CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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 deathcare services and merchandise in the United States. As of
March 31, 2018
, we operated
178
funeral homes in
29
states and
32
cemeteries in
11
states. Our operations are reported in
two
business segments: Funeral Home Operations, which currently account for approximately
80%
of our revenues and Cemetery Operations, which currently account for approximately
20%
of our revenues.
Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. We market funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
Principles of Consolidation and Interim Condensed Disclosures
Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended
December 31, 2017
unless otherwise disclosed herein, and should be read in conjunction therewith.
Cash and Cash Equivalents
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
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 ongoing 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.
Revenue Recognition - Funeral Home Operations
Our funeral home operations are principally service businesses that generate revenues from sales of burial and cremation services and related merchandise, such as caskets and urns. Funeral services include consultation, the removal and preparation of remains, the use of funeral home facilities for visitation and remembrance services and transportation services. We provide funeral services and products on both an atneed and preneed basis.
Funeral arrangements sold at the time of death are referred to as atneed funeral contracts. We record the revenue from atneed funeral contracts when the merchandise is delivered or the service is performed. Merchandise delivery and service performance generally takes place shortly after the time of need. Payment is due at or before time of transfer. Outstanding balances due from customers, if any, on atneed funeral contracts are included in
Accounts receivable
on our Consolidated Balance Sheets
.
Funeral arrangements sold prior to death occurring are referred to as preneed funeral contracts. In many instances, the customer pays for the preneed contract over a period of time. The performance of a preneed funeral contract is secured by placing the funds collected, less amounts that we may retain under state regulations, in trust for the benefit of the customer or by the customer's purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. These methods are intended to fund preneed funeral contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases.
Revenue from preneed funeral contracts, along with accumulated earnings, is deferred until the time the merchandise is delivered or the service is performed. The principal and accumulated earnings of the trusts are withdrawn at maturity (death) or cancellation. The cumulative trust income earned and the increases in insurance benefits on the insurance products are recognized when the service is performed. The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheets. Beginning January 1, 2018, balances due on undelivered preneed funeral trust contracts have been reclassified to reduce
Deferred preneed funeral revenue
on our Consolidated Balance Sheet, as noted in our table of Deferred Revenue in Note 3 to the Consolidated Financial Statements. See Note 2 to the Consolidated Financial Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
The earnings from our preneed funeral trust investments, as well as trust management fees charged by our wholly-owned registered investment advisory firm, (“CSV RIA”), are recorded as
Preneed trust earnings - funeral
, as noted in our table of disaggregated revenues in Note 3. As of
March 31, 2018
, 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.
When preneed funeral contracts are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recorded as
Preneed funeral commission income
, as noted in our table of disaggregated revenues in Note 3, at the point at which the commission is no longer subject to refund, which is typically
one
year after the policy is issued. Preneed funeral contracts to be funded at maturity by insurance policies totaled
$371.5 million
at March 31, 2018 and are not included on our Consolidated Balance Sheets.
See Note 3 to the Consolidated Financial Statements included herein for additional information on our revenues.
Revenue Recognition - Cemetery Operations
Our cemetery operations generate revenues primarily through sales of cemetery interment rights (primarily grave sites, lawn crypts, mausoleum spaces and niches), related cemetery merchandise (such as outer burial containers, memorial markers and floral placements) and services (interments, inurnments and installation of cemetery merchandise). We provide cemetery services and products on both an atneed and preneed basis.
Cemetery arrangements sold at the time of death are referred to as atneed cemetery contracts. We record the revenue from atneed cemetery contracts when the product is delivered or the service is performed. Payment is due at or before time of transfer. Outstanding balances due from customers, if any, on completed atneed contracts are included in
Accounts receivable
on our Consolidated Balance Sheet
.
Cemetery arrangements sold prior to death occurring are referred to as preneed cemetery contracts. Preneed cemetery contracts are usually financed through interest-bearing installment sales contracts, generally with terms of up to
five
years. In substantially all cases, we receive an initial down payment at the time the contract is signed.
We record revenue on the sales of cemetery property interment rights at the time the contract is signed. Customers select a specific location and space for their interment right, thus, restricting us from other use or transfer of the contracted cemetery property. The interment right is deeded to the customer when the contract is paid in full. Revenue from preneed sales of cemetery merchandise and services contracts, along with accumulated earnings, is not recognized until the time the merchandise is transferred or the service is performed. Earnings on these installment contracts are recorded as
Preneed cemetery finance charges
, as noted in our table of disaggregated revenues in Note 3 to the Consolidated Financial Statements.
The performance of the preneed cemetery contracts is secured by placing the funds collected, less amounts that we may retain under state regulations, in trust for the benefit of the customer, the proceeds of which will pay for such services at the time of need. This method is intended to fund preneed contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases. The amounts deposited in trusts that we control are included in the non-current asset section of our Consolidated Balance Sheets. The earnings from preneed cemetery contracts placed in trust are recorded as
Preneed trust earnings - cemetery
, as noted in our table of disaggregated revenues in Note 3 to the Consolidated Financial Statements.
Balances due from customers on delivered preneed cemetery contracts are included in
Accounts receivable
and
Preneed receivables
on our Consolidated Balance Sheet. Beginning January 1, 2018, balances due on undelivered preneed cemetery contracts have been reclassified to reduce
Deferred preneed cemetery revenue
on our Consolidated Balance Sheet, as noted in our table of
Deferred Revenue
in Note 3 to the Consolidated Financial Statements. See Note 2 to the Consolidated Financial Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
Interment right costs, which include real property and other costs related to cemetery development, are expensed 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 interment rights of approximately
$0.8 million
and
$0.9 million
for the three months ended
March 31, 2017
and
2018
, respectively.
See Note 3 to the Consolidated Financial Statements included herein for additional information on our revenues.
Arrangements with Multiple Performance Obligations
Some of our contracts with customers include multiple performance obligations. For these contracts, we allocate transaction price to each performance obligation based on its relative standalone selling price, which is based on prices charged to customers per our general price list. Packages for service and ancillary items are offered to help the customer make decisions during emotional/stressful times. Package discounts are reflected net in Services Revenue. We recognize revenue when the merchandise is transferred or the service is performed, in satisfaction of the corresponding performance obligation. Sales taxes collected are recognized on a net basis in our Consolidated Financial Statements.
Allowances for bad debts and customer cancellations
Our funeral receivables primarily consist of amounts due for funeral services already performed which were
$8.5 million
and
$7.8 million
at
December 31, 2017
and
March 31, 2018
, respectively. We estimate an allowance for doubtful accounts on these receivables based on our historical experience, which amounted to
2.5%
and
2.4%
of funeral receivables at December 31, 2017 and March 31, 2018, respectively. In addition, our other funeral receivables not related to funeral services performed were
$0.8 million
and
$0.5 million
at
December 31, 2017
and
March 31, 2018
, respectively.
Our cemetery financed receivables totaled
$40.5 million
and
$41.3 million
at
December 31, 2017
and
March 31, 2018
, respectively. The unearned finance charges associated with these receivables were
$5.7 million
at both
December 31, 2017
and
March 31, 2018
. If a preneed contract is canceled prior to delivery, state law determines the amount of the refund owed to the customer. Allowances for bad debts and customer cancellations on cemetery financed receivables are provided at the date that the sale is recognized as revenue and are based on our historical experience. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. 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
4.9%
and
4.7%
of the total receivables at
December 31, 2017
and
March 31, 2018
. See Note 5 to the Consolidated Financial Statements included herein for additional information on cemetery financed receivables.
Accounts receivable was comprised of the following at
December 31, 2017
and
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Funeral receivables, net of allowance for bad debt of $213 and $184, respectively
|
$
|
9,061
|
|
|
$
|
8,099
|
|
Cemetery receivables, net of allowance for bad debt of $622 and $630, respectively
|
10,331
|
|
|
9,395
|
|
Other receivables
|
263
|
|
|
323
|
|
Accounts receivable, net
|
$
|
19,655
|
|
|
$
|
17,817
|
|
Non-current preneed receivables represent payments expected to be received beyond one year from the balance sheet date. Preneed receivables were comprised of the following at
December 31, 2017
and
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Funeral receivables, net of allowance for bad debt of $882
|
$
|
7,934
|
|
|
$
|
—
|
|
Cemetery receivables, net of allowance for bad debt of $1,396 and $1,391, respectively
|
23,710
|
|
|
20,982
|
|
Preneed receivable, net
|
$
|
31,644
|
|
|
$
|
20,982
|
|
Bad debt expense totaled approximately
$0.4 million
and
$0.5 million
for the three months ended
March 31, 2017
and
2018
, respectively.
Capitalized Commissions on Preneed Contracts
Effective January 1, 2018, we adopted the Financial Accounting Standards Board’s (“FASB”) Accounting Standards Update (“ASU”),
Revenue from Contracts with Customers (Topic 606),
which impacted our accounting for incremental selling costs, primarily commission costs, related to preneed cemetery merchandise and services and preneed funeral trust contracts.
Upon adoption of Topic 606, we capitalize sales commissions and other direct selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts as these costs are incremental and recoverable costs of obtaining a contract with a customer. We recorded a cumulative adjustment of approximately
$2.8 million
to our opening
Retained earnings
and
Intangible and other non-current assets
on our Consolidated Balance Sheets on January 1, 2018. Our capitalized commissions
on preneed contracts are amortized on a straight-line basis over the average maturity period for our preneed cemetery merchandise and services contracts and preneed funeral trust contracts, of
eight
and
ten
years, respectively. Amortization expense totaled approximately
$149,000
for the three months ended
March 31, 2018
. There were no impairment losses recognized during this period.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheet.
