Form 10-Q
Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended September 30, 2016

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  ☒    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  ☒    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  
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  ☒

 

 

 


Table of Contents

Explanatory Note

The number of the registrant’s outstanding common units at November 1, 2016 was 35,500,745.

On November 9, 2016, the Partnership amended its most recent Form 10-K for the year ended December 31, 2015 and its Form 10-Qs for the periods ended March 31, 2016 and June 30, 2016. The consolidated financial statements and related notes included in this Form 10-Q reflect the restatement for the same errors described in the Partnership’s amended filings. Refer to the explanatory note and Note 2 to the audited consolidated financial statements to the Form 10-K/A for more information on the effects of the restatement on the Partnership’s consolidated financial statements as of December 31, 2015.

The filing of this Form 10-Q for the period ended September 30, 2016 is inclusive of a restatement of the Partnership’s consolidated financial statements as of December 31, 2015 and for the three and nine months ended September 30, 2015 as well as the related notes included in the Original Filing (“Restatement”).

The Restatement of the consolidated financial statements for the three and nine months ended corrects accounting errors related to:

 

  1) The allocation of net loss to the General Partner and the limited partners for the purposes of determining the general partner’s and limited partners’ capital accounts presented within “Partners’ capital,” and the corresponding effect on “net loss per limited partner unit (basic and diluted)” for each of the three and nine months ended September 30, 2015;

 

  2) The presentation of “Cemetery merchandise revenues”, Cemetery service revenues”, and “Cost of goods sold” related to assumed performance obligations from acquisitions for the three and nine months ended September 30, 2015;

 

  3) The recording of incorrect amounts of investment revenues and expenses related to merchandise and perpetual care trusts on the consolidated statement of operations and the incorrect tracking of perpetual care-trusting obligations on the consolidated balance sheets;

 

  4) The recognition of incorrect amounts of revenue from deferred pre-acquisition contracts in the consolidated statements of operations based on inaccurate system inputs;

 

  5) Other adjustments principally relating to the recognition, accuracy and/or classification of certain amounts in “Deferred cemetery revenues, net”, “Merchandise liabilities”, and “Other current assets”; and

 

  6) The corresponding effect of the foregoing accounting errors on the Partnership’s income tax accounts, consolidated statement of partners’ capital, consolidated statement of cash flows, and the related notes thereto, disclosed in the Partnership’s consolidated financial statements as of December 31, 2015 and for each of the three and nine months ended September 30, 2015 included in “Item 1 – Financial Statements (unaudited)” 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.


Table of Contents

Index – Form 10-Q

 

         Page  
Part I   Financial Information   
Item 1.   Financial Statements (unaudited)      1   
Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      32   
Item 3.   Quantitative and Qualitative Disclosures About Market Risk      45   
Item 4.   Controls and Procedures      47   
Part II   Other Information   
Item 6.   Exhibits      49   
  Signatures      50   


Table of Contents

Part I – Financial Information

 

ITEM 1. FINANCIAL STATEMENTS

STONEMOR PARTNERS L.P.

CONSOLIDATED BALANCE SHEETS

(in thousands)

(unaudited)

 

                                         
     September 30, 2016     December 31, 2015  
           (See Note 1)  

Assets

    

Current assets:

    

Cash and cash equivalents

   $ 15,610      $ 15,153   

Accounts receivable, net of allowance

     75,324        68,415   

Prepaid expenses

     7,048        5,367   

Other current assets

     26,531        22,241   
  

 

 

   

 

 

 

Total current assets

     124,513        111,176   

Long-term accounts receivable, net of allowance

     97,982        95,167   

Cemetery property

     337,245        334,457   

Property and equipment, net of accumulated depreciation

     118,158        116,127   

Merchandise trusts, restricted, at fair value

     504,604        464,676   

Perpetual care trusts, restricted, at fair value

     334,923        307,804   

Deferred selling and obtaining costs

     122,249        111,542   

Deferred tax assets

     181        181   

Goodwill

     70,572        69,851   

Intangible assets

     66,028        67,209   

Other assets

     17,684        16,167   
  

 

 

   

 

 

 

Total assets

   $ 1,794,139      $ 1,694,357   
  

 

 

   

 

 

 

Liabilities and Partners’ Capital

    

Current liabilities:

    

Accounts payable and accrued liabilities

   $ 35,920      $ 29,989   

Accrued interest

     4,990        1,503   

Current portion, long-term debt

     2,144        2,440   
  

 

 

   

 

 

 

Total current liabilities

     43,054        33,932   

Long-term debt, net of deferred financing costs

     314,032        316,399   

Deferred revenues

     896,752        815,421   

Deferred tax liabilities

     17,876        17,747   

Perpetual care trust corpus

     334,923        307,804   

Other long-term liabilities

     25,955        21,508   
  

 

 

   

 

 

 

Total liabilities

     1,632,592        1,512,811   
  

 

 

   

 

 

 

Commitments and contingencies

    

Partners’ Capital

    

General partner interest

     (2,220     15   

Common limited partners’ interests

     163,767        181,531   
  

 

 

   

 

 

 

Total partners’ capital

     161,547        181,546   
  

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 1,794,139      $ 1,694,357   
  

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

 

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STONEMOR PARTNERS L.P.

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per unit data)

(unaudited)

 

                                                                                   
     Three months ended September 30,     Nine months ended September 30,  
     2016     2015     2016     2015  
           (As restated - See Note 1)           (As restated - See Note 1)  

Revenues:

        

Cemetery:

        

Merchandise

   $ 36,314      $ 37,570      $ 106,937      $ 105,972   

Services

     13,928        14,945        41,067        44,869   

Investment and other

     14,302        15,011        40,689        42,937   

Funeral home:

        

Merchandise

     6,656        6,588        20,681        19,913   

Services

     7,336        7,654        24,373        23,083   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     78,536        81,768        233,747        236,774   
  

 

 

   

 

 

   

 

 

   

 

 

 

Costs and Expenses:

        

Cost of goods sold

     11,721        12,195        34,483        35,357   

Cemetery expense

     19,926        18,245        53,267        53,789   

Selling expense

     15,931        14,647        46,898        44,326   

General and administrative expense

     9,522        8,819        27,719        27,340   

Corporate overhead

     10,058        9,115        30,106        28,627   

Depreciation and amortization

     2,927        3,311        9,147        9,207   

Funeral home expenses:

        

Merchandise

     2,322        1,002        6,306        5,444   

Services

     6,070        5,432        18,672        16,728   

Other

     5,433        4,774        15,319        13,335   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total cost and expenses

     83,910        77,540        241,917        234,153   
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating income (loss)

     (5,374     4,228        (8,170     2,621   

Other gains (losses), net

     (506     (1,460     (1,579     (1,460

Interest expense

     (5,934     (5,669     (17,431     (16,902
  

 

 

   

 

 

   

 

 

   

 

 

 

Loss before income taxes

     (11,814     (2,901     (27,180     (15,741

Income tax benefit (expense)

     170        (357     (590     (671
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

   $ (11,644   $ (3,258   $ (27,770   $ (16,412
  

 

 

   

 

 

   

 

 

   

 

 

 

General partner’s interest

   $ (130   $ 1,021      $ 2,043      $ 2,605   

Limited partners’ interest

   $ (11,514   $ (4,279   $ (29,813   $ (19,017

Net loss per limited partner unit (basic and diluted)

   $ (0.32   $ (0.14   $ (0.87   $ (0.63

Weighted average number of limited partners’ units outstanding (basic and diluted)

     35,470        31,491        34,287        30,011   

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

 

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STONEMOR PARTNERS L.P.

CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(dollars in thousands)

(unaudited)

 

                                                                                   
     Partners’ Capital  
     Outstanding      Common     General        
     Common Units      Limited Partners     Partner     Total  

December 31, 2015 (See Note 1)

     32,108,782       $ 181,531      $ 15      $ 181,546   

Issuance of common units

     3,203,682         78,832        —          78,832   

Common unit awards under incentive plans

     12,067         1,468        —          1,468   

Net loss

     —           (29,813     2,043        (27,770

Cash distributions

     —           (63,784     (4,278     (68,062

Unit distributions paid in kind

     176,214         (4,467     —          (4,467
  

 

 

    

 

 

   

 

 

   

 

 

 

September 30, 2016

     35,500,745       $ 163,767      $ (2,220   $ 161,547   
  

 

 

    

 

 

   

 

 

   

 

 

 

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

 

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STONEMOR PARTNERS L.P.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

 

                                         
     Nine months ended September 30,  
     2016     2015  
           (As restated - See Note 1)  

Cash Flows From Operating Activities:

    

Net loss

   $ (27,770   $ (16,412

Adjustments to reconcile net loss to net cash provided by operating activities:

    

Cost of lots sold

     6,773        7,506   

Depreciation and amortization

     9,147        9,207   

Non-cash compensation expense

     1,468        824   

Non-cash interest expense

     2,510        2,207   

Other gains (losses), net

     975        (1,540

Changes in assets and liabilities:

    

Accounts receivable, net of allowance

     (9,167     (4,838

Merchandise trust fund

     (13,248     (33,403

Other assets

     (6,270     (6,740

Deferred selling and obtaining costs

     (10,716     (10,959

Deferred revenue

     53,996        60,516   

Deferred taxes (net)

     (245     (40

Payables and other liabilities

     11,034        5,702   
  

 

 

   

 

 

 

Net cash provided by operating activities

     18,487        12,030   
  

 

 

   

 

 

 

Cash Flows From Investing Activities:

    

Cash paid for capital expenditures

     (9,655     (11,033

Cash paid for acquisitions

     (10,550     (13,100

Proceeds from asset sales

     1,896        —     
  

 

 

   

 

 

 

Net cash used in investing activities

     (18,309     (24,133
  

 

 

   

 

 

 

Cash Flows From Financing Activities:

    

Cash distributions

     (68,062     (56,689

Proceeds from borrowings

     207,868        102,323   

Repayments of debt

     (207,700     (99,945

Proceeds from issuance of common units

     74,535        67,871   

Cost of financing activities

     (6,362     (66
  

 

 

   

 

 

 

Net cash provided by financing activities

     279        13,494   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     457        1,391   

Cash and cash equivalents - Beginning of period

     15,153        10,401   
  

 

 

   

 

 

 

Cash and cash equivalents - End of period

   $ 15,610      $ 11,792   
  

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

    

Cash paid during the period for interest

   $ 11,434      $ 10,918   

Cash paid during the period for income taxes

   $ 3,114      $ 4,167   

Non-cash investing and financing activities:

    

Acquisition of assets by financing

   $ 505      $ 593   

Acquisition of assets by assumption of directly related liability

   $ —        $ 876   

See Accompanying Notes to the Unaudited Consolidated Financial Statements.

 

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STONEMOR PARTNERS L.P.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

September 30, 2016

(Unaudited)

 

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, 2016, the Partnership operated 317 cemeteries in 28 states and Puerto Rico, of which 286 are owned and 31 are operated under lease, management or operating agreements. The Partnership also owned and operated 105 funeral homes in 18 states and Puerto Rico.

Basis of Presentation

The accompanying consolidated financial statements, which are unaudited except for the balance sheet at December 31, 2015, which is derived from audited financial statements, are presented 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 consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto presented in the Partnership’s Annual Report on Form 10-K/A for the year ended December 31, 2015. Certain amounts in the prior year’s financial statements have been reclassified to conform to the current year presentation. The results of operations for the three and nine months ended September 30, 2016 may not necessarily be indicative of the results of operations for the full year ending December 31, 2016.

On November 9, 2016, the Partnership amended its most recent Form 10-K for the year ended December 31, 2015 and its Form 10-Qs for the periods ended March 31, 2016 and June 30, 2016. The consolidated financial statements and related notes included in this Form 10-Q reflect the restatement for the same errors described in the Partnership’s amended filings. Refer to the explanatory note and Note 2 to the audited consolidated financial statements to the Form 10-K/A for more information on the effects of the restatement on the Partnership’s consolidated financial statements as of December 31, 2015.

The effect of the adjustments on the Partnership’s consolidated statements of operations for each of the three and nine months ended September 30, 2015 is summarized below for each affected caption:

 

  A. The Partnership allocates net loss to the General Partner and its limited partners for the purposes of determining the General Partner’s and limited partners’ capital accounts within “Partners’ capital”, and to calculate net loss per limited partner unit (basic and diluted). However, the historical allocation of the Partnership’s net losses did not appropriately consider available cash that had been (or will be) distributed to the separate class of nonvoting limited partner interest (the incentive distribution rights) held by the General Partner. While this misallocation had no impact on the Partnership’s consolidated net loss for both the three and nine months ended September 30, 2015, the revised calculation to correctly allocate net losses increased the limited partners’ historical share of allocated net loss and decreased the General Partner’s historical share of allocated net loss. As a result, the accompanying consolidated statements of operations have been restated to increase the limited partners’ share of allocated net loss and decrease the General Partner’s share of allocated net loss by approximately $1.1 million and $2.8 million for the three and nine months ended September 30, 2015, respectively.

 

  B. The Partnership had historically presented revenue related to assumed obligations from acquisitions on a net basis in the Partnership’s consolidated statement of operations. However, the Partnership determined that revenue recognition on such pre-acquisition revenue was understated. Accordingly, the accompanying consolidated financial statements for the three and nine months ended September 30, 2015 have been restated to present this revenue on a gross basis. This classification resulted in an increase in “Cemetery merchandise revenues” of approximately $1.3 million and $3.8 million, an increase in “Cemetery services revenue” of approximately $0.2 million and $0.4 million and an increase “Cost of goods sold” of approximately $1.5 million and $4.2 million for the respective three and nine months ended September 30, 2015.

 

  C. The Partnership had historically recognized incorrect amounts of investment revenues and expenses related to its merchandise and perpetual care trusts on its consolidated statement of operations and was incorrectly tracking its perpetual care-trusting obligations on its consolidated balance sheets. Accordingly, the accompanying consolidated statements of operations for the three and nine months ended September 30, 2015 have been restated for these adjustments. The adjustments resulted in an increase in “Cost of goods sold” of $0.4 million and $1.1 million for the three and nine months ended September 30, 2015, respectively.

 

  D.

The Partnership had historically recognized incorrect amounts of revenue from deferred pre-acquisition contracts in its consolidated statement of operations based on inaccurate system inputs. Accordingly,

 

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  the accompanying consolidated financial statements for the three and nine months ended September 30, 2015 have been restated to reflect the correction of the system inputs. The adjustments resulted in an increase in “Cemetery merchandise revenues” of $0.4 million and $1.2 million for the respective three and nine months ended September 30, 2015 and an increase in “Cemetery services revenues” of $0.1 million for the three and nine months ended September 30, 2015.

 

  E. Remaining adjustments principally relate to the recognition, accuracy and/or classification of certain amounts in deferred cemetery revenues, net, merchandise liabilities, and “Other current assets”, Accordingly, the accompanying consolidated financial statements for the three and nine months ended September 30, 2015 have been restated for these adjustments. The adjustments resulted in an increase in “Cemetery merchandise revenues” of $1.1 million and $3.3 million, an increase in “Cemetery services revenues” of $0.5 million and $1.6 million, and an increase in “Cost of goods sold” of $1.6 million and $4.4 million in the three and nine months ended September 30, 2015, respectively.

