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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2015

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                      to                     .

Commission File Number: 001-32270

 

 

STONEMOR PARTNERS L.P.

(Exact name of registrant as specified in its charter)

 

 

 

Delaware   80-0103159

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

311 Veterans Highway, Suite B

Levittown, Pennsylvania

  19056
(Address of principal executive offices)   (Zip Code)

(215) 826-2800

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   ¨    Accelerated filer   x
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of the registrant’s outstanding common units at July 31, 2015 was 31,728,802.

 

 

 


Table of Contents

Index – Form 10-Q

 

         Page  

Part I

 

Financial Information

  

Item 1.

 

Financial Statements (unaudited)

     3   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     34   

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

     56   

Item 4.

 

Controls and Procedures

     58   

Part II

 

Other Information

  

Item 1.

 

Legal Proceedings

     58   

Item 1A.

 

Risk Factors

     58   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     59   

Item 3.

 

Defaults Upon Senior Securities

     59   

Item 4.

 

Mine Safety Disclosures

     59   

Item 5.

 

Other Information

     59   

Item 6.

 

Exhibits

     60   
 

Signatures

     61   


Table of Contents

Part I – Financial Information

 

Item 1. Financial Statements

StoneMor Partners L.P.

Condensed Consolidated Balance Sheet

(in thousands)

(unaudited)

 

     June 30,     December 31,  
     2015     2014  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 13,403      $ 10,401   

Accounts receivable, net of allowance

     67,761        62,503   

Prepaid expenses

     6,247        4,708   

Other current assets

     31,696        24,266   
  

 

 

   

 

 

 

Total current assets

     119,107        101,878   

Long-term accounts receivable, net of allowance

     93,747        89,536   

Cemetery property

     339,596        339,848   

Property and equipment, net of accumulated depreciation

     99,245        100,391   

Merchandise trusts, restricted, at fair value

     478,927        484,820   

Perpetual care trusts, restricted, at fair value

     332,110        345,105   

Deferred financing costs, net of accumulated amortization

     8,291        9,089   

Deferred selling and obtaining costs

     105,278        97,795   

Deferred tax assets

     42        40   

Goodwill

     58,836        58,836   

Intangible assets

     67,891        68,990   

Other assets

     3,300        3,136   
  

 

 

   

 

 

 

Total assets

   $ 1,706,370      $ 1,699,464   
  

 

 

   

 

 

 

Liabilities and partners’ capital

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 40,711      $ 35,382   

Accrued interest

     1,356        1,219   

Current portion, long-term debt

     4,552        2,251   
  

 

 

   

 

 

 

Total current liabilities

     46,619        38,852   

Other long-term liabilities

     1,185        1,292   

Obligation for lease and management agreements, net

     9,123        8,767   

Long-term debt

     326,206        285,378   

Deferred cemetery revenues, net

     661,282        643,408   

Deferred tax liabilities

     17,665        17,708   

Merchandise liability

     152,899        150,192   

Perpetual care trust corpus

     332,110        345,105   
  

 

 

   

 

 

 

Total liabilities

     1,547,089        1,490,702   
  

 

 

   

 

 

 

Commitments and contingencies

    

Partners’ capital (deficit)

    

General partner deficit

     (7,336     (5,113

Common partners, 29,313 and 29,204 units outstanding as of June 30, 2015 and December 31, 2014, respectively

     166,617        213,875   
  

 

 

   

 

 

 

Total partners’ capital

     159,281        208,762   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 1,706,370      $ 1,699,464   
  

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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Table of Contents

StoneMor Partners L.P.

Condensed Consolidated Statement of Operations

(in thousands, except per unit data)

(unaudited)

 

     Three months ended
June 30,
    Six months ended
June 30,
 
     2015     2014     2015     2014  

Revenues:

        

Cemetery

        

Merchandise

   $ 36,042      $ 34,572      $ 62,979      $ 60,640   

Services

     14,591        12,492        28,501        22,789   

Investment and other

     16,698        12,991        28,008        29,266   

Funeral home

        

Merchandise

     6,250        4,966        13,325        10,018   

Services

     7,244        6,512        15,429        13,207   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     80,825        71,533        148,242        135,920   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and expenses:

        

Cost of goods sold (exclusive of depreciation shown separately below):

        

Perpetual care

     2,067        1,821        3,734        3,212   

Merchandise

     7,740        6,829        13,156        12,942   

Cemetery expense

     19,279        16,141        35,544        29,470   

Selling expense

     15,769        14,861        29,679        26,050   

General and administrative expense

     9,192        8,880        18,521        16,525   

Corporate overhead (including $275 and $266 in unit-based compensation for the three months ended June 30, 2015 and 2014, and $547 and $537 for the six months ended June 30, 2015 and 2014, respectively)

     10,093        6,546        18,827        14,002   

Depreciation and amortization

     2,944        2,513        5,896        4,881   

Funeral home expense

        

Merchandise

     2,066        1,604        4,442        3,250   

Services

     5,703        4,714        11,296        9,501   

Other

     4,380        3,118        8,561        5,971   

Acquisition related costs, net of recoveries

     336        1,240        685        1,589   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     79,569        68,267        150,341        127,393   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating profit (loss)

     1,256        3,266        (2,099     8,527   

Gain on acquisition

     —          —          —          412   

Gain on settlement agreement, net

     —          888        —          888   

Interest expense

     5,770        5,148        11,233        10,722   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

     (4,514     (994     (13,332     (895

Income tax expense (benefit)

     334        (876     399        (1,186
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

   $ (4,848   $ (118   $ (13,731   $ 291   
  

 

 

   

 

 

   

 

 

   

 

 

 

General partner’s interest in net income (loss) for the period

   $ (65   $ (9   $ (185   $ (5

Limited partners’ interest in net income (loss) for the period

   $ (4,783   $ (109   $ (13,546   $ 296   

Net income (loss) per limited partner unit (basic and diluted)

   $ (.16   $ —        $ (.46   $ .01   

Weighted average number of limited partners’ units outstanding - basic

     29,286        25,552        29,258        24,031   

Weighted average number of limited partners’ units outstanding - diluted

     29,286        25,552        29,258        24,312   

Distributions declared per unit

   $ .640      $ .600      $ 1.270      $ 1.200   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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StoneMor Partners L.P.

Condensed Consolidated Statement of

Partners’ Capital (Deficit)

(in thousands)

(unaudited)

 

     Partners’ Capital (Deficit)  
     Common
Unit Holders
    General
Partner
    Total  

Balance, December 31, 2014

   $ 213,875      $ (5,113   $ 208,762   

Issuance of common units

     2,865        —          2,865   

Compensation related to unit awards

     547        —          547   

Net loss

     (13,546     (185     (13,731

Cash distributions

     (34,259     (2,038     (36,297

Unit distributions

     (2,865     —          (2,865
  

 

 

   

 

 

   

 

 

 

Balance, June 30, 2015

   $ 166,617      $ (7,336   $ 159,281   
  

 

 

   

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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StoneMor Partners L.P.

Condensed Consolidated Statement of Cash Flows

(in thousands)

(unaudited)

 

     For the six months ended June 30,  
     2015     2014  

Operating activities:

    

Net income (loss)

   $ (13,731   $ 291   

Adjustments to reconcile net income (loss) to net cash provided by operating activities:

    

Cost of lots sold

     4,917        5,656   

Depreciation and amortization

     5,896        4,881   

Unit-based compensation

     547        537   

Accretion of debt discounts

     1,467        1,297   

Gain on acquisition

     —          (412

Changes in assets and liabilities that provided (used) cash:

    

Accounts receivable

     (11,786     (10,023

Allowance for doubtful accounts

     2,317        2,891   

Merchandise trust fund

     (23,478     (16,292

Prepaid expenses

     (1,539     (2,576

Other current assets

     (7,430     (2,301

Other assets

     (193     (1,129

Accounts payable and accrued and other liabilities

     5,356        525   

Deferred selling and obtaining costs

     (7,483     (5,374

Deferred cemetery revenue

     45,307        32,204   

Deferred taxes (net)

     (44     (1,672

Merchandise liability

     3,852        (1,752
  

 

 

   

 

 

 

Net cash provided by operating activities

     3,975        6,751   
  

 

 

   

 

 

 

Investing activities:

    

Cash paid for cemetery property

     (3,871     (2,914

Purchase of subsidiaries

     —          (54,000

Consideration for lease and management agreements

     —          (53,000

Cash paid for property and equipment

     (3,379     (4,104
  

 

 

   

 

 

 

Net cash used in investing activities

     (7,250     (114,018
  

 

 

   

 

 

 

Financing activities:

    

Cash distributions

     (36,297     (28,225

Additional borrowings on long-term debt

     56,823        39,872   

Repayments of long-term debt

     (14,215     (75,149

Proceeds from public offerings

     —          120,451   

Proceeds from issuance of common units

     —          53,430   

Cost of financing activities

     (34     —     
  

 

 

   

 

 

 

Net cash provided by financing activities

     6,277        110,379   
  

 

 

   

 

 

 

Net increase in cash and cash equivalents

     3,002        3,112   

Cash and cash equivalents - Beginning of period

     10,401        12,175   
  

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ 13,403      $ 15,287   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for interest

   $ 9,551      $ 9,395   

Cash paid during the period for income taxes

   $ 3,516      $ 3,152   

Non-cash investing and financing activities:

    

Acquisition of assets by financing

   $ 242      $ 50   

Acquisition of asset by assumption of directly related liability

   $ —        $ 8,368   

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

 

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1. NATURE OF OPERATIONS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Nature of Operations

StoneMor Partners L.P. (“StoneMor”, the “Company” or the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, StoneMor offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a pre-need basis. As of June 30, 2015, the Partnership operated 303 cemeteries in 27 states and Puerto Rico, of which 272 are owned and 31 are operated under lease, management or operating agreements. The Partnership also owned and operated 98 funeral homes in 19 states and Puerto Rico.

Basis of Presentation

The unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). All interim financial data is unaudited. However, in the opinion of management, the interim financial data as of June 30, 2015 and for the three and six months ended June 30, 2015 and 2014 includes all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for the interim periods. The results of operations for interim periods are not necessarily indicative of the results of operations to be expected for a full year. The December 31, 2014 condensed consolidated balance sheet data was derived from audited financial statements included in the Company’s 2014 Annual Report on Form 10-K (“2014 Form 10-K”), but does not include all disclosures required by GAAP, which are presented in the Company’s 2014 Form 10-K.

Principles of Consolidation

The unaudited condensed consolidated financial statements include the accounts of each of the Company’s subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The Company operates 31 cemeteries under long-term lease, operating or management contracts. The operations of 16 of these managed cemeteries have been consolidated in accordance with the provisions of Accounting Standards Codification (ASC) 810.

The Company operates 15 cemeteries under long-term lease, operating or management agreements that do not qualify as acquisitions for accounting purposes, including 13 cemeteries related to the transaction with the Archdiocese of Philadelphia that closed in the second quarter of 2014. As a result, the Company did not consolidate all of the existing assets and liabilities related to these cemeteries. The Company has consolidated the existing assets and liabilities of these cemeteries’ merchandise and perpetual care trusts as variable interest entities since the Company controls and receives the benefits and absorbs any losses from operating these trusts. Under these long-term lease, operating or management agreements, which are subject to certain termination provisions, the Company is the exclusive operator of these cemeteries. The Company earns revenues related to sales of merchandise, services, and interment rights and incurs expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Company will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Company has also recognized the existing merchandise liabilities that it assumed as part of these agreements.

New Accounting Pronouncements

In the second quarter of 2014, the Financial Accounting Standards Board issued Update No. 2014-09, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2014-09”), which supersedes the revenue recognition requirements in “Topic 605 - Revenue Recognition” and most industry-specific guidance. The core principle of ASU 2014-09 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The amendments are effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted. On April 29, 2015, the Financial Accounting Standards Board issued for public comment a proposed update that would defer the effective date of ASU 2014-09 by one year. The Company is currently in the process of evaluating the potential impact of this update on its financial statements.

In the first quarter of 2015, the Financial Accounting Standards Board issued Update No. 2015-02, “Consolidation (Topic 810)” (“ASU 2015-02”), which amends previous consolidation analysis guidance. ASU 2015-02 requires

 

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companies to consider revised consolidation criteria regarding limited partnerships and similar legal entities. The amendments are effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting period. Early application is permitted. The Company has evaluated the impact of this update, concluding that it will not have an impact on the Company’s financial position, results of operations, or cash flows.

In the second quarter of 2015, the Financial Accounting Standards Board issued Update No. 2015-03, “Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs” (“ASU 2015-03”), which changes the presentation of debt issuance costs. ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the related debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by ASU 2015-03. The amendments in the update are effective for annual reporting periods beginning after December 15, 2015, including interim periods within those reporting periods. Early application is permitted. The Company is currently in the process of evaluating the impact of this update, which is not expected to have a significant impact on its financial position, results of operations, or cash flows.

Use of Estimates

Preparation of these unaudited condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the unaudited condensed consolidated financial statements and the reported amounts of revenue and expense during the reporting periods. As a result, actual results could differ from those estimates. The most significant estimates in the unaudited condensed consolidated financial statements are the valuation of assets in the merchandise trusts and perpetual care trusts, allowance for cancellations, unit-based compensation, merchandise liability, deferred sales revenue, deferred margin, deferred merchandise trust investment earnings, deferred obtaining costs, assets and liabilities obtained via business combinations and income taxes. Deferred sales revenue, deferred margin and deferred merchandise trust investment earnings are included in deferred cemetery revenues, net, on the unaudited condensed consolidated balance sheet.

 

2. LONG-TERM ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Long-term accounts receivable, net, consists of the following:

 

     As of  
     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Customer receivables

   $ 207,685       $ 194,537   

Unearned finance income

     (21,103      (20,360

Allowance for contract cancellations

     (25,074      (22,138
  

 

 

    

 

 

 
     161,508         152,039   

Less: current portion, net of allowance

     67,761         62,503   
  

 

 

    

 

 

 

Long-term portion, net of allowance

   $ 93,747       $ 89,536   
  

 

 

    

 

 

 

 

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Activity in the allowance for contract cancellations is as follows:

 

     For the six months ended June 30,  
     2015      2014  
     (in thousands)  

Balance - Beginning of period

   $ 22,138       $ 20,275   

Provision for cancellations

     13,200         11,128   

Charge-offs - net

     (10,264      (7,706
  

 

 

    

 

 

 

Balance - End of period

   $ 25,074       $ 23,697   
  

 

 

    

 

 

 

There have been no changes to the Company’s long-term accounts receivable accounting policies since the filing of the Company’s 2014 Form 10-K.

 

3. CEMETERY PROPERTY

Cemetery property consists of the following:

 

     As of  
     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Developed land

   $ 79,407       $ 79,058   

Undeveloped land

     171,446         172,238   

Mausoleum crypts and lawn crypts

     78,715         78,524   

Other land

     10,028         10,028   
  

 

 

    

 

 

 

Total

   $ 339,596       $ 339,848   
  

 

 

    

 

 

 

 

4. PROPERTY AND EQUIPMENT

Major classes of property and equipment follow:

 

     As of  
     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Building and improvements

   $ 110,283       $ 108,178   

Furniture and equipment

     50,330         49,290   
  

 

 

    

 

 

 
     160,613         157,468   

Less: accumulated depreciation

     (61,368      (57,077
  

 

 

    

 

 

 

Property and equipment - net

   $ 99,245       $ 100,391   
  

 

 

    

 

 

 

Depreciation expense was $2.4 million and $4.8 million for the three and six months ended June 30, 2015, respectively, as compared to $2.0 million and $4.0 million during the same periods last year.

 

5. MERCHANDISE TRUSTS

At June 30, 2015, the Company’s merchandise trusts consisted of the following types of assets:

 

    Money market funds that invest in low risk short term securities;

 

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    Publicly traded mutual funds that invest in underlying debt securities;

 

    Publicly traded mutual funds that invest in underlying equity securities;

 

    Equity investments primarily in securities that are currently paying dividends or distributions. These investments include Master Limited Partnerships and global equity securities;

 

    Fixed maturity debt securities issued by various corporate entities; and

 

    Fixed maturity debt securities issued by U.S. states and local government agencies.