See Note 2 to the Consolidated Financial Statements included herein for additional information related to our adoption of the new revenue recognition standard on January 1, 2018.
See Note 9 to the Consolidated Financial Statements included herein for additional information regarding our capitalized commissions on preneed contracts.
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 major replacements that extend the useful economic life of the asset are capitalized. Depreciation of property, plant and equipment (including equipment under capital leases) is computed based on the straight-line method.
Property, plant and equipment was comprised of the following at
December 31, 2017
and
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Land
|
$
|
74,981
|
|
|
$
|
74,981
|
|
Buildings and improvements
|
211,934
|
|
|
212,186
|
|
Furniture, equipment and automobiles
|
76,155
|
|
|
77,319
|
|
Property, plant and equipment, at cost
|
363,070
|
|
|
364,486
|
|
Less: accumulated depreciation
|
(115,776
|
)
|
|
(118,864
|
)
|
Property, plant and equipment, net
|
$
|
247,294
|
|
|
$
|
245,622
|
|
We recorded depreciation expense of approximately
$3.1 million
and
$3.3 million
for the three months ended
March 31, 2017
and
2018
, respectively.
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 has an indefinite life and is not subject to amortization. As such, we test goodwill for impairment on an annual basis, using information as of August 31st each year. Our intent is to perform a quantitative impairment test at least once every
three years
unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining
two
years.
We conducted qualitative assessments in 2017. For our 2016 annual impairment test, however, we performed a quantitative goodwill impairment test. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017, for a discussion of the methodology used for the goodwill impairment test.
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. No such events or changes occurred between our testing date and reporting period to trigger a subsequent impairment review. No impairments were recorded to our goodwill during the three months ended
March 31, 2017
and
2018
.
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. As such, we test our intangible assets for impairment on an annual basis, using information as of August 31st each year. Our intent is to perform a quantitative impairment test at least once every
three years
unless certain indicators or events suggest otherwise and perform a qualitative assessment during the remaining
two
years.
We conducted qualitative assessments in 2017. For our 2016 annual impairment test, however, we performed a quantitative impairment test using the relief from royalty method. See Part II, Item 7, Overview of Critical Accounting Policies and Estimates and Item 8. Financial Statements and Supplementary Data, Note 1, to the Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2017, for a discussion of the methodology used for the intangibles impairment test.
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. No impairments were recorded to our intangible assets during the three months ended
March 31, 2017
and
2018
.
Stock Plans and Stock-Based Compensation
We have stock-based employee and director compensation plans under which we grant restricted stock, stock options and performance awards. We also have an employee stock purchase plan (the “ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period.
Fair value is determined on the date of the grant. The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metrics is determined using the stock price on the grant date. The fair value of the ESPP is determined based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
See Note 12 to the Consolidated Financial Statements included herein for additional information on our stock-based compensation plans.
Income Taxes
We and our subsidiaries file a consolidated U.S. federal income tax return, separate income tax returns in
16
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 the 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 our Consolidated Balance Sheets.
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, but are not limited to, such events as changes in estimates due to finalization of income tax returns, tax audit settlements, tax effects of exercised or vested stock-based awards and increases or decreases in valuation allowances on deferred tax assets.
Income tax expense was
$4.7 million
for the three months ended
March 31, 2017
compared to
$2.9 million
for the three months ended
March 31, 2018
. We recorded income taxes at the estimated effective rate, before discrete items, of
40.0%
for the three months ended
March 31, 2017
and approximately
27.5%
for the three months ended
March 31, 2018
. The discrete items include an income tax benefit related to stock compensation and refunds received from the completion of state income tax audits, and income tax expense related to state tax rate changes and other non-material discrete state items. The decrease in the estimated effective tax rate, before discrete items, is primarily attributable to the reduction of the U.S. federal statutory income tax rate from 35% to 21% resulting from enactment of the Tax Cuts and Jobs Act of 2017 (the “TCJA”).
Regulatory changes from the TCJA negatively impacted the effective tax rate for the first quarter of 2018 by
0.2%
due to the repeal of the domestic production activities deduction and by
0.3%
due to the exclusion of performance based compensation from the overall executive compensation deduction limitation. Additionally, regulatory changes to the deductibility of meals and entertainment along with the state conformity to the federal bonus depreciation rules both had a non-material negative rate impact on the effective tax rate.
Subsequent Events
Management evaluated events and transactions during the period subsequent to
March 31, 2018
through the date the financial statements were issued for potential recognition or disclosure in the accompanying financial statements covered by this report.
See Note 16 to the Consolidated Financial Statements included herein for additional information on our subsequent events.
2.
RECENTLY ISSUED ACCOUNTING STANDARDS
Revenue Recognition
In May 2014, the FASB issued ASU,
Revenue from Contracts with Customers (Topic 606).
FASB Accounting Standards Codification (“ASC”) Topic 606 supersedes the revenue recognition requirements under 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 recognizes 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 Topic 606, 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. Additionally, the guidance requires improved disclosures as to the nature, amount, timing and uncertainty of revenue that is recognized.
We adopted the provisions of this ASU on January 1, 2018 using the modified retrospective approach. As such, the comparative information has not been restated and continues to be reported under the accounting standards in effect for those periods.
Topic 606 did not materially affect the accounting for our revenue streams. Revenue from sales of preneed cemetery interment rights was previously recognized in the period in which the customer’s cumulative payments exceeded 10% of the contract price related to the interment right. Under Topic 606, we recognize revenue at the time the contract is signed. Customers select a specific location and space for their interment right, thus, restricting us from other use or transfer of the contracted cemetery property. The interment right is deeded to the customer when the contract is paid in full. Because we generally receive an initial down payment at the time the contract is signed, there is no significant difference in the timing of revenue recognition under Topic 606, as compared to previous guidance. Revenue from preneed sales of funeral and cemetery merchandise and services continues to be deferred and recognized when the merchandise is delivered or the service is performed.
Topic 606 impacted our accounting for incremental selling costs, primarily commission costs, related to preneed cemetery merchandise and services and preneed funeral trust contracts. Under Topic 606, these costs are capitalized and amortized over the average maturity period for our preneed cemetery contracts and preneed funeral trust contracts. Previously, these costs were expensed in the period incurred. Our capitalized commissions on preneed contracts are included in
Intangible and other non-current assets
on our Consolidated Balance Sheets. See Note 9 to the Consolidated Financial Statements included herein for additional information.
The selling costs related to the sales of cemetery interment rights, which include real property and other costs related to cemetery development activities, continue to be expensed using the specific identification method in the period in which the sale of the cemetery interment right is recognized as revenue. The selling costs related to preneed funeral insurance contracts continue to be expensed in the period incurred as these contracts are not included on our Consolidated Balance Sheets.
Topic 606 also impacted our classification of amounts due from customers for undelivered performance obligations. Under Topic 606 amounts due on our preneed funeral trust contracts and preneed cemetery merchandise and services contracts have been reclassified to reduce
Deferred preneed funeral revenue
and
Deferred preneed cemetery revenue
, respectively, on our Consolidated Balance Sheets. These amounts were previously reported as
Accounts receivable
and
Preneed receivables
on our Consolidated Balance Sheets.
The adoption of the provisions of this ASU did not have a material impact on the effective tax rate for the reporting period.
