Washington, D.C. 20549
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Securities Exchange Act of 1934.
CARRIAGE SERVICES, INC.
CARRIAGE SERVICES, INC.
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
The accompanying condensed notes are an integral part of these Consolidated Financial Statements.
CARRIAGE SERVICES, INC.
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) is a leading provider of deathcarefuneral and cemetery services and merchandise in the United States. As of SeptemberJune 30, 2017,2020, we operated 171186 funeral homes in 2829 states and 32 cemeteries in 11 states.
Our unaudited consolidated financial statements include the Company and its subsidiaries. All intercompany balances and transactions have been eliminated. Our interim consolidated financial statements are unaudited but include all adjustments, which consist of normal, recurring accruals, that are necessary for a fair presentation of our financial position and results of operations as of and for the interim periods presented. Our unaudited consolidated financial statements have been prepared in a manner consistent with the accounting principles described in our Annual Report on Form 10-K for the year ended December 31, 20162019 unless otherwise disclosed herein, and should be read in conjunction therewith.
We consider all highly liquid investments purchased with an original maturity of three months or less to be cash equivalents.
The preparation of our Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenuesrevenue and expenses. On an ongoing basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets and liabilities. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenuesrevenue and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance that our results of operations will be consistent from year to year.
We have stock-based employee and director compensation plans under which we grant stock, restricted stock, stock options and performance awards. We also have an employee stock purchase plan (“ESPP”). We recognize compensation expense in an amount equal to the fair value of the stock-based awards expected to vest or to be purchased over the requisite service period. We recognize the effect of forfeitures in compensation cost when they occur and any previously recognized compensation cost for an award is reversed in the period that the award is forfeited.
Fair value is determined on the date of the grant.
The fair value of restricted stock is determined using the stock price on the grant date. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. The fair value of the performance awards related to market performance conditions is determined using a Monte-Carlo simulation pricing model. The fair value of the performance awards related to internal performance metricsESPP is determined using the stock price on the grant date. The fair value of the ESPP is determined
based on the discount element offered to employees and the embedded option element, which is determined using an option calculation model.
We record a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.
We analyze tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in the financial statements; provide certain disclosures of uncertain tax matters; and specify how reserves for uncertain tax positions should be classified on our Consolidated Balance Sheets.
We are continually evaluating the impact on our Consolidated Financial Statements and are currently modifying our financial systems to provide accounting under the new guidance. |
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total |
Recognized revenue | $ | 728 |
| | $ | 508 |
| | $ | 266 |
| | $ | 2,128 |
| | $ | 3,630 |
| | $ | 29,394 |
| | $ | 33,024 |
|
Deferred revenue | 186 |
| | 166 |
| | 81 |
| | 397 |
| | 830 |
| | 10,475 |
| | 11,305 |
|
Total contracts | $ | 914 |
| | $ | 674 |
| | $ | 347 |
| | $ | 2,525 |
| | $ | 4,460 |
| | $ | 39,869 |
| | $ | 44,329 |
|
Leases
In February 2016, the FASB issued ASU, Leases (Topic 842). This ASU addresses certain aspects of recognition, presentation, and disclosure of leases and applies to all entities that enter into a lease, with some specified scope exemptions. The amendments in this ASU aim to increase transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. This ASU is effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years, with earlier application permitted for all entities. Both lessees and lessors are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach, which recognizes the cumulative effect of initially applying the standard as an adjustment to retained earnings at the date of initial application. We plan to adopt the provisions of this ASU for our fiscal year beginning January 1, 2019 and are currently evaluating the impact the adoption of this new accounting standard will have on our Consolidated Financial Statements.
3. PRENEED TRUST INVESTMENTS
Preneed Cemetery Trust Investments
Preneed cemetery trust investments represent trust fund assets that we are generally permitted to withdraw as the services and merchandise are provided to customers. Preneed funeral and cemetery contracts are secured by payments from customers, less retained amounts not required by law to be deposited into trust. Preneed cemetery trust investments can be reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed cemetery trust investments on our Consolidated Balance Sheets at December 31, 2016 and September 30, 2017 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed cemetery trust investments, at market value | $ | 71,834 |
| | $ | 73,889 |
|
Less: allowance for contract cancellation | (2,138 | ) | | (2,161 | ) |
Preneed cemetery trust investments, net | $ | 69,696 |
| | $ | 71,728 |
|
Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus, and in some instances, a portion of all of the earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if
the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At September 30, 2017, none of our preneed cemetery trust investments were underfunded.
Earnings from our preneed cemetery trust investments are recognized as revenue when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2017. There are no Level 3 investments in the preneed cemetery trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information on the fair value measurement and the three-level hierarchy.
The cost and fair market values associated with preneed cemetery trust investments at September 30, 2017 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 4,698 |
| | $ | — |
| | $ | — |
| | $ | 4,698 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 4,834 |
| | 275 |
| | (168 | ) | | 4,941 |
|
Corporate debt | 2 | | 19,335 |
| | 1,145 |
| | (553 | ) | | 19,927 |
|
Preferred stock | 2 | | 16,329 |
| | 383 |
| | (524 | ) | | 16,188 |
|
Mortgage-backed securities | 2 | | 1,089 |
| | 240 |
| | (23 | ) | | 1,306 |
|
Common stock | 1 | | 24,574 |
| | 3,376 |
| | (3,119 | ) | | 24,831 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 1,200 |
| | 81 |
| | — |
| | 1,281 |
|
Trust securities | | | $ | 72,059 |
| | $ | 5,501 |
| | $ | (4,387 | ) | | $ | 73,173 |
|
Accrued investment income | | | $ | 716 |
| | | | | | $ | 716 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 73,889 |
|
Market value as a percentage of cost | | | | | | | | | 101.5 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 15 |
|
Due in one to five years | 2,718 |
|
Due in five to ten years | 5,751 |
|
Thereafter | 33,879 |
|
Total | $ | 42,363 |
|
The cost and fair market values associated with preneed cemetery trust investments at December 31, 2016 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 10,852 |
| | $ | — |
| | $ | — |
| | $ | 10,852 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 496 |
| | 18 |
| | (4 | ) | | 510 |
|
Foreign debt | 2 | | 7,574 |
| | 160 |
| | (656 | ) | | 7,078 |
|
Corporate debt | 2 | | 20,621 |
| | 1,569 |
| | (1,123 | ) | | 21,067 |
|
Preferred stock | 2 | | 16,287 |
| | 8 |
| | (947 | ) | | 15,348 |
|
Mortgage-backed securities | 2 | | 949 |
| | 372 |
| | (4 | ) | | 1,317 |
|
Common stock | 1 | | 13,250 |
| | 2,191 |
| | (1,838 | ) | | 13,603 |
|
Mutual funds: | | | | | | | | | |
Fixed income | | | 1,223 |
| | 107 |
| | — |
| | 1,330 |
|
Trust securities | | | $ | 71,252 |
| | $ | 4,425 |
| | $ | (4,572 | ) | | $ | 71,105 |
|
Accrued investment income | | | $ | 729 |
| | | | | | $ | 729 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 71,834 |
|
Market value as a percentage of cost | | | | | | | | | 99.8 | % |
We determine whether or not the assets in the preneed cemetery trust investments have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis of the investment due to an other-than-temporary impairment is likewise recorded as a reduction in Deferred preneed cemetery receipts held in trust on our Consolidated Balance Sheets. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.8 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2017, we had certain investments within our preneed cemetery trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2017 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 153 |
| | $ | (2 | ) | | $ | 1,657 |
| | $ | (166 | ) | | $ | 1,810 |
| | $ | (168 | ) |
Corporate debt | 2,158 |
| | (410 | ) | | 624 |
| | (143 | ) | | 2,782 |
| | (553 | ) |
Preferred stock | 273 |
| | (2 | ) | | 8,111 |
| | (522 | ) | | 8,384 |
| | (524 | ) |
Mortgage-backed securities | 200 |
| | (23 | ) | | — |
| | — |
| | 200 |
| | (23 | ) |
Common stock | 8,473 |
| | (2,247 | ) | | 1,936 |
| | (872 | ) | | 10,409 |
| | (3,119 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed Income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporary impaired securities | $ | 11,257 |
| | $ | (2,684 | ) | | $ | 12,328 |
| | $ | (1,703 | ) | | $ | 23,585 |
| | $ | (4,387 | ) |
Our preneed cemetery trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | $ | 228 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 228 |
| | $ | (4 | ) |
Foreign debt | 2,523 |
| | (180 | ) | | 2,868 |
| | (475 | ) | | 5,391 |
| | (655 | ) |
Corporate debt | 6,939 |
| | (233 | ) | | 2,168 |
| | (890 | ) | | 9,107 |
| | (1,123 | ) |
Preferred stock | 3,217 |
| | (121 | ) | | 11,635 |
| | (826 | ) | | 14,852 |
| | (947 | ) |
Mortgage-backed securities | 51 |
| | (5 | ) | | — |
| | — |
| | 51 |
| | (5 | ) |
Common stock | 2,608 |
| | (202 | ) | | 3,385 |
| | (1,636 | ) | | 5,993 |
| | (1,838 | ) |
Total temporary impaired securities | $ | 15,566 |
| | $ | (745 | ) | | $ | 20,056 |
| | $ | (3,827 | ) | | $ | 35,622 |
| | $ | (4,572 | ) |
Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Investment income | $ | 578 |
| | $ | 474 |
| | $ | 1,546 |
| | $ | 1,755 |
|
Realized gains | 126 |
| | — |
| | 415 |
| | 2,215 |
|
Realized losses | (673 | ) | | — |
| | (4,081 | ) | | (1,312 | ) |
Expenses and taxes | (139 | ) | | (336 | ) | | (832 | ) | | (1,213 | ) |
Decrease (increase) in deferred preneed cemetery receipts held in trust | 108 |
| | (138 | ) | | 2,952 |
| | (1,445 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed cemetery trusts for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (1,434 | ) | | $ | (915 | ) | | $ | (19,540 | ) | | $ | (19,355 | ) |
Sales | $ | 5,973 |
| | $ | — |
| | $ | 18,003 |
| | $ | 13,189 |
|
Preneed Funeral Trust Investments
Preneed funeral trust investments represent trust fund assets that we are permitted to withdraw as services and merchandise are provided to customers. Preneed funeral contracts are secured by payments from customers, less retained amounts not required to be deposited into trust. Preneed funeral trust investments are reduced by the trust earnings we have been allowed to withdraw in certain states prior to our performance.
The components of Preneed funeral trust investments on our Consolidated Balance Sheets at December 31, 2016 and September 30, 2017 were as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed funeral trust investments, at market value | $ | 91,980 |
| | $ | 92,151 |
|
Less: allowance for contract cancellation | (2,740 | ) | | (2,707 | ) |
Preneed funeral trust investments, net | $ | 89,240 |
| | $ | 89,444 |
|
Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and in some instances, a portion of all These earnings held in trust. In certain jurisdictions, we may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including investment income. As a result, when realized or unrealized
losses of a trust result in the trust being underfunded, we assess whether we are responsible for replenishing the corpus of the trust, in which case a loss provision is recorded. At September 30, 2017, none of our preneed funeral trust investments were underfunded.
Earnings from our preneed funeral trust investments are recognized as earned, in Other revenue, when a service is performed or merchandise is delivered. Trust management fees charged by CSV RIA are included inas revenue in the period in which they are earned.
Cemetery perpetual care trust investments represent a portion of the proceeds from the sale of cemetery property interment rights which we are required by various state laws to deposit into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in Other revenue.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash, U.S. treasury debt, common stock and common stock.equity mutual funds. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stocks, mortgage-backed securities and fixed income mutual funds and other investments, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy classifications quarterly. There were no transfers between Levels 1 and 2 for the three and nine months ended September 30, 2017. There are no Level 3 investments in the preneed funeral trust investment portfolio. See Note 78 to the Consolidated Financial Statements included herein for further information onof the fair value measurement and the three-level hierarchy.measurement.
The cost and fair market values associated with preneed funeral trust investments at SeptemberAs of June 30, 2017 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 15,636 |
| | $ | — |
| | $ | — |
| | $ | 15,636 |
|
Fixed income securities: | | | | | | | | | |
U.S treasury debt | 1 | | 1,490 |
| | 13 |
| | (4 | ) | | 1,499 |
|
Foreign debt | 2 | | 4,882 |
| | 282 |
| | (166 | ) | | 4,998 |
|
Corporate debt | 2 | | 20,244 |
| | 1,165 |
| | (571 | ) | | 20,838 |
|
Preferred stock | 2 | | 16,837 |
| | 457 |
| | (526 | ) | | 16,768 |
|
Mortgage-backed securities | 2 | | 1,273 |
| | 255 |
| | (25 | ) | | 1,503 |
|
Common stock | 1 | | 24,488 |
| | 3,392 |
| | (3,133 | ) | | 24,747 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 1,998 |
| | 87 |
| | (38 | ) | | 2,047 |
|
Other investments | 2 | | 3,374 |
| | — |
| | — |
| | 3,374 |
|
Trust securities | | | $ | 90,222 |
| | $ | 5,651 |
| | $ | (4,463 | ) | | $ | 91,410 |
|
Accrued investment income | | | $ | 741 |
| | | | | | $ | 741 |
|
Preneed funeral trust investments | | | | | | | | | $ | 92,151 |
|
Market value as a percentage of cost | | | | | | | | | 101.3 | % |
The estimated maturities2020, we have net unrealized losses of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 78 |
|
Due in one to five years | 4,320 |
|
Due in five to ten years | 6,208 |
|
Thereafter | 35,000 |
|
Total | $ | 45,606 |
|
The cost and fair market values associated with preneed funeral trust investments at December 31, 2016 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 22,787 |
| | $ | — |
| | $ | — |
| | $ | 22,787 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 1,491 |
| | 21 |
| | (10 | ) | | 1,502 |
|
Municipal bonds | 2 | | 447 |
| | 17 |
| | (4 | ) | | 460 |
|
Foreign debt | 2 | | 7,692 |
| | 170 |
| | (677 | ) | | 7,185 |
|
Corporate debt | 2 | | 21,454 |
| | 1,566 |
| | (1,134 | ) | | 21,886 |
|
Preferred stock | 2 | | 17,037 |
| | 64 |
| | (970 | ) | | 16,131 |
|
Mortgage-backed securities | 2 | | 1,165 |
| | 400 |
| | (5 | ) | | 1,560 |
|
Common stock | 1 | | 13,675 |
| | 2,256 |
| | (1,850 | ) | | 14,081 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 2,124 |
| | 115 |
| | (66 | ) | | 2,173 |
|
Other investments | 2 | | 3,463 |
| | — |
| | — |
| | 3,463 |
|
Trust securities | | | $ | 91,335 |
| | $ | 4,609 |
| | $ | (4,716 | ) | | $ | 91,228 |
|
Accrued investment income | | | $ | 752 |
| | | | | | $ | 752 |
|
Preneed funeral trust investments | | | | | | | | | $ | 91,980 |
|
Market value as a percentage of cost | | | | | | | | | 99.9 | % |
We determine whether or not the assets$10.8 million in the preneed funeral trust investments have other-than-temporary impairments on a security-by-security basis. This assessment is made based upon a numberour trusts. At June 30, 2020, these net unrealized losses represented 4% of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, theour original cost basis of the security$242.1 million. The decline in fair value is adjusted downwardlargely due to its fairchanges in interest rates and other market value. Any reductionconditions. Our trusts have been and continue to be impacted by adverse conditions in the cost basis of the investment due to an other-than-temporary impairment is likewise recordedU.S. and global financial markets primarily as a reductionresult of COVID-19. Our investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. In addition, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery.
Changes in unrealized gains and/or losses related to these securities are reflected in Other comprehensive income and offset by the Deferred preneed funeral and cemetery receipts held in truston our Consolidated Balance Sheets. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines and Care trusts’ corpus interests in the fair value related tothose unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.9 million impairment and no impairments have been recorded in the nine months ended September 30, 2017.gains and/or losses. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to the preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At SeptemberFor available-for-sale debt securities in an unrealized loss position, we first assess whether we intend to sell or it is more likely than not that we will be required to sell the security before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the security's amortized cost basis is written down to fair value through income. For available-for-sale debt securities that do not meet the aforementioned criteria, we evaluate whether the decline in fair value has resulted from credit losses or other factors. In making this assessment, we consider the extent to which fair value is less than amortized cost, any changes to the rating of the security by a rating agency, and adverse conditions specifically related to the security, among other factors. If our assessment indicates that a credit loss exists, the present value of cash flows expected to be collected from the security are compared to the amortized cost basis of the security. If the present value of cash flows expected to be collected is less than the amortized cost basis, a credit loss exists and an allowance for credit losses is recorded for the credit loss, limited by the amount that the fair value is less than the amortized cost basis. Any unrealized loss that has not been recorded through an allowance for credit losses is recognized in other comprehensive income.
We rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations.
Preneed Cemetery Trust Investments
The components of Preneed cemetery trust investments on our Consolidated Balance Sheet at December 31, 2019 and June 30, 2017, we had certain2020 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Preneed cemetery trust investments, at market value | $ | 74,572 |
| | $ | 74,914 |
|
Less: allowance for contract cancellation | (2,190 | ) | | (2,345 | ) |
Preneed cemetery trust investments | $ | 72,382 |
| | $ | 72,569 |
|
The cost and market values associated with preneed cemetery trust investments at June 30, 2020 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 2,844 |
| | $ | — |
| | $ | — |
| | $ | 2,844 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 12,628 |
| | 867 |
| | (1,014 | ) | | 12,481 |
|
Corporate debt | 2 | | 15,911 |
| | 794 |
| | (1,500 | ) | | 15,205 |
|
Preferred stock | 2 | | 13,586 |
| | 334 |
| | (1,341 | ) | | 12,579 |
|
Mortgage-backed securities | 2 | | 394 |
| | — |
| | (227 | ) | | 167 |
|
Common stock | 1 | | 27,093 |
| | 5,453 |
| | (7,544 | ) | | 25,002 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 5,700 |
| | 494 |
| | (277 | ) | | 5,917 |
|
Trust securities | | | $ | 78,156 |
| | $ | 7,942 |
| | $ | (11,903 | ) | | $ | 74,195 |
|
Accrued investment income | | | $ | 719 |
| | | | | | $ | 719 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 74,914 |
|
Market value as a percentage of cost | | | | | | | | | 94.9 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 1 |
|
Due in one to five years | 8,738 |
|
Due in five to ten years | 9,703 |
|
Thereafter | 21,990 |
|
Total fixed income securities | $ | 40,432 |
|
The cost and market values associated with preneed cemetery trust investments at December 31, 2019 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 5,729 |
| | $ | — |
| | $ | — |
| | $ | 5,729 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 5,609 |
| | 312 |
| | (243 | ) | | 5,678 |
|
Corporate debt | 2 | | 16,916 |
| | 1,044 |
| | (649 | ) | | 17,311 |
|
Preferred stock | 2 | | 14,206 |
| | 904 |
| | (164 | ) | | 14,946 |
|
Mortgage-backed securities | 2 | | 517 |
| | — |
| | (114 | ) | | 403 |
|
Common stock | 1 | | 28,569 |
| | 2,766 |
| | (3,017 | ) | | 28,318 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 1,463 |
| | 72 |
| | (85 | ) | | 1,450 |
|
Trust Securities | | | $ | 73,009 |
| | $ | 5,098 |
| | $ | (4,272 | ) | | $ | 73,835 |
|
Accrued investment income | | | $ | 737 |
| | | | | | 737 |
|
Preneed cemetery trust investments | | | | | | | | | $ | 74,572 |
|
Market value as a percentage of cost | | | | | | | | | 101.1 | % |
The following table summarized our fixed income securities within our preneed cemetery trust investments in an unrealized loss position at June 30, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 3,149 |
| | $ | (334 | ) | | $ | 311 |
| | $ | (680 | ) | | $ | 3,460 |
| | $ | (1,014 | ) |
Corporate debt | 3,140 |
| | (989 | ) | | 4,227 |
| | (511 | ) | | 7,367 |
| | (1,500 | ) |
Preferred stock | 9,882 |
| | (1,341 | ) | | — |
| | — |
| | 9,882 |
| | (1,341 | ) |
Mortgage-backed securities | — |
| | — |
| | 167 |
| | (227 | ) | | 167 |
| | (227 | ) |
Total fixed income securities with an unrealized loss
| $ | 16,171 |
| | $ | (2,664 | ) | | $ | 4,705 |
| | $ | (1,418 | ) | | $ | 20,876 |
| | $ | (4,082 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 268 |
| | $ | (42 | ) | | $ | 758 |
| | $ | (201 | ) | | $ | 1,026 |
| | $ | (243 | ) |
Corporate debt | 1,368 |
| | (168 | ) | | 4,520 |
| | (481 | ) | | 5,888 |
| | (649 | ) |
Preferred stock | 4,135 |
| | (164 | ) | | — |
| | — |
| | 4,135 |
| | (164 | ) |
Mortgage-backed securities | — |
| | — |
| | 402 |
| | (114 | ) | | 402 |
| | (114 | ) |
Total fixed income securities with an unrealized loss
| $ | 5,771 |
| | $ | (374 | ) | | $ | 5,680 |
| | $ | (796 | ) | | $ | 11,451 |
| | $ | (1,170 | ) |
Preneed cemetery trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Investment income | $ | 414 |
| | $ | 653 |
| | $ | 985 |
| | $ | 972 |
|
Realized gains | 2,363 |
| | 1,619 |
| | 3,821 |
| | 3,535 |
|
Realized losses | (1,001 | ) | | (2,200 | ) | | (1,636 | ) | | (3,572 | ) |
Expenses and taxes | (407 | ) | | (438 | ) | | (685 | ) | | (625 | ) |
Net change in deferred preneed cemetery receipts held in trust | (1,369 | ) | | 366 |
| | (2,485 | ) | | (310 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed cemetery trusts for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Purchases | $ | (8,186 | ) | | $ | (13,597 | ) | | $ | (10,258 | ) | | $ | (32,454 | ) |
Sales | 10,026 |
| | 12,135 |
| | 13,899 |
| | 25,366 |
|
Preneed Funeral Trust Investments
The components of Preneed funeral trust investments on our Consolidated Balance Sheet at December 31, 2019 and June 30, 2020 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Preneed funeral trust investments, at market value | $ | 99,246 |
| | $ | 93,110 |
|
Less: allowance for expected credit losses and cancellations | (2,911 | ) | | (2,875 | ) |
Preneed funeral trust investments | $ | 96,335 |
| | $ | 90,235 |
|
The cost and market values associated with preneed funeral trust investments at June 30, 2020 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 19,920 |
| | $ | — |
| | $ | — |
| | $ | 19,920 |
|
Fixed income securities: | | | | | | | | | |
U.S treasury debt | 1 | | 820 |
| | 13 |
| | — |
| | 833 |
|
Foreign debt | 2 | | 12,400 |
| | 857 |
| | (955 | ) | | 12,302 |
|
Corporate debt | 2 | | 14,637 |
| | 738 |
| | (1,432 | ) | | 13,943 |
|
Preferred stock | 2 | | 12,871 |
| | 316 |
| | (1,295 | ) | | 11,892 |
|
Mortgage-backed securities | 2 | | 433 |
| | 1 |
| | (226 | ) | | 208 |
|
Common stock | 1 | | 25,825 |
| | 5,377 |
| | (7,052 | ) | | 24,150 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 4,942 |
| | 462 |
| | (189 | ) | | 5,215 |
|
Other investments | 2 | | 3,982 |
| | — |
| | — |
| | 3,982 |
|
Trust securities | | | $ | 95,830 |
| | $ | 7,764 |
| | $ | (11,149 | ) | | $ | 92,445 |
|
Accrued investment income | | | $ | 665 |
| | | | | | $ | 665 |
|
Preneed funeral trust investments | | | | | | | | | $ | 93,110 |
|
Market value as a percentage of cost | | | | | | | | | 96.5 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | — |
|
Due in one to five years | 9,528 |
|
Due in five to ten years | 8,481 |
|
Thereafter | 21,169 |
|
Total fixed income securities | $ | 39,178 |
|
The cost and market values associated with preneed funeral trust investments at December 31, 2019 are detailed below (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 24,160 |
| | $ | — |
| | $ | — |
| | $ | 24,160 |
|
Fixed income securities: | | | | | | | | | |
U.S. treasury debt | 1 | | 822 |
| | — |
| | — |
| | 822 |
|
Foreign debt | 2 | | 5,587 |
| | 309 |
| | (232 | ) | | 5,664 |
|
Corporate debt | 2 | | 16,109 |
| | 992 |
| | (646 | ) | | 16,455 |
|
Preferred stock | 2 | | 14,094 |
| | 874 |
| | (198 | ) | | 14,770 |
|
Mortgage-backed securities | 2 | | 585 |
| | — |
| | (117 | ) | | 468 |
|
Common stock | 1 | | 27,652 |
| | 2,773 |
| | (2,869 | ) | | 27,556 |
|
Mutual funds: | | | | | | | | | |
Equity | 1 | | 772 |
| | 617 |
| | (4 | ) | | 1,385 |
|
Fixed income | 2 | | 4,364 |
| | 107 |
| | (107 | ) | | 4,364 |
|
Other investments | 2 | | 2,902 |
| | — |
| | — |
| | 2,902 |
|
Trust securities | | | $ | 97,047 |
| | $ | 5,672 |
| | $ | (4,173 | ) | | $ | 98,546 |
|
Accrued investment income | | | $ | 700 |
| | | | | | $ | 700 |
|
Preneed funeral trust investments | | | | | | | | | $ | 99,246 |
|
Market value as a percentage of cost | | | | | | | | | 101.5 | % |
The following table summarized our fixed income securities within our preneed funeral trust investments that had tax lotsinvestment in an unrealized loss positions for more than one year. Based on our analysesposition at June 30, 2020, aggregated by major security type and length of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporarytime in nature.
