NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
1. Nature of Operations
We are North America’s largest provider of deathcare products and services, with a network of funeral service locations and cemeteries operating in the United States and Canada. Our funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and other related businesses, which enable us to serve a wide array of customer needs. We sell cemetery property and funeral and cemetery merchandise and services at the time of need and on a preneed basis.
Funeral service locations provide all professional services relating to funerals and cremations, including the use of funeral facilities and motor vehicles, arranging and directing services, removal, preparation, embalming, cremations, memorialization, and catering. Funeral merchandise, including burial caskets and related accessories, urns and other cremation receptacles, outer burial containers, flowers, online and video tributes, stationery products, casket and cremation memorialization products, and other ancillary merchandise, is sold at funeral service locations.
Our cemeteries provide cemetery property interment rights, including developed lots, lawn crypts, mausoleum spaces, niches, and other cremation memorialization and interment options. Cemetery merchandise and services, including memorial markers and bases, outer burial containers, flowers and floral placement, other ancillary merchandise, graveside services, merchandise installation, travel protection, and burial openings and closings, are sold at our cemeteries.
2. Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
Our unaudited condensed consolidated financial statements include the accounts of Service Corporation International (SCI) and all subsidiaries in which we hold a controlling financial interest. Our financial statements also include the accounts of the merchandise and service trusts and cemetery perpetual care trusts in which we have a variable interest and are the primary beneficiary. Our interim condensed consolidated financial statements are unaudited but include all adjustments, consisting of normal recurring accruals and any other adjustments, which management considers necessary for a fair statement of our results for these periods. Our unaudited condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in our Annual Report on Form 10-K for the year ended
December 31, 2016
, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end condensed Consolidated Balance Sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.
Reclassifications to Prior Period Financial Statements and Adjustments
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 in the Preparation of Financial Statements
The preparation of the unaudited condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in our Annual Report on Form 10-K for the year ended
December 31, 2016
. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from these estimates.
Accounting Standards Adopted in 2017
Stock Compensation
In March 2016, the FASB amended
"Stock Compensation",
modifying certain aspects of the accounting for share-based payment transactions,which requires the tax effects related to share-based payments to be recorded through the income statement, simplifies the accounting requirements for forfeitures and employers' tax withholding requirements, and modifies the presentation of certain items on the statement of cash flows. The guidance requires the tax effect related to the settlement of share-based awards in income tax benefit or expense in the statements of earnings rather than in additional paid-in-capital. This guidance also eliminates the requirement to reclassify excess tax benefits from operating activities to financing activities within the statement of cash flows. We adopted the new guidance in the first quarter of 2017, as required, and the impact of the restricted stock deliveries and option exercises in the first quarter of 2017 was a reduction to our adjusted provision for income taxes of
$6.4 million
. Prior periods have not been retrospectively adjusted for adoption of this guidance. The remaining amendments to this standard, as noted above, are either not applicable or do not change our current accounting practices and thus do not impact our consolidated financial statements, including our consolidated statement of cash flows.
Inventory
In July 2015, the FASB amended
"Inventory"
to state that an entity using an inventory method other than last-in, first out ("LIFO") or the retail inventory method should measure inventory at the lower of cost or net realizable value. The new guidance clarifies that net realizable value is the estimated selling price in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance was effective for us on January 1, 2017 and adoption did not materially impact our consolidated results of operations, consolidated financial position, and cash flows.
Recently Issued Accounting Standards
Revenue Recognition
In May 2014, the FASB issued
"Revenue from Contracts with Customers,"
which replaces most existing revenue recognition guidance. During 2016, the FASB made several amendments to the new standard that clarified guidance on several matters, including principal vs. agent considerations, identifying performance obligations, sales taxes, and licensing.
The new standard, as amended, requires that we recognize revenue in the amount to which we expect to be entitled for delivery of promised goods and services to our customers. The new standard will also result in enhanced revenue-related disclosures, including any significant judgments and changes in judgments. Additionally, the new standard requires the deferral of incremental selling costs to the period in which the related revenue is recognized.
The new standard will be effective for us beginning January 1, 2018 and we intend to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. We have not fully determined the impact on the new standard on our consolidated results of operations, consolidated financial position, and cash flows. However, we believe the standard primarily impacts the manner in which we recognize certain nonrefundable up-front fees and incremental costs to acquire new preneed funeral trust contracts and preneed and atneed cemetery contracts (i.e., selling costs). The nonrefundable fees will be deferred and recognized as revenue when the related goods and services are delivered to the customer. The incremental selling costs will be deferred and amortized by specific identification to the delivery of the related goods and services.
We will continue to expense costs to acquire new preneed funeral insurance contracts in the period incurred. The insurance contracts are not, and will not be, reflected in our Consolidated Balance Sheet because they do not represent assets or liabilities as we have no claim to the insurance proceeds until the contract is fulfilled and no obligation under the contract until the benefits are assigned to us after the time of need.
Financial Instruments
In January 2016, the FASB amended
"Financial Instruments"
to provide additional guidance on the recognition and measurement of financial assets and liabilities. The amendment requires investments in equity instruments to be measured at fair value with changes in fair value reflected in net income. The new guidance is effective for us on January 1, 2018, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
In June 2016, the FASB amended
"Financial Instruments"
to provide financial statement users with more decision-useful information about the expected credit losses on debt instruments and other commitments to extend credit held by a reporting entity at each reporting date. This amendment replaces the incurred loss impairment methodology in the current standard with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The new guidance is effective for us on January 1, 2020, and we are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Leases
In February 2016, the FASB amended
"Leases"
to increase transparency and comparability among organizations. Under the new standard, an entity will be required to recognize lease assets and liabilities on its balance sheet and disclose key information about leasing arrangements. In addition, the new standard offers specific accounting guidance for a lessee, a lessor, and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases. This new standard will be effective for us on January 1, 2019. We are still evaluating the impact of adoption on our consolidated results of operations, consolidated financial position, and cash flows.
Cash Flow
In August and November 2016, the FASB amended
"Statement of Cash Flows"
to clarify guidance on the classification of certain cash receipts and cash payments. Additionally, the guidance requires that the statement of cash flows reflects changes in restricted cash in addition to cash and cash equivalents. Amended guidance includes clarification on debt prepayment and extinguishment costs, contingent consideration in business combinations, proceeds from insurance claims, and premium payments on company-owned life insurance. The new guidance is effective for us on January 1, 2018, and we are still evaluating the impact of adoption on our consolidated statement of cash flows.
Goodwill
In January 2017, the FASB amended
"Goodwill"
to simplify the subsequent measurement of goodwill. Amended guidance eliminates Step 2 from the goodwill impairment test. 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. The new guidance is effective for us on January 1, 2020, and is not expected to impact on our consolidated results of operations, consolidated financial position, and cash flows.
Retirement Plans
In March 2017, the FASB amended
"Retirement Plans"
to improve the presentation of net periodic pension cost and net periodic postretirement benefit cost by requiring the classification of interest costs and actuarial gains and losses separately from operating income. The new guidance is effective for us on January 1, 2018, and we are evaluating the impact on our consolidated results of operations, consolidated financial position, and cash flows.
3. Preneed Funeral Activities
Preneed funeral receivables, net and trust investments
represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, related to unperformed price-guaranteed preneed funeral contracts. Our merchandise and service trusts are variable interest entities. We have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. Our trust investments detailed in Notes 4 and 5 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from
Deferred preneed funeral revenue
into
Deferred preneed receipts held in trust.
Amounts are withdrawn from the trusts after the contract obligations are performed. Cash flows from preneed contracts are presented as operating cash flows in our unaudited condensed Consolidated Statement of Cash Flows.
Preneed funeral receivables, net and trust investments
are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in
Deferred preneed funeral revenue
until the merchandise is delivered or the service is performed.