All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.

The merchandise trusts are variable interest entities (VIE) for which the Company is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise to which they relate. If the value of these assets falls below the cost of purchasing such merchandise, the Company may be required to fund this shortfall.

The Company has included $8.2 million and $8.3 million of investments held in trust by the West Virginia Funeral Directors Association at June 30, 2015 and December 31, 2014, respectively, in its merchandise trust assets. As required by law, the Company deposits a portion of certain funeral merchandise sales in West Virginia into a trust that is held by the West Virginia Funeral Directors Association. These trusts are recorded at their account value, which approximates their fair value.

 

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The cost and market value associated with the assets held in the merchandise trusts at June 30, 2015 and December 31, 2014 were as follows:

 

As of June 30, 2015

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments

   $ 18,782       $ —         $ —         $ 18,782   

Fixed maturities:

           

U.S. State and local government agency

     85         13         —           98   

Corporate debt securities

     12,697         4         (381      12,320   

Other debt securities

     7,033         —           (18      7,015   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     19,815         17         (399      19,433   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     256,287         873         (16,100      241,060   

Mutual funds - equity securities

     142,481         37         (9,743      132,775   

Equity securities

     59,550         926         (6,772      53,704   

Other invested assets

     5,306         —           (329      4,977   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total managed investments

   $ 502,221       $ 1,853       $ (33,343    $ 470,731   
  

 

 

    

 

 

    

 

 

    

 

 

 

West Virginia Trust Receivable

     8,196         —           —           8,196   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 510,417       $ 1,853       $ (33,343    $ 478,927   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of December 31, 2014

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments

   $ 52,521       $ —         $ —         $ 52,521   

Fixed maturities:

           

U.S. State and local government agency

     270         —           (1      269   

Corporate debt securities

     9,400         23         (447      8,976   

Other debt securities

     7,157         —           (18      7,139   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     16,827         23         (466      16,384   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     150,477         869         (8,666      142,680   

Mutual funds - equity securities

     167,353         12,568         (463      179,458   

Equity securities

     81,639         4,167         (5,507      80,299   

Other invested assets

     5,400         —           (241      5,159   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total managed investments

   $ 474,217       $ 17,627       $ (15,343    $ 476,501   
  

 

 

    

 

 

    

 

 

    

 

 

 

West Virginia Trust Receivable

     8,319         —           —           8,319   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 482,536       $ 17,627       $ (15,343    $ 484,820   
  

 

 

    

 

 

    

 

 

    

 

 

 
The contractual maturities of debt securities as of June 30, 2015 are presented below:   

As of June 30, 2015

   Less than
1 year
     1 year through
5 years
     6 years through
10 years
     More than
10 years
 
     (in thousands)  

U.S. State and local government agency

   $ —         $ 30       $ 66       $ 2   

Corporate debt securities

     —           8,986         3,334         —     

Other debt securities

     —           7,015         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ —         $ 16,031       $ 3,400       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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Table of Contents

Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost of each individual asset held in the merchandise trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at June 30, 2015 and December 31, 2014 is presented below:

 

     Less than 12 months      12 Months or more      Total      Number of
Securities in
Loss Position
 

As of June 30, 2015

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    
     (in thousands, except number of securities data)  

Fixed maturities:

                    

Corporate debt securities

   $ 6,824       $ 144       $ 4,437       $ 237       $ 11,261       $ 381         61   

Other debt securities

     —           —           5,786         18         5,786         18         10   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     6,824         144         10,223         255         17,047         399         71   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     32,615         1,414         205,405         14,686         238,020         16,100         42   

Mutual funds - equity securities

     117,450         9,293         14,682         450         132,132         9,743         8   

Equity securities

     35,820         5,206         9,654         1,566         45,474         6,772         78   

Other invested assets

     —           —           4,878         329         4,878         329         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 192,709       $ 16,057       $ 244,842       $ 17,286       $ 437,551       $ 33,343         200   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 Months or more      Total      Number of
Securities in
Loss Position
 

As of December 31, 2014

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    
     (in thousands, except number of securities data)  

Fixed maturities:

                    

U.S. State and local government agency

   $ 143       $ 1       $ —         $ —         $ 143       $ 1         3   

Corporate debt securities

     5,905         342         1,506         105         7,411         447         58   

Other debt securities

     2,370         8         4,769         10         7,139         18         13   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     8,418         351         6,275         115         14,693         466         74   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     32,072         1,039         95,629         7,627         127,701         8,666         34   

Mutual funds - equity securities

     4,147         463         —           —           4,147         463         2   

Equity securities

     44,563         4,641         3,909         866         48,472         5,507         60   

Other invested assets

     —           —           4,881         241         4,881         241         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 89,200       $ 6,494       $ 110,694       $ 8,849       $ 199,894       $ 15,343         171   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were 200 and 171 securities in an unrealized loss position in merchandise trusts as of June 30, 2015 and December 31, 2014, respectively, of which 67 and 39, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluated the severity of the impairment, the length of time that a security has been in a loss position, the security’s performance relative to the overall performance for the sector in which the security resides, and has concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

During the three months ended June 30, 2015, the Company determined that there were no other than temporary impairments to the investment portfolio in the merchandise trusts. During the six months ended June 30, 2015, the Company determined that there were two securities with an aggregate cost basis of approximately $0.6 million and an aggregate fair value of approximately $0.4 million, resulting in an impairment of $0.2 million, wherein such impairment was considered to be other-than-temporary. During the three and six months ended June 30, 2014, the Company determined that there were two securities with an aggregate cost basis of approximately $0.2 million and an aggregate fair value of approximately $0.1 million, resulting in an impairment of $0.1 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue will be reflected in earnings in future periods as the underlying merchandise is delivered or the underlying service is performed.

 

12


Table of Contents

A reconciliation of the Company’s merchandise trust activities for the six months ended June 30, 2015 is presented below:

 

Fair
Value at

12/31/2014

   Contributions      Distributions     Interest/
Dividends
     Capital
Gain
Distributions
    Realized
Gain/
Loss (1)
     Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value at
6/30/2015
 
(in thousands)  

$484,820

     31,667         (21,231     8,391         (741     14,453         (3,026     (1,632     (33,774   $ 478,927   

 

(1) Includes $4.2 million representing the net effect of other-than-temporary impairment charges and the release of previously realized impairment charges, as a result of sales and maturities of impaired securities.

The Company made net contributions into the trusts of approximately $10.4 million during the six months ended June 30, 2015. During the six months ended June 30, 2015, purchases and sales of securities available for sale included in trust investments were approximately $468.8 million and $456.2 million, respectively.

 

6. PERPETUAL CARE TRUSTS

At June 30, 2015, the Company’s perpetual care trusts consisted of the following types of assets:

 

    Money market funds that invest in low risk short term securities;

 

    Publicly traded mutual funds that invest in underlying debt securities;

 

    Publicly traded mutual funds that invest in underlying equity securities;

 

    Equity investments that are currently paying dividends or distributions. These investments include Master Limited Partnerships and global equity securities;

 

    Fixed maturity debt securities issued by various corporate entities;

 

    Fixed maturity debt securities issued by the U.S. Government and U.S. Government agencies; and

 

    Fixed maturity debt securities issued by U.S. states and local government agencies.

All of these investments are classified as Available for Sale as defined by the Investments in Debt and Equity topic of the ASC. Accordingly, all of the assets are carried at fair value. All of these investments are considered to be either Level 1 or Level 2 assets as defined by the Fair Value Measurements and Disclosures topic of the ASC. See Note 15 for further details. There were no Level 3 assets.

 

13


Table of Contents

The cost and market value associated with the assets held in the perpetual care trusts at June 30, 2015 and December 31, 2014 were as follows:

 

As of June 30, 2015

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments

   $ 13,122       $ —         $ —         $ 13,122   

Fixed maturities:

           

U.S. Government and federal agency

     101         14         —           115   

U.S. State and local government agency

     27         —           —           27   

Corporate debt securities

     24,130         153         (638      23,645   

Other debt securities

     371         —           —           371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     24,629         167         (638      24,158   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     217,589         3,065         (10,213      210,441   

Mutual funds - equity securities

     78,559         3,663         (236      81,986   

Equity securities

     1,957         472         (26      2,403   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 335,856       $ 7,367       $ (11,113    $ 332,110   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

As of December 31, 2014

   Cost      Gross
Unrealized
Gains
     Gross
Unrealized
Losses
     Fair
Value
 
     (in thousands)  

Short-term investments

   $ 26,644       $ —         $ —         $ 26,644   

Fixed maturities:

           

U.S. Government and federal agency

     100         16         —           116   

U.S. State and local government agency

     78         1         —           79   

Corporate debt securities

     24,275         104         (913      23,466   

Other debt securities

     371         —           —           371   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     24,824         121         (913      24,032   
  

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     128,735         379         (5,220      123,894   

Mutual funds - equity securities

     103,701         23,003         (1,268      125,436   

Equity securities

     30,617         14,704         (247      45,074   

Other invested assets

     25         —           —           25   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 314,546       $ 38,207       $ (7,648    $ 345,105   
  

 

 

    

 

 

    

 

 

    

 

 

 

The contractual maturities of debt securities as of June 30, 2015 were as follows:

 

As of June 30, 2015

   Less than
1 year
     1 year through
5 years
     6 years through
10 years
     More than
10 years
 
     (in thousands)  

U.S. Government and federal agency

   $ —         $ 115       $ —         $ —     

U.S. State and local government agency

     27         —           —           —     

Corporate debt securities

     262         17,204         6,160         19   

Other debt securities

     371         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 660       $ 17,319       $ 6,160       $ 19   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

14


Table of Contents

Temporary Declines in Fair Value

The Company evaluates declines in fair value below cost of each individual asset held in the perpetual care trusts on a quarterly basis.

An aging of unrealized losses on the Company’s investments in fixed maturities and equity securities at June 30, 2015 and December 31, 2014 is presented below:

 

     Less than 12 months      12 Months or more      Total      Number of
Securities in
Loss Position
 

As of June 30, 2015

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    
     (in thousands, except number of securities data)  

Fixed maturities:

                    

Corporate debt securities

   $ 10,190       $ 274       $ 6,033       $ 364       $ 16,223       $ 638         64   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     10,190         274         6,033         364         16,223         638         64   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     77,446         1,967         126,253         8,246         203,699         10,213         35   

Mutual funds - equity securities

     11,136         236         —           —           11,136         236         2   

Equity securities

     203         17         819         9         1,022         26         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 98,975       $ 2,494       $ 133,105       $ 8,619       $ 232,080       $ 11,113         108   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

     Less than 12 months      12 Months or more      Total      Number of
Securities in
Loss Position
 

As of December 31, 2014

   Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
     Fair
Value
     Unrealized
Losses
    
     (in thousands, except number of securities data)  

Fixed maturities:

                    

Corporate debt securities

   $ 14,434       $ 798       $ 2,519       $ 115       $ 16,953       $ 913         83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     14,434         798         2,519         115         16,953         913         83   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     30,345         768         86,814         4,452         117,159         5,220         31   

Mutual funds - equity securities

     13,035         1,268         —           —           13,035         1,268         5   

Equity securities

     3,866         245         620         2         4,486         247         29   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 61,680       $ 3,079       $ 89,953       $ 4,569       $ 151,633       $ 7,648         148   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

There were 108 and 148 securities in an unrealized loss position in perpetual care trusts as of June 30, 2015 and December 31, 2014, respectively, of which 42 and 20, respectively, were in an unrealized loss position for more than twelve months. For all securities in an unrealized loss position, the Company evaluated the severity of the impairment, the length of time that a security has been in a loss position, the security’s performance relative to the overall performance for the sector in which the security resides, and has concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Company is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

During the three and six months ended June 30, 2015, the Company determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts.

During the three and six months ended June 30, 2014, the Company determined that there were 2 securities with an aggregate cost basis of approximately $1.3 million and an aggregate fair value of approximately $0.8 million, resulting in an impairment of $0.5 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Company adjusted the cost basis of these assets to their current value and offset this change against the liability for perpetual care trust corpus.

 

15


Table of Contents

A reconciliation of the Company’s perpetual care trust activities for the six months ended June 30, 2015 is presented below:

 

Fair

Value at

12/31/2014

   Contributions      Distributions     Interest/
Dividends
     Capital
Gain
Distributions
     Realized
Gain/
Loss (1)
     Taxes     Fees     Unrealized
Change in
Fair Value
    Fair
Value at
6/30/2015
 
     (in thousands)  

$ 345,105

     5,766         (6,253     8,144         35         15,296         (605     (1,073     (34,305   $ 332,110   

 

(1) Includes $12.0 million representing the net effect of other-than-temporary impairment charges and the release of previously realized impairment charges, as a result of sales and maturities of impaired securities.

The Company made net withdrawals from the trusts of approximately $0.5 million during the six months ended June 30, 2015. During the six months ended June 30, 2015, purchases and sales of securities available for sale included in trust investments were approximately $281.3 million and $276.7 million, respectively.

 

7. GOODWILL AND INTANGIBLE ASSETS

Goodwill

Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired in acquisitions.

There have been no changes in the goodwill balance during the period and a summary by reportable segment is as follows:

 

     Cemeteries      Funeral         
     Southeast      Northeast      West      Homes      Total  
     (in thousands)  

Goodwill as of June 30, 2015 and December 31, 2014

   $ 8,950       $ 3,288       $ 11,948       $ 34,650       $ 58,836   

Other Acquired Intangible Assets

The Company has other acquired intangible assets, most of which have been recognized as a result of acquisitions and long-term lease, management and operating agreements. All of the intangible assets are amortized as a component of depreciation and amortization in the unaudited condensed consolidated statement of operations. The major classes of intangible assets are as follows:

 

     As of      As of  
     June 30, 2015      December 31, 2014  
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Intangible
Asset
     Gross Carrying
Amount
     Accumulated
Amortization
    Net Intangible
Asset
 
     (in thousands)  

Amortized intangible assets:

               

Lease and management agreements

   $ 59,758       $ (1,079   $ 58,679       $ 59,758       $ (581   $ 59,177   

Underlying contract value

     6,239         (936     5,303         6,239         (858     5,381   

Non-compete agreements

     5,250         (2,625     2,625         5,250         (2,126     3,124   

Other intangible assets

     1,439         (155     1,284         1,439         (131     1,308   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total intangible assets

   $ 72,686       $ (4,795   $ 67,891       $ 72,686       $ (3,696   $ 68,990   
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

See Note 7 of the Company’s 2014 Form 10-K for a discussion of the Company’s intangible assets, including its contract-based intangible asset pertaining to the lease and management agreements with the Archdiocese of Philadelphia.

 

16


Table of Contents
8. LONG-TERM DEBT

The Company had the following outstanding debt:

 

     As of  
     June 30,
2015
     December 31,
2014
 
     (in thousands)  

7.875% Senior Notes, due June 2021

   $ 175,000       $ 175,000   

Credit Facility, due December 2019:

     

Working Capital Draws

     126,902         85,902   

Acquisition Draws

     25,000         25,000   

Notes payable - acquisition debt

     776         861   

Notes payable - acquisition non-competes

     2,295         2,765   

Insurance and vehicle financing

     4,037         1,632   
  

 

 

    

 

 

 

Total

     334,010         291,160   

Less current portion

     4,552         2,251   

Less unamortized bond and note payable discounts

     3,252         3,531   
  

 

 

    

 

 

 

Long-term portion

   $ 326,206       $ 285,378   
  

 

 

    

 

 

 

This note includes a summary of material terms of the Company’s senior notes and revolving credit facility. For a more detailed description of the Company’s long-term debt agreements, see the Company’s 2014 Form 10-K.

