NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
As used in this Quarterly Report on Form 10-Q (the “Quarterly Report”), unless the context otherwise requires, references to the terms the “Company,” “StoneMor,” “we,” “us,” and “our” refer to StoneMor Inc. and its consolidated subsidiaries.
Nature of Operations
The Company is a provider of funeral and cemetery products and services in the death care industry in the United States. As of March 31, 2022, the Company operated 304 cemeteries in 24 states and Puerto Rico, of which 275 were owned and 29 were operated under lease, management or operating agreements. As of March 31, 2022, the Company also owned and operated 72 funeral homes, including 34 located on the grounds of cemetery properties that the Company owned, in 15 states and Puerto Rico.
The Company’s cemeteries provide cemetery property interment rights, such as burial lots, lawn and mausoleum crypts, and cremation niches. Cemetery merchandise is comprised of burial vaults, caskets, grave markers and memorials. Cemetery services include the installation of this merchandise and other service items. The Company sells these products and services both at the time of death, which is referred to as at-need, and prior to the time of death, which is referred to as pre-need.
The Company’s funeral home services include family consultation, the removal and preparation of remains, insurance products and the use of funeral home facilities for visitation and memorial services.
Basis of Presentation and Principles of Consolidation
The accompanying condensed consolidated financial statements, which are unaudited, have been prepared in accordance with the requirements of the Quarterly Report on Form 10-Q and Generally Accepted Accounting Principles (“GAAP”) for interim reporting. They do not include all disclosures normally made in financial statements contained in Annual Reports on Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Company’s financial position, results of operations and cash flows for the periods disclosed have been made. The balance sheet as of December 31, 2021 has been derived from the audited consolidated financial statement as of December 31, 2021, as presented in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, which was filed with Securities and Exchange Commission (“SEC”) on March 31, 2022 (the “Annual Report”). The interim unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements and the related notes thereto presented in the Annual Report. The results of operations for the three months ended March 31, 2022 may not necessarily be indicative of the results of operations for the full year ending December 31, 2022.
The unaudited condensed consolidated financial statements include the accounts of each of the Company’s 100% owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 29 cemeteries under long-term leases, operating agreements and management agreements. The operations of 16 of these managed cemeteries have been consolidated.
The Company operates 13 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities, since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under the long-term leases, and other agreements associated with these properties, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services and interment rights and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these agreements, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the agreement period. The Company has also recognized the existing customer contract-related performance obligations that it assumed as part of these agreements.
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COVID-19 Pandemic
In December 2019, an outbreak of a novel strain of coronavirus (“COVID-19”) spread worldwide posing public health risks that reached pandemic proportions (including the effect of variants that have developed, the “COVID-19 Pandemic”). The COVID-19 Pandemic poses a significant threat to the health and economic wellbeing of the Company’s employees, customers and vendors. The Company’s operations are deemed essential by the state and local governments in which it operates, with the exception of Puerto Rico, and the Company has been working with federal, state and local government officials to ensure that it continues to satisfy their requirements for offering the Company’s essential services.
Like most businesses world-wide, the COVID-19 Pandemic has impacted the Company financially. At the start of the COVID-19 Pandemic in early 2020, the Company saw its pre-need sales and at-need sales activity decline as Americans practiced social distancing and crowd size restrictions were put in place. However, since May 2020, the Company experienced at-need sales growth, and since late 2020, it has experienced pre-need sales growth. The Company believes the implementation of its virtual meeting tools early on in the COVID-19 Pandemic was one of several key steps that had mitigated this disruption. Throughout the COVID-19 Pandemic, the Company’s cemeteries and funeral homes have largely remained open and available to serve its families in all the locations in which it operates to the extent permitted by local authorities and the Company expects that this will continue. The Company has leveraged the relationships it has made with the families it has served during its response to the COVID-19 Pandemic, which has directly resulted in new sales leads and the increase in pre-need sales activity. In addition, as community restrictions have eased and the COVID-19 vaccine became more widely available, the Company has experienced growth in its pre-need cemetery sales.
The Company expects the COVID-19 Pandemic could have an adverse effect on its future results of operations and cash flows depending on COVID-19 variants and case counts. However, the Company cannot presently predict the likely scope and severity of that impact. In the event there are confirmed diagnoses of COVID-19 within a significant number of its facilities, the Company may incur additional costs related to the closing and subsequent cleaning of these facilities and the ability to adequately staff the impacted sites. In addition, the Company’s pre-need customers with installment contracts could default on their installment contracts due to lost work or other financial stresses arising from the COVID-19 Pandemic. Alternatively, in the event that COVID-19 case counts continue to normalize and variants become less severe, we would expect to see a reduction in the demand for at-need products and services as well as a reduction in pre-need turning to at-need.
Summary of Significant Accounting Policies
Refer to Note 1 General to the Company’s audited consolidated financial statements included in Item 8 of its Annual Report for the complete summary of significant accounting policies.
Use of Estimates
The preparation of the Company’s unaudited condensed consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions as described in its Annual Report. These estimates and assumptions may affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. As a result, actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of three months or less from the time they are acquired to be cash equivalents. Cash and Cash Equivalents was $74.2 million and $83.9 million as of March 31, 2022 and December 31, 2021, respectively.
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Restricted Cash
Cash that is restricted from withdrawal or use under the terms of certain contractual agreements is recorded as restricted cash. Restricted cash was $16.7 million and $16.4 million as of March 31, 2022 and December 31, 2021, respectively, which primarily related to cash collateralization of the Company’s letters of credit and surety bonds.
Revenue
The Company's revenues are derived from contracts with customers through sale and delivery of death care products and services. Primary sources of revenue are derived from (1) cemetery and funeral home operations generated both at-need and pre-need, which are classified on the unaudited condensed consolidated statements of operations as Interments, Merchandise and Services, (2) investment income, which includes income earned on assets maintained in perpetual care and merchandise trusts related to pre-need sales of cemetery and funeral home merchandise and services that are required to be maintained in the trust by state law and (3) interest earned on pre-need installment contracts. Investment income is presented within Investment and other for Cemetery revenue and Services for Funeral home revenue. Revenue is measured based on the consideration specified in a contract with a customer and is net of any sales incentives and amounts collected on behalf of third parties. Pre-need contracts are price guaranteed, providing for future merchandise and services at prices prevailing when the agreements are signed.
Investment income is earned on certain payments received from customers on pre-need contracts, which are required by law to be deposited into the merchandise and service trusts. Amounts are withdrawn from the merchandise trusts when the Company fulfills the performance obligations. Earnings on these trust funds, which are specifically identifiable for each performance obligation, are also included in total transaction price. Pre-need contracts are generally subject to financing arrangements on an installment basis, with a contractual term not to exceed 60 months. Interest income is recognized utilizing the effective interest method. For those contracts that do not bear a market rate of interest, the Company imputes such interest based upon the prime rate at the time of origination plus 375 basis points in order to segregate the principal and interest component of the total contract value. The Company has elected to not adjust the transaction price for the effects of a significant financing component for contracts that have payment terms under one year.
At the time of a non-cancellable pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income and any cash deposit paid. The revenue from both the sales and interest income from trusted funds are deferred until the merchandise is delivered or the services are performed. For a sale in a cancellable state, an account receivable is only recorded to the extent control has transferred to the customer for interment rights, merchandise or services for which the Company has not collected cash. The amounts collected from customers in states in which pre-need contracts are cancellable may be subject to refund provisions. The Company estimates the fair value of its refund obligation under such contracts on a quarterly basis and records such obligations within other long-term liabilities line item on its consolidated balance sheets.
In accordance with Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (“ASC 606”), the Company recognizes revenue in the amount to which the Company expects to be entitled to when it satisfies a performance obligation by transferring control over a product or service to a customer. The Company only recognizes amounts due from a customer for unfulfilled performance obligations on a cancellable pre-need contract to the extent that control has transferred to the customer for interments, merchandise or services for which the Company has not collected cash. The Company defers the recognition of any nonrefundable up-front fees and incremental direct selling costs associated with its sales contracts with a customer (i.e., commissions and bonuses) until the underlying goods or services have been delivered to the customer if the amortization period associated with the deferred nonrefundable up-front fees and incremental direct selling is greater than a year; otherwise, these nonrefundable up-front fees and incremental direct selling costs are expensed immediately. Incremental direct selling costs are recognized by specific identification. The Company calculates the deferred selling costs asset by dividing total deferred selling and obtaining expenses by total deferrable revenues and multiplying such percentage by the periodic change in gross deferred revenues. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in deferred revenues. All other selling costs are expensed as incurred.
In addition, the Company maintains a reserve representing the fair value of the refund obligation that may arise due to state law provisions that include a guarantee of customer funds collected on unfulfilled performance obligations and maintained in trust to the extent that the funds are refundable upon a customer’s exercise of any cancellation rights.
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Sales taxes assessed by governmental authorities are excluded from revenue. Any shipping and handling costs that are incurred after control over a product has transferred to a customer are accounted for as a fulfillment cost and are included in cost of goods sold.
Nature of Goods and Services
The following is a description of the principal activities within the Company’s two reportable segments from which the Company generates its revenue.
Cemetery Operations
The Company generates revenues in its Cemetery Operations segment principally from (1) providing rights to inter remains in a specific cemetery property inventory space such as burial lots and constructed mausoleum crypts (“Interments”), (2) sales of cemetery merchandise which includes markers (i.e., method of identifying a deceased person in a burial space, crypt or niche), base (i.e., the substrate upon which a marker is placed), vault (i.e., a container installed in the burial lot in which the casket is placed), caskets, cremation niches and other cemetery related items and (3) service revenues, including opening and closing, a service of digging and refilling burial spaces to install the burial vault and place the casket into the vault, cremation services and fees for installation of cemetery merchandise. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services in a package based on their relative stand-alone selling prices. The stand-alone selling price is determined by management based upon local market conditions and reasonable ranges for both merchandise and services which is the best estimate of the stand-alone price. For items that are not sold separately (e.g., second interment rights), the Company estimates stand-alone selling prices using the best estimate of market value, using inputs such as average selling price and list price broken down by each geographic location. Additionally, the Company considers typical sales promotions that could have impacted the stand-alone selling price estimates.
Interments revenue is recognized when control transfers, which is when the property is available for use by the customer. For pre-construction mausoleum contracts, the Company only recognizes revenue once the property is constructed and the customer has obtained substantially all of the remaining benefits of the property.
Merchandise revenue and deferred investment earnings on merchandise trusts are recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse at no additional cost to the Company). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligation. The estimate of the refund obligation is reevaluated on a quarterly basis. In addition, the Company is entitled to retain, in certain jurisdictions, a portion of collected customer payments when a customer cancels a pre-need contract; these amounts are also recognized in revenue at the time the contract is cancelled.
Service revenue is recognized when the services are performed, and the performance obligation is thereby satisfied.
The cost of goods sold related to merchandise and services reflects the actual cost of purchasing products and performing services and the value of cemetery property depleted through the recognized sales of interment rights. The costs related to the sales of lots and crypts are determined systematically using a specific identification method under which the total value of the underlying cemetery property and the lots available to be sold at the location are used to determine the cost per lot.
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Funeral Home Operations
The Company generates revenues in its Funeral Home Operations segment principally from (1) sales of funeral home merchandise which includes caskets and other funeral related items and (2) service revenues, which includes services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation and services of remembrance. The Funeral Home Operations segment also include revenues related to the sale of term and whole life insurance on an agency basis, in which the Company earns a commission from the sales of these policies. Insurance commission revenue is reported within service revenues. Products and services may be sold separately or in packages. For packages, the Company accounts for individual products and services separately as they are distinct (i.e., the product or service is separately identifiable from other items in the package and the customer can benefit from it on its own or with other resources that are readily available to the customer). The consideration (including any discounts) is allocated among separate products and services based on their relative stand-alone selling prices. The relative stand-alone selling price is determined by management's best estimate of the stand-alone price based upon the list price at each location. The revenue generated by the Company through its Funeral Home Operations segment is principally derived from at-need sales.
Merchandise revenue is recognized when a customer obtains control of the product. This usually occurs when the customer takes possession of the product (title has transferred to the customer and the merchandise is either installed or stored, at the direction of the customer, at the vendor’s warehouse or a third-party warehouse). The amount of revenue recognized is adjusted for expected refunds, which are estimated based on applicable law, general business practices and historical experience observed specific to the respective performance obligations. The estimate of the refund obligation is reevaluated on a quarterly basis.
Service revenue is recognized when the services are performed and the performance obligation is thereby satisfied.
Costs related to the delivery or performance of merchandise and services are charged to expense when merchandise is delivered or services are performed.
Deferred Revenues
Revenues from the sale of services and merchandise as well as any investment income from the merchandise trusts is deferred until such time that the services are performed or the merchandise is delivered. In addition, for amounts deferred on new contracts and investment income and unrealized gains on our merchandise trusts, deferred revenues include deferred revenues from pre-need sales that were entered into by entities prior to the Company’s acquisition of those entities or the assets of those entities. The Company provides for a profit margin for these deferred revenues to account for the projected future costs of delivering products and providing services on pre-need contracts that the Company acquired through acquisition. These revenues and their associated costs are recognized when the related merchandise is delivered or services are performed and are presented on a gross basis on the unaudited condensed consolidated statements of operations.