 

  F. The Partnership calculated the effect on income taxes associated with the foregoing accounting errors and, as such, the accompanying statement of operations has been restated to recognize “Income tax benefit (expense)” of approximately $0.1 million for the three and nine months ended September 30, 2015.

The effect of these adjustments on the Partnership’s consolidated statements of operations and cash flows for the three and nine months ended September 30, 2015 is summarized below for each affected caption:

 

                                                                            
            September 30, 2015  
            Three months ended     Nine months ended  
            As     Restatement     As     As     Restatement     As  
     Reference      Filed     Adjustments     Restated     Filed     Adjustments     Restated  
            (in thousands, except per unit data)  

Cemetery revenues:

               

Merchandise

     B, D, E       $ 34,709      $ 2,861      $ 37,570      $ 97,688      $ 8,284      $ 105,972   

Services

     B, D, E         14,195        750        14,945        42,696        2,173        44,869   

Investment and other

     C         15,054        (43     15,011        43,062        (125     42,937   

Total revenues

        78,200        3,568        81,768        226,442        10,332        236,774   

Cost of goods sold

     B, C, E         8,728        3,467        12,195        25,618        9,739        35,357   

Total cost and expenses

        74,073        3,467        77,540        224,414        9,739        234,153   

Operating income (loss)

        4,127        101        4,228        2,028        593        2,621   

Loss before income taxes

        (3,002     101        (2,901     (16,334     593        (15,741

Income tax benefit (expense)

     F         (400     43        (357     (799     128        (671

Net loss

        (3,402     144        (3,258     (17,133     721        (16,412

General partner’s interest for the period

     A, C, D, E, F         (42     1,063        1,021        (227     2,832        2,605   

Limited partners’ interest for the period

     A, C, D, E, F         (3,360     (919     (4,279     (16,906     (2,111     (19,017

Net loss per limited partner unit (basic and diluted)

     A, C, D, E, F       $ (0.11   $ (0.03   $ (0.14   $ (0.56   $ (0.07   $ (0.63

 

                                                                                   
            Nine months ended September 30,  
            2015  
            As      Restatement      As  
     Reference      Filed      Adjustments      Restated  

Net loss

     C, D, E, F       $ (17,133    $ 721       $ (16,412

Changes in assets and liabilities:

           

Other assets

     E         (11,551      4,811         (6,740

Deferred revenues

     D, E         60,572         (56      60,516   

Deferred taxes (net)

     F         106         (146      (40

Payables and other liabilities

     C         11,032         (5,330      5,702   

Net cash provided by operating activities

      $ 12,030       $ —         $ 12,030   

The Restatement adjustments affecting the consolidated statement of cash flows for the periods 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.

Principles of Consolidation

The unaudited consolidated financial statements include the accounts of each of the Partnership’s wholly-owned subsidiaries. These statements also include the accounts of the merchandise and perpetual care trusts in which the

 

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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 performance obligations that it assumed as part of these agreements.

New Accounting Pronouncements

In the second quarter of 2014, the Financial Accounting Standards Board (“FASB”) 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. During the third quarter of 2015, Update No. 2015-14, “Revenue from Contracts with Customers (Topic 606)” was released, deferring the effective date of the amendments to annual reporting periods beginning after December 15, 2017, including interim periods within that reporting period. Early application is permitted, only as of an annual reporting period beginning after December 15, 2016. During the first quarter of 2016, Update No. 2016-08, “Revenue from Contracts with Customers (Topic 606)” was released, which clarifies the implementation guidance on principal versus agent considerations. During the second quarter of 2016, Update No. 2016-10, “Revenue from Contracts with Customers (Topic 606)” was released, which clarifies the implementation guidance on identifying performance obligations. The FASB also issued Update No. 2016-12, “Revenue from Contracts with Customers (Topic 606)” (“ASU 2016-12”), which clarifies the guidance on assessing collectability, presenting sales taxes, measuring non-cash consideration, and certain transition matters. The Partnership will adopt the requirements of these updates upon the effective date of January 1, 2018, and is evaluating the potential impact of the adoption on its financial position, results of operations or related disclosures.

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 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.

 

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In 2015, the FASB issued Update No. 2015-07, “Fair Value Measurement (Topic 820).” The amendments in this update removed the requirement to categorize within the fair value hierarchy investments for which fair value is measured using the net asset value per share practical expedient. The entity adopted this guidance in the current period pertaining to its new investment funds (see Notes 6, 7 and 14).

In the third quarter of 2016, the FASB issued Update No. 2016-15, “Statement of Cash flows (Topic 230)” (“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.

Summary of Significant Accounting Policies

Refer to Note 1 of the December 31, 2015 10K/A for the complete summary of significant accounting policies, including those pertaining to cemetery merchandise and services sales, which has been expanded in the subsequent paragraph.

The cost of goods sold related to merchandise and services reflects the actual cost of purchasing products and performing services, and the value of cemetery property depleted through the recognized sales of interment rights. The costs related to the sales of lots and crypts are determined systematically using a specific identification method under which the total value of the underlying cemetery property and the spaces available to be sold at the location are used to determine the cost per space.

Use of Estimates

The preparation of the Partnership’s unaudited 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 consolidated financial statements, as well as the reported amounts of revenue and expense during the reporting periods. The Partnership’s unaudited consolidated financial statements are based on a number of significant estimates, including revenue and expense accruals, depreciation and amortization, merchandise trusts and perpetual care trusts asset valuation, allowance for cancellations, unit-based compensation, deferred revenues, deferred merchandise trust investment earnings, deferred selling and obtaining costs, assets and liabilities obtained via business combinations and income taxes. As a result, actual results could differ from those estimates.

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 ownership interest 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, except unit data):

 

                                   
     Three months ended September 30,     Nine months ended September 30,  
     2016     2015     2016     2015  

Net loss

   $ (11,644   $ (3,258   $ (27,770   $ (16,412

Less: Incentive distribution right (“IDR”) payments to general partner

     —          1,074        2,387        2,860   
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss to allocate to general and limited partners

     (11,644     (4,332     (30,157     (19,272

General partner’s interest excluding IDRs

     (130     (53     (344     (255
  

 

 

   

 

 

   

 

 

   

 

 

 

Net loss attributable to common limited partners

   $ (11,514   $ (4,279   $ (29,813   $ (19,017
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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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 appreciation rights and other 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 (see Note 12).

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,  
     2016      2015      2016      2015  

Weighted average number of common limited partner units - basic

     35,470         31,491         34,287         30,011   

Add effect of dilutive incentive awards (1)

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average number of common limited partner units - diluted

     35,470         31,491         34,287         30,011   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The diluted weighted average number of limited partners’ units outstanding presented on the consolidated statement of operations does not include 383,091 units and 192,482 units for the three months ended September 30, 2016 and 2015, respectively and 374,649 units and 187,640 units for the nine months ended September 30, 2016 and 2015, as their effects would be anti-dilutive.

 

2. ACQUISITIONS

2016 Acquisition

During the second quarter of 2016, the Partnership acquired the assets, net of certain assumed liabilities of three direct service cremation businesses for $1.5 million. During the third quarter of 2016, the Partnership acquired the assets, net of certain assumed liabilities of ten cemeteries and one granite company for $9.0 million. The Partnership accounted for these transactions under the acquisition method of accounting. Accordingly, the Partnership evaluated the identifiable assets acquired and liabilities assumed at the acquisition date fair values. All other costs associated with the acquisition of the assets noted were expensed as incurred. The following table presents the Partnership’s values assigned to the assets acquired and liabilities assumed in the acquisitions, based on their estimated fair values at the date of the acquisition, which may be prospectively adjusted as additional information is received (in thousands):

 

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Assets:

  

Accounts receivable

   $ 791   

Cemetery property

     4,612   

Property and equipment

     4,527   

Inventory

     1,900   

Merchandise trusts, restricted

     4,424   

Perpetual care trusts, restricted

     5,631   

Intangible assets

     508   

Other assets

     13   
  

 

 

 

Total assets

     22,406   
  

 

 

 

Liabilities:

  

Deferred revenues

     4,204   

Perpetual care trust corpus

     5,631   

Deferred taxes

     375   
  

 

 

 

Total liabilities

     10,210   
  

 

 

 

Fair value of net assets acquired

     12,196   
  

 

 

 

Consideration paid - cash

     10,550   
  

 

 

 

Total consideration paid

     10,550   
  

 

 

 

Gain on bargain purchase

   $ 2,704   
  

 

 

 

Goodwill from purchase

   $ 1,058   
  

 

 

 

The Partnership recorded goodwill of $1.1 million in the Funeral Home reporting unit for the properties acquired in 2016. The third quarter acquisition resulted in the recognition of a gain of $2.7 million based on provisional amounts. This gain was recorded within “Other gains (losses), net” in the consolidated statement of operations.

2015 Acquisitions

During the year ended December 31, 2015, the Partnership acquired the following properties’ assets, net of certain assumed liabilities:

 

    One funeral home for cash consideration of $0.9 million on July 21, 2015;

 

    Three funeral homes and one cemetery for cash consideration of $5.7 million on August 6, 2015;

 

    Two cemeteries for cash consideration of $1.5 million on August 20, 2015;

 

    One funeral home for cash consideration of $5.0 million on August 31, 2015, and an additional $1.0 million paid in five annual installments beginning on the 1st anniversary of the closing date; and

 

    One cemetery and two funeral homes for cash consideration of $5.7 million on December 1, 2015.

The Partnership accounted for these transactions under the acquisition method of accounting. Accordingly, the Partnership evaluated the identifiable assets acquired and liabilities assumed at their respective acquisition date fair values. All other costs incurred associated with the acquisition of the assets noted were expensed as incurred. The following table presents the Partnership’s values assigned to the assets acquired and liabilities assumed in the acquisitions, based on their estimated and revised fair values, as applicable, which may be prospectively adjusted as additional information is received (in thousands):

 

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Assets:

  

Accounts receivable

   $ 2,690   

Cemetery property

     5,249   

Property and equipment

     7,710   

Inventory

     53   

Merchandise trusts, restricted

     15,075   

Perpetual care trusts, restricted

     4,134   

Intangible assets

     406   
  

 

 

 

Total assets

     35,317   
  

 

 

 

Liabilities:

  

Deferred revenues

     21,243   

Perpetual care trust corpus

     4,134   

Other liabilities

     21   
  

 

 

 

Total liabilities

     25,398   
  

 

 

 

Fair value of net assets acquired

     9,919   
  

 

 

 

Consideration paid - cash

     18,800   

Deferred cash consideration

     876   
  

 

 

 

Total consideration paid

     19,676   
  

 

 

 

Gain on bargain purchase

   $ 921   
  

 

 

 

Goodwill from purchase

   $ 10,678   
  

 

 

 

Certain provisional amounts pertaining to the 2015 acquisitions were adjusted in the second and third quarters of 2016 as the Company obtained additional information related to three of the acquisitions. The changes resulted in an adjustment to the gains on acquisition recognized during the year ended December 31, 2015, reducing the gain by $0.6 million via a loss recognized in the current period in accordance with GAAP. The amounts shown may be adjusted as additional information is received. The Partnership recorded goodwill of $1.1 million and $9.6 million in the Cemetery and Funeral Home reporting units, respectively, with regard to the properties acquired during the year ended December 31, 2015. The original gains and related adjustments pertaining to the 2015 acquisitions were recorded within “Other gains (losses), net” in the consolidated statement of operations.

The following data presents pro forma revenues, net income (loss) and basic and diluted net income (loss) per unit for the Partnership as if the acquisitions consummated during the nine months ended September 30, 2016 and the year ended December 31, 2015 had occurred as of January 1, 2015. The Partnership prepared these pro forma unaudited financial results for comparative purposes only. The results may not be indicative of the results that would have occurred if the acquisitions consummated during the nine months ended September 30, 2016 and 2015 had occurred as of January 1, 2015 or the results that will be attained in future periods (in thousands, except per unit data):

 

                                                                                   
     Three months ended September 30,     Nine months ended September 30,  
     2016     2015     2016     2015  

Revenue

   $ 78,713      $ 82,209      $ 234,731      $ 238,135   

Net loss

     (15,085     (4,449     (33,544     (17,061

Net loss per limited partner unit (basic and diluted)

   $ (0.42   $ (0.17   $ (1.04   $ (0.66

The properties acquired in 2016 have contributed $0.3 million and $0.4 million of revenue for the three and nine months ended September 30, 2016, respectively and $0.6 million of operating losses for both the three and nine months ended September 30, 2016. The properties acquired in 2015 have contributed $1.7 million and $6.5 million of revenue and $0.6 million of operating loss and $0.3 million of operating profit for the three and nine months ended September 30, 2016 respectively.

 

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3. ACCOUNTS RECEIVABLE, NET OF ALLOWANCE

Accounts receivable, net of allowance, consists of the following at the dates indicated (in thousands):

 

                                         
     September 30, 2016      December 31, 2015  

Customer receivables

   $ 222,238       $ 207,645   

Unearned finance income

     (20,730      (20,078

Allowance for contract cancellations

     (28,202      (23,985
  

 

 

    

 

 

 

Accounts receivable, net of allowance

     173,306         163,582   

Less: current portion, net of allowance

     75,324         68,415   
  

 

 

    

 

 

 

Long-term portion, net of allowance

   $ 97,982       $ 95,167   
  

 

 

    

 

 

 

Activity in the allowance for contract cancellations is as follows (in thousands):

 

                                         
     Nine months ended September 30,  
     2016      2015  

Balance, beginning of period

   $ 23,985       $ 22,138   

Provision for cancellations

     20,301         19,054   

Charge-offs, net

     (16,084      (17,489
  

 

 

    

 

 

 

Balance, end of period

   $ 28,202       $ 23,703   
  

 

 

    

 

 

 

 

4. CEMETERY PROPERTY

Cemetery property consists of the following at the dates indicated (in thousands):

 

                                         
     September 30, 2016      December 31, 2015  

Cemetery land

   $ 256,627       $ 253,955   

Mausoleum crypts and lawn crypts

     80,618         80,502   
  

 

 

    

 

 

 

Cemetery property

   $ 337,245       $ 334,457   
  

 

 

    

 

 

 

 

5. PROPERTY AND EQUIPMENT

Property and equipment consists of the following at the dates indicated (in thousands):

 

                                         
     September 30, 2016      December 31, 2015  

Building and improvements

   $ 123,670       $ 117,034   

Furniture and equipment

     55,184         54,346   

Funeral home land

     11,707         11,797   
  

 

 

    

 

 

 

Property and equipment, gross

     190,561         183,177   

Less: accumulated depreciation

     (72,403      (67,050
  

 

 

    

 

 

 

Property and equipment, net of accumulated depreciation

   $ 118,158       $ 116,127   
  

 

 

    

 

 

 

Depreciation expense was $2.3 million and $2.8 million for three months ended September 30, 2016 and 2015, respectively, and $7.4 million and $7.5 million for nine months ended September 30, 2016 and 2015, respectively.