Our preneed funeral trust investmenta continuous unrealized losses, their associated fair market values, and the duration of unrealized losses as of September 30, 2017 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | 837 |
| | $ | (4 | ) | | $ | — |
| | $ | — |
| | $ | 837 |
| | $ | (4 | ) |
Foreign debt | 170 |
| | (4 | ) | | 1,628 |
| | (163 | ) | | 1,798 |
| | (167 | ) |
Corporate debt | 2,273 |
| | (430 | ) | | 609 |
| | (141 | ) | | 2,882 |
| | (571 | ) |
Preferred stock | 191 |
| | (6 | ) | | 8,183 |
| | (520 | ) | | 8,374 |
| | (526 | ) |
Mortgage-backed securities | 234 |
| | (24 | ) | | 9 |
| | — |
| | 243 |
| | (24 | ) |
Common stock | 8,497 |
| | (2,241 | ) | | 1,934 |
| | (892 | ) | | 10,431 |
| | (3,133 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed income | 79 |
| | (1 | ) | | 608 |
| | (37 | ) | | 687 |
| | (38 | ) |
Total temporary impaired securities | $ | 12,281 |
| | $ | (2,710 | ) | | $ | 12,971 |
| | $ | (1,753 | ) | | $ | 25,252 |
| | $ | (4,463 | ) |
Our preneed funeral trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses as of December 31, 2016 are shown in the following tableloss position (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
U.S. treasury debt | $ | 834 |
| | $ | (10 | ) | | $ | — |
| | $ | — |
| | $ | 834 |
| | $ | (10 | ) |
Municipal bonds | 244 |
| | (5 | ) | | — |
| | — |
| | 244 |
| | (5 | ) |
Foreign debt | 2,654 |
| | (186 | ) | | 2,905 |
| | (490 | ) | | 5,559 |
| | (676 | ) |
Corporate debt | 6,977 |
| | (215 | ) | | 2,234 |
| | (919 | ) | | 9,211 |
| | (1,134 | ) |
Preferred stock | 3,420 |
| | (128 | ) | | 11,750 |
| | (842 | ) | | 15,170 |
| | (970 | ) |
Mortgage-backed securities | 55 |
| | (5 | ) | | 11 |
| | (1 | ) | | 66 |
| | (6 | ) |
Common stock | 2,795 |
| | (216 | ) | | 3,390 |
| | (1,634 | ) | | 6,185 |
| | (1,850 | ) |
Mutual funds: | | | | | | | | | | | |
Fixed income | 97 |
| | (7 | ) | | 644 |
| | (58 | ) | | 741 |
| | (65 | ) |
Total temporary impaired securities | $ | 17,076 |
| | $ | (772 | ) | | $ | 20,934 |
| | $ | (3,944 | ) | | $ | 38,010 |
| | $ | (4,716 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 3,093 |
| | $ | (332 | ) | | $ | 288 |
| | $ | (623 | ) | | $ | 3,381 |
| | $ | (955 | ) |
Corporate debt | 3,125 |
| | (984 | ) | | 4,012 |
| | (448 | ) | | 7,137 |
| | (1,432 | ) |
Preferred stock | 9,493 |
| | (1,295 | ) | | — |
| | — |
| | 9,493 |
| | (1,295 | ) |
Mortgage-backed securities | 4 |
| | — |
| | 175 |
| | (226 | ) | | 179 |
| | (226 | ) |
Total fixed income securities with an unrealized loss
| $ | 15,715 |
| | $ | (2,611 | ) | | $ | 4,475 |
| | $ | (1,297 | ) | | $ | 20,190 |
| | $ | (3,908 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 274 |
| | $ | (43 | ) | | $ | 723 |
| | $ | (189 | ) | | $ | 997 |
| | $ | (232 | ) |
Corporate debt | 1,403 |
| | (172 | ) | | 4,433 |
| | (474 | ) | | 5,836 |
| | (646 | ) |
Preferred stock | 4,412 |
| | (198 | ) | | — |
| | — |
| | 4,412 |
| | (198 | ) |
Mortgage-backed securities | — |
| | — |
| | 439 |
| | (117 | ) | | 439 |
| | (117 | ) |
Total fixed income securities with an unrealized loss
| $ | 6,089 |
| | $ | (413 | ) | | $ | 5,595 |
| | $ | (780 | ) | | $ | 11,684 |
| | $ | (1,193 | ) |
Preneed funeral trust investment security transactions recorded in Other, net on the Consolidated Statements of Operations for the three and ninesix months ended SeptemberJune 30, 20162019 and 2017 were2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Investment income | $ | 409 |
| | $ | 604 |
| | $ | 982 |
| | $ | 862 |
|
Realized gains | 2,486 |
| | 1,606 |
| | 3,806 |
| | 4,157 |
|
Realized losses | (1,007 | ) | | (2,053 | ) | | (424 | ) | | (3,182 | ) |
Expenses and taxes | (513 | ) | | (253 | ) | | (285 | ) | | (350 | ) |
Net change in deferred preneed funeral receipts held in trust | (1,375 | ) | | 96 |
| | (4,079 | ) | | (1,487 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Investment income | $ | 596 |
| | $ | 524 |
| | $ | 1,639 |
| | $ | 1,801 |
|
Realized gains | 131 |
| | — |
| | 525 |
| | 2,296 |
|
Realized losses | (716 | ) | | (2 | ) | | (4,090 | ) | | (1,314 | ) |
Expenses and taxes | (253 | ) | | (390 | ) | | (946 | ) | | (1,106 | ) |
Decrease (increase) in deferred preneed funeral receipts held in trust | 242 |
| | (132 | ) | | 2,872 |
| | (1,677 | ) |
| $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Purchases and sales of investments in the preneed funeral trusts for the three and ninesix months ended SeptemberJune 30, 20162019 and 2017 were2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Purchases | $ | (8,436 | ) | | $ | (13,153 | ) | | $ | (19,195 | ) | | $ | (31,691 | ) |
Sales | 10,816 |
| | 11,888 |
| | 13,601 |
| | 27,856 |
|
Cemetery Perpetual Care Trust Investments
Care trusts’ corpus on our Consolidated Balance Sheet represent the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2019 and June 30, 2020 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Cemetery perpetual care trust investments, at market value | $ | 64,047 |
| | $ | 63,228 |
|
Obligations due to (from) trust | (631 | ) | | (916 | ) |
Care trusts’ corpus | $ | 63,416 |
| | $ | 62,312 |
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at June 30, 2020 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 1,646 |
| | $ | — |
| | $ | — |
| | $ | 1,646 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 10,794 |
| | 707 |
| | (872 | ) | | 10,629 |
|
Corporate debt | 2 | | 13,182 |
| | 757 |
| | (1,213 | ) | | 12,726 |
|
Preferred stock | 2 | | 12,332 |
| | 288 |
| | (1,234 | ) | | 11,386 |
|
Mortgage-backed securities | 2 | | 316 |
| | — |
| | (181 | ) | | 135 |
|
Common stock | 1 | | 22,459 |
| | 4,517 |
| | (6,288 | ) | | 20,688 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 5,336 |
| | 380 |
| | (318 | ) | | 5,398 |
|
Trust securities | | | $ | 66,065 |
| | $ | 6,649 |
| | $ | (10,106 | ) | | $ | 62,608 |
|
Accrued investment income | | | $ | 620 |
| | | | | | $ | 620 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 63,228 |
|
Market value as a percentage of cost | | | | | | | | | 94.8 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (1,486 | ) | | $ | (966 | ) | | $ | (19,917 | ) | | $ | (19,548 | ) |
Sales | $ | 6,336 |
| | $ | 23 |
| | $ | 19,005 |
| | $ | 13,266 |
|
|
| | | |
Due in one year or less | $ | — |
|
Due in one to five years | 7,115 |
|
Due in five to ten years | 7,936 |
|
Thereafter | 19,825 |
|
Total fixed income securities | $ | 34,876 |
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2019 (in thousands): 4. PRENEED CEMETERY RECEIVABLESPreneed |
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 4,624 |
| | $ | — |
| | $ | — |
| | $ | 4,624 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 4,200 |
| | 238 |
| | (175 | ) | | 4,263 |
|
Corporate debt | 2 | | 11,658 |
| | 802 |
| | (534 | ) | | 11,926 |
|
Preferred stock | 2 | | 10,782 |
| | 666 |
| | (106 | ) | | 11,342 |
|
Mortgage-backed securities | 2 | | 324 |
| | — |
| | (71 | ) | | 253 |
|
Common stock | 1 | | 21,594 |
| | 3,399 |
| | (1,911 | ) | | 23,082 |
|
Mutual funds: | | | | | | | | | |
Equity | 1 | | 233 |
| | 146 |
| | (1 | ) | | 378 |
|
Fixed income | 2 | | 7,156 |
| | 618 |
| | (107 | ) | | 7,667 |
|
Trust securities | | | $ | 60,571 |
| | $ | 5,869 |
| | $ | (2,905 | ) | | $ | 63,535 |
|
Accrued investment income | | | $ | 512 |
| | | | | | $ | 512 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 64,047 |
|
Market value as a percentage of cost | | | | | | | | | 104.9 | % |
The following table summarized our fixed income securities within our perpetual care trust investment in an unrealized loss position at June 30, 2020, aggregated by major security type and length of time in a continuous unrealized loss position (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2020 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 2,833 |
| | $ | (272 | ) | | $ | 276 |
| | $ | (600 | ) | | $ | 3,109 |
| | $ | (872 | ) |
Corporate debt | 2,523 |
| | (795 | ) | | 3,772 |
| | (418 | ) | | 6,295 |
| | (1,213 | ) |
Preferred stock | 8,849 |
| | (1,234 | ) | | — |
| | — |
| | 8,849 |
| | (1,234 | ) |
Mortgage-backed securities | — |
| | — |
| | 134 |
| | (181 | ) | | 134 |
| | (181 | ) |
Total fixed income securities with an unrealized loss
| $ | 14,205 |
| | $ | (2,301 | ) | | $ | 4,182 |
| | $ | (1,199 | ) | | $ | 18,387 |
| | $ | (3,500 | ) |
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2019 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses | | Fair market value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 168 |
| | $ | (26 | ) | | $ | 549 |
| | $ | (149 | ) | | $ | 717 |
| | $ | (175 | ) |
Corporate debt | 1,057 |
| | (196 | ) | | 3,253 |
| | (338 | ) | | 4,310 |
| | (534 | ) |
Preferred stock | 2,989 |
| | (106 | ) | | — |
| | — |
| | 2,989 |
| | (106 | ) |
Mortgage-backed securities | — |
| | — |
| | 252 |
| | (71 | ) | | 252 |
| | (71 | ) |
Total fixed income securities with an unrealized loss
| $ | 4,214 |
| | $ | (328 | ) | | $ | 4,054 |
| | $ | (558 | ) | | $ | 8,268 |
| | $ | (886 | ) |
Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Realized gains | $ | 670 |
| | $ | 439 |
| | $ | 1,024 |
| | $ | 1,148 |
|
Realized losses | (270 | ) | | (606 | ) | | (441 | ) | | (1,285 | ) |
Net change in Care trusts’ corpus | (400 | ) | | 167 |
| | (583 | ) | | 137 |
|
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Perpetual care trust investment security transactions recorded in Other revenue on our Consolidated Statements of Operations for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | | Six months ended June 30, | |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Investment income | $ | 1,107 |
| | $ | 1,942 |
| | $ | 2,194 |
| | $ | 3,347 |
|
Realized gain (losses), net | 10 |
| | 27 |
| | (280 | ) | | (9 | ) |
Total | $ | 1,117 |
| | $ | 1,969 |
| | $ | 1,914 |
| | $ | 3,338 |
|
Purchases and sales of cemetery interment rightsinvestments in the perpetual care trusts for the three and related products and services are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years, with such interest income reflected as Preneed cemetery finance charges. In substantially all cases, we receive an initial down payment at the time the contract is signed. At September 30, 2017, our total financed preneed receivables were $39.9 million, of which $29.3 million and $10.6 million were for cemetery interment rights and for merchandise and services, respectively. These amounts are presented on our consolidated balance sheet as $11.7 million within Accounts receivable and $28.2 million within Preneed receivables and exclude unearned finance charges and allowance for contract cancellations. The unearned finance charges associated with these receivables were $5.7 million at both December 31, 2016 and September 30, 2017.
We determine an allowance for customer cancellations and refunds on contracts in which revenue has been recognized on sales of cemetery interment rights. We have a collections policy where past due notifications are sent to the customer beginning at 15 days past due and periodically thereafter until the contract is cancelled or payment is received. We reserve 100% of the receivables on contracts in which the revenue has been recognized and payments are 90 days past due or more, which was approximately 4.8% of the total receivables on recognized sales at September 30, 2017. An allowance is recorded at the date that the contract is executed and periodically adjusted thereafter based upon actual collection experience at the business level. For the ninesix months ended SeptemberJune 30, 2017, the change in the allowance for contract cancellations was2019 and 2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Purchases | $ | (5,117 | ) | | $ | (11,066 | ) | | $ | (14,274 | ) | | $ | (25,678 | ) |
Sales | 6,278 |
| | 9,458 |
| | 7,980 |
| | 22,152 |
|
|
| | | |
| September 30, 2017 |
Beginning balance | $ | 1,861 |
|
Write-offs and cancellations | (1,004 | ) |
Provision | 1,093 |
|
Ending balance | $ | 1,950 |
|
| |
7. | RECEIVABLES FROM PRENEED TRUSTS |
The aging of past due financing receivables as of September 30, 2017 was as follows (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | |
| 31-60 Past Due | | 61-90 Past Due | | 91-120 Past Due | | >120 Past Due | | Total Past Due | | Current | | Total Financing Receivables |
Recognized revenue | $ | 866 |
| | $ | 393 |
| | $ | 190 |
| | $ | 1,205 |
| | $ | 2,654 |
| | $ | 26,517 |
| | $ | 29,171 |
|
Deferred revenue | 272 |
| | 145 |
| | 71 |
| | 387 |
| | 875 |
| | 9,900 |
| | 10,775 |
|
Total contracts | $ | 1,138 |
| | $ | 538 |
| | $ | 261 |
| | $ | 1,592 |
| | $ | 3,529 |
| | $ | 36,417 |
| | $ | 39,946 |
|
5. RECEIVABLES FROM PRENEED TRUSTS
The receivablesOur Receivables from preneed trusts represent assets in trusts which are controlled and operated by third parties in which we do not have a controlling financial interest (less than 50%) in the trust assets. We account for these investments at cost. As of December 31, 20162019 and SeptemberJune 30, 2017,2020, receivables from preneed trusts wereare as follows (in thousands):
|
| | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Preneed trust funds, at cost | $ | 18,581 |
| | $ | 18,012 |
|
Less: allowance for contract cancellation | (557 | ) | | (541 | ) |
Receivables from preneed trusts, net | $ | 18,024 |
| | $ | 17,471 |
|
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Preneed trust funds, at cost | $ | 14,658 |
| | $ | 15,780 |
|
Less: allowance for contract cancellation | (440 | ) | | (474 | ) |
Receivables from preneed trusts, net | $ | 14,218 |
| | $ | 15,306 |
|
The following summary reflects the composition of the assets held in trust and controlled by third parties to satisfy our future obligations under preneed arrangements related to the preceding contracts at SeptemberJune 30, 20172020 and December 31, 2016.2019. The cost basis includes reinvested interest and dividends that have been earned on the trust assets. Fair value includes the unrealized gains and losses on trust assets.
The composition of the preneed trust funds at September 30, 2017 was as follows (in thousands):
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
As of September 30, 2017 | | | |
Cash and cash equivalents | $ | 4,054 |
| | $ | 4,054 |
|
Fixed income investments | 9,218 |
| | 9,218 |
|
Mutual funds and common stocks | 2,492 |
| | 2,516 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 15,780 |
| | $ | 15,804 |
|
The composition of the preneed trust funds at December 31, 2016 was2019 is as follows (in thousands):
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
Cash and cash equivalents | $ | 4,533 |
| | $ | 4,533 |
|
Fixed income investments | 11,603 |
| | 11,603 |
|
Mutual funds and common stocks | 2,440 |
| | 2,518 |
|
Annuities | 5 |
| | 5 |
|
Total | $ | 18,581 |
| | $ | 18,659 |
|
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
As of December 31, 2016 | | | |
Cash and cash equivalents | $ | 3,378 |
| | $ | 3,378 |
|
Fixed income investments | 8,809 |
| | 8,809 |
|
Mutual funds and common stocks | 2,455 |
| | 2,463 |
|
Annuities | 16 |
| | 16 |
|
Total | $ | 14,658 |
| | $ | 14,666 |
|
6.CEMETERY PERPETUAL CARE TRUST INVESTMENTS
Care trusts’ corpus on our Consolidated Balance Sheets representsThe composition of the corpus of those trusts plus undistributed income. The components of Care trusts’ corpus as of December 31, 2016 and Septemberpreneed trust funds at June 30, 2017 were2020 is as follows (in thousands):
|
| | | | | | | |
| Historical Cost Basis | | Fair Value |
Cash and cash equivalents | $ | 4,425 |
| | $ | 4,425 |
|
Fixed income investments | 11,324 |
| | 11,324 |
|
Mutual funds and common stocks | 2,259 |
| | 2,397 |
|
Annuities | 4 |
| | 4 |
|
Total | $ | 18,012 |
| | $ | 18,150 |
|
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Trust assets, at market value | $ | 46,889 |
| | $ | 48,679 |
|
Obligations due from trust | (599 | ) | | (493 | ) |
Care trusts’ corpus | $ | 46,290 |
| | $ | 48,186 |
|
We are required by various state laws to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The income earned from these perpetual care trusts offsets maintenance expenses for cemetery property and memorials. This trust fund income is recognized, as earned, in Revenues: Cemetery. Trust management fees charged by CSV RIA are included in revenue in the period in which they are earned. At September 30, 2017, none of our cemetery perpetual care trust investments were underfunded.
Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. Our Level 1 investments include cash and common stock. Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of similar securities in active markets or other inputs other than quoted prices that can corroborate observable market data. These investments are fixed income securities, including municipal bonds, foreign debt, corporate debt, preferred stock, mortgage-backed securities and fixed income mutual funds, all of which are classified within Level 2 of the valuation hierarchy. We review and update our fair value hierarchy
classifications quarterly. There were no transfers between Levels 1 and 2 in the three and nine months ended September 30, 2017. There are no Level 3 investments in the cemetery perpetual care trust investment portfolio. See Note 7 to the Consolidated Financial Statements included herein for further information of the fair value measurement and the three-level valuation hierarchy.
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at September 30, 2017 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 2,573 |
| | $ | — |
| | $ | — |
| | $ | 2,573 |
|
Fixed income securities: | | | | | | | | | |
Foreign debt | 2 | | 3,568 |
| | 211 |
| | (117 | ) | | 3,662 |
|
Corporate debt | 2 | | 13,194 |
| | 768 |
| | (368 | ) | | 13,594 |
|
Preferred stock | 2 | | 11,464 |
| | 260 |
| | (368 | ) | | 11,356 |
|
Mortgage-backed securities | 2 | | 661 |
| | 147 |
| | (14 | ) | | 794 |
|
Common stock | 1 | | 15,263 |
| | 1,985 |
| | (2,021 | ) | | 15,227 |
|
Mutual funds: | | | | | | | | | |
Fixed Income | 2 | | 909 |
| | 64 |
| | — |
| | 973 |
|
Trust securities | | | $ | 47,632 |
| | $ | 3,435 |
| | $ | (2,888 | ) | | $ | 48,179 |
|
Accrued investment income | | | $ | 500 |
| | | | | | $ | 500 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 48,679 |
|
Market value as a percentage of cost | | | | | | | | | 101.1 | % |
The estimated maturities of the fixed income securities included above are as follows (in thousands):
|
| | | |
Due in one year or less | $ | 9 |
|
Due in one to five years | 1,770 |
|
Due in five to ten years | 4,004 |
|
Thereafter | 23,622 |
|
| $ | 29,405 |
|
The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at December 31, 2016 (in thousands):
|
| | | | | | | | | | | | | | | | | |
| Fair Value Hierarchy Level | | Cost | | Unrealized Gains | | Unrealized Losses | | Fair Market Value |
Cash and money market accounts | 1 | | $ | 6,522 |
| | $ | — |
| | $ | — |
| | $ | 6,522 |
|
Fixed income securities: | | | | | | | | | |
Municipal bonds | 2 | | 365 |
| | 13 |
| | (3 | ) | | 375 |
|
Foreign debt | 2 | | 5,100 |
| | 99 |
| | (435 | ) | | 4,764 |
|
Corporate debt | 2 | | 13,715 |
| | 966 |
| | (821 | ) | | 13,860 |
|
Preferred stock | 2 | | 11,323 |
| | 5 |
| | (664 | ) | | 10,664 |
|
Mortgage-backed securities | 2 | | 569 |
| | 223 |
| | (3 | ) | | 789 |
|
Common stock | 1 | | 8,259 |
| | 1,382 |
| | (1,146 | ) | | 8,495 |
|
Mutual funds: | | | | | | | | | |
Fixed income | 2 | | 855 |
| | 76 |
| | — |
| | 931 |
|
Trust securities | | | $ | 46,708 |
| | $ | 2,764 |
| | $ | (3,072 | ) | | $ | 46,400 |
|
Accrued investment income | | | $ | 489 |
| | | | | | $ | 489 |
|
Cemetery perpetual care investments | | | | | | | | | $ | 46,889 |
|
Market value as a percentage of cost | | | | | | | | | 99.3 | % |
We determine whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-
than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is also recorded as a reduction to Care trusts’ corpus. In the three months ended September 30, 2016, we recorded a $0.1 million impairment for other-than-temporary declines in the fair value related to unrealized losses on certain investments. We did not record any impairments in the three months ended September 30, 2017. In the nine months ended September 30, 2016, we recorded a $0.5 million impairment and no impairments have been recorded in the nine months ended September 30, 2017. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
At September 30, 2017, we had certain investments within our perpetual care trust investments that had tax lots in loss positions for more than one year. Based on our analyses of these securities, the companies’ businesses and current market conditions, we determined that these investment losses were temporary in nature.
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended September 30, 2017 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| September 30, 2017 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Foreign debt | $ | 93 |
| | $ | (2 | ) | | $ | 1,138 |
| | $ | (115 | ) | | $ | 1,231 |
| | $ | (117 | ) |
Corporate debt | 1,435 |
| | (276 | ) | | 417 |
| | (92 | ) | | 1,852 |
| | (368 | ) |
Preferred stock | 681 |
| | (4 | ) | | 5,475 |
| | (364 | ) | | 6,156 |
| | (368 | ) |
Mortgage-backed securities | 121 |
| | (14 | ) | | — |
| | — |
| | 121 |
| | (14 | ) |
Common stock | 5,393 |
| | (1,466 | ) | | 1,221 |
| | (555 | ) | | 6,614 |
| | (2,021 | ) |
Mutual Funds: | | | | | | | | | | | |
Fixed Income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
|
Total temporary impaired securities | $ | 7,723 |
| | $ | (1,762 | ) | | $ | 8,251 |
| | $ | (1,126 | ) | | $ | 15,974 |
| | $ | (2,888 | ) |
Our perpetual care trust investment unrealized losses, their associated fair market values, and the duration of unrealized losses for the periods ended December 31, 2016 are shown in the following table (in thousands):
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2016 |
| In Loss Position Less than 12 months | | In Loss Position Greater than 12 months | | Total |
| Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses | | Fair Market Value | | Unrealized Losses |
Fixed income securities: | | | | | | | | | | | |
Municipal bonds | $ | 137 |
| | $ | (3 | ) | | $ | — |
| | $ | — |
| | $ | 137 |
| | $ | (3 | ) |
Foreign debt | 1,619 |
| | (120 | ) | | 1,961 |
| | (315 | ) | | 3,580 |
| | (435 | ) |
Corporate debt | 4,679 |
| | (152 | ) | | 1,439 |
| | (669 | ) | | 6,118 |
| | (821 | ) |
Preferred stock | 2,038 |
| | (77 | ) | | 8,329 |
| | (587 | ) | | 10,367 |
| | (664 | ) |
Mortgage-backed securities | 31 |
| | (3 | ) | | — |
| | — |
| | 31 |
| | (3 | ) |
Common stock | 1,563 |
| | (121 | ) | | 2,004 |
| | (1,025 | ) | | 3,567 |
| | (1,146 | ) |
Total temporary impaired securities | $ | 10,067 |
| | $ | (476 | ) | | $ | 13,733 |
| | $ | (2,596 | ) | | $ | 23,800 |
| | $ | (3,072 | ) |
Perpetual care trust investment security transactions recorded in Other, net on our Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Realized gains | $ | 44 |
| | $ | — |
| | $ | 156 |
| | $ | 925 |
|
Realized losses | (261 | ) | | — |
| | (1,943 | ) | | (630 | ) |
Decrease (increase) in care trusts’ corpus | 217 |
| | — |
| | 1,787 |
| | (295 | ) |
Total | $ | — |
| | $ | — |
| | $ | — |
| | $ | — |
|
Perpetual care trust investment security transactions recorded in Revenues: Cemetery for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Investment income | $ | 1,523 |
| | $ | 1,539 |
| | $ | 4,503 |
| | $ | 4,831 |
|
Realized gain, net | 14 |
| | (283 | ) | | (444 | ) | | (891 | ) |
Total | $ | 1,537 |
| | $ | 1,256 |
| | $ | 4,059 |
| | $ | 3,940 |
|
Purchases and sales of investments in the perpetual care trusts for the three and nine months ended September 30, 2016 and 2017 were as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Purchases | $ | (936 | ) | | $ | (556 | ) | | $ | (12,888 | ) | | $ | (12,430 | ) |
Sales | $ | 3,832 |
| | $ | — |
| | $ | 11,702 |
| | $ | 8,390 |
|
7. FAIR VALUE MEASUREMENTS
| |
8. | FAIR VALUE MEASUREMENTS |
We evaluateevaluated our financial assets and liabilities for those financial assets and liabilities that meetmet the criteria of the disclosure requirements and fair value framework. The carrying values of cash and cash equivalents, trade receivables, and trade payables approximate the fair values of those instruments due to the short-term nature of the instruments. The fair values of receivables on preneed funeral and cemetery contracts are impracticable to estimate because of the lack of a trading market and the diverse number of individual contracts with varying terms. Our long-termacquisition debt and Credit Facility (as defined in Note 9)10) are classified within Level 2 of the Fair Value MeasurementMeasurements hierarchy.
The fair values of our long-termthe acquisition debt and Credit Facility approximate the carrying values of these instruments based on the index yields of similar securities compared to U.S. Treasury yield curves. The fair value of the convertible subordinated notes due 2021Convertible Notes (as defined in Note 11) was approximately $179.9$6.4 million at SeptemberJune 30, 20172020 based on the last traded or broker quoted price. The fair value of the Senior Notes (as defined in Note 12) was approximately $419.9 million at June 30, 2020 based on the last traded or broker quoted price. We identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual care trust investmentinvestments categories on our Consolidated Balance SheetsSheet as having met the criteria for fair value measurement.
As of SeptemberDecember 31, 2019 and June 30, 2017,2020, we did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.
We account for our investments as available-for-sale and measure them at fair value under the standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities. See Notes 3 andNote 6 to our Consolidated Financial Statements included herein for the fair value hierarchy levels of our trust investments.
8. INTANGIBLE AND OTHER NON-CURRENT ASSETS
Intangibles
| |
9. | INTANGIBLE AND OTHER NON-CURRENT ASSETS |
Intangible and other non-current assets at December 31, 20162019 and SeptemberJune 30, 2017 were2020 are as follows (in thousands):
|
| | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Prepaid agreements not-to-compete, net of accumulated amortization of $7,195 and $7,548, respectively | $ | 3,915 |
| | $ | 3,617 |
|
Tradenames | 25,233 |
| | 26,649 |
|
Capitalized commissions on preneed contracts, net of accumulated amortization of $1,127 and $1,412, respectively | 2,818 |
| | 2,989 |
|
Other | 150 |
| | 93 |
|
Intangible and other non-current assets, net | $ | 32,116 |
| | $ | 33,348 |
|
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Prepaid agreements not-to-compete, net of accumulated amortization of $5,501 and $5,908, respectively | $ | 3,244 |
| | $ | 2,930 |
|
Tradenames | 11,663 |
| | 11,663 |
|
Other | 50 |
| | 23 |
|
Intangible and other non-current assets | $ | 14,957 |
| | $ | 14,616 |
|
Prepaid agreements not-to-compete are amortized over the term of the respective agreements, ranging generally from one to ten years. Amortization expense was approximately $106,000$168,000 and $135,000$166,000 for the three months ended SeptemberJune 30, 20162019 and 2017,2020, respectively and $308,000$336,000 and $407,000$353,000 for the ninesix months ended SeptemberJune 30, 20162019 and 2017,2020, respectively. Our tradenames have indefinite lives
Amortization expense related to capitalized commissions totaled $139,000 and therefore are not amortized.$144,000 for the three months ended June 30, 2019 and 2020, respectively and $277,000 and $285,000 for the six months ended June 30, 2019 and 2020, respectively.
See Notes 1 and 3 to the Consolidated Financial Statements included herein, for a discussion of the methodology used for our indefinite-lived intangible asset impairment test and discussion of our acquisitions, respectively.