Accounts Receivable, Net of Allowance
The Company sells pre-need cemetery contracts whereby the customer enters into arrangements for future pre-need merchandise and services. These sales are usually made using interest-bearing installment contracts not to exceed 60 months. The interest income is recorded as revenue when the interest amount is considered realizable and collectible, which typically coincides with cash payment. Interest income is not recognized until payments are collected in accordance with the contract. At the time of a pre-need sale, the Company records an account receivable in an amount equal to the total contract value less unearned finance income, unfulfilled performance obligations on cancellable contracts and any cash deposit paid. The Company recognizes an allowance for doubtful accounts by applying a cancellation rate to amounts included in accounts receivable, which is recorded as a reduction in accounts receivable and a corresponding offset to deferred revenues. The cancellation rate is based on a five year average rate by each specific location. Management evaluates customer receivables for impairment based upon historical experience, including the age of the receivables and customers’ payment histories.
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Leases
The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. The Company has both operating and finance leases. The Company’s operating leases primarily include office space, funeral homes and equipment. The Company’s finance leases primarily consist of vehicles and certain IT equipment. The Company determines whether an arrangement is or contains a lease at the inception of the arrangement based on the facts and circumstances in each contract. Leases with an initial term of 12 months or less are not recorded on the balance sheet, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term in excess of 12 months, the Company records the lease liability and Right of Use (“ROU”) asset at commencement date based upon the present value of the sum of the remaining minimum rental payments, which exclude executory costs. Certain adjustments to the ROU asset may be required for items such as initial direct costs paid or incentives received.
Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from 1 to 30 years. Where leases contain escalation clauses, rent abatements and/or concessions, the Company applies them in the determination of lease expense. The exercise of lease renewal options is at the Company’s sole discretion, and the Company is only including the renewal option in the lease term when the Company can be reasonably certain that the Company will exercise the additional options.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company evaluates the term of the lease, type of asset and its weighted average cost of capital to determine its incremental borrowing rate used to measure the ROU asset and lease liability.
The Company calculates operating lease expense ratably over the lease term plus any reasonably assured renewal periods. The Company considers reasonably assured renewal options, fixed escalation provisions and residual value guarantees in its calculation. Leasehold improvements are amortized over the shorter of the lease term or asset life, which may include renewal periods where the renewal is reasonably assured, and are included in the determination of straight-line rent expense. The depreciable life of assets and leasehold improvements are generally limited by the expected lease term.
The Company’s leases also typically have lease and non-lease components, which are generally accounted for separately and not included in the measurement of the ROU asset and lease liability.
Business Combinations
Tangible and intangible assets acquired and liabilities assumed are recorded at their estimated fair value and goodwill or bargain gain is recognized for any difference between the purchase price of the acquisition and the Company's fair value estimation. To the extent that new information is obtained during the measurement period about facts and circumstances that existed at the closing date, the Company may adjust goodwill, intangible assets, assets or liabilities associated with the acquisition. The measurement period is no longer than one year from the date of acquisition. Acquisition-related expenses are recognized separately from the business combination and are expensed as incurred.
Goodwill
Goodwill resulting from the acquisitions completed during the three months ended March 31, 2022, which is preliminary and subject to change, represents the excess of purchase price over the fair market value of net assets acquired, based on their respective fair values at the date of acquisition.
The Company will test goodwill for impairment at least annually or if impairment indicators arise by comparing its reporting units’ estimated fair values to carrying values. Because quoted market prices for the reporting units are not available, the Company’s management must apply judgment in determining the estimated fair value of these reporting units. The Company’s management will use all available information to make these fair value determinations, including the present values of expected future cash flows using discount rates commensurate with the risks involved in the Company’s assets and the available market data of the industry group.
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Income Taxes
The Company is subject to U.S. federal income taxes and certain state income and franchise taxes in the states in which it operates. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards, if applicable. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in earnings in the period that includes the enactment date.
The Company records 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.
Income tax expense during interim periods is based on the Company’s forecasted annual effective tax rate plus any discrete items on an estimated basis, 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.
For the three months ended March 31, 2022 and 2021, the Company had income tax expense of $0.2 million and an income tax benefit of $1.7 million, respectively. The Company’s effective tax rate before discrete items was 1.9% and 26.6% for the three months ended March 31, 2022 and 2021, respectively.
Stock-Based Compensation
The Company has a long-term incentive plan under which it is authorized to grant stock-based compensation awards, such as restricted stock or restricted units to be settled in common stock and non-qualified stock options (“stock options”). The Company recognizes compensation expense in an amount equal to the fair value of the stock-based awards on the date of grant over the requisite service period. The fair value of restricted stock awards and restricted stock unit awards is determined based on the number of restricted stock or restricted stock units granted and the closing price of the Company’s common stock on the date of grant. The fair value of stock options is determined by applying the Black-Scholes model to the grant-date market value of the underlying common stock of the Company. The Company has elected to recognize forfeiture credits for these stock-based compensation awards as they are incurred, as this method best reflects actual stock-based compensation expense.
Tax deductions on the stock-based compensation awards are not realized until the related income is recognized, which is generally when the awards are vested or exercised. The Company recognizes deferred tax assets for stock-based compensation awards that will result in future deductions on its income tax returns, based on the amount of stock-based compensation recognized at the statutory tax rate in the jurisdiction in which the Company will receive a tax deduction. If the tax deduction for a stock-based compensation award is greater than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of a tax deduction, an excess tax benefit will be recognized and recorded as a favorable impact on the effective tax rate. If the tax deduction for a stock-based compensation award is less than the cumulative GAAP compensation expense for that stock-based compensation award upon realization of the tax deduction, a tax shortfall will be recognized and recorded as an unfavorable impact on the effective tax rate. Any excess tax benefits or shortfalls will be recorded discretely in the period in which they occur. The cash flows resulting from any excess tax benefit will be classified as financing cash flows in the Company’s consolidated statements of cash flows.
The Company provides its employees with the election to settle the income tax obligations arising from the vesting of their restricted stock-based compensation awards by the Company withholding stock equal to such income tax obligations. Shares of stock acquired from employees in connection with the settlement of the employees’ income tax obligations on these stock-based compensation awards are accounted for as treasury shares that are subsequently retired. Restricted stock awards, restricted stock units and stock options are not considered issued and outstanding for purposes of earnings per share calculations until vested or exercised.
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Net Income (Loss) per Common Share (Basic and Diluted)
Basic net income (loss) per common share is computed by dividing net income (loss) attributable to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income (loss) per common share is calculated by dividing net income (loss) attributable to common shares by the sum of the weighted-average number of outstanding common shares and the dilutive effect of share-based awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common shares that are contingently issuable upon the satisfaction of certain vesting conditions for stock awards granted under the Company’s long-term incentive plan.
The following table sets forth the reconciliation of the Company’s weighted-average number of outstanding common shares for the three months ended March 31, 2022 and 2021 used to compute basic net income (loss) attributable to common shares to those used to compute diluted net income (loss) per common share (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Weighted average number of outstanding common shares—basic |
|
|
118,329 |
|
|
|
117,909 |
|
Plus effect of dilutive incentive awards(1): |
|
|
|
|
|
|
Restricted shares |
|
|
— |
|
|
|
— |
|
Stock options |
|
|
— |
|
|
|
— |
|
Weighted average number of outstanding common shares—diluted |
|
|
118,329 |
|
|
|
117,909 |
|
(1)For the three months ended March 31, 2022 and 2021, the diluted weighted-average number of outstanding common shares does not include 903,490 and 796,168 shares issuable upon the exercise of outstanding options, respectively, and 211,896 and 413,097 restricted common shares, respectively, as their effects would have been anti-dilutive.
Recently Issued Accounting Standard Updates - Not Yet Effective
Credit Losses
In June 2016, the FASB issued ASU No. 2016-13, Credit Losses (Topic 326) ("ASU 2016-13"). The core principle of ASU 2016-13 is that all assets measured at amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions and reasonable and supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. In November 2018, FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2018-09”), which clarified that receivables arising from operating leases are not within the scope of Accounting Standards Codification (“ASC”) 326-20, Financial Instruments-Credit Losses-Measured at Amortized Cost, and should be accounted for in accordance with ASC 842, Leases. In April 2019, FASB issued ASU No. 2019-04, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments (“ASU 2019-04”), which includes clarifications to the amendments issued in ASU 2016-13. In May 2019, FASB issued ASU No. 2019-05, Financial Instruments-Credit Losses (Topic 326), which provides entities that have certain instruments within the scope of ASC 326-20 with an option to irrevocably elect the fair value option in ASC 825, Financial Instruments, upon adoption of ASU 2016-13. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”), which modifies the effective dates for ASU 2016-13, ASU 2017-12 and ASU 2016-02 to reflect the FASB’s new policy of staggering effective dates between larger public companies and all other companies. With the issuance of ASU 2019-10, the Company’s effective date for adopting all amendments related to the new credit loss standard has been extended to January 1, 2023. In November 2019, FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses (“ASU 2019-11”), which includes clarifications to and addresses specific stakeholders’ issues concerning the amendments issued in ASU 2016-13. In February 2020, FASB issued ASU No, 2020-02, Financial Instruments-Credit Losses (Topic 326) and Leases (Topic 842) and in March 2020 issued ASU No. 2020-03, Codification Improvements to Financial Instruments, both of which also provide updates and clarification. The Company plans to adopt the requirements of these amendments upon their effective date of January 1, 2023, using the modified-retrospective method and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
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2.ACQUISITIONS AND DIVESTITURES
Acquisitions
On January 31, 2022, the Company acquired two cemeteries in Virginia for cash consideration of $5.1 million, pursuant to a definitive agreement signed on March 23, 2021 with Daly Seven, Inc. to acquire four cemeteries for a total purchase price of $5.4 million, subject to customary working capital adjustments. The remaining two cemeteries, which are located in North Carolina, closed on May 10, 2022, see Note 17 Subsequent Events.
On March 1, 2022, the Company acquired one funeral home in Florida for cash consideration of $1.7 million, subject to customary working capital adjustments, pursuant to a definitive agreement signed on March 1, 2022 with MacDonald Funeral Home & Cremation, Inc.
On March 15, 2022, the Company acquired one combination cemetery and funeral home, a separate cemetery and a separate funeral home in West Virginia for cash consideration of $11.3 million, subject to customary working capital adjustments, pursuant to a definitive agreement signed on February 4, 2022 with Roselawn Acquisition Group LLC, Monte Vista Park LLC, CPJ LLC, and WV Memorial Properties LLC.
The Company accounted for these transactions under the acquisition method of accounting. Accordingly, the Company recorded the identifiable assets acquired and liabilities assumed at their respective acquisition date fair values. Costs associated with the acquisition of the assets noted were expensed as incurred. For the three months ended March 31, 2022, acquisition costs were $0.8 million and were included in corporate overhead on the condensed consolidated statement of operations. The following table summarizes the preliminary estimated fair values assigned to the assets acquired and liabilities assumed in the acquisitions at the respective acquisition dates (in thousands):
|
|
|
|
|
Assets: |
|
|
|
Accounts receivable |
|
$ |
808 |
|
Cemetery property |
|
|
10,728 |
|
Property and equipment |
|
|
2,140 |
|
Merchandise trusts, restricted |
|
|
5,575 |
|
Perpetual care trusts, restricted |
|
|
4,712 |
|
Total assets |
|
|
23,963 |
|
Liabilities: |
|
|
|
Deferred revenues |
|
|
6,326 |
|
Perpetual care trust corpus |
|
|
4,712 |
|
Total liabilities |
|
|
11,038 |
|
Fair value of net assets acquired |
|
|
12,925 |
|
Cash consideration paid |
|
|
18,020 |
|
Deferred cash consideration |
|
|
100 |
|
Total consideration |
|
|
18,120 |
|
Goodwill from purchase |
|
$ |
5,195 |
|
The Company recorded goodwill of $4.8 million and $0.4 million in the Cemetery Operations reporting segment and the Funeral Home Operations reporting segment, respectively, for the properties acquired, which is deductible for tax purposes. The goodwill recorded for the acquisitions mainly reflects the strategic fit and synergies expected from the acquisitions.
The estimated fair values of assets acquired and liabilities assumed presented above are provisional and are based on the information that was available as of the acquisition dates to estimate the fair value of assets acquired and liabilities assumed, including property and building values and deferred revenues. The Company believes the information provides a reasonable basis for estimating the fair values but the Company is waiting for additional information necessary to finalize those amounts. Therefore, the provisional measurements of fair value reflected are preliminary and subject to change, and such change could be significant. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the respective acquisition dates.
Revenue related to the assets acquired was $0.3 million for the three months ended March 31, 2022, and net income related to the assets acquired was not considered material.