 

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6. MERCHANDISE TRUSTS

At September 30, 2016 and December 31, 2015, 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. Certain assets acquired in connection with the Partnership’s 2015 and 2016 acquisitions (see Note 2) are based upon preliminary estimated values assigned to the assets by the Partnership at the date of acquisition, and will be adjusted when additional information is received.

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 (see Note 1) are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 14. There were no Level 3 assets.

The merchandise trusts are variable interest entities (VIE) for 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 $8.5 million and $8.2 million of investments held in trust by the West Virginia Funeral Directors Association at September 30, 2016 and December 31, 2015, 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, 2016 and 2015 is presented below (in thousands):

 

                                         
     Nine months ended September 30,  
     2016      2015  

Balance, beginning of period

   $ 464,676       $ 484,820   

Contributions

     49,841         60,875   

Distributions

     (49,168      (34,477

Interest and dividends

     17,657         13,642   

Capital gain distributions

     264         (738

Realized gains and losses

     3,727         14,190   

Other than temporary impairment

     (7,278      —     

Taxes

     (1,721      (3,441

Fees

     (2,234      (2,474

Unrealized change in fair value

     28,840         (73,077
  

 

 

    

 

 

 

Balance, end of period

   $ 504,604       $ 459,320   
  

 

 

    

 

 

 

During the nine months ended September 30, 2016, purchases of available for sale securities were $82.6 million, while sales, maturities and paydowns of available for sale securities were $65.9 million.

 

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The cost and market value associated with the assets held in the merchandise trusts as of September 30, 2016 and December 31, 2015 were as follows (in thousands):

 

                                                                          
                   Gross     Gross        
     Fair Value             Unrealized     Unrealized     Fair  

September 30, 2016

   Hierarchy Level      Cost      Gains     Losses     Value  

Short-term investments

     1       $ 29,928       $ —        $ —        $ 29,928   

Fixed maturities:

            

U.S. governmental securities

     2         41         2        —          43   

Corporate debt securities

     2         7,017         347        (323     7,041   

Other debt securities

     2         —           —          —          —     
     

 

 

    

 

 

   

 

 

   

 

 

 

Total fixed maturities

        7,058         349        (323     7,084   
     

 

 

    

 

 

   

 

 

   

 

 

 

Mutual funds - debt securities

     1         241,048         2,885        (4,156     239,777   

Mutual funds - equity securities

     1         131,331         5,813        (2,079     135,065   

Other investment funds (1)

        41,447         892        —          42,339   

Equity securities

     1         38,711         2,782        (1,753     39,740   

Other invested assets

     2         2,457         (255     —          2,202   
     

 

 

    

 

 

   

 

 

   

 

 

 

Total managed investments

      $ 491,980       $ 12,466      $ (8,311   $ 496,135   
     

 

 

    

 

 

   

 

 

   

 

 

 

Assets acquired via acquisition

        —           —          —          —     

West Virginia Trust Receivable

        8,469         —          —          8,469   
     

 

 

    

 

 

   

 

 

   

 

 

 

Total

      $ 500,449       $ 12,466      $ (8,311   $ 504,604   
     

 

 

    

 

 

   

 

 

   

 

 

 

 

(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.

 

                                                                          
                   Gross      Gross        
     Fair Value             Unrealized      Unrealized     Fair  

December 31, 2015

   Hierarchy Level      Cost      Gains      Losses     Value  

Short-term investments

     1       $ 35,150       $ —         $ —        $ 35,150   

Fixed maturities:

             

U.S. governmental securities

     2         98         6         (3     101   

Corporate debt securities

     2         11,922         8         (546     11,384   

Other debt securities

     2         7,150         11         (7     7,154   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

        19,170         25         (556     18,639   
     

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     1         232,096         86         (10,713     221,469   

Mutual funds - equity securities

     1         139,341         69         (12,249     127,161   

Equity securities

     1         49,563         1,127         (2,474     48,216   

Other invested assets

     2         1,681         —           —          1,681   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

      $ 477,001       $ 1,307       $ (25,992   $ 452,316   
     

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

        4,185         —           —          4,185   

West Virginia Trust Receivable

        8,175         —           —          8,175   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 489,361       $ 1,307       $ (25,992   $ 464,676   
     

 

 

    

 

 

    

 

 

   

 

 

 

The contractual maturities of debt securities as of September 30, 2016 were as follows below:

 

                                                                                   
     Less than      1 year through      6 years through      More than  
     1 year      5 years      10 years      10 years  

U.S. governmental securities

   $ 5       $ 23       $ 15       $ —     

Corporate debt securities

     —           6,261         780         —     

Other debt securities

     —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 5       $ 6,284       $ 795       $ —     
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the merchandise trusts as of September 30, 2016 and December 31, 2015 is presented below (in thousands):

 

                                                                                         
     Less than 12 months      12 Months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

September 30, 2016

   Value      Losses      Value      Losses      Value      Losses  

Fixed maturities:

                 

U.S. governmental securities

   $ 4       $ —         $ 2       $ —         $ 6       $ —     

Corporate debt securities

     2,275         175         2,724         148         4,999         323   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     2,279         175         2,726         148         5,005         323   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     15,642         312         131,966         3,844         147,608         4,156   

Mutual funds - equity securities

     2,204         33         27,098         2,046         29,302         2,079   

Equity securities

     10,304         869         4,763         884         15,067         1,753   

Other invested assets

     —           —           —           —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 30,429       $ 1,389       $ 166,553       $ 6,922       $ 196,982       $ 8,311   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 Months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

December 31, 2015

   Value      Losses      Value      Losses      Value      Losses  

Fixed maturities:

                 

U.S. governmental securities

   $ —         $ —         $ 33       $ 3       $ 33       $ 3   

Corporate debt securities

     7,247         411         1,513         135         8,760         546   

Other debt securities

     2,883         7         —           —           2,883         7   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     10,130         418         1,546         138         11,676         556   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     121,777         6,938         36,682         3,775         158,459         10,713   

Mutual funds - equity securities

     58,467         10,994         5,465         1,255         63,932         12,249   

Equity securities

     21,480         2,275         649         199         22,129         2,474   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 211,854       $ 20,625       $ 44,342       $ 5,367       $ 256,196       $ 25,992   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For all securities in an unrealized loss position, the Partnership evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Partnership is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

The Partnership assesses its merchandise trust assets for other-than-temporary declines in fair value on a quarterly basis. During the nine months ended September 30, 2016, the Partnership 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, with such impairment considered to be other-than-temporary. During the nine months ended September 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. 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. PERPETUAL CARE TRUSTS

At September 30, 2016 and December 31, 2015, 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. Certain assets acquired in connection with the Partnership’s 2015 acquisitions (see Note 2) are based upon preliminary estimated values assigned to the assets by the Partnership at the date of acquisition, and will be adjusted when additional information is received.

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 (see Note 1) are considered either Level 1 or Level 2 assets pursuant to the three-level hierarchy described in Note 14. There were no Level 3 assets. The perpetual care trusts are VIEs for which the Partnership is the primary beneficiary.

 

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A reconciliation of the Partnership’s perpetual care trust activities for the nine months ended September 30, 2016 and 2015 is presented below (in thousands):

 

                                         
     Nine months ended September 30,  
     2016      2015  

Balance, beginning of period

   $ 307,804       $ 345,105   

Contributions

     13,111         12,058   

Distributions

     (10,923      (10,254

Interest and dividends

     13,609         13,236   

Capital gain distributions

     477         41   

Realized gains and losses

     (413      13,942   

Other than temporary impairment

     (466      —     

Taxes

     (566      (637

Fees

     (2,189      (1,654

Unrealized change in fair value

     14,479         (60,056
  

 

 

    

 

 

 

Balance, end of period

   $ 334,923       $ 311,781   
  

 

 

    

 

 

 

During the nine months ended September 30, 2016, purchases of available for sale securities were $256.1 million, while sales, maturities and paydowns of available for sale securities were $223.3 million.

 

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The cost and market value associated with the assets held in the perpetual care trusts as of September 30, 2016 and December 31, 2015 were as follows (in thousands):

 

                                                                          
                   Gross      Gross        
     Fair Value             Unrealized      Unrealized     Fair  

September 30, 2016

   Hierarchy Level      Cost      Gains      Losses     Value  

Short-term investments

     1       $ 16,470       $ —         $ —        $ 16,470   

Fixed maturities:

             

U.S. governmental securities

     2         183         17         (1     199   

Corporate debt securities

     2         12,504         468         (370     12,602   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

        12,687         485         (371     12,801   
     

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     1         130,598         1,604         (1,722     130,480   

Mutual funds - equity securities

     1         30,788         3,070         (237     33,621   

Other investment funds (1)

        116,466         2,238         —          118,704   

Equity securities

     1         21,473         1,487         (186     22,774   

Other invested assets

     2         73              73   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

      $ 328,555       $ 8,884       $ (2,516   $ 334,923   
     

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

        —           —           —          —     
     

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 328,555       $ 8,884       $ (2,516   $ 334,923   
     

 

 

    

 

 

    

 

 

   

 

 

 

 

(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 September 30, 2016 there are $46.1 million in unfunded commitments to the private credit funds, which are callable at any time.

 

                                                                          
                   Gross      Gross        
     Fair Value             Unrealized      Unrealized     Fair  

December 31, 2015

   Hierarchy Level      Cost      Gains      Losses     Value  

Short-term investments

     1       $ 36,618       $ —         $ —        $ 36,618   

Fixed maturities:

             

U.S. governmental securities

     2         126         14         —          140   

Corporate debt securities

     2         22,837         57         (845     22,049   

Other debt securities

     2         36         —           (1     35   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total fixed maturities

        22,999         71         (846     22,224   
     

 

 

    

 

 

    

 

 

   

 

 

 

Mutual funds - debt securities

     1         184,866         35         (7,180     177,721   

Mutual funds - equity securities

     1         68,079         1,054         (1,713     67,420   

Equity securities

     1         2,319         636         (7     2,948   

Other invested assets

     2         473         1         (162     312   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total managed investments

      $ 315,354       $ 1,797       $ (9,908   $ 307,243   
     

 

 

    

 

 

    

 

 

   

 

 

 

Assets acquired via acquisition

        561         —           —          561   
     

 

 

    

 

 

    

 

 

   

 

 

 

Total

      $ 315,915       $ 1,797       $ (9,908   $ 307,804   
     

 

 

    

 

 

    

 

 

   

 

 

 

The contractual maturities of debt securities as of September 30, 2016 were as follows below:

 

                                                                                   
     Less than      1 year through      6 years through      More than  
     1 year      5 years      10 years      10 years  

U.S. governmental securities

   $ 111       $ —         $ 37       $ 51   

Corporate debt securities

     121         11,162         1,319         —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

   $ 232       $ 11,162       $ 1,356       $ 51   
  

 

 

    

 

 

    

 

 

    

 

 

 

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.

 

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An aging of unrealized losses on the Partnership’s investments in debt and equity securities within the perpetual care trusts as of September 30, 2016 and December 31, 2015 is presented below (in thousands):

 

                                                                                         
     Less than 12 months      12 Months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

September 30, 2016

   Value      Losses      Value      Losses      Value      Losses  

Fixed maturities:

                 

U.S. governmental securities

   $ —         $ —         $ 24       $ 1       $ 24       $ 1   

Corporate debt securities

     2,787         190         2,972         180         5,759         370   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     2,787         190         2,996         181         5,783         371   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     11,485         93         50,053         1,629         61,538         1,722   

Mutual funds - equity securities

     977         47         2,874         190         3,851         237   

Equity securities

     4,991         186         3            4,994         186   

Other invested assets

     —           —           73         —           73         —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 20,240       $ 516       $ 55,999       $ 2,000       $ 76,239       $ 2,516   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 
     Less than 12 months      12 Months or more      Total  
     Fair      Unrealized      Fair      Unrealized      Fair      Unrealized  

December 31, 2015

   Value      Losses      Value      Losses      Value      Losses  

Fixed maturities:

                 

U.S. governmental securities

   $ —         $ —         $ 112       $ —         $ 112       $ —     

Corporate debt securities

     12,482         535         4,505         310         16,987         845   

Other debt securities

     35         1         —           —           35         1   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total fixed maturities

     12,517         536         4,617         310         17,134         846   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Mutual funds - debt securities

     81,215         4,263         50,774         2,917         131,989         7,180   

Mutual funds - equity securities

     16,514         1,363         4,308         350         20,822         1,713   

Equity securities

     488         6         1,137         1         1,625         7   

Other invested assets

     —           —           315         162         315         162   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 110,734       $ 6,168       $ 61,151       $ 3,740       $ 171,885       $ 9,908   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

For all securities in an unrealized loss position, the Partnership evaluated the severity of the impairment and length of time that a security has been in a loss position and concluded the decline in fair value below the asset’s cost was temporary in nature. In addition, the Partnership is not aware of any circumstances that would prevent the future market value recovery for these securities.

Other-Than-Temporary Impairment of Trust Assets

The Partnership assesses its perpetual care trust assets for other-than-temporary declines in fair value on a quarterly basis. During the nine months ended September 30, 2016, the Partnership 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, with such impairment considered to be other-than-temporary. During the nine months ended September 30, 2015, the Company determined that there were no other than temporary impairments to the investment portfolio in the perpetual care trusts. Accordingly, the Partnership adjusted the cost basis of these assets to their current value and offset this change against the liability for perpetual care trust corpus. 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.

 

8. GOODWILL AND INTANGIBLE ASSETS

Goodwill

The Partnership has recorded goodwill of approximately $70.6 million as of September 30, 2016 and $69.9 million as of December 31, 2015. This amount represents the excess of the purchase price over the fair value of identifiable net assets acquired.

A rollforward of goodwill by reporting unit is as follows (in thousands):

 

                                                              
     Cemeteries      Funeral Homes      Total  

Balance at December 31, 2015

   $ 25,320       $ 44,531       $ 69,851   

Goodwill from acquisitions during 2015

     —           (337      (337

Goodwill from acquisitions during 2016

     —           1,058         1,058   
  

 

 

    

 

 

    

 

 

 

Balance at September 30, 2016

   $ 25,320       $ 45,252       $ 70,572   
  

 

 

    

 

 

    

 

 

 

 

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The Partnership adjusted preliminary amounts relating to 2015 acquisitions during the second quarter of 2016 as the Company obtained additional information. These updates resulted in a decrease in goodwill acquired from 2015 acquisitions.

The Partnership tests goodwill for impairment at each year end by comparing its reporting units’ estimated fair values to carrying values. There were no goodwill impairments recognized by the Partnership during the periods presented. Management will continue to evaluate goodwill at least annually or when impairment indicators arise.

Intangible Assets

The Partnership has intangible assets with finite lives recognized in connection with acquisitions and long-term lease, management and operating agreements. The Partnership amortizes these intangible assets over their estimated useful lives.