9.LONG-TERM10.CREDIT FACILITY AND ACQUISITION DEBT
At June 30, 2020, our Credit Facility was comprised of: (i) a $190.0 million revolving credit facility, including a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 31, 2023.
The Credit Facility contains customary affirmative covenants, including, but not limited to, covenants with respect to the use of proceeds, payment of taxes and other obligations, continuation of the Company’s business and the maintenance of existing rights and privileges, the maintenance of property and insurance, amongst others.
In addition, the Credit Facility also contains customary negative covenants, including, but not limited to, covenants that restrict (subject to certain exceptions) the ability of the Company and its subsidiaries and party thereto as guarantors (the “Credit Facility Guarantors”) to incur additional indebtedness, grant liens on assets, make investments, engage in mergers and acquisitions, and pay dividends and other restricted payments, and certain financial covenants. As of June 30, 2020, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed, (i) 5.75 to 1.00 for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and (ii) 5.50 to 1.00 for the quarter ended December 31, 2020 and each quarter ended thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit Facility) not to exceed 2.00 to 1.00 as of the end of any period of four consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis. As more fully described below, we were not in compliance with the Total Leverage Ratio covenant for the quarter ended March 31, 2020.
On May 18, 2020, we received a waiver under our Credit Facility for the failure to comply with the Total Leverage Ratio covenant for the fiscal quarter ended March 31, 2020. In connection with the waiver, the Credit Facility was also amended to increase the interest rate margin applicable to borrowings by up to 0.625% at each pricing level based on the Total Leverage Ratio.
We were in compliance with the total leverage ratio, fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility as of June 30, 2020.
Our long-termCredit Facility and Acquisition debt consisted of the following at December 31, 20162019 and SeptemberJune 30, 20172020 (in thousands):
|
| | | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Credit Facility | $ | 83,800 |
| | $ | 89,700 |
|
Debt issuance costs, net of accumulated amortization of $337 and $582, respectively | (1,618 | ) | | (1,373 | ) |
Total Credit Facility | $ | 82,182 |
| | $ | 88,327 |
|
| | | |
Acquisition debt | $ | 6,964 |
| | $ | 6,427 |
|
Less: current portion | (1,306 | ) | — |
| (1,142 | ) |
Total acquisition debt, net of current portion | $ | 5,658 |
| | $ | 5,285 |
|
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Revolving credit facility, secured, floating rate | $ | 67,700 |
| | $ | 75,500 |
|
Term loan, secured, floating rate | 138,750 |
| | 130,313 |
|
Acquisition debt | 12,245 |
| | 11,348 |
|
Debt issuance costs, net of accumulated amortization of $4,138 and $4,366, respectively | (1,270 | ) | | (1,043 | ) |
Less: current portion | (13,021 | ) | | (16,126 | ) |
Total long-term debt | $ | 204,404 |
| | $ | 199,992 |
|
As of September 30, 2017, we had a $300 million secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.
As of September 30, 2017, we had outstanding borrowings under the revolving credit facility of $75.5 million and approximately $130.3 million was outstanding on the term loan. We have one letter of credit issued on November 30, 2016 and outstanding under the Credit Facility issued on November 30, 2019 for approximately $2.0 million, which bears interest at 2.125% and will expire on November 27, 2017.25, 2020. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under theour Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of SeptemberJune 30, 2017,2020, the prime rate margin was equivalent to 1.125%2.00% and the LIBOR rate margin was 2.125%3.00%. The weighted average interest rate on theour Credit Facility was 3.6% and 3.9% for the three and ninesix months ended SeptemberJune 30, 20172020, respectively. The weighted average interest rate on our Credit Facility was 3.4%3.9% and 3.1%,4.0% for the three and six months ended June 30, 2019, respectively.
We were in compliance with the covenants contained in the Credit Agreement as of September 30, 2017. The Credit Agreement contains key ratios that we must comply with, including a requirement to maintain a leverage ratio of no more than 3.50 to 1.00interest expense and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of September 30, 2017, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 1.89 to 1.00.
Amortizationamortization of debt issuance costs related to our Credit Facility was approximately $0.1 million for bothduring the three and six months ended SeptemberJune 30, 20162019 and 2017 and $0.3 million and $0.2 million for the nine months ended September 30, 2016 and 2017, respectively. The unamortized debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.2020 is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Credit Facility interest expense | $ | 362 |
| | $ | 1,106 |
| | $ | 740 |
| | $ | 2,336 |
|
Credit Facility amortization of debt issuance costs | 54 |
| | 118 |
| | 108 |
| | 245 |
|
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from five to twenty years.
The imputed interest expense related to our acquisition debt during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):
10. |
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Acquisition debt imputed interest expense | $ | 161 |
| | $ | 124 |
| | $ | 329 |
| | $ | 251 |
|
11.CONVERTIBLE SUBORDINATED NOTES
On March 19, 2014, we issued $143.75 million aggregate principal amountThe carrying values of the liability and equity components of our 2.75% convertible subordinated notes due March 15, 2021 (the “Convertible Notes”). at December 31, 2019 and June 30, 2020 are reflected on our Consolidated Balance Sheet as follows (in thousands):
|
| | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Current liabilities: | | | |
Principal amount | $ | 6,319 |
| | $ | 6,319 |
|
Unamortized discount of liability component | (319 | ) | | (187 | ) |
Convertible Notes issuance costs, net of accumulated amortization of $130 and $142, respectively | (29 | ) | | (17 | ) |
Carrying value of the liability component | $ | 5,971 |
| | $ | 6,115 |
|
| | | |
Carrying value of the equity component | $ | 789 |
| | $ | 789 |
|
The carrying value of the liability component and the carrying value of the equity component are recorded in Convertible subordinated notes due 2021 and Additional paid-in capital, respectively, on our Consolidated Balance Sheet at December 31, 2019 and June 30, 2020.
The fair value of the Convertible Notes, which are Level 2 measurements, was $6.4 million at June 30, 2020. The Convertible Notes are due in March 2021 and bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 andyear, which is payable semi-annually in arrears on March 15 and September 15 of each year.
The carrying values ofAt June 30, 2020, the liability and equity components of the Convertible Notes at December 31, 2016 and September 30, 2017 are reflected in our Consolidated Balance Sheets as follows (in thousands):
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Long-term liabilities: | | | |
Principal amount | $ | 143,750 |
| | $ | 143,750 |
|
Unamortized discount of liability component | (21,887 | ) | | (18,687 | ) |
Convertible Notes issuance costs, net of accumulated amortization of $1,359 and $1,746, respectively | $ | (2,268 | ) | | $ | (1,881 | ) |
Carrying value of the liability component | $ | 119,596 |
| | $ | 123,182 |
|
| | | |
Equity component carrying value | $ | 17,973 |
| | $ | 17,973 |
|
The fair value of the Convertible Notes, which are Level 2 measurements, was approximately $179.9 million at September 30, 2017.
Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $1.0 million for both the three months ended September 30, 2016 and 2017 and $3.0 million for both the nine months ended September 30, 2016 and 2017. Accretion of the discount on the Convertible Notes was $1.0 million and $1.1 million for the three months ended September 30, 2016 and 2017, respectively, and $2.9 million and $3.2 million for the nine months ended September 30, 2016 and 2017, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 and $0.4 million for both the nine months ended September 30, 2016 and 2017.
The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes in effect at September 30, 2017, is 44.5392was 45.7053 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.45$21.88 per share of common stock.
The unamortizedinterest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Convertible Notes interest expense | $ | 44 |
| | $ | 43 |
| | $ | 87 |
| | $ | 87 |
|
Convertible Notes accretion of debt discount | 59 |
| | 66 |
| | 117 |
| | 131 |
|
Convertible Notes amortization of debt issuance costs | 5 |
| | 6 |
| | 11 |
| | 12 |
|
The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately eight months of the Convertible Notes. The effective interest rate on the unamortized debt discount for both the three and six months ended June 30, 2019 and 2020 was 11.4%. The effective interest rate on the debt issuance costs for both the three and ninesix months ended SeptemberJune 30, 20162019 and 20172020 was 6.75% and 2.75%, respectively.3.2%.
11.STOCKHOLDERS’ EQUITY
Stock-Based Compensation Plans
During the nine months ended September 30, 2017, we had two stock benefits plans in effect under which restricted stock, stock options and performance awards have been granted or remain outstanding: the Second Amended and Restated 2006 Long-Term Incentive Plan (the “Amended and Restated 2006 Plan”) and the 2017 Omnibus Incentive Plan (the “2017 Plan”). The Amended and Restated 2006 Plan was terminated upon the approval of the 2017 Plan at the annual shareholders meeting on May 17, 2017. The termination of the Amended and Restated 2006 Plan does not affect the awards previously issued and outstanding.
All stock-based plans are administered by the Compensation Committee appointed by our Board of Directors (the “Board”). The 2017 Plan provides for grants of options as non-qualified options or incentive stock options, restricted stock and performance awards. The 2017 Plan expires on May 17, 2027.12.SENIOR NOTES
The statuscarrying value of each of the plansour 6.625% Senior Notes due 2026 (the “Senior Notes”) at SeptemberDecember 31, 2019 and June 30, 20172020 is reflected on our Consolidated Balance Sheet as follows (shares in(in thousands):
|
| | | | | | | | | | | |
| Shares Reserved | | Shares Available to Issue | | Options Outstanding | | Performance Awards Outstanding (2) |
Amended and Restated 2006 Plan | — |
| | — |
| | 1,929 |
| | 319 |
|
2017 Plan | 1,571 |
| (1) | 1,541 |
| | 16 |
| | 9 |
|
Total | 1,571 |
| | 1,541 |
| | 1,945 |
| | 328 |
|
|
| | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Long-term liabilities: | | | |
Principal amount | $ | 400,000 |
| | $ | 400,000 |
|
Debt premium, net of accumulated amortization of $0 and $109, respectively | 1,688 |
| | 1,579 |
|
Debt discount, net of accumulated amortization of $765 and $1,025, respectively | (4,110 | ) | | (3,850 | ) |
Debt issuance costs, net of accumulated amortization of $216 and $352, respectively | (2,131 | ) | | (2,061 | ) |
Carrying value of the Senior Notes | $ | 395,447 |
| | $ | 395,668 |
|
The fair value of the Senior Notes, which are Level 2 measurements, was $419.9 million at June 30, 2020. The Senior Notes are due on June 1, 2026 and bear interest at 6.625% per year which is payable semi-annually in arrears on June 1 and December 1 of each year.
The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Senior Notes interest expense | $ | 5,383 |
| | $ | 6,625 |
| | $ | 10,766 |
| | $ | 13,250 |
|
Senior Notes amortization of debt discount | 122 |
| | 131 |
| | 242 |
| | 260 |
|
Senior Notes amortization of debt premium | — |
| | 55 |
| | — |
| | 109 |
|
Senior Notes amortization of debt issuance costs | 34 |
| | 69 |
| | 68 |
| | 136 |
|
The debt discount, the debt premium and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 71 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the initial Senior Notes, which were issued in May 2018, for both the three and six months ended June 30, 2020 was 6.87% and 6.69%, respectively. The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the additional Senior Notes, which were issued in December 2019, for both the three and six months ended June 30, 2020 was 6.20% and 6.90%, respectively.
13.LEASES
Our lease obligations consist of operating and finance leases related to real estate and equipment. The components of lease cost for the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | | | |
| | | Three months ended June 30, | | Six months ended June 30, |
| Income Statement Classification | | 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Operating lease cost | Facilities and grounds expense(1) | | $ | 942 |
| | $ | 954 |
| | $ | 1,862 |
| | $ | 1,911 |
|
Short-term lease cost | Facilities and grounds expense(1) | | 59 |
| | 39 |
| | 133 |
| | 96 |
|
| | | | | | | | | |
Finance lease cost: | | | | | | | | | |
Depreciation of leased assets | Depreciation and amortization(2) | | $ | 131 |
| | $ | 109 |
| | $ | 263 |
| | $ | 218 |
|
Interest on lease liabilities | Interest expense | | 131 |
| | 125 |
| | 263 |
| | 251 |
|
Total finance lease cost | | | 262 |
| | 234 |
| | 526 |
| | 469 |
|
Total lease cost | | | $ | 1,263 |
| | $ | 1,227 |
| | $ | 2,521 |
| | $ | 2,476 |
|
|
| | | | |
| | | | |
(1) | Amount includes approximately 17,500 shares granted from the AmendedFacilities and Restated 2006 Plan that were returned to the Company due to cancellations.grounds expense is included within Cost of service and General, administrative and other on our Consolidated Statements of Operations.
|
(2) | Performance Awards are reserved at 200%Depreciation and amortization expense is included within Field depreciation and Home office depreciation and amortization on our Consolidated Statements of shares granted which is equal to the maximum payout in shares.Operations. |
Variable lease expense was immaterial for thethree and six months ended June 30, 2019 and 2020.
Supplemental cash flow information related to our leases for the six months ended June 30, 2019 and 2020 is as follows (in thousands):
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Cash paid for operating leases included in operating activities | $ | 1,947 |
| | $ | 1,507 |
|
Cash paid for finance leases included in financing activities | 457 |
| | 400 |
|
Right-of-use assets obtained in exchange for new leases for the six months ended June 30, 2019 and 2020 is as follows (in thousands):
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Right-of-use assets obtained in exchange for new operating lease liabilities | $ | 8,175 |
| | $ | 77 |
|
Right-of-use assets obtained in exchange for new finance lease liabilities | — |
| | — |
|
Supplemental balance sheet information related to leases as of December 31, 2019 and June 30, 2020 is as follows (in thousands):
|
| | | | | | | | |
Lease Type | Balance Sheet Classification | December 31, 2019 |
| | June 30, 2020 |
|
Operating lease right-of-use assets | Operating lease right-of-use assets | $ | 22,304 |
| | $ | 21,407 |
|
| | | | |
Finance lease right-of-use assets | Property, plant and equipment, net | $ | 6,770 |
| | $ | 6,770 |
|
Accumulated depreciation | Property, plant and equipment, net | (1,566 | ) | | (1,784 | ) |
Finance lease right-of-use assets, net | | 5,204 |
| | 4,986 |
|
| | | | |
Operating lease current liabilities | Current portion of operating lease obligations | $ | 1,554 |
| | $ | 2,008 |
|
Finance lease current liabilities | Current portion of finance lease obligations | 290 |
| | 306 |
|
Total current lease liabilities | | 1,844 |
| | 2,314 |
|
| | | | |
Operating lease non-current liabilities | Obligations under operating leases, net of current portion | 21,533 |
| | 20,583 |
|
Finance lease non-current liabilities | Obligations under finance leases, net of current portion | 5,854 |
| | 5,696 |
|
Total non-current lease liabilities | | 27,387 |
| | 26,279 |
|
| |
| | |
Total lease liabilities | | $ | 29,231 |
| | $ | 28,593 |
|
The average lease terms and discount rates as of June 30, 2020 are as follows:
|
| | | | |
| Weighted-average remaining lease term (years) | | Weighted-average discount rate |
Operating leases | 10.5 | | 8.1 | % |
Finance leases | 6.4 | | 8.2 | % |
The aggregate future lease payments for operating and finance leases as of June 30, 2020 are as follows (in thousands):
|
| | | | | | | |
| Operating | | Finance |
Lease payments due: | | | |
Remainder of 2020 | $ | 1,874 |
| | $ | 428 |
|
2021 | 3,725 |
| | 836 |
|
2022 | 3,365 |
| | 860 |
|
2023 | 3,267 |
| | 860 |
|
2024 | 3,262 |
| | 791 |
|
Thereafter | 17,799 |
| | 6,291 |
|
Total lease payments | 33,292 |
| | 10,066 |
|
Less: Interest | (10,701 | ) | | (4,064 | ) |
Present value of lease liabilities | $ | 22,591 |
| | $ | 6,002 |
|
As ofJune 30, 2020, we had no additional significant operating or finance leases that had not yet commenced.
| |
14. | COMMITMENTS AND CONTINGENCIES |
Litigation
We are a party to various litigation matters and proceedings. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. If we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters.
Faria, et al. v. Carriage Funeral Holdings, Inc., Superior Court of California, Contra Costa County, Case No. MSC18-00606. On March 26, 2018, six Plaintiffs filed a putative class action against Carriage Funeral Holdings, Inc., our subsidiary, their alleged employer, on behalf of themselves and all similarly situated current and former employees. Plaintiffs seek monetary damages and claim that Carriage Funeral Holdings, Inc. failed to pay minimum wages, provide meal and rest breaks, provide accurately itemized
wage statements, reimburse employees for required expenses, and provide wages when due. Plaintiffs also claim that Carriage Funeral Holdings, Inc. violated California Business and Professions Code §17200 et seq. On June 5, 2018, Plaintiffs filed a First Amended Complaint to add a claim under the California Private Attorney General Act. On October 23, 2018, the parties mediated this matter and executed a Memorandum of Understanding for class settlement. In February 2019, a Class Action Settlement Agreement was fully executed and was approved by the Court in October 2019. We paid $0.7 million under the settlement agreement in November 2019. This case was formally closed on May 25, 2020.
15.STOCKHOLDERS’ EQUITY
Restricted Stock
We did not issue anyDuring the six months ended June 30, 2020, we issued restricted stock during the three months ended September 30, 2017. During the second quarter of 2017, we issued 5,000 restricted stock grants to a new employee of the leadership teamcertain employees totaling 10,200 shares that vest over a five-yearthree-year period withand had an aggregate grant date market value of approximately $0.1 million. During the first quarter$0.3 million at a weighted average stock price of 2017, we issued a total of 22,250$25.00. We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for restricted stock grants that vest over a three-year period with an aggregate grant date market valueawards of approximately $0.6 million.
During$211,000 and $183,000, for the three months ended SeptemberJune 30, 20162019 and 2017, we recorded a benefit of $21,0002020, respectively and $174,000 of pre-tax compensation expense, respectively, related to$428,000 and $368,000 for the vesting of restricted stock awards, which is included in general, administrative and other expenses. The benefit was primarily related to the cancellation of 50,000 unvested restricted stock for a former executive. During the ninesix months ended SeptemberJune 30, 20162019 and 2017, we recorded pre-tax compensation expense of approximately $0.5 million for both periods.2020, respectively.
As of SeptemberJune 30, 2017,2020, we had approximately $1.3$1.1 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 1.71.4 years.
Stock Options
As of September 30, 2017, there were 1,945,656 stock options outstanding and 708,379 stock options which remain unvested. We did not grant any options duringDuring the threesix months ended SeptemberJune 30, 2017. During the second quarter of 2017,2020, we granted 16,25020,000 options to a newcertain key employee of the leadership team at an exercisea weighted average price of $26.89.$18.02. These options will vest in one-fifthone-third increments over a five-yearthree-year period and have a ten-year term. The fair value of thethese options granted during the second quarter of 2017 was approximately $0.1 million. DuringOn June 26, 2020, we cancelled 100,000 options in connection with the first quarterresignation of 2017, we granted 445,450 options to our leadership teamPresident and certain key employees at a weighted average exercise price of $26.54. These options will vest in one-fifth increments over a five-year period and have a ten-year term. Chief Operating Officer.
The fair value of the total options granted duringwere estimated on the first quarterdate of 2017 was approximately $3.2 million.grant using the Black-Scholes option pricing model with the following weighted-average assumptions:
During |
| | |
| 2020 |
Dividend yield | 1.67 | % |
Expected volatility | 38.54 | % |
Risk-free interest rate | 0.25 | % |
Expected holding period (years) | 3.74 |
|
Black-Scholes value | $4.61 |
We recorded stock-based compensation expense, which is included in General, administrative and other expenses, for stock options of $149,000 and $122,000, for the three months ended SeptemberJune 30, 20162019 and 2017, we recorded approximately $0.2 million2020, respectively and $0.3 million, respectively, of pre-tax stock-based compensation expense$353,000 and $337,000 for stock options. During the ninesix months ended SeptemberJune 30, 20162019 and 2017, we recorded approximately $1.4 million and $1.2 million, respectively, of pre-tax compensation expense for stock options.
2020, respectively.
Performance Awards
On May 19, 2020, we cancelled all Performance Award Agreements previously awarded to all individuals in 2019 and 2020. Concurrently with the cancellation, the Compensation Committee of the Board of Directors (the “Board”) approved a new performance award to be issued to certain employees. We did not grant any performance awards during the three months ended September 30, 2017. During the second quarter of 2017, we granted 4,500368,921 performance awards to a new employee of the leadership team,certain eligible employees, payable in shares. The fair value of these performance awards granted during the second quarter of 2017 was approximately $0.1 million. These awards will vest (if at all) on June 30, 2022,December 31, 2024 provided that certain criteria surrounding Adjusted Consolidated EBITDA (Adjusted Earnings Before Interest Tax Depreciationthe Company’s common stock reaches one of five pre-determined growth targets for a sustained period beginning on the grant date of May 19, 2020 and Amortization) and Adjusted Consolidated EBITDA Marginending on December 31, 2024. The new performance is achieved and the individual has remained continuously employed by Carriage through such date. The Adjusted Consolidated EBITDA performance represents 50%award was treated as a modification of the awardcancelled awards and resulted in an additional $1.7 million of incremental compensation costs, which are expected to be recognized over the Adjusted Consolidated EBITDA Margin performance represents 50%remaining term of the award. During the first quarter of 2017,54 months.
On June 25, 2020, we granted 101,040an additional 13,974 performance awards to our leadership teamVice-President of Cemetery Sales and certain key employees, payable in shares. TheMarketing with the same vesting criteria described above with a fair value of these$0.2 million. On June 26, 2020, we cancelled 33,538 performance awards in connection with the resignation of our President and Chief Operating Officer.
The fair values of the performance awards granted during the first quarter of 2017 was approximately $2.7 million. three months ended June 30, 2020 were determined by using the Monte-Carlo simulation pricing model with the following assumptions:
|
| | | | | |
| May 19, 2020 | | June 25, 2020 |
Performance period | May 19, 2020 - December 31, 2024 |
| | June 25, 2020 - December 31, 2024 |
|
Simulation period (years) | 4.62 |
| | 4.52 |
|
Share price at grant date | $15.79 | | $18.02 |
Expected volatility | 34.54 | % | | 36.24 | % |
Risk-free interest rate | 0.33 | % | | 0.29 | % |
We recorded pre-taxstock-based compensation expense, which is included in General, administrative and other expenses, for performance awards totaling $46,000of $58,000 and $208,000$182,000 for the three months ended SeptemberJune 30, 20162019 and 2017,2020, respectively and $154,000$77,000 and $465,000$303,000 for the ninesix months ended SeptemberJune 30, 20162019 and 2017,2020, respectively.
Employee Stock Purchase Plan
During the third quarter of 2017,six months ended June 30, 2020, employees purchased a total of 11,52543,314 shares of common stock through our employee stock purchase plan (“ESPP”) at a weighted average price of $21.76$14.39 per share. We recorded pre-tax stock-based compensation expense for the ESPP totaling approximately $53,000 and $60,000 for the three months ended September 30, 2016 and 2017, respectively, and $197,000 and $204,000 for both the nine months ended September 30, 2016 and 2017.
The fair value of the optionright (option) to purchase shares under the ESPP is estimated onat the date of grant (January 1 of each year) associatedpurchase with the four quarterly purchase dates using the following assumptions:
|
| | |
| 20172020 |
Dividend yield | 0.820.01 | % |
Expected volatility | 18.8248.63 | % |
Risk-free interest rate | 0.53%, 0.65%, 0.77%, 0.89%1.54%,1.57%,1.57%,1.56% |
|
Expected life (years) | 0.25, 0.50, 0.75, 1.00 |
|
Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of the purchase. The expected life of the ESPP grants represents the calendar quarters from the beginning of the year to the purchase date (end of each quarter).
Director Compensation
We recorded pre-taxstock-based compensation expense, related to director compensation, which is included in general,General, administrative and other expenses and Regional and unallocated funeral and cemetery costs, for the ESPP totaling $90,000$61,000 and $80,000 for both the three months ended SeptemberJune 30, 20162019 and 2017,2020, respectively and $302,000$166,000 and $271,000$244,000 for the ninesix months ended SeptemberJune 30, 20162019 and 2017,2020, respectively.
Share RepurchaseGood to Great Incentive Program
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 millionDuring the six months ended June 30, 2020, we issued 17,991 shares of our common stock in accordance with Rule 10b-18to certain employees, which were valued at approximately $0.4 million at a grant date stock price of $25.00.
Non-Employee Director Compensation
On February 19, 2020, our Board revised the Director Compensation Policy to provide that each independent director is entitled to a quarterly retainer of $35,000, payable at the end of the Securities Exchange Actquarter. On April 23, 2020, as part of 1934,our broad-based effort to respond to COVID-19, the Board approved a temporary reduction of the quarterly retainer for our non-employee directors from $35,000 per quarter to $29,750 per quarter (or 15%) effective April 19, 2020. On June 26, 2020, the Board voted to reinstate the quarterly retainer back to 100% effective as amended (the “Exchange Act”). Duringof June 28, 2020.
For the six months ended June 30, 2020, we granted an aggregate of 16,680 shares of our common stock to 5 of our non-employee directors, which were valued at $0.3 million at a weighted average stock price of $17.08.
We recorded stock-based compensation expense, which is included in General, administrative and other expenses, related to annual retainers and common stock awards of $114,000 and $201,000 for the three months ended SeptemberJune 30, 2017,2019 and 2020, respectively and $228,000 and $402,000 for the six months ended June 30, 2019 and 2020, respectively.
Share Repurchase
During the six months ended June 30, 2020, we repurchased 574,054 shares of common stock for a total cost of $14.0 million at an average cost of $24.35 per share pursuant to this share repurchase program. We did not repurchase any shares of common stock in the first or second quarter of 2017. Our shares were purchased in the open market. Purchases were at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of theour share repurchase program approved by the Board on February 25, 2016. Theprogram. At June 30, 2020, we had approximately $25.6 million available for repurchases under our share repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. See Note 15 to our Consolidated Financial Statements included herein for additional information on our related party transactions.program.