7.875% Senior Notes due 2021

On May 28, 2013, the Company issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). The Company pays 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, since December 1, 2013. The net proceeds from the offering were used to retire a $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. The Company incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are amortized over the life of the Senior Notes. Based on trades made on June 30, 2015, the Company has estimated the fair value of its Senior Notes to be in excess of par and trading at a premium of 5.06%, which would imply a fair value of $183.9 million at June 30, 2015. The Senior Notes are valued using Level 2 inputs as defined by the Fair Value Measurements and Disclosures topic of the ASC in Note 15. As of June 30, 2015, the Company was in compliance with all applicable covenants of the Senior Notes.

Credit Facility

On December 19, 2014, the Partnership entered into the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”).

The Credit Agreement provides for a single revolving credit facility of $180.0 million (the “Credit Facility”) maturing on December 19, 2019. Additionally the Credit Agreement provides for an uncommitted ability to increase the Credit Facility by an additional $70.0 million. The summary of the material terms of the Credit Agreement is set forth below. Capitalized terms, which are not defined in the following description, shall have the meaning assigned to such terms in the Credit Agreement.

At June 30, 2015, amounts outstanding under the Credit Facility bore interest at rates between 4.0% and 6.0%. The interest rates on the Credit Facility are calculated as follows:

 

    For Eurodollar Rate Loans, the outstanding principal amount thereof bears interest for each Interest Period at a rate per annum equal to the Eurodollar Rate for the Interest Period plus the Applicable Rate for Eurodollar Rate Loans; and

 

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    For Base Rate Loans and Swing Line Loans, the outstanding principal amount thereof bears interest from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate for Base Rate Loans.

In addition, the Borrowers must pay a Letter of Credit Fee for each Letter of Credit equal to the Applicable Rate for Letter of Credit Fees times the daily amount to be drawn under such Letter of Credit. The Applicable Rate is determined based on the Consolidated Leverage Ratio of the Partnership and its Subsidiaries, and ranges from 2.25% to 4.00% for Eurodollar Rate Loans and Letter of Credit Fees, and 1.25% to 3.00% for Base Rate Loans. The current Applicable Rate for each of: (i) Eurodollar Rate Loans and Letter of Credit Fees is 3.75% and (ii) Base Rate Loans is 2.75% based on the current Consolidated Leverage Ratio. The Credit Agreement also requires the Borrowers to pay a quarterly unused commitment fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceeds the usage of such commitments.

The Credit Agreement contains financial covenants, pursuant to which the Borrowers and the Guarantors will not permit:

 

    Consolidated EBITDA for any Measurement Period to be less than the sum of (i) $80.0 million plus (ii) 80% of the aggregate of all Consolidated EBITDA for each Permitted Acquisition completed after June 30, 2014;

 

    the Consolidated Debt Service Coverage Ratio to be less than 2.50 to 1.0 for any Measurement Period; and

 

    the Consolidated Leverage Ratio to be greater than 4.00 to 1.0 for any period.

The covenants include, among other limitations, limitations on: (i) liens, (ii) the creation or incurrence of debt, (iii) investments and acquisitions, (iv) dispositions of property, (v) dividends, distributions and redemptions, and (vi) transactions with Affiliates.

The Credit Agreement provides that two types of draws are permitted with respect to the Credit Facility: Acquisition Draws and Working Capital Draws. The proceeds of Acquisition Draws may be utilized by the Borrowers to finance Permitted Acquisitions, the purchase and construction of mausoleums and related costs or the net amount of Merchandise Trust deposits made after the Closing Date under the Credit Agreement, irrespective of whether such amounts relate to new or existing cemeteries or funeral homes. The proceeds of Working Capital Draws, Letters of Credit and Swing Line Loans may be utilized by the Borrowers to finance working capital requirements, Capital Expenditures and for other general corporate purposes. The borrowing of Working Capital Advances is subject to a borrowing formula of 85% of Eligible Receivables. This limit was $137.3 million at June 30, 2015.

Each Acquisition Draw is subject to equal quarterly amortization of the principal amount of such draw, with annual principal payments comprised of ten percent (10%) of the related draw amount, commencing on the second anniversary of such draw, with the remaining principal due on the Maturity Date, subject to certain mandatory prepayment requirements. Working Capital Draws are due on the Maturity Date, subject to certain mandatory prepayment requirements.

Effective July 10, 2015, the Company entered into the First Amendment (the “First Amendment”) to the Credit Agreement to allow the Company to apply Net Cash Proceeds received from certain: (i) Dispositions of property by any Credit Party or any of its Subsidiaries, (ii) sales or issuances of Equity Interests by the Company or any of its Subsidiaries and (iii) Extraordinary Receipts received by or paid to or for the account of any Credit Party or any of its Subsidiaries and not otherwise included in clause (i) and (ii) above that are required to be prepaid to the Lenders, to Acquisition Draws or Working Capital Draws, at the Company’s discretion. Prior to the execution of the First Amendment, the Credit Agreement required that the Net Cash Proceeds from the transactions described above be applied to Acquisition Draws before they could be applied to Working Capital Draws.

As of June 30, 2015, there were $151.9 million of outstanding borrowings under the Credit Facility. The Credit Facility approximates fair value as it consists of multiple current LIBOR borrowings with maturities of 90 days or less, with amounts that can be rolled-over or reborrowed at market rates. It is valued using Level 2 inputs. As of June 30, 2015, the Company complied with all applicable financial covenants.

The Company routinely incurs debt financing costs and fees when borrowing under, or making amendments to, the Credit Facility. These costs and fees are deferred and are amortized over the life of the Credit Facility.

 

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9. INCOME TAXES

As of June 30, 2015, the Company’s taxable corporate subsidiaries had federal net operating loss carryforwards of approximately $223.1 million, which will begin to expire in 2017 and $272.0 million in state net operating loss carryforwards, a portion of which expires annually.

The Partnership is not a taxable entity for federal and state income tax purposes; rather, the Partnership’s tax attributes, except those of its corporate subsidiaries, are to be included in the individual tax returns of its partners. Neither the Partnership’s financial reporting income, nor the cash distributions to unit-holders, can be used as a substitute for the detailed tax calculations that the Partnership must perform annually for its partners. Net income from the Partnership is not treated as “passive income” for federal income tax purposes. As a result, partners subject to the passive activity loss rules are not permitted to offset income from the Partnership with passive losses from other sources.

The Partnership’s corporate subsidiaries account for their income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards.

Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

The provision for income taxes for the six months ended June 30, 2015 and 2014 is based upon the estimated annual effective tax rates expected to be applicable to the Company for 2015 and 2014, respectively. The Company’s effective tax rate differs from its statutory tax rate primarily because the Company’s legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

The Company is not currently under examination by any federal or state jurisdictions. The federal statute of limitations and certain state statutes of limitations are open from 2011 forward. Management believes that the accrual for tax liabilities is adequate for all open years. This assessment relies on estimates and assumptions and may involve a series of complex judgments about future events. Based on present information, it is the opinion of the Company’s management that there are no pending assessments that will result in a material effect on the Company’s consolidated financial statements over the next twelve months.

 

10. DEFERRED CEMETERY REVENUES, NET

At June 30, 2015 and December 31, 2014, deferred cemetery revenues, net, consisted of the following:

 

     As of  
     June 30,
2015
     December 31,
2014
 
     (in thousands)  

Deferred cemetery revenue

   $ 497,991       $ 456,632   

Deferred merchandise trust revenue

     124,374         104,717   

Deferred merchandise trust unrealized gains (losses)

     (31,490      2,284   

Deferred pre-acquisition margin

     138,457         140,378   

Deferred cost of goods sold

     (68,050      (60,603
  

 

 

    

 

 

 

Deferred cemetery revenues, net

   $ 661,282       $ 643,408   
  

 

 

    

 

 

 

Deferred selling and obtaining costs

   $ 105,278       $ 97,795   

Deferred selling and obtaining costs are carried as an asset on the unaudited condensed consolidated balance sheet in accordance with the Financial Services – Insurance topic of the ASC.

 

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11. COMMITMENTS AND CONTINGENCIES

Legal

The Company is party to legal proceedings in the ordinary course of its business but does not expect the outcome of any proceedings, individually or in the aggregate, to have a material effect on the Company’s financial position, results of operations or liquidity.

Leases

At June 30, 2015, the Company was committed to operating lease payments for premises, automobiles and office equipment under various operating leases with initial terms ranging from one to twenty-five years and options to renew at varying terms. Expenses under these operating leases were $0.8 million and $1.5 million for the three and six months ended June 30, 2015, respectively, and $0.6 million and $1.2 million for the three and six months ended June 30, 2014, respectively.

On June 5, 2015, the Company entered into a lease agreement for a new corporate office location in Trevose, Pennsylvania. The lease term will commence on February 1, 2016 and will expire on July 31, 2028, with certain contractual renewal options. The Company does not expect this new lease to have a significant impact on its cash flows.

The operating leases will result in future payments in the following approximate amounts from June 30, 2015 and beyond:

 

     (in thousands)  

2015

   $ 1,476   

2016

     2,699   

2017

     3,000   

2018

     3,004   

2019

     2,828   

2020

     1,675   

Thereafter

     10,471   
  

 

 

 

Total

   $ 25,153   
  

 

 

 

Other

See Note 13 of the Company’s 2014 Form 10-K for a discussion of the Company’s future commitments related to its agreements with the Archdiocese of Philadelphia.

 

12. PARTNERS’ CAPITAL

The table below reflects the activity relating to the number of common units outstanding for the six months ended June 30, 2015:

 

     Six months ended
June 30, 2015
 

Outstanding, beginning of period

     29,203,595   

Unit distributions

     104,533   

Unit-based compensation

     4,564   
  

 

 

 

Outstanding, end of period

     29,312,692   
  

 

 

 

Unit-Based Compensation

The Company has issued to certain key employees, management, and directors unit-based compensation in the form of unit appreciation rights and restricted phantom partnership units.

 

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Compensation expense recognized related to unit appreciation rights and restricted phantom unit awards for the three and six months ended June 30, 2015 and 2014 are summarized in the table below:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  
     (in thousands)      (in thousands)  

Unit appreciation rights

   $ 19       $ 20       $ 40       $ 39   

Restricted phantom units

     256         246         507         498   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total unit-based compensation expense

   $ 275       $ 266       $ 547       $ 537   
  

 

 

    

 

 

    

 

 

    

 

 

 

As of June 30, 2015, there was approximately $0.1 million in non-vested unit appreciation rights expense outstanding. These unit appreciation rights will be expensed through 2018.

The diluted weighted average number of limited partners’ units outstanding presented on the unaudited condensed consolidated statement of operations does not include 193,172 and 187,758 units for the three and six months ended June 30, 2015, respectively, and 267,580 units for the three months ended June 30, 2014, as their effects would be anti-dilutive.

During the six months ended June 30, 2015, 4,564 common units were issued under the StoneMor Partners L.P. Long-Term Incentive Plan, as amended. See Note 11 of the Company’s 2014 Form 10-K for a description of the Company’s Long-Term Incentive Plans.

Other Unit Issuances

Pursuant to a Common Unit Purchase Agreement, dated May 19, 2014, by and between the Company and American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (“ACII”), the Company issued 54,622 and 49,911 common units to ACII in lieu of cash distributions of approximately $1.4 million and $1.4 million on February 16, 2015 and May 15, 2015, respectively. Refer to the Company’s 2014 Form 10-K, Note 17, for a detailed discussion of the Common Unit Purchase Agreement.

 

13. ACQUISITIONS

First Quarter 2014 Acquisition

On January 16, 2014, certain subsidiaries of the Company (collectively the “Buyer”) entered into an Asset Purchase and Sale Agreement with Carriage Cemetery Services, Inc. (the “Seller”). Pursuant to the Agreement, the Buyer acquired one cemetery in Florida, including certain related assets, and assumed certain related liabilities. In consideration for the net assets acquired, the Buyer paid the Seller $0.2 million in cash.

The table below reflects the Company’s final assessment of the fair value of net assets acquired and the resulting gain on bargain purchase.

 

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     Final
Assessment
 
  
     (in thousands)  

Assets:

  

Accounts receivable

   $ 47   

Cemetery property

     470   

Property and equipment

     140   

Merchandise trusts, restricted, at fair value

     2,607   

Perpetual care trusts, restricted, at fair value

     691   
  

 

 

 

Total assets

     3,955   
  

 

 

 

Liabilities:

  

Deferred margin

     1,035   

Merchandise liabilities

     956   

Deferred tax liability

     641   

Perpetual care trust corpus

     691   

Other liabilities

     20   
  

 

 

 

Total liabilities

     3,343   
  

 

 

 

Fair value of net assets acquired

     612   
  

 

 

 

Consideration paid

     200   
  

 

 

 

Gain on bargain purchase

   $ 412   
  

 

 

 

Second Quarter 2014 Acquisition

On June 10, 2014, certain subsidiaries of the Company (collectively the “Buyers”) closed the transaction under the Asset Sale Agreements (the “Agreements”), with certain subsidiaries of Service Corporation International (collectively the “Sellers”) to acquire nine funeral homes, twelve cemeteries and certain related assets in Central Florida, North Carolina, Southeastern Pennsylvania and Virginia. In consideration for the net assets acquired, the Buyers paid the Sellers $53.8 million in cash.

The Company recorded an intangible asset of $1.2 million for a favorable interest in a lease at one of the acquired North Carolina funeral home businesses. This asset will be amortized over the full remaining term of the lease agreement, which is approximately 36 years, with renewals. This asset was previously reported as a component of “Other assets” on the consolidated balance sheet.

The table below reflects the Company’s final assessment of the fair value of net assets acquired and the resulting goodwill from purchase. There was no change to the amounts retrospectively adjusted in the fourth quarter of 2014. The Company acquired goodwill of $2.8 million, $3.3 million and $2.4 million in the Company’s Cemetery Operations—Southeast, Cemetery Operations—Northeast and Funeral Homes operating segments, respectively.

 

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     Final
Assessment
 
     (in thousands)  

Assets:

  

Accounts receivable

   $ 6,188   

Cemetery property

     26,029   

Property and equipment

     15,776   

Merchandise trusts, restricted, at fair value

     31,534   

Perpetual care trusts, restricted, at fair value

     16,913   

Intangible assets

     1,170   

Other assets

     178   
  

 

 

 

Total assets

     97,788   
  

 

 

 

Liabilities:

  

Deferred margin

     13,570   

Merchandise liabilities

     19,905   

Deferred tax liability

     2,010   

Perpetual care trust corpus

     16,913   

Other liabilities

     63   
  

 

 

 

Total liabilities

     52,461   
  

 

 

 

Fair value of net assets acquired

     45,327   
  

 

 

 

Consideration paid

     53,800   
  

 

 

 

Goodwill from purchase

   $ 8,473   
  

 

 

 

Agreements with the Archdiocese of Philadelphia

On May 28, 2014, certain subsidiaries of the Company (“Tenant”) and the Archdiocese of Philadelphia, an archdiocese governed by Canon Law of the Roman Catholic Church (“Landlord”) closed a Lease Agreement (the “Lease”) and a Management Agreement (the “Management Agreement”), pursuant to which Tenant will operate 13 cemeteries in Pennsylvania for a term of 60 years. The Company joined the Lease and the Management Agreement as a guarantor of all of Tenant’s obligations under this operating arrangement.

Landlord agreed to lease to Tenant eight cemetery sites in the Philadelphia area. The Lease granted Tenant a sole and exclusive license (the “License”) to maintain and construct improvements in the operation of the cemeteries and to sell burial rights and all related merchandise and services, subject to the terms and conditions of the Lease. The Management Agreement enabled Tenant, subject to certain closing conditions, to serve as the exclusive operator of the remaining five cemeteries. The Lease may be terminated pursuant to the terms of the Lease, including, but not limited to, by notice of termination given by Landlord to Tenant at any time during Lease year 11 (a “Lease Year 11 Termination”) or by either party due to the default or bankruptcy of the other party in accordance with the termination provisions of the Lease. If the Lease is terminated by Landlord or Tenant pursuant to the terms of the Lease, the Management Agreement will also be terminated.