The following table presents the impact of the adoption of Topic 606 on our Consolidated Balance Sheet (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2018
|
|
As Reported
|
|
Balances Without Adoption of Topic 606
|
|
Effect of Change
|
Assets
|
|
|
|
|
|
Accounts receivable, net of allowance for bad debts
|
$
|
17,817
|
|
|
$
|
19,199
|
|
|
$
|
(1,382
|
)
|
Preneed receivables, net of allowance for bad debts
|
$
|
20,982
|
|
|
$
|
32,173
|
|
|
$
|
(11,191
|
)
|
Intangible and other non-current assets
|
$
|
2,798
|
|
|
$
|
—
|
|
|
$
|
2,798
|
|
Liabilities
|
|
|
|
|
|
Deferred preneed cemetery revenue, net
|
$
|
50,797
|
|
|
$
|
55,292
|
|
|
$
|
(4,495
|
)
|
Deferred preneed funeral revenue, net
|
$
|
27,251
|
|
|
$
|
35,329
|
|
|
$
|
(8,078
|
)
|
Deferred tax liability
|
$
|
31,366
|
|
|
$
|
31,361
|
|
|
$
|
5
|
|
Stockholders’ equity:
|
|
|
|
|
|
Retained earnings
|
$
|
70,038
|
|
|
$
|
67,245
|
|
|
$
|
2,793
|
|
The following table presents the impact of the adoption of Topic 606 on our Consolidated Statement of Operations (in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
As
Reported
|
|
Balances Without Adoption of Topic 606
|
|
Effect of Change
|
Field costs and expenses:
|
|
|
|
|
|
Funeral
|
$
|
36,366
|
|
|
$
|
36,406
|
|
|
$
|
(40
|
)
|
Cemetery
|
$
|
9,060
|
|
|
$
|
9,041
|
|
|
$
|
19
|
|
Income before income taxes
|
$
|
12,234
|
|
|
$
|
12,213
|
|
|
$
|
(21
|
)
|
Net income
|
$
|
9,356
|
|
|
$
|
9,341
|
|
|
$
|
15
|
|
|
|
|
|
|
|
Basic earnings per common share:
|
$
|
0.58
|
|
|
$
|
0.58
|
|
|
$
|
—
|
|
Diluted earnings per common share:
|
$
|
0.52
|
|
|
$
|
0.52
|
|
|
$
|
—
|
|
|
|
|
|
|
|
Dividends declared per common share
|
$
|
0.075
|
|
|
$
|
0.075
|
|
|
$
|
—
|
|
The following table presents the impact of the adoption of Topic 606 on our Consolidated Statement of Cash Flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
As
Reported
|
|
Balances Without Adoption of Topic 606
|
|
Effect of Change
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
Amortization of capitalized commissions on preneed contracts
|
$
|
149
|
|
|
$
|
—
|
|
|
$
|
149
|
|
Changes in operating assets and liabilities that provided (required) cash:
|
|
|
|
|
|
Intangible and other non-current assets
|
$
|
(169
|
)
|
|
$
|
—
|
|
|
$
|
(169
|
)
|
The cumulative effect of changes made to our opening Consolidated Balance Sheet on January 1, 2018 for the adoption of Topic 606 was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
Effect of Adoption of
Topic 606
|
|
January 1, 2018
|
Assets
|
|
|
|
|
|
Accounts receivable, net of allowance for bad debts
(1)
|
$
|
19,655
|
|
|
$
|
(1,399
|
)
|
|
$
|
18,256
|
|
Preneed receivables, net of allowance for bad debts
(2)(3)
|
$
|
31,644
|
|
|
$
|
(11,129
|
)
|
|
$
|
20,515
|
|
Intangible and other non-current assets
(4)
|
$
|
—
|
|
|
$
|
2,778
|
|
|
$
|
2,778
|
|
|
|
|
$
|
(9,750
|
)
|
|
|
Liabilities
|
|
|
|
|
|
Deferred preneed cemetery revenue
(1)(2)
|
$
|
54,690
|
|
|
$
|
(4,594
|
)
|
|
$
|
50,096
|
|
Deferred preneed funeral revenue
(3)
|
$
|
34,585
|
|
|
$
|
(7,934
|
)
|
|
$
|
26,651
|
|
Stockholders’ equity:
|
|
|
|
|
|
Retained earnings
(4)
|
$
|
57,904
|
|
|
$
|
2,778
|
|
|
$
|
60,682
|
|
|
|
|
$
|
(9,750
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of accounts receivable, net of allowance for bad debts, of $19.7 million at December 31, 2017, included the current portion of receivables for preneed cemetery merchandise and service contracts totaling $1.4 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed cemetery revenue on January 1, 2018.
|
(2)
|
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of preneed receivables, net of allowance for bad debts, of $31.6 million at December 31, 2017, included the non-current portion of receivables for preneed cemetery merchandise and service contracts totaling $4.6 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed cemetery revenue on January 1, 2018.
|
(3)
|
Under Topic 606, receivables represent an entity’s unconditional right to consideration, billed or unbilled. Our balance of preneed receivables, net of allowance for bad debts, $31.6 million at December 31, 2017, included the non-current portion of receivables for preneed funeral trust contracts totaling $7.9 million. As these amounts represent undelivered performance obligations, they have been reclassified to reduce deferred preneed funeral revenue on January 1, 2018.
|
(4)
|
Under Topic 606, certain costs incurred to obtain or fulfill a contract with a customer are capitalized. Beginning January 1, 2018, we capitalize selling costs related to undelivered preneed cemetery merchandise and services and preneed funeral trust contracts. Previously, these costs were expensed in the period incurred. We recorded a cumulative adjustment of approximately $2.8 million to our opening
Retained earnings
and
Intangible and other non-current assets
on our Consolidated Balance Sheets on January 1, 2018 to capitalize these costs.
|
The following accounting pronouncements were adopted on January 1, 2018 with no impact to our Consolidated Financial Statements:
Compensation (Topic 718): Stock Compensation – Scope of Modification Accounting
The amendments provide guidance about which changes to the terms and conditions of a share-based payment award require an entity to apply modification accounting in Topic 718. An entity should account for the effects of a modification unless the fair value, vesting conditions and classification of the modified award are the same as the original award immediately before the award is modified.
Business Combinations (Topic 805): Clarifying the Definition of a Business
This ASU applies to all entities that must determine whether they have acquired or sold a business. The amendments in this ASU 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.
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
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.
Financial Instruments – Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities
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.
Accounting Pronouncements Not Yet Adopted
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 June 2016, the FASB issued ASU,
Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
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.
REVENUE FROM CONTRACTS WITH CUSTOMERS
Revenues
Our operations are reported in
two
business segments: Funeral Home Operations and Cemetery Operations. Revenues, disaggregated by major source for each of our reportable segments was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2018
|
|
|
|
|
|
|
|
|
Funeral
|
|
Cemetery
|
|
Total
|
Services
|
|
$
|
36,300
|
|
|
$
|
3,121
|
|
|
$
|
39,421
|
|
Merchandise
|
|
19,982
|
|
|
1,957
|
|
|
21,939
|
|
Cemetery interment rights
|
|
—
|
|
|
7,509
|
|
|
7,509
|
|
Revenue from contracts with customers
|
|
$
|
56,282
|
|
|
$
|
12,587
|
|
|
$
|
68,869
|
|
|
|
|
|
|
|
|
Preneed funeral commission income
|
|
$
|
260
|
|
|
$
|
—
|
|
|
$
|
260
|
|
Preneed trust earnings
|
|
1,914
|
|
|
1,549
|
|
|
3,463
|
|
Preneed trust management fees
|
|
138
|
|
|
210
|
|
|
348
|
|
Preneed cemetery finance charges
|
|
—
|
|
|
447
|
|
|
447
|
|
Financial revenues
|
|
$
|
2,312
|
|
|
$
|
2,206
|
|
|
$
|
4,518
|
|
Total Revenues
|
|
$
|
58,594
|
|
|
$
|
14,793
|
|
|
$
|
73,387
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, 2017
|
|
|
|
|
|
|
|
|
Funeral
|
|
Cemetery
|
|
Total
|
Services
|
|
$
|
32,799
|
|
|
$
|
3,000
|
|
|
$
|
35,799
|
|
Merchandise
|
|
19,163
|
|
|
1,843
|
|
|
21,006
|
|
Cemetery interment rights
|
|
—
|
|
|
6,905
|
|
|
6,905
|
|
Revenue from contracts with customers
|
|
$
|
51,962
|
|
|
$
|
11,748
|
|
|
$
|
63,710
|
|
|
|
|
|
|
|
|
Preneed funeral commission income
|
|
$
|
303
|
|
|
$
|
—
|
|
|
$
|
303
|
|
Preneed trust earnings
|
|
1,809
|
|
|
1,514
|
|
|
3,323
|
|
Preneed trust management fees
|
|
137
|
|
|
202
|
|
|
339
|
|
Preneed cemetery finance charges
|
|
—
|
|
|
482
|
|
|
482
|
|
Financial revenues
|
|
$
|
2,249
|
|
|
$
|
2,198
|
|
|
$
|
4,447
|
|
Total Revenues
|
|
$
|
54,211
|
|
|
$
|
13,946
|
|
|
$
|
68,157
|
|
Deferred Revenue
Deferred revenue is presented net of amounts due on undelivered preneed contracts shown below as of January 1, 2018 and March 31, 2018 (in thousands):
|
|
|
|
|
|
|
|
|
|
January 1, 2018
(1)
|
|
March 31, 2018
|
Contract liabilities:
|
|
|
|
Deferred preneed cemetery revenue
|
$
|
54,690
|
|
|
$
|
55,292
|
|
Less: Balances due on undelivered cemetery preneed contracts
(2)
|
(4,594
|
)
|
|
(4,495
|
)
|
Deferred preneed cemetery revenue, net
|
$
|
50,096
|
|
|
$
|
50,797
|
|
|
|
|
|
Deferred preneed funeral revenue
|
$
|
34,585
|
|
|
$
|
35,329
|
|
Less: Balances due on undelivered funeral preneed contracts
(3)
|
(7,934
|
)
|
|
(8,078
|
)
|
Deferred preneed funeral revenue, net
|
$
|
26,651
|
|
|
$
|
27,251
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
January 1, 2018 balances have been adjusted to reflect the cumulative effect of changes for the adoption of ASC 606.
|
(2)
|
In accordance with Topic 606, $1.4 million of cemetery accounts receivables have been reclassified to reduce deferred preneed cemetery revenue at both January 1, 2018 and March 31, 2018 and $3.2 million and $3.1 million of preneed cemetery receivables have been reclassified to reduce deferred preneed cemetery revenue at January 1, 2018 and March 31, 2018, respectively.
|
(3)
|
In accordance with Topic 606, $7.9 million and $8.1 million of preneed funeral receivables have been reclassified to reduce deferred preneed funeral revenue at January 1, 2018 and March 31, 2018, respectively.
|
Our merchandise and service performance obligations related to our preneed contracts are considered fulfilled at the point in time the merchandise is delivered or the burial, cremation or interment service is performed. The transaction price allocated to preneed merchandise and service performance obligations that were unfulfilled at March 31, 2018 was
$4.5 million
for preneed cemetery contracts and
$8.1 million
for preneed funeral contracts. As these performance obligations are to be completed after the date of death, we cannot quantify the recognition of revenue for any given period. However, we estimate an average maturity period of
eight
years for preneed cemetery contracts and
ten
years for preneed funeral contracts.
4. PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are permitted to withdraw as merchandise and services are provided to customers. Preneed cemetery contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed cemetery trust investments can be 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, 2017
and
March 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Preneed cemetery trust investments, at market value
|
$
|
75,992
|
|
|
$
|
72,450
|
|
Less: allowance for contract cancellation
|
(2,139
|
)
|
|
(2,154
|
)
|
Preneed cemetery trust investments, net
|
$
|
73,853
|
|
|
$
|
70,296
|
|
Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some instances, a portion of 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 investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At
March 31, 2018
, none of our preneed cemetery trust investments were underfunded.
Earnings from our preneed cemetery trust investments are recognized as 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 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 foreign debt, corporate debt, preferred stocks, 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 three months ended
March 31, 2018
. There are
no
Level 3 investments in the preneed cemetery trust investment portfolio. See Note 8 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at
March 31, 2018
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
7,366
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
7,366
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
2
|
|
4,848
|
|
|
193
|
|
|
(244
|
)
|
|
4,797
|
|
Corporate debt
|
2
|
|
15,665
|
|
|
733
|
|
|
(665
|
)
|
|
15,733
|
|
Preferred stock
|
2
|
|
16,471
|
|
|
118
|
|
|
(751
|
)
|
|
15,838
|
|
Mortgage-backed securities
|
2
|
|
1,015
|
|
|
281
|
|
|
(26
|
)
|
|
1,270
|
|
Common stock
|
1
|
|
25,216
|
|
|
4,074
|
|
|
(3,783
|
)
|
|
25,507
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
2
|
|
1,202
|
|
|
27
|
|
|
(43
|
)
|
|
1,186
|
|
Trust securities
|
|
|
$
|
71,783
|
|
|
$
|
5,426
|
|
|
$
|
(5,512
|
)
|
|
$
|
71,697
|
|
Accrued investment income
|
|
|
$
|
753
|
|
|
|
|
|
|
$
|
753
|
|
Preneed cemetery trust investments
|
|
|
|
|
|
|
|
|
$
|
72,450
|
|
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
|
$
|
—
|
|
Due in one to five years
|
2,177
|
|
Due in five to ten years
|
2,561
|
|
Thereafter
|
32,900
|
|
Total
|
$
|
37,638
|
|
The cost and fair market values associated with preneed cemetery trust investments at
December 31, 2017
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
3,132
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
3,132
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
2
|
|
4,834
|
|
|
292
|
|
|
(193
|
)
|
|
4,933
|
|
Corporate debt
|
2
|
|
18,238
|
|
|
1,184
|
|
|
(273
|
)
|
|
19,149
|
|
Preferred stock
|
2
|
|
16,421
|
|
|
510
|
|
|
(588
|
)
|
|
16,343
|
|
Mortgage-backed securities
|
2
|
|
1,018
|
|
|
249
|
|
|
(24
|
)
|
|
1,243
|
|
Common stock
|
1
|
|
26,465
|
|
|
5,250
|
|
|
(2,460
|
)
|
|
29,255
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
1,198
|
|
|
50
|
|
|
(11
|
)
|
|
1,237
|
|
Trust securities
|
|
|
$
|
71,306
|
|
|
$
|
7,535
|
|
|
$
|
(3,549
|
)
|
|
$
|
75,292
|
|
Accrued investment income
|
|
|
$
|
700
|
|
|
|
|
|
|
$
|
700
|
|
Preneed cemetery trust investments
|
|
|
|
|
|
|
|
|
$
|
75,992
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
105.6
|
%
|
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. In the three months ended
March 31, 2017
and
2018
, we did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. 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
March 31, 2018
, 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.
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
March 31, 2018
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
$
|
519
|
|
|
$
|
(20
|
)
|
|
$
|
1,605
|
|
|
$
|
(224
|
)
|
|
$
|
2,124
|
|
|
$
|
(244
|
)
|
Corporate debt
|
6,987
|
|
|
(464
|
)
|
|
768
|
|
|
(201
|
)
|
|
7,755
|
|
|
(665
|
)
|
Preferred stock
|
4,731
|
|
|
(43
|
)
|
|
8,295
|
|
|
(708
|
)
|
|
13,026
|
|
|
(751
|
)
|
Mortgage-backed securities
|
75
|
|
|
—
|
|
|
73
|
|
|
(26
|
)
|
|
148
|
|
|
(26
|
)
|
Common stock
|
12,001
|
|
|
(2,461
|
)
|
|
1,666
|
|
|
(1,322
|
)
|
|
13,667
|
|
|
(3,783
|
)
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
842
|
|
|
(43
|
)
|
|
—
|
|
|
—
|
|
|
842
|
|
|
(43
|
)
|
Total temporary impaired securities
|
$
|
25,155
|
|
|
$
|
(3,031
|
)
|
|
$
|
12,407
|
|
|
$
|
(2,481
|
)
|
|
$
|
37,562
|
|
|
$
|
(5,512
|
)
|
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2017
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
$
|
151
|
|
|
$
|
(6
|
)
|
|
$
|
1,637
|
|
|
$
|
(187
|
)
|
|
$
|
1,788
|
|
|
$
|
(193
|
)
|
Corporate debt
|
3,735
|
|
|
(72
|
)
|
|
846
|
|
|
(201
|
)
|
|
4,581
|
|
|
(273
|
)
|
Preferred stock
|
48
|
|
|
—
|
|
|
8,109
|
|
|
(588
|
)
|
|
8,157
|
|
|
(588
|
)
|
Mortgage-backed securities
|
127
|
|
|
(15
|
)
|
|
27
|
|
|
(9
|
)
|
|
154
|
|
|
(24
|
)
|
Common stock
|
8,249
|
|
|
(1,512
|
)
|
|
1,742
|
|
|
(948
|
)
|
|
9,991
|
|
|
(2,460
|
)
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
496
|
|
|
(11
|
)
|
|
—
|
|
|
—
|
|
|
496
|
|
|
(11
|
)
|
Total temporary impaired securities
|
$
|
12,806
|
|
|
$
|
(1,616
|
)
|
|
$
|
12,361
|
|
|
$
|
(1,933
|
)
|
|
$
|
25,167
|
|
|
$
|
(3,549
|
)
|
Preneed cemetery trust investment security transactions recorded in
Other, net
on our Consolidated Statements of Operations for the
three
months ended
March 31, 2017
and
2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2018
|
Investment income
|
$
|
589
|
|
|
$
|
425
|
|
Realized gains
|
820
|
|
|
853
|
|
Realized losses
|
(383
|
)
|
|
(607
|
)
|
Expenses and taxes
|
(545
|
)
|
|
(51
|
)
|
Increase in deferred preneed cemetery receipts held in trust
|
(481
|
)
|
|
(620
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchases and sales of investments in the preneed cemetery trusts for the
three
months ended
March 31, 2017
and
2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2018
|
Purchases
|
$
|
(7,609
|
)
|
|
$
|
(3,376
|
)
|
Sales
|
$
|
5,982
|
|
|
$
|
7,559
|
|
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 retained amounts not required 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, 2017
and
March 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Preneed funeral trust investments, at market value
|
$
|
93,341
|
|
|
$
|
94,603
|
|
Less: allowance for contract cancellation
|
(2,659
|
)
|
|
(2,821
|
)
|
Preneed funeral trust investments, net
|
$
|
90,682
|
|
|
$
|
91,782
|
|
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and in some instances, a portion of all 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 investment income. As a result, when realized or unrealized
losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At
March 31, 2018
, none of our preneed funeral trust investments were underfunded.