Cash Dividends
On July 26, 2017,May 19, 2020, the Board approved an increase of $0.05 to our annual dividend beginning with the next dividend declaration in the third quarter of 2020. During the six months ended June 30, 2019 and 2020, our Board declared a dividend of $0.05the following dividends payable on the dates below (in thousands, except per share totaling approximately $0.8 million, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. For the three months ended September 30, 2016, we paid a quarterly dividend of $0.050 per share, totaling approximately $0.8 million. For the nine months ended September 30, 2016 and 2017, we paid total dividends of approximately $1.7 million and $2.5 million, respectively.amounts):
|
| | | | | | | |
2019 | Per Share | | Dollar Value |
March 1st | $ | 0.075 |
| | $ | 1,360 |
|
June 1st | $ | 0.075 |
| | $ | 1,365 |
|
| | | |
2020 | Per Share | | Dollar Value |
March 1st | $ | 0.075 |
| | $ | 1,339 |
|
June 1st | $ | 0.075 |
| | $ | 1,343 |
|
Accumulated other comprehensive income
Our components of accumulated other comprehensive income are as follows (in thousands):
|
| | | | |
Three months ended June 30, 2020 | | |
| | Accumulated Other Comprehensive Income |
Balance at DecemberMarch 31, 20162020 | | $ | — |
|
Increase in netNet unrealized gains associated with available-for-sale securities of the trusts | 2,84934,301 |
|
Reclassification of net unrealized gaingains activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus | (2,84934,301 | ) |
Balance at SeptemberJune 30, 20172020 | $ | — |
|
|
| | | | |
Six months ended June 30, 2020 | | |
| | Accumulated Other Comprehensive Income |
Balance at December 31, 2019 | $ | — |
|
Net unrealized losses associated with available-for-sale securities of the trusts | (10,803 | ) |
Reclassification of net unrealized losses activity attributable to the Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus | 10,803 |
|
Balance at June 30, 2020 | $ | — |
|
16.EARNINGS PER SHARE
The following table sets forth the computation of the basic and diluted earnings per share for the three and ninesix months ended SeptemberJune 30, 20162019 and 20172020 (in thousands, except per share data):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Numerator for basic and diluted earnings per share: | | | | | | | |
Net income | $ | 4,862 |
| | $ | 6,397 |
| | $ | 11,387 |
| | $ | 2,200 |
|
Less: Earnings allocated to unvested restricted stock | (21 | ) | | (18 | ) | | (52 | ) | | (8 | ) |
Income attributable to common stockholders | $ | 4,841 |
| | $ | 6,379 |
| | $ | 11,335 |
| | $ | 2,192 |
|
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per common share - weighted average shares outstanding | 17,959 |
| | 17,860 |
| | 18,008 |
| | 17,833 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 29 |
| | 29 |
| | 35 |
| | 29 |
|
Denominator for diluted earnings per common share - weighted average shares outstanding | 17,988 |
| | 17,889 |
| | 18,043 |
| | 17,862 |
|
| | | | | | | |
Basic earnings per common share: | $ | 0.27 |
| | $ | 0.36 |
| | $ | 0.63 |
| | $ | 0.12 |
|
Diluted earnings per common share: | $ | 0.27 |
| | $ | 0.36 |
| | $ | 0.63 |
| | $ | 0.12 |
|
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Numerator for basic and diluted earnings per share: | | | | | | | |
Net income | $ | 5,683 |
| | $ | 3,038 |
| | $ | 15,454 |
| | $ | 14,532 |
|
Less: Earnings allocated to unvested restricted stock | (25 | ) | | (10 | ) | | (76 | ) | | (52 | ) |
Income attributable to common stockholders | $ | 5,658 |
| | $ | 3,028 |
| | $ | 15,378 |
| | $ | 14,480 |
|
| | | | | | | |
Denominator: | | | | | | | |
Denominator for basic earnings per common share - weighted average shares outstanding | 16,529 |
| | 16,476 |
| | 16,502 |
| | 16,575 |
|
Effect of dilutive securities: | | | | | | | |
Stock options | 273 |
| | 335 |
| | 260 |
| | 332 |
|
Convertible subordinated notes | 299 |
| | 787 |
| | 200 |
| | 980 |
|
Denominator for diluted earnings per common share - weighted average shares outstanding | 17,101 |
| | 17,598 |
| | 16,962 |
| | 17,887 |
|
| | | | | | | |
Basic earnings per common share: | $ | 0.34 |
| | $ | 0.18 |
| | $ | 0.93 |
| | $ | 0.87 |
|
Diluted earnings per common share: | $ | 0.33 |
| | $ | 0.17 |
| | $ | 0.91 |
| | $ | 0.81 |
|
TheFor the three and six months ended June 30, 2019 and 2020, there were 0 shares that would have been issued upon conversion of our Convertible Notes as a result of the application under the if-converted method prescribed by the FASB ASC 260, Earnings Per Share for the fully diluted weighted average shares outstanding for the three and nine months ended September 30, 2017 and the corresponding calculation of fully diluted earnings per share, include approximately 787,000 and 980,000 shares that would have been issued upon the conversion of our convertible subordinated notes as a result of the application of the if-converted method prescribed by the FASB ASC 260, Earnings Per Share. There were 299,000 and 200,000 shares for the three and nine months ended September 30, 2016 that would have been issued upon conversion under the if-converted method.share.
For the both the three and nine months ended SeptemberJune 30, 2017 approximately 455,0002019 and 320,0002020, there were 1,094,070 and 1,017,383 stock options, wererespectively and 1,200,404 and 1,025,734 for the six months ended June 30, 2019 and 2020, respectively, excluded from the computation of diluted earnings per share because the inclusion of such stock options would result in an antidilutive effect. For the both the three and ninesix months ended SeptemberJune 30, 2016, no stock options were2020, 349,357 performance awards have been excluded from the computation of diluted earnings per share.share as the performance criteria have not been met.
17.SEGMENT REPORTING
Revenue, disaggregated by major source for each of our reportable segments was as follows (in thousands):
|
| | | | | | | | | | | | |
Three months ended June 30, 2020 | | | | | | |
| | Funeral |
| | Cemetery |
| | Total |
|
Services | | $ | 35,653 |
| | $ | 3,227 |
| | $ | 38,880 |
|
Merchandise | | 20,121 |
| | 2,512 |
| | 22,633 |
|
Cemetery property | | — |
| | 10,009 |
| | 10,009 |
|
Other revenue | | 3,347 |
| | 2,608 |
| | 5,955 |
|
Total | | $ | 59,121 |
| | $ | 18,356 |
| | $ | 77,477 |
|
|
| | | | | | | | | | | | |
Three months ended June 30, 2019 | | | | | | |
| | Funeral |
| | Cemetery |
| | Total |
|
Services | | $ | 31,931 |
| | $ | 2,728 |
| | $ | 34,659 |
|
Merchandise | | 18,378 |
| | 1,953 |
| | 20,331 |
|
Cemetery property | | — |
| | 8,546 |
| | 8,546 |
|
Other revenue | | 2,198 |
| | 2,018 |
| | 4,216 |
|
Total | | $ | 52,507 |
| | $ | 15,245 |
| | $ | 67,752 |
|
13.MAJOR SEGMENTS OF BUSINESS
|
| | | | | | | | | | | | |
Six months ended June 30, 2020 | | | | | | |
| | Funeral |
| | Cemetery |
| | Total |
|
Services | | $ | 73,212 |
| | $ | 6,400 |
| | $ | 79,612 |
|
Merchandise | | 40,821 |
| | 4,798 |
| | 45,619 |
|
Cemetery property | | — |
| | 18,294 |
| | 18,294 |
|
Other revenue | | 6,830 |
| | 4,612 |
| | 11,442 |
|
Total | | $ | 120,863 |
| | $ | 34,104 |
| | $ | 154,967 |
|
|
| | | | | | | | | | | | |
Six months ended June 30, 2019 | | | | | | |
| | Funeral |
| | Cemetery |
| | Total |
|
Services | | $ | 65,908 |
| | $ | 5,403 |
| | $ | 71,311 |
|
Merchandise | | 38,343 |
| | 3,731 |
| | 42,074 |
|
Cemetery property | | — |
| | 15,382 |
| | 15,382 |
|
Other revenue | | 4,419 |
| | 3,647 |
| | 8,066 |
|
Total | | $ | 108,670 |
| | $ | 28,163 |
| | $ | 136,833 |
|
We conduct funeral and cemetery operations only in the United States. The following table presents revenues from operations,Operating income (loss) from operations, Income (loss) before income taxes and totalTotal assets by segment (in thousands):
|
| | | | | | | | | | | | | | | |
| Funeral |
| | Cemetery |
| | Corporate |
| | Consolidated |
|
Operating income (loss): | | | | | | | |
Three months ended June 30, 2020 | $ | 19,869 |
| | $ | 5,291 |
| | $ | (6,894 | ) | | $ | 18,266 |
|
Three months ended June 30, 2019 | 14,624 |
| | 4,626 |
| | (6,061 | ) | | 13,189 |
|
| | | | | | | |
Six months ended June 30, 2020 | $ | 24,180 |
| | $ | 9,458 |
| | $ | (13,222 | ) | | $ | 20,416 |
|
Six months ended June 30, 2019 | 32,700 |
| | 8,150 |
| | (12,062 | ) | | 28,788 |
|
| | | | | | | |
Income (loss) before income taxes: | | | | | | | |
Three months ended June 30, 2020 | $ | 19,674 |
| | $ | 5,348 |
| | $ | (15,176 | ) | | $ | 9,846 |
|
Three months ended June 30, 2019 | 14,418 |
| | 4,852 |
| | (12,262 | ) | | 7,008 |
|
| | | | | | | |
Six months ended June 30, 2020 | $ | 23,792 |
| | $ | 9,453 |
| | $ | (29,746 | ) | | $ | 3,499 |
|
Six months ended June 30, 2019 | 32,279 |
| | 8,438 |
| | (24,508 | ) | | 16,209 |
|
| | | | | | | |
Total assets: | | | | | | | |
June 30, 2020 | $ | 768,462 |
| | $ | 341,522 |
| | $ | 24,668 |
| | $ | 1,134,652 |
|
December 31, 2019 | 790,459 |
| | 314,413 |
| | 24,883 |
| | 1,129,755 |
|
|
| | | | | | | | | | | | | | | |
| Funeral | | Cemetery | | Corporate | | Consolidated |
Revenues from operations: | | | | | | | |
Three months ended September 30, 2017 | $ | 47,329 |
| | $ | 13,725 |
| | $ | — |
| | $ | 61,054 |
|
Three months ended September 30, 2016 | $ | 45,183 |
| | $ | 14,957 |
| | $ | — |
| | $ | 60,140 |
|
| | | | | | | |
Nine months ended September 30, 2017 | $ | 150,279 |
| | $ | 42,784 |
| | $ | — |
| | $ | 193,063 |
|
Nine months ended September 30, 2016 | $ | 140,952 |
| | $ | 44,384 |
| | $ | — |
| | $ | 185,336 |
|
| | | | | | | |
Income (loss) from operations before income taxes: | | | | | | | |
Three months ended September 30, 2017 | $ | 12,394 |
| | $ | 3,002 |
| | $ | (10,836 | ) | | $ | 4,560 |
|
Three months ended September 30, 2016 | $ | 13,478 |
| | $ | 4,327 |
| | $ | (10,231 | ) | | $ | 7,574 |
|
| | | | | | | |
Nine months ended September 30, 2017 | $ | 45,414 |
| | $ | 11,609 |
| | $ | (33,208 | ) | | $ | 23,815 |
|
Nine months ended September 30, 2016 | $ | 44,322 |
| | $ | 12,875 |
| | $ | (33,337 | ) | | $ | 23,860 |
|
| | | | | | | |
Total assets: | | | | | | | |
September 30, 2017 | $ | 637,075 |
| | $ | 245,674 |
| | $ | 4,297 |
| | $ | 887,046 |
|
December 31, 2016 | $ | 634,145 |
| | $ | 241,621 |
| | $ | 9,303 |
| | $ | 885,069 |
|
14.18.SUPPLEMENTARY DATA
Balance Sheet
The following table presents the detail of certain balance sheet accounts as of December 31, 20162019 and SeptemberJune 30, 20172020 (in thousands):
|
| | | | | | | |
| December 31, 2019 |
| | June 30, 2020 |
|
Prepaid and other current assets: | | | |
Prepaid expenses | $ | 1,596 |
| | $ | 1,403 |
|
Deposit on pending acquisition | 5,000 |
| | — |
|
Federal income taxes receivable | 2,973 |
| | 9,949 |
|
State income taxes receivable | 986 |
| | 616 |
|
Other current assets | 112 |
| | 119 |
|
Total prepaid and other current assets | $ | 10,667 |
| | $ | 12,087 |
|
| | | |
Current portion of debt and lease obligations: | | | |
Current portion of acquisition debt | $ | 1,306 |
| | $ | 1,142 |
|
Current portion of finance lease obligations | 290 |
| | 306 |
|
Current portion of operating lease obligations | 1,554 |
| | 2,008 |
|
Total current portion of debt and lease obligations | $ | 3,150 |
| | $ | 3,456 |
|
| | | |
Accrued and other liabilities: | | | |
Accrued salaries and wages | $ | 4,323 |
| | $ | 3,820 |
|
Accrued incentive compensation | 9,199 |
| | 3,248 |
|
Accrued vacation | 2,880 |
| | 3,208 |
|
Accrued insurance | 2,329 |
| | 2,888 |
|
Accrued interest | 2,299 |
| | 2,363 |
|
Accrued ad valorem and franchise taxes | 678 |
| | 1,785 |
|
Employer payroll tax deferral | — |
| | 867 |
|
Accrued commissions | 560 |
| | 719 |
|
Perpetual care trust payable | 401 |
| | 180 |
|
Other accrued liabilities | 1,357 |
| | 1,329 |
|
Unrecognized tax benefit | — |
| | 2,860 |
|
Total accrued and other liabilities | $ | 24,026 |
| | $ | 23,267 |
|
| | | |
Other long-term liabilities: | | | |
Incentive compensation | $ | 1,267 |
| | $ | 1,524 |
|
Contingent consideration | 470 |
| | — |
|
Total other long-term liabilities | $ | 1,737 |
| | $ | 1,524 |
|
|
| | | | | | | |
| December 31, 2016 | | September 30, 2017 |
Other current assets: | | | |
Income taxes receivable | $ | 1,932 |
| | $ | 671 |
|
Other current assets | 102 |
| | 93 |
|
Total other current assets | $ | 2,034 |
| | $ | 764 |
|
| | | |
Current portion of long-term debt and capital lease obligations: | | | |
Term note | $ | 11,250 |
| | $ | 14,063 |
|
Acquisition debt | 1,771 |
| | 2,063 |
|
Capital leases | 246 |
| | 197 |
|
Total current portion of long-term debt and capital lease obligations | $ | 13,267 |
| | $ | 16,323 |
|
| | | |
Other current liabilities: | | | |
Income taxes payable | $ | 509 |
| | $ | 1,579 |
|
Deferred rent | 208 |
| | 232 |
|
Total other current liabilities | $ | 717 |
| | $ | 1,811 |
|
| | | |
Accrued liabilities: | | | |
Accrued salaries and wages | $ | 4,005 |
| | $ | 1,365 |
|
Accrued incentive compensation | 8,237 |
| | 4,864 |
|
Accrued vacation | 2,305 |
| | 2,614 |
|
Accrued insurance | 1,726 |
| | 2,053 |
|
Accrued interest | 1,235 |
| | 257 |
|
Accrued ad valorem and franchise taxes | 981 |
| | 2,314 |
|
Accrued commissions | 543 |
| | 410 |
|
Other accrued liabilities | 1,059 |
| | 1,417 |
|
Total accrued liabilities | $ | 20,091 |
| | $ | 15,294 |
|
| | | |
Other long-term liabilities: | | | |
Deferred rent | $ | 1,207 |
| | $ | 1,029 |
|
Incentive compensation | 575 |
| | 924 |
|
Contingent consideration | 785 |
| | 770 |
|
Total other long-term liabilities | $ | 2,567 |
| | $ | 2,723 |
|
15.RELATED PARTY TRANSACTIONS
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. These shares had been held by Mr. Payne prior to such repurchase for over one year. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. These shares are currently held as treasury shares. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.
16.19.SUBSEQUENT EVENTS
On October 14, 2017,July 2, 2020, we completed construction of and began operating a newsold one funeral home business in Pennsylvania.Florida for $0.8 million.
On October 25, 2017, our Board approved an increaseJuly 10, 2020, we sold two funeral home businesses in our quarterly dividend on our common stock from $0.050 to $0.075 per share, effective with respect to dividends payable on December 1, 2017 and later.
On October 25, 2017, our Board approved a $15.0 million increase in its authorizationColorado for repurchases of ourcommon stock in addition to the $25.0 million approved on February 25, 2016, bringing the total authorized repurchase amount to $40.0 million, in accordance with the Exchange Act.$3.2 million.
CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
In addition to historical information, this Quarterly Report on Form 10-Q contains certain statements and information that may constitute forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. All statements, other than statements of historical information, should be deemed to be forward-looking statements. These statements include, but are not limited to, statements regarding any projections of earnings, revenues,revenue, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing and are based on our current expectations and beliefs concerning future developments and their potential effect on us. The words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “seek”, “project”, “forecast”, “foresee”, “should”, “would”, “could”, “plan”, “anticipate” and other similar words or expressions are intended to identify forward-looking statements, which are generally not historical in nature. While management believes that these forward-looking statements are reasonable as and when made, there can be no assurance that future developments affecting us will be those that we anticipate. All comments concerning our expectations for future revenuesrevenue and operating results are based on our forecasts for our existing operations and do not include the potential impact of any future acquisitions. Our forward-looking statements involve significant risks and uncertainties (some of which are beyond our control) and assumptions that could cause actual results to differ materially from our historical experience and our present expectations or projections. Important factors that could cause actual results to differ materially from those in the forward-looking statements include, but are not limited to, those summarized below:
our ability to find and retain skilled personnel;
our ability to execute our growth strategy;
the effects of competition;
the execution of our Standards Operating, 4E Leadership and StrategicStandard Acquisition Models;
changes in the number of deaths in our markets;
changes in consumer preferences;
our ability to generate preneed sales;
the investment performance of our funeral and cemetery trust funds;
fluctuations in interest rates;
our ability to obtain debt or equity financing on satisfactory terms to fund additional acquisitions, expansion projects, working capital requirements and the repayment or refinancing of indebtedness;
our ability to meet the timing, objectives and cost saving expectations related to anticipated financing activities, including our deleveraging program, forecasts and planned uses of free cash flow, expected plans for refinancing our senior notes, and future capital allocation;
the timely and full payment of death benefits related to preneed funeral contracts funded through life insurance contracts;
the financial condition of third-party insurance companies that fund our preneed funeral contracts;
increased or unanticipated costs, such as insurance or taxes;
our level of indebtedness and the cash required to service our indebtedness;
changes in federal income tax laws and regulations and the implementation and interpretation of these laws and regulations by the Internal Revenue Service;
the potential impact of epidemics and pandemics, including the COVID-19 coronavirus (“COVID-19”), on customer preferences and on our business;
effects of litigation and burial practice claims;
effects of the application of other applicable laws and regulations, including changes in such regulations or the interpretation thereof;
consolidation of the deathcarefuneral and cemetery industry;
our ability to consummate the divestiture of low performing businesses as currently expected, if at all, including expected use of proceeds related thereto;
our ability to integrate acquired businesses with our existing businesses, including expected performance and financial improvements related thereto; and
other factors and uncertainties inherent in the deathcarefuneral and cemetery industry.
For additional information regarding known material factors that could cause our actual results to differ from our projected results, please see (i) Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
ReadersInvestors are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date hereof. We undertake no obligation to publicly update or revise any forward-looking statements after the date they are made, whether as a result of new information, future events or otherwise.
| |
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations. |
OVERVIEW
General
Carriage Services, Inc. (“Carriage,” the “Company,” “we,” “us,” or “our”) was incorporated in the State of Delaware in December 1993 and is a leading U.S. provider of funeral and cemetery services and merchandise in the United States.merchandise. We operate in two business segments: funeral home operations,Funeral Home Operations, which currently account for approximately 78%80% of our revenues,revenue, and cemetery operations,Cemetery Operations, which currently account for approximately 22%20% of our revenues.revenue.
At SeptemberJune 30, 2017,2020, we operated 171186 funeral homes in 2829 states and 32 cemeteries in 11 states. We compete with other publicpublicly held and independent operators of funeral and cemetery companies and smaller, independent operators.companies. We believe we are a market leader in most of our markets. We provide funeral and cemetery services and products on both an “at-need” (time of death) and “preneed” (planned prior to death) basis.
Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. We provide funeral and cemetery services and products on both an “atneed” (time of death) and “preneed” (planned prior to death) basis.
Recent Developments
Credit Facility
On May 18, 2020, we received a waiver under our Credit Facility for the failure to comply with the Total Leverage Ratio covenant for the fiscal quarter ended March 31, 2020. In connection with the waiver, the Credit Facility was also amended to increase the interest rate margin applicable to borrowings by up to 0.625% at each pricing level based on the Total Leverage Ratio. We are in compliance with the total leverage ratio, fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility as of June 30, 2020.
Dividend Increase
On May 19, 2020, the Board of Directors (the “Board”) approved an increase of $0.05 to our annual dividend beginning with the next dividend declaration in the third quarter. The annual dividend is now $0.35 per share.
Performance Awards
On May 19, 2020, we cancelled all the Performance Awards previously awarded to all individuals in 2019 and 2020 and the Compensation Committee of the Board approved a new Performance Award Agreement (the “New Agreement”) for certain eligible employees. Pursuant to the New Agreement, the target share awards for each of the eligible employees will vest on December 31, 2024 if the Company’s common stock reaches one of five pre-determined growth targets for a sustained period beginning on the grant date of May 19, 2020 and ending on December 31, 2024.
Executive Leadership Changes
On June 25, 2020, William W. Goetz resigned as President and Chief Operating Officer effective June 26, 2020. Mr. Goetz further agreed to resign from his position as a director on the Board, also effective as of June 26, 2020. The resignation was not the result of any disagreement Mr. Goetz had with the Company on any matter relating to the Company’s operations, policies, and practices.
On June 25, 2020, Carlos Quezada joined the Company as Vice President of Cemetery Sales and Marketing. His primary responsibilities include building High Performance sales teams and standardized sales systems across our portfolio of cemetery businesses. Prior to joining Carriage, Mr. Quezada was a Managing Director for another publicly traded deathcare company. He also has held prior leadership roles in sales and operations in the deathcare and hospitality industries.
Executive Management reduction in base salaries
On April 19, 2020, the Company initiated measures to address potential future challenges from the COVID-19 pandemic. These measures included cost reduction efforts, including, among other things, a temporary reduction in the base salaries for the Company’s executive officers. The Compensation Committee of the Board approved the temporary reductions in compensation.
On June 26, 2020, the Compensation Committee of the Board voted to reinstate the 2020 annual base salaries for the executive officers back to 100% due to the Company’s performance. The reinstatement of 2020 annual base salaries is effective as of June 28, 2020. The annual base salary reductions for the Company’s executive officers from April 19, 2020 through June 27, 2020 have been treated as a temporary pay cut, and the lost wages from that time period will not be paid.
Board of Directors reduction in retainer fees
On April 23, 2020, the Board approved a temporary reduction of the quarterly retainer for our non-employee directors from $35,000 per quarter to $29,750 per quarter (or 15%) effective April 19, 2020.
On June 26, 2020, the Board voted to reinstate the compensation fees back to 100%, effective as of June 28, 2020.
Business Impact under the Macroeconomic Environment of COVID-19
On March 11, 2020, COVID-19 was deemed a global pandemic and since then, the Company has continued to proactively monitor and assess the pandemic’s current and potential impact to the Company’s operations. Since early March, the Company’s senior leadership team has taken certain steps to assist our businesses in appropriately adjusting and adapting to the conditions resulting from the COVID-19 pandemic. Our businesses have been designated as essential services and, therefore, each one of the Company’s business locations remains open and ready to provide service to their communities in this time of need. While our businesses provide an essential public function, along with a critical responsibility to the communities and families they serve, the health and safety of our employees and the families we serve remain our top priority. The Company has taken additional steps during this time to continually review and update our processes and procedures to comply with all regulatory mandates and procure additional supplies to ensure that each of our businesses have appropriate personal protective equipment to provide these essential services. Additionally, in many of our business locations, we have also updated staffing and service guidelines, such as reducing the number of team members present for a service, restricting the size and number of attendees and adjusting other operating procedures. The Company has also implemented additional safety and precautionary measures as it concerns our businesses’ day-to-day interaction with the families and communities they serve.
The overall impact of the macroeconomic environment to the deathcare industry from COVID-19 may provide varying results as compared to other industries. Our industry’s revenues are impacted by various factors, including the number of funeral services performed, the average price for a service and the mix of traditional burial versus cremation contracts. Changes in the macroeconomic environment as a result of the pandemic may not necessarily impact volume, but could create situations where people choose to spend less on funerals by purchasing less expensive caskets, minimize the scale of services and visitations, or elect not to make a preneed funeral or cemetery arrangement. During this time, our businesses have been focused on being innovative and resourceful, providing some type of immediate service as part of the grieving process. Gathering and travel restrictions across many areas of the country have limited our ability to provide large, in-person memorialization services and we have seen client families elect webcasting and livestreaming services, hold services with smaller attendance or rotating visitors, or in some cases, choose to delay services to a future date. We have also offered various incentives to our customers and sales counselors to continue to foster sales in our cemeteries.
Within our financial reporting environment, we have considered various areas that could affect the results of our operations, though the scope, severity and duration of these impacts remain uncertain at this time because the COVID-19 pandemic is continually evolving and the ultimate impact of COVID-19 remains uncertain. Certain estimates inherently involve assumptions about future events and annual results, making reliable estimates for those matters challenging in periods of economic instability. We do not believe we are vulnerable to certain concentrations, whether by geographic area, revenue for specific products or our relationships with our vendors. Our relationships with our vendors and suppliers have remained consistent and we continue to receive utmost service. Remote working arrangements have not adversely affected our ability to maintain and support operations, including financial reporting systems, internal controls over financial reporting, and disclosure controls and procedures.
We believe our access to capital, the cost of our capital, or the sources and uses of our cash should be relatively consistent in the near term, but given the unprecedented nature of COVID-19, we also believe, it is prudent for us to take a broad-based approach to ensuring we maintain financial flexibility throughout the expected duration of the pandemic. We have, as part of a larger plan, taken steps to reduce overall expenses throughout the rest of 2020. For example, discretionary spending, such as growth capital expenditures (primarily cemetery inventory development) will be tightly managed and minimized during this time. Moreover, our executive officers and non-employee directors voluntarily agreed to temporary reductions in salary compensation from April 19, 2020 through June 28, 2020 (see above herein). While the expected duration of the pandemic is unknown, we have not currently experienced any material impacts to our liquidity position, access to capital, or cash flows as a result of COVID-19. See Liquidity within Item 2, Management’s Discussion and Analysis of Financial Condition and Results of Operations, for additional information related to our liquidity position.
We have also applied certain measures of the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted on March 27, 2020, which we anticipate should provide a cash benefit in the form of a tax payment refund, tax credits related to employee retention, cash deferral for the employer portion of the Social Security tax and anticipated minimal cash taxes for 2020. Although we expect to take advantage of certain tax relief provisions of the CARES Act, we do not believe it will have a significant impact on our short-term or long-term liquidity position. See Item 1, Financial Statements and Supplementary Data, Note 1 for additional information related to the CARES Act.
The COVID-19 pandemic, and related gathering restrictions issued by state and local officials, did impact, while not material, aspects of our financial results in the second quarter and year to date, including revenue, volume, preneed cemetery sales, and average revenue per contract. We will continue to assess these impacts and implement appropriate procedures, plans, strategy, and issue any disclosures that may be required, as the situation surrounding the pandemic and related gathering restrictions evolves.
Funeral Home Operations
Our funeral homes offer a complete range of high value personal services to meet a family’s funeral needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and remembrance services and transportation services. Factors affecting our funeral operating results include, but are not limited to: demographic trends relating to population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by selling complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage to increase average revenue per contract.
Cemetery Operations
Our cemeteries provide interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers both on an at-needatneed and preneed basis. Factors affecting our cemetery operating results include, but are not limited to: the size and success of our sales organization; local perceptions and heritage of our cemeteries; our ability to adapt to changes in the economy and consumer confidence; and our response to fluctuations in capital markets and interest rates, which affect investment earnings on trust funds, finance charges on installment contracts and our securities portfolio within the trust funds.
Business Strategy
Our business strategy is based on having strong, local leadership with entrepreneurial principles that is focused on sustainable long termlong-term market share, revenue, and profitability growth in each local business. We believe Carriage has the most innovative operating model in the funeral and cemetery industry, which we are able to achieve through a decentralized, high performancehigh-performance culture and operating framework linked with incentive compensation programs that attract top-quality industry talent to our organizationorganization.
