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EX-32.2 - EXHIBIT 32.2 - STONEMOR PARTNERS LPston-09302017xex322.htm
EX-32.1 - EXHIBIT 32.1 - STONEMOR PARTNERS LPston-09302017xex321.htm
EX-31.2 - EXHIBIT 31.2 - STONEMOR PARTNERS LPston-09302017xex312.htm
EX-31.1 - EXHIBIT 31.1 - STONEMOR PARTNERS LPston-09302017xex311.htm

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 September 30, 2017
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.)
 
 
3600 Horizon Boulevard
Trevose, Pennsylvania
 
19053
(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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
x

 
Accelerated filer
¨
 
Non-accelerated filer
¨
Smaller reporting company
¨
 
Emerging growth company
¨
 
 
 

If an emerging growth company, indicate by check mark if either registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act ¨
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 January 19, 2018 was 37,957,936.



Explanatory Note
On September 18, 2017, the Partnership filed its Annual Report on Form 10-K for the year ended December 31, 2016, which amended the Partnership's audited consolidated financial statements as of December 31, 2015, and for each of the two years in the period ended December 31, 2015 and the related notes thereto. This Form 10-Q amends the Partnership’s unaudited condensed consolidated financial information for the three and nine months ended September 30, 2016 and the related notes thereto, included on Form 10-Q filed on November 9, 2016 ("Original Filing"). The restatement in this Form 10-Q (“Restatement”) reflects the correction of the following errors identified subsequent to the Original Filing:
1)
The timing and accuracy of the recognition of revenues and certain associated costs related to the Partnership’s cemetery and funeral home performance obligations in the condensed consolidated statement of operations in improper accounting periods and the related effects on “Deferred revenues” and “Partners’ Capital”;
2)
The presentation of certain components of “Other current assets” and “Accounts payable and accrued liabilities” in the condensed consolidated balance sheet;
3)
The corresponding effect of the foregoing accounting errors on the Partnership’s condensed consolidated statement of cash flows and the related notes thereto;
4)
The recording and presentation of incorrect amounts of individual cemetery and funeral home location-level equity and intercompany balances—the impact of which is limited to Note 11, Supplemental Condensed Consolidating Financial Information; and
5)
The presentation of changes in “Accounts receivable, net of allowance” and “Deferred revenues” on a gross versus net basis in the Partnership’s condensed consolidated statement of cash flows and Note 2, Accounts Receivable, Net of Allowance, and omission of related disclosures.
Note 1, General, (“Note 1”) in the Partnership’s unaudited condensed consolidated financial information included in Item 1 provides further information regarding the Restatement.
The following sections in the Original Filing have been corrected in this Form 10-Q to reflect the Restatement:
Part I—Item 1—Financial Statements
Part I—Item 2—Management’s Discussion and Analysis of Financial Condition and Results of Operations
“Part I—Item 4—Controls and Procedures” to this Form 10-Q discloses the material weaknesses in the Partnership’s internal controls associated with the Restatement, as well as management’s conclusion that the Partnership’s internal control over financial reporting was not effective as of September 30, 2017. As disclosed therein, we continued to make improvements to our internal control over financial reporting with respect to material weaknesses that had been identified at that time, and those remediation efforts as well as other remediation efforts relating to material weaknesses we identified subsequent to September 30, 2017 remain ongoing.
This Form 10-Q does not reflect events occurring after the filing of the Original Filing except to the extent otherwise required to be included herein and does not substantively modify or update the disclosures therein other than as required to reflect the adjustments described above. See Note 1 to the accompanying unaudited condensed consolidated financial information, set forth in Item 1 of this Form 10-Q, for additional information.
We are also filing currently dated certifications from our Chief Executive Officer and Chief Financial Officer as Exhibits 31.1, 31.2, 32.1 and 32.2 to this Form 10-Q.
Unless the context otherwise requires, references to “we,” “us,” “our,” “StoneMor,” the “Company,” or the “Partnership” are to StoneMor Partners L.P. and its subsidiaries.



FORM 10-Q OF STONEMOR PARTNERS L.P.
TABLE OF CONTENTS




PART I – FINANCIAL INFORMATION
 
ITEM 1.
FINANCIAL STATEMENTS
STONEMOR PARTNERS L.P.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands)
 
September 30, 2017
 
December 31, 2016
 
(Unaudited)
 
 
Assets
 
 
 
Current assets:
 
 
 
Cash and cash equivalents
$
8,460

 
$
12,570

Accounts receivable, net of allowance
77,058

 
77,253

Prepaid expenses
7,949

 
5,532

Assets held for sale
1,169

 

Other current assets
24,524

 
23,466

Total current assets
119,160

 
118,821

 
 
 
 
Long-term accounts receivable, net of allowance
101,094

 
98,886

Cemetery property
334,208

 
337,315

Property and equipment, net of accumulated depreciation
115,116

 
118,281

Merchandise trusts, restricted, at fair value
512,181

 
507,079

Perpetual care trusts, restricted, at fair value
338,611

 
333,780

Deferred selling and obtaining costs
124,137

 
116,890

Deferred tax assets
68

 
64

Goodwill
70,436

 
70,436

Intangible assets
63,740

 
65,438

Other assets
20,603

 
20,023

Total assets
$
1,799,354

 
$
1,787,013

 
 
 
 
Liabilities and Partners' Capital
 
 
 
Current liabilities:
 
 
 
Accounts payable and accrued liabilities
$
47,157

 
$
35,547

Accrued interest
5,159

 
1,571

Current portion, long-term debt
1,114

 
1,775

Total current liabilities
53,430

 
38,893

 
 
 
 
Long-term debt, net of deferred financing costs
306,572

 
300,351

Deferred revenues
903,853

 
866,633

Deferred tax liabilities
21,487

 
20,058

Perpetual care trust corpus
338,611

 
333,780

Other long-term liabilities
38,655

 
36,944

Total liabilities
1,662,608

 
1,596,659

Commitments and contingencies

 

Partners' capital (deficit):
 
 
 
General partner interest
(2,486
)
 
(1,914
)
Common limited partners' interest
139,232

 
192,268

Total partners' capital
136,746

 
190,354

Total liabilities and partners' capital
$
1,799,354

 
$
1,787,013

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

1


STONEMOR PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
(in thousands, except per unit data)
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
(As restated -
see Note 1)
 
 
 
(As restated -
see Note 1)
Revenues:
 
 
 
 
 
 
 
Cemetery:
 
 
 
 
 
 
 
Merchandise
$
40,331

 
$
38,129

 
$
119,229

 
$
110,239

Services
15,414

 
14,260

 
46,703

 
41,712

Investment and other
13,798

 
14,340

 
39,884

 
40,805

Funeral home:
 
 
 
 
 
 
 
Merchandise
6,591

 
6,708

 
21,176

 
20,794

Services
7,900

 
7,336

 
25,940

 
24,373

Total revenues
84,034

 
80,773

 
252,932

 
237,923

 
 
 
 
 
 
 
 
Costs and Expenses:
 
 
 
 
 
 
 
Cost of goods sold
11,910

 
11,721

 
37,472

 
34,483

Cemetery expense
19,984

 
19,926

 
56,805

 
53,267

Selling expense
17,082

 
16,466

 
49,164

 
47,774

General and administrative expense
9,752

 
9,522

 
29,462

 
27,719

Corporate overhead
11,887

 
10,058

 
39,058

 
30,106

Depreciation and amortization
3,186

 
2,927

 
10,032

 
9,147

Funeral home expenses:
 
 
 
 
 
 
 
Merchandise
1,793

 
2,322

 
5,176

 
6,306

Services
5,442

 
6,076

 
16,595

 
18,687

Other
5,346

 
5,433

 
15,678

 
15,319

Total costs and expenses
86,382

 
84,451

 
259,442

 
242,808

 
 
 
 
 
 
 
 
Other gains (losses), net
338

 
(506
)
 
(733
)
 
(1,579
)
Interest expense
(6,944
)
 
(5,934
)
 
(20,391
)
 
(17,431
)
Loss from continuing operations before income taxes
(8,954
)
 
(10,118
)
 
(27,634
)
 
(23,895
)
Income tax benefit (expense)
(622
)
 
169

 
(2,085
)
 
(591
)
Net loss
$
(9,576
)
 
$
(9,949
)
 
$
(29,719
)
 
$
(24,486
)
General partner's interest
$
(99
)
 
$
(111
)
 
$
(309
)
 
$
2,081

Limited partners' interest
$
(9,477
)
 
$
(9,838
)
 
$
(29,410
)
 
$
(26,567
)
Net loss per limited partner unit (basic and diluted)
$
(0.25
)
 
$
(0.28
)
 
$
(0.78
)
 
$
(0.77
)
Weighted average number of limited partners' units outstanding (basic and diluted)
37,958

 
35,470

 
37,945

 
34,287

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.


