
four
or
three
year terms, respectively. During the first quarter of
2016
, we issued restricted stock totaling
16,900
to certain employees that vest over a
three
year period and had an aggregate grant date market value of approximately
$0.3 million
. A summary of the status of unvested restricted stock as of
December 31, 2016
, and changes during
2016
, is presented below (shares in thousands):
|
|
|
|
|
|
|
|
Unvested stock awards
|
Shares
|
|
Weighted Average
Grant Date
Fair Value
|
Unvested at January 1, 2016
|
202
|
|
|
$
|
20.64
|
|
Awards
|
18
|
|
|
20.27
|
|
Vestings
|
(66
|
)
|
|
20.78
|
|
Cancellations
|
(91
|
)
|
|
20.17
|
|
Unvested at December 31, 2016
|
63
|
|
|
$
|
21.07
|
|
Related to the vesting of restricted stock awards previously awarded to our officers and key employees, we recorded pre-tax compensation expense, which is included in general, administrative and other expenses, totaling
$1.8 million
for the year ended
December 31, 2014
,
$1.5 million
for the year ended
December 31, 2015
and
$0.7 million
for the year ended
December 31, 2016
. The significant decrease in expense for the year ended
December 31, 2016
as compared to 2015 was due to the cancellation of
50,000
unvested restricted stock for a former executive.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
As of
December 31, 2016
, we had
$1.1 million
of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately
1.4
years.
Performance Awards
During the
first quarter
of
2016
, we granted
73,700
performance awards to certain officers and key employees, payable in shares. These awards will vest (if at all) on December 31, 2020 provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Consolidated Earnings Before Interest Tax Depreciation and Amortization) and Relative Shareholder Return performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents
25%
of the award and the Relative Shareholder Return performance represents
75%
of the award. The fair value of these performance awards granted during the first quarter of 2016 was approximately
$1.6 million
. The pre-tax compensation expense associated with these awards for the year ended
December 31, 2016
was approximately
221,000
. During the third quarter of 2016, we canceled
14,200
performance awards related to the retirement of a former executive.
The fair value of the performance awards are estimated on the date of the grant using a Monte-Carlo simulation pricing model with the following assumptions:
|
|
|
|
|
February 23, 2016
|
Performance period
|
January 1, 2016 - December 31, 2020
|
Simulation period (years)
|
4.86
|
|
Share price at grant date
|
$20.06
|
Expected volatility
|
31.2
|
%
|
Risk-free interest rate
|
1.21
|
%
|
Forfeiture rate
|
2.0
|
%
|
Director Compensation Plans
On May 17, 2016, our Board approved a new Director Compensation Policy, which provides for the following: (i) each independent director is entitled to an annual retainer of
$75,000
, payable in quarterly installments of
$18,750
each at the end of the quarter; and (ii) the Lead Director and chairman of our Audit Committee are entitled to an additional annual retainer of
$10,000
, payable in quarterly installments of
$2,500
each at the end of each quarter, and the chairman of our Corporate Governance and Compensation Committees are entitled to an additional annual retainer of
$5,000
, payable in quarterly installments of
$1,250
each at the end of each quarter. Any new independent director will receive upon admission to the Board a grant of
$25,000
(in addition to the independent director annual retainer prorated at the time the new director is admitted to the Board) which can be taken in cash or restricted shares of our common stock. The number of shares of such common stock will be determined by dividing the cash amount by the closing price of our common stock on the date of grant, which will be the date of admission to the Board. Such common stock, will vest (based on continued service on the Board)
50%
immediately and
25%
on the first and second anniversaries of admission. Prior to the approval of the new Director Compensation Policy, there was one meeting during the second quarter of 2016 for which the directors were paid under the previous policy.