Our Mission Statement states that “we are committed to being the most professional, ethical and highest quality funeral and cemetery service organization in our industry” and our Guiding Principles state our core values, which are comprised of:
honesty, integrityHonesty, Integrity and qualityQuality in all that we do;All That We Do
hardHard work, pridePride of accomplishmentAccomplishment, and shared success through employee ownership;Shared Success Through Employee Ownership
beliefBelief in the powerPower of people through individual initiativePeople Through Individual Initiative and teamwork;Teamwork
outstanding serviceOutstanding Service and profitability go hand-in-hand; andProfitability Go Hand-in-Hand
growthGrowth of the Company is drivenIs Driven by decentralizationDecentralization and partnership.Partnership
Our five Guiding Principles collectively embody our Being The Best high-performance culture, operating framework. Our operations and business strategy are built upon the execution of the following three models:
Standards Operating Model;
4E Leadership Model; and
Strategic Acquisition Model.
Standards Operating Model
Our Standards Operating Model is focused on growing local market share, people development, and the key operating and financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenues and earnings.
4E Leadership Model
Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high-performance culture: Energy to get the job done; the ability to Energize others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams.
Strategic Acquisition Model
Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. Both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic ranking criteria to assess acquisition candidates. As we execute this strategy over time, we will acquire larger, higher margin strategic businesses.
Our belief in our Mission Statement and Guiding Principles that define us and proper execution of the following three models that define our strategy, have given us the competitive advantage in any market in which we compete. We believe that we can execute our three models without proportionate incremental investment in our consolidation platform infrastructure and without additional fixed regional and corporate overhead. This gives us a competitive advantage that is evidenced by the sustained earning power of our portfolio as defined by our EBITDA margin.
Standards Operating Model
Our Standards Operating Model is focused on growing local market share, providing personalized high-value services to our client families and guests, and operating financial metrics that drive long-term, sustainable revenue growth and improved earning power of our portfolio of businesses by employing leadership and entrepreneurial principles that fit the nature of our high-value personal service business. Standards Achievement is the measure by which we judge the success of each business and incentivize our local managers and their teams. Our Standards Operating Model is not designed to produce maximum short-term
earnings because we believe such performance is unsustainable and will ultimately stress the business, which very often leads to declining market share, revenue and earnings.
4E Leadership Model
Our 4E Leadership Model requires strong local leadership in each business to grow an entrepreneurial, decentralized, high-value, personal service and sales business at sustainable profit margins. Our 4E Leadership Model is based upon principles established by the late Jack Welch during his tenure at General Electric, and is based upon 4E qualities essential to succeed in a high-performance culture: Energy to get the job done; the ability to Energize others; the Edge necessary to make difficult decisions; and the ability to Execute and produce results. To achieve a high level within our Standards in a business year after year, we require local Managing Partners that have the 4E Leadership skills to entrepreneurially grow the business by hiring, training and developing highly motivated and productive local teams.
Strategic Acquisition Model
Our Standards Operating Model led to the development of our Strategic Acquisition Model, which guides our acquisition strategy. We believe that both models, when executed effectively, will drive long-term, sustainable increases in market share, revenue, earnings and cash flow. We believe a primary driver of higher revenue and profits in the future will be the execution of our Strategic Acquisition Model using strategic ranking criteria to assess acquisition candidates. As we execute this strategy over time, we expect to acquire larger, higher margin strategic businesses.
We have learned that the long-term growth or decline of a local branded funeral and cemetery business is reflected by several criteria that correlate strongly with five to ten year performance in volumes (market share), revenue and sustainable field-level earnings before interest, taxes, depreciation and amortization (“EBITDA”) margins (a non-GAAP measure). We use criteria such as cultural alignment, volume and price trends, size of business, size of market, competitive standing, demographics, strength of brand and barriers to entry to evaluate the strategic position of potential acquisition candidates. Our financial valuation of the acquisition candidate is then determined through the application of an appropriate after-tax cash return on investment that exceeds our cost of capital.
LIQUIDITY AND CAPITAL RESOURCES
Overview
Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.
We generate cash in our operations primarily from atneed sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position, steps taken to reduce overall expenses throughout the rest of 2020, and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. However, if our capital expenditures, acquisition or divestiture plans, or business impacts from the pandemic change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and cost of financing sources are materially different than expected, future liquidity may be adversely affected. For additional information regarding known material factors that could cause cash flow or access to and cost of finance sources to differ from our expectations, please read (i) Part II, Item 1A “Risk Factors” in this Quarterly Report on Form 10-Q and (ii) Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2019.
Our plan is to remain focused on integrating our newly acquired businesses and to use cash on hand and borrowings under our Credit Facility primarily for general corporate purposes and for payment of dividends and our debt obligations. Discretionary spending, such as internal growth projects and expenditures (primarily cemetery inventory development, along with funeral home expansion projects) will be tightly managed and minimized during the remainder of 2020. We also expect increased divestiture activity for the next 12-18 months which we anticipate will yield approximately $15 million of additional cash from the proceeds of the sale. From time to time we may also use available cash resources (including borrowings under our Credit Facility) to, subject to satisfying certain financial covenants in our Credit Facility, repurchase shares of our common stock and our remaining 2.75% convertible subordinated notes due 2021 (“Convertible Notes”) in open market or privately negotiated transactions. We have the ability to draw on our Credit Facility, subject to its customary terms and conditions.
As of June 30, 2020, we have net unrealized losses of $10.8 million in our trusts. At June 30, 2020, these net unrealized losses represented 4% of our original cost basis of $242.1 million. The decline in fair value is largely due to changes in interest rates and other market conditions as a result of COVID-19. Our investments are diversified across multiple industry segments using a balanced allocation strategy to minimize long-term risk. In addition, we do not intend to sell and it is likely that we will not be required to sell the securities prior to their anticipated recovery. Changes in unrealized gains and/or losses related to these securities are reflected in Other comprehensive income and offset by the Deferred preneed funeral and cemetery receipts held in
trust and Care trusts’ corpus interests in those unrealized gains and/or losses. There is no impact on earnings until such time that the loss is realized in the trusts, allocated to the preneed contracts and the services are performed or the merchandise is delivered, causing the contract to be withdrawn from the trust in accordance with state regulations.
We rely on our trust investments to provide funding for the various contractual obligations that arise upon maturity of the underlying preneed contracts. Because of the long-term relationship between the establishment of trust investments and the required performance of the underlying contractual obligations, the impact of current market conditions that may exist at any given time is not necessarily indicative of our ability to generate profit on our future performance obligations.
In light of recent developments relating to COVID-19, we believe that our existing and anticipated cash resources will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments and dividends for the next 12 months.
Cash Flows
We began 2020 with $0.7 million in cash and other liquid investments and ended the second quarter with $0.7 million. As of June 30, 2020, we had borrowings of $89.7 million outstanding on our Credit Facility compared to $83.8 million as of December 31, 2019.
The following table sets forth the elements of cash flow for the six months ended June 30, 2019 and 2020 (in thousands):
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Cash at beginning of year | $ | 644 |
| | $ | 716 |
|
| | | |
Net cash provided by operating activities | 21,912 |
| | 31,001 |
|
| | | |
Acquisitions | — |
| | (28,011 | ) |
Net proceeds from the sale of other assets | 100 |
| | 78 |
|
Capital expenditures | (8,654 | ) | | (5,786 | ) |
Net cash used in investing activities | (8,554 | ) | | (33,719 | ) |
| | | |
Net borrowings (payments) on our Credit Facility, acquisition debt and finance lease obligations | (3,410 | ) | | 5,221 |
|
Redemption of the Convertibles Notes | (27 | ) | | — |
|
Payment of debt issuance costs related to the Senior Notes | — |
| | (66 | ) |
Net proceeds from employee equity plans | 763 |
| | 390 |
|
Dividends paid on common stock | (2,725 | ) | | (2,682 | ) |
Purchase of treasury stock | (7,756 | ) | | — |
|
Other financing costs | (162 | ) | | (169 | ) |
Net cash provided by (used in) financing activities | (13,317 | ) | | 2,694 |
|
| | | |
Cash at end of the period | $ | 685 |
| | $ | 692 |
|
Operating Activities
For the six months ended June 30, 2020, cash provided by operating activities was $31.0 million compared to $21.9 million for the six months ended June 30, 2019. The increase of $9.1 million is a reflection of the resilient cash generating ability of our portfolio of high-quality funeral home and cemetery operations. Our operating income (excluding the non-cash $14.7 million impairment charge of goodwill and tradenames recorded in the first quarter) increased $6.3 million in addition to other favorable working capital changes.
Investing Activities
Our investing activities, resulted in a net cash outflow of $33.7 million for the six months ended June 30, 2020 compared to $8.6 million for the six months ended June 30, 2019, an increase of $25.1 million.
During the six months ended June 30, 2020, we acquired a funeral home and cemetery combination business in Lafayette, California for $33.0 million in cash, of which $5.0 million was deposited in escrow in 2019 and $28.0 million was paid at closing in 2020. We also paid an additional $0.2 million for our acquisition of the cemetery business in Fairfax, Virginia to reimburse the sellers for certain incremental taxes resulting from the 338(h)(10) election under the Internal Revenue Code, which was offset by the receipt of $0.2 million in cash related to the sellers closing all operating bank accounts in place prior to the acquisition.
For the six months ended June 30, 2020, capital expenditures totaled $5.8 million compared to $8.7 million for the six months ended June 30, 2019, a decrease of $2.9 million. The following tables present our growth and maintenance capital expenditures (in thousands):
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Growth | | | |
Cemetery development | $ | 2,673 |
| | $ | 2,127 |
|
Renovations at certain businesses | 1,727 |
| | 319 |
|
Live streaming equipment | 23 |
| | 388 |
|
Other | 56 |
| | 54 |
|
Total growth expenditures | $ | 4,479 |
| | $ | 2,888 |
|
| | | |
Maintenance | | | |
Facility repairs and improvements | $ | 922 |
| | $ | 694 |
|
Vehicles | 1,179 |
| | 634 |
|
General equipment and furniture | 1,545 |
| | 1,176 |
|
Paving roads and parking lots | 362 |
| | 181 |
|
Other | 167 |
| | 213 |
|
Total maintenance expenditures | $ | 4,175 |
| | $ | 2,898 |
|
| | | |
Total capital expenditures | $ | 8,654 |
| | $ | 5,786 |
|
Financing Activities
Our financing activities resulted in a net cash inflow of $2.7 million for the six months ended June 30, 2020 compared to a net cash outflow of $13.3 million for the six months ended June 30, 2019, an increase of $16.0 million. During the six months ended June 30, 2020, we had net borrowings on our Credit Facility of $5.9 million and payments on our acquisition debt and finance leases of $0.7 million and paid $2.7 million in dividends.
During the six months ended June 30, 2019, we had net payments on our Credit Facility of $2.5 million, payments on our acquisition debt and finance leases of $0.9 million, we paid $2.7 million in dividends and repurchased treasury stock for $7.8 million.
Dividends
During the six months ended June 30, 2019 and 2020, our Board declared the following dividends payable on the dates below (in thousands, except per share amounts):
|
| | | | | | | |
2019 | Per Share | | Dollar Value |
March 1st | $ | 0.075 |
| | $ | 1,360 |
|
June 1st | $ | 0.075 |
| | $ | 1,365 |
|
|
| | | | | | | |
2020 | Per Share | | Dollar Value |
March 1st | $ | 0.075 |
| | $ | 1,339 |
|
June 1st | $ | 0.075 |
| | $ | 1,343 |
|
On May 19, 2020, the Board approved an increase of $0.05 to our annual dividend beginning with the next dividend declaration in the third quarter.
Share Repurchases
During the six months ended June 30, 2020, we did not repurchase any shares of common stock pursuant to our share repurchase program. At June 30, 2020, we had approximately $25.6 million available for repurchases under our share repurchase program.
Credit Facility, Lease Obligations and Acquisition Debt
The outstanding principal of our Credit Facility, lease obligations and acquisition debt at June 30, 2020 is as follows (in thousands):
|
| | | |
| June 30, 2020 |
|
Credit Facility | $ | 89,700 |
|
Finance leases | 6,002 |
|
Operating leases | 22,591 |
|
Acquisition debt | 6,427 |
|
Total | $ | 124,720 |
|
Credit Facility
At June 30, 2020, our Credit Facility was comprised of: (i) a $190.0 million revolving credit facility, including a $15.0 million subfacility for letters of credit and a $10.0 million swingline, and (ii) an accordion or incremental option allowing for future increases in the facility size by an additional amount of up to $75.0 million in the form of increased revolving commitments or incremental term loans. The final maturity of the Credit Facility will occur on May 31, 2023.
The Credit Facility is secured by a first-priority perfected security interest in and lien on substantially all of the Company’s personal property assets and those of the Credit Facility Guarantors. In the event the Company’s actual Total Leverage Ratio is not at least 0.25 less than the required Total Leverage Ratio covenant level, at the discretion of the Administrative Agent, the Administrative Agent may unilaterally compel the Company and the Credit Facility Guarantors to grant and perfect first-priority mortgage liens on fee-owned real property assets which account for no less than 50% of funeral operations EBITDA.
As of June 30, 2020, we were subject to the following financial covenants under our Credit Facility: (A) a Total Leverage Ratio not to exceed, (i) 5.75 to 1.00 for the quarters ended March 31, 2020, June 30, 2020 and September 30, 2020 and (ii) 5.50 to 1.00 for the quarter ended December 31, 2020 and each quarter ended thereafter, (B) a Senior Secured Leverage Ratio (as defined in the Credit Facility) not to exceed 2.00 to 1.00 as of the end of any period of four consecutive fiscal quarters, and (C) a Fixed Charge Coverage Ratio (as defined in the Credit Facility) of not less than 1.20 to 1.00 as of the end of any period of four consecutive fiscal quarters. These financial maintenance covenants are calculated for the Company and its subsidiaries on a consolidated basis.
On May 18, 2020, we received a waiver under our Credit Facility for the failure to comply with the Total Leverage Ratio covenant for the fiscal quarter ended March 31, 2020. In connection with the waiver, the Credit Facility was also amended to increase the interest rate margin applicable to borrowings by up to 0.625% at each pricing level based on the Total Leverage Ratio.
We were in compliance with the total leverage ratio, fixed charge coverage ratio and senior secured leverage ratio covenants contained in our Credit Facility as of June 30, 2020.
We have one letter of credit outstanding under the Credit Facility issued on November 30, 2019 for approximately $2.0 million, which bears interest at 2.125% and will expire on November 25, 2020. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Outstanding borrowings under our Credit Facility bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. As of June 30, 2020, the prime rate margin was equivalent to 2.00% and the LIBOR rate margin was 3.00%. The weighted average interest rate on our Credit Facility was 3.6% and 3.9% for the three and six months ended June 30, 2020, respectively. The weighted average interest rate on our Credit Facility was 3.9% and 4.0% for the three and six months ended June 30, 2019, respectively.
The interest expense and amortization of debt issuance costs related to our Credit Facility during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Credit Facility interest expense | $ | 362 |
| | $ | 1,106 |
| | $ | 740 |
| | $ | 2,336 |
|
Credit Facility amortization of debt issuance costs | 54 |
| | 118 |
| | 108 |
| | 245 |
|
Lease Obligations
Our lease obligations consist of operating and finance leases. We lease certain office facilities, certain funeral homes and equipment under operating leases with original terms ranging from one to nineteen years. Many leases include one or more options to renew, some of which include options to extend the leases for up to 26 years. We lease certain funeral homes under finance leases with original terms ranging from ten to forty years.
The lease cost related to our operating leases and short-term leases and depreciation expense and interest expense related to our finance leases during the three and six months ended June 30, 2019 and 2020 are as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Operating lease cost | $ | 942 |
| | $ | 954 |
| | $ | 1,862 |
| | $ | 1,911 |
|
Short-term lease cost | 59 |
| | 39 |
| | 133 |
| | 96 |
|
| | | | | | | |
Finance lease cost: | | | | | | | |
Depreciation of lease right-of-use assets | $ | 131 |
| | $ | 109 |
| | $ | 263 |
| | $ | 218 |
|
Interest on lease liabilities | 131 |
| | 125 |
| | 263 |
| | 251 |
|
Acquisition Debt
Acquisition debt consists of deferred purchase price and promissory notes payable to sellers. A majority of the deferred purchase price and notes bear no interest and are discounted at imputed interest rates ranging from 7.3% to 10.0%. Original maturities range from five to twenty years.
The imputed interest expense related to our acquisition debt during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Acquisition debt imputed interest expense | $ | 161 |
| | $ | 124 |
| | $ | 329 |
| | $ | 251 |
|
Convertible Subordinated Notes due 2021
At June 30, 2020, the principal amount of the liability component of our Convertible Notes was $6.3 million, the net carrying amount was $6.1 million and the carrying amount of the equity component was $0.8 million. The fair value of the Convertible Notes, which are Level 2 measurements, was $6.4 million at June 30, 2020. The Convertible Notes are due in March 2021 and bear interest at 2.75% per year, which is payable semi-annually in arrears on March 15 and September 15 of each year.
The interest expense and accretion of debt discount and debt issuance costs related to our Convertible Notes during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Convertible Notes interest expense | $ | 44 |
| | $ | 43 |
| | $ | 87 |
| | $ | 87 |
|
Convertible Notes accretion of debt discount | 59 |
| | 66 |
| | 117 |
| | 131 |
|
Convertible Notes amortization of debt issuance costs | 5 |
| | 6 |
| | 11 |
| | 12 |
|
The remaining unamortized debt discount and the remaining unamortized debt issuance costs are being amortized using the effective interest method over the remaining term of approximately eight months of the Convertible Notes. The effective interest rate on the unamortized debt discount for both the three and six months ended June 30, 2019 and 2020 was 11.4%. The effective interest rate on the debt issuance costs for both three and six months ended June 30, 2019 and 2020 was 3.2%.
Senior Notes due 2026
At June 30, 2020, the principal amount of our Senior Notes was $400.0 million. The fair value of the Senior Notes, which are Level 2 measurements, was $419.9 million at June 30, 2020. The Senior Notes are due on June 1, 2026 and bear interest at 6.625% per year, which is payable semi-annually in arrears on June 1 and December 1 of each year.
The interest expense and amortization of debt discount, debt premium and debt issuance costs related to our Senior Notes during the three and six months ended June 30, 2019 and 2020 is as follows (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Senior Notes interest expense | $ | 5,383 |
| | $ | 6,625 |
| | $ | 10,766 |
| | $ | 13,250 |
|
Senior Notes amortization of debt discount | 122 |
| | 131 |
| | 242 |
| | 260 |
|
Senior Notes amortization of debt premium | — |
| | 55 |
| | — |
| | 109 |
|
Senior Notes amortization of debt issuance costs | 34 |
| | 69 |
| | 68 |
| | 136 |
|
The debt discount, the debt premium and the debt issuance costs are being amortized using the effective interest method over the remaining term of approximately 71 months of the Senior Notes. The effective interest rate on the unamortized debt discount and the unamortized debt issuance costs for the initial Senior Notes, which were issued in May 2018, for both the three and six months ended June 30, 2020 was 6.87% and 6.69%, respectively. The effective interest rate on the unamortized debt premium and the unamortized debt issuance costs for the additional Senior Notes, which were issued in December 2019, for both the three and six months ended June 30, 2020 was 6.20% and 6.90%, respectively.
FINANCIAL HIGHLIGHTS
Below are our financial highlights for the three months ended June 30, 2019 and 2020 (in thousands except for volumes and averages):
|
| | | | | | | |
| Three months ended June 30, |
| 2019 |
| | 2020 |
|
Revenue | $ | 67,752 |
| | $ | 77,477 |
|
Funeral contracts | 9,366 |
| | 11,737 |
|
Average revenue per funeral contract | $ | 5,557 |
| | $ | 4,908 |
|
Preneed interment rights (property) sold | 2,056 |
| | 2,338 |
|
Average price per preneed interment right sold | $ | 3,660 |
| | $ | 3,988 |
|
Gross profit | $ | 19,250 |
| | $ | 25,160 |
|
Net income | $ | 4,862 |
| | $ | 6,397 |
|
Revenue for the three months ended June 30, 2020 increased $9.7 million compared to the three months ended June 30, 2019, as we experienced a 25.3% increase in total funeral contracts primarily due to the funeral home acquisitions made in the fourth quarter of 2019 and first quarter of 2020, offset by a decrease in the average revenue per funeral contract of 11.7%. In addition, we experienced an increase of 13.7% in the number of preneed interment rights (property) sold primarily due to the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well as an increase in the average price per interment right sold of 9.0%.
Gross profit for the three months ended June 30, 2020 increased $5.9 million compared to the three months ended June 30, 2019, primarily due to the increase in revenue from both our funeral home and cemetery segments due to the acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well as measures the Company has taken to control costs during the COVID-19 pandemic.
Net income for the three months ended June 30, 2020 increased $1.5 million compared to the three months ended June 30, 2019, primarily due to the increase in gross profit, offset by the increase in interest expense related to our Senior Notes and Credit Facility.
Below are our financial highlights for the six months ended June 30, 2019 and 2020 (in thousands except for volumes and averages):
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Revenue | $ | 136,833 |
| | $ | 154,967 |
|
Funeral contracts | 19,247 |
| | 23,230 |
|
Average revenue per funeral contract | $ | 5,597 |
| | $ | 5,069 |
|
Preneed interment rights (property) sold | 3,518 |
| | 4,206 |
|
Average price per preneed interment right sold | $ | 3,721 |
| | $ | 3,895 |
|
Gross profit | $ | 40,850 |
| | $ | 48,331 |
|
Net income | $ | 11,387 |
| | $ | 2,200 |
|
Revenue for the six months ended June 30, 2020 increased $18.1 million compared to the six months ended June 30, 2019, as we experienced a 20.7% increase in total funeral contracts primarily due to the funeral home acquisitions made in the fourth quarter of 2019 and first quarter of 2020, offset by a decrease in the average revenue per funeral contract of 9.4%. In addition, we experienced an increase of 19.6% in the number of preneed interment rights (property) sold primarily due to the cemetery acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well as an increase of 4.7% in the average price per interment right sold.
Gross profit for the six months ended June 30, 2020 increased $7.5 million compared to the six months ended June 30, 2019, primarily due to the increase in revenue from both our funeral home and cemetery segments due to the acquisitions made in the fourth quarter of 2019 and first quarter of 2020, as well as measures the Company has taken to control costs during the COVID-19 pandemic.
Net income for the six months ended June 30, 2020 decreased $9.2 million compared to the six months ended June 30, 2019, primarily due to the $14.7 million impairment of goodwill and tradenames recorded in the first quarter and $4.2 million increase in interest expense related to our Senior Notes and Credit facility, offset by the $7.5 million increase in gross profit.
Further discussion of Revenue and the components of Gross profit for our funeral home and cemetery segments is presented herein under “– Results of Operations.”
Further discussion of General, administrative and other expenses, Home office depreciation and amortization expense, Interest expense, Income taxes and other components of income and expenses are presented herein under “– Other Financial Statement Items.”
REPORTING AND NON-GAAP FINANCIAL MEASURES
We also present our financial performance in our “Operating and Financial Trend Report” (“Trend Report”) as reported in our earnings release for the quarter ending Septemberthree and six months ended June 30, 20172020 dated October 25, 2017July 28, 2020 and discussed in the corresponding earnings conference call. This Trend Report is used as a supplemental financial measurement statement by management and investors to compare our current financial performance with our previous results and with the performance of other companies. We do not intend for this information to be considered in isolation or as a substitute for other measures of performance prepared in accordance with United States generally accepted accounting principles (“GAAP”). The Trend Report is a non-GAAP statement that also provides insight into underlying trends in our business.
Historically, the dynamic natureBelow is a reconciliation of the evolutionary process of building our culture, especially since launching the Good To Great Journey in the beginning of 2012, has ledNet income (a GAAP measure) to a large number of charges such as severance and retirement, consulting and other activities, which are not core to our operations and as such, have been added back to GAAP earnings as “Special Items”. The Special Items are important to add back because of the transformational nature of major changes over the last several years within our Operations and Strategic Growth Leadership Team.
Accordingly, theseAdjusted net income (a non-GAAP Special Items will be comprised of only those charges materially outside the normal course of business. The number of these Special Items were minimal in 2016 and should continue to be minimal thereafter, which should result in major shrinkage of “the gap” between our GAAP and non-GAAP reported performance.
The non-GAAP financial measures in the Trend Report include such measures as “Special Items,” “Adjusted Net Income,” “Consolidated EBITDA,” “Adjusted Consolidated EBITDA,” “Adjusted Consolidated EBITDA Margin,” “Adjusted Free Cash Flow,” “Funeral Field EBITDA,” “Cemetery Field EBITDA,” “Funeral Financial EBITDA,” “Cemetery Financial EBITDA,” “Total Field EBITDA,” “Total Field EBITDA Margin,” “Operating Profit,” “Operating Profit Margin,” “Adjusted Basic Earnings Per Share” and “Adjusted Diluted Earnings Per Share.” These financial measurements are defined as GAAP items adjustedmeasure) for Special Items and are reconciled to GAAP in our earnings release and on the Trend Reports posted on our website (www.carriageservices.com). Our presentation of these measures may not be comparable to similarly titled measures in other companies’ reports.
The non-GAAP definitions we use are as follows:
Special Items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special Items are taxed at the federal statutory rate of 35% for both the three and ninesix months ended SeptemberJune 30, 20162019 and 2017, except for the accretion2020 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Net income | $ | 4,862 |
| | $ | 6,397 |
| | $ | 11,387 |
| | $ | 2,200 |
|
Special items, net of tax(1) | | | | | | | |
Acquisition and divestiture expenses | — |
| | 36 |
| | — |
| | 126 |
|
Severance and separation costs | 483 |
| | 217 |
| | 654 |
| | 445 |
|
Performance awards cancellation and exchange | — |
| | 56 |
| | — |
| | 56 |
|
Accretion of discount on Convertible Notes(1) | 60 |
| | 66 |
| | 117 |
| | 131 |
|
Net impact of impairment of goodwill and other intangibles(2) | — |
| | 51 |
| | — |
| | 9,808 |
|
Litigation reserve | 281 |
| | 154 |
| | 380 |
| | 213 |
|
Natural disaster and pandemic costs | — |
| | 657 |
| | — |
| | 768 |
|
Other special items | — |
| | 371 |
| | — |
| | 371 |
|
Adjusted net income(3) | $ | 5,686 |
| | $ | 8,005 |
| | $ | 12,538 |
| | $ | 14,118 |
|
|
| | | | |
| | | | |
(1) | Special items are defined as charges or credits included in our GAAP financial statements that can vary from period to period and are not reflective of costs incurred in the ordinary course of our operations. Special Items are taxed at the federal statutory rate of 21% for the three and six months ended June 30, 2019 and 2020, except for the Accretion of the discount on the Convertible Notes, as this is a non-tax deductible item and the Net impact of impairment of goodwill and other intangibles (described below). |
(2) | The Net impact of impairment of goodwill and other intangibles special item is net of the operating tax rate of 33.3%. |
(3) | Adjusted net income is defined as Net income plus adjustments for Special items and other expenses or gains that we believe do not directly reflect our core operations and may not be indicative of our normal business operations. |
Below is a non-tax deductible item.
Adjusted Net Income is defined as net income plus adjustments for Special Items.
Consolidated EBITDA is defined as net income before income taxes, interest expenses, non-cash stock compensation, depreciation and amortization, and interest income and other, net.
Adjusted Consolidated EBITDA is defined as Consolidated EBITDA plus adjustments for Special Items.
Adjusted Consolidated EBITDA Margin is defined as Adjusted Consolidated EBITDA as a percentage of revenue.
Adjusted Free Cash Flow is defined as net cash provided by operations, adjusted by Special Items as deemed necessary, less cash for maintenance capital expenditures.
Funeral Field EBITDA is defined as Funeral Gross Profit, which is funeral revenue minus funeral field costs and expenses, less depreciation and amortization, regional and unallocated funeral costs and Funeral Financial EBITDA.