2


STONEMOR PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL (UNAUDITED)
(dollars in thousands)
 
Partners' Capital
 
Outstanding Common Units
 
Common Limited Partners
 
General Partner
 
Total
December 31, 2016
37,863,496

 
$
192,268

 
$
(1,914
)
 
$
190,354

Issuance of common units

 
744

 

 
744

Common unit awards under incentive plans
16,098

 
656

 

 
656

Net loss

 
(29,410
)
 
(309
)
 
(29,719
)
Cash distributions

 
(24,282
)
 
(263
)
 
(24,545
)
Unit distributions paid in kind
78,342

 
(744
)
 

 
(744
)
September 30, 2017
37,957,936

 
$
139,232

 
$
(2,486
)
 
$
136,746

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.


3


STONEMOR PARTNERS L.P.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(in thousands)
 
Nine Months Ended September 30,
 
2017
 
2016
 
 
 
(As restated -
see Note 1)
Cash Flows From Operating Activities:
 
 
 
Net loss
$
(29,719
)
 
$
(24,486
)
Adjustments to reconcile net loss to net cash provided by operating activities:
 
 
 
Cost of lots sold
7,823

 
6,773

Depreciation and amortization
10,032

 
9,147

Provision for cancellations
5,123

 
9,732

Non-cash compensation expense
656

 
1,468

Non-cash interest expense
3,318

 
2,510

Other (gains) losses, net
517

 
975

Changes in assets and liabilities:
 
 
 
Accounts receivable, net of allowance
(8,576
)
 
(18,899
)
Merchandise trust fund
44,251

 
(13,248
)
Other assets
(5,053
)
 
(4,549
)
Deferred selling and obtaining costs
(7,246
)
 
(9,819
)
Deferred revenues
(12,119
)
 
49,821

Deferred taxes, net
1,425

 
(245
)
Payables and other liabilities
14,269

 
9,307

Net cash provided by operating activities
24,701

 
18,487

Cash Flows From Investing Activities:
 
 
 
Cash paid for capital expenditures
(7,960
)
 
(9,655
)
Cash paid for acquisitions

 
(10,550
)
Proceeds from divestitures
701

 

Proceeds from asset sales
401

 
1,896

Net cash used in investing activities
(6,858
)
 
(18,309
)
Cash Flows From Financing Activities:
 
 
 
Cash distributions
(24,545
)
 
(68,062
)
Proceeds from borrowings
78,792

 
207,868

Repayments of debt
(74,627
)
 
(207,700
)
Proceeds from issuance of common units, net of costs

 
74,535

Cost of financing activities
(1,573
)
 
(6,362
)
Net cash provided by (used in) financing activities
(21,953
)
 
279

Net increase (decrease) in cash and cash equivalents
(4,110
)
 
457

Cash and cash equivalents - Beginning of period
12,570

 
15,153

Cash and cash equivalents - End of period
$
8,460

 
$
15,610

Supplemental disclosure of cash flow information:
 
 
 
Cash paid during the period for interest
$
13,653

 
$
11,434

Cash paid during the period for income taxes
$
2,884

 
$
3,114

Non-cash investing and financing activities:
 
 
 
Acquisition of assets by financing
$
2,285

 
$
505

Classification of assets as held for sale
$
1,169

 
$

See Accompanying Notes to the Unaudited Condensed Consolidated Financial Statements.

4


STONEMOR PARTNERS L.P.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
September 30, 2017
1.
GENERAL
Nature of Operations
StoneMor Partners L.P. (the “Partnership”) is a provider of funeral and cemetery products and services in the death care industry in the United States. As of September 30, 2017, the Partnership operated 316 cemeteries in 27 states and Puerto Rico, of which 285 are owned and 31 are operated under lease, management or operating agreements. The Partnership also owned and operated 97 funeral homes, including 45 located on the grounds of cemetery properties that we own, in 18 states and Puerto Rico.
Basis of Presentation
The accompanying condensed consolidated financial statements, which are unaudited except for the balance sheet at December 31, 2016, which is derived from audited financial statements, have been prepared in accordance with the requirements of Form 10-Q and accounting principles generally accepted in the United States (“GAAP”) for interim reporting. They do not include all disclosures normally made in financial statements contained in Form 10-K. In management’s opinion, all adjustments necessary for a fair presentation of the Partnership’s financial position, results of operations and cash flows for the periods disclosed have been made. These interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and the related notes thereto presented in the Partnership’s Annual Report on Form 10-K for the year ended December 31, 2016. The results of operations for the three and nine months ended September 30, 2017 may not necessarily be indicative of the results of operations for the full year ended December 31, 2017.
Principles of Consolidation
The unaudited condensed consolidated financial statements include the accounts of each of the Partnership’s 100% owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the Partnership has a variable interest and is the primary beneficiary. The Partnership operates 31 cemeteries under long-term lease, operating or management contracts. The operations of 16 of these managed cemeteries have been consolidated.
The Partnership operates 15 cemeteries under long-term leases and other agreements that do not qualify as acquisitions for accounting purposes. As a result, the Partnership did not consolidate all of the existing assets and liabilities related to these cemeteries. The Partnership has consolidated the existing assets and liabilities of the merchandise and perpetual care trusts associated with these cemeteries as variable interest entities since the Partnership controls and receives the benefits and absorbs any losses from operating these trusts. Under the long-term leases, and other agreements associated with these properties, which are subject to certain termination provisions, the Partnership is the exclusive operator of these cemeteries and earns revenues related to sales of merchandise, services, and interment rights, and incurs expenses related to such sales, including the maintenance and upkeep of these cemeteries. Upon termination of these contracts, the Partnership will retain all of the benefits and related contractual obligations incurred from sales generated during the contract period. The Partnership has also recognized the existing customer contract related performance obligations that it assumed as part of these agreements.

Restatement of Previously Issued Unaudited Condensed Consolidated Financial Statements
On September 18, 2017, the Partnership filed its Annual Report on Form 10-K for the year ended December 31, 2016, which amended the Partnership's audited consolidated financial statements as of December 31, 2015, and for each of the two years in the period ended December 31, 2015 and the related notes thereto. This Form 10-Q amends the Partnership’s unaudited condensed consolidated financial statements for the three and nine months ended September 30, 2016 and the related notes thereto, included on Form 10-Q filed on November 9, 2016 ("Original Filing"). The Restatement reflects the correction of the following errors identified subsequent to the Original Filing:
A.
The Partnership understated recognized revenues from the satisfaction of cemetery and funeral home performance obligations in its condensed consolidated statement of operations. The understatement was primarily due to lags in or omissions of the data entry of a contract servicing event. The adjustments to correct these accounting errors resulted in a net increase of $2.2 million in revenues for the three months ended September 30, 2016, of which $1.9 million related to merchandise revenues, and a net increase of $4.1 million in revenues for the nine months ended September 30, 2016, of which $3.5 million related to merchandise revenues.