Earnings from our preneed funeral trust investments are recognized as 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 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
transfers between Levels 1 and 2 for the three months ended
March 31, 2018
. There are
no
Level 3 investments in the preneed funeral trust investment portfolio. See Note 8 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed funeral trust investments at
March 31, 2018
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
24,381
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
24,381
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S treasury debt
|
1
|
|
1,490
|
|
|
7
|
|
|
(25
|
)
|
|
1,472
|
|
Foreign debt
|
2
|
|
4,833
|
|
|
195
|
|
|
(238
|
)
|
|
4,790
|
|
Corporate debt
|
2
|
|
16,034
|
|
|
718
|
|
|
(676
|
)
|
|
16,076
|
|
Preferred stock
|
2
|
|
16,211
|
|
|
110
|
|
|
(741
|
)
|
|
15,580
|
|
Mortgage-backed securities
|
2
|
|
1,163
|
|
|
293
|
|
|
(29
|
)
|
|
1,427
|
|
Common stock
|
1
|
|
24,674
|
|
|
4,033
|
|
|
(3,751
|
)
|
|
24,956
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
1,944
|
|
|
28
|
|
|
(106
|
)
|
|
1,866
|
|
Other investments
|
2
|
|
3,301
|
|
|
—
|
|
|
—
|
|
|
3,301
|
|
Trust securities
|
|
|
$
|
94,031
|
|
|
$
|
5,384
|
|
|
$
|
(5,566
|
)
|
|
$
|
93,849
|
|
Accrued investment income
|
|
|
$
|
754
|
|
|
|
|
|
|
$
|
754
|
|
Preneed funeral trust investments
|
|
|
|
|
|
|
|
|
$
|
94,603
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
99.8
|
%
|
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
|
|
|
|
Due in one year or less
|
$
|
—
|
|
Due in one to five years
|
3,702
|
|
Due in five to ten years
|
2,746
|
|
Thereafter
|
32,897
|
|
Total
|
$
|
39,345
|
|
The cost and fair market values associated with preneed funeral trust investments at
December 31, 2017
are detailed below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
14,349
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
14,349
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
U.S. treasury debt
|
1
|
|
1,490
|
|
|
10
|
|
|
(15
|
)
|
|
1,485
|
|
Foreign debt
|
2
|
|
4,870
|
|
|
298
|
|
|
(189
|
)
|
|
4,979
|
|
Corporate debt
|
2
|
|
18,963
|
|
|
1,197
|
|
|
(278
|
)
|
|
19,882
|
|
Preferred stock
|
2
|
|
16,335
|
|
|
501
|
|
|
(585
|
)
|
|
16,251
|
|
Mortgage-backed securities
|
2
|
|
1,187
|
|
|
263
|
|
|
(27
|
)
|
|
1,423
|
|
Common stock
|
1
|
|
26,129
|
|
|
5,253
|
|
|
(2,468
|
)
|
|
28,914
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
1,974
|
|
|
52
|
|
|
(48
|
)
|
|
1,978
|
|
Other investments
|
2
|
|
3,341
|
|
|
—
|
|
|
—
|
|
|
3,341
|
|
Trust securities
|
|
|
$
|
88,638
|
|
|
$
|
7,574
|
|
|
$
|
(3,610
|
)
|
|
$
|
92,602
|
|
Accrued investment income
|
|
|
$
|
739
|
|
|
|
|
|
|
$
|
739
|
|
Preneed funeral trust investments
|
|
|
|
|
|
|
|
|
$
|
93,341
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
104.5
|
%
|
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. In the three months ended
March 31, 2017
and
2018
, we did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. 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
March 31, 2018
, 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.
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
March 31, 2018
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
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. treasury debt
|
$
|
1,313
|
|
|
$
|
(25
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,313
|
|
|
$
|
(25
|
)
|
Foreign debt
|
542
|
|
|
(21
|
)
|
|
1,560
|
|
|
(217
|
)
|
|
2,102
|
|
|
(238
|
)
|
Corporate debt
|
6,988
|
|
|
(475
|
)
|
|
752
|
|
|
(201
|
)
|
|
7,740
|
|
|
(676
|
)
|
Preferred stock
|
4,645
|
|
|
(42
|
)
|
|
8,294
|
|
|
(699
|
)
|
|
12,939
|
|
|
(741
|
)
|
Mortgage-backed securities
|
167
|
|
|
(1
|
)
|
|
84
|
|
|
(28
|
)
|
|
251
|
|
|
(29
|
)
|
Common stock
|
11,560
|
|
|
(2,409
|
)
|
|
1,682
|
|
|
(1,342
|
)
|
|
13,242
|
|
|
(3,751
|
)
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
928
|
|
|
(47
|
)
|
|
571
|
|
|
(59
|
)
|
|
1,499
|
|
|
(106
|
)
|
Total temporary impaired securities
|
$
|
26,143
|
|
|
$
|
(3,020
|
)
|
|
$
|
12,943
|
|
|
$
|
(2,546
|
)
|
|
$
|
39,086
|
|
|
$
|
(5,566
|
)
|
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of
December 31, 2017
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
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. treasury debt
|
$
|
1,325
|
|
|
$
|
(15
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,325
|
|
|
$
|
(15
|
)
|
Foreign debt
|
159
|
|
|
(6
|
)
|
|
1,608
|
|
|
(183
|
)
|
|
1,767
|
|
|
(189
|
)
|
Corporate debt
|
3,770
|
|
|
(74
|
)
|
|
842
|
|
|
(203
|
)
|
|
4,612
|
|
|
(277
|
)
|
Preferred stock
|
50
|
|
|
—
|
|
|
8,184
|
|
|
(585
|
)
|
|
8,234
|
|
|
(585
|
)
|
Mortgage-backed securities
|
221
|
|
|
(17
|
)
|
|
36
|
|
|
(10
|
)
|
|
257
|
|
|
(27
|
)
|
Common stock
|
8,001
|
|
|
(1,496
|
)
|
|
1,728
|
|
|
(972
|
)
|
|
9,729
|
|
|
(2,468
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
549
|
|
|
(12
|
)
|
|
615
|
|
|
(37
|
)
|
|
1,164
|
|
|
(49
|
)
|
Total temporary impaired securities
|
$
|
14,075
|
|
|
$
|
(1,620
|
)
|
|
$
|
13,013
|
|
|
$
|
(1,990
|
)
|
|
$
|
27,088
|
|
|
$
|
(3,610
|
)
|
Preneed funeral trust investment security transactions recorded in
Other, net
on the Consolidated Statements of Operations for the
three
months ended
March 31, 2017
and
2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2018
|
Investment income
|
$
|
591
|
|
|
$
|
412
|
|
Realized gains
|
824
|
|
|
2,896
|
|
Realized losses
|
(379
|
)
|
|
(609
|
)
|
Expenses and taxes
|
(339
|
)
|
|
(144
|
)
|
Increase in deferred preneed funeral receipts held in trust
|
(697
|
)
|
|
(2,555
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
Purchases and sales of investments in the preneed funeral trusts for the
three
months ended
March 31, 2017
and
2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2018
|
Purchases
|
$
|
(7,609
|
)
|
|
$
|
(3,286
|
)
|
Sales
|
$
|
6,002
|
|
|
$
|
7,595
|
|
5. 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.
Our cemetery financed receivables at
December 31, 2017
and
March 31, 2018
are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
|
Accounts receivable, including unearned finance charges and allowance for contract cancellations of $2,779 and $2,745, respectively
|
$
|
11,843
|
|
|
$
|
12,285
|
|
(1)
|
Preneed receivables
, including unearned finance charges and allowance for contract cancellations of $4,922 and $4,903, respectively
|
28,631
|
|
|
28,979
|
|
(2)
|
Preneed cemetery financed receivables
|
$
|
40,474
|
|
|
$
|
41,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
In accordance with Topic 606, $1.4 million of cemetery accounts receivable has been reclassified to reduce deferred preneed cemetery revenue at March 31, 2018.
|
(2)
|
In accordance with Topic 606, $3.1 million of preneed cemetery receivables has been reclassified to reduce deferred preneed cemetery revenue at March 31, 2018.
|
The unearned finance charges associated with these receivables were
$5.7 million
at both
December 31, 2017
and
March 31, 2018
.
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
March 31, 2018
. 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 three months ended
March 31, 2018
, the change in the allowance for contract cancellations was as follows (in thousands):
|
|
|
|
|
|
March 31, 2018
|
Beginning balance
|
$
|
2,019
|
|
Write-offs and cancellations
|
(307
|
)
|
Provision
|
309
|
|
Ending balance
|
$
|
2,021
|
|
The aging of preneed cemetery financed receivables as of
March 31, 2018
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
|
$
|
892
|
|
|
$
|
475
|
|
|
$
|
154
|
|
|
$
|
1,286
|
|
|
$
|
2,807
|
|
|
$
|
27,661
|
|
|
$
|
30,468
|
|
Deferred revenue
|
288
|
|
|
153
|
|
|
50
|
|
|
368
|
|
|
860
|
|
|
9,936
|
|
|
10,796
|
|
Total contracts
|
$
|
1,180
|
|
|
$
|
628
|
|
|
$
|
204
|
|
|
$
|
1,654
|
|
|
$
|
3,667
|
|
|
$
|
37,597
|
|
|
$
|
41,264
|
|
6. 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, 2017
and
March 31, 2018
, receivables from preneed trusts were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Preneed trust funds, at cost
|
$
|
15,759
|
|
|
$
|
16,291
|
|
Less: allowance for contract cancellation
|
(472
|
)
|
|
(489
|
)
|
Receivables from preneed trusts, net
|
$
|
15,287
|
|
|
$
|
15,802
|
|
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
March 31, 2018
and
December 31, 2017
. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes the unrealized gains and losses on trust assets.
The composition of the preneed trust funds at
March 31, 2018
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Historical
Cost Basis
|
|
Fair Value
|
As of March 31, 2018
|
|
|
|
Cash and cash equivalents
|
$
|
3,953
|
|
|
$
|
3,953
|
|
Fixed income investments
|
9,647
|
|
|
9,647
|
|
Mutual funds and common stocks
|
2,685
|
|
|
2,654
|
|
Annuities
|
6
|
|
|
6
|
|
Total
|
$
|
16,291
|
|
|
$
|
16,260
|
|
The composition of the preneed trust funds at
December 31, 2017
was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Historical
Cost Basis
|
|
Fair Value
|
As of December 31, 2017
|
|
|
|
Cash and cash equivalents
|
$
|
3,903
|
|
|
$
|
3,903
|
|
Fixed income investments
|
9,306
|
|
|
9,306
|
|
Mutual funds and common stocks
|
2,544
|
|
|
2,567
|
|
Annuities
|
6
|
|
|
6
|
|
Total
|
$
|
15,759
|
|
|
$
|
15,782
|
|
7.
CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets represents the corpus of those trusts plus undistributed income. The components of
Care trusts’ corpus
as of
December 31, 2017
and
March 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Trust assets, at market value
|
$
|
50,229
|
|
|
$
|
48,285
|
|
Obligations due from trust
|
(373
|
)
|
|
(724
|
)
|
Care trusts’ corpus
|
$
|
49,856
|
|
|
$
|
47,561
|
|
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
March 31, 2018
, none of our cemetery perpetual care trust investments were underfunded.
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 fixed income securities, including 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 three months ended
March 31, 2018
. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 8 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
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
5,067
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
5,067
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
2
|
|
3,602
|
|
|
144
|
|
|
(170
|
)
|
|
3,576
|
|
Corporate debt
|
2
|
|
10,743
|
|
|
486
|
|
|
(429
|
)
|
|
10,800
|
|
Preferred stock
|
2
|
|
11,618
|
|
|
91
|
|
|
(523
|
)
|
|
11,186
|
|
Mortgage-backed securities
|
2
|
|
622
|
|
|
172
|
|
|
(16
|
)
|
|
778
|
|
Common stock
|
1
|
|
15,449
|
|
|
2,414
|
|
|
(2,430
|
)
|
|
15,433
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
2
|
|
919
|
|
|
25
|
|
|
(35
|
)
|
|
909
|
|
Trust securities
|
|
|
$
|
48,020
|
|
|
$
|
3,332
|
|
|
$
|
(3,603
|
)
|
|
$
|
47,749
|
|
Accrued investment income
|
|
|
$
|
536
|
|
|
|
|
|
|
$
|
536
|
|
Cemetery perpetual care investments
|
|
|
|
|
|
|
|
|
$
|
48,285
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
99.4
|
%
|
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
|
|
|
|
Due in one year or less
|
$
|
—
|
|
Due in one to five years
|
1,443
|
|
Due in five to ten years
|
1,765
|
|
Thereafter
|
23,132
|
|
|
$
|
26,340
|
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at
December 31, 2017
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Hierarchy Level
|
|
Cost
|
|
Unrealized
Gains
|
|
Unrealized
Losses
|
|
Fair Market
Value
|
Cash and money market accounts
|
1
|
|
$
|
1,906
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,906
|
|
Fixed income securities:
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
2
|
|
3,580
|
|
|
227
|
|
|
(134
|
)
|
|
3,673
|
|
Corporate debt
|
2
|
|
12,557
|
|
|
805
|
|
|
(187
|
)
|
|
13,175
|
|
Preferred stock
|
2
|
|
11,545
|
|
|
364
|
|
|
(411
|
)
|
|
11,498
|
|
Mortgage-backed securities
|
2
|
|
621
|
|
|
152
|
|
|
(15
|
)
|
|
758
|
|
Common stock
|
1
|
|
16,326
|
|
|
3,116
|
|
|
(1,595
|
)
|
|
17,847
|
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
Fixed income
|
2
|
|
913
|
|
|
42
|
|
|
(10
|
)
|
|
945
|
|
Trust securities
|
|
|
$
|
47,448
|
|
|
$
|
4,706
|
|
|
$
|
(2,352
|
)
|
|
$
|
49,802
|
|
Accrued investment income
|
|
|
$
|
427
|
|
|
|
|
|
|
$
|
427
|
|
Cemetery perpetual care investments
|
|
|
|
|
|
|
|
|
$
|
50,229
|
|
Market value as a percentage of cost
|
|
|
|
|
|
|
|
|
105.0
|
%
|
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
. In the three months ended
March 31, 2017
and
2018
, we did not record any impairments for other-than-temporary declines in the fair value related to unrealized losses on certain investments. 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
March 31, 2018
, 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 investment losses were temporary in nature.
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended
March 31, 2018
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2018
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
$
|
318
|
|
|
$
|
(11
|
)
|
|
$
|
1,110
|
|
|
$
|
(157
|
)
|
|
$
|
1,428
|
|
|
$
|
(168
|
)
|
Corporate debt
|
4,637
|
|
|
(289
|
)
|
|
576
|
|
|
(141
|
)
|
|
5,213
|
|
|
(430
|
)
|
Preferred stock
|
3,423
|
|
|
(32
|
)
|
|
5,622
|
|
|
(492
|
)
|
|
9,045
|
|
|
(524
|
)
|
Mortgage-backed securities
|
45
|
|
|
—
|
|
|
45
|
|
|
(16
|
)
|
|
90
|
|
|
(16
|
)
|
Common stock
|
7,291
|
|
|
(1,534
|
)
|
|
1,079
|
|
|
(894
|
)
|
|
8,370
|
|
|
(2,428
|
)
|
Mutual Funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed Income
|
641
|
|
|
(35
|
)
|
|
—
|
|
|
—
|
|
|
641
|
|
|
(35
|
)
|
Total temporary impaired securities
|
$
|
16,355
|
|
|
$
|
(1,901
|
)
|
|
$
|
8,432
|
|
|
$
|
(1,700
|
)
|
|
$
|
24,787
|
|
|
$
|
(3,601
|
)
|
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended
December 31, 2017
are shown in the following table (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
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:
|
|
|
|
|
|
|
|
|
|
|
|
Foreign debt
|
$
|
92
|
|
|
$
|
(3
|
)
|
|
$
|
1,128
|
|
|
$
|
(131
|
)
|
|
$
|
1,220
|
|
|
$
|
(134
|
)
|
Corporate debt
|
2,621
|
|
|
(59
|
)
|
|
555
|
|
|
(128
|
)
|
|
3,176
|
|
|
(187
|
)
|
Preferred stock
|
29
|
|
|
—
|
|
|
5,492
|
|
|
(411
|
)
|
|
5,521
|
|
|
(411
|
)
|
Mortgage-backed securities
|
76
|
|
|
(10
|
)
|
|
16
|
|
|
(5
|
)
|
|
92
|
|
|
(15
|
)
|
Common stock
|
5,119
|
|
|
(991
|
)
|
|
1,108
|
|
|
(604
|
)
|
|
6,227
|
|
|
(1,595
|
)
|
Mutual funds:
|
|
|
|
|
|
|
|
|
|
|
|
Fixed income
|
$
|
433
|
|
|
$
|
(10
|
)
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
433
|
|
|
$
|
(10
|
)
|
Total temporary impaired securities
|
$
|
8,370
|
|
|
$
|
(1,073
|
)
|
|
$
|
8,299
|
|
|
$
|
(1,279
|
)
|
|
$
|
16,669
|
|
|
$
|
(2,352
|
)
|
Perpetual care trust investment security transactions recorded in
Other, net
on our Consolidated Statements of Operations for the
three
months ended
March 31, 2017
and
2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2018
|
Realized gains
|
$
|
281
|
|
|
$
|
282
|
|
Realized losses
|
(149
|
)
|
|
(214
|
)
|
Increase in care trusts’ corpus
|
(132
|
)
|
|
(68
|
)
|
Total
|
$
|
—
|
|
|
$
|
—
|
|
Perpetual care trust investment security transactions recorded in
Revenues: Cemetery
for the
three
months ended
March 31, 2017
and
2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2018
|
Investment income
|
$
|
1,705
|
|
|
$
|
1,533
|
|
Realized gain, net
|
(499
|
)
|
|
(316
|
)
|
Total
|
$
|
1,206
|
|
|
$
|
1,217
|
|
Purchases and sales of investments in the perpetual care trusts for the
three
months ended
March 31, 2017
and
2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2018
|
Purchases
|
$
|
(5,012
|
)
|
|
$
|
(1,929
|
)
|
Sales
|
$
|
3,887
|
|
|
$
|
4,965
|
|
8.
FAIR VALUE MEASUREMENTS
We evaluate our financial assets and liabilities for those financial assets and liabilities that meet 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 10) are classified within Level 2 of the Fair Value Measurement hierarchy. The fair values of our 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 fair value of the convertible subordinated notes due 2021 was approximately
$188.6 million
at
March 31, 2018
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 investment categories on our Consolidated Balance Sheets as having met the criteria for fair value
measurement. As of
March 31, 2018
, 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 the 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 4 and 7 to our Consolidated Financial Statements included herein for the fair value hierarchy levels of our trust investments.
9. INTANGIBLE AND OTHER NON-CURRENT ASSETS
Intangibles and other non-current assets at
December 31, 2017
and
March 31, 2018
were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Prepaid agreements not-to-compete, net of accumulated amortization of $6,051 and $6,190, respectively
|
$
|
3,730
|
|
|
$
|
3,655
|
|
Tradenames
|
14,372
|
|
|
14,372
|
|
Capitalized commissions on preneed contracts, net of accumulated amortization of $149
|
—
|
|
|
2,798
|
|
Other
|
15
|
|
|
5
|
|
Intangible and other non-current assets
|
$
|
18,117
|
|
|
$
|
20,830
|
|
Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from
one
to
ten
years. Amortization expense for our prepaid agreements not-to-compete was approximately
$136,000
and
$139,000
for the
three months ended March 31, 2017
and
2018
, respectively. Our tradenames have indefinite lives and therefore are not amortized.
Topic 606 impacted our accounting for selling costs related to preneed cemetery merchandise and services and preneed funeral trust contracts. Under Topic 606, these costs are capitalized and amortized over the average maturity period for our preneed cemetery contracts and preneed funeral trust contracts. We estimate an average maturity period of 8 years for preneed cemetery contracts and 10 years for preneed funeral trust contracts. These costs are included in
Intangible and other non-current assets
on our Consolidated Balance Sheets at
March 31, 2018
. Previously, these costs were expensed in the period incurred. Amortization expense for our capitalized commissions on preneed contracts was approximately
$149,000
for the three months ended
March 31, 2018
.