Cemetery Field EBITDA is defined as Cemetery Gross Profit, which is cemetery revenue minus cemetery field costs and expenses, less depreciation and amortization, regional and unallocated cemetery costs and Cemetery Financial EBITDA.
Funeral Financial EBITDA is defined as Funeral Financial Revenue less Funeral Financial Expenses.
Cemetery Financial EBITDA is defined as Cemetery Financial Revenue less Cemetery Financial Expenses.
Total Field EBITDA is defined as Gross Profit less depreciation and amortization, regional and unallocated costs.
Total Field EBITDA Margin is defined as Total Field EBITDA as a percentage of revenue.
Operating Profit is defined as Gross Profit, which is funeral and cemetery revenue minus funeral and cemetery field costs and expenses, less field depreciation and amortization and regional and unallocated funeral and cemetery costs.
Operating Profit Margin is defined as Operating Profit as a percentage of revenue.
Adjusted Basic Earnings Per Share is defined as GAAP Basic Earnings Per Share, adjusted for Special Items.
Adjusted Diluted Earnings Per Share is defined as GAAP Diluted Earnings Per Share, adjusted for Special Items.
We are providing below a reconciliation of Gross profit (a GAAP measure) to Operating profit (a non-GAAP measure) for the three and ninesix months ended SeptemberJune 30, 2017 compared to the three2019 and nine months ended September 30, 20162020 (in thousands):
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Gross profit | $ | 19,250 |
| | $ | 25,160 |
| | $ | 40,850 |
| | $ | 48,331 |
|
| | | | | | | |
Cemetery property amortization | 1,169 |
| | 1,097 |
| | 2,018 |
| | 1,974 |
|
Field depreciation expense | 3,059 |
| | 3,247 |
| | 6,144 |
| | 6,537 |
|
Regional and unallocated funeral and cemetery costs | 3,622 |
| | 3,717 |
| | 6,411 |
| | 6,473 |
|
Operating profit(1) | $ | 27,100 |
| | $ | 33,221 |
| | $ | 55,423 |
| | $ | 63,315 |
|
|
| | | | |
| | | | |
(1) | Operating profit is defined as Gross profit less Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs. |
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Gross profit | $ | 18,228 |
| | $ | 15,480 |
| | $ | 58,338 |
| | $ | 57,239 |
|
| | | | | | | |
Field depreciation and amortization | 3,452 |
| | 3,601 |
| | 10,359 |
| | 10,719 |
|
Regional and unallocated funeral and cemetery costs | 2,783 |
| | 3,937 |
| | 8,547 |
| | 9,845 |
|
Operating profit | $ | 24,463 |
| | $ | 23,018 |
| | $ | 77,244 |
| | $ | 77,803 |
|
We
Our operations are providing belowreported in two business segments: Funeral Home and Cemetery. Below is a breakdown of Operating profit (a non-GAAP measure) by Segment for the three and ninesix months ended SeptemberJune 30, 2017 compared to the three2019 and nine months ended September 30, 20162020 (in thousands):
|
| | | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | For the Nine Months Ended September 30, |
| 2016 | | 2017 | | 2016 | | 2017 |
Funeral Home Segment | $ | 18,201 |
| | $ | 18,062 |
| | $ | 58,406 |
| | $ | 61,161 |
|
Cemetery Segment | 6,262 |
| | 4,956 |
| | 18,838 |
| | 16,642 |
|
Operating profit | $ | 24,463 |
| | $ | 23,018 |
| | $ | 77,244 |
| | $ | 77,803 |
|
|
| | | | | | | | | | | | | | | |
| Three months ended June 30, | | Six months ended June 30, |
| 2019 |
| | 2020 |
| | 2019 |
| | 2020 |
|
Funeral Home | $ | 20,420 |
| | $ | 25,552 |
| | $ | 43,587 |
| | $ | 49,826 |
|
Cemetery | 6,680 |
| | 7,669 |
| | 11,836 |
| | 13,489 |
|
Operating profit | $ | 27,100 |
| | $ | 33,221 |
| | $ | 55,423 |
| | $ | 63,315 |
|
| | | | | | | |
Operating profit margin(1) | 40.0 | % | | 42.9 | % | | 40.5 | % | | 40.9 | % |
|
| | | | |
| | | | |
(1) | Operating profit margin is defined as Operating profit as a percentage of Revenue. |
Further discussion of Operating profit for our Funeral Homefuneral home and Cemetery Segmentscemetery segments is presented herein under “Results“– Results of Operations.”
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three and six months ended June 30, 2020 and 2019.
The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2016 and owned and operated for the entirety of each period being presented, excluding certain funeral home businesses that we intend to divest in the near future.
The term “acquired” refers to funeral homes and cemeteries purchased after December 31, 2015, excluding any funeral home businesses that we intend to divest in the near future. This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance.
The term “divested” when discussed in the Funeral Home Segment, refers to the three funeral home businesses whose building leases expired, one funeral home business we sold and a funeral home business we merged with a business in an existing market in 2019.
“Planned divested” in the Funeral Home Segment refers to the funeral home businesses that we intend to divest in the near future.
“Ancillary” in the Funeral Home Segment represents our flower shop, pet cremation business and online cremation business in Texas.
Cemetery property amortization, Field depreciation expense and Regional and unallocated funeral and cemetery costs, are not included in Operating profit, a non-GAAP financial measure. Adding back these items will result in Gross profit, a GAAP financial measure.
Financial Highlights
Three months ended September 30, 2017 compared toFuneral Home Segment
The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations for the three months ended SeptemberJune 30, 20162020 compared to the three months ended June 30, 2019 (in thousands):
|
| | | | | | | |
| Three months ended June 30, |
| 2019 |
| | 2020 |
|
Revenue: | | | |
Same store operating revenue | $ | 41,690 |
| | $ | 42,664 |
|
Acquired operating revenue | 6,298 |
| | 11,337 |
|
Divested/planned divested revenue | 2,390 |
| | 1,852 |
|
Ancillary funeral services revenue | — |
| | 1,117 |
|
Preneed funeral insurance commissions | 329 |
| | 326 |
|
Preneed funeral trust and insurance | 1,800 |
| | 1,825 |
|
Total | $ | 52,507 |
| | $ | 59,121 |
|
| | | |
Operating profit: | | | |
Same store operating profit | $ | 15,550 |
| | $ | 18,026 |
|
Acquired operating profit | 2,445 |
| | 4,672 |
|
Divested/planned divested operating profit | 535 |
| | 562 |
|
Ancillary funeral services operating profit | — |
| | 321 |
|
Preneed funeral insurance commissions | 134 |
| | 160 |
|
Preneed funeral trust and insurance | 1,756 |
| | 1,811 |
|
Total | $ | 20,420 |
| | $ | 25,552 |
|
The following measures reflect the significant metrics over this comparative period:
|
| | | | | | | |
| Three months ended June 30, |
| 2019 |
| | 2020 |
|
Same store: | | | |
Contract volume | 7,844 |
| | 8,785 |
|
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,315 |
| | $ | 4,856 |
|
Average revenue per contract, including preneed funeral trust earnings | $ | 5,512 |
| | $ | 5,037 |
|
Burial rate | 38.5 | % | | 36.2 | % |
Cremation rate | 53.7 | % | | 57.5 | % |
| | | |
Acquired: | | | |
Contract volume | 961 |
| | 2,350 |
|
Average revenue per contract, excluding preneed funeral trust earnings | $ | 6,554 |
| | $ | 4,824 |
|
Average revenue per contract, including preneed funeral trust earnings | $ | 6,681 |
| | $ | 4,894 |
|
Burial rate | 47.0 | % | | 40.6 | % |
Cremation rate | 46.1 | % | | 54.9 | % |
Funeral home same store operating revenue for the three months ended SeptemberJune 30, 2017 and 2016 was $61.12020 increased $1.0 million and $60.1 million, respectively, which represents ancompared to the three months ended June 30, 2019. The increase of approximately $0.9 million, or 1.5%. Funeralin operating revenue increased $2.1 millionis primarily due to $47.3 million, while cemetery revenue decreased $1.2 million to $13.7 milliona 12.0% same store contract volume increase in the three months ended SeptemberJune 30, 20172020 compared to the same period in 2016. For2019. The increase was offset by a decrease in contract averages excluding preneed interest of 8.6%. The decrease in funeral contract averages for the quarter comparatives,three months ended June 30, 2020 compared to the same period in 2019 is primarily due to a 230 basis point decrease in the burial rate. In addition, in the three months ended June 30, 2020, we experienced a 3.3%decrease in services performed due to the restrictions placed on gatherings mandated by state and local governments due to COVID-19. For both burial and cremation contracts for which memorial services were performed, we experienced a 940 and 1240 basis point decrease in the number of these contracts, respectively, in the three months ended June 30, 2020.
Funeral same store operating profit for the three months ended June 30, 2020 increased $2.5 million when compared to the three months ended June 30, 2019, and the comparable operating profit margin increased 500 basis points to 42.3%. The increase in totaloperating margin is primarily due to the increase in same store operating revenue and a 5.0% decrease in operating costs. Same
store salaries and benefits for the three months ended June 30, 2020 had the largest decrease of $0.4 million or 1.6% compared to the three months ended June 30, 2019. The decrease in salaries and benefits was primarily due to the decrease in part-time funeral contracts andstaff needed to assist with memorial services, offset by an increase in the averagedemand for pickup and embalming services due to increased contracts. The decrease in other operating costs was a result of disciplined expense and cost management by local leaders at each business during the COVID-19 pandemic.
Funeral home acquired operating revenue perfor the three months ended June 30, 2020 increased $5.0 million, as our funeral home acquired portfolio for the three months ended June 30, 2020 included nine funeral home businesses added through four acquisitions in the fourth quarter of 2019 and one business acquired in the first quarter of 2020 not present in the three months ended June 30, 2019.
Acquired operating profit for the three months ended June 30, 2020 increased $2.2 million when compared to the three months ended June 30, 2019. Operating profit margin increased 240 basis points to 41.2% for the three months ended June 30, 2020 compared to the same period in 2019. The increase is primarily due to certain measures taken to control costs during the COVID-19 pandemic, slightly offset by lower margins for our most recent acquisition compared to our other acquired businesses, particularly with regard to higher salaries and benefits expenses. We expect the operating margins for our recently acquired business to improve as we focus on integrating this business into our high performance framework of the Standards Operating Model.
Ancillary funeral services revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation business and online cremation business in Texas, which were acquired in the fourth quarter of 2019. Operating profit from our ancillary funeral service businesses was $0.3 million for the three months ended June 30, 2020, with an operating profit margin of 28.7%.
Preneed funeral insurance commissions and preneed funeral trust and insurance, also recorded in Other revenue, on a combined basis, remained flat for the three months ended June 30, 2020 compared to the same period in 2019. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.1 million or 4.3% for the same comparative period in 2019 primarily due to a reduction in preneed trust and insurance expenses.
The following table sets forth certain information regarding our Revenue and Operating profit from our funeral home operations for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 (in thousands):
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Revenue: | | | |
Same store operating revenue | $ | 86,565 |
| | $ | 87,249 |
|
Acquired operating revenue | 13,032 |
| | 22,859 |
|
Divested/planned divested revenue | 4,780 |
| | 4,062 |
|
Ancillary funeral services revenue | — |
| | 2,268 |
|
Preneed funeral insurance commissions | 688 |
| | 692 |
|
Preneed funeral trust and insurance | 3,605 |
| | 3,733 |
|
Total | $ | 108,670 |
| | $ | 120,863 |
|
| | | |
Operating profit: | | | |
Same store operating profit | $ | 33,564 |
| | $ | 35,152 |
|
Acquired operating profit | 5,162 |
| | 8,900 |
|
Divested/planned divested operating profit | 1,074 |
| | 1,169 |
|
Ancillary funeral services operating profit | — |
| | 616 |
|
Preneed funeral insurance commissions | 266 |
| | 321 |
|
Preneed funeral trust and insurance | 3,521 |
| | 3,668 |
|
Total | $ | 43,587 |
| | $ | 49,826 |
|
The following measures reflect the significant metrics over this comparative period:
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Same store: | | | |
Contract volume | 16,113 |
| | 17,508 |
|
Average revenue per contract, excluding preneed funeral trust earnings | $ | 5,372 |
| | $ | 4,983 |
|
Average revenue per contract, including preneed funeral trust earnings | $ | 5,565 |
| | $ | 5,170 |
|
Burial rate | 38.9 | % | | 36.4 | % |
Cremation rate | 53.3 | % | | 56.4 | % |
| | | |
Acquired: | | | |
Contract volume | 1,966 |
| | 4,516 |
|
Average revenue per contract, excluding preneed funeral trust earnings | $ | 6,629 |
| | $ | 5,062 |
|
Average revenue per contract, including preneed funeral trust earnings | $ | 6,757 |
| | $ | 5,131 |
|
Burial rate | 48.5 | % | | 41.1 | % |
Cremation rate | 44.6 | % | | 54.3 | % |
Funeral home same store operating revenue for the six months ended June 30, 2020 increased $0.7 million compared to the six months ended June 30, 2019. The increase in operating revenue is due to an 8.7% same store contract volume increase in the six months ended June 30, 2020 compared to the same period in 2019. The increase was offset by a decrease in contract averages excluding preneed interest of 7.2%. The decrease in funeral contract averages for the six months ended June 30, 2020 compared to the same period in 2019 is primarily due to a 250 basis point decrease in the burial rate. Beginning in the latter half of 1.8%. In addition, whileMarch 2020, we saw a decrease in services performed due to the restrictions placed on gatherings mandated by state and local governments as the COVID-19 pandemic became more prominent and individuals began to practice social distancing to comply with applicable shelter in place and related orders. For both burial and cremation contracts for which memorial services were performed, we experienced a 580 and 820 basis point decrease in the number of these contracts, respectively, in the six months ended June 30, 2020.
Funeral same store operating profit for the six months ended June 30, 2020 increased $1.6 million when compared to the six months ended June 30, 2019, and the comparable operating profit margin increased 150 basis points to 40.3%. The increase in operating margin is due to the increase in same store operating revenue and a 1.5% decrease in operating costs. Same store promotional costs for the six months ended June 30, 2020 had the largest decrease of 6.3%$0.4 million or 0.5% compared to the six months ended June 30, 2019. The decrease in promotional costs and other operating costs resulted from cost control measures undertaken during the COVID-19 pandemic.
Funeral home acquired operating revenue for the six months ended June 30, 2020 increased $9.8 million, as our funeral home acquired portfolio for the six months ended June 30, 2020 included nine funeral home businesses added through four acquisitions in the fourth quarter of 2019 and one business acquired in the first quarter of 2020 not present in the six months ended June 30, 2019.
Acquired operating profit for the six months ended June 30, 2020 increased $3.7 million when compared to the six months ended June 30, 2019. Operating profit margin decreased 70 basis points to 38.9% for the six months ended June 30, 2020 compared to the same period in 2019. The decrease is primarily due to the recently acquired businesses (discussed above), as operating profit margins for these businesses were lower compared to our other acquired businesses, particularly with regard to higher salaries and benefits expenses. However, the operating margins for our 2019 acquired businesses have increased 440 basis points in the second quarter of 2020 compared to the first quarter of 2020 and we expect continuous improvement as we focus on integrating all of our newly acquired businesses into our high performance framework of the Standards Operating Model.
Ancillary funeral services revenue, which is recorded in Other revenue, represents revenue from our flower shop, pet cremation business and online cremation business in Texas, which were acquired in the fourth quarter of 2019. Operating profit from our ancillary funeral service businesses was $0.6 million for the six months ended June 30, 2020, with an operating profit margin of 27.2%.
Preneed funeral insurance commissions and preneed funeral trust and insurance, also recorded in Other revenue, on a combined basis, increased $0.1 million or 3.1% for the six months ended June 30, 2020 compared to the same period in 2019. The increase is due to the increase in preneed trust and insurance. Operating profit for preneed funeral insurance commissions and preneed trust and insurance, on a combined basis, increased $0.2 million or 5.3% for the same comparative period in 2019, primarily due to the increase in revenue and reduction of preneed trust and insurance expenses.
Cemetery Segment
The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations for the three months ended June 30, 2020 compared to the three months ended June 30, 2019 (in thousands):
|
| | | | | | | |
| Three months ended June 30, |
| 2019 |
| | 2020 |
|
Revenue: | | | |
Same store operating revenue | $ | 13,227 |
| | $ | 11,694 |
|
Acquired operating revenue | — |
| | 4,055 |
|
Preneed cemetery trust and insurance | 1,623 |
| | 2,367 |
|
Preneed cemetery finance charges | 395 |
| | 240 |
|
Total | $ | 15,245 |
| | $ | 18,356 |
|
| | | |
Operating profit: | | | |
Same store operating profit | $ | 4,808 |
| | $ | 3,674 |
|
Acquired operating profit | — |
| | 1,434 |
|
Preneed cemetery trust and insurance | 1,477 |
| | 2,321 |
|
Preneed cemetery finance charges | 395 |
| | 240 |
|
Total | $ | 6,680 |
| | $ | 7,669 |
|
The following measures reflect the significant metrics over this comparative period:
|
| | | | | | | |
| Three months ended June 30, |
| 2019 |
| | 2020 |
|
Same store: | | | |
Preneed revenue as a percentage of operating revenue | 64 | % | | 61 | % |
Preneed revenue (in thousands) | $ | 8,455 |
| | $ | 7,089 |
|
Atneed revenue (in thousands) | $ | 4,772 |
| | $ | 4,605 |
|
Number of preneed interment rights sold | 2,056 |
| | 1,786 |
|
Average price per interment right sold | $ | 3,660 |
| | $ | 3,900 |
|
| | | |
| | | |
Acquired: | | | |
Preneed revenue as a percentage of operating revenue | n/a |
| | 62 | % |
Preneed revenue (in thousands) | n/a |
| | $ | 2,522 |
|
Atneed revenue (in thousands) | n/a |
| | $ | 1,533 |
|
Number of preneed interment rights sold | n/a |
| | 552 |
|
Average price per interment right sold | n/a |
| | $ | 4,273 |
|
Cemetery same store preneed revenue for the three months ended June 30, 2020 decreased $1.4 million due to the decrease in cemetery property revenue as we experienced a 13.1% decrease in the number of preneed interment rights (property) sold, offset by a 6.6% increase in the average price per interment right sold increased 1.2%. Further discussion of revenue for our funeral home and cemetery segments on a same store and acquired basis is presented herein under “Results of Operations.”
Gross profit for the three months ended September 30, 2017 decreased $2.7 million, or 15.1%, to $15.5 million, from $18.2 million for the three months ended September 30, 2016 primarily due to a decline in preneed cemetery revenue and higher costs as a percentage of revenue in the six businesses we acquired in 2016. As these acquired businesses transition into our Standards Operating Model, we expect to see their gross profit margins rise towards those on a same store basis.
Further discussion of the components of Gross profit, excluding field depreciation and amortization and regional and unallocated funeral and cemetery costs is presented herein under “Results of Operations” within our funeral home and cemetery segments. Further discussion of field depreciation and amortization and regional and unallocated funeral and cemetery costs are presented herein under “Other Financial Statement Items.”
Net income for the three months ended September 30, 2017 decreased $2.6 million to $3.0 million, equal to $0.17 per diluted share, compared to net income of $5.7 million, equal to $0.33 per diluted share, for the three months ended September 30, 2016. Further discussion of general, administrative and other expenses, home office depreciation and amortization expense, interest expense, income taxes and other components of income and expenses are presented herein under “Other Financial Statement Items.”
Nine months ended September 30, 2017 compared to Nine months ended September 30, 2016
Total revenue for the nine months ended September 30, 2017 and 2016 was $193.1 million and $185.3 million, respectively, which represents an increase of approximately $7.7 million, or 4.2%. Funeral revenue increased $9.3 million to $150.3 million, while cemetery revenue decreased $1.6 million to $42.8 million in the nine months ended September 30, 2017 compared to the same period in 2016. For the period comparatives, we experienced a 5.2% increase in total funeral contracts and an increase in the average revenue per funeral contract of 1.7%. In addition, while we experienced asold. The decrease of 10.4% in the number of preneed interment rights (property) sold is primarily due to the COVID-19 pandemic as individuals began practicing social distancing to comply with applicable shelter in place and related orders, which resulted in our preneed sales personnel being unable to meet with families at our businesses, in certain areas of the country, during this time. In addition, these restrictions impacted our ability to host annual events at certain cemeteries notably the Ching Ming festival during April and Memorial Day festivities during May. Cemetery same store atneed revenue, which represents 39.0% of our same store operating revenue decreased $0.2 million, as we experienced a 3.1% decrease in the average sale per contract, while the number of atneed contracts sold remained flat.
Cemetery same store operating profit for the three months ended June 30, 2020 decreased $1.1 million from the same period in 2019. The comparable operating profit margin decreased 490 basis points to 31.4% for the three months ended June 30, 2020 from 36.3% in the same period in 2019. The decrease in operating profit margin is the result of an 11.6% decrease in operating revenue, offset by a 4.8% decrease in operating costs. Operating expense as a percent of operating revenue increased in two categories for the three months ended June 30, 2020 compared to the same period in 2019. Most notably, salaries and benefits increased 1.2% as a percentage of revenue and the allowance for credit losses expense increased 2.4% as a percentage of revenue.
The increase in salaries and benefits is due to additional support staff hired in the latter half of 2019. The increase in the allowance for credit losses is due to slower payments on financed receivables particularly in the states most affected by COVID-19.
Our acquired cemetery portfolio includes two businesses acquired during the fourth quarter of 2019 and one business acquired during the first quarter of 2020. These three businesses contributed $4.1 million in operating revenue and $1.4 million in operating profit for the three months ended June 30, 2020.
Preneed cemetery trust and insurance and preneed cemetery finance charges, which are recorded in Other revenue, on a combined basis increased $0.6 million for the three months ended June 30, 2020 compared to the same period in 2019. Earnings in our perpetual care trust fund increased $0.6 million due to our acquisitions. Operating profit for the two categories of Other revenue, on a combined basis, increased $0.7 million for the three months ended June 30, 2020 compared to the same period in 2019, primarily due to the increase in perpetual care trust fund revenue. The increase in our trust fund income is primarily due to our major capital deployment during and after the COVID-19 market crash in March 2020, which we expect will produce sustainable increases in both revenue and operating profit throughout the year.
The following table sets forth certain information regarding our Revenue and Operating profit from our cemetery operations for the six months ended June 30, 2020 compared to the six months ended June 30, 2019 (in thousands):
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Revenue: | | | |
Same store operating revenue | $ | 24,516 |
| | $ | 22,639 |
|
Acquired operating revenue | — |
| | 6,854 |
|
Preneed cemetery trust and insurance | 2,874 |
| | 4,128 |
|
Preneed cemetery finance charges | 773 |
| | 483 |
|
Total | $ | 28,163 |
| | $ | 34,104 |
|
| | | |
Operating profit: | | | |
Same store operating profit | $ | 8,469 |
| | $ | 6,825 |
|
Acquired operating profit | — |
| | 2,261 |
|
Preneed cemetery trust and insurance | 2,594 |
| | 3,920 |
|
Preneed cemetery finance charges | 773 |
| | 483 |
|
Total | $ | 11,836 |
| | $ | 13,489 |
|
The following measures reflect the significant metrics over this comparative period:
|
| | | | | | | |
| Six months ended June 30, |
| 2019 |
| | 2020 |
|
Same store: | | | |
Preneed revenue as a percentage of operating revenue | 62 | % | | 59 | % |
Preneed revenue (in thousands) | $ | 15,114 |
| | $ | 13,400 |
|
Atneed revenue (in thousands) | $ | 9,402 |
| | $ | 9,239 |
|
Number of preneed interment rights sold | 3,518 |
| | 3,354 |
|
Average price per interment right sold | $ | 3,721 |
| | $ | 3,762 |
|
| | | |
| | | |
Acquired: | | | |
Preneed revenue as a percentage of operating revenue | n/a |
| | 62 | % |
Preneed revenue (in thousands) | n/a |
| | $ | 4,258 |
|
Atneed revenue (in thousands) | n/a |
| | $ | 2,596 |
|
Number of preneed interment rights sold | n/a |
| | 852 |
|
Average price per interment right sold | n/a |
| | $ | 4,422 |
|
Cemetery same store preneed revenue for the six months ended June 30, 2020 decreased $1.7 million due to the decrease in cemetery property revenue as we experienced a 4.7% decrease in the number of preneed interments sold compared to the same period in 2019, offset slightly by a 1.1% increase in the average price per interment right sold. The decrease in the number of preneed interment rights sold increased 4.6%. Further discussionis primarily due to the COVID-19 pandemic as individuals began practicing social distancing to comply with applicable shelter in place and related orders, which resulted in our preneed sales personnel being unable to meet with families at our businesses, in certain areas of revenue for our funeral home and cemetery segments on athe country, during this time. Cemetery same store and acquired basis is presented herein under “Resultsatneed revenue, which represents 41% of Operations.”our same store operating revenue, decreased $0.2 million as we experienced a 1.3% decrease in the average sale per contract, while the number of atneed contracts sold remained flat.
GrossCemetery same store operating profit for the ninesix months ended SeptemberJune 30, 20172020 decreased $1.1 million, or 1.9%, to $57.2$1.6 million from $58.3 millionthe same period in 2019. The comparable operating profit margin decreased 440 basis points to 30.1% for the ninesix months ended SeptemberJune 30, 2016 primarily due to2020 from 34.5% in the same period in 2019. The decrease in operating profit margin is a declineresult of a 7.7% decrease in preneed cemeteryoperating revenue and higher costsa 1.5% decrease in operating costs. Operating expense as a percent of operating revenue increased in three categories in the six months ended June 30, 2020 compared to the same period in 2019. Our allowance for credit losses expense increased 1.7%, promotional expense increased 1.2% and salaries and wages increased 1.0% as a percentage of revenuerevenue. The increase in the allowance for credit losses is due to slower payments on financed receivables particularly in the states most affected by COVID-19. The increase in promotional expenses is due to the addition of marketing personnel and increased counselor bonuses at certain cemeteries. Salaries and benefits related to the beautification and maintenance of our cemetery grounds were fairly flat but increased as a percentage of revenue.
Our acquired cemetery portfolio includes two businesses acquired during the fourth quarter of 2019 and one business acquired during the first quarter of 2020. These three businesses contributed $6.9 million in operating revenue and $2.3 million in operating profit for the six businesses we acquiredmonths ended June 30, 2020.
Preneed cemetery trust and insurance and preneed cemetery finance charges, which are recorded in 2016. As these acquired businesses transition intoOther revenue, on a combined basis increased $1.0 million for the six months ended June 30, 2020 compared to the same period in 2019. Earnings in our Standardsperpetual care trust fund increased $1.4 million primarily from acquisitions and an increase in realized gains and was partially offset by $0.3 million decrease in finance charge revenue. The decrease in finance charge revenue is due to our enhanced preneed cemetery property sales strategy of reducing interest rates on preneed contracts. Operating Model,profit for the two categories of Other revenue, on a combined basis, also increased $1.0 million for the six months ended June 30, 2020 compared to the same period in 2019 due to the increase in revenue. The increase in our trust fund income is primarily due to our major capital deployment during and after the COVID-19 market crash in March 2020, which we expect will produce sustainable increases in both revenue and operating profit throughout the year.
Cemetery property amortization. Cemetery property amortization totaled $1.1 million for the three months ended June 30, 2020, a decrease of $0.1 million compared to see their gross profit margins rise towards those on a same store basis.the three months ended June 30, 2019. Cemetery property amortization remained flat at $2.0 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019.