5


B.
In conjunction with the foregoing revenue recognition errors, on its condensed consolidated balance sheet, the Partnership had historically (i) deferred incorrect and imprecise amounts of investment revenues and expenses related to its merchandise trusts, (ii) reserved incorrect amounts for future cancellations related to its cemetery and funeral home performance obligations, and (iii) deferred incorrect amounts of selling costs. The correction of these accounting errors resulted in a net increase in "Selling expense" of $0.5 million for the three months ended September 30, 2016. The correction of these accounting errors resulted in a net increase in “Cemetery investment and other revenues” of $0.1 million for the nine months ended September 30, 2016 due to changes in the inputs used to calculate trust income recognition. This also resulted in a decrease in “Cemetery merchandise revenues” of $0.1 million for the nine months ended September 30, 2016 due to an increase in cancellation reserve expense and an increase in “Selling expense” of $0.9 million for that period.
C.
Certain components of “Other current assets” and “Accounts payable and accrued liabilities” on its condensed consolidated balance sheet were determined to be inappropriate in the Partnership’s review of accounting policies during its ongoing remediation. The Partnership had historically presented intercompany deposits due to its merchandise and perpetual care trust funds within “Other current assets” and presented intercompany payables to its merchandise and perpetual care trusts in “Accounts payable and accrued liabilities”. The Partnership has determined the intercompany payables and liabilities to its consolidated trust funds should be eliminated. The correction of the error resulted in a reclassification of $1.7 million in the condensed consolidated statements of cash flows between "Other assets" and "Payables and other liabilities" for the nine months ended September 30, 2016.
D.
Specific to the Partnership’s disclosure in Note 11, Supplemental Condensed Consolidating Financial Information, (“Note 11”) the Partnership recorded incorrect amounts for its individual cemetery and funeral home location-level equity and intercompany balances at its formation and in subsequent acquisitions. Additionally, the Partnership presented certain managed locations as guarantor subsidiaries instead of non-guarantor subsidiaries in Note 11. Note that this error had no impact to amounts presented on the face of the condensed consolidated financial statements.
E.
The Partnership incorrectly presented the changes in “Accounts receivable, net of allowance” net of the income statement “Provision for cancellations” and omitted certain disclosures regarding the components of the changes in “Accounts receivable, net of allowance” and “Deferred revenues” in its condensed consolidated statement of cash flows. Additionally, specific to the Partnership’s related disclosure in Note 2, Accounts Receivable, Net of Allowance, the Partnership presented activity in the allowance for cancellations that related to deferred revenues on a gross basis instead of on a net basis. The correction of the error resulted in a reclassification of $9.7 million in the condensed consolidated statement of cash flows between "Provision for cancellations" and "Accounts receivable, net of allowance" for the nine months ended September 30, 2016.

6


The effect of these adjustments on the Partnership’s unaudited condensed consolidated statements of operations for the three and nine months ended September 30, 2016 and the unaudited condensed consolidated statement of cash flows for the nine months ended September 30, 2016 is summarized below for each affected caption (in thousands, except per unit data):
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS (unaudited)
 
 
Three Months Ended September 30, 2016
 
Nine Months Ended September 30, 2016
 
Reference
 
As Filed
 
Restatement
Adjustments
 
As Restated
 
As Filed
 
Restatement
Adjustments
 
As Restated
Cemetery revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Merchandise
A, B
 
$
36,314

 
$
1,815

 
$
38,129

 
$
106,937

 
$
3,302

 
$
110,239

Services
A
 
13,928

 
332

 
14,260

 
41,067

 
645

 
41,712

Investment and other
B
 
14,302

 
38

 
14,340

 
40,689

 
116

 
40,805

Funeral home revenues:
 
 
 
 
 
 
 
 
 
 
 
 
 
Merchandise
A
 
6,656

 
52

 
6,708

 
20,681

 
113

 
20,794

Total revenues
 
 
78,536

 
2,237

 
80,773

 
233,747

 
4,176

 
237,923

Selling expense
B
 
15,931

 
535

 
16,466

 
46,898

 
876

 
47,774

Funeral home expenses:
 
 
 
 
 
 
 
 
 
 
 
 
 
Services
B
 
6,070

 
6

 
6,076

 
18,672

 
15

 
18,687

Total costs and expenses
 
 
83,910

 
541

 
84,451

 
241,917

 
891

 
242,808

Net loss
 
 
(11,644
)
 
1,695

 
(9,949
)
 
(27,770
)
 
3,284

 
(24,486
)
General partner's interest for the period
 
 
(130
)
 
19

 
(111
)
 
2,043

 
38

 
2,081

Limited partners' interest for the period
 
 
(11,514
)
 
1,676

 
(9,838
)
 
(29,813
)
 
3,246

 
(26,567
)
Net loss per limited partner unit (basic and diluted)
 
 
$
(0.32
)
 
$
0.04

 
$
(0.28
)
 
$
(0.87
)
 
$
0.10

 
$
(0.77
)
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS (unaudited)
 
 
Nine Months Ended September 30, 2016
 
Reference
 
As Filed
 
Restatement
Adjustments
 
As Restated
Net loss
 
 
$
(27,770
)
 
$
3,284

 
$
(24,486
)
Provision for cancellations
E
 

 
9,732

 
9,732

Changes in assets and liabilities:
 
 
 
 
 
 
 
Accounts receivable, net of allowance
E
 
(9,167
)
 
(9,732
)
 
(18,899
)
Other assets
B, C
 
(6,270
)
 
1,721

 
(4,549
)
Deferred selling and obtaining costs
B
 
(10,716
)
 
897

 
(9,819
)
Deferred revenues
A, B
 
53,996

 
(4,175
)
 
49,821

Payables and other liabilities
C
 
11,034

 
(1,727
)
 
9,307

Net cash provided by operating activities
 
 
$
18,487

 
$

 
$
18,487

As shown above, the adjustments affecting the condensed consolidated statement of cash flows for the period noted are included in the Partnership’s net loss from operations and offset by changes in operating assets and liabilities. There were no adjustments related to cash provided by (used in) investing and financing activities.
Uses and Sources of Liquidity
Our primary use of liquidity is to fund working capital requirements of our businesses, capital expenditures and for general corporate purposes, including debt repayment and distributions. As more fully discussed in Note 7, the terms of the Partnership's senior credit facility, as amended, place certain restrictions on the Partnership’s ability to increase and make distributions and obtain additional debt. Finally, the Partnership has incurred net losses for the reporting periods in this Form 10-Q, and the Consolidated Leverage Ratio under the credit facility has been nearing the maximum allowed ratio under existing covenants as disclosed in Note 7.

7


During 2016 and 2017, the Partnership completed various financing transactions to provide supplemental liquidity necessary to achieve management’s strategic objectives, including issuance of common units, utilization of the at-the-market equity program and establishment of a new credit facility which, as discussed more fully in Note 7, was further amended during 2017. The Partnership acknowledges that it continues to face a challenging competitive environment, and while the Partnership continues to focus on its overall profitability, including managing expenses, the Partnership reported a loss for the three and nine months ended September 30, 2017. The Partnership expects that the actions taken in 2016 and 2017 will enhance its liquidity and financial flexibility. The Partnership will likely seek to continue to supplement cash generation with proceeds from financing activities, including borrowings under the credit facility and other borrowings, the issuance of additional limited partner units, capital contributions from the general partner and the sale of assets and other transactions. As of September 30, 2017, the Partnership had $3.0 million of total available borrowing capacity under its revolving credit facility.
If the Partnership continues to experience operating losses and is not able to generate additional liquidity through the mechanisms described above or through some combination of other actions, while not expected, the Partnership may be in breach of its covenants under the credit facility, and may not be able to access additional funds and the Partnership might need to secure additional sources of funds, which may or may not be available to the Partnership. Additionally, a failure to generate additional liquidity could negatively impact our access to inventory or services that are important to the operation of our business. Moreover, our ability to declare or pay future distributions may be impacted. Given the Partnership's current level of cash and cash equivalents, to preserve capital resources and liquidity, the Board of Directors of the General Partner has concluded that it is not in the best interest of unitholders to pay a second or third quarter 2017 distribution to unitholders. The Board expects to consider appropriate levels of distributions if and as conditions improve, but it is possible that we will not pay a distribution for several additional quarters.
Summary of Significant Accounting Policies
Refer to Note 1 to the Partnership's audited consolidated financial statements included in Item 8 of its Annual Report on Form 10-K for the year ended December 31, 2016 for the complete summary of significant accounting policies.
Use of Estimates
The preparation of the Partnership’s unaudited condensed consolidated financial statements in conformity with GAAP 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, as well as the reported amounts of revenue and expense during the reporting periods. The Partnership’s unaudited condensed consolidated financial statements are based on a number of significant estimates, including revenue and expense accruals, depreciation and amortization, merchandise trust and perpetual care trust asset valuation, allowance for cancellations, unit-based compensation, deferred revenues, deferred merchandise trust investment earnings, deferred selling and obtaining costs, assets and liabilities obtained through business combinations, income taxes, hurricane-related losses and goodwill including quarterly assessment for impairment. As a result, actual results could differ from those estimates.
Assets Held for Sale
We classify our assets or entities as held for sale in the period in which all of the following criteria are met:
management, having the authority to approve the action, commits to a plan to sell the entity;
the entity is available for immediate sale in its present condition;
an active program to locate a buyer and other actions required to complete the plan to sell have been initiated;
the sale is probable and transfer is expected to be completed within one year;
the entity is being actively marketed for sale at a price that is reasonable in relation to its current fair value; and
actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