At closing, Tenant paid to Landlord an up-front rental payment of $53.0 million (the “Up-Front Rent”). Tenant shall also pay to Landlord aggregate fixed rent of $36.0 million (the “Fixed Rent”) for the Cemeteries in the following amounts:

 

Lease Years 1-5    None
Lease Years 6-20    $1,000,000 per Lease Year
Lease Years 21-25    $1,200,000 per Lease Year
Lease Years 26-35    $1,500,000 per Lease Year
Lease Years 36-60    None

 

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The Fixed Rent for Lease Years 6 through 11 (the “Deferred Fixed Rent”) shall be deferred. If Landlord terminates the Lease pursuant to a Lease Year 11 Termination or Tenant terminates the Lease as a result of a Landlord’s default prior to the end of Lease Year 11 (collectively, a “Covered Termination”), the Deferred Fixed Rent shall be forfeited by Landlord and shall be retained by Tenant. If the Lease is not terminated by a Covered Termination, the Deferred Fixed Rent shall become due and payable 30 days after the end of Lease Year 11.

If Landlord terminates the Lease pursuant to a Lease Year 11 Termination, Landlord must repay to Tenant all $53.0 million of the Up-Front Rent. If the Lease is terminated for cause at any time, Landlord must repay to Tenant the unamortized portion of the Up-Front Rent: (i) based on a 60 year amortization schedule if terminated by Tenant due to Landlord’s default and (ii) based on a 30 year amortization schedule if terminated by Landlord due to Tenant’s default.

Generally, 51% of gross revenues from any source received by Tenant on account of the Cemeteries but unrelated to customary operations of the Cemeteries less Tenant’s and Landlord’s reasonable costs and expenses applicable to such unrelated activity shall be paid to Landlord as additional rent. In addition, Tenant shall have the right to request from time to time that Landlord sell (to a party that is independent and not an affiliate of StoneMor or any party that is a Tenant) all or portions of undeveloped land at the leased Cemeteries. If Landlord approves the sale of such undeveloped land, Tenant shall pay to Landlord, as additional rent, 51% of the net proceeds of any such sale.

The table below reflects the assets and liabilities recognized:

 

     (in thousands)  

Assets:

  

Accounts receivable

   $ 1,610   

Intangible asset

     59,758   
  

 

 

 

Total assets

     61,368   
  

 

 

 

Liabilities:

  

Obligation for lease and management agreements

     36,000   

Discount on obligation for lease and management agreements

     (27,632
  

 

 

 

Obligation for lease and management agreements, net

     8,368   
  

 

 

 

Total liabilities

     8,368   
  

 

 

 

Total net assets

   $ 53,000   
  

 

 

 

The Company recorded the underlying value of the Lease and Management Agreements as a contract-based intangible asset at the present value of the consideration, less the fair value of net assets received, consisting of acquired accounts receivable. A liability of $8.4 million was also recorded for the present value of the Fixed Rent, which is equal to the $36.0 million gross amount due to the Archdiocese of Philadelphia in the future, net of a discount $27.6 million. The discounted values were determined using an effective annual rate of 8.3%, which represents an estimate of the return an investor would require to make this type of investment in the Company over the rent payment period.

If the transactions noted above had been consummated at the beginning of the comparable prior annual reporting period, on a pro forma basis, for the three and six months ended June 30, 2015 and 2014, consolidated revenues, consolidated net income (loss), and net income (loss) per limited partner unit (basic and diluted) would have been as follows:

 

     Three months ended
June 30,
     Six months ended
June 30,
 
     2015      2014      2015      2014  
     (in thousands, except per unit data)  

Revenue

   $ 80,825       $ 77,196       $ 148,242       $ 149,386   

Net income (loss)

     (4,848      573         (13,731      1,327   

Net income (loss) per limited partner unit (basic and diluted)

   $ (.16    $ .02       $ (.46    $ .05   

 

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These pro forma results are unaudited, have been prepared for comparative purposes only, and may include certain adjustments such as increased interest on the acquisition of debt, changes in the timing of financing events and the recognition of gains on acquisitions. They do not purport to be indicative of the results of operations which actually would have resulted had these transactions been in effect at the beginning of the comparable prior annual reporting period or of future results of operations of the location.

The properties acquired in 2014 have contributed $10.7 million and $20.7 million of revenue, for the three and six months ended June 30, 2015, respectively, and $1.4 million and $3.0 million of operating profit for the three and six months ended June 30, 2015, respectively. These properties contributed $2.2 million and $2.3 million of revenue, for the three and six months ended June 30, 2014, respectively, and less than $0.1 million of operating profit for both the three and six months ended June 30, 2014.

Other 2014 Acquisitions

See Note 13 of the Company’s 2014 Form 10-K for a discussion of the Company’s other 2014 acquisitions. There have been no changes during the period to assessments of the fair value of net assets acquired in the other 2014 acquisitions. Those amounts may be retrospectively adjusted as additional information is received.

 

14. SEGMENT INFORMATION

The Company is organized into five distinct reportable segments, which are classified as Cemetery Operations – Southeast, Cemetery Operations – Northeast, Cemetery Operations – West, Funeral Homes, and Corporate.

The Company has chosen this level of organization of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from other segments; b) the Company has organized its management personnel at these operational levels; and c) it is the level at which the Company’s chief decision makers and other senior management evaluate performance.

The cemetery operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. The nature of the Company’s customers differs in each of its regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.

The Company’s Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the cemetery operations segments.

The Company’s Corporate segment includes various home office selling and administrative expenses that are not allocable to the other operating segments.

 

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Segment information is as follows:

As of and for the three months ended June 30, 2015:

 

     Cemeteries      Funeral                     
     Southeast      Northeast      West      Homes      Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 27,574       $ 16,064       $ 13,486       $ —         $ —        $ (17,419   $ 39,705   

Service and other

     12,646         11,430         10,055         —           —          (6,505     27,626   

Funeral home

     —           —           —           15,734         —          (2,240     13,494   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     40,220         27,494         23,541         15,734         —          (26,164     80,825   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     6,374         3,574         2,581         —           —          (2,722     9,807   

Cemetery

     8,150         6,917         4,212         —           —          —          19,279   

Selling

     8,934         5,432         4,290         —           1,082        (3,969     15,769   

General and administrative

     4,622         2,575         1,995         —           —          —          9,192   

Corporate overhead

     —           —           —           —           10,093        —          10,093   

Depreciation and amortization

     810         637         457         802         238        —          2,944   

Funeral home

     —           —           —           12,675         —          (526     12,149   

Acquisition related costs, net of recoveries

     —           —           —           —           336        —          336   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     28,890         19,135         13,535         13,477         11,749        (7,217     79,569   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit (loss)

   $ 11,330       $ 8,359       $ 10,006       $ 2,257       $ (11,749   $ (18,947   $ 1,256   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 643,341       $ 428,476       $ 438,130       $ 166,040       $ 30,383      $ —        $ 1,706,370   

Amortization of cemetery property

   $ 1,472       $ 769       $ 350       $ —         $ —        $ (252   $ 2,339   

Long lived asset additions

   $ 2,740       $ 1,024       $ 436       $ 253       $ 101      $ —        $ 4,554   

Goodwill

   $ 8,950       $ 3,288       $ 11,948       $ 34,650       $ —        $ —        $ 58,836   

 

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As of and for the six months ended June 30, 2015:

 

     Cemeteries      Funeral
Homes
                    
     Southeast      Northeast      West         Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 51,864       $ 28,549       $ 24,181       $ —         $ —        $ (34,945   $ 69,649   

Service and other

     24,532         20,189         19,055         —           —          (13,937     49,839   

Funeral home

     —           —           —           33,149         —          (4,395     28,754   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     76,396         48,738         43,236         33,149         —          (53,277     148,242   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     11,642         5,903         4,721         —           —          (5,376     16,890   

Cemetery

     14,984         12,770         7,790         —           —          —          35,544   

Selling

     18,081         10,437         8,442         —           1,282        (8,563     29,679   

General and administrative

     9,292         5,115         4,114         —           —          —          18,521   

Corporate overhead

     —           —           —           —           18,827        —          18,827   

Depreciation and amortization

     1,610         1,244         956         1,601         485        —          5,896   

Funeral home

     —           —           —           25,286         —          (987     24,299   

Acquisition related costs, net of recoveries

     —           —           —           —           685        —          685   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     55,609         35,469         26,023         26,887         21,279        (14,926     150,341   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit (loss)

   $ 20,787       $ 13,269       $ 17,213       $ 6,262       $ (21,279   $ (38,351   $ (2,099
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 643,341       $ 428,476       $ 438,130       $ 166,040       $ 30,383      $ —        $ 1,706,370   

Amortization of cemetery property

   $ 2,602       $ 1,254       $ 740       $ —         $ —        $ (669   $ 3,927   

Long lived asset additions

   $ 4,245       $ 1,770       $ 933       $ 471       $ 185      $ —        $ 7,604   

Goodwill

   $ 8,950       $ 3,288       $ 11,948       $ 34,650       $ —        $ —        $ 58,836   

 

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As of and for the three months ended June 30, 2014:

 

     Cemeteries      Funeral                     
     Southeast      Northeast      West      Homes      Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 24,565       $ 10,945       $ 13,878       $ —         $ —        $ (11,428   $ 37,960   

Service and other

     9,362         7,885         7,212         —           —          (2,364     22,095   

Funeral home

     —           —           —           13,066         —          (1,588     11,478   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     33,927         18,830         21,090         13,066         —          (15,380     71,533   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     5,425         2,343         2,742         —           —          (1,860     8,650   

Cemetery

     7,129         4,688         4,324         —           —          —          16,141   

Selling

     8,598         4,069         4,227         —           304        (2,337     14,861   

General and administrative

     4,614         1,909         2,357         —           —          —          8,880   

Corporate overhead

     —           —           —           —           6,546        —          6,546   

Depreciation and amortization

     661         338         533         743         238        —          2,513   

Funeral home

     —           —           —           9,635         —          (199     9,436   

Acquisition related costs, net of recoveries

     —           —           —           —           1,240        —          1,240   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     26,427         13,347         14,183         10,378         8,328        (4,396     68,267   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit (loss)

   $ 7,500       $ 5,483       $ 6,907       $ 2,688       $ (8,328   $ (10,984   $ 3,266   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 647,511       $ 423,077       $ 454,896       $ 165,027       $ 29,869      $ —        $ 1,720,380   

Amortization of cemetery property

   $ 1,213       $ 838       $ 579       $ —         $ —        $ (248   $ 2,382   

Long lived asset additions

   $ 24,956       $ 70,868       $ 1,403       $ 8,764       $ 208      $ —        $ 106,199   

Goodwill

   $ 8,950       $ 3,288       $ 11,948       $ 33,024       $ —        $ —        $ 57,210   

As of and for the six months ended June 30, 2014:

 

     Cemeteries      Funeral                     
     Southeast      Northeast      West      Homes      Corporate     Adjustment     Total  
     (in thousands)  

Revenues

                  

Sales

   $ 46,666       $ 18,355       $ 23,699       $ —         $ —        $ (21,886   $ 66,834   

Service and other

     20,988         18,489         18,135         —           —          (11,751     45,861   

Funeral home

     —           —           —           26,320         —          (3,095     23,225   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total revenues

     67,654         36,844         41,834         26,320         —          (36,732     135,920   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Costs and expenses

                  

Cost of sales

     10,217         4,021         5,519         —           —          (3,603     16,154   

Cemetery

     13,524         7,923         8,023         —           —          —          29,470   

Selling

     15,846         6,871         7,461         —           849        (4,977     26,050   

General and administrative

     8,710         3,401         4,414         —           —          —          16,525   

Corporate overhead

     —           —           —           —           14,002        —          14,002   

Depreciation and amortization

     1,294         574         1,054         1,479         480        —          4,881   

Funeral home

     —           —           —           19,139         —          (417     18,722   

Acquisition related costs, net of recoveries

     —           —           —           —           1,589        —          1,589   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total costs and expenses

     49,591         22,790         26,471         20,618         16,920        (8,997     127,393   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Operating profit (loss)

   $ 18,063       $ 14,054       $ 15,363       $ 5,702       $ (16,920   $ (27,735   $ 8,527   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

   

 

 

 

Total assets

   $ 647,511       $ 423,077       $ 454,896       $ 165,027       $ 29,869      $ —        $ 1,720,380   

Amortization of cemetery property

   $ 2,464       $ 1,421       $ 1,802       $ —         $ —        $ (582   $ 5,105   

Long lived asset additions

   $ 26,520       $ 71,310       $ 2,444       $ 8,821       $ 260      $ —        $ 109,355   

Goodwill

   $ 8,950       $ 3,288       $ 11,948       $ 33,024       $ —        $ —        $ 57,210   

Results of individual operating segments are presented based on our management accounting practices and management structure. There is no comprehensive, authoritative body of guidance for management accounting

 

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equivalent to GAAP; therefore, the financial results of individual operating segments are not necessarily comparable with similar information for any other company. The management accounting process uses assumptions and allocations to measure performance of the operating segments. Methodologies are refined from time to time as management accounting practices are enhanced and businesses change. Revenues and associated expenses are not deferred in accordance with SAB No. 104; therefore, the deferral of these revenues and expenses is provided in the adjustment column to reconcile the Company’s managerial financial statements to those prepared in accordance with GAAP. Pre-need sales revenues included within the sales category consist primarily of the sale of burial lots, burial vaults, mausoleum crypts, grave markers and memorials, and caskets. Management accounting practices included in the Southeast, Northeast, and Western Regions reflect these pre-need sales when contracts are signed by the customer and accepted by the Company. Pre-need sales reflected in the unaudited condensed consolidated financial statements, prepared in accordance with GAAP, recognize revenues for the sale of burial lots and mausoleum crypts when the product is constructed and at least 10% of the sales price is collected. With respect to the other products, the unaudited condensed consolidated financial statements prepared under GAAP recognize sales revenues when the criteria for delivery under SAB No. 104 are met. These criteria include, among other things, purchase of the product, delivery and installation of the product in the ground, and transfer of title to the customer. In each case, costs are accrued in connection with the recognition of revenues; therefore, the unaudited condensed consolidated financial statements reflect Deferred Cemetery Revenue, Net, and Deferred Selling and Obtaining Costs on the unaudited condensed consolidated balance sheet, whereas the Company’s management accounting practices exclude these items.

 

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15. FAIR VALUE MEASUREMENTS

The Fair Value Measurements and Disclosures topic of the ASC defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. This topic also establishes a fair value hierarchy that gives the highest priority to observable inputs and the lowest priority to unobservable inputs. The three levels of the fair value hierarchy defined by this topic are described below.

Level 1: Quoted market prices available in active markets for identical assets or liabilities. The Company includes short-term investments, consisting primarily of money market funds, U.S. Government debt securities and publicly traded equity securities and mutual funds in its level 1 investments.

Level 2: Quoted prices in active markets for similar assets; quoted prices in non-active markets for identical or similar assets; inputs other than quoted prices that are observable. The Company includes U.S. state and municipal, corporate and other fixed income debt securities in its level 2 investments.

Level 3: Any and all pricing inputs that are generally unobservable and not corroborated by market data.

On the Company’s unaudited condensed consolidated balance sheet, current assets, long-term accounts receivable and current liabilities are recorded at amounts that approximate fair value.

The following table displays the Company’s assets measured at fair value as of June 30, 2015 and December 31, 2014.