The table below sets forth certain investment-related activities associated with these preneed merchandise and service trusts:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Deposits
|
$
|
34,976
|
|
|
$
|
27,708
|
|
Withdrawals
|
$
|
42,123
|
|
|
$
|
35,170
|
|
Purchases of available-for-sale securities
|
$
|
90,952
|
|
|
$
|
109,522
|
|
Sales of available-for-sale securities
|
$
|
89,412
|
|
|
$
|
99,493
|
|
The components of
Preneed funeral receivables, net and trust investments
in our unaudited condensed Consolidated Balance Sheet at
March 31, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Trust investments, at market
|
$
|
1,199,453
|
|
|
$
|
1,152,752
|
|
Cash and cash equivalents
|
115,914
|
|
|
122,517
|
|
Insurance-backed fixed income securities
|
270,348
|
|
|
271,248
|
|
Trust investments
|
1,585,715
|
|
|
1,546,517
|
|
Receivables from customers
|
319,456
|
|
|
312,556
|
|
Unearned finance charge
|
(13,233
|
)
|
|
(12,562
|
)
|
|
1,891,938
|
|
|
1,846,511
|
|
Allowance for cancellation
|
(29,283
|
)
|
|
(29,066
|
)
|
Preneed funeral receivables, net and trust investments
|
$
|
1,862,655
|
|
|
$
|
1,817,445
|
|
The costs and values associated with trust investments measured at market at
March 31, 2017
and
December 31, 2016
are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Value represents the value of the underlying securities held by the trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
72,835
|
|
|
$
|
405
|
|
|
$
|
(372
|
)
|
|
$
|
72,868
|
|
Canadian government
|
2
|
|
53,740
|
|
|
254
|
|
|
(59
|
)
|
|
53,935
|
|
Corporate
|
2
|
|
11,874
|
|
|
193
|
|
|
(71
|
)
|
|
11,996
|
|
Residential mortgage-backed
|
2
|
|
172
|
|
|
17
|
|
|
—
|
|
|
189
|
|
Asset-backed
|
2
|
|
52
|
|
|
—
|
|
|
(1
|
)
|
|
51
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
1,425
|
|
|
112
|
|
|
(54
|
)
|
|
1,483
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
332,089
|
|
|
62,224
|
|
|
(5,017
|
)
|
|
389,296
|
|
Canada
|
1
|
|
11,593
|
|
|
2,966
|
|
|
(441
|
)
|
|
14,118
|
|
Other international
|
1
|
|
23,513
|
|
|
2,212
|
|
|
(2,439
|
)
|
|
23,286
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
320,086
|
|
|
15,302
|
|
|
(12,428
|
)
|
|
322,960
|
|
Fixed income
|
1
|
|
94,756
|
|
|
1,332
|
|
|
(6,782
|
)
|
|
89,306
|
|
Other
|
3
|
|
4,017
|
|
|
1,448
|
|
|
(30
|
)
|
|
5,435
|
|
Trust investments, at fair value
|
|
|
926,152
|
|
|
86,465
|
|
|
(27,694
|
)
|
|
984,923
|
|
Fixed income commingled funds
|
|
|
174,432
|
|
|
4,608
|
|
|
(1,131
|
)
|
|
177,909
|
|
Private equity
|
|
|
36,430
|
|
|
3,150
|
|
|
(2,959
|
)
|
|
36,621
|
|
Trust investments, at net asset value
|
|
|
210,862
|
|
|
7,758
|
|
|
(4,090
|
)
|
|
214,530
|
|
Trust investments, at market
|
|
|
$
|
1,137,014
|
|
|
$
|
94,223
|
|
|
$
|
(31,784
|
)
|
|
$
|
1,199,453
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
75,245
|
|
|
$
|
317
|
|
|
$
|
(557
|
)
|
|
$
|
75,005
|
|
Canadian government
|
2
|
|
55,752
|
|
|
272
|
|
|
(42
|
)
|
|
55,982
|
|
Corporate
|
2
|
|
12,702
|
|
|
177
|
|
|
(92
|
)
|
|
12,787
|
|
Residential mortgage-backed
|
2
|
|
29
|
|
|
1
|
|
|
—
|
|
|
30
|
|
Asset-backed
|
2
|
|
58
|
|
|
—
|
|
|
(3
|
)
|
|
55
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
1,428
|
|
|
81
|
|
|
(39
|
)
|
|
1,470
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
334,854
|
|
|
49,785
|
|
|
(11,525
|
)
|
|
373,114
|
|
Canada
|
1
|
|
11,853
|
|
|
2,592
|
|
|
(263
|
)
|
|
14,182
|
|
Other international
|
1
|
|
25,761
|
|
|
1,824
|
|
|
(3,167
|
)
|
|
24,418
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
313,132
|
|
|
7,780
|
|
|
(26,842
|
)
|
|
294,070
|
|
Fixed income
|
1
|
|
92,760
|
|
|
1,344
|
|
|
(7,368
|
)
|
|
86,736
|
|
Other
|
3
|
|
4,079
|
|
|
1,214
|
|
|
(17
|
)
|
|
5,276
|
|
Trust investments, at fair value
|
|
|
927,653
|
|
|
65,387
|
|
|
(49,915
|
)
|
|
943,125
|
|
Fixed income commingled funds
|
|
|
168,959
|
|
|
3,177
|
|
|
(1,167
|
)
|
|
170,969
|
|
Private equity
|
|
|
40,892
|
|
|
2,956
|
|
|
(5,190
|
)
|
|
38,658
|
|
Trust investments, at net asset value
|
|
|
209,851
|
|
|
6,133
|
|
|
(6,357
|
)
|
|
209,627
|
|
Trust investments, at market
|
|
|
$
|
1,137,504
|
|
|
$
|
71,520
|
|
|
$
|
(56,272
|
)
|
|
$
|
1,152,752
|
|
Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer. Additionally, valuations are reviewed quarterly by the Investment Committee of the Board of Directors.
Where quoted prices are available in an active market, securities are classified as Level 1 investments pursuant to the fair value measurements hierarchy.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, ratings, and tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurements hierarchy.
The valuation of other investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These funds are classified as Level 3 investments pursuant to the fair value measurements hierarchy.
Fixed income commingled funds and private equity investments are measured at net asset value. Fixed income commingled funds are redeemable for net asset value with two weeks' notice. Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next
2
to
10
years. As of
March 31, 2017
, our unfunded commitment for our private equity investments was
$44.0 million
which, if called, would be funded by the assets of the trusts.
The change in our trust investments measured at fair value with significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Fair value, beginning balance
|
$
|
5,276
|
|
|
$
|
4,756
|
|
Net unrealized gains included in
Accumulated other comprehensive income
(1)
|
221
|
|
|
55
|
|
Distributions and other
|
(62
|
)
|
|
—
|
|
Fair value, ending balance
|
$
|
5,435
|
|
|
$
|
4,811
|
|
|
|
(1)
|
All net unrealized gains recognized in
Accumulated other comprehensive income
for our merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in
Accumulated other comprehensive income
to
Deferred preneed receipts held in trust
. See Note 6 for further information related to our
Deferred preneed receipts held in trust
.
|
Maturity dates of our fixed income securities range from
2017
to
2041
. Maturities of fixed income securities, excluding mutual funds, at
March 31, 2017
are estimated as follows:
|
|
|
|
|
|
Fair Value
|
|
(In thousands)
|
Due in one year or less
|
$
|
71,410
|
|
Due in one to five years
|
26,461
|
|
Due in five to ten years
|
33,537
|
|
Thereafter
|
7,631
|
|
|
$
|
139,039
|
|
Earnings from all our merchandise and service trust investments are recognized in revenue when merchandise is delivered or a service is performed. Fees charged by our wholly-owned registered investment advisor are also included in current revenue. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenue in the period in which they are earned. Recognized trust fund income (realized and unrealized) related to
these trust investments was
$14.3 million
and
$12.0 million
for the
three
months ended
March 31, 2017
and
2016
, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in
Other expense, net
and a decrease to
Preneed funeral receivables, net and trust investments
. These investment losses, if any, are offset by the corresponding reclassification in
Other expense, net,
which reduces
Deferred preneed receipts held in trust
. See Note 6 for further information related to our
Deferred preneed receipts held in trust
.