8


When the disposals of an entity or components of an entity that are classified as held for sale represent a strategic shift that has, or will have, a major effect on an entity's operations and financial results we account for such disposals as discontinued operations. Otherwise when the held for sale criteria is met but the disposal does not meet the criteria to be treated as discontinued operations, the assets or disposal group are reclassified from the corresponding balance sheet line items to held for sale. Assets classified as held for sale are carried at the lower of cost or market, with any gain or loss on sale recorded in "Other gains (losses), net" in the condensed consolidated statement of operations.
The Partnership classified certain assets of three cemeteries and three funeral homes as held for sale at September 30, 2017 and no assets at December 31, 2016. The contributions of revenues and earnings by these assets in 2017 were not material. Assets held for sale consisted of the following at the date indicated (in thousands):
 
September 30, 2017
Cemetery property
$
281

Buildings and improvements
718

Funeral home land
170

Assets held for sale
$
1,169

The Partnership recorded a loss on impairment of $1.0 million in "Other gains (losses), net" in the second quarter of 2017, given the net book value of the assets of two of these funeral home properties exceeded their estimated fair value.
In addition, for those assets that do not currently meet the classification as discontinued operations or held for sale but where, as a result of strategic discussions with third parties, information is identified that an asset may be impaired an interim assessment of impairment is performed to determine whether the carrying value is impaired. During the second quarter of 2017, the Partnership conducted an interim assessment with regards to certain assets held for use of two funeral homes with net book value of $0.9 million and recognized a loss on impairment of $0.4 million in "Other gains (losses), net" on the unaudited condensed consolidated statement of operations during the nine months ended September 30, 2017, resulting in an updated net book value of $0.5 million.
Goodwill
Goodwill represents the excess of the purchase price over the fair value of identifiable net assets acquired. Goodwill is not amortized, but instead is subject to impairment testing on an annual basis, and between annual tests whenever events or changes in circumstances indicate that the fair value of a reporting unit may be below its carrying amount. No such events have occurred during the nine months ended September 30, 2017. Goodwill totaled approximately $70.4 million as of both September 30, 2017 and December 31, 2016.
Income Taxes
The Partnership is not subject to U.S. federal and most state income taxes. The partners of the Partnership are liable for income tax in regard to their distributive share of the Partnership’s taxable income. Such taxable income may vary substantially from net income reported in the accompanying condensed consolidated financial statements. Certain corporate subsidiaries are subject to federal and state income tax. Deferred tax assets and liabilities are recognized for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis and tax carryforwards. 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 Partnership records a valuation allowance against its deferred tax assets if it deems that it is more likely than not that some portion or all of the recorded deferred tax assets will not be realizable in future periods.
The change in the deferred tax liability during the nine months ended September 30, 2017 was caused by an increase in deferred tax liabilities associated with long-lived intangibles that will reverse after the expiration of the existing deferred tax assets.

9


Net Income (Loss) per Common Unit
Basic net income (loss) attributable to common limited partners per unit is computed by dividing net income (loss) attributable to common limited partners, which is determined after the deduction of the general partner’s interest, by the weighted average number of common limited partner units outstanding during the period. Net income (loss) attributable to common limited partners is determined by deducting net income attributable to participating securities, if applicable, and net income (loss) attributable to the general partner’s units. The general partner’s interest in net income (loss) is calculated on a quarterly basis based upon its units and incentive distributions to be distributed for the quarter, with a priority allocation of net income to the general partner’s incentive distributions, if any, in accordance with the partnership agreement, and the remaining net income (loss) allocated with respect to the general partner’s and limited partners’ ownership interests.
The Partnership presents net income (loss) per unit under the two-class method for master limited partnerships, which considers whether the incentive distributions of a master limited partnership represent a participating security when considered in the calculation of earnings per unit under the two-class method. The two-class method considers whether the partnership agreement contains any contractual limitations concerning distributions to the incentive distribution rights that would impact the amount of earnings to allocate to the incentive distribution rights for each reporting period. If distributions are contractually limited to the incentive distribution rights’ share of currently designated available cash for distributions as defined under the partnership agreement, undistributed earnings in excess of available cash should not be allocated to the incentive distribution rights. Under the two-class method, management of the Partnership believes the partnership agreement contractually limits cash distributions to available cash; therefore, undistributed earnings in excess of available cash are not allocated to the incentive distribution rights.
The following is a reconciliation of net income (loss) allocated to the common limited partners for purposes of calculating net income (loss) attributable to common limited partners per unit (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
 
 
 
(As restated -
see above)
 
 
 
(As restated -
see above)
Net loss
$
(9,576
)
 
$
(9,949
)
 
$
(29,719
)
 
$
(24,486
)
Less: Incentive distribution right (“IDR”) payments to general partner

 

 

 
2,387

Net loss to allocate to general and common limited partners
(9,576
)
 
(9,949
)
 
(29,719
)
 
(26,873
)
Less: General partner’s interest excluding IDRs
(99
)
 
(111
)
 
(309
)
 
(306
)
Net loss attributable to common limited partners
$
(9,477
)
 
$
(9,838
)
 
$
(29,410
)
 
$
(26,567
)

Diluted net income (loss) attributable to common limited partners per unit is calculated by dividing net income (loss) attributable to common limited partners, less income allocable to participating securities, by the sum of the weighted average number of common limited partner units outstanding and the dilutive effect of unit option awards, as calculated by the treasury stock or if converted methods, as applicable. These awards consist of common units issuable upon payment of an exercise price by the participant under the terms of the Partnership’s long-term incentive plan.
The following table sets forth the reconciliation of the Partnership’s weighted average number of common limited partner units used to compute basic net income (loss) attributable to common limited partners per unit with those used to compute diluted net income (loss) attributable to common limited partners per unit (in thousands):
 
Three Months Ended September 30,
 
Nine Months Ended September 30,
 
2017
 
2016
 
2017
 
2016
Weighted average number of common limited partner units - basic and diluted (1)
37,958

 
35,470

 
37,945

 
34,287

_____________________________
(1)
The diluted weighted average number of limited partners’ units outstanding presented on the condensed consolidated statement of operations does not include 335 thousand units and 383 thousand units for the three months ended September 30, 2017 and 2016, respectively, and 328 thousand units and 375 thousand units for the nine months ended September 30, 2017 and 2016, respectively, as their effects would be anti-dilutive.