On August 9, 2016, Richard W. Scott resigned from our Board. At the time of his resignation, Mr. Scott was serving as the chairman of the Corporate Governance Committee and a member of the Audit and Compensation Committees. On the same day, the Board voted James R. Schenck to serve as a Class 1 Director until the 2018 annual meeting of shareholders. Mr. Schenck was appointed to serve as the chairman of the Corporate Governance Committee and a member of the Audit and Compensation Committees. Concurrently with the appointment, the Board granted Mr. Schenck
1,061
shares of the Company’s common stock under our Director Compensation Policy, which such grant was valued at approximately
$25,000
based on the closing price on the grant date. One-half of these shares vested immediately upon grant, and the remaining one-half of the shares will vest equally on August 9, 2017 and August 9, 2018.
We recorded approximately
$0.8 million
,
$0.7 million
and
$0.4 million
of pre-tax compensation expense, which is included in general, administrative and other expenses, in the years ended
2014
,
2015
and
2016
, respectively, related to the director fees and annual retainers.
Cash Dividends
Our Board declared two quarterly dividends of
$0.025
per share and two quarterly dividends of
$0.05
per share, totaling approximately
$2.5 million
. The
two
dividends of
$0.025
per share were paid on March 1, 2016 and June 1, 2016 and the
two
dividends of
$0.05
per share were paid on September 1, 2016 and December 1, 2016. During 2015, we paid
four
quarterly dividends of
$0.025
per share, totaling approximately
$1.8 million
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Accumulated other comprehensive income
Our components of Accumulated other comprehensive income are as follows (in thousands):
|
|
|
|
|
|
Accumulated Other Comprehensive Income
|
Balance at December 31, 2015
|
$
|
—
|
|
Decrease in net unrealized gains associated with available-for-sale securities of the trusts
|
(563
|
)
|
Reclassification of net unrealized gain activity attributable to the
Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus’
|
563
|
|
Balance at December 31, 2016
|
$
|
—
|
|
18. SHARE REPURCHASE PROGRAM
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of
$25.0 million
of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). The shares may be purchased from time to time in the open market or in privately negotiated transactions. Purchases will be at times and in amounts as management deems appropriate based on factors such as market conditions, legal requirements and other business considerations. During the year ended
December 31, 2016
, we did not repurchase any shares of common stock pursuant to this share repurchase program.
During 2015, we purchased
1,927,665
shares of our common stock for a total cost of
$45.0 million
, at an average cost of
$23.34
per share under a previous share repurchase program.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
19. EARNINGS PER SHARE
Share-based awards that contain non-forfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities and we have prepared our earnings per share calculations to exclude outstanding unvested restricted stock awards, using the two-class method, in the basic and diluted weighted average shares outstanding calculation.