We have determined that the remaining unrealized losses in our merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our merchandise and service trust investment unrealized losses, their associated values, and the duration of unrealized losses as of
March 31, 2017
and
December 31, 2016
, respectively, are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
24,169
|
|
|
$
|
(372
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,169
|
|
|
$
|
(372
|
)
|
Canadian government
|
4,011
|
|
|
(45
|
)
|
|
173
|
|
|
(14
|
)
|
|
4,184
|
|
|
(59
|
)
|
Corporate
|
1,383
|
|
|
(15
|
)
|
|
2,564
|
|
|
(56
|
)
|
|
3,947
|
|
|
(71
|
)
|
Asset-backed
|
—
|
|
|
—
|
|
|
51
|
|
|
(1
|
)
|
|
51
|
|
|
(1
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
112
|
|
|
(29
|
)
|
|
95
|
|
|
(25
|
)
|
|
207
|
|
|
(54
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
58,091
|
|
|
(5,017
|
)
|
|
13,858
|
|
|
—
|
|
|
71,949
|
|
|
(5,017
|
)
|
Canada
|
3,353
|
|
|
(430
|
)
|
|
124
|
|
|
(11
|
)
|
|
3,477
|
|
|
(441
|
)
|
Other international
|
3,846
|
|
|
(357
|
)
|
|
7,567
|
|
|
(2,082
|
)
|
|
11,413
|
|
|
(2,439
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
25,972
|
|
|
(1,954
|
)
|
|
132,756
|
|
|
(10,474
|
)
|
|
158,728
|
|
|
(12,428
|
)
|
Fixed income
|
26,910
|
|
|
(447
|
)
|
|
30,967
|
|
|
(6,335
|
)
|
|
57,877
|
|
|
(6,782
|
)
|
Other
|
—
|
|
|
—
|
|
|
1,400
|
|
|
(30
|
)
|
|
1,400
|
|
|
(30
|
)
|
Trust investments, at fair value
|
147,847
|
|
|
(8,666
|
)
|
|
189,555
|
|
|
(19,028
|
)
|
|
337,402
|
|
|
(27,694
|
)
|
Fixed income commingled funds
|
72,487
|
|
|
(467
|
)
|
|
18,383
|
|
|
(664
|
)
|
|
90,870
|
|
|
(1,131
|
)
|
Private equity
|
28
|
|
|
(17
|
)
|
|
20,373
|
|
|
(2,942
|
)
|
|
20,401
|
|
|
(2,959
|
)
|
Trust investments, at net asset value
|
72,515
|
|
|
(484
|
)
|
|
38,756
|
|
|
(3,606
|
)
|
|
111,271
|
|
|
(4,090
|
)
|
Total temporarily impaired securities
|
$
|
220,362
|
|
|
$
|
(9,150
|
)
|
|
$
|
228,311
|
|
|
$
|
(22,634
|
)
|
|
$
|
448,673
|
|
|
$
|
(31,784
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
25,996
|
|
|
$
|
(557
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
25,996
|
|
|
$
|
(557
|
)
|
Canadian government
|
2,847
|
|
|
(30
|
)
|
|
191
|
|
|
(12
|
)
|
|
3,038
|
|
|
(42
|
)
|
Corporate
|
1,710
|
|
|
(15
|
)
|
|
3,560
|
|
|
(77
|
)
|
|
5,270
|
|
|
(92
|
)
|
Residential mortgage-backed
|
—
|
|
|
—
|
|
|
55
|
|
|
(3
|
)
|
|
55
|
|
|
(3
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
125
|
|
|
(17
|
)
|
|
98
|
|
|
(22
|
)
|
|
223
|
|
|
(39
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
87,059
|
|
|
(8,149
|
)
|
|
14,939
|
|
|
(3,376
|
)
|
|
101,998
|
|
|
(11,525
|
)
|
Canada
|
2,832
|
|
|
(254
|
)
|
|
482
|
|
|
(9
|
)
|
|
3,314
|
|
|
(263
|
)
|
Other international
|
5,390
|
|
|
(1,301
|
)
|
|
7,368
|
|
|
(1,866
|
)
|
|
12,758
|
|
|
(3,167
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
108,109
|
|
|
(5,080
|
)
|
|
127,273
|
|
|
(21,762
|
)
|
|
235,382
|
|
|
(26,842
|
)
|
Fixed income
|
34,120
|
|
|
(817
|
)
|
|
31,654
|
|
|
(6,551
|
)
|
|
65,774
|
|
|
(7,368
|
)
|
Other
|
26
|
|
|
(2
|
)
|
|
1,160
|
|
|
(15
|
)
|
|
1,186
|
|
|
(17
|
)
|
Trust investments, at fair value
|
268,214
|
|
|
(16,222
|
)
|
|
186,780
|
|
|
(33,693
|
)
|
|
454,994
|
|
|
(49,915
|
)
|
Fixed income commingled funds
|
75,041
|
|
|
(687
|
)
|
|
17,656
|
|
|
(480
|
)
|
|
92,697
|
|
|
(1,167
|
)
|
Private equity
|
693
|
|
|
(481
|
)
|
|
22,812
|
|
|
(4,709
|
)
|
|
23,505
|
|
|
(5,190
|
)
|
Trust investments, at net asset value
|
75,734
|
|
|
(1,168
|
)
|
|
40,468
|
|
|
(5,189
|
)
|
|
116,202
|
|
|
(6,357
|
)
|
Total temporarily impaired securities
|
$
|
343,948
|
|
|
$
|
(17,390
|
)
|
|
$
|
227,248
|
|
|
$
|
(38,882
|
)
|
|
$
|
571,196
|
|
|
$
|
(56,272
|
)
|
4. Preneed Cemetery Activities
Preneed cemetery receivables, net and trust investments
represent trust investments, including investment earnings, and customer receivables, net of unearned finance charges, for contracts sold in advance of when the property interment rights, merchandise, or services are needed. Our merchandise and service trusts are variable interest entities. We have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The trust investments detailed in Notes 3 and 5 are also accounted for as variable interest entities. When we receive payments from the customer, we deposit the amount required by law into the trust and reclassify the corresponding amount from
Deferred preneed cemetery revenue
into
Deferred preneed receipts held in trust.
Amounts are withdrawn from the trusts when the contract obligations are performed. Cash flows from preneed cemetery contracts are presented as operating cash flows in our unaudited condensed Consolidated Statement of Cash Flows.
Preneed cemetery receivables, net and trust investments
are reduced by the trust investment earnings (realized and unrealized) that we have been allowed to withdraw in certain states prior to maturity. These earnings are recorded in
Deferred preneed cemetery revenue
until the merchandise is delivered or the service is performed.
The table below sets forth certain investment-related activities associated with these preneed merchandise and service trusts:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Deposits
|
$
|
39,522
|
|
|
$
|
36,998
|
|
Withdrawals
|
$
|
38,534
|
|
|
$
|
32,411
|
|
Purchases of available-for-sale securities
|
$
|
398,813
|
|
|
$
|
131,851
|
|
Sales of available-for-sale securities
|
$
|
384,538
|
|
|
$
|
118,581
|
|
The components of
Preneed cemetery receivables, net and trust investments
in our unaudited condensed Consolidated Balance Sheet at
March 31, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Trust investments, at market
|
$
|
1,534,024
|
|
|
$
|
1,435,083
|
|
Cash and cash equivalents
|
107,287
|
|
|
123,146
|
|
Trust investments
|
1,641,311
|
|
|
1,558,229
|
|
Receivables from customers
|
1,049,235
|
|
|
1,038,592
|
|
Unearned finance charges
|
(33,055
|
)
|
|
(33,427
|
)
|
|
2,657,491
|
|
|
2,563,394
|
|
Allowance for cancellation
|
(75,746
|
)
|
|
(75,674
|
)
|
Preneed cemetery receivables, net and trust investments
|
$
|
2,581,745
|
|
|
$
|
2,487,720
|
|
The costs and values associated with the trust investments measured at market at
March 31, 2017
and
December 31, 2016
are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Value represents the market value of the underlying securities held by the trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
7,450
|
|
|
$
|
10
|
|
|
$
|
(6
|
)
|
|
$
|
7,454
|
|
Canadian government
|
2
|
|
9,052
|
|
|
10
|
|
|
(84
|
)
|
|
8,978
|
|
Corporate
|
2
|
|
1,587
|
|
|
15
|
|
|
(40
|
)
|
|
1,562
|
|
Asset-backed
|
2
|
|
169
|
|
|
16
|
|
|
—
|
|
|
185
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
542,523
|
|
|
76,165
|
|
|
(11,907
|
)
|
|
606,781
|
|
Canada
|
1
|
|
8,897
|
|
|
5,188
|
|
|
(60
|
)
|
|
14,025
|
|
Other international
|
1
|
|
33,081
|
|
|
3,542
|
|
|
(2,550
|
)
|
|
34,073
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
372,427
|
|
|
17,328
|
|
|
(13,079
|
)
|
|
376,676
|
|
Fixed income
|
1
|
|
264,979
|
|
|
2,959
|
|
|
(10,310
|
)
|
|
257,628
|
|
Trust investments, at fair value
|
|
|
1,240,165
|
|
|
105,233
|
|
|
(38,036
|
)
|
|
1,307,362
|
|
Fixed income commingled funds
|
|
|
181,054
|
|
|
5,100
|
|
|
(293
|
)
|
|
185,861
|
|
Private equity
|
|
|
41,393
|
|
|
4,962
|
|
|
(5,554
|
)
|
|
40,801
|
|
Trust investments, at net asset value
|
|
|
222,447
|
|
|
10,062
|
|
|
(5,847
|
)
|
|
226,662
|
|
Trust investments, at market
|
|
|
$
|
1,462,612
|
|
|
$
|
115,295
|
|
|
$
|
(43,883
|
)
|
|
$
|
1,534,024
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
70,070
|
|
|
$
|
567
|
|
|
$
|
(281
|
)
|
|
$
|
70,356
|
|
Canadian government
|
2
|
|
9,109
|
|
|
49
|
|
|
(66
|
)
|
|
9,092
|
|
Corporate
|
2
|
|
1,596
|
|
|
18
|
|
|
(34
|
)
|
|
1,580
|
|
Asset-backed
|
2
|
|
170
|
|
|
13
|
|
|
—
|
|
|
183
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
539,445
|
|
|
72,682
|
|
|
(21,680
|
)
|
|
590,447
|
|
Canada
|
1
|
|
9,027
|
|
|
4,807
|
|
|
(84
|
)
|
|
13,750
|
|
Other international
|
1
|
|
42,870
|
|
|
3,023
|
|
|
(5,229
|
)
|
|
40,664
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
356,079
|
|
|
7,812
|
|
|
(29,603
|
)
|
|
334,288
|
|
Fixed income
|
1
|
|
94,383
|
|
|
1,535
|
|
|
(9,854
|
)
|
|
86,064
|
|
Trust investments, at fair value
|
|
|
1,122,749
|
|
|
90,506
|
|
|
(66,831
|
)
|
|
1,146,424
|
|
Fixed income commingled funds
|
|
|
245,813
|
|
|
5,347
|
|
|
(1,681
|
)
|
|
249,479
|
|
Private equity
|
|
|
37,881
|
|
|
4,616
|
|
|
(3,317
|
)
|
|
39,180
|
|
Trust investments, at net asset value
|
|
|
283,694
|
|
|
9,963
|
|
|
(4,998
|
)
|
|
288,659
|
|
Trust investments, at market
|
|
|
$
|
1,406,443
|
|
|
$
|
100,469
|
|
|
$
|
(71,829
|
)
|
|
$
|
1,435,083
|
|
Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer. Additionally, valuations are reviewed quarterly by the Investment Committee of the Board of Directors.
Where quoted prices are available in an active market, securities held by the trusts are classified as Level 1 investments pursuant to the fair value measurements hierarchy.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, ratings, and tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurements hierarchy.
The valuation of other investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These funds are classified as Level 3 investments pursuant to the fair value measurements hierarchy.