10


Recently Issued Accounting Standard Updates - Not Yet Effective
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606). This ASU supersedes the revenue recognition requirements in FASB ASC 605, Revenue Recognition, and in most industry-specific topics. The new guidance identifies how and when entities should recognize revenue. The new rules establish a core principle requiring the recognition of revenue to depict the transfer of promised goods or services to customers in an amount reflecting the consideration to which the entity expects to be entitled in exchange for such goods or services. In connection with this new standard, the FASB has issued several amendments to ASU 2014-09, as follows:
In March 2016, the FASB issued ASU 2016-08, Revenue from Contracts with Customers (Topic 606): Principal versus Agent Considerations (Reporting Revenue Gross versus Net). This standard improves the implementation guidance on principal versus agent considerations and whether an entity reports revenue on a gross or net basis.
In April 2016, the FASB issued ASU 2016-10, Revenue from Contracts with Customers (Topic 606): Identifying Performance Obligations and Licensing. This standard clarifies identifying performance obligations and the licensing implementation guidance.
In May 2016, the FASB issued ASU 2016-12, Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients. This standard provides additional guidance on (a) the objective of the collectability criterion, (b) the presentation of sales tax collected from customers, (c) the measurement date of non-cash consideration received, (d) practical expedients in respect of contract modifications and completed contracts at transition and (e) disclosure of the effects of the accounting change in the period of adoption.
In December 2016, the FASB issued ASU No. 2016-20, Technical Corrections and Improvements to Topic 606, Revenue from Contracts with Customers, which amends certain narrow aspects of the guidance, including the disclosure of remaining performance obligations and prior-period performance obligations, as well as other amendments to the guidance on loan guarantee fees, contract costs, refund liabilities, advertising costs and the clarification of certain examples.
In September 2017, the FASB issued ASU No. 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments, which provides additional clarification and implementation guidance on ASU 2014-09 and is effective consistent with the adoption schedule for ASU 2014-09.
The new guidance in ASU 2014-09, as well as all amendments discussed above, is effective for fiscal years, and interim periods within those years, beginning after December 15, 2017. The new guidance permits two methods of adoption, full retrospective or modified retrospective and we intend to implement the standard with the modified retrospective approach, which recognizes the cumulative effect of application recognized on that date. Management has developed an implementation plan and is continuing to evaluate the impact that the adoption of this guidance will have on the financial statements of the Partnership. Management continues to monitor modifications, clarifications and interpretations issued by the FASB. Management's implementation plan includes the following:
Establishing an ASC 606 steering committee comprised of various functions across the Partnership;
Performing the detailed review of customer contracts in scope of ASU 2014-09;
Assessing the potential impact that the guidance will have on our current accounting policies and practices; and
Evaluating the changes, if any, to our business processes, systems and controls necessary to support recognition and disclosure under the new guidance.
Management continues to make progress toward the adoption of the new standard but has not yet fully determined the impact of the new standard on our consolidated results of operations, financial position and cash flows. Management is currently assessing the timing of revenue recognition under the new standard, including the recognition of nonrefundable upfront fees. Management expects that there will be an impact to the financial reporting disclosures and internal control over financial reporting.
The Partnership will adopt the requirements of the new standard upon its effective date of January 1, 2018.

11


In the first quarter of 2016, the FASB issued Update No. 2016-01, Financial Instruments (Subtopic 825-10) (“ASU 2016-01”). The core principle of ASU 2016-01 is that all equity investments should be measured at fair value with changes in the fair value recognized through net income. The amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is not permitted for the key aspects of the amendment. The Partnership will adopt the requirements of ASU 2016-01 upon its effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the first quarter of 2016, the FASB issued Update No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). The core principle of ASU 2016-02 is that all leases create an asset and a liability for lessees and recognition of those lease assets and lease liabilities represents an improvement over previous GAAP, which did not require lease assets and lease liabilities to be recognized for most leases. The amendment is effective for annual reporting periods beginning after December 15, 2018, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-02 upon its effective date of January 1, 2019, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the second quarter of 2016, the FASB issued Update No. 2016-13, Credit Losses (Topic 326) (“ASU 2016-13”). The core principle of ASU 2016-13 is that all assets measured at amortized cost basis should be presented at the net amount expected to be collected using historical experience, current conditions and reasonable and supportable forecasts as a basis for credit loss estimates, instead of the probable initial recognition threshold used under current GAAP. The amendment is effective for annual reporting periods beginning after December 15, 2019, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-13 upon its effective date of January 1, 2020, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the third quarter of 2016, the FASB issued Update No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”). The core principle of ASU 2016-15 is to provide cash flow statement classification guidance. The amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-15 upon its effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the fourth quarter of 2016, the FASB issued Update No. 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (“ASU 2016-18”). The core principle of ASU 2016-18 is to provide guidance on the presentation of restricted cash or restricted cash equivalents in the statement of cash flows. The amendment is effective for annual reporting periods beginning after December 15, 2017, including interim periods within those fiscal years. Early application is permitted. The Partnership plans to adopt the requirements of ASU 2016-18 upon its effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the first quarter of 2017, the FASB issued Update No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business, which clarifies the definition of a business. The amendments affect all companies and other reporting organizations that must determine whether they have acquired or sold a business. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The amendments are intended to help companies and other organizations evaluate whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments are effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Partnership is evaluating the potential impact of the adoption on its financial position, results of operations and related disclosures.
In the first quarter of 2017, the FASB also issued Update No. 2017-04, Intangibles-Goodwill and Other (Topic 350) (“ASU 2017-04”) to simplify the subsequent measurement of goodwill. ASU 2017-04 eliminates Step 2 from the goodwill impairment test. Instead, impairment is defined as the amount by which the carrying value of the reporting unit exceeds its fair value, up to the total amount of goodwill. The Partnership plans to adopt the requirements of ASU 2017-04 upon its effective date of January 1, 2020, and is evaluating the impact, if any, on its financial position, results of operations and related disclosures.

12


2.
ACCOUNTS RECEIVABLE, NET OF ALLOWANCE
Long-term accounts receivable, net, consisted of the following at the dates indicated (in thousands):
 
September 30, 2017
 
December 31, 2016
Customer receivables
$
223,861

 
$
223,326

Unearned finance income
(20,490
)
 
(21,034
)
Allowance for contract cancellations
(25,219
)
 
(26,153
)
Accounts receivable, net of allowance
178,152

 
176,139

Less: Current portion, net of allowance
77,058

 
77,253

Long-term portion, net of allowance
$
101,094

 
$
98,886

Activity in the allowance for contract cancellations was as follows (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
 
 
 
(As restated -
see Note 1)
Balance, beginning of period
$
26,153

 
$
23,985

Provision for cancellations
5,123

 
9,732

Cancellations
(6,057
)
 
(5,515
)
Balance, end of period
$
25,219

 
$
28,202

As noted in Note 1, the Partnership has changed its presentation herein to focus only on the provision and cancellations of amounts recognized. The allowance for contract cancellations included $16.9 million and $17.4 million related to deferred revenues as of September 30, 2017 and December 31, 2016, respectively.
3.
CEMETERY PROPERTY
Cemetery property consisted of the following at the dates indicated (in thousands):
 
September 30, 2017
 
December 31, 2016
Cemetery land
$
256,120

 
$
257,914

Mausoleum crypts and lawn crypts
78,088

 
79,401

Cemetery property
$
334,208

 
$
337,315

Due to the hurricanes in Florida and Puerto Rico during September 2017, the Partnership has realized damages at certain locations of $0.5 million.
4.
PROPERTY AND EQUIPMENT
Property and equipment consisted of the following at the dates indicated (in thousands):
 
September 30, 2017
 
December 31, 2016
Buildings and improvements
$
124,551

 
$
125,442

Furniture and equipment
57,170

 
56,408

Funeral home land
14,235

 
11,527

Property and equipment, gross
195,956

 
193,377

Less: Accumulated depreciation
(80,840
)
 