The following table reflects the components of intangible assets as of September 30, 2016 and December 31, 2015 (in thousands):

 

                                                                                                                             
    September 30, 2016     December 31, 2015  
    Gross Carrying     Accumulated     Net Intangible     Gross Carrying     Accumulated     Net Intangible  
    Amount     Amortization     Asset     Amount     Amortization     Asset  

Lease and management agreements

  $ 59,758      $ (2,324   $ 57,434      $ 59,758      $ (1,577   $ 58,181   

Underlying contract value

    6,239        (1,131     5,108        6,239        (1,014     5,225   

Non-compete agreements

    5,656        (3,705     1,951        5,656        (3,112     2,544   

Other intangible assets

    1,777        (242     1,535        1,439        (180     1,259   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total intangible assets

  $ 73,430      $ (7,402   $ 66,028      $ 73,092      $ (5,883   $ 67,209   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Amortization expense for intangible assets was $0.6 million for both the three months ended September 30, 2016 and 2015 and $1.7 million for both the nine months ended September 30, 2016 and 2015. The following is estimated amortization expense related to intangible assets with finite lives for the periods noted below (in thousands):

 

                    

2016 (remainder)

   $ 590   

2017

   $ 2,194   

2018

   $ 1,769   

2019

   $ 1,451   

2020

   $ 1,278   

 

9. LONG-TERM DEBT

Total debt consists of the following at the dates indicated (in thousands):

 

                                         
     September 30, 2016      December 31, 2015  

Credit facility

   $ 151,125       $ 149,500   

7.875% Senior Notes, due June 2021

     172,510         172,186   

Notes payable - acquisition debt

     549         687   

Notes payable - acquisition non-competes

     937         1,629   

Insurance and vehicle financing

     2,291         2,336   

Less deferred financing costs, net of accumulated amortization

     (11,236      (7,499
  

 

 

    

 

 

 

Total debt

     316,176         318,839   

Less current maturities

     (2,144      (2,440
  

 

 

    

 

 

 

Total long-term debt

   $ 314,032       $ 316,399   
  

 

 

    

 

 

 

 

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Credit Facility

On August 4, 2016, StoneMor Operating LLC (the “Operating Company”), a wholly-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.

The New Agreements replaced the Partnership’s Fourth Amended and Restated Credit Agreement, as amended with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer and other lenders party thereto (the “Prior Credit Agreement”), Second Amended and Restated Security Agreement, and Second Amended and Restated Pledge Agreement, each dated as of December 19, 2014. The Prior Credit Agreement provided for a revolving credit facility of $180.0 million, with borrowings classified as either acquisition draws or working capital draws, maturing on December 19, 2019. In connection with entering into the Credit Agreement, the Partnership incurred an extinguishment of debt charge of approximately $1.2 million recorded in “other gains and losses, net”.

The Credit Agreement provides for up to $210.0 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 $6.5 million outstanding at September 30, 2016 and none outstanding at December 31, 2015. The Maturity Date under the 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, 2016, the outstanding amount of borrowings under the Credit Agreement was $151.1 million, which was used to pay down outstanding obligations under the 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 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 Credit Agreement. At September 30, 2016, the amount available under the credit facility was $42.4 million.

Each Borrowing under the 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 3.25% for Eurodollar Rate Loans and 0.75% to 2.25% for Base Rate Loans. As of September 30, 2016, the Applicable Rate for Eurodollar Rate Loans was 2.75% and for Base Rate Loans was 1.75%. The 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 Credit Agreement exceed the usage of such commitments, and which is included within interest expense on the Partnership’s consolidated statements of operations. On September 30, 2016, the weighted average interest rate on outstanding borrowings under the Credit Agreement was 3.2%.

The 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 4.00 to 1.0, which may be increased to 4.25 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; and

 

    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.

 

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Table of Contents

On September 30, 2016, the Partnership’s Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio were 3.62 and 4.19, respectively.

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 Partnership was in compliance with the Credit Agreement covenants as of September 30, 2016.

The Borrowers’ obligations under the Credit Agreement are guaranteed by the Partnership and the Borrowers. Pursuant to the Guaranty Agreement, the Borrowers’ obligations under the 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.

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  

2016

     105.906

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 our assets, among other items. As of September 30, 2016, the Partnership was in compliance with these covenants.

 

10. 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 unaudited 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

 

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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.

As of September 30, 2016, the Partnership had available approximately less than $0.1 million of alternative minimum tax credit carryforwards, which are available indefinitely, and $264.5 million of federal net operating loss carryforwards, which will begin to expire in 2017 and $321.8 million in state net operating loss carryforwards, a portion of which expires annually.

In assessing the realizability of deferred tax assets, management considers whether it’s more likely than not that some portion or all of the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected future taxable income and tax planning strategies in making this assessment. As of September 30, 2016, based on the level of historical taxable income and projections for future taxable income over the periods in which the deferred tax assets are deductible, management believes it is more likely than not that the Partnership will realize a partial benefit of these deductible differences. The amount of deferred tax assets considered realizable could be reduced in the future if estimates of future taxable income during the carryforward period are reduced.

In accordance with applicable accounting standards, the Partnership recognizes only the impact of income tax positions that, based upon their merits, are more likely than not to be sustained upon audit by a taxing authority. To evaluate its current tax positions in order to identify any material uncertain tax positions, the Partnership developed a policy of identifying and evaluating uncertain tax positions that considers support for each tax position, industry standards, tax return disclosures and schedules and the significance of each position. It is the Partnership’s policy to recognize interest and penalties, if any, related to unrecognized tax benefits in income tax expense. At September 30, 2016 and December 31, 2015, the Partnership had no material uncertain tax positions.

The Partnership 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 2012 forward.

 

11. DEFERRED REVENUES

The Partnership defers revenues and all direct costs associated with the sale of pre-need cemetery merchandise and services until the merchandise is delivered or the services are performed. The Partnership recognizes deferred merchandise and service revenues as deferred revenues within long-term liabilities on its consolidated balance sheet. The Partnership recognizes deferred direct costs associated with pre-need cemetery merchandise and service revenues as deferred selling and obtaining costs within long-term assets on its consolidated balance sheet. The Partnership also defers the costs to obtain new pre-need cemetery and new prearranged funeral business as well as the investment earnings on the prearranged services and merchandise trusts.

At September 30, 2016 and December 31, 2015, deferred revenues consisted of the following (in thousands):

 

                                         
     September 30, 2016      December 31, 2015  

Deferred contract revenues

   $ 806,322       $ 759,812   

Deferred merchandise trust revenue

     86,275         80,294   

Deferred merchandise trust unrealized gains (losses)

     4,155         (24,685
  

 

 

    

 

 

 

Deferred revenues

   $ 896,752       $ 815,421   
  

 

 

    

 

 

 

Deferred selling and obtaining costs

   $ 122,249       $ 111,542   

 

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12. LONG-TERM INCENTIVE PLANS

2014 Long-Term Incentive Plan

During the year ended December 31, 2014, the General Partner’s Board of Directors (the “Board”) and the Partnership’s unitholders approved a 2014 Long-Term Incentive Plan (“2014 LTIP”). The Compensation, Nominating and Governance, and Compliance Committee of the Board (the “Compensation Committee”) administers the 2014 LTIP. The 2014 LTIP permits the grant of awards, which may be in the form of phantom units, restricted units, unit appreciation rights (“UAR”), or unit options, including performance factors for each, covering an aggregate of 1,500,000 common units, a number that the Board may increase by up to 100,000 common units per year. At September 30, 2016, the estimated number of common units to be issued upon vesting and exercise of outstanding rights under this plan, assuming the satisfaction of the maximum conditions for performance factors, was 186,845. A cumulative number of 17,229 common units have been issued, leaving 1,295,926 common units available for future grants under the plan, assuming no increases by the Board.

Phantom Unit Awards

Phantom units represent rights to receive a common unit or an amount of cash, or a combination of either, based upon the value of a common unit. Phantom units become payable, in cash or common units, at the Partnership’s election, upon the separation of directors and executives from service or upon the occurrence of certain other events specified in the underlying agreements. Phantom units are subject to terms and conditions determined by the Compensation Committee. In tandem with phantom unit grants, the compensation committee may grant distribution equivalent rights (“DERs”), which are the right to receive an amount in cash or common units equal to the cash distributions made by the Partnership with respect to common unit during the period that the underlying phantom unit is outstanding. All phantom units outstanding under the 2014 LTIP at September 30, 2016 contain tandem DERs.

The following table sets forth the 2014 LTIP phantom unit award activity for the three and nine months ended September 30, 2016 and 2015, respectively:

 

                                                                                   
     Three months ended September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Outstanding, beginning of period

     110,090         6,281         102,661         2,189   

Granted (1)

     102,715         2,566         110,144         6,658   

Settled in common units or cash (1)

     (2,774      —           (2,774      —     

Forfeiture

     (23,185      —           (23,185      —     
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, end of period (2)

     186,846         8,847         186,846         8,847   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The weighted-average grant date fair value for the unit awards on the date of grant was $25.16 and $24.00 for three months ended September 30, 2016 and 2015, respectively, and $25.12 and $27.14 for nine months ended September 30, 2016 and 2015, respectively. The intrinsic value of vested unit awards was $0.1 million for both the three months ended September 30, 2016 and 2015 and $0.3 million for the nine months ended September 30, 2016 and $0.2 million for the nine months ended 2015.
(2) Based on the closing price of the common units on September 30, 2016, the estimated intrinsic value of the outstanding unit awards was $4.7 million at September 30, 2016.

2004 Long-Term Incentive Plan

The Compensation Committee administers the Partnership’s 2004 Long-Term Incentive Plan (“2004 LTIP”). The 2004 LTIP permitted the grant of awards, which may be in the form of phantom units, restricted units, or unit appreciation rights (“UAR”). At September 30, 2016, the estimated number of common units to be issued upon vesting and exercise of outstanding rights under this plan was 199,919, based upon the closing price of our common units at September 30, 2016. A cumulative number of 626,188 common units have been issued under the 2004 LTIP. There were no awards available for grant under the 2004 LTIP at September 30, 2016 because the plan expired in 2014.

Phantom Unit Awards

Phantom units were credited to participants’ mandatory deferred compensation accounts in connection with DERs accruing on phantom units received under the 2004 LTIP. These DERs continue to accrue until the underlying securities are issued. The following table sets forth the 2004 LTIP activity related to DERs credited as phantom units to the participant’s accounts for the three and nine months ended September 30, 2016 and 2015, respectively:

 

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     Three months ended September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Outstanding, beginning of period

     194,085         176,349         184,457         169,122   

Granted (1)

     5,108         4,188         14,736         11,415   
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, end of period (2)

     199,193         180,537         199,193         180,537   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(1) The weighted-average fair value for the phantom units credited was $24.32 and $26.46 for the three months ended September 30, 2016 and 2015, respectively, and $24.63 and $28.08 for the nine months ended September 30, 2016 and 2015, respectively. The intrinsic value of vested phantom unit awards was $0.1 million for both of the three months ended September 30, 2016 and 2015 and $0.4 million and $0.3 million for the nine months ended September 30, 2016 and 2015, respectively.
(2) Based on the closing price of the common units on September 30, 2016, the estimated intrinsic value of the outstanding unit awards was $5.0 million at September 30, 2016.

Total compensation expense for phantom units credited under both the 2004 and 2014 plans was approximately $0.2 million and $0.3 million for the three months ended September 30, 2016 and 2015, respectively, and $0.6 million and $0.8 million for the nine months ended September 30, 2016 and 2015, respectively.

Unit Appreciation Rights Awards

UAR awards represent a right to receive an amount equal to the closing price of the Partnership’s common units on the date preceding the exercise date less the exercise price of the UARs, to the extent the closing price of the Partnership’s common units on the date preceding the exercise date is in excess of the exercise price. This amount is then divided by the closing price of the Partnership’s common units on the date preceding the exercise date to determine the number of common units to be issued to the participant. UAR awards granted through September 30, 2016 have a five-year contractual term beginning on the grant date and vest ratably over a period of 48 months beginning on the grant date. Of the UARs outstanding at September 30, 2016, 14,583 UARs will vest within the following twelve months. The following table sets forth the UAR award activity for the three and nine months ended September 30, 2016 and 2015, respectively:

 

                                                                                   
     Three months ended September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Outstanding, beginning of period

     66,793         87,021         66,793         123,000   

Exercised

     —           (19,791      —           (50,040

Forfeited

     (438      —           (438      (5,730
  

 

 

    

 

 

    

 

 

    

 

 

 

Outstanding, end of period (1)

     66,355         67,230         66,355         67,230   
  

 

 

    

 

 

    

 

 

    

 

 

 

Exercisable, end of period

     48,750         27,562         48,750         27,562   

 

(1) Based on the closing price of the common units on September 30, 2016, the estimated intrinsic value of the outstanding unit awards was less than $0.1 million at September 30, 2016. The weighted average remaining contractual life for outstanding UAR awards at September 30, 2016 was 1.8 years.

At September 30, 2016, the Partnership had approximately $0.1 million of unrecognized compensation expense related to unvested UAR awards that will be recognized through the year ended December 31, 2018. The Partnership recognized total compensation expense for UAR awards of less than $0.1 million for the three and nine months ended September 30, 2016 and 2015. The Partnership issued 3,067 common units for the three months ended September 30, 2015 and 7,631 common units for the nine months ended September 30, 2015 due to exercised UAR awards. There were no UAR exercises during the three and nine months ended September 30, 2016.

 

13. COMMITMENTS AND CONTINGENCIES

Legal

The Partnership 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 its financial position or results of operations.

 

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Other

During the first quarter of 2016, the Partnership moved its corporate headquarters to Trevose, Pennsylvania. Due to the relocation, a cease-use expense of $2.4 million, of which $0.5 million was incurred in the first quarter of 2016, was recorded in “Other gains and losses, net” on the unaudited consolidated statement of operations. This charge represents the net recognition of the discounted liability for future rent payments due under the lease on the previous headquarters, net of estimated sublease collections and deferred rent and lease incentives pertaining to the previous corporate office location.

In connection with the Partnership’s 2014 lease and management agreements with the Archdiocese of Philadelphia, it has committed to pay aggregate fixed rent of $36.0 million 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                                   

The fixed rent for lease years 6 through 11 shall be deferred. If the Archdiocese terminates the agreements pursuant to a lease year 11 termination or the Partnership terminates the agreements as a result of a default by the Archdiocese, prior to the end of lease year 11, the deferred fixed rent shall be retained by the Partnership. If the agreements are not terminated, the deferred fixed rent shall become due and payable 30 days after the end of lease year 11.

 

14. FAIR VALUE OF FINANCIAL INSTRUMENTS

Management has established a hierarchy to measure the Partnership’s financial instruments at fair value, which requires it to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs represent market data obtained from independent sources; whereas, unobservable inputs reflect the Partnership’s own market assumptions, which are used if observable inputs are not reasonably available without undue cost and effort. The hierarchy defines three levels of inputs that may be used to measure fair value:

Level 1 – Unadjusted quoted market prices in active markets for identical, unrestricted assets or liabilities that the reporting entity has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset and liability or can be corroborated with observable market data for substantially the same contractual term of the asset or liability.

Level 3 – Unobservable inputs that the entity’s own assumptions about the assumptions market participants would use in the pricing of the asset or liability and are consequently not based on market activity but rather through particular valuation techniques.

The Partnership’s current assets and liabilities on its consolidated balance sheets are considered to be financial instruments, and their estimated fair values approximate their carrying values due to their short-term nature and thus are categorized as Level 1. The Partnership’s merchandise and perpetual care trusts consist of investments in debt and equity marketable securities and cash equivalents, are carried at fair value, and are considered either Level 1 or Level 2 (see Notes 6 and 7). Certain investments in the merchandise and perpetual care trusts are excluded from the fair value leveling hierarchy in accordance with GAAP.