Fixed income commingled funds and private equity investments are measured at net asset value. Fixed income commingled funds are redeemable for net asset value with two weeks notice. Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next
2
to
10
years. As of
March 31, 2017
, our unfunded commitment for our private equity investments was
$49.7 million
which, if called, would be funded by the assets of the trusts.
The change in our trust investments measured at fair value with significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2016
|
|
(In thousands)
|
Fair value, beginning balance
|
$
|
1,504
|
|
Net unrealized losses included in
Accumulated other comprehensive income
(1)
|
(207
|
)
|
Fair value, ending balance
|
$
|
1,297
|
|
|
|
(1)
|
All net unrealized losses recognized in
Accumulated other comprehensive income
for our merchandise and service trust investments are attributable to our preneed customers and are offset by a corresponding reclassification in
Accumulated other comprehensive income
to
Deferred preneed receipts held in trust
. See Note 6 for further information related to our
Deferred preneed receipts held in trust
.
|
Maturity dates of our fixed income securities range from
2017
to
2023
. Maturities of fixed income securities, excluding mutual funds, at
March 31, 2017
are estimated as follows:
|
|
|
|
|
|
Fair Value
|
|
(In thousands)
|
Due in one year or less
|
$
|
3,306
|
|
Due in one to five years
|
14,675
|
|
Due in five to ten years
|
198
|
|
|
$
|
18,179
|
|
Earnings from all our merchandise and service trust investments are recognized in current revenue when merchandise is delivered or a service is performed. Fees charged by our wholly-owned registered investment advisor are also included in current revenue. In addition, we are entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a preneed contract; these amounts are also recognized in current revenue in the period in which they are earned. Recognized trust fund income (realized and unrealized) related to these trust investments was
$12.6 million
and
$9.7 million
for the
three
months ended
March 31, 2017
and
2016
, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in
Other expense, net
and a decrease to
Preneed cemetery receivables, net and trust investments
. These investment losses, if any, are offset by the corresponding reclassification in
Other expense, net,
which reduces
Deferred preneed receipts held in trust
. See Note 6 for further information related to our
Deferred preneed receipts held in trust
.
We have determined that the remaining unrealized losses in our merchandise and service trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our merchandise and service trust investment unrealized losses, their associated values and the duration of unrealized losses as of
March 31, 2017
and
December 31, 2016
, respectively, are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
4,542
|
|
|
$
|
(6
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
4,542
|
|
|
$
|
(6
|
)
|
Canadian government
|
1,416
|
|
|
(10
|
)
|
|
1,184
|
|
|
(74
|
)
|
|
2,600
|
|
|
(84
|
)
|
Corporate
|
—
|
|
|
—
|
|
|
731
|
|
|
(40
|
)
|
|
731
|
|
|
(40
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
132,638
|
|
|
(8,635
|
)
|
|
11,759
|
|
|
(3,272
|
)
|
|
144,397
|
|
|
(11,907
|
)
|
Canada
|
420
|
|
|
(44
|
)
|
|
861
|
|
|
(16
|
)
|
|
1,281
|
|
|
(60
|
)
|
Other international
|
5,703
|
|
|
(524
|
)
|
|
7,754
|
|
|
(2,026
|
)
|
|
13,457
|
|
|
(2,550
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
12,921
|
|
|
(846
|
)
|
|
150,724
|
|
|
(12,233
|
)
|
|
163,645
|
|
|
(13,079
|
)
|
Fixed income
|
26,620
|
|
|
(445
|
)
|
|
45,679
|
|
|
(9,865
|
)
|
|
72,299
|
|
|
(10,310
|
)
|
Trust investments, at fair value
|
184,260
|
|
|
(10,510
|
)
|
|
218,692
|
|
|
(27,526
|
)
|
|
402,952
|
|
|
(38,036
|
)
|
Fixed income commingled funds
|
97,530
|
|
|
(293
|
)
|
|
—
|
|
|
—
|
|
|
97,530
|
|
|
(293
|
)
|
Private equity
|
—
|
|
|
—
|
|
|
16,420
|
|
|
(5,554
|
)
|
|
16,420
|
|
|
(5,554
|
)
|
Trust investments, at net asset value
|
97,530
|
|
|
(293
|
)
|
|
16,420
|
|
|
(5,554
|
)
|
|
113,950
|
|
|
(5,847
|
)
|
Total temporarily impaired securities
|
$
|
281,790
|
|
|
$
|
(10,803
|
)
|
|
$
|
235,112
|
|
|
$
|
(33,080
|
)
|
|
$
|
516,902
|
|
|
$
|
(43,883
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
$
|
15,413
|
|
|
$
|
(281
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
15,413
|
|
|
$
|
(281
|
)
|
Canadian government
|
—
|
|
|
—
|
|
|
1,192
|
|
|
(66
|
)
|
|
1,192
|
|
|
(66
|
)
|
Corporate
|
—
|
|
|
—
|
|
|
736
|
|
|
(34
|
)
|
|
736
|
|
|
(34
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
149,530
|
|
|
(13,680
|
)
|
|
23,010
|
|
|
(8,000
|
)
|
|
172,540
|
|
|
(21,680
|
)
|
Canada
|
408
|
|
|
(82
|
)
|
|
38
|
|
|
(2
|
)
|
|
446
|
|
|
(84
|
)
|
Other international
|
9,707
|
|
|
(2,330
|
)
|
|
11,442
|
|
|
(2,899
|
)
|
|
21,149
|
|
|
(5,229
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
125,728
|
|
|
(4,728
|
)
|
|
146,332
|
|
|
(24,875
|
)
|
|
272,060
|
|
|
(29,603
|
)
|
Fixed income
|
26,566
|
|
|
(446
|
)
|
|
45,337
|
|
|
(9,408
|
)
|
|
71,903
|
|
|
(9,854
|
)
|
Trust investments, at fair value
|
327,352
|
|
|
(21,547
|
)
|
|
228,087
|
|
|
(45,284
|
)
|
|
555,439
|
|
|
(66,831
|
)
|
Fixed income commingled funds
|
133,164
|
|
|
(1,681
|
)
|
|
—
|
|
|
—
|
|
|
133,164
|
|
|
(1,681
|
)
|
Private equity
|
558
|
|
|
(1
|
)
|
|
16,769
|
|
|
(3,316
|
)
|
|
17,327
|
|
|
(3,317
|
)
|
Trust investments, at net asset value
|
133,722
|
|
|
(1,682
|
)
|
|
16,769
|
|
|
(3,316
|
)
|
|
150,491
|
|
|
(4,998
|
)
|
Total temporarily impaired securities
|
$
|
461,074
|
|
|
$
|
(23,229
|
)
|
|
$
|
244,856
|
|
|
$
|
(48,600
|
)
|
|
$
|
705,930
|
|
|
$
|
(71,829
|
)
|
5. Cemetery Perpetual Care Trusts
We are required by state and provincial law to pay into cemetery perpetual care trusts a portion of the proceeds from the sale of cemetery property interment rights. Our cemetery perpetual care trusts are variable interest entities. We have determined that we are the primary beneficiary of these trusts, as we absorb a majority of the losses and returns associated with these trusts. The trust investments detailed in Notes 3 and 4 are also accounted for as variable interest entities. We consolidate our cemetery perpetual care trust investments with a corresponding amount recorded as
Care trusts’ corpus.
Cash flows from cemetery perpetual care trusts are presented as operating cash flows in our unaudited condensed Consolidated Statement of Cash Flows.