Further discussion ofField depreciation. Depreciation expense for our field businesses increased $0.2 million for the components of Gross profit, excludingthree months ended June 30, 2020 compared to the three months ended June 30, 2019. Depreciation expense for our field businesses increased $0.4 million for the six months ended June 30, 2020 compared to the six months ended June 30, 2019. The increase was primarily attributable to additional depreciation expense from the assets acquired through our 2019 and amortizationfirst quarter 2020 acquisitions.
Regional and regionalunallocated funeral and cemetery costs. Regional and unallocated funeral and cemetery costs is presented herein under “Resultsconsist of Operations” within our funeral homesalaries and cemetery segments. Further discussion ofbenefits for regional management, field depreciationincentive compensation and amortization and regionalother related costs for field infrastructure. Regional and unallocated funeral and cemetery costs are presented herein under “Othertotaled $3.7 million for the three months ended June 30, 2020, an increase of $0.1 million primarily due to a $0.4 million increase related to a state audit assessment, a $0.3 million increase in expenses related to the COVID-19 pandemic and a $0.1 million increase in other general and administrative costs, offset by a $0.7 million decrease in severance expense.
Regional and unallocated funeral and cemetery costs totaled $6.5 million for the six months ended June 30, 2020, an increase of $0.1 million primarily due to a $0.4 million increase related to a state audit assessment, a $0.4 million increase in expenses due to the COVID-19 pandemic, offset by a $0.6 million decrease in severance expense and a $0.1 million decrease in other general administrative costs.
Other Financial Statement Items.”Items
Net income for the nine months ended September 30, 2017 decreased $0.9 million to $14.5 million, equal to $0.81 per diluted share, compared to net income of $15.4 million, equal to $0.91 per diluted share, for the nine months ended September 30, 2016. Further discussion of general,General, administrative and other. General, administrative and other expenses hometotaled $6.5 million for the three months ended June 30, 2020, an increase of $0.8 million compared to the three months ended June 30, 2019. The increase was primarily attributable to a $0.6 million increase in incentive compensation, a $0.3 million increase in public company costs, a $0.2 million increase in litigation reserve, offset by a $0.2 million decrease in other general administrative costs and a $0.1 million decrease in acquisition expenses.
General, administrative and other expenses totaled $12.5 million for the six months ended June 30, 2020, an increase of $1.2 million compared to the six months ended June 30, 2019. The increase was primarily attributable to a $0.5 million increase in salaries, benefits and severance costs, a $0.4 million increase in incentive and equity compensation, a $0.3 million increase in public company costs, a $0.3 million increase in litigation reserve and a $0.1 million increase in acquisition expenses, offset by a $0.4 million decrease in other general administrative costs.
Home office depreciation and amortization. Home office depreciation and amortization expense interest expense, income taxesremained flat at $0.4 million and $0.7 million for the three and six months ended June 30, 2020, compared to the three and six months ended June 30, 2019 primarily due to machinery and equipment at the home office becoming fully depreciated in 2019, offset by additional software assets purchased in the latter half of 2019.
Impairment of goodwill and other componentsintangibles. As a result of the economic conditions caused by the response to COVID-19, we performed a quantitative assessment of our goodwill and indefinite-lived intangible assets at March 31, 2020. We recorded a goodwill impairment of $13.6 million related to our funeral homes in the Eastern Reporting Unit as the carrying value of goodwill exceeded the fair value at March 31, 2020. We also recorded a $1.1 millionimpairment charge to certain of our tradenames as the carrying amount of these tradenames exceeded the fair value.
Interest expense. Interest expense totaled $8.4 million for the three months ended June 30, 2020, an increase of $2.1 million compared to the three months ended June 30, 2019. Interest expense totaled $16.8 million for the six months ended June 30, 2020, an increase of $4.2 million compared to the six months ended June 30, 2019. The increase was primarily due to increased borrowings on our Credit Facility and the $75.0 million of additional Senior Notes we issued on December 19, 2019.
Accretion of discount on convertible subordinated notes. We recognized accretion of the discount on our Convertible Notes of $0.1 million for both the three months ended June 30, 2020 and 2019 and $0.1 million for both the six months ended June 30, 2020 and 2019.
Income taxes. We calculate our quarterly income tax expense using a forecasted annual effective tax rate and expenseswe adjust for any discrete items arising during the quarter. Our income tax expense was $3.4 million and $2.1 million for the three months ended June 30, 2020 and 2019, respectively and $1.3 million and $4.8 million for the six months ended June 30, 2020 and 2019, respectively. Our operating tax rate before discrete items was 33.5% and 29.2% for the three months ended June 30, 2020 and 2019, and 33.3% and 28.5% for the six months ended June 30, 2020 and 2019, respectively.
The increase in our overall effective tax rate is due to the unfavorable tax impact of impairment of goodwill and other intangibles recorded in the first quarter of 2020 for businesses that were previously acquired through stock acquisitions.
In connection with the CARES Act, we expect to file a claim for a refund during 2020 to carryback the net operating losses generated in the tax years ending December 31, 2018 and 2019 and have included the anticipated impact in our current provision. In an effort to maximize the expected benefits afforded by the CARES Act we plan to amend our 2018 tax return to include the additional first year depreciation deduction for qualified improvement property. The majority of the net operating losses generated in 2018 are presented herein under “Other Financial Statement Items.”the result of filing non-automatic accounting method changes relating to the recognition of revenue from our cemetery property and merchandise and services sales. Due to the uncertainty of the timing of receiving Internal Revenue Service approval for non-automatic accounting method changes, a reserve has been recorded against the benefit derived from this carrying back that the net operating losses generated.
OVERVIEW OF CRITICAL ACCOUNTING POLICIES AND ESTIMATES
The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the amounts reported in the unaudited consolidated financial statements and accompanying notes. We base our estimates on historical experience, third-party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenuesrevenue and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance because there
can be no assurance thethat our margins, operating income and net earnings,income, as a percentage of revenues,revenue, will be consistent from year to year.
Management’s discussion and analysis of financial condition and results of operations (“MD&A”) is based upon our Consolidated Financial Statements presented herewith, which have been prepared in accordance with GAAP. Our critical accounting policies are discussed in MD&A in our Annual Report on Form 10-K for the year ended December 31, 2016.2019.
RESULTS OF OPERATIONS
The following is a discussion of our results of operations for the three and nine months ended September 30, 2017 compared to the same periods of 2016. The term “same store” refers to funeral homes and cemeteries acquired prior to January 1, 2013 and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after December 31, 2012 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective acquisition program can have on total company performance. Depreciation and amortization, within our field costs and expenses and regional and unallocated funeral and cemetery costs, are not included in operating profit, a non-GAAP financial measure. Adding back these items will result in Gross Profit, a GAAP financial measure.
Funeral Home Segment. The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the three months ended September 30, 2017 compared to three months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 37,094 |
| | $ | 38,032 |
| | $ | 938 |
| | 2.5 | % |
Acquired operating revenue | 5,996 |
| | 7,363 |
| | 1,367 |
| | 22.8 | % |
Preneed funeral insurance commissions | 361 |
| | 315 |
| | (46 | ) | | (12.7 | )% |
Preneed funeral trust earnings | 1,732 |
| | 1,618 |
| | (114 | ) | | (6.6 | )% |
Total | $ | 45,183 |
| | $ | 47,328 |
| | $ | 2,145 |
| | 4.7 | % |
| | | | | | | |
Operating profit: |
| |
| | | | |
Same store operating profit | $ | 13,894 |
| | $ | 13,938 |
| | $ | 44 |
| | 0.3 | % |
Acquired operating profit | 2,431 |
| | 2,419 |
| | (12 | ) | | (0.5 | )% |
Preneed funeral insurance commissions | 166 |
| | 120 |
| | (46 | ) | | (27.7 | )% |
Preneed funeral trust earnings | 1,710 |
| | 1,585 |
| | (125 | ) | | (7.3 | )% |
Total | $ | 18,201 |
| | $ | 18,062 |
| | $ | (139 | ) | | (0.8 | )% |
Funeral home same store operating revenues for the three months ended September 30, 2017 increased $0.9 million or 2.5%, when compared to the three months ended September 30, 2016. This was due primarily to a 0.7% increase in same store contract volumes to 7,093 and a 1.8% increase in the average revenue per contract to $5,362. The average revenue per contract excludes the impact of the preneed funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 1.6% to $5,543 in the three months ended September 30, 2017. The average revenue per burial contract increased 0.2% to $8,832 and the number of burial contracts increased 1.9% to 2,898. The average revenue per cremation contract increased 1.1% to $3,352 and the number of cremation contracts increased 1.7% to 3,702.
The burial rate for our same store businesses increased 50 basis points to 40.9% and the cremation rate also increased 50 basis points to 52.2% for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 6.9% of the total number of contracts in the three months ended September 30, 2017, increased 16.6% to $2,669.
Same store operating profit for the three months ended September 30, 2017 remained flat, when compared to the three months ended September 30, 2016. Although revenue increased, operating profit margin decreased by 90 basis points to 36.6% for the three months ended September 30, 2017 compared to the same period in 2016. The decline in operating profit margin largely relates to significant increases in certain expenses including $0.4 million of general liability and other insurance related expenses, $0.2 million of salaries and benefits and $0.1 million of bad debt expense.
Funeral home acquired operating revenues for the three months ended September 30, 2017 increased $1.4 million, or 22.8%, when compared to the three months ended September 30, 2016. The funeral home acquired portfolio for the three months ended September 30, 2017 includes four businesses acquired in the latter half of 2016, not fully present in the three months ended September 30, 2016 results. We experienced a slight increase in the average revenue per contract of 0.2% to $6,370 and a 22.6% increase in the total number of contracts to 1,156. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract slightly decreased 0.4% to $6,538 in the three months ended September 30, 2017. The average revenue per burial contract decreased 1.7% to $9,458, while the number of burial contracts increased 22.4% to 525. The average revenue per cremation contract increased 6.1% to $4,421 and the number of cremation contracts increased 18.3% to 531.
The burial rate for our acquired businesses slightly decreased 10 basis points to 45.4% and the cremation rate also decreased 170 basis points to 45.9% for the three months ended September 30, 2017 when compared to the three months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 8.7% of the total number of contracts in the three months ended September 30, 2017, decreased 17.6% to $2,446.
Acquired operating profit for the three months ended September 30, 2017 remained flat when compared to the three months ended September 30, 2016. Although revenue increased, operating profit margin decreased 760 basis points to 32.9% for the three months ended September 30, 2017 compared to the same period in 2016. The decrease is primarily due to the businesses we acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased by 12.7% for the three months ended September 30, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the three months ended September 30, 2017 is from the preneed funeral insurance contracts sold in the three months ended September 30, 2016. The number of preneed insurance contracts sold in the three months ended September 30, 2016 decreased 4.9% and the face value of the insurance products that earned commissions decreased 2.3% compared to the contracts sold during the same period of the prior year. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and earnings from the maturity of preneed funeral contracts. Trust earnings decreased $0.1 million or 6.6% for the three months ended September 30, 2017, which is comprised of a 7.8% decrease in earnings from the maturity of preneed contracts, offset by an 8.9% increase in earnings from trust management fees.
Operating profit for our two categories of financial revenue, on a combined basis, decreased 9.1% in the three months ended September 30, 2017 due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.
The following tables set forth certain information regarding the revenues and operating profit from our funeral home operations for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 117,029 |
| | $ | 119,310 |
| | $ | 2,281 |
| | 1.9 | % |
Acquired operating revenue | 17,303 |
| | 24,727 |
| | 7,424 |
| | 42.9 | % |
Preneed funeral insurance commissions | 1,138 |
| | 951 |
| | (187 | ) | | (16.4 | )% |
Preneed funeral trust earnings | 5,482 |
| | 5,290 |
| | (192 | ) | | (3.5 | )% |
Total | $ | 140,952 |
| | $ | 150,278 |
| | $ | 9,326 |
| | 6.6 | % |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 45,119 |
| | $ | 46,111 |
| | $ | 992 |
| | 2.2 | % |
Acquired operating profit | 7,293 |
| | 9,515 |
| | 2,222 |
| | 30.5 | % |
Preneed funeral insurance commissions | 577 |
| | 329 |
| | (248 | ) | | (43.0 | )% |
Preneed funeral trust earnings | 5,417 |
| | 5,206 |
| | (211 | ) | | (3.9 | )% |
Total | $ | 58,406 |
| | $ | 61,161 |
| | $ | 2,755 |
| | 4.7 | % |
Funeral home same store operating revenues for the nine months ended September 30, 2017 increased $2.3 million, or 1.9%, when compared to the nine months ended September 30, 2016. The increase was due primarily to a 0.9% increase in same store contract volumes to 22,296 and a 1.0% increase in the average revenue per contract to $5,351. The average revenue per contract excludes the impact of the preneed funeral trust earnings (separately reflected in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including preneed funeral trust earnings, the average revenue per contract increased 0.9% to $5,540 in the nine months ended September 30, 2017. The average revenue per burial contract increased 1.1% to $8,877, while the number of burial contracts decreased 0.6% to 9,037. The average revenue per cremation contract increased 1.3% to $3,363 and the number of cremation contracts increased 3.0% to 11,664.
The burial rate for our same store businesses decreased 70 basis points to 40.5%, while the cremation rate increased 100 basis points to 52.3% for the nine months ended September 30, 2017 when compared to the nine months ended September 30, 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 7.2% of the total number of contracts in the nine months ended September 30, 2017, increased 10.8% to $2,561.
Same store operating profit for the nine months ended September 30, 2017 increased $1.0 million, or 2.2%, when compared to the nine months ended September 30, 2016. This increase is a result of increased revenue and better management of expenses as operating profit margin remained stable at 38.6% for the nine months ended September 30, 2017 compared to the same period in 2016.
Funeral home acquired operating revenues for the nine months ended September 30, 2017 increased $7.4 million, or 42.9%, when compared to the nine months ended September 30, 2016. The funeral home acquired portfolio for the nine months ended September 30, 2017 includes six businesses acquired during 2016, not fully present in the nine months ended September 30, 2016 results. We experienced an increase in the average revenue per contract of 1.7% to $6,524 and a 40.5% increase in the total number of contracts to 3,790. The average revenue per contract excludes the impact of the preneed funeral trust earnings (reflected separately in Revenues above) recognized at the time that we provide the services pursuant to the preneed contract. Including funeral trust earnings, the average revenue per contract increased 1.2% to $6,699 in the nine months ended September 30, 2017. The average revenue per burial contract decreased 1.3% to $9,505, while the number of burial contracts increased 43.4% to 1,817. The average revenue per cremation contract increased 5.9% to $4,396 and the number of cremation contracts increased 35.8% to 1,661.
The burial rate for our acquired businesses increased 90 basis points to 47.9%, while the cremation rate decreased 150 basis points to 43.8%. This is the result of an increase in the number of burial versus cremation contract sales at the businesses that were acquired the latter half of 2016. The average revenue for “other” contracts, which are charges for merchandise or services for which we do not perform a funeral service and which made up approximately 8.3% of the total number of contracts in the nine months ended September 30, 2017, decreased 5.1% to $2,625.
Acquired operating profit for the nine months ended September 30, 2017 increased $2.2 million, or 30.5%, from the nine months ended September 30, 2016, primarily due to the six businesses acquired during 2016 and not fully present in the nine months ended September 30, 2016 results. Although revenues increased, operating profit margin decreased 360 basis points to 38.5% for the nine months ended September 30, 2017 compared to the same period in 2016. The decrease is primarily due to the
businesses we acquired in 2016, as salaries and benefits for newly acquired businesses are generally higher as a percentage of revenue than same store businesses. As these acquired businesses transition into our Standards Operating Model, we expect to see their operating profit margins rise towards those on a same store basis.
The two categories of financial revenue consist of preneed funeral insurance commission revenue and preneed funeral trust earnings. Preneed funeral insurance commission revenue decreased $0.2 million or 16.4% for the nine months ended September 30, 2017 compared to the same period in 2016. Preneed funeral insurance commission revenue is deferred for one year after the preneed funeral contracts are sold. The Preneed commission revenue recognized for the nine months ended September 30, 2017 is from the preneed funeral insurance contracts sold in the nine months ended September 30, 2016. The number of preneed insurance contracts sold in the nine months ended September 30, 2016 decreased 1.1% and the face value of the insurance products that earned commissions decreased 7.1% over the same period of the prior year. Preneed funeral trust earnings include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets and earnings from the maturity of preneed funeral contracts. Trust earnings decreased $0.2 million or 3.5% for the nine months ended September 30, 2017, which is comprised of a 4.6% decrease in earnings from the maturity of preneed contracts, offset by a 12.3% increase in earnings from trust management fees.
Operating profit for our two categories of financial revenue, on a combined basis, decreased 7.7% in the nine months ended September 30, 2017 due to the decrease in preneed funeral trust earnings and preneed funeral insurance commission revenue, along with an increase in commission and preneed selling expenses.
Cemetery Segment. The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the three months ended September 30, 2017 compared to three months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Three Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 11,467 |
| | $ | 10,748 |
| | $ | (719 | ) | | (6.3 | )% |
Acquired operating revenue | 978 |
| | 761 |
| | (217 | ) | | (22.2 | )% |
Cemetery trust earnings | 2,025 |
| | 1,768 |
| | (257 | ) | | (12.7 | )% |
Preneed cemetery finance charges | 487 |
| | 449 |
| | (38 | ) | | (7.8 | )% |
Total | $ | 14,957 |
| | $ | 13,726 |
| | $ | (1,231 | ) | | (8.2 | )% |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 3,342 |
| | $ | 2,649 |
| | $ | (693 | ) | | (20.7 | )% |
Acquired operating profit | 479 |
| | 200 |
| | (279 | ) | | (58.2 | )% |
Cemetery trust earnings | 1,954 |
| | 1,658 |
| | (296 | ) | | (15.1 | )% |
Preneed cemetery finance charges | 487 |
| | 449 |
| | (38 | ) | | (7.8 | )% |
Total | $ | 6,262 |
| | $ | 4,956 |
| | $ | (1,306 | ) | | (20.9 | )% |
Cemetery same store operating revenues for the three months ended September 30, 2017 decreased $0.7 million, or 6.3%, when compared to the three months ended September 30, 2016. Approximately 55.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the three months ended September 30, 2017. Preneed revenue decreased $0.9 million, or 13.6%, as we experienced a 5.7% decrease in the number of preneed interment rights sold to 1,542 and a 5.9% decrease in average price per interment to $3,278 for the three months ended September 30, 2017 compared to the same period in 2016. The decrease in preneed revenue was due to the attrition of key sales personnel at certain businesses, the absence of approximately $0.4 million of large private estate sales we had in the third quarter of last year, as well as the impact of the Texas and Florida hurricanes which caused business closures and displaced workers in these States during the period. Same store at-need revenue, which represents approximately 45.0% of our same store operating revenues, increased $0.2 million, or 4.4%, due primarily to a 7.9% increase in the average sale per contract to $1,562.
Cemetery same store operating profit for the three months ended September 30, 2017 decreased $0.7 million, or 20.7% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 24.6% in the three months ended September 30, 2017 compared to 29.1% in the same period in 2016. The decline in operating profit margin largely relates to significant increases in certain expenses including $0.2 million of general liability and other insurance related expenses, $0.1 million of salaries and benefits and $0.1 million of facilities and grounds expenses, offset by a $0.4 million decrease in promotional expenses.
Cemetery acquired operating revenue and acquired operating profit decreased for the three months ended September 30, 2017 primarily due to a $0.2 million decrease in preneed revenue. The decrease in preneed revenue was primarily due to the absence of approximately $0.2 million of large private estate sales we had in the third quarter of last year. In addition, we experienced a 14% decrease in the number of preneed interment rights sold compared with the same period in 2016 and increases in facilities and grounds expenses and bad debt expense for the three months ended September 30, 2017 compared to the same period in 2016.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of the trust assets. Total trust earnings decreased $0.3 million or 12.7%, primarily due to a $0.3 million decrease in capital gains from our perpetual care trust in the three months ended September 30, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts remained flat in the three months ended September 30, 2017 compared to the same period in 2016.
Cemetery Segment. The following tables set forth certain information regarding the revenues and operating profit from the cemetery operations for the nine months ended September 30, 2017 compared to nine months ended September 30, 2016 (dollars in thousands):
|
| | | | | | | | | | | | | | |
| For the Nine Months Ended September 30, | | Change |
| 2016 | | 2017 | | Amount | | % |
Revenues: | | | | | | | |
Same store operating revenue | $ | 35,093 |
| | $ | 33,522 |
| | $ | (1,571 | ) | | (4.5 | )% |
Acquired operating revenue | 2,312 |
| | 2,370 |
| | 58 |
| | 2.5 | % |
Cemetery trust earnings | 5,622 |
| | 5,512 |
| | (110 | ) | | (2.0 | )% |
Preneed cemetery finance charges | 1,357 |
| | 1,381 |
| | 24 |
| | 1.8 | % |
Total | $ | 44,384 |
| | $ | 42,785 |
| | $ | (1,599 | ) | | (3.6 | )% |
| | | | | | | |
Operating profit: | | | | | | | |
Same store operating profit | $ | 11,283 |
| | $ | 9,287 |
| | $ | (1,996 | ) | | (17.7 | )% |
Acquired operating profit | 791 |
| | 743 |
| | (48 | ) | | (6.1 | )% |
Cemetery trust earnings | 5,407 |
| | 5,231 |
| | (176 | ) | | (3.3 | )% |
Preneed cemetery finance charges | 1,357 |
| | 1,381 |
| | 24 |
| | 1.8 | % |
Total | $ | 18,838 |
| | $ | 16,642 |
| | $ | (2,196 | ) | | (11.7 | )% |
Cemetery same store operating revenues for the nine months ended September 30, 2017 decreased $1.6 million, or 4.5%, when compared to the nine months ended September 30, 2016. Approximately 56.0% of our same store operating revenues were related to preneed sales of interment rights and related merchandise and services for the nine months ended September 30, 2017. Preneed revenue decreased $2.4 million, or 11.2%, as we experienced a 11.4% decrease in the number of preneed interment rights sold to 4,942 in the nine months ended September 30, 2017 compared to the same period in 2016. The decrease was primarily a result of attrition of key sales personnel at certain businesses during the period. In addition, preneed sales were negatively impacted in our Texas and Florida businesses due to the hurricanes affecting those areas in the third quarter of 2017, as well as the absence of approximately $0.4 million of large private estate sales we had in the third quarter of last year. The decrease was slightly offset by a 4.0% increase in the average price per interment to $3,256. Same store at-need revenue, which represents approximately 44.0% of our same store operating revenues, increased $0.8 million, or 5.7%, due primarily to a 9.0% increase in the average sale per contract to $1,459.
Cemetery same store operating profit for the nine months ended September 30, 2017 decreased $2.0 million, or 17.7% from the same period in 2016. As a percentage of revenue, cemetery operating profit decreased to 27.7% in the nine months ended September 30, 2017 compared to 32.2% in the same period in 2016. The decrease in operating profit was primarily a result of the decrease in revenue, combined with a $0.4 million, or 1.8%, increase in operating costs for the nine months ended September 30, 2017 compared with the same period in 2016. Those expenses with significant increases include $0.2 million of salaries and benefits and $0.2 million of facilities and grounds expenses.
Cemetery acquired operating revenue and acquired operating profit remained flat for the nine months ended September 30, 2017. Cemetery acquired operating profit margin decreased from 34.2% to 31.4% for the nine months ended September 30, 2017 compared to the same period in 2016 as we experienced increases in salaries and benefits and bad debt expense.
The two categories of financial revenue consist of trust earnings and finance charges on preneed receivables. Trust earnings also include trust management fees charged by our wholly-owned registered investment advisor based on the fair market value of
the trust assets. Total trust earnings decreased $0.1 million or 2.0%, primarily due to decreased capital gains from our perpetual care trust in the nine months ended September 30, 2017 compared to the same period in 2016. Financial revenue earned from finance charges on the preneed contracts remained flat at $1.4 million in the nine months ended September 30, 2017 compared to the same period in 2016.
Other Financial Statement Items
Depreciation and Amortization. Depreciation and amortization costs for the field and home office totaled $4.0 million for the three months ended September 30, 2017, an increase of $0.2 million, or 5.1%, from the three months ended September 30, 2016 and $11.9 million for the nine months ended September 30, 2017, an increase of $0.4 million or 3.3%, from the nine months ended September 30, 2016. These increases were primarily attributable to additional depreciation expense from assets acquired in our 2016 acquisitions.
Regional and Unallocated Funeral and Cemetery Costs. Regional and unallocated funeral and cemetery costs consist of salaries and benefits for regional management, field incentive compensation and other related costs for field infrastructure. Regional and unallocated funeral and cemetery costs totaled $3.9 million for the three months ended September 30, 2017, an increase of $1.2 million, or 41.5%, compared to the same period in 2016, primarily due to a $0.5 million increase in field incentive compensation, a $0.4 million increase in natural disaster related costs and a $0.3 million increase in other general administrative costs.
Regional and unallocated funeral and cemetery costs totaled $9.8 million for the nine months ended September 30, 2017, an increase of $1.3 million, or 15.2%, compared to the same period in 2016, primarily due a $0.4 million increase in field incentive compensation, a $0.4 million increase in natural disaster related costs, a $0.4 million increase in other general administrative costs and $0.1 million increase in salaries and benefits.
On Friday, August 25, 2017 and Sunday, September 10, 2017, hurricanes Harvey and Irma struck Texas and Florida, respectively. Thirteen of our funeral homes and six of our cemeteries were impacted by either or both property damage and business interruption. Based on our preliminary review of our property, flood and business interruption insurance policies, we believe that much of the loss we have experienced will be covered by insurance. As of September 30, 2017, we have spent approximately $0.5 million for employee assistance and property repair costs. We have recognized approximately $0.4 million in expenses and recorded a receivable for insurance reimbursement of approximately $0.1 million.
General, Administrative and Other. General, administrative and other expenses remained flat at $6.1 million for both the three months ended September 30, 2016 and 2017. Those expenses with significant increases include $0.4 million of equity compensation, $0.2 million of salaries and benefits for leadership investments in our Houston support office, $0.2 million of other general administrative costs, $0.2 million of incentive compensation and $0.2 million of public company and regulatory costs related to tax planning, offset by a $1.2 million decrease in severance and retirement expenses primarily related to the retirement of a former executive.
General, administrative and other expenses totaled $19.5 million for the nine months ended September 30, 2017, a decrease of $1.7 million, or 7.8%, from the nine months ended September 30, 2016. The decrease was attributable to a $3.5 million decrease in retirement expenses primarily related to the retirement of two former executives during 2016, a $0.7 million decrease in acquisition costs, offset by a $0.9 million increase in salaries and benefits for leadership investments in our Houston support office, a $0.7 million increase in public company, regulatory and legal costs related to tax planning, filing our current shelf registration statement and adopting a new long-term incentive plan, a $0.6 million increase in other general administrative costs and a $0.3 million increase in incentive and equity compensation.
Interest Expense. Interest expense was $3.3 million for the three months ended September 30, 2017 compared to $2.9 million for the three months ended September 30, 2016, an increase of approximately $0.4 million. During the three months ended September 30, 2017, interest expense increased by approximately $0.3 million related to our term note and revolving credit facility and by approximately $0.1 million related to our deferred purchase obligations for our 2016 acquisitions. During the three months ended September 30, 2017, the weighted average interest rate increased 0.6% compared to the same period in 2016.
Interest expense was $9.5 million for the nine months ended September 30, 2017 compared to $8.7 million for the nine months ended September 30, 2016, an increase of approximately $0.8 million. During the nine months ended September 30, 2017, interest expense increased by approximately $0.4 million related to our term note and revolving credit facility and by approximately $0.4 million related to our deferred purchase obligations for our 2016 acquisitions. During the nine months ended September 30, 2017, the weighted average interest rate increased 0.3% compared to the same period in 2016.