The following table sets forth the computation of the basic and diluted earnings per share for the years ended
December 31, 2014
,
2015
and
2016
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
|
(in thousands, except per share data)
|
Numerator for basic earnings per share:
|
|
|
|
|
|
Numerator from continuing operations
|
|
|
|
|
|
Income from continuing operations
|
$
|
15,446
|
|
|
$
|
20,853
|
|
|
$
|
19,581
|
|
Less: Earnings allocated to unvested restricted stock
|
(295
|
)
|
|
(257
|
)
|
|
(89
|
)
|
Income attributable to continuing operations
|
$
|
15,151
|
|
|
$
|
20,596
|
|
|
$
|
19,492
|
|
|
|
|
|
|
|
Numerator from discontinued operations
|
|
|
|
|
|
Income from discontinued operations
|
$
|
392
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Less: Earnings allocated to unvested restricted stock
|
(8
|
)
|
|
—
|
|
|
—
|
|
Income attributable to discontinued operations
|
$
|
384
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Numerator for diluted earnings per share:
|
|
|
|
|
|
Income attributable to continuing operations
|
$
|
15,151
|
|
|
$
|
20,596
|
|
|
$
|
19,492
|
|
Income attributable to discontinuing operations
|
$
|
384
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Denominator
|
|
|
|
|
|
Denominator for basic earnings per common share - weighted average shares outstanding
|
18,108
|
|
|
17,791
|
|
|
16,515
|
|
Effect of dilutive securities:
|
|
|
|
|
|
Stock options
|
149
|
|
|
246
|
|
|
454
|
|
Convertible subordinated notes
|
—
|
|
|
276
|
|
|
491
|
|
Denominator for diluted earnings per common share - weighted average shares outstanding
|
18,257
|
|
|
18,313
|
|
|
17,460
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
|
|
|
|
|
Continuing operations
|
$
|
0.84
|
|
|
$
|
1.16
|
|
|
$
|
1.18
|
|
Discontinued operations
|
0.02
|
|
|
—
|
|
|
—
|
|
Basic earnings per common share
|
$
|
0.86
|
|
|
$
|
1.16
|
|
|
$
|
1.18
|
|
|
|
|
|
|
|
Diluted earnings per common share:
|
|
|
|
|
|
Continuing operations
|
$
|
0.83
|
|
|
$
|
1.12
|
|
|
$
|
1.12
|
|
Discontinued operations
|
0.02
|
|
|
—
|
|
|
—
|
|
Diluted earnings per common share
|
$
|
0.85
|
|
|
$
|
1.12
|
|
|
$
|
1.12
|
|
|
|
|
|
|
|
The fully diluted weighted average shares outstanding for the years ended
December 31, 2015
and
2016
, and the corresponding calculation of fully diluted earnings per share, included approximately
0.3 million
and
0.5 million
shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260. There were
no
shares that would have been issued upon conversion under the if-converted method for our convertible subordinated notes for the year ended
December 31, 2014
.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
There were
no
options excluded in the computation of diluted earnings per share for the years ended
December 31, 2014
,
2015
and
2016
.
20. MAJOR SEGMENTS OF BUSINESS
We conduct funeral and cemetery operations only in the United States. The following table presents revenues from continuing operations, income (loss) from continuing operations before income taxes, total assets, long-lived assets, depreciation and amortization, capital expenditures, number of operating locations, interest expense and income tax expense (benefit) by segment:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral
|
|
Cemetery
|
|
Corporate
|
|
Consolidated
|
|
(in thousands, except number of operating locations)
|
Revenues from continuing operations:
|
|
|
|
|
|
|
|
2016
|
$
|
189,401
|
|
|
$
|
58,799
|
|
|
$
|
—
|
|
|
$
|
248,200
|
|
2015
|
185,818
|
|
|
56,684
|
|
|
—
|
|
|
242,502
|
|
2014
|
173,735
|
|
|
52,389
|
|
|
—
|
|
|
226,124
|
|
Income (loss) from continuing operations before income taxes:
|
|
|
|
|
|
|
|
2016
|
$
|
61,163
|
|
|
$
|
18,400
|
|
|
$
|
(47,322
|
)
|
|
$
|
32,241
|
|
2015
|
58,404
|
|
|
17,492
|
|
|
(41,306
|
)
|
|
34,590
|
|
2014
|
53,385
|
|
|
15,180
|
|
|
(45,864
|
)
|
|
22,701
|
|
Total assets:
|
|
|
|
|
|
|
|
2016
|
$
|
634,145
|
|
|
$
|
241,621
|
|
|
$
|
9,303
|
|
|
$
|
885,069
|
|
2015
|
591,389
|
|
|
229,479
|
|
|
12,271
|
|
|
833,139
|
|
2014
|
568,842
|
|
|
240,009
|
|
|
18,677
|
|
|
827,528
|
|
Long-lived assets:
|
|
|
|
|
|
|
|
2016
|
$
|
509,361
|
|
|
$
|
89,767
|
|
|
$
|
2,548
|
|
|
$
|
601,676
|
|
2015
|
472,419
|
|
|
89,866
|
|
|
3,370
|
|
|
565,655
|
|
2014
|
437,735
|
|
|
88,467
|
|
|
1,835
|
|
|
528,037
|
|
Depreciation and amortization
|
|
|
|
|
|
|
|
2016
|
$
|
8,891
|
|
|
$
|
5,028
|
|
|
$
|
1,502
|
|
|
$
|
15,421
|
|
2015
|
7,614
|
|
|
4,420
|
|
|
1,746
|
|
|
13,780
|
|
2014
|
6,841
|
|
|
3,704
|
|
|
1,378
|
|
|
11,923
|
|
Capital expenditures:
|
|
|
|
|
|
|
|
2016
|
$
|
17,411
|
|
|
$
|
4,962
|
|
|
$
|
731
|
|
|
$
|
23,104
|
|
2015
|
27,654
|
|
|
5,332
|
|
|
2,838
|
|
|
35,824
|
|
2014
|
16,804
|
|
|
5,606
|
|
|
1,265
|
|
|
23,675
|
|
Number of operating locations at year end:
|
|
|
|
|
|
|
|
2016
|
170
|
|
|
32
|
|
|
—
|
|
|
202
|
|
2015
|
167
|
|
|
32
|
|
|
—
|
|
|
199
|
|
2014
|
164
|
|
|
32
|
|
|
—
|
|
|
196
|
|
Interest expense:
|
|
|
|
|
|
|
|
2016
|
$
|
826
|
|
|
$
|
3
|
|
|
$
|
10,909
|
|
|
$
|
11,738
|
|
2015
|
577
|
|
|
8
|
|
|
9,974
|
|
|
10,559
|
|
2014
|
316
|
|
|
17
|
|
|
9,975
|
|
|
10,308
|
|
Income tax expense (benefit)
|
|
|
|
|
|
|
|
2016
|
$
|
24,019
|
|
|
$
|
7,226
|
|
|
$
|
(18,585
|
)
|
|
$
|
12,660
|
|
2015
|
23,195
|
|
|
6,947
|
|
|
(16,405
|
)
|
|
13,737
|
|
2014
|
17,061
|
|
|
4,851
|
|
|
(14,657
|
)
|
|
7,255
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
21. SUPPLEMENTARY DATA
Balance Sheet
The detail of certain balance sheet accounts as of
December 31, 2015
and
2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
2015
|
|
2016
|
Other current assets:
|
|
|
|
Deferred taxes
|
$
|
4,256
|
|
|
$
|
—
|
|
Income tax receivables
|
279
|
|
|
1,932
|
|
Other current assets
|
172
|
|
|
102
|
|
Total other current assets
|
$
|
4,707
|
|
|
$
|
2,034
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations
|
|
|
|
Term note
|
$
|
10,938
|
|
|
$
|
11,250
|
|
Acquisition debt
|
$
|
1,075
|
|
|
$
|
1,771
|
|
Capital leases
|
$
|
223
|
|
|
$
|
246
|
|
Total current portion of long-term debt and capital lease obligations
|
$
|
12,236
|
|
|
$
|
13,267
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
Income taxes payable
|
$
|
387
|
|
|
$
|
509
|
|
Deferred rent
|
137
|
|
|
208
|
|
Total other current liabilities
|
$
|
524
|
|