The table below sets forth certain investment-related activities associated with our cemetery perpetual care trusts:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Deposits
|
$
|
9,989
|
|
|
$
|
9,813
|
|
Withdrawals
|
$
|
12,425
|
|
|
$
|
16,294
|
|
Purchases of available-for-sale securities
|
$
|
27,266
|
|
|
$
|
48,476
|
|
Sales of available-for-sale securities
|
$
|
13,975
|
|
|
$
|
33,522
|
|
The components of
Cemetery perpetual care trust investments
in our unaudited condensed Consolidated Balance Sheet at
March 31, 2017
and
December 31, 2016
are as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Trust investments, at market
|
$
|
1,378,853
|
|
|
$
|
1,349,073
|
|
Cash and cash equivalents
|
62,082
|
|
|
58,392
|
|
Cemetery perpetual care trust investments
|
$
|
1,440,935
|
|
|
$
|
1,407,465
|
|
The costs and values associated with trust investments, at market at
March 31, 2017
and
December 31, 2016
are detailed below. Cost reflects the investment (net of redemptions) of control holders in the trusts. Value represents the value of the underlying securities or cash held by the trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. Treasury
|
2
|
|
$
|
10
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
10
|
|
Canadian government
|
2
|
|
14,085
|
|
|
16
|
|
|
(142
|
)
|
|
13,959
|
|
Corporate
|
2
|
|
4,503
|
|
|
98
|
|
|
(107
|
)
|
|
4,494
|
|
Residential mortgage-backed
|
2
|
|
251
|
|
|
1
|
|
|
(1
|
)
|
|
251
|
|
Asset-backed
|
2
|
|
112
|
|
|
3
|
|
|
(15
|
)
|
|
100
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
1,469
|
|
|
18
|
|
|
(89
|
)
|
|
1,398
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
243,197
|
|
|
39,567
|
|
|
(4,899
|
)
|
|
277,865
|
|
Canada
|
1
|
|
4,863
|
|
|
2,875
|
|
|
(90
|
)
|
|
7,648
|
|
Other international
|
1
|
|
10,655
|
|
|
275
|
|
|
(936
|
)
|
|
9,994
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
15,484
|
|
|
3,808
|
|
|
(258
|
)
|
|
19,034
|
|
Fixed income
|
1
|
|
692,627
|
|
|
3,948
|
|
|
(20,870
|
)
|
|
675,705
|
|
Other
|
3
|
|
622
|
|
|
1,256
|
|
|
—
|
|
|
1,878
|
|
Trust investments, at fair value
|
|
|
987,878
|
|
|
51,865
|
|
|
(27,407
|
)
|
|
1,012,336
|
|
Fixed income commingled funds
|
|
|
278,935
|
|
|
—
|
|
|
(8,967
|
)
|
|
269,968
|
|
Private equity
|
|
|
100,496
|
|
|
2,938
|
|
|
(6,885
|
)
|
|
96,549
|
|
Trust investments, at net asset value
|
|
|
379,431
|
|
|
2,938
|
|
|
(15,852
|
)
|
|
366,517
|
|
Trust investments, at market
|
|
|
$
|
1,367,309
|
|
|
$
|
54,803
|
|
|
$
|
(43,259
|
)
|
|
$
|
1,378,853
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Value
|
|
|
|
|
|
(In thousands)
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Canadian government
|
2
|
|
$
|
14,280
|
|
|
$
|
88
|
|
|
$
|
(114
|
)
|
|
$
|
14,254
|
|
Corporate
|
2
|
|
4,636
|
|
|
100
|
|
|
(101
|
)
|
|
4,635
|
|
Residential mortgage-backed
|
2
|
|
304
|
|
|
—
|
|
|
(1
|
)
|
|
303
|
|
Asset-backed
|
2
|
|
220
|
|
|
3
|
|
|
(28
|
)
|
|
195
|
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
2
|
|
1,479
|
|
|
2
|
|
|
(117
|
)
|
|
1,364
|
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
United States
|
1
|
|
233,643
|
|
|
28,679
|
|
|
(2,337
|
)
|
|
259,985
|
|
Canada
|
1
|
|
4,828
|
|
|
2,631
|
|
|
(108
|
)
|
|
7,351
|
|
Other international
|
1
|
|
14,607
|
|
|
148
|
|
|
(2,236
|
)
|
|
12,519
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Equity
|
1
|
|
18,909
|
|
|
4,370
|
|
|
(412
|
)
|
|
22,867
|
|
Fixed income
|
1
|
|
688,472
|
|
|
3,324
|
|
|
(28,997
|
)
|
|
662,799
|
|
Other
|
3
|
|
633
|
|
|
1,254
|
|
|
—
|
|
|
1,887
|
|
Trust investments, at fair value
|
|
|
982,011
|
|
|
40,599
|
|
|
(34,451
|
)
|
|
988,159
|
|
Fixed income commingled funds
|
|
|
277,662
|
|
|
—
|
|
|
(9,386
|
)
|
|
268,276
|
|
Private equity
|
|
|
97,108
|
|
|
2,240
|
|
|
(6,710
|
)
|
|
92,638
|
|
Trust investments, at net asset value
|
|
|
374,770
|
|
|
2,240
|
|
|
(16,096
|
)
|
|
360,914
|
|
Trust investments, at market
|
|
|
$
|
1,356,781
|
|
|
$
|
42,839
|
|
|
$
|
(50,547
|
)
|
|
$
|
1,349,073
|
|
Valuation policies and procedures are determined by our Trust Services department, which reports to our Chief Financial Officer. Additionally, valuations are reviewed quarterly by the Investment Committee of the Board of Directors.
Where quoted prices are available in an active market, securities held by the trusts are classified as Level 1 investments pursuant to the fair value measurements hierarchy.
Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, ratings, and tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurements hierarchy.
The valuation of other investments requires management judgment due to the absence of quoted market prices, inherent lack of liquidity, and the long-term nature of such assets. These securities are classified as Level 3 investments pursuant to the fair value measurements hierarchy.
Private equity investments are measured at net asset value. Our private equity investments include several funds that invest in limited partnerships, distressed debt, real estate, and mezzanine financing. These investments can never be redeemed by the funds. Instead, due to the nature of the investments in this category, distributions are received through the liquidation of the underlying assets of the funds. We estimate that the underlying assets will be liquidated over the next
2
to
10
years. As of
March 31, 2017
, our unfunded commitment for our private equity investments was
$27.2 million
which, if called, would be funded by the assets of the trusts.
The change in our trust investments measured at fair value with significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Fair market value, beginning balance
|
$
|
1,887
|
|
|
$
|
1,902
|
|
Net unrealized losses included in
Accumulated other comprehensive income
(1)
|
2
|
|
|
(19
|
)
|
Distributions and other
|
(11
|
)
|
|
—
|
|
Fair market value, ending balance
|
$
|
1,878
|
|
|
$
|
1,883
|
|
|
|
(1)
|
All net unrealized losses recognized in
Accumulated other comprehensive income
for our cemetery perpetual care trust investments are offset by a corresponding reclassification in
Accumulated other comprehensive income
to
Care trusts’ corpus
. See Note 6 for further information related to our
Care trusts’ corpus
.
|
Maturity dates of our fixed income securities range from
2017
to
2040
. Maturities of fixed income securities at
March 31, 2017
are estimated as follows:
|
|
|
|
|
|
Fair Value
|
|
(In thousands)
|
Due in one year or less
|
$
|
1,795
|
|
Due in one to five years
|
16,719
|
|
Due in five to ten years
|
105
|
|
Thereafter
|
195
|
|
|
$
|
18,814
|
|
Distributable earnings from these cemetery perpetual care trust investments are recognized in current cemetery revenue to the extent we incur qualifying cemetery maintenance costs. Fees charged by our wholly-owned registered investment advisor are also included in current revenue. Recognized trust fund income related to these trust investments was
$11.3 million
and
$18.5 million
for the
three
months ended
March 31, 2017
and
2016
, respectively.
We assess our trust investments for other-than-temporary declines in fair value on a quarterly basis. Impairment charges resulting from this assessment are recognized as investment losses in
Other expense, net
and a decrease to
Cemetery perpetual care trust investments
. These investment losses, if any, are offset by the corresponding reclassification in
Other expense, net,
which reduces
Care trusts’ corpus
. See Note 6 for further information related to our
Care trusts’ corpus
.
We have determined that the remaining unrealized losses in our cemetery perpetual care trust investments are considered temporary in nature, as the unrealized losses were due to temporary fluctuations in interest rates and equity prices. The investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. We believe that none of the remaining securities are other-than-temporarily impaired based on our analysis of the investments. Our analysis included a review of the portfolio holdings and discussions with the individual money managers as to the sector exposures, credit ratings, and the severity and duration of the unrealized losses. Our cemetery perpetual care trust investment unrealized losses, their associated values and the duration of unrealized losses as of
March 31, 2017
and
December 31, 2016
, respectively, are shown in the following tables:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Canadian government
|
$
|
1,501
|
|
|
$
|
(14
|
)
|
|
$
|
1,943
|
|
|
$
|
(128
|
)
|
|
$
|
3,444
|
|
|
$
|
(142
|
)
|
Corporate
|
628
|
|
|
(13
|
)
|
|
1,453
|
|
|
(94
|
)
|
|
2,081
|
|
|
(107
|
)
|
Residential mortgage-backed
|
203