15
Table of Contents
Divestitures
On April 2, 2021, the Company completed the sale of substantially all of the Company’s assets in Oregon and Washington, consisting of nine cemeteries, ten funeral establishments and four crematories (the “Clearstone Assets”) pursuant to the terms of an asset sale agreement entered into on November 6, 2020 (the “Clearstone Agreement”) with Clearstone Memorial Partners, LLC for a net cash purchase price of $6.2 million, subject to certain adjustments (the “Clearstone Sale”). The Clearstone Agreement to sell the Clearstone Assets, together with other divestitures completed in 2020, represented a strategic exit from the west coast. Therefore, the results of operations of the Clearstone Assets have been presented as discontinued operations on the accompanying consolidated statement of operations for the three months ended March 31, 2021.
The following table summarizes the results of discontinued operations (in thousands):
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2021 |
|
Cemetery revenues |
|
$ |
1,142 |
|
Funeral home revenues |
|
|
1,146 |
|
Cost of goods sold |
|
|
(191 |
) |
Cemetery expense |
|
|
(233 |
) |
Selling expense |
|
|
(231 |
) |
General and administrative expense |
|
|
(151 |
) |
Depreciation and amortization |
|
|
(40 |
) |
Funeral home expenses |
|
|
(694 |
) |
Interest expense |
|
|
(166 |
) |
Income from discontinued operations before income taxes |
|
|
582 |
|
Net gain on sale of businesses |
|
|
7 |
|
Income tax expense |
|
|
— |
|
Net income from discontinued operations |
|
$ |
589 |
|
The following table presents the depreciation and amortization, capital expenditures, sale proceeds and operating noncash items of the discontinued operations (in thousands):
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2021 |
|
Cash flows from discontinued operating activities: |
|
|
|
Depreciation and amortization |
|
$ |
40 |
|
Gain on sales of discontinued operations businesses |
|
|
7 |
|
|
|
|
|
Cash flows from discontinued investing activities: |
|
|
|
Capital expenditures |
|
$ |
10 |
|
16
Table of Contents
3.ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
Long-term accounts receivable, net, consisted of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Customer receivables |
|
$ |
156,791 |
|
|
$ |
154,664 |
|
Unearned finance income |
|
|
(14,407 |
) |
|
|
(14,319 |
) |
Allowance for doubtful accounts |
|
|
(5,867 |
) |
|
|
(5,816 |
) |
Accounts receivable, net of allowance |
|
|
136,517 |
|
|
|
134,529 |
|
Less: Current portion, net of allowance |
|
|
64,321 |
|
|
|
62,220 |
|
Long-term portion, net of allowance |
|
$ |
72,196 |
|
|
$ |
72,309 |
|
Activity in the allowance for doubtful accounts was as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Balance, beginning of period |
|
$ |
5,816 |
|
|
$ |
5,711 |
|
Provision for doubtful accounts |
|
|
1,255 |
|
|
|
6,354 |
|
Charge-offs, net |
|
|
(1,204 |
) |
|
|
(6,249 |
) |
Balance, end of period |
|
$ |
5,867 |
|
|
$ |
5,816 |
|
Management evaluates customer receivables for impairment based upon its historical experience, including the age of the receivables and the customers’ payment histories.
Cemetery property consisted of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Cemetery land |
|
$ |
239,000 |
|
|
$ |
229,736 |
|
Mausoleum crypts and lawn crypts |
|
|
67,065 |
|
|
|
67,022 |
|
Cemetery property |
|
$ |
306,065 |
|
|
$ |
296,758 |
|
Property and equipment consisted of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Buildings and improvements |
|
$ |
117,880 |
|
|
$ |
115,141 |
|
Furniture and equipment |
|
|
54,437 |
|
|
|
54,099 |
|
Funeral home land |
|
|
10,932 |
|
|
|
10,932 |
|
Property and equipment, gross |
|
|
183,249 |
|
|
|
180,172 |
|
Less: Accumulated depreciation |
|
|
(98,795 |
) |
|
|
(97,562 |
) |
Property and equipment, net of accumulated depreciation |
|
$ |
84,454 |
|
|
$ |
82,610 |
|
Depreciation expense was $1.8 million for the three months ended March 31, 2022 and 2021.
17
Table of Contents
At March 31, 2022 and December 31, 2021, the Company’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly and through mutual and investment funds. All of these investments are carried at fair value. All of these investments are subject to the fair value hierarchy and considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 13 Fair Value of Financial Instruments. There were no Level 3 assets. When the Company receives a payment from a pre-need customer, the Company deposits the amount required by law into the merchandise trusts that may be subject to cancellation on demand by the pre-need customer. The Company’s merchandise trusts related to states in which pre-need customers may cancel contracts with the Company comprised 47.7% of the total merchandise trust as of March 31, 2022. The merchandise trusts are variable interest entities (“VIE”) of which the Company is deemed the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and providing such services, the Company may be required to fund this shortfall.
The Company included $9.9 million and $10.3 million of investments held in trust as required by law by the West Virginia Funeral Directors Association at March 31, 2022 and December 31, 2021, respectively, in its merchandise trust assets. These trusts are recognized at their account value, which approximates fair value.
A reconciliation of the Company’s merchandise trust activities for the three months ended March 31, 2022 and 2021 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Balance—beginning of period |
|
$ |
567,853 |
|
|
$ |
516,284 |
|
Contributions |
|
|
20,752 |
|
|
|
13,089 |
|
Distributions |
|
|
(20,200 |
) |
|
|
(14,801 |
) |
Interest and dividends |
|
|
13,783 |
|
|
|
9,594 |
|
Capital gain distributions |
|
|
2,038 |
|
|
|
379 |
|
Realized gains and losses, net |
|
|
1,587 |
|
|
|
223 |
|
Other than temporary impairment |
|
|
— |
|
|
|
(136 |
) |
Taxes |
|
|
(67 |
) |
|
|
(247 |
) |
Fees |
|
|
(1,673 |
) |
|
|
(805 |
) |
Unrealized change in fair value |
|
|
5,694 |
|
|
|
16,454 |
|
Total |
|
|
589,767 |
|
|
|
540,034 |
|
Less: Assets held for sale |
|
|
— |
|
|
|
(15,411 |
) |
Balance—end of period |
|
$ |
589,767 |
|
|
$ |
524,623 |
|
During the three months ended March 31, 2022 and 2021, purchases of available for sale securities were approximately $19.4 million and $21.6 million, respectively. During the three months ended March 31, 2022 and 2021, sales, maturities and paydowns of available for sale securities were approximately $9.1 million and $4.9 million, respectively. Cash flows from pre-need contracts are presented as operating cash flows in the Company’s unaudited condensed consolidated statements of cash flows.
18
Table of Contents
The cost and market value associated with the assets held in the merchandise trusts as of March 31, 2022 and December 31, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
Fair Value
Hierarchy
Level |
|
Cost |
|
|
Gross
Unrealized
Gains |
|
|
Gross
Unrealized
Losses |
|
|
Fair
Value |
|
Short-term investments |
|
1 |
|
$ |
43,112 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
43,112 |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities |
|
2 |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Corporate debt securities |
|
2 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
2 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Mutual funds—debt securities |
|
1 |
|
|
6,097 |
|
|
|
19 |
|
|
|
(303 |
) |
|
|
5,813 |
|
Mutual funds—equity securities |
|
1 |
|
|
1,022 |
|
|
|
213 |
|
|
|
— |
|
|
|
1,235 |
|
Other investment funds(1) |
|
|
|
|
479,490 |
|
|
|
31,690 |
|
|
|
(3,908 |
) |
|
|
507,272 |
|
Equity securities |
|
1 |
|
|
15,017 |
|
|
|
5,814 |
|
|
|
(2,170 |
) |
|
|
18,661 |
|
Other invested assets |
|
2 |
|
|
3,735 |
|
|
|
69 |
|
|
|
— |
|
|
|
3,804 |
|
Total investments |
|
|
|
|
548,474 |
|
|
|
37,805 |
|
|
|
(6,381 |
) |
|
|
579,898 |
|
West Virginia Trust Receivable |
|
|
|
|
9,997 |
|
|
|
— |
|
|
|
(128 |
) |
|
|
9,869 |
|
Total |
|
|
|
$ |
558,471 |
|
|
$ |
37,805 |
|
|
$ |
(6,509 |
) |
|
$ |
589,767 |
|
(1)Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to fourteen years with three potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2022, there were $139.7 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $126.7 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
Fair Value
Hierarchy
Level |
|
Cost |
|
|
Gross
Unrealized
Gains |
|
|
Gross
Unrealized
Losses |
|
|
Fair
Value |
|
Short-term investments |
|
1 |
|
$ |
51,243 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
51,243 |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities |
|
2 |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
Corporate debt securities |
|
2 |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
1 |
|
Other debt securities |
|
2 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
|
|
|
1 |
|
|
|
1 |
|
|
|
— |
|
|
|
2 |
|
Mutual funds—debt securities |
|
1 |
|
|
6,097 |
|
|
|
81 |
|
|
|
(15 |
) |
|
|
6,163 |
|
Mutual funds—equity securities |
|
1 |
|
|
1,021 |
|
|
|
245 |
|
|
|
— |
|
|
|
1,266 |
|
Other investment funds(1) |
|
|
|
|
457,447 |
|
|
|
26,008 |
|
|
|
(4,398 |
) |
|
|
479,057 |
|
Equity securities |
|
1 |
|
|
14,696 |
|
|
|
3,316 |
|
|
|
(2,051 |
) |
|
|
15,961 |
|
Other invested assets |
|
2 |
|
|
3,766 |
|
|
|
103 |
|
|
|
— |
|
|
|
3,869 |
|
Total investments |
|
|
|
|
534,271 |
|
|
|
29,754 |
|
|
|
(6,464 |
) |
|
|
557,561 |
|
West Virginia Trust Receivable |
|
|
|
|
9,992 |
|
|
|
300 |
|
|
|
— |
|
|
|
10,292 |
|
Total |
|
|
|
$ |
544,263 |
|
|
$ |
30,054 |
|
|
$ |
(6,464 |
) |
|
$ |
567,853 |
|
(1)Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 1 to 30 days, and private credit funds, which have lockup periods of zero to 15 years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2021, there were $112.4 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $125.4 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.
19
Table of Contents
The contractual maturities of debt securities as of March 31, 2022 and December 31, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
Less than
1 year |
|
|
1 year
through
5 years |
|
|
6 years
through
10 years |
|
|
More than
10 years |
|
U.S. governmental securities |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
— |
|
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
Less than
1 year |
|
|
1 year
through
5 years |
|
|
6 years
through
10 years |
|
|
More than
10 years |
|
U.S. governmental securities |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
— |
|
Corporate debt securities |
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
$ |
— |
|
|
$ |
2 |
|
|
$ |
— |
|
|
$ |
— |
|
Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.
An aging of unrealized losses on the Company’s investments in debt and equity securities within the merchandise trusts as of March 31, 2022 and December 31, 2021 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
March 31, 2022 |
|
Fair
Value |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Unrealized
Losses |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Mutual funds—debt securities |
|
|
5,359 |
|
|
|
303 |
|
|
|
2 |
|
|
|
— |
|
|
|
5,361 |
|
|
|
303 |
|
Mutual funds—equity securities |
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
Other investment funds |
|
|
47,530 |
|
|
|
3,908 |
|
|
|
— |
|
|
|
— |
|
|
|
47,530 |
|
|
|
3,908 |
|
Equity securities |
|
|
463 |
|
|
|
165 |
|
|
|
1,891 |
|
|
|
2,005 |
|
|
|
2,354 |
|
|
|
2,170 |
|
Total |
|
$ |
53,353 |
|
|
$ |
4,376 |
|
|
$ |
1,893 |
|
|
$ |
2,005 |
|
|
$ |
55,246 |
|
|
$ |
6,381 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
December 31, 2021 |
|
Fair
Value |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Unrealized
Losses |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
297 |
|
|
$ |
— |
|
|
$ |
297 |
|
|
$ |
— |
|
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
620 |
|
|
|
— |
|
|
|
620 |
|
|
|
— |
|
Other debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
|
— |
|
|
|
— |
|
|
|
917 |
|
|
|
— |
|
|
|
917 |
|
|
|
— |
|
Mutual funds—debt securities |
|
|
890 |
|
|
|
15 |
|
|
|
— |
|
|
|
— |
|
|
|
890 |
|
|
|
15 |
|
Mutual funds—equity securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other investment funds |
|
|
42,645 |
|
|
|
4,398 |
|
|
|
— |
|
|
|
— |
|
|
|
42,645 |
|
|
|
4,398 |
|
Equity securities |
|
|
3,108 |
|
|
|
2,050 |
|
|
|
1 |
|
|
|
1 |
|
|
|
3,109 |
|
|
|
2,051 |
|
Total |
|
$ |
46,643 |
|
|
$ |
6,463 |
|
|
$ |
918 |
|
|
$ |
1 |
|
|
$ |
47,561 |
|
|
$ |
6,464 |
|
For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.