See Note 2 for additional information on our opening balance sheet entry on January 1, 2018 to
Intangible and other non-current assets
related to these capitalized commissions on preneed contracts.
10.
LONG-TERM DEBT
Our long-term debt consisted of the following at
December 31, 2017
and
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Revolving credit facility, secured, floating rate
|
$
|
92,000
|
|
|
$
|
84,200
|
|
Term loan, secured, floating rate
|
127,500
|
|
|
123,750
|
|
Acquisition debt
|
10,548
|
|
|
10,212
|
|
Debt issuance costs, net of accumulated amortization of $4,442 and $4,518, respectively
|
(967
|
)
|
|
(891
|
)
|
Less: current portion
|
(16,927
|
)
|
|
(16,996
|
)
|
Total long-term debt
|
$
|
212,154
|
|
|
$
|
200,275
|
|
As of
March 31, 2018
, we had a
$300 million
secured 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.
As of
March 31, 2018
, we had outstanding borrowings under the revolving credit facility of
$84.2 million
and approximately
$123.8 million
was outstanding on the term loan. We have one letter of credit issued on November 30, 2017 and outstanding under the Credit Facility for approximately
$2.0 million
, which bears interest at
2.125%
and will expire on November 26, 2018. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under the Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon
our leverage ratio. As of
March 31, 2018
, the prime rate margin was equivalent to
1.625%
and the LIBOR margin was
2.625%
. The weighted average interest rate on the Credit Facility for the three months ended
March 31, 2018
was
3.9%
.
We were in compliance with the covenants contained in the Credit Agreement as of
March 31, 2018
. 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
March 31, 2018
, the leverage ratio was
2.96
to 1.00 and the fixed charge coverage ratio was
2.04
to 1.00.
Amortization of debt issuance costs related to our Credit Facility was approximately
$0.1 million
for both the three months ended
March 31, 2017
and
2018
, respectively. The unamortized debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight-line method for our revolving credit facility.
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers.
11.
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 bear interest at
2.75%
per year. 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 carrying values of the liability and equity components of the Convertible Notes at
December 31, 2017
and
March 31, 2018
are reflected in our Consolidated Balance Sheets as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Long-term liabilities:
|
|
|
|
Principal amount
|
$
|
143,750
|
|
|
$
|
143,750
|
|
Unamortized discount of liability component
|
(17,559
|
)
|
|
(16,398
|
)
|
Convertible Notes issuance costs, net of accumulated amortization of $1,877 and $2,008, respectively
|
(1,750
|
)
|
|
(1,619
|
)
|
Carrying value of the liability component
|
$
|
124,441
|
|
|
$
|
125,733
|
|
|
|
|
|
Equity component carrying value
|
$
|
17,973
|
|
|
$
|
17,973
|
|
The Carrying value of the liability component and the Carrying value of the equity component are recorded in
Convertible subordinated notes due 2021
and
Additional paid-in capital
, respectively, on our Consolidated Balance Sheets at
December 31, 2017
and
March 31, 2018
.
The fair value of the Convertible Notes, which are Level 2 measurements, was approximately
$188.6 million
at
March 31, 2018
.
Interest expense on the Convertible Notes included contractual coupon interest expense of approximately
$1.0 million
for both the three months ended
March 31, 2017
and
2018
. Accretion of the discount on the Convertible Notes was
$1.0 million
and
$1.2 million
for the three months ended
March 31, 2017
and
2018
, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately
$0.1 million
for both the three months ended
March 31, 2017
and
2018
.
The initial conversion rate of the Convertible Notes, as of March 19, 2014, was
44.3169
shares of our common stock per
$1,000
principal amount of Convertible Notes, equivalent to an initial conversion price of approximately
$22.56
per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at
March 31, 2018
, is
44.7115
shares of our common stock per
$1,000
principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately
$22.37
per share of common stock.
The unamortized discount and the unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized discount and the debt issuance costs for the three months ended
March 31, 2017
and
2018
was
6.75%
and
2.75%
, respectively.
12.
STOCKHOLDERS
’
EQUITY
Stock-Based Compensation Plans
During the three months ended
March 31, 2018
, we had two stock benefits plans under which restricted stock, stock options and performance awards have been granted or remain outstanding: the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”). The Amended and Restated 2006 Plan was terminated upon the approval of the 2017 Plan at the annual shareholders meeting on May 17, 2017. The termination of the Amended and Restated 2006 Plan does not affect the awards previously issued and outstanding.
All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). The 2017 Plan provides for grants of options as non-qualified options or incentive stock options, restricted stock and performance awards. The 2017 Plan expires on May 17, 2027.
The status of each of the plans at
March 31, 2018
is as follows (shares in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
Reserved
|
|
Shares
Available to
Issue
|
|
Options
Outstanding
|
|
Performance Awards Outstanding
(2)
|
Amended and Restated 2006 Plan
|
—
|
|
|
—
|
|
|
1,641
|
|
|
303
|
|
2017 Plan
|
1,768
|
|
(1)
|
1,230
|
|
|
223
|
|
|
229
|
|
Total
|
1,768
|
|
|
1,230
|
|
|
1,864
|
|
|
532
|
|
|
|
|
|
|
|
|
|
|
|
|
(1)
|
Amount includes approximately 213,000 shares granted from the Amended and Restated 2006 Plan that were returned to the Company due to cancellations, to pay taxes on restricted stock vestings and to pay option price and taxes on option exercises.
|
(2)
|
Performance Awards are reserved at 200% of shares granted which is equal to the maximum payout in shares.
|
Restricted Stock
During the
three months ended March 31, 2018
, we issued restricted stock to our leadership team and certain key employees totaling
77,260
shares that vest over a
three
-year period and had an aggregate grant date market value of approximately
$2.0 million
. We recorded stock-based compensation expense, which is included in
General, administrative and other expenses
, for restricted stock awards of
$189,000
and
$245,000
during the
three months ended March 31, 2017
and
2018
, respectively.
As of
March 31, 2018
, we had approximately
$2.3 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
2.7
years.
Stock Options
During the
three months ended March 31, 2018
, we granted
212,853
options to our leadership team and certain key employees at a weighted average exercise price of
$25.43
. These options will vest in
one-fifth
increments over a
five
-year period and have a
ten
-year term. The fair value of these options was approximately
$1.4 million
.
The fair value of the options granted were estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
|
|
|
|
|
2018
|
Dividend yield
|
1.18
|
%
|
Expected volatility
|
27.08
|
%
|
Risk-free interest rate
|
2.65
|
%
|
Expected holding period (years)
|
5.0
|
|
Black-Scholes value
|
$6.38
|
We recorded stock-based compensation expense, which is included in
General, administrative and other expenses
, for stock options of approximately
$0.5 million
during the
three months ended March 31, 2017
and
2018
.
Performance Awards
During the
three months ended March 31, 2018
, we granted
113,320
performance awards to our leadership team and certain key employees, payable in shares. These awards will vest (if at all) on December 31, 2022, provided that certain criteria, including but not limited to, Adjusted Consolidated EBITDA (Adjusted Earnings Before Interest Tax Depreciation and Amortization) and Adjusted Consolidated EBITDA Margin performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents
50%
of the award and the Adjusted Consolidated EBITDA Margin performance represents
50%
of the award. The fair value of these performance awards was approximately
$2.9 million
and was determined by using the stock price on the grant date of
$25.43
.
We recorded stock-based compensation expense, which is included in
General, administrative and other expenses
, for performance awards of
$55,000
and
$276,000
during the
three months ended March 31, 2017
and
2018
, respectively.
Employee Stock Purchase Plan
During the
three months ended March 31, 2018
, employees purchased a total of
13,938
shares of common stock through our ESPP at a weighted average price of
$22.07
per share. We recorded stock-based compensation expense, which is included in
General, administrative and other expenses
, for the ESPP totaling approximately
$96,000
and
$97,000
for the
three months ended March 31, 2017
and
2018
, respectively.
The fair value of the right (option) to purchase shares under the ESPP is estimated at the date of purchase with the four quarterly purchase dates using the following assumptions:
|
|
|
|
|
2018
|
Dividend yield
|
0.01
|
%
|
Expected volatility
|
20.89
|
%
|
Risk-free interest rate
|
1.44%, 1.61%, 1.72%, 1.83%
|
|
Expected life (years)
|
0.25, 0.50, 0.75, 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 the 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).
Director Compensation
We recorded stock-based compensation expense, which is included in
General, administrative and other expenses
, related to annual retainers and restricted stock awards of
$90,000
and
$84,000
for the
three months ended March 31, 2017
and
2018
, respectively.
Share Repurchase
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”). On October 25, 2017, our Board approved a
$15.0 million
increase in its authorization for repurchases of our common stock in addition to the
$25.0 million
approved on February 25, 2016, bringing the total authorized repurchase amount to
$40.0 million
, in accordance with the Exchange Act. At
March 31, 2018
, we had approximately
$26.0 million
available for repurchases under this share repurchase program. During the three months ended
March 31, 2018
, we did not purchase any shares of common stock pursuant to this share repurchase program.