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
203
|
|
|
(1
|
)
|
Asset-backed
|
41
|
|
|
(10
|
)
|
|
10
|
|
|
(5
|
)
|
|
51
|
|
|
(15
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
367
|
|
|
(6
|
)
|
|
416
|
|
|
(83
|
)
|
|
783
|
|
|
(89
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
28,989
|
|
|
(2,332
|
)
|
|
10,246
|
|
|
(2,567
|
)
|
|
39,235
|
|
|
(4,899
|
)
|
Canada
|
129
|
|
|
(24
|
)
|
|
757
|
|
|
(66
|
)
|
|
886
|
|
|
(90
|
)
|
Other international
|
4,547
|
|
|
(66
|
)
|
|
2,663
|
|
|
(870
|
)
|
|
7,210
|
|
|
(936
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
399
|
|
|
(27
|
)
|
|
1,941
|
|
|
(231
|
)
|
|
2,340
|
|
|
(258
|
)
|
Fixed income
|
266,649
|
|
|
(1,819
|
)
|
|
342,090
|
|
|
(19,051
|
)
|
|
608,739
|
|
|
(20,870
|
)
|
Trust investments, at fair value
|
303,453
|
|
|
(4,312
|
)
|
|
361,519
|
|
|
(23,095
|
)
|
|
664,972
|
|
|
(27,407
|
)
|
Fixed income commingled funds
|
269,968
|
|
|
(8,967
|
)
|
|
—
|
|
|
—
|
|
|
269,968
|
|
|
(8,967
|
)
|
Private equity
|
924
|
|
|
(31
|
)
|
|
34,880
|
|
|
(6,854
|
)
|
|
35,804
|
|
|
(6,885
|
)
|
Trust investments, at net asset value
|
270,892
|
|
|
(8,998
|
)
|
|
34,880
|
|
|
(6,854
|
)
|
|
305,772
|
|
|
(15,852
|
)
|
Total temporarily impaired securities
|
$
|
574,345
|
|
|
$
|
(13,310
|
)
|
|
$
|
396,399
|
|
|
$
|
(29,949
|
)
|
|
$
|
970,744
|
|
|
$
|
(43,259
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
In Loss Position
Less Than 12 Months
|
|
In Loss Position
Greater Than 12 Months
|
|
Total
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
Value
|
|
Unrealized
Losses
|
|
|
|
|
|
(In thousands)
|
|
|
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
|
|
Canadian government
|
$
|
66
|
|
|
$
|
(1
|
)
|
|
$
|
1,961
|
|
|
$
|
(113
|
)
|
|
$
|
2,027
|
|
|
$
|
(114
|
)
|
Corporate
|
397
|
|
|
(7
|
)
|
|
1,866
|
|
|
(94
|
)
|
|
2,263
|
|
|
(101
|
)
|
Residential mortgage-backed
|
303
|
|
|
(1
|
)
|
|
—
|
|
|
—
|
|
|
303
|
|
|
(1
|
)
|
Asset-backed
|
28
|
|
|
(22
|
)
|
|
101
|
|
|
(6
|
)
|
|
129
|
|
|
(28
|
)
|
Equity securities:
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock
|
846
|
|
|
(36
|
)
|
|
417
|
|
|
(81
|
)
|
|
1,263
|
|
|
(117
|
)
|
Common stock:
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
34,844
|
|
|
(1,339
|
)
|
|
12,974
|
|
|
(998
|
)
|
|
47,818
|
|
|
(2,337
|
)
|
Canada
|
78
|
|
|
(47
|
)
|
|
558
|
|
|
(61
|
)
|
|
636
|
|
|
(108
|
)
|
Other international
|
4,177
|
|
|
(508
|
)
|
|
5,715
|
|
|
(1,728
|
)
|
|
9,892
|
|
|
(2,236
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Equity
|
877
|
|
|
(17
|
)
|
|
2,899
|
|
|
(395
|
)
|
|
3,776
|
|
|
(412
|
)
|
Fixed income
|
263,231
|
|
|
(4,678
|
)
|
|
348,623
|
|
|
(24,319
|
)
|
|
611,854
|
|
|
(28,997
|
)
|
Trust investments, at fair value
|
304,847
|
|
|
(6,656
|
)
|
|
375,114
|
|
|
(27,795
|
)
|
|
679,961
|
|
|
(34,451
|
)
|
Fixed income commingled funds
|
265,345
|
|
|
(9,346
|
)
|
|
2,931
|
|
|
(40
|
)
|
|
268,276
|
|
|
(9,386
|
)
|
Private equity
|
21,426
|
|
|
(268
|
)
|
|
33,519
|
|
|
(6,442
|
)
|
|
54,945
|
|
|
(6,710
|
)
|
Trust investments, at net asset value
|
286,771
|
|
|
(9,614
|
)
|
|
36,450
|
|
|
(6,482
|
)
|
|
323,221
|
|
|
(16,096
|
)
|
Total temporarily impaired securities
|
$
|
591,618
|
|
|
$
|
(16,270
|
)
|
|
$
|
411,564
|
|
|
$
|
(34,277
|
)
|
|
$
|
1,003,182
|
|
|
$
|
(50,547
|
)
|
6. Deferred Preneed Receipts Held in Trust and Care Trusts’ Corpus
Deferred preneed receipts held in trust
We consolidate the merchandise and service trusts associated with our preneed activities. Although the consolidation of the merchandise and service trusts is required by accounting standards, it does not change the legal relationships among the trusts, us, or our customers. The customers are the legal beneficiaries of these merchandise and service trusts, and therefore their interests in these trusts represent a liability to us. The components of
Deferred preneed receipts held in trust
in our unaudited condensed Consolidated Balance Sheet at
March 31, 2017
and
December 31, 2016
are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
Preneed
Funeral
|
|
Preneed
Cemetery
|
|
Total
|
|
Preneed
Funeral
|
|
Preneed
Cemetery
|
|
Total
|
|
(In thousands)
|
Trust investments
|
$
|
1,585,715
|
|
|
$
|
1,641,311
|
|
|
$
|
3,227,026
|
|
|
$
|
1,546,517
|
|
|
$
|
1,558,229
|
|
|
$
|
3,104,746
|
|
Accrued trust operating payables and other
|
(605
|
)
|
|
(401
|
)
|
|
(1,006
|
)
|
|
(589
|
)
|
|
(361
|
)
|
|
(950
|
)
|
Deferred preneed receipts held in trust
|
$
|
1,585,110
|
|
|
$
|
1,640,910
|
|
|
$
|
3,226,020
|
|
|
$
|
1,545,928
|
|
|
$
|
1,557,868
|
|
|
$
|
3,103,796
|
|
Care trusts’ corpus
The
Care trusts’ corpus
reflected in our unaudited condensed Consolidated Balance Sheet represents the cemetery perpetual care trusts, including the related accrued expenses. The components of
Care trusts’ corpus
in our unaudited condensed Consolidated Balance Sheet at
March 31, 2017
and
December 31, 2016
are detailed below.
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
Cemetery perpetual care trust investments
|
$
|
1,440,935
|
|
|
$
|
1,407,465
|
|
Accrued trust deferred taxes, operating payables, and other
|
1,330
|
|
|
778
|
|
Care trusts’ corpus
|
$
|
1,442,265
|
|
|
$
|
1,408,243
|
|
Other expense, net
The components of
Other expense, net
in our unaudited condensed Consolidated Statement of Operations for the
three months ended March 31, 2017
and
2016
are detailed below. See Notes 3, 4, and 5 for further discussion of the amounts related to the funeral, cemetery, and cemetery perpetual care trusts.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2017
|
|
Funeral
Trusts
|
|
Cemetery
Trusts
|
|
Cemetery Perpetual
Care Trusts
|
|
Other, Net
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Realized gains
|
$
|
11,561
|
|
|
$
|
40,029
|
|
|
$
|
843
|
|
|
$
|
—
|
|
|
$
|
52,433
|
|
Realized losses
|
(5,544
|
)
|
|
(14,261
|
)
|
|
(1,969
|
)
|
|
—
|
|
|
(21,774
|
)
|
Impairment charges
|
(4,267
|
)
|
|
(765
|
)
|
|
(7
|
)
|
|
—
|
|
|
(5,039
|
)
|
Interest, dividend, and other ordinary income
|
2,810
|
|
|
7,773
|
|
|
12,576
|
|
|
—
|
|
|
23,159
|
|
Trust expenses and income taxes
|
(4,109
|
)
|
|
(11,075
|
)
|
|
(5,170
|
)
|
|
—
|
|
|
(20,354
|
)
|
Net trust investment (loss) income
|
451
|
|
|
21,701
|
|
|
6,273
|
|
|
—
|
|
|
28,425
|
|
Reclassification to deferred preneed receipts held in trust and care trusts’ corpus
|
(451
|
)
|
|
(21,701
|
)
|
|
(6,273
|
)
|
|
—
|
|
|
(28,425
|
)
|
Other expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(434
|
)
|
|
(434
|
)
|
Total other expense, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(434
|
)
|
|
$
|
(434
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2016
|
|
Funeral
Trusts
|
|
Cemetery
Trusts
|
|
Cemetery Perpetual
Care Trusts
|
|
Other, Net
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Realized gains
|
$
|
6,824
|
|
|
$
|
6,246
|
|
|
$
|
1,494
|
|
|
$
|
—
|
|
|
$
|
14,564
|
|
Realized losses
|
(19,651
|
)
|
|
(22,853
|
)
|
|
(1,616
|
)
|
|
—
|
|
|
(44,120
|
)
|
Impairment charges
|
(1,118
|
)
|
|
(2,049
|
)
|
|
(115
|
)
|
|
—
|
|
|
(3,282
|
)
|
Interest, dividend, and other ordinary income
|
2,773
|
|
|
2,360
|
|
|
12,990
|
|
|
—
|
|
|
18,123
|
|
Trust expenses and income taxes
|
(4,442
|
)
|
|
(4,853
|
)
|
|
(5,757
|
)
|
|
—
|
|
|
(15,052
|
)
|
Net trust investment (loss) income
|
(15,614
|
)
|
|
(21,149
|
)
|
|
6,996
|
|
|
—
|
|
|
(29,767
|
)
|
Reclassification to deferred preneed receipts held in trust and care trusts’ corpus
|
15,614
|
|
|
21,149
|
|
|
(6,996
|
)
|
|
—
|
|
|
29,767
|
|
Other expense, net
|
—
|
|
|
—
|
|
|
—
|
|
|
(242
|
)
|
|
(242
|
)
|
Total other expense, net
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
(242
|
)
|
|
$
|
(242
|
)
|
7. Income Taxes
Income tax expense during interim periods is based on our estimated annual effective income tax rate plus any discrete items, which are recorded in the period in which they occur. Discrete items include, among others, such events as changes in estimates due to the finalization of tax returns, tax audit settlements, expiration of statutes of limitation, and increases or decreases in valuation allowances on deferred tax assets. Our effective tax rate was a benefit of
77.4%
and expense of
40.5%
for the
three
months ended
March 31, 2017
and
2016
, respectively. The effective tax rate for the
three months ended
March 31, 2017
is lower than the federal statutory tax rate of
35%
primarily due to the recent IRS tax settlement discussed below and a
result of tax benefits recognized during the quarter on the settlement of employee share-based awards in accordance with a revised accounting standard for share-based compensation.