20
Table of Contents
Other-Than-Temporary Impairment of Trust Assets
The Company assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2022, the Company determined, based on its review, that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. During the three months ended March 31, 2021, the Company determined, based on its review, that there were 6 securities with an aggregate costs basis of approximately $0.3 million and an aggregate fair value of approximately $0.2 million, resulting in an impairment of $0.1 million, with such impairment considered to be other than temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset these changes against deferred merchandise trust revenue. These adjustments to deferred revenue will be reflected within the Company’s unaudited condensed consolidated statements of operations in future periods as the underlying merchandise is delivered or the underlying service is performed.
Impairment of Direct Loans
On a quarterly basis, the merchandise trusts evaluate the carrying value of each direct loan for impairment. A direct loan is considered impaired when, based on current information and events, it is determined that the trusts will not be able to collect the amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The trusts would generally place direct loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain and they are 90 days past due for interest or principal, unless the direct loan is both well-secured and in the process of collection. When placed on nonaccrual, the trusts would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the trusts would return a direct loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the trusts may place a direct loan on nonaccrual status but conclude it is not impaired. The trusts may retain independent third-party valuations on such nonaccrual positions to support impairment decisions.
When the trusts identify a direct loan as impaired, they measure the impairment based on the present value of expected future cash flows, discounted at the receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired receivable is less than the recorded investment, the trusts would recognize impairment with a charge to deferred revenue. When the value of the impaired loan is calculated by discounting expected cash flows, interest income would be recognized using the loan’s effective interest rate over the remaining life of the loan.
The trusts individually develop the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the trusts consider, among other things, the following credit quality indicators:
•business characteristics and financial conditions of obligors;
•current economic conditions and trends;
•actual charge-off experience;
•current delinquency levels;
•value of underlying collateral and guarantees;
•regulatory environment; and
•any other relevant factors predicting investment recovery.
There were no such impairments during the three months ended March 31, 2022 and 2021.
At March 31, 2022 and December 31, 2021, the Company’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds. All of these investments are carried at fair value. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 13 Fair Value of Financial Instruments. There were no Level 3 assets. The perpetual care trusts are VIEs for which the Company is the primary beneficiary.
21
Table of Contents
A reconciliation of the Company’s perpetual care trust activities for the three months ended March 31, 2022 and 2021 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Balance—beginning of period |
|
$ |
339,138 |
|
|
$ |
316,746 |
|
Contributions |
|
|
8,592 |
|
|
|
2,136 |
|
Distributions |
|
|
(14,379 |
) |
|
|
(9,229 |
) |
Interest and dividends |
|
|
7,798 |
|
|
|
10,357 |
|
Capital gain distributions |
|
|
1,362 |
|
|
|
604 |
|
Realized gains and losses, net |
|
|
808 |
|
|
|
(129 |
) |
Other than temporary impairment |
|
|
— |
|
|
|
(55 |
) |
Taxes |
|
|
(510 |
) |
|
|
(219 |
) |
Fees |
|
|
(240 |
) |
|
|
(940 |
) |
Unrealized change in fair value |
|
|
2,844 |
|
|
|
4,545 |
|
Total |
|
|
345,413 |
|
|
|
323,816 |
|
Less: Assets held for sale |
|
|
— |
|
|
|
(4,641 |
) |
Balance—end of period |
|
$ |
345,413 |
|
|
$ |
319,175 |
|
During the three months ended March 31, 2022 and 2021, purchases of available for sale securities were approximately $5.8 million and $15.7 million, respectively. During the three months ended March 31, 2022 and 2021, sales, maturities and paydowns of available for sale securities were approximately $0.8 million and $2.2 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in Company’s unaudited condensed consolidated statements of cash flows.
The cost and market value associated with the assets held in the perpetual care trusts as of March 31, 2022 and December 31, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
Fair Value
Hierarchy
Level |
|
Cost |
|
|
Gross
Unrealized
Gains |
|
|
Gross
Unrealized
Losses |
|
|
Fair
Value |
|
Short-term investments |
|
1 |
|
$ |
20,178 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20,178 |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities |
|
2 |
|
|
11 |
|
|
|
1 |
|
|
|
— |
|
|
|
12 |
|
Corporate debt securities |
|
2 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
2 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
|
|
|
11 |
|
|
|
1 |
|
|
|
— |
|
|
|
12 |
|
Mutual funds—debt securities |
|
1 |
|
|
39 |
|
|
|
2 |
|
|
|
(1 |
) |
|
|
40 |
|
Mutual funds—equity securities |
|
1 |
|
|
92 |
|
|
|
329 |
|
|
|
(3 |
) |
|
|
418 |
|
Other investment funds(1) |
|
|
|
|
300,248 |
|
|
|
17,611 |
|
|
|
(2,479 |
) |
|
|
315,380 |
|
Equity securities |
|
1 |
|
|
6,648 |
|
|
|
2,909 |
|
|
|
(182 |
) |
|
|
9,375 |
|
Other invested assets |
|
2 |
|
|
9 |
|
|
|
1 |
|
|
|
— |
|
|
|
10 |
|
Total investments |
|
|
|
$ |
327,225 |
|
|
$ |
20,853 |
|
|
$ |
(2,665 |
) |
|
$ |
345,413 |
|
(1)Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from zero to fourteen years with four potential one year extensions at the discretion of the funds’ general partners. As of March 31, 2022, there were $84.3 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $81.0 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.
22
Table of Contents
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
Fair Value
Hierarchy
Level |
|
Cost |
|
|
Gross
Unrealized
Gains |
|
|
Gross
Unrealized
Losses |
|
|
Fair
Value |
|
Short-term investments |
|
1 |
|
$ |
25,674 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
25,674 |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities |
|
2 |
|
|
12 |
|
|
|
2 |
|
|
|
— |
|
|
|
14 |
|
Corporate debt securities |
|
2 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
2 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
|
|
|
12 |
|
|
|
2 |
|
|
|
— |
|
|
|
14 |
|
Mutual funds—debt securities |
|
1 |
|
|
2,306 |
|
|
|
28 |
|
|
|
(35 |
) |
|
|
2,299 |
|
Mutual funds—equity securities |
|
1 |
|
|
3,894 |
|
|
|
1,341 |
|
|
|
(63 |
) |
|
|
5,172 |
|
Other investment funds(1) |
|
|
|
|
285,826 |
|
|
|
14,554 |
|
|
|
(2,776 |
) |
|
|
297,604 |
|
Equity securities |
|
1 |
|
|
6,817 |
|
|
|
1,661 |
|
|
|
(113 |
) |
|
|
8,365 |
|
Other invested assets |
|
2 |
|
|
9 |
|
|
|
1 |
|
|
|
— |
|
|
|
10 |
|
Total investments |
|
|
|
$ |
324,538 |
|
|
$ |
17,587 |
|
|
$ |
(2,987 |
) |
|
$ |
339,138 |
|
(1)Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 1 to 30 days, and private credit funds, which have lockup periods ranging from zero to 15 years with four potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2021, there were $67.3 million in unfunded investment commitments to the private credit funds, which are callable at any time. This asset class also includes $79.7 million of direct loans which are accounted for at amortized cost, net of unamortized origination fees, if any, and are categorized as Level 3 investments in the fair value hierarchy. The interest rates on these direct loans are consistent with market rates, and their amortized cost approximates fair value.
The contractual maturities of debt securities as of March 31, 2022 and December 31, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
Less than
1 year |
|
|
1 year through
5 years |
|
|
6 years through
10 years |
|
|
More than
10 years |
|
U.S. governmental securities |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
— |
|
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
11 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2021 |
|
Less than
1 year |
|
|
1 year through
5 years |
|
|
6 years through
10 years |
|
|
More than
10 years |
|
U.S. governmental securities |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
13 |
|
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
$ |
— |
|
|
$ |
1 |
|
|
$ |
— |
|
|
$ |
13 |
|
Temporary Declines in Fair Value
The Company evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.
23
Table of Contents
An aging of unrealized losses on the Company’s investments in debt and equity securities within the perpetual care trusts as of March 31, 2022 and December 31, 2021 is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
March 31, 2022 |
|
Fair
Value |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Unrealized
Losses |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Mutual funds—debt securities |
|
|
— |
|
|
|
— |
|
|
|
21 |
|
|
|
1 |
|
|
|
21 |
|
|
|
1 |
|
Mutual funds—equity securities |
|
|
— |
|
|
|
— |
|
|
|
1 |
|
|
|
3 |
|
|
|
1 |
|
|
|
3 |
|
Other investment funds |
|
|
29,605 |
|
|
|
2,479 |
|
|
|
— |
|
|
|
— |
|
|
|
29,605 |
|
|
|
2,479 |
|
Equity securities |
|
|
277 |
|
|
|
103 |
|
|
|
75 |
|
|
|
79 |
|
|
|
352 |
|
|
|
182 |
|
Total |
|
$ |
29,882 |
|
|
$ |
2,582 |
|
|
$ |
97 |
|
|
$ |
83 |
|
|
$ |
29,979 |
|
|
$ |
2,665 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less than 12 months |
|
|
12 months or more |
|
|
Total |
|
December 31, 2021 |
|
Fair
Value |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Unrealized
Losses |
|
|
Fair
Value |
|
|
Unrealized
Losses |
|
Fixed maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. governmental securities |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
990 |
|
|
$ |
— |
|
|
$ |
990 |
|
|
$ |
— |
|
Corporate debt securities |
|
|
— |
|
|
|
— |
|
|
|
1,959 |
|
|
|
— |
|
|
|
1,959 |
|
|
|
— |
|
Other debt securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Total fixed maturities |
|
|
— |
|
|
|
— |
|
|
|
2,949 |
|
|
|
— |
|
|
|
2,949 |
|
|
|
— |
|
Mutual funds—debt securities |
|
|
863 |
|
|
|
25 |
|
|
|
454 |
|
|
|
10 |
|
|
|
1,317 |
|
|
|
35 |
|
Mutual funds—equity securities |
|
|
661 |
|
|
|
60 |
|
|
|
1 |
|
|
|
3 |
|
|
|
662 |
|
|
|
63 |
|
Other investment funds |
|
|
26,533 |
|
|
|
2,776 |
|
|
|
— |
|
|
|
— |
|
|
|
26,533 |
|
|
|
2,776 |
|
Equity securities |
|
|
962 |
|
|
|
112 |
|
|
|
1 |
|
|
|
1 |
|
|
|
963 |
|
|
|
113 |
|
Total |
|
$ |
29,019 |
|
|
$ |
2,973 |
|
|
$ |
3,405 |
|
|
$ |
14 |
|
|
$ |
32,424 |
|
|
$ |
2,987 |
|
For all securities in an unrealized loss position, the Company evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.
Other-Than-Temporary Impairment of Trust Assets
The Company assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the three months ended March 31, 2022, the Company determined, based on its review, that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts. During the three months ended March 31, 2021, the Company determined, based on its review, that there were 6 securities with an aggregate cost basis of approximately $84,000 and an aggregate fair value of approximately $30,000, resulting in an impairment of $54,000, with such impairment considered to be other than temporary due to credit indicators. Accordingly, the Company adjusted the cost basis of these assets to their current value with the offset going against the liability for perpetual care trust corpus.
24
Table of Contents
Impairment of Direct Loans
On a quarterly basis, the perpetual care trusts evaluate the carrying value of each direct loan for impairment. A direct loan is considered impaired when, based on current information and events, it is determined that the trusts will not be able to collect the amounts due according to the loan contract, including scheduled interest payments. This evaluation is generally based on delinquency information, an assessment of the borrower’s financial condition and the adequacy of collateral, if any. The trusts would generally place direct loans on nonaccrual status when the full and timely collection of interest or principal becomes uncertain and they are 90 days past due for interest or principal, unless the direct loan is both well-secured and in the process of collection. When placed on nonaccrual, the trusts would reverse any accrued unpaid interest receivable against interest income and amortization of any net deferred fees is suspended. Generally, the trusts would return a direct loan to accrual status when all delinquent interest and principal become current under the terms of the credit agreement and collectability of remaining principal and interest is no longer doubtful. In certain circumstances, the trusts may place a direct loan on nonaccrual status but conclude it is not impaired. The trusts may retain independent third-party valuations on such nonaccrual positions to support impairment decisions.
When the trusts identify a direct loan as impaired, they measure the impairment based on the present value of expected future cash flows, discounted at the receivable’s effective interest rate, or the estimated fair value of the collateral, less estimated costs to sell. If it is determined that the value of an impaired receivable is less than the recorded investment, the trusts would recognize impairment with a charge to deferred revenue. When the value of the impaired loan is calculated by discounting expected cash flows, interest income would be recognized using the loan’s effective interest rate over the remaining life of the loan.
The trusts individually develop the allowance for credit losses for any identified impaired loans. In developing the allowance for credit losses, the trusts consider, among other things, the following credit quality indicators:
•business characteristics and financial conditions of obligors;
•current economic conditions and trends;
•actual charge-off experience;
•current delinquency levels;
•value of underlying collateral and guarantees;
•regulatory environment; and
•any other relevant factors predicting investment recovery.