(75,096
)
Property and equipment, net of accumulated depreciation
$
115,116

 
$
118,281


13


Depreciation expense was $2.6 million and $2.3 million for the three months ended September 30, 2017 and 2016, respectively, and $8.3 million and $7.4 million for the nine months ended September 30, 2017 and 2016, respectively.
5.
MERCHANDISE TRUSTS
At September 30, 2017 and December 31, 2016, the Partnership’s merchandise trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds.
All of these investments are classified as available for sale and, accordingly, all of the assets are carried at fair value. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 10. There were no Level 3 assets.
The merchandise trusts are variable interest entities ("VIE") of which the Partnership is the primary beneficiary. The assets held in the merchandise trusts are required to be used to purchase the merchandise and provide the services to which they relate. If the value of these assets falls below the cost of purchasing such merchandise and providing such services, the Partnership may be required to fund this shortfall.
The Partnership included $8.9 million and $8.6 million of investments held in trust by the West Virginia Funeral Directors Association at September 30, 2017 and December 31, 2016, respectively, in its merchandise trust assets. As required by law, the Partnership 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 recognized at their account value, which approximates fair value.
A reconciliation of the Partnership’s merchandise trust activities for the nine months ended September 30, 2017 and 2016 is presented below (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Balance, beginning of period
$
507,079

 
$
464,676

Contributions
44,497

 
49,841

Distributions
(65,723
)
 
(49,168
)
Interest and dividends
18,252

 
17,657

Capital gain distributions
927

 
264

Realized gains and losses
14,192

 
3,727

Other than temporary impairment

 
(7,278
)
Taxes
(1,306
)
 
(1,721
)
Fees
(1,855
)
 
(2,234
)
Unrealized change in fair value
(3,882
)
 
28,840

Balance, end of period
$
512,181

 
$
504,604

During the nine months ended September 30, 2017 and 2016, purchases of available for sale securities were $298.7 million and $82.6 million, respectively, while sales, maturities and paydowns of available for sale securities were $297.2 million and $65.9 million, respectively. Cash flows from pre-need customer contracts are presented as operating cash flows in our condensed consolidated statement of cash flows.

14


The cost and market value associated with the assets held in the merchandise trusts as of September 30, 2017 and December 31, 2016 were as follows (in thousands):
September 30, 2017
Fair Value
Hierarchy Level
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments
1
 
$
10,874

 
$

 
$

 
$
10,874

Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. governmental securities
2
 
206

 
1

 
(64
)
 
143

Corporate debt securities
2
 
2,308

 
141

 
(188
)
 
2,261

Total fixed maturities
 
 
2,514

 
142

 
(252
)
 
2,404

Mutual funds - debt securities
1
 
249,209

 
4,153

 
(426
)
 
252,936

Mutual funds - equity securities
1
 
81,029

 
3,412

 
(5,001
)
 
79,440

Other investment funds (1)
 
 
131,010

 
169

 
(353
)
 
130,826

Equity securities
1
 
15,712

 
2,720

 
(445
)
 
17,987

Other invested assets
2
 
8,797

 

 

 
8,797

Total investments
 
 
$
499,145

 
$
10,596

 
$
(6,477
)
 
$
503,264

West Virginia Trust Receivable
 
 
8,917

 

 

 
8,917

Total
 
 
$
508,062

 
$
10,596

 
$
(6,477
)
 
$
512,181

______________________________ 
(1)
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 30 to 90 days, and private credit funds, which have lockup periods of seven years with two potential one year extensions at the discretion of the funds’ general partners. As of September 30, 2017, there were $32.4 million in unfunded commitments to the private credit funds, which are callable at any time.
December 31, 2016
Fair Value
Hierarchy Level
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments
1
 
$
17,317

 
$

 
$

 
$
17,317

Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. governmental securities
2
 
172

 
2

 
(44
)
 
130

Corporate debt securities
2
 
6,311

 
269

 
(202
)
 
6,378

Total fixed maturities
 
 
6,483

 
271

 
(246
)
 
6,508

Mutual funds - debt securities
1
 
236,159

 
1,580

 
(96
)
 
237,643

Mutual funds - equity securities
1
 
126,215

 
3,361

 
(533
)
 
129,043

Other investment funds (1)
 
 
60,017

 
603

 
(387
)
 
60,233

Equity securities
1
 
35,079

 
3,640

 
(192
)
 
38,527

Other invested assets
2
 
9,239

 

 

 
9,239

Total investments
 
 
$
490,509

 
$
9,455

 
(1,454
)
 
$
498,510

West Virginia Trust Receivable
 
 
8,569

 

 

 
8,569

Total
 
 
$
499,078

 
$
9,455

 
$
(1,454
)
 
$
507,079

______________________________ 
(1)
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have redemption periods ranging from 30 to 90 days.

15



The contractual maturities of debt securities as of September 30, 2017 were as follows (in thousands):
 
Less than
1 year
 
1 year through
5 years
 
6 years through
10 years
 
More than
10 years
U.S. governmental securities
$

 
$
88

 
$
55

 
$

Corporate debt securities
172

 
1,835

 
242

 
12

Total fixed maturities
$
172

 
$
1,923

 
$
297

 
$
12

Temporary Declines in Fair Value
The Partnership evaluates declines in fair value below cost for each asset held in the merchandise trusts on a quarterly basis.
An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the merchandise trusts as of September 30, 2017 and December 31, 2016 is presented below (in thousands):
 
Less than 12 months
 
12 months or more
 
Total
September 30, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental securities
$

 
$

 
$
123

 
$
64

 
$
123

 
$
64

Corporate debt securities
68

 
1

 
454

 
187

 
522

 
188

Total fixed maturities
68

 
1

 
577

 
251

 
645

 
252

Mutual funds - debt securities
27,882

 
142

 
1,911

 
284

 
29,793

 
426

Mutual funds - equity securities
50,406

 
5,001

 

 

 
50,406

 
5,001

Other investment funds
60,896

 
353

 

 

 
60,896

 
353

Equity securities
3,460

 
418

 
467

 
27

 
3,927

 
445

Total
$
142,712

 
$
5,915

 
$
2,955

 
$
562

 
$
145,667

 
$
6,477

 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental securities
$

 
$

 
$
87

 
$
44

 
$
87

 
$
44

Corporate debt securities
556

 
6

 
871

 
196

 
1,427

 
202

Total fixed maturities
556

 
6

 
958

 
240

 
1,514

 
246

Mutual funds - debt securities
6,040

 
61

 
754

 
35

 
6,794

 
96

Mutual funds - equity securities
7,475

 
357

 
2,578

 
176

 
10,053

 
533

Other investment funds
37,357

 
387

 

 

 
37,357

 
387

Equity securities
1,292

 
89

 
413

 
103

 
1,705

 
192

Total
$
52,720

 
$
900

 
$
4,703

 
$
554

 
$
57,423

 
$
1,454

Other-Than-Temporary Impairment of Trust Assets
On a quarterly basis, the Partnership assesses all securities in an unrealized loss position by evaluating the severity of the impairment, the length of time that each security has been in a loss position, changes in credit ratings and qualitative factors observed in the market. The Partnership has concluded that the assets currently suffering from a decline in fair value below the cost of the asset are temporary in nature. During the nine months ended September 30, 2017, the Partnership determined that there were no securities with impairment considered to be other-than-temporary.

16


During the nine months ended September 30, 2016, the Company determined that there were forty-eight securities with an aggregate cost basis of approximately $50.0 million and an aggregate fair value of approximately $42.7 million, resulting in an impairment of $7.3 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Partnership adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue is reflected in earnings in periods after the impairment date as the underlying merchandise is delivered or the underlying services are performed.
6.
PERPETUAL CARE TRUSTS
At September 30, 2017 and December 31, 2016, the Partnership’s perpetual care trusts consisted of investments in debt and equity marketable securities and cash equivalents, both directly as well as through mutual and investment funds.
All of these investments are classified as available for sale and, accordingly, all of the assets are carried at fair value. All of the investments subject to the fair value hierarchy are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 10. There were no Level 3 assets. The perpetual care trusts are VIEs of which the Partnership is the primary beneficiary.
A reconciliation of the Partnership’s perpetual care trust activities for the three months ended September 30, 2017 and 2016 is presented below (in thousands):
 
Nine Months Ended September 30,
 
2017
 
2016
Balance, beginning of period
$
333,780

 
$
307,804

Contributions
7,156

 
13,111

Distributions
(13,449
)
 
(10,923
)
Interest and dividends
12,935

 
13,609

Capital gain distributions
403

 
477

Realized gains and losses
1,371

 
(413
)
Other than temporary impairment

 
(466
)
Taxes
(420
)
 
(566
)
Fees
(1,095
)
 
(2,189
)
Unrealized change in fair value
(2,070
)
 
14,479

Balance, end of period
$
338,611

 
$
334,923

During the nine months ended September 30, 2017 and 2016, purchases of available for sale securities were $82.8 million and $256.1 million, respectively, while sales, maturities and paydowns of available for sale securities were $68.7 million and $223.3 million, respectively. Cash flows from perpetual care trust related contracts are presented as operating cash flows in our condensed consolidated statement of cash flows.