Unrecognized Tax Benefits
As of March 31, 2017, the total amount of our unrecognized tax benefits was
$79.5 million
and the total amount of our accrued interest was
$7.3 million
.
We reached an agreement with the Internal Revenue Service (“IRS”) to resolve the issues under audit with respect to tax years
1999 through 2005
. In March 2017, we received from the IRS Office of Appeals the fully executed Form 870-AD, which, subject to finalization of computations, effectively settles the issues under audit for those years. As a result of this resolution, we recognized a reduction in our unrecognized tax benefits of
$143.0 million
of which
$102.5 million
was recognized as income tax benefit for the matters that were effectively settled with an increase in our taxes payable of
$40.5 million
.
We remain under audit for years 2006 and 2007 as a result of carryback claims. In addition, we are under audit by various state jurisdictions for years
2000 through 2015
. There are currently no federal or provincial audits in Canada. It is reasonably possible that the amount of unrecognized tax benefits could significantly decrease over the next 12 months. However, due to the uncertainty regarding the timing of completion and possible outcomes on the outstanding audits, a current estimate of the range of decrease that may occur within the next 12 months cannot be made.
8. Debt
Debt as of
March 31, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
7.625% Senior Notes due October 2018
|
$
|
250,000
|
|
|
$
|
250,000
|
|
4.5% Senior Notes due November 2020
|
200,000
|
|
|
200,000
|
|
8.0% Senior Notes due November 2021
|
150,000
|
|
|
150,000
|
|
5.375% Senior Notes due January 2022
|
425,000
|
|
|
425,000
|
|
5.375% Senior Notes due May 2024
|
850,000
|
|
|
850,000
|
|
7.5% Senior Notes due April 2027
|
200,000
|
|
|
200,000
|
|
Term Loan due March 2021
|
665,000
|
|
|
673,750
|
|
Bank Credit Facility due March 2021
|
385,000
|
|
|
350,000
|
|
Obligations under capital leases
|
183,043
|
|
|
208,758
|
|
Mortgage notes and other debt, maturities through 2050
|
3,722
|
|
|
3,753
|
|
Unamortized premiums, net
|
8,102
|
|
|
8,313
|
|
Unamortized debt issuance costs
|
(31,608
|
)
|
|
(32,984
|
)
|
Total debt
|
3,288,259
|
|
|
3,286,590
|
|
Less: Current maturities of long-term debt
|
(63,606
|
)
|
|
(89,974
|
)
|
Total long-term debt
|
$
|
3,224,653
|
|
|
$
|
3,196,616
|
|
Current maturities of debt at
March 31, 2017
include amounts due under our Term Loan, mortgage notes and other debt, and capital leases within the next year. Our consolidated debt had a weighted average interest rate of
4.75%
and
4.68%
at
March 31, 2017
and
December 31, 2016
, respectively. Approximately
63%
of our total debt had a fixed interest rate at both
March 31, 2017
and
December 31, 2016
.
During the
three months ended March 31, 2017
and
2016
, we paid
$20.0 million
and
$15.9 million
in cash interest, respectively.
Bank Credit Agreement
As of
March 31, 2017
, we have
$385.0 million
of outstanding borrowings under our Bank Credit Facility due
March 2021
;
$665.0 million
of outstanding borrowings under our Term Loan due
March 2021
; and have issued
$32.7 million
of letters of credit. The bank credit agreement due
March 2021
provides us with flexibility for working capital, if needed, and is guaranteed by a majority of our domestic subsidiaries. The subsidiary guaranty is a guaranty of payment of the outstanding amount of the total lending commitment, including letters of credit. The bank credit agreement contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, and certain dividend and share repurchase restrictions. As of
March 31, 2017
, we were in compliance with all of our debt covenants. We pay a quarterly fee on the unused commitment, which was
0.30%
at
March 31, 2017
. As of
March 31, 2017
, we have
$282.3 million
in borrowing capacity under the Bank Credit Facility.
Debt Issuances and Additions
In
January 2017
, we drew
$25.0 million
and in March 2017 we drew
$10.0 million
on our Bank Credit Facility due
March 2021
to make required payments on our Term Loan due
March 2021
and for general corporate purposes.
Debt Extinguishments and Reductions
During the
three months ended March 31, 2017
, we made aggregate principal debt payments of
$8.8 million
for scheduled payments towards our Term Loan due
March 2021
.
9. Fair Value of Financial Instruments
Fair Value Estimates
The fair value estimates of the following financial instruments have been determined using available market information and appropriate valuation methodologies. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair value of receivables on preneed contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms.
The fair value of our debt instruments at
March 31, 2017
and
December 31, 2016
was as follows:
|
|
|
|
|
|
|
|
|
|
March 31, 2017
|
|
December 31, 2016
|
|
(In thousands)
|
7.625% Senior Notes due October 2018
|
$
|
270,000
|
|
|
$
|
272,353
|
|
4.5% Senior Notes due November 2020
|
202,500
|
|
|
205,000
|
|
8.0% Senior Notes due November 2021
|
174,708
|
|
|
175,500
|
|
5.375% Senior Notes due January 2022
|
440,938
|
|
|
444,614
|
|
5.375% Senior Notes due May 2024
|
882,003
|
|
|
884,000
|
|
7.5% Senior Notes due April 2027
|
230,532
|
|
|
231,590
|
|
Term Loan due March 2021
|
665,000
|
|
|
673,750
|
|
Bank Credit Facility due March 2021
|
385,000
|
|
|
350,000
|
|
Mortgage notes and other debt, maturities through 2050
|
3,721
|
|
|
3,753
|
|
Total fair value of debt instruments
|
$
|
3,254,402
|
|
|
$
|
3,240,560
|
|
The fair value of our long-term, fixed-rate loans were estimated using market prices for those loans, and therefore they are classified within Level 2 of the fair value measurements hierarchy. The Term Loan, Bank Credit Facility agreement, and the mortgage and other debt are classified within Level 3 of the fair value measurements hierarchy. The fair value of these instruments has been estimated using a discounted cash flow analysis based on our incremental borrowing rate for similar borrowing arrangements. An increase (decrease) in the inputs results in a directionally opposite change in the fair value of the instruments.
10. Equity
(All shares reported in whole numbers)
Our components of
Accumulated other comprehensive income
are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign
Currency
Translation
Adjustment
|
|
Unrealized
Gains and
Losses
|
|
Accumulated
Other
Comprehensive
Income
|
|
|
|
(In thousands)
|
|
|
Balance at December 31, 2016
|
$
|
16,492
|
|
|
$
|
—
|
|
|
$
|
16,492
|
|
Activity in 2017
|
3,164
|
|
|
—
|
|
|
3,164
|
|
Net unrealized gains associated with available-for-sale securities of the trusts, net of taxes
|
—
|
|
|
69,351
|
|
|
69,351
|
|
Reclassification of net unrealized gain activity attributable to the
Deferred preneed receipts held in trust
and
Care trusts’ corpus,
net of taxes
|
—
|
|
|
(69,351
|
)
|
|
(69,351
|
)
|
Balance at March 31, 2017
|
$
|
19,656
|
|
|
$
|
—
|
|
|
$
|
19,656
|
|
|
|
|
|
|
|
Balance at December 31, 2015
|
$
|
6,164
|
|
|
$
|
—
|
|
|
$
|
6,164
|
|
Activity in 2016
|
22,707
|
|
|
—
|
|
|
22,707
|
|
Net unrealized gains associated with available-for-sale securities of the trusts, net of taxes
|
—
|
|
|
17,985
|
|
|
17,985
|
|
Reclassification of net unrealized gains activity attributable to the
Deferred preneed receipts held in trust
and
Care trusts’ corpus
, net of taxes
|
—
|
|
|
(17,985
|
)
|
|
(17,985
|
)
|
Balance at March 31, 2016
|
$
|
28,871
|
|
|
$
|
—
|
|
|
$
|
28,871
|
|
The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. The U.S. dollar amount that arises from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the foreign currency translation adjustment in
Accumulated other comprehensive income
.
Share Repurchases
Subject to market conditions, normal trading restrictions, and limitations in our debt covenants, we may make purchases in the open market or through privately negotiated transactions under our stock repurchase program. During the
three
months ended
March 31, 2017
, we repurchased
2,813,134
shares of common stock at an aggregate cost of
$83.5 million
, which is an average cost per share of
$29.67
. After these repurchases, the remaining dollar value of shares authorized to be purchased under our share repurchase program was approximately
$284.8 million
at
March 31, 2017
.
Subsequent to
March 31, 2017
, we repurchased
362,260
shares of common stock at an aggregate cost of
$11.2 million
, which is an average cost per share of
$30.88
. After these second quarter repurchases, the remaining dollar value of shares authorized to be repurchased under our repurchase program is
$273.6 million
.
11. Segment Reporting
Our operations are both product-based and geographically-based, and the reportable operating segments presented below include our funeral and cemetery operations. Our geographic areas include the United States and Canada, where we conduct both funeral and cemetery operations.