There were no such impairments during the three months ended March 31, 2022 and 2021.
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Total debt consisted of the following at the dates indicated (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
8.500% Senior Secured Notes due 2029 |
|
$ |
400,000 |
|
|
$ |
400,000 |
|
Insurance and vehicle financing |
|
|
3,876 |
|
|
|
762 |
|
Less deferred financing costs, net of accumulated amortization |
|
|
(10,272 |
) |
|
|
(10,599 |
) |
Total debt |
|
|
393,604 |
|
|
|
390,163 |
|
Less current maturities |
|
|
(3,876 |
) |
|
|
(762 |
) |
Total long-term debt |
|
$ |
389,728 |
|
|
$ |
389,401 |
|
2029 Notes
On May 11, 2021, the Company issued $400.0 million aggregate principal amount of 8.500% Senior Secured Notes due 2029. The gross proceeds from the sale of the 2029 Notes was $389.9 million, less advisor fees, legal fees, mortgage costs and other closing expenses. The 2029 Notes were issued pursuant to the 2029 Indenture, dated as of May 11, 2021, by and among the Company, the guarantors named therein and Wilmington Trust, National Association, as trustee and collateral agent (“Wilmington”). Capitalized terms that are used in this description of the 2029 Notes but not defined herein shall have the meaning assigned to such terms in the 2029 Indenture.
Proceeds from the sale of the 2029 Notes were used to fund the redemption in full of approximately $338.1 million aggregate principal amount of the 2024 Notes together with an approximately $18.5 million prepayment premium and pay fees and expenses incurred in connection with the offering. Any remaining proceeds will be used for general corporate purposes, which may include acquisitions. Upon deposit of the funds to redeem the 2024 Notes with the 2024 Trustee, the 2024 Indenture was satisfied and discharged in accordance with its terms. As a result of the satisfaction and discharge of the 2024 Indenture, the 2024 Issuers and the 2024 Guarantors, including the Company, have been released from their obligations with respect to the 2024 Indenture and the 2024 Notes, except with respect to those provisions of the 2024 Indenture that, by their terms, survive the satisfaction and discharge of the 2024 Indenture.
Interest; Maturity; Issue Price
Interest on the 2029 Notes accrues at a rate of 8.5% per year, payable in cash semiannually, in arrears, on May 15 and November 15 of each year, beginning on November 15, 2021. The Notes mature on May 15, 2029. Subject to the covenants contained in the 2029 Indenture, the Company may, without the consent of the holders of the 2029 Notes, issue additional notes under the 2029 Indenture (“Additional Notes”) having the same terms in all respects as the 2029 Notes, which shall be treated with the 2029 Notes as a single class under the 2029 Indenture. The issue price of the 2029 Notes was 100%.
Redemption
The 2029 Notes are redeemable at the Company’s option, in whole or in part, on and after May 15, 2024 at the redemption prices (expressed as percentages of principal amount) set forth below, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date.
|
|
|
On or after May 15, 2024 and prior to May 15, 2025 |
|
104.250% |
On or after May 15, 2025 and prior to May 15, 2026 |
|
102.125% |
On or after May 15, 2026 |
|
100.000% |
In addition, prior to May 15, 2024, the Company may utilize the net proceeds of one or more equity offerings to redeem up to 40% of the aggregate principal amount of the 2029 Notes originally issued under the 2029 Indenture, including any Additional Notes, at a redemption price of 108.500% of the principal amount of the 2029 Notes redeemed, plus any accrued and unpaid interest, if any, to, but excluding, the redemption date, provided that at least 50% of the aggregate principal amount of the 2029 Notes (including Additional Notes) originally issued under the 2029 Indenture remain outstanding following such redemption.
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Table of Contents
During each of the 12-month periods ending May 10, 2022, May 10, 2023 and May 10, 2024, respectively, the Company may redeem up to 10% of the aggregate principal amount of the 2029 Notes (including Additional Notes) originally issued under the 2029 Indenture at a redemption price equal to 103% of the principal amount of the 2029 Notes redeemed plus accrued and unpaid interest, if any, to, but excluding, the redemption date.
Prior to May 15, 2024, the 2029 Notes are redeemable at the Company’s option, in whole or in part, at a redemption price equal to 100% of the principal amount of the 2029 Notes being redeemed plus an “applicable premium” (as defined in the 2029 Indenture) along with accrued and unpaid interest, if any, to, but excluding, the redemption date.
Upon the occurrence of a “change of control” (as defined in the 2029 Indenture), if the Company has not previously exercised its right to redeem all of the outstanding 2029 Notes pursuant to the optional redemption provisions as described above, the Company must offer to repurchase the 2029 Notes at a redemption price equal to 101% of the principal amount of the 2029 Notes, plus accrued and unpaid interest, if any, to, but excluding, the date of repurchase.
Upon certain asset sales where the excess proceeds from all applicable asset sales exceed $10 million since the issue date of the 2029 Notes, the Company may be required in certain circumstances to make an offer to purchase 2029 Notes with the excess proceeds from such an asset sale in excess of such $10 million threshold at a price in cash equal to 100% of the principal amount thereof, together with accrued and unpaid interest, if any, to, but excluding, the date of purchase.
Guarantees and Collateral
The Company’s obligations under the 2029 Notes and the 2029 Indenture are jointly and severally guaranteed (the “Note Guarantees”) by each of the Company’s existing and future direct and indirect domestic subsidiaries, with certain exceptions, and will be guaranteed by each of the Company’s foreign subsidiaries that guarantees any future credit facility (each applicable foreign and domestic subsidiary, a “2029 Guarantor” and collectively, the “2029 Guarantors”). In connection with the Note Guarantees, the Company, the 2029 Guarantors and Wilmington entered into a Security Agreement, dated May 11, 2021 (the “Security Agreement”). Pursuant to the 2029 Indenture and the Security Agreement, the Company’s obligations under the 2029 Indenture and the 2029 Notes are secured by a lien and security interest (subject to permitted liens and security interests) in substantially all of the Company’s and the 2029 Guarantors’ existing and future property and assets, excluding certain assets which include, among others: (a) trust and other fiduciary accounts and amounts required to be deposited or held therein, (b) assets that may not be pledged as a matter of law or without governmental approvals, until such time such assets may be pledged without legal prohibition and (c) owned and leased real property that (i) may not be pledged as a matter of law or without the prior approval of any governmental authority or third person, (ii) is not operated or intended to be operated as a cemetery, crematory or funeral home or (iii) has a fair market value of less than $3.0 million.
The 2029 Notes are the Company’s senior secured obligations and the guarantees are the 2029 Guarantors’ senior secured obligations. The obligations of the Company and each 2029 Guarantor:
•rank equal in right of payment with all of the Company and each 2029 Guarantor’s existing and future senior indebtedness, including any borrowings under any future credit facility;
•rank senior in right of payment to all of the Company’s and each 2029 Guarantor’s existing and future subordinated indebtedness;
•are effectively senior to all of the Company’s and each 2029 Guarantor’s unsecured senior indebtedness to the extent of the value of the collateral securing the 2029 Notes and the Note Guarantees;
•are contractually subordinated to the Company’s and each 2029 Guarantor’s obligations under any future credit facility permitted by the 2029 Indenture to the extent of the value of the collateral securing such credit facility and subject to the terms of any future intercreditor agreement; and
•are structurally subordinated to all indebtedness and other obligations of the Company’s existing and future subsidiaries that do not guarantee the 2029 Notes.
Covenants
The 2029 Indenture requires the Company and the 2029 Guarantors, as applicable, to comply with various affirmative covenants regarding, among other matters, delivery to Wilmington of financial statements and certain other information or reports filed with the Securities and Exchange Commission.
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The 2029 Indenture requires the Company and the 2029 Guarantors, as applicable, to comply with certain covenants including, but not limited to, covenants that, subject to certain exceptions, limit the Company’s and 2029 Guarantors’ ability to: (i) incur additional indebtedness or issue disqualified capital stock; (ii) pay dividends, redeem subordinated debt or make other restricted payments; (iii) make certain investments; (iv) create or incur certain liens; (v) issue stock of subsidiaries; (vi) enter into certain transactions with affiliates; (vii) merge, consolidate or transfer substantially all of its respective assets; (viii) agree to dividend or other payment restrictions affecting the Restricted Subsidiaries; (ix) change the business it conducts; (x) withdraw any monies or other assets from, or make any investments of, its trust funds; and (xi) transfer or sell assets, including capital stock of a Restricted Subsidiary.
Events of Default
The 2029 Indenture contains customary events of default, which could, subject to certain conditions, cause the 2029 Notes to become immediately due and payable, including, but not limited to defaults by the Company in the payment of the principal of any 2029 Notes when the same becomes due and payable at maturity, upon acceleration or redemption, or otherwise (other than pursuant to an offer to purchase by the Company) or in the payment of interest on any 2029 Notes when the same becomes due and payable, and the default continues for a period of 30 days; failure to comply with certain repurchase obligations in the 2029 Indenture and certain other covenants the 2029 Indenture relating to mergers, consolidation or sales of assets; failure to comply with certain other covenants in the 2029 Indenture beyond the applicable cure period following notice by Wilmington or the holders of at least 30% in aggregate principal amount of the 2029 Notes then outstanding; failure to pay debt within any applicable grace period after the final maturity or acceleration of such debt by the holders thereof because of a default, if the total amount of such debt unpaid or accelerated exceeds $20.0 million; failure to pay final judgments entered by a court or courts of competent jurisdiction aggregating $20.0 million or more (excluding amounts covered by insurance), which judgments are not paid, discharged or stayed, for a period of 60 days; and certain events of bankruptcy or insolvency.
As of March 31, 2022, the Company was in compliance with the covenants of the 2029 Indenture.
Deferred Financing Costs
For the three months ended March 31, 2022 and 2021, the Company recognized $0.4 million and $1.0 million, respectively, of amortization of deferred financing fees on its various debt facilities.
Capital Stock
The Company is authorized to issue two classes of capital stock: common stock, $0.01 par value per share (“Common Stock”) and preferred stock, $0.01 par value per share (“Preferred Stock”).
At March 31, 2022, 118,337,475 shares of Common Stock were issued and outstanding and no shares of Preferred Stock were issued or outstanding. At March 31, 2022, there were 81,662,525 shares of Common Stock available for issuance, including 1,036,685 shares available for issuance as stock-based incentive compensation under the Company’s Amended and Restated 2019 Long-Term Incentive Plan (as amended, the “Plan”), and 10,000,000 shares of Preferred Stock available for issuance.
Stock-based Compensation
The Plan permits the granting of awards covering a total of 9,875,000 common units of the Company. A “unit” under the Plan is defined as a common unit of the Company and such other securities as may be substituted or resubstituted for common units of the Company, including but not limited to shares of the Company’s Common Stock. The Plan is intended to promote the interests of the Company by providing to employees, consultants and directors of the Company incentive compensation awards to encourage superior performance and enhance the Company’s ability to attract and retain the services of individuals who are essential for its growth and profitability and to encourage them to devote their best efforts to advancing the Company’s business.
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Table of Contents
Stock Options
A rollforward of stock options as of March 31, 2022 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Stock Options |
|
|
Weighted Average Exercise Price Per Share ($) |
|
Total outstanding at December 31, 2021 |
|
|
6,075,000 |
|
|
|
1.27 |
|
Options granted |
|
|
— |
|
|
|
— |
|
Options exercised |
|
|
— |
|
|
|
— |
|
Options forfeited |
|
|
(187,667 |
) |
|
|
1.30 |
|
Options expired |
|
|
— |
|
|
|
— |
|
Total outstanding at March 31, 2022 |
|
|
5,887,333 |
|
|
|
1.27 |
|
For the three months ended March 31, 2022 and 2021, non-cash compensation expense related to stock options was $0.2 million. As of March 31, 2022, total unrecognized compensation cost related to unvested stock options was $0.6 million, which the Company expects to recognize over the remaining weighted-average period of 1.0 year.
Restricted Stock and Restricted Phantom Stock
A rollforward of restricted stock and phantom stock awards as of March 31, 2022 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Number of Restricted Stock and Phantom Stock Awards |
|
|
Weighted Average Grant Date Fair Value ($) |
|
Total non-vested at December 31, 2021 |
|
|
873,600 |
|
|
|
1.95 |
|
Granted |
|
|
19,160 |
|
|
|
2.74 |
|
Vested |
|
|
(46,875 |
) |
|
|
3.88 |
|
Forfeited |
|
|
(37,667 |
) |
|
|
1.71 |
|
Total non-vested at March 31, 2022 |
|
|
808,218 |
|
|
|
1.87 |
|
For the three months ended March 31, 2022 and 2021, the Company recognized $0.3 million of non-cash compensation expense related to restricted stock and phantom stock awards into earnings. As of March 31, 2022, total unamortized compensation cost related to unvested restricted stock awards was $0.9 million, which the Company expects to recognize over the remaining weighted-average period of 1.4 years.