 

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As of June 30, 2015

Merchandise Trust

 

     Level 1      Level 2      Total  
            (in thousands)         

Assets

        

Short-term investments

   $ 18,782       $ —         $ 18,782   

Fixed maturities:

        

U.S. state and local government agency

     —           98         98   

Corporate debt securities

     —           12,320         12,320   

Other debt securities

     —           7,015         7,015   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     —           19,433         19,433   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     241,060         —           241,060   

Mutual funds - equity securities - real estate sector

     18,023         —           18,023   

Mutual funds - equity securities - energy sector

     11,267         —           11,267   

Mutual funds - equity securities - MLP’s

     18,421         —           18,421   

Mutual funds - equity securities - other

     85,064         —           85,064   

Equity securities:

        

Master limited partnerships

     23,926         —           23,926   

Global equity securities

     29,778         —           29,778   

Other invested assets

     —           4,977         4,977   
  

 

 

    

 

 

    

 

 

 

Total

   $ 446,321       $ 24,410       $ 470,731   
  

 

 

    

 

 

    

 

 

 

Perpetual Care Trust

 

     Level 1      Level 2      Total  
            (in thousands)         

Assets

        

Short-term investments

   $ 13,122       $ —         $ 13,122   

Fixed maturities:

        

U.S. government and federal agency

     115         —           115   

U.S. state and local government agency

     —           27         27   

Corporate debt securities

     —           23,645         23,645   

Other debt securities

     —           371         371   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     115         24,043         24,158   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     210,441         —           210,441   

Mutual funds - equity securities - real estate sector

     15,969         —           15,969   

Mutual funds - equity securities - energy sector

     17,976         —           17,976   

Mutual funds - equity securities - MLP’s

     34,990         —           34,990   

Mutual funds - equity securities - other

     13,051         —           13,051   

Equity securities:

        

Master limited partnerships

     1,312         —           1,312   

Global equity securities

     1,091         —           1,091   
  

 

 

    

 

 

    

 

 

 

Total

   $ 308,067       $ 24,043       $ 332,110   
  

 

 

    

 

 

    

 

 

 

 

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As of December 31, 2014

Merchandise Trust

 

     Level 1      Level 2      Total  
            (in thousands)         

Assets

        

Short-term investments

   $ 52,521       $ —         $ 52,521   

Fixed maturities:

        

U.S. state and local government agency

     —           269         269   

Corporate debt securities

     —           8,976         8,976   

Other debt securities

     —           7,139         7,139   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     —           16,384         16,384   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     142,680         —           142,680   

Mutual funds - equity securities - real estate sector

     58,672         —           58,672   

Mutual funds - equity securities - energy sector

     7,733         —           7,733   

Mutual funds - equity securities - MLP’s

     22,927         —           22,927   

Mutual funds - equity securities - other

     90,126         —           90,126   

Equity securities:

        

Master limited partnerships

     50,091         —           50,091   

Global equity securities

     30,208         —           30,208   

Other invested assets

     —           5,159         5,159   
  

 

 

    

 

 

    

 

 

 

Total

   $ 454,958       $ 21,543       $ 476,501   
  

 

 

    

 

 

    

 

 

 

Perpetual Care Trust

 

     Level 1      Level 2      Total  
            (in thousands)         

Assets

        

Short-term investments

   $ 26,644       $ —         $ 26,644   

Fixed maturities:

        

U.S. government and federal agency

     116         —           116   

U.S. state and local government agency

     —           79         79   

Corporate debt securities

     —           23,466         23,466   

Other debt securities

     —           371         371   
  

 

 

    

 

 

    

 

 

 

Total fixed maturity investments

     116         23,916         24,032   
  

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     123,894         —           123,894   

Mutual funds - equity securities - real estate sector

     41,753         —           41,753   

Mutual funds - equity securities - energy sector

     14,829         —           14,829   

Mutual funds - equity securities - MLP’s

     43,596         —           43,596   

Mutual funds - equity securities - other

     25,258         —           25,258   

Equity securities:

        

Master limited partnerships

     43,207         —           43,207   

Global equity securities

     1,867         —           1,867   

Other invested assets

     —           25         25   
  

 

 

    

 

 

    

 

 

 

Total

   $ 321,164       $ 23,941       $ 345,105   
  

 

 

    

 

 

    

 

 

 

Level 1 securities primarily consist of actively publicly traded money market funds, mutual funds and equity securities.

Level 2 securities primarily consist of corporate and other fixed income debt securities. The Company obtains pricing information for these securities from an independent pricing vendor. The pricing vendor uses various pricing models for each asset class that are consistent with what other market participants would use. The inputs and

 

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assumptions to the pricing vendor’s model are derived from market observable sources including benchmark yields, reported trades, broker/dealer quotes, issuer spreads, benchmark securities, bids, offers, and other market-related data. Since many fixed income securities do not trade on a daily basis, the pricing vendor uses available information as applicable such as benchmark curves, benchmarking of like securities, sector groupings, and matrix pricing. Thus, certain securities may not be priced using quoted prices, but rather determined from market observable information. These investments are included in Level 2. The Company reviews the information provided by the pricing vendor on a regular basis. In addition, the pricing vendor has an established process in place for the identification and resolution of potentially erroneous prices.

There were no level 3 assets.

 

16. SUBSEQUENT EVENTS

On July 10, 2015, the Company completed a follow-on public offering of 2,415,000 common units at a public offering price of $29.63 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.8 million. The proceeds were used to pay down outstanding indebtedness under our Credit Facility.

Effective July 10, 2015, the Company entered into the First Amendment to the Credit Agreement. Refer to Note 8 for a more detailed discussion.

The Company completed two acquisitions subsequent to June 30, 2015. The acquisitions included one cemetery and four funeral homes located in Illinois and Florida. The aggregate purchase price for these acquisitions was $6.6 million. At this time, the Company does not have the information necessary to assess the fair value of net assets acquired and make a preliminary purchase price allocation.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The words “we,” “us,” “our,” “StoneMor,” the “Partnership,” the “Company” and similar words refer to StoneMor Partners L.P. and its subsidiaries.

This Management’s Discussion and Analysis of Financial Condition and Results of Operations should be read in conjunction with our unaudited condensed consolidated financial statements and notes thereto included in “Part I, Item 1” of this Quarterly Report on Form 10-Q.

Forward-Looking Statements

Certain statements contained in this Quarterly Report on Form 10-Q, including, but not limited to, information regarding the status and progress of our operating activities, the plans and objectives of our management, assumptions regarding our future performance and plans, and any financial guidance provided or guidance related to our future distributions, as well as certain information in our other filings with the SEC and elsewhere are forward-looking statements.

Generally, the words “believe,” “may,” “will,” “estimate,” “continue,” “anticipate,” “intend (including, but not limited to our intent to maintain or increase our distributions),” “project,” “expect,” “predict” and similar expressions identify these forward-looking statements.

These forward-looking statements are made subject to certain risks and uncertainties that could cause actual results to differ materially from those stated or implied. Our major risk is related to uncertainties associated with the cash flow from our pre-need and at-need sales, our trusts, and financings, which may impact our ability to meet our financial projections, our ability to service our debt and pay distributions, and our ability to increase our distributions.

Our additional risks and uncertainties, include, but are not limited to, the following: uncertainties associated with future revenue and revenue growth; uncertainties associated with the integration or anticipated benefits of our recent acquisitions or any future acquisitions; our ability to complete and fund additional acquisitions; the effect of economic downturns; the impact of our significant leverage on our operating plans; the decline in the fair value of certain equity and debt securities held in our trusts; our ability to attract, train and retain an adequate number of sales people; uncertainties associated with the volume and timing of pre-need sales of cemetery services and products; increased use of cremation; changes in the death rate; changes in the political or regulatory environments, including potential changes in tax accounting and trusting policies; our ability to successfully implement a strategic plan relating to achieving operating improvements, strong cash flows and further deleveraging; our ability to successfully compete in the cemetery

 

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and funeral home industry; litigation or legal proceedings that could expose us to significant liabilities and damage our reputation; the effects of cyber security attacks due to our significant reliance on information technology; uncertainties relating to the financial condition of third-party insurance companies that fund our pre-need funeral contracts; and various other uncertainties associated with the death care industry and our operations in particular.

When considering forward-looking statements, you should keep in mind the risk factors and other cautionary statements set forth in our Annual Report on Form 10-K for the fiscal year ended December 31, 2014 (“2014 Form 10-K”), our Current Report on Form 8-K filed with the SEC on July 6, 2015 and our other reports filed with the SEC. Except as required under applicable law, we assume no obligation to update or revise any forward-looking statements made herein or any other forward-looking statements made by us, whether as a result of new information, future events or otherwise.

Overview

Cemetery Operations

We are currently the second largest owner and operator of cemeteries in the United States. As of June 30, 2015, we operated 303 cemeteries in 27 states and Puerto Rico. We own 272 of these cemeteries and we manage or operate the remaining 31 under lease, operating or management agreements. As a result of the agreements, other control arrangements and applicable accounting rules, we have treated 16 of these cemeteries as acquisitions for accounting purposes.

We operate 15 cemeteries under long-term lease, operating or management agreements that do not qualify as acquisitions for accounting purposes. As a result, we did not consolidate all of the existing assets and liabilities related to these cemeteries. We have consolidated the existing assets and liabilities of these cemeteries’ merchandise and perpetual care trusts as variable interest entities since we control and receive the benefits and absorb any losses from operating these trusts. Under these long-term lease, operating or management agreements, which are subject to certain termination provisions, we are the exclusive operator of these cemeteries. We earn revenues related to sales of merchandise, services, and interment rights and incur expenses related to such sales and the maintenance and upkeep of these cemeteries. Upon termination of these contracts, we will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. We have also recognized the existing merchandise liabilities assumed as part of these agreements.

We sell cemetery products and services both at the time of death, which we refer to as at-need, and prior to the time of death, which we refer to as pre-need. Revenues from cemetery operations accounted for approximately 83.3% and 80.6% of our total revenues during the three and six months ended June 30, 2015, respectively, as compared to 84.0% and 82.9% during the same periods last year. The change in the contribution to total revenues was primarily due to one large land sale from the first quarter of 2014, as well as higher contributions during the current period from our 2014 funeral home acquisitions.

Our results of operations for our cemetery operations are determined primarily by the volume of sales of products and services and the timing of product delivery and performance of services. We derive our cemetery revenues primarily from:

 

    at-need sales of cemetery interment rights, merchandise and services, which we recognize as revenue when we have delivered the related merchandise or performed the service;

 

    pre-need sales of cemetery interment rights, which we generally recognize as revenues when we have collected 10% of the sales price from the customer;

 

    pre-need sales of cemetery merchandise, which we recognize as revenues when we satisfy the criteria specified below for delivery of the merchandise to the customer;

 

    pre-need sales of cemetery services which we recognize as revenues when we perform the services for the customer;

 

    investment income from assets held in our merchandise trust, which we recognize as revenues when we deliver the underlying merchandise or perform the underlying services and recognize the associated sales revenue as discussed above;

 

    investment income from perpetual care trusts, excluding realized gains and losses on the sale of trust assets, which we recognize as revenues as the income is earned in the trust; and

 

    other items, such as interest income on pre-need installment contracts and sales of land.

 

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The criteria for recognizing revenue related to the sale of cemetery merchandise is that such merchandise is “delivered” to our customer, which generally means that:

 

    the merchandise is complete and ready for installation; or

 

    the merchandise is either installed or stored at an off-site location, at no additional cost to us, and specifically identified with a particular customer; and

 

    the risks and rewards of ownership have passed to the customer.

We generally satisfy these delivery criteria by purchasing the merchandise and either installing it on our cemetery property or storing it, at the customer’s request, in third-party warehouses, at no additional cost to us, until the time of need. With respect to burial vaults, we install the vaults rather than storing them to satisfy the delivery criteria. When merchandise is stored for a customer, we may issue a certificate of ownership to the customer to evidence the transfer to the customer of the risks and rewards of ownership.

Pre-need Sales

As previously noted, we do not recognize revenue on pre-need sales of merchandise and services until we have delivered the merchandise or performed the services. Accordingly, deferred revenues from pre-need sales and related merchandise trust earnings are reflected as a liability on our unaudited condensed consolidated balance sheet in deferred cemetery revenues, net.

Total deferred cemetery revenues, net, also includes deferred revenues from pre-need sales that were entered into by entities we acquired prior to the time we acquired them. This includes both those entities that we acquired at the time of the formation of Cornerstone and other subsequent acquisitions. Our profit margin on pre-need sales entered into by entities we subsequently acquired is generally less than our profit margin on other pre-need sales because, in accordance with industry practice at the time these acquired pre-need sales were made, none of the selling expenses were recognized at the time of sale. As a result, we are required to recognize all of the expenses (including deferred selling expenses) associated with these acquired pre-need sales when we recognize the revenues from that sale.

Pre-need products and services are typically sold on an installment basis. Subject to state law, these contracts are normally subject to “cooling-off” periods, generally between three and thirty days, during which the customer may elect to cancel the contract and receive a full refund of amounts paid. Also, subject to applicable state law, we are generally permitted to retain the amounts already paid on contracts, including any amounts that were required to be deposited into trust, on contracts cancelled after the “cooling-off” period. Historical post “cooling-off” period cancellations total approximately 10% of our pre-need sales (based on contract dollar amounts). If the products and services purchased under a pre-need contract are needed for interment before payment has been made in full, generally the balance due must be immediately paid in full.

Contracts related to pre-need installment sales are usually for a period not to exceed 60 months, with payments of principal and interest required. Pre-need sales contracts normally contain provisions for both principal and interest. For those contracts that do not bear a market rate of interest, we impute such interest based upon the prime rate plus 150 basis points, which resulted in a rate of 4.75% for the three and six months ended June 30, 2015 and 2014.

We normally offer prepayment incentives to customers whose pre-need contracts are longer than 36 months and bear interest. If those customers pay their contracts in full in less than 12 months, we rebate the interest that we have collected from them. Even though this rebate policy reduces the amount of interest income we receive on our accounts receivable, the net effect is an increase in our immediate cash flow.

In certain cases, pre-need contracts will be cancelled before they are fully paid. In these circumstances, we are generally permitted to retain amounts already paid to us, including any amounts that were required to be deposited into trust. In certain other cases, the products and services purchased under a pre-need contract are needed for interment before payment has been made in full. In these cases, we are generally entitled to be immediately paid in full for any amounts still outstanding.

At-need Sales

Revenue on at-need merchandise sales is deferred until the time that such merchandise is delivered. The lag between the contract origination and delivery is normally minimal. At-need sales of products and services are generally required to be paid for in full at the time of sale. At that time, we will deposit amounts, as legally required, into our perpetual care trusts. We are not required to deposit any amounts from our at-need sales into merchandise trusts.

 

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Expenses

We analyze and categorize our operating expenses as follows:

1. Cost of goods sold and selling expenses

Cost of goods sold reflects the actual cost of purchasing products and performing services. Sales of cemetery lots and interment rights, whether at-need or pre-need, typically have a lower cost of goods sold than other merchandise that we sell.

Selling expenses consist of salesperson and sales management payroll costs, including selling commissions, bonuses and employee benefits. We self-insure medical expenses of our employees up to certain individual and aggregate limits over which we have stop-loss insurance coverage. Our self-insurance policy may result in variability in our future operating expenses. Selling expenses also include other costs of obtaining product and service sales, such as advertising, marketing, postage and telephone.

Direct costs associated with pre-need sales of cemetery merchandise and services, such as sales commissions and cost of goods sold, are reflected in the unaudited condensed consolidated balance sheet in deferred selling and obtaining costs and deferred cemetery revenues, net, respectively, and are expensed as the merchandise is delivered or the services are performed. Indirect costs, such as marketing and advertising costs, are expensed in the period in which they are incurred.

2. Cemetery Expenses

Cemetery expenses represent the cost to maintain and repair our cemetery properties and consist primarily of labor and equipment, utilities, real estate taxes and other maintenance items. Repairs necessary to maintain our cemeteries are expensed as they are incurred. Other maintenance costs required over the long term to maintain the operating capacity of our cemeteries, such as to build roads and install sprinkler systems are capitalized.

3. General and administrative expenses

General and administrative expenses, which do not include corporate overhead, primarily include personnel costs, insurance and other costs necessary to maintain our cemetery offices.

4. Depreciation and amortization

We depreciate our property and equipment on a straight-line basis over their estimated useful lives.

5. Acquisition related costs

Acquisition related costs, which include legal fees and other third party costs incurred in acquisition related activities, are expensed as incurred.

Funeral Home Operations

As of June 30, 2015, we owned and operated 98 funeral homes. These properties are located in 19 states and Puerto Rico. Forty-five of our funeral homes are located on the grounds of cemeteries that we own.