The Partnership’s other financial instruments as of September 30, 2016 and December 31, 2015 consist of its Senior Notes and outstanding borrowings under its revolving credit facility (see Note 9). The estimated fair values of the Partnership’s Senior Notes as of September 30, 2016 and December 31, 2015 were $178.5 million and $179.9 million, respectively, based on trades made on those dates, compared with the carrying amounts of $172.5 million and $172.2 million, respectively. As of September 30, 2016 and December 31, 2015, the carrying values of outstanding borrowings under the Partnership’s revolving credit facility (see Note 9), which bears interest at variable interest rates with maturities of 90 days or less, approximated their estimated fair values. The Senior Notes and the credit facility are valued using Level 2 inputs.

 

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15. SUPPLEMENTAL CONDENSED CONSOLIDATING FINANCIAL INFORMATION

The Partnership’s Senior Notes are guaranteed by StoneMor Operating LLC and its wholly-owned subsidiaries, other than the co-issuer, as described below. The guarantees are full, unconditional, joint and several. The Partnership, or the “Parent”, and its wholly-owned subsidiary Cornerstone Family Services of West Virginia Subsidiary Inc., are the co-issuers of the Senior Notes. The Partnership’s unaudited consolidated financial statements as of September 30, 2016 and December 31, 2015 and for the three and nine months ended September 30, 2016 and 2015 include the accounts of cemeteries operated under long-term lease, operating or management agreements. For the purposes of this note, these entities are deemed non-guarantor subsidiaries, as they are not wholly-owned by the Partnership. The Partnership’s unaudited consolidated financial statements also contain merchandise and perpetual care trusts that are also deemed non-guarantor subsidiaries for the purposes of this note.

The following unaudited supplemental condensed consolidating financial information reflects the Partnership’s standalone accounts, the combined accounts of the subsidiary co-issuer, the combined accounts of the guarantor subsidiaries, the combined accounts of the non-guarantor subsidiaries, the consolidating adjustments and eliminations and the Partnership’s consolidated accounts as of and for the three and nine months ended September 30, 2016 and 2015. For the purpose of the following financial information, the Partnership’s investments in its subsidiaries and the guarantor subsidiaries’ investments in their respective subsidiaries are presented in accordance with the equity method of accounting (in thousands):

 

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CONDENSED CONSOLIDATING BALANCE SHEETS

 

            Subsidiary      Guarantor      Non-Guarantor               
September 30, 2016    Parent      Issuer      Subsidiaries      Subsidiaries      Eliminations     Consolidated  

Assets

                

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 13,165       $ 2,445       $ —        $ 15,610   

Other current assets

     —           4,336         87,620         16,947         —          108,903   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           4,336         100,785         19,392         —          124,513   

Long-term accounts receivable

     —           1,564         84,767         11,651         —          97,982   

Cemetery property and equipment

     —           940         422,761         31,702         —          455,403   

Merchandise trusts

     —           —           —           504,604         —          504,604   

Perpetual care trusts

     —           —           —           334,923         —          334,923   

Deferred selling and obtaining costs

     —           6,240         97,414         18,595         —          122,249   

Goodwill and intangible assets

     —           —           78,510         58,090         —          136,600   

Other assets

     —           —           15,505         2,360         —          17,865   

Investments in and amounts due from affiliates eliminated upon consolidation

     229,565         138,604         485,550         —           (853,719     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 229,565       $ 151,684       $ 1,285,292       $ 981,317       $ (853,719   $ 1,794,139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Equity

                

Current liabilities

   $ —         $ 27       $ 42,070       $ 957       $ —        $ 43,054   

Long-term debt, net of deferred financing costs

     68,018         104,492         141,522         —           —          314,032   

Deferred revenues

     —           37,489         769,930         89,333         —          896,752   

Perpetual care trust corpus

     —           —           —           334,923         —          334,923   

Other long-term liabilities

     —           —           33,758         10,073         —          43,831   

Due to affiliates

     —           —           172,510         492,234         (664,744     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     68,018         142,008         1,159,790         927,520         (664,744     1,632,592   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Partners' capital

     161,547         9,676         125,502         53,797         (188,975     161,547   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and partners' capital

   $ 229,565       $ 151,684       $ 1,285,292       $ 981,317       $ (853,719   $ 1,794,139   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 
            Subsidiary      Guarantor      Non-Guarantor               
December 31, 2015    Parent      Issuer      Subsidiaries      Subsidiaries      Eliminations     Consolidated  

Assets

                

Current assets:

                

Cash and cash equivalents

   $ —         $ —         $ 11,869       $ 3,284       $ —        $ 15,153   

Other current assets

     —           4,858         78,464         12,701         —          96,023   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total current assets

     —           4,858         90,333         15,985         —          111,176   

Long-term accounts receivable

     —           2,888         80,969         11,310         —          95,167   

Cemetery property and equipment

     —           1,084         418,400         31,100         —          450,584   

Merchandise trusts

     —           —           —           464,676         —          464,676   

Perpetual care trusts

     —           —           —           307,804         —          307,804   

Deferred selling and obtaining costs

     —           5,967         91,275         14,300         —          111,542   

Goodwill and intangible assets

     —           —           78,223         58,837         —          137,060   

Other assets

     —           —           14,153         2,195         —          16,348   

Investments in and amounts due from affiliates eliminated upon consolidation

     249,436         165,639         436,811         —           (851,886     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total assets

   $ 249,436       $ 180,436       $ 1,210,164       $ 906,207       $ (851,886   $ 1,694,357   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Liabilities and Equity

                

Current liabilities

   $ —         $ 12       $ 33,083       $ 837       $ —        $ 33,932   

Long-term debt, net of deferred financing costs

     67,890         104,295         144,214         —           —          316,399   

Deferred revenues

     —           40,467         697,516         77,438         —          815,421   

Perpetual care trust corpus

     —           —           —           307,804         —          307,804   

Other long-term liabilities

     —           —           29,761         9,494         —          39,255   

Due to affiliates

     —           —           172,185         454,605         (626,790     —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities

     67,890         144,774         1,076,759         850,178         (626,790     1,512,811   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Partners’ capital

     181,546         35,662         133,405         56,029         (225,096     181,546   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total liabilities and partners’ capital

   $ 249,436       $ 180,436       $ 1,210,164       $ 906,207       $ (851,886   $ 1,694,357   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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CONDENSED CONSOLIDATING STATEMENTS OF OPERATIONS

 

                                                                             
          Subsidiary     Guarantor     Non-Guarantor              
Three months ended September 30, 2016   Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Total revenues

  $ —        $ 2,198      $ 68,936      $ 11,858      $ (4,456   $ 78,536   

Total cost and expenses

    —          (3,069     (70,790     (14,507     4,456        (83,910

Other income (loss)

    —          —          (506     —          —          (506

Net loss from equity investment in subsidiaries

    (10,286     (8,418     —          —          18,704        —     

Interest expense

    (1,358     (2,087     (2,296     (193     —          (5,934
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

    (11,644     (11,376     (4,656     (2,842     18,704        (11,814
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

    —          —          170        —          —          170   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (11,644   $ (11,376   $ (4,486   $ (2,842   $ 18,704      $ (11,644
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          Subsidiary     Guarantor     Non-Guarantor              
Three months ended September 30, 2015   Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Total revenues

  $ —        $ 1,333      $ 71,344      $ 12,628      $ (3,537   $ 81,768   

Total cost and expenses

    —          (2,883     (65,285     (12,909     3,537        (77,540

Other income (loss)

    —          —          (1,460     —          —          (1,460

Net loss from equity investment in subsidiaries

    (1,900     (1,877     —          —          3,777        —     

Interest expense

    (1,358     (2,087     (2,041     (183     —          (5,669
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

    (3,258     (5,514     2,558        (464     3,777        (2,901
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

    —          —          (357     —          —          (357
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (3,258   $ (5,514   $ 2,201      $ (464   $ 3,777      $ (3,258
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          Subsidiary     Guarantor     Non-Guarantor              
Nine months ended September 30, 2016   Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Total revenues

  $ —        $ 5,084      $ 199,637      $ 38,214      $ (9,188   $ 233,747   

Total cost and expenses

    —          (8,161     (204,438     (38,506     9,188        (241,917

Other income (loss)

    —          —          (1,579     —          —          (1,579

Net loss from equity investment in subsidiaries

    (23,695     (24,873     —          —          48,568        —     

Interest expense

    (4,075     (6,261     (6,516     (579     —          (17,431
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

    (27,770     (34,211     (12,896     (871     48,568        (27,180
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

    —          —          (590     —          —          (590
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (27,770   $ (34,211   $ (13,486   $ (871   $ 48,568      $ (27,770
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          Subsidiary     Guarantor     Non-Guarantor              
Nine months ended September 30, 2015   Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Total revenues

  $ —        $ 4,118      $ 206,289      $ 36,298      $ (9,931   $ 236,774   

Total cost and expenses

    —          (8,159     (198,399     (37,526     9,931        (234,153

Other income (loss)

    —          —          (1,460     —          —          (1,460

Net loss from equity investment in subsidiaries

    (12,337     (13,262     —          —          25,599        —     

Interest expense

    (4,075     (6,261     (6,026     (540     —          (16,902
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss) before income taxes

    (16,412     (23,564     404        (1,768     25,599        (15,741
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Income tax benefit (expense)

    —          —          (671     —          —          (671
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net income (loss)

  $ (16,412   $ (23,564   $ (267   $ (1,768   $ 25,599      $ (16,412
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
                                                                             
          Subsidiary     Guarantor     Non-Guarantor              
Nine months ended September 30, 2016   Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net cash provided by (used in) operating activities

  $ 2,624      $ 86      $ 27,172      $ 1,565      $ (12,960   $ 18,487   

Cash Flows From Investing Activities:

           

Cash paid for acquisitions and capital expenditures

    —          (86     (15,819     (2,404     —          (18,309

Payments to affiliates

    (9,097     —          —          —          9,097        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (9,097     (86     (15,819     (2,404     9,097        (18,309
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

           

Cash distributions

    (68,062     —          —          —          —          (68,062

Payments from affiliates

    —          —          (3,863     —          3,863        —     

Net borrowings and repayments of debt

    —          —          168        —          —          168   

Proceeds from issuance of common units

    74,535        —          —          —          —          74,535   

Other financing activities

    —          —          (6,362     —          —          (6,362
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    6,473        —          (10,057     —          3,863        279   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    —          —          1,296        (839     —          457   

Cash and cash equivalents - Beginning of period

    —          —          11,869        3,284        —          15,153   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents - End of period

  $ —        $ —        $ 13,165      $ 2,445      $ —        $ 15,610   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
          Subsidiary     Guarantor     Non-Guarantor              
Nine months ended September 30, 2015   Parent     Issuer     Subsidiaries     Subsidiaries     Eliminations     Consolidated  

Net cash provided by (used in) operating activities

  $ 36,297      $ 225      $ 18,725      $ 3,416      $ (46,633   $ 12,030   

Cash Flows From Investing Activities:

           

Cash paid for acquisitions and capital expenditures

    —          (225     (21,385     (2,523     —          (24,133

Payments to affiliates

    (47,479     —          —          —          47,479        —     
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash used in investing activities

    (47,479     (225     (21,385     (2,523     47,479        (24,133
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash Flows From Financing Activities:

           

Cash distributions

    (56,689     —          —          —          —          (56,689

Payments to affiliates

    —          —          846        —          (846     —     

Net borrowings and repayments of debt

    —          —          2,378        —          —          2,378   

Proceeds from issuance of common units

    67,871        —          —          —          —          67,871   

Other financing activities

    —          —          (66     —          —          (66
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net cash provided by (used in) financing activities

    11,182        —          3,158        —          (846     13,494   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

    —          —          498        893        —          1,391   

Cash and cash equivalents - Beginning of period

    —          —          7,059        3,342        —          10,401   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Cash and cash equivalents - End of period

  $ —        $ —        $ 7,557      $ 4,235      $ —        $ 11,792   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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16. ISSUANCES OF LIMITED PARTNER UNITS

On November 19, 2015, the Partnership entered into an equity distribution agreement (“ATM Equity Program”) with a group of banks (the “Agents”) whereby it may sell, from time to time, common units representing limited partner interests having an aggregate offering price of up to $100,000,000. During the three months ended September 30, 2016, the Partnership did not issue common units under the ATM Equity Program. During the nine months ended September 30, 2016, the Partnership issued 903,682 common units under the ATM Equity Program for net proceeds of $23.0 million.

Pursuant to a Common Unit Purchase Agreement, dated May 19, 2014, by and between the Partnership and American Cemeteries Infrastructure Investors, LLC, a Delaware limited liability company (“ACII”), the Partnership issued 58,924 paid-in-kind units to ACII in lieu of cash distributions of $1.5 million during the three months ended September 30, 2016 and 176,214 paid-in-kind Units to ACII in lieu of cash distributions of $4.5 million for the nine months ended September 30, 2016.

On April 20, 2016, the Partnership completed a follow-on public offering of 2,000,000 common units at a public offering price of $23.65 per unit. Additionally, the underwriters exercised their option to purchase an additional 300,000 common units. The offering resulted in net proceeds, after deducting underwriting discounts and offering expenses, of $51.5 million. The proceeds from the offering were used to pay down outstanding indebtedness under the Credit Facility.