10.DEFERRED REVENUES AND COSTS
The Company defers revenues and all direct costs associated with the sale of pre-need cemetery merchandise and services until the merchandise is delivered or the services are performed. The Company recognizes deferred merchandise and service revenues as customer contract liabilities within long-term liabilities on its consolidated balance sheets. The Company recognizes deferred direct costs associated with pre-need cemetery merchandise and service revenues as deferred selling and obtaining costs within long-term assets on its consolidated balance sheets. The Company also defers the costs to obtain new pre-need cemetery and new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts. Such costs are recognized when the associated performance obligation is fulfilled based upon the net change in the customer contract liabilities. All other selling costs are expensed as incurred. Additionally, the Company has elected the practical expedient of not recognizing incremental costs to obtain a contract as incurred, as the associated amortization period is typically one year or less.
Deferred revenues and related costs consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
|
|
|
|
|
|
|
Deferred contract revenues |
|
$ |
901,679 |
|
|
$ |
880,290 |
|
Deferred merchandise trust revenue |
|
|
161,390 |
|
|
|
150,368 |
|
Deferred merchandise trust unrealized gains (losses) |
|
|
31,260 |
|
|
|
25,602 |
|
Deferred revenues |
|
$ |
1,094,329 |
|
|
$ |
1,056,260 |
|
Deferred selling and obtaining costs |
|
$ |
125,886 |
|
|
$ |
124,023 |
|
For the three months ended March 31, 2022 and 2021, the Company recognized $23.1 million and $24.7 million, respectively, of the customer contract liabilities balance that existed at December 31, 2021 and 2020, respectively, as revenue.
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The components of the customer contract liabilities, net in the Company’s consolidated balance sheets at March 31, 2022 and December 31, 2021 were as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Customer contract liabilities, gross |
|
$ |
1,121,259 |
|
|
$ |
1,082,970 |
|
Amounts due from customers for unfulfilled performance obligations on cancellable
pre-need contracts |
|
|
(26,930 |
) |
|
|
(26,710 |
) |
Customer contract liabilities, net |
|
$ |
1,094,329 |
|
|
$ |
1,056,260 |
|
The Company expects to service approximately 55% of its deferred revenue in the first 4-5 years and approximately 80% of its deferred revenue within 18 years. The Company cannot estimate the period when it expects its remaining performance obligations will be recognized, because certain performance obligations will only be satisfied at the time of death.
11.COMMITMENTS AND CONTINGENCIES
Legal
The Company is subject to state law claims that certain of its officers and directors breached their fiduciary duties, as well as a claim under federal law that certain of the Company’s prior proxy disclosures were misleading. The Company could also become subject to additional claims and legal proceedings relating to the factual allegations made in these actions. While management cannot reasonably estimate the potential exposure in these matters at this time, if we do not prevail in any such proceedings, we could be required to pay substantial damages or settlement costs, subject to certain insurance coverages. Management has determined that, based on the status of the claims and legal proceedings described below, the amount of the potential losses cannot be reasonably estimated at this time. These actions are summarized below.
•Bunim v. Miller, et al., No. 2:17-cv-519-ER, pending in the United States District Court for the Eastern District of Pennsylvania, and filed on February 6, 2017. The plaintiff in this case brought, derivatively on behalf of the Partnership, claims that the officers and directors of StoneMor GP LLC, a Delaware limited liability company and general partner of the Partnership (“StoneMor GP”), aided and abetted in breaches of StoneMor GP’s purported fiduciary duties by, among other things and in general, allegedly making misrepresentations through the use of non-GAAP accounting standards in the Partnership’s public filings, by allegedly failing to clearly disclose the use of proceeds from debt and equity offerings, and by allegedly approving unsustainable distributions. The plaintiff also claims that these actions and misrepresentations give rise to causes of action for gross mismanagement, unjust enrichment, and (in connection with a purportedly misleading proxy statement filed in 2014) violations of Section 14(a) of the Exchange Act. The derivative plaintiff seeks an award of damages, attorneys’ fees and costs in favor of the Partnership as nominal plaintiff, as well as general compliance and governance changes. This case has been stayed, by the agreement of the parties, provided that either party may terminate the stay on 30 days’ notice.
•Fried v. Axelrod, et al., C.A. No. 2020-1065-SG, pending in the Chancery Court of the State of Delaware and filed on December 16, 2020. The plaintiff in this case brought an action he seeks to have certified as a class action that asserts claims against Axar Capital Management, LP (“Axar”), Andrew M. Axelrod and the other individuals who were directors at the time of the transactions in question and against the Company as a nominal defendant. The complaint includes direct claims against all individual defendants and derivative claims against the individual defendants other than Mr. Axelrod for breach of fiduciary duty in approving certain transactions in connection with the Company’s sale of preferred and common stock to Axar and certain accounts managed by Axar (the “Axar Stock Purchase”). The complaint also includes derivative claims against Axar for breach of fiduciary duty and unjust enrichment in connection with those same transactions as well as direct claims against both Axar and Mr. Axelrod for breach of fiduciary duty with respect to those transactions. Finally, the complaint includes a derivative claim against all individual defendants for breach of fiduciary duty in connection with the approval of a related-party investment disclosed by the Company. The plaintiff seeks rescission of the transactions contemplated by the Axar Stock Purchase and the related-party investment and/or an award of damages as well as attorneys’ fees and costs. On January 6, 2021, a motion to dismiss the complaint was filed on behalf of the Company and the individual defendants other than Mr. Axelrod and on January 11, 2021, a motion to dismiss the complaint was filed on behalf of Axar and Mr. Axelrod. On April 2, 2021, the plaintiff filed a First Amended Complaint, which included additional factual background regarding the plaintiff’s claims and alleged demand futility, but did not add additional defendants, claims or relief sought. The defendants filed a motion to dismiss the First Amended Complaint on April 16, 2021. Thereafter, the plaintiff and defendants filed a joint stipulation to stay the Fried litigation. On December 9, 2021, this action was consolidated with the Titterton action filed in November 2021 and described below.
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•Titterton v. StoneMor Inc., C.A. No.: 2021-1028-SG, pending in the Court of Chancery of the State of Delaware and filed on November 24, 2021. The plaintiff in this case brought a derivative action that asserts claims against Axar, Andrew M. Axelrod and the other individuals who were directors at the time of the transactions in question and against the Company as a nominal defendant. On December 9, 2021, the Fried action was consolidated with this action, with Titterton and Fried appointed as lead plaintiffs. On December 27, 2021, a motion to dismiss plaintiffs’ complaint was filed on behalf of the Company and the individual defendants other than Mr. Axelrod and on December 28, 2021, a motion to dismiss the complaint was filed on behalf of Axar and Mr. Axelrod. On February 4, 2022, all defendants filed their briefs in support of their motions to dismiss. The plaintiffs subsequently filed an amended complaint on March 11, 2022. The amended complaint includes derivative claims against the individual defendants, Mr. Axelrod, and Axar for breach of fiduciary duty in approving certain transactions in connection with the Company’s sale of preferred and common stock to Axar and certain accounts managed by Axar (the “Axar Stock Purchase”), as well as for breach of fiduciary duty in connection with the approval of a related-party investment disclosed by the Company. The amended complaint also includes claims against Mr. Axelrod and Axar for unjust enrichment with respect to those same transactions. The plaintiffs seek rescission of the transactions contemplated by the Axar Stock Purchase and the related-party investment and/or an award of damages as well as attorneys’ fees and costs. On March 25, 2022, the defendants filed motions to dismiss the amended complaint. On April 22, 2022, all defendants filed their briefs in support of their motions to dismiss.
The Company is party to other legal proceedings in the ordinary course of its business, but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material adverse effect on its financial position, results of operations or cash flows. The Company carries insurance with coverage and coverage limits that it believes to be customary in the cemetery and funeral home industry. Although there can be no assurance that such insurance will be sufficient to protect the Company against all contingencies, Management believes that the insurance protection is reasonable in view of the nature and scope of the Company’s operations.
Moon Landscaping, Inc.
On April 2, 2020, the Company entered into two multi-year Master Services Agreements (the “MSAs”) with Moon Landscaping, Inc. and its affiliate, Rickert Landscaping, Inc. (collectively “Moon”) to outsource grounds and maintenance services at most of the Company’s funeral homes and cemeteries. Due to certain liquidity constraints and performance issues experienced by Moon, the Company exercised its right under the MSAs to take back the responsibility for grounds and maintenance services at the locations outsourced to Moon with respect to 81 locations effective July 1, 2021, 22 locations effective August 1, 2021, 111 locations effective August 9, 2021, 34 locations effective November 15, 2021 and the remaining locations effective January 7, 2022.
Archdiocese of Philadelphia
In May 2014, the Company entered into lease and management agreements with the Archdiocese of Philadelphia, pursuant to which the Company has committed to pay aggregate fixed rent of $36.0 million in the following amounts:
|
|
|
Lease Years 6-20 (June 1, 2019-May 31, 2034) |
|
$1,000,000 per Lease Year |
Lease Years 21-25 (June 1, 2034-May 31, 2039) |
|
$1,200,000 per Lease Year |
Lease Years 26-35 (June 1, 2039-May 31, 2049) |
|
$1,500,000 per Lease Year |
Lease Years 36-60 (June 1, 2049-May 31, 2074) |
|
None |
The fixed rent for lease years six through 11, an aggregate of $6.0 million, is deferred. If prior to May 31, 2025, the Archdiocese terminates the agreements in accordance with their terms during lease year 11 or the Company terminates the agreements as a result of a default by the Archdiocese, the Company is entitled to retain the deferred fixed rent. If the agreements are not terminated, the deferred fixed rent will become due and payable on or before June 30, 2025.
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The Company leases a variety of assets throughout its organization, such as office space, funeral homes, warehouses and equipment. In addition the Company has a sale-leaseback related to one of its warehouses. Leases with an initial term of 12 months or less are not recorded on the Company’s consolidated balance sheets, and the Company recognizes lease expense for these leases on a straight-line basis over the lease term. For lease agreements with an initial term of more than 12 months, the Company measures the lease liability at the present value of the sum of the remaining minimum rental payments, which exclude executory costs.
Certain leases provide the Company with the option to renew for additional periods, with renewal terms that can extend the lease term for periods ranging from 1 to 30 years. The exercise of lease renewal options is at the Company’s sole discretion, and the Company is only including the renewal option in the lease term when the Company can be reasonably certain that it will exercise the renewal options. The Company does have residual value guarantees on the finance leases for its vehicles, but no residual guarantees on any of its operating leases.
Certain of the Company’s leases have variable payments with annual escalations based on the proportion by which the consumer price index (“CPI”) for all urban consumers increased over the CPI index for the prior comparative year.
The Company has the following balances recorded on its consolidated balance sheets related to leases:
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
Assets: |
|
|
|
|
|
|
Operating |
|
$ |
5,654 |
|
|
$ |
5,944 |
|
Finance |
|
|
3,306 |
|
|
|
3,343 |
|
Total ROU assets(1) |
|
$ |
8,960 |
|
|
$ |
9,287 |
|
Liabilities: |
|
|
|
|
|
|
Current |
|
|
|
|
|
|
Operating |
|
$ |
1,087 |
|
|
$ |
1,103 |
|
Finance |
|
|
1,869 |
|
|
|
1,859 |
|
Long-term |
|
|
|
|
|
|
Operating |
|
|
4,705 |
|
|
|
4,969 |
|
Finance |
|
|
911 |
|
|
|
1,035 |
|
Total lease liabilities(2) |
|
$ |
8,572 |
|
|
$ |
8,966 |
|
(1)The Company’s ROU operating assets and finance assets are presented within Other assets and Property and equipment, net of accumulated depreciation, respectively, in its consolidated balance sheets.
(2)The Company’s current lease liabilities and long-term are presented within Accounts payable and accrued liabilities and Other long-term liabilities, respectively, in its consolidated balance sheets.
As most of the Company’s leases do not provide an implicit rate, the Company uses its incremental borrowing rate, based on the information available at commencement date, in determining the present value of lease payments. The Company used the incremental borrowing rate on January 1, 2019 for operating leases that commenced prior to that date. The weighted average borrowing rates for operating and finance leases were 9.9% and 8.7%, respectively, as of March 31, 2022.
The components of lease expense were as follows:
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Lease cost |
Classification |
|
|
|
|
|
Operating lease costs(1) |
General and administrative expense |
$ |
463 |
|
|
$ |
479 |
|
Finance lease costs |
|
|
|
|
|
|
Amortization of leased assets |
Depreciation and Amortization |
|
234 |
|
|
|
329 |
|
Interest on lease liabilities |
Interest expense |
|
81 |
|
|
|
87 |
|
Short-term lease costs(2) |
General and administrative expense |
|
— |
|
|
|
— |
|
Net lease costs |
|
$ |
778 |
|
|
$ |
895 |
|
(1)The Company includes its variable lease costs under operating lease costs as these variable lease costs are immaterial.
(2)The Company does not have any short-term leases with lease terms greater than one month.