|
$
|
717
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
Accrued salaries and wages
|
$
|
2,383
|
|
|
$
|
4,005
|
|
Accrued incentive compensation
|
5,862
|
|
|
8,237
|
|
Accrued vacation
|
2,239
|
|
|
2,305
|
|
Accrued insurance
|
2,246
|
|
|
1,726
|
|
Accrued interest
|
1,295
|
|
|
1,235
|
|
Accrued ad valorem and franchise taxes
|
604
|
|
|
981
|
|
Accrued commissions
|
470
|
|
|
543
|
|
Other accrued liabilities
|
1,442
|
|
|
1,059
|
|
Total accrued liabilities
|
$
|
16,541
|
|
|
$
|
20,091
|
|
|
|
|
|
Other long term liabilities:
|
|
|
|
Deferred rent
|
$
|
1,405
|
|
|
$
|
1,207
|
|
Incentive compensation
|
2,505
|
|
|
575
|
|
Reserve for uncertain tax positions
|
814
|
|
|
—
|
|
Contingent consideration
|
763
|
|
|
785
|
|
Other long term liabilities
|
44
|
|
|
—
|
|
Total other long term liabilities
|
$
|
5,531
|
|
|
$
|
2,567
|
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Revenues and Field costs and expenses
The detail of certain income statement accounts for the years ended
December 31, 2014
,
2015
and
2016
is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Revenues:
|
|
|
|
|
|
Goods
|
|
|
|
|
|
Funeral
|
$
|
66,877
|
|
|
$
|
71,399
|
|
|
$
|
72,002
|
|
Cemetery
|
32,300
|
|
|
35,479
|
|
|
37,678
|
|
Total goods
|
$
|
99,177
|
|
|
$
|
106,878
|
|
|
$
|
109,680
|
|
Services
|
|
|
|
|
|
Funeral
|
$
|
97,375
|
|
|
$
|
104,969
|
|
|
$
|
108,622
|
|
Cemetery
|
10,556
|
|
|
11,178
|
|
|
11,269
|
|
Total services
|
$
|
107,931
|
|
|
$
|
116,147
|
|
|
$
|
119,891
|
|
Financial revenue
|
|
|
|
|
|
Preneed funeral commission income
|
$
|
2,036
|
|
|
$
|
1,484
|
|
|
$
|
1,429
|
|
Preneed funeral trust earnings
|
7,447
|
|
|
7,966
|
|
|
7,348
|
|
Cemetery trust earnings
|
8,123
|
|
|
8,440
|
|
|
8,004
|
|
Cemetery finance charges
|
1,410
|
|
|
1,587
|
|
|
1,848
|
|
Total financial revenue
|
$
|
19,016
|
|
|
$
|
19,477
|
|
|
$
|
18,629
|
|
Total revenues
|
$
|
226,124
|
|
|
$
|
242,502
|
|
|
$
|
248,200
|
|
|
|
|
|
|
|
Field costs and expenses:
|
|
|
|
|
|
Goods
|
|
|
|
|
|
Funeral
|
$
|
54,421
|
|
|
$
|
56,819
|
|
|
$
|
56,787
|
|
Cemetery
|
23,800
|
|
|
24,600
|
|
|
26,199
|
|
Total goods
|
$
|
78,221
|
|
|
$
|
81,419
|
|
|
$
|
82,986
|
|
Services
|
|
|
|
|
|
Funeral
|
$
|
49,357
|
|
|
$
|
51,236
|
|
|
$
|
52,595
|
|
Cemetery
|
6,860
|
|
|
6,924
|
|
|
7,081
|
|
Total services
|
$
|
56,217
|
|
|
$
|
58,160
|
|
|
$
|
59,676
|
|
Financial expenses
|
|
|
|
|
|
Preneed funeral commissions
|
$
|
1,078
|
|
|
$
|
1,031
|
|
|
$
|
747
|
|
Trust administration fees
|
249
|
|
|
353
|
|
|
378
|
|
Total financial expenses
|
$
|
1,327
|
|
|
$
|
1,384
|
|
|
$
|
1,125
|
|
Total field costs and expenses
|
$
|
135,765
|
|
|
$
|
140,963
|
|
|
$
|
143,787
|
|
The Field costs and expenses, for purposes of this supplemental disclosure, include only costs and expenses that are directly allocable between the goods, services and financial categories in the funeral and cemetery segments. Depreciation and amortization and Regional and unallocated funeral and cemetery costs are not included in this disclosure.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
22. QUARTERLY FINANCIAL DATA (UNAUDITED)
The tables below set forth consolidated operating results by fiscal quarter for the years ended