 

17. SEGMENT INFORMATION

The Partnership’s operations include two reportable operating segments, Cemetery Operations and Funeral Homes. These operating segments reflect the way the Partnership manages its operations and makes business decisions as of September 30, 2016 and represent a change from the comparable period presented. Prior period information was revised to the current year presentation. Operating segment data for the periods indicated were as follows (in thousands):

 

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    Three months ended September 30,     Nine months ended September 30,  
    2016     2015     2016     2015  

Cemetery Operations:

       

Revenues

  $ 64,544      $ 67,526      $ 188,693      $ 193,778   

Operating costs and expenses

    (57,100     (53,906     (162,367     (160,812

Depreciation and amortization

    (2,058     (1,933     (6,042     (5,743
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment income

  $ 5,386      $ 11,687      $ 20,284      $ 27,223   
 

 

 

   

 

 

   

 

 

   

 

 

 

Funeral Homes:

       

Revenues

  $ 13,992      $ 14,242      $ 45,054      $ 42,996   

Operating costs and expenses

    (13,825     (11,208     (40,297     (35,507

Depreciation and amortization

    (692     (780     (2,427     (2,381
 

 

 

   

 

 

   

 

 

   

 

 

 

Segment income

  $ (525   $ 2,254      $ 2,330      $ 5,108   
 

 

 

   

 

 

   

 

 

   

 

 

 

Reconciliation of segment income to net loss:

       

Cemeteries

  $ 5,386      $ 11,687      $ 20,284      $ 27,223   

Funeral homes

    (525     2,254        2,330        5,108   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total segment income

    4,861        13,941        22,614        32,331   
 

 

 

   

 

 

   

 

 

   

 

 

 

Corporate overhead

    (10,058     (9,115     (30,106     (28,627

Corporate depreciation and amortization

    (177     (598     (678     (1,083

Other gains (losses), net

    (506     (1,460     (1,579     (1,460

Interest expense

    (5,934     (5,669     (17,431     (16,902

Income tax benefit (expense)

    170        (357     (590     (671
 

 

 

   

 

 

   

 

 

   

 

 

 

Net loss

  $ (11,644   $ (3,258   $ (27,770   $ (16,412
 

 

 

   

 

 

   

 

 

   

 

 

 

Capital expenditures:

       

Cemeteries

  $ 1,696      $ 3,225      $ 6,328      $ 9,918   

Funeral homes

    305        79        800        461   

Corporate

    150        479        2,527        654   
 

 

 

   

 

 

   

 

 

   

 

 

 

Total capital expenditures

  $ 2,151      $ 3,783      $ 9,655      $ 11,033   
 

 

 

   

 

 

   

 

 

   

 

 

 
    September 30, 2016     December 31, 2015        

Balance sheet information:

     

Assets:

     

Cemetery Operations

  $ 1,568,829      $ 1,481,926     

Funeral Homes

    200,073        190,443     

Corporate

    25,237        21,988     
 

 

 

   

 

 

   

Total assets

  $ 1,794,139      $ 1,694,357     
 

 

 

   

 

 

   

Goodwill:

     

Cemetery Operations

  $ 25,320      $ 25,320     

Funeral Homes

    45,252        44,531     
 

 

 

   

 

 

   

Total goodwill

  $ 70,572      $ 69,851     
 

 

 

   

 

 

   

 

18. SUBSEQUENT EVENTS

On October 27, 2016, we announced a quarterly cash distribution of $0.33 per common unit pertaining to the results for the third quarter of 2016. The distribution is scheduled to be paid November 14, 2016 to common unit holders of record as of the close of business on November 7, 2016. A part of or all of this quarterly cash distribution may be deemed to be a return of capital for our limited partners if such quarterly cash distribution, when combined with all other cash distributions made during the calendar year, exceeds the partner’s share of taxable income for the corresponding period, depending upon the individual limited partner’s specific tax position. Because the Partnership’s general and limited partner interests have cumulative net losses as of the end of the period, the distribution represented a return of capital to those interests in accordance with US GAAP.

 

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As discussed in the Explanatory Note to this Form 10-Q and Note 1 to the Partnership’s consolidated financial statements included in Item 1 of this Form 10-Q, such financial statements reflect the Restatement of the Partnership’s consolidated financial statements as of December 31, 2015 and for the three and nine months ended September 30, 2015. The management’s discussion and analysis presented below provides information to assist in understanding the Partnership’s financial condition and results of operations and should be read in conjunction with the Partnership’s consolidated financial statements included in Item 1 of this Form 10-Q.

Certain statements contained in this Form 10-Q, including, but not limited to, information regarding our operating activities, the plans and objectives of our management, and assumptions regarding our future performance and plans are forward-looking statements. When used in this Form 10-Q, the words “believes,” “anticipates,” “expects” and similar expressions are intended to identify forward-looking statements. Forward-looking statements are based on management’s expectations and estimates. These statements are neither promises nor guarantees and are made subject to certain risks and uncertainties that could cause actual results to differ materially from the results stated or implied in this Form 10-Q.

Our major risks are related to uncertainties associated with the cash flow from pre-need and at-need sales, trusts and financings, which may impact StoneMor’s ability to meet its financial projections, service its debt and pay distributions, and increase its distributions, as well as with its ability to maintain an effective system of internal control over financial reporting and disclosure controls and procedures.

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 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 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 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.

Our risks and uncertainties are more particularly described in “Item 1A. Risk Factors” of our Annual Report on Form 10-K/A for the year ended December 31, 2015. Readers are cautioned not to place undue reliance on forward looking statements included in this Form 10-Q, which speak only as of the date hereof. Except as required by applicable laws, we undertake no obligation to update or revise forward-looking statements, whether as a result of new information, future events or otherwise.

BUSINESS OVERVIEW

We are a publicly-traded Delaware master-limited partnership (“MLP”) and provider of funeral and cemetery products and services in the death care industry in the United States. As of September 30, 2016, we operated 317 cemeteries in 28 states and Puerto Rico, of which 286 are owned and 31 are operated under lease, management or operating agreements. We also owned and operated 105 funeral homes in 18 states and Puerto Rico.

FINANCIAL PRESENTATION

Our consolidated balance sheets at September 30, 2016 and December 31, 2015, and the consolidated statements of operations for the three and nine months ended September 30, 2016 and 2015 include our accounts and our wholly-owned subsidiaries. Accounting principles generally accepted in the United States of America require management to make estimates and assumptions that affect the amounts reported in the consolidated balance sheets and related consolidated statements of operations. Actual balances and results could be different from those estimates. All intercompany transactions and balances have been eliminated in the consolidation of the financial statements.

SUBSEQUENT EVENTS

On October 27, 2016, we announced a quarterly cash distribution of $0.33 per common unit pertaining to the results for the third quarter of 2016. The distribution is scheduled to be paid November 14, 2016 to common unit holders of record as of the close of business on November 7, 2016. A part of or all of this quarterly cash distribution may be deemed to be a return of capital for our limited partners if such quarterly cash distribution, when combined with all other cash distributions made during the calendar year, exceeds the partner’s share of taxable income for the corresponding period, depending upon the individual limited partner’s specific tax position. Because the Partnership’s general and limited partner interests have cumulative net losses as of the end of the period, the distribution represented a return of capital to those interests in accordance with US GAAP.

 

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REVENUE RECOGNITION

Cemetery Operations

Our cemetery revenues are principally derived from sales of interment rights, merchandise and services. These sales occur 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. Pre-need sales are typically sold on an installment plan. At-need cemetery sales and pre-need merchandise and services sales are recognized as revenue when the merchandise is delivered or the service is performed. For pre-need sales of interment rights, we recognize the associated revenue when we have collected 10% of the sales price from the customer. We consider our cemetery merchandise delivered to our customer when it is either installed or ready to be installed and delivered to a third-party storage facility until it is needed, with ownership transferred to the customer at that time. Pre-need sales that have not yet been recognized as revenue are recognized as deferred revenues, a liability on our consolidated balance sheet. Direct costs associated with pre-need sales that are recognized as deferred revenues, such as sales commissions, are recognized as deferred selling and obtaining costs, an asset on our consolidated balance sheet, until the merchandise is delivered or the services are performed.

Funeral Home Operations

Our funeral home revenues are principally derived from at-need and pre-need sales of merchandise and services. Pre-need sales are typically sold on an installment plan. Both at-need and pre-need funeral home sales are recognized as revenue when the merchandise is delivered or the service is performed. Pre-need sales that have not yet been recognized as revenue are recognized as deferred revenues, a liability on our consolidated balance sheet. Direct costs associated with pre-need sales that are recognized as deferred revenues, such as sales commissions, are recognized as deferred selling and obtaining costs, an asset on our consolidated balance sheet, until the merchandise is delivered or the services are performed. Our funeral home operations also include revenues related to the sale of term and final expense whole life insurance. As an agent for these insurance sales, we earn and recognize commission-related revenue streams from the sales of these policies.

Trust Investment Income

Sales of cemetery and funeral home merchandise and services are subject to state law. Under these laws, which vary by state, a portion of the cash proceeds received from the sale of interment rights and pre-need sales of cemetery and funeral home merchandise and services are required to be deposited into trusts. For sales of interment rights, a portion of the cash proceeds received are required to be deposited into a perpetual care trust. While the principal balance of the perpetual care trust must remain in the trust in perpetuity, we recognize investment income on such assets as revenue, excluding realized gains and losses from the sale of trust assets. For sales of cemetery and funeral home merchandise and services, a portion of the cash proceeds received are required to be deposited into a merchandise trust until the merchandise is delivered or the services are performed, at which time the funds deposited, along with the associated investment income, may be withdrawn. Investment income from assets held in the merchandise trust is recognized as revenues when withdrawn. Amounts deposited into trusts are invested as recommended by our wholly-owned registered investment adviser and approved by the Trust Committee of the board of directors of our general partner, including use of investment managers. These investment managers are required to invest our trust funds in accordance with applicable state law and internal investment guidelines adopted by the Trust Committee. Our investment managers are monitored by our wholly-owned registered investment advisor, who advises the Trust Committee of asset allocations, evaluates the investment managers and provides detailed monthly reports on the performance of each merchandise and perpetual care trust.

GENERAL TRENDS AND OUTLOOK

We expect our business to be affected by key trends in the deathcare industry, based upon assumptions made by us and information currently available. Deathcare industry factors affecting our financial position and results of operations include, but are not limited to, demographic trends in terms of population growth and average age, which impacts death rates and number of deaths, increasing cremation trends, and increasing memorialization trends. In addition, we are subject to fluctuations in the fair value of equity and fixed-maturity debt securities held in our trusts. These values can be negatively impacted by contractions in the credit market and overall downturns in economic activity. Our ability to make payments on our debt and our ability to make cash distributions to our unitholders depends on our success at managing these industry trends. To the extent our underlying assumptions about or interpretations of available information prove to be incorrect, our actual results may vary materially from our expected results.

 

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RESULTS OF OPERATIONS

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Cemetery Operations

Overview

We are currently the second largest owner and operator of cemeteries in the United States. At September 30, 2016, we operated 317 cemeteries in 28 states and Puerto Rico. We own 286 of these cemeteries and we manage or operate the remaining 31 under lease, operating or management agreements. Revenues from cemetery operations accounted for approximately 82.2% of our total revenues during the three months ended September 30, 2016.

Operating Results

The following table presents operating results for our cemetery operations for the respective reporting periods (in thousands):

 

                                         
     Three months ended September 30,  
     2016      2015  

Merchandise

   $ 36,314       $ 37,570   

Services

     13,928         14,945   

Interest income

     2,197         2,233   

Investment and other

     12,105         12,778   
  

 

 

    

 

 

 

Total revenue

     64,544         67,526   
  

 

 

    

 

 

 

Cost of goods sold

     11,721         12,195   

Cemetery expense

     19,926         18,245   

Selling expense

     15,931         14,647   

General and administrative expense

     9,522         8,819   

Depreciation and amortization

     2,058         1,933   
  

 

 

    

 

 

 

Total cost and expenses

     59,158         55,839   
  

 

 

    

 

 

 

Operating income

   $ 5,386       $ 11,687   
  

 

 

    

 

 

 

Cemetery merchandise revenues were $36.3 million for the three months ended September 30, 2016, a decrease of $1.3 million from $37.6 million for the three months ended September 30, 2015. This decrease was primarily due to a decrease in recognized sales of mausoleums, vaults, and niches. Cemetery services revenues were $13.9 million for the three months ended September 30, 2016, a decrease of $1.0 million from $14.9 million for the three months ended September 30, 2015. This decrease was primarily due to a reduction in opening and closing service revenues. Investment and other income was $12.1 million for the three months ended September 30, 2016, a decrease of $0.7 million from $12.8 million for the three months ended September 30, 2015. This decrease was primarily attributable to merchandise trust income, which was $2.0 million for the three months ended September 30, 2016, representing a $2.1 million decrease from $4.1 million earned during the three months ended September 30, 2015. This change is primarily attributable to a decrease in net income earned by the trust and a decrease in the recognition of deferred merchandise trust revenue resulting from impairment of trust assets. A portion of deferred trust income is recognized as underlying merchandise is delivered or underlying services are performed. The decrease in merchandise trust income was partially offset by perpetual care trust income, which was $4.8 million for the three months ended September 30, 2016, representing a $0.4 million increase from $4.4 million earned during the three months ended September 30, 2015. The remaining $1.0 million change in investment and other income is attributed to a net increase in records fee revenue, travel care insurance fee revenue, and other miscellaneous cemetery revenue. Interest income remained consistent for the three months ended September 30, 2016 and 2015.

 

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Cost of goods sold was $11.7 million for the three months ended September 30, 2016, a decrease of $0.5 million from $12.2 million for the three months ended September 30, 2015. This decrease consisted principally of a $0.5 million decrease in merchandise costs.

Cemetery expenses were $19.9 million for the three months ended September 30, 2016, an increase of $1.7 million from $18.2 million for the three months ended September 30, 2015. This increase was principally due to a $1.7 million increase in repair and maintenance expenses.

Selling expenses were $15.9 million for the three months ended September 30, 2016, an increase of $1.3 million from $14.6 million for the three months ended September 30, 2015. This increase was primarily due to a $1.3 million increase in personnel costs.

General and administrative expenses were $9.5 million for the three months ended September 30, 2016, an increase of $0.7 million from $8.8 million for the three months ended September 30, 2015. This increase was primarily due to a $0.7 million increase in professional fees.

Depreciation and amortization expense was relatively consistent with the prior period, with $2.1 million for the three months ended September 30, 2016 compared to $1.9 million for the three months ended September 30, 2015.

Funeral Home Operations

Overview

At September 30, 2016, we owned and operated 105 funeral homes. These properties are located in 18 states and Puerto Rico. Revenues from funeral home operations accounted for approximately 17.8% of our total revenues during three months ended September 30, 2016.

Operating Results

The following table presents operating results for our funeral home operations for the respective reporting periods (in thousands):

 

                                         
     Three months ended September 30,  
     2016      2015  

Merchandise

   $ 6,656       $ 6,588   

Services

     7,336         7,654   
  

 

 

    

 

 

 

Total revenue

     13,992         14,242   
  

 

 

    

 

 

 

Merchandise

     2,322         1,002   

Service

     6,070         5,432   

Depreciation and amortization

     692         780   

Other

     5,433         4,774   
  

 

 

    

 

 

 

Total expenses

     14,517         11,988   
  

 

 

    

 

 

 

Operating income

   $ (525    $ 2,254   
  

 

 

    

 

 

 

Funeral home merchandise revenues were consistent with the prior period with $6.7 million for the three months ended September 30, 2016, an increase of $0.1 million from $6.6 million for the three months ended September 30, 2015. Funeral home service revenues were $7.3 million for the three months ended September 30, 2016, a decrease of $0.4 million from $7.7 million for the three months ended September 30, 2015. The decrease is principally due to a decrease in cremations and other related service revenues.

 

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Funeral home expenses were $14.5 million for the three months ended September 30, 2016, an increase of $2.5 million from $12.0 million for the three months ended September 30, 2015. This increase principally consists of a $1.3 million increase in merchandise costs, primarily driven by higher merchandise procurement costs, $0.6 million increase in personnel costs and a $0.1 million increase in costs associated with insurance-related sales with the remaining increase in other funeral home related expenses.

Corporate Overhead

Corporate overhead was $10.1 million for the three months ended September 30, 2016, an increase of $1.0 million from $9.1 million for the three months ended September 30, 2015. This increase was principally due to a $0.7 million increase in professional fees and a $0.3 million increase in acquisition-related costs. Acquisition costs may vary from period to period depending on the amount of acquisition activity that takes place.

Corporate Depreciation and Amortization

Depreciation and amortization expense was consistent with the prior period, with $0.2 million for the three months ended September 30, 2016, a decrease of $0.4 million from $0.6 million for the three months ended September 30, 2015.