Our reportable segment information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral
|
|
Cemetery
|
|
Reportable
Segments
|
|
(In thousands)
|
Three months ended March 31,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2017
|
$
|
498,764
|
|
|
$
|
278,946
|
|
|
$
|
777,710
|
|
2016
|
$
|
492,189
|
|
|
$
|
257,030
|
|
|
$
|
749,219
|
|
Operating profit:
|
|
|
|
|
|
2017
|
$
|
112,607
|
|
|
$
|
64,558
|
|
|
$
|
177,165
|
|
2016
|
$
|
107,211
|
|
|
$
|
55,712
|
|
|
$
|
162,923
|
|
The following table reconciles operating profit from reportable segments to our consolidated income before income taxes:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
|
Operating profit from reportable segments
|
$
|
177,165
|
|
|
$
|
162,923
|
|
General and administrative expenses
|
(42,504
|
)
|
|
(38,904
|
)
|
Gains (losses) on divestitures and impairment charges, net
|
4,935
|
|
|
(347
|
)
|
Operating income
|
139,596
|
|
|
123,672
|
|
Interest expense
|
(40,636
|
)
|
|
(43,082
|
)
|
Loss on early extinguishment of debt
|
—
|
|
|
(581
|
)
|
Other expense, net
|
(434
|
)
|
|
(242
|
)
|
Income before income taxes
|
$
|
98,526
|
|
|
$
|
79,767
|
|
Our geographic area information is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
United States
|
|
Canada
|
|
Total
|
|
|
|
(In thousands)
|
|
|
Three months ended March 31,
|
|
|
|
|
|
Revenue from external customers:
|
|
|
|
|
|
2017
|
$
|
727,240
|
|
|
$
|
50,470
|
|
|
$
|
777,710
|
|
2016
|
$
|
708,887
|
|
|
$
|
40,332
|
|
|
$
|
749,219
|
|
12. Commitments and Contingencies
Insurance Loss Reserves
We purchase comprehensive general liability, morticians’ and cemetery professional liability, automobile liability, and workers’ compensation insurance coverage all of which are structured with high deductibles. The high-deductible insurance program means we are primarily self-insured for claims and associated costs and losses covered by these policies. As of
March 31, 2017
and
December 31, 2016
, we have self-insurance reserves of
$78.6 million
and
$78.0 million
, respectively.
Litigation and Regulatory Matters
We are a party to various litigation and regulatory matters, investigations, and proceedings. Some of the more frequent routine litigations incidental to our business are based on burial practices claims and employment related matters, including discrimination, harassment, and wage and hour laws and regulations. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to vigorously defend ourselves in the matters described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these matters. We accrue such insurance recoveries when they become probable of being paid and can be reasonably estimated.
Wage and Hour Claims
. We are named a defendant in various lawsuits alleging violations of federal and state laws regulating wage and hour pay, including but not limited to the Samborsky, Vasquez, and Romano lawsuits described below.
Charles Samborsky, et al, individually and on behalf of those persons similarly situated, v. SCI California Funeral Services, Inc., et al ;
Case No. BC544180; in the Superior Court of the State of California for the County of Los Angeles, Central District-Central Civil West Courthouse. This lawsuit was filed in April 2014 against an SCI subsidiary and purports to have been brought on behalf of employees who worked as family service counselors in California since April 2010. The plaintiffs allege causes of action for various violations of state laws regulating wage and hour pay. The plaintiffs seek unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The claims have been sent to arbitration. We cannot quantify our ultimate liability, if any, in this lawsuit.
Adrian Mercedes Vasquez, an individual and on behalf of others similarly situated, v. California Cemetery and Funeral Services, LLC, et al;
Case No. BC58837; in the Superior Court of the State of California for the County of Los Angeles. This lawsuit was filed in July 2015 against SCI subsidiaries and purports to be brought on behalf of current and former non-exempt California employees of defendants during the four years preceding the filing of the complaint. The plaintiff alleges numerous causes of action for alleged wage and hour pay violations. The plaintiff seeks unpaid wages, compensatory and punitive damages, attorneys’ fees and costs, interest, and injunctive relief. The claims have been ordered to arbitration, with the arbitrator to determine whether the claims will proceed as a class or individual claims. In addition, the plaintiff filed an unfair labor practice charge against defendants with the National Labor Relations Board alleging that by enforcing a mandatory arbitration provision, defendants allegedly violated the National Labor Relations Act. We cannot quantify our ultimate liability, if any, in this lawsuit.
Nicole Romano, individually and on behalf of all others similarly situated v. SCI Direct, Inc., et al;
Case No. BC656654; in the Superior Court of California for the County of Los Angeles. This lawsuit was filed in April 2017 against an SCI subsidiary and purports to have been brought on behalf of persons who worked as independent sales representatives in California during the four years preceding the filing of the complaint. The plaintiff alleges numerous causes of action for alleged wage and hour pay violations, including mis-classifying the independent sales representatives as independent contractors instead of employees. The plaintiff seeks unpaid wages, compulsory and punitive damages, attorneys’ fees and costs, interest and injunctive relief. We cannot quantify our ultimate liability, if any, in the lawsuit.
Claims Regarding Acquisition of Stewart Enterprises
. We are involved in the following lawsuit.
Karen Moulton, Individually and on behalf of all others similarly situated v. Stewart Enterprises, Inc., Service Corporation International and others ;
Case No. 2013-5636; in the Civil District Court Parish of New Orleans. This case was filed as a class action in June 2013 against SCI and our subsidiary in connection with SCI's proposed acquisition of Stewart Enterprises, Inc. The plaintiffs allege that SCI aided and abetted breaches of fiduciary duties by Stewart Enterprises and its board of directors in negotiating the combination of Stewart Enterprises with a subsidiary of SCI. The plaintiffs seek damages concerning the combination. We filed exceptions to the plaintiffs’ complaint that were granted in June 2014. Thus, subject to appeals, SCI will no longer be party to the suit. The case has continued against our subsidiary Stewart Enterprises and its former individual directors. However, in October 2016, the court entered a judgment dismissing all of plaintiffs’ claims. Plaintiffs have filed documents indicating that they are appealing the dismissal. We cannot quantify our ultimate liability, if any, for the payment of damages.
Operational Claims.
We are subject to the following lawsuit.
Linda Allard, on behalf of herself and all others similarly situated v. SCI Direct, Inc.,
Case No 16-1033; In the United
States District Court, Middle District of Tennessee. This case was filed in June 2016 as a class action under the Telephone Consumer Protection Act (the “Act”). Plaintiff alleges she received telemarketing telephone calls that were made with a prerecorded voice or made by an automatic telephone dialing system in violation of the Act. Plaintiff seeks actual and statutory damages, as well as attorney’s fees and costs. We cannot quantify our ultimate liability, if any, in this lawsuit.
Unclaimed Property Audit.
We are involved in the following matter.
We received notices from a third party auditor representing unclaimed property departments of
36
states regarding preneed funeral and cemetery contracts that were not funded by the purchase and assignment of the proceeds of insurance policies. The auditor claims that we are subject to the laws of those states concerning escheatment of unclaimed funds. The auditor seeks escheatment of funds from the portion of such contracts for which it claims that we will probably not be required to provide services or merchandise in the future. No actual audits have commenced at this time. We cannot quantify our ultimate liability, if any, in this matter.
The ultimate outcome of the matters described above cannot be determined at this time. We intend to vigorously defend all of the above matters; however, an adverse decision in one or more of such matters could have a material effect on us, our financial condition, results of operations, and cash flows.
13. Earnings Per Share
Basic earnings per common share (EPS) excludes dilution and is computed by dividing
Net income attributable to common stockholders
by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common shares that then shared in our earnings.
A reconciliation of the numerators and denominators of the basic and diluted EPS computations is presented below:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
(In thousands, except per share amounts)
|
Amounts attributable to common stockholders:
|
|
|
|
Net income:
|
|
|
|
Net income — basic
|
$
|
174,702
|
|
|
$
|
47,445
|
|
After tax interest on convertible debt
|
12
|
|
|
12
|
|
Net income — diluted
|
$
|
174,714
|
|
|
$
|
47,457
|
|
Weighted average shares (denominator):
|
|
|
|
Weighted average shares — basic
|
188,260
|
|
|
194,924
|
|
Stock options
|
4,425
|
|
|
2,985
|
|
Restricted stock units
|
61
|
|
|
—
|
|
Convertible debt
|
121
|
|
|
121
|
|
Weighted average shares — diluted
|
192,867
|
|
|
198,030
|
|
Net income per share:
|
|
|
|
Basic
|
$
|
0.93
|
|
|
$
|
0.24
|
|
Diluted
|
$
|
0.91
|
|
|
$
|
0.24
|
|
The computation of diluted EPS excludes outstanding stock options in certain periods in which the inclusion of such options would be anti-dilutive in the periods presented. Total options not included in the computation of dilutive EPS are as follows (in shares):
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Antidilutive options
|
898
|
|
|
1,886
|
|
14. Divestiture-Related Activities
As divestitures occur in the normal course of business, gains or losses on the sale of such assets are recognized in the income statement line item
Gains
(
losses) on divestitures and impairment charges, net,
which consist of the following:
|
|
|
|
|
|
|
|
|
|
Three Months Ended
|
|
March 31,
|
|
2017
|
|
2016
|
|
(In thousands)
|
Gains on divestitures, net
|
$
|
16,751
|
|
|
$
|
1,426
|
|
Impairment losses
|
(11,816
|
)
|
|
(1,773
|
)
|
Gains (losses) on divestitures and impairment charges, net
|
$
|
4,935
|
|
|
$
|
(347
|
)
|