December 31, 2015
and
2016
(in thousands, except earnings per share):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
First
Quarter
|
|
Second
Quarter
|
|
Third
Quarter
|
|
Fourth
Quarter
|
2016
|
|
|
|
|
|
|
|
Revenues
|
$
|
63,331
|
|
|
$
|
61,865
|
|
|
$
|
60,140
|
|
|
$
|
62,864
|
|
Gross profit
|
21,303
|
|
|
18,807
|
|
|
18,228
|
|
|
21,312
|
|
Net income
|
$
|
4,571
|
|
|
$
|
5,200
|
|
|
$
|
5,683
|
|
|
$
|
4,127
|
|
Basic earnings per common share: (a)
|
$
|
0.27
|
|
|
$
|
0.31
|
|
|
$
|
0.34
|
|
|
$
|
0.25
|
|
Diluted earnings per common share: (a)
|
$
|
0.27
|
|
|
$
|
0.30
|
|
|
$
|
0.33
|
|
|
$
|
0.22
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
|
|
|
|
|
Revenues
|
$
|
63,253
|
|
|
$
|
59,261
|
|
|
$
|
58,378
|
|
|
$
|
61,610
|
|
Gross profit
|
22,209
|
|
|
18,248
|
|
|
17,360
|
|
|
19,691
|
|
Net income
|
$
|
6,418
|
|
|
$
|
4,557
|
|
|
$
|
4,444
|
|
|
$
|
5,434
|
|
Basic earnings per common share: (a)
|
$
|
0.35
|
|
|
$
|
0.25
|
|
|
$
|
0.25
|
|
|
$
|
0.32
|
|
Diluted earnings per common share: (a)
|
$
|
0.34
|
|
|
$
|
0.24
|
|
|
$
|
0.24
|
|
|
$
|
0.31
|
|
|
|
|
|
|
|
|
(a)
|
Earnings per share are computed independently for each of the quarters presented. Therefore, the sum of the quarterly per share amounts may not equal the total computed for 2015 and 2016 due to rounding.
|
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
23. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
The following information is supplemental disclosure for the Consolidated Statements of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
2014
|
|
2015
|
|
2016
|
Cash paid for interest and financing costs
|
$
|
8,894
|
|
|
$
|
9,159
|
|
|
$
|
10,366
|
|
Cash paid for taxes
|
2,674
|
|
|
8,283
|
|
|
10,874
|
|
Fair value of stock, stock options and performance awards issued to directors, officers, and certain other employees
|
8,219
|
|
|
4,879
|
|
|
3,275
|
|
Restricted common stock withheld for payroll taxes
|
1,305
|
|
|
1,580
|
|
|
580
|
|
Net withdrawals (deposits) from / into preneed funeral trusts
|
(418
|
)
|
|
12,054
|
|
|
(3,687
|
)
|
Net withdrawals (deposits) from / into preneed cemetery trusts
|
1
|
|
|
8,681
|
|
|
(6,405
|
)
|
Net withdrawals (deposits) from / into perpetual care trusts
|
1,857
|
|
|
5,543
|
|
|
(3,762
|
)
|
Net increase in preneed receivables
|
(1,731
|
)
|
|
(1,714
|
)
|
|
(2,385
|
)
|
Net deposits of receivables into preneed trusts
|
(1,643
|
)
|
|
(735
|
)
|
|
(674
|
)
|
Net change in preneed funeral receivables increasing deferred revenue
|
677
|
|
|
483
|
|
|
1,450
|
|
Net change in preneed cemetery receivables decreasing deferred revenue
|
(374
|
)
|
|
(154
|
)
|
|
(2,090
|
)
|
Net (withdrawals) deposits from / into preneed funeral trust accounts (decreasing) increasing deferred preneed funeral receipts held in trust
|
418
|
|
|
(12,054
|
)
|
|
3,687
|
|
Net (withdrawals) deposits from / into preneed cemetery trust accounts (decreasing) increasing deferred cemetery receipts held in trust
|
(1
|
)
|
|
(8,681
|
)
|
|
6,405
|
|
Net (withdrawals) deposits from / into perpetual care trust accounts (decreasing) increasing care trusts’ corpus
|
(1,901
|
)
|
|
(5,726
|
)
|
|
3,874
|
|