Other Gains and Losses

During the third quarter of 2016, we obtained additional information related to one of the acquisitions that closed during 2015. The change resulted in an adjustment to the gain on acquisition recognized during the year ended December 31, 2015, increasing the gain by $0.2 million via a gain recognized in the current period in accordance with GAAP. In addition, there was a $2.7 million gain from our most recent acquisition as of September 30, 2016. We sold two funeral home buildings and related property during the period resulting in a loss on sale of $0.2 million. Also, we incurred a charge related to deferred financing costs related to our prior line of credit in the amount of $1.2 million and a loss of $2.0 million related to the revision of our cease-use expense due to the relocation of corporate headquarters to Trevose, Pennsylvania and other realignment charges.

Interest Expense

Interest expense was $5.9 million for the three months ended September 30, 2016, an increase of $0.2 million from $5.7 million for the three months ended September 30, 2015. This increase was principally due to an increase in interest expense on amounts outstanding under the credit facility, which had higher average amounts outstanding during the current period than the comparable period.

Income Tax Benefit (Expense)

Income tax benefit was $0.2 million for the three months ended September 30, 2016, as compared to an income tax expense of $0.4 million for the three months ended September 30, 2015. 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.

Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Cemetery Operations

Operating Results

Revenues from cemetery operations accounted for approximately 80.7% of our total revenues during the nine months ended September 30, 2016. The following table presents operating results for our cemetery operations for the respective reporting periods (in thousands):

 

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     Nine months ended September 30,  
     2016      2015  

Merchandise

   $ 106,937       $ 105,972   

Services

     41,067         44,869   

Interest income

     6,678         6,617   

Investment and other

     34,011         36,320   
  

 

 

    

 

 

 

Total revenue

     188,693         193,778   
  

 

 

    

 

 

 

Cost of goods sold

     34,483         35,357   

Cemetery expense

     53,267         53,789   

Selling expense

     46,898         44,326   

General and administrative expense

     27,719         27,340   

Depreciation and amortization

     6,042         5,743   
  

 

 

    

 

 

 

Total cost and expenses

     168,409         166,555   
  

 

 

    

 

 

 

Operating income

   $ 20,284       $ 27,223   
  

 

 

    

 

 

 

Cemetery merchandise revenues were $106.9 million for the nine months ended September 30, 2016, an increase of $0.9 million from $106.0 million for the nine months ended September 30, 2015. The increase is principally due to a $1.8 million increase in recognized sales of markers and mausoleums, partially offset by decreases in recognized sales of vaults, crypts and niches of approximately $0.9 million. Cemetery services revenues were $41.1 million for the nine months ended September 30, 2016, a decrease of $3.8 million from $44.9 million for the nine months ended September 30, 2015. This decrease was primarily due to a reduction in opening and closing service revenues. Investment and other income was $34.0 million for the nine months ended September 30, 2016, a decrease of $2.3 million from $36.3 million for the nine months ended September 30, 2015. This decrease was primarily attributable to merchandise trust income, which was $5.5 million for the nine months ended September 30, 2016, representing a $5.1 million decrease from $10.6 million earned during the nine months ended September 30, 2015. This change is primarily attributable to a decrease in net income earned by the trust and a decrease in the recognition of deferred merchandise trust revenue resulting from impairment of trust assets. A portion of deferred trust income is recognized as underlying merchandise is delivered or underlying services are performed. This decrease in merchandise trust income was partially offset by perpetual care trust income, which was $11.9 million for the nine months ended September 30, 2016, representing a $0.4 million increase from $11.5 million earned during the nine months ended September 30, 2015. The remaining $2.4 million change in investment and other income is attributed to a net increase in permanent record fee revenue, travel care insurance fee revenue, and other miscellaneous cemetery revenue. Interest income remained consistent for both the nine months ended September 30, 2016 and 2015.

Cost of goods sold was $34.5 million for the nine months ended September 30, 2016, a decrease of $0.9 million from $35.4 million for the nine months ended September 30, 2015. This decrease consisted principally of a $1.7 million decrease in merchandise costs partially offset by a $0.8 million increase in perpetual care costs.

Cemetery expenses were $53.3 million for the nine months ended September 30, 2016, a decrease of $0.5 million from $53.8 million for the nine months ended September 30, 2015. This decrease was principally due to a $2.0 million decrease in personnel costs partially offset by a $1.5 million increase in repair and maintenance expenses.

Selling expenses were $46.9 million for the nine months ended September 30, 2016, an increase of $2.6 million from $44.3 million for the nine months ended September 30, 2015. This increase was primarily due to a $1.3 million increase in personnel costs and a $1.3 million increase in advertising and marketing costs.

General and administrative expenses were $27.7 million for the nine months ended September 30, 2016, an increase of $0.4 million from $27.3 million for the nine months ended September 30, 2015. This increase was primarily due to a $0.9 million increase in professional fees and a $0.7 million increase in overhead expenses partially offset by a $1.2 million decrease in personnel costs.

 

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Depreciation and amortization expense was relatively consistent with the prior period, with $6.0 million for the nine months ended September 30, 2016 compared to $5.7 million for the nine months ended September 30, 2015.

Funeral Home Operations

Operating Results

Revenues from funeral home operations accounted for approximately 19.3% of our total revenues during nine months ended September 30, 2016. The following table presents operating results for our funeral home operations for the respective reporting periods (in thousands):

 

                                         
     Nine months ended September 30,  
     2016      2015  

Merchandise

   $ 20,681       $ 19,913   

Services

     24,373         23,083   
  

 

 

    

 

 

 

Total revenue

     45,054         42,996   
  

 

 

    

 

 

 

Merchandise

     6,306         5,444   

Service

     18,672         16,728   

Depreciation and amortization

     2,427         2,381   

Other

     15,319         13,335   
  

 

 

    

 

 

 

Total expenses

     42,724         37,888   
  

 

 

    

 

 

 

Operating income

   $ 2,330       $ 5,108   
  

 

 

    

 

 

 

Funeral home merchandise revenues were $20.7 million for the nine months ended September 30, 2016, an increase of $0.8 million from $19.9 million for the nine months ended September 30, 2015. Funeral home service revenues were $24.4 million for the nine months ended September 30, 2016, an increase of $1.3 million from $23.1 million for the nine months ended September 30, 2015. The overall increase was largely due to the locations acquired in the last twelve months, specifically with increases in casket and at-need service revenue.

Funeral home expenses were $42.7 million for the nine months ended September 30, 2016, an increase of $4.8 million from $37.9 million for the nine months ended September 30, 2015. This increase principally consists of a $2.0 million increase in personnel costs, $2.0 million increase in other costs and $0.8 million in merchandise costs, all primarily due to the locations acquired in the last twelve months and an increase in costs associated with insurance and merchandise related sales.

Corporate Overhead

Corporate overhead was $30.1 million for the nine months ended September 30, 2016, an increase of $1.5 million from $28.6 million for the nine months ended September 30, 2015. This increase was principally due to a $2.9 million increase in acquisition-related costs, partially offset by a $1.4 million decrease in personnel costs. Acquisition costs may vary from period to period depending on the amount of acquisition activity that takes place.

Corporate Depreciation and Amortization

Corporate depreciation and amortization expense was consistent with the prior period, with $0.7 million for the nine months ended September 30, 2016 compared to $1.1 million for nine months ended September 30, 2015.

Other Gains and Losses

We obtained additional information related to two of the acquisitions that closed during 2015. The changes resulted in an adjustment to the gain on acquisition recognized during the year ended December 31, 2015, reducing the gain by $0.6 million via a loss recognized in the current period in accordance with GAAP. In addition, there was a $2.7 million gain from our most recent acquisition as of September 30, 2016. We sold a warehouse and three funeral home businesses during the year for a net gain of $0.1 million. Also, we wrote off deferred financing related to our prior line of credit in the amount of $1.2 million and incurred a loss of $2.4 million related to our cease-use expense due to the relocation of corporate headquarters to Trevose, Pennsylvania and other realignment charges.

 

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Interest Expense

Interest expense was $17.4 million for the nine months ended September 30, 2016, an increase of $0.5 million from $16.9 million for the nine months ended September 30, 2015. This increase was principally due to an increase in interest expense on amounts outstanding under the credit facility, which had higher average amounts outstanding during the current period than the comparable period.

Income Tax Expense

Income tax expense was $0.6 million for the nine months ended September 30, 2016, as compared to $0.7 million for the nine months ended September 30, 2015. 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.

Supplemental Data

The following table presents supplemental operating data for the periods presented (in thousands):

 

                                                                                   
    Three months ended September 30,     Nine months ended September 30,  
    2016     2015     2016     2015  

Interments performed

    13,127        12,878        40,161        41,514   

Interment rights sold (1)

       

Lots

    8,469        8,086        23,710        23,980   

Mausoleum crypts (including pre-construction)

    419        446        1,471        1,779   

Niches

    426        441        1,181        1,285   
 

 

 

   

 

 

   

 

 

   

 

 

 

Net interment rights sold (1)

    9,314        8,973        26,362        27,044   
 

 

 

   

 

 

   

 

 

   

 

 

 

Number of cemetery contracts written

    27,404        28,890        81,800        86,516   

Number of pre-need cemetery contracts written

    12,795        13,799        36,955        39,847   

Number of at-need cemetery contracts written

    14,609        15,091        44,845        46,669   

 

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

LIQUIDITY AND CAPITAL RESOURCES

General

Our primary sources of liquidity are cash generated from operations, borrowings under our revolving credit facility and capital raised through the issuance of additional limited partner units. As an MLP, our primary cash requirements, in addition to normal operating expenses, are for cash distributions, capital expenditures, net contributions to the merchandise trust funds and debt service. In general, we expect to fund:

 

    cash distributions in accordance with our partnership agreement and maintenance capital expenditures through available cash and cash flows from operating activities;

 

    working capital deficits through cash generated from operations and additional borrowings; and

 

    expansion capital expenditures, net contributions to the merchandise trust funds and debt service obligations through additional borrowings, the issuance of additional limited partner units or assets sales. Amounts contributed to the merchandise trust funds will be withdrawn at the time of the delivery of the product or service sold that the contribution is associated with (see “Revenue Recognition”), at which time it will reduce the amount of additional borrowings, issuance of additional limited partner units or assets sales needed.

 

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We rely on cash flow from operations, borrowings under our credit facility and the issuance of additional limited partner units to execute our growth strategy and meet our financial commitments and other short-term financial needs. We cannot be certain that additional capital will be available to us to the extent required and on acceptable terms.

We believe that we will have sufficient liquid assets, cash from operations and borrowing capacity to meet our financial commitments, debt service obligations, contingencies and anticipated capital expenditures for at least the next twelve-month period. However, we are subject to business, operational and other risks that could adversely affect our cash flow. We may supplement our cash generation with proceeds from financing activities, including borrowings under our credit facility and other borrowings, the issuance of additional limited partner units, and the sale of assets and other transactions.

Cash Flows - Nine Months Ended September 30, 2016 Compared to Nine Months Ended September 30, 2015

Net cash flows provided by operating activities were $18.5 million during the nine months ended September 30, 2016, an increase of $6.5 million from $12.0 million during the nine months ended September 30, 2015. The $6.5 million favorable movement in net cash provided by operating activities resulted from a $15.1 million favorable movement in working capital and a $8.6 million unfavorable movement in net income excluding non-cash items. The favorable movement in working capital was principally due to larger withdrawals from and smaller realized gains in our merchandise trusts. The unfavorable movement in net income excluding non-cash items was due principally to our cemetery operations.

Net cash used in investing activities was $18.3 million during the nine months ended September 30, 2016, a decrease of $5.8 million from $24.1 million during the nine months ended September 30, 2015. Net cash used in investing activities during the nine months ended September 30, 2016 consisted of $9.7 million for capital expenditures and $10.5 million for acquisitions, partially offset by proceeds from asset sales of $1.9 million. Net cash used in investing activities during the nine months ended September 30, 2015 principally consisted of $11.0 million for capital expenditures and $13.1 million for acquisitions.

Net cash flows provided by financing activities were $0.3 million for the nine months ended September 30, 2016 compared to $13.5 million for the nine months ended September 30, 2015. Cash flows provided by financing activities during the nine months ended September 30, 2016 consisted primarily of $74.5 million of net proceeds from the issuance of common units and $0.2 million of net borrowings, partially offset by $68.1 million of cash distributions and $6.4 million of financing costs. Cash flows provided by financing activities during the nine months ended September 30, 2015 consisted primarily of $67.9 million of proceeds from the issuance of common units and $2.4 million of net borrowings, partially offset by $56.7 million of cash distributions.

Capital Expenditures

Our capital requirements consist primarily of:

 

    Expansion capital expenditures – we consider expansion capital expenditures to be capital expenditures that expand the capacity of our existing operations; and

 

    Maintenance capital expenditures – we consider maintenance capital expenditures to be any capital expenditures that are not expansion capital expenditures – generally, this will include furniture, fixtures, equipment and major facility improvements that are capitalized in accordance with generally accepted accounting principles.

 

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The following table summarizes maintenance and expansion capital expenditures, excluding amounts paid for acquisitions, for the periods presented (in thousands):

 

                                                                                   
     Three months ended September 30,      Nine months ended September 30,  
     2016      2015      2016      2015  

Maintenance capital expenditures

   $ 1,129       $ 1,632       $ 5,422       $ 5,011   

Expansion capital expenditures

     1,022         2,151         4,233         6,022   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total capital expenditures

   $ 2,151       $ 3,783       $ 9,655       $ 11,033   
  

 

 

    

 

 

    

 

 

    

 

 

 

Issuance of Common Units

During the nine months ended September 30, 2016, we issued 903,682 common units under the ATM program for net proceeds of $23.0 million.

On April 20, 2016, we completed a follow-on public offering of 2,000,000 common units at a public offering price of $23.65 per unit. Additionally, the underwriters exercised their option to purchase an additional 300,000 common units. The offering resulted in net proceeds, after deducting underwriting discounts and offering expenses, of $51.5 million. The proceeds from the offering were used to pay down outstanding indebtedness under the Credit Facility.

Long-Term Debt

Credit Facility

On August 4, 2016, We (the “Operating Company”), a wholly-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.

The New Agreements replaced the Partnership’s Fourth Amended and Restated Credit Agreement, as amended with Bank of America, N.A., as Administrative Agent, Swing Line Lender and L/C Issuer and other lenders party thereto (the “Prior Credit Agreement”), Second Amended and Restated Security Agreement, and Second Amended and Restated Pledge Agreement, each dated as of December 19, 2014. The Prior Credit Agreement provided for a revolving credit facility of $180.0 million, with borrowings classified as either acquisition draws or working capital draws, maturing on December 19, 2019. In connection with entering into the Credit Agreement, the Partnership incurred an extinguishment of debt charge of approximately $1.2 million.

The Credit Agreement provides for up to $210.0 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 $6.5 million outstanding at September 30, 2016 and none outstanding at December 31, 2015. The Maturity Date under the 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, 2016, the outstanding amount of borrowings under the Credit Agreement was $151.1 million, which was used to pay down outstanding obligations under the 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 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 Credit Agreement. At September 30, 2016, the amount available under the credit facility was $42.4 million.

Each Borrowing under the 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.