17


The cost and market value associated with the assets held in the perpetual care trusts as of September 30, 2017 and December 31, 2016 were as follows (in thousands):
September 30, 2017
Fair Value
Hierarchy Level
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments
1
 
$
9,195

 
$

 
$

 
$
9,195

Fixed maturities:
 
 
 
 
 
 
 
 

U.S. governmental securities
2
 
560

 
5

 
(40
)
 
525

Corporate debt securities
2
 
5,778

 
166

 
(147
)
 
5,797

Total fixed maturities
 
 
6,338

 
171

 
(187
)
 
6,322

Mutual funds - debt securities
1
 
156,057

 
3,318

 
(482
)
 
158,893

Mutual funds - equity securities
1
 
32,573

 
1,374

 
(1,470
)
 
32,477

Other investment funds (1)
 
 
107,563

 
2,697

 
(1,065
)
 
109,195

Equity securities
1
 
22,389

 
1,701

 
(1,707
)
 
22,383

Other invested assets
2
 
146

 

 

 
146

Total investments
 
 
$
334,261

 
$
9,261

 
$
(4,911
)
 
$
338,611

______________________________  
(1)
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 30 to 90 days, and private credit funds, which have lockup periods ranging from five to ten years with three potential one year extensions at the discretion of the funds’ general partners. As of September 30, 2017, there were $78.2 million in unfunded commitments to the private credit funds, which are callable at any time.
December 31, 2016
Fair Value
Hierarchy Level
 
Cost
 
Gross
Unrealized
Gains
 
Gross
Unrealized
Losses
 
Fair
Value
Short-term investments
1
 
$
16,113

 
$

 
$

 
$
16,113

Fixed maturities:
 
 
 
 
 
 
 
 
 
U.S. governmental securities
2
 
483

 
14

 
(23
)
 
474

Corporate debt securities
2
 
12,598

 
380

 
(152
)
 
12,826

Total fixed maturities
 
 
13,081

 
394

 
(175
)
 
13,300

Mutual funds - debt securities
1
 
127,033

 
1,187

 
(669
)
 
127,551

Mutual funds - equity securities
1
 
30,708

 
1,940

 
(26
)
 
32,622

Other investment funds (1)

 
119,196

 
2,672

 
(622
)
 
121,246

Equity securities
1
 
20,978

 
2,150

 
(432
)
 
22,696

Other invested assets
2
 
252

 

 

 
252

Total investments
 
 
$
327,361

 
$
8,343

 
$
(1,924
)
 
$
333,780

______________________________  
(1)
Other investment funds are measured at fair value using the net asset value per share practical expedient and have not been categorized in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the balance sheet. This asset class is composed of fixed income funds and equity funds, which have a redemption period ranging from 30 to 90 days, and private credit funds, which have lockup periods ranging from six to ten years with three potential one year extensions at the discretion of the funds’ general partners. As of December 31, 2016, there were $45.1 million in unfunded commitments to the private credit funds, which are callable at any time.

18


The contractual maturities of debt securities as of September 30, 2017 were as follows (in thousands):
 
Less than
1 year
 
1 year through
5 years
 
6 years through
10 years
 
More than
10 years
U.S. governmental securities
$
52

 
$
267

 
$
166

 
$
40

Corporate debt securities
843

 
4,514

 
340

 
100

Total fixed maturities
$
895

 
$
4,781

 
$
506

 
$
140

Temporary Declines in Fair Value
The Partnership 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 Partnership’s investments in debt and equity securities within the perpetual care trusts as of September 30, 2017 and December 31, 2016 is presented below (in thousands):
 
Less than 12 months
 
12 months or more
 
Total
September 30, 2017
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental securities
$

 
$

 
$
456

 
$
40

 
$
456

 
$
40

Corporate debt securities
659

 
12

 
1,640

 
135

 
2,299

 
147

Total fixed maturities
659

 
12

 
2,096

 
175

 
2,755

 
187

Mutual funds - debt securities
15,678

 
235

 
8,408

 
247

 
24,086

 
482

Mutual funds - equity securities
15,381

 
1,458

 
41

 
12

 
15,422

 
1,470

Other investment funds
56,165

 
1,065

 

 

 
56,165

 
1,065

Equity securities
9,238

 
1,686

 
37

 
21

 
9,275

 
1,707

Total
$
97,121

 
$
4,456

 
$
10,582

 
$
455

 
$
107,703

 
$
4,911

 
 
 
 
 
 
 
 
 
 
 
 
 
Less than 12 months
 
12 months or more
 
Total
December 31, 2016
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
 
Fair
Value
 
Unrealized
Losses
Fixed maturities:
 
 
 
 
 
 
 
 
 
 
 
U.S. governmental securities
$

 
$

 
$
283

 
$
23

 
$
283

 
$
23

Corporate debt securities
747

 
10

 
2,980

 
142

 
3,727

 
152

Total fixed maturities
747

 
10

 
3,263

 
165

 
4,010

 
175

Mutual funds - debt securities
24,026

 
620

 
1,908

 
49

 
25,934

 
669

Mutual funds - equity securities
3,836

 
16

 
452

 
10

 
4,288

 
26

Other investment funds
37,577

 
622

 

 

 
37,577

 
622

Equity securities
4,532

 
409

 
145

 
23

 
4,677

 
432

Total
$
70,718

 
$
1,677

 
$
5,768

 
$
247

 
$
76,486

 
$
1,924

Other-Than-Temporary Impairment of Trust Assets
On a quarterly basis, the Partnership assesses all securities in an unrealized loss position by evaluating the severity of the impairment, the length of time that each security has been in a loss position, changes in credit ratings and qualitative factors observed in the market.  The Partnership has concluded that the assets currently suffering from a decline in fair value below the cost of the asset are temporary in nature. During the nine months ended September 30, 2017, the Partnership determined that there were no securities with impairment considered to be other-than-temporary.

19


During the nine months ended September 30, 2016, the Company determined that there were eighteen securities with an aggregate cost basis of approximately $3.4 million and an aggregate fair value of approximately $2.9 million, resulting in an impairment of $0.5 million, wherein such impairment was considered to be other-than-temporary. Accordingly, the Partnership adjusted the cost basis of these assets to their current value and offset this change against deferred revenue. This reduction in deferred revenue is reflected in earnings in periods after the impairment date as the underlying merchandise is delivered or the underlying services are performed.
7.
LONG-TERM DEBT
Total debt consisted of the following at the dates indicated (in thousands):
 
September 30, 2017
 
December 31, 2016
Credit facility
$
142,925

 
$
137,125

7.875% Senior Notes, due June 2021
172,975

 
172,623

Notes payable - acquisition debt
354

 
502

Notes payable - acquisition non-competes
395

 
928

Insurance and vehicle financing
1,488

 
1,807

Less deferred financing costs, net of accumulated amortization
(10,451
)
 
(10,859
)
Total debt
307,686

 
302,126

Less current maturities
(1,114
)
 