We derive revenues at our funeral homes from the sale of funeral home merchandise, including caskets and related funeral merchandise, and services, including removal and preparation of remains, the use of our facilities for visitation, worship and performance of funeral services and transportation services. We sell these services and merchandise generally at the time of need utilizing salaried licensed funeral directors. Our funeral home operations also include revenues related to the sale of term and final expense whole life insurance in markets where we do not own a funeral home, as well as pre-need whole life insurance in markets where we own a funeral home. Funeral home revenues accounted for approximately 16.7% and 19.4% of our total revenues during the three and six months ended June 30, 2015, respectively, as compared to 16.0% and 17.1% during the same periods last year.

Pursuant to state law, a portion of proceeds received from pre-need funeral service contracts is put into trust while amounts used to defray the initial administrative costs are not. All investment earnings generated by the assets in the trust (including realized gains and losses) are deferred until the associated merchandise is delivered or the services are performed. The balance of the amounts in these trusts is included within the merchandise trusts.

 

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We generally include revenues from pre-need casket sales in the results of our cemetery operations. However, some states require that caskets be sold by funeral homes, and revenues from casket sales in those states are included in our funeral home results.

Our funeral home operating expenses consist primarily of compensation to our funeral directors, day-to-day costs of managing the business and the cost of caskets.

Corporate

We incur fixed costs for corporate overhead primarily for centralized functions, such as payroll, accounting, collections and professional fees. We also incur expenses related to reporting requirements under U.S. federal securities laws and certain other additional expenses of being a public company.

2015 Developments

Significant business developments for 2015 include the following:

 

    On June 5, 2015, we entered into a lease agreement for a new corporate office location in Trevose, Pennsylvania. The lease term will commence on February 1, 2016 and will expire on July 31, 2028, with certain contractual renewal options.

 

    On July 10, 2015, we completed a follow-on public offering of 2,415,000 common units at a public offering price of $29.63 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.8 million. The proceeds were used to pay down outstanding indebtedness under our Credit Facility.

Current Market Conditions and Economic Developments

As of June 30, 2015, the amortized cost of the assets in our merchandise trusts exceeded their market value by 6.6%, compared to December 31, 2014 when the market value of the assets exceeded their amortized cost by 0.5%. As of June 30, 2015, the amortized cost of the assets in our perpetual care trusts exceeded their market value by 1.1% as compared to December 31, 2014 when the market value of the assets exceeded their amortized cost by 9.7%. Changes in the cost to market ratios are due in part to the repositioning of assets within our merchandise and perpetual care trust portfolios, as well as declines in market conditions.

As of June 30, 2015, the majority of our long-term debt consisted of $175.0 million in Senior Notes due 2021, the offering of which took place in May of 2013, and $151.9 million of borrowings under our credit facility, which expires in 2019. As of June 30, 2015, we had $28.1 million of total availability under our revolving credit facility. The revolving credit facility provides for both acquisition draws, which are used primarily to finance acquisitions, acquisition related costs and mausoleum construction costs, and working capital draws, which are used to finance all other corporate costs. As of June 30, 2015, we had approximately $126.9 million of working capital draws, which are limited to a borrowing formula of 85% of eligible account receivables. This limit was $137.3 million at June 30, 2015.

On July 10, 2015, we completed a follow-on public offering of 2,415,000 common units at a public offering price of $29.63 per unit. Net proceeds of the offering, after deducting underwriting discounts and offering expenses, were approximately $67.8 million. The proceeds were used to pay down outstanding indebtedness under our Credit Facility.

The aggregate values of pre-need and at-need contracts written were $90.2 million and $168.5 million for the three and six months ended June 30, 2015, respectively, as compared to $77.9 million and $141.6 million during the same periods last year.

Impact on Our Ability to Meet Our Debt Covenants

Debt covenants in the Credit Agreement specifically relate to a certain measure of Consolidated EBITDA and certain coverage and leverage ratios as defined in the Credit Agreement described below.

Consolidated EBITDA is a non-GAAP financial measure and is primarily related to the current period value of contracts written, investment income from the merchandise and perpetual care trusts, and current expenses incurred.

We have two primary debt covenants that are dependent upon our financial results, the Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio. The Consolidated Leverage Ratio relates to the ratio of Consolidated

 

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Funded Indebtedness to Consolidated EBITDA. Our Consolidated Leverage Ratio was 3.62 at June 30, 2015 compared to a maximum allowed ratio of 4.00. The Consolidated Debt Service Coverage Ratio relates to the ratio of Consolidated EBITDA to Consolidated Debt Service. Our Consolidated Debt Service Coverage Ratio was 4.40 at June 30, 2015 compared to a minimum allowed ratio of 2.50.

Segment Reporting and Related Information

The Company is organized into five distinct reportable segments, which are classified as Cemetery Operations—Southeast, Cemetery Operations—Northeast, Cemetery Operations—West, Funeral Homes, and Corporate.

We chose this level of organization and disaggregation of reportable segments due to the fact that a) each reportable segment has unique characteristics that set it apart from each other; b) we have organized our management personnel at these operational levels; and c) this is the level at which our chief decision makers and other senior management evaluate performance.

The Cemetery Operations segments sell interment rights, caskets, burial vaults, cremation niches, markers and other cemetery related merchandise. Our cemetery operations are disaggregated into three different geographically based segments. The nature of our customers differs in each of our regionally based cemetery operating segments. Cremation rates in the West region are substantially higher than they are in the Southeast region. Rates in the Northeast region tend to be somewhere between the two. Statistics indicate that customers who select cremation services have certain attributes that differ from customers who select other methods of interment. The disaggregation of cemetery operations into the three distinct regional segments is primarily due to these differences in customer attributes along with the previously mentioned management structure and senior management analysis methodologies.

Our Funeral Homes segment offers a range of funeral-related services such as family consultation, the removal of and preparation of remains and the use of funeral home facilities for visitation. These services are distinctly different than the cemetery merchandise and services sold and provided by the Cemetery Operations segments.

Our Corporate segment includes various home office expenses, miscellaneous selling, cemetery and general administrative expenses that are not allocable to other operating segments, certain depreciation and amortization expenses and acquisition related costs.

Critical Accounting Policies and Estimates

The unaudited condensed consolidated financial statements are prepared in conformity with GAAP. The preparation of these consolidated financial statements required us to make estimates, judgments and assumptions that affected the reported amounts of assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods (see Note 1 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in the Management’s Discussion and Analysis of Financial Condition and Results of Operations section of our 2014 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2014 Form 10-K.

Results of Operations – Segments

We account for and analyze the results of operations for our segments on a basis of accounting that is different from GAAP. We reconcile these non-GAAP accounting results of operations to GAAP based amounts at the consolidated level. This reconciliation is included in Note 14 to the unaudited condensed consolidated financial statements included in this Quarterly Report on Form 10-Q.

The method of accounting we utilize to analyze our overall results of operations, including segment results, provides for a production-based view of our business. Under the production-based view, we recognize revenues at their contract value at the point in time in which the contract is written, less a historic cancellation reserve. All related costs are expensed in the period the contract is recognized as revenue. In contrast, GAAP requires that we defer all revenues, and the direct costs associated with these revenues, until we meet certain delivery and performance requirements. The nature of our business is such that there is no meaningful relationship between the time that elapses from the date a contract is executed and the date the underlying merchandise is delivered or the service, delivery and performance requirements are met. Further, certain factors affecting this time period, such as weather and supplier issues, are out of our control. As a

 

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result, during a period of growth, operating profits as defined by GAAP will tend to lag behind operating profits on a production-based view because of the required deferral of revenues. Our performance-based view ignores these delays and presents results based upon the underlying value of contracts written. We believe this is the most reliable indicator of our performance for a given period as the value of contracts written less a historical cancellation reserve reflects the economic value added during a given period of time. Accordingly, the ensuing segment discussion is on a basis of accounting that differs from GAAP. See Note 1 to the consolidated financial statements included in the 2014 Form 10-K for a more detailed discussion of our accounting policies under GAAP.

Three Months Ended June 30, 2015 Compared to Three Months Ended June 30, 2014

Cemetery Segments

Cemetery Operations – Southeast

In June of 2014, we have acquired nine properties in our Cemetery Operations – Southeast segment. The results of operations for these acquired properties have less impact on the results for the three months ended June 30, 2014 as compared to the results for the three months ended June 30, 2015. The acquisitions contributed approximately $3.8 million of the revenues and $2.4 million of the costs and expenses for the three months ended June 30, 2015 as compared to $0.5 million and $0.3 million, respectively, for the same period last year.

The table below compares the results of operations for our Cemetery Operations – Southeast for the three months ended June 30, 2015 to the same period last year:

 

     Three months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 40,220       $ 33,927       $ 6,293         18.5

Total costs and expenses

     28,890         26,427         2,463         9.3
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 11,330       $ 7,500       $ 3,830         51.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $1.4 million in the value of pre-need contracts written, $1.6 million in the value of at-need contracts written, $0.5 million in interest and other income and $2.8 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was primarily related to:

 

    A $1.1 million increase in the cost of goods sold primarily attributable to the increase in the value of contracts written and changes in product mix.

 

    A $1.0 million increase in cemetery expenses primarily due to increases of $0.3 million in labor costs and $0.5 million in repairs and maintenance costs.

 

    A $0.3 million increase in selling expenses due to increases of $0.6 million in commissions and personnel costs and $0.1 million in travel expenses, partially offset by a $0.4 million decrease in advertising and marketing expenses.

 

    A $0.1 million increase in depreciation expense.

Cemetery Operations – Northeast

During the second quarter of 2014, we acquired three properties and separately obtained the rights from the Archdiocese of Philadelphia to operate thirteen properties in our Cemetery Operations – Northeast segment. The results

 

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of operations for these acquired properties have less impact on the results for the three months ended June 30, 2014 as compared to the results for the three months ended June 30, 2015. These properties have contributed approximately $10.6 million of the revenues and $7.2 million of the costs and expenses of the segment for the three months ended June 30, 2015 as compared to $2.0 million and $1.9 million, respectively, for the same period last year.

The table below compares the results of operations for our Cemetery Operations – Northeast for the three months ended June 30, 2015 to the same period last year:

 

     Three months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 27,494       $ 18,830       $ 8,664         46.0

Total costs and expenses

     19,135         13,347         5,788         43.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 8,359       $ 5,483       $ 2,876         52.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $4.7 million in the value of pre-need contracts written, $2.5 million in the value of at-need contracts written, $0.9 million in interest and other income and $0.6 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:

 

    A $1.2 million increase in the cost of goods sold primarily attributable to the increase in the value of contracts written and changes in product mix.

 

    A $2.2 million increase in cemetery expenses primarily due to increases of $1.2 million in labor costs, $0.7 million in repairs and maintenance expense, $0.1 million in utility and fuel costs and $0.1 million in real estate tax expense.

 

    A $1.4 million increase in selling expenses primarily attributable to a $1.1 million increase in commissions and personnel costs and a $0.2 million increase in advertising and marketing costs.

 

    A $0.7 million increase in general and administrative expenses primarily due to increases of $0.1 million in insurance costs, $0.3 million in personnel costs and $0.1 million in professional fees.

 

    A $0.3 million increase in depreciation and amortization expense, most of which was attributable to the amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia.

 

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Cemetery Operations – West

The table below compares the results of operations for our Cemetery Operations – West for the three months ended June 30, 2015 to the same period last year:

 

     Three months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 23,541       $ 21,090       $ 2,451         11.6

Total costs and expenses

     13,535         14,183         (648      -4.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 10,006       $ 6,907       $ 3,099         44.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $0.1 million in the value of at-need contracts written, $0.2 million in interest and other income and $2.7 million in income from our trusts, partially offset by a $0.5 million decrease in the value of pre-need contracts written. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net decrease in costs and expenses was primarily related to:

 

    A $0.1 million decrease in the cost of goods sold primarily attributable to the change in the value of contracts written and changes in product mix.

 

    A $0.1 million decrease in cemetery expenses primarily related to a decrease of $0.2 million in repair and maintenance costs, partially offset by a $0.1 million increase in real estate tax expense.

 

    A $0.3 million decrease in general and administrative expenses primarily related to a decrease of $0.2 million in professional fees.

 

    A $0.1 million decrease in depreciation expense.

Funeral Homes Segment

In the second quarter of 2014, we acquired nine funeral homes and in the fourth quarter of 2014, we acquired two funeral homes. Therefore, the results of operations for these properties have either less or no impact on the results for the three months ended June 30, 2014, but are included in the results for the three months ended June 30, 2015. The additions have contributed approximately $2.7 million of the revenues and $2.2 million of the costs and expenses of the segment for the three months ended June 30, 2015 as compared to $0.6 million and $0.3 million, respectively, for the same period last year.

The table below compares the results of operations for our Funeral Homes segment for the three months ended June 30, 2015 to the same period last year:

 

     Three months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 15,734       $ 13,066       $ 2,668         20.4

Total costs and expenses

     13,477         10,378         3,099         29.9
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 2,257       $ 2,688       $ (431      -16.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily attributable to increases of $1.2 million in the value of pre-need contracts written, $1.2 million in the value of at-need contracts written, and $0.5 million in insurance-related revenues, partially offset by a $0.2 million decrease in other income.

 

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Total costs and expenses

The net increase in costs and expenses was primarily attributable to increases of $1.3 million in personnel costs, $0.6 million in merchandise costs, $0.2 million in facility related costs, $0.4 million in other service and supplies expense, and $0.6 million in expenses related to insurance sales.

Corporate Segment

The table below compares expenses incurred by the Corporate segment for the three months ended June 30, 2015 to the same period last year:

 

     Three months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Selling, cemetery and general and administrative expenses

   $ 1,082       $ 304       $ 778         100.0

Depreciation and amortization

     238         238         —           0.0

Acquisition related costs, net of recoveries

     336         1,240         (904      -72.9

Corporate expenses

           

Corporate personnel expenses

     3,678         3,117         561         18.0

Other corporate expenses

     6,415         3,429         2,986         87.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate overhead

     10,093         6,546         3,547         54.2
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate expenses

   $ 11,749       $ 8,328       $ 3,421         41.1
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in corporate expenses was primarily driven by an increase in corporate overhead of $3.5 million, which included increases of $0.6 million in corporate personnel costs, $1.9 million in professional fees, $0.2 million in information technology costs, and $0.5 million in advertising expenses, with the remaining increase in general corporate costs. There was also an increase in corporate selling expenses, which included an increase of $0.7 million in personnel costs. These increases were partially offset by a $0.9 million decrease in acquisition related costs. Acquisition costs may vary from period to period depending on the amount of acquisition activity that takes place.

Reconciliation of Segment Results of Operations to Consolidated Results of Operations

As discussed in the segment sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, revenues and their associated costs as reported at the segment level are not deferred.

Periodic consolidated revenues recorded in accordance with GAAP reflect the amount of total merchandise and services that were delivered during the period. Accordingly, period over period changes to revenues can be impacted by:

 

  Changes in the value of contracts written and other revenues generated during a period that are delivered in their period of origination and are recognized as revenue and not deferred as of the end of their period of origination.

 

  Changes in merchandise and services that are delivered during a period that had been originated during a prior period.

The table below analyzes results of operations and the changes therein for the three months ended June 30, 2015 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/or changes in the timing of when merchandise and services were delivered. Since March 31, 2014, we acquired 12 cemeteries and 11 funeral homes, and obtained the rights from the Archdiocese of Philadelphia to operate 13 cemetery properties. The results of operations for these properties have either less or no impact on the results for the three months ended June 30, 2014, but are included in the results for the three months ended June 30, 2015. These properties are contributing a significant portion of the increases to revenues and costs and expenses in the table below.