 

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The Applicable Rate is determined based on the Consolidated Leverage Ratio of the Partnership and its Subsidiaries and ranges from 1.75% to 3.25% for Eurodollar Rate Loans and 0.75% to 2.25% for Base Rate Loans. As of September 30, 2016, the Applicable Rate for Eurodollar Rate Loans was 2.75% and for Base Rate Loans – 1.75%. The 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 Credit Agreement exceed the usage of such commitments, and which is included within interest expense on the Partnership’s consolidated statements of operations. On September 30, 2016, the weighted average interest rate on outstanding borrowings under the Credit Agreement was 3.2%.

The 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 4.00 to 1.0, which may be increased to 4.25 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; and

 

    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.

On September 30, 2016, our Consolidated Leverage Ratio and the Consolidated Debt Service Coverage Ratio were 3.62 and 4.19, respectively.

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 Partnership was in compliance with the Credit Agreement covenants as of September 30, 2016.

The Borrowers’ obligations under the Credit Agreement are guaranteed by the Partnership and the Borrowers. Pursuant to the Guaranty Agreement, the Borrowers’ obligations under the 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.

Senior Notes

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. 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. We 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 these 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:

 

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Year

   Percentage  

2016

     105.906

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 us 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 our subsidiaries. The Indenture governing the Senior Notes contains covenants, including limitations of our 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 our assets, among other items. As of September 30, 2016, we were in compliance with these covenants.

Cash Distribution Policy

Our partnership agreement requires that we distribute 100% of available cash to our common unitholders and general partner within 45 days following the end of each calendar quarter in accordance with their respective percentage interests. Available cash consists generally of all of our cash receipts, less cash disbursements. Our general partner is granted discretion under the partnership agreement to establish, maintain and adjust reserves for future operating expenses, debt service, maintenance capital expenditures and distributions for the next four quarters. These reserves are not restricted by magnitude, but only by type of future cash requirements with which they can be associated.

Available cash is distributed to the common limited partners and the general partner in accordance with their ownership interests, subject to the general partner’s incentive distribution rights if quarterly cash distributions per limited partner unit exceed specified targets. Incentive distribution rights are generally defined as all cash distributions paid to our general partner that are in excess of its general partner ownership interest. The incentive distribution rights will entitle our general partner to receive the following increasing percentage of cash distributed by us as it reaches certain target distribution levels:

 

    13.0% of all cash distributed in any quarter after each common unit has received $0.5125 for that quarter;

 

    23.0% of all cash distributed in any quarter after each common unit has received $0.5875 for that quarter; and

 

    48.0% of all cash distributed in any quarter after each common unit has received $0.7125 for that quarter.

Agreements with the Archdiocese of Philadelphia

In accordance with the lease and management agreements with the Archdiocese of Philadelphia, we have agreed pay to the Archdiocese aggregate fixed rent of $36.0 million 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                                   

The fixed rent for lease years 6 through 11 shall be deferred. If the Archdiocese terminates the agreements pursuant to a lease year 11 termination or we terminate the agreements as a result of a default by the Archdiocese, prior to the end of lease year 11, the deferred fixed rent shall be retained by us. If the agreements are not terminated, the deferred fixed rent shall become due and payable 30 days after the end of lease year 11.

 

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The preparation of financial statements in conformity with accounting principles generally accepted in the United States requires making estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of actual revenue and expenses during the reporting period. Although we base our estimates on historical experience and various other assumptions that we believe to be reasonable under the circumstances, actual results may differ from the estimates on which our financial statements are prepared at any given point of time. Changes in these estimates could materially affect our financial position, results of operations or cash flows. Significant items that are subject to such estimates and assumptions include revenue and expense accruals, fair value of merchandise and perpetual care trusts assets and the allocation of purchase price to the fair value of assets acquired. A discussion of our significant accounting policies we have adopted and followed in the preparation of our consolidated financial statements was included in our Annual Report on Form 10-K/A for the year ended December 31, 2015, and we summarize our significant accounting policies and any updates within our consolidated financial statements included in Note 1 under “Item 1” of this Form 10-Q.

 

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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK

The primary objective of the following information is to provide forward-looking quantitative and qualitative information about our potential exposure to market risks. The term “market” risk refers to the risk of gains or losses arising from changes in interest rates and prices of marketable securities. The disclosures are not meant to be precise indicators of expected future gains or losses, but rather indicators of reasonably possible gains or losses. This forward-looking information provides indicators of how we view and manage our ongoing market risk exposures. All of our market risk-sensitive instruments were entered into for purposes other than trading.

INTEREST-BEARING INVESTMENTS

Our fixed-income securities subject to market risk consist primarily of certain investments in our merchandise trusts and perpetual care trusts. As of September 30, 2016, the fair value of fixed-income securities in our merchandise trusts and perpetual care trusts represented 1.4% and 3.8%, respectively, of the fair value of total trust assets. The aggregate of the quoted fair value of these fixed-income securities was $7.1 million and $12.8 million in the merchandise trusts and perpetual care trusts, respectively, as of September 30, 2016. Holding all other variables constant, a hypothetical 1% change in variable interest rates on these fixed-income securities would change the fair market value of the assets in our merchandise trusts and perpetual care trusts each by approximately $0.1 million, based on discounted expected future cash flows. If these securities are held to maturity, no change in fair market value will be realized. Our money market and other short-term investments subject to market risk consist primarily of certain investments in our merchandise trusts and perpetual care trusts. As of September 30, 2016, the fair value of money market and short-term investments in our merchandise trusts and perpetual care trusts represented 5.9% and 4.9%, respectively, of the fair value of total trust assets. The aggregate of the quoted fair value of these money market and short-term investments was $29.9 million and $16.5 million in the merchandise trusts and perpetual care trusts, respectively, as of September 30, 2016. Holding all other variables constant, a hypothetical 1% change in variable interest rates on these money market and short-term investments would change the fair market value of the assets in our merchandise trusts and perpetual care trusts by approximately $0.3 million and $0.2 million respectively, based on discounted expected future cash flows.

MARKETABLE EQUITY SECURITIES

Our marketable equity securities subject to market risk consist primarily of certain investments held in our merchandise trusts and perpetual care trusts. These assets consist of investments in both individual equity securities as well as closed and open-ended mutual funds. As of September 30, 2016, the fair value of marketable equity securities in our merchandise trusts and perpetual care trusts represented 7.9% and 6.8%, respectively, of the fair value of total trust assets. The aggregate of the quoted fair market value of these marketable equity securities was $39.7 million and $22.8 million in our merchandise trusts and perpetual care trusts, respectively, as of September 30, 2016, based on final quoted sales prices. Holding all other variables constant, a hypothetical 10% change in average market prices of the equity securities would change the fair market value of the assets in our merchandise trusts and perpetual care trusts by approximately $4.0 million and $2.3 million, respectively. As of September 30, 2016, the fair value of marketable closed and open-ended mutual funds in our merchandise trusts represented 74.3% of the fair value of total trust assets, 64.0% of which pertained to fixed-income mutual funds. As of September 30, 2016, the fair value of closed and open-ended mutual funds in our perpetual care trusts represented 49.0% of total trust assets, 79.5% of which pertained to fixed-income mutual funds. The aggregate of the quoted fair market value of these closed and open-ended mutual funds was $374.8 million and $164.1 million, respectively, in the merchandise trusts and perpetual care trusts as of September 30, 2016, of which $240.0 million and $130.5 million, respectively, pertained to fixed-income mutual funds. Holding all other variables constant, a hypothetical 10% change in the average market prices of the closed and open-ended mutual funds would change the fair market value of the assets in our merchandise trusts and perpetual care trusts by approximately $37.5 million and $16.4 million, respectively. As of September 30, 2016, the fair value of other investment funds in our merchandise trusts and perpetual care trusts represented 8.4% and 35.4%, respectively, of the fair value of total trust assets. The fair market value of the holdings in these funds was $42.3 million and $118.7 million in our merchandise trusts and perpetual care trusts, respectively, as of September 30, 2016, based on net asset value quotes. Holding all other variables constant, a hypothetical 10% change in the average net asset value quotes would change the fair market value of the assets in our merchandise trusts and perpetual care trusts by approximately $4.2 million and $11.9 million, respectively.

DEBT INSTRUMENTS

Our Credit Facility bears interest at a floating rate, based on LIBOR, which is adjusted quarterly. This subjects us to increases in interest expense resulting from movements in interest rates. As of September 30, 2016, we had $151.1

 

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million of borrowings outstanding under our Credit Facility, which generally bears interest at a variable rate. Holding all other variables constant, a hypothetical 1% change in variable interest rates would change our consolidated interest expense for the nine-month period ending September 30, 2016 by approximately $1.1 million.

 

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ITEM 4. CONTROLS AND PROCEDURES

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Disclosure Committee and management, including our Chief Executive Officer and our Chief Financial Officer, of the effectiveness of our disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b) as to whether they provide reasonable assurance that information we are required to disclose in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that as a result of management’s identification of the material weaknesses described below, our failures related to disclosure controls and procedures were not yet remediated as of September 30, 2016.

As discussed in the Explanatory Note and Note 1,General, included in this Form 10-Q, we determined to restate our previously issued financial statements to correct for errors associated with the recognition and presentation of certain revenues, expenses, assets, and liabilities, both recognized and deferred, the allocation of income and loss to our partners, and errors in the processing of transactions. As a result of the restatement, management identified deficiencies in our processes and procedures that constitute material weaknesses in our internal control over financial reporting as follows:

 

  A. The Partnership did not design and maintain effective controls over establishing accounting policies nor did they periodically review them for appropriate application in the financial statements.

 

  B. The Partnership did not design and maintain effective controls over the review of certain recorded balances within “Deferred cemetery revenues, net,” “Merchandise liability,” “Investment and other” revenues, “Cemetery property,” and “Partners’ Capital”.

 

  C. The Partnership did not design and maintain effective controls over the reconciliation of amounts recorded in the general ledger to relevant supporting details.

In connection with the restatement of our consolidated financial statements, management re-evaluated the effectiveness of our internal control over financial reporting. Based on that re-assessment, management concluded that our internal control over financial reporting was not effective as of December 31, 2015, due to the material weaknesses described above.

Management is committed to the remediation of the material weaknesses, as well as the continued improvement of our internal control over financial reporting (“ICFR”). We are in the process of implementing measures to remediate the underlying causes of the control deficiencies that gave rise to the material weaknesses, which primarily include:

 

  1. Reevaluating and establishing, on a periodic basis, accounting policies and the appropriate application thereof;

 

  2. Enhancing control procedures related to the review of certain recorded balances affected by the material weaknesses to ensure the appropriateness of such balances; and

 

  3. Enhancing the control procedures related to the reconciliation of amounts recorded in the general ledger to relevant supporting details.

We believe these measures will remediate the material weaknesses noted. While we have completed some of these measures as of the date of this report, we have not completed and tested all of the planned corrective processes, enhancements, procedures and related evaluation that we believe are necessary to determine whether the material weaknesses have been fully remediated. We believe the corrective actions and controls need to be in operation for a sufficient period of time for management to conclude that the control environment is operating effectively and has been adequately tested through audit procedures. Therefore, the material weaknesses have not been fully remediated as of the date of this report. As we continue to evaluate and work to remediate the control deficiencies that gave rise to the material weaknesses, we may determine that additional measures or time are required to address the control deficiencies or that we need to modify or otherwise adjust the remediation measures described above. We will continue to assess the effectiveness of our remediation efforts in connection with our evaluation of our ICFR.

 

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CHANGES IN INTERNAL CONTROL OVER FINANCIAL REPORTING

Except as set fourth above, there have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter ended September 30, 2016 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

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Part II – Other Information

 

Item 6. Exhibits

Exhibits are listed in the Exhibit Index, which is incorporated herein by reference.

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 

    STONEMOR PARTNERS L.P.
    By: StoneMor GP LLC
    its general partner
November 9, 2016    

 /s/ Lawrence Miller

    Lawrence Miller
    Chief Executive Officer, President and Chairman of the Board of Directors (Principal Executive Officer)
November 9, 2016    

 /s/ Sean P. McGrath

    Sean P. McGrath
    Chief Financial Officer (Principal Financial Officer)

 

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EXHIBIT INDEX

 

Exhibit
Number

  

Description

    4.1
   Supplemental Indenture No. 2, dated as of September 1, 2016, by and among StoneMor Wisconsin LLC, StoneMor Wisconsin Subsidiary LLC, subsidiaries of StoneMor Partners L.P., and Cornerstone Family Services of West Virginia Subsidiary, Inc., the Guarantors under the Indenture, and Wilmington Trust, National Association, as trustee.
  10.1 †    Key Employee Unit Agreement under the StoneMor Partners L.P. 2014 Long-Term Incentive Plan, entered into as of September 28, 2016, by and between StoneMor GP LLC and Sean McGrath.
  10.2 †    Key Employee Unit Agreement under the StoneMor Partners L.P. 2014 Long-Term Incentive Plan, entered into as of July 5, 2016, by and between StoneMor GP LLC and Lawrence Miller.
  10.3 †    Key Employee Unit Agreement under the StoneMor Partners L.P. 2014 Long-Term Incentive Plan, entered into as of July 5, 2016, by and between StoneMor GP LLC and Austin So.
  10.4 †    Employment Separation Agreement, effective as of August 5, 2016, by and between StoneMor GP LLC and David Meyers (incorporated by reference to Exhibit 10.1 of Registrant’s Current Report on Form 8-K filed on August 10, 2016).
  10.5    Credit Agreement, dated as of August 4, 2016, by and among StoneMor Operating LLC, the other Borrowers party thereto, the Lenders party thereto, Capital One, National Association, 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.
  10.6    Guaranty and Collateral Agreement, dated as of August 4, 2016, by and among StoneMor Partners L.P., StoneMor Operating LLC, the other Grantors party thereto and Capital One, National Association, as Administrative Agent.
  31.1    Certification pursuant to Exchange Act Rule 13a-14(a) of Lawrence Miller, Chief Executive Officer, President and Chairman of the Board of Directors.
  31.2    Certification pursuant to Exchange Act Rule 13a-14(a) of Sean P. McGrath, Chief Financial Officer.
  32.1    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Lawrence Miller, Chief Executive Officer, President and Chairman of the Board of Directors (furnished herewith).
  32.2    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (18 U.S.C. § 1350) and Exchange Act Rule 13a-14(b) of Sean P. McGrath, Chief Financial Officer (furnished herewith).
101    Attached as Exhibit 101 to this report are the following Interactive Data Files formatted in XBRL (eXtensible Business Reporting Language): (i) Unaudited Condensed Consolidated Balance Sheets as of September 30, 2016, and December 31, 2015; (ii) Unaudited Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2016 and 2015; (iii) Unaudited Condensed Consolidated Statement of Partners’ Capital (Deficit); (iv) Unaudited Condensed Consolidated Statement of Cash Flows for the three and nine months ended September 30, 2016 and 2015; and (v) Notes to the Unaudited Condensed Consolidated Financial Statements. Users of this data are advised that the information contained in the XBRL documents is unaudited and these are not the official publicly filed financial statements of StoneMor Partners L.P.

 

Management contract, compensatory plan or arrangement

 

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