(1,775
)
Total long-term debt
$
306,572

 
$
300,351

Credit Facility
On August 4, 2016, StoneMor Operating LLC (the “Operating Company”), a 100% owned subsidiary of the Partnership, entered into the Credit Agreement (the “Credit Agreement”) among each of the Subsidiaries of the Operating Company (together with the Operating Company, “Borrowers”), the Lenders identified therein, Capital One, National Association (“Capital One”), as Administrative Agent, Issuing Bank and Swingline Lender, Citizens Bank of Pennsylvania, as Syndication Agent, and TD Bank, N.A. and Raymond James Bank, N.A., as Co-Documentation Agents. In addition, on the same date, the Partnership, the Borrowers and Capital One, as Administrative Agent, entered into the Guaranty and Collateral Agreement (the “Guaranty Agreement,” and together with the Credit Agreement, “New Agreements”). Capitalized terms which are not defined in the following description of the New Agreements shall have the meaning assigned to such terms in the New Agreements, as amended.
On March 15, 2017, the Borrowers, Capital One, as Administrative Agent and acting in accordance with the written consent of the Required Lenders, entered into the First Amendment to Credit Agreement (as so amended, the "Original Credit Agreement"). Those parties subsequently entered into a Second Amendment and Limited Waiver on July 26, 2017, a Third Amendment and Limited Waiver effective as of August 15, 2017 and a Fourth Amendment to Credit Agreement dated September 29, 2017. We refer to the Original Credit Agreement, as amended, as the "Amended Credit Agreement."
The Amended Credit Agreement provides for up to $200.0 million initial aggregate amount of Revolving Commitments, which may be increased, from time to time, in minimum increments of $5.0 million so long as the aggregate amount of such increases does not exceed $100.0 million. The Operating Company may also request the issuance of Letters of Credit for up to $15.0 million in the aggregate, of which there were $7.5 million outstanding at September 30, 2017 and $6.8 million outstanding at December 31, 2016. The Maturity Date under the Amended Credit Agreement is the earlier of (i) August 4, 2021 and (ii) the date that is six months prior to the earliest scheduled maturity date of any outstanding Permitted Unsecured Indebtedness (at present, such date is December 1, 2020, which is six months prior to June 1, 2021 maturity date of outstanding 7.875% senior notes).
As of September 30, 2017, the outstanding amount of borrowings under the Amended Credit Agreement was $142.9 million, which was used to pay down outstanding obligations under the Partnership's prior credit agreement, to pay fees, costs and expenses related to the New Agreements and to fund working capital needs. Generally, proceeds of the Loans under the Amended Credit Agreement can be used to finance the working capital needs and for other general corporate purposes of the Borrowers and Guarantors, including acquisitions and distributions permitted under the Amended Credit Agreement. As of September 30, 2017, the Partnership had $3.0 million of total available borrowing capacity under its revolving credit facility.

20


Each Borrowing under the Amended Credit Agreement is comprised of Base Rate Loans or Eurodollar Loans. The Loans comprising each Base Rate Borrowing (including each Swingline Loan) bear interest at the Base Rate plus the Applicable Rate, and the Loans comprising each Eurodollar Borrowing bear interest at the Eurodollar Rate plus the Applicable Rate.
The Applicable Rate is determined based on the Consolidated Leverage Ratio of the Partnership and its Subsidiaries and ranges from 1.75% to 3.75% for Eurodollar Rate Loans and 0.75% to 2.75% for Base Rate Loans. Based on our Consolidated Leverage Ratio for the compliance period ended September 30, 2017, the Applicable Rate for Eurodollar Rate Loans was 3.75% and for Base Rate Loans was 2.75%. The Amended Credit Agreement also requires the Borrowers to pay a quarterly unused commitment fee, which accrues at the Applicable Rate on the amount by which the commitments under the Amended Credit Agreement exceed the usage of such commitments, and which is included within interest expense on the Partnership’s condensed consolidated statements of operations. On September 30, 2017, the weighted average interest rate on outstanding borrowings under the Amended Credit Agreement was 5.1%.
The Amended Credit Agreement contains financial covenants, pursuant to which the Partnership will not permit:
the ratio of Consolidated Funded Indebtedness to Consolidated EBITDA, or the Consolidated Leverage Ratio, as of the last day of any fiscal quarter, commencing on September 30, 2016, determined for the period of four consecutive fiscal quarters ending on such date (the “Measurement Period”), to be greater than 4.50 to 1.0 for the periods ended September 30, 2017 and December 31, 2017, 4.25 to 1.0 for periods ending in 2018 and 4.00 to 1.0 for periods thereafter, which may be increased after January 1, 2019 to 4.50 to 1.0 (in case of a Designated Acquisition made subsequent to the last day of the immediately preceding fiscal quarter) as of the last day of the fiscal quarter in which such Designated Acquisition occurs and as of the last day of the immediately succeeding fiscal quarter;
the ratio of Consolidated EBITDA to Consolidated Debt Service, or the Consolidated Debt Service Coverage Ratio, as of the last day of any fiscal quarter, commencing on September 30, 2016 to be less than 2.50 to 1.0 for any Measurement Period; and
the ratio of Consolidated EBITDA (reduced by the amount of capital expenditures not financed with debt other than Revolving Commitments, taxes and restricted payments including distributions paid in cash) to Consolidated Fixed Charges, as of the last day of any fiscal quarter, commencing on December 31, 2017, to be less than 1.20 to 1.0 for any Measurement Period.
The Amended Credit Agreement prohibits the Partnership from increasing its regularly scheduled quarterly cash distributions otherwise permitted under the Amended Credit Agreement until January 1, 2018 unless at the time such distribution is declared and on a pro forma basis after giving effect to the payment of any such distribution the Consolidated Leverage Ratio is no greater than 3.75:1.00. Additional covenants include customary limitations, subject to certain exceptions, on, among others: (i) the incurrence of Indebtedness; (ii) granting of Liens; (iii) fundamental changes and dispositions; (iv) investments, loans, advances, guarantees and acquisitions; (v) swap agreements; (vi) transactions with Affiliates; (vii) Restricted Payments; and (viii) Sale and Leaseback Transactions.
The Borrowers’ obligations under the Amended Credit Agreement are guaranteed by the Partnership and the Borrowers. Pursuant to the Guaranty Agreement, the Borrowers’ obligations under the Amended Credit Agreement are secured by a first priority lien and security interest (subject to permitted liens and security interests) in substantially all of the Partnership’s and Borrowers’ assets, whether then owned or thereafter acquired, excluding certain excluded assets, which include, among others: (i) Trust Accounts, certain proceeds required by law to be placed into such Trust Accounts and funds held in such Trust Accounts; and (ii) Excluded Real Property, including owned and leased real property that may not be pledged as a matter of law.
On September 30, 2017, the Partnership’s Consolidated Leverage Ratio was 4.46 compared to a maximum allowable ratio of 4.50, and the Consolidated Debt Service Coverage Ratio was 2.99 compared to a minimum required ratio of 2.50. The Partnership was in compliance with the Amended Credit Agreement covenants as of September 30, 2017.

21


Senior Notes
On May 28, 2013, the Partnership issued $175.0 million aggregate principal amount of 7.875% Senior Notes due 2021 (the “Senior Notes”). The Partnership 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. 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 Partnership incurred debt issuance costs and fees of approximately $4.6 million. These costs and fees are deferred and are being amortized over the life of the Senior Notes. The Senior Notes mature on June 1, 2021.
At any time on or after June 1, 2016, we may redeem the Senior Notes, in whole or in part, at the redemption prices (expressed as percentages of the principal amount) set forth below, together with accrued and unpaid interest, if any, to the redemption date, if redeemed during the 12-month period beginning June 1 of the years indicated:
Year
Percentage
2017
103.938%
2018
101.969%
2019 and thereafter
100.000%
Subject to certain exceptions, upon the occurrence of a Change of Control (as defined in the Indenture), each holder of the Senior Notes will have the right to require the Partnership to purchase that holder’s Senior Notes for a cash price equal to 101% of the principal amounts to be purchased, plus accrued and unpaid interest.
The Senior Notes are jointly and severally guaranteed by certain of the Partnership’s subsidiaries. The Indenture governing the Senior Notes contains covenants, including limitations of the Partnership’s ability to incur certain additional indebtedness and liens, make certain dividends, distributions, redemptions or investments, enter into certain transactions with affiliates, make certain asset sales, and engage in certain mergers, consolidations or sales of all or substantially all of the Partnership's assets, among other items. As of September 30, 2017, the Partnership was in compliance with these covenants.