Accretion of Discount on Convertible Subordinated Notes. For the three and nine months ended September 30, 2017, we recognized accretion of the discount on our convertible subordinated notes issued in March 2014 of $1.1 million and $3.2 million respectively,
compared to $1.0 million and $2.9 million for the three and nine months ended September 30, 2016, respectively. Accretion is calculated using the effective interest method based on a stated interest rate of 6.75%.
Income Taxes. Income tax expense was $1.5 million for the three months ended September 30, 2017 compared to $1.9 million for the three months ended September 30, 2016. We recorded income taxes at the estimated effective rate, before discrete items, of 40.0% for both the three and nine months ended September 30, 2017 and 2016. Income tax expense was $9.3 million for the nine months ended September 30, 2017 compared to $8.4 million for the nine months ended September 30, 2016.
During the third quarter of 2017, we recognized a tax benefit of $0.2 million which reduced our effective tax rate to 39% for the nine months ended September 30, 2017. During the third quarter of 2016, we recognized a tax benefit of $1.1 million which reduced our effective tax rate to 35.2% for the nine months ended September 30, 2016.
We have approximately $36.8 million of state net operating loss carry forwards that will expire between 2018 and 2038, if not utilized. Based on management’s assessment of the various state net operating losses, it has been determined that it is more likely than not that we will not be able to realize the tax benefits of certain portions of the state losses. Accordingly, a valuation allowance has been established and the deferred tax asset for the state operating losses is reviewed every quarter. At September 30, 2017, the valuation allowance totaled $0.2 million.
LIQUIDITY AND CAPITAL RESOURCES
Our primary sources of liquidity and capital resources are internally generated cash flows from operating activities and availability under our Credit Facility.
We generate cash in our operations primarily from at-need sales and delivery of preneed sales. We also generate cash from earnings on our cemetery perpetual care trusts. Based on our recent operating results, current cash position and anticipated future cash flows, we do not anticipate any significant liquidity constraints in the foreseeable future. However, if our capital expenditures or acquisition plans change, we may need to access the capital markets to obtain additional funding. Further, to the extent operating cash flow or access to and costs of financing sources are materially different than expected, future liquidity may be adversely affected. Please read Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2016.
We intend to use cash on hand and borrowings under our Credit Facility primarily to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development and funeral home expansion projects, and for payment of dividends. From time to time we may also use available cash to repurchase shares of our common stock in open market or privately negotiated transactions. We have the ability to draw on our revolving credit facility, subject to customary terms and conditions of the Credit Agreement. We believe that our existing cash balance, future cash flows from operations and borrowings under our Credit Facility described below will be sufficient to meet our anticipated working capital requirements, capital expenditures, scheduled debt payments, commitments, dividends and acquisitions for the foreseeable future.
Cash Flows
We began 2017 with $3.3 million in cash and other liquid investments and ended the third quarter with $0.8 million in cash. As of September 30, 2017, we had borrowings of $75.5 million outstanding on our revolving credit facility compared to $67.7 million outstanding as of December 31, 2016.
The following table sets forth the elements of cash flow for the nine months ended September 30, 2016 and 2017 (in millions):
|
| | | | | | | |
| For the Nine Months Ended September 30, |
| 2016 | | 2017 |
Cash at January 1st | $ | 0.5 |
| | $ | 3.3 |
|
Cash flow from operating activities | 34.8 |
| | 30.8 |
|
Acquisitions and land for new construction | (15.1 | ) | | (0.7 | ) |
Purchase of land and buildings previously leased | (6.3 | ) | | — |
|
Net proceeds from the sale of other assets | 1.0 |
| | 0.4 |
|
Growth capital expenditures | (6.8 | ) | | (6.8 | ) |
Maintenance capital expenditures | (5.2 | ) | | (6.3 | ) |
Net (payments) borrowings on our revolving credit facility, term loan and long-term debt obligations | 0.3 |
| | (1.7 | ) |
Taxes paid on restricted stock vestings and exercise of non-qualified options | (0.6 | ) | | (0.5 | ) |
Dividends paid on common stock | (1.7 | ) | | (2.5 | ) |
Proceeds from the exercise of stock options and employee stock purchase plan contributions | 0.7 |
| | 1.2 |
|
Purchase of treasury stock | — |
| | (16.4 | ) |
Payment of loan origination costs related to the credit facility | (0.7 | ) | | — |
|
Other financing costs | (0.1 | ) | | — |
|
Cash at September 30th | $ | 0.8 |
| | $ | 0.8 |
|
Operating Activities
For the nine months ended September 30, 2017, cash provided by operating activities was $30.8 million compared to cash provided by operating activities of $34.8 million for the nine months ended September 30, 2016, a decrease of $4.0 million, due primarily to the decline in preneed cemetery revenue and acquired funeral home operating profit margin in the second and third quarters of 2017 and unfavorable working capital changes, which include, the timing of payments for income taxes, payments for accrued severance for the retirement of a former executive and our Good To Great incentive compensation plan during the first quarter of 2017.
Investing Activities
Our investing activities resulted in a net cash outflow of $13.4 million for the nine months ended September 30, 2017 compared to $32.4 million for the nine months ended September 30, 2016, a decrease of $19.0 million. During the nine months ended September 30, 2017, we purchased real estate for funeral home parking lot expansion projects for approximately $0.7 million. Capital expenditures totaled $13.1 million, of which $6.8 million and $6.3 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily related to cemetery development costs of $3.0 million, construction costs related to two new funeral home facilities of approximately $2.5 million and renovations at certain businesses of $1.3 million. Maintenance capital expenditures in the nine months ended September 30, 2017 were primarily related to maintenance projects for facility repairs and improvements of $1.8 million, vehicle purchases of $1.7 million, IT infrastructure improvements, general equipment, and furniture purchases of $1.8 million, and paving roads, parking lots and landscaping projects of $1.0 million.
During the nine months ended September 30, 2016, we acquired three funeral home businesses for approximately $15.8 million. We purchased land for funeral home expansion projects for approximately $2.7 million. Additionally, we purchased land and buildings at four funeral home locations that were previously leased for approximately $6.3 million. Capital expenditures totaled $12.0 million, of which $6.8 million and $5.2 million were growth and maintenance capital expenditures, respectively. Our growth capital expenditures were primarily construction costs related to funeral home facilities of approximately $2.3 million, renovations at certain business locations of $1.3 million and cemetery development costs of $3.2 million. Maintenance capital expenditures in the nine months ended September 30, 2016 were primarily related to vehicle purchases of $1.2 million, general
equipment and furniture purchases of $1.6 million and maintenance projects such as paving roads, parking lots, facility repairs and general improvements of $2.4 million.
Financing Activities
Our financing activities resulted in a net cash outflow of $19.9 million for the nine months ended September 30, 2017 compared to $2.1 million for the nine months ended September 30, 2016, an increase of $17.8 million. During the nine months ended September 30, 2017, we had net payments on our revolving credit facility and term loan of $0.6 million. We also purchased treasury stock for $16.4 million and paid $2.5 million in dividends.
During the nine months ended September 30, 2016, we had net borrowings on our revolving credit facility and term loan of $1.3 million. We also paid transaction costs of approximately $0.7 million related to the Seventh Amendment of our Credit Facility and paid $1.7 million in dividends.
Dividends
On July 26, 2017 our Board declared a dividend of $0.05 per share, totaling approximately $0.8 million, which was paid on September 1, 2017 to record holders of our common stock as of August 14, 2017. For the three months ended September 30, 2016, we paid a quarterly dividend of $0.050 per share, totaling approximately $0.8 million. For the nine months ended September 30, 2016 and 2017, we paid total dividends of approximately $1.7 million and $2.5 million, respectively.
Share Repurchase
On February 25, 2016, our Board approved a share repurchase program authorizing us to purchase up to an aggregate of $25.0 million of our common stock in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). During the three months ended September 30, 2017, we repurchased 574,054 shares of common stock for a total cost of $14.0 million at an average cost of $24.35 per share pursuant to this share repurchase program. We did not purchase any shares of common stock in the first or second quarter of 2017. Our shares were purchased in the open market. Purchases were at times and in amounts as management determined appropriate based on factors such as market conditions, legal requirements and other business considerations. Shares purchased pursuant to the repurchase program are currently held as treasury shares.
On August 18, 2017, we purchased 100,000 shares of our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million. The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of the share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining.
Debt Obligations
The outstanding principal of our total long-term debt and capital lease obligations at September 30, 2017 totaled $218.8 million and consisted of $130.3 million under our term loan, $75.5 million outstanding under our revolving credit facility and $14.0 million in acquisition indebtedness and capital lease obligations.
As of September 30, 2017, we had a $300 million secured bank credit facility with Bank of America, N.A., as Administrative Agent (the “Credit Agreement”), comprised of a $150 million revolving credit facility and a $150 million term loan (collectively, the “Credit Facility”). The Credit Facility also contains an accordion provision to borrow up to an additional $75 million in revolving loans, subject to certain conditions. The Credit Facility is collateralized by all personal property and funeral home real property in certain states.
We have one letter of credit issued on November 30, 2016 and outstanding under the Credit Facility for approximately $2.0 million, which bears interest at 2.125% and will expire on November 27, 2017. The letter of credit automatically renews annually and secures our obligations under our various self-insured policies. Under the Credit Facility, outstanding borrowings bear interest at either a prime rate or a LIBOR rate, plus an applicable margin based upon our leverage ratio. At September 30, 2017, the prime rate margin was equivalent to 1.125% and the LIBOR margin was 2.125%. The weighted average interest rate on the Credit Facility for the three and nine months ended September 30, 2017 was 3.4% and 3.1%, respectively.
We have no material assets or operations independent of our subsidiaries. All assets and operations are held and conducted by our subsidiaries, each of which have fully and unconditionally guaranteed our obligations under the Credit Facility. Additionally, we do not currently have any significant restrictions on our ability to receive dividends or loans from any subsidiary guarantor under the Credit Facility.
We were in compliance with the covenants contained in the Credit Agreement as of September 30, 2017. The Credit Agreement contains key ratios with which we must comply, including a requirement to maintain a leverage ratio of no more than 3.5 to 1.00 and a covenant to maintain a fixed charge coverage ratio of no less than 1.20 to 1.00. As of September 30, 2017, the leverage ratio was 2.99 to 1.00 and the fixed charge coverage ratio was 1.89 to 1.00.
Amortization of debt issuance costs related to our Credit Facility was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 and $0.3 million and $0.2 million for the nine months ended September 30, 2016 and 2017, respectively. The unamortized debt issuance costs related to the Credit Facility are being amortized over the remaining term of the related debt using the effective interest method for our term loan and the straight line method for our revolving credit facility.
Convertible Subordinated Notes due 2021
On March 19, 2014, we issued $143.75 million aggregate principal amount of 2.75% convertible subordinated notes due March 15, 2021 (the “Convertible Notes”). The Convertible Notes bear interest at 2.75% per year. Interest on the Convertible Notes began to accrue on March 19, 2014 and is payable semi-annually in arrears on March 15 and September 15 of each year.
At September 30, 2017, the carrying amount of the equity component was approximately $18.0 million. At September 30, 2017, the principal amount of the liability component was $143.75 million and the net carrying amount was $123.2 million. The unamortized discount of $18.7 million and the unamortized debt issuance costs of $1.9 million as of September 30, 2017 are being amortized using the effective interest method over the remaining term of the Convertible Notes. The effective interest rate on the unamortized discount and the debt issuance costs for the three and nine months ended September 30, 2016 and 2017 was 6.75% and 2.75%, respectively.
Interest expense on the Convertible Notes included contractual coupon interest expense of approximately $1.0 million for both the three months ended September 30, 2016 and 2017 and $3.0 million for both the nine months ended September 30, 2016 and 2017. Accretion of the discount on the Convertible Notes was $1.0 million and $1.1 million for the three months ended September 30, 2016 and 2017, respectively, and $2.9 million and $3.2 million for the nine months ended September 30, 2016 and 2017, respectively. Amortization of debt issuance costs related to our Convertible Notes was approximately $0.1 million for both the three months ended September 30, 2016 and 2017 and $0.4 million for both the nine months ended September 30, 2016 and 2017.
The initial conversion rate of the Convertible Notes, as of March 19, 2014, was 44.3169 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an initial conversion price of approximately $22.56 per share of common stock. The adjusted conversion rate of the Convertible Notes, in effect at September 30, 2017, is 44.5392 shares of our common stock per $1,000 principal amount of Convertible Notes, equivalent to an adjusted conversion price of approximately $22.45 per share of common stock.
SEASONALITY
Our business can be affected by seasonal fluctuations in the death rate. Generally, the death rate is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.
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Item 3. | Quantitative and Qualitative Disclosures About Market Risk. |
In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to interest rate risk and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. We are not exposed to any other significant market risks.risks other than those related to COVID-19 which are described in more detail in Item 1A - Risk Factors below.
The following quantitative and qualitative information is provided about financial instruments to which we are a party at SeptemberJune 30, 20172020 and from which we may incur future gains or losses from changes in market conditions. We do not enter into derivative or other financial instruments for speculative or trading purposes.
Hypothetical changes in interest rates and the values of securities associated with the preneed and perpetual care trusts chosen for the following estimated sensitivity analysis are considered to be reasonable near-term changes generally based on consideration of past fluctuations for each risk category. However, since it is not possible to accurately predict future changes in interest rates, these hypothetical changes may not necessarily be an indicator of probable future fluctuations.
The following information about our market-sensitive financial instruments constitutes a “forward-looking statement.”
In connection with our preneed funeral operations and preneed cemetery merchandise and service sales, the related funeral and cemetery trust funds own investments in equity and debt securities and mutual funds, which are sensitive to current market prices. Cost and market values of such investments as of SeptemberJune 30, 20172020 are presented in Item 1, “Condensed Notes to Consolidated Financial Statements,” Notes 36 and 67 to our Consolidated Financial Statements in this Quarterly Report on Form 10-Q. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.51%1.59% change in the value of the fixed income securities.
We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of SeptemberJune 30, 2017,2020, we had outstanding borrowings under the Credit Facility of $75.5 million under our $150.0
million revolving credit facility and approximately $130.3 million outstanding on our term loan.$89.7 million. Any further borrowings or voluntary prepayments against the revolving credit facilityCredit Facility or any change in the floating rate would cause a change in interest expense. We have the option to pay interest under the Credit Facility at either prime rate or the LIBOR rate plus a margin. At SeptemberJune 30, 2017,2020, the prime rate margin was equivalent to 1.125%2.00% and the LIBOR rate margin was 2.125%3.00%. Assuming the outstanding balance remains unchanged, a change of 100 basis points in our borrowing rate would result in a change in income before taxes of $2.1$0.9 million. We have not entered into interest rate hedging arrangements in the past. Management continually evaluates the cost and potential benefits of interest rate hedging arrangements.
Our Convertible Notes bear interest at athe fixed annual rate of 2.75% per year.. The Convertible Notes do not contain a call feature. At SeptemberJune 30, 2017,2020, the carrying value of the Convertible Notes on our Consolidated Balance Sheet was $6.1 million and the fair value of these notesthe Convertible Notes was approximately $179.9$6.4 million based on the last traded or broker quoted price.price, as reported by the Financial Industry Regulatory Authority, Inc. (“FINRA)”. Increases in market interest rates may cause the value of the Convertible Notes to decrease, but such changes will not affect our interest costs.
Our Senior Notes bear interest at the fixed annual rate of 6.625%. We may redeem all or part of the Senior Notes at any time prior to June 1, 2021 at a redemption price equal to 100% of the principal amount of Senior Notes redeemed, plus a “make whole” premium, and accrued and unpaid interest, if any, to the date of redemption. We have the right to redeem the Senior Notes at any time on or after June 1, 2021 at the redemption prices described in the indenture governing the Senior Notes, plus accrued and unpaid interest, if any, to the date of redemption. At June 30, 2020, the carrying value of the Senior Notes on our Consolidated Balance Sheet was $395.7 million and the fair value of the Senior Notes was $419.9 million based on the last traded or broker quoted price, as reported by FINRA. Increases in market interest rates may cause the value of the Senior Notes to decrease, but such changes will not affect our interest costs.
The remainder of our long-term debt and leases consistsconsist of non-interest bearing notes and fixed rate instruments that do not trade in a market and do not have a quoted market value. Any increase in market interest rates could causecauses the fair value of those liabilities to decrease, but such changes will not affect our interest costs.
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Item 4. | Controls and Procedures. |
Management’s Evaluation of Disclosure Controls and Procedures
Our management, including our principal executive and principal financial officer, hasofficers, have evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) as of the end of the period covered by this Quarterly Report on Form 10-Q. Our disclosure controls and procedures are designed to ensure that the information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionSEC rules and forms, and to ensure that such information is accumulated and communicated to management, including our principal executive and principal financial officer,officers, as appropriate, to allow timely decisions regarding required disclosure. Based on such evaluation, our principal executive and principal financial officerofficers concluded that our disclosure controls and procedures are effective as of SeptemberJune 30, 20172020 and that the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, results of operations, and cash flows for the periods presented in conformity with US GAAP.
Changes in Internal Control over Financial Reporting
There was no change in our system of internal control over financial reporting (defined in Rules 13a-15(f) or 15d-15(f) under the Exchange Act) during the fiscal quarter covered by this quarterly reportQuarterly Report on Form 10-Q that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II – OTHER INFORMATION
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Item 1. | Legal Proceedings. |
We and our subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of our business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our financial statements.
We self-insure against certain risks and carry insurance with coverage and coverage limits for risk in excess of the coverage amounts consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there can be no assurance that self-insurance reserves and insurance will be sufficient to mitigate all damages, claims, or contingencies, we believe that the reserves and our insurance provides reasonable coverage for known asserted and unasserted claims. In the event we sustain a loss from a claim and the insurance carrier disputes coverage or coverage limits, we may record a charge in a different period than the recovery, if any, from the insurance carrier.
See Part I, Item 1, Financial Statements and Supplementary Data, Note 14 for additional information related to our legal proceedings.
There have been no material changes in ourRisk Factor Update
In light of the rapidly evolving COVID-19 outbreak, we are also supplementing the risk factors as previously disclosed in Part I, Item 1A, “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2016. Readers should carefully consider the factors discussed in Part I, Item 1A “Riskset out under “Item 1A. Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2016, which could materially affect our business, financial condition or future results.2019 (the “2019 Form 10-K”) with the new risk factor set out below. The risks describedrisk factors below should be read in conjunction with the risk factors set out in our Annual Report on2019 Form 10-K for the year ended December 31, 2016 are not the only risks we face. Additional risks10-K:
Unfavorable economic conditions, including as a result of health and uncertainties not currently known to us or that we currently deem to be immaterial also may materiallysafety concerns, could adversely affect our business, financial condition or results of operations.
Our business and operational results could be adversely affected by general conditions in the U.S. economy, including conditions that are outside of our control, such as the impact of health and safety concerns from the COVID-19 pandemic. The most recent U.S. and global economic and financial conditions related to COVID-19 resulted in extreme volatility and disruptions in the capital and credit markets. A severe or prolonged economic downturn, and the related adverse economic and health consequences could result in a variety of risks to our business, financial condition or results from operations, including weakened demand from our client families, decreased preneed sales, increased preneed installment contract defaults, increased cremation rates, reduced access to capital and credit markets or delays in obtaining client family payments. A weak or declining economy could also strain our supply partners. Additionally, our business relies heavily on our employees, including key employees due to the localized and personal nature of our business, and adverse events such as health-related concerns, the inability to travel and other matters affecting the general work environment could harm our business. In the event of a major disruption caused by the outbreak of pandemic diseases such as COVID-19, we may lose the services of a number of our key employees or experience system interruptions, which could lead to impacts to our regular business operations, inefficiencies and reputational harm. Due to the uncertainty around the ultimate impact of COVID-19 to our business and operations, the impact on our business and operational results cannot be reasonably estimated at this time. Any of the foregoing could harm our business and we cannot anticipate all the ways in which the current COVID-19 pandemic and financial market conditions could adversely impact our business.
Covenant restrictions in our debt instruments may limit our flexibility to operate and grow our business, and if we are not able to comply with such covenants, our lenders could accelerate our indebtedness, proceed against certain collateral or exercise other remedies, which could have a material adverse effect on us.
The covenants in our Credit Facility and the indenture governing our Senior Notes contain a number of provisions that impose operating and financial restrictions which, subject to certain exceptions, limit our ability and the ability of our subsidiaries to, among other things: incur additional indebtedness (including guarantees); pay dividends or make distributions or redeem or repurchase our common stock; make investments; grant liens on assets; make capital expenditures; enter into transactions with affiliates; enter into sale-leaseback transactions; sell or dispose assets; and acquire the assets of, or merge or consolidate with, other companies.
We are required to comply with certain financial covenants in our Credit Facility. Complying with these financial covenants and other restrictive covenants, as well as those that may be contained in any future results.debt agreements, may limit our ability to finance our future operations or working capital needs or to take advantage of future business opportunities. Our ability to comply with these covenants will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with any of these covenants or restrictions could result in a default under any future debt instrument, which could lead to
an acceleration of the debt under that instrument and, in some cases, the acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions, each of which could have a material adverse effect on us. In the case of an event of default, or in the event of a cross-default or cross-acceleration, we may not have sufficient funds available to make the required payments under our debt instruments. If we are unable to repay amounts owed under the terms of our Credit Facility, the lenders thereunder may choose to exercise their remedies in respect of the collateral, including a foreclosure of their lien which results in a sale of certain of our funeral assets to satisfy our obligations under the Credit Facility.
Pursuant to the terms of our Credit Facility, we must comply with, amongst other things, a maximum Total Leverage Ratio covenant which is measured quarterly. If we are unable to comply with the maximum Total Leverage Ratio, we will be in immediate default under the Credit Facility. The COVID-19 pandemic may have a future impact on our business which could result in our inability to comply with this Total Leverage Ratio covenant and other covenants in our Credit Facility. There can be no assurance that the lenders will agree to amend the Credit Facility in the future to adjust or eliminate this covenant or whether the lenders may agree to waive any non-compliance with this financial covenant or any other covenant in the future.
Moreover, if we do not maintain compliance with our continuing obligations or any covenants, terms and conditions of the Credit Facility, we could be in default and required to repay outstanding borrowings on an accelerated basis, which could subject us to decreased liquidity and other negative impacts on our business, results of operations and financial condition. It may be difficult for us to find an alternative lending source under these circumstances. Without access to borrowings under the Credit Facility, our liquidity would be adversely affected and we would lack sufficient working capital to operate our business as presently conducted. Any disruption in access to credit could force us to take measures to conserve cash.
New or revised tax regulations could have a material effect on our financial statements
New tax laws or regulations could be enacted at any time, and existing tax laws or regulations could be interpreted, amended, or applied in a manner that has a material effect on us, which could materially impact our business and financial condition. For example, on March 27, 2020, the CARES Act was enacted in response to the macroeconomic environment conditions posed by COVID-19. The CARES Act is a sweeping stimulus bill intended to bolster the U.S. economy, among other things, and provide emergency assistance to qualifying businesses and individuals. Based on available guidance, we anticipate that the legislative changes will have a positive impact on our earnings and cash flow. We have conducted an initial analysis into determining the impact of the legislative changes on our provision for income taxes. As the enacted legislation includes provisions that would expire after certain periods of time, the fact that our business has the potential to change its operating situation, and the existence of potential changes by state tax authorities related to conformity with federal tax regulations, the possibility exists that the future benefit of the legislation could change. In addition, it is uncertain if, and to what extent, various states will conform to the CARES Act, or any newly enacted or revised federal tax legislation. Under the CARES Act, the primary areas that should be considered for future earnings and cash impact are the changes to the interest expense limitation threshold and the technical correction to the Tax Cuts and Jobs Act regarding the qualified improvement property now being eligible for full expensing. We continue to work to determine the full impact that the recent tax legislation as a whole will have on us.
Please also refer to the complete set of Risk Factors under Item 1A in the Company’s 2019 Form 10-K, filed with the U.S. Securities and Exchange Commission on February 28, 2020, for additional risks and uncertainties to the Company that may have an adverse effect on the Company’s business, financial condition and results of operations.
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Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table sets forth certain information with respect to repurchases of our common stock during the quarter ended SeptemberJune 30, 2017:2020:
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Period | | Total Number of Shares Purchased (1) | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Dollar Value of Shares That May Yet Be Purchased Under the Program |
| | | | | | | | |
July 1, 2017 - July 31, 2017 | | — |
| | $ | — |
| | — |
| | $ | — |
|
August 1, 2017 - August 31, 2017 | | 285,353 |
| | $ | 24.30 |
| | 185,353 |
| | $ | 20,450,852 |
|
September 1, 2017 - September 30, 2017 | | 388,701 |
| | $ | 24.26 |
| | 388,701 |
| | $ | 11,019,052 |
|
Total for quarter ended September 30, 2017 | | 674,054 |
| | | | 574,054 |
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|
| | | | | | | | | | | | | | |
Period | | Total Number of Shares Purchased | | Average Price Paid Per Share | | Total Number of Shares Purchased as Part of Publicly Announced Program | | Dollar Value of Shares That May Yet Be Purchased Under the Program(1) |
| | | | | | | | |
April 1, 2020 - April 30, 2020 | | — |
| | $ | — |
| | — |
| | $ | 25,601,446 |
|
May 1, 2020 - May 31, 2020 | | — |
| | $ | — |
| | — |
| | $ | 25,601,446 |
|
June 1, 2020 - June 30, 2020 | | — |
| | $ | — |
| | — |
| | $ | 25,601,446 |
|
Total for quarter ended June 30, 2020 | | — |
| | | | — |
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(1(1) | ) | On August 18, 2017, we purchased 100,000 shares ofSee Note 15 to the Consolidated Financial Statements included herein for additional information on our common stock from Melvin C. Payne, our Chairman of the Board and Chief Executive Officer. The purchase of these shares was made pursuant to a privately negotiated transaction at a price of $23.85 per share for a total purchase price of $2.4 million.The purchase price was the stock's trading price at the time of the transaction. This purchase was not a part of thepublicly announced share repurchase program approved by the Board on February 25, 2016. The repurchase of the shares held by Mr. Payne was approved in advance by our Board, with Mr. Payne abstaining. program. |
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Item 3. | Defaults Upon Senior Securities. |
Not applicable.
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Item 4. | Mine Safety Disclosures. |
Not applicable.
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Item 5. | Other Information. |
None.
The exhibits required to be filed pursuant to the requirements of Item 601 of Regulation S-K are set forth in the Exhibit Index accompanying this Quarterly Report on Form 10-Q and are incorporated herein by reference.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
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| | CARRIAGE SERVICES, INC. |
Date: | October 25, 2017August 4, 2020 | /s/ Viki K. Blinderman |
| | Viki K. Blinderman |
| | Senior Vice President, Principal FinancialChief Accounting Officer and Secretary |
| | (Principal Financial Officer) |
CARRIAGE SERVICES, INC.
INDEX OF EXHIBITS
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Exhibit No. | | Description |
10.1 | | Limited Waiver and Fourth Amendment to Credit Agreement, dated as of May 18, 2020, by and among Carriage Services, Inc., the financial institutions party thereto, as lenders, and Bank of America, as administrative agent, swing line lender and L/C issuer. Incorporated by reference to exhibit 10.1 to the Company's Current Report on Form 8-K filed on May 22, 2020. |
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10.2 | | |
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*31.1 | | |
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*31.2 | | |
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**32 | | |
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*101 | | Interactive Data Files. |
__________________
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(†) | Management contract or compensatory plan or arrangement. |