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Table of Contents
Maturities of the Company’s lease labilities as of March 31, 2022 were as follows:
|
|
|
|
|
|
|
|
|
Year ending December 31, |
|
Operating |
|
|
Finance |
|
2022 |
|
$ |
1,217 |
|
|
$ |
1,740 |
|
2023 |
|
|
1,467 |
|
|
|
828 |
|
2024 |
|
|
1,230 |
|
|
|
217 |
|
2025 |
|
|
1,113 |
|
|
|
131 |
|
2026 |
|
|
1,086 |
|
|
|
152 |
|
Thereafter |
|
|
1,498 |
|
|
|
44 |
|
Total |
|
$ |
7,611 |
|
|
$ |
3,112 |
|
Less: Interest |
|
|
(1,819 |
) |
|
|
(331 |
) |
Present value of lease liabilities |
|
$ |
5,792 |
|
|
$ |
2,781 |
|
Maturities of the Company’s lease labilities as of December 31, 2021 were as follows:
|
|
|
|
|
|
|
|
|
Year ending December 31, |
|
Operating |
|
|
Finance |
|
2022 |
|
$ |
1,661 |
|
|
$ |
2,099 |
|
2023 |
|
|
1,460 |
|
|
|
780 |
|
2024 |
|
|
1,223 |
|
|
|
168 |
|
2025 |
|
|
1,111 |
|
|
|
95 |
|
2026 |
|
|
1,086 |
|
|
|
100 |
|
Thereafter |
|
|
1,498 |
|
|
|
— |
|
Total |
|
$ |
8,039 |
|
|
$ |
3,242 |
|
Less: Interest |
|
|
(1,967 |
) |
|
|
(348 |
) |
Present value of lease liabilities |
|
$ |
6,072 |
|
|
$ |
2,894 |
|
Operating and finance lease payments include $0.7 million related to options to extend lease terms that are reasonably certain of being exercised and $1.5 million related to residual value guarantees. The weighted average remaining lease term for operating and finance leases was 5.5 years and 1.6 years, respectively, as of March 31, 2022.
As of March 31, 2022, the Company had no additional operating leases that had not yet commenced, and did not have any lease transactions with its related parties. In addition, as of March 31, 2022, the Company had not entered into any new sale-leaseback arrangements.
13.FAIR VALUE OF FINANCIAL INSTRUMENTS
Management has established a hierarchy to classify the inputs used to measure the Company’s financial instruments at fair value, pursuant to which the Company is required to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect the Company’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:
•Level 1 – Unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities that the reporting entity has the ability to access at the measurement date.
•Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the same contractual term of the asset or liability.
•Level 3 – Unobservable inputs based on the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.
The carrying value of the Company’s current assets and current liabilities on its consolidated balance sheets approximated or equaled their estimated fair values due to their short-term nature or imputed interest rates.
33
Table of Contents
Recurring Fair Value Measurement
At March 31, 2022 and December 31, 2021, the two financial instruments measured by the Company at fair value on a recurring basis were its merchandise and perpetual care trusts, which consist of investments in debt and equity marketable securities and cash equivalents that are carried at fair value and are classified as either Level 1 or Level 2 (see Note 6 Merchandise Trusts and Note 7 Perpetual Care Trusts).
Where quoted prices are available in an active market, securities are classified as Level 1 investments pursuant to the fair value measurement hierarchy. Where quoted market prices are not available for the specific security, fair values are estimated by using either quoted prices of securities with similar characteristics or an income approach fair value model with observable inputs that include a combination of interest rates, yield curves, credit risks, prepayment speeds, rating, and tax-exempt status. These securities are classified as Level 2 investments pursuant to the fair value measurements hierarchy. Certain investments in the merchandise and perpetual care trusts are excluded from the fair value leveling hierarchy in accordance with GAAP. These funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy.
Non-Recurring Fair Value Measurement
The Company may be required to measure certain assets and liabilities at fair value, such as its indefinite-lived assets and long-lived assets, on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from impairment charges.
Other Financial Instruments
The Company’s other financial instruments at March 31, 2022 and December 31, 2021 consisted of its 2029 Notes (see Note 8 Long-Term Debt). At March 31, 2022 and December 31, 2021, the estimated fair value of the Company's 2029 Notes was $397.1 million and $413.5 million, respectively, based on trades made on that date, compared with the carrying amount of $400.0 million.
34
Table of Contents
Management operates the Company in two reportable operating segments: Cemetery Operations and Funeral Home Operations. These operating segments reflect the way the Company manages its operations and makes business decisions. Management evaluates the performance of these operating segments based on interments performed, interment rights sold, pre-need cemetery and at-need cemetery contracts written, revenue and segment profit (loss). As a percentage of revenue and assets, the Company’s major operations consist of its cemetery operations.
The following tables present financial information with respect to the Company’s segments (in thousands). Corporate costs represent those not directly associated with an operating segment, such as corporate overhead, interest expense and income taxes. Corporate assets primarily consist of cash and cash equivalents and restricted cash.
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
STATEMENT OF OPERATIONS DATA: |
|
|
|
|
|
|
Cemetery Operations: |
|
|
|
|
|
|
Revenues |
|
$ |
69,497 |
|
|
$ |
66,980 |
|
Operating costs and expenses |
|
|
(60,044 |
) |
|
|
(53,745 |
) |
Depreciation and amortization |
|
|
(1,434 |
) |
|
|
(1,576 |
) |
Segment operating profit |
|
$ |
8,019 |
|
|
$ |
11,659 |
|
Funeral Home Operations: |
|
|
|
|
|
|
Revenues |
|
$ |
11,480 |
|
|
$ |
11,333 |
|
Operating costs and expenses |
|
|
(9,775 |
) |
|
|
(9,341 |
) |
Depreciation and amortization |
|
|
(432 |
) |
|
|
(431 |
) |
Segment operating profit |
|
$ |
1,273 |
|
|
$ |
1,561 |
|
Reconciliation of segment operating profit to net loss from continuing operations: |
|
|
|
|
|
|
Cemetery Operations |
|
$ |
8,019 |
|
|
$ |
11,659 |
|
Funeral Home Operations |
|
|
1,273 |
|
|
|
1,561 |
|
Total segment profit |
|
|
9,292 |
|
|
|
13,220 |
|
Corporate overhead |
|
|
(11,813 |
) |
|
|
(9,541 |
) |
Corporate depreciation and amortization |
|
|
(195 |
) |
|
|
(95 |
) |
Interest expense |
|
|
(9,286 |
) |
|
|
(10,473 |
) |
Income tax (expense) benefit |
|
|
(232 |
) |
|
|
1,676 |
|
Net loss from continuing operations |
|
$ |
(12,234 |
) |
|
$ |
(5,213 |
) |
|
|
|
|
|
|
|
CASH FLOW DATA: |
|
|
|
|
|
|
Capital expenditures: |
|
|
|
|
|
|
Cemetery Operations |
|
$ |
1,944 |
|
|
$ |
1,713 |
|
Funeral Home Operations |
|
|
593 |
|
|
|
61 |
|
Corporate |
|
|
65 |
|
|
|
— |
|
Total capital expenditures |
|
$ |
2,602 |
|
|
$ |
1,774 |
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2022 |
|
|
December 31, 2021 |
|
BALANCE SHEET DATA: |
|
|
|
|
|
|
Assets: |
|
|
|
|
|
|
Cemetery Operations |
|
$ |
1,537,603 |
|
|
$ |
1,506,504 |
|
Funeral Home Operations |
|
|
130,082 |
|
|
|
128,590 |
|
Corporate |
|
|
117,793 |
|
|
|
106,050 |
|
Total assets |
|
$ |
1,785,478 |
|
|
$ |
1,741,144 |
|
Goodwill: |
|
|
|
|
|
|
Cemetery Operations |
|
$ |
4,838 |
|
|
$ |
— |
|
Funeral Home Operations |
|
|
357 |
|
|
|
— |
|
Total goodwill |
|
$ |
5,195 |
|
|
$ |
— |
|
35
Table of Contents
15.SUPPLEMENTAL CONSOLIDATED CASH FLOW INFORMATION
The tables presented below provide supplemental information to the unaudited condensed consolidated statements of cash flows regarding contract origination and maturity activity included in the pertinent captions on the Company’s unaudited condensed consolidated statements of cash flows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
Three months ended March 31, |
|
|
|
2022 |
|
|
2021 |
|
Accounts Receivable |
|
|
|
|
|
|
Pre-need/at-need contract originations (sales on credit) |
|
$ |
(34,759 |
) |
|
$ |
(34,176 |
) |
Cash receipts from sales on credit (post-origination) |
|
|
29,984 |
|
|
|
27,333 |
|
Changes in accounts receivable, net of allowance |
|
$ |
(4,775 |
) |
|
$ |
(6,843 |
) |
Customer Contract Liabilities |
|
|
|
|
|
|
Deferrals: |
|
|
|
|
|
|
Cash receipts from customer deposits at origination, net of refunds |
|
$ |
46,899 |
|
|
$ |
44,683 |
|
Withdrawals of realized income from merchandise trusts during the period |
|
|
4,129 |
|
|
|
3,220 |
|
Pre-need/at-need contract originations (sales on credit) |
|
|
34,759 |
|
|
|
34,176 |
|
Undistributed merchandise trust investment earnings, net |
|
|
11,188 |
|
|
|
4,881 |
|
Recognition: |
|
|
|
|
|
|
Merchandise trust investment income, net withdrawn as of end of period |
|
|
(3,385 |
) |
|
|
(2,149 |
) |
Recognized maturities of customer contracts collected as of end of period |
|
|
(50,891 |
) |
|
|
(52,862 |
) |
Recognized maturities of customer contracts uncollected as of end of period |
|
|
(9,025 |
) |
|
|
(9,351 |
) |
Changes in customer contract liabilities |
|
$ |
33,674 |
|
|
$ |
22,598 |
|
At March 31, 2022, Axar beneficially owned 74.9% of the Company’s outstanding Common Stock, which constituted a majority of the Company’s outstanding Common Stock. As a result, the Company is a “controlled company” within the meaning of NYSE corporate governance standards. For discussion of certain risks and uncertainties attributable to the Company being a controlled company, see Part I, Item 1A. Risk Factors of the Company’s Annual Report. For discussion on the security ownership of certain beneficial owners, directors and executives of the Company, see Part III, Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters of the Annual Report.
On February 1, 2021, Cornerstone Trust Management Services LLC (“Cornerstone”), a wholly-owned subsidiary of the Company, entered into a Subadvisor Agreement (the “Agreement”) with Axar. The sole member of Axar’s general partner is Andrew M. Axelrod, who serves as the Chairman of the Company’s Board of Directors. In connection with the execution of the Agreement, Mr. Axelrod resigned as a member of the Trust and Compliance Committee (the “Trust Committee”) of the Company’s Board of Directors (the “Board”).
On April 19, 2022, Axar, at the request of the Trust Committee, agreed to terminate the Agreement effective immediately. In connection with the termination, Axar also agreed to waive all fees payable to Axar under the Agreement for the period from January 1, 2022 though the termination date, which amounted to $219,000 for the three months ended March 31, 2022. The termination was requested by the Trust Committee following its review of certain investments by the Company’s trusts recommended by Axar under the Agreement in which Axar had an interest, as more fully described in the Company’s Annual Report. In connection with the termination, the Trust Committee authorized Cornerstone to engage Cambridge Associates LLC, which is also a subadvisor to Cornerstone, to resume providing the administrative and other investment advisory services it had previously furnished to Cornerstone prior to the assumption of such responsibilities by Axar under the Agreement.
The Company is a party to a Nomination and Director Voting Agreement dated as of September 17, 2018 (as amended on February 4, 2019, June 27, 2019, November 3, 2020 and November 20, 2020, the “DVA”) with Axar, certain funds and managed accounts for which it serves as investment manager and its general partner, Axar GP, LLC (collectively, the “Axar Entities”), StoneMor GP Holdings LLC, a Delaware limited liability company and formerly the sole member of StoneMor GP (“GP Holdings”), and Robert B. Hellman, Jr., as trustee under the Voting and Investment Trust Agreement for the benefit of American Cemeteries Infrastructure Investors LLC (“ACII” and, collectively with GP Holdings, the “ACII Entities”). Under the DVA, and subject to certain conditions and exceptions, the Axar Entities and their affiliates are prohibited from acquiring additional shares of the Company’s Common Stock. On April 13, 2021, the Axar Entities, the ACII Entities and the Company entered into a letter
36
Table of Contents
agreement (the “Waiver”) pursuant to which the Axar Entities were permitted to acquire some or all of the shares of the Company’s Common Stock held by ACII and its affiliates in a single privately negotiated transaction and not in the open market. The terms of the Waiver were approved by the Conflicts Committee of the Company’s Board of Directors. The waiver was subject to the following conditions:
•any such purchase be consummated on or before May 31, 2021;
•the Company, the Axar Entities and the ACII Entities have entered into a further amendment to the DVA to clarify that the standstill period applicable to the Axar Entities will expire on December 31, 2023;
•Axar will vote or direct the voting of all shares of the Company’s Common Stock it beneficially owns in favor of amendments to Article VIII of the Company’s Certificate of Incorporation (the “Charter”) relating to amendments of the Company’s Bylaws and Article X of the Charter with respect to any amendment or repeal of Article V, Article VI(c), Article VII(a)-(d), Article VIII, Article X or Article XI of the Charter to increase the required stockholder approval required thereunder from “at least sixty six and two thirds percent (66 2/3%)” to “at least eighty-five percent (85%) (collectively, the “Supermajority Provisions”);” and
•pending the effectiveness of such amendment to Article VIII and Article X of the Charter, Axar would not vote or direct the voting of any shares of the Company’s Common Stock in favor of any proposal to which the Supermajority Provisions are applicable unless such proposal has been approved by the Company’s Board of Directors and its Conflicts Committee.