Cash Dividends
On January 25, 2018, our Board declared a dividend of
$0.075
per share, totaling approximately
$1.2 million
, which was paid on March 1, 2018 to record holders of our common stock as of February 12, 2018. For the
three months ended March 31, 2017
, we paid a quarterly dividend of
$0.050
per share, totaling approximately
$0.8 million
.
Accumulated other comprehensive income
Our components of accumulated other comprehensive income are as follows (in thousands):
|
|
|
|
|
|
Accumulated Other Comprehensive Income
|
Balance at December 31, 2017
|
$
|
—
|
|
Decrease in net unrealized gains associated with available-for-sale securities of the trusts
|
(539
|
)
|
Reclassification of net unrealized gain activity attributable to the
Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus
|
539
|
|
Balance at March 31, 2018
|
$
|
—
|
|
13.
EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings per share for the three months ended
March 31, 2017
and
2018
(in thousands, except per share data):
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31,
|
|
2017
|
|
2018
|
Numerator for basic and diluted earnings per share:
|
|
|
|
Net income
|
$
|
7,084
|
|
|
$
|
9,356
|
|
Less: Earnings allocated to unvested restricted stock
|
(27
|
)
|
|
(60
|
)
|
Income attributable to common stockholders
|
$
|
7,057
|
|
|
$
|
9,296
|
|
|
|
|
|
Denominator:
|
|
|
|
Denominator for basic earnings per common share - weighted average shares outstanding
|
16,597
|
|
|
16,094
|
|
Effect of dilutive securities:
|
|
|
|
Stock options
|
395
|
|
|
376
|
|
Convertible subordinated notes
|
1,090
|
|
|
1,230
|
|
Denominator for diluted earnings per common share - weighted average shares outstanding
|
18,082
|
|
|
17,700
|
|
|
|
|
|
Basic earnings per common share:
|
$
|
0.42
|
|
|
$
|
0.58
|
|
Diluted earnings per common share:
|
$
|
0.39
|
|
|
$
|
0.52
|
|
The fully diluted weighted average shares outstanding for the three months ended
March 31, 2018
and the corresponding calculation of fully diluted earnings per share, include approximately
1,230,000
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,
Earnings Per Share
. There were approximately
1,090,000
shares for the three months ended
March 31, 2017
that would have been issued upon conversion under the if-converted method.
For the three months ended
March 31, 2018
and
2017
,
no
stock options were excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect.
14.
MAJOR SEGMENTS OF BUSINESS
We conduct funeral and cemetery operations only in the United States. The following table presents revenues, gross profit (loss), income (loss) before income taxes and total assets by segment (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral
|
|
Cemetery
|
|
Corporate
|
|
Consolidated
|
Revenues:
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
$
|
58,594
|
|
|
$
|
14,793
|
|
|
$
|
—
|
|
|
$
|
73,387
|
|
Three Months Ended March 31, 2017
|
$
|
54,211
|
|
|
$
|
13,946
|
|
|
$
|
—
|
|
|
$
|
68,157
|
|
|
|
|
|
|
|
|
|
Gross Profit (loss):
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
$
|
19,664
|
|
|
$
|
4,524
|
|
|
$
|
(7,061
|
)
|
|
$
|
17,127
|
|
Three Months Ended March 31, 2017
|
$
|
18,969
|
|
|
$
|
4,123
|
|
|
$
|
(7,223
|
)
|
|
$
|
15,869
|
|
|
|
|
|
|
|
|
|
Income (loss) before income taxes:
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2018
|
$
|
19,414
|
|
|
$
|
4,592
|
|
|
$
|
(11,772
|
)
|
|
$
|
12,234
|
|
Three Months Ended March 31, 2017
|
$
|
18,822
|
|
|
$
|
4,212
|
|
|
$
|
(11,228
|
)
|
|
$
|
11,806
|
|
|
|
|
|
|
|
|
|
Total assets:
|
|
|
|
|
|
|
|
March 31, 2018
|
$
|
658,637
|
|
|
$
|
242,723
|
|
|
$
|
3,830
|
|
|
$
|
905,190
|
|
December 31, 2017
|
$
|
665,483
|
|
|
$
|
251,243
|
|
|
$
|
4,807
|
|
|
$
|
921,533
|
|
15.
SUPPLEMENTARY DATA
Balance Sheet
The detail of certain balance sheet accounts as of
December 31, 2017
and
March 31, 2018
(in thousands):
|
|
|
|
|
|
|
|
|
|
December 31, 2017
|
|
March 31, 2018
|
Other current assets:
|
|
|
|
State income taxes receivable
|
$
|
889
|
|
|
$
|
447
|
|
Other current assets
|
97
|
|
|
125
|
|
Total other current assets
|
$
|
986
|
|
|
$
|
572
|
|
|
|
|
|
Current portion of long-term debt and capital lease obligations:
|
|
|
|
Term note
|
$
|
15,000
|
|
|
$
|
15,000
|
|
Acquisition debt
|
1,927
|
|
|
1,996
|
|
Capital leases
|
324
|
|
|
324
|
|
Total current portion of long-term debt and capital lease obligations
|
$
|
17,251
|
|
|
$
|
17,320
|
|
|
|
|
|
Other current liabilities:
|
|
|
|
Federal income taxes payable
|
$
|
1,120
|
|
|
$
|
3,542
|
|
Deferred rent
|
241
|
|
|
247
|
|
Total other current liabilities
|
$
|
1,361
|
|
|
$
|
3,789
|
|
|
|
|
|
Accrued liabilities:
|
|
|
|
Accrued salaries and wages
|
$
|
2,643
|
|
|
$
|
1,399
|
|
Accrued incentive compensation
|
6,412
|
|
|
2,332
|
|
Accrued vacation
|
2,417
|
|
|
2,672
|
|
Accrued insurance
|
1,832
|
|
|
1,966
|
|
Accrued interest
|
1,271
|
|
|
290
|
|
Accrued ad valorem and franchise taxes
|
1,003
|
|
|
1,080
|
|
Accrued commissions
|
461
|
|
|
554
|
|
Other accrued liabilities
|
1,520
|
|
|
2,104
|
|
Total accrued liabilities
|
$
|
17,559
|
|
|
$
|
12,397
|
|
|
|
|
|
Other long-term liabilities:
|
|
|
|
Deferred rent
|
$
|
966
|
|
|
$
|
901
|
|
Incentive compensation
|
1,287
|
|
|
954
|
|
Contingent consideration
|
1,125
|
|
|
964
|
|
Total other long-term liabilities
|
$
|
3,378
|
|
|
$
|
2,819
|
|
16.
SUBSEQUENT EVENTS
On April 25, 2018 (the “Eighth Amendment Effective Date”), the Company entered into an eighth amendment and commitment increase to the Credit Agreement (the “Eighth Amendment”), which amended the Credit Agreement to (i) increase the aggregate revolving credit commitment to
$200 million
; (ii) permit the Company to use the proceeds of revolving loans; (a) to repay certain indebtedness; (b) for working capital and acquisitions; (c) to make certain capital expenditures; (d) to pay interest on certain subordinated indebtedness and refinancing indebtedness (subject to the satisfaction of certain terms and conditions); (e) to prepay, repay, purchase or redeem certain subordinated indebtedness; and (f) for general corporate purposes; (iii) modify the maximum senior secured leverage ratio covenant, as described below, and (iv) release the mortgage liens of the Administrative Agent on certain real property collateral located in a flood plain, among other things.
Following the effectiveness of the Eighth Amendment, under the Credit Agreement, the Company must comply with a covenant to maintain a maximum senior secured leverage ratio as follows: no more than
4.50
to 1.00 from the Eighth Amendment Effective Date through June 30, 2018; no more than
4.25
to 1.00 at the end of the fiscal quarter ending September 30, 2018; no more than
4.00
to 1.00 at the end of the fiscal quarter ending December 31, 2018; no more than
3.75
to 1.00 at the end of the fiscal quarter ending March 31, 2019; and no more than
3.50
to 1.00 at the end of the fiscal quarter ending June 30, 2019 and at the end of any fiscal quarter thereafter.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains certain statements and information that may constitute forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include statements regarding any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. The words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions are intended to identify forward-looking statements, which are generally not historical in nature. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenues and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
|
|
•
|
the ability to find and retain skilled personnel;
|
|
|
•
|
our ability to execute our growth strategy;
|
|
|
•
|
the execution of our Standards Operating, 4E leadership and Standard Acquisition Models;
|
|
|
•
|
the effects of competition;
|
|
|
•
|
changes in the number of deaths in our markets;
|
|
|
•
|
changes in consumer preferences;
|
|
|
•
|
our ability to generate preneed sales;
|
|
|
•
|
the investment performance of our funeral and cemetery trust funds;
|
|
|
•
|
fluctuations in interest rates;
|
|
|
•
|
our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
|
|
|
•
|
death benefits related to preneed funeral contracts funded through life insurance contracts;
|
|
|
•
|
the financial condition of third-party insurance companies that fund our preneed funeral contracts;
|
|
|
•
|
increased or unanticipated costs, such as insurance or taxes;
|
|
|
•
|
recent changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service;
|
|
|
•
|
effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;
|
|
|
•
|
consolidation of the funeral and cemetery industry; and
|
|
|
•
|
other factors and uncertainties inherent in the funeral and cemetery industry.
|
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (i) Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended
December 31, 2017
.
Readers are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.