 

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     Three months ended
June 30, 2015
     Three months ended
June 30, 2014
              
     (in thousands)      (in thousands)               
     Segment
Results
(non-GAAP)
     GAAP
Adjustments
    GAAP
Results
     Segment
Results
(non-GAAP)
     GAAP
Adjustments
    GAAP
Results
     Change in
GAAP results

($)
    Change in
GAAP results
(%)
 

Revenues

                    

Pre-need cemetery revenues

   $ 44,012       $ (16,187   $ 27,825       $ 38,409       $ (12,659   $ 25,750       $ 2,075        8.1

At-need cemetery revenues

     27,435         (1,200     26,235         23,110         1,595        24,705         1,530        6.2

Investment income from trusts

     15,641         (6,562     9,079         9,612         (3,138     6,474         2,605        40.2

Interest income

     2,184         —          2,184         2,034         —          2,034         150        7.4

Funeral home revenues

     15,734         (2,240     13,494         13,066         (1,588     11,478         2,016        17.6

Other cemetery revenues

     1,983         25        2,008         682         410        1,092         916        83.9
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     106,989         (26,164     80,825         86,913         (15,380     71,533         9,292        13.0
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Costs and expenses

                    

Cost of goods sold

     12,529         (2,722     9,807         10,510         (1,860     8,650         1,157        13.4

Cemetery expense

     19,279         —          19,279         16,141         —          16,141         3,138        19.4

Selling expense

     19,738         (3,969     15,769         17,198         (2,337     14,861         908        6.1

General and administrative expense

     9,192         —          9,192         8,880         —          8,880         312        3.5

Corporate overhead

     10,093         —          10,093         6,546         —          6,546         3,547        54.2

Depreciation and amortization

     2,944         —          2,944         2,513         —          2,513         431        17.2

Funeral home expense

     12,675         (526     12,149         9,635         (199     9,436         2,713        28.8

Acquisition related costs, net of recoveries

     336         —          336         1,240         —          1,240         (904     -72.9
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     86,786         (7,217     79,569         72,663         (4,396     68,267         11,302        16.6
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit

   $ 20,203       $ (18,947   $ 1,256       $ 14,250       $ (10,984   $ 3,266       $ (2,010     -61.5
  

 

 

    

 

 

   

 

 

    

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Revenues

Pre-need cemetery revenues were $27.8 million for the three months ended June 30, 2015, an increase of $2.0 million, or 8.1%, as compared to $25.8 million during the same period last year. The increase was primarily caused by an increase of $5.6 million in the value of cemetery contracts written, partially offset by an increase of $3.6 million in deferred revenue.

At-need cemetery revenues were $26.2 million for the three months ended June 30, 2015, an increase of $1.5 million, or 6.2%, as compared to $24.7 million during the same period last year. The increase was primarily caused by an increase of $4.3 million in the value of cemetery contracts written, partially offset by an increase of $2.8 million in deferred revenue.

Investment income from trusts was $9.1 million for the three months ended June 30, 2015, an increase of $2.6 million, or 40.2%, as compared to $6.5 million during the same period last year. On a segment basis, we had an increase of $6.0 million, which was offset by an adjustment of $3.4 million related to funds for which we have not met the requirements that would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Interest income on accounts receivable was $2.2 million for the three months ended June 30, 2015, an increase of $0.2 million, or 7.4%, as compared to $2.0 million during the same period last year, primarily due to an increase in accounts receivable.

Funeral home revenues were $13.5 million for the three months ended June 30, 2015, an increase of $2.0 million, or 17.6%, as compared to $11.5 million during the same period last year. The increase was primarily driven by the 11 funeral homes we acquired in 2014 and an increase in insurance-related revenues.

Other cemetery revenues were $2.0 million during the three months ended June 30, 2015 as compared to $1.1 million in the same period last year.

Costs and Expenses

The cost of goods sold was $9.8 million for the three months ended June 30, 2015, an increase of $1.1 million, or 13.4%, as compared to $8.7 million during the same period last year. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 18.1% during the three months ended June 30, 2015 as compared to 17.1% during the same period last year. The change in the ratio primarily relates to changes in product mix.

Cemetery expenses were $19.3 million during the three months ended June 30, 2015, an increase of $3.2 million, or 19.4%, compared to $16.1 million during the same period last year. Within this category, there were increases of $1.6 million in personnel costs, $0.9 million in repairs and maintenance expense, $0.2 million in real estate tax expense, with the remaining increase in general cemetery costs. Cemetery expenses relate to the current costs of managing and

 

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maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs relative to our overall cemetery operations. An increase in the ratio indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the ratio indicates that expense growth did not exceed increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 27.0% during the three months ended June 30, 2015 as compared to 26.2% during the same period last year.

Selling expenses were $15.8 million during the three months ended June 30, 2015, an increase of $0.9 million, or 6.1%, as compared to $14.9 million during the same period last year. The ratio of selling expenses to cemetery revenues was 29.2% during the three months ended June 30, 2015 as compared to 29.5% during the same period last year. This is largely due to segment-based increases of $2.5 million in commissions and personnel costs, partially offset by a $1.6 million increase in deferred selling expenses. The ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority of our selling expenses are directly related to sales commissions and bonuses, which would be directly related to changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to follow relatively consistent trends over the long-term.

General and administrative expenses were $9.2 million during the three months ended June 30, 2015, an increase of $0.3 million, or 3.5%, as compared to $8.9 million during the same period last year. The increase was due to an increase of $0.6 million in personnel costs, partially offset by a $0.3 million decrease in professional fees. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our general and administrative costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value of contracts written, while a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to decrease slightly as many of the expenses in this category are fixed in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 12.9% during the three months ended June 30, 2015 as compared to 14.4% during the same period last year.

Total corporate overhead was $10.1 million for the three months ended June 30, 2015, an increase of $3.6 million, or 54.2% compared to $6.5 million during the same period last year. The increase was primarily driven by increases of $0.6 million in corporate personnel costs, $1.9 million in professional fees, $0.2 million in information technology costs, $0.5 million in advertising expenses, with the remaining increase in general corporate costs.

Depreciation and amortization was $2.9 million for the three months ended June 30, 2015, an increase of $0.4 million, or 17.2%, as compared to $2.5 million during the same period last year. The majority of the increase was attributable to acquired properties and amortization of the intangible assets relating to the lease and management agreements entered into in 2014.

Funeral home expenses were $12.1 million for the three months ended June 30, 2015, an increase of $2.7 million, or 28.8%, as compared to $9.4 million during the same period last year. The increase was primarily attributable to segment based increases of $1.3 million in personnel costs, $0.6 million in merchandise costs, $0.2 million in facility costs, and $0.6 million in expenses related to insurance sales, partially offset by a $0.3 million increase in deferred funeral home expenses, with the remaining increase in other general costs.

Acquisition related costs were $0.3 million for the three months ended June 30, 2015, a decrease of $0.9 million, or 72.9%, as compared to $1.2 million during the same period last year. These costs may vary from period to period depending on the amount of acquisition activity that takes place.

 

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Non-segment Allocated Results

Certain statement of operations amounts are not allocated to segment operations. These amounts are those line items that can be found on our unaudited condensed consolidated statement of operations below operating profit (loss) and above net income (loss).

The table below summarizes these items and the changes between the three months ended June 30, 2015 and 2014:

 

     Three months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  

Gain on settlement agreement, net

   $ —         $ 888       $ (888      -100.0

Interest expense

     5,770         5,148         622         12.1

Income tax expense (benefit)

   $ 334       $ (876    $ 1,210         -138.1

During the three months ended June 30, 2014, we recovered an additional $1.5 million related to the settlement of claims from locations acquired in 2010. A gain of $0.9 million has been recorded as gain on settlement agreement, on the unaudited condensed consolidated statement of operation, which was net of legal fees of $0.6 million.

There was an increase in interest expense on amounts outstanding under the credit facility and an increase in discount accretion expense, primarily relating to the obligation for the lease and management agreements entered into in 2014 with the Archdiocese of Philadelphia. Average amounts outstanding under the credit facility were $141.6 million and $84.9 million during the three months ended June 30, 2015 and 2014, respectively.

We had income tax expense of $0.3 million for the three months ended June 30, 2015, as compared to an income tax benefit of $0.9 million during the same period last year. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

Six Months Ended June 30, 2015 Compared to Six Months Ended June 30, 2014

Cemetery Operations – Southeast

In June of 2014, we have acquired nine properties in our Cemetery Operations – Southeast segment. The results of operations for these acquired properties have less impact on the results for the six months ended June 30, 2014 as compared to the results for the six months ended June 30, 2015. The acquisitions contributed approximately $7.4 million of the revenues and $4.9 million of the costs and expenses for the six months ended June 30, 2015 as compared to $0.6 million and $0.5 million, respectively, for the same period last year.

The table below compares the results of operations for our Cemetery Operations – Southeast for the six months ended June 30, 2015 to the same period last year:

 

     Six months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 76,396       $ 67,654       $ 8,742         12.9

Total costs and expenses

     55,609         49,591         6,018         12.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 20,787       $ 18,063       $ 2,724         15.1
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $2.4 million in the value of pre-need contracts written, $3.3 million in the value of at-need contracts written, $0.6 million in interest and other income and $2.4 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

 

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Total costs and expenses

The net increase in costs and expenses was primarily related to:

 

    A $1.4 million increase in cost of goods sold primarily attributable to the increase in the value of contracts written and changes in product mix.

 

    A $1.5 million increase in cemetery expenses primarily due to increases of $0.7 million in labor costs, and $0.5 million in repairs and maintenance costs.

 

    A $2.2 million increase in selling expenses primarily attributable to an increase of $2.1 million in commissions and personnel expenses.

 

    A $0.6 million increase in general and administrative expense primarily due to an increase of $0.5 million in personnel expenses.

 

    A $0.3 million increase in depreciation expense.

Cemetery Operations – Northeast

During the second quarter of 2014, we acquired three properties and separately obtained the rights from the Archdiocese of Philadelphia to operate thirteen properties in our Cemetery Operations – Northeast segment. The results of operations for these acquired properties have less impact on the results for the six months ended June 30, 2014 as compared to the results for the six months ended June 30, 2015. The additions have contributed approximately $19.9 million of the revenues and $13.5 million of the costs and expenses of the segment for the six months ended June 30, 2015 as compared to $2.0 million and $1.9 million, respectively, for the same period last year.

The table below compares the results of operations for our Cemetery Operations – Northeast for the six months ended June 30, 2015 to the same period last year:

 

     Six months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 48,738       $ 36,844       $ 11,894         32.3

Total costs and expenses

     35,469         22,790         12,679         55.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 13,269       $ 14,054       $ (785      -5.6
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $8.9 million in the value of pre-need contracts written and $6.9 million in the value of at-need contracts written, partially offset by a $3.4 million decrease in other income and a $0.5 million decrease in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net increase in costs and expenses was mostly attributable to the new properties and was primarily related to:

 

    A $1.9 million increase in cost of goods sold primarily attributable to the increase in the value of contracts written and changes in product mix.

 

    A $4.8 million increase in cemetery expenses primarily attributable to increases of $3.3 million in labor costs, $1.0 million in repairs and maintenance expense, $0.2 million in utility and fuel costs, $0.2 million in real estate tax expense and $0.1 million in automobile and equipment related costs.

 

    A $3.6 million increase in selling expenses primarily attributable to increases of $2.9 million in commissions and personnel costs and $0.5 million in advertising and marketing expenses.

 

    A $1.7 million increase in general and administrative expenses primarily due to increases of $0.4 million in insurance costs, $0.2 million in professional fees and $0.8 million in personnel costs.

 

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    A $0.7 million increase in depreciation expense, $0.5 million of which was attributable to the amortization of the intangible assets relating to the lease and management agreements with the Archdiocese of Philadelphia.

Cemetery Operations – West

The table below compares the results of operations for our Cemetery Operations – West for the six months ended June 30, 2015 to the same period last year:

 

     Six months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 43,236       $ 41,834       $ 1,402         3.4

Total costs and expenses

     26,023         26,471         (448      -1.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 17,213       $ 15,363       $ 1,850         12.0
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $0.2 million in the value of pre-need contracts written, $0.2 million in the value of at-need contracts written, $0.5 million in interest and other income and $0.5 million in income from our trusts. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Total costs and expenses

The net decrease in costs and expenses was primarily related to:

 

    A $0.8 million decrease in cost of goods sold primarily attributable to changes in product mix.

 

    A $0.2 million decrease in cemetery expenses primarily due to a decrease of $0.3 million in repairs and maintenance expenses, partially offset by a net increase of $0.1 million in other cemetery expenses.

 

    A $1.0 million increase in selling expenses primarily due to a $0.8 million increase in commission and personnel costs and a $0.1 million increase in advertising and marketing expenses.

 

    A $0.3 million decrease in general and administrative expenses primarily due to a decrease of $0.3 million in legal and professional fees.

 

    A $0.1 million decrease in depreciation expense.

Funeral Homes Segment

In the second quarter of 2014, we acquired nine funeral homes and in the fourth quarter of 2014, we acquired two funeral homes. Therefore, the results of operations for these properties have either less or no impact on the results for the six months ended June 30, 2014, but are included in the results for the six months ended June 30, 2015. The additions have contributed approximately $5.6 million of the revenues and $4.3 million of the costs and expenses of the segment for the six months ended June 30, 2015 as compared to $0.6 million and $0.3 million, respectively, for the same period last year.

 

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The table below compares the results of operations for our Funeral Homes segment for the six months ended June 30, 2015 to the same period last year:

 

     Six months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Total revenues

   $ 33,149       $ 26,320       $ 6,829         25.9

Total costs and expenses

     26,887         20,618         6,269         30.4
  

 

 

    

 

 

    

 

 

    

 

 

 

Operating profit

   $ 6,262       $ 5,702       $ 560         9.8
  

 

 

    

 

 

    

 

 

    

 

 

 

Revenues

The increase in revenues was primarily related to increases of $2.8 million in the value of pre-need contracts written, $3.4 million in the value of at-need contracts written, and $0.8 million in insurance-related revenues, partially offset by a $0.2 million decrease in other income.

Total costs and expenses

The increase in costs and expenses was primarily attributable to increases of $2.3 million in personnel costs, $1.4 million in merchandise costs, $0.6 million in other service and supplies costs, $0.5 million in facility costs, $0.4 million in general and administrative expenses, $1.0 million in expenses related to insurance sales, and $0.1 million in depreciation expense.

Corporate Segment

The table below compares expenses incurred by the Corporate segment for the six months ended June 30, 2015 to the same period last year:

 

     Six months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  
     (non-GAAP)  

Selling, cemetery and general and administrative expenses

   $ 1,282       $ 849       $ 433         51.0

Depreciation and amortization

     485         480         5         1.0

Acquisition related costs, net of recoveries

     685         1,589         (904      -56.9

Corporate expenses

           

Corporate personnel expenses

     7,389         6,359         1,030         16.2

Other corporate expenses

     11,438         7,643         3,795         49.7
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate overhead

     18,827         14,002         4,825         34.5
  

 

 

    

 

 

    

 

 

    

 

 

 

Total corporate expenses

   $ 21,279       $ 16,920       $ 4,359         25.8
  

 

 

    

 

 

    

 

 

    

 

 

 

The increase in corporate expenses was primarily driven by an increase in corporate overhead of $4.8 million, which included increases of $2.1 million in professional fees, $1.0 million in personnel costs, $0.4 million in advertising expenses, and $0.4 million in information technology costs, with the remainder attributable to increases in other general expense categories. There was also an increase in corporate selling, which included increases of $0.2 million in personnel costs and $0.2 million in advertising expenses. These increases were partially offset by a $0.9 million decrease in acquisition related costs. Acquisition costs may vary from period to period depending on the amount of acquisition activity that takes place.

Reconciliation of Segment Results of Operations to Consolidated Results of Operations

As discussed in the segment sections of this Management’s Discussion and Analysis of Financial Condition and Results of Operations, cemetery revenues and their associated costs as reported at the segment level are not deferred until such time that we satisfy the delivery criteria for revenue recognition.