As contemplated by the Waiver, on April 13, 2021, the Company, the Axar Entities and the ACII Entities also entered into the Fifth Amendment to the DVA pursuant to which the parties clarified that the standstill period applicable to the Axar Entities thereunder would expire on December 31, 2023.
On September 27, 2021, the Company announced that it had received a letter (the “Letter”) dated September 22, 2021 from Axar Capital Management, LP (“Axar”) in which Axar expressed an interest in pursuing discussions concerning strategic alternatives that may be beneficial to the Company and its various stakeholders. Axar has engaged Schulte Roth & Zabel LLP as its legal advisor and stated in the Letter that it would engage a financial advisor at the appropriate time. According to the Letter, Axar expected that any such discussions would be conducted with a special committee of the Board of Directors of the Company (the “Board”), assisted by financial and legal advisors engaged by such committee. The Letter also stated that any transaction involving Axar arising from such discussions would be conditioned upon, among other things, approval of the special committee and the Board, the negotiation and execution of mutually satisfactory definitive agreements and customary terms. The Letter also stated that any transaction structured as a take-private transaction would be subject to a closing condition that the approval of holders of a majority of the outstanding shares not owned by Axar or its affiliates be obtained. On September 26, 2021, the Board authorized its Conflicts Committee, which is comprised of independent directors Stephen J. Negrotti, Kevin Patrick and Patricia Wellenbach, to engage in the discussions contemplated by the Letter, including the authority to engage in discussions concerning and to negotiate the terms and provisions of any strategic alternative the Conflicts Committee determines to be appropriate in connection with such discussions. Under its charter, the Conflicts Committee has the authority to reject, approve or recommend that the Board approve any transaction that is a related party transaction, which would include any transaction to which Axar is a party. The Conflicts Committee has retained independent legal and financial advisors to assist in such discussions. Following receipt of the Letter, the Conflicts Committee and its counsel had engaged in discussions with Axar and Axar’s counsel, which evolved to focus on a transaction in which Axar would acquire the shares of the Company that are not owned by Axar or its affiliates. While these negotiations had been productive, negotiations between the Conflicts Committee and Axar were tabled in March 2022 in light of the work undertaken by the Conflicts Committee with respect to the independent review of certain investments by our trusts in which Axar had an interest. See Note 17 Related Parties to the consolidated financial statements in Part II, Item 8. Financial Statements and Supplementary Data of the Company’s Annual Report. The Conflicts Committee and Axar recently resumed active negotiations and those negotiations are continuing, but they have not come to agreement on any price that Axar would pay for such shares or on certain other terms of any transaction. There can be no assurance that any agreement with respect to a take-private transaction will be executed or that this or any other transaction will be approved or consummated. The Company does not undertake any obligation to provide any updates with respect to these matters except as required under applicable law.
On March 9, 2021, the Company's trusts purchased an aggregate of 43,681,528 shares (the “Nevada Company Shares”) of common stock of a Nevada company whose primary assets now consist of cash and tax-related assets (the “Nevada Company”), representing approximately 27% of the outstanding common stock of the Nevada Company, from three private investment funds (the “Nevada Company Sellers”) for an aggregate cash purchase price of $18.0 million. Axar had originally agreed to acquire the Nevada Company Shares pursuant to a Securities Purchase Agreement dated December 31, 2020, among the Nevada Company
37
Table of Contents
Sellers and Axar (the “Nevada Company Purchase Agreement”). On February 1, 2021, pursuant to the Subadvisor Agreement described above, Axar recommended to Cornerstone that our trusts purchase the Nevada Company Shares. Pursuant to that recommendation, on February 4, 2021, Axar and our trusts entered into an Assignment and Assumption Agreement (the “Nevada Company Assignment Agreement”), pursuant to which Axar agreed to assign its rights under the Nevada Company Purchase Agreement to our trusts and our trusts agreed to assume Axar’s obligations thereunder. Axar did not receive any additional consideration from our trusts for this assignment and has represented to us that it did not receive any consideration for this assignment from any other person.
The Nevada Company Sellers and Axar entered into the Nevada Company Purchase Agreement while the Subadvisor Agreement was being finalized. Axar has informed us that it entered into the Nevada Company Purchase Agreement with the intention that our trusts would purchase the Nevada Company Shares directly from the Nevada Company Sellers. Axar has represented to Cornerstone that it is not, and at the time it entered into the Nevada Company Purchase Agreement was not, affiliated with any of the Nevada Company Sellers and did not control and was not an affiliate of Nevada Company at the time it executed the Nevada Company Purchase Agreement or when our trusts purchased the Nevada Company Shares. Axar has represented to us that, at the time the Nevada Company Purchase Agreement was signed and at all times thereafter until our trusts completed their purchase of the Nevada Company Shares, funds and accounts affiliated with Axar owned approximately 13.8% of Nevada Company’s outstanding common stock, and that Andrew Axelrod was elected to the board of directors of the Nevada Company on December 31, 2020.
On May 17, 2021, our trusts entered into a Loan Agreement with a hotel investor and developer and certain of its subsidiaries (collectively, the “Hotel Fund”), which was amended and restated on October 12, 2021 (such agreement, as so amended and restated, the “Hotel Fund Loan Agreement”) and subsequently amended on December 13, 2021 and March 7, 2022. Pursuant to the Hotel Fund Loan Agreement, our trusts provided a $33.2 million mezzanine loan to the Hotel Fund on May 19, 2021 as part of a $162.2 million loan facility originated by an unaffiliated loan fund. The participation by our trusts was based on the recommendation of Axar under the Subadvisor Agreement. As part of the same transaction, funds and other accounts affiliated with or managed by Axar loaned $10.0 million to the Hotel Fund on the same terms as the trusts’ loans, representing the balance of the $43.2 million mezzanine loan, and our trusts and the Axar funds and accounts each received an origination fee equal to 4% of their respective loan amounts. The principal amount of these loans is payable on October 12, 2023, subject to acceleration under the circumstances described in the Hotel Fund Loan Agreement, and bear interest at an adjustable rate equal to one-month LIBOR plus a spread. On February 15, 2022, the administrative agent for the lenders under the Hotel Fund Loan Agreement delivered a reservation of rights letter to the Hotel Fund with respect to the Hotel Fund’s apparent failure to comply with several covenants in the Hotel Fund Loan Agreement, none of which related to payment of amounts due to the lenders. As of March 31, 2022, the interest rate was 18%. Through March 31, 2022, the trusts have received cash interest in the aggregate amount of $7.2 million on this loan from an interest and expense reserve account established for that purpose, and accrued interest payable in kind of $0.5 million. In April 2022 in connection with an amendment of the Hotel Fund Loan Agreement pursuant to which Axar committed to provide an additional $5.0 million loan commitment to the Hotel Fund (our trusts did not participate in this commitment), Axar and our trusts agreed to have the interest payable on the mezzanine loan in April, May and June 2022 paid in kind.
On September 27, 2021, our trusts entered into an Assignment and Acceptance Agreement (the “Holdco Loan Assignment”) with an insurance holding company (“Holdco”) and Holdco’s then current lender (the “Initial Lender”) pursuant to which the Initial Lender agreed to assign to our trusts all of its rights, duties and obligations under a Loan Agreement dated as of July 9, 2019 between the Initial Lender and Holdco (the “Holdco Loan Agreement”). The Initial Lender had previously declared Holdco in default under the terms of the Holdco Loan Agreement. At the closing of the transactions contemplated by the Holdco Loan Assignment on October 6, 2021, our trusts paid the Initial Lender $28.7 million in cash, which equaled the then outstanding principal balance of the loan under the Holdco Loan Agreement (the “Holdco Loan”). The Company was not affiliated with either Holdco or the Initial Lender and Axar has represented to Cornerstone that it did not control and was not an affiliate of either Holdco or the Initial Lender. Also on September 27, 2021, our trusts and Holdco entered into the First Amendment to Loan Agreement (the “Amended Holdco Loan Agreement”) pursuant to which, among other changes, the defaults asserted by the Initial Lender were waived and the interest rate on the Holdco Loan was increased from 10%, all of which had been payable in kind by increasing the principal balance of the loan, to 15%, of which 10% continued to be payable in kind and 5% was payable in cash. In addition, the Amended Holdco Loan Agreement accelerated the maturity of the Holdco Loan to the earliest of the first anniversary of the closing (subject to a six month extension at the request of Holdco with the consent of our trusts) and the occurrence of certain other events described further below. As of March 31, 2022, the interest rate on the Holdco Loan remained at 15%. Through March 31, 2022, the trusts have received cash interest in the aggregate amount of $1.2 million on the Holdco Loan and additional interest in the form of an increase in the principal balance of the Holdco Loan in the amount of $1.4 million, representing all interest payable to our trusts under the Amended Loan Agreement.
38
Table of Contents
Also on September 27, 2021, Axar entered into a letter agreement with Holdco (the “Transaction Letter Agreement”) pursuant to which Holdco agreed, in order to induce Axar to enter into the Amended Holdco Loan Agreement, that it would, if requested by Axar, enter into an agreed-upon form of purchase agreement for the sale of the outstanding capital stock of its wholly-owned insurance company subsidiary (the “Holdco Subsidiary”) to Axar for a purchase price of $100 million, subject to certain conditions including completion by Axar of a customary due diligence investigation and regulatory approval of the transaction by the state insurance regulator. Recently, Axar advised us that the state insurance regulators had advised Axar that regulatory approval of the transaction between Axar and Holdco would not be granted because the contemplated purchase price included a $40 million note to be issued to Holdco, and, as a result, after further negotiations, that Holdco and Axar entered into a purchase agreement dated January 20, 2022, which provided for a cash purchase price of $75 million, less the outstanding amounts owed to our trusts under the Amended Holdco Loan Agreement and a fee that remained payable to the Initial Lender. Axar has advised us that the sale to Axar under the purchase agreement remains subject to regulatory approval. Because the Holdco Loan is secured by the stock of the Holdco Subsidiary, the Holdco Loan is required to be repaid in full upon the sale of the stock of the Holdco Subsidiary to Axar or any third party.
The Amended Holdco Loan Agreement provides that the Holdco Loan is due and payable on the earliest of (a) October 6, 2022 (subject to a six-month extension as discussed above), (b) an election by Holdco not to proceed with the transaction contemplated by the Transaction Letter Agreement, (c) a breach by Holdco of any of its obligations under the Transaction Letter Agreement or any purchase agreement executed with respect to the sale of Holdco Subsidiary or (d) the consummation of the sale of Holdco Subsidiary to Axar.
Also on September 27, 2021, (i) our trusts and Holdco entered into a letter agreement pursuant to which Holdco has paid our trusts a fee of $500,000 (the “StoneMor Trusts Fee Letter Agreement”) and (ii) Axar and Holdco entered into an Expense Fee Letter pursuant to which Holdco agreed to pay Axar’s due diligence expenses of up to $630,000 (the “Expense Fee Letter Agreement”). Entrance of Holdco into both the Expense Fee Letter Agreement and the StoneMor Trusts Fee Letter Agreement were conditions to the effectiveness of the Amended Holdco Loan Agreement.
In January 2020, the Company’s trusts completed the purchase of a $30 million participation in a new $70 million debt facility issued by a discount shoe retailer (the “Shoe Retailer”). Funds and accounts affiliated with Axar also invested $20 million in this facility. The investment was initially proposed by the Chairman of the Board, Mr. Axelrod. The investment was reviewed and approved in December 2019 in accordance with the Partnership’s governance policies in place at that time. At the time of the investment, the funds and accounts affiliated with Axar owned approximately 30% of the equity of the Shoe Retailer, and Mr. Axelrod served on the Shoe Retailer’s board of directors. The Company’s investment in the Shoe Retailer represented approximately 4% of the total fair market value of the Company’s trust assets when the investment was made.
On May 10, 2022, the Company acquired two cemeteries in North Carolina for cash consideration of $0.3 million, pursuant to a definitive agreement signed on March 23, 2021 with Daly Seven, Inc. to acquire four cemeteries for a total purchase price of $5.4 million, subject to customary working capital adjustments. See Note 2 Acquisitions and Divestitures for information regarding the two cemeteries previously acquired.
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