 

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The table below analyzes results of operations and the changes therein for the six months ended June 30, 2015 as compared to the same period last year. The table is structured so that our readers can determine whether changes were based upon changes in the level of merchandise and services and other revenues generated during each period and/or changes in the timing of when merchandise and services were delivered. During 2014, we acquired 13 cemeteries and 11 funeral homes, and obtained the rights from the Archdiocese of Philadelphia to operate 13 cemetery properties. The results of operations for these properties have either less or no impact on the results for the six months ended June 30, 2014, but are included in the results for the six months ended June 30, 2015. These properties are contributing a significant portion of the increases to revenues and costs and expenses in the table below:

 

     Six months ended
June 30, 2015
    Six months ended
June 30, 2014
              
     (in thousands)     (in thousands)               
     Segment
Results
(non-GAAP)
     GAAP
Adjustments
    GAAP
Results
    Segment
Results
(non-GAAP)
     GAAP
Adjustments
    GAAP
Results
     Change in
GAAP results

($)
    Change in
GAAP results
(%)
 

Revenues

                   

Pre-need cemetery revenues

   $ 79,905       $ (31,418   $ 48,487      $ 68,385       $ (21,927   $ 46,458       $ 2,029        4.4

At-need cemetery revenues

     53,411         (3,858     49,553        42,958         370        43,328         6,225        14.4

Investment income from trusts

     27,626         (14,011     13,615        25,240         (12,789     12,451         1,164        9.3

Interest income

     4,384         —          4,384        4,041         —          4,041         343        8.5

Funeral home revenues

     33,149         (4,395     28,754        26,320         (3,095     23,225         5,529        23.8

Other cemetery revenues

     3,044         405        3,449        5,708         709        6,417         (2,968     -46.3
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total revenues

     201,519         (53,277     148,242        172,652         (36,732     135,920         12,322        9.1
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Costs and expenses

                   

Cost of goods sold

     22,266         (5,376     16,890        19,757         (3,603     16,154         736        4.6

Cemetery expense

     35,544         —          35,544        29,470         —          29,470         6,074        20.6

Selling expense

     38,242         (8,563     29,679        31,027         (4,977     26,050         3,629        13.9

General and administrative expense

     18,521         —          18,521        16,525         —          16,525         1,996        12.1

Corporate overhead

     18,827         —          18,827        14,002         —          14,002         4,825        34.5

Depreciation and amortization

     5,896         —          5,896        4,881         —          4,881         1,015        20.8

Funeral home expense

     25,286         (987     24,299        19,139         (417     18,722         5,577        29.8

Acquisition related costs, net of recoveries

     685         —          685        1,589         —          1,589         (904     -56.9
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Total costs and expenses

     165,267         (14,926     150,341        136,390         (8,997     127,393         22,948        18.0
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Operating profit (loss)

   $ 36,252       $ (38,351   $ (2,099   $ 36,262       $ (27,735   $ 8,527       $ (10,626     -124.6
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

    

 

 

   

 

 

 

Revenues

Pre-need cemetery revenues were $48.5 million for the six months ended June 30, 2015, an increase of $2.0 million, or 4.4%, as compared to $46.5 million during the same period last year. The increase was primarily caused by an increase of $11.5 million in the value of cemetery contracts written, partially offset by an increase of $9.5 million in deferred revenue.

At-need cemetery revenues were $49.6 million for the six months ended June 30, 2015, an increase of $6.3 million, or 14.4%, as compared to $43.3 million during the same period last year. The increase was primarily caused by an increase of $10.5 million in the value of cemetery contracts written, partially offset by an increase of $4.2 million in deferred revenue.

Investment income from trusts was $13.6 million for the six months ended June 30, 2015, an increase of $1.1 million, or 9.3%, as compared to $12.5 million during the same period last year. On a segment basis, we had an increase of $2.4 million primarily related to an increase in realized gains on our investments, which was offset by an adjustment of $1.3 million related to funds for which we have not met the requirements that would allow us to recognize them as revenue. Our investment results can vary from period to period based on a number of factors including realized income and the timing of the recognition of gains within the trusts.

Interest income on accounts receivable was $4.4 million for the six months ended June 30, 2015, an increase of $0.4 million or 8.5%, as compared to $4.0 million during the same period last year, primarily due to a larger accounts receivable balance.

Funeral home revenues were $28.8 million for the six months ended June 30, 2015, an increase of $5.6 million, or 23.8%, compared to $23.2 million during the same period last year. The increase was primarily driven by the 11 funeral homes we acquired in 2014 and an increase in insurance related revenues.

Other cemetery revenues were $3.4 million for the six months ended June 30, 2015, as compared to $6.4 million during the same period last year. The comparison was affected by the one-time land sale in the first quarter of 2014.

 

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Costs and Expenses

The cost of goods sold was $16.9 million for the six months ended June 30, 2015, an increase of $0.7 million, or 4.6%, as compared to $16.2 million during the same period last year. The ratio of cost of goods sold to pre-need and at-need cemetery revenues was 17.2% during the six months ended June 30, 2015 as compared to 18.0% during the same period last year. The change in the ratio primarily relates to changes in product mix.

Cemetery expenses were $35.5 million during the six months ended June 30, 2015, an increase of $6.0 million, or 20.6%, compared to $29.5 million during the same period last year. Within this category, there were increases of $1.2 million in repairs and maintenance expenses, $4.1 million in personnel costs, $0.2 million in real estate taxes, with the remaining increase in general cemetery costs. Cemetery expenses relate to the current costs of managing and maintaining our cemetery properties. These costs are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring cemetery expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our operating costs relative to our overall cemetery operations. An increase in the ratio indicates that expense increases related to the operation and maintenance of our cemetery properties exceeded increases in the value of contracts written, while a decrease in the ratio indicates that expense growth did not exceed increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to slightly decline as many of the expenses in this category are fixed in nature. The ratio of cemetery expenses to segment level pre-need and at-need cemetery revenues was 26.7% during the six months ended June 30, 2015 as compared to 26.5% during the same period last year.

Selling expenses were $29.7 million during the six months ended June 30, 2015, an increase of $3.6 million, or 13.9%, as compared to $26.1 million during the same period last year. The overall expense increase was primarily caused by increases of $6.0 million in commissions and personnel costs, $0.6 million in advertising and marketing expenses, $0.2 million in supplies and printing costs and $0.2 million in travel expenses, partially offset by an increase in deferred selling expenses of $3.6 million. The ratio of selling expenses to cemetery revenues was 30.3% during the six months ended June 30, 2015 as compared to 29.0% during the same period last year. The ratio gives some indication of how effectively the money we invest in selling efforts is translating into sales. However, the majority of our selling expenses are directly related to sales commissions and bonuses, which would be directly related to changes in the value of pre-need and at-need contracts written. As a result, we would expect this ratio to follow relatively consistent trends over the long-term.

General and administrative expenses were $18.5 million during the six months ended June 30, 2015, an increase of $2.0 million, or 12.1%, compared to $16.5 million during the same period last year. The majority of the increase was due to increases of $1.3 million in personnel costs and $0.7 million in insurance costs. General and administrative expenses are expensed as incurred and are not deferred. Accordingly, from a margin standpoint, the most effective gauge of measuring general and administrative expenses is as a ratio of segment level pre-need and at-need cemetery revenues. Changes in this ratio give an indication of our ability to manage and control our general and administrative costs relative to our overall cemetery operations. An increase in the ratio indicates that general and administrative percentage expense increases related to our cemetery properties exceeded percent increases in the value of contracts written, while a decrease in the ratio indicates that expense growth on a percentage basis did not exceed percentage increases in the value of contracts written. In the short-term, this ratio can be positively or negatively impacted by our acquisitions, including such factors as how long it takes us to fully implement our pre-need sales programs and whether there are any unanticipated costs. Over the long-term, we would expect this ratio to decrease slightly as many of the expenses in this category are fixed in nature. The ratio of general and administrative expenses to segment level pre-need and at-need cemetery revenues was 13.9% during the six months ended June 30, 2015 as compared to 14.8% during the same period last year.

Total corporate overhead was $18.8 million for the six months ended June 30, 2015, an increase of $4.8 million, or 34.5% compared to $14.0 million during the same period last year. The increase in corporate expenses was primarily attributable to increases of $2.1 million in professional fees, $1.0 million in personnel costs, $0.4 million in advertising expenses, $0.4 million in information technology costs, with the remainder attributable to increases in other general expense categories.

Depreciation and amortization was $5.9 million during the six months ended June 30, 2015, an increase of $1.0 million, or 20.8%, as compared to $4.9 million during the same period last year. The majority of the increase was attributable to acquired properties and amortization of the intangible assets relating to the lease and management agreements entered into during 2014.

 

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Funeral home expenses were $24.3 million for the six months ended June 30, 2015, an increase of $5.6 million, or 29.8%, compared to $18.7 million during the same period last year. The increase was primarily attributable to segment based increases of $2.3 million in personnel costs, $1.4 million in merchandise costs, $0.6 million in other service and supplies costs, $0.5 million in facility costs, $0.4 million in general and administrative expenses, $1.0 million in expenses related to insurance sales. These key increases were partially offset by a $0.6 million increase in deferred funeral home expenses, with the remaining increase in other general costs.

Acquisition related costs were $0.7 million for the six months ended June 30, 2015, a decrease of $0.9 million, or 56.9%, as compared to $1.6 million during the same period last year. These costs may vary from period to period depending on the amount of acquisition activity that takes place.

Non-segment Allocated Results

As previously mentioned, certain statement of operations amounts are not allocated to segment operations. These amounts are those line items that can be found on our unaudited condensed consolidated statement of operations below operating profit (loss) and above net income (loss).

The table below summarizes these items and the changes between the six months ended June 30, 2015 and 2014:

 

     Six months ended June 30,  
     2015      2014      Change ($)      Change (%)  
     (in thousands)  

Gain on acquisition

   $ —         $ 412       $ (412      -100.0

Gain on settlement agreement, net

     —           888         (888      -100.0

Interest expense

     11,233         10,722         511         4.8

Income tax expense (benefit)

   $ 399       $ (1,186    $ 1,585         -133.6

The gain on acquisition recorded during the six months ended June 30, 2014 relates to our first quarter 2014 acquisition. Refer to Note 13 of our unaudited condensed consolidated financial statements in Item 1 of this Form 10-Q for a more detailed discussion.

During the six months ended June 30, 2014, we recovered an additional $1.5 million related to the settlement of claims from locations acquired in 2010. A gain of $0.9 million has been recorded as gain on settlement agreement on the unaudited condensed consolidated statement of operations, which was net of legal fees of $0.6 million.

There was an increase in interest expense on amounts outstanding under the credit facility and an increase in discount accretion expense, primarily relating to the obligation for the lease and management agreements entered into in 2014 with the Archdiocese of Philadelphia. Average amounts outstanding under the credit facility were $133.3 million and $92.6 million during the six months ended June 30, 2015 and 2014, respectively.

We had an income tax expense of $0.4 million for the six months ended June 30, 2015, as compared to an income tax benefit of $1.2 million during the same period last year. Our effective tax rate differs from our statutory tax rate primarily because our legal entity structure includes different tax filing entities, including a significant number of partnerships that are not subject to paying tax.

 

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Supplemental Data

The following table presents supplemental operating data for the periods presented:

 

    Three months ended
June 30, 2015
    Three months ended
June 30, 2014
    Six months ended
June 30, 2015
    Six months ended
June 30, 2014
 

Operating Data:

       

Interments performed

    14,024        12,188        28,636        23,501   

Interment rights sold (1):

       

Lots

    8,844        10,470        15,894        15,747   

Mausoleum crypts (including pre-construction)

    715        639        1,333        1,203   

Niches

    475        520        844        781   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interment rights sold (1)

    10,034        11,629        18,071        17,731   
 

 

 

   

 

 

   

 

 

   

 

 

 

Number of contracts written

    32,461        28,822        61,942        52,653   

Aggregate contract amount, in thousands (excluding interest)

  $ 90,204      $ 77,938      $ 168,508      $ 141,610   

Average amount per contract (excluding interest)

  $ 2,779      $ 2,704      $ 2,720      $ 2,689   

Number of pre-need contracts written

    15,729        14,331        29,430        26,259   

Aggregate pre-need contract amount, in thousands (excluding interest)

  $ 59,977      $ 52,249      $ 110,005      $ 94,011   

Average amount per pre-need contract (excluding interest)

  $ 3,813      $ 3,646      $ 3,738      $ 3,580   

Number of at-need contracts written

    16,732        14,491        32,512        26,394   

Aggregate at-need contract amount, in thousands (excluding interest)

  $ 30,227      $ 25,689      $ 58,503      $ 47,599   

Average amount per at-need contract (excluding interest)

  $ 1,807      $ 1,773      $ 1,799      $ 1,803   

 

(1) Net of cancellations. Sales of double-depth burial lots are counted as two sales.

Liquidity and Capital Resources

Overview

Our primary short-term liquidity needs are to fund general working capital requirements, repay our debt obligations, service our debt, make routine maintenance capital improvements and pay distributions. We will need additional liquidity to construct mausoleum and lawn crypts on the grounds of our cemetery properties.

Our primary sources of liquidity are cash flows from operations and amounts available under our revolving credit facility as described below. In the past, we have been able to increase our liquidity through long-term bank borrowings and the issuance of additional common units and other partnership securities, including debt, subject to the restrictions in our revolving credit facility and under our senior notes.

We believe that cash generated from operations and our borrowing capacity under our revolving credit facility, which is discussed below, will be sufficient to meet our working capital requirements as well as our anticipated capital expenditures for the foreseeable future.

In addition to macroeconomic conditions, our ability to satisfy our debt service obligations, fund planned capital expenditures, make acquisitions and pay distributions to partners will depend upon our future operating performance. Our operating performance is primarily dependent on the sales volume of customer contracts, the cost of purchasing cemetery merchandise that we have sold, the amount of funds withdrawn from merchandise trusts and perpetual care trusts and the timing and amount of collections on our pre-need installment contracts.

Long-term Debt

7.875% Senior Notes due 2021

On May 28, 2013, we issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). We pay 7.875% interest per annum on the principal amount of the Senior Notes, payable in cash semi-annually in arrears on June 1 and December 1 of each year, since December 1, 2013. The net proceeds from the offering were used to retire our previously outstanding $150.0 million aggregate principal amount of 10.25% Senior Notes due 2017 and the remaining proceeds were used for general corporate purposes. The Senior Notes were issued at 97.832% of par resulting in gross proceeds of $171.2 million with an original issue discount of approximately $3.8 million. We incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are amortized over the life of the Senior Notes. As of June 30, 2015, we were in compliance with all applicable covenants of the Senior Notes.

 

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Credit Facility

On December 19, 2014, we entered into the Fourth Amended and Restated Credit Agreement (the “Credit Agreement”).

The Credit Agreement provides for a single revolving credit facility of $180.0 million (the “Credit Facility”) maturing on December 19, 2019. Additionally the Credit Agreement provides for an uncommitted ability to increase the Credit Facility by an additional $70.0 million. The summary of the material terms of the Credit Agreement is set forth below. Capitalized terms, which are not defined in the following description, shall have the meaning assigned to such terms in the Credit Agreement.

At June 30, 2015, amounts outstanding under the Credit Facility bore interest at rates between 4.0% and 6.0%. The interest rates on the Credit Facility are calculated as follows:

 

    For Eurodollar Rate Loans, the outstanding principal amount thereof bears interest for each Interest Period at a rate per annum equal to the Eurodollar Rate for the Interest Period plus the Applicable Rate for Eurodollar Rate Loans; and

 

    For Base Rate Loans and Swing Line Loans, the outstanding principal amount thereof bears interest from the applicable borrowing date at a rate per annum equal to the Base Rate plus the Applicable Rate for Base Rate Loans.

In addition, the Borrowers must pay a Letter of Credit Fee for each Letter of Credit equal to the Applicable Rate for Letter of Credit Fees times the daily amount to be drawn under such Letter of Credit. The Applicable Rate is determined based on our Consolidated Leverage Ratio, and ranges from 2.25% to 4.00% for Eurodollar Rate Loans and Letter of Credit Fees, and 1.25% to 3.00% for Base Rate Loans. The current Applicable Rate for each of: (i) Eurodollar Rate Loans and Letter of Credit Fees is 3.75% and (ii) Base Rate Loans is 2.75% based on the current Consolidated Leverage Ratio. The Credit Agreement also requires the Borrowers to pay a quarterly unused commitment fee, which is calculated based on the amount by which the commitments under the Credit Agreement exceed the usage of such commitments.

The Credit Agreement contains financial covenants, pursuant to which the Borrowers and the Guarantors will not permit:

 

    Consolidated EBITDA